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What changed in JAKKS PACIFIC INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of JAKKS PACIFIC INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+176 added−196 removedSource: 10-K (2024-03-15) vs 10-K (2023-04-14)

Top changes in JAKKS PACIFIC INC's 2023 10-K

176 paragraphs added · 196 removed · 154 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeCurrently, among others, we have license agreements with Nickelodeon®, Disney®, Pixar®, Marvel®, NBC Universal®, Microsoft©, Sega®, Sony®, Netflix® and WarnerMedia®, as well as with the licensors of many other popular characters. We also license IP from other toy companies for categories in which they do not offer products found within our Core Product Lines.
Biggest changeWe 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 with Nickelodeon®, Disney®, Pixar®, Marvel®, NBC Universal®, Microsoft®, Sega®, Sony®, Netflix® and WarnerMedia®, as well as with the licensors of many other popular characters.
Our products include: ● Action figures and accessories, including licensed characters based on the Nintendo®, Sonic the Hedgehog® and Apex Legends® franchises and our own proprietary brands including Creepy Crawlers®; ● Toy vehicles, including Xtreme Power Dozer®, Xtreme Power Dump Truck®, XPV®, Road Champs®, Fly Wheels® and AirTitans® inflatable remote-control dinosaur; ● Dolls and accessories, including small dolls, large dolls, fashion dolls and baby dolls based on licenses, including Disney Encanto®, Disney 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 developed exclusively for certain retail customers in various product categories; ● Foot-to-floor ride-on products, including those based on Fisher-Price®, Nickelodeon®, and Hasbro®/Entertainment One® licenses and inflatable play environments, tents and wagons; ● Role play, dress-up, pretend play and novelty products for boys and girls based on well-known brands and entertainment properties such as Disney Frozen® , Black & Decker® , Disney Princess®, and Disney Encanto®, 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 Disney® characters, Nickelodeon® , Hasbro® / Entertainment One® licenses; ● Halloween and everyday costumes for all ages based on licensed and proprietary non-licensed brands, including Super Mario Bros.®, Microsoft’s Halo®, Disney-Pixar Toy Story®, Harry Potter®, Minions®, Sesame Street®, Power Rangers®¸ Hasbro® brands and Disney Frozen®, Disney Princess® and related Halloween accessories; ● Outdoor activity toys including ReDo Skateboard Co.® and junior sports toys including Sky Ball® hyper-charged balls, SportsZone™ sport sets and Wave Hoop® toy hoops marketed under our Maui® brand; and ● Board games under the brand JAKKS Wild Games™, including Temple Raider®, K.O.
Our products include: ● Action figures and accessories, including licensed characters based on the Nintendo®, Sonic the Hedgehog® and Apex Legends® franchises and our own proprietary brands including Creepy Crawlers®; ● Toy vehicles, including Xtreme Power Dozer®, Xtreme Power Dump Truck®, XPV®, Road Champs®, Fly Wheels® and AirTitans® inflatable remote-control dinosaur; ● Dolls and accessories, including small dolls, large dolls, fashion dolls and baby dolls based on licenses, including Disney Wish®, Disney Encanto®, Disney 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 developed exclusively for certain retail customers in various product categories; ● Foot-to-floor ride-on products, including those based on Fisher-Price®, Nickelodeon®, and Hasbro® licenses and inflatable play environments, tents and wagons; ● Role play, dress-up, pretend play and novelty products for boys and girls based on well-known brands and entertainment properties such as Disney Frozen® , Black & Decker® , Disney Princess®, and Disney Encanto®, as well as those based on our own proprietary brands; ● Indoor and outdoor kids’ furniture, activity trays and tables and room décor; seasonal and outdoor products, including those based on Disney® characters, Nickelodeon® and Hasbro® licenses; ● Halloween and everyday costumes for all ages based on licensed and proprietary non-licensed brands, including Super Mario Bros.®, Microsoft’s Halo®, Disney-Pixar Toy Story®, Harry Potter®, Minions®, Sesame Street®, Power Rangers®¸ Hasbro® brands and Disney Frozen®, Disney Princess® and related Halloween accessories; ● Outdoor activity toys including ReDo Skateboard Co.® and junior sports toys including Sky Ball® hyper-charged balls, SportsZone™ sport sets and Wave Hoop® toy hoops marketed under our Maui® brand; and ● Board games under the brand JAKKS Wild Games®, including Temple Raider®, K.O.
We intend to continue expanding distribution of our products into foreign territories and, accordingly, we have: ● engaged representatives to oversee sales in certain foreign territories; ● engaged distributors in certain foreign territories; ● established direct relationships with retailers in certain foreign territories; ● opened sales offices in Canada, Europe and Mexico; and ● opened distribution centers in the UK and Netherlands.
We intend to continue expanding distribution of our products into foreign territories and, accordingly, we have: ● engaged representatives to oversee sales in certain foreign territories; ● engaged distributors in certain foreign territories; ● established direct relationships with retailers in certain foreign territories; ● opened sales offices in Canada, Europe and Mexico; and ● opened distribution centers in the UK, Netherlands, Italy and Mexico.
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.
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 current marketplace.
No other customer accounted for more than 10% of our net sales in 2021. We generally sell products to our customers on open account with payment terms typically varying from 30 to 90 days or, in some cases, pursuant to letters of credit.
No other customer accounted for more than 10% of our net sales in 2022. We generally sell products to our customers on open account with payment terms typically varying from 30 to 90 days or, in some cases, pursuant to letters of credit.
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 re-introduction of previously established products and product lines. Over the years, the toy industry has experienced substantial consolidation among both toy companies and toy retailers.
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 re-introduction of previously established products and product lines. Over the decades, the toy industry has experienced substantial consolidation among both toy companies and toy retailers.
Royalties payable to inventors and developers generally range from 1% to 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.
Royalties payable to inventors and developers generally range from 1% to 5% 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.
Currently, we have ongoing relationships with over sixty 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 on short notice.
Currently, we have ongoing relationships with over 50 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 on short notice.
Typically, the development process takes from nine to eighteen months from concept to production and shipment to our 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. 8 Table of Contents We employ a staff of designers for all of our product lines.
Typically, the development process takes from nine to eighteen months from concept to production and shipment to our 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.
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 operations. 9 Table of Contents Competition Competition in the toy industry is intense.
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 operations. Competition Competition in the toy industry is intense.
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 television/media advertising. Product Development Each of our product lines has an in-house manager responsible for product development.
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 television/media advertising. 8 Table of Contents Product Development Each of our product lines has an in-house manager responsible for product development.
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 a US warehouse and fulfillment facility.
As of December 31, 2023, Meisheng owns 5.2% 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 a US warehouse and fulfillment facility.
Industry Overview According to Toy 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 $29.2 billion in 2022.
Industry Overview According to Toy 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 $28.0 billion in 2023.
In addition, we compete in our Halloween costume lines with 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 2022, 57.1% of our net sales were made in the third and fourth quarters.
In addition, we compete in our Halloween costume lines with 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 2023, 61.4% of our net sales were made in the third and fourth quarters.
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 in-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.
We empower our management to identify top performers and mentor them. We encourage all employees to take advantage of in-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.
