JAKKS PACIFIC INC (JAKK) Business

Item 1. Business

In this report, “JAKKS,” the “Company,”
“we,” “us” and “our” refer to JAKKS Pacific, Inc. and its subsidiaries.

Company Overview

We are a leading multi-product line, multi-brand
toy company that designs, produces, markets, sells and distributes toys and related kid-targeted consumer products, inclusive of kids
indoor and outdoor furniture, costumes and various product lines in the sporting goods and home furnishings space. We focus our business
on acquiring or licensing well-recognized intellectual property (“IP”), trademarks and/or brand names, most with long product
histories (“evergreen brands”). We seek to acquire/license these evergreen brands because we believe they are less subject
to market fads or trends. We also develop proprietary products marketed under our own trademarks and brand names and have historically
acquired complementary businesses to further grow our portfolio. For accounting purposes, our products have been divided into two segments:
(i) Toys/Consumer Products and (ii) Costumes. Segment information with respect to revenues, assets and profits or losses attributable
to each segment is contained in Note 3 to the audited consolidated financial statements contained below in Item 8. Our products include:

We continually review the marketplace to identify
and evaluate popular and evergreen brands and product categories that we believe have the potential for growth. We endeavor to generate
growth within these lines by:

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Our Business Strategy

In addition to developing our own proprietary brands,
properties and marks, licensing popular IP enables us to use these high-profile marks at a lower cost than we would incur if we purchased
these marks or funded the development of comparable marks on our own. Beyond the investment profile, we have an appreciation of the challenges
and expertise required to break through the noise in a world filled with high-budget, content-centric consumer choices either based on
well-known pre-existing IP or the even higher hurdle to launch new IP in the current marketplace. By licensing IP and trademarks from
world-class brand owners and content creators, we have potential access to a far greater range of marks than would be available for purchase.
Licensors ultimately are responsible for the franchise management of their IP, and we, by extension, leverage their related investment
in content and promotion, which we hope in turn will create a robust market for our related toy, consumer products and costume product
lines. Licensors often also invest resources in engaging our largest customers directly to keep them aware of new initiatives and content
to facilitate our sell-in of product. It also helps to credibly assure licensors that we will prioritize their brands, properties and
IP rather than explicitly competing with them with a broad range of self-developed content-led offerings. We also license technology developed
by unaffiliated inventors and product developers to enhance the design, innovation and functionality of our products.

We sell our products through our in-house sales staff and independent
sales representatives to toy and mass-market retail chain stores, department stores, office supply stores, drug and grocery store chains,
club stores, value-oriented dollar stores, toy specialty stores and wholesalers. Our two largest customers are Target® and Walmart®,
which accounted for 26.6% and 26.1%, respectively, of our net sales in 2025. No other customer accounted for more than 10% of our net
sales in 2025.

Our Growth Strategy

Key elements of our growth strategy include:

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The execution of our medium-longer-term growth
strategy, however, is subject to several risks and uncertainties, and we cannot assure you that we will experience growth in or maintain
our present level of net sales (see “Risk Factors,” in Item 1A). For example, our growth strategy will place additional demands
upon our management, operational capacity and financial resources and systems. The increased demand upon management may necessitate our
recruitment and retention of additional qualified management personnel. We cannot assure you that we will be able to recruit and retain
qualified personnel or expand and manage our operations effectively and profitably. To effectively manage future growth, we must continue
to expand our operational, financial and management information systems and to train, motivate and manage our workforce, globally. While
we believe that our operational, financial and management information systems will be adequate to support our future growth, no assurance
can be given they will be adequate without significant investment in our infrastructure. Failure to expand our operational, financial
and management information systems or to train, motivate, manage and retain employees could have a material adverse effect on our business,
financial condition and results of operations.

Moreover, implementation of our growth strategy
is subject to risks beyond our control, including: competition; market acceptance of new products; changes in economic conditions; changes
in the media & entertainment landscape disrupting the traditional model of capturing consumer attention for new entertainment-led
offerings; our ability to obtain or renew licenses on commercially reasonable terms; and our ability to finance increased levels of accounts
receivable and inventory necessary to support our sales growth, if any.

