Business Wire | Jul 29, 2020 04:01PM EDT

JAKKS Pacific Reports Second Quarter 2020 Financial Results

Jul. 29, 2020

SANTA MONICA, Calif.--(BUSINESS WIRE)--Jul. 29, 2020--JAKKS Pacific, Inc. (NASDAQ: JAKK) today reported preliminary financial results for the second quarter ended June 30, 2020.

Second Quarter 2020 Overview vs. Same Period Last Year

* Net sales were $78.8 million, down 17% compared to $95.2 million reported in the comparable period in 2019. Sales in the 2020 second quarter were negatively impacted by the closure of many of the stores operated by the Company's retail customers during the stay-at-home mandates, both in the U.S. and Europe. * Net sales in the Company's Toys/Consumer Products segment declined 4% compared to last year, with increases in Boys' and Girls' toys being more than offset by declines in Seasonal products. Net sales of Toys/Consumer Products in North America were down 2% compared to last year; outside of North America, net sales of Toys/Consumer Products were down 14%. * Net sales in the Company's Disguise (Halloween) segment declined 38% compared to last year. Factors contributing to the decline include uncertainty among retailers over the impact that COVID-19 will have on Halloween merchandise sales, the Company's decision to prudently scale back shipments to retailers with elevated credit risk, and the fact that last year Disguise saw strong sales in the second quarter powered by a stronger entertainment calendar in 2019. * Gross margin was 21.3%, compared to 18.6% in the second quarter of 2019. Progress in lowering product cost as a percent of sales was somewhat offset by higher royalty expense and duty/freight expenses and, to a lesser degree, deleveraging of certain fixed costs due to lower volume. * Operating expenses, excluding restructuring and pandemic related charges, were $24.7 million compared to $33.9 million, excluding restructuring and acquisition related charges, in the second quarter of 2019, a reduction of 27% following a series of steps to reduce costs. * Net loss attributable to common stockholders was $23.6 million, or $7.70 per diluted share. This compares to a net loss attributable to common stockholders of $22.5 million, or $9.55 per diluted share, reported in the second quarter of 2019 (per share figures adjusted for a one-for-ten reverse stock split effective July 9, 2020). * Adjusted EBITDA (a non-GAAP measure) was negative $4.6 million, compared to negative $11.5 million in the 2019 second quarter. See note below on "Use of Non-GAAP Financial Information."

Management Commentary

"Over the past quarter, our organization like everyone else was challenged daily by the negative ramifications of the COVID-19 pandemic on both a personal and professional level. With that in mind, I'm extremely pleased with our financial results, especially considering that essentially all of our retailer customers were either shuttered for part of the quarter or operating with reduced hours and consumer access. We benefited from strong sales of Frozen 2, Fly Wheels, Minnie Mouse, Nintendo and ReDo skateboards, offset by declines from two Spring 2019 films: Disney's Aladdin and Godzilla: King of the Monsters. In addition, we had reduced volumes in certain low margin seasonal products which we have been selectively pruning to improve our overall profitability. In fact, excluding these lines we exited at the end of 2019, sales in our toy segment were up compared to last year, and roughly flat through the first half of 2020," said Stephen Berman, CEO of JAKKS Pacific.

"The decline we experienced in sales of Disguise reflect what we believe is pervasive uncertainty among retailers with regard to Halloween this year, and the fact that we are taking a more cautious approach to credit risk. We believe consumers will celebrate Halloween in some way this year, but perhaps with lower levels of spending.

"Among our major customers that report the data, our retail POS was up mid-teens through June, and our retail inventories were down mid-to-high teens at mid-year. Our goal for the second half of 2020 is to focus on our proven, evergreen brands and categories, keep costs low, preserve cash and set up the Company for a strong 2021.

"We continue to prioritize the safety of our employees, our customers and our suppliers, and have been slowly and cautiously returning our facilities to normal levels of activity. We are very proud of what our team has been able to accomplish against this challenging backdrop, but we believe we are taking the right steps to position the Company for success in the future."

Cash and Cash Equivalents

The Company's cash and cash equivalents (including restricted cash) totaled $52.7 million as of June 30, 2020 compared to $37.0 million as of June 30, 2019 and $66.3 million as of December 31, 2019.

Use of Non-GAAP Financial Information

In addition to the preliminary results reported in accordance with U.S. GAAP included in this release, the Company has provided certain non-GAAP financial information including Adjusted EBITDA which is a non-GAAP metric that excludes various items that are detailed in the financial tables and accompanying footnotes reconciling GAAP to non-GAAP results contained in this release. Management believes that the presentation of these non-GAAP financial measures provides useful information to investors because the information may allow investors to better evaluate ongoing business performance and certain components of the Company's results. In addition, the Company believes that the presentation of these financial measures enhances an investor's ability to make period-to-period comparisons of the Company's operating results. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. The Company has reconciled the non-GAAP financial information included in this release to the nearest GAAP measures. See the attached "Reconciliation of Non-GAAP Financial Information."

