What changed in this filing

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Item 1A. Risk Factors

2022-03-03 compared with 2021-03-11 · 135 added, 131 removed, 794 unchanged (25% of the section changed)

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BUSINESS, ECONOMIC, MARKET AND OPERATING RISKS

The COVID-19 pandemic has adversely impacted and could materially adversely impact our business, financial condition and results of operations.

In 2020, the COVID-19 outbreak was declared a pandemic and has spread throughout the world.

COVID-19 has caused and continues to cause significant loss of life and disruption to the global economy, including the curtailment of activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease, including through business and transportation shutdowns and restrictions on people’s movement and congregation.

As a result of the COVID-19 pandemic, we have experienced, weakened demand for our products, which has had a negative impact on our net sales and liquidity.

Beginning at the end of the first quarter of 2020 and continuing through the remainder of 2020, many of our retail customers were unable to sell our products in their stores due to government-mandated closures and temporarily reduced orders for our products.

While some of these closures have been lifted, due to the surge of cases in certain areas we expect to see additional closures, stores that reopened to close back down and/or delays in planned reopenings.

For example, certain regions in Europe implemented new restrictions and closures during the fourth quarter of 2020 in response to increased rates of infection.

We expect these trends to continue until infection rates are significantly reduced.

In addition, the pandemic has reduced foot traffic in the stores that remain open where our products are sold, and the global economic impact of the pandemic has reduced consumer demand for our products generally.

At the end of the second quarter of 2020 and through the third quarter of 2020 we began seeing a number of our key accounts reopening and remain open through the end of the year.

There can be no guarantees that this demand will be preserved.

In addition, in the year ended December 31, 2020, certain of our suppliers and the manufacturers of certain of our products were adversely impacted by COVID-19.

As a result, we faced delays or difficulty sourcing products, which negatively affected our business and financial results.

The impact on our supply chain and manufacturing could negatively affect our financial results for future reporting periods while the pandemic is ongoing.

The COVID-19 pandemic adversely impacted our business in 2020.

Ongoing impacts of the COVID-19 pandemic or its variants could materially adversely impact our business, financial condition and results of operations going forward.

In 2020, the COVID-19 outbreak was declared a pandemic and spread throughout the world.

COVID-19 and new variants of the virus have caused and continue to cause significant loss of life and disruption to the global economy.

Although by the end of December 31, 2021 our business, financial condition and operations did not experience a material effect from COVID-19, any renewed surge that leads to the curtailment of activities by businesses and consumers in much of the world, including as a result of restrictions imposed by governments and others to limit the spread of the disease and its variants such as through business and transportation shutdowns and restrictions on people’s movement and congregation, would adversely affect our business going forward.

In addition, during 2020 and through 2021, certain of our suppliers and the manufacturers of certain of our products have been adversely impacted by COVID-19.

As a result, we faced and continue to face delays and difficulty sourcing products, and significant increases in shipping costs, which have negatively affected our business and financial results.

If such supplier and manufacturer challenges continue or recur, the impact on our supply chain and manufacturing could negatively affect our financial results for future reporting periods.

Even if we are able to find alternate sources for such products, they may cost more, which could adversely impact our profitability and financial condition.

Additionally, we cannot assure you that our cash provided by operating activities, cash and cash equivalents or cash available under our Revolving Credit Facility will be sufficient to meet our future liquidity needs, particularly in light of the ongoing nature of the COVID-19 pandemic and its continuing impact on the global economy and consumer demand.

While we do not have any current plans to seek additional liquidity, we have evaluated options to improve our liquidity, such as the issuance of additional unsecured and secured debt, equity securities and equity-linked securities.

There can be no assurance when or whether any such issuance will occur, and any such financing may be material in nature and could result in significant additional borrowings or issuances of equity or equity-linked securities.

If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted, which may be significant.

If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations.

We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all.

Additionally, concerns over the economic impact of the COVID-19 pandemic have previously caused extreme volatility in financial and capital markets and may continue to do so in the future, which may materially adversely impact our stock price and our ability to access capital markets.

The COVID-19 pandemic continues to rapidly evolve.

The extent to which the pandemic impacts our business, liquidity, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the transmission rate of the disease, new variants or mutations in the disease, the duration and extent of the pandemic, the effectiveness, timing and distribution of vaccines, travel restrictions and social distancing in the United States, the United Kingdom and other countries in Europe, the duration and extent of business closures and business disruptions and the effectiveness of actions taken to contain, treat and prevent the disease.

The extent to which the pandemic impacts our business, liquidity, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the transmission rate of the disease, new variants or mutations in the disease, the duration and extent of the pandemic, the effectiveness, timing and distribution of vaccines and treatments, travel restrictions and social distancing in the United States, the United Kingdom and other countries in Europe, the duration and extent of business closures and business disruptions and the effectiveness of actions taken to contain, treat and prevent the disease.

If we or our retail customers continue to experience prolonged shutdowns or other business disruptions, our ability to conduct our business and, in turn, our liquidity, results of operations and financial condition, are likely to be materially and adversely affected.

Additionally, concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and capital markets, which has adversely impacted and may materially adversely impact our stock price and our ability to access capital markets.

Our success depends on our ability to execute our business strategy.

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however, this should not be considered indicative of our future performance.

In the year ended December 31, 2020, our net sales decreased 17.9% compared to our net sales in the year ended December 31, 2019.

Our future growth, profitability and cash flows depend upon our ability to successfully execute our business strategy, which is dependent upon a number of factors, including our ability to:

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We believe our ability to retain our license agreements depends, in large part, on the strength of our relationships with our licensors.

Any events or developments adversely affecting those relationships, or the loss of one or more members of our management team, particularly our chief executive officer, could adversely affect our ability to maintain and renew our license agreements on similar terms or at all.

Any events or developments adversely affecting those relationships, or the loss of one or more members of our management team, particularly our chief executive officer and chief creative officer, could adversely affect our ability to maintain and renew our license agreements on similar terms or at all.

Our top ten licensors collectively accounted for approximately 74%, 74% and 73% of our sales for the years ended December 31, 2021, 2020 and 2019, respectively.

Moreover, while we have separate licensing arrangements with Disney, LucasFilm and Marvel, these parties are all under common ownership by Disney and collectively these licensors accounted for approximately 43%, 41% and 38% of our sales for the years ended December 31, 2021, 2020 and 2019, respectively.

The termination or lack of renewal of one or more of our license agreements, or the renewal of a license agreement on less favorable terms, could have a material adverse effect on our business, financial condition and results of operations.

The termination or failure to renew one or more of our license agreements, or the renewal of a license agreement on less favorable terms, could have a material adverse effect on our business, financial condition and results of operations.

While we may enter into additional license agreements in the future, the terms of such license agreements may be less favorable than the terms of our existing license agreements.

