UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




FORM 10-K


(Mark One)

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 20172022

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 0-28104

JAKKS PACIFIC, INC.

(Exact name of registrant as specified in its charter)

Delaware

95-4527222

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

2951 28th28thSt.

Santa Monica, California

90405

(Address of principal executive offices)

(Zip Code)

Registrant’s

Registrants telephone number, including area code: (424) 268-9444

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

TradingSymbol(s)

Name of each exchange

on which registered

Common Stock $.001 par value per sharePar Value

Nasdaq

JAKK

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Exchange Act:

None

Title of Class

Common Stock, $.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 of the Act. Yes No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):

 Large Accelerated Filer

 Accelerated Filer

 Non-Accelerated Filer

 Smaller Reporting Company

☐ Emerging growth company

(Do not check if a Smaller Reporting Company)Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the voting and non-voting common equity (the only such common equity being Common Stock, $.001 par value per share) held by non-affiliates of the registrant (computed by reference to the closing sale price of the Common Stock on June 30, 20172022 of $4.00)$12.66 is $107,392,952.$69,833,332.

The number of shares outstanding of the registrant’s Common Stock, $.001 par value (being the only class of its common stock), is 29,159,3249,870,927 as of March 15, 2018.April 14, 2023.

Documents Incorporated by Reference

None.

 
None.



1

JAKKS PACIFIC, INC.

INDEX

TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K

For the Fiscal Year ended December 31, 20172022

Items in Form 10-K

Page

PART I

Item 1.

Business

5

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

None

Item 2.

Properties

24

Item 3.

Legal Proceedings

25

Item 4.

Mine Safety Disclosures

25

  Page

PART III

3
12
Item 1B.Unresolved Staff CommentsNone
18
19
20
PART II

21

26

24

26

26

27

36

35

37

Item 9.

Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure

None

72

69

Item 9B.

Other Information

None

Item 9B.9C.Other InformationDisclosure Regarding Foreign Jurisdictions that Prevent InspectionsNone69
 PART III 

PART III

Item 10.

74

70

79

76

99

88

101

89

101

90

 PART IV 

PART IV

Item 15.

103

91

105

95

106

96

Certifications

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements included in this report regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. When we use words like “intend,” “anticipate,” “believe,” “estimate,” “plan” or “expect,” we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based upon information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We have disclosed certain important factors that could cause our actual results to differ materially from our current expectations elsewhere in this report. You should understand that forward-looking statements made in this report are necessarily qualified by these factors. We are not undertaking to publicly update or revise any forward-looking statement if we obtain new information or upon the occurrence of future events or otherwise.

Item 1. Business

In this report, “JAKKS,” the “Company,” “we,” “us” and “our” refer to JAKKS Pacific, Inc., its subsidiaries and our majority ownedmajority-owned joint venture.

Company Overview

We are a leading multi-line, multi-brand toy company that designs, produces, markets, sells and distributes toys and related products, consumables and related products, electronics and related products, kids indoor and outdoor furniture, and other consumer products. We focus our business on acquiring or licensing well-recognized intellectual property (“IP”), trademarks andand/or brand names, most with long product histories (“evergreen brands”). We seek to acquireacquire/license these evergreen brands because we believe they are less subject to market fads or trends. We also develop proprietary products marketed under our own trademarks and brand names, and have historically acquired complementary businesses to further grow our portfolio. For accounting purposes, our products have been divided into threetwo segments: (i) U.S.Toys/Consumer Products and Canada, (ii) International and (iii) Halloween.Costumes. Segment information with respect to revenues, assets and profits or losses attributable to each segment is contained in Note 3 to the audited consolidated financial statements contained below in Item 8. Our products include:

Traditional Toys and Electronics

Action figures and accessories, including licensed characters principally based on Batman®the Nintendo®, Star Wars®Sonic the Hedgehog® and Nintendo® franchises; Apex Legends® franchises and our own proprietary brands including Creepy Crawlers®;

Toy vehicles, including Max Tow®Xtreme Power Dozer®, Xtreme Power Dump Truck®, XPV®, Road Champs®Champs®, Fly Wheels®Wheels® and MXS® toy vehicles and accessories; AirTitans® inflatable remote-control dinosaur;

Dolls and accessories, including small dolls, large dolls, fashion dolls and baby dolls based on licenses, including Disney’s Frozen, Disney Princess,Encanto®, Disney Fairies, ILY 4EVER™, Disney Frozen®, Disney Princess® and Minnie Mouse®, and infant and pre-school toys based on TV shows like PBS’s Daniel Tiger’s Neighborhood® as well as in-house brands such as Perfectly Cute® and collectable plush Ami Amis™;

Private label products as “exclusives”developed exclusively for a myriad ofcertain retail customers in manyvarious product categories; and

Foot-to-floor ride-on toysproducts, including those based on Fisher Price®Fisher-Price®, Kawasaki®Nickelodeon®, and DC Comics®,Hasbro®/Entertainment One® licenses and inflatable play environments, tents and wagons.wagons;

Role Play, Novelty and Seasonal Toys

Role play, dress-up, pretend play and novelty products for boys and girls based on well-known brands and entertainment properties such as Disney’s Frozen, Disney Frozen®, Black & Decker®Decker®, McDonald’s®,Disney PrincessPrincess®, and Disney FairiesEncanto®, as well as those based on our own proprietary brands;

Indoor and outdoor kids’ furniture, activity trays and tables and room décor; kiddie pools, seasonal and outdoor products, including those based on Crayola® Disney® characters, Nickelodeon®, Disney characters and more, and Funnoodle® pool floats;Hasbro®/Entertainment One®licenses;

Halloween and everyday costumes for all ages based on licensed and proprietary non-licensed brands, including Spiderman® Super Mario Bros.®, Microsoft’s Halo®, Disney-Pixar Toy Story,Story®, Harry Potter®, Minions®, Sesame Street®, Power Rangers®¸Hasbro® brands and Disney’s Frozen, Disney PrincessFrozen®, Disney Princess® and related Halloween accessories; and

Junior sports and outdoor

Outdoor activity toys including SkyballReDo Skateboard Co.® and junior sports toys including Sky Ball® hyper-charged balls, andSportsZone™ sport sets and Wave Hoops®Hoop® toy hoops marketed under our Maui ® brand.Maui® brand; and

Board games under the brand JAKKS Wild Games™, including Temple Raider®, K.O. Corral™, and Galactic JAXX™.

3

We continually review the marketplace to identify and evaluate popular and evergreen brands and product categories that we believe have the potential for growth. We endeavor to generate growth within these lines by:

creating innovative products under our established licenses and brand names;

adding new items to the branded product lines that we expect will enjoy greater popularity;

infusing innovation and technology when appropriate to make themproducts more appealing to today’s kids; and

focusing

expanding our marketing effortsinternational product offering either sold directly to enhance consumer recognition and retailer interest.retailers or via third-party distributors.

Our Business Strategy

In addition to developing our own proprietary brands, properties and marks, licensing popular trademarksIP enables us to use these high-profile marks at a lower cost than we would incur if we purchased these marks or developedfunded the development of comparable marks on our own. Beyond the investment profile, we have an appreciation of the challenges and expertise required to break through the noise in a world filled with high-budget, content-centric consumer choices either based on well-known pre-existing IP or the even higher hurdle to launch new IP in the aforementioned marketplace. By licensing IP and trademarks from world-class brand owners and content creators, we have access to a far greater range of marks than would be available for purchase. It also helps to credibly assure licensors that we will prioritize their brands, properties and IP rather than explicitly competing with them with a broad range of self-developed content-led offerings. We also license technology developed by unaffiliated inventors and product developers to enhance the design, innovation and functionality of our products.

We sell our products through our in-house sales staff and independent sales representatives to toy and mass-market retail chain stores, department stores, office supply stores, drug and grocery store chains, club stores, value-oriented dollar stores, toy specialty stores and wholesalers. Our threetwo largest customers are Wal-Mart, TargetWalmart® and Toys ‘R’ Us,Target®, which accounted for approximately28.4% and 25.5%, 17.8% and 11.3%, respectively, of our net sales in 2017.2022. No other customer accounted for more than 10.0%10% of our net sales in 2017.2022.

Our Growth Strategy

 In 2016 and 2017, we generated net sales of $706.6 million and $613.1 million, respectively, and net income of $1.2 million in 2016 and a net loss of $83.1 million in 2017.

Key elements of our growth strategy include:

Expand Core Products.Product Lines. We manage our existing and new brands through strategic product development initiatives, including introducing new products, modifying existing products and extending existing product lines to maximize their longevity. Our marketing teams and product designers strive to develop new products or product lines to offer added technological, aesthetic and functional improvements to our extensive portfolio.

Enter New Product Categories. We use our extensive experience in the toy and other consumer product industries to evaluate products and licenses in new product categories and to develop additional product lines. We began marketing licensed classic video games for simple plug-in use with television sets and expanded into several related categories by infusing additional technologies such as motion gaming and through the licensing of this category from our current licensors, such as DisneyDisney. We recently entered the skateboard space at a retailer’s request and Viacom which owns Nickelodeon®.are now expanding into related protective gear and accessories.

Pursue Strategic Acquisitions. We supplementhave supplemented our internal growth with selected strategic acquisitions. In October 2016, we acquired the operating assetsMost of the C’est Moi™ performance makeup and youth skincare product lines whose distribution is limited primarilywe market today were originally acquired via acquisition over the past 20+ years. In 2022, we evaluated several potential acquisitions although none resonated to Asia. We expect to launch a full linethe point of makeup and skincare products branded under the C’est Moi name in the U.S. and Canada in the first quarter of 2018. We will continue focusing our acquisition strategy on businesses or brands that we believe have compatible product lines and/or offer valuable trademarks or brands.
reaching an agreement.

4

Acquire Additional Character and Product Licenses. We have acquired the rights to use many familiar brand and character names and logos from third parties that we use with our primary trademarks and brands. Currently, among others, we have license agreements withNickelodeon®, DisneyDisney®, Pixar®, Marvel®, NBC Universal®, Microsoft©, Sega®, Sony®, Netflix® and Warner Bros.®WarnerMedia®, as well as with the licensors of the many other popular licensed children’s characters previously mentioned, among others.characters. We also license IP from other toy companies for categories in which they do not offer products found within our Core Product Lines. We intend to continue to pursue new licenses from these media & entertainment and media companies andalong with other licensors. We also intend to continue to purchasesecure additional inventions and product concepts through our existing network of inventors and product developers.

Expand International Sales. We believe that foreign markets, especiallynon-US markets: Europe, Australia, Canada, Latin America and Asia, offer us significant growth opportunities. In 2017,2022, our sales generated outside the United States were approximately $134.0$151.9 million, or 21.9%19.1% of total net sales. We intendIn 2020, we migrated from a distributor model to continueselling direct in Spain, Italy, France and Mexico. Third-party distributors remain a core component of our international business, and we are constantly assessing how to expand our international sales and further expand distribution agreements in Europe to capitalizemutual businesses. Although the COVID-19 pandemic had a significantly negative impact on our experienceinternational business, we remain focused on international being a source of revenue growth. We currently utilize one warehouse in the United Kingdom and our relationships with foreign distributors and retailers. We expect these initiativesanother in the Netherlands to contribute to our international growthsupport sales expansion in 2018.that region.

Capitalize On Our Operating Efficiencies. We believe that our current infrastructure and operating model can accommodate growth without a proportionate increase in our operating and administrative expenses, thereby increasing our operating margins.

The execution of our growth strategy, however, is subject to several risks and uncertainties and we cannot assure you that we will continue to experience growth in, or maintain our present level of net sales (see “Risk Factors,” in Item 1A). For example, our growth strategy will place additional demands upon our management, operational capacity and financial resources and systems. The increased demand upon management may necessitate our recruitment and retention of additional qualified management personnel. We cannot assure you that we will be able to recruit and retain qualified personnel or expand and manage our operations effectively and profitably. To effectively manage future growth, we must continue to expand our operational, financial and management information systems and to train, motivate and manage our work force.workforce. While we believe that our operational, financial and management information systems will be adequate to support our future growth, no assurance can be given they will be adequate without significant investment in our infrastructure. Failure to expand our operational, financial and management information systems or to train, motivate, or manage and retain employees could have a material adverse effect on our business, financial condition and results of operations.

Moreover, implementation of our growth strategy is subject to risks beyond our control, including competition,including: competition; market acceptance of new products,products; changes in economic conditions,conditions; changes in the media & entertainment landscape disrupting the traditional model of capturing consumer attention for new entertainment-led offerings; our ability to obtain or renew licenses on commercially reasonable termsterms; and our ability to finance increased levels of accounts receivable and inventory necessary to support our sales growth, if any.

Furthermore, we cannot assure you that we can identify attractive acquisition candidates or negotiate acceptable acquisition terms, and our failure to do so may adversely affect our results of operations and our ability to sustain growth.

Finally, our acquisition strategy involves a number of risks, each of which could adversely affect our operating results, including difficulties in integrating acquired businesses or product lines, assimilating new facilities and personnel and harmonizing diverse business strategies and methods of operation; diversion of management attention from operation of our existing business; loss of key personnel from acquired companies; and failure of an acquired business to achieve targeted financial results.


5

Industry Overview

According to Toy Industry Association, Inc., the leading toy industry trade group, the United States is the world’s largest toy market, followed by China, Japan and Western Europe. Total retail sales of toys, excluding video games, in the United States, were approximately $20.7$29.2 billion in 2017.2022. We believe the two largest United States toy companies, MattelHasbro® and Hasbro,Mattel®, along with The LEGO Group (headquartered in Denmark), collectively hold a dominant share of the domestic non-videoU.S. toy market. In addition, hundreds of smaller companies compete in the design and development of new toys, the procurement of character and product licenses, and the improvement, expansion and expansionre-introduction of previously introducedestablished products and product lines.

Over the past few years, the toy industry has experienced substantial consolidation among both toy companies and toy retailers. We believe that the ongoing consolidation of toy companies provides us with increased growth opportunities due to retailers’ desire to not be entirely dependent upon a few dominant toy companies. Retailer concentration also enables us to ship products, manage account relationships and track point of sale information more effectively and efficiently.

Products

Products

We focus our business on acquiring or licensing well-recognized properties, trademarks and/or brand names, and we seek to acquire evergreen brands which are less subject to market fads or trends. Generally, our license agreements for products and concepts call for royalties ranging from 1% to 21%22% of net sales, and some may require minimum royalty guarantees and advances.up-front or advanced royalty payments against those guarantees. Our principal products include:

Traditional Toys
Wheels Products
Motorized and plastic toy vehicles and accessories.
Our extreme sports offerings include our MXS® line of motorcycles with generic and well-known riders and other vehicles include off-road vehicles and skateboards, which are sold individually and with playsets and accessories. In 2014, we launchedhighlighted above in our proprietary line of motorized vehicles under the brand Max Tow®, and in 2015, we expanded the product line to include higher performance versions as well as mini size vehicles and play sets under the Max Tow®Mini line. In 2017, we launched Real Workin’ Buddies™ with Mr. Dusty, the talking cleaning dump truck.Company Overview.

Action Figures and Accessories
We currently develop, manufacture and distribute other action figures and action figure accessories including those based on Star Wars® and Batman®, capitalizing on the expertise we built in the action figure category.
Our line of Big-Figs™ large scale action figures features an assortment of 20” figures, 31” figures, and 48” figures of characters including Superman®, Power Rangers®, Star Wars® and Teenage Mutant Ninja Turtles®.

6

Dolls
Dolls and accessories include small dolls, large dolls, fashion dolls and baby dolls based on licenses, including Disney’s Frozen, Disney Princess, Disney Fairies, including an extensive line of baby doll accessories that emulate real baby products that mothers today use; plush, infant and pre-school toys, and private label fashion dolls for other retailers and sold to Disney Stores and Disney Parks and Resorts. In 2016, we launched lines of dolls based on Disney’s animated feature Moana and animated television series Elena of Avalor.
Role Play, Novelty & Seasonal
Role Play and Dress-up Products
Our line of role play and dress-up products for boys and girls features entertainment and consumer products properties such as Disney’s Frozen, Disney Princess, Disney Fairies, Moana, Elena of Avalor and Black & Decker®. These products generated a significant amount of sales in 2015, 2016 and 2017.
Seasonal/ Outdoor Products
We have a wide range of seasonal toys and outdoor and leisure products including our Maui® line of proprietary products including Sky Ball®, Sky Bouncer® and Wave Hoop® among other outdoor toys. Our Funnoodle® pool toys include basic Funnoodle® pool floats and a variety of other pool toys.
Indoor and Outdoor Kids’ Furniture
We produce an extensive array of licensed indoor and outdoor kids' furniture and activity tables, and room decor. Our licensed portfolio includes character licenses, including Crayola®, Disney Princess, Toy Story, Mickey Mouse, Paw Patrol®, and others. Products include children’s puzzle furniture, tables and chairs to activity sets, trays, stools and a line of licensed molded kiddie pools, among others.
Halloween and Everyday Costume Play
We produce an expansive and innovative line of Halloween costumes and accessories which includes a wide range of non-licensed Halloween costumes such as horror, pirates, historical figures and aliens to animals, vampires, angels and more, as well as popular licensed characters from top intellectual property owners including Disney, Hasbro®, Sesame Workshop®, Mattel®, and many others. In 2016, we launched new licenses including Lego® brands.

7

Sales, Marketing and Distribution

We sell all of our products through our own in-house sales staff and independent sales representatives to toy and mass-market retail chain stores, department stores, office supply stores, drug and grocery store chains, club stores, dollar stores, toy specialty stores and wholesalers. Our threeIn 2022, our two largest customers, are Wal-Mart,Walmart and Target, and Toys ‘R’ Us, which accounted for approximately 54.9%28.4% and 25.5%, respectively, of our net sales. No other customer accounted for more than 10% of our net sales in 20162022. In 2021, our two largest customers, Walmart and 54.6%Target, accounted for 26.9% and 28.4%, respectively, of our net sales. No other customer accounted for more than 10% of our net sales in 2017.2021. We generally sell products to our customers pursuant to letters of credit or, in some cases, on open account with payment terms typically varying from 30 to 90 days.days or, in some cases, pursuant to letters of credit. For sales outside of the United States, we may also purchase credit insurance to mitigate the risk, if any, of non-payment. From time to time, we allow our customers credits against future purchases from us in order to facilitate their retail markdown and sales of slow-moving inventory. We also sell our products through e-commerce sites, including Walmart.com, Target.com, Toysrus.comWalmart.com®, Target.com™ and Amazon.com.Amazon.com®.

We contract the manufacture of most of our products to unaffiliated manufacturers located in The People’s Republic of China (“China”). We sell the finished products on a letter of credit basis or on open account to our customers, many of whom take title to the goods in Hong Kong or China. These methods allow us to reduce certain operating costs and working capital requirements. We also contract the manufacture of certain products from Hong Kong Meisheng Cultural Company Limited (“Meisheng”), which involved payment to Meisheng of approximately $120.5 million and $77.7 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, Meisheng owns 5.4% of our outstanding common stock, and Zhao Xiaoqiang, one of our directors, is executive director of Meisheng. A portion of our sales originate in the United States, so we hold certain inventory in our warehousesa US warehouse and fulfillment facilities.facility. To date, a majority of all of our sales has been to domestic customers.customers based in the United States. We intend to continue expanding distribution of our products into foreign territories and, accordingly, we have:

entered into a joint venture in China,

engaged representatives to oversee sales in certain foreign territories,territories;

engaged distributors in certain foreign territories,territories;

established direct relationships with retailers in certain foreign territories,territories;

opened sales offices in Canada, Europe and Mexico,Mexico; and

opened sales officesdistribution centers in the UK and a distribution center in Canada, andNetherlands.

expanded in-house resources dedicated to product development and marketing of our lines.


8

Outside of the United States, we currently sell our products primarily in Europe, Australia, Canada, Latin America and Asia. Sales of our products abroad accounted for approximately $134.0$151.9 million, or 21.9%19.1% of our net sales in 20172022 and approximately $162.5$108.9 million, or 23.0%17.5% of our net sales in 2016.2021. We believe that foreign markets present an attractive opportunity, and we plan to intensify our marketing efforts and further expand our distribution channels abroad.

We establish reserves for sales allowances provided to our customers, including discounts, pricing concessions, promotional allowances and allowances for anticipated breakage or defective product, returns, at the time of shipment. The reserves are determined as a percentage of net sales based upon either historical experience or upon estimates or programs agreed upon bywith our customers and us.customers.

We obtain, directly, or through our sales representatives, orders for our products from our customers and arrange for the manufacture of these products as discussed below. Cancellations generally are made in writing, and we take appropriate steps to notify our manufacturers of these cancellations. We may incur costs or other losses as a result of cancellations.

We maintain a full-time sales and marketing staff, many of whom make on-site visits to customers for the purpose of showing productproducts and soliciting orders for products. We also retain a number of independent sales representatives to sell and promote our products, both domestically and internationally. Together with retailers, we occasionally test the consumer acceptance of new products in selected markets before committing resources to large-scale production.

We publicize and advertise our products online and on mobile, in trade and consumer magazines and other publications, market our products at international, national and regional toy and other specialty trade shows, conventions and exhibitions and carry on cooperative advertising programs with toy and mass market retailers and other customers which include the use of print, online, mobile and television ads and via in-store displays. We also produce and broadcast television commercials for several of our product lines, if we expect that the resulting increase in our net sales will justify the relatively high cost of televisiontelevision/media advertising.

Product Development

Each of our product lines has an in-house manager responsible for product development. The in-house manager identifies and evaluates inventor products and concepts and other opportunities to enhance or expand existing product lines or to enter new product categories. In addition, we create proprietary products to fully exploit our concept and character licenses. Although we have the capability to create and develop products from inception to production, we also use third-parties to provide a portion of the sculpting, sample making, illustration and package design required for our products in order to accommodate our increasing product innovations and introductions.introductions as well as accelerate our speed-to-market. Typically, the development process takes from threenine to nineeighteen months from concept to production and shipment to our customers.customers, but given our Company’s size and structure, we have demonstrated the ability to shrink that down to three to nine months successfully when the opportunity requires.

We employ a staff of designers for all of our product lines. We occasionally acquire our other product concepts from unaffiliated third parties. If we accept and develop a third party’sthird-party’s concept for new toys, we generally pay a royalty on the sale of the toys developed from this concept, and may, on an individual basis, guarantee a minimum royalty. Royalties payable to inventors and developers generally range from 1% to 5%4% of the wholesale sales price for each unit of a product sold by us. We believe that utilizing experienced third-party inventors gives us access to a wide range of development talent. We currently work with numerous toy inventors and designers for the development of new products and the enhancement of existing products.

Safety testing of our products is done at the manufacturers’ facilities by quality control personnel employed by us or by independent third-party contractors engaged by us. Safety testing is designed to meet or exceed regulations imposed by federal and state, as well as applicable international governmental authorities, our retail partners, licensors and the Toy Industry Association. We also closely monitor quality assurance procedures for our products for safety purposes. In addition, independent laboratories engaged by some of our larger customers and licensors test certain of our products.


9

Manufacturing and Supplies

Most of our

Our products are currently produced by overseas third-party manufacturers, which we choose on the basis of quality, flexibility, reliability and price. Consistent with industry practice, the use of third-party manufacturers enables us to avoid incurring fixed manufacturing costs, while maximizing flexibility, capacity and the latest production technology. Substantially all of the manufacturing services performed overseas for us are paid for on open account with the manufacturers. To date, we have not experienced any material delays in the delivery of our products;products from our manufacturers; however, delivery schedules are subject to various factors beyond our control, and any delays in the future could adversely affect our sales. The COVID-19 pandemic, in particular, created some short-term delays as manufacturing capacity both dropped during the peak of the China outbreak and then again was stretched when consumer demand for different categories of products spiked as a result of the unprecedented level of households operating under confined-to-home/social distancing guidelines. The lingering impact of the pandemic has created volatility in costs associated with the sourcing and importation of product, in particular due to changes in factor inputs (labor, oil) and market demand for services (transport). In addition, our third-party manufacturers have seen increases in foreign exchange rate exposure during this time. Currently, we have ongoing relationships with over eightysixty different manufacturers. We believe that alternative sources of supply are available to us although we cannot be assured that we can obtain adequate supplies of manufactured products.products on short notice. We may also incur costs or other losses as a result of not placing orders consistent with our forecasts for product to be manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand.

Although we do not conduct the day-to-day manufacturing of our products, we are extensively involved in the design of the product prototypeprototypes and production tools, dyesdies and molds for our products and we seek to ensure quality control by actively reviewing the production process and testing the products produced by our manufacturers. We employ quality control inspectors who rotate among our manufacturers’ factories to monitor the production of substantially all of our products.

The principal raw materials used in the production and sale of our toy products are plastics, zinc alloy, plush, printed fabrics, paper products and electronic components, all of which are currently available at reasonable prices from a variety of sources. Although we do not directly manufacture our products, we own the majority of the tools, dyesdies and molds used in the manufacturing process, and these are transferable among manufacturers if we choose to employ alternative manufacturers. Tools, dyesdies and molds represent a substantial portion of our property and equipment with a net book value of $15.7$14.1 million in 2016 and $17.0$11.6 million in 2017; substantiallyas of December 31, 2022 and 2021, respectively. Substantially all of these assets are located in China.

Patents, Trademarks, Copyrights and CopyrightsLicenses

We routinely pursue protection of our products through some form or combination of intellectual property right(s). We file patent applications where appropriate to protect our innovations arising from new development and design, and as a result, possess a portfolio of issued patents in the U.S. and abroad. Most of our products are produced and sold under trademarks owned by or licensed to us. In recent years, our rate of filing new trademark applications has increased. We typicallyalso register our properties, and seek protection under the trademark, copyright and patent lawscertain aspects of the United States and other countries wheresome of our products are produced or sold. Thesewith the U.S. Copyright Office. In the same vein, we enforce our rights against infringers because we recognize our intellectual property rights can beare significant assets.assets that contribute to our success. Accordingly, while we believe we are sufficiently protected and the duration of our rights are aligned with the lifecycle of our products, the loss of some of these rights could have an adverse effect on our financial growth expectations and business financial condition and resultsoperations.

Competition

Competition in the toy industry is intense. Globally, certain of our competitors have greater financial resources, larger sales and marketing and product development departments, stronger name recognition, wholly-owned brands and properties with high consumer awareness and appeal, longer operating histories and benefit from greater economies of scale. These factors, among others, may enable our competitors to market their products at lower prices or on terms more advantageous to customers than those we could offer for our competitive products. Competition often extends to the procurement of entertainment and product licenses, as well as the marketing and distribution of products and the obtaining of adequate shelf space. Competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition and results of operations. In eachmany of our product lines we compete directly against one or both of two of the toy industry’s twomost dominant companies, MattelMattel® and Hasbro.Hasbro®. In addition, we compete in our Halloween costume lines with Rubies.Rubies II. We also compete with numerous smaller domestic and foreign toy manufacturers, importers and marketers in each of our product categories.

Seasonality and Backlog

In 2017, approximately 65.1%2022, 57.1% of our net sales were made in the third and fourth quarters. Generally, the first quarter is the period of lowest shipments and sales in our business and in the toy industry and therefore it is also the least profitable quarter due to various fixed costs. Seasonality factors may cause our operating results to fluctuate significantly from quarter to quarter. However, our outdoor/seasonal products are primarily sold in the spring and summer seasons. Our results of operations may also fluctuate as a result of factors such as the timing of new products (and related expenses) introduced by us or our competitors, the theatrical/entertainment-led releases of licensed brands, the advertising activities of our competitors, delivery schedules set by our customers and the emergence of new market entrants. We believe, however, that the low retail price of most of our products may be less subject to seasonal fluctuations than higher pricedhigher-priced toy products.

We ship products in accordance with delivery schedules specified by our customers, who generally request delivery of products within three to six months of the date of their orders for orders shipped FOB China or Hong Kong and within three days for orders shipped domestically.domestically (i.e., from one of our warehouses). Because customer orders may be canceled at any time, often without penalty, our backlog may not accurately indicate sales for any future period.

In 2022 and 2021, a number of factors partially attributable to the COVID-19 pandemic created significant bottlenecks and supply-demand imbalances in exporting product out of Asia into the United States and Europe. These factors increased the cost of ocean freight and the cost of trucking while incurring higher expenses and penalties from product being stuck at the port awaiting inbound trucking pickup. The unpredictability of delivery times further resulted in higher warehouse handling costs as container arrival timelines proved less predictable sometimes requiring overtime labor and expansion of the short-term labor pool to cope with above-average arriving volumes. Specifically, in 2022, companies and retailers responded to the ocean freight crisis by shifting more of their importation of product to the first half of the year. These efforts created more volatility in accurately forecasting market demand. In areas where consumer demand subsequently cooled, a backlog of inventory accumulated both at retailers and in manufacturer distribution centers. These excesses in turn generated incremental costs as inventory levels exceeded normal capacity levels, and temporary price reductions were utilized to accelerated consumer demand. Finally, the longer delivery time resulted in a slower cash conversion cycle for us as the net impact was a longer holding period for finished goods inventory between manufacture and sale to customer.

10

Government and Industry Regulation

Our products are subject to the provisions of the Consumer Product Safety Act (“CPSA”), the Federal Hazardous Substances Act (“FHSA”), the Flammable Fabrics Act (“FFA”) and the regulations promulgated there under.thereunder, and various other regulations in the European Union and other jurisdictions. The CPSA and the FHSA enable the Consumer Products Safety Commission (“CPSC”) to exclude from the market consumer products that fail to comply with applicable product safety regulations or otherwise create a substantial risk of injury, and articles that contain excessive amounts of a banned hazardous substance. The FFA enables the CPSC to regulate and enforce flammability standards for fabrics used in consumer products. The CPSC may also require the repurchase by the manufacturer of articles. Similar laws exist in some states and cities and in various international markets. We maintain a quality control program designed to ensure compliance with all applicable laws.

Human Capital

Our success comes from recruiting, retaining and motivating talented individuals around the world. JAKKS Pacific, Inc. continuously strives to create a safe, healthy, productive and harmonious work environment.

Employees

As of February 28, 2018,December 31, 2022, we employed 751 people,had approximately 622 employees (including temporary and seasonal employees) working in over 8 countries worldwide to create innovative products and experiences that inspire, entertain, and develop children through play, with approximately 265 employees (43% of the total workforce) located outside the U.S.

Employee Engagement

One of our main focuses is employee retention. We empower our management to identify top performers and mentor them. We encourage all employees to take advantage of whomin-house and external training programs and continuing education. Our Human Resources department has an open-door policy that encourages employees to seek career advancement advice. Holding various events and workshops throughout the year, employees are full-timeencouraged to voice any concerns and/or to bring forth their ideas and suggestions.

Diversity and Inclusion

We are committed to fostering, cultivating and preserving a culture of diversity, equity and inclusion.

The collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities and talent that our employees including three executive officers. invest in their work represents a significant part of the culture.

We employed 409 peopleembrace and encourage employees’ differences in age, color, ability, ethnicity, family or marital status, gender identity or expression, language, national origin, physical and mental ability, political affiliation, race, religion, sexual orientation, socio-economic status, veteran status, and other characteristics.

Our diversity initiatives are applicable—but not limited—to practices and policies on recruitment and selection; compensation and benefits; professional development and training; and promotions and transfers.

Training and Development

We take pride in offering the United States, 9 people in Canada, 4 people in Mexico, 203 people in Hong Kong, 100 people in China, 20 people inopportunity for employees to continuously learn and to grow their careers. Annually, employees are offered various types of training and the United Kingdom, 3 people in Franceopportunity to continue their education. This includes both online and 3 people in Germany. instructor-led training covering a variety of topics including: career-related, federally- and locally-mandated, JAKKS Pacific, Inc. Company policy and legal, financial services and health/wellness-related. Nearly all employees take advantage of these learning opportunities.

Health and Safety

We believe that we have good relationships with our employees. Noneare committed to providing a safe, healthy and productive working environment for all of our employees are represented byglobally.

In 2022 with the impact of the COVID-19 pandemic, our number one priority was the health and safety of all of our employees, worldwide. The immediate and continuous response was to support a union.remote work environment for employees (when available and appropriate), implement enhanced protocols to provide a safe and sanitary working environment and offer on-site COVID-19 testing at no cost to employees and their dependents.

Environmental Issues

We aremay be subject to legal and financial obligations under environmental, health and safety laws in the United States and in other jurisdictions where we operate. We are not currently aware of any material environmental liabilities associated with any of our operations.

Available Information

We make available free of charge on or through our Internet website, www.jakks.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The contents of our website are not incorporated in or deemed to be a part of any such report.

Our Corporate Information

We were formed as a Delaware corporation in 1995. Our principal executive offices are located at 2951 28th Street, Santa Monica, California 90405. Our telephone number is (424) 268-9444 and our Internet Website address is www.jakks.com. The contents of our website are not incorporated in or deemed to be a part of this Annual Report on Form 10-K.


Item 1A. Risk Factors

From time to time, including in this Annual Report on Form 10-K, we publish forward-looking statements, as disclosed in our Disclosure Regarding Forward-Looking Statements, beginning immediately following the Table of Contents of this Annual Report. We note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed or anticipated in our forward-looking statements. The factors listed below are risks and uncertainties that may arise and that may be detailed from time to time in our public announcements and our filings with the Securities and Exchange Commission, such as on Forms 8-K, 10-Q and 10-K. We undertake no obligation to make any revisions to the forward-looking statements contained in this Annual Report on Form 10-K to reflect events or circumstances occurring after the date of the filing of this report.

Our inability to redesign, restyle and extend our existing core products and product lines as consumer preferences evolve, and to develop, introduce and gain customer acceptance of new products and product lines, may materially and adversely impact our business, financial condition and results of operations.

Our business and operating results depend largely upon the appeal of our products. Our continued success in the toy industry will depend upon our ability to redesign, restyle and extend our existing core products and product lines as consumer preferences evolve, and to develop, introduce and gain customer acceptance of new products and product lines. Several trends in recent years have presented challenges for the toy industry, including:

the phenomenon of children outgrowing toys at younger ages, particularly in favor of interactive and high technology products;

 

increasing use of technology;technology, broadly, be it taking share of childrens discretionary time or otherwise;

 

shorter life cycles for individual products; and

 

higher consumer expectations for product quality, functionality, price-value and value.environmental-impact;

a wider array of content offerings and platforms attracting a viable audience that enables a meaningful consumer products opportunity, and our ability to effectively predict those platforms and offerings given the increasingly fragmented content distribution marketplace;

the evolving media landscape increases the cost and complexity of advertising our products directly to end-consumers, and similarly our ability to effectively predict the most effective advertising platforms could adversely impact our ability to introduce and sell our product lines at planned levels or better; and

consumer shopping habits migrating from traditional brick & mortar” browsing to more online experiences. We cannot be assured that this change will not adversely impact our historical ability to have our newest product offerings discovered, evaluated and appreciated sufficiently to motivate purchase and ultimately build word-of-mouth endorsement about the value of our offerings.

We cannot assure you that:

our current products will continue to be popular with consumers;

 

the products that we introduce will achieve any significant degree of market acceptance;

 

our support of customers with an online shopping proposition is expected to lead to a comparable degree of sales or margins through the offline shopping experience should consumer behavior migrate more of our business in that direction;

the life cycles of our products will be sufficient to permit us to recover our inventory costs, and licensing, design, manufacturing, marketing and other costs associated with those products.products;

 

we will be able to manufacture and distribute new or current products in a timely manner to meet demand; or

our inclusion of new technology will result in higher sales or increased profits.

Our failure to achieve any

Any or all of the foregoing benchmarksfactors may adversely affect our business, financial condition and results of operations.

The failure of our character-relatedoperations and theme-related products to become and/or remain popular with children may materially and adversely impact our business, financial condition and results of operations.condition.

The success of many of our character-related and theme-related products depends upon the popularity of characters in movies, television programs, live sporting exhibitions, and other media and events. We cannot assure you that:
media associated with our character-related and theme-related product lines will be released at the times we expect or will be successful;
the success of media associated with our existing character-related and theme-related product lines will result in substantial promotional value to our products;
we will be successful in renewing licenses upon expiration on terms that are favorable to us; or
we will be successful in obtaining licenses to produce new character-related and theme-related products in the future.
Our failure to achieve any or all of the foregoing benchmarks may cause the infrastructure of our operations to fail, thereby adversely affecting our business, financial condition and results of operations.

There are risks associated with our license agreements.

Our current licenses require us to pay minimum royaltiesroyalties.

Sales of products under trademarks or trade or brand names licensed from others account for substantially all of our net sales. Product licenses allow us to capitalize on characters, designs, concepts and inventions owned by others or developed by toy inventors and designers. Our license agreements generally require us to make specified minimum royalty payments, even if we fail to sell a sufficient number of units to covergenerate these amounts.dollar amounts under the percentage of sales basis under which most agreements are written. Some of our license agreements have additional requirements for marketing spend for the brands licensed. Some of our license agreements disallow certain retailer credits and deductions from the sales base on which royalties are calculated, including in some cases uncollectable accounts. In addition, under certain of our license agreements, if we fail to achieve certain prescribed sales targets, we may be unable to retain or renew these licenses.licenses which may adversely impact our business, results of operations and financial condition. Many of our license agreements, although multi-year in total, require us to pay a minimum level of royalties annually that cannot be recouped outside of selling during that time period (often 12 months). There may also be minimum commitments assigned to specific geographic regions or countries. As a result, sudden shocks to the market, such as has been the case with COVID-19 or when a foundational retailer goes bankrupt, might leave us with these fixed expenses unless licensors are willing to renegotiate terms in consideration for the unexpected nature of the shock. Contractual minimal royalty payments are almost always fixed and determined upon signing, so these sorts of shocks could have a negative impact on our business, results of operations and financial condition for multiple years given the nature and timing of the shock.

Some of our licenses are restricted as to use and include other restrictive provisions.

Under the majority of our license agreements, the licensors have the right to review and approve our use of their licensed products, designs or materials before we may make any sales. If a licensor refuses to permit our use of any licensed property in the way we propose, or if their review process is delayed or not timely, our development, manufacturing and/or sale of new products could be impeded. Our licensing agreements include other restrictive provisions, such as limitations of the time period in which we have to sell existing inventory upon expiration of the license, requiring licensor approval of contract manufacturers and approval of marketing and promotional materials, limitations on channels of distribution, including internet sales, change of ownership clauses that require licensor approval of such change and may require a fee to be paid under certain circumstances and various other provisions that may have an adverse impact on our business, results of operations and financial condition.

New licenses arecan be difficult and expensive to obtain and in some cases, retain.

Our continued success will substantially depend upon our ability to maintain existing relevant and obtain new additional licenses. Intense competition exists for desirable licenses in our industry. We cannot assure you that we will be able to secure or renew significant licenses on terms acceptable to us. In addition, as we add licenses, the need to fund additional capital expenditures, royalty advances and guaranteed minimum royalty payments may strain our cash resources. Often times, licensors require cash advance payments upon signing agreements against future minimum royalty obligations, which requires us to pay out cash several quarters prior to our ability to ship, invoice and ultimately collect revenue from the related product sales. In addition, there might be licensor or consumer expectations that certain toy products contain music or musical elements related to the original entertainment. Those music rights must be separately acquired at additional expense, and as a result can adversely affect our profitability and competitiveness at retail.

A limited number of licensors account for a large portion of our net salessales.

We derive a significant portion of our net sales from a limited number of licensors.licensors, one of which accounted for over 61% of our net sales in 2022. If one or more of these licensors were to terminate or fail to renew our licenselicenses or not grant us new licenses, our business, financial condition and results of operations and financial condition could be adversely affected.

Our license agreements are subject to audit.

In most of our license agreements, the licensor retains the right to utilize an auditor of their choosing to audit our performance against all elements of the agreement up to some number of years after license expiration. In the event that errors or omissions were made in our normal course of business that resulted in underpayment of royalties, shipping product to an unlicensed territory or channel of distribution, or a variety of other technical infractions, we could be liable for past due royalties, accrued interest and other financial penalties as outlined in the agreement.

The failure of our character-related and theme-related products to become and/or remain popular with children may materially and adversely impact our business, results of operations and financial condition.

The success of many of our character-related and theme-related products depends upon the popularity of characters in movies, television programs, live sporting exhibitions, and other media and events. By extension, any sudden disruption in that calendar can have negative repercussions to our business, both in terms of recouping our investments to date, as well as, monetizing those investments at the profit margins we have planned. As we have a 9-18-month concept-to-market timeline depending on the product category, there is a degree of exposure given our dependence on third parties to adhere to their planned schedules. We cannot assure you that:

entertainment content associated with our character-related and theme-related product lines will be released at the times we expect, via the media we expected and/or will reach a wide enough audience to generate the level of consumer demand we anticipated in agreeing to sign the license and develop our product line;

the success of entertainment content associated with our existing character-related and theme-related product lines will result in substantial promotional value to our products;

we will be successful in renewing licenses upon expiration of terms that are favorable to us;

we will be successful in obtaining licenses to produce new character-related and theme-related products in the future;

we will continue to be able to assess effectively our licensors’ ability to launch new brands in a manner to effectively create a market for consumer products given the rapidly changing content distribution landscape and a potential reprioritization of their goals for their content launches; or

we will continue to be able to effectively assess the longevity and market appetite for consumer products for pre-existing licensor brands given the ever-increasing competition for consumers attention and discretionary spending.

Our failure to achieve any or all of the foregoing benchmarks may cause the infrastructure of our operations to fail, thereby adversely affecting our business, results of operations and financial condition.

A limited number of customers account for a large portion of our net sales, so that if one or more of our major customers were to experience difficulties in fulfilling their obligations to us, cease doing business with us, significantly reduce the amount of their purchases from us or return substantial amounts of our products, it could have a materially adverse effect on our business, results of operations and financial condition.

Our two largest customers, Walmart and Target, accounted for 53.9% of our net sales in 2022. Except for outstanding purchase orders for specific products, we do not have written contracts with, or commitments from, any of our customers, and pursuant to the terms of certain of our vendor agreements, even some purchase orders may be cancelled without penalty up until delivery. A substantial reduction in or termination of orders from any of our largest customers would adversely affect our business, results of operations and financial condition. In addition, pressure by large customers seeking price reductions, financial incentives and changes in other terms of sale or for us to bear the risks and the cost of importing and carrying inventory could also adversely affect our business, results of operations and financial condition.

If one or more of our major customers were to experience difficulties in fulfilling their obligations to us resulting from bankruptcy or other deterioration in their financial condition or ability to meet their obligations, cease doing business with us, significantly reduce the amount of their purchases from us, or return substantial amounts of our products, it could have a material adverse effect on our business, results of operations and financial condition. The COVID-19 pandemic has left many customers outside of our largest customers under varying degrees of financial distress. Customers may request extended payment terms which may require us to take on increased credit risk or to reduce or forgo sales entirely in an attempt to mitigate financial risk associated with customer bankruptcy risk.

Restrictions under or the loss of availability under our term loan and revolving credit line could adversely impact our business and financial condition.

In June 2021, we entered into and consummated binding definitive agreements with JPMorgan Chase (for an asset-based credit line) and Benefit Street Partners (a subsidiary of Franklin Templeton – for a secured term loan) to refinance our balance sheet, with the objectives of increasing our overall liquidity, extending the duration of our debt obligations and reducing our overall borrowing costs.

All outstanding borrowings under the revolving credit line and term loan are accelerated and become immediately due and payable (and the revolving credit line and term loan terminate) in the event of a default, which includes, among other things, failure to comply with certain financial covenants or breach of representations contained in the credit line and term loan documents, defaults under other loans or obligations, involvement in bankruptcy proceedings, an occurrence of a change of control or an event constituting a material adverse effect on us (as such terms are defined in the credit line and term loan documents). We are also subject to negative covenants which, during the life of the credit line and term loan, prohibit and/or limit us from, among other things, incurring certain types of other debt, acquiring other companies, making certain expenditures or investments, and changing the character of our business. An outbreak of infectious disease, a pandemic or a similar public health threat, such as the COVID-19 pandemic (see below), could adversely impact our ability to comply with such covenants. Our failure to comply with such covenants or any other breach of the credit line or term loan agreements could cause a default and we may then be required to repay borrowings under our credit line and term loan with capital from other sources. We could also be blocked from future borrowings or obtaining letters of credit under the revolving credit line, and the credit line agreement and the term loan could be terminated by the lenders. Under these circumstances, other sources of capital may not be available or may be available only on unfavorable terms. In the event of a default, it is possible that our assets and certain of our subsidiaries’ assets may be attached or seized by the lenders. Any (i) failure by us to comply with the covenants or other provisions of the credit line and term loan, (ii) difficulty in securing any required future financing, or (iii) any such seizure or attachment of assets could have a material adverse effect on our business and financial condition. Our revolving credit line and term loan mature in May 2026 and June 2027, respectively.

We utilize At the Market Issuance Sales Agreements, pursuant to which we may offer and sell, from time to time, shares of our common stock, which may adversely affect the price of our Common Stock.

We utilize At the Market Issuance Sales Agreements (“ATM Agreements”) pursuant to which we may issue, from time to time, up to $75 million of common stock, in one or more offerings in amounts, prices and at terms that we will determine at the time of the offering. Any such sale of common stock will dilute our other equity holders and may adversely affect the market price of the common stock. Under our currently existing ATM Agreement with B. Riley, as of April 14, 2023, we have not sold any shares of the common stock.

We have an effective shelf registration statement pursuant to which we may offer and sell, from time to time, securities, which may adversely affect the price of our Common Stock.

We have on file with the SEC an effective registration statement pursuant to which we may issue, from time to time, up to an additional $75 million of securities consisting of, or any combination of, common stock, preferred stock, debt securities, warrants, rights and/or units, in one or more offerings in amounts, prices and at terms that we will determine at the time of the offering. Any such sale of stock or convertible securities will, or have the potential to, dilute our other equity holders and may adversely affect the market price of the common stock. As of April 14, 2023, we have not sold any securities pursuant to our shelf registration statement.

The agreement governing our outstanding preferred stock includes terms and conditions that may adversely impact our business and cash flows.

In August 2019, we issued a series of preferred stock with a face amount of $20.0 million. The preferred stock (i) is senior to our common stock, (ii) not convertible into common stock, (iii) earns a dividend at an annual rate of 6% (which may or may not be paid in cash), (iv) includes a liquidation preference of up to 150% of the accrued amount, and (v) included the right to elect up to two members to the Company’s Board of Directors, among other rights, terms and conditions. In addition, the series of preferred stock includes other protective rights and provisions, such as amendments to the Company’s bylaws to restrict changes that may adversely impact the rights of the preferred stockholders, engaging in businesses that are not permitted businesses, as defined, limitations on assets dispositions and entering into a change of control transaction without the approval of the preferred stockholders. Some of these rights, restrictions and other terms and conditions may prevent us from taking advantageous actions with respect to our business, result in our inability to respond effectively to competitive pressures and industry developments, and/or adversely affect our cash flows or operations. In 2022, an agreement was reached with the preferred shareholders to eliminate their ability to elect members to the Company’s Board of Directors on a going-forward basis.

We depend upon our Chief Executive Officer and any loss or interruption of his services could adversely affect our business, results of operations and financial condition.

Our success has been largely dependent upon the experience and continued services of Stephen G. Berman, our Chairman and Chief Executive Officer. Though Mr. Berman is under contract through 2026, we cannot assure you that we would be able to find an appropriate replacement for Mr. Berman should the need arise, and any loss or interruption of the services of Mr. Berman could adversely affect our business, results of operations and financial condition.

Market conditions and other third-party conduct could negatively impact our margins and implementation of other business initiatives.

Economic conditions, such as decreased consumer confidence, inflation or a recession, may adversely impact our business, results of operations and financial condition. In addition, general economic conditions were significantly and negatively affected by the September 11th terrorist attacks and could be similarly affected by any future attacks. The COVID-19 pandemic had a negative impact to our business in 2020 by disrupting consumer behavior, spending patterns and ultimately the play patterns and events that often motivate purchases of our products. Furthermore, restrictions on nearly all of our customers’ operating hours in 2020 at one point in the year or another, limited consumers’ ability to discover our products thru traditional in-store browsing and unplanned purchase. Continuation of such a weakened economic and business climate, as well as consumer uncertainty created by such a climate, could further adversely affect our sales and profitability. Other conditions, such as the unavailability of electronic components or other raw materials, for example, may impede our ability to manufacture, source and ship new and continuing products on a timely basis. Interruptions and delays in the availability of raw materials and finished goods could result from labor stoppages and strikes, the occurrence or threat of wars or similar conflicts, trade restrictions, and severe or unexpected weather conditions and other factors, any of which could adversely affect our business and the results of our operations. Significant and sustained increases in the price of oil, for example, could adversely impact the cost of the raw materials used in the manufacture of certain of our products, such as plastic, as well as ocean and over-the-road shipping costs. Increases in the costs of raw materials and shipping and other transportation costs and delays in the delivery of finished goods, if not offset by higher prices, could adversely impact our sales.

We face risks related to health epidemics and other widespread outbreaks of contagious disease, which could significantly disrupt our supply chain and impact our operating results.

Significant outbreaks of contagious diseases, and other adverse public health developments, could have a material impact on our business operations and operating results. In December 2019, a strain of Novel Coronavirus causing respiratory illness and death emerged in the city of Wuhan in the Hubei province of China. The Chinese government took certain emergency measures to combat the spread of the virus, including extension of the Lunar New Year holiday, implementation of travel bans and closure of factories and businesses. The majority of our materials and products are sourced from suppliers located in China.

The COVID-19 virus was ultimately declared a global pandemic by the World Health Organization and has been spreading throughout the world, including the United States, resulting in emergency measures, including travel bans, closure of retail stores, and restrictions on gatherings of more than a maximum number of people. These outbreaks are disruptive to local economies and commercial activity, and create downward pressure on our ability to make our product line available to consumers or for consumers to purchase our products, even if our products are available. At this time, we still cannot predict with any certainty the further duration and depth of the impact in the United States or other places worldwide where we sell our products or manufacture our products. Accordingly, it is extremely challenging to estimate the extent by which we will be negatively impacted by this disease. Uncertainty surrounds the length of time this disease will continue to spread, and the extent governments will continue to impose, or add additional, quarantines, curfews, travel restrictions and closures of retail stores. In addition, even following control of the disease and the end of the pandemic, the economic dislocation caused by the disease to so many people may linger and be so significant that consumers’ focus could be directed away from consumer discretionary spending for products such as ours for an extended period of time. For all of these reasons, at this time we cannot quantify the extent of the impact this disease will have on our sales, net income and cash flows, but it could be quite significant.

Our business is seasonal and therefore our annual operating results will depend, in large part, on our sales during the relatively brief holiday shopping season. This seasonality is exacerbated by retailers shifting inventory management techniques.

Sales of our products at retail are extremely seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season. Further, e-commerce is growing significantly and accounts for a higher portion of the ultimate sales of our products. E-commerce retailers tend to hold less inventory and take inventory closer to the time of sale to consumers than traditional brick-and-mortar retailers. As a result, customers are timing their orders so that they are being filled by suppliers, such as us, closer to the time of purchase by consumers. For our products, a majority of retail sales for the entire year generally occur in the fourth quarter, close to the holiday season. As a consequence, the majority of our sales to our customers occur in the third and fourth quarters, as our customers do not want to maintain large on-hand inventories throughout the year ahead of consumer demand. While these techniques reduce a retailer’s investment in inventory, they increase pressure on suppliers like us to fill orders promptly and thereby shift a significant portion of inventory risk and carrying costs to the supplier. The level of inventory carried by retailers may also reduce or delay retail sales resulting in lower revenues for us. If we or our customers determine that one of our products is more popular at retail than was originally anticipated, we may not have sufficient time to produce and ship enough additional products to fully meet consumer demand. Additionally, the logistics of supplying more and more product within shorter time periods increases the risk that we will fail to achieve tight and compressed shipping schedules and quality control, which also may reduce our sales and harm our results of operations. This seasonal pattern requires significant use of working capital, mainly to manufacture or acquire inventory during the portion of the year prior to the holiday season, and it requires accurate forecasting of demand for products during the holiday season in order to avoid losing potential sales of popular products or producing excess inventory of products that exceed consumer demand. Our failure to accurately predict and respond to consumer demand, resulting in under-producing popular items and/or overproducing less popular items, could significantly reduce our total sales, negatively impact our cash flows, increase the risk of inventory obsolescence, and harm our results of operations and financial condition. In addition, as a result of the seasonal nature of our business, we would be significantly and adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events such as a terrorist attack or economic shock that harm the retail environment or consumer buying patterns during our key selling season, or by events such as strikes or port delays that interfere with the shipment of goods, during the critical months leading up to the holiday shopping season.

