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Item 1A. Risk Factors

2026-03-12 compared with 2025-03-13 · 218 added, 250 removed, 718 unchanged (39% of the section changed)

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BUSINESS, ECONOMIC, MARKET AND OPERATING RISKS

Global and regional economic downturns that negatively impact the retail and credit markets, or that otherwise damage the financial health of our retail customers and consumers, can harm our business and financial performance.

We design, manufacture and market a wide variety of consumer products worldwide for sale to our retail customers and directly to consumers.

Our financial performance is impacted by the level of discretionary consumer spending in the markets in which we operate.

Recessions, credit crises and other economic downturns, or disruptions in credit markets, in the United States and in other markets in which our products are sold can result in lower levels of economic activity, lower employment levels, less consumer disposable income, and lower consumer confidence.

The retail industry is subject to volatility, especially during uncertain economic conditions.

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 general inflationary pressures as well as inflation caused by constrained sourcing capacity, the availability of qualified labor and related wage inflation, as well as inflationary pressures to increase commissions and benefits expenses, 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.

Such cost increases and weakened economic conditions may result from any number of factors, including pandemics or other health crises, terrorist attacks, wars and other conflicts, natural disasters, increases in critical commodity prices or labor costs, tariffs, sovereign debt defaults or the prospect of such events.

General inflation in the United States, Europe and other geographies has recently risen to levels not experienced in decades.

Such a weakened economic and business climate, as well as consumer uncertainty created by such a climate, has adversely impacted and could in the future materially harm our sales and profitability.

Similarly, reductions in the value of key assets held by consumers, such as their homes or stock market investments, can lower consumer confidence and consumer spending power.

Any of these factors can reduce the amount which consumers spend on the purchase of our products.

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 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.

As a result of increased inflation or supply constraints, like we have previously faced, 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.

The Company maintains the majority of its cash and cash equivalents in accounts with major U.S.

and multi-national financial institutions, and our deposits at certain of these institutions exceed insured limits.

Market conditions can impact the viability of these institutions.

In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all.

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.

Our products are primarily sold to consumers through retailers that are our direct customers or customers of our distributors.

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

For example, in recent years, the retail industry has faced reductions in sales due to macroeconomic uncertainty which adversely impacted our sales.

Due to the challenging environment for traditional “brick-and-mortar” retail locations caused by declining in-store traffic, many retailers have closed physical stores, and some traditional retailers have engaged in significant reorganizations, filed for bankruptcy and gone out of business.

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.

If any of our retail customers were to file for bankruptcy, we could be unable to collect amounts owed to us and could even be required to repay certain amounts paid to us prior to the bankruptcy filing.

The occurrence of any of these events would have an adverse effect on our business, cash flows, financial condition and results of operations.

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

We operate facilities and sell products in numerous countries outside the United States.

Sales to our international customers comprised approximately 40%, 35% and 31% of our sales for the years ended December 31, 2025, 2024 and 2023, respectively.

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, Cambodia, China and Mexico to produce most of our products.

These international sales and manufacturing operations, including operations in emerging markets, are subject to risks that may significantly harm our sales, increase our costs or otherwise damage our business, including:

• the imposition of and changes in tariffs, quotas, taxes or other protectionist measures by any major country or market in which we operate, which could make it significantly more expensive and difficult to import products into that country or market, raise the cost of such products, decrease our sales of such products or decrease our profitability;

• currency conversion risks and currency fluctuations;

• limitations on the repatriation of earnings;

• 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, war and economic instability, such as the current situation with Ukraine and Russia or Israel and Hamas and any impacts on surrounding regions;

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

• complications in complying with different laws and regulations in varying jurisdictions, including the U.S.

Foreign Corrupt Practices Act (“FCPA”), the U.K.

Bribery Act of 2010, similar anti-bribery and anti-corruption laws and local and international environmental, labor, health and safety laws, and in dealing with changes in governmental policies and the evolution of laws and regulations and related enforcement;

• difficulties understanding the retail climate, consumer trends, local customs and competitive conditions in foreign markets which may be quite different from the United States;

• changes in international labor costs and other costs of doing business internationally;

• proper payment of customs duties and/or excise taxes;

• natural disasters, pandemics and other health crises, and the greater difficulty and cost in recovering therefrom;

• difficulties in moving materials and products from one country to another, including port congestion, strikes or other labor disruptions, trade route disruptions due to geopolitical tensions and other transportation delays and interruptions;

• increased investment and operational complexity to make our products compatible with systems in various countries and compliant with local laws.

Because of the importance of international sales, sourcing and manufacturing to our business, our financial condition and results of operations could be significantly harmed if any of the risks described above were to occur or if we are otherwise unsuccessful in managing our increasingly global business.

