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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO 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 Incorporation or Organization)(I.R.S. Employer Identification No.)
2951 28th Street
Santa MonicaCalifornia
(Address of Principal Executive Offices)
90405
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (424) 268-9444
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   ☒       No   ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes   ☒       No   ☐
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,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ☐Accelerated filer  ☐
Non-accelerated filer  ☒
Smaller reporting company 
Emerging 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  ☒
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Trading
Symbol(s)
 Name of each exchange on which registered
Common Stock $.001 Par Value JAKK The NASDAQ Global Select Market
The number of shares outstanding of the issuer’s common stock is 4,244,360 as of August 3, 2020.
1


JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2020
ITEMS IN FORM 10-Q
Item 2.Unregistered Sales of Equity Securities and Use of ProceedsNone
Item 3.Defaults Upon Senior SecuritiesNone
Item 4.Mine Safety DisclosuresNone
Item 5.Other InformationNone
  


2


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

Assets
June 30,
2020
December 31,
2019
 
(Unaudited)
Current assets
 
 
Cash and cash equivalents
$48,133  $61,613  
Restricted cash
4,555  4,673  
Accounts receivable, net of allowance for doubtful accounts of $3,527 and $3,394 at June 30, 2020 and December 31, 2019, respectively
69,003  117,942  
Inventory
57,681  54,259  
Prepaid expenses and other assets
28,448  21,898  
Total current assets
207,820  260,385  
Property and equipment
Office furniture and equipment
11,820  11,678  
Molds and tooling
94,336  103,335  
Leasehold improvements
6,821  6,808  
Total
112,977  121,821  
Less accumulated depreciation and amortization
95,998  106,562  
Property and equipment, net
16,979  15,259  
Operating lease right-of-use assets, net27,644  32,081  
Other long term assets10,056  18,926  
Intangible assets, net2,538  3,188  
Goodwill
35,083  35,083  
Trademarks
300  300  
Total assets
$300,420  $365,222  
Liabilities, Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable
$53,103  $61,196  
Accrued expenses
25,192  39,515  
Reserve for sales returns and allowances32,312  38,365  
Income taxes payable502  2,492  
Short term operating lease liabilities9,632  9,451  
Short term debt, net1,772  1,905  
Total current liabilities122,513  152,924  
Long term operating lease liabilities20,743  25,632  
Debt, non-current portion, net of issuance costs and debt discounts174,164  174,962  
Other liabilities3,333  5,409  
Income taxes payable1,491  1,565  
Deferred income taxes, net226  226  
Total liabilities322,470  360,718  
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 200,000 shares issued and outstanding at June 30, 2020 and December 31, 2019
1,102  483  
Stockholders' Equity (Deficit)*
Common stock, $0.001 par value; 100,000,000 shares authorized; 4,239,578 and 3,521,037 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively*
5  4  
Additional paid-in capital *210,152  200,507  
Accumulated deficit
(218,463) (183,149) 
Accumulated other comprehensive loss
(15,975) (14,422) 
Total JAKKS Pacific, Inc. stockholders' equity (deficit) *(24,281) 2,940  
Non-controlling interests
1,129  1,081  
Total stockholders' equity (deficit) *(23,152) 4,021  
Total liabilities, preferred stock and stockholders' equity (deficit)$300,420  $365,222  
* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.
See accompanying notes to condensed consolidated financial statements.
3


JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
 Three Months Ended June 30, (Unaudited)Six Months Ended June 30, (Unaudited)
 2020201920202019
Net sales$78,758  $95,182  $145,315  $166,008  
Cost of sales61,988  77,436  112,195  133,922  
Gross profit16,770  17,746  33,120  32,086  
Selling, general and administrative expenses24,664  33,870  57,000  69,136  
Restructuring charge1,631  22  1,631  270  
Pandemic related charges221    221    
Acquisition related and other  2,503    5,370  
Loss from operations(9,746) (18,649) (25,732) (42,690) 
Income from joint ventures    2    
Other income (expense), net16  (242) 54  (159) 
Change in fair value of preferred stock derivative liability1    2,083    
Change in fair value of convertible senior notes(7,727) (106) (52) (2,529) 
Interest income3  20  17  47  
Interest expense(5,543) (2,919) (11,090) (5,937) 
Loss before provision for income taxes(22,996) (21,896) (34,718) (51,268) 
Provision for income taxes272  589  548  344  
Net loss(23,268) (22,485) (35,266) (51,612) 
Net income attributable to non-controlling interests8  57  48  88  
Net loss attributable to JAKKS Pacific, Inc.$(23,276) $(22,542) $(35,314) $(51,700) 
Net loss attributable to common stockholders$(23,588) $(22,542) $(35,933) $(51,700) 
Loss per share - basic and diluted*$(7.70) $(9.55) $(11.81) $(21.93) 
Shares used in loss per share - basic and diluted*3,064  2,360  3,043  2,358  
Comprehensive loss$(23,187) $(22,935) $(36,819) $(50,759) 
Comprehensive loss attributable to JAKKS Pacific, Inc.$(23,195) $(22,992) $(36,867) $(50,847) 
* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.
See accompanying notes to condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)

