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JAKKS Pacific Reports Second Quarter 2018 Financial Results

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JAKKS Pacific, Inc. (NASDAQ:JAKK) today reported financial results for
the second quarter ended June 30, 2018.

Second Quarter 2018 Financial Results

Net sales for the second quarter were $105.8 million compared to $119.6
million reported in the comparable period in 2017. The net loss
attributable to JAKKS Pacific for the second quarter was $18.6 million,
or $0.80 per diluted share. This compares to a net loss attributable to
JAKKS Pacific of $16.7 million, or $0.77 per diluted share, reported in
the comparable period in 2017. Adjusted EBITDA for the second quarter
was negative $8.5 million, compared to Adjusted EBITDA of negative $5.4
million in the 2017 second quarter. See note below on "Use of Non-GAAP
Financial Information."

Gross margin in the second quarter was 26.4%, down from 28.2% last year,
as a result of an increased level of sales reserves.

Management Commentary

JAKKS Chairman and CEO Stephen Berman stated, "As expected, during the
second quarter we continued to see the impact of the liquidation of Toys
R Us, which offset the positive contribution of several successful
products, including Incredibles 2, Squish-Dee-Lish®, and MorfBoard®. The
net sales declines of 11.5% in the quarter and 7.1% year-to-date were
primarily the result of the loss of sales to Toys R Us and the short
term disruption from its stores' liquidation throughout the marketplace."

"We saw expected declines in several properties that were driven by
unusually strong entertainment content a year ago, but we were pleased
with the performance of new product segments. The investments in the
C'est Moi™ and MorfBoard® brands continue to show momentum as
distribution broadens."

"Despite the fact that international sales were negatively impacted by
the loss of Toys R Us in many Europe and Asia Pacific markets, we saw a
sales increase of over 25% in the second quarter of this year compared
to last year, due in part to our geographic expansion, new warehouses,
and the launch of Incredibles 2 and Squish-Dee-Lish®."

"As we look ahead to the second half, we will continue to focus on cost
management and on new product launches. Our Fall lines are moving
forward as planned and we have a strong line-up of new product
introductions that are a balanced mix of owned IP and licensed brands,
including MorfBoard® Xtensions, Real Workin' Buddies® Mr. Banks,
Squish-Dee-Lish®, Perfectly Cute™, TP Blaster™, Fancy Nancy, Incredibles
2, and Mega Man."

Cash and Cash Equivalents

The Company's cash and cash equivalents, including restricted cash,
totaled $63.0 million as of June 30, 2018 compared to $46.8 million at
March 31, 2018.

Convertible Senior Note Retirement

On July 25, 2018, the Company reached an agreement to exchange $8.0
million of the 2018 convertible senior notes held by Oasis Management
with new convertible senior notes with terms similar to the notes issued
to Oasis Management in November 2017. The new notes will mature in
November 2020.

On June 14, 2018, the Company closed a $20.0 million term loan with
Great American Capital Partners Finance Co., LLC, the net proceeds of
which will be used to retire the remaining $13.2 million of the
Company's convertible senior notes that mature on August 1, 2018.

Expression of Interest from Hong Kong Meisheng Cultural Company
Limited

A committee of independent directors continues to evaluate Meisheng's
expression of interest, which was recently reaffirmed, in buying
additional shares to bring its holdings to 51% of JAKKS' outstanding
shares, as well as other possible interest.

2018 Outlook

The Company believes the market disruption and lingering effects of the
Toys R Us bankruptcy and liquidation in the United States and
internationally will continue to persist into the second half of 2018,
and will likely result in a decline in net revenues in 2018 when
compared to 2017.

Use of Non-GAAP Financial Information

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

Conference Call Live Webcast

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

A replay of the call will be available on JAKKS' website approximately
one hour following completion of the call through August 2, 2018 ending
at 11:59 p.m. Eastern Time/8:59 p.m. Pacific Time. The playback can be
accessed by calling (888) 843-7419 or (630) 652-3042 for international
callers, with passcode "47253718#" for both playback numbers.

About JAKKS Pacific, Inc.

JAKKS Pacific, Inc. (NASDAQ:JAKK) is a leading designer, manufacturer
and marketer of toys and consumer products sold throughout the world,
with its headquarters in Santa Monica, California. JAKKS Pacific's
popular proprietary brands include BIG-FIGS™, XPV®, Max Tow™, Disguise®,
Moose Mountain®, Funnoodle®, Maui®, Kids Only!®; a wide range of
entertainment-inspired products featuring premier licensed properties;
and C'est Moi™, a youth skincare and make-up brand. Through JAKKS Cares,
the company's commitment to philanthropy, JAKKS is helping to make a
positive impact on the lives of children. Visit us at www.jakks.com and
follow us on Instagram (@jakkstoys),
Twitter (@jakkstoys)
and Facebook (JAKKS
Pacific
).

©2018 JAKKS Pacific, Inc. All rights reserved.

