{"url_path":"/sec/jakk/10-k/2026/item-7","section_key":"item-7","section_title":"Item 7 Management**’**s Discussion and Analysis","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-03-02","source_url":"https://www.sec.gov/Archives/edgar/data/1009829/0001185185-26-000723-index.html","accession_number":"0001185185-26-000723","cik":"0001009829","ticker":"JAKK","issuer_name":"JAKKS PACIFIC INC","edgar_url":"https://www.sec.gov/Archives/edgar/data/1009829/0001185185-26-000723-index.html","primary_entity_key":"0001009829","primary_entity_name":"JAKKS PACIFIC INC"},"word_count":5068,"has_tables":true,"body_markdown":"**Item 7. Management**’**s Discussion and Analysis\nof Financial Condition and Results of Operations**\n\n \n\n*The following Management*’*s Discussion\nand Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties.\nOur actual results could differ materially from those anticipated in these forward-looking*statements *because of various factors.\nYou should read this section in conjunction with our consolidated financial statements and the related notes included in Item 8*“*Consolidated\nFinancial Statements and Supplementary Data.*”\n\n \n\n**Critical Accounting Policies and Estimates**\n\n \n\nThe accompanying consolidated financial statements\nand supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America.\nSignificant accounting policies are discussed in Note 2 to the Consolidated Financial Statements, included within Item 8. Inherent in\nthe application of many of these accounting policies is the need for management to make estimates and judgments in the determination\nof certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change\nand additional information becomes known. The estimates with the greatest potential effect on our results of operations and financial\nposition include:\n\n \n\n**Allowance for Current Expected Credit Losses.**\nOur allowance for current expected credit losses is based upon management’s assessment of the business environment, customers’\nrisk profile characteristics, historical collection and loss information, aging of accounts receivables, and other matters specific to\ncustomer accounts in the establishment of pools. If there were a deterioration of a major customer’s creditworthiness, or actual\ndefaults were higher than our current expected credit losses, our estimates of the recoverability of amounts due to us could be misstated,\nwhich could have an adverse impact on our operating results. Our allowance for current expected credit losses is also affected by the\ntime at which uncollectible accounts receivable balances are actually written off. The allowance for current expected credit losses requires\njudgement related to the establishment of pools based on customer risk profile characteristics and the historical loss rates applied to\neach pool and requires judgement since it involves estimation of the impact of both current and future economic factors in relation to\nits customers’ risk profile characteristics. Changes in the assumptions used to develop the estimates could materially affect key\nfinancial measures, including other selling and administrative expenses, net income and accounts receivable.\n\n \n\n**Goodwill**. Goodwill represents the\nexcess of the purchase price over the fair values of the underlying net assets acquired in an acquisition. Goodwill is not amortized but\ntested for impairment at least annually at the reporting unit level and asset level. The annual goodwill test is performed in the second\nquarter and whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value,\nwe may assess goodwill for impairment using a qualitative assessment. Qualitative factors and their impact on critical inputs are assessed\nto determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine\nthat a reporting unit has an indication of impairment based on the qualitative assessment, it is required to perform a quantitative assessment.