Three and Six Months Ended June 30, 2020
 (Unaudited)
 Common Stock*Treasury
Stock
Additional
Paid-in
Capital*
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
JAKKS
Pacific, Inc.
Stockholders’
Equity (Deficit)*
Non-
Controlling
Interests
Total Stockholders'
Equity (Deficit)*
Balance, December 31, 2019$4  $  $200,507  $(183,149) $(14,422) $2,940  $1,081  $4,021  
Stock-based compensation expense—  —  252  —  —  252  —  252  
Repurchase of common stock for employee tax withholding—  —  (172) —  —  (172) —  (172) 
Preferred stock accrued dividends—  —  (307) —  —  (307) —  (307) 
Net income (loss)—  —  —  (12,038) —  (12,038) 40  (11,998) 
Foreign currency translation adjustment—  —  —  —  (1,634) (1,634) —  (1,634) 
Balance, March 31, 2020$4  $  $200,280  $(195,187) $(16,056) $(10,959) $1,121  $(9,838) 
Conversion of convertible senior notes1  —  9,472  —  —  9,473  —  9,473  
Stock-based compensation expense—  —  714  —  —  714  —  714  
Repurchase of common stock for employee tax withholding—  —  (2) —  —  (2) —  (2) 
Preferred stock accrued dividends—  —  (312) —  —  (312) —  (312) 
Net income (loss)—  —  —  (23,276) —  (23,276) 8  (23,268) 
Foreign currency translation adjustment—  —  —  —  81  81  —  81  
Balance, June 30, 2020$5  $  $210,152  $(218,463) $(15,975) $(24,281) $1,129  $(23,152) 

Three and Six Months Ended June 30, 2019
 (Unaudited)
 Common Stock*Treasury
Stock
Additional
Paid-in
Capital*
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
JAKKS
Pacific, Inc.
Stockholders’
Equity (Deficit)*
Non-
Controlling
Interests
Total Stockholders'
Equity (Deficit)*
Balance, December 31, 2018$3  $(24,000) $218,182  $(127,601) $(15,847) $50,737  $912  $51,649  
Stock-based compensation expense—  —  618  —  —  618  —  618  
Repurchase of common stock for employee tax withholding—  —  (249) —  —  (249) —  (249) 
Net income (loss)—  —  —  (29,158) —  (29,158) 31  (29,127) 
Foreign currency translation adjustment—  —  —  —  1,303  1,303  —  1,303  
Balance, March 31, 2019$3  $(24,000) $218,551  $(156,759) $(14,544) $23,251  $943  $24,194  
Stock-based compensation expense—  —  397  —  —  397  —  397  
Repurchase of common stock for employee tax withholding—  —  (24) —  —  (24) —  (24) 
Net income (loss)—  —  —  (22,542) —  (22,542) 57  (22,485) 
Foreign currency translation adjustment—  —  —  —  (450) (450) —  (450) 
Balance, June 30, 2019$3  $(24,000) $218,924  $(179,301) $(14,994) $632  $1,000  $1,632  
* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.

See accompanying notes to condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Six Months Ended June 30,
(Unaudited)
 
20202019
Cash flows from operating activities
 
 
Net loss
$(35,266) $(51,612) 
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts
423  (248) 
Depreciation and amortization
4,461  7,473  
Payment-in-kind interest
2,277    
Amortization of debt discount
1,388    
Write-off and amortization of debt issuance costs
702  803  
Share-based compensation expense
966  1,015  
Gain on disposal of property and equipment
(115) (61) 
Change in fair value of convertible senior notes
52  2,529  
Change in fair value of preferred stock derivative liability(2,083)   
Changes in operating assets and liabilities:
Accounts receivable
48,516  37,407  
Inventory
(3,422) 359  
Prepaid expenses and other assets
2,142  (12,079) 
Accounts payable
(9,239) 6,785  
Accrued expenses
(14,323) 3,714  
Reserve for sales returns and allowances
(6,053) (4,905) 
Income taxes payable(2,064) 13  
Other liabilities
(264) (58) 
Total adjustments
23,364  42,747  
Net cash used in operating activities(11,902) (8,865) 
Cash flows from investing activities
Purchases of property and equipment
(4,335) (5,205) 
Proceeds from sale of property and equipment
65    
Net cash used in investing activities
(4,270) (5,205) 
Cash flows from financing activities
Retirement of convertible senior notes
(1,905)   
Repayment of credit facility borrowings
  (7,500) 
Proceeds from loan under the Paycheck Protection Program6,206    
Repayment of term loan  (167) 
Repurchase of common stock for employee tax withholding
(174) (273) 
Net cash provided by (used in) financing activities4,127  (7,940) 
Net decrease in cash, cash equivalents and restricted cash(12,045) (22,010) 
Effect of foreign currency translation
(1,553) 853  
Cash, cash equivalents and restricted cash, beginning of period
66,286  58,205  
Cash, cash equivalents and restricted cash, end of period
$52,688  $37,048  
Cash paid during the period for:
Income taxes
$2,791  $68  
Interest
$6,720  $5,063  

