What changed in this filing

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Item 1A. Risk Factors

2023-04-14 compared with 2022-03-16 · 55 added, 38 removed, 270 unchanged (26% of the section changed)

From time to time, including in this Annual Report on Form 10-K, we publish forward-looking statements, as disclosed in our Disclosure Regarding Forward-Looking Statements, immediately following the of this Annual Report.

We note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed or anticipated in our forward-looking statements.

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Several trends in recent years have presented challenges for the toy industry, including:

the phenomenon of children outgrowing toys at younger ages, particularly in favor of interactive and high

technology products;

the phenomenon of children outgrowing toys at younger ages, particularly in favor of interactive and high technology products;

increasing use of technology, broadly, be it taking share of children ’ s discretionary time or otherwise;

shorter life cycles for individual products;

higher consumer expectations for product quality, functionality and price-value;

higher consumer expectations for product quality, functionality, price-value and environmental-impact;

a wider array of content offerings and platforms attracting a viable audience that enables a meaningful consumer products opportunity, and our ability to effectively predict those platforms and offerings given the increasingly fragmented content distribution marketplace;

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the life cycles of our products will be sufficient to permit us to recover our inventory costs, and licensing, design, manufacturing, marketing and other costs associated with those products;

we will be able to manufacture and distribute new or current products in a timely manner to meet demand;

our inclusion of new technology will result in higher sales or increased profits.

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A limited number of licensors account for a large portion of our net sales.

We derive a significant portion of our net sales from a limited number of licensors, one of which accounts for over 59% of our net sales.

We derive a significant portion of our net sales from a limited number of licensors, one of which accounted for over 61% of our net sales in 2022.

If one or more of these licensors were to terminate or fail to renew our licenses or not grant us new licenses, our business, results of operations and financial condition could be adversely affected.

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In most of our license agreements, the licensor retains the right to utilize an auditor of their choosing to audit our performance against all elements of the agreement up to some number of years after license expiration.

In the event that errors were made in our normal course of business that resulted in underpayment of royalties, shipping product to an unlicensed territory or a variety of other infractions, we could be liable for past due royalties, accrued interest and other financial penalties as outlined in the agreement.

In the event that errors or omissions were made in our normal course of business that resulted in underpayment of royalties, shipping product to an unlicensed territory or channel of distribution, or a variety of other technical infractions, we could be liable for past due royalties, accrued interest and other financial penalties as outlined in the agreement.

The failure of our character-related and theme-related products to become and/or remain popular with children may materially and adversely impact our business, results of operations and financial condition.

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A substantial reduction in or termination of orders from any of our largest customers would adversely affect our business, results of operations and financial condition.

In addition, pressure by large customers seeking price reductions, financial incentives and changes in other terms of sale or for us to bear the risks and the cost of carrying inventory could also adversely affect our business, results of operations and financial condition.

In addition, pressure by large customers seeking price reductions, financial incentives and changes in other terms of sale or for us to bear the risks and the cost of importing and carrying inventory could also adversely affect our business, results of operations and financial condition.

If one or more of our major customers were to experience difficulties in fulfilling their obligations to us resulting from bankruptcy or other deterioration in their financial condition or ability to meet their obligations, cease doing business with us, significantly reduce the amount of their purchases from us, or return substantial amounts of our products, it could have a material adverse effect on our business, results of operations and financial condition.

The COVID-19 pandemic has left many customers outside of our largest customers under varying degrees of financial distress, and it seems some of our largest customers are facing increases in their operating costs.

The COVID-19 pandemic has left many customers outside of our largest customers under varying degrees of financial distress.

Customers may request extended payment terms which may require us to take on increased credit risk or to reduce or forgo sales entirely in an attempt to mitigate financial risk associated with customer bankruptcy risk.

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Our revolving credit line and term loan mature in May 2026 and June 2027, respectively.

We utilize At the Market Issuance Sales Agreements, pursuant to which we may offer and sell, from time to time, shares of our common stock, which may adversely affect the price of our Common Stock.

