Long-term debt retired; Second-Highest First Half Net Sales in 15 Years

JAKKS Pacific, Inc. (NASDAQ:JAKK) today reported financial results for the second quarter ended June 30, 2023.

Second Quarter 2023 Overview

Net sales were $166.9 million, a year-over-year decrease of 24.3%
- Toys/Consumer Products Net Sales were $117.9 million, a year-over-year decrease of 20.8%
- Costumes Net Sales were $49.0 million, a year-over-year decrease of 31.5%
- First-half Net Sales for JAKKS Pacific, Inc. were $274.4 million, a year-over-year decrease of 19.6%
Gross profit was $51.2 million, a year-over-year decrease of 15.9% from $60.9 million
Gross margin was 30.7%, up 310 basis points vs. Q2 2022
Retired debt of $30.2 million four years prior to maturity, eliminating 11%+ interest burden
- Total debt was $84.9 million as of June 30, 2022, and $177.7 million as of September 30, 2019, post company recapitalization
Operating income was $16.4 million (9.9% of net sales) vs. $23.7 million (10.7% of net sales) in Q2 2022
Net income attributable to common stockholders was $6.1 million or $0.58 per diluted share, compared to net income attributable to common stockholders of $26.2 million or $2.61 per share in Q2 2022
Adjusted net income attributable to common stockholders (a non-GAAP measure) was $13.3 million or $1.26 per diluted share, compared to an adjusted net income attributable to common stockholders of $21.1 million or $2.10 per diluted share in Q2 2022
Adjusted EBITDA (a non-GAAP measure) was $20.7 million, vs. $27.1 million in Q2 2022
Trailing twelve month adjusted EBITDA was $66.9 million (9.2% of net sales) down 12% from $75.7 million (9.9% of net sales) in the trailing twelve months ended June 2022

Management Commentary

"I'm pleased to say that the first half of the year has met, and in many cases, exceeded our expectations," said Stephen Berman, CEO of JAKKS Pacific, Inc. "Consumers reacted favorably to our new product launches, both supporting the most talked about film releases of the first half of the year as well as the innovation and excitement we've brought to our classic, evergreen product lines. Retail sell-through accelerated in the quarter from earlier in the year, as customers continued to work down inventory levels and refocus their attention and planning for the annual holiday shopping season.

"We similarly are taking a very thoughtful approach to our own inventory given the continuing uncertainty around consumer behavior. Our Q2 ending inventory balance of $65.1 million is our lowest Q2 level since 2021.

"Our Action Play & Collectibles business led all segments with 41% growth year-over-year in the quarter. We have steadily rebuilt this business over the past three years extending and expanding our long-standing relationships in the gaming space and partnering with companies like Nintendo® and SEGA to extend their franchises to create compelling products for their theatrical and streaming releases. Through the first half of the year, our Action Play division has grown to be 84% of our market-leading Doll and Role Play division, balancing our portfolio substantially.

"Our Costume business shipped $49 million, substantially lower than last year's all-time peak of $72 million as we see customers ordering more conservatively and later than last year but it was nonetheless the second highest Q2 shipment level in the past 10+ years. We are still anticipating a very strong year in Costumes.

"And as we've previously disclosed, during the quarter we took the opportunity to eliminate our existing high-cost debt to further increase the agility of our capital structure."

Second Quarter 2023 Results

Net sales for the second quarter of 2023 were $166.9 million, down 24% versus an all-time high of $220.4 million last year. The Toys/Consumer Products segment sales were down 21% globally and sales of Disguise costumes were down 32% compared to last year.

For the first half, North America was down 24% while International was up 10%.

Balance Sheet Highlights

The Company's cash and cash equivalents (including restricted cash) totaled $32.4 million as of June 30, 2023, compared to $62.3 million as of June 30, 2022, and $85.5 million as of December 31, 2022.

Total debt was zero, compared to $84.9 million as of June 30, 2022, and $67.2 million as of December 31, 2022.

