JAKKS PACIFIC INC (JAKK)

Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The
following discussion and analysis of financial condition and results of operations should be read together with our condensed consolidated
financial statements and notes thereto, which appear elsewhere herein.

Disclosure
Regarding Forward-Looking Statements

This
Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. For example, statements included in this Report regarding our financial position, business
strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing,
costs, marketing and pricing factors are all forward-looking statements. When we use words like “intend,” “anticipate,”
“believe,” “estimate,” “plan” or “expect,” or other words of a similar import, we are
making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are
reasonable, based upon information available to us on the date hereof, but we cannot assure you that these assumptions and expectations
will prove to have been correct or that we will take any action that we may presently be planning. We have disclosed certain important
factors (e.g., see “Risk Factors”) that could cause our actual results to differ materially from our current expectations
elsewhere in this Report. You should understand that forward-looking statements made in this Report are necessarily qualified by these
factors. We are not undertaking to publicly update or revise any forward-looking statement if we obtain new information or upon the occurrence
of future events or otherwise.

Critical
Accounting Estimates

Our
critical accounting policies and estimates are included in the 2025 Annual Report on Form 10-K and did not materially change during the
first six months of 2026.

New
Accounting Pronouncements

See
Note 1 to the condensed consolidated financial statements.

Results
of Operations

The
following unaudited table sets forth, for the periods indicated, certain statement of income data as a percentage of net sales:

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The
following unaudited table sets forth, for the periods indicated, certain statements of operations data by segment (in thousands):

Comparison
of the Three Months Ended June 30, 2026 and 2025

Net
Sales

Toys/Consumer
Products. Net sales of our Toys/Consumer Products segment were $97.5 million for the three months ended June 30, 2026 compared to
$80.4 million for the prior year period, representing an increase of $17.1 million, or 21.3%. The increase was driven by higher sales
in the Action Play and Collectibles division, up 40.7% versus a year ago, driven by sales of Super Mario Movie and Nintendo products.
Additionally, the Dolls, Role-Play/Dress Up division increased 11.8% compared to the same period a year ago.

Costumes.
Net sales of our Costumes segment were $41.7 million for the three months ended June 30, 2026 compared to $38.7 million for the prior
year period, representing an increase of $3.0 million, or 7.8%. The increase was primarily due to reduced orders a year ago from select
recurring customers as a result of the US tariffs.

Cost
of Sales

Toys/Consumer
Products. Cost of sales of our Toys/Consumer Products segment was $64.0 million, or 65.6% of related net sales for the three months
ended June 30, 2026 compared to $53.3 million, or 66.3% of related net sales for the prior year period, representing an increase of $10.7
million, or 20.1%. The decrease as a percentage of net sales was due to lower product costs as a percentage of net sales, while in the
increase in dollars was due to higher volume.

Costumes.
Cost of sales of our Costumes segment was $30.3 million, or 72.7% of related net sales for the three months ended June 30, 2026, compared
to $26.8 million, or 69.3% of related net sales for the prior year period, representing an increase of $3.5 million, or 13.1%. The increase
was due to higher product costs as a percentage of net sales on Costume product versus a year ago.

Selling,
General and Administrative Expenses

Selling,
general and administrative expenses were $45.1 million for the three months ended June 30, 2026 compared to $41.8 million for the prior
year period constituting 32.4% and 35.1% of net sales, respectively. Selling, general and administrative expenses were up $3.3 million
year over year due to slightly higher selling expenses and salaries and benefits.

Other
Income (Expense), net

Other Income (Expense), net was $7.0 million for
the three months ended June 30, 2026 compared to $25 thousand for the prior year period. The increase is mainly due to refunded import
tariff expenditures. A portion of the refund related to U.S. inventory still on hand as of June 30, 2026 was applied to these inventory
items to reduce their cost basis.

Provision for (Benefit from) Income Taxes

Our
income tax expense, which includes federal, state and foreign income taxes and discrete items, was $1.7 million, or an effective tax
rate of 22.5%, for the three months ended June 30, 2026. During the comparable period in 2025, our income tax benefit was $0.6 million,
or an effective tax rate of 20.7%. The increase in the effective tax rate is primarily attributable to an increase in tax expense from
discrete items recognized during the current-year period.

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Comparison
of the Six Months Ended June 30, 2026 and 2025

Net
Sales

Toys/Consumer
Products. Net sales of our Toys/Consumer Products segment were $197.6 million for the six months ended June 30, 2026 compared to
$187.8 million for the prior year period, representing an increase of $9.8 million, or 5.2%. The increase was driven by higher sales
in the Action Play and Collectibles division, up 33.7% versus a year ago, due to higher sales related to the Super Mario Movie product,
offset by 12.3% lower sales in the Dolls, Role-Play/Dress Up division.

Costumes.
Net sales of our Costumes segment were $48.3 million for the six months ended June 30, 2026 compared to $44.5 million for the prior year
period, representing an increase of $3.8 million, or 8.5%. The increase was primarily due to reduced orders a year ago from select recurring
customers as a result of the US tariffs.

Cost
of Sales

Toys/Consumer
Products. Cost of sales of our Toys/Consumer Products segment was $130.1 million, or 65.8% of related net sales for the six months
ended June 30, 2026 compared to $122.5 million, or 65.2% of related net sales for the prior year period, representing an increase of
$7.6 million, or 6.2%. Cost of sales as a percentage of related net sales was relatively flat year-over-year with the increase in dollars
due to greater overall sales.

