As of December 31, 2014, there is $0.5 million and $2.1 million of property and equipment included in accounts payable and accrued expenses, respectively. As of December 31, 2015, there is $0.4 million and $2.7 million of property and equipment included in accounts payable and accrued expenses, respectively. As of December 31, 2016, there is $6.6 million and nil of property and equipment included in accounts payable and accrued expenses, respectively.
See Notes 4, 5 and 19 for additional supplemental information to consolidated statements of cash flows.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
Note 1—Principal Industry
JAKKS Pacific, Inc. (the “Company”) is engaged in the development, production and marketing of consumer products, including toys and related products, electronic products, pet toys and related products, and other consumer products, many of which are based on highly-recognized character and entertainment licenses. The Company commenced its primary business operations in July 1995 through the purchase of substantially all of the assets of a Hong Kong toy company. The Company markets its product lines domestically and internationally.
The Company was incorporated under the laws of the State of Delaware in January 1995.
Note 2—Summary of Significant Accounting Policies
Principles of consolidation
These consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and its majority owned joint venture. All intercompany transactions have been eliminated.
The Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns fifty-one percent of the joint venture and consolidates the joint venture since control rests with the Company.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less, when acquired, to be cash equivalents. The Company maintains its cash in bank deposits which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk of cash and cash equivalents.
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is granted to customers on an unsecured basis. Credit limits and payment terms are established based on extensive evaluations made on an ongoing basis throughout the fiscal year of the financial performance, cash generation, financing availability, and liquidity status of each customer. Customers are reviewed at least annually, with more frequent reviews performed as necessary, depending upon the customer’s financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses before shipping to those customers on credit. The Company uses a variety of financial arrangements to ensure collectability of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.
The Company records an allowance for doubtful accounts 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.
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual future results could differ from those estimates.
Revenue recognition
Revenue is recognized upon the shipment of goods to customers or their agents, depending upon terms, provided there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collectability is reasonably assured.
Generally the Company does not allow product returns. It provides its customers a negotiated allowance for breakage or defects, which is recorded when the related revenue is recognized. However, the Company does make occasional exceptions to this policy and consequently accrues a return allowance based upon historic return amounts and management estimates. The Company occasionally grants credits to facilitate markdowns and sales of slow moving merchandise. These credits are recorded as a reduction of gross sales at the time of the sale.
Fair value measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based upon these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
Level 1:
|
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
|
Level 2:
|
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
|
Level 3:
|
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
|
In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. The Company’s 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.
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of December 31 (in thousands):
|
|
|
Fair Value Measurements
|
|
|
Carrying Amount as of
|
|
As of December 31, 2015
|
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
13,218
|
|
$
|
13,218
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
Fair Value Measurements
|
|
|
Carrying Amount as of
|
|
As of December 31, 2016
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
15,312
|
|
$
|
15,312
|
|
$
|
—
|
|
$
|
—
|
|
The Company’s accounts receivable, accounts payable and accrued expenses represent financial instruments. The carrying value of these financial instruments is a reasonable approximation of fair value.
The fair value of the 4.25% convertible senior notes payable due 2018 as of December 31, 2015 and 2016 was $102.0 million and $83.7 million respectively, based upon the most recent quoted market prices, and the fair value of the 4.875% convertible senior notes payable due 2020 as of December 31, 2015 and 2016 was $112.3 million and $89.3 million, respectively, based upon the most recent quoted market prices. The fair values of the convertible senior notes are considered to be Level 2 measurements on the fair value hierarchy.
For the years ended December 31, 2015 and 2016, there was no impairment to the value of the Company’s non-financial assets.
Inventory
Inventory, which includes the ex-factory cost of goods, capitalized warehouse costs and in-bound freight and duty, is valued at the lower of cost (first-in, first-out) or market, net of inventory obsolescence reserve, and consists of the following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
|
2016
|
|
Raw materials
|
|
$
|
3,717
|
|
|
$
|
5,204
|
|
Finished goods
|
|
|
56,827
|
|
|
|
70,231
|
|
|
|
$
|
60,544
|
|
|
$
|
75,435
|
|
Property and equipment
Property and equipment are stated at cost and are being depreciated using the straight-line method over their estimated useful lives as follows:
Office equipment
|
5 years
|
Automobiles
|
5 years
|
Furniture and fixtures
|
5 - 7 years
|
Leasehold improvements
|
Shorter of length of lease or 10 years
|
The Company uses the usage method as its depreciation methodology for molds and tools used in the manufacturing of its products, which is more closely correlated to production of goods. The Company believes that the usage method more accurately matches costs with revenues. Furthermore, the useful estimated life of molds and tools is two years.
For the years ended December 31, 2014, 2015 and 2016, the Company’s aggregate depreciation expense related to property and equipment was $10.4 million, $10.9 million and $13.9 million, respectively.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes all changes in equity from non-owner sources. The Company accounts for other comprehensive income in accordance with Accounting Standards Codification (“ASC”) ASC 220, “Comprehensive Income.” All the activity in other comprehensive income (loss) and all amounts in accumulated other comprehensive income (loss) relate to foreign currency translation adjustments.
Advertising
Production costs of commercials and programming are charged to operations in the period during which the production is first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the period incurred. Advertising expense for the years ended December 31, 2014, 2015 and 2016, was approximately $19.3 million, $15.8 million and $20.1 million, respectively.
The Company also participates in cooperative advertising arrangements with certain customers, whereby it allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. Typically, these discounts range from 1% to 6% of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such amounts are accrued when the related revenue is recognized or when the advertising campaign is initiated. These cooperative advertising arrangements are accounted for as direct selling expenses.
Income taxes
The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdictions. Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized as deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Foreign Currency Translation Exposure
The Company’s reporting currency is the U.S. dollar. The translation of its net investment in subsidiaries with non-U.S. dollar functional currencies subjects the Company to currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at year-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss/gain within stockholders’ equity. The Company’s primary currency translation exposures in 2014, 2015 and 2016 were related to its net investment in entities having functional currencies denominated in the Hong Kong dollar, British pound, Canadian dollar, Chinese yuan, Mexican peso and the Euro.
Foreign Currency Transaction Exposure
Currency exchange rate fluctuations may impact the Company’s results of operations and cash flows. The Company’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income in the consolidated statement of operations.
Accounting for the impairment of finite-lived tangible and intangible assets
Long-lived assets with finite lives, which include property and equipment and intangible assets other than goodwill, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. Finite-lived intangible assets consist primarily of product technology rights, acquired backlog, customer relationships, product lines and license agreements. These intangible assets are amortized over the estimated economic lives of the related assets. There were no impairments for years ended December 31, 2014, 2015 and 2016.
Goodwill and other indefinite-lived intangible assets
Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level and asset level, respectively. Losses in value are recorded when material impairment has occurred in the underlying assets or when the benefits of the identified intangible assets are realized. Indefinite-lived intangible assets other than goodwill consist of trademarks.
The carrying value of goodwill and trademarks are based upon cost, which is subject to management’s current assessment of fair value. Management evaluates fair value recoverability using both objective and subjective factors. Objective factors include cash flows and analysis of recent sales and earnings trends. Subjective factors include management’s best estimates of projected future earnings and competitive analysis and the Company’s strategic focus.
For the years ended December 31, 2014, 2015 and 2016, there was no impairment to the value of the Company's goodwill or trademarks.
Share-based Compensation
The Company measures all employee stock-based compensation awards using a fair value method and records such expense in its consolidated financial statements. The Company recorded $1.5 million, $1.6 million and $1.6 million of restricted stock expense, in 2014, 2015 and 2016, respectively. See Note 17 for further details relating to share based compensation.
Earnings per share
The following table is a reconciliation of the weighted-average shares used in the computation of basic and diluted earnings per share (“EPS”) for the periods presented (in thousands, except per share data):
|
|
2014
|
|
|
|
|
Income
|
|
|
|
|
|
|
Per Share
|
|
Basic EPS
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
21,509
|
|
|
|
20,948
|
|
|
$
|
1.03
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion of convertible senior notes
|
|
|
7,345
|
|
|
|
20,388
|
|
|
|
|
|
Options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Unvested restricted stock grants
|
|
|
—
|
|
|
|
180
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders plus assumed exercises and conversion
|
|
$
|
28,854
|
|
|
|
41,516
|
|
|
$
|
0.70
|
|
|
|
2015
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
Per Share
|
|
Basic EPS
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
23,254
|
|
|
|
19,435
|
|
|
$
|
1.20
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion of convertible senior notes
|
|
|
7,385
|
|
|
|
23,369
|
|
|
|
|
|
Options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Unvested performance stock grants
|
|
|
—
|
|
|
|
347
|
|
|
|
|
|
Unvested restricted stock grants
|
|
|
—
|
|
|
|
170
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders plus assumed exercises and conversion
|
|
$
|
30,639
|
|
|
|
43,321
|
|
|
$
|
0.71
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
Per Share
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
1,243
|
|
|
|
16,542
|
|
|
$
|
0.08
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion of convertible senior notes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Unvested performance stock grants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Unvested restricted stock grants
|
|
|
—
|
|
|
|
123
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders plus assumed exercises and conversion
|
|
$
|
1,243
|
|
|
|
16,665
|
|
|
$
|
0.07
|
|
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the period (which consist of warrants, options and convertible debt to the extent they are dilutive). For the years ended December 31, 2014, 2015 and 2016, the convertible senior notes interest and related common share equivalent of nil, nil and 23,004,916, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive. Potentially dilutive stock options and warrants of 1,601,272, 1,518,596 and 1,500,000 for the years ended December 31, 2014, 2015 and 2016, respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive. Potentially dilutive restricted stock of nil for each of the years ended December 31, 2014, 2015 and 2016 were excluded from the computation of diluted earnings per share since they would have been anti-dilutive.