Generally, our license agreements for products and concepts call for royalties ranging from 1% to 22% of net sales, and some may require minimum royalty guarantees and up-front or advanced royalty payments against those guarantees. Our principal products are highlighted above in our Company Overview.
Generally, our license agreements for products and concepts call for royalties ranging from 1% to 22% of net sales, and some may require minimum royalty guarantees and up-front or advanced royalty payments against those guarantees.
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 principal products are highlighted above in our Company Overview. 7 Table of Contents 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.
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.
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™ and Amazon.com®.
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 $151.9 million, or 19.1% of our net sales in 2022 and approximately $108.9 million, or 17.5% of our net sales in 2021.
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 $153.7 million, or 21.6% of our net sales in 2023 and approximately $151.9 million, or 19.1% of our net sales in 2022.
We recently entered the skateboard space at a retailer’s request and are now expanding into related protective gear and accessories. ●Pursue Strategic Acquisitions. We have supplemented our internal growth with selected strategic acquisitions. Most of the product lines we market today were originally acquired via acquisition over the past 20+ years.
In recent years, we entered the skateboard space at a retailer’s request and have since expanded into related protective gear and accessories. ●Pursue Strategic Acquisitions. We have supplemented our internal growth with selected strategic acquisitions. Most of the product lines we market today were originally acquired via acquisition over the past 20+ years. ●Acquire Additional Character and Product Licenses.
This includes both online and 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 are committed to providing a safe, healthy and productive working environment for all of our employees globally.
This includes both online and 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.
Our two largest customers are Walmart® and Target®, which accounted for 28.4% and 25.5%, respectively, of our net sales in 2022. No other customer accounted for more than 10% of our net sales in 2022. Our Growth Strategy Key elements of our growth strategy include: ●Expand Core Product Lines.
Our three largest customers are Target®, Walmart® and Amazon®, which accounted for 30.3%, 20.8% and 10.5%, respectively, of our net sales in 2023. No other customer accounted for more than 10% of our net sales in 2023. Our Growth Strategy Key elements of our growth strategy include: ●Expand Core Product Lines.
In 2022, our two largest customers, Walmart and Target, accounted for 28.4% and 25.5%, respectively, of our net sales. No other customer accounted for more than 10% of our net sales in 2022. In 2021, our two largest customers, Walmart and Target, accounted for 26.9% and 28.4%, respectively, of our net sales.
Our three largest customers are Target®, Walmart® and Amazon®, which accounted for 30.3%, 20.8% and 10.5%, respectively, of our net sales in 2023. No other customer accounted for more than 10% of our net sales in 2023. In 2022, our two largest customers, Walmart® and Target®, accounted for 28.4% and 25.5%, respectively, of our net sales.
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.
We also contract the manufacture of certain products from Hong Kong Meisheng Cultural Company Limited (“Meisheng”), which involved payments to Meisheng of approximately $75.7 million and $120.5 million for the years ended December 31, 2023 and 2022, respectively.
In the same vein, we enforce our rights against infringers because we recognize our intellectual property rights are significant assets that contribute to our success.
We also register certain aspects of some of our products with the U.S. Copyright Office. In the same vein, we enforce our rights against infringers because we recognize our intellectual property rights are significant assets that contribute to our success.
Tools, dies and molds represent a substantial portion of our property and equipment with a net book value of $14.1 million and $11.6 million as of December 31, 2022 and 2021, respectively. Substantially all of these assets are located in China.
Tools, dies and molds represent a substantial portion of our property and equipment with a net book value of $13.7 million and $14.1 million as of December 31, 2023 and 2022, respectively.
The contents of our website are not incorporated in or deemed to be a part of this Annual Report on Form 10-K. 11 Table of Contents
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. 12 Table of Contents
In 2022, our sales generated outside the United States were approximately $151.9 million, or 19.1% of total net sales. In 2020, we migrated from a distributor model to selling 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 mutual businesses.
In 2020, we migrated from a distributor model to selling 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 mutual businesses. We currently utilize warehouses in the United Kingdom, the Netherlands and Italy (opened in 2023) to support sales expansion in Europe.
We intend to continue to pursue new licenses from these media & entertainment companies along with other licensors. We also intend to continue to secure additional inventions and product concepts through our existing network of inventors and product developers. ●Expand International Sales. We believe that non-US markets: Europe, Australia, Canada, Latin America and Asia, offer us significant growth opportunities.
We also intend to continue to secure additional inventions and product concepts through our existing network of inventors and product developers. ●Expand International Sales. We believe that non-US markets: Europe, Australia, Canada, Latin America and Asia, offer us significant growth opportunities. In 2023, our sales generated outside the United States were approximately $153.7 million, or 21.6% of total net sales.
JAKKS Pacific, Inc. continuously strives to create a safe, healthy, productive and harmonious work environment. 10 Table of Contents As of December 31, 2022, we 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.
As of December 31, 2023, we had approximately 659 employees (including temporary and seasonal employees) working in over 10 countries worldwide to create innovative products and experiences that inspire, entertain, and develop children through play, with approximately 277 employees (42% of the total workforce) located outside the U.S. Employee Engagement One of our main focuses is employee retention.
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 thereunder, and various other regulations in the European Union and other jurisdictions.
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 Table of Contents 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 thereunder, and various other regulations in the European Union and other jurisdictions.
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 also register certain aspects of some of our products with the U.S. Copyright Office.
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.
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 28 th Street, Santa Monica, California 90405. Our telephone number is (424) 268-9444 and our Internet Website address is www.jakks.com.
(These website addresses are not intended to function as hyperlinks, and the information contained in our website and in the SEC’s website is not intended to be a part of this filing.) 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.
We also sell our products through e-commerce sites, including Walmart.com®, Target.com™ and Amazon.com®. 7 Table of Contents 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 to our customers, many of whom take title to the goods in China.
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 to our customers, many of whom take title to the goods in China. These methods allow us to reduce certain operating costs and working capital requirements.
Environmental Issues We may 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.
Health and Safety We are committed to providing a safe, healthy and productive working environment for all of our employees globally. 11 Table of Contents Environmental Issues We may be subject to legal and financial obligations under environmental, health and safety laws in the United States and in other jurisdictions where we operate.
Human Capital Our success comes from recruiting, retaining and motivating talented individuals around the world.
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.
Item 1. Business In this report, “JAKKS,” the “Company,” “we,” “us” and “our” refer to JAKKS Pacific, Inc., its subsidiaries and our majority-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, kids indoor and outdoor furniture, and other consumer products.
Item 1. Business In this report, “JAKKS,” the “Company,” “we,” “us” and “our” refer to JAKKS Pacific, Inc., its subsidiaries and our majority-owned joint venture.
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.
These excesses in turn generated incremental costs as inventory levels exceeded normal capacity levels, and temporary price reductions were utilized to accelerate consumer demand.
Patents, Trademarks, Copyrights and Licenses 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.
Substantially all of these assets are located in China. 9 Table of Contents Patents, Trademarks, Copyrights and Licenses We routinely pursue protection of our products through some form or combination of intellectual property right(s).
Removed
In 2022, we evaluated several potential acquisitions although none resonated to the point of reaching an agreement. ●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.