The COVID-19 pandemic has also accelerated consumers’ shift to e-commerce transactions with traditional brick & mortar retailers. Some of these transactions are for “ship-to-home” purchases and some are for local pick-up by the consumer at the brick-and-mortar location. In either case, the consumer’s path to discovery of new items changes to a digital medium. It remains to be seen whether this change has a negative adverse impact on consumers’ ability to discover the breadth and depth of our product range or whether it discourages adding incremental unplanned purchases to the shopping cart. Either scenario could have a negative impact on our overall business performance.

Our Costume (Disguise) business is even more seasonal than our core Toy/Consumer Products business as Halloween remains the primary purchase occasion for our costumes. This seasonality is further exacerbated by consumer migration to online shopping as the style and size attributes of the Halloween business (i.e., we make the same costume in multiple sizes, and the same item costume across a very wide range of brands and properties) in part behaves like an apparel-driven transaction rather than one-size-for-all toy/consumer product transaction.

In 2020, COVID-19 was an unexpected shock to the market, making the traditional Halloween experience less feasible to celebrate in its traditional manner. It had a material impact on our sales of related product. Any similar event that suddenly makes the holiday less relevant or infeasible to celebrate can and likely will have a negative impact on that segment of business. Given that securing licenses, product design and development and ultimately sourcing of the product takes place over a year in advance of the actual Halloween selling season, we have limited ability to recover invested expense if the market demand for those products were to suddenly be reduced. Although some product could be held in inventory or materials rolled forward to the next manufacturing season, these events would in turn incrementally tie up our capital and add warehousing expense until the following year at best, and/or put added strain on our third-party manufacturers.

We depend upon third-party manufacturers, and if our relationship with any of them is harmed or if they independently encounter difficulties in their manufacturing processes, we could experience product defects, production delays, unplanned costs or higher product costs, or the inability to fulfill orders on a timely basis, any of which could adversely affect our business, results of operations and financial condition.

We depend upon many third-party manufacturers who develop, provide and use the tools, dies and molds that we generally own to manufacture our products. However, we have limited control over the manufacturing processes themselves. As a result, any difficulties encountered by the third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis, could adversely affect our business, results of operations and financial condition.

We do not have long-term contracts with our third-party manufacturers. Although we believe we could secure other third-party manufacturers to produce our products, our operations would be adversely affected if we suddenly lost our relationship with any of our current suppliers or if our current suppliers’ operations or sea or air transportation with our overseas manufacturers were disrupted or terminated even for a relatively short period of time. Our tools, dies and molds are located at the facilities of our third-party manufacturers. Although we own the majority of those tools, dies and molds, our ability to retrieve them and move them to a new manufacturer might be limited by lack of manufacturing equipment compatibility. In addition, the current COVID-19 pandemic has made on-site engagement of our vendor base more challenging.

Although we do not purchase the raw materials used to manufacture our products, we are potentially subject to variations in the prices we pay our third-party manufacturers for products, depending upon what they pay for their raw materials. We may also incur costs or other losses as a result of not placing orders consistent with our forecasts for product manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. In the event that some unexpected shock to the market (like the COVID-19 pandemic) were to suddenly drastically change demand for product anticipated to be procured from our third-party manufacturers, we may incur some costs relating to raw materials they have ordered on our behalf, and/or finished goods that were not shipped due to last-minute cancelled orders from our customers buying FOB from China.

Although our manufacturers bear the foreign-exchange risk by committing to USD/HKD pricing despite having non-USD/HKD cost elements, we could nonetheless be adversely impacted if they fail to manage that risk accordingly. In that event, the predictable flow of product at the prices we expect could be disrupted, and we may not have adequate time to source comparable product elsewhere in time to avoid disruptions in our selling cycle.

The toy industry is highly competitive and our inability to compete effectively may materially and adversely impact our business, financial condition and results of operations.operations and financial condition.

The toy industry is highly competitive. Globally, certain of our competitors have financial and strategic advantages over us, including:

greater financial resources;

 greater financial resources;
 

larger sales, marketing and product development departments;

 

stronger brand name recognition;recognition and/or well-established owned brands/trademark;

broader international sales and marketing infrastructure;

 

longer operating histories; and

 

greater economies of scale.scale, inclusive of purchasing power and leverage of their investments across a range of areas, inclusive but not limited to research, technology, data analytics and strategic sourcing.

In addition, the toy industry has no significant barriers to entry. Competition is based primarily upon the ability to design and develop new toys, procure licenses for popular characters and trademarks, and successfully market products. Many of our competitors offer similar products or alternatives to our products. Our competitors have obtained and are likely to continue to obtain licenses that overlap our licenses with respect to products, geographic areas and markets.retail channels. We cannot assure you that we will be able to obtain adequate shelf space in retail stores to support our existing products, expand our products and product lines or continue to compete effectively against current and future competitors.


We

Our corporate headquarters, fulfillment center and information technology systems are in Southern California, and if these operations are disrupted, we may not be able to sustain operate our core functions and/or manage our product line growth, which may prevent us from increasing our net revenues.

Historically, we have experienced growth in our product lines through acquisitions of businesses, products and licenses. This growth in product lines has contributed significantlyship merchandise to our total revenues overcustomers, which would adversely affect our business.

Our corporate headquarters, distribution center and information technology systems are in Santa Monica and the last few years. Even thoughCity of Industry, California, and the overwhelming majority of our U.S.-based staff lives in Southern California. If we had no significant acquisitions since 2012, comparing our future period-to-period operating results may not be meaningful and results of operations from prior periods may not be indicative of future results. We cannot assure you that we will continueencounter any disruptions to experience growth in, or maintain our present level of, net sales.

Our growth strategy calls for us to continuously develop and diversify our toy business by acquiring other companies, entering into additional license agreements, refining our product lines and expanding into international markets, which will place additional demands upon our management, operational capacity and financial resources and systems. The increased demand upon management may necessitate our recruitment and retention of qualified management personnel. We cannot assure you that we will be able to recruit and retain qualified personnel or expand and manage our operations within these buildings, or if they were to shut down for any reason, including by fire or other natural disaster, or as a result of the COVID-19 pandemic, then we may be prevented from effectively operating, shipping and profitably. To effectively manage future growth, we must continueprocessing our merchandise. Furthermore, the risk of disruption or shut down at these buildings and/or within the Southern California community is greater than it might be if they were located in another region as Southern California is prone to expandnatural disasters such as earthquakes and wildfires. Any disruption or shut down at these locations could significantly impact our operational, financialoperations and management information systems and to train, motivate and manage our work force. There can be no assurance that our operational, financial and management information systems will be adequate to support our future operations. Failure to expand our operational, financial and management information systems or to train, motivate or manage employees could have a material adverse effect on our business, financial condition and results of operations.
In addition, implementation of our growth strategy is subject to risks beyond our control, including competition, market acceptance of new products, changes in economic conditions, our ability to obtain or renew licenses on commercially reasonable terms, our ability to identify acquisition candidates and conclude acquisitions on acceptable terms, and our ability to finance increased levels of accounts receivable and inventory necessary to support our sales growth, if any. Accordingly, we cannot assure you that our growth strategy will be successful.
If we are unable to acquire and integrate companies and new product lines successfully, we will be unable to implement a significant component of our growth strategy.
Our growth strategy depends, in part, upon our ability to acquire companies and new product lines. Future acquisitions, if any, may succeed only if we can effectively assess characteristics of potential target companies and product lines, such as:
attractiveness of products;
suitability of distribution channels;
management ability;
financial condition and results of operations; and
the degree to which acquired operations can be integrated with our operations.
We cannot assure you that we can identify attractive acquisition candidates or negotiate acceptable acquisition terms, and our failure to do so may adversely affect our results of operations and our ability to sustain growth. Our acquisition strategy involves a number of risks, each of which could adversely affect our operating results, including:
difficulties in integrating acquired businesses or product lines, assimilating new facilities and personnel and harmonizing diverse business strategies and methods of operation;
diversion of management attention from operation of our existing business;
loss of key personnel from acquired companies;
failure of an acquired business to achieve targeted financial results; and
Limited capital to finance acquisitions.

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A limited number of customers account for a large portion of our net sales, so that if one or more of our major customers were to experience difficulties in fulfilling their obligations to us, cease doing business with us, significantly reduce the amount of their purchases from us or return substantial amounts of our products, it could have a material adverse effect on our business, financial condition and results of operations.
Our three largest customers accounted for 54.6% of our net sales in 2017. Except for outstanding purchase orders for specific products, we do not have written contracts with or commitments from any of our customers and pursuant to the terms of certain of our vendor agreements, even some purchase orders may be cancelled without penalty up until delivery. A substantial reduction in or termination of orders from any of our largest customers could adversely affect our business, financial condition and results of operations. In addition, pressure by large customers seeking price reductions, financial incentives, and changes in other terms of sale or for us to bear the risks and the cost of carrying inventory could also adversely affectit is possible that our business financial condition and results of operations. If one or more of our major customers were to experience difficulties in fulfilling their obligations to us, cease doing business with us, significantly reduce the amount of their purchases from us or return substantial amounts of our products, it could have a material adverse effect on our business, financial condition and results of operations. In addition, the bankruptcy or other lack of success of one or more of our significant retailers could negatively impact our revenues and bad debt expense.

Liquidity problems or bankruptcy of our key customers, including the recent bankruptcy filing by Toys “R” Us, could have a significant adverse effect on our business, financial condition and results of operations.

Our sales to customers are typically made on credit without collateral. There is a risk that key customersoperations will not pay, or that payment may be delayed, because of bankruptcy, concentration of credit availability to such customers, weak retail sales or other factors beyond our control, which could increase our exposure to losses from bad debts. In addition, if key customers were to cease doing business as a result of bankruptcy or significantly reduce the number of stores operated, it could have a significant adverse effect on our business, financial condition, and results of operations.

On September 18, 2017, Toys “R” Us, Inc. (“Toys R Us”), accounting for 11.3% and 12.8% of our net sales for the fiscal years ended December 31, 2017 and 2016, announced that certain of its U.S. subsidiaries and its Canadian subsidiary voluntarily filed for relief under Chapter 11 of the Bankruptcy Code in the U.S. and that its Canadian subsidiary also began parallel proceedings under the Companies’ Creditors Arrangement Act (“CCAA”) in Canada.

On March 15, 2018, Toys R Us filed a motion to conduct an orderly wind down of its operations in the U.S. and commence store closing sales at all 735 US stores. Our worldwide Toys R Us accounts receivable balance as of March 15, 2018 is $35.9 million (unaudited). Due to the evolving nature of this matter, it is too early to assess the impact on the collectibility of this receivable and on future revenues we generate from this customer relationship (See Notes 3 and 22).
We depend upon our Chief Executive Officer and any loss or interruption of his services could adversely affect our business, financial condition and results of operations.
Our success has been largely dependent upon the experience and continued services of Stephen G. Berman, our President and Chief Executive Officer. We cannot assure you that we would be able to find an appropriate replacement for Mr. Berman should the need arise, and any loss or interruption of the services of Mr. Berman could adversely affect our business, financial condition and results of operations.
We depend upon third-party manufacturers, and if our relationship with any of them is harmed or if they independently encounter difficulties in their manufacturing processes, we could experience product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis, any of which could adversely affect our business, financial condition and results of operations.
We depend upon many third-party manufacturers who develop, provide and use the tools, dyes and molds that we generally own to manufacture our products. However, we have limited control over the manufacturing processes themselves. As a result, any difficulties encountered by the third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis could adversely affect our business, financial condition and results of operations.
We do not have long-term contracts with our third-party manufacturers. Although we believe we could secure other third-party manufacturers to produce our products, our operations would be adversely affected ifimpacted by future climate changes, albeit in ways we lost our relationship with any of our current supplierscannot predict or if our current suppliers’ operations or sea or air transportation with our overseas manufacturers were disrupted or terminated even for a relatively short period ofquantify at this time. Our tools, dyes and molds are located at the facilities of our third-party manufacturers.

Although we do not purchase the raw materials used to manufacture our products, we are potentially subject to variations in the prices we pay our third-party manufacturers for products, depending upon what they pay for their raw materials.

We have substantial sales and manufacturing operations outside of the United States, subjecting us to risks common to international operations.

We sell products and operate facilities in numerous countries outside the United States. Sales to our international customers comprised approximately 21.9%19.1% of our net sales for the year ended December 31, 20172022 and approximately 23.0%17.5% of our net sales for the year ended December 31, 2016.2021. We expect our sales to international customers to account for a greater portion of our revenues in future fiscal periods. Additionally, we utilizeuse third-party manufacturers, located principally in China, and are subject to the risks normally associated with international operations, including:

currency conversion risks and currency fluctuations;

 

limitations, including taxes, on the repatriation of earnings;

 

political instability, including wars and civil unrest, and economic instability;


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greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;

 

complications in complying with laws in varying jurisdictions and changes in governmental policies;

 

greater difficulty and expenses associated with recovering from natural disasters, such as earthquakes, hurricanes and floods;

 

transportation delays and interruption;interruption, inclusive of raw materials sourcing to our third-party manufacturers as well as finished goods delivery through to our customers and ultimate consumers;

 

work stoppages;

 

the potential imposition of tariffs; and

 

the pricing of intercompany transactions may be challenged by taxing authorities in both foreign jurisdictions and the United States, with potential increases in income and other taxes.

Our reliance upon external sources of manufacturing can be shifted, over a period of time, to alternative sources of supply, should such changes be necessary. However, if we were prevented from obtaining products or components for a material portion of our product line due to medical,regulatory, political, labor or other factors beyond our control, our operations would be disrupted while alternative sources of products were secured. Also, the imposition of trade sanctions by the United States against a class of products imported by us from, or the loss of “normal trade relations” status by China could significantly increase our cost of products imported from that nation. Because of the importance of international sales and international sourcing of manufacturing to our business, our financial condition and results of operations and financial condition could be significantly and adversely affected if any of the risks described above were to occur.

Legal proceedings may harm our business, results of operations, and financial condition.

We are a party to lawsuits and other legal proceedings in the normal course of our business. Litigation and other legal proceedings can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We cannot provide assurance that we will not be a party to additional legal proceedings in the future. To the extent legal proceedings continue for long time periods or are adversely resolved, our business, results of operations, and financial condition could be significantly harmed.

Our business is subject to extensive government regulation and any violation by us of such regulations could result in product liability claims, loss of sales, diversion of resources, damage to our reputation, increased warranty costs or removal of our products from the market, and we cannot assure you that our product liability insurance for the foregoing will be sufficient.

Our business is subject to various laws, including the Federal Hazardous Substances Act, the Consumer Product Safety Act, the Flammable Fabrics Act and the rules and regulations promulgated under these acts. These statutes are administered by the CPSC,Consumer Product Safety Commission (“CPSC”), which has the authority to remove from the market products that are found to be defective and present a substantial hazard or risk of serious injury or death. The CPSC can require a manufacturer to recall, repair or replace these products under certain circumstances. We cannot assure you that defects in our products will not be alleged or found. Any such allegations or findings could result in:

product liability claims;

 product liability claims;

loss of sales;

 loss

diversion of sales;resources;

 diversion of resources;
 

damage to our reputation;

 

increased warranty and insurance costs; and

 

removal of our products from the market.market and/or destruction of existing inventory.

Any of these results may adversely affect our business, financial condition and results of operations.operations and financial condition. There can be no assurance that our product liability insurance will be sufficient to avoid or limit our loss in the event of an adverse outcome of any product liability claim.

We depend upon our proprietary rights, and our inability to safeguard and maintain the same, or claims of third partiesthird-parties that we have violated their intellectual property rights, could have a material adverse effect on our business, financial condition and results of operations.operations and financial condition.

We rely upon trademark, copyright and trade secret protection, nondisclosure agreements and licensing arrangements to establish, protect and enforce our proprietary rights in our products. The laws of certain foreign countries may not protect intellectual property rights to the same extent or in the same manner as the laws of the United States. We cannot assure you that we or our licensors will be able to successfully safeguard and maintain our proprietary rights. Further, certain parties have commenced legal proceedings or made claims against us based upon our alleged patent infringement, misappropriation of trade secrets or other violations of their intellectual property rights. We cannot assure you that other parties will not assert intellectual property claims against us in the future. These claims could divert our attention from operating our business or result in unanticipated legal and other costs, which could adversely affect our business, results of operations and financial condition.

Restructuring our workforce can be disruptive and harm our results of operations and financial condition.

We have in the past restructured or made other adjustments to our workforce in response to the economic environment, performance issues, acquisitions, and other internal and external considerations. Restructurings can among other things result in a temporary lack of focus, reductions in net sales and reduced productivity. In addition, we may be unable to realize the anticipated cost savings from our previously announced restructuring efforts or may incur additional and/or unexpected costs in order to realize the anticipated savings. The amounts of anticipated cost savings and anticipated expenses-related restructurings are based on our current estimates, but they involve risks, uncertainties, assumptions and other factors that may cause actual results, performance or achievements to be materially different from those previously planned. These impacts, among others, could occur in connection with previously announced restructuring efforts, or related to future acquisitions and other restructurings and, as a result, our results of operations and financial condition and results of operations.


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Market conditions and other third-party conduct could negatively impact our margins and implementation of other business initiatives.
Economic conditions, such as decreased consumer confidence, may adversely impact our margins. In addition, general economic conditions were significantly and negatively affected by the September 11th terrorist attacks and could be similarly affected by any future attacks. Suchnegatively affected. In particular, in April 2020 the company executed a weakened economic and business climate, as well as consumer uncertainty created by such a climate,restructuring of its workforce to mitigate costs in light of reduced revenue expectations attributable to the COVID-19 pandemic.

The inability to successfully defend claims from taxing authorities or the adoption of new tax legislation could adversely affect our salesresults of operations and profitability. Other conditions, suchfinancial condition.

We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those jurisdictions. Due to the complexity of tax laws in those jurisdictions as well as the unavailabilitysubjectivity of electronics components,factual interpretations, our estimates of income tax liabilities may impedediffer from actual payments or assessments. Claims from tax authorities related to these differences could have an adverse impact on our ability to manufacture, sourceresults of operations and ship new and continuing products on a timely basis. Significant and sustained increasesfinancial condition. In addition, legislative bodies in the price of oil could adversely impact the cost of the raw materials usedvarious countries in the manufacture of our products, such as plastic.

Wewhich we do business may not have the funds necessaryfrom time to purchase our outstanding convertible senior notes upon a fundamental change or other purchase date, as required by the indenture governing the notes.
In June 2014 we sold an aggregate of $115.0 million principal amount of 4.875% convertible senior notes due on June 1, 2020, of which $113.0 million are currently outstanding (the “2020 Notes”). In July 2013, we sold an aggregate of $100.0 million principal amount of 4.25% convertible senior notes due on August 1, 2018, of which $21.2 million are currently outstanding (the “2018 Notes”) and $21.5 million were extended to November 1, 2020 (the “3.25% 2020 Notes” and collectively with the 2018 Notes and 2020 Notes, the “Notes”). Holders of the Notes may require us to repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the Notes). Holders of the Notes may convert their notes upon the occurrence of specified events. Upon conversion, the Notes will be settled in shares of our common stock and/or in cash. Restrictions on borrowings under or loss of our credit facilitytime adopt new tax legislation that could have a material adverse effect on our business, results of operations and financial condition including an adverse impact oncondition.

We may not be able to sustain or manage our ability to pay the Notes when due.

Restrictions under or the loss of availability under our credit facility could adversely impact our financial condition and our ability to pay our convertible senior notes when due.
In March 2014, we obtained a $75.0 million revolvingproduct line of credit. Any amounts borrowed under the revolving credit line are our senior secured obligations. All outstanding borrowings under the revolving credit line are accelerated and become immediately due and payable (and the revolving credit line terminates) in the event of a defaultgrowth, which includes, among other things, failure to comply with financial ratio covenants or breach of representations contained in the credit line documents, defaults under other loans or obligations, involvement in bankruptcy proceedings, an occurrence of a change of control or an event constituting a material adverse effect on us (as such terms are defined in the credit line documents). We are also subject to negative covenants which, during the life of the credit line, prohibit and/or limitmay prevent us from among other things, incurring certain typesincreasing our net revenues.

Historically, we experienced growth in our product lines through acquisitions of other debt,businesses, products and licenses. This growth in product lines has contributed significantly to our total revenues over the years. Even though we have had no significant acquisitions since 2012, comparing our future period-to-period operating results may not be meaningful and results of operations from prior periods may not be indicative of future results. We cannot assure that we will continue to experience growth in, or maintain our present level of, net sales.

Our growth strategy calls for us to continuously develop and diversify our toy business by acquiring other companies, making certain expenditures or investments, changing the characterentering into additional license agreements, refining our product lines, expanding into adjacent Toys/Consumer Products/Costume categories and expanding into international markets, which will place additional demands upon our management, operational capacity and financial resources and systems. The increased demand upon management may necessitate our recruitment and retention of our business, and certain changes to our executive officers.

qualified management personnel. We have a valuation allowance on the deferred taxes on our books since their future realization is uncertain.

Deferred tax assets are realized by prior and future taxable income of appropriate character. Current accounting standards requirecannot assure that a valuation allowance be recorded if it is not likely that sufficient taxable income of appropriate characterwe will be generatedable to realize the deferred tax assets. We currently believe that based on the availablerecruit and retain qualified personnel or expand and manage our operations effectively and profitably. To effectively manage future growth, we must continue to expand our operational, financial and management information it is more likely than notsystems and to train, motivate and manage our workforce. There can be no assurance that our deferred tax assetsoperational, financial and management information systems will not be realized,adequate to support our future operations. Failure to expand our operational, financial and accordingly we have recorded a valuation allowance against our US federal and state deferred tax assets. Our net operating losses and tax credit carry-forwards can expire if unused, and their utilization could be substantially limited in the event of an "ownership change," as defined in Section 382 of the Internal Revenue Code of 1986, as amended,management information systems or the Internal Revenue Code.
An adverse decision in litigation in which we have been named as a defendantto train, motivate or manage employees could have a material adverse effect on our financial condition andbusiness, results of operations. operations and financial condition.

We are defendants

In addition, implementation of our growth strategy is subject to risks beyond our control, including competition, market acceptance of new products, changes in a class action described hereineconomic conditions, our ability to obtain or renew licenses on commercially reasonable terms, our ability to identify acquisition candidates and under “Legal Proceedings” inconclude acquisitions on acceptable terms, and our periodic reports filed pursuantability to obtain the Securities Exchange Actrequired consents from certain lenders and finance increased levels of 1934 (see “Legal Proceedings”). No assurances can be givenaccounts receivable and inventory necessary to support our sales growth, if any. Accordingly, we cannot assure that the results of these litigation mattersour growth strategy will be favorable to us or that an adverse decision in such litigation would not have a material adverse impact on our financial condition and resultssuccessful.

We rely extensively on information technology in our operations, and any material failure, inadequacy, interruption, or security breach of that technology could have a material adverse impact on our business.

We rely extensively on information technology systems across our operations, including for management of our supply chain, sale and delivery of our products and services, reporting our results of operations, collection and storage of consumer data, personal data of customers, employees and other stakeholders, and various other processes and transactions. Many of these systems are managed by third-party service providers. We use third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. AIn any given year, a small and growing volume of our consumer products and services are web-based,may rely on a component or element which is internet-enabled, and some aremay be offered in conjunction with business partners or such third-party service providers. We, our business partners and third-party service providers may collect, process, store and transmit consumer data, including personal information, in connection with those products and services. Failure to follow applicable regulations related to those activities, or to prevent or mitigate data loss or other security breaches, including breaches of our business partners’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information, which could adversely affect our operating results of operations, result in regulatory enforcement or other litigation and could be a potential liability for us, and otherwise significantly harm our business. Our ability to effectively manage our business and coordinate the production, distribution, and sale of our products and services depends significantly on the reliability and capacity of these systems and third-party service providers.

Although we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third partythird-party provider, such measures cannot provide absolute security. We have exposureexposures to similar security risks faced by other large companies that have data stored on their information technology systems. ToIn December 2022 we were the target of a ransomware attack which caused a temporary disruption in our knowledge, weinformation technology system that did not have a material adverse impact on our results of operations. We implemented and continue to implement improvements to our information technology systems to defend against and mitigate the potential impact of such attacks. There is no assurance, however, that such improvements will be successful in preventing such attacks in the future. There is also no assurance that such an event or other attacks against our information technology systems in the future might not experienced any material breachhave an adverse impact on our business, or that the exfiltration of certain sensitive employee and vendor data as a result of such attack or future events of this nature might not result in claims or litigations in the future. If our cybersecurity systems. If wesystems or our third-party service providersproviders’ systems fail to operate effectively or are damaged, destroyed, or shut down, or there are problems with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of the aforementioned could occur as a result of natural disasters, human error, software or equipment failures, telecommunications failures, loss or theft of equipment, acts of terrorism, circumvention of security systems, or other cyber-attacks, including denial-of-service attacks, we could experience delays or decreases in product sales, and reduced efficiency of our operations. Additionally, any of these events could lead to violations of continually evolving privacy laws, loss of customers, or loss, misappropriation or corruption of confidential information, trade secrets or data, which could expose us to potential litigation, regulatory actions, sanctions or other statutory penalties, any or all of which could adversely affect our business, and cause itus to incur significant losses and remediation costs.

The COVID-19 pandemic required most of our employees to work remotely, putting unprecedented strain on our information technology resources and infrastructure. Although in 2022 we defaulted back to a more traditional on-premise work model, we continue to support a higher degree of work-from-home opportunities than we did pre-COVID-19 (“the work-from-home model”). Although our policies and procedures continue to adjust and adapt informed by our own experiences and market norms, we cannot say with certainty what level of hybrid work we will continue to support as we move forward. With that in mind, we cannot be sure how remote work may generate an increase in new and unforeseen risks of business disruption and/or increased complexity across the range of functions that comprise the Company’s daily activities. In addition, the work-from-home model may increase our vulnerability to hacking and other nefarious activities as employees adjust to new hardware/software infrastructure, resources and processes as well as close the gap created by no longer being in close physical proximity to their colleagues. Although all employees are required to use work infrastructure and our secure VPN, we cannot be completely certain that we will not have increased exposure to security considerations in this environment.

If we are unable to acquire and integrate companies and new product lines successfully, we will be unable to implement a significant component of our growth strategy.

Our growth strategy depends, in part, upon our ability to acquire companies and new product lines. Future acquisitions, if any, may succeed only if we can effectively assess characteristics of potential target companies and product lines, such as:

attractiveness of products;

suitability of distribution channels;

management ability;

financial condition and results of operations;

supply-chain resilience and competitive advantage;

the degree to which acquired operations can be seamlessly integrated with our organization; and

appropriate valuation and our ability to create substantially more value post-acquisition.

We cannot assure you that we can identify attractive acquisition candidates or negotiate acceptable acquisition terms, and our failure to do so may adversely affect our results of operations and our ability to sustain growth. Our acquisition strategy involves a number of risks, each of which could adversely affect our operating results, including:

difficulties in integrating acquired businesses or product lines, assimilating new facilities and personnel, and harmonizing diverse business strategies and methods of operation;

diversion of management attention from operation of our existing business;

loss of key personnel and institutional knowledge from acquired companies;

failure of an acquired business to achieve targeted financial results, inclusive of working capital needs;

limited capital to finance acquisitions and/or fund appropriate working capital post-acquisition; and

inability to maintain or secure relevant licenses to maintain or expand the net sales of acquired business.

We may engage in strategic transactions that could negatively impact our liquidity, increase our expenses and present significant distractions to our management.

We may consider strategic transactions and business arrangements, including, but not limited to, acquisitions, asset purchases, partnerships, joint ventures, restructurings, divestitures and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could harm our operations and financial results.

If securities or industry analysts publish inaccurate or unfavorable research about our business, the price and trading volume of our common stock could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our common stock, publishes inaccurate or unfavorable research about our business, or sets unreasonable expectations or makes erroneous assumptions about our future performance which ultimately are not achieved, the price of our common stock would likely decline. If one or more of these analysts cease coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause the price of our common stock and trading volume to decline.

We have a small public float compared to other larger publicly-traded companies, which may result in price swings in our common stock or make it difficult to acquire or dispose of our common stock.

This small public float can result in large swings in our stock price with relatively low trading volume. In addition, a purchaser that seeks to acquire a significant number of shares may be unable to do so without increasing our common stock price, and conversely, a seller that seeks to dispose of a significant number of shares may experience a decreasing stock price.

Our stock price has been volatile over the past several years and could decline in the future, resulting in losses for our investors.

All the factors discussed in this section, disclosures made in other parts of this Annual Report on Form 10-K, or any other material announcements or events could affect our stock price. In addition, quarterly fluctuations in our operating results, changes in investor and analyst perception of the business risks and conditions of our business, our ability to meet earnings estimates and other performance expectations of financial analysts or investors, unfavorable commentary or downgrades of our stock by research analysts, fluctuations in the stock prices of other toy companies or in stock markets in general, and general economic or political conditions could also cause the price of our stock to change. A significant drop in the price of our stock could expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, adversely affecting our business.

We have a valuation allowance on a portion of the deferred taxes on our books since their future realization is uncertain.

Deferred tax assets are realized by prior and future taxable income of appropriate character. Current accounting standards require that a valuation allowance be recorded if it is not likely that sufficient taxable income of appropriate character will be generated to realize the deferred tax assets. We currently believe that based on the available information, it is more likely than not that a portion of the deferred tax assets, related to capital losses, will not be realized.

We have a material amount of goodwill which, if it becomes impaired, would result in a reduction in our net earnings.

Goodwill is the amount by which the cost of an acquisition exceeds the fair value of the net assets we acquire. Goodwill is not amortized and is required to be evaluated for impairment at least annually. At December 31, 2022, $35.1 million, or 8.7% of our total assets represented goodwill. Declines in our profitability may impact the fair value of our reporting units, which could result in a write-down of our goodwill and consequently harm our results of operations. We did not record any goodwill impairment charges during 2022, 2021, or 2020. In the future, if we do not maintain our profitability and growth targets, the carrying value of our goodwill may become impaired, resulting in impairment charges.

Item 2. Properties

The following is a listing of the principal leased offices maintained by us as of February 28, 2018:April 14, 2023

Property
Location

 
Approximate
Square Feet

 
Lease Expiration
Date
US and Canada *

Approximate

 

LeaseExpiration

Property

 

Location

 

Square Feet

Date

US*

Distribution Center

City of Industry, California

 

800,000

 

April 30, 20232025

Distribution CenterHickory, North Carolina

Disguise Office

 139,300

Poway, California

 August 31, 2018
Sales Office/ShowroomBentonville, Arkansas

24,200

 

June 30, 2024

9,000

Corporate Headquarters/Showroom

 September 30, 2019
Disguise OfficePoway,

Santa Monica, California

 24,200

65,858

 March

January 31, 20212024

Sales OfficeHoffman Estates, Illinois

 2,102

 December 31, 2018
Corporate Office/ShowroomSanta Monica, California

 

65,858

International *

 January 31, 2024
ShowroomGlendale, California

 5,830

 January 31, 2020

Distribution CenterBrampton, Ontario, Canada

Europe Office

 105,700

Bracknell, United Kingdom

 December 31, 2019

8,957

 

January 19, 2027

Hong Kong Headquarters

 

Kowloon, Hong Kong

 
International *

18,500

 
Europe OfficeBerkshire, United Kingdom4,746January 19, 2027
Hong Kong HeadquartersKowloon, Hong Kong41,130

June 30, 2019

Production Inspection and Testing OfficeShenzhen, China5,417May 14, 2019
Production Inspection and
Testing Lab
Kowloon, Hong Kong34,400October 31, 2018
2025

 *The Halloween

* The Costumes segment is included in the properties listed above.



Item 3. Legal Proceedings

We are a party to, and certain of

For information regarding our property is the subject of, various pending claims and legal proceedings, that routinely arise in the ordinary course of our business, but we do not believe that any of these claims or proceedings will have a material effect on our business, financial condition or results of operations. see Item 8 “Consolidated Financial Statements and Supplementary Data Note 20 – Litigation and Contingencies.”

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Item 4. Mine Safety Disclosures

Not applicable.



PART II

Item 5. Market for Registrant’sRegistrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is traded on the Nasdaq Global Select exchange under the symbol “JAKK.” The following table sets forth, for the periods indicated, the range of high and low sales prices for our common stock on this exchange.

  
Price Range of
Common Stock
 
  High  Low 
2016:      
First quarter $7.97  $6.17 
Second quarter  8.02   6.94 
Third quarter  9.75   7.57 
Fourth quarter  9.15   4.63 
2017:        
First quarter  5.85   4.78 
Second quarter  5.55   3.80 
Third quarter  4.20   2.68 
Fourth quarter  3.55   2.20 
Performance Graph
The graph and tables below display the relative performance of our common stock, the Russell 2000 Price Index (the “Russell 2000”) and a peer group index, by comparing the cumulative total stockholder return (which assumes reinvestment of dividends, if any) on an assumed $100 investment on December 31, 2012 in our common stock, the Russell 2000 and the peer group index over the period from January 1, 2013 to December 31, 2017.
In accordance with recently enacted regulations implemented by the Securities and Exchange Commission, we retained the services of an expert compensation consultant. In the performance of its services, such consultant used a peer group index for its analysis of our compensation policies. We believe that these companies represent a cross-section of publicly-traded companies with product lines and businesses similar to our own throughout the comparison period and, accordingly, we are using the same peer group for purposes of the performance graph. EMak Worldwide Inc. and THQ Inc. were excluded from the performance peer group in 2014, Kid Brands, Inc. was excluded in 2015 and Leapfrog Enterprises, Inc. was excluded in 2016. Deckers Outdoor Corporation was added in 2016 and our peer group index now is comprised of the following companies: Activision Blizzard, Inc., Deckers Outdoor Corporation, Electronic Arts, Inc., Hasbro, Inc., Mattel, Inc. and Take-Two Interactive, Inc.
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The historical performance data presented below may not be indicative of the future performance of our common stock, any reference index or any component company in a reference index.
Annual Return Percentage
  
December 31,
2013
  
December 31,
2014
  
December 31,
2015
  
December 31,
2016
  
December 31,
2017
 
JAKKS Pacific  (45.6)%  1.2%  17.1%  (35.3)%  (54.4)%
Peer Group  55.6   11.7   39.4   7.0   42.8 
Russell 2000  38.8   4.9   (4.4)  21.3   14.7 

Indexed Returns

  
January 1,
2013
  
December 31,
2013
  
December 31,
2014
  
December 31,
2015
  
December 31,
2016
  
December 31,
2017
 
JAKKS Pacific $100.0  $54.4  $55.1  $64.4  $41.7  $19.0 
Peer Group  100.0   155.6   173.8   242.2   259.2   370.6 
Russell 2000  100.0   138.8   145.6   139.2   168.9   193.6 

Security Holders

To the best of our knowledge, as of March 6, 2018,April 13, 2023, there were 10979 holders of record of our common stock. We believe there are numerous beneficial owners of our common stock whose shares are held in “street name.”

Dividends

Dividends

The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations.limitationsand may be subject to certain restrictions pursuant to the terms of our preferred stock and under our credit facility and term loan. We currently intend to retain our future earnings, ifdo not anticipate paying any to finance the growth and development of our business and/or buy backdividends in the market some of our common stock and/or retire some of our outstanding convertible senior notes.foreseeable future.



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Equity

Compensation Plan Information

The table below sets forth the following information as of the year ended December 31, 20172022 for (i) all compensation plans previously approved by our stockholders and (ii) all compensation plans not previously approved by our stockholders, if any:

(a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights;

(b) the weighted-average exercise price of such outstanding options, warrants and rights; and

(c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans.

Plan Category 

Number of

Securities to
be Issued
Upon
Exercise of
Outstanding
Options,
Warrants
and Rights

(a)

  
Weighted-
Average

Weighted-Average Exercise

Price of
Outstanding
Options,
Warrants and
Rights

(b)

  

Number of

Securities
Remaining
Available for
Future Issuance
Under
Equity
Compensation
Plans, Excluding
Securities Reflected
in
Column (a)
(c)

 

Equity compensation plans approved by security holders

  $   3,539,848943,633 

Equity compensation plans not approved by security holders

         

Total

  $   3,539,848943,633 

Equity compensation plans approved by our stockholders consistsconsist of the 2002 Stock Award and Incentive Plan. An additional 1.41.0 million, 3.6 million, 2.5 million and 2.51.4 million shares were added to the number of total issuable shares under the Plan and approved by the Board in 20132021, 2019, 2017, and 2017,2013, respectively. Additionally, 981,208no shares of restricted stock awards remained unvested as of December 31, 2017.2022. Disclosures with respect to equity issuable to certain of our executive officers pursuant to the terms of their employment agreements isare disclosed below under Item 11.


Issuer Purchases of Equity Securities


There were no issuer purchases of equity securities in the fourth quarter of 2017.2022.


Issuer Unregistered Sale of Equity Securities


There were no issuer sales of unregistered equity securities in the fourth quarter of 2017.2022.


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Item 6. Selected Financial Data[Reserved]

You should read the financial data set forth below in conjunction with “Management’s

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations” (included in Item 7) and our consolidated financial statements and the related notes (included in Item 8).Operations

  Years Ended December 31, 
  2013 2014  2015  2016  2017 
  (In thousands, except per share data) 
Consolidated Statement of Operations Data:               
Net sales $632,925  $810,060  $745,741  $706,603  $613,111 
Cost of sales  477,146   574,253   517,172   483,582   457,430 
Gross profit  155,779   235,807   228,569   223,021   155,681 
Selling, general and administrative expenses  195,296   203,326   198,039   205,915   206,303 
Goodwill and other intangibles impairment              13,536 
Reorganization charges  5,015   1,154          
Income (loss) from operations  (44,532)  31,327   30,530   17,106   (64,158)
Change in fair value of business combination liability  6,000   5,932   5,642       
Income (loss) from joint ventures  (3,148)  314   2,761   889   105 
Other income           305   342 
Loss on extinguishment of convertible senior notes              (919)
Write-off of investment in DreamPlay, LLC              (7,000)
Interest income  327   112   62   51   37 
Interest expense  (9,942)  (12,461)  (12,402)  (12,975)  (9,829)
Income (loss) before provision for income taxes  (51,295)  25,224   26,593   5,376   (81,422)
Provision for income taxes  2,611   3,715   3,423   4,127   1,606 
Net income (loss)  (53,906)  21,509   23,170   1,249   (83,028)
Net income (loss) attributable to non-controlling interests        (84)  6   57 
Net income (loss) attributable to JAKKS Pacific, Inc. $(53,906) $21,509  $23,254  $1,243  $(83,085)
Basic earnings (loss) per share $(2.43) $1.03  $1.20  $0.08  $(3.89)
Diluted earnings (loss) per share $(2.43) $0.70  $0.71  $0.07  $(3.89)
Dividends declared per common share $0.14  $  $  $  $ 
During the third quarter of 2017, we recorded impairment charges of $8.3 million to write off goodwill, $2.9 million to write off the remaining unamortized technology rights related to DreamPlay, LLC, and $2.3 million to write down several underutilized trademarks and trade names that were determined to have no value. Additionally, we wrote off our investment in DreamPlay, LLC in the amount of $7.0 million. During the third and fourth quarters of 2017, we recorded a charge of $9.6 million related to the write-down of certain excess and impaired inventory, recognized a bad debt write-off of $8.9 million related to the Toys “R” Us bankruptcy filing on September 18, 2017, and recorded a charge of $20.5 million related to the write-down of license advances and minimum guarantees that are not expected to be earned through sales of that licensed product. During the fourth quarter of 2017, we recognized a $0.6 million loss related to the extinguishment of $21.5 million face amount of our 4.25% convertible senior notes due in 2018 and we recognized a $0.3 million loss related to the fair market value adjustment for the 3.25% convertible senior notes due in 2020.

During the second quarter of 2016, we recorded income of $0.7 million related to Pacific Animation Partners and $0.2 million for funds received related to our former video game joint venture, which is included in income (loss) from joint ventures.

During the third quarter of 2015, we recorded income of $5.6 million related to the reversal of a portion of the Maui earn-out and during the second and fourth quarters of 2015 we recorded an aggregate of $2.7 million related to our former video game joint venture with THQ.

During the second quarter of 2014, we incurred restructuring charges of $1.2 million related to office space consolidations as part of the reorganization plan which commenced in the third quarter of 2013. During the third quarter of 2014, we recorded income of $5.9 million related to the reversal of a portion of the Maui earn-out. The Maui earn-out reversal was due to Maui not achieving the prescribed earn-out targets in 2014.
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In 2013, we recorded a charge of $14.9 million related to the write-down of certain excess and impaired inventory. We also recorded a charge of $14.4 million related to the write-down of license advances and minimum guarantees that are not expected to be earned through sales of that licensed product. During the fourth quarter of 2013, we incurred restructuring charges of $5.0 million related to the office space consolidations given the decrease in sales in 2013, and recorded income of $6.0 million related to the reversal of a portion of the Maui earn-out. The Maui earn-out reversal was due to Maui not achieving the prescribed earn-out targets in 2013.

  At December 31,
  2013 2014 2015 2016 2017
  (In thousands)
Consolidated Balance Sheet Data:               
Cash and cash equivalents $117,071  $71,525  $102,528  $86,064  $64,977 
Working capital  136,337   246,245   254,967   236,569   146,911 
Total assets  449,844   561,782   499,620   464,303   370,349 
Short-term debt  38,098         10,000   26,178 
Long-term debt  100,000   215,000   215,000   206,865   135,469 
Total stockholders' equity  148,685   145,084   153,406   135,200   94,513 


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’sManagements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. You should read this section in conjunction with our consolidated financial statements and the related notes (includedincluded in Item 8).8 Consolidated Financial Statements and Supplementary Data.

Critical Accounting PoliciesEstimates

The accompanying consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements, included within Item 8. Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change and additional information becomes known. The policiesestimates with the greatest potential effect on our results of operations and financial position include:

Allowance for Doubtful Accounts.Accounts. Our allowance for doubtful accounts is 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. If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results. Our allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off.

Major customers’ accounts are monitored on an ongoing basis; more in-depth reviews are performed based upon changes in a customer’s financial condition and/or Management believes the level of credit being extended. When a significant event occurs, such as a bankruptcy filing by a specific customer, and on a quarterly basis,accounting estimate related to the allowance for doubtful account is reviewed for adequacy anda “critical accounting policy” because significant judgement is required to evaluate the balance or accrual rate is adjusted to reflect current risk prospects.
Revenue Recognition. Our revenue recognition policy is to recognize revenue when persuasive evidencecreditworthiness of an arrangement exists, title transfer has occurred (product shipment), the price is fixed or determinable and collectability is reasonably assured. Sales are recorded net of sales returns and discounts, which are estimated at the time of shipment based upon historical data. JAKKS routinely enters into arrangements with its customers to provide sales incentives and support customer promotions and we provide allowances for returns and defective merchandise. Such programs are primarily based upon customer purchases, customer performancewhen estimating the collectability of specified promotional activities and other specified factors such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross revenue inits accounts receivable. In addition, the period the related revenue is recognized.
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.
Factors we consider important that could trigger an impairment review include the following:
significant underperformance relative to expected historical or projected future operating results;
significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and
significant negative industry or economic trends.

Due to the subjective natureallowance requires a high degree of judgement since it involves estimation of the impairment analysis, significantimpact of both current and future economic factors in relation to its customers’ ability to pay amounts due to us. Significant changes in the assumptions used to develop the estimateestimates could materially affect key financial measures, including other selling and administrative expenses, net income and accounts receivable.

Royalties. We enter into license agreements with strategic partners, inventors, designers and others for the conclusion regardinguse of intellectual properties in its products. These agreements may call for payment in advance or future payment of minimum guaranteed amounts. Amounts paid in advance are recorded as an asset and charged to expense when the related revenue is recognized in the consolidated statements of operations. If all or a portion of the minimum guaranteed amounts appear not to be recoverable through future cash flows necessaryuse of the rights obtained under the license, the non-recoverable portion of the guaranty is charged to supportexpense at that time. On a quarterly basis, we evaluate the recoverability of minimum guarantee amounts based on forecasted revenues to be received for the products and record a shortfall reserve for expected un-recoverable amounts. If our actual revenue generated differs from our projections, recoverability of our minimum guarantees would be impacted and could materially affect key financial measures, including gross profit, net income and prepaid assets.

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, we use various methods including market, income and cost approaches. Based upon these approaches, we often utilize 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. We utilize valuation techniques that maximize the use of long-lived assets, including goodwill. The valuationobservable inputs and minimize the use of goodwill involves a high degree of judgment and uncertainty related to our key assumptions. Any changes in our key projections or estimates could result in a reporting unit either passing or failing the first step of the impairment model, which could significantly change the amount of any impairment ultimately recorded.

unobservable inputs. Based upon the assumptions underlyingobservable inputs used in the valuation impairment is determined by estimatingtechniques, we are required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of a reporting unit and comparing that valuethe 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 reporting unit’s book value. Goodwill is tested for impairment annually, and on an interim basis if certain events or circumstances indicate that an impairment loss may have been incurred. Ifdetermination of the fair value measurement is more than the carrying valuebased upon inputs from different levels of the reporting unit, an impairment loss is not indicated. If a reporting unit's carrying value exceeds its fair value an impairment charge would be recognized forhierarchy, the excess amount, notlevel in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to exceed the carrying amount of goodwill.


26

We performed our annualfair value measurement in its entirety. Our assessment of goodwill for impairment asthe significance of our annual testing date being April 1, 2017 for each of our reporting units by evaluating qualitative factors, including, but not limiteda particular input to the performancefair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 16 - Fair Value Measurements” for further information).

Goodwill and intangible assets amounted to $57.6 million as of December 31, 2017.

Reserve for Inventory Obsolescence.Obsolescence. We value our inventory at the lower of cost or market.net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value.

Failure to accurately predict and respond to consumer demand could result in us under-producing popular items or overproducingover-producing less popular items. Furthermore, significant changes in demand for our products would impact management’s estimates in establishing our inventory provision.

Management

Management’s estimates are monitored on a quarterly basis, and a further adjustment to reduce inventory to its net realizable value is recorded as an increase to cost of sales when deemed necessary under the lower of cost or marketnet realizable value standard. Significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including gross profit, net income and inventories.

Reserve for Sales Returns and Allowances. We routinely enter into arrangements with our customers to provide sales incentives, support customer promotions and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities and other specified factors such as sales to consumers. Management believes that the accounting estimates related to sales adjustments are “critical accounting policies” because significant judgment is required to estimate related accruals, such as estimating volumes of defective products to support reserves for defective merchandise and estimating future customer performance and consumer preferences that could impact the discretionary sales promotions. Significant changes in the assumptions used to develop the estimates could materially affect key financial measures, such as net sales, gross profit, net income, and reserve for sales returns and allowances.

Income Allocation for Income Taxes. Taxes. Our annual income tax provision and related income tax assets and liabilities are based upon actual income as allocated to the various tax jurisdictions based upon our transfer pricing study, US and foreign statutory income tax rates and tax regulations and planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in interpreting tax regulations in the U.S. and foreign jurisdictions, and in evaluating worldwide uncertain tax positions. Actual results could differ materially from those judgments, and changes from such judgments could materially affect our consolidated financial statements.

Income taxes and interest and penalties related to income tax payable.taxes. We do not file a consolidated return for our foreign subsidiaries. We file federal and state returns and our foreign subsidiaries each file returns in their respective jurisdictions, as applicable. Deferred taxes are provided on aan asset and liability method, whereby deferredmethod. Deferred tax assets are recognized as deductible temporary differences, and operating loss andlosses, or tax credit carry-forwards and deferredcarry-forwards. Deferred tax liabilities are recognized foras taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some 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.

We must assess the likelihood that we will be able to recover our deferred tax assets. Deferred tax assets are reduced by a valuation allowance, if, based upon the weight of available evidence, it is more likely than not that we will not realize some portion or all of the deferred tax assets. We consider all available positive and negative evidence when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of cumulative losses or cumulative income in previous periods and our forecast of future taxable income. We believe this to be a critical accounting policy because should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that the recovery is not likely, as well as decrease in the period in which the assessment of the recoverability of the deferred tax assets reverses, which could have a material impact on our results of operations.

We accrue a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based upon management’s assessment of all relevant information and is periodically reviewed and adjusted as circumstances warrant. As of December 31, 2017,2022, our income tax reserves were approximately $1.3$2.9 million and relates to the potential tax settlement in Hong Kong, adjustments in the area of withholding taxes,federal and state taxes.

We recognize current period interest expense and penalties and the reversal of previously recognized interest expense and penalties that has been determined to not be assessable due to the expiration of the related audit period or other compelling factors on the income tax liability for unrecognized tax benefits as interest expense, and penalties and penalty reversals related toa component of the income taxes payable as other expensetax provision recognized in ourthe consolidated statements of operations.


The U.S. Tax Cuts and Jobs Act (the Act) was signed into law on December 22, 2017 and introduces significant changes to the Internal Revenue Code. Effective for tax years beginning after December 31, 2017, the Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings and related-party payments, which are referred to as the global intangible low-taxed income and the base erosion and anti-abuse tax, respectively. In addition, the Act includes 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 US 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. In accordance with this guidance, we have made reasonable estimates of the effects of the Act and recorded provisional amounts in our financial statements as of December 31, 2017. For the items for which we determined a reasonable estimate, we recognized a provisional amount of $34.3 million, which is included as a component of income tax expense from continuing operations and partially reduced by fully-valued tax attribute carryforwards. As we collect and prepare necessary data, and interpret the Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Act will be completed in 2018.

Share-Based Compensation. We grant restricted stock and options to purchase our common stock to our employees (including officers) and non-employee directors under our 2002 Stock Award and Incentive Plan (the “Plan”), which incorporated the shares remaining under our Third Amended and Restated 1995 Stock Option Plan. The benefits provided under the Plan are share-based payments. Related to the stock option grants, we estimate the value of share-based awards on the date of grant using the Black-Scholes option-pricing model. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, cancellations, terminations, risk-free interest rates and expected dividends. Related to the restricted stock award grants, we determine the value of each award based on the market value of the underlying common stock at the date of each grant and expense each award over the stipulated service period.

Recent Accounting Pronouncements.


In May 2014, the FASB issued

See Item 8 “Consolidated Financial Statements and Supplementary Data Note 2 - Summary of Significant Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)Policies., which supersedes the revenue recognition requirements in Accounting Standard Codification (“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.


Our approach to analyze the impact of the standard on our revenue contracts included a review of existing contracts with customers, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a comparison of that new treatment to our existing accounting policies to identify differences. We will adopt the requirements of the new standard on January 1, 2018 using the modified retrospective approach.

We identified the same performance obligation (sale of our products) under Topic 606 as compared with deliverables and separate units of account previously identified under Topic 605.
We do offer certain types of variable consideration to customers such as discounts, pricing allowances and collaborative marketing arrangements. The standard requires us to estimate these amounts. We anticipate that the timing and measurement of revenue will be consistent with our current revenue recognition although our approach to revenue recognition will now be based on the transfer of control. As a result, there will be no impact on our consolidated financial statements on our adoption of the new standard as of January 1, 2018.

We established new key controls within our financial reporting infrastructure specific to our adoption of ASC 606. Furthermore, additional disclosures will be required to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Beginning in the first quarter of 2018, additional disclosures will include, but are not limited to, significant judgments and practical expedients elected in the adoption of Topic 606.
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 is not expected to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). 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. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of the pending adoption of this new standard on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

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 reduces 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. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our 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 is not expected to have a material impact on our consolidated financial statements.


28

Results of Operations

The following table sets forth, for the periods indicated, certain statement of operations data as a percentage of net sales. A discussion of the operating results for 2020 can be found in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 16, 2022, in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.

