JAKKS PACIFIC INC Fair Value Disclosure
Note 15—Fair Value Measurements
In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2024 and 2023 (in thousands):
| Carrying Amount as of December 31, | Fair Value Measurements As of December 31, 2024 | |||||||||||||||
| 2024 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Money market funds | $ | 39,907 | $ | 39,907 | $ | — | $ | — | ||||||||
| Investments in employee deferred compensation trusts | 1,686 | 1,686 | — | — | ||||||||||||
| Carrying Amount as of December 31, | Fair Value Measurements As of December 31, 2023 | |||||||||||||||
| 2023 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Money market funds | $ | 45,130 | $ | 45,130 | $ | — | $ | — | ||||||||
| Investments in employee deferred compensation trusts | 41 | 41 | — | — | ||||||||||||
| Preferred stock derivative liability | 29,947 | — | — | 29,947 | ||||||||||||
Money market funds are included in cash and cash equivalents on the Consolidated Balance Sheets. Investments in employee deferred compensation trusts which are comprised of mutual funds are classified as trading securities are included in prepaid and other assets on the Consolidated Balance Sheets (refer to Note 18 – Employee Benefit Plans).
The following table provides a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
| Preferred stock derivative liability | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Balance at January 1, | $ | 29,947 | $ | 21,918 | $ | 21,282 | ||||||
| — | 8,029 | 636 | ||||||||||
| Extinguishment through redemption of preferred stock | (29,947 | ) | — | — | ||||||||
| Balance at December 31, | $ | — | $ | 29,947 | $ | 21,918 | ||||||
The Company’s Series A Preferred derivative liability was classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value. The fair value of the redemption provision embedded in the Series A Preferred Stock was estimated based on a discounted cash flow model and probability assumptions based on management’s estimates of a change of control event occurring. The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. In subsequent periods, the derivative liability was accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company’s consolidated statements of operations.
The following table provides quantitative information of liabilities measured at fair value and the significant unobservable inputs (Level 3), the range of the significant unobservable inputs, and the valuation techniques.
The preferred stock derivative liability was extinguished on March 11, 2024.
| Fair Value As of December 31, 2023 | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||||||
| (In thousands) | |||||||||||||
| Preferred Stock Derivative Liability | $ | 29,947 | Discounted Cash Flow | Change-in-control probability assumptions | Range: 0% to 100% | ||||||||
| Timing of change-in-control assumptions | Range: 1 to 10 years | ||||||||||||
| Discount Rate | Range: 8% to 10% | ||||||||||||
| Market yield* | 6.3%* | ||||||||||||
| * | Represents the hypothetical market yield |
The Company’s cash and cash equivalents including restricted cash, accounts receivable, accounts payable, accrued expenses and short-term debt represent financial instruments. The carrying value of these financial instruments is a reasonable approximation of fair value due to the short-term nature of the instruments.
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.