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As of December 31, 2021, we had a reserve of $12.6 million on our balance sheet related to ongoing and future royalty audits, based on estimates of the costs we expect to incur.

In addition to royalty payments, these agreements as a whole impose numerous other obligations on us, including obligations to, among other things:

In addition to royalty payments, these agreements as a whole impose numerous other obligations on us, including, among other things, obligations to:

• maintain the integrity of the applicable intellectual property;

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A downturn in the retail industry in particular may disproportionately affect us because a substantial majority of our net sales are to retail customers.

In addition, our business is subject to significant pressure on costs and pricing caused by constrained sourcing capacity and related inflationary pressure, the availability of qualified labor and related wage inflation, and associated changes in consumer demand.

Significant increases in the costs of other products which are required by consumers, such as gasoline, home heating fuels, or groceries, may reduce household spending on our products.

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This in turn can reduce our sales and harm our financial performance and profitability.

In addition to experiencing potentially lower sales of our products during times of economic difficulty, in an effort to maintain sales during such times, we may need to reduce the price of our products, increase our promotional spending or sales allowances, or take other steps to encourage retailer and consumer purchases of our products.

In addition to experiencing potentially lower sales of our products during times of economic difficulty, in an effort to maintain sales during such times, we may need to increase our promotional spending or sales allowances, or take other steps to encourage retailer and consumer purchases of our products.

Those steps may lower our net sales or increase our costs, thereby decreasing our operating margins and lowering our profitability.

During periods of increased inflation or supply constraints, like we are currently facing, we have increased prices of certain products, and may in the future need to increase our prices further in order to cover increased costs of goods sold, which may reduce demand for our products and may not fully offset our increased costs.

Changes in the retail industry and markets for consumer products affecting our retail customers or retailing practices could negatively impact our business, financial condition and results of operations.

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As such, trends and changes in the retail industry can negatively impact our business, financial condition and results of operations.

For example, in 2020, the retail industry has experienced dramatic reductions in sales due to the store closures related to the COVID-19 pandemic and weakened consumer demand, which has adversely impacted our net sales.

For example, in 2020 and 2021, the retail industry has experienced dramatic reductions in sales due to the store closures related to the COVID-19 pandemic and weakened consumer demand, which has adversely impacted our net sales.

Prior to the onset of the COVID-19 pandemic, due to the challenging environment for traditional “brick-and-mortar” retail locations caused by declining in-store traffic, many retailers were closing physical stores, and some traditional retailers were engaging in significant reorganizations, filing for bankruptcy and going out of business.

We expect that the COVID-19 pandemic will exacerbate this trend.

In addition to furthering consolidation in the retail industry, such a trend could have a negative effect on the financial health of our retail customers and distributors, potentially causing them to experience difficulties in fulfilling their payment obligations to us or our distributors, reduce the amount of their purchases, seek extended credit terms or otherwise change their purchasing patterns, alter the manner in which they promote our products or the resources they devote to promoting and selling our products or cease doing business with us or our distributors.

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To do so, we must continue to increase the productivity of our existing employees and to hire, train and manage new employees as needed, which we may not be able to do successfully or without compromising our corporate culture.

See “Our success is critically dependent on the efforts and dedication of our officers and other employees, and the loss of one or more key employees, or our inability to attract and retain qualified personnel and maintain our corporate culture, could adversely affect our business.” To manage domestic and international growth of our operations and personnel, we will need to continue to improve our product development, supply chain, financial and management controls and our reporting processes and procedures and implement more extensive and integrated financial and business information systems.

See “Our success is critically dependent on the efforts and dedication of our officers and other employees, and the loss of one or more key employees, or our inability to attract and retain qualified personnel and maintain our corporate culture, could adversely affect our business.” To manage domestic and international growth of our operations and personnel, we have invested in the development of a new enterprise resource planning system, additional platforms to support our direct-to-consumer experience, and capital build out of new leased warehouse and office spaces.

We will need to continue to improve our product development, supply chain, financial and management controls and our reporting processes and procedures to support our infrastructure and new business initiatives.

These additional investments will increase our operating costs, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term.

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Alternatively, if demand or future sales do not reach forecasted levels, we could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard.

For example, inventories at the end of the fourth quarter 2021 increased 178% over the prior year period, primarily from longer transit times due to the COVID-19 pandemic’s impact on the global supply chain, resulting in a significant amount of inventory being “in transit” as of December 31, 2021.

If, as a result of longer transit times, consumer preferences have shifted by the time we receive inventory, demand for our products and our results of operations could be adversely affected.

If we are not successful in managing our inventory, our business, financial condition and results of operations could be adversely affected.

For example, in the fourth quarter of 2019, we wrote-down $16.8 million of inventory due to our decision to dispose of slower moving inventory to increase operational capacity which contributed to the Company's net loss for the period.

We may also be negatively affected by changes in retailers’ inventory policies and practices.

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If demand or future sales do not reach forecasted levels, we could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard.

If we are not successful in managing our inventory, our business, financial condition and results of operations could be adversely affected.

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It is their skill, creativity and hard work that drive our success.

In particular, our success depends to a significant extent on the continued service and performance of our senior management team, including our chief executive officer, Brian Mariotti.

We are dependent on his talents and believe he is integral to our relationships with our licensors and certain of our key retail customers.

In particular, our success depends to a significant extent on the continued service and performance of our senior management team, including our Chief Executive Officer, Andrew Perlmutter, and our former Chief Executive Officer and current Chief Creative Officer since January 3, 2022, Brian Mariotti.

We are dependent on their talents and continuing employment, and believe they are integral to our relationships with our licensors, certain of our key retail customers and to our overall selling and creative design processes.

The loss of any member of our senior management team, or of any other key employees, or the inability to successfully complete planned management transitions, could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, financial condition and results of operations.

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Our headquarters is located near Seattle and competition in the Seattle area for qualified personnel, particularly those with technology-related skills and experience, is intense due to the increasing number of technology and e-commerce companies with a large or growing presence in Seattle, some of whom have greater resources than us and may be located closer to the city of Seattle than we are.

In 2021, we also faced and we continue to face higher than normal recruitment and personnel costs in efforts to seek and retain qualified personnel.

Furthermore, as we continue to grow our business and hire new employees, it may become increasingly challenging to hire people who will maintain our corporate culture.

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If we were prevented from or delayed in obtaining a material portion of the products produced by our manufacturers, or if we were required to shift manufacturers (assuming we would be able to do so), our sales and profitability could be significantly reduced.

In addition, while we require that our products supplied by third-party manufacturers be produced in compliance with all applicable laws and regulations, and we have the right to monitor compliance by our third-party manufacturers with our manufacturing requirements and to oversee the quality control process at our manufacturers’ factories, there is always a risk that one or more of our third-party manufacturers will not comply with our requirements, and that we will not immediately discover such non-compliance.