Conference Call Live Webcast

JAKKS Pacific will webcast its second quarter earnings call at 5:00 p.m. Eastern Time/2:00 p.m. Pacific Time today. To listen to the live webcast and access the accompanying presentation slides, go to www.jakks.com/investors and click on the earnings website link under the Presentations tab at least 10 minutes prior to register, download and install any necessary audio software.

A replay of the call will be available on JAKKS' website approximately one hour following completion of the call through August 5, 2020 ending at 7:59 p.m. Eastern Time/4:59 p.m. Pacific Time. The playback can be accessed by calling (855) 859-2056 or (404) 537-3406 for international callers, with passcode 4594426 for both playback numbers.

About JAKKS Pacific, Inc.

JAKKS Pacific, Inc. (NASDAQ: JAKK) is a leading designer, manufacturer and marketer of toys and consumer products sold throughout the world, with its headquarters in Santa Monica, California. JAKKS Pacific's popular proprietary brands include; Fly Wheels(tm), Kitten Catfe(tm), Perfectly Cute(tm), Real Workin' Buddies(tm), Squish-Dee-Lish(tm), XPV(r), Disguise(r), Moose Mountain(r), Maui(r), Kids Only!(r); a wide range of entertainment-inspired products featuring premier licensed properties; and C'est Moi(tm), a new generation of clean beauty. Through JAKKS Cares, the company's commitment to philanthropy, JAKKS is helping to make a positive impact on the lives of children. Visit us at www.jakks.com and follow us on Instagram (@jakkstoys), Twitter (@jakkstoys) and Facebook (JAKKS Pacific).

Forward-Looking Statements

This press release may contain "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations, estimates and projections about JAKKS Pacific's business based partly on assumptions made by its management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such statements due to numerous factors, including, but not limited to, those described above, changes in demand for JAKKS Pacific's products, product mix, the timing of customer orders and deliveries, the impact of competitive products and pricing, and disruptions to operations, staffing, consumer demand and retail customer activity caused by the COVID-19 pandemic. The "forward-looking statements" contained herein speak only as of the date on which they are made, and JAKKS undertakes no obligation to update any of them to reflect events or circumstances after the date of this release.

JAKKS Pacific, Inc. and SubsidiariesCondensed Consolidated Balance Sheets (Unaudited) June 30, December 31,

2020 2019

(In thousands)ASSETS Current assets:Cash and cash equivalents $ 48,133 $ 61,613

Restricted cash 4,555 4,673

Accounts receivable, net 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 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, net 27,644 32,081

Goodwill 35,083 35,083

Intangibles and other assets, net 12,894 22,414

Total assets $ 300,420 $ 365,222

LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities:Accounts payable and accrued expenses $ 78,295 $ 100,711

Reserve for sales returns and allowances 32,312 38,365

Income taxes payable 502 2,492

Short term operating lease liabilities 9,632 9,451

Short term debt, net 1,772 1,905

Total current liabilities 122,513 152,924

Long term operating lease liabilities 20,743 25,632

Debt, non-current portion, net 174,164 174,962

Other liabilities 3,333 5,409

Income taxes payable 1,491 1,565

Deferred tax liability, net 226 226

Total liabilities 322,470 360,718

Preferred stock 1,102 483

Stockholders' equity (deficit):Common stock, $.001 par value 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 (24,281 ) 2,940 (deficit)Non-controlling interests 1,129 1,081

Total stockholders' equity (deficit) (23,152 ) 4,021

Total liabilities, preferred stock and stockholders' $ 300,420 $ 365,222 equity (deficit)

JAKKS Pacific, Inc. and SubsidiariesCondensed Consolidated Statements of Operations (Unaudited) Three Months Ended June Six Months Ended June 30, 30,

2020 2019 2020 2019

(In thousands, except per (In thousands, except per share data) share data)

Net sales $ 78,758 $ 95,182 $ 145,315 $ 166,008

Less cost of salesCost of goods 46,309 60,691 84,013 105,799

Royalty expense 13,885 14,125 25,360 23,966

Amortization of tools 1,794 2,620 2,822 4,157 and moldsCost of sales 61,988 77,436 112,195 133,922

Gross profit 16,770 17,746 33,120 32,086

Direct selling expenses 3,908 8,115 12,410 16,343

Selling, general and 19,971 24,136 42,951 49,477 administrative expensesDepreciation and 785 1,619 1,639 3,316 amortizationRestructuring charge 1,631 22 1,631 270

Pandemic related charges 221 - 221 -

Acquisition related and - 2,503 - 5,370 otherLoss from operations (9,746 ) (18,649 ) (25,732 ) (42,690 )