Forward Looking Statements

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

 
JAKKS Pacific, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
     
June 30, December 31,
2018 2017
(In thousands)
 
ASSETS
 
Current assets:
Cash and cash equivalents $ 36,824 $ 64,977
Restricted cash 26,167 -
Accounts receivable, net 100,279 142,457
Inventory 62,161 58,432
Prepaid expenses and other assets   24,677     16,803  
Total current assets 250,108 282,669
 
Property and equipment 140,050 141,357
Less accumulated depreciation and amortization   115,344     118,130  
Property and equipment, net 24,706 23,227
 
Goodwill 35,268 35,384
Intangibles and other assets, net   38,799     29,069  
Total assets $ 348,881   $ 370,349  
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
Accounts payable and accrued expenses $ 103,593 $ 92,061
Reserve for sales returns and allowances 21,335 17,622
Short term debt, net   40,211     26,075  
Total current liabilities 165,139 135,758
 
Long term debt, net 137,323 133,497
Other liabilities 4,346 4,537
Income taxes payable 994 1,261
Deferred tax liability, net   784     783  
Total liabilities 308,586 275,836
 
Stockholders' equity:
Common stock, $.001 par value 30 27
Additional paid-in capital 216,709 215,809
Treasury stock (24,000 ) (24,000 )
Accumulated deficit (140,036 ) (85,233 )
Accumulated other comprehensive loss   (13,399 )   (13,059 )
Total JAKKS Pacific, Inc. stockholders' equity 39,304 93,544
Non-controlling interests   991     969  
Total stockholders' equity   40,295     94,513  
Total liabilities and stockholders' equity $ 348,881   $ 370,349  
 

 
JAKKS Pacific, Inc. and Subsidiaries
Condensed Statements of Operations (Unaudited)
 
    Three Months Ended June 30,   Six Months Ended June 30,
2018   2017 2018   2017
(In thousands, except per share data) (In thousands, except per share data)
 
Net sales $ 105,781 $ 119,565 $ 198,785 $ 214,070
Less cost of sales
Cost of goods 61,059 65,417 114,317 117,734
Royalty expense 14,344 17,258 29,635 27,623
Amortization of tools and molds   2,437     3,171     3,933     4,973  
Cost of sales   77,840     85,846     147,885     150,330  
Gross profit 27,941 33,719 50,900 63,740
Direct selling expenses 9,994 10,805 22,481 21,524
Selling, general and administrative expenses 27,859 34,460 72,389 66,908
Depreciation and amortization 1,895 2,562 3,495 5,140
Acquisition related and other   333     -     333     -  
Income (loss) from operations (12,140 ) (14,108 ) (47,798 ) (29,832 )
Other income (expense):
Income from joint ventures 205 105 227 105
Other income 31 159 81 182
Change in fair value of convertible senior notes (2,410 ) - (3,431 ) -
Interest income 14 10 28 14
Interest expense   (2,197 )   (2,537 )   (4,133 )   (5,469 )
Income (loss) before provision for (benefit from) income taxes (16,497 ) (16,371 ) (55,026 ) (35,000 )
Provision for (benefit from) income taxes   2,091     316     (245 )   (28 )
Net income (loss) (18,588 ) (16,687 ) (54,781 ) (34,972 )
Net income (loss) attributable to non-controlling interests   (29 )   55     22     86  
Net income (loss) attributable to JAKKS Pacific, Inc. $ (18,559 ) $ (16,742 ) $ (54,803 ) $ (35,058 )
Income (loss) per share - basic and diluted $ (0.80 ) $ (0.77 ) $ (2.37 ) $ (1.77 )
Shares used in income (loss) per share - basic and diluted   23,106     21,616     23,103     19,865  
 

JAKKS Pacific, Inc. and Subsidiaries
Reconciliation of
Non-GAAP Financial Information (Unaudited)

Reconciliation of GAAP to Non-GAAP measures:

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

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

 
    Three Months Ended June 30,     Six Months Ended June 30,

2018

 

2017

2018

 

2017

(In thousands) (In thousands)
 
Net income (loss) $ (18,588 ) $ (16,687 ) $ (54,781 ) $ (34,972 )
Income from joint ventures (205 ) (105 ) (227 ) (105 )
Other income (31 ) (159 ) (81 ) (182 )
Interest income (14 ) (10 ) (28 ) (14 )
Interest expense 2,197 2,537 4,133 5,469
Provision for (benefit from) from income taxes 2,091 316 (245 ) (28 )
Depreciation and amortization 4,332 5,733 7,428 10,113
Acquisition related and other 333 - 333 -
Restricted stock compensation expense 311 713 987 1,460
Bad debt write-offs (recoveries) (1,326 ) 2,305 12,468 2,305
Change in fair value of convertible senior notes 2,410 - 3,431 -
Minimum guarantee shortfalls   -     -     3,468     -  
 
Adjusted EBITDA $ (8,490 ) $ (5,357 ) $ (23,114 ) $ (15,954 )
 
 
Three Months Ended June 30, Six Months Ended June 30,

2018

2017

2018

2017

(In thousands, except per share data) (In thousands, except per share data)
 
Net income (loss) attributable to JAKKS Pacific, Inc. $ (18,559 ) $ (16,742 ) $ (54,803 ) $ (35,058 )
Restricted stock compensation expense 311 713 987 1,460
Bad debt write-offs (recoveries) (1,326 ) 2,305 12,468 2,305
Acquisition related and other 333 - 333 -
Change in fair value of convertible senior notes 2,410 - 3,431 -
Minimum guarantee shortfalls - - 3,468 -
Tax impact of additional charges   162     -     (2,185 )   -  
 
Adjusted net income (loss) attributable to JAKKS Pacific, Inc. $ (16,669 ) $ (13,724 ) $ (36,301 ) $ (31,293 )
 
Adjusted income (loss) per share - basic and diluted $ (0.72 ) $ (0.63 ) $ (1.57 ) $ (1.58 )
Shares used in adjusted income (loss) per share- basic and diluted   23,106     21,616     23,103     19,865  
 

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