In addition, while we require that our products supplied by third-party manufacturers be produced in compliance with all applicable laws and regulations, and we have the right to monitor compliance by our third-party manufacturers with our manufacturing requirements and to oversee the quality control process at our manufacturers’ factories, there is risk that one or more of our third-party manufacturers will not comply with our requirements, and that we will not promptly discover such non-compliance.

For example, the Consumer Product Safety Improvement Act of 2008 (the "CPSIA") limits the amounts of lead and phthalates that are permissible in certain products and requires that our products be tested to ensure that they do not contain these substances in amounts that exceed permissible levels.

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See “Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations.”

Historical data regarding our business, results of operations, financial condition and liquidity does not reflect the impact of the COVID-19 pandemic and related containment measures and therefore does not purport to be representative of our future performance.

The information included in this annual report and our other reports filed with the SEC includes information regarding our business, results of operations, financial condition and liquidity as of dates and for periods before or during the impact of COVID-19 and related containment measures (including border closings, quarantining, “shelter-in-place” orders and “social distancing”).

This historical information therefore does not fully reflect the adverse impacts of the COVID-19 pandemic and the related containment measures on our business.

Accordingly, investors are cautioned not to unduly rely on historical information regarding our business, results of operations, financial condition or liquidity, as that data does not fully reflect the adverse impact of COVID-19 and therefore does not purport to be representative of the future results of operations, financial condition, liquidity or other financial or operating results of our business.

Our operations, including our corporate headquarters, primary distribution facilities and third-party manufacturers, are concentrated in certain geographic regions, which makes us susceptible to adverse conditions in those regions.

Our corporate headquarters and primary distribution facilities are located in Everett, Washington.

Our corporate headquarters and primary distribution facilities are currently located in Everett, Washington .

We also have additional warehouse facilities and/or offices located in Coventry, England;

London, England;

Bath, England;

Burbank, California;

and Puyallup, Washington.

Puyallup, Washington, and Eindhoven, Netherlands, and we also recently announced our intention to consolidate our distribution facilities in the U.S.

into a new facility in Buckeye, Arizona.

In addition, the factories that produce most of our products are located in Vietnam, China and Mexico.

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Such conditions could include, among others, adverse economic and labor conditions, as well as demographic trends.

Furthermore, Everett is the location from which most of the products we sell are received, stored and shipped to our customers.

Furthermore, Everett is currently the location from which most of the products we sell are received, stored and shipped to our customers.

We depend heavily on ocean container delivery to receive products from our third-party manufacturers located in Asia and contracted third-party delivery service providers to deliver our products to our distribution facilities.

Any disruption to or failures in these delivery services, whether as a result of extreme or severe weather conditions, natural disasters, labor unrest or otherwise, affecting western Washington in particular, or the West Coast in general, or in other areas in which we operate, could significantly disrupt our operations, damage or destroy our equipment and inventory and cause us to incur additional expenses, any of which could have a material adverse effect on our business, financial condition and results of operations.

In addition, in the year ended December 31, 2020, certain of our suppliers and the manufacturers of certain of our products were adversely impacted by COVID-19.

Any disruption to or failures in these delivery services, whether as a result of extreme or severe weather conditions, natural disasters, labor unrest or otherwise, affecting western Washington or Arizona in particular, or the West Coast in general, or in other areas in which we operate, could significantly disrupt our operations, damage or destroy our equipment and inventory and cause us to incur additional expenses, any of which could have a material adverse effect on our business, financial condition and results of operations.

For example, in 2020 and through 2021, certain of our suppliers and the manufacturers of certain of our products have been adversely impacted by COVID-19.

As a result, we faced delays or difficulty sourcing products, which negatively affected our business and financial results.

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Sales to our international customers comprised approximately 28%, 25% and 34% of our sales for the years ended December 31, 2021, 2020 and 2019, respectively.

We expect sales to our international customers to account for an increasing portion of our sales in future fiscal years, including as a result of our 2017 acquisition of Underground Toys and the formation of our subsidiary Funko UK, Ltd., through which we now sell directly to certain of our customers in Europe, the Middle East and Africa.

In fact, over time, we expect our international sales and operations to continue to grow both in dollars and as a percentage of our overall business as a result of a key business strategy to expand our presence in emerging and underserved international markets.

We expect sales to our international customers to account for an increasing portion of our sales in future fiscal years.

Over time, we expect our international sales and operations to continue to grow both in dollars and as a percentage of our overall business as a result of a key business strategy to expand our presence in emerging and underserved international markets.

Additionally, as discussed above, we use third-party manufacturers located in Vietnam, China and Mexico to produce most of our products.

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• potential challenges to our transfer pricing determinations and other aspects of our cross-border transactions, which can materially increase our taxes and other costs of doing business;

• political instability, civil unrest and economic instability;

• political instability, civil unrest, war and economic instability, such as the current situation with Ukraine and Russia;

• greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;

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Certain of the products we purchase from manufacturers in China have been or may in the future be subject to these tariffs, which could make our products less competitive than those of our competitors whose inputs are not subject to these tariffs.

In addition, the U.S.

administration has threatened to impose tariffs on all products imported from China, which would impact all of our products and supplies imported from China to the United States.

If this were to occur, we may not be able to mitigate the impacts of these tariffs, and our business, results of operations and financial position would be materially adversely affected.

Products we sell into certain foreign markets could also become subject to similar retaliatory tariffs, making the products we sell uncompetitive compared to similar products not subjected to such import tariffs.

More recently, the U.S.

government enacted the Uyghur Forced Labor Prevention Act, which bars the importation into the United States of products made from forced labor in the Xinjiang region of China.

The Xinjiang region of China is the source of a large portion of the world's cotton supply and this import ban may impact prices and the availability of cotton for our clothing products.

company, we are subject to U.S.

export control and economic sanctions laws and regulations, and we are required to export our products in compliance with those laws and regulations, including the U.S.

Export Administration Regulations and economic and trade sanctions programs administered by the Treasury Department’s Office of Foreign Assets Control.

economic sanctions and export control laws and regulations prohibit the shipment of specified products and services to countries, governments and persons that are the subject of U.S.

While we take precautions against doing any business, directly or indirectly, in or with countries, governments and persons subject to U.S.

sanctions, such measures may be circumvented.

There can be no assurance that we will be in compliance with U.S.

export control or economic sanctions laws and regulations in the future.

Any such violation could result in criminal or civil fines, penalties or other sanctions and repercussions, including reputational harm that could materially adversely affect our business.

Further changes in U.S.

trade policies, tariffs, taxes, export restrictions or other trade barriers, or restrictions on raw materials or components may limit our ability to produce products, increase our manufacturing costs, decrease our profit margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase raw materials or components, which would have a material adverse effect on our business, results of operations and financial condition.