Furthermore, we cannot assure you that we can
identify attractive acquisition candidates or negotiate acceptable acquisition terms, and our failure to do so may adversely affect the
results of our operations and our ability to sustain growth.

Finally, our acquisition strategy involves a number
of risks, each of which could adversely affect our operating results, including difficulties in integrating acquired businesses or product
lines, assimilating new facilities and personnel and harmonizing diverse business strategies and methods of operation, diversion of management
attention from operation of our existing business, loss of key personnel from acquired companies, and failure of an acquired business
to achieve targeted financial results.

Industry Overview

According to Toy Association, Inc., the leading
toy industry trade group, the United States is the world’s largest toy market, followed by China, Japan and Western Europe. Total
retail sales of toys, excluding video games, in the United States, were approximately $30.3 billion in 2025. We believe the two largest
United States toy companies, Hasbro® and Mattel®, along with The LEGO Group (headquartered in Denmark), collectively hold a dominant
share of the U.S. toy market. In addition, hundreds of smaller companies compete in the design and development of new toys, the procurement
of character and product licenses, and the improvement, expansion and re-introduction of previously established products and product
lines.

Over the decades, the toy industry has experienced
substantial consolidation among both toy companies and toy retailers. We believe that the ongoing consolidation of toy companies provides
us with increased growth opportunities due to retailers’ desire to not be entirely dependent upon a few dominant toy companies.
Retailer concentration also enables us to ship products, manage account relationships and track point of sale information more effectively
and efficiently.

Products

We focus our business on acquiring or licensing
well-recognized properties, trademarks and/or brand names, and we seek to acquire evergreen brands which are less subject to market fads
or trends. Generally, our license agreements for products and concepts call for royalties ranging from 1% to 22% of net sales, and some
may require minimum royalty guarantees and up-front or advanced royalty payments against those guarantees. Our principal products are
highlighted above in our Company Overview.

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Sales, Marketing and Distribution

We sell all our products through our own in-house
sales staff and independent sales representatives to toy and mass-market retail chain stores, department stores, office supply stores,
drug and grocery store chains, club stores, dollar stores, toy specialty stores and wholesalers. Our two largest customers are Target®
and Walmart®, which accounted for 26.6% and 26.1%, respectively, of our net sales in 2025. No other customer accounted for more than
10% of our net sales in 2025. In 2024, our three largest customers, Target®, Walmart® and Amazon®, accounted for 29.6%, 26.2%
and 10.6%, respectively, of our net sales. No other customer accounted for more than 10% of our net sales in 2024. We generally sell products
to our customers on open account with payment terms typically varying from 30 to 90 days or, in some cases, pursuant to letters of credit.
For sales outside of the United States, we may also purchase credit insurance to mitigate the risk, if any, of non-payment. From time
to time, we allow our customers credits against future purchases from us in order to facilitate their retail markdown and sales of slow-moving
inventory. We also sell our products through e-commerce sites, including Walmart.com, Target.com and Amazon.com.

We contract the manufacture of most of our products
to unaffiliated manufacturers located in The People’s Republic of China (“China”). We sell the finished products to
our customers, many of whom take title to the goods in China. These methods allow us to reduce certain operating costs and working capital
requirements. We also contract the manufacture of certain products from Hong Kong Meisheng Cultural Company Limited (“Meisheng”),
which involved payments to Meisheng of approximately $75.3 million and $98.4 million for the years ended December 31, 2025 and 2024, respectively.
As of December 31, 2024, Meisheng owned 4.8% of our outstanding common stock and until our 2025 annual meeting a designee of Meisheng
was a member of our board of directors. A portion of our sales originate in the United States, so we hold certain inventory in a US warehouse
and fulfillment facility. To date, a majority of all our sales has been to customers based in the United States. We intend to continue
trying to expand distribution of our products into foreign territories and, accordingly, we have:

Outside of the United States, we currently sell
our products primarily in Europe, Australia, Canada, Latin America and Asia. Sales of our products abroad accounted for approximately
$154.1 million, or 27.0% of our net sales in 2025 and approximately $146.0 million, or 21.1% of our net sales in 2024. We believe that
foreign markets present an attractive opportunity, and we plan to intensify our marketing efforts and further expand our distribution
channels abroad.