Use of Non-GAAP Financial Information

In addition to the preliminary results reported in accordance with U.S. GAAP included in this release, the Company has provided certain non-GAAP financial information including Adjusted EBITDA and Adjusted Net Income (Loss) which are non-GAAP metrics that exclude various items that are detailed in the financial tables and accompanying footnotes reconciling GAAP to non-GAAP results contained in this release. Management believes that the presentation of these non-GAAP financial measures provides useful information to investors because the information may allow investors to better evaluate ongoing business performance and certain components of the Company's results. In addition, the Company believes that the presentation of these financial measures enhances an investor's ability to make period-to-period comparisons of the Company's operating results. This information should be considered in addition to the results presented in accordance with GAAP and should not be considered a substitute for the GAAP results. The Company has reconciled the non-GAAP financial information included in this release to the nearest GAAP measures. See the attached "Reconciliation of Non-GAAP Financial Information." "Total liquidity" is calculated as cash and cash equivalents, plus availability under the Company's $67.5 million revolving credit facility.

Conference Call Live Webcast

JAKKS Pacific, Inc. invites analysts, investors and media to listen to the teleconference scheduled for 5:00 p.m. ET / 2:00 p.m. PT on July 27, 2023. A live webcast of the call will be available on the "Investor Relations" page of the Company's website at www.jakks.com/investors. To access the call by phone, please go to this link (2Q23 Registration link), and you will be provided with dial in details. To avoid delays, we encourage participants to dial into the conference call fifteen minutes ahead of the scheduled start time. A replay of the webcast will also be available for a limited time at (www.jakks.com/investors).

About JAKKS Pacific, Inc.

JAKKS Pacific, Inc. is a leading designer, manufacturer and marketer of toys and consumer products sold throughout the world, with its headquarters in Santa Monica, California. JAKKS Pacific's popular proprietary brands include Fly Wheels®, Perfectly Cute®, ReDo® Skateboard Co., AirTitans®, Sky Ball®, JAKKS Wild Games™, Moose Mountain®, Maui®, SportsZone™, Kids Only!™, Xtreme Power Dozer®, Disguise®, WeeeDo®, Ami Amis™ and a wide range of entertainment-inspired products featuring premier licensed properties. Through JAKKS Cares, the company's commitment to philanthropy, JAKKS is helping to make a positive impact on the lives of children. Visit us at www.jakks.com and follow us on Instagram (@jakkstoys), Twitter (@jakkstoys) and Facebook (@jakkstoys).

Forward Looking Statements

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

JAKKS Pacific, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)

			June 30,						December 31,
				2023			2022			2022
			(In thousands)
Assets
Current assets:
	Cash and cash equivalents		$	32,228		$	62,283		$	85,297
	Restricted cash			203			-			193
	Accounts receivable, net			132,479			164,020			102,771
	Inventory			65,059			123,666			80,619
	Prepaid expenses and other assets			11,227			14,519			6,331
		Total current assets		241,196			364,488			275,211

Property and equipment				134,091			128,844			130,437
Less accumulated depreciation and amortization				116,813			112,601			115,575
	Property and equipment, net			17,278			16,243			14,862

Operating lease right-of-use assets, net				15,249			24,584			19,913
Deferred income tax assets, net				57,804			-			57,804
Goodwill				35,083			35,083			35,083
Intangibles and other assets, net				2,331			3,239			2,469
		Total assets	$	368,941		$	443,637		$	405,342


Liabilities, Preferred Stock and Stockholders' Equity

Current liabilities:
	Accounts payable		$	57,768		$	86,660		$	33,687
	Accounts payable - Meisheng (related party)			18,612			42,254			9,820
	Accrued expenses			46,448			58,189			37,998
	Reserve for sales returns and allowances			37,851			45,625			51,877
	Income taxes payable			5,808			2,333			8,165
	Short term operating lease liabilities			9,226			10,239			10,746
	Short term debt, net			-			2,475			25,529
		Total current liabilities		175,713			247,775			177,822

Long term operating lease liabilities				6,220			15,406			9,863
Debt, non-current portion, net				-			82,453			41,622
Preferred stock derivative liability				27,793			15,898			21,918
Income taxes payable				2,971			215			2,929
Deferred income tax liabilities, net				-			51			-
		Total liabilities		212,697			361,798			254,154