The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

Following a national referendum and enactment of legislation by the government of the United Kingdom, the United Kingdom withdrew from the European Union ("Brexit") on January 31, 2020 and ratified an agreement on the future trading relationship between the parties (the “UK-EU Trade and Cooperation Agreement” or “TCA”) in December 2020, relating to the future trading relationship between the parties.

The TCA is subject to formal approval by the European Parliament and the Council of the European Union before it comes into effect and has been applied provisionally since January 1, 2021.

Because the agreement merely sets forth a framework in many respects and will require complex additional bilateral negotiations between the United Kingdom and the European Union as both parties continue to work on the rules for implementation, significant political and economic uncertainty remains about whether the relationship will differ materially from the terms before withdrawal.

The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

The agreement, which entered into force May 1, 2021, addresses trade, economic arrangements, law enforcement, judicial cooperation and a governance framework including procedures for dispute resolution, among other things.

Because the agreement merely sets forth a framework in many respects and will require complex additional bilateral negotiations between the United Kingdom and the European Union as both parties continue to work on the rules for implementation, significant political and economic uncertainty remains about how the precise terms of the relationship between the parties will differ from the terms before withdrawal.

These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets.

Asset valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility.

Lack of clarity about future United Kingdom laws and regulations, including financial laws and regulations, tax and free trade agreements, intellectual property rights, privacy and data protection, environmental, health and safety laws and regulations and employment laws, could increase costs and depress economic activity.

If other European Union member states pursue withdrawal, barrier-free access between the United Kingdom and other European Union member states or among the European economic area overall could be diminished or eliminated.

Any of these factors could have a material adverse effect on our business, financial condition and results of operations.

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Any shortcoming of one of our vendors or outsourcers, including our third party logistics providers, particularly one affecting the quality of these services or systems, may be attributed by customers to us, thus damaging our reputation and brand value, and potentially affecting our results of operations.

This includes potential shipping delays as a result of container availability or other global capacity constraints.

In addition, problems with transitioning these services and systems to, or operating failures with, these vendors and outsourcers could cause delays in product sales, reduce the efficiency of our operations and require significant capital investments to remediate.

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The imposition of any penalties or other remedial measures could have a material adverse effect on our business, results of operations, and financial condition.

We could also incur additional expenses related to remedial measures, including those that we are implementing in response to our conclusion that we have a material weakness in our internal control over financial reporting.

We could also incur additional expenses related to remedial measures, including those that we are implementing in response to our conclusion that we had a material weakness in our internal control over financial reporting.

Our e-commerce business is subject to numerous risks that could have an adverse effect on our business and results of operations.

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For example, on March 10, 2020, a purported stockholder of the Company filed a putative class action lawsuit in the United States District Court for the Central District of California against us and certain of our officers, entitled Ferreira v.

The complaint alleges that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as Rule 10b-5 promulgated thereunder, by making allegedly materially misleading statements in our earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, as well as by omitting material facts necessary to make the statements made therein not misleading.

The lawsuit seeks, among other things, compensatory damages and attorneys’ fees and costs.

Two additional complaints making substantially similar allegations— Nahas v.

and Dachev v.

—were filed April 3, 2020 in the United States District Court for the Central District of California and April 9, 2020 in the United States District Court for the Western District of Washington, respectively.

On June 11, 2020, the Central District of California actions were consolidated for all purposes into one action under the Ferreira caption, and a lead plaintiff and lead counsel were appointed pursuant to the Private Securities Litigation Reform Act.

Lead plaintiff filed the consolidated complaint on July 31, 2020, against us and certain of our officers and directors, as well as entities affiliated with ACON.

The consolidated complaint added Section 10(b) and 20(a) claims based on our earnings announcement and Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, as well as claims under Section 20A of the Securities Exchange Act of 1934.

All defendants moved to dismiss the consolidated action on October 2, 2020, and briefing on the motions to dismiss concluded on January 29, 2021.

On February 26, 2021, the Court granted our motion to dismiss the Ferreira action, allowing the plaintiffs leave to amend the complaint.

On June 25, 2020, the Dachev action was voluntarily dismissed.

Five shareholder derivative actions based on the earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 have been brought on behalf of the Company against certain of our directors and officers.

The original complaint alleged that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as Rule 10b-5 promulgated thereunder, by making allegedly materially misleading statements in our earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, as well as by omitting material facts necessary to make the statements made therein not misleading.

The lawsuit sought, among other things, compensatory damages and attorneys’ fees and costs.

Two additional complaints making substantially similar allegations were filed April 3, 2020 in the United States District Court for the Central District of California and April 9, 2020 in the United States District Court for the Western District of Washington, respectively.

On June 11, 2020, the Central District of California actions were consolidated for all purposes into one action under the Ferreira caption, and lead plaintiffs and lead counsel were appointed pursuant to the Private Securities Litigation Reform Act;

shortly thereafter, the Western District of Washington action was voluntarily dismissed.

Lead plaintiffs filed the consolidated complaint on July 31, 2020, against us and certain of our officers and directors, as well as entities affiliated with ACON.

All defendants moved to dismiss the consolidated action on October 2, 2020, and on February 25, 2021, the Court granted all defendants’ motions to dismiss the Ferreira action, allowing the lead plaintiffs leave to amend the complaint.

Lead plaintiffs filed their amended complaint on March 29, 2021, and all defendants moved to dismiss.

On October 25, 2021, the Court issued an order granting defendants’ motion in part and denying the motion in part.

Specifically, the court dismissed with prejudice all claims related to statements regarding Funko’s projected net sales and the claims based on inventory risk warnings in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, but denied the motion to dismiss as to claims based on inventory risk warnings in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.

Several shareholder derivative actions based on the earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 have been brought on behalf of the Company against certain of our directors and officers.

Specifically, on April 23, June 5, and June 10, 2020, the actions captioned Cassella v.

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These two actions were consolidated for all purposes into one action under the title In re Funko, Inc.

Stockholder Derivative Litigation on September 8, 2020.

On October 30, 2020, the consolidated action was transferred to the United States District Court for the Central District of California.

The complaints filed in the shareholder derivative actions have alleged breaches of fiduciary duties, unjust enrichment, waste of corporate assets, insider trading, and violations of the Exchange Act.

The actions seek, among other things, payment of damages to the Company and to disgorge the directors and officers from all profits and benefits they obtained due to their alleged wrongful conduct.

Stockholder Derivative Litigation on September 8, 2020 and were subsequently transferred to the United States District Court for the Central District of California.

On April 23, 2021, both cases pending under the “Stockholder Derivative Litigation” caption were voluntarily dismissed, without prejudice.

On June 11, 2021, one of those purported stockholders filed an additional derivative action, captioned Silverberg v.

Mariotti, et al.

, was filed in the Court of Chancery of the State of Delaware.

In response, on July 8, 2021, the Company moved to stay and dismiss the action.