  Years Ended December 31, 
  2015  2016  2017 
Net Sales  100.0%  100.0%  100.0%
Cost of Sales  69.4   68.4   74.6 
Gross profit  30.6   31.6   25.4 
Selling, general and administrative expenses  26.5   29.1   33.7 
Goodwill and other intangibles impairment        2.2 
Income (loss) from operations  4.1   2.5   (10.5)
Change in fair value of business combination liability  0.8       
Income from joint ventures  0.4   0.1    
Other income        0.1 
Loss on extinguishment of convertible senior notes        (0.2)
Write-off of investment in DreamPlay, LLC        (1.1)
Interest income         
Interest expense  (1.7)  (1.8)  (1.6)
Income (loss) before provision for income taxes  3.6   0.8   (13.3)
Provision for income taxes  0.5   0.6   0.2 
Net income (loss)  3.1   0.2   (13.5)
Net income attributable to non-controlling interests        0.1 
Net income (loss) attributable to JAKKS Pacific, Inc.  3.1%  0.2%  (13.6)%
  

Year Ended December 31,

 
  

2022

  

2021

 

Net sales

  100.0

%

  100.0

%

Less: Cost of sales:

        

Cost of goods

  56.5   55.2 

Royalty expense

  15.9   14.0 

Amortization of tools and molds

  1.1   1.3 

Cost of sales

  73.5   70.5 

Gross profit

  26.5   29.5 

Direct selling expenses

  4.2   6.9 

General and administrative expenses

  14.4   15.9 

Depreciation and amortization

  0.2   0.4 

Selling, general and administrative expenses

  18.8   23.2 

Income from operations

  7.7   6.3 

Other income (expense), net

  0.1    

Change in fair value of preferred stock derivative liability

  (0.1)  (2.1)

Change in fair value of convertible senior notes

     (2.6)

Gain on loan forgiveness

     1.0 

Loss on debt extinguishment

     (1.2)

Interest expense

  (1.4)  (2.3)

Income (loss) before provision for (benefit from) income taxes

  6.3   (0.9)

Provision for (benefit from) income taxes

  (5.2)   

Net income (loss)

  11.5   (0.9)

Net income (loss) attributable to JAKKS Pacific, Inc.

  11.5

%

  (0.9

)%

Net income (loss) attributable to common stockholders

  11.3

%

  (1.2

)%

The following table summarizes, for the periods indicated, certain income statement of operations data by segment (in thousands).

  Years Ended December 31, 
  2015  2016  2017 
          
Net Sales         
U.S. and Canada $478,728  $478,595  $406,411 
International  169,826   131,229   107,231 
Halloween  97,187   96,779   99,469 
   745,741   706,603   613,111 
Cost of Sales            
U.S. and Canada  334,989   322,721   297,115 
International  110,174   89,187   81,381 
Halloween  72,009   71,674   78,934 
   517,172   483,582   457,430 
Gross Profit            
U.S. and Canada  143,739   155,874   109,296 
International  59,652   42,042   25,850 
Halloween  25,178   25,105   20,535 
  $228,569  $223,021  $155,681 
  

Year Ended December 31,

 
  

2022

  

2021

 

Net Sales

        

Toys/Consumer Products

 $647,317  $513,517 

Costumes

  148,870   107,599 
   796,187   621,116 

Cost of Sales

        

Toys/Consumer Products

  465,405   357,226 

Costumes

  119,496   80,933 
   584,901   438,159 

Gross Profit

        

Toys/Consumer Products

  181,912   156,291 

Costumes

  29,374   26,666 
  $211,286  $182,957 

Comparison of the Years Ended December 31, 20172022 and 20162021

Net Sales

U.S. and Canada.

Toys/Consumer Products. Net sales of our U.S. and CanadaToys/Consumer Products segment were $406.4$647.3 million in 2017,2022, compared to $478.6$513.5 million in 2016,2021, representing a decreasean increase of $72.2$133.8 million, or 15.1%26.1%. The decreaseincrease in net sales was primarily due to decreaseshigher sales of Disney Encanto™. In addition, net sales from video game properties, Sonic the Hedgehog® and Nintendo®, also added to the yearly increase in unit sales in our Disney Tsum Tsum, Disney Frozen, XPV radio controlled vehicles, Graco, and Star Wars product lines partially offset by higher unit sales in our Moana, Squish-Dee-Lish, Beauty and the Beast Live Action, Tangled – the Series, and Real Workin’ Buddies – Mr. Dusty product lines.net sales.

International.

Costumes. Net sales of our InternationalCostumes segment were $107.2$148.9 million in 2017,2022, compared to $131.2$107.6 million in 2016, representing a decrease of $24.0 million, or 18.3%. The decrease in net sales was primarily driven by declines in unit sales in our Disney Frozen, Star Wars, and Sofia the First product lines, partially offset by higher unit sales in our Moana, Elena of Avalor, Beauty & the Beast Live Action product lines.

Halloween.  Net sales of our Halloween segment were $99.5 million in 2017, compared to $96.8 million in 2016,2021, representing an increase of $2.7$41.3 million, or 2.8%38.4%. The increase in net sales was due to an increase in unit salesprimarily driven by the Disney® and Microsoft® lines of a variety of products in 2017.costumes and expanded retail distribution.


Cost of Sales

U.S. and Canada.

Toys/Consumer Products. Cost of sales of our U.S. and CanadaToys/Consumer Products segment was $297.1$465.4 million, or 73.1%71.9% of related net sales in 20172022 compared to $322.7$357.2 million, or 67.4%69.6% of related net sales in 2016,2021 representing a decreasean increase of $25.6$108.2 million or 7.9%30.3%. The decreaseincrease in cost of salesdollars is due to lowerhigher overall unit sales in 2017, partially offset by minimum guarantee shortfalls. The2022, while the increase as ain percentage of net sales, year over year,year-over-year is primarily due to increased charges recorded for minimum guarantee shortfallsa higher average royalty rate and inventory impairment.higher freight charges.


International.

Costumes. Cost of sales of our InternationalCostumes segment was $81.4$119.5 million, or 75.9%80.3% of related net sales in 2017for 2022 compared to $89.2$80.9 million, or 68.0%75.2% of related net sales in 2016,for 2021 representing a decreasean increase of $7.8$38.6 million, or 8.7%47.7%. The decreaseincrease in cost of salesdollars is due to lowerhigher overall unit sales in 2017, partially offset by minimum guarantee shortfalls.2022. The increase as a percentage of net sales, year-over-year, is primarily due to increased charges recorded for minimum guarantee shortfalls and inventory impairment.


Halloween.  Cost of sales of our Halloween segment was $78.9 million, or 79.3% of related net sales for 2017 compared to $71.7 million, or 74.1% of related net sales in 2016, representing an increase of $7.2 million, or 10.0%. The increase in cost of sales is due to higher overall unit sales in 2017 and minimum guarantee shortfalls. The increase as a percentage of net sales, year-over-year, is primarily due to increased charges for minimum guarantee shortfalls, changes in product mix and inventory impairment.freight charges.


Selling, General and Administrative Expenses

Selling, general and administrative expenses were $206.3$150.0 million in 20172022 and $205.9$144.2 million in 2016,2021, constituting 33.7%18.8% and 29.1%23.2% of net sales, respectively. Selling, general and administrative expenses increased from the prior year primarily driven by $0.4higher outbound freight and warehouse expenses related to higher domestic shipping, as well as higher compensation expense.

Gain on loan forgiveness

In 2021, we recognized a gain on loan forgiveness of $6.2 million primarily due to badas a result of the forgiveness of the Paycheck Protection Program Loan secured under the Coronavirus Aid Relief and Economic Security Act.

Loss on debt write-offsextinguishment

In 2021, we recognized a loss on debt extinguishment of $7.4 million in connection with the refinance of the 2019 Recap Term Loan.

Interest Expense

Interest expense was $11.2 million offset by lower marketing expense and other general and administrative costs. The increases as a percentage of net sales,for the year over year is due to the lower net sales in 2017 coupled with comparable costs. 


Goodwill and Other Intangibles Impairment

Goodwill and other intangibles impairment was $13.5 million for 2017,ended December 31, 2022, as compared to nil in the prior year period. In 2017, we recorded impairment charges of $8.3 million for goodwill, $2.9 million to write-off the remaining unamortized technology rights related to DreamPlay, LLC and $2.3 million to write down several underutilized trademarks and trade names that were determined to have no value.

Income from Joint Ventures
We recognized $0.1 million of income for funds received in 2017 related to our former video game joint venture in partial settlement of amounts owed to the Company when our joint venture partner was liquidated pursuant to their 2012 bankruptcy filing. It is not known if any additional funds will be received by us. In 2016, we recognized $0.2 million of income for funds received related to our former video game joint venture and $0.7 million of income for funds received related to Pacific Animation Partners.

Other Income
We recognized income of $0.1 million for funds received in 2017 related to the disgorgement of short swing trading profits from a shareholder, net of legal fees and a $0.1 million gain on extinguishment of convertible senior notes. We recognized income of $0.2 million for funds received in 2016 related to the disgorgement of short swing trading profits from a shareholder, net of legal fees and a $0.1 million gain on extinguishment of convertible senior notes.

Loss on Extinguishment of Convertible Senior Notes
In 2017, we recognized a $0.6 million loss related to the extinguishment of $21.5 million face amount of our 4.25% convertible senior notes due in 2018. In 2017, we also recognized a $0.3 million loss related to the fair market value adjustment for the 3.25% convertible senior notes due in 2020.
30

Interest Income
Interest income in 2017 was $37,000, comparable to $51,000 in 2016.

Interest Expense

Interest expense was $9.8 million in 2017, as compared to $13.0$14.1 million in the prior year period. In 2017,2022, we recorded interest expense of $9.4$9.3 million related to our convertible senior notes payable due in 2018 and 2020 and $0.4 million related to our revolving credit facility. In 2016, we recorded interest expense of $11.7 million related to our convertible senior notes payable, $0.92021 BSP Term Loan, $0.6 million related to our revolving credit facility and $0.4$1.3 million related to theother borrowing costs. In 2021, we booked interest componentexpense of $7.3 million related to our Maui acquisition earn-out. The overall decrease2019 Recap Term Loan, $5.4 million related to our 2021 BSP Term Loan, $0.8 million related to our revolving credit facility and $0.6 million related to our convertible senior notes due in 2017 is due to a lower average debt.2023.


Provision for Income Taxes

Our income tax expense,benefit, which includes federal, state and foreign income taxes and discrete items, was $1.6$41.0 million, or an effective tax rate of (2.0%(81.9%) for 2017.2022. During 2016,2021, the income tax expense was $4.1$0.2 million, or an effective tax rate of 76.8%(4.0%).

The 20172022 tax expensebenefit of $1.6$41.0 million included a discrete tax benefit of $0.6$49.8 million primarily comprised of a valuation allowance release. Absent these discrete tax benefits, our effective tax rate for 2022 was 17.6%, primarily due to taxes on federal, state, and foreign income.

The 2021 tax expense of $0.2 million included a discrete tax benefit of ($0.4) million primarily comprised of return to provision and uncertain tax position adjustments. Absent these discrete tax benefits, our effective tax rate for 20172021 was (2.8%(10.7%), primarily due to the US federal transition tax, various state taxes and taxes on foreign income.


The 2016 tax expense of $4.1 million included a discrete tax benefit of $0.1 million primarily comprised of return to provision adjustments. Absent these discrete tax expenses, our effective tax rate for 2016 was 79.2%, primarily due to US federal alternative minimum tax, various state taxes and taxes on foreign income.

We assess 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. Based on our evaluation of all positive and negative evidence, as of December 31, 2017,2022, a valuation allowance of $89.7$0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized. The net deferred tax liabilitiesassets of $0.8$57.8 million consists of the net deferred tax liabilitiesassets in the US and foreign jurisdiction,jurisdictions, where we are in a cumulative income position, partially offsetposition.

Uncertainties that may have a significant impact on net sales and income (loss) from operations

Significant outbreaks of contagious diseases, and other adverse public health developments, could have a material impact on our business operations and operating results. In December 2019, a strain of Novel Coronavirus causing respiratory illness and death emerged in the city of Wuhan in the Hubei province of China. The Chinese government took certain emergency measures to combat the spread of the virus, including extension of the Lunar New Year holiday, implementation of travel bans and closure of factories and businesses. The majority of our materials and products are sourced from suppliers located in China.

In 2020, the Novel Coronavirus was declared a global pandemic by the deferred tax assetsWorld Health Organization and has been spreading throughout the world, including the United States, resulting in emergency measures, including travel bans, closure of retail stores, and restrictions on gatherings of more than a maximum number of people. To the US relatedextent that these outbreaks are disruptive to local economies and commercial activity, that development creates downward pressure on our ability to make our product line available to consumers or for consumers to purchase our products, even if our products are available. At this time, we cannot quantify the AMT carryforward, which are fully realizable.


Comparisonextent of the Years Ended December 31, 2016 and 2015
Net Sales
U.S. and Canada.  Net sales of our U.S. and Canada segment were $478.6 million in 2016, compared to $478.7 million in 2015, representing a decrease of $0.1 million. Net sales were flat year-over year primarily due to a decrease in unit sales of various products due to the suspension of shipments to a major U.S. customer and lower than expected unit sales of some movie licensed products, offset by higher unit sales of our Disney Tsum Tsum line of collectibles, Disney Princess and Alice Through the Looking Glass dolls, kids furniture and accessories, and our Big Figs line.
International.  Net sales of our International segment were $131.2 million in 2016, compared to $169.8 million in 2015, representing a decrease of $38.6 million,impact this disease has had or 22.7%. The decrease in net sales was primarily driven by declines in unit sales of various products in the United Kingdom and Western Europe due to the reduced buying power of our customers stemming from the devaluation of the British Pound, and lower than expected unit sales of movie licensed product.

Halloween.  Net sales of our Halloween segment were $96.8 million in 2016, compared to $97.2 million in 2015, representing a decrease of $0.4 million, or 0.4%. The decrease in net sales was primarily due to a decrease in unit sales of a variety of products in 2016.

Cost of Sales
U.S. and Canada.  Cost of sales of our U.S. and Canada segment was $322.7 million, or 67.4% of related net sales in 2016 compared to $335.0 million, or 70.0% of related net sales in 2015, representing a decrease of $12.3 million, or 3.7%. The decrease in cost of sales as a percentage of net sales, year over year, is due to reduced costing of legacy products and product mix, partially offset by increased product tooling driven by new product introductions in 2016. Depreciation of molds and tools for the segment increased slightly in 2016 due to an increase in new product tooling driven by product introductions in 2016.
31


International.  Cost of sales of our International segment was $89.2 million, or 68.0% of related net sales in 2016 compared to $110.2 million, or 64.9% of related net sales in 2015, representing a decrease of $21.0 million, or 19.1%. The decrease in cost of sales is a direct function of lower overall unit sales. The increase as a percentage of net sales, year-over-year, is due to the change in product mix to relatively higher cost product and an increase in the average royalty rate. The increase in royalties is driven by a shift in the product mix to products with relatively higher royalty rates and an increase in royalty rates on shipments made FOB China. Our depreciation of molds and tools for the segment showed a modest increase from 2015 due to increased product tooling driven by new product introductions in 2016.

Halloween.  Cost of sales of our Halloween segment was $71.7 million, or 74.1% of related net sales for 2016 compared to $72.0 million, or 74.1% of related net sales in 2015, representing a decrease of $0.3 million, or 0.4%. The percentage of net sales in 2016 is comparable to 2015.

Selling, General and Administrative Expenses
Selling, general and administrative expenses were $205.9 million in 2016 and $198.0 million in 2015, constituting 29.1% and 26.5% of net sales, respectively. Selling, general and administrative expenses increased by $7.9 million driven by higher marketing expenses ($6.7 million), higher product development costs in support of increased product launches ($2.5 million), and increased depreciation and amortization ($1.6 million), partially offset by a decrease in general and administrative expenses ($2.9 million). 
Income from Joint Ventures
We recognized $0.2 million of income for funds received in 2016 related to our former video game joint venture in partial settlement of amounts owed to the Company when our joint venture partner was liquidated pursuant to their 2012 bankruptcy filing and $0.7 million of income for funds received in 2016 related to Pacific Animation Partners. In 2015, we recognized $2.7 million in income related to our former video game joint venture and $0.1 million of income for funds received related to Pacific Animation Partners.
Other Income
We recognized income of $0.2 million for funds received in 2016 related to the disgorgement of short swing trading profits from a shareholder, net of legal fees and a $0.1 million gain on extinguishment of convertible senior notes.
Interest Income
Interest income in 2016 was $51,000, comparable to $62,000 in 2015.
Interest Expense
Interest expense was $13.0 million in 2016, as compared to $12.4 million in 2015. In 2016, we recorded interest expense of $11.7 million related to our convertible senior notes payable, $0.9 million related to our revolving credit facility and $0.4 million related to the interest component of our Maui acquisition earn-out. In 2015, we recorded interest expense of $11.5 million related to our convertible senior notes payable and $0.9 million related to our revolving credit facility.
Provision for Income Taxes
Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $4.1 million, or an effective tax rate of 76.8% for 2016. During 2015, the income tax expense was $3.4 million, or an effective tax rate of 12.9%.
The 2016 tax expense of $4.1 million included a discrete tax benefit of $0.1 million primarily comprised of return to provision adjustments. Absent these discrete tax benefits, our effective tax rate for 2016 was 79.2%, primarily due to US federal alternative minimum tax, various state taxes and taxes on foreign income.

The 2015 tax expense of $3.4 million included a discrete tax expense of $0.9 million primarily comprised of return to provision adjustments. Absent these discrete tax expenses, our effective tax rate for 2015 was 9.5%, primarily due to a full valuation allowance on the Company's United States deferred tax assets and the foreign rate differential, and is impacted by the proportion of Hong Kong earnings to overall earnings and is expected to vary depending on the level of consolidated earnings.

We assess 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. Basedhave on our evaluationsales, net income and cash flows, but it could be significant.

In the first quarter of all positive2022, Russia and negative evidence, asUkraine were engaged in an armed conflict. We cannot predict at this time the length of December this conflict and if it will spread to other countries. Accordingly, we cannot quantify at this time if, or the extent, this conflict will adversely impact our business operations.

31 2016, a valuation allowance

Quarterly Fluctuations and Seasonality

We have experienced significant quarterly fluctuations in operating results and anticipate these fluctuations in the future. The operating results for any quarter are not necessarily indicative of results for any future period. Our first quarter is typically expected to be the least profitable as a result of lower net sales but substantially similar fixed operating expenses. This is consistent with the performance of many companies in the toy industry.

The following table presents our unaudited quarterly results for the years indicated. The seasonality of our business is reflected in this quarterly presentation.


 2016  2017  

2022

  

2021

 
 First  Second  Third  Fourth  First  Second  Third  Fourth  

First

  

Second

  

Third

  

Fourth

  

First

  

Second

  

Third

  

Fourth

 
(unaudited) Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter 
                        

(Unaudited)

 

Quarter

  

Quarter

  

Quarter

  

Quarter

  

Quarter

  

Quarter

  

Quarter

  

Quarter

 
Net sales $95,809  $140,977  $302,791  $167,026  $94,505  $119,565  $262,413  $136,628  $120,881  $220,422  $322,998  $131,886  $83,843  $112,352  $236,957  $187,964 
As a % of full year  13.6%  20.0%  42.8%  23.6%  15.4%  19.5%  42.8%  22.3%  15.2

%

  27.7

%

  40.6

%

  16.5

%

  13.5

%

  18.1

%

  38.1

%

  30.3

%

Gross Profit $31,183  $44,800  $94,933  $52,105  $30,021  $33,719  $61,781  $30,160 

Gross profit

 $29,917  $60,890  $91,911  $28,568  $26,094  $31,897  $74,924  $50,042 
As a % of full year  14.0%  20.1%  42.5%  23.4%  19.3%  21.7%  39.7%  19.3%  14.2

%

  28.8

%

  43.5

%

  13.5

%

  14.3

%

  17.4

%

  41.0

%

  27.3

%

As a % of net sales  32.5%  31.8%  31.4%  31.2%  31.8%  28.2%  23.5%  22.1%  24.7

%

  27.6

%

  28.5

%

  21.7

%

  31.1

%

  28.4

%

  31.6

%

  26.6

%

Income (loss) from operations $(13,816) $(1,100) $34,413  $(2,391) $(15,724) $(14,108) $(7,746) $(26,580) $(734) $23,660  $53,741  $(15,697) $(2,723) $1,821  $36,743  $2,926 
As a % of full year  (80.8)%  (6.4)%  201.2%  (14.0)%  24.5%  22.0%  12.1%  41.4%  (1.2

)%

  38.8

%

  88.1

%

  (25.7

)%

  (7.0

)%

  4.7

%

  94.8

%

  7.5

%

As a % of net sales  (14.4)%  (0.8)%  11.4%  (1.4)%  (16.6)%  (11.8)%  (3.0)%  (19.5)%  (0.7

)%

  10.7

%

  16.7

%

  (11.9

)%

  (3.2

)%

  1.6

%

  15.5

%

  1.6

%

Income (loss) before provision
(benefit) for income taxes
 $(16,951) $(3,441) $31,612  $(5,844) $(18,629) $(16,371) $(16,651) $(29,771)

Income (loss) before provision for (benefit from) income taxes

 $(3,492) $27,541  $42,248  $(16,221) $(23,963) $(15,160) $36,674  $(3,213)
As a % of net sales  (17.7)%  (2.4)%  10.4%  (3.5)%  (19.7)%  (13.7)%  (6.3)%  (21.8)%  (2.9

)%

  12.4

%

  13.1

%

  (12.3

)%

  (28.6

)%

  (13.5

)%

  15.5

%

  (1.7

)%

Net income (loss) $(17,383) $(4,145) $30,529  $(7,752) $(18,285) $(16,687) $(17,569) $(30,487) $(3,909) $26,207  $30,676  $38,109  $(24,051) $(15,060) $36,376  $(3,153)
As a % of net sales  (18.1)%  (2.9)%  10.1%  (4.6)%  (19.3)%  (14.0)%  (6.7)%  (22.3)%  (3.2

)%

  11.8

%

  9.5

%

  28.9

%

  (28.7

)%

  (13.4

)%

  15.4

%

  (1.7

)%

Net income (loss) attributable to non-controlling interests $32  $224  $(83) $(167) $31  $55  $45  $(74) $(100) $(353) $(17) $140  $35  $24  $42  $19 
As a % of net sales  %  0.2%  %  (0.1)%  %  %  %  (0.1)%  (0.1

)%

  (0.2

)%

  

%

  0.1

%

  

%

  

%

  

%

  

%

Net income (loss) attributable to JAKKS Pacific, Inc. $(17,415) $(4,369) $30,612  $(7,585) $(18,316) $(16,742) $(17,614) $(30,413) $(3,809) $26,560  $30,693  $37,969  $(24,086) $(15,084) $36,334  $(3,172)
As a % of net sales  (18.2)%  (3.1)%  10.1%  (4.5)%  (19.4)%  (14.0)%  (6.7)%  (22.3)%  (3.1

)%

  12.0

%

  9.5

%

  28.8

%

  (28.7

)%

  (13.4

)%

  15.3

%

  (1.7

)%

Net income (loss) attributable to common stockholders

 $(4,155) $26,209  $30,336  $37,607  $(24,412) $(15,415) $35,998  $(3,513)

As a % of net sales

  (3.4

)%

  11.9

%

  9.4

%

  28.5

%

  (29.1

)%

  (13.7

)%

  15.2

%

  (1.9

)%

Diluted earnings (loss) per share $(1.01) $(0.27) $0.82  $(0.47) $(1.01) $(0.77) $(0.77) $(1.33) $(0.43) $2.73  $2.96  $3.66  $(4.54) $(2.48) $3.97  $(0.37)
Weighted average shares and
equivalents outstanding
  17,218   16,402   39,504   16,098   18,104   21,616   22,772   22,799   9,588   10,037   10,260   10,263   5,379   6,220   9,073   9,511 

Consistent with the seasonality of our business, first and second quarters of 2016 and 2017 and fourth quarter of 2017, experienced seasonally low sales which coupled with fixed overhead resulted in significant net losses.

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.

Debt with Conversion and Other Options
In July 2013, we sold an aggregate of $100.0 million principal amount of 4.25% convertible senior notes due 2018 (the “2018 Notes”). The 2018 Notes, which are senior unsecured obligations, pay interest semi-annually in arrears on August 1 and February 1 of each year at a rate of 4.25% per annum and will mature on August 1, 2018. The initial and still conversion rate for the 2018 Notes is 114.3674 shares of our 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. Upon conversion, the 2018 Notes will be settled in shares of our common stock. Holders of the 2018 Notes may require us to repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2018 Notes). In 2016, we repurchased and retired $6.1 million principal amount of the 2018 Notes. In 2017, we exchanged and retired an aggregate of $51.1 million principal amount of the 2018 Notes at par for $35.6 million in cash and approximately 3.0 million shares of our common stock, and the maturity of $21.5 million principal amount of the 2018 Notes was extended to November 1, 2020 along with a reduction in the interest rate to 3.25% per annum if paid in cash and a reduction in the conversion price to $3.05 per share.

In June 2014, we 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 conversion rate for the 2020 Notes is 103.7613 shares of our 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 our common stock. Holders of the 2020 Notes may require us to repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2020 Notes). In 2016, we repurchased and retired $2.0 million principal amount of the 2020 Notes.

Liquidity and Capital Resources

As of December 31, 2017,2022, we had working capital of $146.9$101.9 million compared to $236.6$114.5 million as of December 31, 2016. The decrease was primarily attributable to the reclassification of $21.1 million of the 2018 convertible senior notes to current liabilities, the exchange and retirement of convertible senior notes, and the net loss, partially offset by proceeds from the issuance of common stock to a Hong Kong affiliate of our China joint venture partner during the second quarter of 2017.2021.

Operating activities provided net cash of $65.8$86.1 million $16.7in 2022 and used net cash of $5.9 million in 2021. The increase in cash flows provided by operating activities, year-over-year, was primarily due to a higher net income and $11.4 millionlower working capital usage, partially offset by lower non-cash charges related to valuation adjustments for our convertible senior notes and preferred stock derivative liability, and an increase in deferred income tax assets due to the years ended December 31, 2015, 2016 and 2017, respectively. Net cash was favorably impacted primarilyrelease of the valuation allowance, offset by decreases in accounts receivable and inventory. Our accounts receivable turnover as measured by days sales for the quarter outstanding in accounts receivable was 90 days, 96 days, and 96 days as of December 31, 2015, 2016 and 2017, respectively.other deferred tax activities. Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase finished goodsinventory from our manufacturers. AsHowever, we may incur costs or other losses as a result of December 31, 2017, we had cash and cash equivalentsnot placing orders consistent with our forecasts for product manufactured by our suppliers or manufacturers for a variety of $65.0 million.

Investing activities used net cash of $21.7 million, $15.1 million and $14.8 million for the years ended December 31, 2015, 2016 and 2017, respectively. Cash usedreasons including customer order cancellations or a decline in 2017 consisted primarily of $14.9 million cash paid for the purchase of molds and tooling used in the manufacture of our products. Cash used in 2016 consisted primarily of $14.8 million cash paid for the purchase of office furniture, equipment, and molds and tooling used in the manufacturing of our products. Cash used in 2015 consisted primarily of $17.8 million cash paid for leasehold improvements, the purchase of office furniture, equipment and molds and tooling used in the manufacturing of our products.demand. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royaltiesroyalties/obligations generally ranging from 1% to 21%22% payable on net sales of such products. As of December 31, 2017,2022, these agreements required future aggregate minimum royalty guarantees of $57.1$74.7 million, exclusive of $23.4$1.8 million in advances already paid. Of this $57.1$74.7 million future minimum royalty guarantee, $40.7$38.1 million is due over the next twelve months.

Financing

Investing activities used net cash of $13.4 million, $12.0$10.4 million and $21.4$8.2 million for the years ended December 31, 2015, 20162022 and 2017, respectively.2021, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.

Financing activities used net cash of $31.0 million in 2022 and $32.8 million in 2021. The cash used in 20172022 primarily consists primarily of the cash portion of $35.6 million in the exchange of $51.1 million principal amountrepayment of our 2018 convertible senior notes, partially offset by the issuance2021 BSP Term loan of approximately 3.7$29.6 million sharesand repurchase of common stock for cash in the amountemployee tax withholding of $19.3$1.4 million. The cash used in 20162021 primarily consists primarily of the repurchaserepayment of our common stock and convertible senior notes. The cash used2019 Recap Term Loan of $125.8 million, as well as, debt issuance costs of $2.6 million incurred in 2015 consists primarily ofconnection with the repurchaserefinancing of our common stock.debt (see Item 8 “Consolidated Financial Statements and Supplementary Data Note 10 – Debt”), partially offset by the net proceeds from the issuance of our 2021 BSP Term Loan of $96.3 million.


The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of December 31, 20172022 and is based upon information appearing in the notes to the consolidated financial statements (in thousands):

 
Less than
1 year
  
1 ��� 3
years
  
3 – 5
years
  
More Than
5 years
  Total  

2023

  

2024

  

2025

  

2026

  

2027

  

Thereafter

  

Total

 
Short-term debt $26,178  $  $  $  $26,178  $25,529  $  $  $  $  $  $25,529 
Long-term debt     135,469         135,469      2,475   2,475   2,475   35,947      43,372 
Interest on debt  6,734   9,088         15,822   5,219   4,390   4,122   3,867   1,543       19,141 
Operating leases  13,403   21,396   18,884   7,121   60,804   11,723   7,619   2,346   372   13      22,073 
Minimum guaranteed license/royalty payments  40,725   16,408         57,133   38,089   34,630   1,969            74,688 
Employment contracts  8,936   10,312         19,248   8,500   3,166   2,458   2,508         16,632 
Total contractual cash obligations $95,976  $192,673  $18,884  $7,121  $314,654  $89,060  $52,280  $13,370  $9,222  $37,503  $  $201,435 
 `

The above table excludes any potential uncertain income tax liabilities that may become payable upon examination of our income tax returns by taxing authorities. Such amounts and periods of payment cannot be reliably estimated. Seeestimated (see Item 8 “Consolidated Financial Statements and Supplementary Data Note 13 to the consolidated financial statements- Income Taxes” for further explanation of our uncertain tax positions.positions).

As of December 31, 2022, we have $68.9 million of outstanding indebtedness under our first-lien secured term loan (the “2021 BSP Term Loan Agreement”) and we have no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $17.2 million in letters of credit.


In October 2016, we acquired

The First Lien Term Loan Facility Credit Agreement (the “2021 BSP Term Loan Agreement”) and the operatingCredit Agreement with JPMorgan Chase Bank, N.A., as agent and lender (the “JPMorgan ABL Credit Agreement”) each contain negative covenants that, subject to certain exceptions, limit our ability and our subsidiaries ability to, among other things, incur additional indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The terms of the C’est Moi brand2021 BSP Term Loan Agreement also require us to maintain a Net Leverage Ratio of performance makeup4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which we are required to maintain a Net Leverage Ratio of 3:00x. On April 26, 2022, we entered into a First Amendment to the 2021 BSP Term Loan Agreement, to provide, among other things, that we must maintain Qualified Cash of at least: (a) at all times after the Closing Date and youth skincare products whose distribution is currently limited primarilyprior to Asia. We expectthe First Amendment Effective Date, $20.0 million; (b) at all times during the period commencing on the First Amendment Effective Date through and including June 30, 2022, $15.0 million; and (c) at all times on and after July 1, 2022, through September 30, 2022, $17.5 million; provided, however, that if the Total Net Leverage Ratio exceeded 1.75:1.00 as of the last day of the most recently ended month for which financial statements were required to launchhave been delivered, then the amount set forth in this clause shall be increased to $20.0 million. Notwithstanding the foregoing, the Applicable Minimum Cash Amount shall be reduced by $1.0 million for every $5.0 million principal prepayment or repayment of the Term Loans following the First Amendment Effective Date; provided however, that, the Applicable Minimum Cash Amount shall in no event be reduced below $15.0 million.

On June 27, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, we made a full linevoluntary fee-free $10.0 million prepayment towards the outstanding principal amount of makeupthe 2021 BSP Term Loan.

On September 28, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, we made a voluntary $17.5 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and skincare products brandedincurred a $0.5 million prepayment penalty.

The 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement contain events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults and a change of control as specified in each Agreement. If an event of default occurs under either Agreement, the maturity of the amounts owed under the C’est Moi name2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement may be accelerated.

We were in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of December 31, 2022.

(See Item 8 “Consolidated Financial Statements and Supplementary Data, Note 10 – Debt and Note 11 – Credit Facilities” for additional information pertaining to our Debt and Credit Facilities.)

As of December 31, 2022 and 2021, we held cash and cash equivalents, including restricted cash, of $85.5 million and $45.3 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $39.4 million and $30.7 million as of December 31, 2022 and 2021, respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and CanadaJobs 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 first quarterform of 2018 prior todividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which saleswe expect would not be significant as of December 31, 2022.

Our primary sources of working capital are anticipated to be nominal.

We believe that our cash flows from operations and borrowings under our JPMorgan ABL Facility (See Item 8 “Consolidated Financial Statements and Supplementary Data Note 11 – Credit Facilities”).

Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of our products, (2) the success of our licensed brands in motivating consumer purchase of related merchandise, (3) the highly competitive conditions existing in the toy industry and in securing commercially-attractive licenses, (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 our ability to generate sufficient cash equivalents will be sufficientflows to meetoperate the business. In addition, our working capitalbusiness and capital expenditure requirementsliquidity are dependent to a significant degree on our vendors and provide us with adequate liquiditytheir financial health, as well as the ability to meet our anticipated operating needsaccurately forecast the demand for at least the next 12 months from the issuanceproducts. The loss of this annual report. We expect our capital expenditures to be approximately $14.0 milliona key vendor, or material changes in 2018. Although operating activities are expected to provide cash,support by them, or a significant variance in actual demand compared to the extent we make any acquisitions or grow significantlyforecast, can have a material adverse impact on our cash flows and business. Given the conditions in the future,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 our operating and investing activities may use cash and, consequently, any acquisitions or growth may require us to obtain additional sourcesliquidity.

As of December 31, 2017, we do not have any2022, off-balance sheet arrangements.arrangements include letters of credit issued by JPMorgan of $17.2 million.

On July 1, 2022, we entered into an ATM Agreement with B. Riley, as agent pursuant to which we may, from time to time, sell shares of our common stock, up to $75 million in common stock, in one or more offerings in amounts, at prices and in the terms that we will determine at the time of the offering. On July 1, 2022, we filed a Form S-3 shelf registration statement (File No. 333-266009) with the SEC. On Aug 1, 2022, the SEC declared the Form S-3 shelf registration statement filed by us to be effective.

During

As of April 14, 2023, we have not sold any shares of common stock under the ATM Agreement.

We have on file with the SEC an effective registration statement pursuant to which we may issue, from time to time, up to an additional $75 million of securities consisting of, or any combination of, common stock, preferred stock, debt securities, warrants, rights and/or units, in one or more offerings in amounts, prices and at terms that we will determine at the time of the offering.

As of April 14, 2023, we have not sold any securities pursuant to our shelf registration statement.

The nature of our business is a number of factors influence the price we offer product to our customers, and by extension they sell to our end customer. Our products are manufactured by third-party vendors who deal with increases in labor rates as a normal course of their respective businesses. The costing of the plastic components of our toys can be sensitive to sudden swings in oil prices. Currency exchange can also create a degree of volatility, although the majority of our products are sourced in USD or Hong Kong Dollars. Increased volumes ideally generate increased scale at various points in the value chain. Often times, in the toy industry when cost pressures result in price increases, the development teams will reengineer subsequent year refreshes to cost-reduce the items down to support traditional price points and preserve historical margins. With those considerations in mind as well as others, during the last three fiscal years ending December 31, 2017, we do not believe that inflation has had a material impact on our net sales and revenues and on income from continuing operations.


Exchange Rates

Sales from our United States and Hong Kong operations are denominated in U.S. dollars and our manufacturing costs are denominated in either U.S. or Hong Kong dollars. Local sales (other than in Hong Kong) and operating expenses of our operations in Hong Kong, the United Kingdom, Germany, the Netherlands, France, Spain, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in the various exchange rates against the U.S. dollar may positively or negatively affect our operating results. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixedlinked to the U.S. dollar by the Hong Kong government since 1983Monetary Authority at HK$7.807.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We cannot assure you that the exchange rate between the United States and Hong Kong currencies will continue to be fixed or that exchange rate fluctuations between the United States and Hong Kong or all other currencies will not have a material adverse effect on our business, financial condition or results of operations.



35

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in United States and international borrowing rates and changes in foreign currency exchange rates. In addition, we are exposed to market risk in certain geographic areas that have experienced or remain vulnerable to an economic downturn, such as China. We purchase substantially all of our inventory from companies in China, and, therefore, we are subject to the risk that such suppliers will be unable to provide inventory at competitive prices. While we believe that, should such events occur we would be able to find alternative sources of inventory at competitive prices, we cannot assure you that we would be able to do so. These exposures are directly related to our normal operating and funding activities. To date, we have not used derivative instruments or engaged in hedging activities to minimize our market risk.

Interest Rate Risk

As of December 31, 2017, we have outstanding convertible senior notes payable of $21.2 million principal amount due August 2018 with a fixed interest rate of 4.25% per annum, $113.0 million principal amount due June 2020 with a fixed interest rate of 4.875% per annum, and $21.5 million principal amount due November 2020 with a fixed interest rate of 3.25% per annum if paid in cash. As the interest rates on the notes are at fixed rates, we are not generally subject to any direct risk of loss related to these notes arising from changes in interest rates.

Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facility2021 BSP Term Loan (see Item 8 “Consolidated Financial Statements and Supplementary Data, Note 10 – Debt) and our 2021 JPMorgan ABL Facility (see Item 8 “Consolidated Financial Statements and Supplementary Data, Note 11 – Credit Facilities). As of December 31, 2022, we have $68.9 million of outstanding indebtedness under our BSP Term Loan which is due June 2027 with interest at either (i) LIBOR plus 6.50% - Credit7.00% (determined by reference to a net leverage pricing grid), subject to a 1.00% LIBOR floor, or (ii) base rate plus 5.50% - 6.00% (determined by reference to a net leverage pricing grid), subject to a 2.00% base rate floor. Borrowings under our JPMorgan ABL Facility in the accompanying notesbear interest at either (i) Eurodollar spread plus 1.50% - 2.00% (determined by reference to the consolidated financial statements for additional information)an excess availability pricing grid) or (ii) Alternate Base Rate plus 0.50% - 1.00% (determined by reference to an excess availability pricing grid and base rate subject to a 1.00% floor). Borrowings under the revolving credit facility bear interest at a variable rate based on Prime Lending Rate or LIBOR Rate at the option of the Company. For Prime Lending Rate loans, the interest rate is equal to 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%, plus a margin of 2.25%. For LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin of 2.25%. Borrowings under the revolving credit facility2021 BSP Term Loan and 2021 JPMorgan ABL Facility are therefore subject to risk based upon prevailing market interest rates. Interest rate risk may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. During the yeartwelve-month period ended December 31, 2017,2022, the maximum amount borrowed under the revolving credit facility was $20.0$13.0 million and the average amount of borrowings outstanding was $5.7$0.8 million. As of December 31, 2017,2022, the amount of total borrowings outstanding under the revolving credit facility was $5.0 million. Ifnil.

London Interbank Offering Rate (“LIBOR”) is an interest rate benchmark used as a reference rate for our term loan. Borrowings under our term loan will bear interest at a variable rate, primarily based on LIBOR. In July 2017, the prevailing market interestUnited Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates relativefor the calculation of LIBOR after 2021. It is unclear whether or not LIBOR will cease to these borrowings increased by 10%exist at that time (and if so, what reference rate will replace it) or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. On November 30, 2020, ICE Benchmark Administration (“IBA”), our interest expense during the period endedadministrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom’s FCA, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2017 would have increased2021 for only the one-week and two-month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by lessthe end of 2021. In light of these recent announcements, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phase-out could cause LIBOR to perform differently than $0.1 million.in the past or cease to exist.

The Alternative Reference Rates Committee (“ARRC”) has identified the Secured Overnight Financing Rate ("SOFR") as the recommended alternative for use in financial and other derivatives contracts that are currently indexed to U.S. dollar LIBOR.

In Q1 2023, we entered into amendments to our 2021 BSP Term Loan Agreement and our JPMorgan ABL Credit Agreement which changed the interest reference rate on our term loan and revolving line of credit from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

Foreign Currency Risk

We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, Germany, France, Spain,the Netherlands, Canada and Mexico. Sales are generally made by these operations on FOB China or Hong Kong terms and are denominated in U.S. dollars. However, purchases of inventory and Hong Kong operating expenses are typically denominated in Hong Kong dollars and local operating expenses in the United Kingdom, Germany, France, Spain,the Netherlands, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in the U.S. dollar exchange rates may positively or negatively affect our gross margins, operating income and retained earnings.results of operations. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixedlinked to the U.S. dollar by the Hong Kong government since 1983Monetary Authority at HK$7.807.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We do not believe that near-term changes in these exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows. Therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of these foreign currencies.



Item 8. Consolidated Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

JAKKS Pacific, Inc.

Santa Monica, California

Opinion on the Consolidated Financial Statements


We have audited the accompanying consolidated balance sheets of JAKKS Pacific, Inc. (the “Company"“Company”) and subsidiaries as of December 31, 20172022 and 2016 and2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 20172022 and 2016,2021, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2017,2022, in conformity with accounting principles generally accepted in the United States of America.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2018 expressed an unqualified opinion thereon.

Basis for Opinion


These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.


Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.


Cost of Sales for Royalties and Related Liabilities

As described in Notes 2, 9 and 17 of the consolidated financial statements, the Company enters into various license agreements whereby the Company uses certain characters and intellectual properties in conjunction with its products. For the year ended December 31, 2022, the cost of sales related to license agreement royalties was $126.6 million. As of December 31, 2022, accrued royalties were $18.0 million.

We identified the cost of sales for royalties and related liabilities as a critical audit matter. The royalty expense calculation includes multiple variables based on various license agreements, including amended and renewed license agreements, and a significant volume of underlying data. Variables in calculating the royalty expense include the territory of where the sale occurs, a broad range of negotiated royalty rates for the type of product, user/usage measures, and the applicable license holder. The cost of sales for royalties and related liabilities requires judgment to critically evaluate its forecasts and evaluate its ability to fully utilize minimum guaranteed royalties. Auditing management’s royalty expense and associated liabilities involved especially challenging auditor judgment and audit effort due to the nature and extent of effort required to address these matters.

The primary procedure we performed to address this critical audit matter included:

/S/ BDO USA, LLP

Evaluating the reasonableness of management’s forecasts, which included: (i) obtaining an understanding of management’s process for developing forecasts, (ii) comparing prior period forecasts to actual results, (iii) assessing the Company’s ability to meet its future guarantees and (iv) evaluating the impact of alternative assumptions on the measurement and comparing to management’s estimate.


Assessing management’s projections in the context of other audit evidence obtained during the audit and historical performance to determine whether it was contradictory to the conclusion reached by management.

Recalculating royalty costs, agreeing calculation variables to the underlying agreements, and evaluating the reasonableness of royalty expense and related liabilities based on existing, amended and renewed license agreements during the year.

Accounting for Income Taxes

As described in Notes 2 and 13 of the consolidated financial statements, the Company’s benefit from income taxes for the fiscal year ended December 31, 2022 was $41.0 million, which included a discrete tax benefit of $49.8 million primarily comprised of the release of a majority of the Company’s valuation allowance related to the deferred tax assets.

We identified the Company’s assessment of the realizability of its deferred tax assets as a critical audit matter. The principal considerations for this determination were complex and subjective judgements involved in management’s assessment of the realizability of its deferred tax assets, including the evaluation of assumptions that may be affected by future operations of the Company, market or economic conditions and assessing the weight of all existing positive and negative available evidence such as forecasts of future profitability, current and cumulative financial reporting results, and reversal of temporary differences. Auditing these elements involved especially complex and subjective auditor judgement, including the extent of specialized skills and knowledge needed.

The primary procedures we performed to address this critical audit matter included:

Testing mathematical accuracy and computation of the tax provision and agreeing to relevant source information.

Assessing the reasonableness of management’s projections in the context of other audit evidence obtained during the audit, historical performance, allocations by tax jurisdiction, and the inherent uncertainty in the projections to determine whether it was contradictory to the conclusion reached by management.

Utilizing personnel with specialized knowledge and skills in accounting for income taxes to assist in evaluating the reasonableness of certain assumptions related to the timing of the release of the valuation allowance and the Company’s consideration of the weight of both positive and negative evidence supporting the potential use of projections of future taxable income to support the realizability of the deferred tax assets.

/s/ BDO USA, LLP

We have served as the Company’sCompany's auditor since 2006.


Los Angeles, California

March 16, 2018

April 14, 2023

JAKKS PACIFIC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Assets

 

December 31,

 
 December 31,  

2022

  

2021

 
 2016  2017  

(In thousands, except per share data)

 
 (In thousands, except 
 share data) 
Assets      
Current assets              
Cash and cash equivalents $86,064  $64,977  $85,297  $44,521 
Accounts receivable, net of allowance for uncollectible accounts of $2,864 and $10,940 in 2016 and 2017, respectively  173,599   142,457 
Inventory, net  75,435   58,432 
Income taxes receivable  1,204   1,880 

Restricted cash

  193   811 

Accounts receivable, net of allowance for doubtful accounts of $2,865 and $2,626 in 2022 and 2021, respectively

  102,771   147,394 

Inventory

  80,619   83,954 
Prepaid expenses and other assets  17,077   14,923   6,331   10,877 
Total current assets  353,379   282,669   275,211   287,557 
Property and equipment                
Office furniture and equipment  14,345   15,043   10,064   11,967 
Molds and tooling  103,128   115,378   113,714   103,102 
Leasehold improvements  10,927   10,936   6,659   6,876 
Total  128,400   141,357   130,437   121,945 
Less accumulated depreciation and amortization  105,559   118,130   115,575   108,796 
Property and equipment, net  22,841   23,227   14,862   13,149 

Operating lease right-of-use assets, net

  19,913   16,950 

Other long-term assets

  2,469   2,993 

Deferred income tax assets, net

  57,804    
Intangible assets, net  33,111   22,190      1,015 
Other long term assets  2,156   6,579 
Investment in DreamPlay, LLC  7,000    
Goodwill  43,208   35,384   35,083   35,083 
Trademarks  2,608   300      300 
Total assets $464,303  $370,349  $405,342  $357,047 
Liabilities and Stockholders’ Equity        

Liabilities, Preferred Stock and Stockholders' Equity

        
Current liabilities                
Accounts payable $51,741  $49,916  $33,687  $50,237 

Accounts Payable - Meisheng (related party)

  9,820   15,894 
Accrued expenses  38,645   42,145   37,998   47,071 
Reserve for sales returns and allowances  16,424   17,622   51,877   46,285 
Short term debt  10,000   5,000 
Convertible senior notes, net     21,075 

Income taxes payable

  8,165   1,004 

Short-term operating lease liabilities

  10,746   10,477 

Short-term debt, net

  25,529   2,104 
Total current liabilities  116,810   135,758   177,822   173,072 
Convertible senior notes, net  203,007   133,497 
Other liabilities  5,004   4,537 

Long-term operating lease liabilities

  9,863   8,039 

Debt, non-current portion, net of issuance costs and debt discounts

  41,622   93,415 

Preferred stock derivative liability

  21,918   21,282 
Income taxes payable  2,248   1,261   2,929   215 
Deferred income taxes, net  2,034   783 

Deferred income taxes liabilities, net

     51 
Total liabilities  329,103   275,836   254,154   296,074 
Commitments and Contingencies        
Stockholders’ equity        
Preferred stock, $.001 par value; 5,000,000 shares authorized; nil outstanding      
Common stock, $.001 par value; 100,000,000 shares authorized; 19,376,773 and 26,957,354 shares issued and outstanding in 2016 and 2017, respectively  19   27 
Treasury stock, at cost; 3,112,840 shares  (24,000)  (24,000)

Commitments and contingencies (Note 17)

        

Preferred stock accrued dividends, $0.001 par value; 5,000,000 shares authorized; 200,000 shares issued and outstanding in 2022 and 2021

  4,490   3,074 
        

Stockholders' Equity

        

Common stock, $0.001 par value; 100,000,000 shares authorized; 9,742,236 and 9,520,817 shares issued and outstanding in 2022 and 2021, respectively

  10   10 
Additional paid-in capital  177,624   215,809   275,187   272,941 
Accumulated deficit  (2,148)  (85,233)  (112,018

)

  (203,431

)

Accumulated other comprehensive loss  (17,207)  (13,059)  (17,482

)

  (12,952

)

Total JAKKS Pacific, Inc. stockholders’ equity  134,288   93,544 

Total JAKKS Pacific, Inc. stockholders' equity

  145,697   56,568 
Non-controlling interests  912   969   1,001   1,331 
Total stockholders’ equity  135,200   94,513 
Total liabilities and stockholders’ equity $464,303  $370,349 

Total stockholders' equity

  146,698   57,899 

Total liabilities, preferred stock and stockholders' equity

 $405,342  $357,047 

See accompanying notes to consolidated financial statements.



JAKKS PACIFIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 
  

(In thousands, except per share amounts)

 

Net sales

 $796,187  $621,116  $515,872 

Cost of sales:

            

Cost of goods

  449,597   343,130   274,867 

Royalty expense

  126,633   87,187   83,150 

Amortization of tools and molds

  8,671   7,842   8,090 

Cost of sales

  584,901   438,159   366,107 

Gross profit

  211,286   182,957   149,765 

Direct selling expenses

  33,290   43,069   41,590 

General and administrative expenses

  114,819   98,712   90,424 

Depreciation and amortization

  1,907   2,409   2,846 

Selling, general and administrative expense

  150,016   144,190   134,860 

Intangible asset impairment

  300       

Restructuring charge

        1,631 

Pandemic related charges

        366 

Income from operations

  60,970   38,767   12,908 

Income from joint ventures

        2 

Other income (expense), net

  797   446   301 

Change in fair value of preferred stock derivative liability

  (636

)

  (13,220

)

  (2,815

)

Change in fair value of convertible senior notes

     (16,419

)

  (2,265

)

Gain on loan forgiveness

     6,206    

Loss on debt extinguishment

     (7,351

)

   

Interest income

  127   13   22 

Interest expense

  (11,183

)

  (14,104

)

  (21,562

)

Income (loss) before provision for (benefit from) income taxes

  50,075   (5,662

)

  (13,409

)

Provision for (benefit from) income taxes

  (41,008

)

  226   735 

Net income (loss)

  91,083   (5,888

)

  (14,144

)

Net income (loss) attributable to non-controlling interests

  (330

)

  120   130 

Net income (loss) attributable to JAKKS Pacific, Inc.

 $91,413  $(6,008

)

 $(14,274

)

Net income (loss) attributable to common stockholders

 $89,997  $(7,342

)

 $(15,531

)

Earnings (loss) per share - basic*

 $9.33  $(0.98

)

 $(4.27

)

Shares used in earnings (loss) per share - basic*

  9,651   7,498   3,634 

Earnings (loss) per share - diluted*

 $8.86  $(0.98

)

 $(4.27

)

Shares used in earnings (loss) per share - diluted*

  10,155   7,498   3,634 
  Years Ended December 31, 
  2015  2016  2017 
  (In thousands, except per share amounts) 
Net sales $745,741  $706,603  $613,111 
Cost of sales  517,172   483,582   457,430 
Gross profit  228,569   223,021   155,681 
Selling, general and administrative expenses  198,039   205,915   206,303 
Goodwill and other intangibles impairment        13,536 
Income (loss) from operations  30,530   17,106   (64,158)
Change in fair value of business combination liability  5,642       
Income from joint ventures  2,761   889   105 
Other income     305   342 
Loss on extinguishment of convertible senior notes        (919)
Write-off of investment in DreamPlay, LLC        (7,000)
Interest income  62   51   37 
Interest expense  (12,402)  (12,975)  (9,829)
Income (loss) before provision for income taxes  26,593   5,376   (81,422)
Provision for income taxes  3,423   4,127   1,606 
Net income (loss)  23,170   1,249   (83,028)
Net income (loss) attributable to non-controlling interests  (84)  6   57 
Net income (loss) attributable to JAKKS Pacific, Inc. $23,254  $1,243  $(83,085)
Basic earnings (loss) per share $1.20  $0.08  $(3.89)
Basic weighted number of shares  19,435   16,542   21,341 
Diluted earnings (loss) per share $0.71  $0.07  $(3.89)
Diluted weighted number of shares  43,321   16,665   21,341 

* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.