As of June 30, 2020, there was $3.2 million of property and equipment purchases included in accounts payable. As of June 30, 2019, there was $3.4 million of property and equipment purchases included in accounts payable.
See Notes 1, 5, 6 and 9 for additional supplemental information to the condensed consolidated statements of cash flows.
See accompanying notes to condensed consolidated financial statements.
6



JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2020

Note 1 — Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to prevent the information presented from being misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, which contains audited financial information for the three years in the period ended December 31, 2019.

The information provided in this report reflects all adjustments (consisting solely of normal recurring items) that are, in the opinion of management, necessary to present fairly the financial position and the results of operations for the periods presented. Interim results are not necessarily, especially given seasonality, indicative of results to be expected for a full year.

The condensed consolidated financial statements include the accounts of JAKKS Pacific, Inc. and its wholly-owned subsidiaries (collectively, “the Company”). The condensed consolidated financial statements also include the accounts of DreamPlay Toys, LLC, a joint venture with NantWorks LLC, JAKKS Meisheng Trading (Shanghai) Limited, a joint venture with Meisheng Cultural & Creative Corp., Ltd., and JAKKS Meisheng Animation (HK) Limited, a joint venture with Hong Kong Meisheng Cultural Company Limited.

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 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 the 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 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.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new standard was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10 which deferred the effective date of ASU 2016-13 by three years for Smaller Reporting Companies. As a result, the effective date for the standard is fiscal years beginning after December 15, 2022, and interim periods therein, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which improves the effectiveness of the disclosures required under ASC 820 and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard did not have an impact on the Company’s condensed consolidated financial statements.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2020

In October 2018, the FASB issued ASU 2018-17, "Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities," which improves the accounting for variable interest entities by considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. This new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments are required to be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The adoption of this standard did not have an impact on the Company's condensed 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 intraperiod 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 Company is currently evaluating the impact that the adoption of this new guidance will have on its condensed consolidated financial statements.

Going Concern and Liquidity

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation and the resulting impact on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, it is extremely challenging for the Company to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, and liquidity for fiscal years 2020 and 2021. The first half of fiscal year 2020 has seen the full spectrum of stay-at-home orders and retail closures to reduced retailer hours and focus on “essential” items to some markets trying to take a business-as-usual approach. In addition, published data has indicated a similar wide range in some toy categories significantly outperforming last year’s comparable period sales while others lag behind, which is at least partly due to drastic changes in purchase occasions (e.g., staying at home with family in the backyard vs. attending a school acquaintance’s birthday party).

Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, it is likely the pandemic will have a material adverse effect on the Company’s sales expectations for fiscal year 2020.

In mid-March 2020, the Company began migrating to a work-from-home model in compliance with local guidance. In early April 2020, the Company began to reassess its revenue and expense projections for the year in an attempt to anticipate decreases in customer and consumer demand based on the uncertainty associated with the economic impact of the pandemic. In parallel, the Company began a review of worldwide spending to identify both short-term and long-term cost savings measures to preserve both profitability and liquidity in light of the potential for decreased product demand. By late April 2020, the Company had identified new revenue and spending objectives for the year 2020 and synchronized those expectations across the senior leadership team. It is the Company’s intention to carefully monitor the pandemic’s impact across markets, channels and customers and strike the right balance of pursuing opportunity while minimizing risk to the Company’s long-term health.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to monitor and explore any relevant government assistance programs that could support either cash liquidity or operating results in the short-medium term. As of the filing of this document, the Company continues to have no draw down on its credit facility with Wells Fargo.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2020

On June 12, 2020, the Company received a $6.2 million loan (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) within the CARES Act. The PPP Loan matures on June 2, 2022 and is subject to the CARES Act terms which include, among other terms, an interest rate of 1.00% per annum and monthly installment payments of $261,275 commencing on December 1, 2020. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The PPP Loan is subject to events of default and other provisions customary for a loan of this type. The application for the loan required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The 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. The forgiveness of the loan is also dependent on the Company having initially qualified for the loan.

