What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-11 compared with 2020-03-05 · 366 added, 427 removed, 728 unchanged (52% of the section changed)

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Consolidated Balance Sheets

Consolidated Statements of Stockholders’ and Members’ Equity

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

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We have audited the accompanying consolidated balance sheets of Funko, Inc.

and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders' and members' equity and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes, and the financial statement schedule listed in the index at Item 15(a) (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S.

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Selling, general, and administrative expenses 181,234 193,803 155,349

Acquisition transaction costs — 28 3,641

Depreciation and amortization 44,368 42,126 39,116

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Diluted 35,770 32,926 25,560

________________________________________________________________

(1) Basic and diluted earnings per Class A common stock is applicable only for the period after the Company’s IPO.

See Note 20, Earnings Per Share.

See accompanying notes to consolidated financial statements.

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Other comprehensive income:

Foreign currency translation (loss) gain, net of tax effect of $(282), $ 51 and $ — for the years ended December 31, 2019, 2018 and 2017, respectively

Foreign currency translation gain (loss), net of tax effect of $( 274 ), $( 282 ) and $ 51 for the years ended December 31, 2020, 2019 and 2018, respectively

1,415 1,458 ( 2,020 )

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CONSOLIDATED BALANCE SHEETS

(In thousands)

(in thousands, except per share data)

Current assets:

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Liabilities under tax receivable agreement, net of current portion 60,297 61,554

Deferred rent and other long-term liabilities 7,421 6,623

Commitments and contingencies

Other long-term liabilities 3,848 7,421

Commitments and contingencies (Note 14)

Stockholders' equity:

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AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ AND MEMBERS’ EQUITY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

Member Units Recourse

Loans To Management Other

Income Members'

Earnings (Deficit) Class A Common

Class A Common

Stock Class B Common

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Paid-In Capital Other

Comprehensive

Income Retained

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Controlling Interests Total

Units Amounts Shares Amount Shares Amount

January 1, 2017 243 $ 277,401 $ ( 773 ) $ — $ ( 59,251 ) — $ — — $ — $ — $ — $ — $ — $ 217,377

Equity issued in connection with acquisition prior to

Transactions 2 5,313 — — — — — — — — — — — 5,313

Warrants issued in connection with long-term debt

prior to Transactions — — — — 5,726 — — — — — — — — 5,726

Equity-based compensation prior to Transactions — 4,571 159 — — — — — — — — — — 4,730

Net income prior to Transactions — — — — 2,684 — — — — — — — — 2,684

Cumulative translation adjustment prior to Transactions — — — 1,184 — — — — — — — — — 1,184

Distribution to members prior to Transactions — — — — ( 72,965 ) — — — — — — — — ( 72,965 )

Contributions from members prior to Transactions 5 5,000 — — — — — — — — — — — 5,000

Recourse loans to management prior to Transactions — — 188 — — — — — — — — — — 188

Effect of Transactions ( 250 ) ( 292,285 ) 426 ( 1,184 ) 123,806 12,921 1 168,052 572 612 —

Sale of Class A common stock in initial public offering,

net — — — — — 10,417 1 — — 108,919 — — — 108,920

Issuance of Class B common stock — — — — — — — 24,976 2 — — — — 2

Net deferred tax adjustments resulting from the

Transactions — — — — — — — — — ( 1,241 ) — — — ( 1,241 )

Unrecognized tax benefits resulting from the

— — — — — — — — — ( 254 ) — — — ( 254 )

Non-controlling interests related to purchase of

common units from FAH, LLC — — — — — — — — — ( 147,254 ) — — 147,254 —

Equity-based compensation subsequent to

Transactions — — — — — — — — — 844 — — — 844

Cumulative translation adjustment — — — — — — — — — — 234 — 249 483

Net income subsequent to the Transactions — — — — — — — — — — — 1,254 2,047 3,301

Shares Amount Shares Amount

Period ended December 31, 2017 23,338 $ 2 24,976 $ 2 $ 129,066 $ 806 $ 1,254 $ 150,162 $ 281,292

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Shares issued for equity-based compensation awards 175 — — — 28 — — — 28

Cumulative translation adjustment, net of tax — — — — — — — — — — ( 973 ) — ( 1,047 ) ( 2,020 )

Establishment of liabilities under tax receivable

agreement and related changes to deferred tax

assets — — — — — — — — — 193 — — — 193

Redemption of common units of FAH, LLC — — — — — 1,447 — ( 1,392 ) — 7,727 — — ( 7,727 ) —

Cumulative translation adjustment,

net of tax — — — — — ( 973 ) — ( 1,047 ) ( 2,020 )

Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets — — — — 193 — — — 193

Redemption of common units of

FAH, LLC 1,447 — ( 1,392 ) — 7,727 — — ( 7,727 ) —

Net income — — — — — — 7,463 17,599 25,062

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net of tax — — — — — 958 — 500 1,458

Establishment of liabilities under tax receivable

agreement and related changes to deferred tax

assets — — — — — — — — — ( 10,947 ) — — — ( 10,947 )

Redemption of common units of FAH, LLC — — — — — 9,472 1 ( 9,069 ) ( 1 ) 51,484 — — ( 51,484 ) —

Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets — — — — ( 10,947 ) — — — ( 10,947 )

Redemption of common units of

FAH, LLC 9,472 1 ( 9,069 ) ( 1 ) 51,484 — — ( 51,484 ) —

Net income — — — — — — 11,725 16,095 27,820

Period ended December 31, 2019 34,918 $ 3 14,515 $ 1 $ 204,174 $ 791 $ 20,442 $ 79,733 $ 305,144

Distribution to continuing equity owners — — — — — — — ( 3,576 ) ( 3,576 )

Equity-based compensation — — — — 10,116 — — — 10,116

Shares issued for equity-based compensation awards 226 — — — 219 — — — 219

Shares withheld related to net share settlement of equity-based compensation awards — — — — ( 101 ) — — — ( 101 )

Cumulative translation adjustment,

net of tax — — — — — 927 — 488 1,415

Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets — — — — ( 536 ) — — — ( 536 )

Redemption of common units of

FAH, LLC 513 1 ( 475 ) — 2,269 — — ( 2,269 ) 1

Net income — — — — — — 3,961 5,802 9,763

Period ended December 31, 2020 35,657 $ 4 14,040 $ 1 $ 216,141 $ 1,718 $ 24,403 $ 80,178 $ 322,445

See accompanying notes to consolidated financial statements.

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Loss on debt extinguishment — — 4,547

Deferred tax benefit ( 2,293 ) ( 964 ) ( 718 )

Deferred tax expense (benefit) 3,323 ( 2,293 ) ( 964 )

Other 1,952 635 4,288

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Payment of long-term debt ( 26,438 ) ( 11,750 ) ( 231,338 )

Payment of subordinated debt, net — — ( 20,000 )

Proceeds from subordinated debt, net — — 20,000

Contingent consideration — — ( 2,500 )

Contributions from members — — 5,000

Proceeds from initial public offering, net of underwriters

discount and commissions — — 117,337

Proceeds from issuance of Class B common stock — — 2

Distributions to continuing equity owners ( 3,575 ) ( 23,923 ) ( 20,441 )

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Proceeds from exercise of equity-based options 219 2,217 23

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

Net cash used in financing activities ( 61,838 ) ( 28,340 ) ( 15,046 )

Effect of exchange rates on cash and cash equivalents 107 ( 2,049 ) ( 1,686 )

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Issuance of equity instruments for acquisitions — 2,221 —

Issuance of warrants for Class A units in connection with long-term debt — — 5,061

Issuance of warrants for common units in connection with long-term debt — — 665

Reimbursement of management recourse loans — — 773

Tenant allowance 269 3,201 168

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(“FAH, LLC”) and its subsidiaries.

FAH, LLC, a holding company with no operating assets or operations, was formed on September 24, 2015.

On October 30, 2015, ACON Funko Investors, L.L.C.

(together with related entities, “ACON”), through FAH, LLC, acquired a controlling interest in Funko Holdings LLC (“FHL”) (the “ACON Acquisition”), a Delaware limited liability company formed on May 28, 2013, which is also a holding company with no operating assets or operations.

FAH, LLC owns 100 % of FHL and FHL owns 100 % of Funko, LLC, a limited liability company formed in the state of Washington, which is its operating entity.

FAH, LLC owns 100 % of Funko Holdings LLC ("FHL") and FHL owns 100 % of Funko, LLC, a limited liability company formed in the state of Washington, which is its operating entity.

Funko, LLC is headquartered in Everett, Washington and is a leading pop culture consumer products company.

Funko, LLC designs, sources, and distributes licensed pop culture products.

On November 6, 2017, the Company completed an IPO of 10,416,666 shares of its Class A common stock at a public offering price of $ 12.00 per share (the “IPO”), receiving approximately $ 117.3 million in net proceeds, after deducting underwriting discounts and commissions, which were used to purchase 10,416,666 of FAH, LLC’s newly-issued common units at a price per unit equal to the price per share of Class A common stock sold in the IPO, less underwriting discounts and commissions.

The IPO and related reorganization transactions (the “Transactions”) resulted in the Company being the sole managing member of FAH, LLC.

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Accordingly, the Company consolidates the financial results of FAH, LLC and reports a non-controlling interest in its consolidated financial statements representing the FAH, LLC interests held by ACON Funko Investors, L.L.C., a Delaware limited liability company (“ACON Funko Investors”) and certain of its affiliates, Fundamental Capital, LLC and Funko International, LLC (collectively, “Fundamental”), and certain current and former executive officers, employees and directors, in each case, who held profits interests in FAH, LLC and who received common units of FAH, LLC in exchange for their profits interests in connection with the Transactions (as defined herein) (collectively, the “Original Equity Owners”) and the former holders of warrants to purchase ownership interests in FAH, LLC, which were converted into common units of FAH, LLC in connection with the Transactions, and, in each case, each of their permitted transferees that own common units in FAH, LLC and who may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their common units for, at the Company’s election, cash or newly-issued shares of the Company’s Class A common stock (collectively, the “Continuing Equity Owners”).

As the Transactions, discussed further in Note 18, Stockholders’ Equity, are considered transactions between entities under common control, the financial statements reflect the combined entities for all periods presented.

As the Transactions, are considered transactions between entities under common control, the financial statements reflect the combined entities for all periods presented.

Significant Accounting Policies

Certain of the significant accounting policies are discussed within the note to which they specifically relate.

Certain prior-year amounts have been reclassified to conform to the current year presentation.

Use of Estimates

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For the years ended December 31, 2020, 2019 and 2018 there was no individual customer that generated net sales over 10%.

For the year ended December 31, 2019, 13 %, 11 %, and 11 % of sales were related to the Company’s three largest license agreements with no other license agreements accounting for more than 10% of sales.

For the year ended December 31, 2018, there were three license agreements that accounted for more than 10% of sales.

For the year ended December 31, 2017, there were no license agreements that accounted for more than 10% of sales.

For the year ended December 31, 2020, 12 % and 11 % of sales were related to the Company’s two largest license agreements with no other license agreements accounting for more than 10% of sales.

For both of the years ended December 31, 2019 and 2018, there were three license agreements that accounted for more than 10% of sales.

The Company maintains its cash within bank deposit accounts at high quality, accredited financial institutions.

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Inventory consists primarily of figures, plush, apparel, homewares, accessories, games and other finished goods, and is accounted for using the first-in, first-out (“FIFO”) method.

Inventory costs include direct product costs and freight costs.

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

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The Company estimates obsolescence based on assumptions regarding future demand.

Inventory costs include direct product costs and freight costs.

During the year ended December 31, 2019, we recorded a $ 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.

Reserves for excess and obsolete inventories were $ 8.6 million and $ 23.3 million as of December 31, 2020 and 2019, respectively.

During the year ended December 31, 2019, the Company recorded a $ 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.

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Lesser of useful life or term of lease

The Company monitors our long-lived assets for impairment indicators on an ongoing basis in accordance with U.S.

If impairment indicators exist, the Company will perform the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values.

If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized.

An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets.

Fair value is estimated based upon a combination of market and cost approaches, as appropriate.

Changes in economic or operating conditions impacting these estimates and assumptions could result in the impairment of the Company's long-lived assets.

Revenue Recognition and Sales Allowance

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These sales adjustments require management to make estimates.

In making these estimates, management considers all available information including the overall business environment, historical trends and information from customers, such as agreed upon

customer contract terms as well as historical experience from the customer.

In making these estimates, management considers all available information including the overall business environment, historical trends and information from customers, such as agreed upon customer contract terms as well as historical experience from the customer.

The costs of these programs reduce gross sales in the period the related sale is recognized.

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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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are included in other expense (income), net on our consolidated statements of operations.

In connection with the settlement and remeasurement of intercompany balances, we recorded gains of $ 0.7 million, $ 0.1 million and a nominal amount for the years ended December 31, 2019, 2018 and 2017, respectively.

In connection with the settlement and remeasurement of intercompany balances, we recorded a loss of $ 0.4 million and gains of $ 0.7 million and $ 0.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The income tax effects related to the unrealized foreign currency component of other comprehensive income are reclassified to earnings only when the net investment is sold, or when a liquidation of the respective net investment in the foreign entity is substantially completed.

Recently Adopted Accounting Standards

Lease Accounting.

In February 2016, the FASB issued guidance related to lease accounting that requires the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements for leases with a term of more than 12 months.

The Company adopted the standard on January 1, 2019 by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application.

Credit Losses.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments," and since modified the standard with several ASUs (collectively, the "new credit loss standard").

The new credit loss standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount.

The Company adopted the standard on January 1, 2020 with no recorded cumulative-effect adjustment.

Comparative information has not been restated and continues to be reported under the standards in effect for those periods.

The Company has elected the “package of practical expedients” and as a result is not required to reassess under the new standard its prior accounting conclusions about lease identification, lease classification and initial direct costs for lease contracts that exist as of the transition date.

However, the Company has not elected the use of hindsight for determining the reasonably certain lease term.

The new lease standard also provides practical expedients and policy elections for an entity’s ongoing accounting.

The Company has elected the practical expedient to not separate lease and non-lease components for all of its leases.

The Company has also elected the short-term lease recognition exemption, which results in no recognition of right-of-use assets and lease liabilities for short-term leases.

Upon adoption on January 1, 2019, the Company recognized operating lease right-of-use assets and lease liabilities that have not previously been recorded.

The lease liability for operating leases is based on the net present value of future minimum lease payments.

The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as deferred and prepaid rent.

Deferred and prepaid rent will not be presented separately for periods subsequent to the adoption of the new lease standard.

The cumulative effect of initially applying the new lease accounting standard as of January 1, 2019 is as follows (in thousands):

January 1, 2019

Beginning balance Cumulative Effect Adjustment Beginning Balance, As Adjusted

Operating lease right-of-use assets $ — $ 33,014 $ 33,014

Liabilities and Stockholders' Equity:

Current portion of operating lease liabilities $ — $ 7,380 $ 7,380

Accrued expenses and other current liabilities $ 33,015 $ ( 429 ) $ 32,586

Operating lease liabilities, net of current portion $ — $ 30,076 $ 30,076

Deferred rent and other long-term liabilities $ 6,623 $ ( 4,013 ) $ 2,610

Acquisitions completed during the year ended December 31, 2019

In 2019, the Company completed the acquisition of Forrest-Pruzan Creative, LLC which was accounted for as a business combination.

On February 11, 2019, the Company acquired 100 % of the membership interests of Forrest-Pruzan Creative LLC (the “Forrest-Pruzan Acquisition”), a board game development studio in Seattle, WA, which now operates as Funko Games, LLC.

This transaction represents an opportunity to expand the Company’s product offerings into the board game category.

The purchase consideration consists of $ 6.5 million in cash and 126,757 shares of the Company’s Class A common stock with a fair value of $ 2.2 million paid at closing, $ 1.5 million cash holdback due to the sellers in 18 months, subject to certain conditions as per the agreement, and $ 2 million in cash due after a 24-month deferral period.

The total purchase consideration of $ 11.9 million was allocated on a relative fair value basis between net assets acquired and liabilities assumed of $ 11.6 million and noncompetition agreements entered into contemporaneously with the acquisition of $ 0.3 million.

The Company has finalized its analysis of the opening balance sheet balances and assumptions over the fair value of assets and liabilities acquired and purchase consideration transferred.

Goodwill of $ 8.5 million is calculated as the excess of the purchase price paid over the net assets acquired.

The goodwill recognized in connection with the Forrest-Pruzan Acquisition primarily reflects relevant skills and industry knowledge of the retained workforce, as well as intangible assets that do not qualify for separate recognition.

The finalization of the purchase price allocation resulted in no change from the preliminary estimate.

The activity of Funko Games, LLC included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2019 was not material.

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Consideration transferred $ 11,646

The following table shows the amounts recognized for each major class of assets acquired and liabilities assumed and the resultant purchase price allocation for the Forrest-Pruzan Acquisition as of February 11, 2019:

The purchase price allocation for the acquisition was as follows:

Assets (Liabilities) Acquired (Assumed)

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Consideration transferred $ 11,646

The following table summarizes the identifiable intangible assets acquired in connection with the transactions described above and their estimated useful lives as of February 11, 2019:

The following table summarizes the identifiable intangible assets acquired in connection with the transactions described above and their estimated useful lives:

Estimated Fair Value of

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Intangible assets $ 3,300

Acquisitions completed during the year ended December 31, 2017

In 2017, the Company completed three acquisitions that were accounted for as business combinations by applying the acquisition method of accounting, where identifiable tangible and intangible assets acquired and liabilities assumed are recognized and measured as of the acquisition date at fair value and goodwill is calculated as the excess of the purchase price paid over the net assets acquired.

A Large Evil Corporation Limited.

On November 28, 2017 , the Company acquired all of the outstanding equity of A Large Evil Corporation Limited (“A Large Evil Corporation Acquisition”), an animation studio based in the United Kingdom.

The preliminary purchase consideration included $ 3.9 million paid in cash and additional $ 1.0 million due to the sellers based on certain working capital adjustments and other conditions as per the agreement.

The purchase price allocation was finalized during the third quarter of 2018 and the estimated fair value of the assets acquired and liabilities assumed has been finalized.

The finalization of the purchase price allocation resulted in no change from the preliminary estimate.

Costs, such as advisory, legal and accounting fees the Company incurred related to A Large Evil Corporation Acquisition were $ 0.1 million for the year ended December 31, 2017 and are recorded within acquisition transaction costs in the consolidated statements of operations.

The activity of A Large Evil Corporation included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2017 was not material.

On June 28, 2017, the Company acquired all of the outstanding equity interests of Loungefly, LLC (“Loungefly”), a designer of licensed pop culture fashion handbags, small leather goods and accessories (the “Loungefly Acquisition”).

The purchase consideration included $ 17.9 million paid in cash, which included $ 1.8 million in transaction fees paid on behalf of the seller, and the issuance of $ 2.1 million of FAH, LLC’s Class A units.

The Company recorded certain fair value adjustments to Loungefly’s assets and liabilities as of the acquisition date, including a $ 1.4 million increase to inventory.

The purchase price allocation was finalized during the first quarter of 2018 and the estimated fair value of the assets acquired and liabilities assumed has been finalized.

The finalization of purchase price allocation resulted primarily in a reduction of $ 1.7 million to intangible assets and an increase in goodwill of $ 1.8 million .

Costs, such as advisory, legal, accounting fees and change of control fees, the Company incurred related to the Loungefly Acquisition were $ 1.1 million for the year ended December 31, 2017, and are recorded within acquisition transaction costs in the consolidated statements of operations.

The activity of Loungefly included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2017 was net sales of $ 17.0 million and net income of $ 1.9 million.

Underground Toys Limited.

On January 27, 2017, the Company acquired certain assets of Underground Toys Limited, a manufacturer and distributor of licensed products based in the United Kingdom (the “Underground Toys Acquisition”).

The acquired assets primarily consisted of inventory and identifiable intangible assets, which are now used by the Company’s newly formed subsidiary Funko UK, Ltd.

The purchase consideration included $ 12.6 million in cash, the issuance of $ 3.2 million of FAH, LLC’s Class A units, an additional payment in cash of up to $ 2.5 million contingent upon the assignment of certain license agreements and certain working capital adjustments of $ 1.8 million.

The Company has recorded certain adjustments to the working capital assumed, including a $ 1.3 million decrease to inventory.

The purchase price allocation has been finalized.

Costs, such as advisory, legal, accounting fees and change of control fees incurred by the Company related to the acquisition of certain assets of Underground

Toys Limited were $ 1.8 million for the year ended December 31, 2017, and are recorded within acquisition transaction costs in the consolidated statements of operations.

Foreign currency transaction gains and losses are included in other income, net on the consolidated statements of operations.

Foreign currency transaction gain, net for the year ended December 31, 2017 was $ 0.7 million.

The activity of Funko UK, Ltd.

included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2017 was net sales of $ 93.4 million and a net income of $ 2.3 million for the year ended December 31, 2017.

The Company’s U.K.

operations are subject to U.K.

income taxes, which were $ 0.5 million for the period from the acquisition date to December 31, 2017 and are included within income tax expense on the consolidated statements of operations.

For the acquisitions described above, the Company recorded goodwill amounting to $ 15.4 million in the aggregate, which relates to a number of factors, including the future earnings and cash flow potential of the businesses, the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the processes by which the Company acquired the businesses, the avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance its existing offerings to key target markets and develop new and profitable businesses, and the complimentary strategic fit and resulting expected synergies to be achieved.

Goodwill is not deductible for tax purposes.

The purchase consideration for the acquisitions was as follows:

Purchase Consideration

Corporation Limited

(in thousands)

$ 16,113 $ 12,554 $ 3,862

Transaction fees paid (incurred) on behalf of seller

Working capital adjustment to be paid in cash

635 1,784 1,003

Fair value of Class A Units issued

2,131 3,182 —

Fair value of contingent consideration

Purchase consideration

$ 20,656 $ 19,990 $ 4,865

The purchase price allocations for the acquisitions were as follows:

Assets (Liabilities) Acquired (Assumed) at Fair Value

Corporation Limited

(in thousands)

$ 1,501 $ — $ 645

Accounts receivable

2,351 15,263 —

Other current assets

132 1,122 321

Property and equipment

Intangible assets

12,605 6,500 —

11,249 3,438 4,000

Current liabilities

( 10,711 ) ( 6,622 ) ( 207 )

Consideration transferred

$ 20,656 $ 19,990 $ 4,865

The following table summarizes the estimated identifiable intangible assets acquired in connection with the transactions described above and their estimated useful lives:

Estimated Fair Value of

Assets Acquired

(in thousands)

Intangible asset type:

Customer relationships

$ 2,015 $ 3,700 10

Licensor relationships

8,590 2,500 10

Supplier relationships

Intangible assets

$ 12,605 $ 6,500

Goodwill and Intangible Assets

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The Company evaluates goodwill for impairment annually on October 1 of each year and upon the occurrence of triggering events or substantive changes in circumstances that could indicate a potential impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of the net assets is below their carrying amounts.

The Company has determined that it has one reporting unit for which discrete financial information is available and results are regularly reviewed by management.

During the year ended December 31, 2020, the Company assessed a series of triggering events related to the Company’s book value in excess of the market capitalization of the Company.

Such triggering events included the World Health Organization declaring on March 11, 2020 that the COVID-19 outbreak constituted a global pandemic and the Company releasing a business update on March 20, 2020 announcing the closing of its retail locations, that employees would be working from home and the withdrawal of its 2020 financial guidance that had been issued on March 5, 2020.

Due to sustained lower market capitalization below book value, the Company performed a quantitative analysis at each of the 2020 quarterly reporting periods.

The fair value of the reporting unit was determined using a market approach which considered the current market capitalization of the Company as well as a control premium that was estimated based upon comparable market transactions to reflect the synergies and other benefits available to a market participant.

The Company’s long-lived asset groups, which includes intangible assets, property and equipment and operating lease right-of-use assets net of operating lease liabilities, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group might not be recoverable.

Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset (or asset group), a significant change in the extent or manner in which an asset (or asset group) is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable.

No impairment charges relating to goodwill were recorded in the years ended December 31, 2020, 2019 and 2018.

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Balance as of January 1, 2019 $ 116,078

Measurement period adjustment 1,773

Acquisition 8,465

Foreign currency remeasurement 292

Balance as of December 31, 2019 $ 124,835

Acquisitions 8,465

Foreign currency remeasurement 226

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December 31, 2020 December 31, 2019

Intangible assets

amortization:

Intangible assets subject

to amortization:

Intellectual property 3 - 20

$ 115,131 $ ( 30,008 ) $ 85,123 $ 115,131 $ ( 24,047 ) $ 91,084

Trade names 10 - 20

83,359 ( 21,717 ) 61,642 83,359 ( 17,450 ) 65,909

Customer relationships 3 - 20

71,736 ( 20,301 ) 51,435 71,620 ( 15,633 ) 55,987

Licensor relationships 10 - 20

11,301 ( 4,068 ) 7,233 11,222 ( 2,915 ) 8,307

Supplier relationships 2 325 ( 325 ) — 316 ( 316 ) —

Noncompetition

agreements 3 290 ( 85 ) 205 — — —

Noncompetition agreements 3 290 ( 182 ) 108 290 ( 85 ) 205

Total $ 282,142 $ ( 76,601 ) $ 205,541 $ 281,938 $ ( 60,446 ) $ 221,492

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2021 $ 16,076

Thereafter 129,802

Total $ 205,541

Accounts Receivable, Net

Accounts receivable, net, primarily represent customer receivables, recorded at invoiced amount, net of a sales allowance and an allowance for doubtful accounts.

An allowance for doubtful accounts is determined based on various factors, including specific identification of balances at risk for not being collected, historical experience and existing economic conditions.

