The official start to the holiday shopping season is only two weeks away--which means for companies that make toys and gadgets for kids, now is a really terrible time to run into supply issues.

According to Bloomberg, Fuhu--which Inc. twice named the fastest growing private company in the U.S.--is going to be stuck without a holiday supply of its signature Nabi tablets this season. Citing unnamed sources familiar with the matter, Bloomberg reports that Fuhu has canceled shipments to Walmart, Target, Best Buy, and Toys "R" Us due to a financial dispute with Foxconn, the Chinese manufacturer that has also invested in the company. Foxconn is reportedly holding on to Fuhu's inventory.

Fuhu did not immediately respond to Inc.'s request for comment.

The tablet-maker, based in El Segundo, California, sells colorful, rubber-protected Android tablets for children that are loaded with licensed content from most of the major entertainment studios, including Dreamworks and Disney. The company also earns a good chunk of its revenue from an ever-expanding line of accessories, ranging from tablet sleeves and car-charging kits to decals and headphones. Fuhu hit $195.6 million in revenue in 2013, a 158,957 percent uptick from three years prior.

Although not much is known about the nature of the financial dispute with Foxconn, it's an unusual turn of events for a company that has had deep connections with hardware-makers since its launch in 2008. As Inc. has previously reported, two of Fuhu's co-founders, John Hui and Steve Hui, have a long history in the industry--John co-founded eMachines, which was acquired by Gateway for a reported $290 million. So the two were able to turn to their hardware friends for the company's initial $1.5 million in seed funding. Fuhu sold equity stakes to Acer, Kingston Technology, and Foxconn.

This is not the first time the company has experienced the perils of fast growth, however. When I wrote about Fuhu for Inc.'s September 2014 issue, the company was struggling to cope with employee burnout and concerns about micromanagement. 

"On the one extreme, you can be called a micromanager. On the other extreme, you let the business get away from you," co-founder and president Robb Fujioka told me last year. "Ultimately, it's a weakness but also a competitive strength. We move product faster than anyone else in this space."

Even so, in the last couple of years, tablet sales have slowed because of market saturation and because unlike smartphones, consumers don't tend to replace them as often, Morningstar equity analyst Brian Colello told me at the time. Meanwhile, competition has been mounting: Big competitors, including Samsung and Amazon, have developed their own kids tablets. Overall, tablet shipments are down 9 percent from this time last year, according to data from IDC. 

Fuhu's response to the change in demand for its core products seemed to come, in part, this summer with a content subscription service. Kids can get new videos, apps, and games for a flat monthly rate of $9.99 (for a two-year contract) or annual rate of $14.99, without forking over the $170 for a traditional Nabi. At the end of the subscription, parents can return the tablet or upgrade.

More recently, Fuhu launched the Nabi Compete, a wearable device and corresponding app that encourages kids to do physical activity and complete goals.

Published on: Nov 13, 2015