Preferred stock accrued dividends				5,230			3,771			4,490

Stockholders' equity:
	Common stock, $.001 par value			10			10			10
	Additional paid-in capital			277,178			273,625			275,187
	Accumulated deficit			(110,876	)		(180,680	)		(112,018	)
	Accumulated other comprehensive loss			(16,021	)		(15,765	)		(17,482	)
		Total JAKKS Pacific, Inc. stockholders' equity		150,291			77,190			145,697
	Non-controlling interests			723			878			1,001
		Total stockholders' equity		151,014			78,068			146,698
		Total liabilities, preferred stock and stockholders' equity	$	368,941		$	443,637		$	405,342


Supplemental Balance Sheet and Cash Flow Data (Unaudited)
						June 30,
Key Balance Sheet Data:							2023			2022

Accounts receivable days sales outstanding (DSO)							72			68
Inventory turnover (DSI)							51			71

						Six Months Ended June 30,
						Six Months Ended June 30,
Condensed Cash Flow Data:							2023			2022
						(In thousands)
Cash flows provided by operating activities						$	20,805		$	36,549
Cash flows used in investing activities							(4,893	)		(5,274	)
Cash flows used in financing activities and other							(68,971	)		(14,324	)
Increase (Decrease) in cash, cash equivalents and restricted cash						$	(53,059	)	$	16,951

Capital expenditures						$	(4,918	)	$	(5,276	)

		JAKKS Pacific, Inc. and Subsidiaries
		Condensed Consolidated Statements of Operations (Unaudited)

			Three Months Ended June 30,								Six Months Ended June 30,
			Three Months Ended June 30,								Six Months Ended June 30,
				2023			2022		Δ (%)			2023			2022		Δ (%)
			(In thousands, except per share data)								(In thousands, except per share data)

Net sales			$	166,933		$	220,422		(24	)%	$	274,417		$	341,303		(20	)%
Less: Cost of sales
	Cost of goods			86,156			121,850		(29	)		144,460			193,908		(26	)
	Royalty expense			27,279			35,704		(24	)		43,933			53,394		(18	)
	Amortization of tools and molds			2,300			1,978		16			3,389			3,194		6
	Cost of sales			115,735			159,532		(27	)		191,782			250,496		(23	)
		Gross profit		51,198			60,890		(16	)		82,635			90,807		(9	)
Direct selling expenses				3,980			6,838		(42	)		11,721			11,740		(0	)
General and administrative expenses				30,677			29,514		4			58,671			54,667		7
Depreciation and amortization				93			578		(84	)		195			1,174		(83	)
	Selling, general and administrative expenses			34,750			36,930		(6	)		70,587			67,581		4
Intangibles impairment				-			300		nm			-			300		nm
		Income from operations		16,448			23,660		(30	)		12,048			22,926		(47	)
Other income (expense):
	Loss from joint ventures			(565	)		-		nm			(565	)		-		nm
	Other income (expense), net			38			183		(79	)		476			269		77
	Change in fair value of preferred stock derivative liability			(6,022	)		6,029		nm			(5,875	)		5,384		nm
	Loss on debt extinguishment			(1,023	)		-		nm			(1,023	)		-		nm
	Interest income			86			6		nm			203			9		nm
	Interest expense			(1,302	)		(2,337	)	(44	)		(4,305	)		(4,539	)	(5	)
Income before provision for income taxes				7,660			27,541		(72	)		959			24,049		(96	)
Provision for income taxes				1,478			1,334		11			95			1,751		(95	)
Net income				6,182			26,207		(76	)		864			22,298		(96	)
Net loss attributable to non-controlling interests				(273	)		(353	)	(23	)		(278	)		(453	)	(39	)
Net income attributable to JAKKS Pacific, Inc.			$	6,455		$	26,560		(76	)%	$	1,142		$	22,751		(95	)%
Net income attributable to common stockholders			$	6,082		$	26,209		(77	)%	$	402		$	22,054		(98	)%
	Earnings per share - basic		$	0.62		$	2.73				$	0.04		$	2.30
	Shares used in earnings per share - basic			9,871			9,588					9,871			9,588
	Earnings per share - diluted		$	0.58		$	2.61				$	0.04		$	2.21
	Shares used in earnings per share - diluted			10,532			10,037					10,428			9,978

