JAKKS PACIFIC INC

Previous wording

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-lookingstatementsas a result of various factors. You should read this section in conjunction with our consolidated financial statements and the related notes included in Item 8“Consolidated Financial Statements and Supplementary Data.”

Current wording

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-lookingstatementsbecause of various factors. You should read this section in conjunction with our consolidated financial statements and the related notes included in Item 8“Consolidated Financial Statements and Supplementary Data.”

Previous wording

Allowance for Current Expected Credit Losses. Our allowance for current expected credit losses is based upon management’s assessment of the business environment, customers’ risk profile characteristics, historical collection and loss information, aging of accounts receivables, and other matters specific to customer accounts in the establishment of pools. If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our current expected credit losses, our estimates of the recoverability of amounts due to us could be misstated, which could have an adverse impact on our operating results. Our allowance for current expected credit losses is also affected by the time at which uncollectible accounts receivable balances are actually written off. Management believes the accounting estimate related to the allowance for current expected credit losses is a “critical accounting policy” because judgement is required in the establishment of pools based on customer risk profile characteristics and the historical loss rates applied to each pool. In addition, the allowance requires judgement since it involves estimation of the impact of both current and future economic factors in relation to its customers’ risk profile characteristics. Changes in the assumptions used to develop the estimates could materially affect key financial measures, including other selling and administrative expenses, net income and accounts receivable.

Current wording

Allowance for Current Expected Credit Losses. Our allowance for current expected credit losses is based upon management’s assessment of the business environment, customers’ risk profile characteristics, historical collection and loss information, aging of accounts receivables, and other matters specific to customer accounts in the establishment of pools. If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our current expected credit losses, our estimates of the recoverability of amounts due to us could be misstated, which could have an adverse impact on our operating results. Our allowance for current expected credit losses is also affected by the time at which uncollectible accounts receivable balances are actually written off. The allowance for current expected credit losses requires judgement related to the establishment of pools based on customer risk profile characteristics and the historical loss rates applied to each pool and requires judgement since it involves estimation of the impact of both current and future economic factors in relation to its customers’ risk profile characteristics. Changes in the assumptions used to develop the estimates could materially affect key financial measures, including other selling and administrative expenses, net income and accounts receivable.

Previous wording

Royalties. We enter into license agreements with strategic partners, inventors, designers and others for the use of intellectual properties in its products. These agreements may call for payment in advance or future payment of minimum guaranteed amounts. Amounts paid in advance are recorded as an asset and charged to expense when the related revenue is recognized in the consolidated statements of operations. If all or a portion of the minimum guaranteed amounts appear not to be recoverable through future use of the rights obtained under the license, the non-recoverable portion of the guaranty is charged to expense at that time. On a quarterly basis, we evaluate the recoverability of minimum guarantee amounts based on forecast revenues to be received for the products and record a shortfall reserve for expected unrecoverable amounts. If our actual revenue generated differs from our projections, the recoverability of our minimum guarantees would be impacted and could materially affect key financial measures, including gross profit, net income and prepaid assets.

Current wording

Royalties. We enter into license agreements with strategic partners, inventors, designers and others for the use of intellectual properties in our products. These agreements generally require a percentage of sales (as defined by the respective agreements) be paid to third parties as royalties. They also often require a fixed minimum dollar amount of royalties to be paid regardless of what level of sales are achieved during the term of the agreement. Payment timing varies across agreements and may precede any sales or collections of monies related to such sales. We recognize royalty expenses in the period in which sales are made. In addition, we assess whether forecasted revenue under any agreement is likely to be sufficient to cover the minimum royalty guarantee, and if not a royalty shortfall reserve and associated royalty expense is recorded at that time. If our actual revenue generated differs from our projections, the recoverability of our minimum guarantees would be impacted and could materially affect key financial measures, including gross profit, net income and prepaid assets.

Previous wording

Reserve for Sales Returns and Allowances. We routinely enter into arrangements with our customers to provide sales incentives, support customer promotions and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities and other specified factors such as sales to consumers. Management believes that the accounting estimates related to sales adjustments are “critical accounting policies” because significant judgment is required to estimate related accruals, such as estimating volumes of defective products to support reserves for defective merchandise and estimating future customer performance and consumer preferences that could impact the discretionary sales promotions. Significant changes in the assumptions used to develop the estimates could materially affect key financial measures, such as net sales, gross profit, net income, and reserve for sales returns and allowances.

