JAKKS Pacific Reports Second Quarter 2019 Financial Results

SANTA MONICA, Calif.--(BUSINESS WIRE)--JAKKS Pacific, Inc. (NASDAQ: JAKK) today reported preliminary financial results for the second quarter ended June 30, 2019.

Second Quarter 2019 Overview vs. Same Period Last Year

• Net sales for the second quarter were $95.2 million compared to $105.8 million reported in the comparable period in 2018. Sales in the 2019 second quarter were negatively impacted primarily by a decline in sales of Incredibles 2 which more than offset strong growth in Disguise costumes and the introduction of several new toy lines tied to entertainment content.
• Gross margin was 18.6%, compared to 26.4% in the second quarter of 2018.
• Net loss attributable to JAKKS Pacific was $22.5 million, or $0.96 per diluted share. This compares to a net loss attributable to JAKKS Pacific of $18.6 million, or $0.80 per diluted share, reported in the second quarter of 2018.
• Adjusted EBITDA was negative $11.5 million, compared to Adjusted EBITDA of negative $8.5 million in the 2018 second quarter. See note below on “Use of Non-GAAP Financial Information.”

Management Commentary

“As expected, our results for the second quarter showed the effect of declines in products that contributed strongly to results in the second quarter of last year,” said Stephen Berman, CEO of JAKKS Pacific. “We saw strong growth in our Disguise, Halloween costume business, and strong contributions from toys tied to several new theatrical releases, including Aladdin, Godzilla and Toy Story 4, but these were more than offset by the declines in toys tied to Incredibles 2 and our Squish Dee Lish products. As we have noted before, our sales this year have been shifted to the second half as a result of the timing of several films and television shows, notably Frozen 2, as well as Toy Story 4, the 30^th Anniversary of the release of Disney’s The Little Mermaid, and Disney Jr.’s Gigantosaurus animated TV series.

We remain confident that our second half sales will show renewed strength, as the disruptions caused by Toys R Us’ liquidation in the United States no longer weigh down the industry. This coupled with the recently announced Recapitalization transaction to strengthen our balance sheet provides a clearer pathway to the future here at JAKKS.”

Cash and Cash Equivalents

The Company’s cash and cash equivalents (including restricted cash) totaled $37.0 million as of June 30, 2019 compared to $47.4 million as of March 31, 2019 and $63.0 million as of June 30, 2018.

2019 Outlook

Our goal for 2019 is to grow sales by approximately 5% on a year-over-year basis with improved levels of Adjusted EBITDA compared to 2018.

Recapitalization Transaction

As discussed in the Current Report on Form 8-K dated August 9, 2019, the Company entered into multiple, binding definitive agreements (collectively, the “Recapitalization”) among Wells Fargo Bank, National Association, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the 4.875% convertible senior notes due 2020 to recapitalize the Company’s balance sheet, including the extension to the Company of incremental liquidity and three-year extensions of substantially all of the Company’s outstanding convertible debt obligations and revolving credit facility. The Company’s term loan agreement entered into with Great American Capital Partners will be paid in full in connection with the Recapitalization transaction.

Use of Non-GAAP Financial Information

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

Conference Call Live Webcast

JAKKS Pacific will webcast its second quarter earnings call at 9:00 a.m. Eastern Time/ 6:00 a.m. Pacific Time today. To listen to the live webcast and access the accompanying presentation slides, go to www.jakks.com/investors and click on the earnings website link under the Presentations tab at least 10 minutes prior to register, download and install any necessary audio software.

A replay of the call will be available on JAKKS’ website approximately one hour following completion of the call through August 16, 2019 ending at 11:59 p.m. Eastern Time/8:59 p.m. Pacific Time. The playback can be accessed by calling [phone] or [phone] for international callers, with passcode “48922294#” for both playback numbers.

About JAKKS Pacific, Inc.

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

©2019 JAKKS Pacific, Inc. All rights reserved.

Forward Looking Statements

This press release may contain “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations, estimates and projections about JAKKS Pacific's business based partly on assumptions made by its management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such statements due to numerous factors, including, but not limited to, those described above, changes in demand for JAKKS Pacific's products, product mix, the timing of customer orders and deliveries, the impact of competitive products and pricing, and difficulties with integrating acquired businesses, or that the Recapitalization transaction or any other 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,
			2019			2018
			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	32,125		$	53,282
	Restricted cash			4,923			4,923
	Accounts receivable, net			85,119			122,278
	Inventory			53,521			53,880
	Prepaid expenses and other assets			28,523			15,780
		Total current assets		204,211			250,143
Property and equipment				127,346			128,049
Less accumulated depreciation and amortization				106,239			107,147
	Property and equipment, net			21,107			20,902
Operating lease right-of-use assets				35,848			-
Goodwill				35,083			35,083
Intangibles and other assets, net				32,495			36,713
		Total assets	$	328,744		$	342,841
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable and accrued expenses		$	98,016		$	87,488
	Reserve for sales returns and allowances			24,498			29,403
	Short term operating lease liabilities			9,182			-
	Short term debt, net			1,892			27,211
		Total current liabilities		133,588			144,102
Long term operating lease liabilities				29,829			-
Long term debt, net				160,656			139,792
Other liabilities				137			4,409
Income taxes payable				1,471			1,458
Deferred tax liability, net				1,431			1,431
		Total liabilities		327,112			291,192
Stockholders' equity:
	Common stock, $.001 par value			30			30
	Additional paid-in capital			218,897			218,155
	Treasury stock			(24,000	)		(24,000	)
	Accumulated deficit			(179,301	)		(127,601	)
	Accumulated other comprehensive loss			(14,994	)		(15,847	)
		Total JAKKS Pacific, Inc. stockholders' equity		632			50,737
	Non-controlling interests			1,000			912
		Total stockholders' equity		1,632			51,649
		Total liabilities and stockholders' equity	$	328,744		$	342,841

