JAKKS Pacific, Inc.

Good afternoon, everyone. Welcome to the JAX Pacific First Quarter Earnings Conference Call with Management, who will review financial results for the quarter ended March 31, 2020. JAX issued its earnings press release earlier today. The earnings release and presentation slides for today's call are available on the company's website in the Investors section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer, and Jon Kimble, Chief Financial Officer. Mr. Berman will provide an overview of the quarter, along with highlights of product lines and current business trends, and a discussion of the impact of COVID-19. Then Mr. Kimble will provide detailed comments regarding Jax Pacific's financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions. Your line will be placed on mute for the first portion of the call. If you would like to be placed in the queue to ask a question, please press star 1 on your telephone keypad. Before we begin, the company would like to point out that any comments made about Jacks Pacific's future performance, events, or circumstances, including the estimates of sales and or adjusted EBITDA in 2020, as well as any other forward-looking statements concerning 2020 and beyond, are subject to safe harbor protection under federal security laws. These statements reflect the company's best judgment based on current market trends and conditions today. and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected and forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult Jack's most recent 10-K and 10-Q filings with the SEC, as well as the company's other reports subsequently filed with the SEC from time to time. In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this conference is being recorded. With that, I would like to turn the call over to Stephen Berman.

Thank you and good afternoon everyone, and thank you for joining us today. I want to start by saying that we recognize that everyone in the world is managing through a difficult time, something we've never seen before, and we are doing everything we can to keep our people safe, our business intact, and our prospects bright. We have an incredible team at JAX. During this time of tremendous change, our employees have done an incredible job to create opportunities, Preserve our resources and keep the company on track. Before COVID-19 was even identified as a pandemic, we have been taking steps to keep our employees safe, our supplies lines open, and our business running as smoothly as it can when everything is changing by the hour. Obviously, we're all experiencing fluctuations which bring great uncertainty. Jack's Pacific was founded 25 years ago, and I can say that we have never operated in an environment that has changed so rapidly. But I have never been so proud of our people for all they are doing to find ways to preserve and excel. It has been less than three months since our last conference call. At that time, the big question was, when will our Asian suppliers be back to normal production? Now, we're all asking ourselves, when will anything be normal? While in many ways everything is different, in some ways they are the same. JAX has been built on the idea that a strong collection of evergreen products and brands supplemented by opportunistic promotional initiatives can do well, and we continue to see that. Our sales were down a modest 6% in the quarter compared to last year, but we see several areas of strength, and our retail POS remains encouraging. Led by Frozen 2 and Disney Princess roleplay, dolls, and play environments, our girls' toys were up 35% year-over-year in the quarter. Our boys' toys were down, but excluding the decline in some entertainment properties, we saw strength in Nintendo and Sonic the Hedgehog. Seasonal products like kids' furniture have been very strong at retail, and our disguise business was up nicely year-over-year. Clearly the retail landscape has changed quickly and dramatically, but kids still like to play and parents still want to give their children good products to play with. That being said, the ability to go to stores, to interact with other kids, and to consume new entertainment content has changed. JAXA has been diligently working to adapt to the new patterns of consumer behaviors and we believe we have some strategic advantages. With kids spending much more time at home, away from social settings, and traditional play groups, products such as activity tables, video games, and fantasy and role-play toys have performed well, whereas action figures and some dolls and some collectibles have not performed as well. Fortunately for Jack's, we have a very strong position in a wide range of categories like ball pits and activity tables. In addition, our foot-to-floor ride-ons are steady sellers, and our cute girls hairstyle is a new activity line for us. And the dolls that have done well are tied to high quality entertainment content with strong brand recognition such as the likes of Frozen 2 and Disney Princess. An additional key business focus continues to be reducing costs and preserving cash. As John will discuss later, our gross margin showed a nice increase year over year While we have simultaneously reduced our operating expenses. Last year, we exited some low margin product categories like Fun Noodles, and we have worked to cut costs by downsizing. In addition to reducing our workforce with layoffs this quarter, we also asked all employees to take a temporary reduction in pay, including the executive team. Prior to the pandemic, we implemented a multi-tier development program focused on designing and developing products specific to the following retail channels. Mass, which is including Walmart, Target, Amazon, Tesco, Edeka, and Aldi, to name a few. Specialty, including TJ Maxx, Ross, GameStop, and others. Big Box, which includes Costco, Sam's Club, and BJ's. Dollar Trade, including Family Dollar, Five Below, and others. This development initiative with stratified price points has allowed Jaxx to pivot accordingly into opportunities and segments during this disruptive time, where other companies have been more drastically affected by retail store closures. We also know we have many strategic strengths, most notably our strong licensing partnerships, our longstanding manufacturing relationships, and great partnerships with our retail customers. POS sales at our largest customers was positive in Q1 and has been even more positive in April. Our China manufacturing partners have returned to near normal levels of production and we believe that our many stable and evergreen product lines can do well in any economic environment and we remain confident that we will emerge from this even stronger than we were before the pandemic began. After Jon gives an update on our financial performance, I will return with some brief comments about our major product categories and what we are doing for the balance of 2020. With that, I will turn the call over to Jon.