The Company is also party to a prepaid forward contract to purchase 3,112,840 shares of its common stock that are to be delivered over a settlement period in 2020. The number of shares to be delivered under the prepaid forward contract has been removed from the weighted-average basic and diluted shares outstanding. Any dividends declared and paid on the shares underlying the forward contract are to be reverted back to the Company based on the contractual terms of the forward contract.
Debt with Conversion and Other Options
In July 2013, the Company sold an aggregate of $100.0 million principal amount of 4.25% convertible senior notes due 2018 (the “2018 Notes”). The 2018 Notes are senior unsecured obligations of the Company paying interest semi-annually in arrears on August 1 and February 1 of each year at a rate of 4.25% per annum and will mature on August 1, 2018. The initial and still current conversion rate for the 2018 Notes is 114.3674 shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $8.74 per share of common stock, subject to adjustment in certain events. Upon conversion, the 2018 Notes will be settled in shares of the Company’s common stock. Holders of the 2018 Notes may require that the Company repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2018 Notes). In 2016, the Company repurchased and retired an aggregate of approximately $6.1 million principal amount of the 2018 Notes.
In June 2014, the Company sold an aggregate of $115.0 million principal amount of 4.875% convertible senior notes due 2020 (the “2020 Notes”). The 2020 Notes are senior unsecured obligations of the Company paying interest semi-annually in arrears on June 1 and December 1 of each year at a rate of 4.875% per annum and will mature on June 1, 2020. The initial and still current conversion rate for the 2020 Notes is 103.7613 shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $9.64 per share of common stock, subject to adjustment in certain events. Upon conversion, the 2020 Notes will be settled in shares of the Company’s common stock. Holders of the 2020 Notes may require that the Company repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2020 Notes). The Company received net proceeds of approximately $110.4 million from the offering of which $24.0 million was used to repurchase 3.1 million shares of the Company’s common stock under a prepaid forward purchase contract. In January 2016, the Company repurchased and retired an aggregate of $2.0 million principal amount of the 2020 Notes.
In June 2014, the Company effectively repurchased 3,112,840 shares of its common stock at an average cost of $7.71 per share for an aggregate amount of $24.0 million pursuant to a prepaid forward share repurchase agreement entered into with Merrill Lynch International (“ML”). These repurchased shares are treated as retired for basic and diluted EPS purposes although they remain legally outstanding. The Company reflects the aggregate purchase price of its common shares repurchased as a reduction to stockholders’ equity allocated to treasury stock. Any dividends declared and paid on the shares underlying the forward contract are to be reverted back to the Company based on the contractual terms of the forward contract.
Reclassifications
Certain reclassifications were made to the prior year consolidated financial statements to conform to current year presentation.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard in 2018.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires inventory accounted for under the FIFO or average cost method to be measured using the lower of cost and net realizable value. The amendments are effective prospectively for fiscal years and for interim periods beginning after December 15, 2016. The Company is currently evaluating the impact of the pending adoption of ASU 2015-11 on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of this new standard on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” (“ASU 2016-09”) which simplifies several aspects of the accounting for share-based payments, including income tax consequences and classification on the statement of cash flows. Under the new standard, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Additionally, excess tax benefits will be classified as an operating activity on the statement of cash flows. In regards to forfeitures, the entity can make an accounting policy election to either recognize forfeitures as they occur or estimate the number of awards expected to be forfeited. The guidance in ASU 2016-09 is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory.” The amendments in this ASU reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
Note 3—Business Segments, Geographic Data, Sales by Product Group and Major Customers
The Company is a worldwide producer and marketer of children’s toys and other consumer products, principally engaged in the design, development, production, marketing and distribution of its diverse portfolio of products. The Company recently realigned its operating segments into three new segments to better reflect the management and operation of the business. The Company’s segments are (i) U.S. and Canada, (ii) International and (iii) Halloween. Prior year’s segment reporting units have been restated to reflect this change.
The U.S. and Canada segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, role play and everyday costume play, foot to floor ride-on vehicles, wagons, novelty toys, seasonal and outdoor products, kids’ indoor and outdoor furniture, and pet treats and related products, primarily within the United States and Canada.
Within the International segment, the Company markets and sells its toy products in markets outside of the U.S. and Canada, primarily in the European, Asia Pacific, and Latin and South American regions.
Within the Halloween segment, the Company markets and sells Halloween costumes and accessories and everyday costume play products, primarily in the U.S. and Canada.
Segment performance is measured at the operating income level. All sales are made to external customers and general corporate expenses have been attributed to the various segments based upon relative sales volumes. Segment assets are primarily comprised of accounts receivable and inventories, net of applicable reserves and allowances, goodwill and other assets. Certain assets which are not tracked by operating segment and/or that benefit multiple operating segments have been allocated on the same basis.
Results are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise. Information by segment and a reconciliation to reported amounts as of December 31, 2015 and 2016 and for the three years in the period ended December 31, 2016 are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
$
|
546,864
|
|
|
$
|
478,728
|
|
|
$
|
478,595
|
|
International
|
|
|
121,607
|
|
|
|
169,826
|
|
|
|
131,229
|
|
Halloween
|
|
|
141,589
|
|
|
|
97,187
|
|
|
|
96,779
|
|
|
|
$
|
810,060
|
|
|
$
|
745,741
|
|
|
$
|
706,603
|
|
|
|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Income from Operations
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
$
|
20,864
|
|
|
$
|
17,562
|
|
|
$
|
17,434
|
|
International
|
|
|
6,275
|
|
|
|
16,249
|
|
|
|
4,360
|
|
Halloween
|
|
|
4,188
|
|
|
|
(3,281
|
)
|
|
|
(4,688
|
)
|
|
|
$
|
31,327
|
|
|
$
|
30,530
|
|
|
$
|
17,106
|
|
|
|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
$
|
13,411
|
|
|
$
|
13,023
|
|
|
$
|
16,817
|
|
International
|
|
|
2,991
|
|
|
|
4,439
|
|
|
|
4,549
|
|
Halloween
|
|
|
2,569
|
|
|
|
1,398
|
|
|
|
1,578
|
|
|
|
$
|
18,971
|
|
|
$
|
18,860
|
|
|
$
|
22,944
|
|
|
|
December 31,
|
|
|
2015
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
U.S. and Canada
|
|
$
|
313,312
|
|
|
$
|
306,895
|
|
International
|
|
|
149,950
|
|
|
|
119,560
|
|
Halloween
|
|
|
36,358
|
|
|
|
37,848
|
|
|
|
$
|
499,620
|
|
|
$
|
464,303
|
|
Information regarding the Company’s operations in different geographical areas is presented below on the basis the Company uses to manage its business. Net revenues are categorized based upon location of the customer, while long-lived assets are categorized based upon the location of the Company’s assets. Tools, dies and molds represent a substantial portion of the long-lived assets included in the United States with a net book value of $10.2 million in 2015 and $15.7 million in 2016 and substantially all of these assets are located in China. The following tables present information about the Company by geographic area as of December 31, 2015 and 2016 and for each of the three years in the period ended December 31, 2016 (in thousands):
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Long-lived Assets
|
|
|
|
|
|
|
China
|
|
$
|
10,172
|
|
|
$
|
15,710
|
|
United States
|
|
|
7,702
|
|
|
|
6,587
|
|
Hong Kong
|
|
|
561
|
|
|
|
544
|
|
|
|
$
|
18,435
|
|
|
$
|
22,841
|
|
|
|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Net Sales by Customer Area
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
653,497
|
|
|
$
|
542,101
|
|
|
$
|
544,096
|
|
Europe
|
|
|
67,027
|
|
|
|
117,313
|
|
|
|
92,811
|
|
Canada
|
|
|
33,040
|
|
|
|
32,587
|
|
|
|
26,947
|
|
Hong Kong
|
|
|
2,746
|
|
|
|
1,675
|
|
|
|
2,012
|
|
Other
|
|
|
53,750
|
|
|
|
52,065
|
|
|
|
40,737
|
|
|
|
$
|
810,060
|
|
|
$
|
745,741
|
|
|
$
|
706,603
|
|
Major Customers
Net sales to major customers were as follows (in thousands, except for percentages):
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
Amount
|
|
|
Net Sales
|
|
|
Amount
|
|
|
Net Sales
|
|
|
Amount
|
|
|
Net Sales
|
|
Wal-Mart
|
|
$
|
165,777
|
|
|
|
20.5
|
%
|
|
$
|
163,333
|
|
|
|
21.9
|
%
|
|
$
|
165,345
|
|
|
|
23.4
|
%
|
Target
|
|
|
124,257
|
|
|
|
15.3
|
|
|
|
96,766
|
|
|
|
13.0
|
|
|
|
110,159
|
|
|
|
15.6
|
|
Toys ‘R’ Us
|
|
|
93,926
|
|
|
|
11.6
|
|
|
|
71,150
|
|
|
|
9.5
|
|
|
|
66,633
|
|
|
|
9.4
|
|
|
|
$
|
383,960
|
|
|
|
47.4
|
%
|
|
$
|
331,249
|
|
|
|
44.4
|
%
|
|
$
|
342,137
|
|
|
|
48.4
|
%
|
No other customer accounted for more than 10% of the Company’s total net sales.