We utilize At the Market Issuance Sales Agreements (“ATM Agreements”) pursuant to which we may issue, from time to time, up to $75 million of common stock, in one or more offerings in amounts, prices and at terms that we will determine at the time of the offering.

Any such sale of common stock will dilute our other equity holders and may adversely affect the market price of the common stock.

Under our currently existing ATM Agreement with B.

Riley, as of April 14, 2023, we have not sold any shares of the common stock.

We have an effective shelf registration statement pursuant to which we may offer and sell, from time to time , securities, which may adversely affect the price of our Common Stock.

We have on file with the SEC an effective registration statement pursuant to which we may issue, from time to time, up to an additional $75 million of securities consisting of, or any combination of, common stock, preferred stock, debt securities, warrants, rights and/or units, in one or more offerings in amounts, prices and at terms that we will determine at the time of the offering.

Any such sale of stock or convertible securities will, or have the potential to, dilute our other equity holders and may adversely affect the market price of the common stock.

As of April 14, 2023, we have not sold any securities pursuant to our shelf registration statement.

The agreement governing our outstanding preferred stock includes terms and conditions that may adversely impact our business and cash flows.

In August 2019, we issued a series of preferred stock with a face amount of $20.0 million.

The preferred stock (i) is senior to our common stock, (ii) not convertible into common stock, (iii) earns a dividend at an annual rate of 6% (which may or may not be paid in cash), (iv) includes a liquidation preference of up to 150% of the accrued amount, and (v) includes the right to elect up to two members to the Company’s Board of Directors, among other rights, terms and conditions.

The preferred stock (i) is senior to our common stock, (ii) not convertible into common stock, (iii) earns a dividend at an annual rate of 6% (which may or may not be paid in cash), (iv) includes a liquidation preference of up to 150% of the accrued amount, and (v) included the right to elect up to two members to the Company’s Board of Directors, among other rights, terms and conditions.

In addition, the series of preferred stock includes other protective rights and provisions, such as amendments to the Company’s bylaws to restrict changes that may adversely impact the rights of the preferred stockholders, engaging in businesses that are not permitted businesses, as defined, limitations on assets dispositions and entering into a change of control transaction without the approval of the preferred stockholders.

Some of these rights, restrictions and other terms and conditions may prevent us from taking advantageous actions with respect to our business, result in our inability to respond effectively to competitive pressures and industry developments, and/or adversely affect our cash flows or operations.

In 2022, an agreement was reached with the preferred shareholders to eliminate their ability to elect members to the Company’s Board of Directors on a going-forward basis.

We depend upon our Chief Executive Officer and any loss or interruption of his services could adversely affect our business, results of operations and financial condition.

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Market conditions and other third-party conduct could negatively impact our margins and implementation of other business initiatives.

Economic conditions, such as decreased consumer confidence or a recession, may adversely impact our business, results of operations and financial condition.

Economic conditions, such as decreased consumer confidence, inflation or a recession, may adversely impact our business, results of operations and financial condition.

In addition, general economic conditions were significantly and negatively affected by the September 11 th terrorist attacks and could be similarly affected by any future attacks.

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Other conditions, such as the unavailability of electronic components or other raw materials, for example, may impede our ability to manufacture, source and ship new and continuing products on a timely basis.

Significant and sustained increases in the price of oil, for example, could adversely impact the cost of the raw materials used in the manufacture of certain of our products, such as plastic, as well as shipping costs.

Interruptions and delays in the availability of raw materials and finished goods could result from labor stoppages and strikes, the occurrence or threat of wars or similar conflicts, trade restrictions, and severe or unexpected weather conditions and other factors, any of which could adversely affect our business and the results of our operations.

Increases in the costs of raw materials and shipping and other transportation costs and delays in the delivery of finished goods, if not offset by higher prices, could adversely impact our sales.

We face risks related to health epidemics and other widespread outbreaks of contagious disease, which could significantly disrupt our supply chain and impact our operating results.

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These outbreaks are disruptive to local economies and commercial activity, and create downward pressure on our ability to make our product line available to consumers or for consumers to purchase our products, even if our products are available.

At this time, we cannot predict with any certainty the further duration and depth of the impact in the United States or other places worldwide where we sell our products or manufacture our products.