			Three Months Ended June 30,								Six Months Ended June 30,
			Three Months Ended June 30,								Six Months Ended June 30,
				2023			2022		Δ bps			2023			2022		Δ bps
									Fav/(Unfav)								Fav/(Unfav)
Net sales				100.0	%		100.0	%	-			100.0	%		100.0	%	-
Less: Cost of sales
	Cost of goods			51.6			55.3		370			52.6			56.8		420
	Royalty expense			16.3			16.2		(10	)		16.0			15.6		(40	)
	Amortization of tools and molds			1.4			0.9		(50	)		1.3			1.0		(30	)
	Cost of sales			69.3			72.4		310			69.9			73.4		350
		Gross profit		30.7			27.6		310			30.1			26.6		350
Direct selling expenses				2.4			3.1		70			4.3			3.4		(90	)
General and administrative expenses				18.3			13.4		(490	)		21.3			16.1		(520	)
Depreciation and amortization				0.1			0.3		20			0.1			0.3		20
	Selling, general and administrative expenses			20.8			16.8		(400	)		25.7			19.8		(590	)
Intangibles impairment				-			0.1		10			-			0.1		10
		Income from operations		9.9			10.7		(80	)		4.4			6.7		(230	)
Other income (expense):
	Loss from joint ventures			(0.3	)		-					(0.2	)		-
	Other income (expense), net			-			0.1					0.2			-
	Change in fair value of preferred stock derivative liability			(3.6	)		2.7					(2.1	)		1.6
	Loss on debt extinguishment			(0.6	)		-					(0.4	)		-
	Interest income			-			-					0.1			-
	Interest expense			(0.8	)		(1.1	)				(1.6	)		(1.3	)
Income before provision for income taxes				4.6			12.4					0.4			7.0
Provision for income taxes				0.9			0.6					-			0.4
Net income				3.7			11.8					0.4			6.6
Net loss attributable to non-controlling interests				(0.2	)		(0.2	)				(0.1	)		(0.1	)
Net income attributable to JAKKS Pacific, Inc.				3.9	%		12.0	%				0.5	%		6.7	%
Net income attributable to common stockholders				3.6	%		11.9	%				0.1	%		6.5	%

JAKKS Pacific, Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Information (Unaudited)

Reconciliation of GAAP to Non-GAAP measures:

This press release and accompanying schedules provide certain information regarding Adjusted EBITDA and Adjusted Net Income (Loss), which may be considered non-GAAP financial measures under the rules of the Securities and Exchange Commission. The non-GAAP financial measures included in the press release are reconciled to the corresponding GAAP financial measures below, as required under the rules of the Securities and Exchange Commission regarding the use of non-GAAP financial measures. We define Adjusted EBITDA as income (loss) from operations before depreciation, amortization and adjusted for certain non-recurring and non-cash charges, such as reorganization expenses and restricted stock compensation expense. Net income (loss) is similarly adjusted and tax-effected to arrive at Adjusted Net Income (Loss). Adjusted EBITDA and Adjusted Net Income (Loss) are not recognized financial measures under GAAP, but we believe that they are useful in measuring our operating performance. We believe that the use of the non-GAAP financial measures enhances an overall understanding of the Company's past financial performance, and provides useful information to the investor by comparing our performance across reporting periods on a consistent basis.

Investors should not consider these measures in isolation or as a substitute for net income, operating income, or any other measure for determining the Company's operating performance that is calculated in accordance with GAAP. In addition, because these measures are not calculated in accordance with GAAP, they may not necessarily be comparable to similarly titled measures employed by other companies.