Increases in tariffs, trade restrictions or taxes on our products could have an adverse impact on our operations.

The commerce we conduct in the international marketplace makes us subject to tariffs, trade restrictions and other taxes when the raw materials or components we purchase, and the products we ship, cross international borders.

Trade tensions between the United States and China, Mexico, Canada and other countries have been escalating in recent years.

In 2025, the U.S.

presidential administration announced tariffs on a broad range of imported goods, including on imports from China, Vietnam, Cambodia and Mexico.

tariff impositions against certain exports were followed by retaliatory tariffs on U.S.

exports to certain countries.

Certain of the products we purchase from manufacturers in China, Vietnam, Cambodia and Mexico have been or may in the future be subject to these tariffs, which, to the extent we alter our pricing further as a result of such tariffs, could make our products less competitive than those of our competitors whose inputs are not subject to these tariffs.

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.

Certain tariffs enacted in 2025 have been subject to successful legal challenge, but it remains unclear whether and to whom those tariffs may be refunded, and the federal government may attempt to impose new or similar tariffs under alternative statutory mechanisms.

This has led and may lead to further continued uncertainty and volatility in U.S.

and global financial and economic conditions and commodity markets, declining consumer confidence, significant inflation and diminished expectations for the economy, and ultimately reduced demand for our products.

tariff impositions against Vietnam, Cambodia, China and/or Mexico have had and could continue to have a material adverse effect on our business, results of operations and financial condition.

In addition, trade-related legislation may adversely impact our operations and financial results.

See our risk factor "Our use of third-party manufacturers to produce our products presents risks to our business."

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.

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

FAH, LLC and certain of its material domestic subsidiaries from time to time (collectively, the "Credit Agreement Parties") are parties to a credit agreement dated as of September 17, 2021 (as amended, restated, amended and restated, supplemented, waived or otherwise modified from time to time, the “Credit Agreement”), providing for a term loan facility in the amount of $180.0 million (the “Term Loan Facility”) and a revolving credit facility of $125.0 million (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).

As of December 31, 2025, we had $219.9 million of indebtedness outstanding under our Credit Facilities, consisting of $94.9 million outstanding under our Term Loan Facility (net of unamortized discount of $0.4 million) and $125.0 million of outstanding borrowings under our Revolving Credit Facility.

On November 25, 2022, Funko, LLC, Funko Games, LLC, Funko Acquisition Holdings, L.L.C., Funko Holdings LLC and Loungefly, LLC (collectively, “Equipment Finance Credit Parties”), entered into a $20.0 million equipment finance agreement (“Equipment Finance Loan”) with Wells Fargo Equipment Finance, Inc.

The Equipment Finance Loan is secured by certain identified assets held within our Buckeye, Arizona warehouse.

As of December 31, 2025, the Company had $5.4 million outstanding under the Equipment Finance Loan.

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

Our ability to generate cash is subject, to a certain extent, to our ability to successfully execute our business strategy, as well as general economic, financial, competitive, regulatory and other factors beyond our control.

We cannot assure you that our business will be able to generate sufficient cash flow from operations or that future borrowings or other financing will be available to us in an amount sufficient to enable us to service our indebtedness and fund our other liquidity needs.

To the extent we are required to use our cash flow from operations or the proceeds of any future financing to service our indebtedness instead of funding working capital, capital expenditures or other general corporate purposes, we will be less able to plan for, or react to, changes in our business, industry and in the economy generally.

This will place us at a competitive disadvantage compared to our competitors that have less indebtedness.

In addition, the Credit Agreement contains, and any agreements evidencing or governing other future indebtedness may contain, certain restrictive covenants that limit our ability, among other things, to engage in certain activities that are in our long-term best interests, including our ability to:

• incur additional indebtedness;

• incur certain liens;

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

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

• pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests;

• 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;

• issue or sell equity interests or securities convertible into or exchangeable for equity interests;

• redeem, repurchase or refinance our other indebtedness;

• amend or modify our governing documents.

The restrictive covenants in the Credit Agreement also include certain financial covenants that require us to, subject to certain testing holidays and covenant cure rights set forth in the Credit Agreement, comply with (i) on a quarterly basis, a maximum Net Leverage Ratio (as defined in the Credit Agreement), (ii) on a quarterly basis, a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement), (iii) at all times, a minimum Qualified Cash (as defined in the Credit Agreement) covenant and (iv) for the six-month period ending June 30, 2026, a minimum Consolidated EBITDA (as defined in the Credit Agreement) covenant (collectively, the "Financial Covenants").