As of December 31, 2015 and 2016, the Company’s three largest customers accounted for approximately 56.2% and 35.8%, respectively, of net accounts receivable. The concentration of the Company’s business with a relatively small number of customers may expose the Company to material adverse effects if one or more of its large customers were to experience financial difficulty. The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses.
Note 4—Joint Ventures
The Company owns a fifty percent interest in a joint venture (“Pacific Animation Partners”) with the U.S. entertainment subsidiary of a leading Japanese advertising and animation production company. The joint venture was created to develop and produce a boys’ animated television show, which it licensed worldwide for television broadcast as well as consumer products. The Company produced toys based upon the television program under a license from the joint venture which also licensed certain other merchandising rights to third parties. The Company is responsible for fifty percent of the operating expenses of the joint venture. The Company’s investment is being accounted for using the equity method. The joint venture completed and delivered 65 episodes of the show, which began airing in February 2012, and has since ceased production of the television show. For the years ended December 31, 2014, 2015 and 2016, the Company recognized income from the joint venture of $0.3 million, $0.1 million and $0.7 million, respectively.
As of December 31, 2015 and 2016, the balance of the investment in the Pacific Animation Partners joint venture is nil.
In September 2012, the Company entered into a joint venture (“DreamPlay Toys”) with NantWorks LLC (“NantWorks”) in which it owns a fifty percent interest. Pursuant to the operating agreement of DreamPlay Toys, the Company paid to NantWorks cash in the amount of $8.0 million and issued NantWorks a warrant to purchase 1.5 million shares of the Company’s common stock at a value of $7.0 million in exchange for the exclusive right to arrange for the provision of the NantWorks recognition technology platform for toy products. The Company has classified these rights as an intangible asset, which is being amortized over the anticipated revenue stream from the exploitation of these rights. The joint venture entered into a Toy Services Agreement, as amended, with a current expiration date of October 1, 2018, to develop and produce toys utilizing recognition technologies owned by NantWorks. Pursuant to the terms of the amended Toy Services Agreement, NantWorks is entitled to receive a renewal fee of $0.4 million per year and a preferred return based upon net sales of DreamPlay Toys product sales and third-party license fees. The Company retains the financial risk of the joint venture and is responsible for the day-to-day operations, including development, sales and distribution, for which it is entitled to receive any remaining profit or is responsible for any losses. The results of operations of the joint venture are consolidated with the Company’s results. Sales of DreamPlay Toys products commenced in the third quarter of 2013.
In addition, in 2012, the Company invested $7.0 million in cash in exchange for a five percent economic interest in a related entity, DreamPlay LLC, which will exploit the recognition technologies in non-toy consumer product categories. NantWorks has the right to repurchase the Company’s interest for $7.0 million. The Company has classified this investment as a long term asset on its balance sheet. The Company’s investment is being accounted for using the cost method. As of December 31, 2016, the Company determined the value of this investment will be realized and that no impairment has occurred.
In November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns fifty-one percent of the joint venture and consolidates the joint venture since control rests with the Company. The non-controlling interest’s share of the income and losses from the joint venture for the year ended December 31, 2015 and 2016 was a loss of $84,000 and income of $6,000, respectively.
Note 5—Business Combinations
The Company acquired the following entities to further enhance its existing product lines and to continue diversification into other toy categories and seasonal businesses:
In July 2012, the Company acquired all of the stock of Maui, Inc., an Ohio corporation, Kessler Services, Inc., a Nevada corporation, and A.S. Design Limited, a Hong Kong corporation (collectively, “Maui”). The cash consideration totaled $36.2 million. In addition, the Company agreed to pay an earn-out of up to an aggregate amount of $18.0 million in cash over the three calendar years following the acquisition based upon the achievement of certain financial performance criteria, which was accrued and recorded as goodwill as of December 31, 2012. In 2013, 2014 and 2015, Maui did not achieve the minimum prescribed earn-out targets, therefore the reversals of the earn-out of $6.0 million, $5.9 million and $5.6 million, respectively, was recorded as other income. Maui is a leading manufacturer and distributor of spring and summer activity toys and impulse toys and was included in the Company’s results of operations from the date of acquisition.
In September 2012, the Company acquired all of the stock of JKID, LTD., a United Kingdom corporation for an initial cash consideration of $1.1 million and deferred cash payments of $5.5 million payable in five semi-annual payments of $1.1 million each. In addition, the Company agreed to pay additional compensation of up to an aggregate amount of $4.4 million in cash over the two year period of 2015 through 2016, based upon the achievement of certain financial performance criteria, which was to be accrued and charged to expense when and if it was earned. The financial performance criteria were not met in 2015 or 2016. Accordingly, none of the earn-out was paid. JKID is the developer of augmented reality technology that enhances the play patterns of toys and consumer products.
Note 6—Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2016 are as follows (in thousands):
|
|
U.S. and
Canada
|
|
|
International
|
|
|
Halloween
|
|
|
Total
|
|
Balance, December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
30,418
|
|
|
$
|
11,795
|
|
|
$
|
2,279
|
|
|
$
|
44,492
|
|
Adjustments to goodwill for foreign currency translation
|
|
|
(200
|
)
|
|
|
(78
|
)
|
|
|
(15
|
)
|
|
|
(293
|
)
|
Balance December 31, 2015
:
|
|
|
30,218
|
|
|
|
11,717
|
|
|
|
2,264
|
|
|
|
44,199
|
|
Adjustments to goodwill for foreign currency translation
|
|
|
(678
|
)
|
|
|
(262
|
)
|
|
|
(51
|
)
|
|
|
(991
|
)
|
Balance December 31, 2016:
|
|
$
|
29,540
|
|
|
$
|
11,455
|
|
|
$
|
2,213
|
|
|
$
|
43,208
|
|
The Company assesses goodwill and indefinite-lived intangible assets for impairment on an annual basis by reviewing relevant qualitative and quantitative factors. More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other triggering events that take place. If carrying value exceeds fair value, a possible impairment exists and further evaluation is performed.
As of March 31, 2016, the Company revised its reportable segments based on changes to how the businesses are managed and how resources are allocated to the businesses. In conjunction with the required reallocation of goodwill to the new reportable segments as of March 31, 2016, the Company performed an assessment as of April 1, 2016. In performing its assessment for goodwill impairment, the Company evaluated qualitative factors, including but not limited to the performance of each reporting unit, general economic conditions, access to capital, the industry and competitive environment, and the interest rate environment. The Company prepared step-one of its impairment model. The valuation of goodwill involves a high degree of judgment and uncertainty related to key assumptions. Due to the subjective nature of the impairment analysis, significant changes in the assumptions used to develop the estimate could materially affect the conclusion regarding the future cash flows necessary to support the valuation of goodwill. In prior years, the assessment had been performed as of October 1 of each year, however, based on the seasonality of its businesses, the Company has determined that it is most appropriate and preferable to perform future annual assessments as of April 1 after the completion of the business cycles of each of its reporting units. The Company does not believe that the change in the goodwill impairment testing date will have a material effect on the consolidated financial statements.
Based on the Company’s April 1 assessment, it determined that the fair values of its reporting units were not less than the carrying amounts. In addition, as a result of operating performance below expectations for the full year of 2016 that became apparent in December 2016, the Company performed a subsequent impairment assessment on goodwill as of December 31, 2016. Based on the Company’s subsequent assessment, it determined that the fair values of its reporting units were not less than the carrying amounts with excess coverage of fair value over the carrying value of each of the reporting units of 2.0%, 20.6% and 2.0% for U.S. and Canada, International, and Halloween, respectively. As such, the Company determined there was no impairment to be recorded in 2016.