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Company Overview We are a leading multi-product line, multi-brand toy company that designs, produces, markets, sells and distributes toys and related kid-targeted consumer products, inclusive of kids indoor and outdoor furniture, costumes and various product lines in the sporting goods and home furnishings space.
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Although the COVID-19 pandemic had a significantly negative impact on our international business, we remain focused on international being a source of revenue growth. We currently utilize one warehouse in the United Kingdom and another in the Netherlands to support sales expansion in that region. ●Capitalize On Our Operating Efficiencies.
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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 companies along with other licensors.
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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.
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We also have warehouse capacity in Mexico. ●Capitalize On Our Operating Efficiencies.
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The immediate and continuous response was to support a 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.
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We are not currently aware of any material environmental liabilities associated with any of our operations.
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In addition, we have previously filed registration statements and other documents with the SEC. Any document we file may be inspected without charge at the SEC’s website at www.sec.gov.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

46 edited+6 added−18 removed120 unchanged
Biggest changeAccordingly, we cannot assure that our growth strategy will be successful. 21 Table of Contents 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.
Biggest changeAlthough that incident did not result in material damage to our operations or cash flow, there is no assurance that any future material breach of the security of our computer systems would not occur, and such occurrences could have a material and adverse effect on our financial position, results of operations and cash flows. 22 Table of Contents We rely extensively on information technology in our operations, and any material failure, inadequacy, or interruption of that technology could have a material adverse impact on our business.
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, broadly, be it taking share of children ’ s discretionary time or otherwise; ● shorter life cycles for individual products; ● higher consumer expectations for product quality, functionality, price-value and 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.
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, broadly, be it taking share of children ’ s discretionary time or otherwise; ● shorter life cycles for individual products; ● higher consumer expectations for product quality, functionality, price-value and 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 ” retailer browsing to more online experiences.
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.
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 royalty commitments assigned to specific geographic regions or countries.
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 natural disasters such as earthquakes and wildfires.
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 in another region as Southern California is prone to natural disasters such as earthquakes and wildfires.
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. 13 Table of Contents 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.
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. 14 Table of Contents 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 increased demand upon management may necessitate our recruitment and retention of qualified management personnel. We cannot assure that we will be able to recruit and retain qualified personnel or expand and manage our operations effectively and profitably.
The increased demand upon management may necessitate our recruitment and retention of additional qualified management personnel. We cannot assure that we will be able to recruit and retain qualified personnel or expand and manage our operations effectively and profitably.
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. 23 Table of Contents 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.
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. 24 Table of Contents 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.
Our corporate headquarters, distribution center and information technology systems are in Santa Monica and the City of Industry, California, and the overwhelming majority of our U.S.-based staff lives in Southern California.
Our corporate headquarters, distribution center and information technology systems are in Santa Monica and the City of Industry, California, and the majority of our U.S.-based staff lives in Southern California.
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. 22 Table of Contents 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.
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. 23 Table of Contents 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.
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.
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 2023, 2022 or 2021.
Any or all of the foregoing factors may adversely affect our business, results of operations and financial condition. 12 Table of Contents There are risks associated with our license agreements. ● Our current licenses require us to pay minimum royalties.
Any or all of the foregoing factors may adversely affect our business, results of operations and financial condition. 13 Table of Contents There are risks associated with our license agreements. ● Our current licenses require us to pay minimum royalties.
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. 16 Table of Contents 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.
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.
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.
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 through traditional in-store browsing and unplanned purchase.
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.
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. 16 Table of Contents 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.
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.
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, 2023, $35.1 million, or 8.8% of our total assets represented goodwill.
Because of the importance of international sales and international sourcing of manufacturing to our business, our results of operations and financial condition could be significantly and adversely affected if any of the risks described above were to occur. 19 Table of Contents Legal proceedings may harm our business, results of operations, and financial condition.
Because of the importance of international sales and international sourcing of manufacturing to our business, our 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.
If we encounter any disruptions to 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 processing our merchandise.
If we encounter any disruptions to 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 another pandemic, then we may be prevented from effectively operating, shipping and processing our merchandise.
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 sales.
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 sales. We derive a significant portion of our net sales from a limited number of licensors.
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.
Any (i) failure by us to comply with the covenants or other provisions of the credit line (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 matures in June 2026.
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.
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 March 15, 2024, we have not sold any shares of the common stock.
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.
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 March 15, 2024, we have not sold any securities pursuant to our shelf registration statement.
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.
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.
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.
We have on file with the SEC an effective registration statement pursuant to which we may issue, from time to time, up to $150 million of securities (which will be reduced by any amount of securities sold pursuant to the ATM Agreement) 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 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. 17 Table of Contents We do not have long-term contracts with our third-party manufacturers.
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 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.
We have entered into an At the Market Issuance Sales Agreement (“ATM Agreement”), pursuant to which we may issue, from time to time, up to $75.0 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.
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.
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. 25 Table of Contents Item 1B. Unresolved Staff Comments None.
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.
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. 20 Table of Contents 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.
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).
In June 2021, we entered into and consummated a binding definitive agreement with JPMorgan Chase (for an asset-based credit line) with the objective of increasing our overall liquidity. 15 Table of Contents 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 default, which includes, among other things, failure to comply with certain financial 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).
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 could be negatively affected.
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 could be negatively affected. 21 Table of Contents The inability to successfully defend claims from taxing authorities or the adoption of new tax legislation could adversely affect our results of operations and financial condition.
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.
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.
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.
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. 18 Table of Contents The toy industry is highly competitive and our inability to compete effectively may materially and adversely impact our business, results of operations and financial condition.
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.
Either scenario could have a negative impact on our overall business performance. 17 Table of Contents 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.
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.
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.
Our two largest customers, Walmart and Target, accounted for 53.9% of our net sales in 2022.
Our three largest customers, Target®, Walmart® and Amazon®, accounted for 61.6% of our net sales in 2023.
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 have entered into an At the Market Issuance Sales Agreement, 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 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. 18 Table of Contents 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 operate our core functions and/or ship merchandise to our customers, which would adversely affect our business.
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 operate our core functions and/or ship merchandise to our customers, which would adversely affect our business.
Sales to our international customers comprised approximately 19.1% of our net sales for the year ended December 31, 2022 and approximately 17.5% of our net sales for year ended December 31, 2021. We expect our sales to international customers to account for a greater portion of our revenues in future fiscal periods.
We expect our sales to international customers to account for a greater portion of our revenues in future fiscal periods.
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.
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.
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.
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.
Any disruption or shut down at these locations could significantly impact our operations and have a material adverse effect on our financial condition and results of operations. In addition, it is possible that our business operations will be adversely impacted by future climate changes, albeit in ways we cannot predict or quantify at this time.
Any disruption or shut down at these locations could significantly impact our operations and have a material adverse effect on our financial condition and results of operations.
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. 20 Table of Contents Restructuring our workforce can be disruptive and harm our results of operations and financial condition.
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.
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 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.
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.
We cannot provide assurance that we will not be a party to additional legal proceedings in the future.
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.
We sell products and operate facilities in numerous countries outside the United States. Sales to our international customers comprised approximately 21.6% of our net sales for the year ended December 31, 2023 and approximately 19.1% of our net sales for year ended December 31, 2022.
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. 15 Table of Contents 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.
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.