On February 13, 2026, the Credit Agreement Parties entered into an amendment (the "Fifth Amendment") with the lenders under the Credit Agreement in effect prior to the Fifth Amendment (the "Prior Credit Agreement") and JPMorgan Chase Bank, N.A.

as administrative agent.

The Fifth Amendment, among other things, amended the Prior Credit Agreement to (i) extend the maturity date of the loans under the Prior Credit Agreement from September 17, 2026 to December 31, 2027, and (ii) amend the financial covenants applicable to FAH, LLC and its subsidiaries under the Prior Credit Agreement to, among other things, (a) waive the minimum Fixed Charge Coverage Ratio financial covenant for the fiscal quarter ended December 31, 2025 and the fiscal quarters ending March 31, 2026 and June 30, 2026, (b) provide FAH, LLC additional cushion with respect to the minimum Fixed Charge Coverage Ratio financial covenant for the fiscal quarters ending September 30, 2026, December 31, 2026 and March 31, 2027 relative to the minimum Fixed Charge Coverage Ratio covenant set forth in the Prior Credit Agreement, (c) introduce a minimum Consolidated EBITDA covenant for the six-month period ending June 30, 2026, (d) waive the maximum Net Leverage Ratio covenant for the fiscal quarter ended December 31, 2025 and the fiscal quarters ending March 31, 2026, June 30, 2026 and September 30, 2026 and (e) subject to certain usage restrictions, permit FAH, LLC to forego testing of certain Financial Covenants for any test period (to the extent required to be tested in such test period) if FAH, LLC makes a voluntary prepayment of the loans under the Credit Agreement in an amount not less than $10.0 million prior to the delivery of a compliance certificate for such test period.

See Note 10, “Debt” of the Notes to Consolidated Financial Statements included in this Form 10-K.

There can be no guarantee that we will not breach these covenants in the future.

Our ability to comply with the Financial Covenants and the other covenants and restrictions under our Credit Facilities may be affected by events and factors beyond our control, and there can be no guarantee that we will be able to further amend our Credit Facilities in order to avoid or mitigate the risk of any potential breach that may occur in the future.

Our failure to comply with the Financial Covenants as described above, or with any of the other covenants or restrictions under our Credit Facilities, 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 and exercising other remedies as set forth in the Credit Agreement.

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

The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to secure additional financing or refinancing on favorable terms, or at all, to meet our future capital needs.

In the future, we expect to require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances, including in the event we are unable to maintain compliance with the Financial Covenants or other covenants contained in the Credit Agreement, and may determine to engage in equity or debt financings or enter into credit facilities or refinance existing indebtedness for other reasons.

The Credit Facilities under the Credit Agreement will mature on December 31, 2027.

We may not be able to timely refinance our existing debt, secure additional debt or equity financing on favorable terms, or at all, including due to our current financial condition, market volatility and uncertainty resulting from international conflicts or geopolitical tensions, among other factors.

If an event of default under our Credit Agreement occurs and is not cured or waived, the Required Lenders could elect to declare all amounts outstanding under the Credit Agreement immediately due and payable and exercise other remedies as set forth in the Credit Agreement.

In addition, the Required Lenders would have the right to enforce their security interests against the collateral pledged to them, which includes substantially all of our assets.

As discussed above, the 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.

Furthermore, if we raise additional funds through the issuance of equity or convertible debt or other equity-linked securities, our existing stockholders could suffer significant dilution.

If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business, respond to business challenges and continue as a going concern could be significantly limited.

There can be no assurance that we will be successful in identifying or completing any strategic alternative, that any such strategic alternative will result in additional value for our stockholders or that the process will not have an adverse impact on our business.

Our Board intends to continue to evaluate strategic alternatives for the Company from time to time, aimed at maximizing value for our stockholders.

The process of reviewing strategic alternatives may be costly, time consuming and complex and we may incur significant costs related to this review, such as legal, accounting and advisory fees and expenses and other related charges.

There can be no assurance that any review of strategic alternatives will result in the identification or consummation of any transaction or action and there is no defined timeline for completion of a review process.

There can be no assurance that any potential strategic alternative, if identified, evaluated and consummated, will have a positive impact on our business or provide greater value to our stockholders than that reflected in the current price of our common stock.

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

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Our success depends, in part, on our ability to successfully manage our inventories.

We regularly face challenges in managing our inventory levels.

We must maintain sufficient inventory levels to operate our business successfully, but we must also avoid accumulating excess inventory, which increases working capital needs and lowers gross margin.

We obtain substantially all of our inventory from third-party manufacturers located outside the United States and must typically order products well in advance of the time these products will be offered for sale to our customers.