	Three Months Ended June 30,											Six Months Ended June 30,
		2023			2022		Δ ($)						2023			2022		Δ ($)
	(In thousands)											(In thousands)
EBITDA and Adjusted EBITDA
Net income	$	6,182		$	26,207		$	(20,025	)			$	864		$	22,298		$	(21,434	)
Interest expense		1,302			2,337			(1,035	)				4,305			4,539			(234	)
Interest income		(86	)		(6	)		(80	)				(203	)		(9	)		(194	)
Provision for income taxes		1,478			1,334			144					95			1,751			(1,656	)
Depreciation and amortization		2,393			2,556			(163	)				3,584			4,368			(784	)
EBITDA		11,269			32,428			(21,159	)				8,645			32,947			(24,302	)
Adjustments:
Loss from joint ventures (JAKKS Pacific, Inc. - 51%)		292			-			292					287			-			287
Loss from joint ventures (Meisheng - 49%)		273			-			273					278			-			278
Other (income) expense, net		(38	)		(183	)		145					(476	)		(269	)		(207	)
Restricted stock compensation expense		1,856			1,155			701					3,945			2,025			1,920
Change in fair value of preferred stock derivative liability		6,022			(6,029	)		12,051					5,875			(5,384	)		11,259
Employee Retention Credit/gov't employment support		-			(249	)		249					-			(249	)		249
Loss on debt extinguishment		1,023			-			1,023					1,023			-			1,023
Adjusted EBITDA	$	20,697		$	27,122		$	(6,425	)			$	19,577		$	29,070		$	(9,493	)
Adjusted EBITDA/Net sales %		12.4	%		12.3	%		10 bps					7.1	%		8.5	%		-140 bps


	Trailing Twelve Months Ended June 30,
	Trailing Twelve Months Ended June 30,
		2023			2022		Δ ($)
	(In thousands)
TTM EBITDA and TTM Adjusted EBITDA
TTM Net income	$	69,649		$	55,521		$	14,128
Interest expense		10,949			9,398			1,551
Interest income		(321	)		(16	)		(305	)
Provision for (benefit from) income taxes		(42,664	)		1,989			(44,653	)
Depreciation and amortization		9,794			10,047			(253	)
TTM EBITDA		47,407			76,939			(29,532	)
Adjustments:
Loss from joint ventures (JAKKS Pacific, Inc. - 51%)		287			-			287
Loss from joint ventures (Meisheng - 49%)		278			-			278
Other (income) expense, net		(1,004	)		(588	)		(416	)
Restricted stock compensation expense		7,002			3,353			3,649
Change in fair value of convertible senior notes		-			3,575			(3,575	)
Change in fair value of preferred stock derivative liability		11,895			(1,078	)		12,973
Employee Retention Credit/gov't employment support		-			(249	)		249
Gain on loan forgiveness		-			(6,206	)		6,206
Loss on debt extinguishment		1,023			-			1,023
TTM Adjusted EBITDA	$	66,888		$	75,746		$	(8,858	)	(12	)%
TTM Adjusted EBITDA/TTM Net sales %		9.2	%		9.9	%		-70 bps


	Three Months Ended June 30,											Six Months Ended June 30,
		2023			2022		Δ ($)						2023			2022		Δ ($)
	(In thousands, except per share data)											(In thousands, except per share data)
Adjusted net income (loss) attributable to common stockholders
Net income attributable to common stockholders	$	6,082		$	26,209		$	(20,127	)			$	402		$	22,054		$	(21,652	)
Restricted stock compensation expense		1,856			1,155			701					3,945			2,025			1,920
Change in fair value of preferred stock derivative liability		6,022			(6,029	)		12,051					5,875			(5,384	)		11,259
Loss on debt extinguishment		1,023			-			1,023					1,023			-			1,023
Employee Retention Credit/gov't employment support		-			(249	)		249					-			(249	)		249
Loss from joint ventures (JAKKS Pacific, Inc. - 51%)		292			-			292					287			-			287
2021 BSP Term Loan prepayment penalty		-			-			-					150			-			150
Tax impact of additional charges		(1,979	)		-			(1,979	)				(2,347	)		-			(2,347	)
Adjusted net income attributable to common stockholders	$	13,296		$	21,086		$	(7,790	)			$	9,335		$	18,446		$	(9,111	)
Adjusted earnings per share - basic	$	1.35		$	2.20		$	(0.85	)			$	0.95		$	1.92		$	(0.96	)
Shares used in adjusted earnings per share - basic		9,871			9,588			283					9,871			9,588			283
Adjusted earnings per share - diluted	$	1.26		$	2.10		$	(0.84	)			$	0.90		$	1.85		$	(0.95	)
Shares used in adjusted earnings per share - diluted		10,532			10,037			495					10,428			9,978			450