JAKKS Pacific, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(In thousands, except per share data)						(In thousands, except per share data)
Net sales	$	95,182		$	105,781		$	166,008		$	198,785
Less cost of sales
Cost of goods		60,691			61,059			105,799			114,317
Royalty expense		14,125			14,344			23,966			29,635
Amortization of tools and molds		2,620			2,437			4,157			3,933
Cost of sales		77,436			77,840			133,922			147,885
Gross profit		17,746			27,941			32,086			50,900
Direct selling expenses		8,115			9,994			16,343			22,481
Selling, general and administrative expenses		24,136			27,859			49,477			72,389
Depreciation and amortization		1,619			1,895			3,316			3,495
Restructuring charge		22			-			270			-
Acquisition related and other		2,503			333			5,370			333
Loss from operations		(18,649	)		(12,140	)		(42,690	)		(47,798	)
Other income (expense):
Income from joint ventures		-			205			-			227
Other income (expense), net		(242	)		31			(159	)		81
Change in fair value of convertible senior notes		(106	)		(2,410	)		(2,529	)		(3,431	)
Interest income		20			14			47			28
Interest expense		(2,919	)		(2,197	)		(5,937	)		(4,133	)
Loss before provision for (benefit from) income taxes		(21,896	)		(16,497	)		(51,268	)		(55,026	)
Provision for (benefit from) income taxes		589			2,091			344			(245	)
Net loss		(22,485	)		(18,588	)		(51,612	)		(54,781	)
Net income (loss) attributable to non-controlling interests		57			(29	)		88			22
Net loss attributable to JAKKS Pacific, Inc.	$	(22,542	)	$	(18,559	)	$	(51,700	)	$	(54,803	)
Loss per share - basic and diluted	$	(0.96	)	$	(0.80	)	$	(2.19	)	$	(2.37	)
Shares used in loss per share - basic and diluted		23,600			23,106			23,578			23,103

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,
	2019			2018			2019			2018
	(In thousands)						(In thousands)
Net loss	$	(22,485	)	$	(18,588	)	$	(51,612	)	$	(54,781	)
Income from joint ventures		-			(205	)		-			(227	)
Other income (expense), net		242			(31	)		159			(81	)
Interest income		(20	)		(14	)		(47	)		(28	)
Interest expense		2,919			2,197			5,937			4,133
Provision for (benefit from) income taxes		589			2,091			344			(245	)
Depreciation and amortization		4,239			4,332			7,473			7,428
Acquisition related and other		2,503			333			5,370			333
Restricted stock compensation expense		397			311			1,015			987
Bad debt write-offs (recoveries)		-			(1,326	)		-			12,468
Change in fair value of convertible senior notes		106			2,410			2,529			3,431
Restructuring charge		22			-			270			-
Minimum guarantee shortfalls		-			-			-			3,468
Adjusted EBITDA	$	(11,488	)	$	(8,490	)	$	(28,562	)	$	(23,114	)
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(In thousands, except per share data)						(In thousands, except per share data)
Net loss attributable to JAKKS Pacific, Inc.	$	(22,542	)	$	(18,559	)	$	(51,700	)	$	(54,803	)
Restricted stock compensation expense		397			311			1,015			987
Bad debt write-offs (recoveries)		-			(1,326	)		-			12,468
Acquisition related and other		2,503			333			5,370			333
Change in fair value of convertible senior notes		106			2,410			2,529			3,431
Restructuring charge		22			-			270			-
Minimum guarantee shortfalls		-			-			-			3,468
Tax impact of additional charges		-			162			(15	)		(2,185	)
Adjusted net loss attributable to JAKKS Pacific, Inc.	$	(19,514	)	$	(16,669	)	$	(42,531	)	$	(36,301	)
Adjusted loss per share - basic and diluted	$	(0.83	)	$	(0.72	)	$	(1.80	)	$	(1.57	)
Shares used in adjusted loss per share - basic and diluted		23,600			23,106			23,578			23,103