Note 7—Intangible Assets Other Than Goodwill
Intangible assets other than goodwill consist primarily of licenses, product lines, customer relationships and trademarks. Amortized intangible assets are included in intangibles in the accompanying balance sheets. Trademarks are disclosed separately in the accompanying balance sheets. Intangible assets are as follows (in thousands, except for weighted useful lives):
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
|
|
Weighted
Useful
Lives
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
5.81
|
|
|
$
|
24,930
|
|
|
$
|
(20,436
|
)
|
|
$
|
4,494
|
|
|
$
|
20,130
|
|
|
$
|
(17,248
|
)
|
|
$
|
2,882
|
|
Product lines
|
|
|
7.50
|
|
|
|
50,093
|
|
|
|
(14,376
|
)
|
|
|
35,717
|
|
|
|
50,093
|
|
|
|
(20,634
|
)
|
|
|
29,459
|
|
Customer relationships
|
|
|
4.90
|
|
|
|
3,152
|
|
|
|
(2,195
|
)
|
|
|
957
|
|
|
|
3,152
|
|
|
|
(2,755
|
)
|
|
|
397
|
|
Trade names
|
|
|
5.00
|
|
|
|
3,000
|
|
|
|
(2,050
|
)
|
|
|
950
|
|
|
|
3,000
|
|
|
|
(2,650
|
)
|
|
|
350
|
|
Non-compete/ Employment contracts
|
|
|
5.00
|
|
|
|
200
|
|
|
|
(133
|
)
|
|
|
67
|
|
|
|
200
|
|
|
|
(177
|
)
|
|
|
23
|
|
Total amortized intangible assets
|
|
|
|
|
|
$
|
81,375
|
|
|
$
|
(39,190
|
)
|
|
$
|
42,185
|
|
|
$
|
76,575
|
|
|
$
|
(43,464
|
)
|
|
$
|
33,111
|
|
Unamortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
$
|
2,308
|
|
|
$
|
―
|
|
|
$
|
2,308
|
|
|
$
|
2,608
|
|
|
$
|
―
|
|
|
$
|
2,608
|
|
In October 2016, the Company acquired the operating assets of the C’est Moi brand of performance makeup and youth skincare products whose distribution is currently limited primarily to Asia. The initial consideration consisted of cash in the amount of $0.3 million. In addition, the Company agreed to pay additional compensation of up to an aggregate of $2.1 million in cash over the five year period of 2017 through 2021, based on the achievement of certain financial performance criteria, which will be accrued and charged to expense when and if it is earned.
For the years ended December 31, 2014, 2015 and 2016, the Company’s aggregate amortization expense related to intangible assets was $8.5 million, $8.0 million and $8.8 million, respectively. The Company currently estimates continuing future amortization expense to be approximately (in thousands):
2017
|
|
$
|
8,780
|
|
2018
|
|
|
6,137
|
|
2019
|
|
|
3,144
|
|
2020
|
|
|
3,053
|
|
2021
|
|
|
3,053
|
|
Thereafter
|
|
|
8,944
|
|
|
|
$
|
33,111
|
|
Note 8—Concentration of Credit Risk
Financial instruments that subject the Company to concentration of credit risk are cash and cash equivalents and accounts receivable. Cash equivalents consist principally of short-term money market funds. These instruments are short-term in nature and bear minimal risk. To date, the Company has not experienced losses on these instruments.
The Company performs ongoing credit evaluations of its customers’ financial conditions, but does not require collateral to support domestic customer accounts receivable. Most goods shipped FOB Hong Kong or China are secured with irrevocable letters of credit.
Note 9—Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
2015
|
|
|
2016
|
|
Royalties
|
|
$
|
21,599
|
|
|
$
|
13,805
|
|
Inventory liabilities
|
|
|
6,754
|
|
|
|
5,425
|
|
Professional fees
|
|
|
2,535
|
|
|
|
3,696
|
|
Goods in transit
|
|
|
2,736
|
|
|
|
3,441
|
|
Salaries and employee benefits
|
|
|
185
|
|
|
|
3,243
|
|
Interest expense
|
|
|
2,333
|
|
|
|
2,520
|
|
Bonuses
|
|
|
6,275
|
|
|
|
1,500
|
|
Sales commissions
|
|
|
1,132
|
|
|
|
816
|
|
Unearned revenue
|
|
|
1,720
|
|
|
|
779
|
|
Molds and tools
|
|
|
2,669
|
|
|
|
―
|
|
Other
|
|
|
6,143
|
|
|
|
3,420
|
|
|
|
$
|
54,081
|
|
|
$
|
38,645
|
|
In addition to royalties currently payable on the sale of licensed products during the quarter, the Company records a liability as accrued royalties for the estimated shortfall in achieving minimum royalty guarantees pursuant to certain license agreements (Note 16).
Note 10—Related Party Transactions
A director of the Company is a partner in a law firm that acts as counsel to the Company. The Company incurred legal fees and expenses to the law firm in the amount of approximately $2.4 million in 2014, $3.1 million in 2015 and $3.2 million in 2016. As of December 31, 2015 and 2016, legal fees and reimbursable expenses of $1.6 million and $1.6 million, respectively, were payable to this law firm.
The owner of Nantworks, the Company’s DreamPlay Toys joint venture partner, beneficially owns 16.2% of the Company’s outstanding common stock, which includes 1.5 million shares underlying out-of-the-money stock warrants. Pursuant to the joint venture agreements, the Company is obligated to pay Nantworks a preferred return on joint venture sales.
For the years ended December 31, 2014, 2015 and 2016, preferred returns of $0.8 million, $0.7 million and nil, respectively, were earned and payable to Nantworks. Pursuant to the amended Toy Services Agreement, Nantworks is entitled to receive a renewal fee in the amount $1.2 million payable in installments of $0.8 million paid on the effective date of the renewal in 2015 and $0.2 million on or before each of August 1, 2016 and 2017. As of December 31, 2015 and 2016, the Company has a receivable from Nantworks in the amount of $0.6 million and $0.6 million, respectively. In addition, the Company previously leased office space from Nantworks. Rent expense, including common area maintenance and parking, for the years ended December 31, 2014, 2015 and 2016 was $1.3 million, $0.1 million and nil, respectively.
Note 11—Credit Facility
In March 2014, the Company and its domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”). The loan agreement, as amended and subsequently assigned to Wells Fargo Bank, N.A. pursuant to its acquisition of GECC, provides for a $75.0 million revolving credit facility subject to availability based on prescribed advance rates on certain accounts receivable and inventory (the “WF Loan Agreement”). The amounts outstanding under the credit facility are payable in full upon maturity of the facility on March 27, 2019, and the credit facility is secured by a security interest in favor of the lender covering a substantial amount of the assets of the Company. As of December 31, 2015, the amount of outstanding borrowings was nil and outstanding stand-by letters of credit totaled $23.2 million; the total excess borrowing capacity was $32.3 million. As of December 31, 2016, the amount of outstanding borrowings was $10.0 million and outstanding stand-by letters of credit totaled $28.2 million; the total excess borrowing capacity was $12.1 million.
The Company’s ability to borrow under the WF Loan Agreement is also subject to its ongoing compliance with certain financial covenants, including the maintenance by the Company of a fixed charge coverage ratio of at least 1.2:1.0 based on the trailing four fiscal quarters. As of December 31, 2015 and 2016, the Company was in compliance with the financial covenants under the WF Loan Agreement.
The Company may borrow funds at LIBOR or at a base rate, plus applicable margins of 225 basis point spread over LIBOR and 125 basis point spread on base rate loans. In addition to standard fees, the facility has an unused credit line fee, which ranges from 25 to 50 basis points. As of December 31, 2015 and 2016, the weighted average interest rate on the credit facility was approximately 2.25% and 2.45%, respectively.
The WF Loan Agreement also contains customary events of default, including a cross default provision and a change of control provision. In the event of a default, all of the obligations of the Company and its subsidiaries under the WF Loan Agreement may be declared immediately due and payable. For certain events of default relating to insolvency and receivership, all outstanding obligations become due and payable.
Note 12—Convertible Senior Notes
Convertible senior notes consist of the following (in thousands):
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
Principal
|
|
|
Issuance
|
|
|
Net
|
|
|
Principal
|
|
|
Issuance
|
|
|
Net
|
|
|
|
Amount
|
|
|
Costs
|
|
|
Amount
|
|
|
Amount
|
|
|
Costs
|
|
|
Amount
|
|
4.25% convertible senior notes (due 2018)
|
|
$
|
100,000
|
|
|
$
|
2,181
|
|
|
$
|
97,819
|
|
|
$
|
93,865
|
|
|
$
|
1,098
|
|
|
$
|
92,767
|
|
4.875% convertible senior notes (due 2020)
|
|
|
115,000
|
|
|
|
3,653
|
|
|
|
111,347
|
|
|
|
113,000
|
|
|
|
2,760
|
|
|
|
110,240
|
|
Total convertible senior notes, net of debt issuance costs
|
|
$
|
215,000
|
|
|
$
|
5,834
|
|
|
$
|
209,166
|
|
|
$
|
206,865
|
|
|
$
|
3,858
|
|
|
$
|
203,007
|
|
In November 2009, the Company sold an aggregate of $100.0 million principal amount of the 2014 Notes. The 2014 Notes, which were senior unsecured obligations of the Company, paid cash interest semi-annually at a rate of 4.50% per annum and matured on November 1, 2014. In July 2013, the Company repurchased an aggregate of $61.0 million principal amount of these notes at par plus accrued interest with a portion of the net proceeds from the issuance of $100.0 million principal amount of 4.25% convertible senior notes due 2018 resulting in a gain on extinguishment of $0.1 million. The remainder of these notes was redeemed at par at maturity on November 1, 2014.