\nWe may bypass the qualitative assessment and perform a quantitative assessment. Impairment is recognized in the amount by which, if any,\nthe carrying value of the reporting unit exceeds the fair value, not to exceed the carrying value of goodwill. We evaluate fair value\nrecoverability using both objective and subjective factors. Objective factors include cash flows and analysis of recent sales and earnings\ntrends. Subjective factors include our best estimates of projected future earnings and competitive analysis and the Company’s strategic\nfocus. We performed a quantitative assessment for Toys/Consumer Products reporting unit during Q2 2025, the fair value of which exceeded\nits carrying amount by 26%. As of December 31, 2025, all our Goodwill of $35.1 million related to our Toys/Consumer Products reporting\nunit.\n\n \n\n**Royalties.** We enter into license\nagreements with strategic partners, inventors, designers and others for the use of intellectual properties in our products. These agreements\ngenerally require a percentage of sales (as defined by the respective agreements) be paid to third parties as royalties. They also often\nrequire a fixed minimum dollar amount of royalties to be paid regardless of what level of sales are achieved during the term of the agreement.\nPayment timing varies across agreements and may precede any sales or collections of monies related to such sales. We recognize royalty\nexpenses in the period in which sales are made. In addition, we assess whether forecasted revenue under any agreement is likely to be\nsufficient to cover the minimum royalty guarantee, and if not a royalty shortfall reserve and associated royalty expense is recorded at\nthat time. If our actual revenue generated differs from our projections, the recoverability of our minimum guarantees would be impacted\nand could materially affect key financial measures, including gross profit, net income and prepaid assets.\n\n \n\n28\n\n[Table of Contents](#TableOfContents) \n\n \n\n**Reserve for Inventory Obsolescence.**\nWe value our inventory at the lower of cost or net realizable value. Based upon consideration of quantities on hand, actual and projected\nsales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is\nwritten down to its net realizable value.\n\n \n\nFailure to accurately predict and respond to consumer\ndemand could result in us under-producing popular items or over-producing less popular items. Furthermore, significant changes in demand\nfor our products would impact management’s estimates in establishing our inventory provision.\n\n \n\nManagement’s estimates are monitored on\na quarterly basis, and a further adjustment to reduce inventory to its net realizable value is recorded as an increase in the cost of\nsales when deemed necessary under the lower of cost or net realizable value standard. Significant changes in the assumptions used to\ndevelop the estimate could materially affect key financial measures, including gross profit, net income and inventories.\n\n \n\n**Reserve for Sales Returns and Allowances**.\nWe routinely enter into arrangements with our customers to provide sales incentives, support customer promotions and provide allowances\nfor returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional\nactivities, and other specified factors such as sales to consumers. The accounting estimate related to sales adjustments requires significant\njudgment to estimate related accruals, such as estimating volumes of defective products to support reserves for defective merchandise\nand estimating future customer performance and consumer preferences that could impact the discretionary sales promotions. Significant\nchanges in the assumptions used to develop the estimates could materially affect key financial measures, such as net sales, gross profit,\nnet income, and reserve for sales returns and allowances.\n\n \n\n**Income taxes.** We do not file a consolidated\nreturn for our foreign subsidiaries. We file federal and state returns and our foreign subsidiaries each file returns in their respective\njurisdictions, as applicable. Deferred taxes are provided on an asset and liability method. Deferred tax assets are recognized as deductible\ntemporary differences, operating losses, or tax credit carry-forwards. Deferred tax liabilities are recognized as taxable temporary differences.\nTemporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets\nare reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred\ntax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on\nthe date of enactment.