On December 1, 2021, Silverberg stipulated to a stay of the action pending resolution of Ferreira v.

Funko, Inc., et al.

2:20-cv-02319.

Additionally, between November 16, 2017 and June 12, 2018, seven purported stockholders of the Company filed putative class action lawsuits in the Superior Court of Washington in and for King County against us, certain of our officers and directors, ACON, Fundamental, the underwriters of our IPO, and certain other defendants.

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The motion was fully briefed as of November 30, 2018, and oral argument on the motion was held on May 3, 2019.

On August 2, 2019, the Court granted our motion to dismiss the consolidated state litigation, allowing plaintiffs leave to amend the complaint.

The Court found, inter alia, that “Funko’s statements regarding its financial disclosures were not materially false or misleading” and that “plaintiffs have not shown that Funko’s ‘opinion statements’ were false or that such statements were not simply corporate optimism or puffery.” On October 3, 2019, plaintiffs filed a first amended consolidated complaint.

We moved to dismiss that complaint on December 5, 2019.

The motion was fully briefed as of March 17, 2020, and oral argument on the motion was held on May 15, 2020.

On August 5, 2020, the Superior Court of Washington in and for King County dismissed the consolidated action with prejudice.

Plaintiffs filed a notice of appeal to the Washington Court of Appeals on September 4, 2020 and their opening brief on February 12, 2021.

We expect briefing on the appeal to conclude mid-2021.

On August 2, 2019, the Court granted our motion to dismiss the action, allowing plaintiffs leave to amend the complaint.

On October 3, 2019, plaintiffs filed a first amended consolidated complaint.

We moved to dismiss that complaint on December 5, 2019 and on August 5, 2020, the Superior Court of Washington in and for King County dismissed the consolidated action with prejudice.

Plaintiffs appealed and on November 1, 2021, the Court of Appeals reversed the trial court’s dismissal decision in most respects, and remanded the case to the trial court for further proceedings.

On January 13, 2022, we filed a petition seeking review of the Washington State Court of Appeals’ reversal by the Washington Supreme Court.

That petition is pending, and accordingly the case has not yet been remanded to the trial court.

On June 4, 2018, a putative class action lawsuit entitled Kanugonda v.

Funko, Inc., et al.

was filed in the United States District Court for the Western District of Washington against us, certain of our officers and directors, and certain other defendants.

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, have agreed to a stay of that action pending developments in the state case.

The complaints in Washington state court and Berkelhammer v.

The cases in Washington state court and Berkelhammer v.

allege that we violated Sections 11, 12, and 15 of the Securities Act of 1933, as amended, by making allegedly materially misleading statements in documents filed with the U.S.

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The lawsuits seek, among other things, compensatory statutory damages and rescissory damages in account of the consideration paid for our Class A common stock by the plaintiffs and members of the putative class, as well as attorneys’ fees and costs.

Finally, on December 8, 2020 and February 3, 2021, two purported stockholders of the Company filed complaints against us in the Court of Chancery of the State of Delaware to compel inspection of books and records pursuant to 8 Del.

Those actions, captioned Silverberg v.

and De La Combe v.

, respectively, are pending.

On January 18, 2022, a stockholder filed a putative class action lawsuit in the Court of Chancery of the State of Delaware relating to our corporate “Up-C” structure and bringing direct claims for breach of fiduciary duties against certain current and former officers and directors.

On February 14, 2022, we moved to dismiss the complaint.

A briefing schedule on the motion to dismiss has not yet been set.

The results of the securities class action lawsuit and any future legal proceedings cannot be predicted with certainty.

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Acquisitions can broaden and diversify our brand holdings and product offerings, expand our distribution capabilities and allow us to build additional capabilities and competencies.

For example, in the case of the Underground Toys Acquisition, we looked to strengthen our ability to sell our products directly to international retailers, primarily those located in Europe, and reduce our reliance on third-party distributors in Europe and certain other international jurisdictions.

However, we cannot be certain that the products and offerings of companies we may acquire, or acquire an interest in, will achieve or maintain popularity with consumers in the future or that any such acquired companies or investments will allow us to more effectively distribute our products, market our products, develop our competencies or to grow our business.

We cannot be certain that the products and offerings of companies we may acquire, or acquire an interest in, will achieve or maintain popularity with consumers in the future or that any such acquired companies or investments will allow us to more effectively distribute our products, market our products, develop our competencies or grow our business.

For example, in the first quarter of 2021, we acquired a majority interest in TokenWave LLC, the developer of a mobile application for tracking and displaying non-fungible tokens, or NFTs, to accelerate our entry into the digital collectible space.

We launched our first Digital Pop!

NFT collection in the third quarter of 2021 and we currently plan to conduct future NFT “drops” on a regular cadence.

The market and consumer demand for NFT and digital collectible products is new, rapidly developing and highly uncertain.

No assurance can be given that our investment in TokenWave LLC, or our development or future launch of NFT or digital collectible products, will be successful.

We may have increased financial and reputational risks if there is a security or system failure or if there is a failure to launch one or more products.

In addition, NFT products have new and different risks than our other consumer products, including potential consumer litigation or regulatory challenge, which could harm our financial results.

In some cases, we expect that the integration of the companies that we may acquire into our operations will create production, distribution, marketing and other operating synergies which will produce greater sales growth and profitability and, where applicable, cost savings, operating efficiencies and other advantages.

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We are critically dependent on the integrity, security and consistent operations of these systems and related back-up systems.

These systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, malware and other security breaches, catastrophic events such as hurricanes, fires, floods, earthquakes, tornadoes, acts of war or terrorism and usage errors by our employees.

These systems are subject to damage or interruption from power outages, computer and telecommunications failures, usage errors by our employees, software bugs or misconfigurations, cybersecurity attacks, computer viruses, malware and other security breaches, as well as catastrophic events such as hurricanes, fires, floods, earthquakes, tornadoes, acts of war or terrorism, and global pandemics.

The efficient operation and successful growth of our business depends on these information systems, including our ability to operate and upgrade them effectively and to select and implement adequate disaster recovery systems successfully.

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Our indebtedness could adversely affect our financial health and competitive position.

On October 22, 2018, we entered into the Credit Agreement dated October 22, 2018 (as amended, the "Credit Agreement"), providing for a term loan facility in the amount of $235.0 million (the "Term Loan Facility") and a revolving credit facility of $50.0 million (the "Revolving Credit Facility" and together with the Term Loan Facility, the "Credit Facilities") (which was increased to $75.0 million on February 11, 2019).

As of December 31, 2020, we had $190.8 million of indebtedness outstanding under our Credit Facilities, consisting of $190.8 million outstanding under our Term Loan Facility (net of unamortized discount of $3.1 million) and no outstanding borrowings under our Revolving Credit Facility.