At this time, we still cannot predict with any certainty the further duration and depth of the impact in the United States or other places worldwide where we sell our products or manufacture our products.

Accordingly, it is extremely challenging to estimate the extent by which we will be negatively impacted by this disease.

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Our business is seasonal and therefore our annual operating results will depend, in large part, on our sales during the relatively brief holiday shopping season.

This seasonality is exacerbated by retailers ’ quick response to inventory management techniques.

This seasonality is exacerbated by retailers ’ shifting inventory management techniques.

Sales of our products at retail are extremely seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season.

Further, ecommerce is growing significantly and accounts for a higher portion of the ultimate sales of our products.

Ecommerce retailers tend to hold less inventory and take inventory closer to the time of sale to consumers than traditional retailers.

Further, e-commerce is growing significantly and accounts for a higher portion of the ultimate sales of our products.

E-commerce retailers tend to hold less inventory and take inventory closer to the time of sale to consumers than traditional brick-and-mortar retailers.

As a result, customers are timing their orders so that they are being filled by suppliers, such as us, closer to the time of purchase by consumers.

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Additionally, the logistics of supplying more and more product within shorter time periods increases the risk that we will fail to achieve tight and compressed shipping schedules and quality control, which also may reduce our sales and harm our results of operations.

This seasonal pattern requires significant use of working capital, mainly to manufacture or acquire inventory during the portion of the year prior to the holiday season, and it requires accurate forecasting of demand for products during the holiday season in order to avoid losing potential sales of popular products or producing excess inventory of products that are less popular with consumers.

Our failure to accurately predict and respond to consumer demand, resulting in under-producing popular items and/or overproducing less popular items, could significantly reduce our total sales, negatively impact our cash flows, increase the risk of inventory obsolescence, and harm our results of operations and financial condition.

In addition, as a result of the seasonal nature of our business, we would be significantly and adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events such as a terrorist attack or economic shock that harm the retail environment or consumer buying patterns during our key selling season, or by events such as strikes or port delays that interfere with the shipment of goods, during the critical months leading up to the holiday shopping season.

The COVID-19 pandemic has also accelerated consumers’ shift to ecommerce transactions with traditional brick & mortar retailers.

Some of these transactions are for “Ship-to-home” purchases and some are for local pick-up by the consumer at the brick & mortar location.

The COVID-19 pandemic has also accelerated consumers’ shift to e-commerce transactions with traditional brick & mortar retailers.

Some of these transactions are for “ship-to-home” purchases and some are for local pick-up by the consumer at the brick-and-mortar location.

In either case, the consumer’s path to discovery of new items changes to a digital medium.

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Any similar event that suddenly makes the holiday less relevant or infeasible to celebrate can and likely will have a negative impact on that segment of business.

Given that securing licenses, product design and development and ultimately sourcing of the product takes place several quarters in advance of the actual Halloween selling season, we have limited ability to recover invested expense if the market demand for those products were to suddenly be reduced.

Although some product could be held in inventory or materials rolled forward to the next manufacturing season, these events would in turn incrementally tie up our capital until the following year at best, and/or put added strain on our third-party manufacturers.

Given that securing licenses, product design and development and ultimately sourcing of the product takes place over a year in advance of the actual Halloween selling season, we have limited ability to recover invested expense if the market demand for those products were to suddenly be reduced.

Although some product could be held in inventory or materials rolled forward to the next manufacturing season, these events would in turn incrementally tie up our capital and add warehousing expense until the following year at best, and/or put added strain on our third-party manufacturers.

We depend upon third-party manufacturers, and if our relationship with any of them is harmed or if they independently encounter difficulties in their manufacturing processes, we could experience product defects, production delays, unplanned costs or higher product costs, or the inability to fulfill orders on a timely basis, any of which could adversely affect our business, results of operations and financial condition.

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In the event that some unexpected shock to the market (like the COVID-19 pandemic) were to suddenly drastically change demand for product anticipated to be procured from our third-party manufacturers, we may incur some costs relating to raw materials they have ordered on our behalf, and/or finished goods that were not shipped due to last-minute cancelled orders from our customers buying FOB from China.

Although our manufacturers bear the foreign-exchange risk by committing to USD pricing despite having non-USD cost elements, we could nonetheless be adversely impacted if they fail to manage that risk accordingly.

Although our manufacturers bear the foreign-exchange risk by committing to USD/HKD pricing despite having non-USD/HKD cost elements, we could nonetheless be adversely impacted if they fail to manage that risk accordingly.

In that event, the predictable flow of product at the prices we expect could be disrupted, and we may not have adequate time to source comparable product elsewhere in time to avoid disruptions in our selling cycle.

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longer operating histories;

greater economies of scale, inclusive of purchasing power and leverage of their investments/expenditures.

greater economies of scale, inclusive of purchasing power and leverage of their investments across a range of areas, inclusive but not limited to research, technology, data analytics and strategic sourcing.

In addition, the toy industry has no significant barriers to entry.

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Sales to our international customers comprised approximately 19.1% of our net sales for the year ended December 31, 2022 and approximately 17.5% of our net sales for year ended December 31, 2021.

Although COVID-19 disproportionately negatively impacted our international business in 2021 and 2020, we expect our sales to international customers to account for a greater portion of our revenues in future fiscal periods.

We expect our sales to international customers to account for a greater portion of our revenues in future fiscal periods.

Additionally, we use third-party manufacturers, located principally in China, and are subject to the risks normally associated with operations, including:

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increased warranty and insurance costs;

removal of our products from the market.

removal of our products from the market and/or destruction of existing inventory.

Any of these results may adversely affect our business, results of operations and financial condition.

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We cannot assure that we will be able to recruit and retain qualified personnel or expand and manage our operations effectively and profitably.

To effectively manage future growth, we must continue to expand our operational, financial and management information systems and to train, motivate and manage our work force.

To effectively manage future growth, we must continue to expand our operational, financial and management information systems and to train, motivate and manage our workforce.

There can be no assurance that our operational, financial and management information systems will be adequate to support our future operations.

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We, our business partners and third-party service providers may collect, process, store and transmit consumer data, including personal information, in connection with those products and services.

Failure to follow applicable regulations related to those activities, or to prevent or mitigate data loss or other security breaches, including breaches of our business partners’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information, which could adversely affect our results of operations, result in regulatory enforcement, other litigation and could be a potential liability for us, and otherwise significantly harm our business.

Failure to follow applicable regulations related to those activities, or to prevent or mitigate data loss or other security breaches, including breaches of our business partners’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information, which could adversely affect our results of operations, result in regulatory enforcement or other litigation and could be a potential liability for us, and otherwise significantly harm our business.

Our ability to effectively manage our business and coordinate the production, distribution, and sale of our products and services depends significantly on the reliability and capacity of these systems and third-party service providers.

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We have exposures to similar security risks faced by other large companies that have data stored on their information technology systems.

To our knowledge, we have not experienced any material breach of our cybersecurity systems.

In December 2022 we were the target of a ransomware attack which caused a temporary disruption in our information technology system that did not have a material adverse impact on our results of operations.

We implemented and continue to implement improvements to our information technology systems to defend against and mitigate the potential impact of such attacks.

There is no assurance, however, that such improvements will be successful in preventing such attacks in the future.

There is also no assurance that such an event or other attacks against our information technology systems in the future might not have an adverse impact on our business, or that the exfiltration of certain sensitive employee and vendor data as a result of such attack or future events of this nature might not result in claims or litigations in the future.

If our systems or our third-party service providers’ systems fail to operate effectively or are damaged, destroyed, or shut down, or there are problems with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of the aforementioned could occur as a result of natural disasters, human error, software or equipment failures, telecommunications failures, loss or theft of equipment, acts of terrorism, circumvention of security systems, or other cyber-attacks, including denial-of-service attacks, we could experience delays or decreases in product sales, and reduced efficiency of our operations.

Additionally, any of these events could lead to violations of privacy laws, loss of customers, or loss, misappropriation or corruption of confidential information, trade secrets or data, which could expose us to potential litigation, regulatory actions, sanctions or other statutory penalties, any or all of which could adversely affect our business, and cause it to incur significant losses and remediation costs.