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. 14 Table of Contents Restrictions under or the loss of availability under our term loan and revolving credit line could adversely impact our business and financial condition .
Restrictions under or the loss of availability under our revolving credit line could adversely impact our business and financial condition .
Removed
We derive a significant portion of our net sales from a limited number of licensors, one of which accounted for over 61% of our net sales in 2022.
Added
The continuing conflict in the Middle East and its impact on the Red Sea shipping routes, as well as the climate driven transit disruptions at the Panama Canal in Middle America, may ultimately negatively impact the global flow of goods with increasing transit times and cost, which could adversely affect our ability to deliver our products in a timely manner and maintain our expected cost structure.
Removed
The COVID-19 pandemic has left many customers outside of our largest customers under varying degrees of financial distress.
Added
We do not have long-term contracts with our third-party manufacturers.
Removed
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.
Added
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.
Removed
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.
Added
In addition, it is possible that our business operations will be adversely impacted by future climate changes, albeit in ways we cannot predict or quantify at this time. 19 Table of Contents We have substantial sales and manufacturing operations outside of the United States, subjecting us to risks common to international operations.
Removed
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.
Added
Accordingly, we cannot assure that our growth strategy will be successful. Failures of our computer-based information technology and cybersecurity breaches could damage our business. We use computer-based technology systems to conduct significant operational activities and to maintain our business records. These systems are dependent upon the global world-wide web infrastructure known as the “internet”.
Removed
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.
Added
A material breach in the security of our computer technology systems could result in third parties obtaining or altering the company’s data, including sensitive data of our customers, suppliers, and employees. We experienced a threat to the security of our computer systems in December 2022 which resulted in the leakage of certain data, including information about our employees.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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 11 th terrorist attacks and could be similarly affected by any future attacks.
Removed
The toy industry is highly competitive and our inability to compete effectively may materially and adversely impact our business, results of operations and financial condition. The toy industry is highly competitive.
Removed
We cannot assure you that other parties will not assert intellectual property claims against us in the future.
Removed
In particular, in April 2020 the company executed a 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 results of operations and financial condition.
Removed
We have exposures to similar security risks faced by other large companies that have data stored on their information technology systems. In December 2022 we were the target of a ransomware attack which caused a temporary disruption in our information technology system that did not have a material adverse impact on our results of operations.
Removed
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.
Removed
There is also no assurance that such an event or other attacks against our information technology systems in the future might not have 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.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeProperties The following is a listing of the principal leased offices maintained by us as of April 14, 2023 Approximate Lease Expiration Property Location Square Feet Date US* Distribution Center City of Industry, California 800,000 April 30, 2025 Disguise Office Poway, California 24,200 June 30, 2024 Corporate Headquarters/Showroom Santa Monica, California 65,858 January 31, 2024 International * Europe Office Bracknell, United Kingdom 8,957 January 19, 2027 Hong Kong Headquarters Kowloon, Hong Kong 18,500 June 30, 2025 * The Costumes segment is included in the properties listed above. 24 Table of Contents
Biggest changeProperties The following is a listing of the principal leased offices maintained by us as of March 15, 2024 Approximate Lease Expiration Property Location Square Feet Date US Distribution Center City of Industry, California 800,000 April 30, 2025 Disguise Office Poway, California 24,200 June 30, 2028 Corporate Headquarters/Showroom Santa Monica, California 65,858 January 31, 2029 International Europe Office Bracknell, United Kingdom 8,957 January 19, 2027 Hong Kong Headquarters Kowloon, Hong Kong 18,500 June 30, 2025 Italy Office and Warehouse Piacenza, Italy 26,189 August 31, 2029 We believe our facilities are suitable for their intended uses and, in conjunction with our third-party contract manufacturing agreements, provide adequate capacity and are sufficient to meet our expected needs.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeDisclosures with respect to equity issuable to certain of our executive officers pursuant to the terms of their employment agreements are disclosed below under Item 11. Issuer Purchases of Equity Securities There were no issuer purchases of equity securities in the fourth quarter of 2022.
Biggest changeAdditionally, no shares subject to restricted stock awards remained unvested and no restricted stock awards have been issued as of December 31, 2023. Disclosures with respect to equity issuable to certain of our executive officers pursuant to the terms of their employment agreements are disclosed below under Item 11.
Compensation Plan Information The table below sets forth the following information as of the year ended December 31, 2022 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.
Compensation Plan Information The table below sets forth the following information as of the year ended December 31, 2023 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 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 (c) Equity compensation plans approved by security holders — — 943,633 Equity compensation plans not approved by security holders — — — Total — — 943,633 Equity compensation plans approved by our stockholders consist of the 2002 Stock Award and Incentive Plan.
Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) 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 (c) Equity compensation plans approved by security holders — — 1,847,686 Equity compensation plans not approved by security holders — — — Total — — 1,847,686 Equity compensation plans approved by our stockholders consist of the 2002 Stock Award and Incentive Plan.
Item 5. Market for Registrant ’ s 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.” Security Holders To the best of our knowledge, as of April 13, 2023, there were 79 holders of record of our common stock.
Item 5. Market for Registrant ’ s 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.” Security Holders To the best of our knowledge, as of March 08, 2024, there were 53 holders of record of our common stock.
Issuer Unregistered Sale of Equity Securities There were no issuer sales of unregistered equity securities in the fourth quarter of 2022.
Issuer Purchases of Equity Securities There were no issuer purchases of equity securities in the fourth quarter of 2023. Issuer Unregistered Sale of Equity Securities There were no issuer sales of unregistered equity securities in the fourth quarter of 2023.
An additional 1.0 million, 3.6 million, 2.5 million and 1.4 million shares were added to the number of total issuable shares under the Plan and approved by the Board in 2021, 2019, 2017, and 2013, respectively. Additionally, no shares of restricted stock awards remained unvested as of December 31, 2022.
An additional 1.0 million, 1.0 million, 3.6 million, 2.5 million and 1.4 million shares were added to the number of total issuable shares under the Plan and approved by the Board in 2023, 2021, 2019, 2017, and 2013, respectively.
We believe there are numerous beneficial owners of our common stock whose shares are held in “street name.” Dividends The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations and may be subject to certain restrictions pursuant to the terms of our preferred stock and under our credit facility and term loan.
Dividends The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations and may be subject to certain restrictions under our credit facility and through March 10, 2024 were also subject to certain restrictions pursuant to the terms of our preferred stock.