On September 17, 2021, we entered into a new credit agreement (the "New Credit Agreement"), providing for a term loan facility in the amount of $180.0 million (the "New Term Loan Facility") and a revolving credit facility of $100.0 million (the "New Revolving Credit Facility" and together with the New Term Loan Facility, the " New Credit Facilities").

Proceeds from the New Term Loan Facility were primarily used to repay the Company’s former term loan facility.

As of December 31, 2021, we had $173.2 million of indebtedness outstanding under our New Credit Facilities, consisting of $173.2 million outstanding under our New Term Loan Facility (net of unamortized discount of $2.3 million) and no outstanding borrowings under our New Revolving Credit Facility.

In order to service this indebtedness and any additional indebtedness we may incur in the future, we need to generate cash.

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• consolidate, merge or sell or otherwise dispose of our assets;

• alter the business conducted by us and our subsidiaries;

• make investments, loans, advances, guarantees and acquisitions;

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• enter into transactions with our affiliates;

• enter into sale and leaseback transactions in respect to real property;

• enter into swap agreements;

• enter into agreements restricting our subsidiaries’ ability to pay dividends;

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• amend or modify our governing documents.

The restrictive covenants in the Credit Agreement also require us to maintain specified financial ratios, other than during the Waiver Period.

The restrictive covenants in the New Credit Agreement also require us to maintain specified financial ratios.

While we have not previously breached and are not in breach of any of these covenants, there can be no guarantee that we will not breach these covenants in the future.

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Our failure to comply with any of these covenants or restrictions could result in an event of default under our credit facilities.

This would permit the lending banks under such facilities to take certain actions, including terminating all outstanding commitments and declaring all amounts due under our credit agreement to be immediately due and payable, including all outstanding borrowings, accrued and unpaid interest thereon, and prepayment premiums with respect to such borrowings and any terminated commitments.

This would permit the lending banks under such facilities to take certain actions, including terminating all outstanding commitments and declaring all amounts due under our New Credit Agreement to be immediately due and payable, including all outstanding borrowings, accrued and unpaid interest thereon, and prepayment premiums with respect to such borrowings and any terminated commitments.

In addition, the lenders would have the right to proceed against the collateral we granted to them, which includes substantially all of our assets.

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In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances, and may determine to engage in equity or debt financings or enter into credit facilities or refinance existing indebtedness for other reasons.

As a result of the COVID-19 pandemic, we are currently evaluating additional options to improve our liquidity, such as the issuance of additional unsecured and secured debt, equity securities and equity-linked securities.

We may not be able to timely secure additional debt or equity financing on favorable terms, or at all, including due to market volatility and uncertainty resulting from the COVID-19 pandemic.

As discussed above, the Credit Agreement contains restrictive covenants that limit our ability to incur additional indebtedness and engage in other capital-raising activities.

As discussed above, the New Credit Agreement contains restrictive covenants that limit our ability to incur additional indebtedness and engage in other capital-raising activities.

Any debt financing obtained by us in the future could involve covenants that further restrict our capital raising activities and other financial and operational matters, which may make it more difficult for us to operate our business, obtain additional capital and pursue business opportunities, including potential acquisitions.

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Each share of our Class A common stock and Class B common stock entitles its holders to one vote per share on all matters presented to our stockholders.

As of March 9, 2021, ACON holds approximately 39.8% of the combined voting power of our common stock through its ownership of 10,934,606 shares of our Class A common stock and 8,882,120 shares of our Class B common stock.

Based on a Form 4, filed on February 18, 2022, ACON holds approximately 34.2% of the combined voting power of our common stock through its ownership of 9,604,766 shares of our Class A common stock and 7,789,936 shares of our Class B common stock, as of March 1, 2022.

Accordingly, ACON will have significant influence over substantially all transactions and other matters submitted to a vote of our stockholders, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, the issuance or redemption of certain additional equity interests, and the election of directors.

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In addition, the structuring of future transactions may take into consideration tax or other considerations of the Continuing Equity Owners even in situations where no similar considerations are relevant to us.

In addition, pursuant to the Stockholders Agreement between Funko, Inc., ACON, Fundamental and Brian Mariotti, our chief executive officer (the “Stockholders Agreement”), ACON has the right to designate certain of our directors, which we refer to as the ACON Directors, which will be three ACON Directors for as long as ACON directly or indirectly, beneficially owns, in the aggregate 35% or more of our Class A common stock, two ACON Directors for so long as ACON, directly or indirectly, beneficially owns, in the aggregate, less than 35% but at least 25% or more of our Class A common stock and one ACON Director for as long as ACON, directly or indirectly, beneficially owns, in the aggregate, less than 25% but at least 15% or more of our Class A common stock (assuming in each such case that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis).

Each of ACON, Fundamental, and Brian Mariotti, our chief executive officer, will also agree to vote, or cause to vote, all of their outstanding shares of our Class A common stock and Class B common stock at any annual or special meeting of stockholders in which directors are elected, so as to cause the election of the ACON Directors and Mr.

Mariotti for as long as he is our chief executive officer.

In addition, pursuant to the Stockholders Agreement between Funko, Inc., ACON, Fundamental and Brian Mariotti, our chief creative officer (the “Stockholders Agreement”), ACON has the right to designate certain of our directors, which we refer to as the ACON Directors, which will be two ACON Directors for as long as ACON directly or indirectly, beneficially owns, in the aggregat e, less than 35% but at least 25% o r more of our Class A common stock and one ACON Director for as long as ACON, directly or indirectly, beneficially owns, in the aggregate, less than 25% but at least 15% or more of our Class A common stock (assuming in each such case that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis).

Each of ACON, Fundamental, and Brian Mariotti, our chief creative officer, will also agree to vote, or cause to vote, all of their outstanding shares of our Class A common stock and Class B common stock at any annual or special meeting of stockholders in which directors are elected, so as to cause the election of the ACON Directors.

Additionally, pursuant to the Stockholders Agreement, we shall take all commercially reasonable action to cause (1) the board of directors to be comprised of at least seven directors or such other number of directors as our board of directors may determine;

(2) the individuals designated in accordance with the terms of the Stockholders Agreement to be included in the slate of nominees to be elected to the board of directors at the next annual or special meeting of our stockholders at which directors are to be elected and at each annual meeting of our stockholders thereafter at which a director’s term expires;

(3) the individuals designated in accordance with the terms of the Stockholders Agreement to fill the applicable vacancies on the board of directors;

and (4) an ACON Director to be the chairperson of the board of directors (as defined in the amended and restated bylaws).

and (3) the individuals designated in accordance with the terms of the Stockholders Agreement to fill the applicable vacancies on the board of directors.