Additionally, any of these events could lead to violations of continually evolving privacy laws, loss of customers, or loss, misappropriation or corruption of confidential information, trade secrets or data, which could expose us to potential litigation, regulatory actions, sanctions or other statutory penalties, any or all of which could adversely affect our business, and cause us to incur significant losses and remediation costs.

The COVID-19 pandemic required most of our employees to work remotely, putting unprecedented strain on our information technology resources and infrastructure.

We cannot be sure how long the work-from-home model will stay in place and how mandates around social distancing and extensive remote work will generate new and unforeseen risks of business disruption and increased complexity across the range of functions that comprise the Company’s daily activities.

In addition, by deploying the work-from-home model, we increase our vulnerability to hacking and other nefarious activities as employees adjust to new hardware/software infrastructure and resources as well as close the gap created by no longer being in close physical proximity to their colleagues.

Although all employees are required to use work infrastructure and our secure VPN, we cannot be completely certain that we will not have increased exposure to security considerations in this new environment.

Although in 2022 we defaulted back to a more traditional on-premise work model, we continue to support a higher degree of work-from-home opportunities than we did pre-COVID-19 (“the work-from-home model”).

Although our policies and procedures continue to adjust and adapt informed by our own experiences and market norms, we cannot say with certainty what level of hybrid work we will continue to support as we move forward.

With that in mind, we cannot be sure how remote work may generate an increase in new and unforeseen risks of business disruption and/or increased complexity across the range of functions that comprise the Company’s daily activities.

In addition, the work-from-home model may increase our vulnerability to hacking and other nefarious activities as employees adjust to new hardware/software infrastructure, resources and processes as well as close the gap created by no longer being in close physical proximity to their colleagues.

If we are unable to acquire and integrate companies and new product lines successfully, we will be unable to implement a significant component of our growth strategy.

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financial condition and results of operations;

the degree to which acquired operations can be integrated with our operations;

supply-chain resilience and competitive advantage;

the degree to which acquired operations can be seamlessly integrated with our organization;

appropriate valuation and our ability to create substantially more value post-acquisition.

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diversion of management attention from operation of our existing business;

loss of key personnel from acquired companies;

loss of key personnel and institutional knowledge from acquired companies;

failure of an acquired business to achieve targeted financial results, inclusive of working capital needs;

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The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business.

If one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, the price of our common stock would likely decline.

If one or more of the analysts who covers us downgrades our common stock, publishes inaccurate or unfavorable research about our business, or sets unreasonable expectations or makes erroneous assumptions about our future performance which ultimately are not achieved, the price of our common stock would likely decline.

If one or more of these analysts cease coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause the price of our common stock and trading volume to decline.

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A significant drop in the price of our stock could expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, adversely affecting our business.

We have a valuation allowance on the deferred taxes on our books since their future realization is uncertain.

We have a valuation allowance on a portion of the deferred taxes on our books since their future realization is uncertain.

Deferred tax assets are realized by prior and future taxable income of appropriate character.

Current accounting standards require that a valuation allowance be recorded if it is not likely that sufficient taxable income of appropriate character will be generated to realize the deferred tax assets.

We currently believe that based on the available information, it is more likely than not that our deferred tax assets will not be realized, and accordingly we have recorded a valuation allowance against our US federal and state deferred tax assets.

Certain of our net operating losses and tax credit carry-forwards can expire if unused, and the utilization of our net operating losses and tax credit carry-forwards could be substantially limited in the event of an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code.

We currently believe that based on the available information, it is more likely than not that a portion of the deferred tax assets, related to capital losses, will not be realized.

We have a material amount of goodwill which, if it becomes impaired, would result in a reduction in our net earnings.

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We did not record any goodwill impairment charges during 2022, 2021, or 2020.

In the future, if we do not achieve our profitability and growth targets the carrying value of our goodwill may become further impaired, resulting in additional impairment charges.

In the future, if we do not maintain our profitability and growth targets, the carrying value of our goodwill may become impaired, resulting in impairment charges.

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