\n\n \n\nOur annual income tax provision and related income\ntax assets and liabilities are based upon actual income as allocated to the various tax jurisdictions based upon our transfer pricing\nstudy, US and foreign statutory income tax rates and tax regulations and planning opportunities in the various jurisdictions in which\nwe operate. Significant judgment is required in interpreting tax regulations in the U.S. and foreign jurisdictions, and in evaluating\nworldwide uncertain tax positions. Actual results could differ materially from those judgments, and changes from such judgments could\nmaterially affect our consolidated financial statements.\n\n \n\nWe accrue a tax reserve for additional income taxes\nand interest, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based upon\nmanagement’s assessment of all relevant information and is periodically reviewed and adjusted as circumstances warrant. As of December\n31, 2025, our income tax reserves were approximately $0.8 million and relate to federal and state income taxes.\n\n \n\nWe recognize current period interest expense and\npenalties and the reversal of previously recognized interest expense and penalties that has been determined to not be assessable due\nto the expiration of the related audit period or other compelling factors on the income tax liability for unrecognized tax benefits as\na component of the income tax provision recognized in the consolidated statements of operations.\n\n \n\n29\n\n[Table of Contents](#TableOfContents) \n\n \n\n**Recent Accounting Pronouncements.**\n\n \n\nSee Item 8 “Consolidated Financial Statements\nand Supplementary Data Note 2 - Summary of Significant Accounting Policies.”\n\n \n\n**Results of Operations**\n\n \n\nThe following table sets forth, for the periods\nindicated, certain statement of operations data as a percentage of net sales. A discussion of the operating results for 2024 can be found\nin our Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the SEC on March 6, 2025, in Item 7. Management’s\nDiscussion and Analysis of Financial Condition and Results of Operations – Results of Operations.\n\n \n\n  \nYear Ended December 31, \n\n  \n2025  \n2024 \n\nNet sales \n 100.0% \n 100.0%\n\nLess: Cost of sales \n    \n   \n\nCost of goods \n 49.7  \n 52.3 \n\nRoyalty expense \n 16.2  \n 15.5 \n\nAmortization of tools and molds \n 1.7  \n 1.4 \n\nCost of sales \n 67.6  \n 69.2 \n\nGross profit \n 32.4  \n 30.8 \n\nDirect selling expenses \n 6.4  \n 5.8 \n\nGeneral and administrative expenses \n 23.4  \n 19.2 \n\nDepreciation and amortization \n 0.1  \n 0.1 \n\nSelling, general and administrative expenses \n 29.9  \n 25.1 \n\nIncome from operations \n 2.5  \n 5.7 \n\nOther income (expense), net \n 0.1  \n 0.1 \n\nLoss on debt extinguishment \n (0.1) \n — \n\nInterest income \n 0.2  \n 0.1 \n\nInterest expense \n (0.1) \n (0.2)\n\nIncome before provision for income taxes \n 2.6  \n 5.7 \n\nProvision for income taxes \n 0.9  \n 0.8 \n\nNet income \n 1.7  \n 4.9 \n\nNet income attributable to JAKKS Pacific, Inc. \n 1.7% \n 4.9%\n\nNet income attributable to common stockholders \n 1.7% \n 5.1%\n\n \n\nThe following table summarizes, for the periods\nindicated, certain statement of operations data by segment (in thousands).\n\n \n\n  \nYear Ended December 31, \n\n  \n2025  \n2024 \n\nNet Sales \n   \n  \n\nToys/Consumer Products \n$461,937  \n$570,018 \n\nCostumes \n 108,734  \n 121,024 \n\n  \n 570,671  \n 691,042 \n\nCost of Sales \n    \n   \n\nToys/Consumer Products \n 304,333  \n 389,534 \n\nCostumes \n 81,258  \n 88,487 \n\n  \n 385,591  \n 478,021 \n\nGross Profit \n    \n   \n\nToys/Consumer Products \n 157,604  \n 180,484 \n\nCostumes \n 27,476  \n 32,537 \n\n  \n$185,080  \n$213,021 \n\n \n\n30\n\n[Table of Contents](#TableOfContents) \n\n \n\n**Comparison of the Years Ended December 31, 2025 and 2024**\n\n \n\nNet Sales\n\n \n\n*Toys/Consumer Products.* Net sales of our Toys/Consumer\nProducts segment were $461.9 million in 2025, compared to $570.0 million in 2024, representing a decrease of $108.1 million, or 19.0%.