We establish reserves for allowances provided
to our customers, including discounts, pricing concessions, promotional allowances and allowances for anticipated breakage or defective
product, at the time of shipment. The reserves are determined as a percentage of sales based upon either historical experience or upon
estimates or programs agreed upon with our customers.

We obtain, directly, or through our sales representatives,
orders for our products from our customers and arrange for the manufacture of these products as discussed below. Cancellations generally
are made in writing, and we take appropriate steps to notify our manufacturers of these cancellations. We may incur costs or other losses
because of cancellations.

We maintain a full-time sales and marketing staff,
many of whom make on-site visits to customers for the purpose of showing products and soliciting orders for products. We also retain
a number of independent sales representatives to sell and promote our products, both domestically and internationally. Together with
retailers, we occasionally test the consumer acceptance of new products in selected markets before committing resources to large-scale
production.

We publicize and advertise our products online
and on mobile devices, in trade and consumer magazines and other publications, market our products at international, national and regional
toy and other specialty trade shows, conventions and exhibitions and carry on cooperative advertising programs with toy and mass market
retailers and other customers which include the use of print, online, mobile and television ads and via in-store displays. We also produce
and broadcast television commercials for several of our product lines, if we expect that the resulting increase in our net sales will
justify the relatively high cost of television/media advertising.

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Product Development

Each of our product lines has an in-house lead
responsible for product development. The in-house lead identifies and evaluates inventor products and concepts and other opportunities
to enhance or expand existing product lines or to enter new product categories. In addition, we create proprietary products to fully
exploit our concept and character licenses. Although we have the capability to create and develop products from inception to production,
we also use third-parties to provide a portion of the sculpting, sample making, illustration and package design required for our products
to accommodate our increasing product innovations and introductions as well as accelerate our speed-to-market. Typically, the development
process takes from nine to eighteen months from concept to production and shipment to our customers, but given our Company’s size
and structure, we have demonstrated the ability to shrink that down to three to nine months successfully when the opportunity requires.

We employ a staff of product designers. We occasionally
acquire other product concepts from unaffiliated third-parties. If we accept and develop a third-party’s concept for new toys,
we generally pay a royalty on the sale of the toys developed from this concept, and may, on an individual basis, guarantee a minimum
royalty. Royalties payable to inventors and developers generally range from 1% to 5% of the wholesale sales price for each unit of a
product sold by us. We believe that utilizing experienced third-party inventors gives us access to a wide range of development talent.
We currently work with numerous toy inventors and designers for the development of new products and the enhancement of existing products.

Safety testing of our products is done at the
manufacturers’ facilities by quality control personnel employed by us or by independent third-party contractors engaged by us.
Safety testing is designed to meet or exceed regulations imposed by federal and state, as well as applicable international governmental
authorities, our retail partners, licensors and the Toy Association. We also closely monitor quality assurance procedures for our products
for safety purposes. In addition, independent laboratories engaged by some of our larger customers and licensors test certain of our
products.

Manufacturing and Supplies

Our products are currently produced by overseas
third-party manufacturers, which we choose on the basis of quality, flexibility, reliability and price. Consistent with industry practice,
the use of third-party manufacturers enables us to avoid incurring fixed manufacturing costs, while maximizing flexibility, capacity and
the latest production technology. Substantially all of the manufacturing services performed overseas for us are paid for on open account
with the manufacturers. To date, we have not experienced any material delays in the delivery of our products from our manufacturers; however,
delivery schedules are subject to various factors beyond our control, and any delays in the future could adversely affect our sales. The
COVID-19 pandemic created some short-term delays as manufacturing capacity both dropped during the peak of the outbreak and then again
was stretched when consumer demand for different categories of products spiked because of the unprecedented level of households operating
under confined-to-home/social distancing guidelines. Currently, we have ongoing relationships with over 50 different manufacturers. We
believe that alternative sources of supply are available to us although we cannot be assured that we can obtain adequate supplies of manufactured
products on short notice in a cost neutral manner. We may also incur costs or other losses as a result of not placing orders consistent
with our forecasts for products to be manufactured by our suppliers or manufacturers for a variety of reasons including customer order
cancellations or a decline in demand.