ASC 470-20, “Debt with Conversion and Other Options,” requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) upon conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. In accordance with ASC 470-20, the Company allocated $13.7 million of the $100.0 million principal amount of the 2014 Notes to the equity component, which represents a discount to the debt that was being amortized to interest expense through November 1, 2014. Interest expense associated with the amortization of the discount was $0.9 million, nil and nil for December 31, 2014, 2015 and 2016. The Company repurchased $61.0 million of the 2014 Notes during the year ended December 31, 2013 as discussed below, with $2.8 million of the price allocated to the repurchase of the related equity component. In addition, approximately $2.2 million of the unamortized debt discount and $0.6 million of debt issuance costs were written off in connection with the repurchase of the 2014 Notes. The remaining aggregate $39.0 million of principal amount of the 2014 Notes were redeemed at par at maturity on November 1, 2014.
In July 2013, the Company sold an aggregate of $100.0 million principal amount of 4.25% Convertible Senior Notes due 2018 (the “2018 Notes”). The 2018 Notes are senior unsecured obligations of the Company paying interest semi-annually in arrears on August 1 and February 1 of each year at a rate of 4.25% per annum and will mature on August 1, 2018. The initial and still current conversion rate for the 2018 Notes is 114.3674 shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $8.74 per share of common stock, subject to adjustment in certain events. Upon conversion, the 2018 Notes will be settled in shares of the Company’s common stock. Holders of the 2018 Notes may require that the Company repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2018 Notes). In 2016, the Company repurchased and retired an aggregate of approximately $6.1 million principal amount of the 2018 Notes. In addition, approximately $0.1 million of the unamortized debt issuance costs were written off and a nominal gain was recognized in conjunction with the retirement of the 2018 Notes.
In June 2014, the Company sold an aggregate of $115.0 million principal amount of 4.875% Convertible Senior Notes due 2020 (the “2020 Notes”). The 2020 Notes are senior unsecured obligations of the Company paying interest semi-annually in arrears on June 1 and December 1 of each year at a rate of 4.875% per annum and will mature on June 1, 2020. The initial and still current conversion rate for the 2020 Notes is 103.7613 shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $9.64 per share of common stock, subject to adjustment in certain events. Upon conversion, the 2020 Notes will be settled in shares of the Company’s common stock. Holders of the 2020 Notes may require that the Company repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2020 Notes). In January 2016, the Company repurchased and retired an aggregate of $2.0 million principal amount of the 2020 Notes. In addition, approximately $0.1 million of the unamortized debt issuance costs were written off and a $0.1 million gain was recognized in conjunction with the retirement of the 2020 Notes.
On January 1, 2016, the Company adopted ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt premiums and discounts. ASU 2015-03 applies retrospectively and does not change the recognition and measurement requirements for debt issuance costs. As a result, the Company reclassified $5.8 million of debt issuance costs previously included in other long term assets to convertible senior notes, net on its consolidated financial statements as of December 31, 2015.
Key components of the 4.50% convertible senior notes due 2014 consist of the following (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
2016
|
|
Contractual interest expense on the coupon
|
|
$
|
1,463
|
|
|
$
|
―
|
|
|
$
|
―
|
|
Amortization of debt discount and debt issuance costs recognized as interest expense
|
|
|
1,140
|
|
|
|
―
|
|
|
|
―
|
|
|
|
$
|
2,603
|
|
|
$
|
―
|
|
|
$
|
―
|
|
Key components of the 4.25% convertible senior notes due 2018 consist of the following (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Contractual interest expense
|
|
$
|
4,250
|
|
|
$
|
4,250
|
|
|
$
|
4,191
|
|
Amortization of debt issuance costs recognized as interest expense
|
|
|
835
|
|
|
|
836
|
|
|
|
1,172
|
|
|
|
$
|
5,085
|
|
|
$
|
5,086
|
|
|
$
|
5,363
|
|
Key components of the 4.875% convertible senior notes due 2020 consist of the following (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Contractual interest expense
|
|
$
|
3,135
|
|
|
$
|
5,606
|
|
|
$
|
5,508
|
|
Amortization of debt issuance costs recognized as interest expense
|
|
|
473
|
|
|
|
811
|
|
|
|
804
|
|
|
|
$
|
3,608
|
|
|
$
|
6,417
|
|
|
$
|
6,312
|
|
Note 13—Income Taxes
The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdiction.
For the years ended 2014, 2015 and 2016, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $3.7 million, $3.4 million and $4.1 million reflecting effective tax provision rates of 14.7%, 12.9% and 76.8%, respectively.
For the year ended 2014 and 2015, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of 14.7% and 12.9%. Exclusive of discrete items, the effective tax provision rate would be 13.6% in 2014 and 9.5% in 2015. The decrease in the effective rate absent discrete items was primarily due to the foreign rate differential. The rate exclusive of discrete items can be materially impacted by the proportion of Hong Kong earnings to consolidated earnings.
The 2016 tax expense of $4.1 million included a discrete tax benefit of $0.1 million primarily comprised of return to provision adjustments. Absent these discrete tax expenses, the Company’s effective tax rate for 2016 was 79.2%; primarily due to US federal alternative minimum tax, various state taxes and taxes on foreign income.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The guidance in ASU 2015-17 is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2016, with early adoption permitted. The Company early adopted this standard as of January 1, 2016 and applied the standard retrospectively. As a result of adopting this standard, current deferred tax liabilities of $2.7 million and non-current deferred tax assets of $0.4 million were reclassified to net non-current deferred tax liabilities as of December 31, 2015.
For years ended 2015 and 2016, the Company had net deferred tax liabilities of approximately $2.3 million and $2.0 million, respectively, related to foreign jurisdictions.
Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Federal
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
1,549
|
|
State and local
|
|
|
287
|
|
|
|
708
|
|
|
|
652
|
|
Foreign
|
|
|
3,887
|
|
|
|
3,044
|
|
|
|
1,637
|
|
Total Current
|
|
|
4,170
|
|
|
|
3,752
|
|
|
|
3,838
|
|
APIC
|
|
|
(84
|
)
|
|
|
—
|
|
|
|
548
|
|
Deferred
|
|
|
(371
|
)
|
|
|
(329
|
)
|
|
|
(259
|
)
|
Total
|
|
$
|
3,715
|
|
|
$
|
3,423
|
|
|
$
|
4,127
|
|
The components of deferred tax assets/(liabilities) are as follows (in thousands):
|
|
2015
|
|
|
2016
|
|
Net deferred tax assets/(liabilities):
|
|
|
|
|
|
|
Reserve for sales allowances and possible losses
|
|
$
|
756
|
|
|
$
|
801
|
|
Accrued expenses
|
|
|
1,193
|
|
|
|
1,739
|
|
Prepaid royalties
|
|
|
13,155
|
|
|
|
16,806
|
|
Accrued royalties
|
|
|
3,963
|
|
|
|
2,638
|
|
Inventory
|
|
|
3,315
|
|
|
|
3,506
|
|
State income taxes
|
|
|
―
|
|
|
|
98
|
|
Property and equipment
|
|
|
3,833
|
|
|
|
4,997
|
|
Original issue discount interest
|
|
|
(10,332
|
)
|
|
|
(6,945
|
)
|
Goodwill and intangibles
|
|
|
35,086
|
|
|
|
29,378
|
|
Share based compensation
|
|
|
2,359
|
|
|
|
1,607
|
|
Undistributed foreign earnings
|
|
|
―
|
|
|
|
(48,731
|
)
|
Federal and state net operating loss carryforwards
|
|
|
34,684
|
|
|
|
22,755
|
|
Credit carryforwards
|
|
|
13,254
|
|
|
|
21,097
|
|
Other
|
|
|
(2,621
|
)
|
|
|
(2,495
|
)
|
Gross
|
|
|
98,645
|
|
|
|
47,251
|
|
Valuation allowance
|
|
|
(100,938
|
)
|
|
|
(49,285
|
)
|
Total net deferred tax assets/(liabilities)
|
|
$
|
(2,293
|
)
|
|
$
|
(2,034
|
)
|
Provision for income taxes varies from the U.S. federal statutory rate. The following reconciliation shows the significant differences in the tax at statutory and effective rates:
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Federal income tax expense
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax expense, net of federal tax effect
|
|
|
―
|
|
|
|
1.0
|
|
|
|
(3.6
|
)
|
Effect of differences in U.S. and foreign statutory rates
|
|
|
(14.1
|
)
|
|
|
(9.4
|
)
|
|
|
(53.7
|
)
|
Uncertain tax positions
|
|
|
―
|
|
|
|
0.3
|
|
|
|
3.4
|
|
Earn-out adjustments
|
|
|
―
|
|
|
|
(7.4
|
)
|
|
|
―
|
|
Provision to return
|
|
|
―
|
|
|
|
12.2
|
|
|
|
4.5
|
|
Non-deductible expenses
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
8.9
|
|
Other
|
|
|
(1.5
|
)
|
|
|
0.5
|
|
|
|
0.6
|
|
Foreign deemed dividend
|
|
|
―
|
|
|
|
1.7
|
|
|
|
262.2
|
|
Foreign tax credit
|
|
|
―
|
|
|
|
(0.5
|
)
|
|
|
(126.1
|
)
|
Undistributed foreign earnings
|
|
|
―
|
|
|
|
―
|
|
|
|
906.5
|
|
Valuation allowance
|
|
|
(5.8
|
)
|
|
|
(21.6
|
)
|
|
|
(960.9
|
)
|
|
|
|
14.7
|
%
|
|
|
12.9
|
%
|
|
|
76.8
|
%
|
Deferred taxes result from temporary differences between tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. The temporary differences result from costs required to be capitalized for tax purposes by the U.S. Internal Revenue Code (“IRC”), and certain items accrued for financial reporting purposes in the year incurred but not deductible for tax purposes until paid. The Company has established a full valuation allowance on net deferred tax assets in the United States since, in the opinion of management, it is not more likely than not that the U.S. net deferred tax assets will be realized.