\nThe decrease in net sales was primarily due to lower sales North America, down 24.0%, while International sales grew 2.7%. The Dolls,\nRole Play and Dress Up Division decreased 22.6% year over year, mainly due to limited theatrical releases and lower sales within the Disney\nPrincess and Style Collection businesses. Within the Action Play & Collectibles Division, down 15.6%, Sonic the Hedgehog 3 and the\nSonic/DC collaboration added incremental year over year sales, while lower Nintendo sales offset those gains. The Seasonal Division was\ndown 8.8% from 2024.\n\n \n\n*Costumes.* Net sales of our Costumes segment\nwere $108.7 million in 2025, compared to $121.0 million in 2024, representing a decrease of $12.3 million, or 10.2%. The decrease in net\nsales was primarily driven by US customers lowering their order levels based on tariffs. Despite the lower sales in the US, our International\nsales grew in 2025 its highest level.\n\n \n\nCost of Sales\n\n \n\n*Toys/Consumer Products.*Cost of sales of\nour Toys/Consumer Products segment was $304.3 million, or 65.9% of related net sales in 2025 compared to $389.5 million, or 68.3% of related\nnet sales in 2024 representing a decrease of $85.2 million or 21.9%. Although royalty rates were higher year-over-year, the decrease in\nthe cost of sales percentage of net sales, year-over-year is due to lower inventory obsolescence costs.\n\n \n\n*Costumes.* Cost of sales of our Costumes segment\nwas $81.3 million, or 74.8% of related net sales for 2025 compared to $88.5 million, or 73.1% of related net sales for 2024 representing\na decrease of $7.2 million, or 8.1%. The year-over-year decrease in dollars is directly attributable to lower volume. The increase in\npercent of net sales is attributable higher royalty expense due to higher royalty guarantee shortfalls offset by improvements in product\ncost of goods attributable to mix and design for improved margin.\n\n \n\nSelling, General and Administrative Expenses\n\n \n\nSelling, general and administrative expenses were\n$170.9 million in 2025 and $173.3 million in 2024, constituting 29.9% and 25.1% of net sales, respectively. Selling, general and administrative\nexpenses decreased from the prior year by $2.4 million or 1.4% primarily driven by lower media costs and lower temporary labor costs.\n\n \n\nLoss on Debt Extinguishment\n\n \n\nIn 2025, we recognized a loss on debt extinguishment\nof $0.4 million in connection with the early termination our existing $67.5 million JPMorgan ABL revolving credit facility in connection\nwith entering into a new senior secured facility with BMO Bank, N.A.\n\n \n\nInterest Income\n\n \n\nInterest Income was $1.0 million for the year\nended December 31, 2025, as compared to $0.8 million in the prior year period. Interest income earned is primarily due to the Company’s\nmoney market investments.\n\n \n\nInterest Expense\n\n \n\nInterest expense was $0.5 million for the year\nended December 31, 2025, as compared to $1.1 million in the prior year period, both related to borrowings from our revolving credit facilities.\n\n \n\n31\n\n[Table of Contents](#TableOfContents) \n\n \n\nProvision for Income Taxes\n\n \n\nDuring 2025, our income tax expense, which includes\nfederal, state and foreign income taxes and discrete items, was $4.9 million, or an effective tax rate of 33.1%. The 2025 tax expense\nincluded a discrete tax benefit of $0.2 million primarily related to adjustments to uncertain tax positions and to return to provision\nadjustments. Absent these discrete tax benefits, our effective tax rate for 2025 was 34.4%, primarily due to taxes on federal, state,\nand foreign income.\n\n \n\nDuring 2024, our income tax expense, which includes\nfederal, state and foreign income taxes and discrete items, was $5.5 million, or an effective tax rate of 13.9%. The 2024 tax expense\nincluded a discrete tax benefit of $1.4 million primarily comprised of valuation allowance adjustments. Absent these discrete tax benefits,\nour effective tax rate for 2024 was 17.4%, primarily due to taxes on federal, state, and foreign income.\n\n \n\nWe assess the available positive and negative evidence\nto estimate if sufficient future taxable income will be generated to use the existing deferred tax assets by jurisdiction. Based on our\nevaluation of all positive and negative evidence, as of December 31, 2025, a valuation allowance of $0.7 million has been recorded against\nthe deferred tax assets that more likely than not will not be realized. The net deferred tax asset change of $0.8 million consists of\nthe net deferred tax asset changes in the US and foreign jurisdictions, where we are in a cumulative income position.