Thank you, Stephen, and good afternoon, everyone. Net sales for the 2020 first quarter were $66.6 million, down 6% compared to $70.8 million last year. Reported net loss attributable to common stockholders for the first quarter was $12.3 million, or 41 cents per basic and diluted share, compared to a net loss of $29.2 million, or $1.24 in the first quarter of last year. As a reminder, certain elements of our capital structure are marked to market quarterly based on a few factors, inclusive of our share price. The net loss in Q1 2020 includes non-cash gains totaling $9.8 million, reflecting changes in the fair value of our convertible senior notes and the derivative liability associated with our preferred stock. By comparison, the net loss in the first quarter of 2019 also included changes in the fair value of our 2020 convertible senior notes, but also a number of charges related to our 2019 recapitalization process. Excluding the impact of such charges, as well as stock compensation expense, Our adjusted net loss attributable to common stockholders in the first quarter of 2020 was $21.9 million, or $0.72 per basic and diluted share, compared to a loss of $23 million, or $0.98 per basic and diluted share in the first quarter of 2019, an improvement of $0.26. Adjusted EBITDA for the 2020 first quarter was negative $13.9 million, compared to a negative $17.1 million in the first quarter of 2019. Our girls' targeted business was strongest during the quarter. Inclusive of dolls, role-play, and dress-up toys, girls' toys was $39.2 million in Q1, up 35% compared to $29 million in the first quarter of last year. As was the case in the fourth quarter, the big driver was Frozen, both toys related to Frozen 2, which was released in theaters late in Q4 of 2019, but also for toys tied to the original Frozen. Other girls' toys that were strong included Kitten Cat Fae, our own aspirational doll and collectible world of Cat Fae-inspired surprises, as well as our new Minnie Mouse fashion doll line launched in partnership with Disney, which began shipping last quarter. Those sales more than offset some of the anticipated declines in various other product lines, particularly those related to older entertainment properties such as Moana, Aladdin, and Fancy Nancy, as well as our own Squish Delish line. Sales of action figures, vehicles, roleplay, and electronics products in our Boys category for 2020 first quarter were $9.7 million, down 36% compared to $15.1 million last year. Positive contributions from our Flywheels line of proprietary action vehicles, Sonic the Hedgehog, and Nintendo Super Mario products were more than offset by declines in entertainment-driven properties such as Godzilla, Harry Potter, and Incredibles 2, as well as some non-entertainment properties such as our TP Blaster brand. Sales of seasonal products, including licensed ride-ons, ball pits, play structures, kids activity tables, and morph boards, were $12.9 million in the 2020 first quarter, down 42% from $22.2 million in the first quarter of 2019, as strong sales of ride-ons offset declines in morph board and Maui outdoor toys. The biggest decline in Maui is the result of the discontinuation of Fun Noodles, a low-margin category we exited last year and referenced last quarter. Thank you for joining us today. as well as declines in our Pull My Finger game, which offset the contribution of Gigantosaurus, which was launched last year. Looking at sales by business segment, sales in our toys and consumer products segment, which includes all markets around the world, were down 6.8% to $62.6 million compared to $67.2 million in the first quarter of last year. The decrease was driven by the same factors noted above in the product discussion. Australia, New Zealand, Asia, Latin America, and Europe were all stronger, while the U.S. and Canada were down 11% year over year. And as we already noted above, our Halloween segment was up around 10%. Looking at the rest of the P&L, reported gross margin in the 2020 first quarter was 24.6% compared to 20.2% in the 2019 first quarter. Steady improvements in our product margins and lower obsolescence reserves outpaced higher royalty charges incurred in the quarter. Sharperly lower spend for SG&A expenses, including direct selling expenses and depreciation and amortization in the 2020 first quarter, totaled $32.3 million, or 48.6% of net sales, compared to $38.4 million, or 54.1% of net sales in the first quarter of 2019. Net cash used in operating activities was $18.9 million for the first quarter of 2020, compared to net cash used in operating activities of $1.9 million in the first quarter of 2019, primarily due to higher media and warehouse costs incurred in Q4, as well as higher royalty payments year over year. Free cash flow was negative $20.5 million in the 2020 first quarter and a negative $4.4 million in the 2019 first quarter. As of March 31, 2020, our cash and cash equivalents, including restricted cash, totaled $44 million, compared to $66.3 million at the end of 2019, and $47.4 million as of March 31, 2019. As of April 30, 2020, the company had $42 million of cash on hand and $36 million of availability on its revolving credit facility, resulting in total liquidity of over $78 million. Accounts receivable as of March 31, 2020 were $64.8 million, down from $117.9 million as of December 31, 2019, and $67.8 million at March 31, 2019. DSOs for the 2020 first quarter increased to 89 days from 86 days reported in the 2019 first quarter. Inventory as of March 31, 2020 was $48.2 million versus $54.3 million at December 31, 2019. and $44.7 million as of March 31, 2019. DSIs in the 2020 first quarter were 116 days compared to 89 days in the 2019 first quarter. In looking at DSIs on a trailing 12-month basis, we were at 52 days for both periods. As of December 31, 2019, the company's debt includes $1.9 million of convertible senior notes due June 2020. $37.6 million of recapitalized convertible senior notes due July 2023 and $134.8 million owed under our term loan due February 2023. We intend to pay off the $1.9 million worth of notes this quarter on schedule. We currently have no outstanding balance under our credit facility. Capital expenditures during the first quarter of 2020 were $1.6 million compared to $2.5 million in the first quarter of 2019. The diluted loss per share calculation for the first quarter of 2020 was based on a weighted average of 30.2 million common shares outstanding. And with that, I will now hand the call back over to Stephen for some additional remarks.