Removed
We currently do not anticipate paying any dividends in the foreseeable future.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe seasonality of our business is reflected in this quarterly presentation. 2022 2021 First Second Third Fourth First Second Third Fourth (Unaudited) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Net sales $ 120,881 $ 220,422 $ 322,998 $ 131,886 $ 83,843 $ 112,352 $ 236,957 $ 187,964 As a % of full year 15.2 % 27.7 % 40.6 % 16.5 % 13.5 % 18.1 % 38.1 % 30.3 % Gross profit $ 29,917 $ 60,890 $ 91,911 $ 28,568 $ 26,094 $ 31,897 $ 74,924 $ 50,042 As a % of full year 14.2 % 28.8 % 43.5 % 13.5 % 14.3 % 17.4 % 41.0 % 27.3 % As a % of net sales 24.7 % 27.6 % 28.5 % 21.7 % 31.1 % 28.4 % 31.6 % 26.6 % Income (loss) from operations $ (734 ) $ 23,660 $ 53,741 $ (15,697 ) $ (2,723 ) $ 1,821 $ 36,743 $ 2,926 As a % of full year (1.2 )% 38.8 % 88.1 % (25.7 )% (7.0 )% 4.7 % 94.8 % 7.5 % As a % of net sales (0.7 )% 10.7 % 16.7 % (11.9 )% (3.2 )% 1.6 % 15.5 % 1.6 % 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 (2.9 )% 12.4 % 13.1 % (12.3 )% (28.6 )% (13.5 )% 15.5 % (1.7 )% Net income (loss) $ (3,909 ) $ 26,207 $ 30,676 $ 38,109 $ (24,051 ) $ (15,060 ) $ 36,376 $ (3,153 ) As a % of net sales (3.2 )% 11.8 % 9.5 % 28.9 % (28.7 )% (13.4 )% 15.4 % (1.7 )% Net income (loss) attributable to non-controlling interests $ (100 ) $ (353 ) $ (17 ) $ 140 $ 35 $ 24 $ 42 $ 19 As a % of net sales (0.1 )% (0.2 )% — % 0.1 % — % — % — % — % Net income (loss) attributable to JAKKS Pacific, Inc. $ (3,809 ) $ 26,560 $ 30,693 $ 37,969 $ (24,086 ) $ (15,084 ) $ 36,334 $ (3,172 ) As a % of net sales (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 $ (0.43 ) $ 2.73 $ 2.96 $ 3.66 $ (4.54 ) $ (2.48 ) $ 3.97 $ (0.37 ) Weighted average shares and equivalents outstanding 9,588 10,037 10,260 10,263 5,379 6,220 9,073 9,511 Quarterly and year-to-date computations of income (loss) per share amounts are made independently.
Biggest changeThe seasonality of our business is reflected in this quarterly presentation. 2023 2022 First Second Third Fourth First Second Third Fourth (Unaudited) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Net Sales $ 107,484 $ 166,933 $ 309,744 $ 127,396 $ 120,881 $ 220,422 $ 322,998 $ 131,886 As a % of full year 15.1 % 23.5 % 43.5 % 17.9 % 15.2 % 27.7 % 40.6 % 16.5 % Gross profit $ 31,437 $ 51,198 $ 106,985 $ 33,733 $ 29,917 $ 60,890 $ 91,911 $ 28,568 As a % of full year 14.1 % 22.9 % 47.9 % 15.1 % 14.2 % 28.8 % 43.5 % 13.5 % As a % of net sales 29.2 % 30.7 % 34.5 % 26.5 % 24.7 % 27.6 % 28.5 % 21.7 % Income (loss) from operations $ (4,400 ) $ 16,448 $ 62,399 $ (15,340 ) $ (734 ) $ 23,660 $ 53,741 $ (15,697 ) As a % of full year (7.4 )% 27.8 % 105.6 % (26.0 )% (1.2 )% 38.8 % 88.1 % (25.7 )% As a % of net sales (4.1 )% 9.9 % 20.1 % (12.0 )% (0.7 )% 10.7 % 16.7 % (11.9 )% Income (loss) before provision for (benefit from) income taxes $ (6,701 ) $ 7,660 $ 60,502 $ (16,515 ) $ (3,492 ) $ 27,541 $ 42,248 $ (16,221 ) As a % of net sales (6.3 )% 4.6 % 19.5 % (13.0 )% (2.9 )% 12.4 % 13.1 % (12.3 )% Net income (loss) $ (5,318 ) $ 6,182 $ 48,121 $ (10,872 ) $ (3,909 ) $ 26,207 $ 30,676 $ 38,109 As a % of net sales (5.0 )% 3.7 % 15.5 % (8.5 )% (3.2 )% 11.8 % 9.5 % 28.9 % Net income (loss) attributable to non-controlling interests $ (5 ) $ (273 ) $ (11 ) $ (4 ) $ (100 ) $ (353 ) $ (17 ) $ 140 As a % of net sales — % (0.2 )% — % — % (0.1 )% (0.2 )% — % 0.1 % Net income (loss) attributable to JAKKS Pacific, Inc. $ (5,313 ) $ 6,455 $ 48,132 $ (10,868 ) $ (3,809 ) $ 26,560 $ 30,693 $ 37,969 As a % of net sales (5.0 )% 3.9 % 15.5 % (8.5 )% (3.1 )% 12.0 % 9.5 % 28.8 % Net income (loss) attributable to common stockholders $ (5,680 ) $ 6,082 $ 47,754 $ (11,252 ) $ (4,155 ) $ 26,209 $ 30,336 $ 37,607 As a % of net sales (5.3 )% 3.6 % 15.4 % (8.8 )% (3.4 )% 11.9 % 9.4 % 28.5 % Diluted earnings (loss) per share $ (0.58 ) $ 0.58 $ 4.53 $ (1.12 ) $ (0.43 ) $ 2.73 $ 2.96 $ 3.66 Weighted average shares and equivalents outstanding 9,871 10,532 10,542 10,084 9,588 10,037 10,260 10,263 Quarterly and year-to-date computations of income (loss) per share amounts are made independently.
Local sales (other than in Hong Kong) and operating expenses of our operations in Hong Kong, the United Kingdom, Germany, the Netherlands, France, 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.
Local sales (other than in Hong Kong) and operating expenses of our operations in Hong Kong, the United Kingdom, Germany, the Netherlands, France, Italy, 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 linked to the U.S. dollar by the Hong Kong Monetary Authority at HK$7.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a currency exchange risk to the U.S. dollar.
The exchange rate of the Hong Kong dollar to the U.S. dollar has been linked to the U.S. dollar by the Hong Kong Monetary Authority at HK$7.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a meaningful currency exchange risk to the U.S. dollar.
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 a component of the income tax provision recognized in the consolidated statements of operations. 28 Table of Contents Recent Accounting Pronouncements.
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 a component of the income tax provision recognized in the consolidated statements of operations. 30 Table of Contents Recent Accounting Pronouncements.
Accordingly, we cannot quantify at this time if, or the extent, this conflict will adversely impact our business operations. 31 Table of Contents 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.
Accordingly, we cannot quantify at this time if, or the extent, this conflict will adversely impact our business operations. 33 Table of Contents 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.
Based on our evaluation of all positive and negative evidence, as of December 31, 2022, a valuation allowance of $0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized.
Based on our evaluation of all positive and negative evidence, as of December 31, 2023, a valuation allowance of $0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized.
Such amounts and periods of payment cannot be reliably estimated (see Item 8 “Consolidated Financial Statements and Supplementary Data Note 13 - Income Taxes” for further explanation of our uncertain tax positions).
Such amounts and periods of payment cannot be reliably estimated (see Item 8 “Consolidated Financial Statements and Supplementary Data Note 12 - Income Taxes” for further explanation of our uncertain tax positions).
The terms of the 2021 BSP Term Loan Agreement also require us 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 we are required to maintain a Net Leverage Ratio of 3:00x.
The terms of the 2021 BSP Term Loan Agreement also required us 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 we were required to maintain a Net Leverage Ratio of 3:00x.
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.