\n\n \n\n**Uncertainties that may have a significant impact on net sales\nand income (loss) from operations**\n\n \n\nSignificant outbreaks of contagious diseases,\nand other adverse public health developments, could have a material impact on our business operations and operating results. The immediate\nand lingering impact of the 2019 COVID-19 pandemic added additional risk and complexity to the Company’s operations. In addition,\nthe history of smaller scale epidemics in Hong Kong/China (e.g., “bird flu”) highlights an additional risk given that substantially\nall of our product is sourced from China and our Hong Kong operation is foundational to our business model. We cannot quantify the extent\nthat any new outbreak might have on our sales, net income and cash flows, but it could be significant.\n\n \n\nIn the first quarter of 2022, Russia and Ukraine\nengaged in an armed conflict that continues. We cannot predict at this time if the conflict will spread to other countries. Accordingly,\nwe cannot quantify at this time if, or the extent, this conflict will adversely impact our business operations.\n\n \n\nThe U.S. taking unilateral action to impose tariffs\non products imported from China and adopting an approach to deploy tariffs with no advance notice or feedback mechanism has created across\nmarkets has created uncertainty about our ability to source products with a cost structure consistent with our recent history. It also\nincreased the possibility that markets outside the U.S. could institute retaliatory tariffs that would ultimately increase the cost of\nour doing business in those markets where we import product. In addition, our customer base has faced increased costs in importing our\nproduct from Hong Kong into their home markets. In the event our customers choose to raise consumer prices to offset these costs, negative\nconsumer reaction could substantially reduce unit demand for our product line, and by extension lower sales. Lower sales could negatively\nimpact our profitability and cash flows.\n\n \n\n32\n\n[Table of Contents](#TableOfContents) \n\n \n\n**Quarterly Fluctuations and Seasonality**\n\n \n\nWe have experienced significant quarterly fluctuations\nin operating results and anticipate these fluctuations in the future. The operating results for any quarter are not necessarily indicative\nof results for any future period. Our first quarter is typically expected to be the least profitable as a result of lower net sales but\nsubstantially similar fixed operating expenses. This is consistent with the performance of many companies in the toy industry.\n\n \n\nThe following table presents our unaudited quarterly\nresults for the years indicated. The seasonality of our business is reflected in this quarterly presentation.\n\n \n\n  \n2025  \n2024 \n\n  \nFirst  \nSecond  \nThird  \nFourth  \nFirst  \nSecond  \nThird  \nFourth \n\n(Unaudited) \nQuarter  \nQuarter  \nQuarter  \nQuarter  \nQuarter  \nQuarter  \nQuarter  \nQuarter \n\nNet Sales \n$113,253  \n$119,094  \n$211,210  \n$127,114  \n$90,076  \n$148,619  \n$321,606  \n$130,741 \n\nAs a % of full year \n 19.8% \n 20.9% \n 37.0% \n 22.3% \n 13.0% \n 21.6% \n 46.5% \n 18.9%\n\nGross profit \n$39,013  \n$39,023  \n$67,643  \n$39,401  \n$21,052  \n$47,585  \n$108,831  \n$35,553 \n\nAs a % of full year \n 21.1% \n 21.1% \n 36.5% \n 21.3% \n 9.9% \n 22.3% \n 51.1% \n 16.7%\n\nAs a % of net sales \n 34.4% \n 32.8% \n 32.0% \n 31.0% \n 23.4% \n 32.0% \n 33.8% \n 27.2%\n\nIncome (loss) from operations \n$(3,757) \n$(2,783) \n$29,363  \n$(8,605) \n$(21,324) \n$7,643  \n$68,083  \n$(14,718)\n\nAs a % of full year \n (26.4)% \n (19.6)% \n 206.5% \n (60.5)% \n (53.7)% \n 19.2% \n 171.6% \n (37.1)%\n\nAs a % of net sales \n (3.3)% \n (2.3)% \n 13.9% \n (6.8)% \n (23.7)% \n 5.1% \n 21.2% \n (11.3)%\n\nIncome (loss) before provision for\n(benefit from) income taxes \n$(3,545) \n$(2,925) \n$29,723  \n$(8,488) \n$(20,953) \n$7,547  \n$67,697  \n$(14,559)\n\nAs a % of net sales \n (3.1)% \n (2.5)% \n 14.1% \n (6.7)% \n (23.3)% \n 5.0% \n 21.0% \n (11.2)%\n\nNet income (loss) \n$(2,382) \n$(2,319) \n$19,892  \n$(5,320) \n$(14,225) \n$5,266  \n$52,272  \n$(9,113)\n\nAs a % of net sales \n (2.1)% \n (1.9)% \n 9.4% \n (4.2)% \n (15.8)% \n 3.5% \n 16.3% \n (7.0)%\n\nNet income (loss) attributable to\nnon-controlling interests \n$—  \n$—  \n$—  \n$—  \n$280  \n$—  \n$—  \n$— \n\nAs a % of net sales \n —% \n —% \n —% \n —% \n 0.3% \n —% \n —% \n —%\n\nNet income (loss) attributable to\nJAKKS Pacific, Inc. \n$(2,382) \n$(2,319) \n$19,892  \n$(5,320) \n$(14,505) \n$5,266  \n$52,272  \n$(9,113)\n\nAs a % of net sales \n (2.1)% \n (1.9)% \n 9.4% \n (4.2)% \n (16.1)% \n 3.5% \n 16.3% \n (7.0)%\n\nNet income (loss) attributable to\ncommon stockholders \n$(2,382) \n$(2,319) \n$19,892  \n$(5,320) \n$(13,175) \n$5,266  \n$52,272  \n$(9,113)\n\nAs a % of net sales \n (2.1)% \n (1.9)% \n 9.4% \n (4.2)% \n (14.6)% \n 3.5% \n 16.3% \n (7.0)%\n\nDiluted earnings (loss) per share \n$(0.21) \n$(0.21) \n$1.74  \n$(0.47) \n$(1.27) \n$0.47  \n$4.64  \n$(0.83)\n\nWeighted average shares and equivalents outstanding \n 11,146  \n 11,146  \n 11,423  \n 11,282  \n 10,354  \n 11,245  \n 11,275  \n 11,008 \n\n \n\nQuarterly and year-to-date computations of income\n(loss) per share amounts are made independently. Therefore, the sum of the per share amounts for the quarters may not agree with the\nper share amounts for the year.\n\n \n\n33\n\n[Table of Contents](#TableOfContents) \n\n \n\n**Liquidity and Capital Resources**\n\n \n\nAs of December 31, 2025, we had working capital\nof $121.0 million compared to $119.3 million as of December 31, 2024.\n\n \n\nOperating activities provided net cash of $8.5\nmillion in 2025 and $38.9 million in 2024. The decrease in cash flows provided by operating activities, year-over-year, was primarily\ndue to a lower net income and higher working capital usage, partially offset by higher non-cash charges related to valuation adjustments\nfor our preferred stock derivative liability and an increase in deferred income tax assets due to inventory cost and other expense capitalization\nmatters, both in 2024. Other than open purchase orders issued in the normal course of business related to shipped product, we have no\nobligations to purchase inventory from our manufacturers. However, we may incur costs or other losses as a result of not placing orders\nconsistent with our forecasts for products manufactured by our suppliers or manufacturers for a variety of reasons including customer\norder cancellations or a decline in demand. As part of our strategy to develop and market new products, we have entered into various\ncharacter and product licenses with royalties/obligations generally ranging from 1% to 22% payable on net sales of such products. As\nof December 31, 2025, these agreements required future aggregate minimum royalty guarantees of $189.8 million, exclusive of $2.3 million\nin advances already paid. Of this $189.8 million future minimum royalty guarantee, $57.4 million is due over the next twelve months.\n\n \n\nInvesting activities used net cash of $12.3 million\nand $12.9 million for the years ended December 31, 2025 and 2024, respectively, and consisted primarily of cash paid for the purchase\nof molds and tooling used in the manufacture of our products and purchases of investments to fund our obligation to our employees stemming\nfrom our non-qualified deferred compensation plan.\n\n \n\nFinancing activities used net cash of $17.1 million\nin 2025 and $26.9 million in 2024. The cash used in 2025 primarily consists of the quarterly cash dividends paid to holders of our common\nstock of $11.2 million and the repurchase of common stock for employee tax withholding of $5.7 million. The cash used in 2024 primarily\nconsists of the cash portion for the redemption of the Series A Preferred stock of $20.0 million and the repurchase of common stock for\nemployee tax withholding of $6.9 million.