Current wording

Reserve for Sales Returns and Allowances. We routinely enter into arrangements with our customers to provide sales incentives, support customer promotions and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. The accounting estimate related to sales adjustments requires significant judgment to estimate related accruals, such as estimating volumes of defective products to support reserves for defective merchandise and estimating future customer performance and consumer preferences that could impact the discretionary sales promotions. Significant changes in the assumptions used to develop the estimates could materially affect key financial measures, such as net sales, gross profit, net income, and reserve for sales returns and allowances.

Previous wording

Income Allocation for Income Taxes. Our annual income tax provision and related income tax assets and liabilities are based upon actual income as allocated to the various tax jurisdictions based upon our transfer pricing study, US and foreign statutory income tax rates and tax regulations and planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in interpreting tax regulations in the U.S. and foreign jurisdictions, and in evaluating worldwide uncertain tax positions. Actual results could differ materially from those judgments, and changes from such judgments could materially affect our consolidated financial statements.

Current wording

Our annual income tax provision and related income tax assets and liabilities are based upon actual income as allocated to the various tax jurisdictions based upon our transfer pricing study, US and foreign statutory income tax rates and tax regulations and planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in interpreting tax regulations in the U.S. and foreign jurisdictions, and in evaluating worldwide uncertain tax positions. Actual results could differ materially from those judgments, and changes from such judgments could materially affect our consolidated financial statements.

Previous wording

We accrue a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based upon management’s assessment of all relevant information and is periodically reviewed and adjusted as circumstances warrant. As of December 31, 2024, our income tax reserves were approximately $3.2 million and relate to federal and state income taxes.

Current wording

We accrue a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based upon management’s assessment of all relevant information and is periodically reviewed and adjusted as circumstances warrant. As of December 31, 2025, our income tax reserves were approximately $0.8 million and relate to federal and state income taxes.

Previous wording

Costumes. Net sales of our Costumes segment were $121.0 million in 2024, compared to $130.9 million in 2023, representing a decrease of $9.9 million, or 7.6%. The decrease in net sales was primarily driven by US customers recalibrating their order levels down based on Halloween 2023 sell-through. Despite the lower sales in the US, our International sales grew in 2024 to the highest year ever.

Current wording

Costumes. Net sales of our Costumes segment were $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 sales was primarily driven by US customers lowering their order levels based on tariffs. Despite the lower sales in the US, our International sales grew in 2025 its highest level.

Previous wording

*Toys/Consumer Products.*Cost of sales of our Toys/Consumer Products segment was $389.5 million, or 68.3% of related net sales in 2024 compared to $388.3 million, or 66.9% of related net sales in 2023 representing an increase of $1.2 million or 0.3%. Although royalty rates were lower year-over-year, the increase in the cost of sales percentage of net sales, year-over-year is due to higher inventory obsolescence costs.

Current wording

*Toys/Consumer Products.*Cost of sales of our 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 net sales in 2024 representing a decrease of $85.2 million or 21.9%. Although royalty rates were higher year-over-year, the decrease in the cost of sales percentage of net sales, year-over-year is due to lower inventory obsolescence costs.

Previous wording

Costumes. Cost of sales of our Costumes segment was $88.5 million, or 73.1% of related net sales for 2024 compared to $99.9 million, or 76.3% of related net sales for 2023 representing a decrease of $11.4 million, or 11.4%. The year-over-year decrease in dollars is directly attributable to lower volume. The decrease in percent of net sales is attributable lower royalty expense due to lower royalty guarantee shortfalls and marginal improvements in product cost of goods attributable to mix and design for improved margin.

Current wording

Costumes. Cost of sales of our Costumes segment was $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 a decrease of $7.2 million, or 8.1%. The year-over-year decrease in dollars is directly attributable to lower volume. The increase in percent of net sales is attributable higher royalty expense due to higher royalty guarantee shortfalls offset by improvements in product cost of goods attributable to mix and design for improved margin.

Previous wording

Selling, general and administrative expenses were $173.3 million in 2024 and $164.2 million in 2023, constituting 25.1% and 23.1% of net sales, respectively. Selling, general and administrative expenses increased from the prior year primarily driven by higher media costs, product development expenses and employee compensation.

Current wording

Selling, general and administrative expenses were $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 expenses decreased from the prior year by $2.4 million or 1.4% primarily driven by lower media costs and lower temporary labor costs.

Previous wording

Interest Income was $0.8 million for the year ended December 31, 2024, as compared to $1.3 million in the prior year period. Interest income earned is primarily due to the Company’s money market investments.