See accompanying notes to consolidated financial statements.



JAKKS PACIFIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 
  

(In thousands)

 

Net income (loss)

 $91,083  $(5,888) $(14,144)

Other comprehensive income (loss):

            

Foreign currency translation adjustment

  (4,530)  (506)  1,976 

Comprehensive income (loss)

  86,553   (6,394)  (12,168)

Less: Comprehensive income (loss) attributable to non-controlling interests

  (330)  120   130 

Comprehensive income (loss) attributable to JAKKS Pacific, Inc.

 $86,883  $(6,514) $(12,298)

   Years Ended December 31, 
   2015    2016    2017  
       (In thousands)     
             
Net income (loss) $23,170  $1,249  $(83,028)
Other comprehensive income (loss):            
Foreign currency translation adjustment  (3,216)  (7,156)  4,148 
Comprehensive income (loss)  19,954   (5,907)  (78,880)
Less: Comprehensive income (loss) attributable to non-controlling interests  (84)  6   57 
Comprehensive income (loss) attributable to JAKKS Pacific, Inc. $20,038  $(5,913) $(78,937)

See accompanying notes to consolidated financial statements.



JAKKS PACIFIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS EQUITY

YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017
  

Common Stock

  

 

      

Accumulated

  

JAKKS

  

 

  

 

 
          Additional      

Other

  

Pacific, Inc.

  Non-  Total 
  

Number of

  

 

  

Paid-in

  

Accumulated

  

Comprehensive

  

Stockholders’

  

Controlling

  

Stockholders’

 
  

Shares *

  Amount *   

Capital *

  

Deficit

  

Loss

  

Equity *

  

Interests

  

Equity *

 
  

(In thousands)

 

Balance, December 31, 2019

  3,521  $4  $200,507  $(183,149) $(14,422) $2,940  $1,081  $4,021 

Stock-based compensation expense

  64      2,303         2,303      2,303 

Conversion of convertible senior notes

  2,127   2   20,210         20,212      20,212 

Repurchase of common stock for employee tax withholding

  (17)     (174)        (174)     (174)

Preferred stock accrued dividends

        (1,257)        (1,257)     (1,257)

Net income (loss)

           (14,274)     (14,274)  130   (14,144)

Foreign currency translation adjustment

              1,976   1,976      1,976 

Adjustment to additional paid in capital

        1         1      1 

Balance, December 31, 2020

  5,695   6   221,590   (197,423)  (12,446)  11,727   1,211   12,938 

Stock-based compensation expense

  43      2,093         2,093      2,093 

RSA to RSU conversion

  (431)                     

Conversion of convertible senior notes

  4,247   4   50,756         50,760      50,760 

Repurchase of common stock for employee tax withholding

  (33)     (164)        (164)     (164)

Preferred stock accrued dividends

        (1,334)        (1,334)     (1,334)

Net income (loss)

           (6,008)     (6,008)  120   (5,888)

Foreign currency translation adjustment

              (506)  (506)     (506)

Balance, December 31, 2021

  9,521   10   272,941   (203,431)  (12,952)  56,568   1,331   57,899 

Stock-based compensation expense

  334      5,082         5,082      5,082 

Repurchase of common stock for employee tax withholding

  (113)     (1,420)        (1,420)     (1,420)

Preferred stock accrued dividends

        (1,416)        (1,416)     (1,416)

Net income (loss)

           91,413      91,413   (330)  91,083 

Foreign currency translation adjustment

              (4,530)  (4,530)     (4,530)

Balance, December 31, 2022

  9,742  $10  $275,187  $(112,018) $(17,482) $145,697  $1,001  $146,698 
(In thousands)


*After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.


  Common Stock           Accumulated  JAKKS       
        Additional     Other  Pacific, Inc.  Non-  Total 
  Number     Treasury  Paid-in  Accumulated  Comprehensive  Stockholders’  Controlling  Stockholders’ 
  of Shares  Amount  Stock  Capital  Deficit  Loss  Equity  Interests  Equity 
Balance, January 1, 2015  22,682  $22  $(24,000) $202,052  $(26,645) $(6,835) $144,594  $490  $145,084 
Restricted stock grants  71   1      1,561         1,562      1,562 
Retirement of restricted stock  (52)  (1)              (1)     (1)
Repurchase of common stock  (1,547)  (1)  (13,192)           (13,193)     (13,193)
Retirement of treasury stock     (1)  8,870   (8,869)               
Net income              23,254      23,254   (84)  23,170 
Foreign currency translation adjustment                 (3,216)  (3,216)     (3,216)
Balance, December 31, 2015  21,154   20   (28,322)  194,744   (3,391)  (10,051)  153,000   406   153,406 
Contributions from non-controlling interests                       500   500 
Restricted stock grants  65   1      1,620         1,621      1,621 
Retirement of restricted stock  (25)                        
Repurchase of common stock  (1,766)     (13,506)           (13,506)     (13,506)
Repurchase of common stock for employee tax withholding  (51)        (1,462)        (1,462)     (1,462)
Retirement of treasury stock     (2)  17,828   (17,826)               
Excess tax benefit on vesting of restricted stock           548         548      548 
Net income              1,243      1,243   6   1,249 
Foreign currency translation adjustment                 (7,156)  (7,156)     (7,156)
Balance, December 31, 2016  19,377   19   (24,000)  177,624   (2,148)  (17,207)  134,288   912   135,200 
Restricted stock grants  981   1      3,111         3,112      3,112 
Retirement of restricted stock  (9)                        
Shares issued in exchange for convertible notes  2,977   3      15,521         15,524      15,524 
Repurchase of common stock for employee tax withholding  (30)        (79)        (79)     (79)
Issuance of common stock to Hongkong Meisheng  3,661   4      19,307         19,311      19,311 
Adjustment to additional paid in capital              325           325      325 
Net income (loss)              (83,085)     (83,085)  57   (83,028)
Foreign currency translation adjustment                 4,148   4,148      4,148 
Balance, December 31, 2017  26,957  $27  $(24,000) $215,809  $(85,233) $(13,059) $93,544  $969  $94,513 

See accompanying notes to consolidated financial statements.




JAKKS PACIFIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

  Years Ended December 31, 
  2015  2016  2017 
  (In thousands) 
Cash flows from operating activities         
Net income (loss) $23,170  $1,249  $(83,028)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:            
Provision for doubtful accounts        11,803 
Depreciation and amortization  18,860   22,944   21,003 
Write-off and amortization of debt issuance costs  2,042   2,542   2,104 
Share-based compensation expense  1,562   1,621   3,112 
(Gain) loss on disposal of property and equipment  47   17   (71)
Intangibles impairment        5,248 
Write-off of investment in DreamPlay, LLC        7,000 
Goodwill impairment        8,288 
Change in fair value of business combination liability  (5,642)      
(Gain) loss on extinguishment of convertible senior notes     (98)  497 
Income from joint ventures  (1,017)      
Deferred income taxes  (329)  (259)  (1,251)
Change in fair value of convertible senior notes        308 
Changes in operating assets and liabilities, net of acquisitions:            
Accounts receivable  71,129   (10,212)  19,339 
Inventory  18,283   (14,891)  17,003 
Income taxes receivable     22,804   (676)
Prepaid expenses and other assets  (7,513)  15,227   (2,149)
Accounts payable  (21,037)  10,558   (380)
Accrued expenses  (26,811)  (12,767)  3,500 
Reserve for sales returns and allowances  (7,210)  (843)  1,198 
Income taxes payable   (3,014)  (21,018)  (987)
Other liabilities  3,281   (151)  (467)
Total adjustments  42,631   15,474   94,422 
Net cash provided by operating activities  65,801   16,723   11,394 
Cash flows from investing activities            
Purchases of property and equipment  (17,840)  (14,765)  (14,928)
Proceeds from sale of property and equipment        145 
Distributions from joint venture  60       
Cash paid for intangible assets     (300)   
Sale of marketable securities  220       
Change in other assets  (4,149)      
Net cash used in investing activities  (21,709)  (15,065)  (14,783)
Cash flows from financing activities            
Surrender of common stock  (1)      
Repurchase of common stock  (13,193)  (13,506)   
Repurchase of common stock for employee tax withholding     (1,462)  (79)
Net proceeds from credit facility borrowings     10,000    
Repayment of credit facility borrowings        (5,000)
Credit facility costs  (188)      
Repurchase of convertible senior notes     (8,035)  (35,614)
Proceeds from issuance of common shares of non-controlling interests     500    
Proceeds from issuance of common stock        19,311 
Excess tax benefit from share-based compensation     548    
Net cash used in financing activities  (13,382)  (11,955)  (21,382)
Net increase (decrease) in cash and cash equivalents  30,710   (10,297)  (24,771)
Effect of foreign currency translation  293   (6,167)  3,684 
Cash and cash equivalents, beginning of year  71,525   102,528   86,064 
Cash and cash equivalents, end of year $102,528  $86,064  $64,977 
Cash paid during the period for:            
Interest $10,198  $9,855  $8,778 
Income taxes $7,832  $2,165  $4,076 
  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 

Cash flows from operating activities

            

Net income (loss)

 $91,083  $(5,888) $(14,144)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

         

Provision for (recovery of) doubtful accounts

  233   (1,397)  1,619 

Depreciation and amortization

  10,578   10,251   10,936 

Write-off and amortization of debt issuance costs

  708   1,304   1,404 

Share-based compensation expense

  5,082   2,093   2,303 

Payment-in-kind interest

     1,519   4,366 

Write-off and amortization of debt discount

  845   1,419   2,800 

(Gain) loss on disposal of property and equipment

  (46)  (67)  71 

Tools and molds disposal

        149 

Intangibles impairment

  300       

Gain on loan forgiveness

     (6,206)   

Loss on debt extinguishment

     7,351    

Deferred income taxes

  (57,855)  (72)  (103)

Change in fair value of convertible senior notes

     16,419   2,265 

Change in fair value of preferred stock derivative liability

  636   13,220   2,815 

Changes in operating assets and liabilities:

            

Accounts receivable

  44,390   (43,743)  14,069 

Inventory

  3,335   (45,312)  15,617 

Prepaid expenses and other assets

  4,753   7,330   20,004 

Account payable

  (18,056)  19,752   (12,764)

Account payable - Meisheng (related party)

  (5,411)  5,265   (7,997)

Accrued expenses

  (9,073)  7,767   (211)

Reserve for sales returns and allowances

  5,592   4,177   3,743 

Income taxes payable

  9,875   (212)  (2,626)

Other liabilities

  (870)  (849)  (749)

Total adjustments

  (4,984)  9   57,711 

Net cash provided by (used in) operating activities

  86,099   (5,879)  43,567 

Cash flows from investing activities

            

Purchases of property and equipment

  (10,389)  (8,221)  (8,268)

Proceeds from sale of property and equipment

  2   32   78 

Net cash used in investing activities

  (10,387)  (8,189)  (8,190)

Cash flows from financing activities

            

Repurchase of common stock for employee tax withholding

  (1,420)  (164)  (174)

Proceeds from loan under the Paycheck Protection Program

        6,206 

Retirement of convertible senior notes

        (1,905)

Repayment of credit facility borrowings

  (13,000)  (16,000)   

Proceeds from credit facility borrowings

  13,000   16,000    

Repayment of 2021 BSP Term Loan

  (29,604)  (495)   

Net proceeds from issuance of long-term debt

     96,306    

Deferred issuance costs

     (2,629)   

Repayment of 2019 Recap Term Loan

     (125,805)  (15,073)

Net cash used in financing activities

  (31,024)  (32,787)  (10,946)

Net increase (decrease) in cash, cash equivalents and restricted cash

  44,688   (46,855)  24,431 

Effect of foreign currency translation

  (4,530)  (506)  1,976 

Cash, cash equivalents and restricted cash, beginning of year

  45,332   92,693   66,286 

Cash, cash equivalents and restricted cash, end of year

 $85,490  $45,332  $92,693 

Supplemental disclosures of non-cash financing activities:

            

Forgiveness of Paycheck Protection Program Loan

 $  $6,206  $ 

Supplemental disclosures of cash flow information:

            

Cash paid for interest

 $9,040  $13,355  $13,216 

Cash paid for income taxes, net

 $7,669  $1,615  $3,849 

As of December 31, 20152022, there was $0.4 million and $2.7$3.6 million of property and equipment included in accounts payable and accrued expenses, respectively.payable. As of December 31, 20162021, there was $6.6$2.8 million and nil of property and equipment included in accounts payable and accrued expenses, respectively.payable. As of December 31, 20172020, there was $5.2$2.1 million and nil of property and equipment included in accounts payablepayable.

The Company received income tax refunds of $0.3 million, $0.3 million and accrued expenses, respectively.


See Notes 4, 5$0.6 million for the years ended December 31, 2022, 2021 and 192020, respectively, and has included these amounts in cash paid during the period for additional supplemental information to consolidated statements of cash flows.income taxes, net.


See accompanying notes to consolidated financial statements.



JAKKS PACIFIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 20172022

Note 1—1Principal 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.products. The Company markets its product lines domestically and internationally.

The Company wasis incorporated under the laws of the State of Delaware in January 1995.Delaware.

Note 2—2Summary of Significant Accounting Policies

Principles of consolidation and basis of preparation

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.

Effective July 9, 2020, the Company completed a 1 for 10 reverse stock split of its $0.001 par value common stock reducing the issued and outstanding shares of common stock from 42,395,782 to 4,239,578 (“Reverse Stock Split”). The Company entered into a joint venture with Meisheng Culture & Creative Corp., forReverse Stock Split did not cause an adjustment to the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territoriespar value or the authorized shares of the People’s Republic of China. The joint venture includes a subsidiarycommon stock. All share and per share amounts in the Shanghai Free Trade Zone that sells, distributesfinancial statements 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.notes thereto have been retroactively adjusted for all periods presented to give effect to the Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. The Company owns fifty-one percent ofprimary reason for implementing the joint venture and consolidates the joint venture since control restsReverse Stock Split was to regain compliance with the Company.minimum bid price requirement of The NASDAQ Stock Market LLC (“Nasdaq”). On July 31, 2020, the Company was notified by Nasdaq that it had regained compliance with the Nasdaq listing requirements.

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.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $39.4 million and $30.7 million as of December 31, 2022 and 2021, 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 we expect would not be significant as of December 31, 2022.

Restricted cash

Restricted cash consists of 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 extensive 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

The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products). Revenue is recognized uponin the shipmentgross 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, or their agents, depending upon terms, provided there are no uncertainties regarding customer acceptance,contract assets or contract liability balances.

The Company disaggregates its revenues from contracts with customers by reporting segment: Toys/Consumer Products and Costumes. The Company further disaggregates revenues by major geographic regions (See Note 3 - Business Segments, Geographic Data and Sales by 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 sales price istransaction price. Certain discounts and allowances are fixed orand determinable at the time of sale and collectability is reasonably assured.

Generallyare 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 does not allowoccasionally grants discretionary credits to facilitate markdowns and sales of slow-moving merchandise, and consequently accrues an allowance based on historic credits and management estimates. The Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced product returns. It provides its customers a negotiated allowanceamounts in exchange for breakagecustomer 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 defects, which is recordedspecific advertising campaigns. Such allowances are accrued when the related revenue is recognized. However,To the extent these cooperative advertising arrangements provide a distinct benefit at fair value, they are accounted for as direct selling expenses, otherwise they are recorded as a reduction to revenue. Further, while the Company generally does not allow product returns, the Company does make occasional exceptions to this policy and consequently accruesrecords a sales return allowance based upon historic return amounts and management estimates. The Company occasionally grants credits to facilitate markdownsThese allowances (variable consideration) are estimated using the expected value method and sales of slow-moving merchandise. These credits are recorded as a reduction of gross sales 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 sale.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.

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 one 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. For the twelve months ended December 31, 2022, 2021, and 2020, shipping and handling costs were $7.7 million, $5.4 million, and $4.0 million, respectively.

The Company’s reserve for sales returns and allowances amounted to $51.9 million as of December 31, 2022 and $46.3 million as of December 31, 2021.

Fair value measurementsValue 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.

Inventory

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of December 31 (in thousands):
   Fair Value Measurements 
 Carrying Amount as of As of December 31, 2016 
 December 31, 2016 Level 1 Level 2 Level 3 
         
Cash equivalents $15,312  $15,312  $  $ 
   Fair Value Measurements 
 Carrying Amount as of As of December 31, 2017 
 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 

The following table provides a reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

  2017 
Balance at January 1, 2017 $ 
Issuance of 3.25% Convertible Senior Notes due in 2020  22,161 
Change in fair value  308 
Balance at December 31, 2017  $22,469 

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., 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. The principal balance of the remaining 2018 Notes amounted to approximately $21.2 million. In connection with the transaction, 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, 2017 the 3.25% 2020 Notes had a fair value of $22.5 million.
44

The fair value of the remaining 4.25% convertible senior notes payable due 2018 as of December 31, 2016 and 2017 was $18.9 million and $20.5 million respectively, based upon the most recent quoted market prices, and the fair value of the 4.875% convertible senior notes payable due 2020 as of December 31, 2016 and 2017 was $89.3 million and $89.7 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.
For the years ended December 31, 2016 and 2017, there was no impairment to the value of the Company’s non-financial assets.
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 realizable value, net of inventory obsolescence reserve, and consists of the following (in thousands):

  

December 31,

 
  

2022

  

2021

 

Raw materials

 $69  $106 

Finished goods

  80,550   83,848 
  $80,619  $83,954 

  December 31,
  2016 2017
Raw materials $5,204  $3,265 
Finished goods  70,231   55,167 
  $75,435  $58,432 

As of December 31, 2022 and 2021, the inventory obsolescence reserve was $9.0 million and $4.6 million, respectively.

During

Royalties

The Company enters into license agreements with strategic partners, inventors, designers and others for the first quarteruse of 2017,intellectual properties in its products. These agreements may call for payment in advance or future payment of minimum guaranteed amounts. Amounts paid in advance are recorded as an asset and charged to expense when the related revenue is recognized in the consolidated statements of operations. If all or a portion of the minimum guaranteed amounts appear not to be recoverable through future use of the rights obtained under the license, the non-recoverable portion of the guaranty is charged to expense at that time.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in its consolidated balance sheets. The Company does not have any finance leases.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company adopted Accounting Standards Update (“ASU”) 2015-11, “Simplifyinguses its incremental borrowing rate based on the Measurementinformation available at commencement date in determining the present value of Inventory (Topic 330)”.lease payments. The amendments, which applyoperating lease ROU asset also includes any prepaid lease amounts and excludes lease incentives. The Company’s lease terms may include options to inventoryextend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be appliedrecognized on a prospective basis. The adoption of ASU 2015-11 did not have a material impact onstraight-line basis over the Company’s consolidated financial statements.lease term.



The Company excludes right-of-use ("ROU") assets and lease liabilities for leases with an initial term of 12 months or less from the balance sheet.

Deferred Financing Charges

Deferred financing charges consist of credit facility loan origination fees. These charges are capitalized and amortized over the life of the line of credit agreement.

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, 2015, 20162022, 2021 and 2017.2020.


For the years ended December 31, 2015, 20162022, 2021 and 2017,2020, the Company’s aggregate depreciation expense related to property and equipment was $10.9$9.6 million, $13.9$9.2 million and $13.0$9.8 million, respectively.

For the years ended December 31, 2022, 2021 and 2020, the Company recorded a (gain) loss on disposal of tools and molds of ($43,850), ($34,100) and $0.1 million, respectively, which is included in cost of sales in the consolidated statements of operations.

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

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, 2015, 20162022, 2021 and 2017,2020, was approximately $15.8$14.3 million, $20.1$12.2 million and $10.8$10.1 million, respectively.

The Company also participates in cooperative advertising arrangements with certain customers, whereby it allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. Typically, these discounts range from 2% to 10% of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such amounts are accrued when the related revenue is recognized or when the advertising campaign is initiated. These cooperative advertising arrangements are accounted for as direct selling expenses.

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 jurisdictions. Deferred taxes are provided on an asset and liability method whereby deferredmethod. Deferred tax assets are recognized as deductible temporary differences, and operating loss andlosses, or tax credit carry-forwards and deferredcarry-forwards. Deferred tax liabilities are recognized foras 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 October 2016,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 FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory.” The amendments in this ASU reduces the complexityCompany would be able to realize its deferred tax assets in the accounting standards by allowingfuture in excess of their net recorded amount, management would make an adjustment to the recognitiondeferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions on the basis of current and deferred income taxes for an intra-entity asset transfer, othera two-step process whereby (1) management determines whether it is more likely than inventory, whennot that the transfer occurs. Historically, recognitiontax 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 consequence was not recognized untilexpense. Any accrued interest and penalties are included within the asset was sold torelated tax liability.

Revision of Previously Disclosed Amounts

During the course of preparing the Company’s financial statements as of and for the year ended December 31, 2022, the Company completed an outside party. This ASU is effective for fiscal years,Internal Revenue Code Section 382 and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company expects383 analysis of its historical net operating loss and tax credit carryforward amounts. As a result, a portion of the impact of this ASUprior year net operating loss and tax credit carryforwards were determined to be immaterial to its consolidated financial statements.limited. See Note 13 – Income Taxes, for further details.

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 loss/gainincome (loss) within stockholders’ equity. The Company’s primary currency translation exposures in 2015, 20162022, 2021 and 20172020 were related to its net investment in entities having functional currencies denominated in the Hong Kong dollar,Dollar, British pound,Pound, Canadian dollar,Dollar, Chinese yuan,Yuan, Mexican pesoPeso and the Euro.

46

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 often 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. There were no impairments for years ended December 31, 2015 and 2016. 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.


47

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 occurredlevel. The annual goodwill test is performed in the underlying assetssecond quarter and whenever events or whenchanges in circumstances indicate that the benefitscarrying amount of a reporting unit may exceed its fair value, the Company may assess goodwill for impairment using a qualitative assessment. Qualitative factors and their impact on critical inputs are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company determines that a reporting unit has an indication of impairment based on the qualitative assessment, it is required to perform a quantitative assessment. The Company may bypass the qualitative assessment and perform a quantitative assessment. Impairment is recognized in the amount by which, if any, the carrying value of the identified intangible assets are realized.reporting unit exceeds the fair value, not to exceed the carrying value of goodwill. Indefinite-lived intangible assets other than goodwill consist of trademarks.

The carrying value of goodwill and trademarks areis 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.

For the years ended December 31, 2015 and 2016, there was no impairment to the value of the Company's goodwill or trademarks. In the third quarter of 2017, the Company determined that the fair values of its reporting units should be retested for potential impairment. Based on the retesting performed with the assistance of a third-party valuation consultant as of September 30, 2017, it was determined that the fair values of two of its three reporting units were less than their respective carrying amounts. Accordingly, a charge of $8.3 million for goodwill impairment was recorded.

Share-based Compensation

The Company measures all employee stock-basedshare-based compensation awards using a fair value method and records such expense in its consolidated financial statements. The Company recorded $1.6 million, $1.6 million and $3.1 millionstatements of restricted stock expense in 2015, 2016 and 2017, respectively. See Note 17 for further details relating to share based compensation.operations.

Earnings (Loss) per share

The following table is a

A reconciliation of the weighted-average sharesamounts used in the computation ofto calculate basic and diluted earningsincome (loss) per share (“EPS”) for the periods presentedyears ended December 31, 2022, 2021, and 2020 follows (in thousands, except per share data):

  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 

Net income (loss)

 $91,083  $(5,888

)

 $(14,144

)

Net income (loss) attributable to non-controlling interests

  (330

)

  120   130 

Net income (loss) attributable to JAKKS Pacific, Inc.

  91,413   (6,008

)

  (14,274

)

Preferred stock dividend*

  (1,416

)

  (1,334

)

  (1,257

)

Net income (loss) attributable to common stockholders**

 $89,997  $(7,342

)

 $(15,531

)

Weighted average common shares outstanding - basic

  9,651   7,498   3,634 

Earnings (loss) per share available to common stockholders - basic

 $9.33  $(0.98

)

 $(4.27

)

Weighted average common shares outstanding - diluted

  10,155   7,498   3,634 

Earnings (loss) per share available to common stockholders - diluted

 $8.86  $(0.98

)

 $(4.27

)

  2015
     Weighted   
     Average   
  Income Shares Per Share
Basic EPS         
Income available to common stockholders $23,254   19,435  $1.20 
Effect of dilutive securities:            
Assumed conversion of convertible senior notes  7,385   23,369     
Options and warrants          
Unvested performance stock grants     347     
     Unvested restricted stock grants     170     
Diluted EPS            
Income available to common stockholders plus assumed exercises and conversion $30,639   43,321  $0.71 

* The 200,000 shares issued and outstanding are non-participating.

** Net income (loss) attributable to common stockholders was computed by deducting preferred dividends of $1.4 million, $1.3 million and $1.3 million for the years ended December 31, 2022, 2021 and 2020 respectively.

  2016
     Weighted   
     Average   
  Income 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 
48

  
 
2017
     Weighted   
     Average   
  Loss 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

Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the period (which consist of warrants, optionsrestricted stock awards, restricted stock units and convertible debt to the extent they are dilutive). For the years ended December 31, 2015, 20162021 and 2017,2020, the convertible senior notes interest and related weighted common share equivalent of nil, 23,004,9161,735,938 and 18,272,906,5,758,365, respectively, were excluded from the diluted earnings (loss) per share calculation because they were anti-dilutive. Potentially dilutive stock options and warrants of 1,518,596, 1,500,000 and 1,062,500 for the years ended December 31, 2015, 2016 and 2017, respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive. Potentially dilutive restricted stock awards and units of nil, 122,371 and 185,455 for each of the years ended December 31, 2015, 20162022, 2021 and 20172020, respectively, were excluded from the computation of diluted earnings (loss) per share since they would have been anti-dilutive.

Recent Accounting Pronouncements

The Company is also party to

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which require a prepaid forward contract to purchase 3,112,840 sharesfinancial asset (or a group of its common stock that arefinancial assets) measured at amortized cost basis to be delivered over a settlement period in 2020. The number of sharespresented at the net amount expected 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.



49

Debt with Conversion and Other Options
collected. The new standard was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. 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 are senior unsecured obligations of the Company paying interest semi-annually in arrears on August 1 and February 1 of each year at a rate of 4.25% per annum and will mature on August 1, 2018. The initial and still current conversion rate for the 2018 Notes is 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. Upon conversion, the 2018 Notes will be settled in shares of the Company’s common stock. Holders of the 2018 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 2018 Notes). In 2016, the Company repurchased and retired an aggregate of approximately $6.1 million principal amount of the 2018 Notes. In 2017, the Company exchanged and retired an aggregate of $51.1 million principal amount of the 2018 Notes at par for $35.6 million in cash and approximately 3.0 million shares of its common stock, reducing the principal balance of the remaining 2018 Notes to approximately $21.2 million. In addition, $21.5 million principal amount of the 2018 Notes were exchanged and their maturity extended to November 1, 2020 along with a reduction in the interest rate to 3.25% per annum if paid in cash and a reduction in the conversion price to $3.05 per share (the “3.25% 2020 Notes”).

 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). The Company received net proceeds of approximately $110.4 million from the offering of which $24.0 million was used to repurchase 3.1 million shares of the Company’s common stock under a prepaid forward purchase contract. In January 2016, the Company repurchased and retired an aggregate of $2.0 million principal amount of the 2020 Notes.
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 of its common shares repurchased as a reduction to stockholders’ equity allocated to treasury stock. 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 2014,2019, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”,2019-10 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 defersdeferred 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.

The Company’s approach to analyze the impact of the standard on its revenue contracts included a review of existing contracts with customers, an evaluation of the specific terms of those contracts and the appropriate treatment under the new standards, and a comparison of that new treatment to its existing accounting policies to identify differences. The Company will adopt the requirements of the new standard on January 1, 2018 using the modified retrospective approach.

The Company identified the same performance obligation (sale of our products) under Topic 606 as compared with deliverables and separate units of account previously identified under Topic 605.
50

The Company does offer certain types of variable consideration to customers such as discounts, pricing allowances and collaborative marketing arrangements. The standard requires us to estimate these amounts. The Company anticipates that the timing and measurement of revenue will be consistent with its current revenue recognition although the approach to revenue recognition will now be based on the transfer of control.2016-13 by three years for Smaller Reporting Companies. As a result, there will be no impact to the Company’s consolidated financial statements oneffective date for the adoption of the new standard as of January 1, 2018.

The Company established new key controls within its financial reporting infrastructure specific to its adoption of ASC 606. Furthermore, additional disclosures will be required to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Beginning in the first quarter of 2018, additional disclosures will include, but are not limited to, significant judgments and practical expedients elected in the adoption of Topic 606.

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, 2017.2022, and interim periods therein, and early adoption is permitted. Based on the Company’s preliminary evaluation, the Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax assets for investments. The guidance also reduces complexity in certain areas, including the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating taxes to members of a consolidated group. This new standard is effective for the Company for fiscal years beginning January 1, 2021, with early adoption permitted. The adoption of this standard isdid not expected to have a material impact on the Company’s consolidated financial statements.


In February 2016,March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” The ASUs provide temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions, for a limited period of time, to ease the potential burden of recognizing the effects of reference rate reform on financial reporting. The amendments in ASU 2020-04 apply to contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to the global transition away from LIBOR and certain other interbank offered rates. The new standard is effective for the Company for fiscal years beginning after December 15, 2024, including interim periods within these fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting Standards Update 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 establishesfor Convertible Instruments and Contracts in an Entity’s Own Equity.” The new guidance eliminates two of the three models in ASC 470-20, which required entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. As a right-of-use (“ROU”)result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leasesrequire bifurcation in accordance with terms longer than 12 months. LeasesASC 815-15 will be classified as either finance or operating,accounted for separately. In addition, the amendments in ASU 2020-06 eliminates some of the requirements in ASC 815-40 related to equity classification. The amendments in ASU 2020-06 further revised the guidance in ASC 260, Earnings Per Share (“EPS”), to address how convertible instruments are accounted for in calculating diluted EPS, and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The new standard is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within these fiscal years, with classification affectingearly adoption permitted. The Company is currently evaluating the patternimpact that the adoption of expense recognition inthis new guidance will have on its consolidated financial statements.

In November 2021, the income statement.FASB issued ASU 2016-02 is2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” ASU 2021-10 requires annual disclosures that are expected to increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions and (3) the effect of those transactions on an entity’s financial statements. The provisions of ASU 2021-10 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early31, 2021, with early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluatingadopted ASU 2021-10 during the impact offiscal period December 31, 2021. (See Note 5 – Prepaid Expenses and Other Assets and Note 10 – Debt, for disclosures related to government assistance received by the pending adoption of this new standard on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017.Company). The adoption of this standard isdid not expected to have a material impact on the Company’s consolidated financial statements.


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 reduces 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. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The update requires that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company early adopted this standard during the second quarter of 2017. The adoption of this standard does 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 is not expected to have a material impact on the Company’s consolidated financial statements.

51

Note 3—3Business Segments, Geographic Data and 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.Toys/Consumer Products and Canada, (ii) International and (iii) Halloween.Costumes.

The U.S. and CanadaToys/Consumer Products segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, child-sized and hand-held role play toys and everyday costume play, foot to floorfoot-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.related products.


Within the International

The Costumes segment, the Companyunder its Disguise branding, designs, develops, markets and sells its toy products in markets outsidea wide range of the U.S.every-day and Canada, primarily in the European, Asia Pacific, and Latin and South American regions.


Within the Halloween segment, the Company markets and sells Halloweenspecial occasion dress-up costumes and related accessories in support of Halloween, Carnival, Children’s Day, Book Day/Week, and everydayevery-day/any-day costume play products, primarily in the U.S. and Canada.play.

Segment performance is measured at the operating income (loss) 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, 20162022 and 20172021 and for the three years in the period ended December 31, 20172022 are as follows (in thousands):

  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 

Net Sales

            

Toys/Consumer Products

 $647,317  $513,517  $427,122 

Costumes

  148,870   107,599   88,750 
  $796,187  $621,116  $515,872 

  Years Ended December 31,
  2015 2016 2017
Net Sales         
U.S. and Canada $478,728  $478,595  $406,411 
International  169,826   131,229   107,231 
Halloween  97,187   96,779   99,469 
  $745,741  $706,603  $613,111 
  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 

Income (Loss) from Operations

            

Toys/Consumer Products

 $62,698  $39,046  $20,002 

Costumes

  (1,728)  (279)  (7,094)
  $60,970  $38,767  $12,908 

  Years Ended December 31,
  2015 2016 2017
Income (Loss) from Operations         
U.S. and Canada $17,562  $17,434  $(35,720)
International  16,249   4,360   (13,184)
Halloween  (3,281)  (4,688)  (15,254)
  $30,530  $17,106  $(64,158)
  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 

Depreciation and Amortization Expense

     

Toys/Consumer Products

 $10,182  $9,585  $10,292 

Costumes

  396   666   644 
  $10,578  $10,251  $10,936 

  Years Ended December 31,
  2015 2016 2017
Depreciation and Amortization Expense         
U.S. and Canada $13,023  $16,817  $15,286 
International  4,439   4,549   4,079 
Halloween  1,398   1,578   1,638 
  $18,860  $22,944  $21,003 
  

December 31,

 
  

2022

  

2021

 

Assets

        

Toys/Consumer Products

 $377,605  $338,266 

Costumes

  27,737   18,781 
  

$

405,342

  $357,047 

  December 31,
  2016 2017
Assets      
U.S. and Canada $306,895  $229,505 
International  119,560   106,255 
Halloween  37,848   34,589 
  $464,303  $370,349 

52

Information regarding the Company’s operations in different geographical areas is presented below on the basis the Company uses to manage its business.

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 $15.7 million in 2016 and $17.0 million in 2017 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, 20162022 and 20172021 and for each of the three years in the period ended December 31, 20172022 (in thousands):

  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 

Net Sales by Customer Area

            

United States

 $644,295  $512,193  $421,222 

Europe

  85,348   60,425   51,885 

Canada

  26,515   17,999   18,486 

Latin America

  18,338   12,606   7,734 

Asia

  10,431   9,232   8,285 

Australia and New Zealand

  8,836   6,423   5,795 

Middle East and Africa

  2,424   2,238   2,465 
  $796,187  $621,116  $515,872 

  December 31,
  2016 2017
Long-lived Assets      
China $15,710  $17,194 
United States  6,587   5,755 
Hong Kong  544   278 
  $22,841  $23,227 
51

  Years Ended December 31, 
  2015  2016  2017 
Net Sales by Customer Area         
United States $542,101  $544,096  $479,133 
Europe  117,313   92,811   71,094 
Canada  32,587   26,947   21,882 
Hong Kong  1,675   2,012   1,064 
Other  52,065   40,737   39,938 
  $745,741  $706,603  $613,111 

  

December 31,

 
  

2022

  

2021

 

Long-lived Assets

        

United States

 $17,383  $16,252 

China

  14,161   11,655 

Hong Kong

  2,142   770 

United Kingdom

  974   1,270 

Canada

  46   73 

Mexico

  69   79 
  $34,775  $30,099 

Major Customers

Net sales to major customers were as follows (in thousands, except for percentages):

  

2022

  

2021

  

2020

 
      

Percentage of

      

Percentage of

      

Percentage of

 
  Amount  

Net Sales

  Amount  

Net Sales

  Amount  

Net Sales

 

Wal-Mart

 $226,318   28.4

%

 $167,260   26.9

%

 $150,250   29.1

%

Target

  203,200   25.5   176,561   28.4   132,354   25.7 
  $429,518   53.9

%

 $343,821   55.3

%

 $282,604   54.8

%

  2015 2016 2017
     Percentage of    Percentage of    Percentage of
  Amount Net Sales Amount Net Sales Amount Net Sales
Wal-Mart $180,758   24.3% $186,894   26.5% $156,436   25.5%
Target  96,850   13.0   110,233   15.6   108,799   17.8 
Toys 'R' Us  96,446   12.9   90,568   12.8   69,508   11.3 
  $374,054   50.2% $387,695   54.9% $334,743   54.6%

No other customer accounted for more than 10% of the Company’s total net sales.

As of December 31, 2016 and 2017, the Toys “R” Us, Inc. (“TRU”) consolidated accounts receivable balance represented 23.5% and 26.4%, respectively, of the Company’s gross accounts receivable. When combined with Wal-Mart and Target, the Company’s other two most significant customers, these customers represent 59.6% and 60.6%, respectively, of gross accounts receivable at December 31, 2016 and 2017.

On September 18, 2017, TRU and certain of its U.S. subsidiaries and its Canadian subsidiary voluntarily filed for relief under Chapter 11 of the Bankruptcy Code in the U.S. The Canadian subsidiary also began parallel proceedings under the Companies’ Creditors Arrangement Act (“CCAA”) in Canada. As a result, the Company has reserved $8.9 million of the TRU pre-petition consolidated accounts receivable balance of $22.8 million resulting in a net pre-petition consolidated accounts receivable balance of $13.9 million as of December 31, 2017. The unreserved amount includes $2.9 million and the Company can assert a priority claim under section 503(b)(9) of the Bankruptcy Code for this amount. The balance of the unreserved amount has been submitted to the Company’s insurance carrier and is expected to be recovered.

On September 20, 2017, TRU received interim approval to access up to $2.2 billion in debtor-in-possession financing and on September 22, 2017 TRU closed on $3.1 billion of debtor-in-possession financing to support its ongoing liquidity needs. Accordingly, the Company resumed shipping to TRU for the 2017 holiday season resulting in post-petition consolidated accounts receivable balance with TRU at December 31, 2017 of $18.6 million, with no related amount reserved. Subsequent to the year ended December 31, 2017, the Company has collected $14.1 million (unaudited) of the TRU post-petition consolidated accounts receivable balance outstanding as of December 31, 2017 resulting in a remaining balance of $4.5 million (unaudited) as of March 15, 2018.

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 (see losses.

Note 22).



53

Note 4—4Joint 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, 2015, 2016 and 2017, the Company recognized income from the joint venture of $0.1 million, $0.7 million and nil, respectively.
As of December 31, 2016 and 2017, 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. 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 from the joint venture for the year ended December 31, 2016 and 2017 was income of $6,000 and $57,000, respectively.


In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited, a Hong Kong-based subsidiary of Meisheng (“HK Meisheng”MC&C”), for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows. JAKKS and HK 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 will oversee through the Company’s existing distribution joint venture. The non-controlling interest’s share of the loss from the joint venture for year ended December 31, 2017 was nil. As of April 27, 2017, Hong Kong Meisheng Cultural Company Limited 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. We expect to launch a full line of makeup and skincare products branded under the C’est Moi name in the U.S. and Canada in the first quarter of 2018. The Company’s investment in C’est Moi is included in trademarks in our consolidated financial statements (See Note 7).

54

Note 6—Goodwill
The changes in the carrying amount of goodwill by reporting unit for the years ended December 31, 2016 and 2017 are as follows (in thousands):
  U.S. and Canada  International  Halloween  Total 
Balance, January 1, 2016:            
Goodwill $30,218  $11,717  $2,264  $44,199 
Adjustments to goodwill for foreign currency translation  (678)  (262)  (51)  (991)
Balance December 31, 2016:
  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 
The Company assesses goodwill and indefinite-lived intangible assets for impairment on an annual basis by reviewing relevant qualitative and quantitative factors. More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other triggering events that take place. If carrying value exceeds fair value, a possible impairment exists and further evaluation is performed.
The Company performed its annual assessment for impairment on goodwill as of our annual testing date being April 1, 2017. In performing its assessment for goodwill impairment, the Company prepared a Step 1 quantitative test and determined there was no impairment to goodwill as of April 1, 2017. The valuation of goodwill involves a high degree of judgment and uncertainty related to key assumptions. Due to the subjective nature of the impairment analysis, significant changes in the assumptions used to develop the estimate could materially affect the conclusion regarding the future cash flows necessary to support the valuation of goodwill.

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 several factors that have occurred since the Company’s April 1, 2017 assessment, the Company determined that the fair values of its reporting units should be retested for potential impairment. Based on the retesting performed with the assistance of a third-party valuation consultant as of September 30, 2017, it was determined that the fair values of two of its three reporting units were less than their respective carrying amounts. Accordingly, a charge of $8.3 million for goodwill impairment was recorded during the third quarter of the year ending December 31, 2017. No impairment was recorded during the year ended December 31, 2016.
Note 7—Intangible Assets
Intangible assets consist primarily of licenses, product lines, customer relationships and trademarks. Amortized intangible assets are included in intangibles in the accompanying balance sheets. Trademarks are disclosed separately in the accompanying balance sheets. Intangible assets are as follows (in thousands, except for weighted useful lives):
     December 31, 2016  December 31, 2017 
  
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  $(17,248) $2,882  $20,130  $(18,620) $1,510 
Product lines 5.07   50,093   (20,634)  29,459   33,858   (13,178)  20,680 
Customer relationships 4.90   3,152   (2,755)  397   3,152   (3,152)   
Trade names 5.00   3,000   (2,650)  350   3,000   (3,000)   
Non-compete/ Employment contracts 5.00   200   (177)  23   200   (200)   
Total amortized intangible assets    $76,575   $(43,464) 33,111  $60,340   $(38,150) 22,190 
Unamortized Intangible Assets:                           
Trademarks    $2,608   $  2,608  $300   $  300 
55

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.
For the years ended December 31, 2015, 2016 and 2017, the Company’s aggregate amortization expense related to intangible assets was $8.0 million, $8.8 million and $8.0 million, respectively. The Company currently estimates continuing future amortization expense to be approximately (in thousands):
2018 $4,261 
2019  3,327 
2020  3,053 
2021  3,053 
2022  3,053 
Thereafter  5,443 
  $22,190 

56

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. On September 18, 2017, Toys "R" Us, Inc. filed for relief under Chapter 11 of the Bankruptcy Code. Accordingly, as of December 31, 2017, the Company has reserved $8.9 million of the Toys "R" Us pre-petition bankruptcy receivables (see Note 3).
The Company performs ongoing credit evaluations of its customers’ financial conditions, but does not require collateral to support domestic customer accounts receivable. Most goods shipped FOB Hong Kong or China are secured with irrevocable letters of credit.
Note 9—Accrued Expenses
Accrued expenses consist of the following (in thousands):
  2016  2017 
Royalties $13,805  $17,854 
Inventory liabilities  5,425   5,943 
Salaries and employee benefits  3,243   4,064 
Unearned revenue  779   3,924 
Bonuses  1,500   1,914 
Goods in transit  3,441   1,669 
Interest expense  2,520   1,398 
Professional fees  3,696   1,376 
Sales commissions  816   663 
Other  3,420   3,340 
  $38,645  $42,145 
In addition to royalties currently payable on the sale of licensed products during the quarter, 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 $3.1 million in 2015, $3.2 million in 2016 and $2.2 million in 2017. As of December 31, 2016 and 2017, legal fees and reimbursable expenses of $1.6 million and $0.5 million, respectively, were payable to this law firm.

The owner of NantWorks, the Company’s DreamPlay Toys joint venture partner, beneficially owns 8.9% 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.
For the years ended December 31, 2015, 2016 and 2017, preferred returns of $0.7 million, nil and nil, respectively, were earned and payable to NantWorks. 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, 2016 and 2017, the Company has a receivable from NantWorks in the amount of $0.6 million and nil, respectively. In addition, the Company previously leased office space from NantWorks. Rent expense, including common area maintenance and parking, for the years ended December 31, 2015, 2016 and 2017 was $0.1 million, nil and nil, respectively.

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 year 2016years ended December 31, 2022, 2021 and 20172020 was $6,000($330,000), $120,000 and 57,000,$130,000, 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 (“HK 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 HK 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 lossincome (loss) from the joint venture for the years ended December 31, 2022, 2021 and 2020 was nil.

Note 5Prepaid Expenses and Other Assets

Prepaid expenses and other assets for the year ended December 31, 20172022 and 2021 consist of the following (in thousands):

  

December 31,

 
  

2022

  

2021

 

Prepaid expenses

 $994  $4,151 

Royalty advances

  1,822   2,619 

Employee retention credit

  1,179   2,390 

Income tax receivable

  2,217   1,527 

Other assets

  119   190 
  $6,331  $10,877 

Note 6Goodwill

There were no changes in the carrying amount of goodwill by reporting unit for the year ended December 31, 2022 and 2021.

In the second quarter of 2022, the Company performed a quantitative assessment and determined that goodwill was nil. Asnot impaired as the fair value of April 27, 2017,the reporting units exceeded the carrying value. There were no events or changes in circumstances subsequent to the second quarter assessment that indicate that the carrying value of a reporting unit may exceed its fair value as of December 31, 2022.

Note 7Intangible 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, 2022

  

December 31, 2021

 
  

Weighted

  

Gross

  

Accumulated

      

Gross

  

Accumulated

     
  

Useful

  

Carrying

  

Amortization/

  

Net

  

Carrying

  

Amortization/

  

Net

 
  

Lives

  

Amount

  

Write-off

  

Amount

  

Amount

  

Write-off

  

Amount

 
  

(Years)

                         

Amortized Intangible Assets:

                            

Licenses

  5.81  $20,130  $(20,130) $  $20,130  $(20,130) $ 

Product lines

  10.36   33,858   (33,858)     33,858   (32,843)  1,015 

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  $(60,340) $  $60,340  $(59,325) $1,015 

  

December 31, 2022

  

December 31, 2021

 
  

Gross

          

Gross

         
  

Carrying

  

Impairment

  

Net

  

Carrying

  

Impairment

  

Net

 
  

Amount

  

Charge

  

Amount

  

Amount

  

Charge

  

Amount

 
                         

Unamortized Intangible Assets:

                        

Trademarks

 $300  $(300) $  $300  $  $300 

For the years ended December 31, 2022, 2021 and 2020, the Company’s aggregate amortization expense related to intangible assets was $1.0 million, $1.0 million and $1.2 million, respectively.

Note 8Concentration 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 primarily of overnight funds. These instruments are short-term in nature and bear minimal risk.

The Company maintains certain cash balances in excess of Federal Deposit Insurance Corporation (“FDIC”) insured limits. The Company has not experienced any losses in such accounts and believes that the credit risk to the Company’s cash is minimal.

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 Meisheng Culturalor China, the Company Limited beneficially owns more than 10%may require irrevocable letters of credit from the customer or purchase various forms of credit insurance.

Note 9Accrued Expenses

Accrued expenses consist of the Company’s outstanding common stock.following (in thousands):

  

December 31,

 
  

2022

  

2021

 

Royalties

 $17,980  $18,606 

Salaries and employee benefits

  4,697   4,347 

Inventory liabilities

  3,619   6,003 

Professional fees

  2,949   1,097 

Bonuses

  1,698   1,997 

Goods in transit

  1,519   5,601 

Third-party warehouse

  936   1,807 

Unearned revenue

  922   2,510 

Sales commissions

  558   527 

Interest expense

  68   51 

Other

  3,052   4,525 
  $37,998  $47,071 

57

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 (see Note 17 - Commitments).

Note 10Debt

Convertible senior notes

In March 2017,August 2019, 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,consummated multiple, binding definitive agreements (collectively, 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 vest in January 2018.

A director of the Company is a portfolio manager at Oasis Management. In August 2017, the Company agreed with Oasis Management and“Recapitalization Transaction”) among Wells Fargo, Oasis Investments II Master Fund Ltd., and an ad hoc group of holders of the holder of approximately $21.5 million face amount of its 4.25%Company’s 4.875% convertible senior notes due in2020 ( the “Investor Parties”) to recapitalize the Company’s balance sheet, including the extension to the Company of incremental liquidity and at least three-year extensions of substantially all of the Company’s outstanding convertible debt obligations and revolving credit facility.

In connection with the Recapitalization Transaction, the Company issued (i) amended and restated notes with respect to the Company’s $21.6 million Oasis Note issued on November 7, 2017, and the $8.0 million Oasis Note issued on July 26, 2018 to exchange(together, the “Existing Oasis Notes”), and extend(ii) a new $8.0 million convertible senior note having the maturity date of thesesame terms as such amended and restated notes to(the "New $8.0 million Oasis Note" and collectively, the “New Oasis Notes” or the "3.25% convertible senior notes due 2023"). Interest on the New Oasis Notes is payable on each May 1 and November 1 2020.until maturity and accrues at an annual rate of (i) 3.25% if paid in cash or 5.00% if paid in stock plus (ii) 2.75% payable in kind. The New Oasis Notes mature 91 days after the amounts outstanding under the 2019 Recap Term Loan are paid in full, and in no event later than July 3, 2023.

Excluding the impact of the Reverse Stock Split in July of 2020, the New Oasis Notes provide, among other things, that the initial conversion price is $1.00. The conversion price will be reset on each February 9 and August 9, starting on February 9, 2020 (each, a “reset date”) to a price equal to 105% of the 5-day VWAP preceding the applicable reset date. Under no circumstances shall the reset result in a conversion price be below the greater of (i) the closing price on the trading day immediately preceding the applicable reset date and (ii) 30% of the stock price as of the Transaction Agreement Date, or August 7, 2019, and will not be greater than the conversion price in effect immediately before such reset. The Company may trigger a mandatory conversion of the New Oasis Notes if the market price exceeds 150% of the conversion price under certain circumstances. The Company may redeem the New Oasis Notes in cash if a person, entity or group acquires shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), and as a result owns at least 49% of the Company’s issued and outstanding Common Stock. On February 9, 2020, excluding the impact of the Reverse Stock Split, the conversion price of the New Oasis Notes reset to $1.00 per share ($10.00 per share after reverse stock split). On August 9, 2020, the conversion price of the New Oasis Notes reset to $5.647. On February 9, 2021, the conversion price of the New Oasis Notes recalculated and remained unchanged at $5.647.

During 2021, $24.0 million of the New Oasis Notes (including $1.2 million in payment in-kind interest) were converted for 4,246,828 shares of common stock. As a result, the Company recorded an increase to additional paid-in capital of $50.8 million. As a result of the conversion in 2021, the New Oasis Notes were fully extinguished.

The Company accounted for the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a loss of $16.4 million and $2.3 million for the years ended December 31, 2021 and 2020, respectively, related to changes in the fair value of the 3.25% convertible senior notes due 2023 (see Note 16 – Fair Value Measurement).

On February 5, 2021, Benefit Street Partners and Oasis Investment II Master Funds Ltd, both related parties, entered into a purchase and sale agreement wherein Benefit Street Partners purchased $11.0 million of principal amount, plus all accrued and unpaid interest thereon, of the New Oasis Notes from Oasis Investment II Master Funds Ltd (see Note 12 – Related Party Transactions). The transaction closed on November 7, 2017 (see Note 12).
February 8, 2021. As of December 31, 2022 and 2021, Benefit Street Partners held nil in principal amount of the New Oasis Notes.

Note 11—

Key components of the 3.25% convertible senior notes due 2023 consist of the following (in thousands):

  

Year ended December 31,

 
  

2022

  

2021

  

2020

 

Contractual interest expense

 $  $620  $2,004 

Term Loan

Term loan consists of the following (in thousands):

  

December 31, 2022

  

December 31, 2021

 
      

Debt Discount/

          

Debt Discount/

   
  

Principal

  

Issuance

  

Net

  

Principal

  

Issuance

  

Net

 
  

Amount

  

Costs*

  

Amount

  

Amount

  

Costs*

  

Amount

 

2021 BSP Term Loan

 $68,901  $(1,750) $67,151  $98,505  $(2,986) $95,519 

* The term loan was valued using the discounted cash flow method to determine the implied debt discount. The debt discount and issuance costs are being amortized over the life of the term loan on a straight-line basis which approximates the effective interest method.