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. 37 Table of Contents
Our 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 (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 16 - Fair Value Measurements” for further information). 27 Table of Contents Reserve for Inventory Obsolescence.
Our 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 (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 15 - Fair Value Measurements” for further information). 29 Table of Contents Reserve for Inventory Obsolescence.
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.
The JPMorgan ABL 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, 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.
As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties/obligations generally ranging from 1% to 22% payable on net sales of such products. As of December 31, 2022, these agreements required future aggregate minimum royalty guarantees of $74.7 million, exclusive of $1.8 million in advances already paid.
As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties/obligations generally ranging from 1% to 22% payable on net sales of such products. As of December 31, 2023, these agreements required future aggregate minimum royalty guarantees of $53.1 million, exclusive of $1.5 million in advances already paid.
Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of December 31, 2022. Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (See Item 8 “Consolidated Financial Statements and Supplementary Data Note 11 – Credit Facilities”).
Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of December 31, 2023. 36 Table of Contents Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (See Item 8 “Consolidated Financial Statements and Supplementary Data Note 10 – Credit Facilities”).
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. As of April 14, 2023, we have not sold any shares of common stock under the ATM Agreement.
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. As of March 15, 2024, we have not sold any shares of common stock under the ATM Agreement.
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.
As of March 15, 2024, 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.
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.
A discussion of the operating results for 2022 can be found in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on April 14, 2023, in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.
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 statement of operations data by segment (in thousands).
Year Ended December 31, 2023 2022 Net sales 100.0 % 100.0 % Less: Cost of sales Cost of goods 50.9 56.5 Royalty expense 16.5 15.9 Amortization of tools and molds 1.2 1.1 Cost of sales 68.6 73.5 Gross profit 31.4 26.5 Direct selling expenses 5.2 4.2 General and administrative expenses 17.8 14.4 Depreciation and amortization 0.1 0.2 Selling, general and administrative expenses 23.1 18.8 Income from operations 8.3 7.7 Loss from joint ventures (0.1 ) — Other income (expense), net 0.1 0.1 Change in fair value of preferred stock derivative liability (1.1 ) (0.1 ) Loss on debt extinguishment (0.1 ) — Interest income 0.2 — Interest expense (0.9 ) (1.4 ) Income (loss) before provision for (benefit from) income taxes 6.4 6.3 Provision for (benefit from) income taxes 1.0 (5.2 ) Net income (loss) 5.4 11.5 Net income (loss) attributable to JAKKS Pacific, Inc. 5.4 % 11.5 % Net income (loss) attributable to common stockholders 5.2 % 11.3 % The following table summarizes, for the periods indicated, certain statement of operations data by segment (in thousands).
As such, materially different financial results can occur as circumstances change and additional information becomes known. The estimates with the greatest potential effect on our results of operations and financial position include: Allowance for Doubtful Accounts.
As such, materially different financial results can occur as circumstances change and additional information becomes known. The estimates with the greatest potential effect on our results of operations and financial position include: Allowance for Current Expected Credit Losses.
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.
We have on file with the SEC an effective registration statement pursuant to which we may issue, from time to time, up to $150 million of securities (which will be reduced by any amount of securities sold pursuant to the ATM Agreement) 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.
Of this $74.7 million future minimum royalty guarantee, $38.1 million is due over the next twelve months. Investing activities used net cash of $10.4 million and $8.2 million for the years ended December 31, 2022 and 2021, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.
Of this $53.1 million future minimum royalty guarantee, $45.1 million is due over the next twelve months. Investing activities used net cash of $8.9 million and $10.4 million for the years ended December 31, 2023 and 2022, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.
(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.
(See Item 8 “Consolidated Financial Statements and Supplementary Data, Note 9 – Debt and Note 10 – Credit Facilities” for additional information pertaining to our Debt and Credit Facilities.) As of December 31, 2023 and 2022, we held cash and cash equivalents, including restricted cash, of $72.4 million and $85.5 million, respectively.
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.
If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our current expected credit losses, our estimates of the recoverability of amounts due to us could be misstated, which could have an adverse impact on our operating results.
Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year. 32 Table of Contents Liquidity and Capital Resources As of December 31, 2022, we had working capital of $101.9 million compared to $114.5 million as of December 31, 2021.
Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year. 34 Table of Contents Liquidity and Capital Resources As of December 31, 2023, we had working capital of $106.1 million compared to $101.9 million as of December 31, 2022.
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.
Cash, and cash equivalents, including restricted cash held outside of the United States, in various foreign subsidiaries totaled $21.5 million and $39.4 million as of December 31, 2023 and 2022, respectively.
Financing activities used net cash of $31.0 million in 2022 and $32.8 million in 2021. The cash used in 2022 primarily consists of the repayment of our 2021 BSP Term loan of $29.6 million and repurchase of common stock for employee tax withholding of $1.4 million.
The cash used in 2022 primarily consists of the repayment of our 2021 BSP Term loan of $29.6 million and repurchase of common stock for employee tax withholding of $1.4 million.
Absent these discrete tax benefits, our effective tax rate for 2021 was (10.7%), primarily due to 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.
Absent these discrete tax benefits, our effective tax rate for 2022 was 17.6%, primarily due to taxes on federal, state, and foreign income. 32 Table of Contents 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.
If an event of default occurs under either Agreement, the maturity of the amounts owed under the 2021 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.
If an event of default occurs under the Agreement, the maturity of the amounts owed under the JPMorgan ABL Agreement may be accelerated. We were in compliance with the financial covenants under the JPMorgan ABL Agreement as of December 31, 2023.
The increase in cash flows provided by operating activities, year-over-year, was primarily due to a higher net income and lower 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 release of the valuation allowance, offset by other deferred tax activities.
The decrease in cash flows provided by operating activities, year-over-year, was primarily due to a lower net income and higher working capital usage, partially offset by higher non-cash charges related to valuation adjustments for our preferred stock derivative liability and an increase in deferred income tax assets due to inventory cost and other expense capitalization matters, offset by income tax activities payable.
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 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.
As of December 31, 2022, our income tax reserves were approximately $2.9 million and relates to federal and state taxes.
As of December 31, 2023, our income tax reserves were approximately $3.2 million and relate to federal and state income taxes.
The increase as a percentage of net sales, year-over-year, is due to higher freight charges. Selling, General and Administrative Expenses Selling, general and administrative expenses were $150.0 million in 2022 and $144.2 million in 2021, constituting 18.8% and 23.2% of net sales, respectively.
The decrease as a percentage of net sales, year-over-year, is due to lower inbound freight costs. Selling, General and Administrative Expenses Selling, general and administrative expenses were $164.2 million in 2023 and $150.0 million in 2022, constituting 23.1% and 18.8% of net sales, respectively.
The net deferred tax assets of $57.8 million consists of the net deferred tax assets in the US and foreign jurisdictions, where we are in a cumulative income position.
The net deferred tax asset change of $10.3 million consists of the net deferred tax asset changes in the US and foreign jurisdictions, where we are in a cumulative income position.
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.
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. The immediate and lingering impact of the 2019 COVID-19 pandemic added additional risk and complexity to the Company’s operations.
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.
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.
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. 33 Table of Contents The First Lien Term Loan Facility Credit Agreement (the “2021 BSP Term Loan Agreement”) and the Credit 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.