Current wording

Interest Income was $1.0 million for the year ended December 31, 2025, as compared to $0.8 million in the prior year period. Interest income earned is primarily due to the Company’s money market investments.

Previous wording

During 2023, our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $6.8 million, or an effective tax rate of 15.2%. The 2023 tax expense included a discrete tax benefit of $2.7 million primarily comprised of valuation allowance adjustments. Absent these discrete tax benefits, our effective tax rate for 2023 was 21.3%, primarily due to taxes on federal, state, and foreign income.

Current wording

During 2025, our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $4.9 million, or an effective tax rate of 33.1%. The 2025 tax expense included a discrete tax benefit of $0.2 million primarily related to adjustments to uncertain tax positions and to return to provision adjustments. Absent these discrete tax benefits, our effective tax rate for 2025 was 34.4%, primarily due to taxes on federal, state, and foreign income.

Previous wording

During 2024, our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $5.5 million, or an effective tax rate of 13.9%. The 2024 tax expense included a discrete tax benefit of $1.4 million primarily comprised of return to provision adjustments. Absent these discrete tax benefits, our effective tax rate for 2024 was 17.4%, primarily due to taxes on federal, state, and foreign income.

Current wording

During 2024, our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $5.5 million, or an effective tax rate of 13.9%. The 2024 tax expense included a discrete tax benefit of $1.4 million primarily comprised of valuation allowance adjustments. Absent these discrete tax benefits, our effective tax rate for 2024 was 17.4%, primarily due to taxes on federal, state, and foreign income.

Previous wording

We assess 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. Based on our evaluation of all positive and negative evidence, as of December 31, 2024, a valuation allowance of $0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized. The net deferred tax asset change of $2.3 million consists of the net deferred tax asset changes in the US and foreign jurisdictions, where we are in a cumulative income position.

Current wording

We assess 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. Based on our evaluation of all positive and negative evidence, as of December 31, 2025, a valuation allowance of $0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized. The net deferred tax asset change of $0.8 million consists of the net deferred tax asset changes in the US and foreign jurisdictions, where we are in a cumulative income position.

Previous wording

In the first quarter of 2022, Russia and Ukraine engaged in an armed conflict that continues. We cannot predict at this time the length of this conflict and if it will spread to other countries. Accordingly, we cannot quantify at this time if, or the extent, this conflict will adversely impact our business operations.

Current wording

In the first quarter of 2022, Russia and Ukraine engaged in an armed conflict that continues. We cannot predict at this time if the conflict will spread to other countries. Accordingly, we cannot quantify at this time if, or the extent, this conflict will adversely impact our business operations.

Previous wording

The suggestion that the U.S. will take unilateral action to impose tariffs on products imported from China creates significant uncertainty about our ability to source products with a cost structure consistent with our recent history. The additional suggestion that the U.S. will take unilateral action to impose tariffs on products imported from Canada and/or Mexico also creates significant uncertainty about which additional markets could be targeted for new tariffs. It also increases the possibility that markets outside the U.S. could institute retaliatory tariffs that would ultimately increase the cost of our doing business in those markets where we import product. In addition, our customer base may face significant increased costs in importing our product from Hong Kong into their home markets. In the event our customers choose to raise consumer prices to offset these costs, negative consumer reaction could substantially reduce unit demand for our product line, and by extension lower sales. Lower sales could negatively impact our profitability and cash flows.

Current wording

The U.S. taking unilateral action to impose tariffs on products imported from China and adopting an approach to deploy tariffs with no advance notice or feedback mechanism has created across markets has created uncertainty about our ability to source products with a cost structure consistent with our recent history. It also increased the possibility that markets outside the U.S. could institute retaliatory tariffs that would ultimately increase the cost of our doing business in those markets where we import product. In addition, our customer base has faced increased costs in importing our product from Hong Kong into their home markets. In the event our customers choose to raise consumer prices to offset these costs, negative consumer reaction could substantially reduce unit demand for our product line, and by extension lower sales. Lower sales could negatively impact our profitability and cash flows.

Previous wording

As of December 31, 2024, we had working capital of $119.3 million compared to $106.1 million as of December 31, 2023.

Current wording

As of December 31, 2025, we had working capital of $121.0 million compared to $119.3 million as of December 31, 2024.