As a result, it may be difficult to respond to changes in consumer preferences and market conditions, which, for pop culture products, can change rapidly.

If we do not accurately anticipate the popularity of certain products, then we may not have sufficient inventory to meet demand.

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.

In addition, we may face difficulties processing inventory through our distribution centers, which could cause us to hold inventory for an extended period of time.

If market conditions, demand for our products or consumer preferences shift or we face distribution challenges prior to the sales of the inventory, we may have excess inventory that we may need to hold for a long period of time, write down, and/or sell at prices lower than expected or discard.

We may also be negatively affected by changes in retailers’ inventory policies and practices, including as a result of macroeconomic factors.

As a result of the desire of retailers to more closely manage inventory levels, we are required to more closely anticipate demand, and this could require us to carry additional inventory.

Policies and practices of individual retailers may adversely affect us as well, including those relating to access to and time on shelf space, price demands, payment terms and favoring the products of our competitors.

As a result, at any given time it is difficult to respond to changes in consumer preferences and market conditions, which, for pop culture products, can change rapidly.

At the times when we do not accurately anticipate the popularity of certain products, then we may not have sufficient inventory to meet demand.

Similarly, when demand or future sales do not reach forecasted levels, it often results and could continue to result in our having excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard.

In addition, we often face and may in the future face difficulties processing inventory through our distribution centers, which could cause us to hold inventory for an extended period of time.

When market conditions, demand for our products or consumer preferences shift or we face distribution challenges prior to the sales of the inventory, we have and may in the future have excess inventory that we need to hold for a long period of time, write down, and/or sell at prices lower than expected or discard.

We are also and may in the future be negatively affected by changes in retailers’ inventory policies and practices, including as a result of macroeconomic factors.

As a result of the desire of retailers to more closely manage inventory levels, we are required to more closely anticipate demand, and this has, at times required us to carry additional inventory.

Policies and practices of individual retailers can adversely affect us as well, including those relating to access to and time on shelf space, price demands, payment terms and favoring the products of our competitors.

Our retail customers make no binding long-term commitments to us regarding purchase volumes and make all purchases by delivering purchase orders.

Any retailer can therefore freely reduce its overall purchase of our products, including the number and variety of our products that it carries, and reduce the shelf space allotted for our products.

In recent periods, we have experienced canceled orders and 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, during the year ended December 31, 2023, we incurred an inventory write-down of $30.3 million due to our decision to increase operational efficiency and reduce storage costs and we also wrote down $8.7 million in unfinished and finished goods held at offshore factories, which contributed to the Company's net loss for the period.

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

For additional information, please see " Inventory Management" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

If we fail to manage our growth effectively, our financial performance may suffer.

We have generally experienced rapid growth over the last several years, which has placed a strain on our managerial, operational, product design and development, sales and marketing, administrative and financial infrastructure.

For example, we increased our total number of full-time employees from 702 as of December 31, 2018 to 1,283 as of December 31, 2024.

We also lease distribution centers in the U.S.

and the United Kingdom and utilize third-party distribution centers in the U.S.

and the Netherlands.

and the United Kingdom and utilize third-party distribution centers in Mexico and the Netherlands.

Our success depends in part upon our ability to manage our growth effectively.

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Any events or developments adversely affecting those relationships, or changes in our management team, could adversely affect our ability to maintain and renew our license agreements on similar terms or at all.

In May 2024, we announced that Cynthia Williams would succeed Michael Lunsford as the Company's Chief Executive Officer.

No assurance can be made that these and other changes in our leadership will not have a material adverse impact on our relationships with licensors, and if we fail to manage our licensor relationships successfully, our business, financial condition or results of operations could be adversely affected.

No assurance can be made that the recent and any future changes in our leadership or changes in our financial condition will not have a material adverse impact on our relationships with licensors, and if we fail to manage our licensor relationships successfully, our business, financial condition or results of operations could be materially adversely affected.

Our top ten licensors collectively accounted for approximately 63%, 63% and 68% of our sales for the years ended December 31, 2025, 2024 and 2023, respectively.

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Any such audit could result in a dispute over whether we have paid the proper royalties and a requirement that we pay additional royalties, the amounts of which could be material.

As of December 31, 2024, we had a reserve of $23.5 million on our balance sheet related to ongoing and future royalty audits, based on estimates of the costs we expect to incur.

As of December 31, 2025, we had an accrual of $29.6 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, among other things, obligations to:

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See also “If we are unable to obtain, maintain and protect our intellectual property rights, in particular trademarks and copyrights, or if our licensors are unable to maintain and protect their intellectual property rights that we use in connection with our products, our ability to compete could be negatively impacted.”