On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into a First Lien Term Loan Facility Credit FacilityAgreement (the “2021 BSP Term Loan Agreement”) with Benefit Street Partners L.L.C., as Sole Lead Arranger, and BSP Agency, LLC, as agent, for a $99.0 million first-lien secured term loan (the “Initial Term Loan”) and a $19.0 million delayed draw term loan (the “Delayed Draw Term Loan” and collectively, the “2021 BSP Term Loan”). Net proceeds from the issuance of the 2021 BSP Term Loan, after deduction of $2.2 million in closing fees and $0.5 million of other administrative fees paid directly to the lenders, totaled $96.3 million. These fees are amortized over the life of the 2021 BSP Term Loan on a straight-line basis which approximates the effective interest method. Proceeds from the Initial Term Loan, together with available cash from the Company, were used to repay the Company’s existing term loan (the “2019 Recap Term Loan” formerly known as the “New Term Loan” in prior filings) under the agreement dated as of August 9, 2019 with Cortland Capital Market Services LLC, as agent for certain investor parties. The Delayed Draw Term Loan provision was designed to provide necessary capital to redeem any of the Company’s outstanding 3.25% convertible senior notes due 2023, upon their maturity, which, upon repayment of the 2019 Recap Term Loan, accelerated to no later than 91 days from the repayment of the 2019 Recap Term Loan, or September 1, 2021. On July 29, 2021, the Company terminated its Delayed Draw Term Loan option as it determined it had sufficient liquidity to fund any outstanding convertible senior notes that remained upon maturity.


Amounts outstanding under the 2021 BSP Term Loan bear interest at either (i) LIBOR plus 6.50% - 7.00% (determined by reference to a net leverage pricing grid), subject to a 1.00% LIBOR floor, or (ii) base rate plus 5.50% - 6.00% (determined by reference to a net leverage pricing grid), subject to a 2.00% base rate floor. The 2021 BSP Term Loan matures in June 2027.

In March 2014,

The 2021 BSP Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its domestic subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge its assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Commencing with the fiscal quarter ending June 30, 2021, the Company is required to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which the Company is required to maintain a Net Leverage Ratio of 3:00x. On April 26, 2022, the Company entered into a secured credit facility with General Electric Capital Corporation (“GECC”). First Amendment to the 2021 BSP Term Loan Agreement, to provide, among other things, that the Company must maintain Qualified Cash of at least: (a) at all times after the Closing Date and prior to the First Amendment Effective Date, April 26, 2022, $20.0 million; (b) at all times during the period commencing on the First Amendment Effective Date through and including June 30, 2022, $15.0 million; and (c) at all times on and after July 1, 2022, through September 30, 2022, $17.5 million; provided, however, that if the Total Net Leverage Ratio exceeded 1.75:1.00 as of the last day of the most recently ended month for which financial statements were required to have been delivered, then the amount set forth in this clause shall be increased to $20.0 million. Notwithstanding the foregoing, the Applicable Minimum Cash Amount shall be reduced by $1.0 million for every $5.0 million principal prepayment or repayment of the Term Loans following the First Amendment Effective Date; provided however, that, the Applicable Minimum Cash Amount shall in no event be reduced below $15.0 million.

On June 27, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary fee-free $10.0 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan.

On September 28, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary $17.5 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and incurred a $0.5 million prepayment penalty.

The loan agreement, as amended and subsequently assigned to Wells Fargo Bank, N.A. pursuant to its acquisition2021 BSP Term Loan Agreement contains events of GECC, providesdefault that are customary for a $75.0 million revolving credit facility subjectof this nature, including (subject in certain cases to availability based on prescribed advance rates ongrace periods and thresholds) nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain accounts receivableother existing indebtedness, bankruptcy or insolvency events, certain judgment defaults and inventory (the “WFa change of control as specified in the 2021 BSP Term Loan Agreement”). The amounts outstanding underAgreement. If an event of default occurs, the credit facility are payable in full upon maturity of the facility on March 27, 2019,amounts owed under the 2021 BSP Term Loan Agreement may be accelerated.

The obligations under the 2021 BSP Term Loan Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the credit facility isother existing and future direct and indirect subsidiaries of the Company and are secured by a security interest in favor of the lender covering a substantial amountsubstantially all of the assets of the Company. Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens and subject to the priority lien granted under the JPMorgan ABL Credit Agreement (see Note 11 – Credit Facility).

The agent and Sole Lead Arranger under the 2021 BSP Term Loan are affiliates of an affiliate of the Company, which affiliate, at the time of refinancing, owned common stock and the 3.25% convertible senior notes due 2023 of the Company, as well as the Company’s outstanding Series A Preferred Stock.

Amortization expense classified as interest expense related to the $0.8 million of debt issuance costs associated with the issuance of the 2021 BSP Term Loan was $0.2 million and $0.1 million for the years ended December 31, 2022 and 2021, respectively.

Amortization expense classified as interest expense related to the $1.6 million debt discount associated with the issuance of the 2021 BSP Term Loan was $0.3 million and $0.2 million for the years ended December 31, 2022 and 2021, respectively.

The fair value of the Company’s 2021 BSP Term Loan is considered Level 3 fair value and are measured using the discounted future cash flow method. In addition to the debt terms, the valuation methodology includes an assumption of a discount rate that approximates the current yield on a debt security with comparable risk. This assumption is considered an unobservable input in that it reflects the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believes that this is the best information available for use in the fair value measurement. The estimated fair value of the 2021 BSP Term Loan as of December 31, 2022 was $69.3 million compared to a carrying value of $68.9 million. The estimated fair value of the 2021 BSP Term Loan as of December 31, 2021 was $97.3 million compared to a carrying value of $95.5 million.

As of December 31, 2016, the amount of outstanding borrowings was $10.0 million and outstanding stand-by letters of credit totaled $28.2 million; the total excess borrowing capacity was $12.1 million. 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.


The Company’s ability to borrow under the WF Loan Agreement 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 under the facility is not achieved. As of December 31, 2016 and 2017,2022, the Company was in compliance with the financial covenants under the WF2021 BSP Term Loan Agreement.


The aggregate principal amount of long-term debt maturing in the next five years and thereafter is as follows:

 

 

 

2021 BSP Term Loan

 

2023

*

 

$

25,529

 

2024

 

 

 

2,475

 

2025

 

 

 

2,475

 

2026

 

 

 

2,475

 

2027

 

 

 

35,947

 

 

 

 

$

68,901

 

*Represents the Company’s current portion of principal amortization payments for the 2021 BSP Term Loan.

Loan under Paycheck Protection Program

On June 12, 2020, the Company received a $6.2 million loan under the Paycheck Protection Program (“PPP”) within the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP loan maturity date was June 2, 2022, and was subject to the CARES Act terms which included, among other terms, an interest rate of 1.00% per annum and monthly installment payments of $261,275 commencing on September 27, 2021. The PPP loan allowed for prepayment at any time prior to maturity with no prepayment penalties. The PPP Loan was subject to events of default and other provisions customary for a loan of this type. A PPP loan may be forgiven, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and maintaining certain average levels of employment and payroll as required by the CARES Act. On September 10, 2021, the full amount of the PPP loan was forgiven. The Small Business Administration (“SBA”) may review the Company’s PPP loan forgiveness application for six years after the date of forgiveness. The Company may borrow fundsbe subjected to penalties and repayment of the PPP loan if the SBA disagrees with the Company’s eligibilities. Income from the forgiveness of the PPP Loan is recognized as a$6.2 million gain on loan forgiveness in the consolidated statements of operations.

Note 11Credit Facilities

JPMorgan Chase

On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into a Credit Agreement (the “JPMorgan ABL Credit Agreement”), with JPMorgan Chase Bank, N.A., as agent and lender for a $67,500,000 senior secured revolving credit facility (the “JPMorgan ABL Facility”). The JPMorgan ABL Credit Agreement replaced the Company’s existing asset-based revolving credit agreement, dated as of March 27, 2014 (the “Wells Fargo ABL Facility,” formerly known as the “Amended ABL Facility” in prior filings), with General Electric Capital Corporation, since assigned to Wells Fargo Bank, National Association. The Company pays a commitment fee (0.25% - 0.375%) based on the unused portion of the revolving credit facility. Any amounts borrowed under the JPMorgan ABL Facility will bear interest at LIBOReither (i) Eurodollar spread plus 1.50% - 2.00% (determined by reference to an excess availability pricing grid) or at a(ii) Alternate Base Rate plus 0.50% - 1.00% (determined by reference to an excess availability pricing grid and base rate plus applicable margins of 225 basis point spread over LIBOR and 125 basis point spread on base rate loans. In additionsubject to standard fees, the facility has an unused credit line fee, which ranges from 25 to 50 basis points.a 1.00% floor). The JPMorgan ABL Facility matures in June 2026. As of December 31, 20162022 and 2017,2021, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was approximately 2.45% and 3.79%, respectively.1.88%.


The WF LoanJPMorgan ABL Credit Agreement also contains customary events of default, including a cross default provision and a change of control provision. Innegative covenants that, subject to certain exceptions, limit the event of a default, all of the obligationsability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Under certain circumstances the Company is also subject to a springing fixed charge coverage ratio covenant of not less than 1.1 to 1.0, as described in more detail in the JPMorgan ABL Credit Agreement.

The JPMorgan ABL Credit Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults, loss of liens or guarantees and a change of control as specified in the JPMorgan ABL Credit Agreement. If an event of default occurs, the commitments of the lenders to lend under the WF LoanJPMorgan ABL Credit Agreement may be declared immediately dueterminated and payable. For certain events of default relating to insolvency and receivership, all outstanding obligations become due and payable.


58

Note 12—Convertible Senior Notes
Convertible senior notes consistthe maturity of the following (in thousands):amounts owed may be accelerated.

  December 31, 2016  December 31, 2017 
  Principal/  Debt     Principal/  Debt    
  Fair Value  Issuance  Net  Fair Value  Issuance  Net 
  Amount  Costs  Amount  Amount  Costs  Amount 
3.25% convertible senior notes (due 2020) * $  $  $  $22,469  $  $22,469 
4.25% convertible senior notes (due 2018)  93,865   1,098   92,767   21,178   103   21,075 
4.875% convertible senior notes (due 2020)  113,000   2,760   110,240   113,000   1,972   111,028 
Total convertible senior notes, net of debt issuance costs $206,865  $3,858  $203,007  $156,647  $2,075  $154,572 
57

*

The amount presented forobligations under the 3.25% 2020 convertible senior notes withinJPMorgan ABL Credit Agreement are guaranteed by the table representsCompany, the fair value assubsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.

As of December 31, 2017. The principal2022, the amount of these notes is $21.5outstanding borrowings was nil and the total excess borrowing availability was $46.6 million.


As of December 31, 2022, off-balance sheet arrangements include letters of credit issued by JPMorgan of $17.2 million.

In July 2013,

Amortization expense classified as interest expense related to the $1.6 million of debt issuance costs associated with the transaction that closed on June 2, 2021 was $0.3 million and $0.2 million for the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2022, the Company soldwas in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.

Note 12Related Party Transactions

In November 2014, the Company entered into a joint venture with MC&C 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 (see Note 4 – Joint Ventures).

In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited, 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 (see Note 4 – Joint Ventures).

In March 2017, the Company entered into an aggregateequity purchase agreement with Meisheng which provided, among other things, that as long as Meisheng and its affiliates hold 10% or more of $100.0 million principal amountthe issued and outstanding shares of 4.25% Convertible Senior Notes due 2018 (the “2018 Notes”). The 2018 Notes are senior unsecured obligationscommon stock of the Company, paying interest semi-annually in arrears on August 1Meisheng shall have the right from time to time to designate a nominee (who currently is Mr. Xiaoqiang Zhao) for election to the Company’s board of directors.

Meisheng also serves as a significant manufacturer of the Company. For the years ended December 31, 2022, 2021 and February 12020, the Company made inventory-related payments to Meisheng of each yearapproximately $120.5 million, $77.7 million and $64.8 million respectively. As of December 31, 2022 and 2021, amounts due to Meisheng for inventory received by the Company, but not paid totaled $9.8 million and $15.9 million, respectively.

A director of the Company is a director at a rate of 4.25% per annum and will mature on August 1, 2018. The initial and still current conversion rate for the 2018 Notes is 114.3674Benefit Street Partners, who owns 145,788 shares of the Company’s common stock per $1,000 principal amountSeries A Preferred Stock (see Note 15 – Common Stock and Preferred Stock). As of notes, equivalent to an initial conversion priceDecember 31, 2022, a division of approximately $8.74 per share of common stock, subject to adjustmentBenefit Street Partners held $68.9 million in certain events. Upon conversion, the 2018 Notes will be settled in shares of the Company’s common stock. Holders of the 2018 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 2018 Notes). 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., 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. Further, the Company elected to measure and present the new debt held by Oasis at fair value using Level 3 inputs2021 BSP Term Loan (see Note 2) and as a result, recognized a loss of $0.3 million related to changes in the fair value of the 3.25% 2020 Notes. At December 31, 2017, the 3.25% 2020 Notes had a fair value of $22.5 million.10 - Debt).


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.

Key components of the 4.25% convertible senior notes due 2018 consist of the following (in thousands): 
  Years Ended December 31,
  2015 2016 2017
Contractual interest expense on the coupon $4,250  $4,191  $2,184 
Amortization of debt discount and debt issuance costs recognized as interest expense  836   1,172   844 
  $5,086  $5,363  $3,028 
59

Key components of the 3.25% convertible senior notes due 2020 consist of the following (in thousands): 
  Years Ended December 31,
  2015 2016 2017
Contractual interest expense  $  $  $103 
Amortization of debt issuance costs recognized as interest expense         
  $  $  $103 
Key components of the 4.875% convertible senior notes due 2020 consist of the following (in thousands): 
  Years Ended December 31,
  2015 2016 2017
Contractual interest expense  $5,606  $5,508  $5,509 
Amortization of debt issuance costs recognized as interest expense  811   804   789 
  $6,417  $6,312  $6,298 
60

Note 13—13Income 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 2015, 20162022, 2021 and 2017,2020, the provision for income taxes, which included federal, state and foreign income taxes, was a benefit of $41.0 million, an expense of $3.4 million, $4.1$0.2 million, and $1.6an expense of $0.7 million, respectively, reflecting effective tax provision rates of 12.9%(81.9%), 76.8%(4.0%), and (2.0%(5.5%), respectively.

The 2022 tax benefit of $41.0 million included a discrete tax benefit of $49.8 million primarily comprised of the valuation allowance release. Absent these discrete tax benefits, our effective tax rate for 2022 was 17.6%, primarily due to taxes on federal, state, and foreign income.

For the years ended 20152021 and 2016,2020, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of 12.9%(4.0%) and 76.8%(5.5%). Exclusive of discrete items, the effective tax provision rate would be 9.5%(10.7%) in 20152021 and 79.2%(7.7%) in 2016. The increase in the effective rate absent discrete items was primarily due to the foreign deemed dividend. The rate exclusive2020.

As of Hong Kong earnings to consolidated earnings.

The 2017 tax expense of $1.6 million included a discrete tax benefit of $0.1 million primarily comprised of the US federal transition tax, return to provisionDecember 31, 2022 and uncertain tax position adjustments. Absent these discrete tax expenses, the Company’s effective tax rate for 2017 was (2.8%), primarily due to various state taxes and taxes on foreign income.
For years ended 2016 and 2017,2021, the Company had net deferred tax assets of $57.8 million related to the U.S. and foreign jurisdictions and net deferred tax liabilities of approximately $2.0 million and $0.8 million, respectively,$51,000 primarily related to foreign jurisdictions.jurisdictions, respectively.

Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):

 

Year ended December 31,

 
 2015  2016  2017  

2022

  

2021

  

2020

 
Federal $  $1,549  $550  $11,293  $1  $(212

)

State and local  708   652   51   2,031   43   134 
Foreign  3,044   1,637   2,256   3,523   254   704 
Total Current  3,752   3,838   2,857   16,847   298   626 
APIC     548    
Deferred  (329)  (259)  (1,251)  (57,855

)

  (72

)

  109 
Total $3,423  $4,127  $1,606  $(41,008

)

 $226  $735 

The components of deferred tax assets/(liabilities) are as follows (in thousands):

 

December 31,

 
 2016  2017  

2022

  

2021

 
Net deferred tax assets/(liabilities):              
Reserve for sales allowances and possible losses $801  $611  $469  $356 
Accrued expenses  1,739   1,375   3,884   2,998 
Prepaid royalties  16,806   13,631   599   1,298 
Accrued royalties  2,638   1,864   465   1,731 
Inventory  3,506   6,146   9,574   9,313 
State income taxes  98   26   420   17 
Property and equipment  4,997   4,257   1,701   1,832 
Original issue discount interest  (6,945)  (2,131)
Goodwill and intangibles  29,378   15,782   2,412   4,266 
Share based compensation  1,607   578 

Share-based compensation

  738   593 

Interest limitation

  2,256   3,595 
Undistributed foreign earnings  (48,731)  (2,524)  (479

)

  (2,919

)

Operating lease right-of-use assets

  (3,989

)

  (4,117

)

Operating lease liabilities

  4,120   4,518 
Federal and state net operating loss carryforwards  22,755   14,091   31,263   42,731 
Credit carryforwards  21,097   35,195   110   110 

Research & development capitalization

  3,792   - 
Other  (2,495)  22   1,195   902 
Gross  47,251   88,923   58,530   67,224 
Valuation allowance  (49,285)  (89,706)  (726

)

  (67,275

)

Total net deferred tax liabilities $(2,034) $(783)

Total net deferred tax assets (liabilities)

 $57,804  $(51

)


The U.S. Tax Cuts and Jobs Act (the Act) was signed into law on December 22, 2017 and introduces significant changes to the Internal Revenue Code. Effective for tax years beginning after December 31, 2017, the Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings and related-party payments, which are referred to as the global intangible low-taxed income and the base erosion and anti-abuse tax, respectively. In addition, the Act includes 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 US 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. In accordance with this guidance, we have made reasonable estimates below of the effects of the Act and recorded provisional amounts in our financial statements as of December 31, 2017. For the items for which we determined a reasonable estimate, we recognized a provisional amount of $34.3 million, which is included as a component of income tax expense from continuing operations and partially reduced by fully-valued tax attribute carryforwards. As we collect and prepare necessary data, and interpret the Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Act will be completed in 2018.

Provisional amounts for the following income tax effects of the Tax Act have been recorded as of December 31, 2017 and are subject to change during 2018.

The Act requires 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. Given that the transition tax analysis requires significant data from our foreign subsidiaries that is not regularly collected or analyzed, we recorded a provisional amount for the one-time transitional tax liability for our foreign subsidiaries of approximately $35.1 million, which does not entirely impact income tax expense for 2017 since the Company has reflected the transition tax liability as a partial reduction to existing fully-valued tax attribute carryforwards. Additional work is necessary for a more detailed analysis of the Company’s deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to the amount will be recorded in the quarter of 2018 when the analysis is complete, but is not anticipated to significantly impact tax expense due to the existence of the aforementioned fully-valued tax attribute carryforwards.

The Act reduces the U.S. statutory tax rate from 35% to 21% for tax years after December 31, 2017. Accordingly, we have re-measured our deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. The provisional amount related to the re-measurement was which was fully offset by a concurrent change in the valuation allowance, resulting in no tax expense impact. Although the tax rate reduction is known, we have not collected the necessary data to complete our analysis of the effect of the Act on the underlying deferred taxes and as such, the amounts recorded as of December 31, 2017 are provisional. The Act repeals the Alternative Minimum Tax (AMT) for tax years beginning after 2017. However, AMT credits are fully refundable by tax years beginning after 2021. We have $0.8 million of deferred tax assets related to the AMT credit carryforwards. Given that these credits are now fully realizable, we have released the corresponding valuation allowance against these deferred tax assets and recognized the income tax benefit. We will continue to classify AMT credits along with our other deferred tax assets.

The Act includes new anti-deferral, anti-base erosion, and base broadening provisions. Given the complexity of these provisions, we are still evaluating the effects and impact of these provisions.

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,

 
 2015 2016 2017 

2022

  

2021

  

2020

 
Federal income tax expense  35.0  35.0  35.0  21.0

%

  21.0

%

  21.0

%

State income tax expense, net of federal tax effect  1.0   (3.6  5.0   1.9   3.3   7.7 
Effect of differences in U.S. and foreign statutory rates  (9.4)  (53.7)  1.9   (1.3

)

  (0.5

)

  1.2 
Uncertain tax positions  0.3   3.4      5.0   7.0   3.4 
Earn-out adjustments (7.4)   
Provision to return 12.2 4.5 (0.7)   21.2   6.3   (3.8

)

Change in tax rate

  6.9   6.5   4.4 

Foreign derived intangible income

  (10.6

)

  0.0   0.0 
Non-deductible expenses 1.1 8.9 (48.0)   8.9   (68.7

)

  (26.2

)

Other  0.5   0.6   (0.2) 
Foreign deemed dividend 1.7 262.2  

PPP Loan

  0.0   29.1   0.0 
Foreign tax credit (0.5 (126.1 20.3   (3.6

)

  0.0   0.0 

Unrealized Loss

  0.3   (138.9

)

  (10.0

)

Undistributed foreign earnings  906.5 57.3   (1.4

)

  (8.7

)

  (3.3

)

Effect of change in federal statutory rate   (23.0) 
Valuation allowance  (21.6  (960.9  (49.6  (130.2

)

  139.6   0.1 
  12.9  76.8  (2.0)  (81.9

)%

  (4.0

)%

  (5.5

)%


62

Deferred taxes result from temporary differences between tax basesbasis 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,

 
 2015  2016  2017  

2022

  

2021

  

2020

 
Domestic $11,692  $(7,760) $(85,288) $31,588  $(7,881) $(18,748)
Foreign  14,901   13,136   3,866   18,487   2,219   5,339 
 $26,593  $5,376  $(81,422) $50,075  $(5,662) $(13,409)


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.

$1.1 million of the liability for UTP related to state taxes and audit examination in Hong Kong was de-recognized in 2017. Additionally, approximately $66,300 of UTP related to state taxes was recognized in 2017. During 2016, approximately $49,700 of additional UTP was recognized.

Current interest on uncertain income tax liabilities is recognized as interest expense and penalties are recognized in selling, general and administrative expenses in the consolidated statement of operations. During 2015, the Company did not recognize any current year interest expense relating to UTPs. During 2016, the Company recognized $67,900 of current interest expense relating to UTPs. During 2017, the Company did not recognize any current year 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, 20172022 (in millions):


Balance, January 1, 2015 $2.5 
Current year additions  1.8 
Current year reduction due to lapse of applicable statute of limitations  (2.1)
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 audit settlement  (1.1)
Balance, December 31, 2017 $1.3 

Balance, December 31, 2019

 $1.6 

Settlements

  (0.6

)

Balance, December 31, 2020

  1.0 

Settlements

  (0.8

)

Balance, December 31, 2021

  0.2 

Additions based on tax positions related to the current year

  0.1 

Additions for tax positions of prior years

  2.8 

Settlements

  (0.2

)

Balance, December 31, 2022

 $2.9 


We do

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 2022, the Company recognized $0.2 million of interest expense related to UTPs. The Company did not recognize any interest expense relating to UTPs in 2021.

The Company does not expect ourits gross unrecognized tax benefits to significantly change within the next 12 months.


Tax years 20142019 through 20162021 remain subject to examination in the United States. The tax years 20132018 through 20162021 are generally still subject to examination in the various states. Furthermore, all net operating losses and tax credit carryforwards are still subject to review given that the statute of limitation for these items would begin in the year of utilization. The tax years 20112016 through 20162021 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. The U.S. Internal Revenue Service is currently examining the 2015 tax year.

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 ourthe Company’s evaluation of all positive and negative evidence, as of December 31, 2017,2022, a valuation allowance of $89.7$0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized. For the year ended December 31, 2017,2022, the valuation allowance increased by $40.4 milliondecreased from $49.3$67.3 million at December 31, 2016 to $89.7 million at2021. The release of the valuation allowance as of December 31, 2017.2022 was primarily due to a pattern of sustained profitability such that it is more likely than not that the deferred income tax assets will be realized. The net deferred tax assets of $57.8 million consists of the net deferred tax assets in the US and foreign jurisdictions, where the Company is in a cumulative income position. The net deferred tax liabilities of $2.0 million$51,000 in 20162021 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position. 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

Pursuant to the AMT credit carryforwards.

63

At December 31, 2017, the Company had no remaining U.S. federal net operating loss carryforwards, or "NOLs", as they were fully utilized in 2017. At December 31, 2017, the Company's state NOLs were mainly from California. The majority of the approximately $164.4 million of California NOLs will begin to expire in 2031. At December 31, 2017, the Company had foreign tax credit carryforwards of approximately $34.1 million, which will begin to expire in 2022. At December 31, 2017, the Company had federal research and development tax credit carryforwards ("credit carryforwards") of approximately $0.2 million, which will begin to expire in 2029. At December 31, 2017, the Company had state research and development tax credits of approximately $0.1 million, which carry forward indefinitely. At December 31, 2017, the Company had AMT credit carryforwards of approximately $0.8 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 (the “Code”) Sections 382 and comparable state income383, annual use of a company’s NOL and tax laws. Any futurecredit carryforwards may be limited if there is a cumulative change in ownership of greater than 50% within a three-year period. The amount of the annual limitation is determined based on the value of the company immediately prior to the ownership change. Subsequent ownership changes may resultfurther affect the limitation in future years. If limited, the related tax asset would be removed from the deferred tax asset schedule with a corresponding reduction in the expirationvaluation allowance. The Company had established a valuation allowance as the realization of NOLssuch deferred tax assets had not met the more likely than not threshold requirement. Due to the existence of the valuation allowance, further changes in the Company’s unrecognized tax benefits did not impact the Company’s effective tax rate for 2021.

During 2022, the Company completed an assessment of the available net operating loss and tax credit carryforwards before utilization.

 During the first quarter of 2017,under Section 382 and 383 and determined that the Company adopted ASU 2016-09, “Improvementunderwent two ownership changes during the period from 2019 to Employee Share-Based Payment Accounting,” which simplifies several aspects2021. As a result, net operating loss and tax credit carryforwards attributable to the pre-ownership changes are subject to substantial annual limitations under Section 382 and 383 of Code due to the ownership changes. The Company has adjusted their previously reported net operating loss and tax credit carryforwards to address the impact of the accountingownership changes. This resulted in a net reduction of available gross federal and state net operating loss carryforwards of approximately $53 million and $85 million, respectively which related to the year ended December 31, 2021 and prior. The tax effected federal and state net operating loss carryforwards (“NOL”) reduction amounts were $16.8 million. This also resulted in a reduction of federal tax credit carryforwards of approximately $0.6 million related to the years ended December 31, 2021 and prior. Accordingly, the net operating loss and tax credit carryforwards presented above for share-based payments, including treatmentthe year ending December 31, 2021 were reduced by $16.8 million and $0.6 million, respectively, with a corresponding reduction to the valuation allowance of excess tax benefits$17.4 million.

At December 31, 2022, the Company has U.S. federal net NOLs, of approximately $136 million, which will begin to expire in 2033. At December 31, 2022, the Company has state NOLs of approximately $40 million, which will begin to expire in 2023.

Note 14Leases

The Company has lease agreements with lease and forfeitures, as well as considerationnon-lease components, which are generally accounted for separately. The Company has operating leases for corporate offices, warehouses, and certain equipment. The Company’s leases have remaining lease terms of minimum statutory tax withholding requirements. This accounting standard did not have a material effect on1 to 5 years, some of which include options to extend the lease for up to 10 years, and some of which include options to terminate the lease within 1 year. As of December 31, 2022, the Company’s income tax provision in 2017.weighted average remaining lease term is approximately 2 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.22%. As of December 31, 2021, the Company’s weighted average remaining lease term is approximately 2 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.09%.



Note 14—Leases

The Company leases office, warehouse and showroom facilities and certain equipment under

Under ASC 842, total operating leases. Rent expenselease costs for the years ended December 31, 2015, 20162022, 2021 and 2017 totaled2020 were $19.1 million, 10.3 million, and $11.7 million, respectively. Of the $19.1 million for the year ended December 31, 2022, $10.7 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees. Sublease rental income was $2.2 million in 2022. Of the $10.3 million for the year ended December 31, 2021, $2.0 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees. Sublease rental income was $2.2 million in 2021. Of the $11.7 million for the year ended December 31, 2020, $2.0 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees. Sublease rental income was $0.8 million in 2020.

The Company had a cash outflow of $11.5 million, $12.3$11.4 million and $12.2$11.1 million related to operating leases for the years ended December 31, 2022, 2021 and 2020, respectively. Following is

The following table represents a schedulereconciliation of the Company’s undiscounted future minimum annual lease payments under operating leases to the lease liability excluding minimum lease payments for executed and legally enforceable leases that have not yet commenced as of December 31, 2022 (in thousands).:

2018 $13,403 
2019  11,782 
2020  9,614 
2021  9,405 
2022  9,479 
Thereafter  7,121 
  $60,804 

Year ending December 31,

    

2023

 $11,723 

2024

  7,619 

2025

  2,346 

2026

  372 

2027

  13 

Total lease payments

  22,073 

Less imputed interest

  1,464 

Total

 $20,609 

As of December 31, 2022 and 2021, the minimum lease payments for executed and legally enforceable leases that have not yet commenced were nil.

Note 15—15Common Stock and Preferred Stock and Warrants

Common Stock

The

Effective July 9, 2020, the Company has 105,000,000 authorized sharescompleted a Reverse Stock Split of stock consisting of 100,000,000 shares of $.001its $0.001 par value common stock and 5,000,000 shares of $.001 par value preferred stock. On December 31, 2016 sharesreducing the issued and outstanding were 19,376,773,shares of common stock from 42,395,782 to 4,239,578. All common stock and on Decemberprice per share amounts in this report have been restated to reflect the Reverse Stock Split. The Reverse Stock Split did not cause an adjustment to the par value or the authorized shares of the common stock. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. The primary reason for implementing the Reverse Stock Split was to regain compliance with the minimum bid price requirement of Nasdaq. On July 31, 2017, shares issued and outstanding were 26,957,354.2020, the Company was notified by Nasdaq that it had regained compliance with the Nasdaq listing requirements.

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, 2017.

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 2016,2021, the Company issued an aggregate of 449,120113,896 shares of restricted stock at a value of approximately $3.6$0.6 million to two executive officers, which vest subject toin four equal annual installments over four years.

During 2021, certain company financial performance criteria and market conditions, over a three year period. In addition,employees, including two executive officers, surrendered an aggregate of 62,71032,846 shares of restricted stock atfor $163,573 to cover income taxes due on the vesting of restricted shares. Additionally, an aggregate of 93,352 shares of restricted stock granted in 2018 with a value of approximately $0.5 million were issued to its five non-employee directors, which vested in January 2017.was forfeited during 2021.


In March 2016, the Company issued

During 2022, certain employees, including three executive officers, surrendered an aggregate of 134,058113,162 shares of restricted stock atunits for $1.4 million to cover income taxes due on the vesting of restricted shares. Additionally, an aggregate of 149,238 shares of restricted stock granted in 2019 with a value of approximately $0.9$2.2 million to an executive officer, which vest, subject to certain company financial performance criteria and market conditions, over a three year period.was forfeited during 2022.


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.

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 vest 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 vest 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.

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 20162022 and 2017.2021.


At the Market Offering

On July 1, 2022, the Company entered into an At the Market Issuance Sales Agreement (“ATM Agreement”) with B. Riley, as agent pursuant to which the Company may, from time to time, sell shares of its common stock, up to $75 million of common stock, in one or more offerings in amounts, prices and at terms that the Company will determine at the time of the offering.

During the year ended December 31, 2022, the Company did not sell any shares of common stock under the ATM Agreement.

The Company has on file with the SEC an effective registration statement pursuant to which it may issue, from time to time, up to an additional $75 million of securities consisting of, or any combination of, common stock, preferred stock, debt securities, warrants, rights and/or units, in one or more offerings in amounts, prices and at terms that the Company will determine at the time of the offering.

During the year ended December 31, 2022, the Company has not sold any securities pursuant to its shelf registration statement.

Redeemable Preferred Stock

On August 9, 2019, in connection with the Recapitalization Transaction (see Note 16—Commitments10 - Debt), the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $0.001 par value per share, to the Investor Parties (the “New Preferred Equity”). As of December 31, 2022 and 2021, 200,000 shares of Series A Preferred Stock were outstanding.

Each share of Series A Preferred Stock has an initial value of $100 per share, which is automatically increased for any accrued and unpaid dividends (the “Accreted Value”).

The Series A Preferred Stock has the right to receive dividends on a quarterly basis equal to 6.0% per annum, payable in cash or, if not paid in cash, by an automatic accretion of the Series A Preferred Stock. No cash dividends have been declared or paid. For the year ended December 31, 2022 and 2021, the Company recorded $1.4 million and $1.3 million, respectively of preferred stock dividends as an increase in the value of the Series A Preferred Stock.

The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the 2019 Recap Term Loan. In addition, upon the occurrence of certain change of control type events, holders of the Series A Preferred Stock are entitled to receive an amount (the “Liquidation Preference”), in preference to holders of Common Stock or other junior stock, equal to (i) 20% of the Accreted Value in the case of a certain specified transaction, or (ii) otherwise, 150% of the Accreted value, plus any accrued and unpaid dividends.

The Company has the right, but is not required, to repurchase all or a portion of the Series A Preferred Stock at its Liquidation Preference at any time after payment in full of the 2019 Recap Term Loan (see Note 10 - Debt). The Series A Preferred Stock does not have any voting rights, except to the extent required by the Delaware General Corporation Law, except for the exclusive right to elect the Series A Preferred Directors (as described below) and except for certain approval rights over certain transactions (as described below). These approval rights require the prior consent of specified percentages of holders (or in certain cases, all holders) of the Series A Preferred Stock in order for the Company to take certain actions, including the issuance of additional shares of Series A Preferred Stock or parity stock, the issuance of senior stock, certain amendments to the Amended and Restated Certificate of Incorporation, the Certificate of Designations of the Series A Preferred Stock (the “Certificate of Designations”), the Second Amended and Restated By-laws or the Amended and Restated Nominating and Corporate Governance Committee Charter, material changes in the Company’s line of business and certain change of control type transactions. In addition, the Certificate of Designations provides that the approval of at least six directors is required for any related person transaction within the meaning of Item 404 of Regulation S-K under the Securities Act of 1933, as amended, including, without limitation, the adoption of, or any amendment, modification or waiver of, any agreement or arrangement related to any such transaction. The Certificate of Designations also includes restrictions on the ability of the Company to pay dividends on or make distributions with respect to, or redeem or repurchase, shares of Common Stock or other junior stock. In addition, holders of the Series A Preferred Stock have preemptive rights regarding future issuance of Series A Preferred Stock or parity stock. In 2022, an agreement was reached with the preferred shareholders to eliminate their ability to elect members to the Company’s Board of Directors on a going-forward basis.

The Series A Preferred Stock redemption amount is contingent upon certain events with no stated redemption date as of the reporting date, although may become redeemable in the future. In accordance with the SEC guidance within ASC Topic 480, Distinguishing Liabilities from Equity: Classification and Measurement of Redeemable Securities, the Company classified the Series A Preferred Stock as temporary equity as the Series A Preferred Stock contains a redemption feature which is contingent upon certain deemed liquidation events, the occurrence of which may not solely be within the control of the Company.

Under ASC 815, Derivatives and Hedging, certain contractual terms that meet the accounting definition of a derivative must be accounted for separately from the financial instrument in which they are embedded. The Company has concluded that the redemption upon a change of control and the repurchase option by the Company constitute embedded derivatives.

The embedded redemption upon a change of control must be accounted for separately from the Series A Preferred Stock. The redemption provision specifies if certain events that constitute a change of control occur, the Company may be required to settle the Series A Preferred Stock at 150% of its accreted amount. Accordingly, the redemption provision meets the definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Series A Preferred Stock, which is more akin to a debt instrument than equity.

The Company considers the repurchase option to have no value as the likelihood is remote that this event, within the Company’s control, would ever occur. The liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's condensed consolidated statements of operations (see Note 16 – Fair Value Measurement). The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring.

Accordingly, these two embedded derivatives are accounted for separately from the Series A Preferred Stock at fair value.

As of December 31, 2022, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $4.5 million, and the redemption provision, as a bifurcated derivative, is recorded as a long-term liability with an estimated value of $21.9 million. As of December 31, 2021, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $3.1 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $21.3 million.

The following table provides a reconciliation of the beginning and ending balances of the Series A Preferred Stock, which is recorded in temporary equity:

  

2022

  

2021

 

Balance, January 1,

 $3,074  $1,740 

Preferred stock accrued dividends

  1,416   1,334 

Balance, December 31,

 $4,490  $3,074 

Note 16 Fair Value Measurements

The following tables summarize the Company’s financial liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021 (in thousands):

      

Fair Value Measurements

 
  

Carrying Amount as of

  

As of December 31, 2022

 
  

December 31, 2022

  

Level 1

  

Level 2

  

Level 3

 

Preferred stock derivative liability

 $21,918  $  $  $21,918 

      

Fair Value Measurements

 
  

Carrying Amount as of

  

As of December 31, 2021

 
  

December 31, 2021

  

Level 1

  

Level 2

  

Level 3

 

Preferred stock derivative liability

 $21,282  $  $  $21,282 

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):

3.25% convertible senior notes due 2023

        
  

2022

  

2021

 

Balance at January 1,

 $  $34,134 

Conversion of convertible senior notes

     (50,760)

Change in fair value

     16,419 

Payment in-kind

     207 

Balance at December 31,

 $  $ 

Preferred stock derivative liability

        
  

2022

  

2021

 

Balance at January 1,

 $21,282  $8,062 

Change in fair value

  636   13,220 

Balance at December 31,

 $21,918  $21,282 

The Company had elected the fair value option of measurement for the 3.25% 2023 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 its consolidated statements of operations.

The Company’s Series A Preferred derivative liability is classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value. The fair value of the redemption provision embedded in the Series A Preferred Stock is estimated based on a discounted cash flow model and probability assumptions based on management’s estimates of a change of control event occurring. The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. In subsequent periods, the derivative liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's consolidated statements of operations.

The following table provides quantitative information of liabilities measured at fair value and the significant unobservable inputs (Level 3), the range of the significant unobservable inputs, and the valuation techniques.

  

Fair Value

As of December 31, 2022

 

Valuation

Technique

 

Unobservable

Inputs

 

Range

(Weighted Average)

 
  (In thousands)       

Preferred Stock Derivative Liability

 $21,918 

Discounted Cash Flow

 

Change-in-control probability assumptions

 

Range: 10% to 40% (27.3%)

 
       

Timing of change-in-control assumptions

 

Range: 1 to 10 years (4.19 years)

 
       

Discount Rate

 

Range: 17.48% to 18.23% (17.70%)

 
       

Implied yield*

 11.23%* 

  

Fair Value

As of December 31, 2021

 

Valuation

Technique

 

Unobservable

Inputs

 

Range

(Weighted Average)

 
  

(In thousands)

       

Preferred Stock Derivative Liability

 $21,282 

Discounted Cash Flow

 

Change-in-control probability assumptions

 

Range: 5% to 45% (30.7%)

 
       

Timing of change-in-control assumptions

 

Range: 1 to 10 years (3.67 years)

 
       

Discount Rate

 

Range: 13.71% to 19.46% (15.16%)

 
       

Implied yield*

 7.96%* 

*Represents the implied yield of the 2021 BSP Term Loan

The Company’s cash and cash equivalents including restricted cash, accounts receivable, accounts payable and accrued expenses represent financial instruments. The carrying value of these financial instruments is a reasonable approximation of fair value due to the short-term nature of the instruments.

Note 17Commitments

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 atranging from 1% to 20%22% of net sales with minimum guarantees and advance payments. These license agreements are subject to audits by the licensor, which can result in additional payments due to the licensor.

In the event the Company determinesestimates that a shortfall in achieving the minimum guarantee is likely,probable, a liability is recorded for the estimated short fallshortfall and charged to royalty expense.

Future annual minimum royalty guarantees as of December 31, 20172022 are as follows (in thousands):

2018 $40,725 
2019  14,494 
2020  1,914 
  $57,133 

2023

 $38,089 

2024

  34,630 

2025

  1,969 
  $74,688 

Royalty expense for the year ended December 31, 2022, 2021 and 2020, was $126.6 million, $87.2 million and $83.2 million, respectively.

The Company has entered into employment and consulting agreements with certain executives expiring through December 31, 2020.2026. The aggregate future annual minimum guaranteed amounts due under those agreements as of December 31, 20172022 are as follows (in thousands):

2018 $8,936 
2019  8,027 
2020  2,285 
  $19,248 

2023

 $8,500 

2024

  3,166 

2025

  2,458 

2026

  2,508 
  $16,632 

Note 17—18Share-Based Payments

Under itsthe Company’s 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 (Note 15)(see Note 15 - Common Stock and Preferred Stock). The vesting of these options and other securitiesshare-based awards may vary, but typically vest on a step-up basis over a requisite service period or are based on performance criteria, with a maximum vesting period of 4four years. Restricted shares typically vest in the same manner, with the exception of certain awards vesting over one to twothree 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. Unlike the restricted stock awards, the shares for the restricted stock units are not issued until vested. As of December 31, 2017, 3,539,8482022, 943,633 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, expire, or expire.are forfeited.

Restricted Stock Award

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

66

During 2015, the Company issued a total of 734,823 shares of restricted stock; of which 660,968 shares of restricted stock (with performance based vesting measures) were issued to two executive officers. Of the 660,968 shares, a total of 612,221 were subsequently forfeited based upon the Company not meeting certain financial targets for the year. A total of 73,855 shares were granted to its non-employee directors. The Company cancelled 51,633 shares of restricted stock due to various non-executive employees departing from the Company prior to shares vesting completely. Also during 2015, certain employees, including an executive officer, surrendered an aggregate of 52,024 shares of restricted stock for $0.4 million to cover income taxes due on the vesting of restricted shares. As of December 31, 2015, 411,409 shares of the restricted stock remained unvested, representing a weighted average grant date fair value of $2.7 million.

During 2016, the Company issued a total of 648,351 shares of restricted stock; of which 583,178 shares of restricted stock (with performance based vesting measures) were issued to two executive officers. Of the 583,178 shares, all were subsequently forfeited based upon the Company not meeting certain financial targets for the year. A total of 65,173 shares were granted to its non-employee directors. The Company cancelled 24,822 shares of restricted stock due to various non-executive employees departing from the Company prior to shares vesting completely. Also 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. As of December 31, 2016, 196,453 shares of the restricted stock remained unvested, representing a weighted average grant date fair value of $1.4 million. 
66

During 2017, the Company issued a total of 981,208 shares of restricted stock. A total of 107,421 shares were granted to its non-employee directors. The Company cancelled 9,229 shares of restricted stock due to various non-executive employees departing from the Company prior to shares vesting completely. Also 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. As of December 31, 2017, 981,208 shares of the restricted stock remained unvested, representing a weighted average grant date fair value of $5.1 million.


The following table summarizes the restricted stock award activity, annually, for the yearsyear ended December 31, 2015, 20162022, 2021 and 2017:2020:

  
Restricted and Performance Based
Stock Awards (RSA)
 
   
Number of
Shares
  
Weighted
Average
Fair
Value
 
       
Outstanding, January 1, 2015  568,057  $6.54 
Awarded  734,823   6.81 
Released  (227,616)  6.60 
Forfeited  (663,855)  6.77 
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   5.15 
  

2022

  

2021

  

2020

 
      

Weighted

      

Weighted

      

Weighted

 
  

Number of

  

Average Grant Date

  

Number of

  

Average Grant Date

  

Number of

  

Average Grant Date

 
  

Shares

  

Fair Value

  

Shares

  

Fair Value

  

Shares

  

Fair Value

 

Outstanding, January 1

    $   507,867  $12.73   559,307  $16.00 

Granted

        113,896   4.98   70,422   10.30 

Vested

        (97,645)  20.87   (69,442)  21.76 

Forfeited

        (93,352)  12.67   (52,420)  32.20 

Converted to RSU

        (430,766)  8.85       

Outstanding, December 31

              507,867   12.73 

As of December 31, 2022, there was nil of total unrecognized compensation cost related to non-vested restricted stock. As of December 31, 2021, there was nil of total unrecognized compensation cost related to non-vested restricted stock.

On September 27, 2021, the Company amended the employment agreements with certain executives. The purpose of the amendments was to change the issuance, past and future, of all restricted stock awards to restricted stock units. All other material terms of the respective employment agreements remain the same, including without limitation, the terms of all such grants including the timing of all vesting periods and the vesting benchmarks.

Restricted Stock Units

Under the Plan, share-based compensation payments may include the issuance of Restricted Stock Units (RSUs) to non-executive 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 compensation expense for RSUs is recognized ratably over the service period of the award, which is generally 4 years from the date of grant.


During 2017, the Company issued a total of 1,001,206 RSUs; of which 458,637 RSUs had performance based vesting measures. The Company cancelled 42,014 RSUs due to various non-executive employees departing from the Company prior to shares vesting completely. As of December 31, 2017, 959,192 RSUs remained unvested, representing a weighted average grant date fair value of $4.9 million. 

The following table summarizes the RSU award activity, annually for the year ended December 31, 2017:2022, 2021 and 2020:

  

2022

  

2021

  

2020

 
      

Weighted

      

Weighted

      

Weighted

 
  

Number of

  

Average Grant Date

  

Number of

  

Average Grant Date

  

Number of

  

Average Grant Date

 
  

Shares

  

Fair Value

  

Shares

  

Fair Value

  

Shares

  

Fair Value

 

Outstanding, January 1

  1,073,902  $8.62   131,517  $6.32   102,718  $23.42 

Granted

  827,349   16.75   540,154   8.72   100,200   3.89 

Vested

  (343,427)  8.37   (23,089)  17.28   (41,640)  16.64 

Forfeited

  (149,238)  14.70   (5,446)  9.66   (29,761)  42.83 

Converted from RSA

        430,766   8.85       

Outstanding, December 31

  1,408,586   12.82   1,073,902   8.62   131,517   6.32 

  
Restricted and Performance Based
Stock Units (RSUs)
   
Number of
Shares
 
Weighted 
Average
Fair
Value
       
Outstanding, December 31, 2016  -  $- 
Awarded  1,001,206  5.15 
Released  -   - 
Forfeited  (42,014)  5.15 
Outstanding, December 31, 2017  959,192   5.15 

As of December 31, 2017,2022, there was $4.3$15 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 2.552.6 years.

Share-Based Compensation Expense

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 releavant performance crieria.
67

The following table summarizes the total share-based compensation expense and related tax benefits recognized (in thousands):

  

Year Ended December 31,

 
  

2022

  

2021

  

2020

 

Share-based compensation expense

 $5,082  $2,093  $2,303 

  Year Ended December 31,
  
 
2015
 2016 2017
          
Restricted stock compensation expense $1,562  $1,621  $3,112 
             
67

Stock Options

There has been no stock option activity since December 31, 2015.

68

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—19Employee Benefits Plan

The Company sponsorssponsored for its U.S. employees, a defined contribution plan under Section 401(k) of the Internal Revenue Code. The Plan providesprovided that employees may defer up to 50% of their annual compensation subject to annual dollar limitations, and that the Company willwould make a matching contribution equal to 100% of each employee’s deferral, up to 5% of the employee’s annual compensation. Company matchingCompany-matching contributions, which vestvests immediately, totaled $2.2$2.1 million, $2.5$1.9 million and $2.3 millionnil for the yearsyear ended December 31, 2015, 20162022, 2021 and 2017,2020, respectively.

Note 19—Supplemental Information to Consolidated Statements of Cash Flows
In 2015, certain employees – including an executive officer, surrendered an aggregate of 52,024 shares of restricted stock at a value of $0.4 million to cover their income taxes due on the 2015 vesting of the restricted shares granted them in 2014 and prior. Additionally, the Company recognized a nominal excess tax benefit from the vesting of restricted stock.

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 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. Additionally, the Company recognized nil excess tax deficiency from the vesting of restricted stock.
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).


69


Note 20—Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial data for the years 2016 and 2017 are summarized below. The Company has derived this data fromeliminated the unaudited consolidated interim financial statements that, inmatch on March 31, 2019, and resumed the Company's opinion, have been preparedmatch on substantially the same basis as the audited financial statements contained elsewhere in this reportcontributions effective January 1, 2021.

Note 20Litigation 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.Contingencies


  2016  2017 
  First  Second  Third  Fourth  First  Second  Third  Fourth 
  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter 
  (in thousands, except per share data) 
Net sales $95,809  $140,977  $302,791  $167,026  $94,505  $119,565  $262,413  $136,628 
Gross profit $31,183  $44,800  $94,933  $52,105  $30,021  $33,719  $61,781  $30,160 
Income (loss) from operations $(13,816) $(1,100) $34,413  $(2,391) $(15,724) $(14,108) $(7,746) $(26,580)
Income (loss) before provision
(benefit) for income taxes
 $(16,951) $(3,441) $31,612  $(5,844) $(18,629) $(16,371) $(16,651) $(29,771)
Net income (loss) $(17,383) $(4,145) $30,529  $(7,752) $(18,825) $(16,687) $(17,569) $(30,487)
Basic earnings (loss) per share $(1.01) $(0.27) $1.91  $(0.47) $(1.01) $(.77) $(.77) $(1.33)
Weighted average shares
outstanding
  17,218   16,402   16,044   16,098   18,104   21,616   22,772   22,799 
Diluted earnings (loss) per share $(1.01) $(0.27) $0.82  $(0.47) $(1.01) $(.77) $(.77) $(1.33)
Weighted average shares and
equivalents outstanding
  17,218   16,402   39,504   16,098   18,104   21,616   22,772   22,799 

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.

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Note 21 – Litigation

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, butbusiness. 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 does not believerecords 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.

A putative class action lawsuit was filed on May 18, 2021 in the Superior Court of the State of California for the County of Los Angeles (Isaiah Villarica v. Jakks Pacific, Inc.). Plaintiff formerly worked in one of the Company’s warehouses and was retained via Workforce Enterprises, a provider of temporary employees. The lawsuit alleges that anythe Company violated various California Labor Code provisions governing wage and hour requirements, including that the Company failed to pay all minimum and overtime wages owed, provide legally compliant meal and rest periods, or reimburse business expenses. The lawsuit further alleges derivative wage and hour claims for failure to timely pay all wages owed at separation of employment, failure to provide accurate wage statements, and unfair business practices.

The same counsel in the Villarica matter also filed a related lawsuit on February 15, 2022 in the same court (Matthew Cordova v. Jakks Pacific, Inc). Plaintiff also formerly worked in one of the Company’s warehouses and was retained via Workforce Enterprises. The lawsuit alleges that the Company committed wage and hour violations under the California Private Attorneys General Act, including failing to provide compliant meal and rest periods, properly calculate and pay all minimum and overtime wages, provide accurate wage statements, provide all wages due at separation of employment, provide sick leave, maintain accurate payroll records, or reimburse business expenses. Both of these claims or proceedings willmatters were settled at mediation in March 2022, and the Court in November 2022 approved the settlements, the proceeds of which have a material effect on its business, financial condition or resultsbeen tendered to the settlement administrator to distribute to the State of operations.

Note 22 – Subsequent Events

On March 15, 2018, Toys “R” Us filed a motion to conduct an orderly wind down of its operations inCalifornia, plaintiff’s counsel, and class members. The Company’s temporary employee service providers provided the U.S. and commence store closing sales at all 735 US stores. The total worldwide pre and post-petition gross accounts receivable balance as of March 15, 2018 is $22.8 million (unaudited) and $13.1 million (unaudited), respectively. The Company has filed a claim with its insurance carrier of $13.9 million, netbulk of the deductible, resulting in a net receivable from Toys “R” Us of $22.0 million (unaudited). The reserve with respect to such receivable balance at March 15, 2018 is $8.9 million (unaudited), resulting in a net exposure of $13.1 million (unaudited). Due tosettlement funds, and the evolving nature of this matter it is too early to assess thehad no material impact on the collectabilityCompany.

In the normal course of this receivablebusiness, the Company may provide certain indemnifications and/or other commitments of varying scope to a) its licensors, customers and oncertain 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 Company’s future operations.