\n\n \n\nThe following is a summary of our significant\ncontractual cash obligations for the periods indicated that existed as of December 31, 2025 and is based upon information appearing in\nthe notes to the consolidated financial statements (in thousands):\n\n \n\n  \n2026  \n2027  \n2028  \n2029  \n2030  \nThereafter  \nTotal \n\nOperating leases \n$16,936  \n$17,177  \n$16,757  \n$7,106  \n$426  \n$2,171  \n$60,573 \n\nMinimum guaranteed license/royalty payments \n 57,374  \n 49,070  \n 46,474  \n 36,862  \n —  \n —  \n 189,780 \n\nEmployment contracts \n 6,431  \n 5,355  \n 2,609  \n 665  \n —  \n —  \n 15,060 \n\nTotal contractual cash obligations \n$80,741  \n$71,602  \n$65,840  \n$44,633  \n$426  \n$2,171  \n$265,413 \n\n \n\nThe above table excludes any potential uncertain income\ntax liabilities that may become payable upon examination of our income tax returns by taxing authorities. Such amounts and periods of\npayment cannot be reliably estimated (see Item 8 “Consolidated Financial Statements and Supplementary Data Note 11 - Income\nTaxes” for further explanation of our uncertain tax positions).\n\n \n\nIn June 2025, we terminated our existing $67.5\nmillion JPMorgan ABL revolving credit facility in connection with entering into a new senior secured facility with BMO Bank, N.A. The\nprior facility had no outstanding borrowings at the time of termination. We recorded a non-cash charge of $0.3 million for the write-off\nof previously deferred financing costs associated with the JPMorgan facility.\n\n \n\n34\n\n[Table of Contents](#TableOfContents) \n\n \n\nOn June 24, 2025, the Company and certain of its\nsubsidiaries entered into a new Credit Agreement (the “BMO Credit Agreement”) with BMO Bank, N.A., as administrative agent,\nand a syndicate of lenders. The BMO Credit Agreement provides for a senior secured revolving credit facility (the “Revolving Facility”)\nwith aggregate commitments of up to $70.0 million, including a $10.0 million sublimit for swingline loans and a $25.0 million sublimit\nfor letters of credit. The Revolving Facility matures on June 24, 2030, unless extended pursuant to its terms. Capitalized terms used\nbelow have the meanings assigned to them in the BMO Credit Agreement.\n\n \n\nBorrowings under the Revolving Facility bear interest,\nat the Company’s election, at either (i) the Adjusted Term Secured Overnight Financing Rate (“SOFR”) plus an applicable\nmargin or (ii) the Base Rate plus an applicable margin. The applicable margin varies based on the Company’s Total Net Leverage Ratio\nand ranges from 1.50% to 2.00% for SOFR loans and from 0.50% to 1.00% for Base Rate loans. The Company is also subject to a commitment\nfee on the unused portion of the Revolving Facility ranging from 0.20% to 0.30%, and a fee on outstanding letters of credit ranging from\n1.50% to 2.00%.\n\n \n\nThe BMO Credit Agreement contains customary affirmative\nand negative covenants, including limitations on indebtedness, liens, investments, asset sales and dividends. Financial covenants include\na minimum Consolidated Interest Coverage Ratio of 3.00 to 1.00, and maximum Total Net Leverage Ratio of 2.00 to 1.00, tested quarterly.\n\n \n\nThe obligations under the BMO Credit Agreement\nare guaranteed by certain of the Company’s U.S., Canadian and Hong Kong subsidiaries and are secured by substantially all of the\nassets of the Company and certain of its subsidiaries, including equity interests in certain subsidiaries, subject to certain customary\nexclusions.\n\n \n\nAvailability under the revolving facility as of\nDecember 31, 2025, was $68.3 million. The facility provides the Company with flexibility to fund working capital, capital expenditures,\nacquisitions, and general corporate purposes.\n\n \n\nWe were in compliance with the financial covenants\nunder the BMO Credit Agreement as of December 31, 2025.\n\n \n\n(See Item 8 “Consolidated Financial Statements\nand Supplementary Data, Note 8 – Debt and Note 9 – Credit Facilities” for additional information pertaining to our Debt\nand Credit Facilities.)\n\n \n\nAs of December 31, 2025, and 2024, we held cash\nand cash equivalents, including restricted cash, of $54.1 million and $70.1 million, respectively. Cash, and cash equivalents, including\nrestricted cash held outside of the United States, in various foreign subsidiaries totaled $16.9 million and $16.5 million as of December\n31, 2025, and 2024, respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either\nbeen fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full\nforeign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated\nin the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which we expect would\nnot be significant as of December 31, 2025.