JAKKS Pacific, Inc.

Good afternoon, everyone. Welcome to the Jax Pacific's second quarter earnings conference call with management, who will review financial results for the quarter ended June 30th, 2020. Jax issued its earnings press release early today. The earnings release and presentation slides for today's call are available on the company's website in the investor section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer, and John Kimble, Chief Financial Officer. Mr. Berman will first provide an overview of the quarter along with highlights of product lines and current business trends and the discussion of the impact of COVID-19. Then Mr. Kimble will provide detailed comments regarding that specific 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 question queue, please press star then one on your telephone keypad. Before we begin, the company would like to point out that any comments made about Jax Pacific's future performance, events, or circumstances included estimates of sales and of 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 ASHA results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should contact JAC's most recent 10-K and 10-Q filings with the SEC as well as the company of the report 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 direct comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measures with the company's earnings press release issued today or previously. As a reminder, this conference is being recorded. With that, I would now like to turn the call over to Stephen Berman.

Thank you and good afternoon, everyone, and thank you for joining us today. We are pleased with the results we were able to post for the second quarter, and not just because they were better than we had expected internally, but because I believe underneath the reported numbers there are very promising signs that we believe point to better performance in the future. Like almost every company in the world, we faced considerable challenges in the quarter from the ongoing pandemic. These challenges started in the first quarter, but in some ways they were different from the ones we faced in the first quarter. Our priority remains the health and safety of our employees and their families, our customers, and our suppliers. In some ways, our business is back to normal, and in other ways, it still has a way to go. We continue to operate with limited staff coming into the offices worldwide, and many, if not most of our employees, are working from home. Our manufacturing partners are back online, but they are facing production challenges that are limiting access to some of our products that are selling very well. Our major retail partners stayed open for most of the worst days and have picked up a lot of the slack from those that were closed, but many of our smaller retail partners continue to struggle. Sales through online channels have thrived through this time and continue to grow. We are slowly opening our facilities following federal and state guidelines in an attempt to resume full and normal operations. Our reported sales in the second quarter were down 17% from the results we posted a year ago, but we are encouraged by the composition of those sales. In our toy segment, our sales were down approximately 4%. This was due to the fact that we consciously exited certain low growth, low margin lines of business, notably Fun Noodles at the end of 2019. Excluding the discontinuation of Fun Noodles, our toy segment sales were actually up approximately 3% compared to last year and roughly flat for the first half of the year. The main driver of the sales decline was Disguise, our Halloween division, but even there we think the story is better than it looks. John will go over the details in this section, but the main point is last year Disguise was unusually strong and this year we are being more cautious in who we ship to, even as retailers are being more cautious regarding their Halloween expectations. In other words, we don't just want sales, we want sales that are profitable and where we see sustainable growth potential and are more willing to sacrifice volume in the name of increasing profitability. We are very encouraged by our retail POS and our retail inventory levels. Through the end of June, POS at our top three customers was up mid-single digits and retail inventory at these retailers is down mid to high teens. We are pleased with this position as we move into the second half. We know we have some difficult comps in Q4 against the launch of Frozen 2, but we're satisfied with how clean our inventory levels are at retail. Even more encouraging than the sales trends and POS is how much we have reduced costs compared to last year and the year before. We have been diligently working to reduce our fixed costs, taking dramatic steps to reduce costs in both 2019 and earlier this year. John will review shortly, but we have taken millions of dollars in expenses out of our cost structure, such that despite the reduction in sales, our EBITDA loss is actually considerably lower. These cost reductions lower our break-even and leave us better positions to leverage our costs in higher volume quarters. So we are pleased with how our results are in the quarter, reflect our efforts to be more disciplined and more focused on profits, and we look forward to reaping the benefits of these efforts. Jon will now review financials, and I will return to discuss what we see for the rest of the year. Jon.