In addition, the Stockholders Agreement provides that for as long as ACON or certain related parties, as defined in the Stockholders Agreement (the “ACON Related Parties”), beneficially own, directly or indirectly, in the aggregate, 30% or more of all issued and outstanding shares of our Class A common stock (assuming that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis), we will not take, and will cause our subsidiaries not to take, certain actions or enter into certain transactions (whether by merger, consolidation, or otherwise) without the prior written approval of ACON and each of its affiliated funds that hold common units of FAH, LLC or our Class A common stock, including:

• entering into any transaction or series of related transactions in which any person or group (other than the ACON Related Parties and any group that includes the ACON Related Parties, Fundamental (or certain of its affiliates or permitted transferees) or Mr.

Mariotti) acquires, directly or indirectly, in excess of 50% of the then outstanding shares of any class of our or our subsidiaries’ capital stock, or following which any such person or group has the direct or indirect power to elect a majority of the members of our board of directors or to replace us as the sole manager of FAH, LLC (or to add another person as co-manager of FAH, LLC);

Mariotti) acquires, directly or indirectly, in excess of 50% of the then outstanding shares of any class of our or our subsidiaries’

capital stock, or following which any such person or group has the direct or indirect power to elect a majority of the members of our board of directors or to replace us as the sole manager of FAH, LLC (or to add another person as co-manager of FAH, LLC);

• the reorganization, recapitalization, voluntary bankruptcy, liquidation, dissolution or winding up of us or any of our subsidiaries;

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Upon consummation of the IPO, we became a holding company and have no material assets other than our ownership of 40,088,451 common units of FAH, LLC as of December 31, 2021, representing approximately 77.3% of the economic interest in FAH, LLC.

We have no independent means of generating revenue or cash flow, and our ability to pay dividends in the future, if any, is dependent upon the financial results and cash flows of FAH, LLC and its subsidiaries and distributions we receive from FAH, LLC.

We have no independent means of generating revenue or cash flow, and our ability to pay dividends in the future, if any, is dependent upon the financial results and cash flows of FAH, LLC and

its subsidiaries and distributions we receive from FAH, LLC.

There can be no assurance that our subsidiaries will generate sufficient cash flow to dividend or distribute funds to us or that applicable local law and contractual restrictions, including negative covenants in our debt instruments, will permit such dividends or distributions.

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Funds we receive from FAH, LLC to satisfy its tax distribution obligations will not be available for reinvestment in our business.

To the extent we do not distribute such cash balances as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to FAH, LLC, the Continuing Equity Owners would benefit from any value attributable to such accumulated cash balances as a result of their ownership of Class A common stock following an exchange of their common units for Class A common stock.

Our board of directors will determine the appropriate uses for any excess cash so accumulated, which may include, among other uses, the payment of a cash dividend on our Class A common stock, the payment of obligations under the Tax Receivable Agreement, the declaration of a stock dividend on our Class A common stock, along with the purchase of a corresponding number of common units in FAH, LLC, or the purchase of additional common units in FAH, LLC, along with a recapitalization of all of the outstanding common units in FAH, LLC.

To the extent we do not take such actions and instead, for example, hold such cash balances or lend them to FAH, LLC, the Continuing Equity Owners would benefit from any value attributable to such accumulated cash balances as a result of their ownership of Class A common stock following an exchange of their common units for Class A common stock.

Our Tax Receivable Agreement with the Continuing Equity Owners requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, the amounts that we may be required to pay could be significant, and we may not realize such tax benefits.

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OWNERSHIP OF OUR CLASS A COMMON STOCK RISKS

The Continuing Equity Owners own common units in FAH, LLC, and the Continuing Equity Owners will have the right to redeem their common units in FAH, LLC pursuant to the terms of the FAH LLC Agreement for shares of Class A common stock or cash.

The Continuing Equity Owners own common units in FAH, LLC, and the Continuing Equity Owners have the right to redeem their common units in FAH, LLC pursuant to the terms of the FAH LLC Agreement for shares of Class A common stock or cash.

As of March 1, 2022, we had an aggregate of 159,802,186 shares of Class A common stock authorized but unissued, as well as approximately 11,752,329 shares of Class A common stock issuable, at our election, upon redemption of FAH, LLC common units held by the Continuing Equity Owners.

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• our board of directors is classified into three classes, each of which serves for a staggered three-year term;

• only the chairperson of our board of directors or a majority of our board of directors may call special meetings of our stockholders, except that at such time as ACON, certain of its affiliates and their permitted transferees, which we collectively refer to as the ACON Related Parties, directly or indirectly, beneficially own in the aggregate, 35% or more of all shares of Class A common stock (including for this purpose all shares of Class A common stock issuable upon redemption of common units, assuming all such common units are redeemed for Class A common stock on a one-for-one basis) issued and outstanding, the holders of a majority in voting power of the outstanding shares of our capital stock may also call special meetings of our stockholders;

• only the chairperson of our board of directors or a majority of our board of directors may call special meetings of our stockholders;

• we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

• any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a written consent is signed by the holders of our outstanding shares of common stock representing not less than the minimum number of votes that would be necessary to authorize such action at a meeting at which all outstanding shares of common stock entitled to vote thereon were present and voted, provided that at such time as the ACON Related Parties, directly or indirectly, beneficially own in the aggregate, less than 35% of all shares of Class A common stock (including for this purpose all shares of Class A common stock issuable upon redemption of common units, assuming all such common units are redeemed for Class A common stock on a one-for-one basis) issued and outstanding, any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may not be taken by written consent in lieu of a meeting;

• our amended and restated certificate of incorporation may be amended or repealed by the affirmative vote of a majority of the votes which all our stockholders would be eligible to cast in an election of directors and our amended and restated bylaws may be amended or repealed by a majority vote of our board of directors or by the affirmative vote of a majority of the votes which all our stockholders would be eligible to cast in an election of directors, provided that at such time as the ACON Related Parties, directly or indirectly, beneficially own in the aggregate, less than 35% of all shares of Class A common stock (including for this purpose all shares of Class A common stock issuable upon redemption of common units, assuming all such common units are redeemed for Class A common stock on a one-for-one basis) issued and outstanding, our amended and restated certificate of incorporation and our amended and restated bylaws may be amended or repealed by the affirmative vote of the holders of at least 66 2 / 3 % of the votes which all our stockholders would be entitled to cast in any annual election of directors and our amended and restated bylaws may also be amended or repealed by a majority vote of our board of directors;

• any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may not be taken by written consent in lieu of a meeting;

• our amended and restated certificate of incorporation and our amended and restated bylaws may be amended or repealed by the affirmative vote of the holders of at least 66 2 / 3 % of the votes which all our stockholders would be entitled to cast in any annual election of directors and our amended and restated bylaws may also be amended or repealed by a majority vote of our board of directors;

• we require advance notice and duration of ownership requirements for stockholder proposals;

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We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act.

We could be an emerging growth company until December 31, 2022.

We will be an emerging growth company until December 31, 2022.

We cannot predict if investors will find our Class A common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our Class A common stock.