In June 2023 we had fully paid off our first-lien secured term loan (the “2021 BSP Term Loan Agreement”). 35 Table of Contents The First Lien Term Loan Facility Credit Agreement (the “2021 BSP Term Loan Agreement”) and the Credit Agreement with JPMorgan Chase Bank, N.A., as agent and lender (the “JPMorgan ABL Credit Agreement”) each contained negative covenants that, subject to certain exceptions, limited 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.
Loss on debt extinguishment 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 for the year ended December 31, 2022, as compared to $14.1 million in the prior year period.
Loss on Debt Extinguishment In 2023, we recognized a loss on debt extinguishment of $1.0 million in connection with the extinguishment of the 2021 BSP Term Loan in June 2023. Interest Income Interest Income was $1.3 million for the year ended December 31, 2023, as compared to $0.1 million in the prior year period.
At this time, we cannot quantify the extent of the impact this disease has had or will have on our sales, net income and cash flows, but it could be significant. In the first quarter of 2022, Russia and Ukraine were engaged in an armed conflict.
We cannot quantify the extent that any new outbreak might have on our sales, net income and cash flows, but it could be significant. In the first quarter of 2022, Russia and Ukraine engaged in an armed conflict that continues. We cannot predict at this time the length of this conflict and if it will spread to other countries.
Operating activities provided net cash of $86.1 million in 2022 and used net cash of $5.9 million in 2021.
Operating activities provided net cash of $66.4 million in 2023 and $86.1 million in 2022.
Cost of sales of our Costumes segment was $119.5 million, or 80.3% of related net sales for 2022 compared to $80.9 million, or 75.2% of related net sales for 2021 representing an increase of $38.6 million, or 47.7%. The increase in dollars is due to higher overall sales in 2022.
Cost of sales of our Costumes segment was $99.9 million, or 76.3% of related net sales for 2023 compared to $119.5 million, or 80.3% of related net sales for 2022 representing a decrease of $19.6 million, or 16.4%. The decrease in dollars is due to lower overall sales in 2023.
Cost of sales of our Toys/Consumer Products segment was $465.4 million, or 71.9% of related net sales in 2022 compared to $357.2 million, or 69.6% of related net sales in 2021 representing an increase of $108.2 million or 30.3%.
Cost of sales of our Toys/Consumer Products segment was $388.3 million, or 66.9% of related net sales in 2023 compared to $465.4 million, or 71.9% of related net sales in 2022 representing a decrease of $77.1 million or 16.6%.
In 2021, we booked interest expense of $7.3 million related to our 2019 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 2023.
In 2023, we recorded interest expense of $3.2 million related to our 2021 BSP Term Loan, $0.7 million related to our revolving credit facility and $2.6 million related to other borrowing costs.
Provision for Income Taxes Our income tax benefit, which includes federal, state and foreign income taxes and discrete items, was $41.0 million, or an effective tax rate of (81.9%) for 2022. During 2021, the income tax expense was $0.2 million, or an effective tax rate of (4.0%).
Provision for Income Taxes During 2023, our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $6.8 million, or an effective tax rate of 15.2%. The 2023 tax expense included a discrete tax benefit of $2.7 million primarily comprised of valuation allowance adjustments.
The increase in dollars is due to higher overall sales in 2022, while the increase in percentage of net sales, year-over-year is due to a higher average royalty rate and higher freight charges. Costumes.
The decrease in dollars is due to lower overall sales in 2023, while the decrease in percentage of net sales, year-over-year is due to lower inbound freight costs. Costumes.
Selling, general and administrative expenses increased from the prior year primarily driven by higher outbound freight and warehouse expenses related to higher domestic shipping, as well as higher compensation expense.
Selling, general and administrative expenses increased from the prior year primarily driven by higher outbound freight and warehouse expenses for 3 rd party warehouses and less scale at operated warehouses coupled with lower capitalization of such cost, as well as higher compensation expense.
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 29 Table of Contents Comparison of the Years Ended December 31, 2022 and 2021 Net Sales Toys/Consumer Products.
Year Ended December 31, 2023 2022 Net Sales Toys/Consumer Products $ 580,686 $ 647,317 Costumes 130,871 148,870 711,557 796,187 Cost of Sales Toys/Consumer Products 388,260 465,405 Costumes 99,944 119,496 488,204 584,901 Gross Profit Toys/Consumer Products 192,426 181,912 Costumes 30,927 29,374 $ 223,353 $ 211,286 31 Table of Contents Comparison of the Years Ended December 31, 2023 and 2022 Net Sales Toys/Consumer Products.
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.
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 our liquidity. As of December 31, 2023, off-balance sheet arrangements include letters of credit issued by JPMorgan of $9.4 million.
Absent these discrete tax benefits, our effective tax rate for 2022 was 17.6%, primarily due to taxes on federal, state, and foreign income. 30 Table of Contents 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 2023 was 21.3%, primarily due to taxes on federal, state, and foreign income. During 2022, our income tax benefit was $41.0 million, or an effective tax rate of (81.9)%.
The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of December 31, 2022 and is based upon information appearing in the notes to the consolidated financial statements (in thousands): 2023 2024 2025 2026 2027 Thereafter Total Short-term debt $ 25,529 $ — $ — $ — $ — $ — $ 25,529 Long-term debt — 2,475 2,475 2,475 35,947 — 43,372 Interest on debt 5,219 4,390 4,122 3,867 1,543 19,141 Operating leases 11,723 7,619 2,346 372 13 — 22,073 Minimum guaranteed license/royalty payments 38,089 34,630 1,969 — — — 74,688 Employment contracts 8,500 3,166 2,458 2,508 — — 16,632 Total contractual cash obligations $ 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.
The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of December 31, 2023 and is based upon information appearing in the notes to the consolidated financial statements (in thousands): 2024 2025 2026 2027 2028 Thereafter Total Operating leases $ 8,713 $ 6,432 $ 4,525 $ 4,274 $ 4,384 $ 127 $ 28,455 Minimum guaranteed license/royalty payments 45,066 7,013 1,059 — — — 53,138 Employment contracts 7,560 6,467 3,700 — — — 17,727 Total contractual cash obligations $ 61,339 $ 19,912 $ 9,284 $ 4,274 $ 4,384 $ 127 $ 99,320 The above table excludes any potential uncertain income tax liabilities that may become payable upon examination of our income tax returns by taxing authorities.
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.
Our allowance for current expected credit losses is based upon management’s assessment of the business environment, customers’ risk profile characteristics, historical collection and loss information, aging of accounts receivables, and other matters specific to customer accounts in the establishment of pools.
Significant changes in the assumptions used to develop the estimates 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 use of intellectual properties in its products.
In addition, the allowance requires judgement since it involves estimation of the impact of both current and future economic factors in relation to its customers’ risk profile characteristics. Changes in the assumptions used to develop the estimates could materially affect key financial measures, including other selling and administrative expenses, net income and accounts receivable. Royalties.
Our allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off. Management believes the accounting estimate related to the allowance for doubtful account is a “critical accounting policy” because significant judgement is required to evaluate the creditworthiness of its customers when estimating the collectability of its accounts receivable.
Our allowance for current expected credit losses is also affected by the time at which uncollectible accounts receivable balances are actually written off.