71

JAKKS PACIFIC, INC. AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2015, 2016 and 2017
 Allowances are deducted from the assets toperiods in which they apply, exceptserve 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 to the Company's licensors, no liabilities have been recorded for sales returnsindemnifications and/or other commitments.

Note 21Subsequent Events

On January 3, 2023, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary $15.0 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and allowances.incurred a $0.2 million prepayment penalty.

  Balance at  Charged to     Balance 
  Beginning  Costs and     at End 
  of Period  Expenses  Deductions  of Period 
  (In thousands) 
Year ended December 31, 2015:            
Allowance for:            
Uncollectible accounts $3,264  $(143) $(407) $2,714 
Reserve for potential product obsolescence  7,877   1,511   (1,337)  8,051 
Reserve for sales returns and allowances  24,477   42,507   (49,717)  17,267 
  $35,618  $43,875  $(51,461) $28,032 
Year ended December 31, 2016:                
Allowance for:                
Uncollectible accounts $2,714  $303  $(153) $2,864 
Reserve for potential product obsolescence  8,051   (161)  (273)  7,617 
Reserve for sales returns and allowances  17,267   50,582   (51,425)  16,424 
  $28,032  $50,724  $(51,851) $26,905 
Year ended December 31, 2017:                
Allowance for:                
Uncollectible accounts $2,864  $11,803  $(3,727) $10,940 
Reserve for potential product obsolescence  7,617   7,593   (764)  14,446 
Reserve for sales returns and allowances  16,424   42,654   (41,456)  17,622 
  $26,905  $62,050  $(45,947) $43,008 

On March 3, 2023, as required by the terms within the 2021 BSP Term Loan Agreement under the ECF Sweep provision, the Company made a mandatory $23.1 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan.


In Q1 2023, the Company entered into amendments to its 2021 BSP Term Loan Agreement and its JPMorgan ABL Credit Agreement, which changed the interest reference rate on its term loan and revolving line of credit from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report, have concluded that as of December 31, 2017,2022, our disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed by us in the reports we file or submit with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting.

There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15 that occurred during the fourth quarter period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s

Managements Annual Report on Internal Control over Financial Reporting.

We, as management, are responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Exchange Act Rule 13a-15(f)). Our internal control system was designed by or is under the supervision of management and our board of directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control Integrated Framework (2013) (2013). We believe that, as of December 31, 2017,2022, our internal control over financial reporting was effective based upon those criteria.

Our independent registered public accounting firm has issued a report on our internal control over financial reporting. This report appears below.

72

Report of the Independent Registered Public Accounting Firm.
Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
JAKKS Pacific, Inc.
Santa Monica, California

Opinion on Internal Control over Financial Reporting

We have audited JAKKS Pacific, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, based on criteria established in  Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedule and our report dated March 16, 2018 expressed an unqualified opinion thereon.

Basis of Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/S/ BDO USA, LLP
Los Angeles, California
March 16, 2018

73

PART III

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance


Directors and Executive Officers

Our directorsDirectors and executive officers are as follows:

Name

Age

Positions with the Company

Stephen G. Berman

58

53

Chairman, Chief Executive Officer, President, Secretary and Class I Director

Joel M. Bennett

John L. Kimble

53

56

Executive Vice President and Chief Financial Officer

John J. McGrath

57

52

Chief Operating Officer

Michael S. Sitrick

Zhao Xiaoqiang

55

70

Class I Director

Murray L. Skala

Alexander Shoghi

41

71

Class II Director

Alexander Shoghi

Joshua Cascade

50

36

Class II Director

Rex H. Poulsen

Carole Levine

65

66

Class II Director

Michael J. Gross

Matthew Winkler

41

42

Class III Director

Zhao Xiaoqiang

Lori MacPherson

55

50

Class III Director

Stephen G. Bermanhas been our Chief Operating Officer (until August 23, 2011) and Secretary and one of our directorsDirectors since co-founding JAKKS in January 1995. From February 17, 2009 through March 31, 2010 he was also our Co-Chief Executive Officer and has been our Chief Executive Officer since April 1, 2010. Since January 1, 1999, he has also served as our President, and since October 23, 2015 he has also served as our Chairman. From ourthe Company’s inception until December 31, 1998, Mr. Berman was also our Executive Vice President. From October 1991 to August 1995, Mr. Berman was a Vice President and Managing Director of THQ International, Inc., a subsidiary of THQ. From 1988 to 1991, he was President and an owner of Balanced Approach, Inc., a distributor of personal fitness products and services.

Joel M. Bennett joined us in September 1995 as Chief Financial Officer and was given the additional title of Executive Vice President in May 2000. From August 1993 to September 1995, he served in several financial management capacities at Time Warner Entertainment Company, L.P., including as Controller of Warner Brothers Consumer Products Worldwide Merchandising and Interactive Entertainment. From June 1991 to August 1993, Mr. Bennett was Vice President and Chief Financial Officer of TTI Technologies, Inc., a direct-mail computer hardware and software distribution company. From 1986 to June 1991, Mr. Bennett held various financial management positions at The Walt Disney Company, including Senior Manager of Finance for its international television syndication and production division. Mr. Bennett began his career at Ernst & Young LLP as an auditor from August 1983 to August 1986. Mr. Bennett holds a Bachelor of Science degree in Accounting and a Master of Business Administration degree in Finance and is a Certified Public Accountant (inactive).
John J. (Jack) McGrath is our Chief Operating Officer. He was our Executive Vice President of Operations from December 2007 until August 2011 when he became our Chief Operating Officer. Mr. McGrath was our Vice President of Marketing from 1999 to August 2003 and became a Senior Vice President of Operations in August 2003 and Executive Vice President of Operations in December 2007. From January 1992 to December 1998, Mr. McGrath was Director of Marketing at Mattel Inc. and prior thereto he was a PFC in the U.S. Army. Mr. McGrath holds a Bachelor of Science degree in Marketing.
Michael S. Sitrick

Zhao Xiaoqiang has been a directorDirector since December 19, 2014.April 27, 2017. Since November 2009,2002 Mr. Sitrick isZhao has been the chairmanChairman of Meisheng Holding Co., a private holding company selling cultural products, and chief executive officersince 2007 he has been the Chairman of Sitrick Brinko LLC, a subsidiary of Resources Connection, Inc. (NASDAQ: RECN).Meisheng Culture & Creative Corp. Ltd., and the successor to Sitrick And Company, which he founded in 1989 and was its founder, chairman and chief executive officer until he sold it to Resources Connection, Inc. in 2009, which is a public relations, strategic communicationscompany (listed on the Shenzhen Stock Exchange in 2012) with 23 subsidiaries in the areas of manufacturing, animation, games, movies, online video, stage performance art, e-commerce and crisis management company providing advice and counseling to someoverseas investments. Mr. Zhao is also a director of two of the country’s largest corporations, non-profitsCompany’s subsidiaries, JAKKS Meisheng Animation (H.K.) Limited and governmental agencies, in many areas including mergers and acquisitions, litigation support, corporate positioning and repositioning, developing and implementing strategies to deal with short sellers, executive transitions and government investigations. Prior thereto he wasJAKKS Meisheng Trading (Shanghai) Limited. Mr. Zhao holds an executive and Senior Vice President – Communications for Wickes Companies, Inc. (from 1981to1989), head of Communications and Government Affairs for National Can Corporation (from 1974 to 1981) and Group Supervisor at Selz, Seabolt and Associates before that. Prior thereto Mr. Sitrick was Assistant Director of Public Information in the Richard J. Daley administration in Chicago and worked as a reporter. Mr. Sitrick is a published author, frequent lecturer, a former board member at two public companies (both of which were sold) and a current and former board member of several charitable organizations. He holds a B.S. degree in Business Administration and a major in JournalismEMBA from the University of Maryland, College Park.Zhejiang University.

74

Murray L. Skala has been one of our directors since October 1995. Since 1976, Mr. Skala

Alexander Shoghi has been a partner of the law firm Feder Kaszovitz LLP, our general counsel. 

Alexander Shoghi has been a directorDirector since December 18, 2015. Mr. Shoghi is a Portfolio Manager at Oasis Management, a private investment management firm headquartered in Hong Kong. Mr. Shoghi joined Oasis in 2005, first based in Hong Kong, and subsequently relocating to the USU.S. as the founder and manager of Oasis Capital in Austin, Texas in early 2012. From 2004 to 2005, Mr. Shoghi worked at Lehman Brothers in New York City. Mr. Shoghi receivedholds a Bachelor of Science of Business Administration in Finance and International Business degree from Georgetown University in 2004.University.

Rex H. Poulsen

Joshua Cascade has been a director since December 26, 2012.August 9, 2019. Mr. PoulsenCascade is currently a partnerprivate equity investor with over two decades of private equity experience. From 2014 to 2018 he was a Managing Partner at Wellspring Capital Management, an American private equity firm focused on leveraged buyout investments in the Glendale, California office of Hutchinson and Bloodgood LLP, a regional certified public accounting and consulting firm registered with the PCAOB. Mr. Poulsen has been continuously licensedmiddle-market companies, where he previously served as a Certified Public Accountant since 1974,Partner from 2007 to 2014 and has spent mosta Principal from 2002 to 2006. As a Managing Partner, he was one of his careerfive individuals responsible for firm management. From 1998 to 2002, he was an associate at Odyssey Investment Partners. From 1994 to 1998 he was an Analyst (1994-1996) and an Associate (1996-1998) at The Blackstone Group. Mr. Cascade also teaches a course on leveraged buyouts at Yale School of Management and University of Michigan, Ross School of Business and is a frequent MBA lecturer at numerous institutions. Mr. Cascade graduated with public accounting firms as an independent auditorhighest distinction from the University of both private and publicly-held companies. Mr. Poulsen also has extensive experience in assisting companies in the areas of due diligence, valuation and other services related to the purchase and sale of businesses, as well as providing services in connectionMichigan, Ann Arbor, with litigation matters including forensic accounting  assignments and expert witness testimony. Mr. Poulsen received a Bachelor of ScienceArts degree in Accounting from Weber State University in 1973, and is a member of the American Institute of Certified Public Accountants.Business Administration.

Michael J. Gross

Carole Levine has been a director since October 19, 2016. Michael GrossSeptember 27, 2019. Ms. Levine is currently a Consumer Products Marketing & Sales Consultant, where she works with clients in a range of industries, including toy manufacturing, entertainment, and food and beverage. From 1994 to 2017, she held a number of positions at Mattel, Inc., an American multinational toy manufacturing company, including Vice President, Sales, Mattel & Fisher-Price Emerging Channels (from 2005 to 2012), Vice President, Global Marketing (from 2012 to 2015), Vice President, Interim General Manager, RoseArt (from 2015 to 2017) and Vice President, Retail Business Development - Mattel Consumer Products (from 2015 to 2017). She has also been the Vice ChairmanCo-Chairman of WeWork LLC since July 2015the Children Affected by AIDS Foundation, Los Angeles for over 10 years and was its CFO from October 2013 to July 2015. Prior to joining WeWork LLC, Michael was appointed toa member of the Board of Directors of Morgans Hotel Group from October 2009 to June 2013 and was its CEO from March 2011 to September 2013. From January 2008 until March 2011 Michael partnered with The Yucaipa Companies focusing on retail and consumer investment opportunities. From 1998 to 2007, Michael focused on consumer, retail and real estate companies with various investment and research roles at Prentice Capital Management, S.A.C. Capital Advisors, Lehman Brothers Inc., Salomon Smith Barney and Granite Partners. Michael graduated withLicensing Industry Marketing Association. She holds a Bachelor of ScienceArts degree in Sociology from Cornellthe University of Colorado, Boulder and participated in the Accelerated Executive Marketing Program at Northwestern University’s Kellogg School of Hotel Administration.Business.

Zhao Xiaoqiang

Matthew Winkler has been a director since April 27, 2017. Since 2002August 9, 2019. Mr. Zhao Xiaoqiang Winkler is currently a Managing Director at Benefit Street Partners (“BSP”), a leading credit-focused alternative asset management firm. Mr. Winkler joined Benefit Street Partners in July 2014. Prior thereto, from November 2009 to March 2014, he worked in the Special Assets Group at Goldman Sachs. From July 2003 to November 2009, Mr. Winkler held analyst positions at different firms, focusing on areas such as special situations, distressed debt, and mergers and acquisitions. He holds a Bachelor of Arts in Public and Private Sector Organization from Brown University.

Lori MacPherson has been the Chairman of Meisheng Holding Co., a private holding company, selling cultural products and since 2007 he has been the Chairman of Meisheng Culture & Creative Corp. Ltd. a public company listed on the Shenzen Stock Exchange in 2012, with 23 subsidiaries which business includes manufacturing, animation, games, movies, online video, stage performance art, e-commerce and overseas investments. Mr. Zhao Xiaoqiang is also a director since September 27, 2021.Ms. MacPherson was an entertainment and consumer products executive with over two decades of twoexperience at the Walt Disney Company, a multinational media and entertainment conglomerate. From 2010-2014 she served as Executive Vice President, Global Product Management for The Walt Disney Studios. Prior thereto she was Executive Vice President and General Manager of the global Walt Disney Studios Home Entertainment division (2009-2010), Senior Vice President and General Manager of Walt Disney Studios Home Entertainment North America (2006-2009) and held a variety of senior Marketing and Product Management positions (1991-2006). Ms. MacPherson currently sits of the Board of Trustees at Polytechnic School in Pasadena, California. She holds a Bachelor of Arts degree in French Literature from Pomona College.

Classification of Directors

In November 2019, our stockholders approved the Company’s Amended and Restated Certificate of Incorporation, which divided the Board of Directors into three classes, as nearly equal in number as possible with one class standing for election each year for a three-year term. At our 2020 Annual Meeting we elected directors pursuant to a class system, directors in Class I were elected to a one-year term and directors in Class II were elected to a two-year term. The directors in Class III were initially designated and identified in the Certificate of Designations with their initial terms expiring at the annual meeting of our stockholders to be held in 2023, and thereafter the directors in Class III were to be elected to a three-year term solely by the holders of our Series A Senior Preferred Stock and the common stockholders had no right to vote with respect to the election of such Class III directors. However, pursuant to the terms of an agreement entered into as of August 3, 2022 between us and the holders of our Series A Preferred Stock, special rights granted to the preferred holders with respect to the election and/or nomination of certain directors have been terminated and the election of all of our directors are now voted on solely by our common stockholders. At each Annual Meeting of Stockholders following the 2020 Annual Meeting the successors of the class of directors whose term expires shall be elected to hold office for a term expiring at the Annual Meeting of Stockholders to be held in the third year following the year of their election, with each director in each such class to hold office until his or her successor is duly elected and qualified.

Messrs. Berman and Zhao are Class I Directors; Messrs. Shoghi and Cascade, and Ms. Levine are Class II Directors; and Mr. Winkler and Ms. MacPherson are Class III Directors.

Qualifications for All Directors

In considering potential candidates for election to the Board, the Nominating Committee observes the following guidelines, among other considerations: (i) the Board must include a majority of independent directors; (ii) each candidate shall be selected without regard to age, sex, race, religion or national origin; (iii) each candidate should have the highest level of personal and professional ethics and integrity and have the ability to work well with others; (iv) each candidate should only be involved in activities or interests that do not conflict or interfere with the proper performance of the responsibilities of a director; (v) each candidate should possess substantial and significant experience that would be of particular importance to the Company in the performance of the duties of a director; and (vi) each candidate should have sufficient time available, and a willingness to devote the necessary time, to the affairs of the Company in order to carry out the responsibilities of a director, including, without limitation, consistent attendance at board and committee meetings and advance review of board and committee materials. The Chief Executive Officer will then interview such candidate. The Nominating Committee then determines whether to recommend to the Board that a candidate be nominated for approval by the Company’s stockholders. The manner in which the Nominating Committee evaluates a potential candidate does not differ based on whether the candidate is recommended by a stockholder of the Company. With respect to nominating existing directors, the Nominating Committee reviews relevant information available to it, including the most recent individual director evaluations for such candidates, the number of meetings attended, his or her level of participation, biographical information, professional qualifications and overall contributions to the Company.

The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for board membership. However, California law requires that by the end of 2021 California-headquartered public companies with a board of directors the size of the Company have at least three female directors on its board and at least one director on its board who is from an underrepresented community, defined as “an individual who self identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self identifies as gay, lesbian, bisexual, or transgender.” In the event the size of the Company’s subsidiaries, JAKKS Meisheng Animation (H.K.) Limitedboard remains the same, the law mandates that by the end of calendar 2022 the number of directors from underrepresented communities on the Company’s board be increased to have at least two directors from underrepresented communities. Nasdaq has also adopted board diversity requirements, but the Company believes that by complying with the California diversity requirements it will be in compliance with the Nasdaq requirements. The California diversity requirements have been found unconstitutional and JAKKS Meisheng Trading (Shanghai) Limited. Mr. Zhao Xiaoqiang received an EMBA from Zhejiang Universityare not currently applicable. The Company’s board is currently in 2010.compliance with all applicable diversity requirements.

The Board has identified the following qualifications, attributes, experience and skills that are important to be represented on the Board as a whole: (i) management, leadership and strategic vision; (ii) financial expertise; (iii) marketing and consumer experience; and (iv) capital management.

A majority

The Board has determined that five of ourseven directors who serve on the Board as of the date hereof (Messrs. Cascade, Shoghi and Winkler and Ms. Levine and Ms. MacPherson) are “independent,” as defined under the applicable rules of Nasdaq. In making this determination, the Board or the Nominating Committee, as applicable, considered the standards of independence under the applicable rules of Nasdaq Stock Market. Suchand all relevant facts and circumstances (including, without limitation, commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships) to ascertain whether any such person had a relationship that, in its opinion, would interfere with the exercise of independent directors are currently Messrs. Sitrick, Poulsen, Shoghi, Gross and Xiaoqiang. judgment in carrying out the responsibilities of a director.

Our directors hold officeserve in accordance with the Second Amended and Restated By-laws until the next annual meeting of stockholders and until their respective successors are elected and qualified.qualified or until their earlier death, disability, retirement, resignation or removal. Our officers are elected annually by ourthe Board of Directors and serve at its discretion. None of our current independent directors, haveother than Mr. Shoghi, has served as such for more than the past five years. Our current independent directors were selected for their experience as businessmen (Sitrick, Gross and Xiaoqiang) or financial expertise (Poulsen and Gross) or financial management expertise (Shoghi)(Messrs. Cascade, Shoghi and Winkler) and general business and industry specific experience (Ms. Levine and Ms. MacPherson). We believe that our boardthe Board is best served by benefiting from this blend of business and financial expertise and experience. Our remaining directors consist of our chief executive officer (Berman)Chief Executive Officer (Mr. Berman), who brings management’s perspective to the board’sBoard’s deliberations, and our longest serving director (Skala),Mr. Zhao, who as an attorneycontributes his business experience, including experience in manufacturing and his experience with many years of experience advising businesses, is able to provide guidanceChinese markets, to the Board.

In October 2019 and February 2020, Mr. Zhao Xiaoqiang was issued a warning by the Zhejiang Securities Regulatory Bureau of the China Securities Regulatory Commission and a “public condemnation” by the Shenzhen Stock Exchange, respectively, primarily due to his failure to fulfill his duties (as a director, controlling shareholder and de facto controller of Meisheng Cultural & Creative Co. Ltd. (“Meisheng Cultural”) diligently to cause Meisheng Cultural to comply with applicable PRC regulations and stock exchange rules relating to disclosure and internal control, as well as the use of funds of Meisheng Cultural by Meisheng Holdings Group Co., Ltd. (“Meisheng Holdings”), an affiliate of Mr. Zhao and the controlling shareholder of Meisheng Cultural, without proper authorization. In addition, Mr. Zhao and Meisheng Cultural were also requested to strengthen the study of relevant laws and regulations, establish and improve the strict implementation of financial and accounting management systems of Meisheng Cultural, improve Meisheng Cultural’s internal controls, proper governance and quality of information disclosure. Other than the misuse of funds by his affiliate Meisheng Holdings, Mr. Zhao was punished as a result of activities of Meisheng Cultural as he bears certain statutory responsibilities under the applicable PRC regulations and stock exchange rules as its de facto controller and Chairman of the board fromof directors. Mr. Zhao has advised the Company that the aforementioned matters have nothing to do with his activities as a legal perspective.director of the Company, have all been ratified by Meisheng Cultural, and the related misused funds have been fully repaid by Meisheng Holdings.

Committees of the Board of Directors

We have an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. TheIn August 2019 the Capital Allocation Committee, which was established as a standing committee in February 2016.2016, was dissolved.

Audit Committee.Committee. In addition to risk management functions, the primary functions of the Audit Committee are to select or to recommend to ourthe Board the selection of outside auditors; to monitor our relationships with our outside auditors and their interaction with our management in order to ensure their independence and objectivity; to review and to assess the scope and quality of our outside auditor’s services, including the audit of our annual financial statements; to review our financial management and accounting procedures; to review our financial statements with our management and outside auditors; and to review the adequacy of our system of internal accounting controls. Effective as of their respective dates of appointment to the Board, Messrs. Poulsen (chairman), GrossShoghi (Chair) and ShoghiWinkler and Ms. Levine are the current members of the Audit Committee. Each member of the Audit Committee and are eachis “independent” (as that term is defined in NASD Rule 4200(a)(14)), and are each able to read and understand fundamental financial statements. Mr. Poulsen,Shoghi, our audit committee financial expert, is the Chairman of the Audit Committee and possesses the financial expertise required under Rule 401(h) of Regulation S-K under the Securities Act of the Act1933, as amended (the “Securities Act”), and NASD Rule 4350(d)(2). as a result of his experience as a portfolio manager at Oasis Management. He is further “independent”, as that term is defined under Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. We will, in the future, continue to have (i) an Audit Committee of at least three members comprised solely of independent directors, each of whom will be able to read and understand fundamental financial statements (or will become able to do so within a reasonable period of time after his or her appointment); and (ii) at least one member of the Audit Committee thatwho will possess the financial expertise required under NASD Rule 4350(d)(2). OurThe Board has adopted a written charter for the Audit Committee, and the Audit Committeewhich reviews and reassesses the adequacy of that charter on an annual basis. The full text of the charter is available on our website at www.jakks.com.

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Compensation Committee. In addition to risk oversight functions, the functions of the Compensation Committee are to makemakes recommendations to the Board regarding compensation of management employees and to administeradministers plans and programs relating to employee benefits, incentives, compensation and awards under ourthe 2002 Stock Award and Incentive Plan (the “2002 Plan”). Messrs. Sitrick (Chairman), GrossShoghi (Chair) and PoulsenWinkler are the current members of the Compensation Committee. The Board has determined that each of them is “independent,” as defined under the applicable rules of the Nasdaq Stock Market.Nasdaq. A copy of the Compensation Committee’s Charter is available on our website at www.jakks.com. Executive officers that are members of ourthe Board make recommendations to the Compensation Committee with respect to the compensation of other executive officers thatwho are not on the Board. Except as otherwise prohibited, the Compensation Committee may delegate its responsibilities to subcommittees or individuals. The Compensation Committee has the authority, in its sole discretion, to retain or obtain advice from a compensation consultant, legal counsel or other advisor and is directly responsible for the appointment, compensation and oversight of such persons. The Company provides the appropriate funding to such persons as determined by the Compensation Committee. The Compensation Committee, which also conducts an independence assessment of its outside advisors using the six factors contained in Exchange Act Rule 10C-1. The Compensation Committee historically receives legal advice from our outside general counsel and for 2015 retained Lipis Consulting, Inc. (“LCI”), a compensation consulting firm, which provides advice directly to the Compensation Committee. The Compensation Committeehas retained Willis Towers Watson (“WTW”), a compensation consulting firm, to advise it in 2016 and 2017. WTW provides advice directly toadvise the Compensation Committee.Committee from time to time.


The Compensation Committee also annually reviews the overall compensation of our executive officers for the purpose of determiningto determine whether discretionary bonuses should be granted. In 2015, LCILipis Consulting, Inc. (“LCI”), a compensation consulting firm, presented a report to the Compensation Committee comparing our performance, size and executive compensation levels to those of peer group companies. LCI also reviewed with the Compensation Committee the base salaries, annual bonuses, total cash compensation, long-term compensation and total compensation of our senior executive officers relative to those companies. The performance comparison presented to the Compensation Committee each year includes a comparison of our total shareholder return, earnings per share growth, sales, net income (and one-year growth of both measures) to the peer group companies. The Compensation Committee reviews this information along with details about the components of each executive officer’s compensation. LCI also provided guidance to the Compensation

A compensation consultant was not consulted during 2022.

Nominating Committee with respect to the extension of Messrs. McGrath’s and Bennett’s employment agreements (see “- Employment Agreements and Termination of Employment Arrangements”). The Compensation Committee consulted with Frederick W. Cook & Co., Inc. (“FWC"), a compensation consulting firm, in 2012 with respect to determination of a portion of Mr. Berman’s bonus criteria for 2012, and in 2013 with respect to determination of a portion of his bonus criteria for 2013, and in 2014 with respect to the determination of a portion of his bonus criteria for 2014. The Compensation Committee also consulted with FWC in 2013 with respect to a portion of Mr. McGrath’s bonus criteria for 2013 and in 2014 with respect to a portion of his bonus criteria for 2014. The Compensation Committee consulted with LCI with respect to establishing the bonus criteria for Messrs. Berman and McGrath for 2015. The Compensation Committee consulted with WTW with respect to the amendments to the employment agreements for Messrs. Berman and McGrath in 2016.


Nominating and Corporate Governance Committee. In addition to risk oversight functions, the functions of the Nominating and Corporate Governance Committee are to developdevelops our corporate governance system and to reviewreviews proposed new members of ourthe Board, of Directors, including those recommended by our stockholders. Messrs. Poulsen (Chairman)Winkler (Chair), Cascade and SitrickMacPherson are the current members of ourthe Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee, which operates pursuant to a written charter adopted by the Board. TheBoard, the full text of the charterwhich is available on our website at www.jakks.com. The Board has determined that each member of thisthe Nominating Committee is “independent,” as defined under the applicable rules of the Nasdaq Stock Market.Nasdaq.

The Nominating and Corporate Governance Committee will annually review on an annual basis, the composition of ourthe Board of Directors and the ability of its current members to continue effectively as directors for the upcoming fiscal year. The Nominating and Corporate Governance Committee established the position of Chairman of the Board in 2015. In the ordinary course, absent special circumstances or a change in the criteria for Board membership, the Nominating and Corporate Governance Committee will renominatere-nominate incumbent directors who continue to be qualified for Board service and are willing to continue as directors. If thatthe Nominating Committee thinks it is in ourthe Company’s best interests to nominate a new individual for director in connection with an annual meeting of stockholders, or if a vacancy on the Board occurs between annual stockholder meetings or an incumbent director chooses not to run, the nominating committeeNominating Committee will seek out potential candidates for Board appointment who meet the criteria for selection as a nominee and have the specific qualities or skills being sought. Director candidates will be selected based on input from members of the Board, our senior management and, if the Nominating Committee deems appropriate, a third-party search firm. The Nominating and Corporate Governance Committee will evaluate each candidate’s qualifications and check relevant references, and each candidate will be interviewed by at least one member of thatthe Nominating Committee. Candidates meriting serious consideration will meet with all members of the Board. Based on this input, the Nominating and Corporate Governance Committee will evaluate whether a prospective candidate is qualified to serve as a director and whether the Nominating Committee should recommend to the Board that this candidate be appointed to fill a current vacancy on the Board, or be presented for the approval of the stockholders, as appropriate.


Stockholder recommendations for director nominees are welcome and should be sent to our Chief Financial Officer, who will forward such recommendations to ourthe Nominating and Corporate Governance Committee, and should include the following information: (a) all information relating to each nominee that is required to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) the names and addresses of the stockholders making the nomination and the number of shares of Common Stock which are owned beneficially and of record by such stockholders; and (c) appropriate biographical information and a statement as to the qualification of each nominee, all of which must be submitted in the time frame described under the appropriate caption in our common stockproxy statement. The Nominating Committee will evaluate candidates recommended by stockholders in the same manner as candidates recommended by other sources, using additional criteria, if any, approved by the Board from time to time. Our stockholder communication policy may be amended at any time with the Nominating Committee’s consent.

Pursuant to the Director Resignation Policy adopted by the Board following our 2014 Annual Meeting of Stockholders, if a nominee for director in an uncontested election receives less than a majority of the votes cast, the director must submit his resignation to the Board. The Nominating Committee then considers such resignation and makes a recommendation to the Board concerning the acceptance or rejection of such resignation. This procedure was implemented following our 2016 Annual Meeting of Stockholders.

Special Committees. In addition to the above described standing committees, the Board establishes special committees as it deems warranted.

Executive Officers

Our executive officers are elected by our Board of Directors and serve pursuant to the terms of their respective employment agreements. One of our executive officers, Stephen G. Berman, is also a Director of the Company. See above for biographical information about this officer. The other current executive officers are John L. Kimble, our Executive Vice President and Chief Financial Officer and John (Jack) McGrath, our Chief Operating Officer.

John J. (Jack) McGrath has served as our Chief Operating Officer since 2011 and is responsible for the Company’s global operations. He brings more than 24 years of experience, having served as our Executive Vice President of Operations from December 2007 until August 2011 when he became our Chief Operating Officer. Mr. McGrath was our Vice President of Marketing from 1999 to August 2003 and Senior Vice President of Operations until 2007. Prior to joining the Company, Mr. McGrath was a Brand Marketer for Hot Wheels® at Mattel Inc. and part of its Asia Pacific marketing team. Mr. McGrath served honorably in the U.S. Army and holds a Bachelor of Science degree in Marketing.

John L. Kimble became our Executive Vice President and Chief Financial Officer on November 20, 2019. Mr. Kimble worked for over 12 years at various positions at The Walt Disney Company, ultimately as VP/Finance, Strategy, Operations and Business Development. More recently, Mr. Kimble spent six years at Mattel, Inc. where he served in various positions and concluded his career there as VP/Head of Corporate Development - Licensing Acquisitions - M&A. In between his service at Disney and Mattel, he spent a couple of years as an entrepreneur at a start-up gaming company. He began his career as a consultant for Mars & Co., a global strategy consulting firm. Mr. Kimble received his Bachelor’s Degree in Management Science, Concentration in Finance, Minor in Economics from the Sloan School, Massachusetts Institute of Technology (M.I.T.) and has a Master of Business Administration (MBA) from the Wharton School of the University of Pennsylvania.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to us during and for 2022, all Forms 3, 4 and 5 required to be filed during 2022 by our Directors and executive officers were timely filed, except for one Form 4 filed late by our CFO and two Forms 4 filed by our CEO.

Stockholder Communications

Stockholders interested in communicating with the Board may do so by writing to any or all directors, care of our Chief Financial Officer, at our principal executive offices. Our Chief Financial Officer will log in all stockholder correspondence and forward to the director addressee(s) all communications that, in his judgment, are appropriate for consideration by the directors. Any director may review the correspondence log and request copies of any correspondence. Examples of communications that would be considered inappropriate for consideration by the directors include, but are not limited to, commercial solicitations, trivial, obscene, or profane items, administrative matters, ordinary business matters, or personal grievances. Correspondence that is not appropriate for Board review will be handled by our Chief Financial Officer. All appropriate matters pertaining to accounting or internal controls will be brought promptly to the attention of our Audit Committee Chair.

Stockholder recommendations for director nominees are welcome and should be sent to our Chief Financial Officer, who will forward such recommendations to the Nominating Committee, and should include the following information: (a) all information relating to each nominee that is required to be disclosed pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) the names and addresses of the stockholders making the nomination and the number of shares of Common Stock which are owned beneficially and of record by such stockholders; and (c) appropriate biographical information and a statement as to the qualification of each nominee, and must be submitted in the time frame described under the appropriate caption, “Stockholder Proposals for 2023 Annual Meeting,” in our proxy statement.Proxy Statement for the 2022 Annual Meeting. The Nominating and Corporate Governance Committee will evaluate candidates recommended by stockholders in the same manner as candidates recommended by other sources, using additional criteria, if any, approved by the Board from time to time. Our stockholder communication policy may be amended at any time with the consent of our Nominating and Corporate Governance Committee.

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Pursuant to the Director Resignation Policy adopted by our Board following our 2014 Annual Meeting, in the event a nominee for director in an uncontested election receives less than a majority of the votes cast, the director must submit his resignation to the Board. The Nominating and Corporate Governance Committee then considers such resignation and makes a recommendation to our Board concerning the acceptance or rejection of such resignation. This procedure was implemented following our 2016 Annual Meeting when Mr. Shoghi did not receive a majority of the votes and the Nominating and Corporate Governance Committee recommended that his resignation not be accepted, which recommendation was accepted by the Board.Committee.


Capital Allocation Committee. In addition to assisting the Board and management in reviewing the Company’s capital structure and material capital allocation decisions, the Board established the Capital Allocation Committee to assist the Board and management in reviewing strategic investments, and acquisitions and dispositions and other opportunities for maximizing shareholder value. In furtherance of such purposes, the Committee’s responsibilities include review of the Company’s financial strategies, including debt and equity issuances, repurchases of debt and bank credit facilities. The Capital Allocation Committee is also responsible to consider and, if implemented, review the Corporation's dividend and share repurchase policies and programs and other strategies to return capital to stockholders. The Board is in the process of appointing members of this committee. The Board will ensure that each of them will be “independent “ as defined under the applicable rules of the NASDAQ stock market. A copy of the Capital Allocation Committee's charter is available on our website at www.jakks.com. The Committee does not have any authority or responsibility with respect to matters delegated by the Board to the Corporation's Audit, Compensation or Nominating and Governance Committees. The Committee has the authority, in its discretion, to retain independent consultants, counsel and other advisors, and the Company pays for the expenses of retaining such persons as determined by the Capital Allocation Committee. The Capital Allocation Committee reviewed with management and the Board and financial advisors to the Board regarding the Company’s share and convertible debt repurchases.
Executive Officers

Our executive officers are elected by our Board of Directors and serve pursuant to the terms of their respective employment agreements. One of our executive officers, Stephen G. Berman, is also a director of the Company. See above for biographical information about this officer. The other current executive officers are Joel M. Bennett, our Executive Vice President and Chief Financial Officer and John (Jack) McGrath, our Executive Vice President and Chief Operating Officer.

John J. (Jack) McGrath is our Chief Operating Officer. He was our Executive Vice President of Operations from December 2007 until August 2011 when he became our Chief Operating Officer. Mr. McGrath was our Vice President of Marketing from 1999 to August 2003 and became a Senior Vice President of Operations in August 2003 and Executive Vice President of Operations in December 2007. From January 1992 to December 1998, Mr. McGrath was Director of Marketing at Mattel Inc. and prior thereto he was a PFC in the U.S. Army. Mr. McGrath holds a Bachelor of Science degree in Marketing.

Joel M. Bennett joined us in September 1995 as Chief Financial Officer and was given the additional title of Executive Vice President in May 2000. From August 1993 to September 1995, he served in several financial management capacities at Time Warner Entertainment Company, L.P., including as Controller of Warner Brothers Consumer Products Worldwide Merchandising and Interactive Entertainment. From June 1991 to August 1993, Mr. Bennett was Vice President and Chief Financial Officer of TTI Technologies, Inc., a direct-mail computer hardware and software distribution company. From 1986 to June 1991, Mr. Bennett held various financial management positions at The Walt Disney Company, including Senior Manager of Finance for its international television syndication and production division. Mr. Bennett began his career at Ernst & Young LLP as an auditor from August 1983 to August 1986. Mr. Bennett holds a Bachelor of Science degree in Accounting and a Master of Business Administration degree in Finance and is a Certified Public Accountant (inactive).

On December 27, 2017, we entered into a letter agreement with our Chief Financial Officer, Joel M. Bennett, which provides for Mr. Bennett’s stepping down from his position. In order to arrange for a smooth transition, Mr. Bennett will continue as our Chief Financial Officer  through March 2018.

Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us during 2017 and Forms 5 and amendments thereto furnished to us with respect to 2017, one of our directors filed a Form 3 and a Form 4 late but all other Forms 3, 4 and 5 required to be filed during 2017 by our directors and executive officers were done so on a timely basis.

Code of Ethics

We have a Code of Ethics (which we call a codeCode of conduct)Conduct) that applies to all our employees, officers and directors. This codeCode was filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. We have posted on our website, www.jakks.com, the full text of such Code. We will disclose when there have been waivers of, or amendments to, such Code, as required by the rules and regulations promulgated by the Securities and Exchange CommissionSEC and/or Nasdaq.

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Pursuant to our Code of Conduct, (a copy of which may be found on our website, www.jakks.com), all of our employees are required to disclose to our General Counsel, the Board of Directors or any committee established by the Board of Directors to receive such information, any material transaction or relationship that reasonably could be expected to give rise to actual or apparent conflicts of interest between any of them, personally, and us. In addition, ourthe Company. Our Code of Conduct also directs all employees to avoid any self-interested transactions without full disclosure. This policy, which applies to all of our employees, is reiterated in our Employee Handbook which states that a violation of this policy could be grounds for termination. In approving or rejecting a proposed transaction, our General Counsel, the Board of Directors or a designated committee of the Board will consider the facts and circumstances available and deemed relevant, including, but not limited to, the risks, costs and benefits to us, the terms of the transactions, the availability of other sources for comparable services or products, and, if applicable, the impact on director independence. Upon concluding their review, they will only approve those agreements that, in light of known circumstances, are in or are not inconsistent with, our best interests, as they determine in good faith.

Compensation Committee Interlocks and Insider Participation


No member of the Compensation Committee during the last fiscal year was or previously had been an executive officer or employee of ours, or was party to any related person transaction within the meaning of Item 404 of Regulation S-K under the Securities Act. None of our executive officers has served as a director or member of a compensation committee (or other board committee performing equivalent functions) of any other entity, one of whose executive officers served as a director or a member of the Compensation Committee.


Item 11. Executive Compensation

Compensation Discussion and Analysis
Compensation Philosophy and Objectives

We believe that a strong management team comprised of highly talented individuals in key positions is critical to our ability to deliver sustained growth and profitability, and our executive compensation program is an important tool for attracting and retaining such individuals. We also believe that our people are our most important resource is our people.resource. While some companies may enjoy an exclusive or limited franchise or are able to exploit unique assets or proprietary technology, we depend fundamentally on the skills, energy and dedication of our employees to drive our business. It is only through their constant efforts that we are able to innovate through the creation of new products and the continual rejuvenation of our product lines, to maintain superior operating efficiencies, and to develop and exploit marketing channels. With this in mind, we have consistently sought to employ the most talented, accomplished and energetic people available in the industry. Therefore, we believe it is vital that our named executive officers receive an aggregate compensation package that is both highly competitive with the compensation received by similarly-situated executive officers, at peer group companies, and also reflective of each individual named executive officer’s contributions to our success on both a long-term and short-term basis. As discussed in greater depth below, the objectives of our compensation program are designed to execute this philosophy by compensating our executives at the top quartile of their peers.


 Our executive compensation program is designed with three main objectives:

to offer a competitive total compensation opportunity that will allow us to continue to retain and motivate highly  talented individuals to fill key positions;

to align a significant portion of each executive’s total compensation with our annual performance and the interests of  our stockholders; and

reflect the qualifications, skills, experience and responsibilities of our executives

Administration and Process

Our executive compensation program is administered by the Compensation Committee. The Compensation Committee receives legal advice from our outside general counsel and has retained Willis Towers Watson (“WTW”), a compensation consulting firm, which provides advice directly to the Compensation Committee. Historically, the base salary, bonus structure and the long-term equity compensation of our executive officers are governed by the terms of their individual employment agreements (see “-Employment“Employment Agreements and Termination of Employment Arrangements”) and we expect that to continue in the future. With respect to our chief executive officer and president and our chief operating officer the Compensation Committee, with input from WTW, establishes target performance levels for incentive bonuses based on a number of factors that are designed to further our executive compensation objectives, including our performance, the compensation received by similarly-situated executive officers at peer group companies, the conditions of the markets in which we operate and the relative earnings performance of peer group companies.

Historically, a factor

Factors given considerable weight in establishing bonus performance criteria isare Net Sales, Adjusted EPS, which is the net incomeearnings per share of our common stock calculated on a fully-diluted basis in accordance with GAAP, and Adjusted EBITDA applied on a basis consistent with past periods, as adjusted in the sole discretion of the Compensation Committee to take account of extraordinary or special items.

As explained in greater detail below (see “Employment Agreements and Termination of Employment Arrangements”), pursuant to a September 2012 amendment to Mr. Berman’s employment agreement, commencing in 2013, his annual bonus was restructured so that part of it was capped at 300% of his base salary and the performance criteria and vesting are solely within the discretion of the Compensation Committee, which establishes all of the criteria during the first quarter of each fiscal year for that year’s bonus, based upon financial and non-financial factors selected by the Compensation Committee, and another part of his annual performance bonus is based upon the success of a joint venture entity we initiated in September 2012. The portion of the bonus equal to the first 200% of base salary is payable in cash and the balance in restricted stock vesting over three years. In addition, the annual grant of $500,000 of restricted stock was changed to $3,500,000 of restricted stock and the vesting criteria was also changed from being solely based upon established EPS targets to being based upon performance standards established by the Compensation Committee during the first quarter of each year. On June 7, 2016 we further amended the employment agreement to provide, among other things, for (i) extension of the term to December 31, 2020; (ii) modification of the performance and vesting standards for each $3.5 million Annual Restricted Stock Grant (“Berman Annual Stock Grant”) provided for under Section 3(b) of his Employment Agreement, effective as of January 1, 2017, so that 40% ($1.4 million) of each Berman Annual Stock Grant will be subject to time vesting in four equal annual installments over four years and 60% ($2.1 million) of each Berman Annual Stock Grant will be subject to three year “cliff vesting” (i.e. payment is based upon performance at the close of the three year performance period), with vesting of each Berman Annual Stock Grant determined by the following performance measures: (a) total shareholder return as compared to the Russell 2000 Index (weighted 50%), (b) net revenue growth as compared to our peer group (weighted 25%) and (c) EBITDA growth as compared to our peer group (weighted 25%); and (iii) modification of the performance measures for award of his Annual Performance Bonus equal to up to 300% of Base Salary (“Berman Annual Bonus”) provided for under Section 3(d) of his Employment Agreement, effective as of January 1, 2017, so that the performance measures will be based only upon net revenues and EBITDA, each performance measure weighted 50%, and with the specific performance criteria applicable to each Berman Annual Bonus determined by the Compensation Committee during the first quarter of each fiscal year; and (iv) increase Mr. Berman’s base salary to $1,450,000 effective June 1, 2016 subject to annual increases of at least $25,000 per year thereafter.


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On August 23, 2011 we entered into an amended employment agreement with John J. (Jack) McGrath whereby he became Chief Operating Officer. As disclosed in greater detail below, Mr. McGrath’s employment agreement also provides for fixed and adjustable bonuses payable based upon adjusted EPS, which targets are set in the agreement, based upon input from our outside consulting firm, with the adjustable bonus capped at a maximum of 125% of base salary. On March 31, 2015, the Compensation Committee increased for 2015 the performance bonus that can be earned by Mr. McGrath from a maximum of up to 125% of his base salary to a maximum of up to 150% of his base salary, subject to achievement of certain performance based conditions established by the Committee, and also awarded Mr. McGrath the opportunity to earn an additional $925,000 of restricted stock subject to achievement of certain performance based vesting conditions. On September 29, 2016 we entered into a Fourth Amendment to the employment agreement with Mr. McGrath which provides, among other things, for (i) extension of the term December 31, 2020; (i) modification of the performance and vesting standards for each Annual Restricted Stock Grant (“McGrath Annual Stock Grant”) provided for under Section 3(d) of his Employment Agreement, effective as of January 1, 2017, as follows: each McGrath Annual Stock Grant will be equal to $1 million, and 40% ($0.4 million) of each McGrath Annual Stock Grant will be subject to time vesting in four equal annual installments over four years, and 60% ($0.6 million) of each McGrath Annual Stock Grant will be subject to three year “cliff vesting” (i.e. vesting is based upon satisfaction of the performance measures at the close of the three year performance period), determined by the following performance measures: (A) total shareholder return as compared to the Russell 2000 Index (weighted 50%), (B) net revenue growth as compared to our peer group (weighted 25%) and (C) growth in Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) as compared to our peer group (weighted 25%); and (iii) modification of the Annual Performance Bonus (“McGrath Annual Bonus”) provided for under Section 3(e) of his Employment Agreement, effective as of January 1, 2017, as follows: the McGrath Annual Bonus will be equal to up to 125% of base salary, and the actual amount will be determined by performance measures based upon net revenues and EBITDA, each performance measure weighted 50%, and with the specific performance criteria applicable to each McGrath Annual Bonus determined by the Compensation Committee during the first quarter of each fiscal year, and payable in cash (up to 100% of base salary) and shares of our common stock (any excess over 100% of base salary) with the shares of stock vesting over three years in equal quarterly installments. 

While the Compensation Committee does not establish target performance levels for our chief financial officer, it does consider similar factors when determining such officer’s bonus. The employment agreement for Mr. Bennett expired on December 31, 2009 and from January 1, 2010 through October 20, 2011 Mr. Bennett was an employee at will until his entry into a new employment agreement dated October 21, 2011. Prior to its expiration, the agreement authorized our Compensation Committee and Board of Directors to award an annual bonus to Mr. Bennett in an amount up to 50% of his salary as the Committee or Board determined in its discretion and also gave the Compensation Committee and the Board the discretionary authority to pay Mr. Bennett additional incentive compensation as it determined. Mr. Bennett’s new employment agreement does not contain a limitation on the percentage of salary that can be granted as a bonus. On February 18, 2014, we entered into a Continuation and Extension of Term of Employment Agreement with respect to Mr. Joel M. Bennett’s Employment Agreement dated October 21, 2011 such that it is deemed to have been renewed and continued from January 1, 2014 without interruption and it was extended through December 31, 2015. On June 11, 2015 Mr. Bennett’s employment agreement was extended through December 31, 2017.

The current employment agreements with our named executive officers also givesgive the Compensation Committee the authority to award additional compensation to each of them as it determines in itsthe Committee’s sole discretion based upon criteria it establishes.

The Compensation Committee also annually reviews the overall compensation of our named executive officers for the purpose of determining whether discretionary bonuses should be granted. In 2017, WTW presented a report to theThe Compensation Committee comparing our performance, size and executive compensation levels to those of peer group companies. WTW also reviewed with the Compensation Committeeannually reviews the base salaries, annual bonuses, total cash compensation, long-term compensation and total compensation of our senior executive officers relative to those companies. The performance comparison presented to the Compensation Committee each year includes a comparison of our total shareholder return, earnings per share growth, sales, net income (and one-year growth of both measures) to the peer group companies. The Compensation Committee reviews this information along with details about the components of each named executive officer’s compensation.officers.

Peer Group
One of the factors considered by the Compensation Committee is the relative performance and the compensation of executives of peer group companies. The peer group is comprised of a group of the companies selected in conjunction with WTW that we believe provides relevant comparative information, as these companies represent a cross-section of publicly-traded companies with product lines and businesses similar to our own throughout the comparison period. The composition of the peer group is reviewed annually and companies are added or removed from the group as circumstances warrant. For the last fiscal year, the peer group companies utilized for executive compensation analysis, which remained the same as in the previous year were:
Activision Blizzard, Inc
Deckers Outdoor Corporation
Electronic Arts, Inc.
Hasbro, Inc.
Mattel, Inc.
Take-Two Interactive, Inc.
80

Elements of Executive Compensation

The compensation packages for the Company’s senior executives have both performance-based and non-performance based elements. Based on its review of each named executive officer’s total compensation opportunities and performance, and ourthe Company’s performance, the Compensation Committee determines each year’s compensation in the manner that it considers to be most likely to achieve the objectives of our executive compensation program. The specific elements, which include base salary, annual cash incentive compensation and long-term equity compensation, are described below.

The Compensation Committee has negative discretion to adjust performance results used to determine annual incentive and the vesting schedule of long-term incentive payouts to the named executive officers. The Compensation Committee alsoofficers and has discretion to grant bonuses even if the performance targets were not met.


81

Base Salary
Mr. Berman received compensation in 2016

Our executive officers receive base salary pursuant to the terms of their employment agreement. Mr. Berman has been an executive officer at least since his entry into his employment agreement;agreement in 2010, Mr. McGrath became an executive officer on August 23, 2011 pursuant to the terms of an amendment to his employment agreement, and Mr. BennettKimble became an executive officer when he entered into a newletter employment agreement on October 21, 2011 which was extended in 2015. As discussed in greater detail below, the employment agreement for Mr. Berman was to expire on December 31, 2010 and Mr. Bennett’s employment agreement expired on December 31, 2013. Effective November 11, 2010, Mr. Berman entered into an amended and restated employment agreement, which was further amended in 2012 and 2016. 20, 2019.

Pursuant to the terms of theirMr. Berman’s employment agreements asagreement in effect on December 31, 2013, Messrs.as of January 1, 2023, Mr. Berman McGrath, and Bennett each receivereceives a base salary which is increased automatically each year by at least $25,000$25,000. The employment agreement for Mr. Berman and $15,000Kimble provides for each of Messrs. McGrath and Bennett pursuant to the terms of their respective employment agreements. Mr. Bennett’s extended employment agreement, which was set to expire in December 2017, does not provide foran automatic 4% annual increases in base salary. Any increase or further increase in base salary, as the case may be is determined by the Compensation Committee based on a combination of two factors. The first factor is the Compensation Committee’s evaluation of the salaries paid in peer group companies to executives with similar responsibilities. The second factor is the Compensation Committee’s evaluation of the executive’s unique role, job performance and other circumstances. Evaluating both of these factors allows us to offer a competitive total compensation value to each individual named executive officer taking into account the unique attributes of, and circumstances relating to, each individual, as well as marketplace factors. This approach has allowed us to continue to meet our objective of offering a competitive total compensation value and attracting and retaining key personnel. Based on its review of these factors, the Compensation Committee determined not to increase the base salary of each of Messrs. Berman, McGrath and Bennett above the contractually required minimum increase, in 2016 as unnecessary to maintain our competitive total compensation position inis determined by the marketplace. Pursuant to the 2016 amendment to his employment agreement, Mr. Berman’s base salary as of June 1, 2016 was increased to $1,450,000.Compensation Committee.

Annual Cash Incentive Compensation

The function of the annual cash bonus is to establish a direct correlation between the annual incentives awarded to the participants and our financial performance. This purpose is in keeping with our compensation program’s objective of aligning a significant portion of each executive’s total compensation with our annual performance and the interests of our shareholders.

The employment agreements as in effect on January 1, 2017 for Messrs. Berman and McGrath provided for an incentive cash bonus award based on a percentage of each participant’s base salary if the performance goals set by the Compensation Committee are met for that year. The employment agreements mandated that the specific criteria to be used is growth in earnings per share and the Compensation Committee sets the various target thresholds to be met to earn increasing amounts of the bonus up to a maximum of 200% of base salary for Mr. Berman and 125% for Mr. McGrath, although the Compensation Committee has the ability to increase the maximum in its discretion. Commencing in 2012, the Compensation Committee is required to meet to establish criteria for earning the annual performance bonus (and with respect to Mr. Berman, any additional annual performance bonus) during the first quarter of the year. As described elsewhere herein, Mr. Berman’s employment agreement was further amended in 2016.
The employment agreements as in effect on January 1, 2017 for Messrs. Berman, McGrath and Bennett contemplateKimble contemplated that the Compensation Committee may grant discretionary bonuses in situations where, in its sole judgment, it believes they are warranted. The Compensation Committee approaches this aspect

.

Long-Term Compensation

Long-term compensation is an area of particular emphasis in our executive compensation program because we believe that these incentives foster the long-term perspective necessary for our continued success. Again, thisThis emphasis is in keeping with our compensation program objective of aligning a significant portion of each executive’s total compensation with our long-term performance and the interests of our shareholders.

Historically, our long-term compensation program has focused on the granting of stock options that vested over time. However, commencing in 2006 we began shifting the emphasis of this element of compensation and we

We currently favor the issuance of restricted stock awards.units over granting stock options. The Compensation Committee believes that the award of full-value shares that vest over time is consistent with our overall compensation philosophy and objectives, as the value of the restricted stock variesunits vary based upon the performance of our common stock, thereby aligning the interests of our executives with our shareholders. The Compensation Committee has also determined that awards of restricted stock units are anti-dilutive as compared to stock options inasmuch as it feels that less restricted sharesunits have to be granted to match the compensation value of stock options.