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Once we are no longer an emerging growth company, Section 404(b) of the Sarbanes-Oxley Act will require our independent registered public accounting firm to issue an annual report that addresses the effectiveness of our internal control over financial reporting.

As of December 31, 2019, we had identified a material weakness in our internal control over financial reporting based on the effects of the underpayment of customs duties at Loungefly, which was remediated during the year ended December 31, 2020.

As a result of this material weakness or any other material weakness that may be identified in the future, our senior management was and may in the future be unable to conclude that we have effective internal control over financial reporting, and our independent registered public accounting firm may not be able to render an unqualified opinion on management’s assessment and the effectiveness of our internal control over financial reporting at such time as it is required to do so.

We have in the past identified material weaknesses in our internal control over financial reporting.

As a result of any other material weakness that may be identified in the future, our senior management may in the future be unable to conclude that we have effective internal control over financial reporting, and our independent registered public accounting firm may not be able to render an unqualified opinion on management’s assessment and the effectiveness of our internal control over financial reporting at such time as it is required to do so.

In addition, we could be subject to sanctions or investigations by the SEC, the Nasdaq Stock Market or other regulatory authorities, a loss of public and investor confidence, and litigation from investors and stockholders, any of which could have a material adverse effect on our business and our stock price.

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Depreciation in key currencies during 2022 and beyond may have a significant negative impact on our sales and earnings as they are reported in U.S.

We are subject to governmental economic sanctions requirements and export and import controls that could impair our ability to compete in international markets or subject us to liability if we are not in compliance with applicable laws.

company, we are subject to U.S.

export control and economic sanctions laws and regulations, and we are required to export our products in compliance with those laws and regulations, including the U.S.

Export Administration Regulations and economic and trade sanctions programs administered by the Treasury Department’s Office of Foreign Assets Control.

economic sanctions and export control laws and regulations prohibit the shipment of specified products and services to countries, governments and persons that are the subject of U.S.

While we take precautions against doing any business, directly or indirectly, in or with countries, governments and persons subject to U.S.

sanctions, such measures may be circumvented.

There can be no assurance that we will be in compliance with U.S.

export control or economic sanctions laws and regulations in the future.

Any such violation could result in criminal or civil fines, penalties or other sanctions and repercussions, including reputational harm that could materially adversely affect our business.

If our electronic data is compromised our business could be significantly harmed.

We maintain significant amounts of data electronically.

This data relates to all aspects of our business, including current and future products and entertainment under development, and also contains certain customer, consumer, supplier, partner and employee data.

If our or our third-party providers' electronic data is compromised our business could be significantly harmed.

We rely extensively on various information technology systems and software applications (collectively “IT Systems”) for internal and external operations and while we operate certain of these IT Systems, we also rely on third-party providers for a host of technologies, products and services.

In addition, in the ordinary course of business, both we and our third-party providers collect, process and maintain significant amounts of data electronically, including proprietary and confidential business information as well as personal information.

This data relates to all aspects of our business, including but not limited to current and future products and entertainment under development, and also contains certain customer, consumer, supplier, partner and employee data.

We maintain systems and processes designed to protect the data within our control, but notwithstanding such protective measures, there is a risk of intrusion or tampering that could compromise the integrity and privacy of this data.

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While we obtain assurances from those parties that they have systems and processes in place to protect such data, and where applicable, that they will take steps to assure the protections of such data by third parties, nonetheless those partners may also be subject to data intrusion or otherwise compromise the protection of such data.

Any compromise of the confidential data of our customers, consumers, suppliers, partners, employees or ourselves, or failure to prevent or mitigate the loss of or damage to this data through breach of our information technology systems or other means could substantially disrupt our operations, harm our customers, consumers and other business partners, damage our reputation, violate applicable laws and regulations and subject us to additional costs and liabilities and loss of business that could be material.

We and many third parties have experienced and expect to continue to experience cyberattacks and other security incidents.

Threat actors are becoming more sophisticated and increasingly using techniques designed to circumvent security controls, to evade detection and to obfuscate or remove forensic evidence, which means we may be unable to timely or effectively detect, identify, contain, or remediate future attacks or incidents.

Such attacks may involve internal or external actors, and may result from the exploitation of bugs, misconfigurations or vulnerabilities in our IT Systems, human error, social engineering, supply chain attacks, or malware deployment (for example, ransomware), and may disrupt our operations and/or compromise data.

Any compromise of the confidential data of our customers, consumers, suppliers, partners, employees or ourselves, or failure to prevent or mitigate the loss of or damage to this data through breach of our information technology systems or other means could substantially disrupt our operations, harm our customers, consumers and other business partners, damage our reputation, violate applicable laws and regulations and subject us to litigation or regulatory actions, to additional costs for remediation and compliance, as well to liabilities and loss of business that could be material.

Global consumer protection, data privacy and cybersecurity legal requirements, such as under the GDPR and CCPA, are evolving rapidly and increasingly exposing companies to significant fines and penalties for violations.

While we carry insurance, our policies may not cover, or may not fully cover or reimburse us for, any or all costs and losses associated with cybersecurity related events.

Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021, or in certain cases, 2023, may adversely affect the market value of our current or future debt obligations.

The London Inter-bank Offered Rate (“LIBOR”) and certain other interest “benchmarks” may be subject to regulatory guidance and/or reform that could cause interest rates under our current or future debt agreements to perform differently than in the past or cause other unanticipated consequences.

The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit LIBOR rates after 2021, or in certain cases, 2023, and it is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve.

If LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, interest rates on our debt obligations under our Credit Facilities may be adversely affected.

Any impairment in the value of our goodwill or other assets would adversely affect our financial condition and results of operations.

The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, discontinued certain tenors of LIBOR in 2021, and the remaining tenors are expected to be discontinued by 2023.

The Secured Overnight Financing Rate ("SOFR"), which is a new index calculated by short-term repurchase agreements and is backed by U.S.

Treasury securities, has been proposed as an alternative to LIBOR.

The market transition away from LIBOR towards SOFR is expected to be complicated, and there is no guarantee that SOFR will become a widely accepted benchmark in place of LIBOR.

There remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement rate, and we are uncertain what impact the transition away from LIBOR may have on our business, financial results, and operations.

Any impairment in the value of our goodwill or other assets could adversely affect our financial condition and results of operations.

We are required, at least annually, or as facts and circumstances warrant, to test goodwill and other assets to determine if impairment has occurred.

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• the public’s reaction to our press releases, other public announcements and filings with the SEC;

• the market’s reaction to our reduced disclosure and other requirements as a result of being an “emerging growth company” under the Jumpstart Our Business Startups Act (“JOBS Act”);

• the market’s reaction to our reduced disclosure and other requirements as a result of being an “emerging growth company” under the JOBS Act;

• the size of our public float;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors