What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-03-05 · 117 added, 260 removed, 343 unchanged (52% of the section changed)

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Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth under “Risk Factors” included in this Annual Report on Form 10-K.

Our results of operations for the year ended December 31, 2018, including a discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018, have been reported previously under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.

We are a leading pop culture consumer products company.

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We infuse our distinct designs and aesthetic sensibility into one of the industry’s largest portfolios of licensed content over a wide variety of product categories, including figures, plush, accessories, apparel and homewares.

On November 6, 2017, we completed our IPO of 10,416,666 shares of Class A common stock at an initial public offering price of $12.00 per share and received approximately $117.3 million in net proceeds after deducting underwriting discounts and commissions.

We used the net proceeds to purchase 10,416,666 newly issued common units directly from FAH, LLC at a price per unit equal to the price per share of Class A common stock in the IPO less underwriting discounts and commissions.

As of December 31, 2019, we held 34,917,582 common units, representing an approximately 68.7% interest in FAH, LLC.

Key Performance Indicators

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Year Ended December 31,

2019 2018 2017

(amounts in thousands)

(in thousands)

Net sales $ 652,537 $ 795,122

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Our business has benefitted from pop culture trends including (1) technological innovation that has facilitated content consumption and engagement, (2) creation of more quality content, (3) greater cultural prevalence and acceptance of pop culture fandom and (4) increased engagement by fans with pop culture content beyond mere consumption driven by social media and demonstrated by fan-centric experiences, such as Comic-Con events around the world.

These trends have contributed to significant recent growth in the demand for pop culture products like ours in recent years;

These trends have contributed to significant growth in the demand for pop culture products like ours in recent years;

however, consumer demand for pop culture products and pop culture trends can and does shift rapidly and without warning.

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This is particularly true given the concentration of our sales of products under certain of our brands, particularly our Pop!

brand, which represented approximately 79%,

76% and 70% of our sales for the years ended December 31, 2019, 2018 and 2017, respectively, and which is sold across multiple product categories.

brand, which represented approximately 76% and 79% of our sales for the years ended December 31, 2020 and 2019, respectively, and which is sold across multiple product categories.

Relationships with Content Providers

We generate substantially all of our net sales from products based on intellectual property we license from others.

We generate a majority of our net sales from products based on intellectual property we license from others.

We have strong relationships with many established content providers and seek to establish licensing relationships with newer content providers.

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Our top ten customers represented approximately 48% and 44% of our sales for the years ended December 31, 2020 and 2019, respectively.

In the fourth quarter of 2019, net sales were below expectations due to the challenging retail environment, which resulted in lower than expected purchases among Funko’s top customers throughout the holiday season as well as softness in sales related to certain tentpole movie releases.

During the year ended December 31, 2020, we saw shifts in our client mix as a direct result of the COVID-19 pandemic and the related retail shutdowns and limited store occupancy upon reopening.

We depend on retailers to provide adequate and attractive space for our products and point of purchase displays in their stores.

We continue to have dedicated shelf space for our products in a variety of aisles in mass-market retailer and specialty stores, with our growing diversified product offering.

In recent years, traditional retailers have been affected by a shift in consumer preferences towards other channels, particularly e-commerce.

We believe that this shift may have benefited our business in recent periods as brick and mortar retailers dedicated additional shelf space to our products and pop culture consumer products generally to drive additional traffic to their stores and improve sales in previously less productive shelf space.

In addition, we have seen an increase in sales for our product on retailers’ e-commerce platforms.

We have seen an increase in sales for our product on retailers’ e-commerce platforms, particularly in 2020 as a result of the COVID-19 retail shutdowns.

Our customers do not make long-term commitments to us regarding purchase volumes and can therefore easily reduce their purchases of our products.

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This insight allows us to adjust the mix of products based on classic evergreen properties and new releases, depending on the media release cycle.

For example, in 2020 there was a lack of new content releases due to the impact of COVID-19 on new content production and the movie theater industry.

Due to this impact, the percent of our sales attributable to classic evergreen properties was higher compared to historical trends.

In addition, over time, we have continued to increase our number of active properties.

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While we expect to see growth in the number of properties and products over time, we expect that the number of active properties and the sales per active property will fluctuate from quarter to quarter or year over year based on what is relevant in pop culture at that time and the types of properties we are producing against.

In addition, despite our

efforts to diversify the properties on which we base our products, if the performance of one or more of these properties fails to meet expectations or are delayed in their release, our operating results could be adversely affected.

For example, in the fourth quarter of 2019, sales related to certain movie releases failed to meet expectations, which had an adverse effect on our operating results.

In addition, despite our efforts to diversify the properties on which we base our products, if the performance of one or more of these properties fails to meet expectations or are delayed in their release, our operating results could be adversely affected.

Taxation and Expenses

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federal, state and local income taxes with respect to our allocable share of any taxable income of FAH, LLC, and we are taxed at the prevailing corporate tax rates.

In addition to tax expenses, we also will incur expenses related to our operations, as well as payments under the Tax Receivable Agreement, which we expect to be significant.

We intend to cause FAH, LLC to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement.

In addition, as a public company, we have incurred, and will continue to incur, additional annual expenses related to operating as a public company, including, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.

We also incurred non-recurring costs as part of our transition to a publicly traded company, consisting of professional fees and other expenses.

In addition to tax expenses, we incur expenses related to our operations, as well as payments under the Tax Receivable Agreement.

We have caused and intend to continue to cause FAH, LLC to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement.

Components of our Results of Operations

We sell a broad array of licensed pop culture consumer products across a variety of categories, including figures, plush, accessories, apparel and homewares, primarily to retail customers and distributors.

We also sell our products directly to consumers through our e-commerce operations and, to a lesser extent, at specialty licensing and comic book conventions and exhibitions.

We sell a broad array of licensed pop culture consumer products across a variety of categories, including figures, plush, accessories, apparel, games and homewares, primarily to retail customers and distributors.

We also sell our products directly to consumers through our e-commerce operations, our retail stores and, to a lesser extent, at specialty licensing and comic book conventions and exhibitions.

Revenue from the sale of our products is recognized when control of the goods is transferred to the customer, which is upon shipment or upon receipt of finished goods by the customer, depending on the contract terms.

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Our product costs and gross margins will be impacted from period to period based on the product mix in any given period.

Our plush products tend to have a higher product cost and lower gross margins than our figures.

Our Loungefly branded products tend to have a higher product cost and higher duties as a percentage of sales and therefore lower gross margins than our Pop!

branded products.

Our royalty costs and gross margins will also be impacted from period to period based on our mix of licensed products sold, as well as a variety of other factors including reserves for minimum guarantees and ongoing and future royalty audits.

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Since our IPO, we have experienced a significant increase in accounting, legal and professional fees associated with being a public company as further described above under “—Factors Affecting Our Business—Taxation and Expenses.”

Acquisition Transaction Costs

Acquisition transaction costs represent costs incurred for potential and completed acquisitions.

In 2017, we incurred costs related to the Underground Toys Acquisition, the Loungefly Acquisition, and A Large Evil Corporation Acquisition.

Depreciation and Amortization

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Amortization relates to definite-lived intangible assets that are expensed on a straight-line basis over the estimated useful lives.

Our intangible assets, which are being amortized over a range of two to 20 years, are mainly comprised of trade names, customer relationships and intellectual property we recognized as part of the ACON Acquisition and, to a lesser extent, the Underground Toys Acquisition and the Loungefly Acquisition.

Our intangible assets, which are being amortized over a range of two to 20 years, are mainly comprised of trade names, customer relationships and intellectual property we recognized as part of the ACON Acquisition and, to a lesser extent, the 2017 acquisition of Underground Toys, the 2017 acquisition of Loungefly and the 2019 acquisition of Forrest-Pruzan.

Interest Expense, Net

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2020 2019 Dollar Percentage

(amounts in thousands, except percentages)

(in thousands, except percentages)

Net sales $ 652,537 $ 795,122 $ (142,585) (17.9) %

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Selling, general, and administrative expenses 181,234 193,803 (12,569) (6.5) %

Acquisition transaction costs — 28 (28) (100.0) %

Depreciation and amortization 44,368 42,126 2,242 5.3 %

2 unchanged sentences

Interest expense, net 10,712 14,342 (3,630) (25.3) %

Loss on extinguishment of debt — 4,547 (4,547) (100.0) %

Other expense (income), net (25) 4,082 (4,107) (100.6) %

Other expense (income), net 1,043 (25) 1,068 nm

Income before income taxes 11,788 32,296 (20,508) (63.5) %

5 unchanged sentences

$ 3,961 $ 11,725 $ (7,764) (66.2) %

Net sales were $795.1 million for the year ended December 31, 2019, an increase of 15.9% compared to $686.1 million for the year ended December 31, 2018.

The increase in net sales was due primarily to the continued expansion of products and properties in our portfolio, as well as enhanced distribution and product placement with our retail partners, partially offset by a more challenging retail environment, which resulted in lower than expected purchases among Funko’s top customers throughout the 2019 holiday season as well as softness in sales related to certain tentpole movie releases in the year ended December 31, 2019 as compared to the year ended December 31, 2018 .

In the year ended December 31, 2019, the number of active properties increased 20% to 804 from 672 in the year ended December 31, 2018, and average net sales per active property remained stable at $1.0 million for both the years ended December 31, 2019 and 2018.

Net sales were $652.5 million for the year ended December 31, 2020, a decrease of 17.9% compared to $795.1 million for the year ended December 31, 2019.

The decrease in net sales was due primarily to the impacts from the COVID-19 pandemic, including reduced shipments to our specialty retailer and distributor customers as limited in-store occupancy and social distancing guidelines or non-essential business closures were in effect for a majority of the year ended December 31, 2020.

These decreases were partially offset by growth in our net sales to e-commerce sites and our own direct-to-consumer channels.

In the year ended December 31, 2020, the number of active properties increased 6.2% to 854 from 804 in the year ended December 31, 2019, and average net sales per active property decreased 22.7% to $0.8 million in the year ended December 31, 2020 from $1.0 million in the year ended December 31, 2019.

While we expect to see growth in the number of active properties over time, we expect that the average sales per active property will fluctuate from year to year or quarter to quarter based on what is relevant in pop culture at that time and the types of properties we are producing against.

On a geographical basis, net sales in the United States increased 12.4% to $523.9 million in the year ended December 31, 2019 as compared to $466.0 million in the year ended December 31, 2018, and net sales internationally increased 23.3% to $271.2 million in the year ended December 31, 2019 from $220.0 million in the year ended December 31, 2018, primarily as a result of our growth in Europe.

On a product category basis, net sales of figures increased 14.7% to $642.5 million in the year ended December 31, 2019 as compared to the year ended December 31, 2018 and net sales of other products increased 21.4% to $152.6 million in the year ended December 31, 2019 as compared to the year ended December 31, 2018.

On a geographical basis, net sales in the United States decreased 6.7% to $488.8 million in the year ended December 31, 2020 as compared to $523.9 million in the year ended December 31, 2019, net sales in Europe decreased 43.5% to $112.0 million in the year ended December 31, 2020 from $198.2 million in the year ended December 31, 2019 and net sales in other International decreased 29.2% to $51.7 million in the year ended December 31, 2020 from $73.0 million in the year ended December 31, 2019.

On a product category basis, net sales of Pop!

branded products decreased 20.4% to $497.3 million in the year ended December 31, 2020 as compared to $624.6 million in the year ended December 31, 2019.

Net sales of Loungefly branded products increased 17.0% to $84.8 million in the year ended December 31, 2020 as compared to $72.5 million in the year ended December 31, 2019.

Net sales of other products decreased 28.2% to $70.4 million in the year ended December 31, 2020 as compared to $98.0 million the year ended December 31, 2019.

Cost of Sales and Gross Margin (exclusive of depreciation and amortization)

Cost of sales (exclusive of depreciation and amortization) was $512.6 million for the year ended December 31, 2019, an increase of 19.0%, compared to $430.7 million for the year ended December 31, 2018.

Cost of sales (exclusive of depreciation and amortization) increased primarily as a result of the continued growth in sales, which drove a $27.5 million increase in product costs, a $16.1 million increase in royalty expenses and a $8.1 million increase in shipping and freight costs.

In addition to the increase as a result of sales growth, cost of sales for the year ended December 31, 2019 include a one-time $16.8 million charge related to the write-down of inventory as a result of the Company's decision to dispose of slower moving inventory to increase operational capacity.

This charge is incremental to normal course reserves.

Cost of sales (exclusive of depreciation and amortization) was $403.4 million for the year ended December 31, 2020, a decrease of 21.3%, compared to $512.6 million for the year ended December 31, 2019.

Cost of sales (exclusive of depreciation and amortization) decreased primarily as a result of the decrease in net sales, which drove a $56.9 million decrease in product costs, a $21.8 million decrease in royalty expenses and a $2.2 million decrease in shipping and freight costs.

Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of sales, was 38.2% for the year ended December 31, 2020, compared to 35.5% for the year ended December 31, 2019.

Gross margin (exclusive of depreciation and amortization) decreased 170 basis points for the year ended December 31, 2019 compared to the year ended December 31, 2018, due primarily to a one-time $16.8 million charge related to the write-down of inventory as a result of the Company's decision to dispose of slower moving inventory to increase operational capacity and higher duties as a percentage of net sales related to our Loungefly products, partially offset by lower product costs as a percentage of net sales and a decrease in shipping and freight costs as a percentage of net sales for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Gross margin (exclusive of depreciation and amortization) increased 270 basis points for the year ended December 31, 2020 compared to the year ended December 31, 2019, due primarily to a one-time $16.8 million charge for the year ended December 31, 2019 related to the write-down of inventory as a result of the Company's decision to dispose of slower moving inventory to increase operational capacity.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses were $193.8 million for the year ended December 31, 2019, an increase of 24.8%, compared to $155.3 million for the year ended December 31, 2018.

The increase was driven primarily by a $20.1 million increase in personnel expenses and commissions, a $3.9 million increase in equity-based compensation, a $3.8 million increase in rent and related facilities costs and a $3.7 million increase in warehouse and office support costs.

These increases primarily reflect increased headcount, warehouse costs and marketing to support new product launches as well as new office, retail and warehouse facilities.

Selling, general, and administrative expenses were 24.4% of sales for the year ended December 31, 2019, compared to 22.6% of sales for the year ended December 31, 2018 primarily due to higher personnel expenses and commissions, equity-based compensation and warehouse and office support costs as a percentage of net sales.

Selling, general, and administrative expenses were $181.2 million for the year ended December 31, 2020, a decrease of 6.5%, compared to $193.8 million for the year ended December 31, 2019.

The decrease was driven primarily by a $3.8 million decrease in warehouse and office support, a $3.6 million decrease in advertising and marketing, a $3.5 million decrease in professional fees, a $2.9 million decrease in equity-based compensation, and a $1.8 million decrease in personnel expenses and commissions.

These decreases primarily reflect the impact of the COVID-19 pandemic and the efforts to reduce costs and preserve liquidity.

Selling, general, and administrative expenses were 27.8% of sales for the year ended December 31, 2020, compared to 24.4% of sales for the year ended December 31, 2019, primarily due to the decrease in net sales.

Depreciation and Amortization

Depreciation and amortization expense was $42.1 million for the year ended December 31, 2019, compared to $39.1 million for the year ended December 31, 2018, primarily driven by an increase in depreciation on tooling and molds as we continue to expand our product offerings and an increase in amortization of intangible assets acquired from the Forrest-Pruzan Acquisition in February 2019.

Depreciation and amortization expense was $44.4 million for the year ended December 31, 2020, compared to $42.1 million for the year ended December 31, 2019, primarily driven by an increase in depreciation on our office and warehouse facilities including the full year recognition of our Hollywood retail store.

Interest Expense, Net

Interest expense, net was $10.7 million for the year ended December 31, 2020, a decrease of 25.3%, compared to $14.3 million for the year ended December 31, 2019.

The decrease in interest expense, net was due to lower interest rates and lower average balances of debt outstanding during the year ended December 31, 2019 under the New Credit Facilities as compared to the interest rates and average balances of debt outstanding during the year ended December 31, 2018 primarily under the Former Senior Secured Credit Facilities.

Loss on extinguishment of debt

There was no loss on extinguishment of debt for the year ended December 31, 2019, compared to $4.5 million for the year ended December 31, 2018.

Loss on extinguishment of debt for the year ended December 31, 2018 represented the write-off of $4.1 million of unamortized debt issuance costs on our previous Term Loan A Facility and $0.4 million of unamortized debt issuance costs on our previous Revolving Credit Facility, each of which were repaid in full on October 22, 2018 in connection with the Company entering into a new credit agreement providing

for the New Term Loan Facility in the amount of $235.0 million and the New Revolving Credit Facility of $50.0 million.

The decrease in interest expense, net was due to lower interest rates and lower average balances of debt outstanding during the year ended December 31, 2020.

Income Tax Expense

Income tax expense was $2.0 million for the year ended December 31, 2020, a decrease of 54.8%, compared to $4.5 million for the year ended December 31, 2019.

The decrease was primarily due to lower non-deductible expenses and tax benefits related to share-based compensation awards for the year ended December 31, 2019 as compared to the year ended December 31, 2018, partially offset by an increase in income before income taxes of $1.8 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

Net income was $27.8 million for the year ended December 31, 2019, compared to $25.1 million for the year

ended December 31, 2018.

The increase in net income was primarily the result of the increase in net sales

and the decrease in interest expense, net for the year ended December 31, 2019 as compared to the year

ended December 31, 2018, as discussed above.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table sets forth information comparing the components of net income for the years ended December 31, 2018 and 2017:

Year Ended December 31, Period over Period Change

2018 2017 Dollar Percentage

(amounts in thousands, except percentages)

Net sales $ 686,073 $ 516,084 $ 169,989 32.9 %

Cost of sales (exclusive of depreciation and amortization shown separately below)

430,746 317,267 113,479 35.8 %

Selling, general, and administrative expenses 155,321 120,944 34,377 28.4 %

Acquisition transaction costs 28 3,641 (3,613) (99.2) %

Depreciation and amortization 39,116 31,975 7,141 22.3 %

Total operating expenses 625,211 473,827 151,384 31.9 %

Income from operations 60,862 42,257 18,605 44.0 %

Interest expense, net 21,739 30,636 (8,897) (29.0) %

Loss on extinguishment of debt 4,547 5,103 (556) (10.9) %

Other expense (income), net 4,082 (734) 4,816 (656.1) %

Income before income taxes 30,494 7,252 23,242 320.5 %

Income tax expense 5,432 1,266 4,166 329.1 %

Net income 25,062 5,986 19,076 318.7 %

net income attributable to non-controlling interests

17,599 2,047 15,552 759.7 %

Net income attributable to Funko, Inc.

$ 7,463 $ 3,939 $ 3,524 89.5 %

Net sales were $686.1 million for the year ended December 31, 2018, an increase of 32.9% compared to $516.1 million for the year ended December 31, 2017.

The increase in net sales was due primarily to the continued expansion of products and properties in our portfolio, as well as enhanced distribution and product placement with our retail partners.

In the year ended December 31, 2018, the number of active properties increased 34% to 672 from 500 in the year ended December 31, 2017, and average net sales per active property remained stable at $1.0 million for both the years ended December 31, 2018 and 2017.

On a geographical basis, net sales in the United States increased 23.9% to $466.0 million in the year ended December 31, 2018 as compared to $376.1 million in the year ended December 31, 2017, and net sales internationally increased 57.2% to $220.0 million in the year ended December 31, 2018 from $140.0 million in the year ended December 31, 2017, primarily as a result of our growth in Europe.

On a product category basis, net sales of figures increased 32.7% to $560.1 million in the year ended December 31, 2018 as compared to the year ended December 31, 2017 and net sales of other products increased 34.0% to $126.0 million in the year ended December 31, 2018 as compared to the year ended December 31, 2017.

Cost of Sales and Gross Margin (exclusive of depreciation and amortization)

Cost of sales (exclusive of depreciation and amortization) was $430.7 million for the year ended December 31, 2018, an increase of 35.8%, compared to $317.3 million for the year ended December 31, 2017.

Cost of sales (exclusive of depreciation and amortization) increased primarily as a result of the continued growth in sales, which drove both higher product costs and royalty expenses.

In 2018, in addition to the increase as a result of sales growth, cost of sales included $2.0 million of incremental packaging and display costs, a $1.8 million increase from donating inventory to charitable organizations and a $1.4 million increase for inventory reserves and adjustments.

In 2017, cost of sales included $3.2 million related to the application of purchase accounting in connection with the Underground Toys Acquisition and the Loungefly Acquisition, which required inventory to be recorded at estimated fair value at the time of acquisition.

This step-up in value resulted in an increase to inventory of $2.6 million and $0.6 million based on the estimated fair value as of the date of the Underground Toys Acquisition and Loungefly Acquisition, respectively.

Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of sales, was 37.2% for the year ended December 31, 2018, compared to 38.5% for the year ended December 31, 2017.

Gross margin (exclusive of depreciation and amortization) decreased 130 basis points for the year ended December 31, 2018 compared to the year ended December 31, 2017, due primarily to the increase in our average royalty rate to 16.1% for the year ended December 31, 2018 compared to 14.9% for the year ended December 31, 2017 (primarily reflecting higher reserves for minimum guarantees, due in part to our subscription box business, which we began phasing out in 2018, and higher reserves for minimum guarantees on international sales, as well as ongoing and future royalty audits), higher compliance chargebacks received from our customers and an increase in inventory reserves, partially offset by inventory step up costs in 2017 related to our Underground Toys and Loungefly Acquisitions.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses were $155.3 million for the year ended December 31, 2018, an increase of 28.4%, compared to $120.9 million for the year ended December 31, 2017.

The increase was driven primarily by growth in the business, including incremental expenses associated with our direct distribution model in Europe, our Loungefly operations and growth in the staffing at Funko Animation Studios.

More specifically, the increase in expenses primarily resulted from a $20.3 million increase in personnel expenses and commissions (which included $1.0 million of certain severance costs incurred during the year ended December 31, 2018 in connection with the departure of certain members of senior management, including the founders of Loungefly), a $7.5 million increase in rent and related facilities costs, which is a result of our continued expanded operations, and a $3.6 million increase in equity-based compensation expense.

These increases were partially offset by a decrease in bad debt expense of $3.5 million due primarily to the bad debt expense recorded in 2017 related to the Toys ‘R Us bankruptcy, which was partially offset by $0.8 million in additional bad debt expense related to the bankruptcy of a European customer in 2018.

Selling, general, and administrative expenses were 22.6% of sales for the year ended December 31, 2018, compared to 23.4% of sales for the year ended December 31, 2017.

While we have invested considerably in general and administrative costs to support the growth and anticipated growth of our business and anticipate continuing to do so in the future, our growth in sales more than offset the growth of our selling, general and administrative expenses in the year ended December 31, 2018.

Acquisition Transaction Costs

Transaction costs related to acquisitions were nominal for the year ended December 31, 2018 and $3.6 million for the year ended December 31, 2017.

Transaction costs for the year ended December 31, 2017 were primarily related to the Underground Toys and Loungefly Acquisitions.

Depreciation and Amortization

Depreciation and amortization expense was $39.1 million for the year ended December 31, 2018, compared to $32.0 million for the year ended December 31, 2017.

Depreciation increased $6.5 million, primarily related to the increase in depreciation on tooling and molds as a result of the expansion of our product lines, leasehold improvements at our corporate offices and warehouse facilities, and amortization increased $0.6 million as a result of the Underground Toys Acquisition and the Loungefly Acquisition.

Interest Expense, Net

Interest expense, net was $21.7 million for the year ended December 31, 2018, a decrease of 29.0%, compared to $30.6 million for the year ended December 31, 2017.

The decrease in interest expense, net was primarily related to the paydown of the Term Loan B Facility and Revolving Credit Facility with proceeds from our IPO in November 2017 and lower interest rates on our New Term Loan Facility and New Revolving Credit Facility as compared to our previous Term Loan A Facility and previous Revolving Credit Facility.

Loss on extinguishment of debt

Loss on extinguishment of debt was $4.5 million for the year ended December 31, 2018, a decrease of 10.9%, compared to $5.1 million for the year ended December 31, 2017.

Loss on extinguishment of debt for the year ended December 31, 2017 represented the write-off of unamortized discount costs on our Term Loan B Facility which was repaid in full in November 2017 in connection with the IPO.

Income Tax Expense

Income tax expense was $5.4 million for the year ended December 31, 2018, an increase of 329.1%, compared to $1.3 million for the year ended December 31, 2017.

The increase was primarily due to the increase in income before income taxes of $23.2 million, or 320.5%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017.

Additionally, in 2017, the LLC flow-through structure of FAH, LLC benefited our income tax expense as, prior to the IPO, we were subject to certain LLC entity-level taxes and foreign taxes but generally not subject to entity-level U.S.

federal income taxes.

Partially offsetting the increase in income tax expense was a decrease in the statutory U.S.

federal corporate tax rate to 21% for the year ended December 31, 2018 as compared to a statutory rate of 34% for the year ended December 31, 2017.

Net income was $25.1 million for the year ended December 31, 2018, compared to $6.0 million for the year

ended December 31, 2017.

The increase in net income was primarily the result of the increase in net sales

for the year ended December 31, 2018 as compared to the year ended December 31, 2017, as discussed

The decrease was primarily due to a decrease in income before income taxes of $20.5 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

Net income was $9.8 million for the year ended December 31, 2020, compared to $27.8 million for the year ended December 31, 2019.

The decrease in net income was primarily the result of the decrease in net sales offset by decreases in cost of goods sold, selling, general and administrative and interest expense, net for the year ended December 31, 2020 as compared to the year ended December 31, 2019, as discussed above.

Non-GAAP Financial Measures

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The Non-GAAP Financial Measures are not measurements of our financial performance under U.S.

GAAP and should not be considered as an alternative to net income (loss), earnings per share or any other performance measure derived in accordance with U.S.

We define EBITDA as net income (loss) before interest expense, net, income tax expense (benefit), depreciation and amortization.

We define Adjusted EBITDA as EBITDA further adjusted for monitoring fees, non-cash charges related to equity-based compensation programs, earnout fair market value adjustments, inventory step-ups, loss on extinguishment of debt, acquisition transaction costs and other expenses, the Loungefly customs investigation and related costs, certain severance, relocation and other costs, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments and other unusual or one-time items.

GAAP and should not be considered as an alternative to net income, earnings per share or any other performance measure derived in accordance with U.S.

We define EBITDA as net income before interest expense, net, income tax expense, depreciation and amortization.

We define Adjusted EBITDA as EBITDA further adjusted for non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, customs investigation and related costs, certain severance, relocation and related costs, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments, the one-time inventory write-down and other unusual or one-time items.

We define Adjusted Net Income as net income attributable to Funko, Inc.

adjusted for the reallocation of income attributable to non-controlling interests from the assumed exchange of all outstanding common units and options in FAH, LLC (or the common unit equivalent of profit interests in FAH, LLC for periods prior to the IPO) for newly issued-shares of Class A common stock of Funko, Inc.

adjusted for the reallocation of income attributable to non-controlling interests from the assumed exchange of all outstanding common units and options in FAH, LLC for newly issued-shares of Class A common stock of Funko, Inc.

and further adjusted for the impact of certain non-cash charges and other items that we do not consider in our evaluation of ongoing operating performance.

These items include, among other things, reallocation of net income attributable to non-controlling interests, monitoring fees, non-cash charges related to equity-based compensation programs, loss on extinguishment of debt, earnout fair market value adjustments, inventory step-ups, acquisition transaction costs and other expenses, the Loungefly customs investigation and related costs, certain severance, relocation and related costs, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments and other unusual or one-time items, and the income tax expense (benefit) effect of (1) these adjustments and (2) the pass-through entity taxable income as if the parent company was a subchapter C corporation in periods prior to the IPO.

We define Adjusted Earnings per Diluted Share as Adjusted Net Income divided by the weighted-average shares of Class A common stock outstanding, assuming (1) the full exchange of all outstanding common units and options in FAH, LLC (or the common unit equivalent of profit interest in FAH, LLC for periods prior to the IPO) for newly issued-shares of Class A common stock of Funko, Inc and (2) the dilutive effect of stock options and unvested common units, if any.

These items include, among other things, reallocation of net income attributable to non-controlling interests, non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, customs investigation and related costs, certain severance, relocation and related costs, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments, the one-time inventory write-down and other unusual or one-time items, and the income tax expense effect of these adjustments.

and (2) the dilutive effect of stock options and unvested common units, if any.

We caution investors that amounts presented in accordance with our definitions of the Non-GAAP Financial Measures may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate the Non-GAAP Financial Measures in the same manner.

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By providing these Non-GAAP Financial Measures, together with reconciliations, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.

In addition, our New Credit Facilities use Adjusted EBITDA to measure our compliance with covenants such as a senior leverage ratio.

The Non-GAAP Financial Measures have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income (loss) or other financial statement data presented in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K as indicators of financial performance.

The Non-GAAP Financial Measures have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K as indicators of financial performance.

Some of the limitations are:

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GAAP results and using these non-GAAP measures only supplementally.

As noted in the table below, the Non-GAAP Financial Measures include adjustments for non-cash charges related to equity-based compensation programs, earnout fair market value adjustments, inventory step-ups, loss on extinguishment of debt, acquisition transaction costs and other expenses, the Loungefly customs investigation and related costs, certain severance, relocation and related costs, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments and other unusual or one-time items.

As noted in the table below, the Non-GAAP Financial Measures include adjustments for non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, customs investigation and related costs, certain severance, relocation and related costs, foreign currency transaction gains and losses, Tax Receivable Agreement Liability adjustments and other unusual or one-time items.

It is reasonable to expect that these items will occur in future periods.

However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other companies over time.

In addition, the Non-GAAP Financial Measures include adjustments for other items, such as monitoring fees, that we do not expect to regularly record in the future.

Each of the normal recurring adjustments and other adjustments described herein and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.

The following tables reconcile the Non-GAAP Financial Measures to the most directly comparable U.S.

GAAP financial performance measure, which is net income (loss), for the periods presented:

GAAP financial performance measure, which is net income, for the periods presented:

Year Ended December 31,

2019 2018 2017

(in thousands, except per share data)

Net income attributable to Funko, Inc.

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Reallocation of net income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock (1)

16,095 17,599 2,047

Monitoring fees (2)

Equity-based compensation (2)

10,116 13,044

Loss on extinguishment of debt — 4,547 5,103

Earnout fair market value adjustment (4)

Inventory step-up (5)

Acquisition transaction costs and other expenses (3)

383 3,391 5,336

Customs investigation and related costs (4)

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Foreign currency transaction loss (gain) (6)

(177) 4,082 (733)

Tax receivable agreement liability adjustments 87 152

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Adjusted earnings per diluted share $ 0.37 $ 0.96

Year Ended December 31, Successor Predecessor

2015 Period from

2019 2018 2017 2016

(amounts in thousands)

Net income (loss) $ 27,820 $ 25,062 $ 5,986 $ 26,880 $ (15,561) $ 27,499

Year Ended December 31,

(in thousands)

Net income $ 9,763 $ 27,820

Interest expense, net 10,712 14,342

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EBITDA $ 66,868 $ 88,764

Monitoring fees (2)

— — 1,676 1,498 272 3,346

compensation (3)

13,044 9,140 5,574 2,369 4,484 9,925

Loss on extinguishment

of debt — 4,547 5,103 — — —

Earnout fair market value

adjustment (4)

— — 30 8,561 1,540 —

Inventory step-up (5)

— — 3,182 13,434 8,688 —

Acquisition transaction

costs and other

383 3,391 5,336 3,442 7,559 13,301

Customs investigation

and related costs (7)

3,357 — — — — —

Certain severance,

relocation and

related costs (8)

739 1,031 — — — —

Foreign currency

transaction loss (gain) (9)

(177) 4,082 (733) — — —

Tax receivable

agreement liability

adjustments 152 — — — — —

One-time inventory

write-down (10)

Equity-based compensation (2)

10,116 13,044

Acquisition transaction costs and other expenses (3)

Customs investigation and related costs (4)

Certain severance, relocation and related costs (5)

Foreign currency transaction loss (gain) (6)

Tax receivable agreement liability adjustments 87 152

One-time inventory write-down (7)

Adjusted EBITDA $ 80,216 $ 123,037

(1) Represents the reallocation of net income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC in periods in which income was attributable to non-controlling interests.

(2) Represents monitoring fees paid pursuant to a management services agreement with ACON that was entered into in connection with the ACON Acquisition, which terminated upon the consummation of the IPO in November 2017.

(2) Represents non-cash charges related to equity-based compensation programs, which vary from period to period depending on timing of awards.

(4) Reflects the increase in the fair value of contingent liabilities incurred in connection with the Underground Toys Acquisition.

(5) Represents a non-cash adjustment to cost of sales resulting from acquisitions.

(6) Represents legal, accounting, and other related costs incurred in connection with the IPO, acquisitions and other transactions.

Included for the year ended December 31, 2018 is a one-time $2.0 million consent fee related to certain existing license agreements which we expect to pay in connection with the renewal of such licensing agreements and $0.7 million for the recognition of a pre-acquisition contingency related to our Loungefly acquisition.

(3) Represents legal, accounting, and other related costs incurred in connection with the acquisitions and other transactions.

(4) Represents legal, accounting and other related costs incurred in connection with the Company's investigation of the underpayment of customs duties at Loungefly.

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(5) Represents certain severance, relocation and related costs.

For the year ended December 31, 2020, includes charges related to the global workforce reduction implemented in response to the COVID-19 pandemic and impairment related charges to the right-of-use leased and fixed assets related to Funko Animation Studios.

For the year ended December 31, 2019, includes $0.4 million of severance costs incurred in connection with the departure of our former Chief Financial Officer and $0.3 million of severance, relocation and related costs associated with the consolidation of our warehouse facilities in the United Kingdom.

For the year ended December 31, 2018, includes severance costs incurred in connection with the departure of certain members of senior management, including the founders of Loungefly.

(6) Represents both unrealized and realized foreign currency losses (gains) on transactions other than in U.S.

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This charge is incremental to normal course inventory reserves and was recorded as a result of the Company’s decision to dispose of slower moving inventory to increase operational capacity.

(11) Represents the income tax expense (benefit) effect of (i) the above adjustments and (ii) the pass-through entity taxable income as if the parent company was a subchapter C corporation in periods prior to the IPO.

This adjustment uses an effective tax rate of 25% for the years ended December 31, 2019 and 2018 and 36.2% for the year ended December 31, 2017, respectively.

(8) Represents the income tax expense effect of the above adjustments.

This adjustment uses an effective tax rate of 25% for the years ended December 31, 2020 and 2019.

Liquidity and Financial Condition

Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, debt service and general corporate needs.

In the year ended December 31, 2017 we also received contributions from members of FAH, LLC as further described below under “Liquidity;” however, we do not anticipate receiving any additional contributions from members of FAH, LLC.

On October 22, 2018 (the “Closing Date”), Funko Acquisition Holdings, L.L.C., Funko Holdings LLC, Funko, LLC and Loungefly, LLC (each, an “Original Borrower” and collectively, the “Original Borrowers”), entered into a Credit Agreement by and among each Borrower, certain financial institutions party thereto and PNC Bank, National Association, as administrative agent and collateral agent, providing for the New Term Loan Facility in the amount of $235.0 million and the New Revolving Credit Facility of $50.0 million.

Proceeds from the New Credit Facilities were primarily used to repay the Former Senior Secured Credit Facilities.

On February 11, 2019, the Company amended the Credit Agreement to increase the New Revolving Credit Facility to $75.0 million, reflecting the incremental capacity of $25.0 million contemplated under the New Credit Facilities prior to such amendment.

On September 23, 2019, the Original Borrowers and Funko Games, LLC (collectively, the "Borrowers") entered into a second amendment to the Credit Agreement (the “Amendment”).

The Amendment, among other things, extends the maturity date of the New Credit Facilities to September 23, 2024, reduces the interest margin applicable to all loans under the credit agreement by 0.75% and reduces certain fees incurred under the credit agreement.

The Amendment also allows the Company to request that the New Term Loan Facility be increased by an additional $25.0 million.

The New Credit Facilities are secured by substantially all assets of the Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions.

On October 22, 2018 (the “Closing Date”), Funko Acquisition Holdings, L.L.C., Funko Holdings LLC, Funko, LLC and Loungefly, LLC (each, an “Original Borrower” and collectively, the “Original Borrowers”), entered into a Credit Agreement (as amended, the "Credit Agreement") by and among each Borrower, certain financial institutions party thereto and PNC Bank, National Association, as administrative agent and collateral agent, 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").

On February 11, 2019, the Company amended the Credit Agreement to increase the Revolving Credit Facility to $75.0 million, reflecting the incremental capacity of $25.0 million contemplated under the Credit Facilities prior to such amendment.

On September 23, 2019, the Original Borrowers and Funko Games, LLC (collectively, the "Borrowers") entered into a second amendment to the Credit Agreement (the “Second Amendment”).

The Second Amendment, among other things, extends the maturity date of the Credit Facilities to September 23, 2024, reduces the interest margin applicable to all loans under the credit agreement by 0.75% and reduces certain fees incurred under the Credit Agreement.

The Second Amendment also allows the Company to request that the Term Loan Facility be increased by an additional $25.0 million.

On May 5, 2020 the Company entered into a third amendment to the Credit Agreement (“Third Amendment”) which amended and modified the Credit Agreement, to, among other things, (i) waive the financial covenants under the Credit Agreement for the fiscal quarters ending June 30, 2020 and September 30, 2020 (the “Waiver Period”), (ii) add a requirement to maintain a minimum liquidity of at least $30.0 million until the Leverage Ratio (as defined in the Credit Agreement) is less than 2.50 to 1.00 for a period of four consecutive fiscal quarters, (iii) hold the incurrence ratios for certain restricted payments, investments and dispositions at the levels applicable prior to the effectiveness of the Third Amendment, (iv) increase the interest and fees payable under the Credit Agreement from the date of Third Amendment through (but excluding) the first date on which the Company receives cumulative net cash proceeds of at least $50.0 million from certain issuances of permitted equity or convertible subordinated debt and (v) allow that any calculation of Consolidated EBITDA (as defined in the Credit Agreement) that includes the fiscal quarter ended December 31, 2019 may include non-cash expenses for inventory write-downs incurred by the Company during such quarter.

For the four consecutive fiscal quarter period ended June 30, 2020 we were able to demonstrate a leverage ratio of less than 2.50 to 1:00 and were therefore no longer subject to the minimum liquidity requirement for the three months ended September 30, and December 31, 2020, respectively.

The Credit Facilities are secured by substantially all assets of the Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions.

We are a holding company with no material assets and we do not conduct any business operations of our own.

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.

Under the terms of the New Credit Facilities, our operating subsidiaries are currently limited in their ability to pay cash dividends to the Company, subject to certain customary exceptions, including:

Under the terms of the Credit Facilities, our operating subsidiaries are currently limited in their ability to pay cash dividends to the Company, subject to certain customary exceptions, including:

• the ability to pay, so long as there is no current or ongoing event of default, amounts required to be paid under the Tax Receivable Agreement, certain expenses associated with being a public company and reimbursement of expenses required by the LLC Agreement or the Registration Rights Agreement;

• the ability to make other distributions of up to $25.0 million during any period of four fiscal quarters in order to pay dividends to the common unit holders of FAH, LLC (including the Company) as long as the funds received by the Company are used to pay dividends to the Company’s stockholders, the Leverage Ratio (as defined in the Credit Agreement) is not greater than a ratio that is 0.50:1.00 less than the Leverage Ratio (as defined in the Credit Agreement) for the applicable fiscal quarter and there is remaining Availability (as defined in the Credit Agreement) under the New Credit Facilities of at least $25.0 million.

We expect these limitations to continue in the future under the terms of the New Credit Facilities and that they may continue under the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries.

• the ability to make other distributions of up to $25.0 million during any period of four fiscal quarters in order to pay dividends to the common unit holders of FAH, LLC (including the Company) as long as the funds received by the Company are used to pay dividends to the Company’s stockholders, the Leverage Ratio under the Pro Forma Financial Covenant Requirement (as defined in the Credit Agreement) is not greater than a ratio that is 0.50:1.00 less than the Leverage Ratio (as defined in the Credit Agreement) for the applicable fiscal quarter and there is remaining Availability (as defined in the Credit Agreement) under the Credit Facilities of at least $25.0 million.

We expect these limitations to continue in the future under the terms of the Credit Facilities and that they may continue under the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries.

On February 11, 2019, we acquired Forrest-Pruzan Creative LLC, a board game development studio in Seattle, WA.

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The Form S-3 was declared effective by the SEC on September 16, 2019.

The Form S-3 allows us to offer and sell from time-to-time up to $100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts or units comprised of any combination of these securities for our own account and allows certain selling stockholders to offer and sell 27,884,185 shares of

Class A common stock in one or more offerings.

On September 19, 2019, certain selling stockholders completed a secondary underwritten public offering of 4,000,000 shares of Class A common stock under our Form S-3.

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Year Ended December 31,

2019 2018 2017

Net cash provided by operating activities $ 107,239 $ 90,765

Net cash used in investing activities (18,482) (48,633)

Net cash provided by (used in) financing activities (28,340) (15,046) 43,012

Net cash used in financing activities (61,838) (28,340)

Effect of exchange rates on cash and cash equivalents 107 (2,049)

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Operating Activities.

Our net cash provided by operating activities consists of net income adjusted for certain non-cash items, including depreciation and amortization, equity-based compensation and fair value adjustments to contingent consideration, accretion of discount on long-term debt, as well as the effect of changes in working capital and other activities.

Our net cash provided by operating activities consists of net income adjusted for certain non-cash items, including depreciation and amortization, equity-based compensation, accretion of discount on long-term debt, as well as the effect of changes in working capital and other activities.

Net cash provided by operating activities was $107.2 million for the year ended December 31, 2020, compared to $90.8 million for the year ended December 31, 2019.

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Our accounts receivable typically are short term and settle in approximately 30 to 90 days.

The increase for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to changes in working capital, which increased net cash provided by operating activities by $39.2 million and were primarily due to decreases in inventory and accounts receivable, net of $34.3 million and $32.2 million, respectively, and an increase in accounts payable of $21.0 million, partially offset by decreases to accrued royalties, accrued expenses and other liabilities and income taxes payable of $17.9 million, $10.0 million and $5.8 million, respectively, and an increase in prepaid expenses and other assets of $14.6 million.

The increase in net cash provided by operating activities also reflected an increase in net income, excluding non-cash adjustments, of $1.6 million, driven primarily by an increase in net sales and a decrease in interest expense, net (excluding the effect of a $0.9 million decrease in non-cash adjustments related to accretion of discount on long-term debt and amortization of debt issuance costs), primarily offset by an increase in cost of sales (exclusive of depreciation and amortization) and selling, general and administrative expenses.

Net cash provided by operating activities was $50.0 million for the year ended December 31, 2018, compared to $23.8 million for the year ended December 31, 2017.

The increase was primarily due to an increase in net income, excluding non-cash adjustments, of $30.9 million, driven primarily by an increase in net sales and a decrease in interest expense, net (excluding the effect of a $2.3 million decrease in non-cash adjustments related to accretion of discount on long-term debt and amortization of debt issuance costs), primarily offset by an increase in cost of sales (exclusive of depreciation and amortization) and selling, general and administrative expenses.

The increase in net cash provided by operating activities was partially offset by a decrease due to changes in working capital.

Changes in working capital decreased net cash provided by operating activities by $4.8 million and were primarily due a decrease in accounts payable of $35.4 million and an increase in accounts receivable, net of $7.7 million, partially offset by a decrease in prepaid expenses and other assets of $18.5 million, an increase in accrued royalties of $10.8 million and a decrease in inventory of $8.3 million.

The increase for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to changes in working capital, which increased net cash provided by operating activities by $28.2 million and were primarily due to decreases in accounts receivable, net and prepaid expenses and other assets of $24.0 million and $18.1 million, respectively, and increases in accrued expenses and other liabilities, accrued royalties, and income taxes payable of $12.8 million, $10.3 million and $3.4 million, respectively.

This was partially offset by an increase in inventory and accounts payable of $22.5 million and $17.9 million, respectively.

The increase in net cash provided by operating activities was also offset by a decrease in net income, excluding non-cash adjustments, of $11.7 million, driven primarily by an decrease in net sales.

Investing Activities .

Our net cash used in investing activities primarily relates to the purchase of property and equipment and acquisitions, net of cash acquired.

For the year ended December 31, 2020, net cash used in investing activities was $18.5 million, which was used for the purchase of property and equipment, primarily related to tooling and molds used for the expansion of product lines.

For the year ended December 31, 2019, net cash used in investing activities was $48.6 million and was comprised of $42.3 million used for the purchase of property and equipment, primarily related to tooling and molds used for the expansion of product lines, and cash consideration, net of cash acquired of $6.4 million for the Forrest-Pruzan Acquisition.

For the year ended December 31, 2018, net cash used in investing activities was $27.5 million and was comprised of $26.9 million used for the purchase of property and equipment, primarily related to tooling and molds used for the expansion of product lines, and $0.6 million used for acquisitions, specifically an increase in cash used to acquire Loungefly as a result of certain working capital adjustments.