Thank you, Stephen, and good afternoon, everyone. As I discuss our results for the second quarter of 2020, please note that the company executed a 1 for 10 reverse stock split after the close of trading on July the 9th. and all per share figures discussed here reflect that reverse split. Net sales for the 2020 second quarter were $78.8 million, down 17% compared to $95.2 million last year. Reported net loss attributable to common stockholders for the second quarter was $23.6 million or $7.70 per basic and diluted share compared to a net loss of $22.5 million or $9.55 per basic and diluted share in the second 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 Q2 of 2020 includes non-cash charges totaling $7.7 million, reflecting changes in the fair value of our convertible senior notes and the derivative liability associated with our preferred stock. By comparison, these charges in Q2 of 2019 totaled $0.1 million. The second quarter of 2020 also included restructuring charges and COVID pandemic-related charges of $1.9 million compared to a negligible amount in Q2 of last year for restructuring charges. Conversely, Q2 of last year included $2.5 million in acquisition and recapitalization-related expenses compared to no comparable spending in Q2 of this year. Excluding the impact of such charges as well as stock compensation expense, our adjusted net loss attributable to common stockholders in the second quarter of 2020 was Thank you for watching. Our girls-targeted businesses showed growth for the quarter, inclusive of dolls, role-play, and dress-up toys, preschool plush, as well as same-walk cosmetics. Girls' products were $32.8 million in Q2, up 5% compared to $31.3 million in the second quarter of last year. As was the case in the fourth quarter of 2019 and the first quarter of this year, the big driver was Frozen 2, which was released in theaters late in Q4 of 2019. Other products that contributed to growth were Disney Princess, Perfectly Cute Baby, our exclusive baby doll line with Target, and Kitten Cat Fae, our own aspirational doll and collectible world of Cat Fae-inspired surprises, which continued to build nicely during the quarter. These sales more than offset some of the anticipated declines in various other product lines, particularly those related to older entertainment properties such as Disney's Aladdin, the original Frozen, Squish Delish, and assorted other older lines. Sales of action figures, vehicles, roleplay, and electronic products in our Boys category for the 2020 second quarter were $10.7 million, up 2% compared to $10.5 million last year. Positive contributions from our Flywheels line of proprietary action vehicles, Sonic the Hedgehog and Nintendo Super Mario toys, and Black & Decker roleplay more than offset declines in entertainment-driven properties such as Godzilla, Incredibles 2, and Harry Potter. Sales of seasonal products, including licensed ball pits and play structures, were $12.7 million in the 2020 second quarter, down 26% from $17.1 million in the second quarter of 2019, primarily due to our discontinuation of Fun Noodles, a low-margin product line we exited last year and referenced in Q4 when we took an impairment charge against the intangibles associated with that acquisition. Strong sales of Minnie Mouse and Frozen 2 ride-ons, as well as sales of our Redo skateboards, offset declines in Morphboard. Broadly speaking, we are seeing strong retail sell-through with our activity tables and many more. as well as a shift in some shipments from Q1 to Q2 led to unusually strong sales growth in the second quarter. This year, not only do we not have the same entertainment lineup or the timing shift, but the pandemic is clearly cutting into some of our sales. This business sells disproportionately to smaller specialty retailers, and some of them are struggling. In addition, we have been more cautious and disciplined in our shipments, not wanting to turn good inventory into bad debt. and even the healthiest retailers are uncertain as to how the ongoing pandemic will affect demand for Halloween products, even though Halloween falls on a Saturday this year, which often leads to higher than normal sales. Looking at sales by business segment, sales in our toys consumer product segment, which includes all markets around the world, were down 4% to $56.2 million compared to $58.8 million in the second quarter of last year. The decrease was driven by the same factors noted above in the product discussion. Latin America and Australia and New Zealand were up year over year, whereas the U.S., Canada, Europe, Asia, and the Middle East and Africa were lower. And as we already noted above, our Halloween segment was down 38%. Looking at the rest of the P&L, reported gross margin in the 2020 second quarter was 21.3% compared to 18.6% in the 2019 second quarter. Steady improvements in our product margins and lower obsolescence expense outpaced higher royalty charges incurred in the quarter. The increase in royalty expenses as a percentage of sales was driven partly by a mixed shift towards products with higher royalty rates, but also reflects a more disciplined approach to accruing for royalty costs earlier in the product selling cycle. Sharply lower spend for SG&A expenses, including direct selling expenses and depreciation and amortization in the 2020 second quarter, totaled $24.7 million or 31.3% of net sales compared to $33.9 million or 35.6% of net sales in the second quarter of 2019. Our interest expense in Q2 of this year was $5.5 million compared to $2.9 million last year, reflecting higher borrowings under our term loan and a higher average interest rate. Net cash provided by operating activities was $7 million for the second quarter of 2020 compared to a net cash used in operating activities of $7 million in the second quarter of 2019, primarily due to cost savings measures. Free cash flow is positive $4.2 million in the 2020 second quarter and negative $9.7 million in the 2019 second quarter. As of June 30, 2020, our cash and cash equivalents, including restricted cash, total $52.7 million compared to $66.3 million at the end of 2019 and $37 million as of June 30, 2019. Accounts receivable as of June 30, 2020 were $69 million, down from $117.9 million as of December 31, 2019, and $85.1 million as of June 30, 2019. DSOs for the 2020 second quarter decreased to 80 days from 81 days reported in the 2019 second quarter. Inventory as of June 30, 2020 was $57.7 million versus $54.3 million at December 31, 2019. and $53.5 million as of June 30th, 2019. DSIs in the 2020 second quarter were 85 days compared to 80 days in the 2019 second quarter. And looking at DSIs on a trailing 12-month basis, we were at 62 days for 2020 and 63 days for 2019. During the quarter, the company applied for and was granted a Paycheck Protection Program or PPP loan under the Federal CARES Act program. Those proceeds of $6.2 million will be utilized to cash flow payroll and rent payments over the next six months as per the program's intention. At the end of the time period allotted to utilize the funds, it is the company's intention to file for forgiveness for a portion of the debt. In the absence of knowing whether any funds will be forgiven and how the program may change as the year continues, the company has taken a conservative approach and presumed a two-year loan period with interest beginning to accrue in December of 2020. As a result, we now reflect an additional $1.8 million in short-term and $4.4 million in long-term debt on our balance sheet. As a result, as of June 30, 2020, the company's debt at face value included a $6.2 million PPP loan due June of 2020 to $30.4 million of recapitalized convertible senior notes due July 2023 and $134.8 million owed under our term loan due February of 2023. During the quarter, $7.1 million of the July 2023 convertible senior notes were converted to common shares at $1 per share. The $1.9 million worth of 4.875% convertible senior notes was paid off during Q2 on schedule. We currently have no outstanding balance under our credit facility. Capital expenditures during the second quarter of 2020 were $2.8 million compared to $2.7 million in the second quarter of 2019. Thank you, John. Right now, we are usually at the peak of our Halloween shipping season.