The Company evaluates its general reserves based on historical loss information and applies reserve percentages based on aging schedule.

Days past due is calculated from contractual due date of the trade receivable contract.

The composition of the trade receivables is consistent with that used in developing the historical credit-loss percentages and evaluated to reflect current conditions and supportable forecasted changes.

The trade receivables are generally due in 30 to 90 days.

In addition to the general reserve, certain doubtful accounts are evaluated for a specific reserve.

These accounts generally include significantly past due or other factors known where a substantial portion or all of the balance is uncollectible.

Receivables are written-off when all reasonable collection efforts have been exhausted and it is probable the balance will not be collected.

The Company monitors the financial health of its customers and will take actions to mitigate a customer's credit risk if a negative financial forecast is expected.

Accounts receivable, net consisted of the following (in thousands):

7 unchanged sentences

Bad debt expense was $ 2.4 million, $ 1.1 million and $ 1.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Activity in our allowance for doubtful accounts was as follows:

Activity in our allowance for doubtful accounts was as follows (in thousands):

Allowance for doubtful accounts - beginning $ 2,354 $ 3,049

17 unchanged sentences

Computer equipment, software and other

11,310 10,186

Furniture, fixtures and warehouse equipment

11,762 11,231

Construction in progress

10 unchanged sentences

Accrued sales taxes 757 687

Deferred rent

Current liabilities under tax receivable agreement 2,020 4,262

8 unchanged sentences

and Level 3, defined as unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

Contingent Consideration.

The Company measures contingent consideration obligations at the acquisition date of a business combination, and at each balance sheet date, at fair value, with changes in fair value recognized in its consolidated statements of operations.

Fair value is measured using the discounted cash flow method and based on assumptions the Company believes would be made by a market participant.

Significant market inputs used to determine fair value included probabilities of the likelihood of assignment of license agreements and successful achievement of the EBITDA threshold that would trigger contingent purchase consideration, the timing of when the payments will be made, and the discount rate.

Significant changes to these assumptions would result in a significantly lower or higher fair value measurement.

The valuation represents a Level 3 measurement within the fair value hierarchy.

The Company recorded an estimated $ 2.5 million in contingent consideration at the time the Company acquired Underground Toys Limited, which was paid out in 2018.

The following table sets forth the fair value and a summary of changes to the fair value of these Level 3 financial liabilities (in thousands):

Consideration

Balance at December 31, 2017 $ 2,500

Payments ( 2,500 )

Balance at December 31, 2018 $ —

Changes in fair value reflect changes to the Company’s assumptions regarding probabilities of the likelihood of assignment of license agreements and successful achievement of the earnings-based metrics, the timing of when the payment will be made, and the discount rate used to estimate the fair value of the obligation, and are recorded within selling, general and administrative expense in the consolidated statements of operations.

The estimated fair values of the Company’s debt instruments, which are classified as Level 3 financial instruments, at December 31, 2020 and 2019, was approximately $ 193.9 million and $ 246.1 million, respectively.

2 unchanged sentences

Debt consists of the following (in thousands):

New Revolving Credit Facility

$ 25,822 $ 20,000

New Term Loan Facility

220,313 232,063

Revolving Credit Facility $ — $ 25,822

Term Loan Facility 193,875 220,313

Debt issuance costs

7 unchanged sentences

Maturities of long-term debt for each of the next five years and thereafter are as follows (in thousands):

New Term Loan Facility

Term Loan Facility

2021 $ 11,750

Former Senior Secured Credit Facilities

In October 2015, the Company entered into a credit agreement which provided for the $ 175.0 million Term Loan A Facility and the Revolving Credit Facility, including a $ 3.0 million subfacility for the issuance of letters of credit.

On September 8, 2016, the Company entered into an amendment to the credit agreement which, among other things, increased borrowings under the Term Loan A Facility by $ 50.0 million and changed the interest rate applicable to the Revolving Credit Facility.

On January 17, 2017, the Company entered into an amendment to its credit agreement which provided for, among other things, an additional $ 50.0 million Term Loan B Facility, providing for interest rate options that can be chosen by the Company and an increase in commitments under the Revolving Credit Facility to $ 80.0 million.

In June 2017, the Company entered into additional amendments to its credit agreement to, among other things, (1) permit the Company to enter into certain subordinated loan documents, and (2) increase borrowings under the Term Loan A Facility by $ 20.0 million, increase commitments under the Revolving Credit Facility to $100.0 million and make certain changes to certain covenants and definitions.