Previous wording

Operating activities provided net cash of $38.9 million in 2024 and $66.4 million in 2023. The decrease in cash flows provided by operating activities, year-over-year, was primarily due to a lower net income and higher working capital usage, partially offset by higher non-cash charges related to valuation adjustments for our preferred stock derivative liability and an increase in deferred income tax assets due to inventory cost and other expense capitalization matters, both in 2023. Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase inventory from our manufacturers. However, we may incur costs or other losses as a result of not placing orders consistent with our forecasts for products manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties/obligations generally ranging from 1% to 25% payable on net sales of such products. As of December 31, 2024, these agreements required future aggregate minimum royalty guarantees of $74.6 million, exclusive of $0.9 million in advances already paid. Of this $74.6 million future minimum royalty guarantee, $53.7 million is due over the next twelve months.

Current wording

Operating activities provided net cash of $8.5 million in 2025 and $38.9 million in 2024. The decrease in cash flows provided by operating activities, year-over-year, was primarily due to a lower net income and higher working capital usage, partially offset by higher non-cash charges related to valuation adjustments for our preferred stock derivative liability and an increase in deferred income tax assets due to inventory cost and other expense capitalization matters, both in 2024. Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase inventory from our manufacturers. However, we may incur costs or other losses as a result of not placing orders consistent with our forecasts for products manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties/obligations generally ranging from 1% to 22% payable on net sales of such products. As of December 31, 2025, these agreements required future aggregate minimum royalty guarantees of $189.8 million, exclusive of $2.3 million in advances already paid. Of this $189.8 million future minimum royalty guarantee, $57.4 million is due over the next twelve months.

Previous wording

Investing activities used net cash of $12.9 million and $8.9 million for the years ended December 31, 2024 and 2023, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.

Current wording

Investing activities used net cash of $12.3 million and $12.9 million for the years ended December 31, 2025 and 2024, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products and purchases of investments to fund our obligation to our employees stemming from our non-qualified deferred compensation plan.

Previous wording

Financing activities used net cash of $26.9 million in 2024 and $72.3 million in 2023. The cash used in 2024 primarily consists of the cash portion for the redemption of the Series A Preferred stock of $20 million and the repurchase of common stock for employee tax withholding of $6.9 million. The cash used in 2023 primarily consists of the repayment of our 2021 BSP Term Loan of $69.2 million and the repurchase of common stock for employee tax withholding of $3.1 million.

Current wording

Financing activities used net cash of $17.1 million in 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 stock of $11.2 million and the repurchase of common stock for employee tax withholding of $5.7 million. The cash used in 2024 primarily consists of the cash portion for the redemption of the Series A Preferred stock of $20.0 million and the repurchase of common stock for employee tax withholding of $6.9 million.

Previous wording

We were in compliance with the financial covenants under the JPMorgan ABL Agreement as of December 31, 2024.

Current wording

We were in compliance with the financial covenants under the BMO Credit Agreement as of December 31, 2025.

Previous wording

As of December 31, 2024 and 2023, we held cash and cash equivalents, including restricted cash, of $70.1 million and $72.6 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States, in various foreign subsidiaries totaled $16.5 million and $21.5 million as of December 31, 2024 and 2023, respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either been 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 foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of December 31, 2024.

Current wording

As of December 31, 2025, and 2024, we held cash and cash equivalents, including restricted cash, of $54.1 million and $70.1 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States, in various foreign subsidiaries totaled $16.9 million and $16.5 million as of December 31, 2025, and 2024, respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either been 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 foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of December 31, 2025.

Previous wording

Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (See Item 8 “Consolidated Financial Statements and Supplementary Data Note 10 – Credit Facilities”).

Current wording

Our primary sources of working capital are cash flows from operations and borrowings under our credit facility (See Item 8 “Consolidated Financial Statements and Supplementary Data Note 9 – Credit Facilities”).

Previous wording

As of December 31, 2024, off-balance sheet arrangements include letters of credit issued by JPMorgan of $4.4 million.

Current wording

As of December 31, 2025, off-balance sheet arrangements include letters of credit issued by JPMorgan of $1.6 million, temporarily secured with cash as collateral, and letters of credit issued by BMO of $1.7 million.

Previous wording

On July 1, 2022, we entered into an ATM Agreement with 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, in 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 filed 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 registration statement filed by us to be effective.

Current wording

On July 1, 2022, we entered into an ATM Agreement with 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, in 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 filed 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 registration statement filed by us to be effective. In 2025, the registration statement expired by law on its third anniversary. We expect to file a new registration that will be declared effective during the first or second quarter of 2026.

Previous wording

As of March 6, 2025, we have not sold any shares of common stock under the ATM Agreement.

Current wording

We did not sell any shares of common stock under the ATM Agreement or pursuant to our self-registration statement.