Although we do not conduct the day-to-day manufacturing
of our products, we are extensively involved in the design of product prototypes and production tools, dies and molds for our products
and we seek to ensure quality control by actively reviewing the production process and testing the products produced by our manufacturers.
We employ quality control inspectors who rotate among our manufacturers’ factories to monitor the production of substantially all
our products. Some of our customers might also conduct their own product quality testing.

The principal raw materials used in the production
and sale of our toy products are plastics, zinc alloy, plush, printed fabrics, paper products and electronic components, all of which
are currently available at reasonable prices from a variety of sources. Although we do not directly manufacture our products, we own the
majority of the tools, dies and molds used in the manufacturing process, and these are transferable among manufacturers if we choose to
employ alternative manufacturers. Tools, dies and molds represent a substantial portion of our property and equipment with a net book
value of $16.6 million and $13.5 million as of December 31, 2025, and 2024, respectively. Substantially all of these assets are located
across various provinces in China.

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Patents, Trademarks, Copyrights and Licenses

We routinely pursue protection of our products
through some form or combination of intellectual property right(s). We file patent applications where appropriate to protect our innovations
arising from new development and design, and as a result, possess a portfolio of issued patents in the U.S. and abroad. Most of our products
are produced and sold under trademarks owned by or licensed to us. In recent years, our rate of filing new trademark applications has
increased. We also register certain aspects of some of our products with the U.S. Copyright Office. In the same vein, we enforce our rights
against infringers because we recognize that our intellectual property rights are significant assets that contribute to our success. Accordingly,
while we believe we are sufficiently protected and the duration of our rights are aligned with the lifecycle of our products, the loss
of some of these rights could have an adverse effect on our financial growth expectations and business operations.

Competition

Competition in the toy industry is intense. Globally,
certain of our competitors have greater financial resources, larger sales and marketing and product development departments, stronger
name recognition, wholly-owned brands and properties with high consumer awareness and appeal, longer operating histories and benefit
from greater economies of scale. These factors, among others, may enable our competitors to market their products at lower prices or
on terms more advantageous to customers than those we could offer for our competitive products. Competition often extends to the procurement
of entertainment and product licenses, as well as the marketing and distribution of products and the obtaining of adequate shelf space.
Competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse
effect on our business, financial condition and results of operations. In many of our product lines we compete directly against one or
both of two of the toy industry’s most dominant companies, Mattel® and Hasbro®. In addition, we compete in our Halloween
costume lines with Rubies II®. We also compete with numerous smaller domestic and foreign toy manufacturers, importers and marketers
in each of our product categories.

Seasonality and Backlog

In 2025, 57.9% of our net sales were made in the
second and third quarters. Generally, the first quarter is the period of lowest shipments and sales in our business and in the toy industry
and therefore it is also the least profitable quarter due to various fixed costs. Seasonality factors cause our operating results to fluctuate
significantly from quarter to quarter. However, our outdoor/seasonal products are primarily sold in the spring and summer seasons, and
our year-round costume business ships most of its volume focused on consumer sales taking place just before Halloween at the end of October.
Our results of operations may also fluctuate because of factors such as the timing of new products (and related expenses) introduced by
us or our competitors, the theatrical/entertainment-led releases of licensed brands, the advertising activities of our competitors, delivery
schedules set by our customers and the emergence of new market entrants. We believe, however, that the low retail price of most of our
products may be less subject to seasonal fluctuations than higher-priced toy products.

We ship products in accordance with delivery schedules
specified by our customers, who generally request delivery of products within three to six months of the date of their orders for orders
shipped FOB China or Hong Kong and within three days for orders shipped domestically (i.e., from one of our warehouses). Because customer
orders may be canceled at any time, often without penalty, our backlog may not accurately indicate sales for any future period.