Net sales of our Toys/Consumer Products segment were $647.3 million in 2022, compared to $513.5 million in 2021, representing an increase of $133.8 million, or 26.1%. The increase in net sales was primarily due to higher sales of Disney Encanto™.
Net sales of our Toys/Consumer Products segment were $580.7 million in 2023, compared to $647.3 million in 2022, representing a decrease of $66.6 million, or 10.3%. The decrease in net sales was primarily due to lower sales in our Dolls, Role Play and Dress Up Division, partially offset by increased sales in our Action Play & Collectibles Division. Costumes.
Removed
In addition, the allowance requires a high degree of judgement since it involves estimation of the impact of both current and future economic factors in relation to its customers’ ability to pay amounts due to us.
Added
Management believes the accounting estimate related to the allowance for current expected credit losses is a “critical accounting policy” because judgement is required in the establishment of pools based on customer risk profile characteristics and the historical loss rates applied to each pool.
Removed
In addition, net sales from video game properties, Sonic the Hedgehog® and Nintendo®, also added to the yearly increase in net sales. Costumes. Net sales of our Costumes segment were $148.9 million in 2022, compared to $107.6 million in 2021, representing an increase of $41.3 million, or 38.4%.
Added
We enter into license agreements with strategic partners, inventors, designers and others for the use of intellectual properties in its products. These agreements may call for payment in advance or future payment of minimum guaranteed amounts.
Removed
The increase in net sales was primarily driven by the Disney® and Microsoft® lines of costumes and expanded retail distribution. Cost of Sales Toys/Consumer Products.
Added
Net sales of our Costumes segment were $130.9 million in 2023, compared to $148.9 million in 2022, representing a decrease of $18.0 million, or 12.1%. The decrease in net sales was primarily driven by US customers recalibrating their order levels down based on Halloween 2022 sell-through. Cost of Sales Toys/Consumer Products.
Removed
Gain on loan forgiveness In 2021, we recognized a gain on loan forgiveness of $6.2 million as a result of the forgiveness of the Paycheck Protection Program Loan secured under the Coronavirus Aid Relief and Economic Security Act.
Added
Interest income earned is primarily due to the Company’s money market investments. Interest Expense Interest expense was $6.5 million for the year ended December 31, 2023, as compared to $11.2 million in the prior year period.
Removed
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.
Added
In addition, the history of smaller scale epidemics in Hong Kong/China (e.g., “bird flu”) highlights an additional risk given that substantially all of our product is sourced from China and our Hong Kong operation is foundational to our business model.
Removed
The majority of our materials and products are sourced from suppliers located in China.
Added
Financing activities used net cash of $72.3 million in 2023 and $31.0 million in 2022. The cash used in 2023 primarily consists of the repayment of our 2021 BSP Term Loan of $69.2 million and the repurchase of common stock for employee tax withholding of $3.1 million.
Removed
In 2020, the Novel Coronavirus was 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.
Added
As of December 31, 2023, we had no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $9.4 million in letters of credit.
Removed
To the extent 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.
Added
On January 3, 2023, as permitted by the terms within the 2021 BSP Term Loan Agreement, we made a voluntary $15.0 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and incurred a $0.2 million prepayment penalty.
Removed
We cannot predict at this time the length of this conflict and if it will spread to other countries.
Added
On March 3, 2023, as required by the terms within the 2021 BSP Term Loan Agreement under the Excess Cash Flow (“ECF”) Sweep provision, we made a mandatory $23.1 million payment towards the outstanding principal amount of the 2021 BSP Term Loan.
Removed
The cash used in 2021 primarily consists of the repayment of our 2019 Recap Term Loan of $125.8 million, as well as, debt issuance costs of $2.6 million incurred in connection with the refinancing of our 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.
Added
On June 5, 2023, we paid in full the 2021 BSP Term Loan and terminated the 2021 BSP Term Loan Agreement by making a $30.2 million prepayment towards the outstanding principal amount. Additionally, we made a $0.4 million payment towards the outstanding accrued interest, and a $0.3 million payment for the prepayment penalty and other related fees.
Removed
Changes in this area could have a material adverse impact on our liquidity. 34 Table of Contents As of December 31, 2022, off-balance sheet arrangements include letters of credit issued by JPMorgan of $17.2 million. On July 1, 2022, we entered into an ATM Agreement with B.
Added
In connection with this transaction, we recognized a loss on debt extinguishment of $1.0 million on our consolidated statements of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

9 edited+0 added−8 removed6 unchanged
Biggest changeTo date, we have not used derivative instruments or engaged in hedging activities to minimize our market risk. 35 Table of Contents Interest Rate Risk Our exposure to market risk includes interest rate fluctuations in connection with our 2021 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).
Biggest changeTo date, we have not used derivative instruments or engaged in hedging activities to minimize our market risk. Interest Rate Risk Our exposure to market risk includes interest rate fluctuations in connection with our JPMorgan ABL Facility (see Item 8 “Consolidated Financial Statements and Supplementary Data, Note 10 – Credit Facilities).
Foreign Currency Risk We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, Germany, France, 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.
Foreign Currency Risk We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, Germany, France, the Netherlands, Italy, Canada and Mexico. Sales are generally made by these operations on FOB China or Hong Kong terms and are denominated in U.S. dollars.
The exchange rate of the Hong Kong dollar to the U.S. dollar has been linked to the U.S. dollar by the Hong Kong Monetary Authority at HK$7.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a currency exchange risk to the U.S. dollar.
The exchange rate of the Hong Kong dollar to the U.S. dollar has been linked to the U.S. dollar by the Hong Kong Monetary Authority at HK$7.75 – HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a meaningful currency exchange risk to the U.S. dollar.
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, the Netherlands, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates.
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, the Netherlands, Italy, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates.
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. 36 Table of Contents
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. 38 Table of Contents
Borrowings under the 2021 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.
Borrowings under the 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.
Borrowings under our JPMorgan ABL Facility bear interest at either (i) Eurodollar spread plus 1.50% - 2.00% (determined by reference to 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).
Effective March 16, 2023, borrowings under our JPMorgan ABL Facility bear interest at either (i) SOFR plus 1.50% - 2.00% (determined by reference to 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).
During the twelve-month period ended December 31, 2022, the maximum amount borrowed under the revolving credit facility was $13.0 million and the average amount of borrowings outstanding was $0.8 million. As of December 31, 2022, the amount of total borrowings outstanding under the revolving credit facility was nil.
During the twelve-month period ended December 31, 2023, the maximum amount borrowed under the revolving credit facility was $10 million and the average amount of borrowings outstanding was $0.5 million. As of December 31, 2023, the amount of total borrowings outstanding under the revolving credit facility was nil.
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”).
In Q1 2023, we entered into an amendment to our JPMorgan ABL Credit Agreement which changed the interest reference rate on our revolving line of credit from LIBOR to the Secured Overnight Financing Rate (“SOFR”).
Removed
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% - 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.
Removed
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.
Removed
In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021.
Removed
It is unclear whether or not LIBOR will cease to 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.
Removed
On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator 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, 2021 for only the one-week and two-month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors.
Removed
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 the end of 2021.
Removed
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 in the past or cease to exist.
Removed
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.

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