Other income (expense):Income from joint - - 2 - venturesOther income (expense), 16 (242 ) 54 (159 )netChange in fair value of (7,727 ) (106 ) (52 ) (2,529 )convertible senior notesChange in fair value of 1 - 2,083 - preferred stockderivative liabilityInterest income 3 20 17 47

Interest expense (5,543 ) (2,919 ) (11,090 ) (5,937 )

Loss before provision (22,996 ) (21,896 ) (34,718 ) (51,268 )for income taxesProvision for income 272 589 548 344 taxesNet loss (23,268 ) (22,485 ) (35,266 ) (51,612 )

Net income attributable 8 57 48 88 to non-controllinginterestsNet loss attributable to $ (23,276 ) $ (22,542 ) $ (35,314 ) $ (51,700 )JAKKS Pacific, Inc.Net loss attributable to $ (23,588 ) $ (22,542 ) $ (35,933 ) $ (51,700 )common stockholdersLoss per share - basic $ (7.70 ) $ (9.55 ) $ (11.81 ) $ (21.93 )and dilutedShares used in loss per 3,064 2,360 3,043 2,358 share - basic anddiluted

JAKKS Pacific, Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Information (Unaudited)

Reconciliation of GAAP to Non-GAAP measures:

This press release and accompanying schedules provide certain informationregarding Adjusted EBITDA and Adjusted Net Income (Loss), which may beconsidered non-GAAP financial measures under the rules of the Securities andExchange Commission. The non-GAAP financial measures included in the pressrelease are reconciled to the corresponding GAAP financial measures below, asrequired under the rules of the Securities and Exchange Commission regardingthe use of non-GAAP financial measures. We define Adjusted EBITDA as income(loss) from operations before depreciation, amortization and adjusted forcertain non-recurring and non-cash charges, such as reorganization expenses andrestricted stock compensation expense. Net income (loss) is similarly adjustedand tax-effected to arrive at Adjusted Net Income (Loss). Adjusted EBITDA andAdjusted Net Income (Loss) are not recognized financial measures under GAAP,but we believe that they are useful in measuring our operating performance. Webelieve that the use of the non-GAAP financial measures enhances an overallunderstanding of the Company's past financial performance, and provides usefulinformation to the investor by comparing our performance across reportingperiods on a consistent basis. Investors should not consider these measures in isolation or as a substitutefor net income, operating income, or any other measure for determining theCompany's operating performance that is calculated in accordance with GAAP. Inaddition, because these measures are not calculated in accordance with GAAP,they may not necessarily be comparable to similarly titled measures employed byother companies.

Three Months Ended June Six Months Ended June 30, 30, 2020 2019 2020 2019

(In thousands) (In thousands) Net loss $ (23,268 ) $ (22,485 ) $ (35,266 ) $ (51,612 )

Income from joint - - (2 ) - venturesOther income (expense), (16 ) 242 (54 ) 159 netInterest income (3 ) (20 ) (17 ) (47 )

Interest expense 5,543 2,919 11,090 5,937

Provision for income 272 589 548 344 taxesDepreciation and 2,579 4,239 4,461 7,473 amortizationAcquisition related and - 2,503 - 5,370 otherRestricted stock 714 397 966 1,015 compensation expenseChange in fair value of 7,727 106 52 2,529 convertible seniornotesChange in fair value of (1 ) - (2,083 ) - preferred stockderivative liabilityRestructuring charge 1,631 22 1,631 270

Pandemic related 221 - 221 - charges Adjusted EBITDA $ (4,601 ) $ (11,488 ) $ (18,453 ) $ (28,562 )

Three Months Ended June Six Months Ended June 30, 30, 2020 2019 2020 2019

(In thousands, except per (In thousands, except per share data) share data) Net loss attributable $ (23,588 ) $ (22,542 ) $ (35,933 ) $ (51,700 )to common stockholdersRestricted stock 714 397 966 1,015 compensation expenseAcquisition related and - 2,503 - 5,370 otherChange in fair value of 7,727 106 52 2,529 convertible seniornotesChange in fair value of (1 ) - (2,083 ) - preferred stockderivative liabilityRestructuring charge 1,631 22 1,631 270

Pandemic related 221 - 221 - chargesTax impact of (117 ) - (117 ) (15 )additional charges Adjusted net loss $ (13,413 ) $ (19,514 ) $ (35,263 ) $ (42,531 )attributable to commonstockholders Adjusted loss per share $ (4.38 ) $ (8.27 ) $ (11.59 ) $ (18.04 )- basic and dilutedShares used in adjusted 3,064 2,360 3,043 2,358 loss per share - basicand diluted

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CONTACT: JAKKS Pacific Jared Wolfson, (424) 268-9330 SVP, Media and Entertainment

CONTACT: Gateway Investor Relations Sean McGowan, (949) 574-3860 Managing Director smcgowan@gatewayir.com