The components of income (loss) before provision for income taxes are as follows (in thousands):
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Domestic
|
|
$
|
5,358
|
|
|
$
|
11,692
|
|
|
$
|
(7,760
|
)
|
Foreign
|
|
|
19,866
|
|
|
|
14,901
|
|
|
|
13,136
|
|
|
|
$
|
25,224
|
|
|
$
|
26,593
|
|
|
$
|
5,376
|
|
The Company has approximately $206.0 million of cumulative undistributed earnings of non-U.S. subsidiaries for which U.S. deferred tax liability has been provided as of December 31, 2016. These earnings are no longer permanently reinvested outside the U.S. Due to the valuation allowance against the deferred tax assets, the deferred tax liability recorded reduces the valuation allowance.
The Company uses a recognition threshold and measurement process for recording in the consolidated financial statements uncertain tax positions (“UTP”) taken or expected to be taken in a tax return.
$49,700 of additional UTP related to state taxes was recognized in 2016. During 2015, approximately $1.8 million of the liability for UTP was recognized, and approximately $2.1 million of the liability for UTP was de-recognized.
Current interest on uncertain income tax liabilities is recognized as interest expense and penalties are recognized in selling, general and administrative expenses in the consolidated statement of operations. During 2014, the Company recognized $150,000 of current year interest expense relating to UTPs. During 2015, the Company did not recognize any current year interest expense relating to UTPs. During 2016, the Company recognized $67,900 of current interest expense relating to UTPs.
The following table provides further information of UTPs that would affect the effective tax rate, if recognized, as of December 31, 2016 (in millions):
Balance, January 1, 2014
|
|
$
|
2.6
|
|
Current year additions
|
|
|
—
|
|
Current year reduction due to lapse of applicable statute of limitations
|
|
|
(0.1
|
)
|
Balance, December 31, 2014
|
|
|
2.5
|
|
Current year additions
|
|
|
1.8
|
|
Current year reduction due to lapse of applicable statute of limitations
|
|
|
(2.1
|
)
|
Balance, December 31, 2015
|
|
|
2.2
|
|
Current year additions
|
|
|
0.1
|
|
Current year reduction due to audit settlement
|
|
|
—
|
|
Balance, December 31, 2016
|
|
$
|
2.3
|
|
We do not expect our gross unrecognized tax benefits to significantly change within the next 12 months.
Tax years 2013 through 2015 remain subject to examination in the United States. The tax years 2012 through 2015 are generally still subject to examination in the various states. The tax years 2010 through 2015 are still subject to examination in Hong Kong. In the normal course of business, the Company is audited by federal, state and foreign tax authorities. The U.S. Internal Revenue Service is currently examining the 2015 tax year.
Management assesses 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. The Company is required to establish a valuation allowance for the U.S. deferred tax assets and record a charge to income if Management determines, based upon available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
Based on our evaluation of all positive and negative evidence, as of December 31, 2016, a valuation allowance of $49.3 million has been recorded against the deferred tax assets that more likely than not will not be realized. For the year ended December 31, 2016, the valuation allowance decreased by $51.6 million from $100.9 million at December 31, 2015 to $49.3 million at December 31, 2016. The decrease in the valuation allowance is primarily due to the recognition of the deferred tax liability relating to the Company’s cumulative undistributed earnings of non-U.S. subsidiaries that are no longer permanently reinvested. The net deferred tax liabilities of $2.3 million and $2.0 million in 2015 and 2016, respectively, represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position.
At December 31, 2016, the Company had U.S. federal net operating loss carryforwards, or "NOLs," of approximately $36.8 million, which will begin to expire in 2033. At December 31, 2016, the Company's state NOLs were mainly from California. The majority of the approximately $124.2 million of California NOLs will begin to expire in 2031. At December 31, 2016, the Company had foreign tax credit carryforwards of approximately $19.2 million, which will begin to expire in 2022. At December 31, 2016, the Company had federal research and development tax credit carryforwards ("credit carryforwards") of approximately $0.5 million, which will begin to expire in 2029. At December 31, 2016, the Company had state research and development tax credits of approximately $0.1 million, which carry forward indefinitely. At December 31, 2016, the Company had AMT credit carryforwards of approximately $1.5 million, which carry forward indefinitely. Utilization of certain NOLs and research credit carryforwards may be subject to an annual limitation due to ownership change limitations set forth in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and comparable state income tax laws. Any future annual limitation may result in the expiration of NOLs and credit carryforwards before utilization.
Note 14—Leases
The Company leases office, warehouse and showroom facilities and certain equipment under operating leases. Rent expense for the years ended December 31, 2014, 2015 and 2016 totaled $13.0 million, $11.5 million and $12.3 million, respectively (including leases abandoned during 2014), the following is a schedule of minimum annual lease payments (in thousands).
2017
|
|
$
|
12,030
|
|
2018
|
|
|
9,422
|
|
2019
|
|
|
6,276
|
|
2020
|
|
|
4,247
|
|
2021
|
|
|
3,989
|
|
Thereafter
|
|
|
9,184
|
|
|
|
$
|
45,148
|
|
Note 15—Common Stock, Preferred Stock and Warrants
The Company has 105,000,000 authorized shares of stock consisting of 100,000,000 shares of $.001 par value common stock and 5,000,000 shares of $.001 par value preferred stock. On December 31, 2015 shares issued and outstanding were 21,153,878, and on December 31, 2016, shares issued and outstanding were 19,376,773.
All issuances of common stock, including those issued pursuant to stock option and warrant exercises, restricted stock grants and acquisitions, are issued from the Company’s authorized but not issued and outstanding shares.
In January 2014, the Company issued an aggregate of 531,993 shares of restricted stock at a value of approximately $3.6 million to two executive officers, which vest, subject to certain company financial performance criteria, over a one to three year period. In addition, an aggregate of 78,150 shares of restricted stock were issued to its five non-employee directors, which vested in January 2015, at an aggregate value of approximately $0.5 million.
In June 2014, the Company effectively repurchased 3,112,840 shares of its common stock at an average cost of $7.71 per share for an aggregate amount of $24.0 million pursuant to a prepaid forward share repurchase agreement entered into with Merrill Lynch International (“ML”). These repurchased shares are treated as retired for basic and diluted EPS purposes although they remain legally outstanding. The Company reflects the aggregate purchase price as a reduction to stockholders’ equity classified as Treasury Stock. No shares have been delivered to the Company by ML as of December 31, 2016.
In January 2015, the Company issued an aggregate of 525,734 shares of restricted stock at a value of approximately $3.6 million to two executive officers, which vest, subject to certain company financial performance criteria and market conditions, over a three year period. In addition, an aggregate of 73,855 shares of restricted stock were issued to its five non-employee directors, which vest in January 2016, at an aggregate value of approximately $0.5 million.
In April 2015, the Company issued an aggregate of 135,234 shares of restricted stock at a value of approximately $0.9 million to an executive officer, which vests subject to certain company financial performance criteria and market conditions, over a three year period.
In June 2015, and as subsequently increased, the Board of Directors authorized the repurchase of up to an aggregate of $35.0 million of the Company’s outstanding common stock and/or convertible senior notes (collectively, “securities”). During 2015, the Company repurchased 1,547,361 shares of its common stock at an aggregate value of $13.2 million. During 2016, the Company repurchased 1,766,284 shares of its common stock at an aggregate value of $13.5 million and also repurchased $2.0 million principal amount of its 2020 Notes at a cost of $1.9 million and $6.1 million principal amount of its 2018 Notes at a cost of $6.1 million. As of December 31, 2016, the Company completed the authorized repurchases of securities and retired all of the repurchased securities.