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Government and Industry Regulation

Our products are subject to the provisions of
the Consumer Product Safety Act (“CPSA”) as amended by the Consumer Product Safety Improvement Act (“CPSIA”),
the Federal Hazardous Substances Act (“FHSA”), the Flammable Fabrics Act (“FFA”) and regulations promulgated
thereunder. Additionally, our products may be subject to various other regulations in the United States, European Union, and other jurisdictions.
The CPSIA, FHSA, and FFA are administered by the United States Consumer Products Safety Commission (“CPSC”) which requires
independent third-party testing by accredited laboratories of products we sell in the United States. Failure to comply with such requirements
can result in the CPSC banning such products. The CPSC also may require the recall to repair and/or repurchase by the manufacturer
of articles that it deems noncompliant. Similar laws exist in some states and cities and in various international markets. We maintain
a quality control program designed to reasonably ensure compliance with all applicable laws.

Human Capital

Our success comes from recruiting, retaining and
motivating talented individuals around the world. JAKKS Pacific, Inc. continuously strives to create a safe, healthy, productive and
harmonious work environment.

As of December 31, 2025, we had approximately 652
employees (including temporary and seasonal employees) working in over 10 countries worldwide to create innovative products and experiences
that inspire, entertain, and develop children through play, with 292 employees (44.8 % of the total workforce) located outside the U.S.

Employee Engagement

One of our main focuses is employee retention.
We empower our management to identify top performers and mentor them. We encourage all employees to take advantage of in-house and external
training programs and continuing education. Our Human Resources department has an open-door policy that encourages employees to seek career
advancement advice. We hold various events and workshops throughout the year, and employees are encouraged to voice any concerns and/or
to bring forth their ideas and suggestions.

Culture and Environment

We are dedicated to developing and maintaining
a workplace culture that celebrates and values the unique contributions of every individual.

Our organization’s ethos is significantly
shaped by the collective blend of distinct perspectives, life journeys, expertise, creativity, innovative thinking, self-expression,
exceptional skills, and talents that our team members bring to their roles.

We wholeheartedly welcome and encourage the rich
tapestry of differences among our employees. This includes, but is not limited to, variations in age, skin tone, physical and cognitive
abilities, ethnic background, family composition, gender identity or expression, linguistic heritage, national origin, political views,
racial identity, religious beliefs, sexual orientation, socio-economic background, military service history, and other personal characteristics.

Our initiatives to promote a varied and representative
workforce encompass a wide range of practices and policies. These include, but are not limited to, our approaches to recruitment and
hiring, compensation packages and benefits, professional growth opportunities and training programs, as well as our processes for internal
promotions and transfers.

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Training and Development

We take pride in offering the opportunity for
employees to continuously learn and to grow their careers. Annually, employees are offered various types of training and the opportunity
to continue their education. This includes both online and instructor-led training covering a variety of topics ranging from career-related,
to federally- and locally-mandated, to JAKKS Pacific, Inc. Company policy, to financial services and health/wellness-related. Nearly
all employees take advantage of some if not all of these optional learning opportunities.

Health and Safety

We are committed to providing a safe, healthy and productive working
environment for all our employees globally.

Environmental Issues

We may be subject to legal and financial obligations
under environmental, health and safety laws in the United States and in other jurisdictions where we operate. We are not currently aware
of any material environmental liabilities associated with any of our operations.

Available Information

We make available free of charge on or through
our Internet website, www.jakks.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC. In addition, we have previously filed registration
statements and other documents with the SEC. Any document we file may be inspected without charge at the SEC’s website at www.sec.gov.
(These website addresses are not intended to function as hyperlinks, and the information contained in our website and in the SEC’s
website is not intended to be a part of this filing.)

Our Corporate Information

We were formed as a Delaware corporation in 1995.
Our principal executive offices are located at 2951 28th Street, Santa Monica, California 90405. Our telephone number is (424) 268-9444
and our Internet Website address is www.jakks.com. The contents of our website are not incorporated in or deemed to be a part of this
Annual Report on Form 10-K.