82

Mr. Berman’s 2010 amended and restated employment provided for annual grants of $500,000 of restricted stock which vest in equal annual installments through January 1, 2017, which was one year following the life of the agreement, subject to meeting the 3% vesting condition, as defined in the agreement. As described in greater detail below, pursuant to the 2012 amendment, commencing in 2013, this bonus changed to $3,500,000 of restricted stock, part of which vests over four years and part of which are subject to be earned based upon performance targets established by the Compensation Committee during the first quarter of each year.milestones with cliff vesting spread out over three years. Mr. McGrath’s amended employment agreement provides for annual grants of $75,000 of restricted stock which vests in equal installments over three years subject to meeting certain EPS milestones. As explained in greater detail below (see Employment“Employment Agreements and Termination of Employment ArrangementArrangement”), it was changed to $1,000,000 of restricted stock effective January 1, 2017 subject in part to time vesting over four years and in part to performance milestones with cliff vesting spread over three years. Mr. Kimble’s employment agreement provided for a grant of $250,000 of restricted stock units (“RSU”) for the initial year and annual grants of $500,000 of RSUs thereafter subject in part to time vesting over three years and in part to performance milestones with cliff vesting spread over three years. The Company did not meetmilestone targets for each of these employment agreements are established by the vesting requirements contained in eitherCompensation Committee during the first quarter of each year. The employment agreementagreements for 2014 so both of Messrs. Berman, McGrath and McGrath forfeited their stock awards for 2014. For 2015, due to missed milestones, Mr. Berman forfeited all but 7.5% of his annual grant and Mr. McGrath forfeited all of his annual grant. For 2016, due to missed milestones, both of Messrs. Berman and McGrath forfeited their stock awards. As explained in greater detail below (see “ Employment Agreements and Termination of Employment Arrangements ”), Mr. Berman’s employment agreementKimble also providesprovide for an annual performance bonus. Commencing in 2012, the criteria for earning such bonus are to be established by the Compensation Committee.based upon net revenue and EBITDA criteria. This bonus, if earned, is payable partially in cash and partially in shares of restricted common stock. Messrs. Berman and McGrath earned 75% of the bonus based upon EBITDA criteria for 2020; and, along with Mr. Kimble, earned 100% of the bonus based on Total Shareholders Return, EBITDA, and 50% of the bonus based on Net Revenue in 2022, and 75% of the bonus based upon EBITDA criteria for 2021.

On September 27, 2021, we amended the employment agreements of all of our executive officers, to change the issuance, past and future, of all restricted stock awards to restricted stock units. All other material terms of the respective employment agreements remain the same, including without limitation, the terms of all such grants including the timing of all vesting periods and the vesting benchmarks.

Mr. Berman’s, McGrath's and Kimble’s employment agreement also providesprovide for an additional annual performance bonus payable solely in sharesthe discretion of restricted stock, which can be earned by Mr. Berman if the Company’s performance meets certain criteria to be established by the Compensation Committee during the first quarter of each year.

Committee. After a review of all of the factors discussed above, the Compensation Committee determined that, in keeping with our compensation objectives,objectives. Mr. Kimble received a nil, $284,685 and in light of the$100,000 discretionary bonus already approved, Mr. Berman was not awarded a long term bonus for 2017.


83

Other Benefits2022, 2021 and Perquisites2020, respectively.

Our executive officers participate in the health and dental coverage, life insurance, paid vacation and holidays, 401(k) retirement savings plans and other programs that are generally available to all of the Company’s employees.

The provision of any additional perquisites to each of the named executive officers is subject to review by the Compensation Committee. Historically, these perquisites include payment of an automobile allowance and matching contributions to a 401(k) defined contribution plan. In 2017,2020 to 2022, the named executive officers were granted the following perquisites: automobile allowance and 401(k) plan matching contribution.contribution for Messrs. Berman, McGrath and Kimble; and a life insurance benefit for Mr. Berman. We value perquisites at their incremental cost to us in accordance with SEC regulations.

We believe that the benefits and perquisites we provide to our named executive officers are within competitive practice and customary for executives in key positions at comparable companies. Such benefits and perquisites serve our objective of offering competitive compensation that allows us to continue to attract, retain and motivate highly talented people to these critical positions, ultimately providing a substantial benefit to our shareholders.

Change of Control/Termination Agreements

We recognize that, as with any public company, it is possible that a change of control may take place in the future. We also recognizefuture and that the threat or occurrence of a change of control can result in significant distractions of key management personnel because of the uncertainties inherent in such a situation. We further believe that it is essential and in ourthe best interest and the interests of the Company and our shareholders to retain the services of our key management personnel in the event of the threat or occurrence of a change of control and to ensure their continued dedication and efforts in such event without undue concern for their personal financial and employment security. In keeping with this belief and its objective of retaining and motivating highly talented individuals to fill key positions, which is consistent with our general compensation philosophy, the employment agreement for named chief executive officers contain provisions which guarantee specific payments and benefits upon a termination of employment without good reason following a change of control of the Company. In addition, the employment agreements also contain provisions providing for certain lump-sum payments in the eventif the executive is terminated without “cause” or if we materially breach the agreement leading the affected executive to terminate the agreement for good reason.reason, as applicable.

Additional details of the terms of the change of control agreements and termination provisions outlined above are provided below.

Impact of Accounting and Tax Treatments
Section 162(m) of the Internal Revenue Code (the “Code”) prohibits publicly held companies like us from deducting certain compensation to any one named executive officer in excess of $1,000,000 during the tax year. However, Section 162(m) provides that, to the extent that compensation is based on the attainment of performance goals set by the Compensation Committee pursuant to plans approved by the Company’s shareholders, the compensation is not included for purposes of arriving at the $1,000,000. 
The Company, through the Compensation Committee, intends to attempt to qualify executive compensation as tax deductible to the extent feasible and where it believes it is in our best interests and in the best interests of our shareholders. However, the Compensation Committee does not intend to permit this arbitrary tax provision to distort the effective development and execution of our compensation program. Thus, the Compensation Committee is permitted to and will continue to exercise discretion in those instances in which mechanistic approaches necessary to satisfy tax law considerations could compromise the interests of our shareholders. In addition, because of the uncertainties associated with the application and interpretation of Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under Section 162(m) will in fact be deductible.


84

Compensation Risk Management
As part of its annual review of our executive compensation program, the Compensation Committee reviews with management the design and operation of our incentive compensation arrangements for senior management, including executive officers, to determine if such programs might encourage inappropriate risk-taking that could have a material adverse effect on the Company. The Compensation Committee considered, among other things, the features of the Company’s compensation program that are designed to mitigate compensation-related risk, such as the performance objectives and target levels for incentive awards (which are based on overall Company performance), and its compensation recoupment policy. The Compensation Committee also considered our internal control structure which, among other things, limits the number of persons authorized to execute material agreements, requires approval of our board of directors for matters outside of the ordinary course and its whistle blower program. Based upon the above, the Compensation Committee concluded that any risks arising from the Company’s compensation plans, policies and practices are not reasonably likely to have a material adverse effect on the Company.
Impact of Shareholder Advisory Vote

At our 20172022 annual meeting, our shareholders approved our current executive compensation with over 85%a majority of all shares actually voting on the issue (over 51% of all outstanding shares whether or not voting) affirmatively giving their approval. Accordingly, we believe that this vote ratifies our executive compensation philosophy and policies, as currently adopted and implemented, and we intend to continue such philosophy and policies.


Pay Ratio Disclosure Rule

Pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd – Frank Act”), the SEC adopted a rule requiring annual disclosure of the ratio of the median employee’s annual total compensation to the total annual compensation of the principal executive officer (‟PEO”). Our PEO is Mr. Berman.
Median Employee total annual compensation (excluding Mr. Berman) $67,807 
Mr. Berman’s total annual compensation $2,139,711 
Ratio of PEO to Median Employee Compensation  3.2%

In determining the median employee, a listing was prepared of all employees as of December 31, 2017. The median amount was selected from the annualized list. As of December 31, 2017 the Company employed 749 persons of which 340 are based outside of the United States.

Summary Compensation Committee ReportTable 2021-2022

                        

Change in

         
                        

Pension

         
                        

Value and

         
                    

Non-Equity

  

Nonqualified

         
            

Stock

  

Option

  

Incentive Plan

  

Deferred

  

All Other

     

Name and

   

Salary

  

Bonus

  

Awards

  

Awards

  

Compensation

  

Compensation

  Compensation  Total 

Principal Position

 

Year

 

($)

  ($)  ($) (1)  ($)  ($)  

Earnings ($)

  ($) (2)  ($) 

Stephen G. Berman

 

2022

  1,741,267   5,548,203   5,726,466            71,478   13,087,414 

Chief Executive Officer,

 

2021

  1,724,735   4,221,130   425,402            62,408   6,433,675 

President and Secretary

                                  
                                   

John J. McGrath

 

2022

  520,000   733,022   519,999            43,446   1,816,467 

Chief Operating Officer

 

2021

  750,000   780,498   141,801            42,696   1,714,995 
                                   

John L. Kimble

 

2022

  540,800   753,822   1,352,005            42,046   2,688,673 

Executive Vice President

 

2021

  516,667   785,298               40,296   1,342,261 

and Chief Financial Officer

                                  
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis (the “CD&A”) for the year ended December 31, 2017. In reliance on the reviews and discussions referred to above, the compensation committee recommended to the board, and the board has approved, that the CD&A be furnished in the annual report on Form 10-K for the year ended December 31, 2017.

(1)

By

For Mr. Berman, the Compensation Committeegrant-date fair value of the Boardawards assuming 100% achievement of Directors: the applicable performance conditions totaled the lesser of (a) $3.5 million in value (based on the closing price of a share of Common Stock on the last business day of the prior year), or (b) 2.25% of outstanding shares of Common Stock in 2022 and 2021, respectively. For Mr. McGrath, the grant-date fair value of the awards assuming 100% achievement of the applicable performance conditions totaled the lesser of (a) $0.5 million in value (based on the closing price of a share of Common Stock on the last business day of the prior year), or (b) 1.05% of outstanding shares of Common Stock in 2022 and 2021, respectively. For Mr. Kimble the grant-date fair value of the awards assuming 100% achievement of the applicable performance conditions totaled $540,800 and $520,000 in 2022 and 2021. The awards to Mr. Berman and Mr. McGrath are capped at the amount of available shares in the Plan.

(2)

Michael S. Sitrick, Chairman
Rex H. Poulsen, Member
Michael J. Gross, Member
85

Summary Compensation Table– 2015-2017

Name and 
Principal 
Position
 Year 
Salary
($)
  
Bonus
($)
  
Stock
Awards
($)
  
Option
Awards
($)
  
Non-Equity
Incentive Plan
Compensation
($)
  
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)
  
All Other
Compensation
($) (1)
  
Total
($)
 
Stephen G. Berman 2017  1,475,000   750,000   3,500,000            30,000   5,755,000 
Chief Executive Officer, 2016  1,372,916   652,500               30,000   2,055,416 
President and Secretary 2015  1,240,000   1,241,200   262,500            30,000   2,773,700 
                                   
John J. McGrath 2017  690,000   138,000   1,000,000            26,400   1,854,400 
Chief Operating Officer 2016  675,000                  26,400   701,400 
 2015  660,000   566,600   69,378            26,400   1,322,378 
                                   
Joel M. Bennett 2017  505,000      294,000            24,000   823,000 
Executive Vice President 2016  490,000                  24,000   514,000 
and Chief Financial Officer 2015  475,000   142,500               24,000   641,500 


(1)

Represents automobile allowances paid in the amount of $18,000,$22,528 and $22,643 for Mr. Berman for 2022 and 2021, respectively, $14,400 for Mr. McGrath for 2022 and 2021, respectively, and $13,000 and $12,000 to each of Messrs. Berman, McGrathfor Mr. Kimble for 2022 and Bennett, respectively, for 2015, 2016 and 2017; amount also includes2021, respectively. The amounts include matching contributions made by us to the Named Executive Officer’s 401(k) defined contribution plan in the amount of $12,000, $12,000$15,250 and $12,000,$14,500, respectively, for 2015, 20162022 and 2017,2021, for eachMr. Berman. The amounts include matching contributions made by us to the Named Executive Officer’s 401(k) defined contribution plan in the amount of Messrs.$15,250 and $14,500, respectively, for 2022 and 2021, for Mr. McGrath. The amounts include matching contributions made by us to the Named Executive Officer’s 401(k) defined contribution plan in the amount of $15,250 and $14,500, respectively, for 2022 and 2021, for Mr. Kimble. The amounts include $33,700 and $25,265 related to a life insurance policy for Mr. Berman McGrathin 2022 and Bennett.2021, respectively. See “Employee Pension Plan.”

The following table sets forth certain information regarding all equity-based compensation awards outstanding as of December 31, 20172022 by the Named Officers:

Outstanding Equity Awards At Fiscal Year-end

 Option Awards  Stock Awards 

Option Awards

Option Awards

  

Stock Awards / Units

 
Name 
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
  
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
  
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
  
Option
Exercise
Price
($)
  
Option
Expiration
Date
  
Number
of
Shares or
Units of
Stock
that
Have
Not
Vested
(#)
  
Market
Value of
Shares or
Units of
Stock
that
Have
Not Vested
($) (1)
  
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
that
Have Not
Vested
(#)
  
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
  

Number of Securities Underlying Unexercised Options Exercisable (#)

  

Number of Securities Underlying Unexercised Options Unexercisable (#)

  

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)

  

Option Exercise Price ($)

  

Option Expiration Date

  

Number of Shares or Units of Stock that Have Not Vested (#)

  

Market Value of Shares or Units of Stock that Have Not Vested ($) (1)

  

Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that Have Not Vested (#)

  

Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)

 
Stephen G. Berman                 679,612   1,597,088                        512,250   8,959,253       
                                                                        
John J. McGrath                 194,175   456,311                        88,142   1,541,604       
                                                                        
Joel M. Bennett                 57,087   134,154       

John L. Kimble

                 168,699   2,950,546       

(1)

The product of (x) $2.35$17.49 (the closing sale price of the common stock on December 29, 2017)31, 2022) multiplied by (y) the number of unvested restricted shares or units outstanding.

The following table sets forth certain information regarding amount realized upon the vesting and exercise of any equity-based compensation awards during 20172022 by the Named Executive Officers:

Options Exercises And Stock Vested-2017Vested-2022

Option AwardsStock Awards
Name
  

Option Awards

  

Stock Awards / Units

 
  

Number of

  

Value

  

Number of

     
  

Shares

  

Realized on

  

Shares

  

Value

 
  

Acquired on

  

Exercise

  

Acquired on

  

Realized on

 

Name

 

Exercise (#)

  ($)  

Vesting (#)

  

Vesting ($)

 

Stephen G. Berman

        51,459   522,823 
                 

John J. McGrath

        15,529   157,775 
                 

John L. Kimble

        25,319   469,414 

Number of
Shares
Acquired on
Exercise (#)
Value
Realized on
Exercise
($)
Number of
Shares
Acquired on
Vesting (#)
Value
Realized on
Vesting ($)
Stephen G. Berman
John J. McGrath
Joel M. Bennett

Potential Payments upon Termination or Change in Control

The following tables describe potential payments and other benefits that would have been received by each Named Officer at, following or in connection with any termination, including, without limitation, resignation, severance, retirement or a constructive termination of such Named Officer, or a change in control of our Company or a change in such Named Officer’s responsibilities on December 31, 2017.2022. The potential payments listed below assume that there is no earned but unpaid base salary at December 31, 2017.2022.

Stephen G. Berman

   
Upon
Retirement
  
Quits For
“Good
Reason”
(2)
  
Upon
Death
  
Upon
“Disability”
(3)
  
Termination
Without
“Cause”
  
Termination
For “Cause”
(4)
  
Involuntary
Termination
In
Connection
with Change
of
Control(5)
 
Base Salary $  $4,425,000  $  $  $4,425,000  $  $5,373,918
(6)
Restricted Stock -
Performance-Based
                     
Annual Cash Incentive
Award (1)
                     
                          

Involuntary

 
                      Termination  

Termination

 
      

Quits For

  

Upon

  

Upon

  

Termination

  

For

  

In Connection

 
  

Upon

  

“Good Reason”

  

Death

  

“Disability”

  

Without

  

“Cause”

  

with Change

 
  

Retirement

  

(3)

  

(4)

  

(5)

  

“Cause”

  

(6)

  

of Control (7)

 

Base Salary

 $  $7,100,000  $  $  $7,100,000  $  $13,421,243 (8)

Restricted Stock Units (1)

     8,959,253         8,959,253      8,959,253 

Annual Cash Incentive Award (2)

                     

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(1) The product of (x) $17.49 (the closing sale price of the common stock on December 31, 2022) multiplied by (y) the number of unvested restricted shares outstanding.

(2) Assumes that if the Named Officer is terminated on December 31, 2017,2022, they were employed through the end of the incentive period.period and no bonus was earned and unpaid.

(2)

(3) Defined as (i) our violation or failure to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by us, or (ii) the material change in the nature, titles or scope of the duties, obligations, rights or powers of the Named Officer’s employment resulting from any action or failure to act by us.

(4) Under the terms of Mr. Berman’s employment agreement (see “Employment Agreements”), the provision of health care coverage for Mr. Berman’s children will continue until they reach the maximum age at which a child can be covered as a matter of law under a parent’s policy in the event of his death during the term of his employment agreement.

(3)

(5) Defined as athe Named Officer’s inability to perform his duties by reason of any disability or incapacity (due to any physical or mental injury, illness or defect) for an aggregate of 180 days in any consecutive 12-month period.

(4)

(6) Defined as (i) the Named Officer’s conviction of, or entering a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense and either the Named Officer’s failure to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if he does perfect such an appeal, the sustaining of his conviction of a felony offense on appeal; or (ii) the determination by our Board of Directors, after due inquiry, based upon convincing evidence, that the Named Officer has:

(A) committed fraud against, or embezzled or misappropriated funds or other assets of, our Company (or any subsidiary);

(B) violated, or caused our Company (or any subsidiary) or any of our officers, employees or other agents, or any other individual or entity to violate, any material law, rule, regulation or ordinance, or any material written policy, rule or directive of our Company or our Board of Directors;

(C) willfully, or because of gross or persistent inaction, failed properly to perform his duties or acted in a manner detrimental to, or adverse to our interests; or

(D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by him under his employment agreement with us; and that, in the case of any violation or failure referred to in clause (B), (C) or (D), above, such violation or failure has caused, or is reasonably likely to cause, us to suffer or incur a substantial casualty, loss, penalty, expense or other liability or cost.

and that, in the case of any violation or failure referred to in clause (B), (C) or (D), above, such violation or failure has caused, or is reasonably likely to cause, us to suffer or incur a substantial casualty, loss, penalty, expense or other liability or cost.

(5)

(7) Section 280G of the Code disallows a company’s tax deduction for what are defined as “excess parachute payments” and Section 4999 of the Code imposes a 20% excise tax on any person who receives excess parachute payments. As discussed above, Mr. Berman is entitled to certain payments upon termination of his employment, including termination following a change in control of our Company. Under the terms of his employment agreement (see “ - Employment“Employment Agreements”), Mr. Berman is not entitled to anythe full amount of the payments that would beand benefits payable in the event of a Change in Control (as defined in the employment agreement) even if it triggers an excess parachute payment, and such payments are to be reducedexcise tax imposed by the leasttax code if the net after-tax amount necessarywould still be greater than reducing the total payments and benefits to avoid thesuch excise tax. Accordingly, our tax deduction would not be disallowed under Section 280G of the Code, and no excise tax would be imposed under Section 4999 of the Code.

(6)

(8) Under the terms of Mr. Berman’s employment agreement (see “ - Employment“Employment Agreements”), if a change of control occurs and within two years thereafter Mr. Berman is terminated without “Cause” or quits for “Good Reason”,Reason,” then he has the right to receive a payment equal to 2.99 times his then current base amount as defined in section 280(G) of the Code (which was $1,797,297$4,488,710 in 2017).2022) and continued health care coverage.

John J. McGrath

   
Upon
Retirement
  
Quits For
“Good
Reason”
(2)
  
Upon
Death
  
Upon
“Disability”
(3)
  
Termination
Without
“Cause”
  
Termination
For “Cause”
(4)
  
Involuntary
Termination
In
Connection
with Change
of
Control(5)
Base Salary $  $2,070,000  $  $  $2,070,000  $  $2,070,000(6) 
Restricted Stock -
Performance-Based
                    
 
Annual Cash Incentive
Award (1)
                     
                          

Involuntary

 
                          

Termination

 
      

Quits For

      

Upon

  

Termination

  

Termination For

  

In Connection

 
  

Upon

  

“Good Reason”

  

Upon

  

“Disability”

  

Without

  

“Cause”

  

with Change

 
  

Retirement

  

(3)

  

Death

  

(4)

  

“Cause”

  

(5)

  

of Control (6)

 

Base Salary

 $  $520,000  $  $  $520,000  $  $1,040,000 

Restricted Stock Units (1)

     1,541,604         1,541,604      1,541,604 

Annual Cash Incentive Award (2)

                     

(1) The product of (x) $17.49 (the closing sale price of the common stock on December 31, 2022) multiplied by (y) the number of unvested restricted shares outstanding.

(2) Assumes that if the Named Officer is terminated on December 31, 2017,2022, they were employed through the end of the incentive period.

89

period and no bonus was earned and unpaid.

(2)

(3) Defined as following a Change of Control (i) our violation or failure to perform or satisfy any material covenant, conditionreduction of the Named Officer’s base salary, (ii) relocation of the Named Officer’s principal place of employment by more than thirty miles, or obligation required to be performed or satisfied by us, or (ii)(iii) the material change in the nature, titles or scope of the duties, obligations, rights or powers of the Named Officer’s employment resulting from any action or failure to act by us.

(3)

(4) Defined as a Named Officer’s inability to perform his duties by reason of any disability or incapacity (due to any physical or mental injury, illness or defect) for an aggregate of 18090 days in any consecutive 12-month period.

(5) Defined as (i) the Named Officer’s conviction of, or entering a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense or other crime and either the Named Officer’s failure to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if he does perfect such an appeal, the sustaining of his conviction of a felony offense on appeal; or (ii) the determination by our Board of Directors, after due inquiry, based on convincing evidence, that the Named Officer has:

(A) committed fraud against, or embezzled or misappropriated funds or other assets of, our Company (or any subsidiary);

(B) violated, or caused our Company (or any subsidiary) or any of our officers, employees or other agents, or any other individual or entity to violate, any material law, rule, regulation or ordinance, or any material written policy, rule or directive of our Company or our Board of Directors;

(C) willfully, or because of gross or persistent inaction, failed properly to perform his duties or acted in a manner detrimental to, or adverse to our interests; or

(D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by him under his employment agreement with us; and that, in the case of any violation or failure referred to in clause (B), above, such violation is reasonably expected to have a significant detrimental effect on our Company (or any subsidiary).

(6) Under the terms of Mr. McGrath’s employment agreement (see “Employment Agreements”), if a change of control occurs and within one year thereafter Mr. McGrath is terminated without “Cause” or quits for “Good Reason”, then he has the right to receive a payment equal to the greater of two times his then current base salary or the payments due for the remainder of the term of his employment agreement.

John L. Kimble

                          

Involuntary

 
                          

Termination

 
      

Quits For

      

 

  

Termination

  

Termination For

  

In Connection

 
  

Upon

  

“Good Reason”

  

Upon

  

Upon

  

Without

  

“Cause”

  

with Change

 
  

Retirement

  

(3)

  

Death

  “Disability”  

“Cause”

  

(4)

  

of Control (5)

 

Base Salary

 $  $2,163,200  $  $  $2,163,200  $  $1,081,600 

Restricted Stock Units (1)

     2,950,546         2,950,546      2,950,546 

Annual Cash Incentive Award (2)

                     

(1) The product of (x) $17.49 (the closing sale price of the common stock on December 31, 2022) multiplied by (y) the number of unvested restricted shares outstanding.

(2) Assumes that if the Named Officer is terminated on December 31, 2022, they were employed through the end of the incentive period and no bonus was earned and unpaid.

(3) Defined as (i) any material reduction of the Named Officer’s base salary, (ii) relocation of the Named Officer’s principal place of employment by more than thirty miles, or (iii) the material change in the nature, titles or scope of the duties, obligations, rights or powers of the Named Officer’s employment resulting from any action or failure to act by us.

(4) Defined as (i) the Named Officer’s conviction of, or entering a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense and either the Named Officer’s failure to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if he does perfect such an appeal, the sustaining of his conviction of a felony offense on appeal; or (ii) the determination by our Board of Directors, after due inquiry, based on convincing evidence, that the Named Officer has:

(A) committed fraud against, or embezzled or misappropriated funds or other assets of, our Company (or any subsidiary);

(B) violated, or caused our Company (or any subsidiary) or any of our officers, employees or other agents, or any other individual or entity to violate, any material law, rule, regulation or ordinance, or any material written policy, rule or directive of our Company or our Board of Directors;

(C) willfully, or because of gross or persistent inaction, failed properly to perform his duties or acted in a manner detrimental to, or adverse to our interests; or

(D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by him under his employment agreement with us; and that, in the case of any violation or failure referred to in clause (B), (C) or (D), above, such violation or failure has caused, or is reasonably likely to cause, us to suffer or incur a substantial casualty, loss, penalty, expense or other liability or cost.

and that, in the case of any violation or failure referred to in clause (B), (C) or (D), above, such violation or failure has caused, or is reasonably likely to cause, us to suffer or incur a substantial casualty, loss, penalty, expense or other liability or cost.

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(5) Section 280G of the Code disallows a company’s tax deduction for what are defined as “excess parachute payments” and Section 4999 of the Code imposes a 20% excise tax on any person who receives excess parachute payments. As discussed above, Mr. McGrath is entitled to certain payments upon termination of his employment, including termination following a change in control of our Company. Under the terms of his employment agreement (see “ - Employment Agreements”), Mr. McGrath is not entitled to any payments that would be an excess parachute payment, and such payments are to be reduced by the least amount necessary to avoid the excise tax. Accordingly, our tax deduction would not be disallowed under Section 280G of the Code, and no excise tax would be imposed under Section 4999 of the Code.

(6) Under the terms of Mr. McGrath’sKimble’s employment agreement (see “ - Employment“Employment Agreements”), if a change of control occurs and within two yearsone year thereafter Mr. McGrathKimble is terminated without “Cause” or quits for “Good Reason”, then he has the right to receive a payment equal to the greater of two times his then current base salary or the payments due for the remainder of the term of his employment agreement.salary.

Joel M. Bennett
Upon
Retirement
Quits For
“Good
Reason”
(2)
Upon
Death
Upon
“Disability”
(3)
Termination
Without
“Cause”
Termination
For “Cause”
(4)
Involuntary
Termination
In
Connection
with Change
of
Control(5)
Base Salary$$$$$$$(6) 
Restricted Stock -
Performance-Based
Annual Cash Incentive
Award (1)
(1) Assumes that if the Named Officer is terminated on December 31, 2017, they were employed through the end of the incentive period.
(2) Defined as (i) our violation or failure to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by us, or (ii) the material change in the nature, titles or scope of the duties, obligations, rights or powers of the Named Officer’s employment resulting from any action or failure to act by us.
(3) Defined as a Named Officer’s inability to perform his duties by reason of any disability or incapacity (due to any physical or mental injury, illness or defect) for an aggregate of 180 days in any consecutive 12-month period.
(4) Defined as (i) the Named Officer’s conviction of, or entering a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense and either the Named Officer’s failure to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if he does perfect such an appeal, the sustaining of his conviction of a felony offense on appeal; or (ii) the determination by our Board of Directors, after due inquiry, based on convincing evidence, that the Named Officer has:
(A) committed fraud against, or embezzled or misappropriated funds or other assets of, our Company (or any subsidiary);
(B) violated, or caused our Company (or any subsidiary) or any of our officers, employees or other agents, or any other individual or entity to violate, any material law, rule, regulation or ordinance, or any material written policy, rule or directive of our Company or our Board of Directors;
(C) willfully, or because of gross or persistent inaction, failed properly to perform his duties or acted in a manner detrimental to, or adverse to our interests; or
(D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by him under his employment agreement with us;
and that, in the case of any violation or failure referred to in clause (B), (C) or (D), above, such violation or failure has caused, or is reasonably likely to cause, us to suffer or incur a substantial casualty, loss, penalty, expense or other liability or cost.
91


(5) Section 280G of the Code disallows a company’s tax deduction for what are defined as “excess parachute payments” and Section 4999 of the Code imposes a 20% excise tax on any person who receives excess parachute payments. As discussed above, Mr. Bennett is entitled to certain payments upon termination of his employment, including termination following a change in control of our Company. Under the terms of his employment agreement (see “Employment Agreements”), Mr. Bennett is not entitled to any payments that would be an excess parachute payment, and such payments are to be reduced by the least amount necessary to avoid the excise tax. Accordingly, our tax deduction would not be disallowed under Section 280G of the Code, and no excise tax would be imposed under Section 4999 of the Code.
(6) Under the terms of Mr. Bennett’s employment agreement (see “Employment Agreements”), if a change of control occurs and within two years thereafter Mr. Bennett is terminated without “Cause” or quits for “Good Reason”, then he has the right to receive a payment equal to the greater of two times his then current base salary or the payments due for the remainder of the term of his employment agreement.
92

Compensation of Directors

Analogous to our executive compensation philosophy, it is our desire to similarly compensate our non-employee directorsDirectors for their services in a way that will serve to attract and retain highly qualified members.members of the Board. As changes in the securities laws require greater involvement by, and places additional burdens on, a company’s directorsDirectors, it becomes even more necessary to locate and retain highly qualified directors. As such, after consulting with Lipis Consulting Inc.,Directors.

In August 2019, following the Compensation Committee developed and theRecapitalization, our Board approved a structure for the compensation package of our non-employee directors so that the total compensation package of our non-employee directors would be at approximately the median total compensation package for non-employee directors in our peer group.

In December 2009, our board of directors, after consulting with our prior consultant,Directors changed the compensation package  forpayable to non-employee directors as of January 1, 2010 byDirectors to provide that (i) increasing theeach director receives an annual cash stipend to $75,000,fee of $100,000 paid quarterly, (ii) eliminating meeting fees for attendance at both board and committee meetings,each member of a Committee receives an annual cash fee of $5,000, (iii) increasing the annual fees paid to committee chairs and the members of the audit committee, (iv) decreasing by $25,000 the value of the annual grant of restricted shares of our common stock to $100,000 and (v) imposing minimum shareholding requirements. Specifically, the chair of the audit committeeAudit Committee receives an annualadditional cash fee of $30,000, each member of the audit committee receives a $15,000 annual fee (including the chair),and (iv) the chair of the compensation committee and the nominating and governance committee eachother Committees receives an annual fee of $15,000 and each member of such committees (including the chair) receives an annual fee ofadditional $10,000. Newly-elected non-employee directors will receive a portion of the foregoing annual consideration, prorated accordingMr. Winkler, pursuant to the portioninternal rules of the year in which they serve in such capacity.his employer, does not receive any fees as a director.

In February 2010 our boardBoard determined the terms for the minimum shareholding requirements. Pursuant to the new minimum shareholding requirements, each director will be required to hold shares with a value equal to at least two times the average annual cash stipend paid to the director during the prior two calendar years. In determining the value of a director’s shareholdings, each option, whether or not in the money, will count as ½ share. To illustrate: if an average directorDirector wishes to sell shares in 2018, he2023, he/she will have to hold shares with a market value of at least $215,000$199,667 prior to and following any sale of shares calculated as of the date of the sale, such $215,000$199,667 minimum calculated by taking the average cash stipend of $107,500$99,833 paid during the prior two years multiplied by two.

The following table sets forth the compensation we paid toearned by our non-employee directorsDirectors for our fiscal year ended December 31, 2017:2022:

Director Compensation

Name Year  
Fees
Earned
or Paid in
Cash
($)
  
Stock
Awards
($)
 
Option
Awards
($)
  
Non-Equity
Incentive
Plan
Compensation
($)
  
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
  
All Other
Compensation
($)
  
Total
($)
 
Murray L. Skala  2017   75,000   99,519(1             174,519 
Rex H. Poulsen  2017   165,000   99,519(1             264,519 
Michael S. Sitrick  2017   125,000   99,519(1             224,519 
Alexander Shoghi(22017   86,301   86,551(4             172,852 
Michael J. Gross  2017   125,000   99,519(1             224,519 
Zhao Xiaoquiang(32017   51,164   66,195(5                 117,359 


                    

Change in

         
                    

Pension Value

         
                    

and

         
    

Fees

          

Non-Equity

  

Nonqualified

         
    

Earned

          

Incentive

  

Deferred

         
    

or Paid in

  

Stock

  

Option

  

Plan

  

Compensation

  

All Other

     
    

Cash

  

Awards

  

Awards

  

Compensation

  

Earnings

  

Compensation

  

Total

 

Name

 

Year

 

($)

  ($)  ($)  

Incentive

  ($)  ($)  ($) 

Alexander Shoghi

 

2022

  125,000                  125,000 

Zhao Xiaoqiang

 

2022

  100,000                  100,000 

Joshua Cascade

 

2022

  105,000                  105,000 

Carole Levine

 

2022

  105,000                  105,000 

Lori J. MacPherson

 

2022

  105,000                  105,000 

(1) The value of the shares was determined by taking the product of (a) 19,324 shares of restricted stock multiplied by (b) $5.15, the last sales price of our common stock on January 1, 2016, as reported by Nasdaq, the date prior to the date the shares were granted, all of which shares vested on January 1, 2018.
(2) Mr. Shoghi was reappointed to the Board on February 20, 2017.
(3) Mr. Xiaoquiang was appointed to the Board on April 27, 2017.
(4) The value of the shares was determined by taking the product of (a) 16,806 shares of restricted stock multiplied by (b) $5.15, the last sales price of our common stock on February 17, 2017, as reported by Nasdaq, the date prior to the date the shares were granted, all of which shares vested on January 1, 2018.
(5) The value of the shares was determined by taking the product of (a) 13,319 shares of restricted stock multiplied by (b) $4.97, the last sales price of our common stock on April 26, 2017, as reported by Nasdaq, the date prior to the date the shares were granted, all of which shares vested on January 1, 2018.
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Employment Agreements and Termination of Employment Arrangements

In March 2003 we

We entered into an amended and restated our employment agreement with Mr. Berman and we entered into a new amended and restated agreement with Mr. Berman on November 11, 2010. We entered into a new employment agreement with Mr. Bennett on October 31, 2011. We entered into an emendedamended employment agreement with Mr. McGrath on August 23, 2011 when he became our Chief Operating Officer.


94

On November 11, 2010 we We entered into a second amended and restated employment agreement with Stephen Berman, our President, Chief Executive Officer and Chief Operating Officer. This agreement extended the term of the 2003 agreement to December 31, 2015 from its current termination date of December 31, 2010. The new amended and restated agreement also provides, among other things, new provisions for (i) an annual salary of $1,140,000 in 2011 and annual increases thereafter at the discretion of the Board but no less than $25,000; (ii) an annual restricted stock award of $500,000 of our common stock commencing January 1, 2011, subject to vesting in equal installments through January 1, 2017, except that the vesting of each annual $500,000 award is conditioned on EPS (defined as our net income per share of our common stock, calculated on a fully diluted basis) for the fiscal year in which the shares are issued being equal to minimum EPS as follows: $1.41 for 2011, $1.45 for 2012, $1.49 for 2013, $1.54 for 2014, and $1.59 for 2015. If the minimum EPS vesting condition for the first tranche is not met, then the $500,000 grant lapses, but if the vesting condition is satisfied for the first tranche of the $500,000 grant, then each subsequent tranche of the $500,000 grant will vest; (iii) an annual performance bonus as follows: (x) 2010 bonus (previously established in March 2010) remains unchanged except that 20% of the bonus will be paid in restricted stock which will vest in six equal annual installments of 14.5% of the number of shares, the first on the date in 2011 that the bonus is determined to have been earned, and a seventh and final installment of 13% of the shares on January 1, 2017, and (y) for years commencing January 1, 2011, an amount equal to up to 200% of base salary, to be paid in stock and cash (20-40% in stock, in the percentages set forth on Exhibit E to the agreement), bonus criteria using “Adjusted” EPS growth (as defined in the agreement) to be determined by our Compensation Committee in the first quarter of each fiscal year, except that Adjusted EPS criteria (but not vesting) for 2011 shall range from $1.37 - $1.78 as stated in Exhibit D to the agreement, and shares will vest in equal annual installments commencing with the date the Bonus for a fiscal year is determined to have been earned and thereafter on January 1 in each subsequent year until the final installment on January 1, 2017, and (z) an additional bonus equal to 100% of base salary to be paid entirely in restricted stock; the criteria and vesting schedules to be determined by our Compensation Committee in the first fiscal quarter of each year, using criteria to be selected by such Committee which are in its discretion such as grown in net sales, return on invested capital, growth in free cash flow, total shareholder return (or any combination); (iv) restrictions on sale of our securities such that he cannot sell any shares of our common stock if his shares remaining after a sale are not equal to at least three times his then base salary; (v) life insurance in the amount of $1.5 million; (vi) severance if we terminate the agreement without cause (as defined in the agreement) or Mr. Berman terminates it for Good Reason (as defined in the agreement), in an amount equal to the base salary at termination date multiplied by the number of years and partial years remaining in the term; and (vii) restrictive covenants, change of control provisions and our ownership of certain intellectual property.
On October 19, 2011, we clarified our employment agreement with Mr. Berman and entered into a letter amendment dated OctoberKimble on November 20, 2011. The clarification corrects and clarifies certain cross references relating to Mr. Berman’s entitlement to severance upon a qualifying termination following a change of control (as defined in his employment agreement). It also clarifies that a material change in the nature and/or scope of the duties, obligations, rights or powers of his employment under the agreement would be deemed to include his ceasing to be the2019 when he became our Chief Executive Officer and President of a publicly traded company (one of the standards for determining whether Mr. Berman has “good reason” to terminate his employment under his employment agreement), and further provides that Mr. Berman's post-change of control severance benefits shall be payable upon a qualifying termination of employment within a two year period following a change of control (the agreement originally provided for a one year period).Financial Officer.

On September 21, 2012, in connection with our entry into agreements dated September 10, 2012 with NantWorks LLC to form DreamPlay Toys LLC and DreamPlay LLC, all Delaware limited liability companies, we entered into Amendment Number One to Mr. Berman’s Second Amended and Restated Employment Agreement dated November 11, 2012 (as previously modified by the October 20, 2011 letter amendment); DreamPlay Toys LLC will develop, market and sell toys and consumer products incorporating NantWorks’ proprietary iD (iDream) image recognition technology and DreamPlay LLC’s business is the extension of such image recognition technology to non-toy consumer products and applications.
The following description modifies and supersedes, to the extent inconsistent with, the disclosure in the preceding paragraphs. The term of Mr. Berman’s employment agreement has been extended to December 31, 2018 and provides (i) that commencing on January 1, 2013 the amount of the annual restricted stock award shall increase to up to $3.5M, with the vesting of each annual grant to be determined by the Compensation Committee based upon performance criteria it establishes during the first quarter of the year of grant; (ii) commencing with 2013 Mr. Berman can earn an annual performance bonus described below. Part of the annual performance bonus in an amount not exceeding 300% of that year’s base salary can be earned based upon financial and non-financial factors determined annually by the Compensation Committee during the first quarter of each year. The other part of the additional annual performance bonus can be earned in an amount equal to one-half of the cash distributions we receive from DreamPlay LLC, subject to satisfaction of the following three conditions: (1) we have positive net income after deducting the aggregate annual performance bonus, (2) the aggregate annual performance bonus cannot exceed 2.9% of our net income for such year except that if our net income exceeds $385,000 for the year the percentage limitation shall be reduced to 1% and if our net income for the year exceeds $770,000 the percentage limitation is reduced to 0.5% and (3) we have received an aggregate of at least $15 million of net income from DreamPlay Toys LLC and DreamPlay LLC. The amendment also provides (i) that the portion of the annual performance bonus up to an amount equal to 200% of that year’s base salary shall be paid in cash, and any excess over 200% of such base salary shall be paid in shares of restricted stock vesting in equal quarterly installments with the initial installment vesting upon grant and the balance over three years following the award date; (ii) for a life insurance policy of $5 million or such lesser amount we can obtain for an annual premium of up to $10,000; (iii) for the reimbursement of legal fees in negotiating this amendment of up to $25,000, (iv) that the full amount of the payments and benefits payable in the event of a Change in Control (as defined in the employment agreement) shall be paid, even if it triggers an excise tax imposed by the tax code if the net after-tax amount would still be greater than reducing the total payments and benefits to avoid such excise tax, and (vi) the term “Good Reason Event” has been expanded to include a change in the composition of our board of directors where the majority of the directors were not in office on September 15, 2012. This provision would have been triggered if management’s slate of nominee directors at our 2014 Annual Meeting were elected so prior to such Meeting, Mr. Berman waived such provision of his employment agreement with respect to the slate of nominees at such Meeting. Mr. Berman waived the provision again following our 2015 Annual Meeting.
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On June 7, 2016, we amended the employment agreement between us and Mr. Stephen G. Berman, our Chairman, CEO and President, and entered into Amendment Number Two to Mr. Berman’s Second Amended and Restated Employment Agreement dated November 11, 2010 (the “Employment Agreement”). The terms of Mr. Berman’s Employment Agreement have been amended as follows: (i) extension of the term until December 31, 2020; (ii) increase of Mr. Berman’s Base Salary to $1,450,000.00$1,450,000 effective June 1, 2016, subject to annual increases thereafter as determined by the Compensation Committee, with annual minimum increases of $25,000.00$25,000 commencing January 1, 2017; (iii) modification of the performance and vesting standards for each $3.5 million Annual Restricted Stock Grant (“Annual Stock Grant”) provided for under Section 3(b) of the Employment Agreement, effective as of January 1, 2017, so that 40% ($1.4 million) of each Annual Stock Grant will be subject to time vesting in four equal annual installments over four years and 60% ($2.1 million) of each Annual Stock Grant will be subject to three year “cliff vesting” (i.e. payment is based upon performance at the close of the three year performance period), with vesting of each Annual Stock Grant determined by the following performance measures: (a) total shareholder return as compared to the Russell 2000 Index (weighted 50%), (b) net revenue growth as compared to our peer group (weighted 25%) and (c) EBITDA growth as compared to our peer group (weighted 25%); (iv) modification of the performance measures for award of the Annual Performance Bonus equal to up to 300% of Base Salary (“Annual Bonus”) provided for under Section 3(d) of the Employment Agreement, effective as of January 1, 2017, so that the performance measures will be based only upon net revenues and EBITDA, each performance measure weighted 50%, and with the specific performance criteria applicable to each Annual Bonus determined by the Compensation Committee during the first quarter of each fiscal year; and (v) provision of health and dental insurance coverage for Mr. Berman’s children in the event of his death during the term of the Employment Agreement.

On August 23, 20119, 2019, we entered into anfurther amended employment agreement with John J. (Jack) McGrath whereby he became our Chief Operating Officer. The amended employment agreement, which ran through December 31, 2013, provided for an annual salaryMr. Berman’s Employment Agreement as follows: (i) increase of $600,000; an annual increase overMr. Berman’s Base Salary to $1,700,000, effective immediately; (ii) addition of a 2020 performance bonus opportunity in a range between twenty-five percent (25%) and three hundred percent (300%) of Base Salary, based upon the prior year’s base salarylevel of at least $15,000; an annual award of $75,000 of restricted stock, subject to vesting in equal installments over three years, provided, however, that the initial vesting of the first installment of each year’s award is conditioned on “Adjusted” EPS (as defined in the amended agreement)EBITDA achieved for the fiscal year, in whichas determined by the shares are issued beingCompensation Committee, and subject to additional terms and conditions as set forth therein; (iii) addition of a special sale transaction bonus equal to minimum “Adjusted” EPS$1,000,000 if we enter into and consummate a Sale Transaction on or before February 15, 2020, subject to additional terms and conditions as set forth therein; (iv) modification of the Berman Annual Stock Grant provided for under section 3(b) of the Employment Agreement, effective as of January 2020, so that the number of shares of Restricted Stock granted pursuant to the Berman Annual Stock Grant equal the lesser of (a) $3,500,000 in value (based on the closing price of a share of Common Stock on December 31, 2019), or (b) 1.5% of outstanding shares of Common Stock, which shall vest in four equal installments on each anniversary of grant; (v) waiver of certain “Change of Control”, Liquidity Event, and other provisions under the Employment Agreement with respect to certain Specified Transactions; and (vi) modification of the definition of “Good Reason Event” to include a change in membership of the Board such that following such change, a majority of the directors are not Continuing Directors. All capitalized terms used but not defined in the previous sentence have the meanings ascribed thereto in the Employment Agreement, as amended by the third amendment.

On November 18, 2019, we further amended Mr. Berman’s Employment Agreement as follows: 2011 vesting condition: greater(i) to extend the term of $1.41 or 3% higher than 2010 “Adjusted” EPS; 2012 vesting: greater of $1.45 or 3% higher than 2011“Adjusted” EPS; and 2013 vesting condition: greater of $1.49 or 3% higher than “Adjusted” 2012 EPS. The amended agreement also providesthe Employment Agreement for an annualadditional year through December 31, 2021; (ii) addition of a 2021 performance bonus opportunity in a range between twenty-five percent (25%) and three hundred percent (300%) of up to 125%Base Salary, based upon the level of salaryEBITDA achieved for the fiscal year, as determined by the Compensation Committee, which shall be payable 50% in cash and 50%is subject to additional terms and conditions as set forth therein; (iii) modification of the Berman Annual Stock Grant provided for under section 3(b) of the Employment Agreement, effective as of January 2020, so that the number of shares of Restricted Stock granted pursuant to the Berman Annual Stock Grant equal the lesser of (a) $3,500,000 in restricted stock (withvalue (based on the closing price of a share of Common Stock on the last business day of the prior year), or (b) 1.5% of outstanding shares of Common Stock, which shall vest in four year vesting)equal installments on each anniversary of grant, provided, that no such award under (a) or (b) above shall be made to Executive (and no cash substitute shall be provided to Executive) to the extent shares are not available for grant under the Company’s 2002 Plan as of such date; and, provided, further, that we shall not be obligated to amend the 2002 Plan and/or seek shareholder approval of any amendment to increase the amount of available shares under the 2002 Plan. All capitalized terms used but not defined in the previous sentence have the meanings ascribed thereto in the Employment Agreement, as amended by the fourth amendment.

On February 18, 2021, we further amended Mr. Berman’s Employment Agreement as follows: (i) to extend the Term of the Employment Agreement for an additional three years through December 31, 2024; (ii) addition of a performance bonus opportunity for 2022 – 2024 in a range between twenty-five percent (25%) and three hundred percent (300%) of Base Salary, based upon “Adjusted” EPS growth. Bonus targetsthe level of EBITDA achieved by the Company for 2011 ranged from $1.37 -$1.78. Commencing in 2012 the bonus targets are to be setfiscal year, as determined by the Compensation Committee.


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On May 15, 2013, we entered a Second AmendmentCommittee, which shall be payable in cash and is subject to Mr. John a/k/a Jack McGrath’sadditional terms and conditions as set forth therein; and (iii) modification of the Annual Restricted Stock Grant provided for under section 3(b) of the Employment Agreement, dated March 4, 2010 (effectiveeffective as of January 1, 2010), as previously amended on August 23, 2011. Mr. McGrath’s employment agreement was amended as follows: (i)2022, so that the term was extended by two years to December 31, 2015; (ii) it provides for two annual grantsnumber of $75,000 worth of restricted shares of common stockRestricted Stock granted pursuant to such Annual Restricted Stock Grant equal the lesser of (a) $3,500,000 in value (based on the closing price of a share of Common Stock on the last business day of the Company (A) the first such grant to be made on January 1, 2014,prior year), or (b) 2.25% of outstanding shares of Common Stock, which grant shall vest in three annual equal installments as set forth on Exhibit Beach anniversary of grant, provided, that no such award under (a) or (b) above shall be made to Mr. Berman (and no cash substitute shall be provided to Mr. Berman) to the extent shares are not available for grant under the Plan as of such date; and, provided, further, that the Company shall not be obligated to amend the Plan and/or seek shareholder approval of any amendment provided that Adjusted EPS (asto increase the amount of available shares under the Plan. All capitalized terms used but not defined in the employment agreement) forprevious sentence have the 2014 fiscal year is equal to the greater of $1.05 or an amount that is 3% higher than the actual Adjusted EPS for the 2014 fiscal year; (B) the second grant to be made on January 1, 2015, which grant shall vest in two annual equal installments as set forth on Exhibit B to the amendment, provided that Adjusted EPS for the 2015 fiscal year is equal to the greater of $2.10 or an amount that is 3% higher than the actual Adjusted EPS for the 2015 fiscal year; and (iii) in each of 2014 and 2015 Mr. McGrath can earn an annual performance bonus of up to 125% of his then base salary based upon such financial (e.g., growth in EPS, return on equity, growthmeanings ascribed thereto in the Common Stock price) and non-financial (e.g., organic growth, personnel development) factors determined annuallyEmployment Agreement, as amended by the Compensation Committee of the Board of Directors during the first quarter of the relevant calendar year for which the annual performance bonus criteria are being established; one-half of such bonus shall be paid in cash, and one-half in shares of restricted common stock, which shall vest in two equal annual installments, the first installment of which shall vest on the Annual Performance Bonus Award Date (as defined in the employment agreement) and thereafter on January 1 in each subsequent year until the final vesting date on January 1, 2017. On June 11, 2016, we extended Mr. McGrath’s employment agreement through December 31, 2017.fifth amendment.

On September 29, 2016, we entered into a Fourth Amendment to the employment agreement between us and Mr. John a/k/a Jack McGrath, our Chief Operating Officer, dated March 4, 2010 (which was effective January 1, 2010) (the “Employment Agreement”). The terms of Mr. McGrath’s Employment Agreement were amended as follows: (i) extension of the term until December 31, 2020; (ii) modification of the performance and vesting standards for each Annual Restricted Stock Grant (“Annual Stock Grant”) provided for under Section 3(d) of the Employment Agreement, effective as of January 1, 2017, as follows: each Annual Stock Grant will be equal to $1 million, and 40% ($0.4 million) of each Annual Stock Grant will be subject to time vesting in four equal annual installments over four years, and 60% ($0.6 million) of each Annual Stock Grant will be subject to three year “cliff vesting” (i.e. vesting is based upon satisfaction of the performance measures at the close of the three year performance period), determined by the following performance measures: (A) total shareholder return as compared to the Russell 2000 Index (weighted 50%), (B) net revenue growth as compared to our peer group (weighted 25%) and (C) growth in Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) as compared to our peer group (weighted 25%); and (iii) modification of the Annual Performance Bonus (“Annual Bonus”) provided for under Section 3(e) of the Employment Agreement, effective as of January 1, 2017, as follows: the Annual Bonus will be equal to up to 125% of Base Salary, and the actual amount will be determined by performance measures based upon net revenues and EBITDA, each performance measure weighted 50%, and with the specific performance criteria applicable to each Annual Bonus determined by the Compensation Committee during the first quarter of each fiscal year, and payable in cash (up to 100% of Base Salary) and shares of our common stock (any excess over 100% of Base Salary) with the shares of stock vesting over three years in equal quarterly installments.