In January 2016, the Company issued an aggregate of 449,120 shares of restricted stock at a value of approximately $3.6 million to two executive officers, which vest, subject to certain company financial performance criteria and market conditions, over a three year period. In addition, an aggregate of 62,710 shares of restricted stock at an aggregate value of approximately $0.5 million were issued to its five non-employee directors, which vest in January 2017.
In March 2016, the Company issued an aggregate of 134,058 shares of restricted stock at a value of approximately $0.9 million to an executive officer, which vest, subject to certain company financial performance criteria and market conditions, over a three year period.
In October 2016, the Company issued an aggregate of 2,463 shares of restricted stock at a nominal value to a non-employee director, which vest in January 2017.
All issuances of common stock, including those issued pursuant to stock option and warrant exercises, restricted stock grants and acquisitions, are issued from the Company’s authorized but not issued and outstanding shares.
No dividend was declared or paid in 2015 and 2016.
Note 16—Commitments
The Company has entered into various license agreements whereby the Company may use certain characters and intellectual properties in conjunction with its products. Generally, such license agreements provide for royalties to be paid at 1% to 20% of net sales with minimum guarantees and advance payments.
In the event the Company determines that a shortfall in achieving the minimum guarantee is likely, a liability is recorded for the estimated short fall and charged to royalty expense.
Future annual minimum royalty guarantees as of December 31, 2016 are as follows (in thousands):
2017
|
|
$
|
51,950
|
|
2018
|
|
|
32,677
|
|
2019
|
|
|
7,638
|
|
|
|
$
|
92,265
|
|
The Company has entered into employment and consulting agreements with certain executives expiring through December 31, 2020. The aggregate future annual minimum guaranteed amounts due under those agreements as of December 31, 2016 are as follows (in thousands):
2017
|
|
$
|
8,226
|
|
2018
|
|
|
5,492
|
|
2019
|
|
|
5,332
|
|
2020
|
|
|
2,285
|
|
|
|
$
|
21,335
|
|
Note 17—Share-Based Payments
Under its 2002 Stock Award and Incentive Plan (“the Plan”), which incorporated its Third Amended and Restated 1995 Stock Option Plan, the Company has reserved shares of its common stock for issuance upon the exercise of options granted under the Plan, as well as for the awarding of other securities. Under the Plan, employees (including officers), non-employee directors and independent consultants may be granted options to purchase shares of common stock and other securities (Note 15). The vesting of these options and other securities may vary, but typically vest on a step-up basis over a maximum period of 4 years. Restricted shares typically vest in the same manner, with the exception of certain awards vesting over one to two years. Share-based compensation expense is recognized on a straight-line basis over the requisite service period. As of December 31, 2016, 2,378,630 shares were available for future grant. Additional shares may become available to the extent that options or shares of restricted stock presently outstanding under the Plan terminate or expire.
Restricted Stock
Under the Plan, share-based compensation payments may include the issuance of shares of restricted stock. Restricted stock award grants are based upon employment contracts, which vary by individual and year, and are subject to vesting conditions. Non-employee directors each receive grants of restricted stock at a value of $100,000 annually which vest after one year – this amount is prorated if a director is appointed within the year. In addition, at the discretion of Management and approval of the Board, non-executive employees also may receive restricted stock awards, which occurs approximately once per year.
During 2014, the Company issued a total of 610,143 shares of restricted stock; of which 531,993 shares of restricted stock (with performance based vesting measures) were issued to two executive officers and were subsequently forfeited based upon the Company not meeting certain financial targets for the year. A total of 78,150 shares were granted to its non-employee directors. The Company cancelled 12,658 shares of restricted stock due to various non-executive employees departing from the Company prior to shares vesting completely. Also during 2014, certain employees, including an executive officer, surrendered an aggregate of 51,877 shares of restricted stock at a value of less than $0.1 million to cover income taxes due on the vesting of restricted shares. As of December 31, 2014, 568,057 shares of the restricted stock remained unvested, representing a weighted average grant date fair value of $3.7 million.
During 2015, the Company issued a total of 734,823 shares of restricted stock; of which 660,968 shares of restricted stock (with performance based vesting measures) were issued to two executive officers. Of the 660,968 shares, a total of 612,221 were subsequently forfeited based upon the Company not meeting certain financial targets for the year. A total of 73,855 shares were granted to its non-employee directors. The Company cancelled 51,633 shares of restricted stock due to various non-executive employees departing from the Company prior to shares vesting completely. Also during 2015, certain employees, including an executive officer, surrendered an aggregate of 52,024 shares of restricted stock for $0.4 million to cover income taxes due on the vesting of restricted shares. As of December 31, 2015, 411,409 shares of the restricted stock remained unvested, representing a weighted average grant date fair value of $2.7 million.
During 2016, the Company issued a total of 648,351 shares of restricted stock; of which 583,178 shares of restricted stock (with performance based vesting measures) were issued to two executive officers. Of the 583,178 shares, all were subsequently forfeited based upon the Company not meeting certain financial targets for the year. A total of 65,173 shares were granted to its non-employee directors. The Company cancelled 24,822 shares of restricted stock due to various non-executive employees departing from the Company prior to shares vesting completely. Also during 2016, certain employees, including an executive officer, surrendered an aggregate of 50,719 shares of restricted stock for $1.5 million to cover income taxes due on the vesting of restricted shares. As of December 31, 2016, 196,453 shares of the restricted stock remained unvested, representing a weighted average grant date fair value of $1.4 million.
The following table summarizes the restricted stock award activity, annually, for the years ended December 31, 2014, 2015 and 2016:
|
|
Restricted and Performance Based
Stock Awards (RSA)
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Fair
Value
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
721,752
|
|
|
$
|
6.88
|
|
Awarded
|
|
|
610,143
|
|
|
|
6.72
|
|
Released
|
|
|
(219,187
|
)
|
|
|
7.99
|
|
Forfeited
|
|
|
(544,651
|
)
|
|
|
6.61
|
|
Outstanding, December 31, 2014
|
|
|
568,057
|
|
|
|
6.54
|
|
Awarded
|
|
|
734,823
|
|
|
|
6.81
|
|
Released
|
|
|
(227,616
|
)
|
|
|
6.60
|
|
Forfeited
|
|
|
(663,855
|
)
|
|
|
6.77
|
|
Outstanding, December 31, 2015
|
|
|
411,409
|
|
|
|
6.61
|
|
Awarded
|
|
|
648,351
|
|
|
|
7.00
|
|
Released
|
|
|
(255,307
|
)
|
|
|
6.68
|
|
Forfeited
|
|
|
(608,000
|
)
|
|
|
6.88
|
|
Outstanding, December 31, 2016
|
|
|
196,453
|
|
|
|
7.01
|
|
As of December 31, 2016, there was $0.8 million of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average period of 0.85 years.
The following table summarizes the total share-based compensation expense and related tax benefits recognized (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation expense
|
|
$
|
1,473
|
|
|
$
|
1,562
|
|
|
$
|
1,621
|
|
Excess tax benefit related to restricted stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
548
|
|
Stock Options
Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee's requisite service period. For the three years in the period ending December 31, 2016, the Company incurred no expense related to stock options previously awarded.
The Company uses the Black-Scholes method of valuation for share-based option awards. In valuing the stock options, the Black-Scholes model incorporates assumptions about stock volatility, expected term of stock options, and risk free interest rate. The valuation is reduced by an estimate of stock option forfeitures.
Stock option activity pursuant to the Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
127,144
|
|
|
$
|
20.20
|
|
Cancelled
|
|
|
(52,144
|
)
|
|
|
19.50
|
|
Outstanding, December 31, 2014
|
|
|
75,000
|
|
|
|
20.69
|
|
Cancelled
|
|
|
(75,000
|
)
|
|
|
20.69
|
|
Outstanding, December 31, 2015
|
|
|
—
|
|
|
|
—
|
|
There has been no stock option activity since December 31, 2015.
Non-Employee Stock Warrants
In 2012, the Company granted 1,500,000 stock warrants with an exercise price of $16.28 per share and a five year term to a third party as partial consideration for the exclusive right to use certain recognition technology in connection with the Company’s toy products. The exercise price of the 2012 stock warrants is equal to the volume-weighted average price of the Company’s common stock over the five trading days preceding the date of grant. All warrants vested upon grant and are exercisable over the term of the warrants. At December 31, 2014, 2015 and 2016 all such stock warrants remained outstanding with an exercise price of $16.28 per share and an expiration date of September 12, 2017.
The Company measures the fair value of the warrants granted on the measurement date. The fair value of the 2012 stock warrant is capitalized as an intangible asset and will be amortized to expense in the consolidated statements of operations when the related product is released and the related net sales are recognized, which commenced in the third quarter of 2013.
Note 18—Employee Benefits Plan
The Company sponsors for its U.S. employees, a defined contribution plan under Section 401(k) of the Internal Revenue Code. The Plan provides that employees may defer up to 50% of their annual compensation subject to annual dollar limitations, and that the Company will make a matching contribution equal to 100% of each employee’s deferral, up to 5% of the employee’s annual compensation. Company matching contributions, which vest immediately, totaled $1.9 million, $2.2 million and $2.5 million for the years ended December 31, 2014, 2015 and 2016, respectively.