For the year ended December 31, 2017, net cash used in investing activities was $65.2 million and was primarily comprised of initial cash consideration of $12.6 million, $16.1 million and $3.9 million for the Underground Toys Acquisition, the Loungefly Acquisition and A Large Evil Corporation Acquisition, respectively.

Additionally, $33.6 million of net cash used in investing activities was for the purchase of property and equipment and primarily consisted of $21.1 million for the purchase of property and equipment related to tooling and molds for the expansion of product lines and $6.6 million for leasehold improvements related to the build-out of our new headquarters.

Financing Activities .

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We do not anticipate any financing activity related to contributions from members going forward.

For the year ended December 31, 2019, net cash used in financing activities was $28.3 million, primarily related to distributions to the Continuing Equity Owners of $23.9 million and payments on the New Term Loan Facility of $11.8 million, partially offset by net borrowings on the New Revolving Credit Facility of $5.7 million and proceeds from the exercise of equity based options of $2.2 million.

For the year ended December 31, 2018, net cash used in financing activities was $15.0 million, primarily related to payments on the New Term Loan Facility and Term Loan A Facility of $231.3 million and $20.4 million in distributions to members of FAH, LLC, partially offset by proceeds from the New Term Loan Facility of $230.0 million, and net borrowings on the revolving lines of credit of $9.2 million.

For the year ended December 31, 2017, net cash provided by financing activities was $43.0 million, primarily related to proceeds from the issuance of Class A common stock sold in the IPO net of underwriter’s discounts and commissions of $117.3 million, proceeds from the Term Loan A Facility, Term Loan B Facility and Subordinated Promissory Notes of $86.3 million, and contribution from members of FAH, LLC of $5.0 million, partially offset by payments on the Term Loan B Facility and Subordinated Promissory Notes of $79.0 million, $72.8 million in distributions to members of FAH, LLC and payments for contingent consideration of $18.0 million.

During 2017, we also had net borrowings on the Revolving Credit Facility of $4.1 million.

For the year ended December 31, 2020, net cash used in financing activities was $61.8 million, primarily related to payments under the Tax Receivable Agreement of $4.6 million, distributions to the Continuing Equity Owners of $3.6 million, payments on the Term Loan Facility of $26.4 million, and net payments on the Revolving Credit Facility of $26.8 million, partially offset by $0.2 million proceeds from the exercise of equity based options.

For the year ended December 31, 2019, net cash used in financing activities was $28.3 million, primarily related to distributions to the Continuing Equity Owners of $23.9 million and payments on the Term Loan Facility of $11.8 million, partially offset by net borrowings on the Revolving Credit Facility of $5.7 million and proceeds from the exercise of equity based options of $2.2 million.

Financial Condition

Notwithstanding our obligations under the Tax Receivable Agreement between Funko, Inc., FAH, LLC and each of the Continuing Equity Owners, we believe that our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy, our planned capital expenditures and the additional expenses we incur as a public company for at least the next 12 months.

However, we cannot assure you that our cash provided by operating activities, cash and cash equivalents or cash available under our New Revolving Credit Facility will be sufficient to meet our future needs.

If we are unable to generate sufficient cash flows from operations in the future, and if availability under our New Revolving Credit Facility is not sufficient, we may have to obtain additional financing.

However, 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 needs.

If we are unable to generate sufficient cash flows from operations in the future, and if availability under our Revolving Credit Facility is not sufficient, we may have to obtain additional financing.

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

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

As noted above, on October 22, 2018, we entered into the New Credit Facilities and repaid in full our Former Senior Secured Credit Facilities.

The New Credit Facilities are secured by substantially all assets of the Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions.

The Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions, guarantee repayment of the New Credit Facilities.

The New Term Loan Facility matures on September 23, 2024 (the “Maturity Date”).

The New Term Loan Facility amortizes in quarterly installments in aggregate amounts equal to 5.00% of the original principal amount of the New Term Loan Facility in the first and second years of the New Term Loan Facility, 10.00% of the original principal amount of the New Term Loan Facility in the third and fourth years of the New Term Loan Facility and 12.50% of the original principal amount of the New Term Loan Facility in the fifth and sixth year of the New Term Loan Facility, with any outstanding balance due and payable on the Maturity Date.

The New Revolving Credit Facility terminates on the Maturity Date and loans thereunder may be borrowed, repaid, and reborrowed up to such date.

Loans under the New Credit Facilities will, at the Borrowers’ option, bear interest at either the Euro-Rate (as defined in the Credit Agreement) or, in the case of swing loans, the Swing Rate (as defined in the Credit Agreement), plus 2.50% or the Base Rate (as defined in the Credit Agreement) plus 1.50%, with two 0.25% step-downs based on the achievement of certain leverage ratios.

The Euro-Rate is subject to a 0.00% floor.

For loans based on the Euro-Rate, interest payments are due at the end of each applicable interest period.

For loans based on the Base Rate, interest payments are due quarterly.

The Borrowers may request that the New Term Loan Facility be increased by an additional $25.0 million.

The Credit Agreement governing the New Credit Facilities contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to:

As noted above, on October 22, 2018, we entered into the Credit Facilities which, as amended, are secured by substantially all assets of the Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions.

The Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions, guarantee repayment of the Credit Facilities.

The Term Loan Facility matures on September 23, 2024 (the “Maturity Date”).

The Term Loan Facility amortizes in quarterly installments in aggregate amounts equal to 5.00% of the original principal amount of the Term Loan Facility in the first and second years of the Term Loan Facility, 10.00% of the original principal amount of the Term Loan Facility in the third and fourth years of the Term Loan Facility and 12.50% of the original principal amount of the Term Loan Facility in the fifth and sixth year of the Term Loan Facility, with any outstanding balance due and payable on the Maturity Date.

The Revolving Credit Facility terminates on the Maturity Date and loans thereunder may be borrowed, repaid, and reborrowed up to such date.

As amended, loans under the Credit Facilities, at the Borrowers’ option, bear interest at either the Euro-Rate (as defined in the Credit Agreement) or, in the case of swing loans, the Swing Rate (as defined in the Credit Agreement), plus 3.00% or the Base Rate (as defined in the Credit Agreement) plus 2.00%, with 0.25% step-downs based on the achievement of certain leverage ratios following the Closing Date.

The Euro-Rate is subject to a 1.00% floor and for loans based on the Euro-Rate, interest payments are due at the end of each applicable interest period.

The Borrowers may request that the Term Loan Facility be increased by an additional $25.0 million.

The Credit Agreement governing the Credit Facilities contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to:

• incur additional indebtedness;

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• amend or modify our governing documents.

In addition, the Credit Agreement requires FAH, LLC and its subsidiaries to comply on a quarterly basis with a maximum senior leverage ratio and a minimum fixed charge coverage ratio of 1.25:1.00 (in each case, measured on a trailing four-quarter basis).

The maximum senior leverage ratio is currently 2.75:1.00, which will step down to 2.50:1.00 on December 31, 2020 and to 2.25:1.00 on December 31, 2021.

As of December 31, 2019 and December 31, 2018, we were in compliance with all covenants in our New Credit Facilities.

In addition, the Credit Agreement requires FAH, LLC and its subsidiaries to comply on a quarterly basis with a maximum Leverage Ratio and a minimum fixed charge coverage ratio (in each case, measured on a trailing four-quarter basis), except as described above in connection with the Waiver Period.

The maximum Leverage Ratio and the minimum fixed charge coverage ratio for the fiscal quarter ending December 31, 2020 are 4.25:1.00 and 1.25:1.00, respectively.

As of December 31, 2020 and December 31, 2019, we were in compliance with all covenants in our Credit Facilities.

In accordance with the Third Amendment, the financial covenants under the Credit Agreement were waived during the Waiver Period.

We expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts.