It is the Company’s intention to use the proceeds of the PPP loan to support payroll and rent expenses over the six months following the receipt of the loan in accordance with the guidelines of the program, and to apply for forgiveness for a portion of the loan at the end of this time period. It is unknown whether any forgiveness will be granted. As a result, the Company is taking the approach that a portion of this loan is short-term and a portion is long-term, and has reflected that borrowing on the balance sheet, as appropriate.

On April 23, 2020, the Small Business Administration issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP. Subsequently, on April 28, 2020 the Secretary of the Treasury and Small Business Administrator announced that the government will review all PPP loans of more than $2 million for which the borrower applies for forgiveness. If the Company were to be audited and receive an adverse finding in such audit, the Company could be required to return the full amount of the PPP loan, which could reduce its liquidity, and potentially subject itself to fines and penalties.

As of June 30, 2020 and December 31, 2019, the Company held cash and cash equivalents, including restricted cash, of $52.7 million and $66.3 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $24.7 million and $27.0 million as of June 30, 2020 and December 31, 2019, 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 the Company expects would not be significant as of June 30, 2020.
The Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility (see Note 6 - Credit Facilities).

Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of the Company’s products, (2) the success of its licensed brands, (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 the Company’s ability to generate sufficient cash flows to operate the business. In addition, the Company’s business and liquidity are dependent to a significant degree on its vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on the Company’s cash flows and business. Given the conditions in the 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 the Company’s liquidity.

As of June 30, 2020, the Company has substantial indebtedness including $134.8 million of outstanding indebtedness under a First Lien Term Loan Facility Credit Agreement (the “New Term Loan Agreement”). As of June 30, 2020, the Company has no outstanding indebtedness under an amended and extended Credit Agreement (the “Amended ABL Credit Agreement” or “Amended Wells Fargo Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Company also has the aforementioned PPP loan of $6.2 million secured under the CARES Act program.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2020

The New Term Loan Agreement and Amended ABL each contain negative covenants that, subject to certain exceptions, limit the ability 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, as well as cross-default provisions. The Company secured the appropriate waivers from both parties before receiving the proceeds of the PPP loan. Commencing with the fiscal quarter ending September 30, 2020, the Company is also required to maintain a minimum Earnings Before Interest Tax Depreciation and Amortization (“EBITDA") of not less than $34.0 million over the previous twelve months and a minimum liquidity of not less than $10.0 million.

The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement, and cross-default provisions with the Amended Wells Fargo Credit Agreement. If an event of default occurs under either Agreement, the maturity of the amounts owed under the New Term Loan Agreement and the Amended Wells Fargo Credit Agreement may be accelerated.

The Company was in compliance with the financial covenants under the New Term Loan Agreement as of June 30, 2020. However, given the current uncertainties created by the COVID-19 pandemic, it is probable that the Company will not achieve the minimum EBITDA threshold required under the New Term Loan Agreement at September 30, 2020. Failure to satisfy such requirement would constitute an event of default under the New Term Loan Agreement and Amended ABL Credit Agreement unless the lenders agree to waive compliance with such requirement. The Company’s ability to fund operations and retire debt when due is dependent on a number of factors, some of which are beyond the Company's control and/or inherently difficult to estimate, including the Company's future operating performance and the factors mentioned above, among other risks and uncertainties. To the extent the Company is unable to fund its operations or retire debt when due, no assurances can be given that the Company will have the financial resources required to obtain, or that the conditions of the capital markets will support, any future debt or equity financings, which could have a material adverse impact on the Company’s business, results of operations and financial condition. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued.

The Company plans to negotiate waivers or obtain other accommodations to the satisfaction of its existing lenders, inclusive of Wells Fargo, the Term Loan group and the Company’s unsecured creditors. Although the lenders under the existing credit facilities may waive such covenants or provide other accommodations in event of default, they are not obligated to do so. The Company cannot make any assurances regarding the likelihood or certainty in being successful in obtaining these waivers in the event the Company is unable to achieve the minimum EBITDA threshold. Failure to obtain such a waiver would have a material adverse effect on the Company’s liquidity, financial condition and results of operations.

The Company’s Condensed Consolidated Financial Statements as of June 30, 2020 are being prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. They do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern.
Note 2 — Business Segments, Geographic Data, and Sales by 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 recently re-aligned its products into two reporting segments to better reflect the management and operation of the business. The Company’s segments are (i) Toys/Consumer Products and (ii) Halloween. Prior year’s segment reporting has been restated to reflect this change.
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JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2020