On October 21, 2011,

Effective February 28, 2018, we entered into a Fifth Amendment to Mr. McGrath’s Employment Agreement, to provide that if a change of control occurs and within one year thereafter Mr. McGrath is terminated without “Cause” or quits with “Good Reason”, then he has the right to receive a payment equal to the greater of two times his then current base salary or the payments due for the remainder of the term of his Employment Agreement. The Fifth Amendment amended the definition of “Cause” to mean (i) Mr. McGrath’s conviction of, or entering a plea of guilty or nolo contendere (which plea is not withdrawn prior to its approval by the court) to, a felony offense or other crime and either Mr. McGrath’s failure to perfect an appeal of such conviction prior to the expiration of the maximum period of time within which, under applicable law or rules of court, such appeal may be perfected or, if he does perfect such an appeal, the sustaining of his conviction of a felony offense on appeal; or (ii) the determination by our Board of Directors, after due inquiry, based on convincing evidence, that Mr. McGrath has: (A) committed fraud against, or embezzled or misappropriated funds or other assets of, our Company (or any subsidiary); (B) violated, or caused our Company (or any subsidiary) or any of our officers, employees or other agents, or any other individual or entity to violate, any material law, regulation or ordinance, or any material policy, rule, regulation or practice established by our Company or our Board of Directors; (C) willfully, or because of gross or persistent inaction, failed properly to perform his duties or acted in a manner detrimental to, or adverse to our interests; or (D) violated, or failed to perform or satisfy any material covenant, condition or obligation required to be performed or satisfied by him under his employment agreement with Joel M. Bennett,the Company; and that, in the case of any violation or failure referred to in clause (B), above, such violation is reasonably expected to have a significant detrimental effect on our Company (or any subsidiary). The Fifth Amendment provided for definition of the term “Good Reason” to mean i) any material reduction of Mr. McGrath’s base salary, (ii) relocation of Mr. McGrath’s principal place of employment by more than thirty miles, or (iii) the material change in the nature, titles or scope of the duties, obligations, rights or powers of Mr. McGrath’s employment resulting from any action or failure to act by the Company.

Effective December 31, 2019 we amended Mr. McGrath’s employment agreement as follows: (i) to extend the term of the employment agreement for an additional year through December 31, 2021; (ii) a 2020 and 2021 performance bonus opportunity in a range between twenty-five percent (25%) and one hundred twenty-five percent (125%) of Base Salary, based upon the level of EBITDA achieved for the fiscal year, as determined by the Compensation Committee, which shall be payable in cash and is subject to additional terms and conditions as set forth therein; (iii) modification of the McGrath Annual Stock Grant provided for under section 3(d) of his Employment Agreement, effective as of January 2020, so that the number of shares of Restricted Stock granted pursuant to the McGrath Annual Stock Grant equal the lesser of (a) $1,000,000 in value (based on the closing price of a share of Common Stock on the last business day of the prior year), or (b) 0.5% of outstanding shares of Common Stock, which shall vest in four equal installments on each anniversary of grant, provided, that no such award under (a) or (b) above shall be made to Executive (and no cash substitute shall be provided to Executive) to the extent shares are not available for grant under the 2002 Plan as of such date; and, provided, further, that we shall not be obligated to amend the 2002 Plan and/or seek shareholder approval of any amendment to increase the amount of available shares under the 2002 Plan. All capitalized terms used but not defined in the previous sentence have the meanings ascribed thereto in the Employment Agreement, as amended by such amendment.

On June 18, 2021, the Company amended the employment agreement between the Company and Mr. John (a/k/a Jack) McGrath, our Chief Operating Officer, and entered into Amendment No. 7 to Mr. McGrath’s Employment Agreement, dated March 4, 2010 which was effective January 1, 2010 (the “McGrath Employment Agreement”). The terms of Mr. McGrath’s Employment Agreement have been amended as follows: (i) to extend the Term of the McGrath Employment Agreement for an additional two years through December 31, 2023; (ii) to set the Base Salary, effective January 1, 2022, at the rate of $520,000 per annum; (iii) addition of a performance bonus opportunity for fiscal years 2022 and 2023 in a range between twenty-five percent (25%) and one hundred twenty five percent (125%) of Base Salary, based upon the level of EBITDA achieved by the Company for the fiscal year, as determined by the Compensation Committee, which shall be payable in cash and is subject to additional terms and conditions as set forth therein; and (iv) addition of a provision for the issuance on the first business day of each of calendar years 2022 and 2023 of that number of Restricted Stock Units that are equal to the lesser of (A) an amount in value (determined as provided below) equal to Mr. McGrath’s Base Salary then in effect or (B) 1.05% of common shares outstanding of the Company, which shall vest in two equal installments on each anniversary of grant; provided, that no such award shall be made (and no cash substitute shall be provided) to the extent shares are not available for grant under the Company’s 2002 Stock Award and Incentive Plan (as in effect on the date hereof and as subsequently may be amended, from time to time, or any successor plan, the “Plan”) as of such date; and provided, further, that the Company shall not be obligated to amend the Plan and/or seek shareholder approval of any amendment to increase the amount of available shares under the Plan. The number of Shares in each annual grant of Restricted Stock Units will be determined by the closing price of a share of the Company's common stock on December 31, 2021 with respect to the 2022 award, and December 31, 2022 with respect to the 2023 award.

Effective November 20, 2019, we entered into a letter agreement with John L. Kimble (the “Kimble Employment Agreement”). The Kimble Employment Agreement provides that Mr. Kimble will be our Executive Vice President and Chief Financial Officer as an at-will employee at an annual salary of $500,000. Mr. Kimble will also receive a grant of $250,000 restricted stock units (“RSUs”) on the date hereof and annual grants of $250,000 of RSUs for the initial year and $500,000 annual grants of RSUs for every year thereafter. The number of shares in each annual grant of RSUs will be determined by the closing price of our common stock on the last trading day prior to the day of each annual grant. 60% ($150,000 for the first year and $300,000 thereafter) of each annual grant of RSUs will be subject to three year “cliff vesting” (i.e. vesting is based upon performance at the close of the three year performance period), with vesting of each annual grant of RSUs determined by the following performance measures: (i) Total shareholder return as compared to the Russell 2000 Index (weighted 50%); (ii) Net revenue growth as compared to the Company’s peer group (weighted 25%), and (iii) EBITDA growth as compared to the Company’s peer group (weighted 25%). 40% ($100,000 for the first year and $200,000 thereafter) of each annual grant of RSUs will vest in 3 equal annual installments commencing on the first anniversary of the date of grant and on the second and third anniversaries thereafter. The Kimble Employment Agreement also contains provisions relating to benefits, change of control, and an annual performance-based bonus award equal to up to 125% of base salary.

On February 18, 2021, we amended the Kimble Employment Agreement as follows: (i) changing Mr. Kimble’s status from an “employee at will” by providing for a term ending onextending through December 31, 2013. Pursuant2024; (ii) increase in annual salary to the new agreement, Mr. Bennett is entitled to an$520,000 effective immediately and annual base salaryincreases of $420,000, to be increased annually by at least $15,000 over4% commencing January 1, 2022; (iii) modification of the prior year’s base salary,cash performance bonus opportunity for 2021 – 2024 in a range between twenty-five percent (25%) and will be eligible atone hundred twenty five percent (125%) of Base Salary, based upon the discretionlevel of EBITDA achieved by the Company for the fiscal year, as determined by the Compensation Committee, which shall be payable in cash and is subject to receive bonusesadditional terms and conditions as set forth therein; (iv) modification of the provision of the Kimble Employment Agreement captioned “Restricted Stock Awards”, effective as of January 2022, to provide for the annual grant of a number of shares of Restricted Stock equal to the lesser of (a) Mr. Kimble’s Base Salary in value (based on the closing price of a share of Common Stock on the last business day of the prior year), or other compensation(b) 1.05% of outstanding shares of Common Stock, which shall vest in three equal installments on each anniversary of grant, provided, that no such award under (a) or (b) above shall be made to Mr. Kimble (and no cash substitute shall be provided to Mr. Kimble) to the extent shares are not available for grant under the Plan as of such date; and, provided, further, that the Company shall not be obligated to amend the Plan and/or seek shareholder approval of any amendment to increase the amount of available shares under the Plan; and (v) as described above, inasmuch as this first amendment changes Mr. Kimble’s status as an employee at will, the Kimble Employment Agreement has also been revised to include provisions regarding minimum stock ownership requirements, “clawback” provisions and termination provisions for “Cause” and “Good Reason”, all of which new provisions, are similar to the provisions in the formemployment agreements of cash or equity-based awards upon the achievement of performance goals determined by the Board or the Compensation Committee. In the event of Mr. Bennett’s termination of employment by the Company without “cause” or by Mr. Bennett for “good reason,” in each caseCompany’s other than within two years following a “change in control” (each asexecutive officers. All capitalized terms used but not defined in the agreement), Mr. Bennett would be entitled to receive,previous sentence have the meanings ascribed thereto in addition to accrued benefits, cash severance equal to the amount of base salary payable forKimble Employment Agreement, as amended by the remainder of his termfirst amendment.

On September 27, 2021, the Company amended the employment agreements between the Company and continuation of his medical, hospitalization and dental insurance through the remainder of his term. In the eventeach of Mr. Bennett’s termination of employment by the Company without “cause” or by Mr. Bennett for “good reason” within two years following a “change of control,” Mr. Bennett would be entitled to receive, in addition to accrued benefits, severance equal to the higher of two times his annual base salary and his base salary payable for the remainder of his term.

On February 18, 2014, we entered into a Continuation and Extension of Term of Employment Agreement with respect to Mr. Joel M. Bennett’s Employment Agreement dated October 21, 2011 such that it is deemed to have been renewed and continued from January 1, 2014 without interruption and it was extended through December 31, 2015. On June 11, 2016, we extended Mr. Bennett’s employment agreement through December 31, 2017.
On December 27, 2017, we entered into a letter agreement withStephen G. Berman, our Chief FinancialExecutive Officer, Joel M. Bennett (the “Letter Agreement”), which provides for Mr. Bennett’s stepping down from his position. In order to arrange for John (a/k/a smooth transition, Mr. Bennett will continue asJack) McGrath, our Chief FinancialOperating Officer, until completion ofand Mr. John Kimble, our annual report for the 2017 fiscal year or such earlier date that a successor has been named and transitioned to the office of Chief Financial Officer. The Letterpurpose of the amendments was to change the issuance, past and future, of all restricted stock awards to restricted stock units. All other material terms of the respective employment agreements remain the same, including without limitation, the terms of all such grants including the timing of all vesting periods and the vesting benchmarks.

On October 25, 2022, the Company amended the employment agreement between the Company and Mr. Stephen G. Berman, Chief Executive Officer and President, and entered into Amendment NO. 7 to Mr. Berman’s Second Amended and Restated Employment Agreement, provides, among other things, thatdated as of November 11, 2010 (the “Berman Agreement”). The terms of Mr. Bennett will receiveBerman’s Employment Agreement have been amended as follows: (i) to extend the Terms of the Berman Employment Agreement for an additional two years through December 31, 2026; (ii) addition of a severance paymentperformance bonus opportunity for 2025-2026 in a maximumrange between twenty-five percent (25%) and three hundred percent (300%) of Base Salary, based upon the level of EBITDA achieved by the Company for the fiscal year, as determined by the Compensation Committee, which shall be payable in cash and is subject to additional terms and conditions as set forth herein; (iii) provision of an Annual Restricted Stock Unit Grant as provided for under section 3(b) of the Berman Employment Agreement, effective as of January 2025, if a number of shares of Restricted Stock Units granted pursuant to such Annual Restricted Stock Unit Grant equal the lesser of (a) $3,500,000 in value (based on the closing price of a share of Common Stock on the last business day of the prior year), or (b) 2.25% of outstanding shares of Common Stock, which shall vest in three equal installments on each anniversary of grant, provided, that no such award under (a) or (b) above shall be made to Mr. Berman (and no cash substitute shall be provided to Mr. Berman) to the extent shares are not available for grant under the Plan as of such date; and provided, further, that the Company shall not be obligated to amend the Plan and/or seek shareholder approval of any amendment to increase the amount of upavailable shares under the Plan; and (iv) in consideration of Mr. Berman agreeing to 15 month’s salary, accelerated vestingextend the term of his employment agreement, a grant of 183,748 Restricted Stock Units, which shall vest in two equal installments of 91,874 Restricted Stock Units each on October 25, 2025 and October 25, 2026 (provided that Executive remains employed by the Company on such date(s), as applicable.) All capitalized terms used but not defined in the two previous sentences have the meanings ascribed thereto in the Berman Employment Agreement, as amended by the seventh amendment.

On October 25, 2022, the Company amended the employment letter agreement between the Company and Mr. John L. Kimble, Chief Financial Officer and Executive Vice President, and entered into Amendment No. 1 to Mr. Kimble’s Letter Employment Agreement, dated as of November 18, 2019 (the “Kimble Employment Agreement”). The terms of Mr. Kimble’s Employment Agreement have been amended as follows: (i) ) to extend the Term of the Kimble Employment Agreement for an additional two years through December 31, 2026; (ii) modification of existing cash performance bonus opportunity for 2023 – 2026 in a range between twenty-five percent (25%) and two hundred percent (200%) of Base Salary, based upon the level of EBITDA achieved by the Company for the fiscal year, as determined by the Compensation Committee, which shall be payable in cash and is subject to additional terms and conditions as set forth therein; (iii) modification of the Kimble Employment Agreement captioned “Restricted Stock Awards”, effective as of January 2023, to provide for the annual grant of a portionnumber of shares of Restricted Stock Units equal to the lesser of (a) 150% of Base Salary in value (based on the closing price of a share of Common Stock on the last business day of the prior year), or (b) 1.50% of outstanding shares of Common Stock, which shall vest in three equal installments on each anniversary of grant, provided, that no such award under (a) or (b) above shall be made to Mr. Kimble (and no cash substitute shall be provided to Mr. Kimble) to the extent shares are not available for grant under the Plan as of such date; and, provided, further, that the Company shall not be obligated to amend the Plan and/or seek shareholder approval of any amendment to increase the amount of available shares under the Plan; and (iv) in consideration of Mr. Kimble agreeing to extend the term of his restricted stock unitsemployment agreement, a grant of 41,988 Restricted Stock Units, which shall vest in two equal installments of 20,994 Restricted Stock Units each on October 25, 2025 and continued health care coverageOctober 25, 2026 (provided that Executive remains employed by the Company on such date(s), as applicable.) All capitalized terms used but not defined in the previous sentence have the meanings ascribed thereto in the Kimble Employment Agreement, as amended by the first amendment.

On March 31, 2023, the Company amended the employment agreement between the Company and Mr. Stephen G. Berman, Chief Executive Officer and President, and entered into Amendment No. 8 to the Berman Agreement. The terms of Mr. Berman’s Employment Agreement have been amended to increase Mr. Berman’s Base Salary to an annual rate of $1,800,000, effective January 1, 2023, and for upeach subsequent calendar year during the Term at an annual rate to 12 months. The Letter Agreement also requires Mr. Bennett to comply with confidentiality, non-disparagement and cooperation obligations.be determined by the Compensation Committee of the Company’s Board of Directors, but is at least $25,000 more than the annual rate in the immediately preceding year.

The foregoing is only a summary of the material terms of our employment agreements with the Named Executive Officers. For a complete description, copies of such agreements are annexed herein in their entirety as exhibits or are otherwise incorporated herein by reference.

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On October 19, 2011, our Board of Directors approved the material terms of and adoption of our Company’s Change in Control Severance Plan (the “Severance Plan”), which applies to certain of our key employees. None of our named executive officers participate in the Severance Plan. The Severance Plan provides that if, within the two year period immediately following the “change in control” date (as defined in the Severance Plan), a participant has a qualifying termination of employment, the participant will be entitled to severance equal to a multiple of monthly base salary, which multiple is the greater of (i) the number of months remaining in the participant’s term of employment under his or her employment agreement and (ii) a number ranging between 12 and 18; accelerated vesting of all unvested equity awards; and continued health care coverage for the number of months equal to the multiple used to determine the severance payment. On February 26, 2020 our Board of Directors terminated the Severance Plan, but such termination would not be effective as to any employee who was a participant as of the termination date if a Change In Control were to occur prior to the twelve-month period following the termination date.

Employee Benefits Plan

We sponsor for all of our U.S. employees (including the Named Officers), a defined contribution plan under Section 401(k) of the Internal Revenue Code. The Plan providedCode that provides that employees may defer up to 50%a portion of their annual compensation subject to annual dollar limitations, and that we will make a matching contribution equal to 100% of each employee’s deferral, up to 5% of the employee’s annual compensation.compensation and further subject to federal limitations. We eliminated the match on March 31, 2019. Company matching contributions, which vestvested immediately, totaled $2.2$2.1 million, $2.5$1.9 million, and $2.3 millionnil for 2015, 2016the year ended December 31, 2022, 2021 and 2017,2020, respectively. The Company resumed the match on contributions effective January 1, 2021.

Compensation Committee Interlocks and Insider Participation

None of our executive officers has served as a director or member of a compensation committee (or other boardBoard committee performing equivalent functions) of any other entity, one of whose executive officers served as a director or a member of our Compensation Committee.



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


The following table sets forth certain information as of March 4, 2018April 14, 2023 with respect to the beneficial ownership of our common stock by (1) each person known by us to own beneficially more than 5% of the outstanding shares of our common stock, (2) each of our directors, (3) each of our named executive officers, named in the Summary Compensation Table set forth under the caption “Executive Compensation”, below, and (4) all our directors and executive officers as a group.

Name and Address of
Beneficial Owner (1)(2)
 
Amount
and
Nature of
Beneficial
Ownership
(3)
  
Percent of
Outstanding
Shares (4)
 
Dr. Patrick Soon-Shiong  2,500,676 (5)  8.6%
Oasis Management Company Ltd.  2,506,930(6)  8.3 
Wolverine Asset Management, LLC  1,712,746(7)  5.5 
Renaissance Technologies LLC  2,069,500(8)  7.1 
Hongkong Meisheng Cultural Company Limited  5,239,538(9)  18.0 
Stephen G. Berman  2,311,086(10)  7.9 
Rex H. Poulsen  120,590(11)  * 
Michael S. Sitrick  133,217(12)  * 
Murray L. Skala  156,545(13)  * 
Joel M. Bennett  42,682   * 
John J. McGrath  643,085(14)  2.2 
Alexander Shoghi  70,928(15)  * 
Michael J. Gross  63,367(16)  * 
Zhao Xiaoqiang  54,899(17)  * 
All directors and executive officers as a group (9 persons)  3,596,399(18)  12.3 

Name and Address of

Beneficial Owner (1)(2)

 

Amount and

Nature of

Beneficial

Ownership (3)

 

 

 

Percent of

Outstanding

Shares (4)

 

Lawrence I. Rosen

 

 

1,875,584

 

(6)

 

 

19.0

%

Hong Kong Meisheng Cultural Company Limited

 

 

523,954

 

(5)

 

 

5.3

 

Stephen G. Berman

 

 

134,366

 

(7)

 

 

*

 

John L. Kimble

 

 

94,027

 

(8)

 

 

*

 

John J. McGrath

 

 

75,025

 

(9)

 

 

*

 

Alexander Shoghi

 

 

12,564

 

(10)

 

 

*

 

Zhao Xiaoqiang

 

 

9,629

 

(11)

 

 

*

 

Matthew Winkler

 

 

-

 

(12)

 

 

-

 

Lori MacPherson

 

 

-

 

 

 

 

-

 

Joshua Cascade

 

 

-

 

 

 

 

-

 

Carole Levine

 

 

-

 

 

 

 

-

 

All Directors and executive officers as a group (9 persons)

 

 

325,611

 

(13)

 

 

3.3

 

*

Less than 1% of our outstanding shares.

(1)

Unless otherwise indicated, such person’s address is c/o JAKKS Pacific, Inc., 2951 28th28th Street, Santa Monica, California 90405.

(2)

(2)

The number of shares of common stock beneficially owned by each person or entity is determined under the rules promulgated by the Securities and Exchange Commission. Under such rules, beneficial ownership includes any shares as to which the person or entity has sole or shared voting power or investment power. The percentage of our outstanding shares is calculated by including among the shares owned by such person any shares which such person or entity has the right to acquire within 60 days after March 4, 2018.April 14, 2023. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of such shares.

(3)

(3)

Except as otherwise indicated, exercises sole voting power and sole investment power with respect to such shares. All share amounts have been adjusted to reflect the 1-10 reverse split effective July 9, 2020.

(4)

(4)

Based upon 9,870,927 shares outstanding on April 14, 2023. Does not include, unless noted otherwise, any shares of common stock issuable upon the conversion of $42.7 million of our 4.25% convertible senior notes due 2018, initially convertible at the rate of 114.3674 shares of common stock per $1,000 principal amount at issuance of the notes (but subject to adjustment under certain circumstances as described in the notes) nor any shares of common stock issuable upon the conversion of $113.0 million of our 4.875% convertible senior notes due 2020, initially convertible at the rate of 103.7613 shares of common stock per $1,000 principal amount at issuance of the notes (but subject to adjustment under certain circumstances as described in the notes)Restricted Stock Units (“RSUs”). Does include 3,112,840 shares of common stock repurchased by the Company under a prepaid forward purchase contract under which no shares have been returned to the Company.

(5)

(5)

The address of Dr. Patrick Soon-Shiong is 10182 Culver Blvd., Culver City, CA 90232. Except for 239,622 shares, all of the shares are owned jointly with California Capital Z, LLC. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13D/A filed on July 26, 2016.

(6)The address of Oasis Management Company Ltd. is c/o Oasis Management (Hong Kong) LLC, 21/F Man Yee Building, 68Des Voeux Road, Central, Hong Kong. Possesses shared voting and dispositive power of such shares. 1,063,553 of such shares underlie convertible notes. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13D/A filed on November 8, 2017.
(7)The address of Wolverine Asset Management, LLC is175 West Jackson Blvd., Suite 340, Chicago Illinois 60604. Possesses joint voting and dispositive power with respect to 1,704,622 of such shares (the balance is held jointly by other related parties) and all which shares (except for 8,124 shares) underlie presently convertible notes. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G/A filed on February 14, 2018.
99

(8) The address of Renaissance Technologies LLC is 800 Third Avenue, New York, NY 10022. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G/A filed on February 14, 2018.
(9) The address of HongkongKong Meisheng Culture Company Ltd is Room 1901, 19/F, Lee Garden One, 33 Hysan Avenue, Causeway Bay, Hong Kong. Zhao Xiaoqiang, executive director of this entity, is a director of the Company. Possesses shared voting and dispositive power with respect to all of such shares. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13D/A filed on January 26, 2018.

(6)

The address of Mr. Rosen is 1578 Sussex Turnpike (Bldg. 5), Randolph, NJ 07689. Possesses shared voting and dispositive power with respect to all of such shares. All the information presented in this Item with respect to this beneficial owner was extracted solely from a Form 5 filed on January 26, 2023.

(10)

(7)

Includes 1,489,362

Does not include an aggregate of 512,250 shares of common stock underlying unvested RSUs issued on January 1, 2018 pursuant to the terms of Mr. Berman’s January 1, 2003 Employment Agreement (as amended to date), which sharesRSUs are further subject to the terms of our January 1, 2018 Restricted Stock Unit Award AgreementAgreements with Mr. Berman (the “Berman Agreement”). The Berman Agreement provides that Mr. Berman will forfeit his rights to some or all 1,489,362 shares unless certain conditions precedent are met prior to January 1, 2019, as described in the Berman Agreement, whereupon the forfeited shares will become authorized but unissued shares of our common stock. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.

(8)

(11)Includes 120,590

Does not include 168,699 shares of Common Stock issuedunderlying currently unvested RSUs which will vest pursuant to the terms of Mr. Kimble’s November 18, 2019 Employment Agreement (as amended to date), which RSUs are further subject to the terms of our 2002Restricted Stock Unit Award and Incentive Plan pursuantAgreements with Mr. Kimble (the “Kimble Agreement”). The Kimble Agreement provides that Mr. Kimble will forfeit his rights to which 41,580some or all of such shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2019.168,699 RSUs unless certain conditions precedent are met, as described in the Kimble Agreement. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.

(9)

(12)Consists

Does not include an aggregate of 133,21788,142 shares of Common Stockcommon stock underlying RSUs issued pursuant to our 2002the terms of Mr. McGrath’s March 4, 2010 Employment Agreement (as amended to date) which RSUs are further subject to the terms of a Restricted Stock Unit Award and Incentive Plan, pursuant to which 41,580 of such shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2019.Agreement with Mr. McGrath (the “McGrath Agreement”). Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.

(13)

(10)

Consists of 156,54512,564 shares of Common Stockcommon stock issued pursuant to our 2002 Stock Award and Incentive Plan pursuant to which 41,580 of such shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2019.(the “2002 Plan”). Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.

(11)

(14)Includes 425,532 shares of common stock issued on January 1, 2018 pursuant to the terms of Mr. McGrath’s March 4, 2010 Employment Agreement (as amended to date), which shares are further subject to the terms of our January 1, 2018 Restricted Stock Award Agreement with Mr. McGrath (the “McGrath Agreement”). The McGrath Agreement provides that Mr. McGrath will forfeit his rights to some or all 425,532 shares unless certain conditions precedent are met prior to January 1, 2019, as described in the McGrath Agreement, whereupon the forfeited shares will become authorized but unissued shares of our common stock. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.
(15)

Consists of 70,9289,629 shares of common stock issued pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which 41,580 of such shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2019. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.

(16)Consists of 63,367 shares of common stock issued pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which 41,580 of such shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2019. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors.
(17)Consists of 54,899 shares of common stock issued pursuant to our 2002 Stock Award and Incentive Plan, pursuant to which 41,580 of such shares may not be sold, mortgaged, transferred or otherwise encumbered prior to January 1, 2019.Plan. Certain of these shares may be restricted from transfer pursuant to the minimum stock ownership provisions adopted by the Company's Board of Directors. Does not include the 5,239,538523,954 shares owned by HongkongHong Kong Meisheng Cultural Company Limited reported above, of which entity Zhao Xiaoqiang is executive director.

(12)

Does not include 145,788 shares of preferred stock owned by entities controlled, directly or indirectly, by Mr. Winkler.

(18)

(13)

Does not Include any shares underlying RSUs. Does not include the 5,239,538523,954 shares owned by HongkongHong Kong Meisheng Cultural Company Limited reported above, of which entity Zhao Xiaoqiang is executive director.


100

Item 13. Certain Relationships and Related Transactions, and Director Independence

(a) Transactions with Related Persons

One

In November 2014, the Company entered into a joint venture with Meisheng Cultural & Creative Corp., Ltd., (“MC&C”) for the purpose of our directors, Murray L. Skala, isproviding 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 partnersubsidiary in the law firmShanghai 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 Feder Kaszovitz LLP, which has performed,the joint venture and is expected to continue to perform, legal servicesconsolidates the joint venture since control rests with the Company. The non-controlling interest’s share of the income (loss) from the joint venture for us. In 2016 and 2017, we incurred approximately $3.2 million and $2.2 million, respectively, for legal fees and reimbursable expenses payable to that firm. As ofthe year ended December 31, 2022, 2021 and 2020 was ($330,000), $120,000 and $130,000, respectively.

In October 2016, and 2017, legal fees and reimbursable expenses of $1.6 million and $0.5 million, respectively, were payable to this law firm.

The owner of NantWorks, our DreamPlay Toysthe Company entered into a joint venture partner, beneficially owns 8.9%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 income (loss) from the joint venture for the years ended December 31, 2022, 2021 and 2020 was nil. MC&C is an affiliate of Meisheng and Meisheng holds shares of the Company’s outstanding common stock. Pursuant

In March 2017, the Company entered into an agreement with a Hong Kong affiliate of its China joint venture partner. After their shareholder and China regulatory approval, the transaction closed on April 27, 2017. In 2018, the Company issued 4,158 shares of restricted stock at a value of $0.1 million to the joint venture agreements,non-employee director, which vested in January 2019. In 2019, the Company issued 5,471 shares of restricted stock at a value of $0.1 million to the non-employee director, which vested in January 2020.

In March 2017, the Company entered into an equity purchase agreement with Meisheng which provided, among other things, that as long as Meisheng and its affiliates hold 10% or more of the issued and outstanding shares of common stock of the Company, Meisheng shall have the right from time to time to designate a nominee (who currently is obligatedMr. Xiaoqiang Zhao) for election to pay NantWorksthe Company’s board of directors.

Meisheng also serves as a preferred return on joint venture sales.

significant manufacturer of the Company. For the yearsyear ended and as of December 31, 20162022, 2021 and 2017 preferred returns2020, the Company made inventory-related payments to Meisheng of nilapproximately $120.5 million, $77.7 million and nil, respectively, were earned and payable to NantWorks.$64.8 million respectively. As of December 31, 20162022 and 2017,2021, amounts due to Meisheng for inventory received by the Company, has a receivable from NantWorks in the amount of $0.6but not paid totaled $9.8 million and nil,$15.9 million, respectively.


Hongkong Meisheng Cultural Company Limited (“Meisheng”) owns 18% of our outstanding common stock. On January 25, 2018, Meisheng submitted to our Board of Directors a letter containing a non-binding proposal (“Expression of Interest”) expressing Meisheng’s interest in acquiring additional shares of our common stock for $2.95 per share. Upon completion of the transaction, Meisheng’s shareholdings and voting rights would increase to 51%. The Expression of Interest states that it is subject to due diligence, and to approval by Meisheng’s Board of Directors, shareholders and Chinese regulatory authorities. Our Board of Directors has authorized a Special Committee comprised solely of independent directors to evaluate the Expression of Interest.

We are one of the largest customers of Meisheng and we have entered into two joint ventures in Hong Kong, China, with Meisheng which generated a loss for us of $87,000 in 2015 and income of $6,000 and $59,000 in 2016 and 2017, respectively. Zhao Xiaoqiang, the control person of Meisheng, is one of our directors.

A director of the Company is a portfolio manager at Oasis Management. In August 2017,(see Item 8 “Consolidated Financial Statements and Supplementary DataNote 10 - Debt”)

A director of the Company agreed with Oasis Managementis a director at Benefit Street Partners, who owns 145,788 shares of the Series A Preferred Stock (see Item 8 “Consolidated Financial Statements and Oasis Investments II Master Fund Ltd.Supplementary DataNote 10 - Debt”)

Amounts outstanding under the 2021 BSP Term Loan will bear interest at either (i) LIBOR plus 6.50% - 7.00% (determined by reference to a net leverage pricing grid), subject to a 1.00% LIBOR floor, or (ii) base rate plus 5.50% - 6.00% (determined by reference to a net leverage pricing grid), subject to a 2.00% base rate floor. The 2021 BSP Term Loan matures in June 2027.

The 2021 BSP Term Loan Agreement contains negative covenants, events of default, and the holderobligations under the 2021 BSP Term Loan Agreement are guaranteed by the Company. The terms, covenants, events of approximately $21.5default, and Company obligations are described in more detail in Note 10 – Debt, as well as in the 2021 BSP Term Loan Agreement. As of December 31, 2022, Benefit Street Partners held $68.9 million facein principal 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, 2017.2021 BSP Term Loan.


(b) Review, Approval or Ratification of Transactions with Related Persons

Pursuant to our Ethical Code of Conduct (a copy of which may be found on our website, www.jakks.com), all of our employees are required to disclose to our General Counsel, the Board of directorsDirectors or any committee established by the Board of Directors to receive such information, any material transaction or relationship that reasonably could be expected to give rise to actual or apparent conflicts of interest between any of them, personally, and us. In addition, our Ethical Code of Conduct also directs all employees to avoid any self-interested transactions without full disclosure. This policy, which applies to all of our employees, is reiterated in our Employee Handbook which states that a violation of this policy could be grounds for termination. In approving or rejecting a proposed transaction, our General Counsel, Board of Directors or designated committee will consider the facts and circumstances available and deemed relevant, including but not limited to, the risks, costs and benefits to us, the terms of the transactions, the availability of other sources for comparable services or products, and, if applicable, the impact on director independence. Upon concluding their review, they will only approve those agreements that, in light of known circumstances, are in or are not inconsistent with, our best interests, as they determine in good faith.

(c) Director Independence

For a description of our Board of Directors and its compliance with the independence requirements therefore as promulgated by the Securities and Exchange Commission and Nasdaq, see “Item 10- Directors, Executive Officers and Corporate Governance”.Governance.”

Item 14. Principal Accountant Fees and Services

Before our principal accountant is engaged by us to render audit or non-audit services, as required by the rules and regulations promulgated by the Securities and Exchange Commission and/or Nasdaq, such engagement is approved by the Audit Committee.

The following are the fees of BDO USA, LLP, our principal accountant (PCAOB ID: 243), for the two years ended December 31, 2017,2022, for services rendered in connection with the audit for those respective years (all of which have been pre-approved by the Audit Committee):

 2016  2017  

2022

  

2021

 
Audit Fees $1,215,000  $1,468,199  $1,768,655  $1,230,741 
Audit Related Fees  49,306   32,292   4,200   25,700 
Tax Fees  7,555   2,103 
 $1,271,861  $1,502,594  $1,772,855  $1,256,441 

101

Audit Fees consist of the aggregate fees for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that were normally provided by our auditors in connection with our statutory and regulatory filings or engagements.

Audit Related Fees consist of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees. These fees primarily relate to statutory audit requirements and audits of employee benefit plans.

Tax Fees consist of the aggregate fees billed for professional services rendered for tax consulting. Included in such Tax Fees were fees for consultancy and review of foreign tax filings.
All Other Fees consist of the aggregate fees billed for products and services provided by our auditors and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees.

Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining our auditors’ independence and determined that such services are appropriate.



PART IV

Item 15. Exhibits and Financial Statement Schedules

The following documents are filed as part of this Annual Report on Form 10-K:

(1)

Financial Statements (included in Item 8):

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 20162022 and 20172021

Consolidated Statements of Operations for the years ended December 31, 2015, 20162022, 2021 and 20172020

Consolidated Statements of Other Comprehensive Income (Loss)Loss for the years ended December 31, 2015, 20162022, 2021 and 20172020

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 20162022, 2021 and 20172020

Consolidated Statements of Cash Flows for the years ended December 31, 2015, 20162022, 2021 and 20172020

Notes to Consolidated Financial Statements

(2)

(2)

Financial Statement Schedules (included in Item 8):

(3)

Exhibits:

Exhibit

Number

Description

3.1

Schedule II — Valuation and Qualifying Accounts
(3)
Exhibits:

Exhibit
Number
Description
3.1

Amended and Restated Certificate of Incorporation of the Company (1)

3.2

3.1.1

Certificate of Designations of Series A Senior Preferred Stock (28)

3.1.2

Certificate of Amendment to Certificate of Designations of Series A Senior Preferred Stock (31)

3.1.3

Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company (32)

3.1.4

Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company (34)

3.1.5

Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company (37)

3.1.6

Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (42)

3.1.7

Amended and Restated Certificate of Designations of Series A Senior Preferred Stock (42)

3.2.1

Second Amended and Restated By-Laws of the Company (2)(28)

4.1

3.2.2

Third Amended and Restated By-Laws of the Company (42)

4.1

Indenture dated July 24, 2013 by and between the Registrant and Wells Fargo Bank, N.A (3)

4.2

Form of 4.25% Senior Convertible Note (3)

4.2.1

Convertible Senior Note due November 7, 2020 (24)

4.3

4.2.2

Convertible Senior Note due November 1, 2020 (25)

4.3

Credit Agreement dated as of March 27, 2014 by and among Registrant and its USU.S. wholly-owned subsidiaries and General Electric Capital Corporation (10)

4.3.1

Fourth Amendment to Credit Agreement dated as of June 5, 2015 by and among Registrant and its USU.S. wholly-owned subsidiaries and General Electric Capital Corporation (20)

4.4

4.3.2

Eleventh Amendment to Credit Agreement dated as of June 14, 2018 by and among Registrant and its wholly-owned U.S. subsidiaries and Wells Fargo Bank, National Association (27)

4.4

Revolving Loan Note dated March 27, 2014 by Registrant and its USU.S. wholly-owned subsidiaries in favor of General Electric Capital Corporation (10)

4.5

Indenture dated June 9, 2014 by and between the Registrant and Wells Fargo Bank, N.A (19)

4.6

Form of 4.875% Senior Convertible Note (19)

10.1.1

4.7

Term Loan Agreement dated as of June 14, 2018 by and among Registrant and certain of its wholly-owned subsidiaries and GACP Finance Co., LLC (27)

4.8

Term Note dated June 14, 2018 by and among Registrant and certain of its wholly-owned subsidiaries in favor of GACP II L.P. (27)

10.1.1

Third Amended and Restated 1995 Stock Option Plan (4)

10.1.2

1999 Amendment to Third Amended and Restated 1995 Stock Option Plan (5)

10.1.3

2000 Amendment to Third Amended and Restated 1995 Stock Option Plan (6)

10.1.4

2001 Amendment to Third Amended and Restated 1995 Stock Option Plan (7)

10.2

2002 Stock Award and Incentive Plan (8)

10.2.1

2008 Amendment to 2002 Stock Award and Incentive Plan (9)

10.4.1

10.2.2

2021 Amendment to 2002 Stock Award and Incentive Plan (38)

10.4.1

Second Amended and Restated Employment Agreement between the Company and Stephen G. Berman dated as of November 11, 2010 (11)

10.4.2

Clarification Letter dated October 20, 2011 with respect to Mr. Berman’s Second Amended and Restated employment agreement (12)

10.4.3

Amendment Number One dated September 21, 2012 to Mr. Berman’s Second Amended and Restated Employment Agreement (13)

10.4.4

Amendment Number Two dated June 7, 2016 to Mr. Berman’s Second Amended and Restated Employment Agreement (21)

103

10.5

10.4.5

Amendment Number Three dated August 9, 2019 to Mr. Berman’s Second Amended and Restated Employment Agreement (28)

10.4.6*

Amendment Number Four dated November 18, 2019 to Mr. Berman’s Second Amended and Restated Employment Agreement (30)

10.4.7

Amendment Number Five dated February 18, 2021 to Mr. Berman’s Second Amended and Restated Employment Agreement (36)

10.4.8

Amendment Number Six dated September 27, 2021 to Mr. Berman’s Second Amended and Restated Employment Agreement (39)

10.4.9

Amendment Number Seven dated October 25, 2022 to Mr. Berman’s Second Amended and Restated Employment Agreement (43)

10.5

Office Lease dated November 18, 1999 between the Company and Winco Maliview Partners (14)

10.6

Form of Restricted Stock Agreement (10)

10.7

10.6.1

Form of Restricted Stock Unit Agreement (39)

10.7

Employment Agreement between the Company and Joel M. Bennett, dated October 21, 2011 (12)

10.7.1

Continuation and Extension of Term of Employment Agreement Between JAKKS Pacific, Inc. and Joel M. Bennett dated February 18, 2014 (15)

10.7.2

Amendment Extending Term of Employment Agreement Between JAKKS Pacific, Inc. and Joel M. Bennett dated June 11, 2015 (20)

10.7.3

Letter Agreement dated December 27, 2017 between the Company and Joel M. Bennett (23)

10.8

Employment Agreement between the Company and John a/k/a Jack McGrath, dated March 4, 2010 (16)

10.8.1

First Amendment to Employment Agreement between the Company and John a/k/a Jack McGrath, dated August 23, 2011 (16)

10.8.2

Second Amendment to Employment Agreement between the Company and John a/k/a Jack McGrath, dated May 15, 2013 (17)

10.8.3

Third Amendment to Employment Agreement between the Company and John a/k/a Jack McGrath, dated June 11, 2015 (20)

10.8.4

Fourth Amendment to Employment Agreement between the Company and John a/k/a Jack McGrath, dated September 29, 2016 (22)

10.8.5

Fifth Amendment to Employment Agreement between the Company and John a/k/a Jack McGrath, dated February 28, 2018 (*)(33)

10.9

10.8.6

Sixth Amendment to Employment Agreement between the Company and John a/k/a Jack McGrath, dated December 31, 2019 (29)

10.8.7

Seventh Amendment to Employment Agreement between the Company and John a/k/a Jack McGrath, dated June 18, 2021 (41)

10.8.8

Eighth Amendment to Employment Agreement between the Company and John a/k/a Jack McGrath, dated September 27, 2021 (39)

10.9

Exchange Agreement dated November 7, 2017 between the Company and Oasis Investments II Master Fund Ltd. (24)

14

10.10

Exchange Agreement dated July 25, 2018 between the Company and Oasis Investments II Master Fund Ltd. (25)

10.11

Employment Agreement between the Company and Brent T. Novak, dated April 1, 2018 (26)

10.11.1

Correction Letter dated February 28, 2019 with respect to Mr. Novak’s Employment Agreement (33)

10.12*

Letter Agreement dated November 18, 2019 between the Company and John L. Kimble (30)

10.12.1

First Amendment to Employment Agreement between the Company and John L. Kimble dated February 18, 2021 (36)

10.12.2

Second Amendment to Employment Agreement between the Company and John L. Kimble dated September 27, 2021 (39)

10.12.3

Second Amendment to Employment Agreement between the Company and John L. Kimble dated October 25, 2022 (43)

10.13*

Transaction Agreement, dated as of August 7, 2019, by and among the Company, certain of the Company’s affiliates and subsidiaries, certain holders of the Company’s 4.875% Convertible Senior Notes due 2020 and Oasis Investments II Master Fund Ltd. (28)

10.14*

Amended and Restated Credit Agreement, dated as of August 9, 2019, by and among the Company, Disguise, Inc., JAKKS Sales LLC, Maui, Inc., Moose Mountain Marketing, Inc. and Kids Only, Inc., as borrowers, the lenders party thereto and Wells Fargo Bank, National Association, as agent (28)

10.14.1

Consent and Amendment No. 3 to Amended and Restated Credit Agreement (35)

10.15*

First Lien Term Loan Facility Credit Agreement, dated as of August 9, 2019, by and among the Company, the financial institutions party thereto, as lenders, and Cortland Capital Market Services LLC, as agent (28)

10.15.1

Amendment No. 2 to First Lien Term Loan Facility Credit Agreement (35)

10.16

Amended and Restated Convertible Senior Note due 2023 issued to Oasis Investments II Master Fund Ltd. in the face amount of $21,550,000 (28)

10.17

Amended and Restated Convertible Senior Note due 2023 issued to Oasis Investments II Master Fund Ltd. in the face amount of $8,000,000 (28)

10.18

Convertible Senior Note due 2023 issued to Oasis Investments II Master Fund Ltd. in the face amount of $8,000,000 (28)

10.19*

Amended and Restated Registration Rights Agreement, dated as of August 9, 2019, by and between JAKKS Pacific, Inc. and Oasis Investments II Master Fund Ltd. (28)

10.20*

Credit Agreement, dated as of June 2, 2021, by and among JAKKS Pacific, Inc., Disguise, Inc., JAKKS Sales LLC, and Moose Mountain Marketing, Inc., as borrowers, other Loan Parties hereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (40)

10.21*

First Lien Term Loan Facility Credit Agreement, dated as of June 2, 2021, by and among JAKKS Pacific, Inc. and its subsidiaries parties thereto as borrowers, the lenders party thereto, as lenders, and BSP Agency, LLC, as agent (40)

10.21.1*

First Amendment to First Lien Term Loan Facility Credit Agreement, dated as of June 2, 2021, by and among JAKKS Pacific, Inc. and its subsidiaries parties thereto as borrowers, the lenders party thereto, as lenders, and BSP Agency, LLC, as agent (44)

10.22

Termination of Voting Agreement dated August 3, 2022 between the Company and its Preferred Stockholders (45)

10.23

At Market Issuance Sales Agreement between Registrant and B. Riley Securities, Inc. dated October 20, 2022 (46)

14

Code of Ethics (18)

21

Subsidiaries of the Company (**)

23.1

Consent of BDO USA, LLP (**)

31.1

Rule 13a-14(a)/15d-14(a) Certification of Stephen G. Berman (**)

31.2

Rule 13a-14(a)/15d-14(a) Certification of Joel M. BennettJohn L. Kimble (**)

32.1

Section 1350 Certification of Stephen G. Berman (**)

32.2

Section 1350 Certification of Joel M. BennettJohn L. Kimble (**)

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

104

(1)

Filed previously as Appendix 2 to the Company’s Schedule 14A Proxy Statement, filed August 23, 2002, and incorporated herein by reference.

(2)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed October 21, 2011, and incorporated herein by reference.

(3)

Filed previously as an exhibit to the Company's Current Report on Form 8-K filed July 24, 2013 and incorporated herein by reference.

(4)

Filed previously as Appendix A to the Company’s Schedule 14A Proxy Statement, filed June 23, 1998, and incorporated herein by referencereference.

(5)

Filed previously as an exhibit to the Company’s Registration Statement on Form S-8 (Reg. No. 333-90055), filed November 1, 1999, and incorporated herein by reference.

(6)

Filed previously as an exhibit to the Company’s Registration Statement on Form S-8 (Reg. No. 333-40392), filed June 29, 2000, and incorporated herein by reference.

(7)

Filed previously as Appendix B to the Company’s Schedule 14A Proxy Statement, filed June 11, 2001, and incorporated herein by reference.

(8)

Filed previously as an exhibit to the Company’s Registration Statement on Form S-8 (Reg. No. 333-101665), filed December 5, 2002, and incorporated herein by reference.

(9)

Filed previously as an exhibit to the Company’s Schedule 14A Proxy Statement, filed August 20, 2008, and incorporated herein by reference.

(10)

Filed previously as an exhibit to the Company’s CurrentAnnual Report on Form 8-K10-K for its fiscal year ended December 31, 2002, filed April 2, 2014March 31, 2003, and incorporated herein by reference.

(11)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed November 17, 2010, and incorporated herein by reference.

(12)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed October 21, 2011, and incorporated herein by reference.

(13)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed September 25, 2012, and incorporated herein by reference.

(14)

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 1999, filed March 30, 2000, and incorporated herein by reference.

(15)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed February 20, 2014, and incorporated herein by reference.

(16)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed August 24, 2011, and incorporated herein by reference.

(17)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed May 21, 2013, and incorporated herein by reference.

(18)

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2003, filed March 15, 2004, and incorporated herein by reference.

(19)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed June 9, 2014 and incorporated herein by reference.

(20)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed June 16, 2015 and incorporated herein by reference.

(21)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed June 9, 2016 and incorporated herein by reference.

(22)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed September 30, 2016 and incorporated herein by reference.

(23)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed December 29, 2017 and incorporated herein by reference.

(24)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed November 11, 2017 and incorporated herein by reference.

(25)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed July 26, 2018 and incorporated herein by reference.

(26)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed April 2, 2018 and incorporated herein by reference.

(*)

(27)

Filed herewith.previously as an exhibit to the Company’s Current Report on Form 8-K filed June 15, 2018 and incorporated herein by reference.

(28)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed August 9, 2019 and incorporated herein by reference.

(29)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed January 2, 2020 and incorporated herein by reference.

(30)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed November 20, 2019 and incorporated herein by reference.

(31)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed September 23, 2019 and incorporated herein by reference.

(32)

Filed previously as an annex to the Company’s Schedule 14A filed October 28, 2019 and incorporated herein by reference.

(33)

Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2018, filed March 18, 2019, and incorporated herein by reference.

(34)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed July 9, 2020 and incorporated herein by reference.

(35)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed October 19, 2020 and incorporated herein by reference.

(36)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed February 19, 2021 and incorporated herein by reference.

(37)

Filed previously as an annex to the Company’s Schedule 14A filed March 16, 2021 and incorporated herein by reference.

(38)

Filed previously as an annex to the Company’s Schedule 14A filed October 8, 2021 and incorporated herein by reference.

(39)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed October 1, 2021 and incorporated herein by reference.

(40)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed June 3, 2021 and incorporated herein by reference.

(41)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed June 24, 2021 and incorporated herein by reference.

(42)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed November 15, 2022 and incorporated herein by reference.

(43)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed October 28, 2022 and incorporated herein by reference.

(44)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed May 2, 2022 and incorporated herein by reference.

(45)

Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed August 4, 2022 and incorporated herein by reference.

(46)

Filed previously as an exhibit to the Company’s Registration Statement on Form S-3/A filed on October 27, 2022 and incorporated herein by reference.

(*)

Certain schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K under the Securities Act. The Company agrees to furnish supplementally any omitted schedules to the Securities and Exchange Commission upon request.

(**)

Filed herewith.

Item 16. Form 10-K Summary

None.

None.



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 16, 2018April 14, 2023

JAKKS PACIFIC, INC.

By:

 /s/

/s/ STEPHEN G. BERMAN

Stephen G. Berman

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ STEPHEN G. BERMAN

Director and

March 16, 2018April 14, 2023

Stephen G. Berman

Chief Executive Officer

Chief Financial Officer

/s/ JOEL M. BENNETTJOHN L. KIMBLE

(Principal Financial Officer and

March 16, 2018April 14, 2023
Joel M. Bennett

John L. Kimble

Principal Accounting Officer)

/s/ REX H. POULSENCAROLE LEVINE

Director

March 16, 2018April 14, 2023
Rex H. Poulsen

Carole Levine

/s/ MICHAEL S. SITRICKJOSHUA CASCADE

Director

March 16, 2018April 14, 2023
Michael S. Sitrick

Joshua Cascade

/s/ MURRAY L. SKALAMATTHEW WINKLER

Director

March 16, 2018April 14, 2023
Murray L. Skala

Matthew Winkler

/s/ ALEXANDER SHOGHI

Director

March 16, 2018April 14, 2023

Alexander Shoghi

 /s/ MICHAEL J. GROSS

/s/ LORI MACPHERSON

Director

March 16, 2018April 14, 2023
 Michael J. Gross

Lori MacPherson

 /s/

/s/ ZHAO XIAOQUIANGXIAOQIANG

Director

March 16, 2018April 14, 2023

Zhao XiaoquiangXiaoqiang


106

EXHIBIT INDEX
Exhibit
Number
Description
10.8.5Fifth Amendment to Employment Agreement between the Company and John a/k/a Jack McGrath, dated February 28, 2018 (*)
23.1Consent of BDO USA, LLP (*)
 101.INSXBRL Instance Document
 101.SCHXBRL Taxonomy Extension Schema Document
 101.CALXBRL Taxonomy Extension Calculation Linkbase Document
 101.DEF XBRL Taxonomy Extension Definition Linkbase Document
 101.LABXBRL Taxonomy Extension Label Linkbase Document
 101.PREXBRL Taxonomy Extension Presentation Linkbase Document

10796

(1)Filed previously as Appendix 2 to the Company’s Schedule 14A Proxy Statement, filed August 23, 2002, and incorporated herein by reference.
(2)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed October 21, 2011, and incorporated herein by reference.
(3)Filed previously as an exhibit to the Company's Current Report on Form 8-K filed July 24, 2013 and incorporated herein by reference.
(4)Filed previously as Appendix A to the Company’s Schedule 14A Proxy Statement, filed June 23, 1998, and incorporated herein by reference
(5)Filed previously as an exhibit to the Company’s Registration Statement on Form S-8 (Reg. No. 333-90055), filed November 1, 1999, and incorporated herein by reference.
(6)Filed previously as an exhibit to the Company’s Registration Statement on Form S-8 (Reg. No. 333-40392), filed June 29, 2000, and incorporated herein by reference.
(7)Filed previously as Appendix B to the Company’s Schedule 14A Proxy Statement, filed June 11, 2001, and incorporated herein by reference.
(8)Filed previously as an exhibit to the Company’s Registration Statement on Form S-8 (Reg. No. 333-101665), filed December 5, 2002, and incorporated herein by reference.
(9)Filed previously as an exhibit to the Company’s Schedule 14A Proxy Statement, filed August 20, 2008, and incorporated herein by reference.
(10)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed April 2, 2014 and incorporated herein by reference.
(11)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed November 17, 2010, and incorporated herein by reference.
(12)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed October 21, 2011, and incorporated herein by reference.
(13)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed September 25, 2012, and incorporated herein by reference.
(14)Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 1999, filed March 30, 2000, and incorporated herein by reference.
(15)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed February 20, 2014, and incorporated herein by reference.
(16)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed August 24, 2011, and incorporated herein by reference.
(17)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed May 21, 2013, and incorporated herein by reference.
(18)Filed previously as an exhibit to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2003, filed March 15, 2004, and incorporated herein by reference.
(19)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed June 9, 2014 and incorporated herein by reference.
(20)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed June 16, 2015 and incorporated herein by reference.
(21)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed June 9, 2016 and incorporated herein by reference.
(22)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed September 30, 2016 and incorporated herein by reference.
(23)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed December 29, 2017 and incorporated herein by reference.
(24)Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed November 11, 2017 and incorporated herein by reference.
(*)Filed herewith.

108
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