If economic conditions caused by the COVID-19 global pandemic worsen and the Company’s earnings and operating cash flows do not continue to recover as currently estimated by management, this could impact our ability to maintain compliance with our amended financial covenants and require the Company to seek additional amendments to our Credit Agreement.

The Credit Agreement also contains certain customary representations and warranties and affirmative covenants, and certain reporting obligations.

In addition, the lenders under the New Credit Facilities will be permitted to accelerate all outstanding borrowings and other obligations, terminate outstanding commitments and exercise other specified remedies upon the occurrence of certain events of default (subject to certain grace periods and exceptions), which include, among other things, payment defaults, breaches of representations and warranties, covenant defaults, certain cross-defaults and cross-accelerations to other indebtedness, certain events of bankruptcy and insolvency, certain judgments and changes of control.

In addition, the lenders under the Credit Facilities will be permitted to accelerate all outstanding borrowings and other obligations, terminate outstanding commitments and exercise other specified remedies upon the occurrence of certain events of default (subject to certain grace periods and exceptions), which include, among other things, payment defaults, breaches of representations and warranties, covenant defaults, certain cross-defaults and cross-accelerations to other indebtedness, certain events of bankruptcy and insolvency, certain judgments and changes of control.

The Credit Agreement defines “change of control” to include, among other things, any person or group other than ACON and its affiliates becoming the beneficial owner of more than 35% of the voting power of the equity interests of Funko, Inc.

As of December 31, 2020, we had $52.3 million of cash and cash equivalents and $120.7 million of working capital, compared with $25.2 million of cash and cash equivalents and $101.6 million of working capital as of December 31, 2019.

Working capital is impacted by seasonal trends of our business and the timing of new product releases, as

well as our current portion of long-term debt and draw downs on our line of credit.

Working capital is impacted by seasonal trends of our business and the timing of new product releases, as well as our current portion of long-term debt and draw downs on our line of credit.

For further discussion of changes in our debt, see below, and Note 10, Debt of the notes to our consolidated financial statements.

Future Sources and Uses of Liquidity

As noted above, historically, our primary sources of cash flows have been cash flows from operating activities and borrowings under our Subordinated Promissory Notes, Former Senior Secured Credit Facilities and New Credit Facilities.

As noted above, historically, our primary sources of cash flows have been cash flows from operating activities and borrowings under our Credit Facilities.

We expect these sources of liquidity to continue to be our primary sources of liquidity.

New Credit Facilities .

On October 22, 2018, the Company entered into the New Credit Facilities.

Upon closing, proceeds from the New Credit Facilities were primarily used to repay all of the outstanding aggregate principal balance and accrued interest of $209.6 million on the previous Term Loan A Facility and $65.3 million on the previous Revolving Credit Facility.

Upon repayment, both the previous Term Loan A Facility and the previous Revolving Credit Facility were terminated.

For a discussion of our New Credit Facilities, see Note 10, Debt of the notes to our consolidated financial statements.

Former Senior Secured Credit Facilities.

For a discussion of our Former Senior Secured Credit Facilities, see Note 10, Debt of the notes to our consolidated financial statements.

Subordinated Promissory Notes .

For a discussion of our former Subordinated Promissory Notes, see Note 10, Debt of the notes to our consolidated financial statements.

Credit Facilities .

On October 22, 2018, the Company entered into the Credit Facilities.

For a discussion of our Credit Facilities, see Note 10, Debt of the notes to our consolidated financial statements.

Offerings of Registered Securities .

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Contractual Obligations

The following summarizes our principal future minimum commitments as of December 31, 2019 (in thousands):

The following summarizes our future minimum commitments as of December 31, 2020 (in thousands):

2021 2022 2023 2024 2025 Thereafter Total

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4,985 231 63 — — — 5,279

New Revolving Credit

25,822 — — — — — 25,822

Total 43,857 54,576 53,231 147,852 13,832 71,382 384,730

(1) We estimated interest payments through the maturity of our New Credit Facilities by applying the interest rate of 5.99% in effect as of December 31, 2019 under our New Term Loan Facility.

(1) We estimated interest payments through the maturity of our Credit Facilities by applying the interest rate of 6.04% in effect as of December 31, 2020 under our New Term Loan Facility.

See Note 10, Debt of the notes to our consolidated financial statements.

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(3) Represents minimum guaranteed royalty payments under licensing arrangements.

(4) Represents the amount owed as of December 31, 2019 under our New Revolving Credit Facility.

Off-Balance Sheet Arrangements

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Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and operating results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our critical accounting policies and estimates include those related to revenue recognition and sales allowances, royalties, inventory, goodwill and intangible assets, equity-based compensation and income taxes.

Our critical accounting policies and estimates include those related to revenue recognition and sales allowances, royalties, inventory, goodwill and intangible assets and income taxes.

Changes to these policies and estimates could have a material adverse effect on our results of operations and financial condition.

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Many licensing agreements also require minimum royalty commitments.

When royalty fees are paid in advance, we record these payments as a prepaid asset, either current or long- term based on when we expect to realize revenues under the related licensing agreement.

When royalty fees are paid in advance, we record these payments as a prepaid asset.

If we determine that it is probable that the expected revenue will not be realized, a reserve is recorded against the prepaid asset for the non-recoverable portion.

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As of December 31, 2019, we recorded a prepaid asset of $13.0 million, net of a reserve of $2.4 million.

As of December 31, 2017, we recorded a prepaid asset of $6.4 million, net of a reserve of $2.9 million.

We record a royalty liability as revenues are earned based on the terms of the licensing agreement.

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Royalty and license expense is recorded within cost of sales on the consolidated statements of operations.

Royalty expenses for the years ended December 31, 2019, 2018 and 2017, were $126.8 million, $110.7 million and $77.1 million, respectively.

Royalty expenses for the years ended December 31, 2020 and 2019, were $105.0 million and $126.8 million, respectively.

Inventory consists primarily of figures, plush and accessories and other finished goods, and is accounted for using the first-in, first-out, or FIFO, method.

Inventory costs include direct product costs and freight costs.

We maintain reserves for excess and obsolete inventories to reflect the inventory balance at the lower of cost or net realizable value.

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We estimate obsolescence based on assumptions regarding future demand.

Inventory costs include direct product costs and freight costs.

As a result of the ACON Acquisition, the Underground Toys Acquisition and the Loungefly Acquisition, inventory was adjusted to fair value as of October 31, 2015, January 27, 2017 and June 28, 2017, respectively.

See Note 3, Acquisitions of the notes to our consolidated financial statements.

In addition, during the year ended December 31, 2019, we recorded a one-time $16.8 million charge related to the write-down of inventory as a result of the Company's decision to dispose of slower moving inventory to increase operational capacity.

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As a result of these exchanges, during the years ended December 31, 2020 and 2019, the Company recognized an increase to its net deferred tax assets in the amount of $0.5 million and $48.1 million, respectively, and corresponding Tax Receivable Agreement liabilities of $1.0 million and $59.0 million, respectively, representing 85% of the tax benefits due to the Continuing Equity Owners.

In addition, during the year ended December 31, 2019, the Company recognized $0.2 million of expenses in other (income) expense, net on our consolidated statements of operations related to remeasurement adjustments of Tax Receivable Agreement liabilities.

During the year ended December 31, 2017, there were no redemptions or exchanges of common units in FAH, LLC under the Tax Receivable Agreement.

As such, we did not record any liabilities relating to our obligations under the Tax Receivable Agreement for 2017.

Refer to Note 2, Significant Accounting Policies of the notes to our consolidated financial statements for a discussion of recent accounting pronouncements.

In addition, during the year ended December 31, 2020, the Company recognized $0.1 million of expenses in other expense (income), net on our consolidated statements of operations related to remeasurement adjustments of Tax Receivable Agreement liabilities.

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 7. Management’s Discussion and Analysis