Costumes.
Cost of sales of our Costumes segment was $35.2 million, or 72.9% of related net sales for the six months ended June 30, 2026, compared
to $31.8 million, or 71.5% of related net sales for the prior year period, representing an increase of $3.4 million, or 10.7%. The increase
as a percentage of net sales was due to higher net inventory reserves on Costume product versus a year ago.

Selling,
General and Administrative Expenses

Selling,
general and administrative expenses were $86.3 million for the six months ended June 30, 2026 compared to $84.6 million for the prior
year period constituting 35.1% and 36.4% of net sales, respectively. Selling, general and administrative expenses were up $1.7 million
year over year, with slightly higher selling expenses and salaries and benefits.

Other
Income (Expense), net

Other Income (Expense), net was $7.0 million for
the six months ended June 30, 2026 compared to $30 thousand for the prior year period. The increase is due to refunded import tariff expenditures.
A portion of the refund related to U.S. inventory still on hand as of June 30, 2026 was applied to these inventory items to reduce their
cost basis.

Provision for (Benefit from) Income Taxes

Our income tax expense, which includes federal,
state and foreign income taxes and discrete items, was $0.9 million, or an effective tax rate of 35.1%, for the six months ended June
30, 2026. During the comparable period in 2025, our income tax benefit was $1.8 million, or an effective tax rate of 27.3%. The increase
in the effective tax rate is primarily attributable to an increase in tax expense from discrete items recognized during the current-year
period.

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Seasonality
and Backlog

The
retail toy industry is inherently seasonal. Generally, our sales have been highest during the second and third quarters, and collections
for those sales have been highest during the succeeding fourth and first quarters. Our working capital needs have been highest during
the second and third quarters as we make royalty advance payments for some of our licenses and buy and sell inventory subject to customer
payment terms.

While we have taken steps to level sales over the entire year,
sales are e

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Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations

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-looking statements because 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.”

Critical Accounting Policies and Estimates

The accompanying consolidated financial statements
and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America.
Significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements, included within Item 8. Inherent in
the application of many of these accounting policies is the need for management to make estimates and judgments in the determination
of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change
and additional information becomes known. The estimates with the greatest potential effect on our results of operations and financial
position include:

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.

Goodwill. Goodwill represents the
excess of the purchase price over the fair values of the underlying net assets acquired in an acquisition. Goodwill is not amortized but
tested for impairment at least annually at the reporting unit level and asset level. The annual goodwill test is performed in the second
quarter and whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value,
we may assess goodwill for impairment using a qualitative assessment. Qualitative factors and their impact on critical inputs are assessed
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine
that a reporting unit has an indication of impairment based on the qualitative assessment, it is required to perform a quantitative assessment.
We may bypass the qualitative assessment and perform a quantitative assessment. Impairment is recognized in the amount by which, if any,
the carrying value of the reporting unit exceeds the fair value, not to exceed the carrying value of goodwill. We evaluate fair value
recoverability using both objective and subjective factors. Objective factors include cash flows and analysis of recent sales and earnings
trends. Subjective factors include our best estimates of projected future earnings and competitive analysis and the Company’s strategic
focus. We performed a quantitative assessment for Toys/Consumer Products reporting unit during Q2 2025, the fair value of which exceeded
its carrying amount by 26%. As of December 31, 2025, all our Goodwill of $35.1 million related to our Toys/Consumer Products reporting
unit.

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.

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Reserve for Inventory Obsolescence.
We value our inventory at the lower of cost or net realizable value. Based upon consideration of quantities on hand, actual and projected
sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is
written down to its net realizable value.

Failure to accurately predict and respond to consumer
demand could result in us under-producing popular items or over-producing less popular items. Furthermore, significant changes in demand
for our products would impact management’s estimates in establishing our inventory provision.

Management’s estimates are monitored on
a quarterly basis, and a further adjustment to reduce inventory to its net realizable value is recorded as an increase in the cost of
sales when deemed necessary under the lower of cost or net realizable value standard. Significant changes in the assumptions used to
develop the estimate could materially affect key financial measures, including gross profit, net income and inventories.

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.

Income taxes. We do not file a consolidated
return for our foreign subsidiaries. We file federal and state returns and our foreign subsidiaries each file returns in their respective
jurisdictions, as applicable. Deferred taxes are provided on an asset and liability method. Deferred tax assets are recognized as deductible
temporary differences, operating losses, or tax credit carry-forwards. Deferred tax liabilities are recognized as taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.

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.

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.

We recognize current period interest expense and
penalties and the reversal of previously recognized interest expense and penalties that has been determined to not be assessable due
to the expiration of the related audit period or other compelling factors on the income tax liability for unrecognized tax benefits as
a component of the income tax provision recognized in the consolidated statements of operations.

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Recent Accounting Pronouncements.

See Item 8 “Consolidated Financial Statements
and Supplementary Data Note 2 - Summary of Significant Accounting Policies.”

Results of Operations

The following table sets forth, for the periods
indicated, certain statement of operations data as a percentage of net sales. A discussion of the operating results for 2024 can be found
in our Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the SEC on March 6, 2025, in Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.

The following table summarizes, for the periods
indicated, certain statement of operations data by segment (in thousands).

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