Note 19—Supplemental Information to Consolidated Statements of Cash Flows
In 2014, certain employees, including an executive officer, surrendered an aggregate of 51,877 shares of restricted stock at a value of less than $0.1 million to cover their income taxes due on the 2014 vesting of the restricted shares granted them in 2013 and prior. Additionally, the Company recognized a $0.1 million excess tax deficiency from the vesting of restricted stock.
In 2015, certain employees, including an executive officer, surrendered an aggregate of 52,024 shares of restricted stock at a value of $0.4 million to cover their income taxes due on the 2015 vesting of the restricted shares granted them in 2014 and prior. Additionally, the Company recognized a nominal excess tax benefit from the vesting of restricted stock.
In 2016, certain employees, including an executive officer, surrendered an aggregate of 50,719 shares of restricted stock at a value of $1.5 million to cover their income taxes due on the 2016 vesting of the restricted shares granted them in 2015 and prior. Additionally, the Company recognized a $0.5 million excess tax benefit from the vesting of restricted stock.
Note 20—Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial data for the years 2015 and 2016 are summarized below. The Company has derived this data from the unaudited consolidated interim financial statements that, in the Company's opinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.
|
|
2015
|
|
|
2016
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
Net sales
|
|
$
|
114,201
|
|
|
$
|
131,106
|
|
|
$
|
337,027
|
|
|
$
|
163,407
|
|
|
$
|
95,809
|
|
|
$
|
140,977
|
|
|
$
|
302,791
|
|
|
$
|
167,026
|
|
Gross profit
|
|
$
|
35,378
|
|
|
$
|
39,287
|
|
|
$
|
104,329
|
|
|
$
|
49,575
|
|
|
$
|
31,183
|
|
|
$
|
44,800
|
|
|
$
|
94,933
|
|
|
$
|
52,105
|
|
Income (loss) from operations
|
|
$
|
(4,199
|
)
|
|
$
|
(3,008
|
)
|
|
$
|
44,628
|
|
|
$
|
(6,891
|
)
|
|
$
|
(13,816
|
)
|
|
$
|
(1,100
|
)
|
|
$
|
34,413
|
|
|
$
|
(2,391
|
)
|
Income (loss) before provision
(benefit) for income taxes
|
|
$
|
(7,154
|
)
|
|
$
|
(4,414
|
)
|
|
$
|
47,239
|
|
|
$
|
(9,078
|
)
|
|
$
|
(16,951
|
)
|
|
$
|
(3,441
|
)
|
|
$
|
31,612
|
|
|
$
|
(5,844
|
)
|
Net income (loss)
|
|
$
|
(7,581
|
)
|
|
$
|
(5,727
|
)
|
|
$
|
45,864
|
|
|
$
|
(9,386
|
)
|
|
$
|
(17,383
|
)
|
|
$
|
(4,145
|
)
|
|
$
|
30,529
|
|
|
$
|
(7,752
|
)
|
Basic earnings (loss) per share
|
|
$
|
(0.40
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
2.47
|
|
|
$
|
(0.50
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
1.91
|
|
|
$
|
(0.47
|
)
|
Weighted average shares
outstanding
|
|
|
19,090
|
|
|
|
19,108
|
|
|
|
18,559
|
|
|
|
18,781
|
|
|
|
17,218
|
|
|
|
16,402
|
|
|
|
16,044
|
|
|
|
16,098
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.40
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
1.12
|
|
|
$
|
(0.50
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
0.82
|
|
|
$
|
(0.47
|
)
|
Weighted average shares and
equivalents outstanding
|
|
|
19,090
|
|
|
|
19,108
|
|
|
|
42,562
|
|
|
|
18,781
|
|
|
|
17,218
|
|
|
|
16,402
|
|
|
|
39,504
|
|
|
|
16,098
|
|
Quarterly and year-to-date computations of income (loss) per share amounts are made independently. Therefore, the sum of the per-share amounts for the quarters may not agree with the per share amounts for the year.
Note 21—Litigation
On July 25, 2013, a purported class action lawsuit was filed in the United States District Court for the Central District of California captioned Melot v. JAKKS Pacific, Inc. et al., Case No. CV13-05388 (JAK) against Stephen G. Berman, Joel M. Bennett (collectively the “Individual Defendants”), and the Company (collectively, “Defendants”). On July 30, 2013, a second purported class action lawsuit was filed containing similar allegations against Defendants captioned Dylewicz v. JAKKS Pacific, Inc. et al., Case No. CV13-5487 (OON). The two cases (collectively, the “Class Action”) were consolidated on December 2, 2013 and a lead plaintiff appointed. A Third Amended Complaint (“TAC”) was filed on March 23, 2015 with similar allegations. The Company filed a motion to dismiss the TAC and that motion was argued on July 22, 2015; after argument it was taken on submission and dismissal with prejudice was ordered on November 18, 2016, and final judgment thereon of dismissal with prejudice was entered on December 12, 2016. The foregoing is a summary of the pleadings and is subject to the text of the pleadings which are on file with the Court.
On February 25, 2014, a shareholder derivative action was filed in the Central District of California by Advanced Advisors, G.P. against the Company, nominally, and against Messrs. Berman, Bennett, Miller, Skala, Glick, Ellin, Almagor, Poulsen and Reilly and Ms. Brodsky (Advanced Partners, G.P., v. Berman, et al., CV14-1420 (DSF)). On March 6, 2014, a second shareholder derivative action alleging largely the same claims against the same defendants was filed in the Central District of California by Louisiana Municipal Police Employees Retirement System (Louisiana Municipal Police Employees Retirement System v. Berman et al., CV14-1670 (GHF)). On April 17, 2014, the cases were consolidated under Case No. 2:14-01420-JAK (SSx) (the “Derivative Action”). On April 30, 2014, a consolidated amended complaint (“CAC”) was filed, which alleged (i) a claim for contribution under Sections 10(b) and 21(D) of the Securities Exchange Act related to allegations made in the Class Action; (ii) derivative and direct claims for alleged violations of Section 14 of the Exchange Act and Rule 14a-9 promulgated thereunder related to allegedly misleading statements about Mr. Berman’s compensation plan in the Company’s October 25, 2013 proxy statement; (iii) derivative claims for breaches of fiduciary duty related to the Company’s response to an unsolicited indication of interest from Oaktree Capital, stock repurchase, standstill agreement with the Clinton Group, and decisions related to the NantWorks joint venture; and (iv) claims against Messrs. Berman and Bennett for breach of fiduciary duty related to the Class Action. The CAC seeks compensatory damages, pre-judgment and post-judgment interest, and declaratory and equitable relief. The foregoing is a summary of the CAC and is subject to the text of the CAC, which is on file with the Court. A motion to dismiss the CAC or, in the alternative, to stay the CAC, was filed in May 2014. The Court granted the motion in part and denied the motion in part with leave for plaintiff to file an amended pleading. Plaintiff declined to do so. Accordingly, claims (i), (ii) and (iv) were dismissed and only the elements of claim (iii) not relating to the NantWorks joint venture remained. Thus, there were no surviving claims against Messrs. Poulsen, Reilly and Bennett and Ms. Brodsky and the Court approved the parties’ stipulation to strike their names as defendants in the CAC. Pleadings in response to the CAC were filed on October 30, 2014, which are on file with the Court. The matter was referred to mediation by the Court and the parties, at the mediation, reached an agreement in principle to resolve the action. Thereafter the parties entered into a memorandum of such agreement, subject to Court approval. A motion was filed seeking preliminary approval of the settlement and establishment of the procedure for final approval of the settlement; preliminary approval of the settlement was granted and a hearing regarding final approval of the proposed settlement and attorneys’ fees in connection therewith took place on November 2, 2015. At the hearing, the Judge indicated that he would approve the settlement with a formal order, and that was done in November 2016. The impact of the settlement has been reflected in the consolidated financial statements.
The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business, but the Company does not believe that any of these claims or proceedings will have a material effect on its business, financial condition or results of operations.
Note 22—Subsequent Events
During January and February 2017, the Company entered into exchange transactions with holders of its 4.25% convertible senior notes (due 2018) to exchange at par an aggregate of approximately $39.1 million principal amount of such notes for 2.9 million shares of its common stock and approximately $24.1 million in cash. After these exchanges, the remaining balance of the principal amount of the 2018 Notes was reduced to approximately $54.7 million.
In March 2017, the Company entered into an agreement with Hongkong Meisheng Culture Company Ltd. ("Meisheng Culture Company") to sell 3,660,891 shares of the Company's common stock to Meisheng Culture Company for a total purchase price of $19.3 million. The transaction is subject to approval by the shareholders of Meisheng Culture Company's parent company (Meisheng Culture & Creative Corp., Ltd.), and regulatory filings in China by Meisheng Culture Company. Meisheng Culture & Creative Corp., Ltd. is one of the Company's joint venture partners (Note 2).