JAKKS Pacific, Inc. and Subsidiaries
Net Sales by Division and Geographic Region


(In thousands)	QTD Q2										(In thousands)	YTD Q2
Divisions		2023		2022		2021	% Change 2023 v 2022		% Change 2022 v 2021		Divisions		2023		2022		2021	% Change 2023 v 2022		% Change 2022 v 2021
Toys/Consumer Products	$	117,934	$	148,860	$	81,538	-20.8	%	82.6	%	Toys/Consumer Products	$	215,827	$	259,983	$	161,413	-17.0	%	61.1	%
Dolls, Role-Play/Dress Up		59,669		102,186		49,278	-41.6	%	107.4	%	Dolls, Role-Play/Dress Up		107,512		164,192		94,433	-34.5	%	73.9	%
Action Play & Collectibles		52,571		37,170		19,622	41.4	%	89.4	%	Action Play & Collectibles		90,417		68,868		36,027	31.3	%	91.2	%
Outdoor/Seasonal Toys		5,694		9,504		12,638	-40.1	%	-24.8	%	Outdoor/Seasonal Toys		17,898		26,923		30,953	-33.5	%	-13.0	%
Costumes	$	48,999	$	71,562	$	30,814	-31.5	%	132.2	%	Costumes		58,590		81,320		34,782	-28.0	%	133.8	%
Total	$	166,933	$	220,422	$	112,352	-24.3	%	96.2	%	Total	$	274,417	$	341,303	$	196,195	-19.6	%	74.0	%



(In thousands)	QTD Q2										(In thousands)	YTD Q2
Regions		2023		2022		2021	% Change 2023 v 2022		% Change 2022 v 2021		Regions		2023		2022		2021	% Change 2023 v 2022		% Change 2022 v 2021
United States	$	136,187	$	192,484	$	95,265	-29.2	%	102.1	%	United States	$	216,630	$	289,534	$	164,181	-25.2	%	76.4	%
Europe		16,638		14,447		9,930	15.2	%	45.5	%	Europe		26,800		27,836		17,267	-3.7	%	61.2	%
Latin America		3,067		3,823		1,165	-19.8	%	228.2	%	Latin America		12,271		6,208		3,620	97.7	%	71.5	%
Canada		6,799		5,537		2,208	22.8	%	150.8	%	Canada		10,853		8,916		4,309	21.7	%	106.9	%
Asia		1,831		2,363		2,164	-22.5	%	9.2	%	Asia		3,211		4,439		3,579	-27.7	%	24.0	%
Australia & New Zealand		1,756		1,582		1,249	11.0	%	26.7	%	Australia & New Zealand		3,364		3,073		2,437	9.5	%	26.1	%
Middle East & Africa		655		186		371	252.2	%	-49.9	%	Middle East & Africa		1,288		1,297		802	-0.7	%	61.7	%
Total	$	166,933	$	220,422	$	112,352	-24.3	%	96.2	%	Total	$	274,417	$	341,303	$	196,195	-19.6	%	74.0	%


(In thousands)	QTD Q2										(In thousands)	YTD Q2
Regions		2023		2022		2021	% Change 2023 v 2022		% Change 2022 v 2021		Regions		2023		2022		2021	% Change 2023 v 2022		% Change 2022 v 2021
North America	$	142,986	$	198,021	$	97,473	-27.8	%	103.2	%	North America	$	227,483	$	298,450	$	168,489	-23.8	%	77.1	%
International		23,947		22,401		14,879	6.9	%	50.6	%	International		46,934		42,853		27,706	9.5	%	54.7	%
Total	$	166,933	$	220,422	$	112,352	-24.3	%	96.2	%	Total	$	274,417	$	341,303	$	196,195	-19.6	%	74.0	%

View source version on businesswire.com: https://www.businesswire.com/news/home/20230727816127/en/

JAKKS Pacific Reports Second Quarter 2023 Financial Results