\n\n \n\n35\n\n[Table of Contents](#TableOfContents) \n\n  \n\nOur primary sources of working capital are cash flows\nfrom operations and borrowings under our credit facility (See Item 8 “Consolidated Financial Statements and Supplementary Data Note\n9 – Credit Facilities”).\n\n \n\nTypically, cash flows from operations are impacted\nby the effect on sales of (1) the appeal of our products, (2) the success of our licensed brands in motivating consumer purchase of related\nmerchandise, (3) the highly competitive conditions existing in the toy industry and in securing commercially-attractive licenses, (4)\ndependency on a limited set of large customers, and (5) general economic conditions. A downturn in any single factor or a combination\nof factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate the business. In addition,\nour business and liquidity are dependent to a significant degree on our vendors and their financial health, as well as the ability to\naccurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance\nin actual demand compared to the forecast, can have a material adverse impact on our cash flows and business. Given the conditions in\nthe toy industry environment in general, vendors, including licensors, may seek further assurances or take actions to protect against\nnon-payment of amounts due to them. Changes in this area could have a material adverse impact on our liquidity.\n\n \n\nAs of December 31, 2025, off-balance sheet arrangements\ninclude letters of credit issued by JPMorgan of $1.6 million, temporarily secured with cash as collateral, and letters of credit issued\nby BMO of $1.7 million.\n\n \n\nOn July 1, 2022, we entered into an ATM Agreement\nwith B. Riley, as agent pursuant to which we may, from time to time, sell shares of our common stock, up to $75 million in common stock,\nin one or more offerings in amounts, at prices and in the terms that we will determine at the time of the offering. On July 1, 2022, we\nfiled a Form S-3 shelf registration statement (File No. 333-266009) with the SEC. On Aug 1, 2022, the SEC declared the Form S-3 shelf\nregistration statement filed by us to be effective. In 2025, the registration statement expired by law on its third anniversary. We expect\nto file a new registration that will be declared effective during the first or second quarter of 2026.\n\n \n\nWe did not sell any shares of common stock under\nthe ATM Agreement or pursuant to our self-registration statement.\n\n \n\nThe nature of our business is several factors influence\nthe price we offer product to our customers, and by extension they sell to our end customer. Our products are manufactured by third-party\nvendors who deal with increases in labor rates as a normal course of their respective businesses. The costing of the plastic components\nof our toys can be sensitive to sudden swings in oil prices. Currency exchange can also create a degree of volatility, although the majority\nof our products are sourced in USD or Hong Kong dollars. Increased volumes ideally generate increased scale at various points in the value\nchain. Often times, in the toy industry when cost pressures result in price increases, the development teams will reengineer subsequent\nyear refreshes to cost-reduce the items down to support traditional price points and preserve historical margins. With those considerations\nin mind as well as others, during the last three fiscal years ending December 31, we do not believe that inflation has had a material\nimpact on our net sales and income from continuing operations.\n\n \n\n**Exchange Rates**\n\n \n\nSales from our United States and Hong Kong operations\nare denominated in U.S. dollars and our manufacturing costs are denominated in either U.S. or Hong Kong dollars. Local sales (other than\nin Hong Kong) and operating expenses of our operations in Hong Kong, the United Kingdom, Germany, the Netherlands, France, Italy, Canada,\nMexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in the various exchange\nrates against the U.S. dollar may positively or negatively affect our operating results. We cannot assure you that the exchange rate between\nthe United States and other currencies will not have a material adverse effect on our business, financial condition or results of operations.\n\n \n\n36\n\n[Table of Contents](#TableOfContents)"}