Proceeds from the additional Term Loan A Facility borrowings were used to fund a portion of the purchase price for the Loungefly Acquisition and to pay related fees and expenses.

In November 2017, all of the outstanding aggregate principal balance and accrued interest of $ 46.1 million on the Company’s Term Loan B Facility was repaid in connection with the IPO, and the Company recorded a $ 5.1 million loss on debt extinguishment as a result of the write-off of unamortized discount.

On March 7, 2018, the Company entered into an amendment to its credit agreement which provides for, among other things, (i) a $ 13.0 million prepayment of the amounts owing under the Term Loan A Facility on the effective date of the amendment, with no changes in the amount of future amortization payments, (ii) a reduction in the interest rate margins (a) for the Term Loan A Facility, from 6.25 % to 5.50 % for base rate loans and 7.25 % to 6.50 % for LIBOR rate loans and (b) for the Revolving Credit Facility, from 2.50 % to 1.75 % for LIBOR rate loans, (iii) a 1 % prepayment premium on prepayments under both the Term Loan A Facility and the Revolving Credit Facility for 180 days after the effective date of the amendment, and (iv) a $ 20.0 million increase to the borrowing base under the Revolving Credit Facility, so long as no loan party formed under the laws of England and Wales or Funko UK, Ltd.

incurs secured indebtedness for borrowed money.

The Former Senior Secured Credit Facilities were collateralized by substantially all of the assets of, and the equity interests held by, the borrowers and any subsidiary guarantor that may become party to the credit agreement in the future, subject to certain exceptions.

The Former Senior Secured Credit Facilities also contained certain financial and restrictive covenants.

As of December 31, 2017 the Company was in compliance with all covenants under the Former Senior Secured Credit Facilities.

In November 2017, all of the then outstanding aggregate principal balance and accrued interest of $ 55.6 million was repaid on the Revolving Credit Facility in connection with the IPO.

The Company had $10.8 million of borrowings outstanding under the Revolving Credit Facility as of December 31, 2017.

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

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

On February 11, 2019, the Company amended the New Credit Facilities 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 Company entered into a second amendment to the New Credit Facilities (the “Amendment”) The Amendment extends the maturity date of the term loans and revolving credit facility under the credit agreement 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.

As amended, 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 first amortization payment was on December 31, 2018.

The New 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 New Credit Facilities bear interest, at the Company’s option, 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 following the Closing Date.

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

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

The Borrowers may request that the New Credit Facilities be increased by an additional $ 25.0 million.

At December 31, 2019, the Company had $ 220.3 million and $ 25.8 million of borrowings outstanding under the New Term Loan Facility and New Revolving Credit Facility, respectively.

Credit Facilities

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

Upon closing, proceeds from the 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.

On February 11, 2019, the Company amended the Credit Facilities 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 Company entered into a second amendment to the Credit Facilities (the “Second Amendment”) The Second Amendment extended the maturity date of the term loans and revolving credit facility under the credit agreement to September 23, 2024, reduced the interest margin applicable to all loans under the credit agreement by 0.75 % and reduced 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.

As amended, 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 first amortization payment was on December 31, 2018.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 bear interest, at the Company’s option, 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 Credit Facilities are secured by substantially all assets of the Company and any of its existing or future material domestic subsidiaries, subject to customary exceptions.

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

The Borrowers may request that the Credit Facilities be increased by an additional $ 25.0 million.

At December 31, 2020, the Company had $ 193.9 million of borrowings outstanding under the Term Loan Facility.

We had no borrowings under the Revolving Credit Facility as of December 31, 2020 and an available borrowing capacity of $ 75.0 million.

There were no outstanding letters of credit as of December 31, 2020 and 2019.

Subordinated Promissory Notes

On June 26, 2017, FAH, LLC issued promissory notes payable to certain of its members, including several members of management and its majority owner, in the aggregate principal amount of $ 20.0 million (the “Subordinated Promissory Notes”).

Borrowings under the Subordinated Promissory Notes accrued interest at a rate equal to 11.0 % per year for the first 90 days after their effective date, increasing to 13.0 % per year 91 days after such effective date and 15.0 % per year 181 days after such effective date.

Proceeds from the Subordinated Promissory Notes were used to finance a portion of the contingent consideration related to the ACON Acquisition that was paid out during the year ended December 31, 2018.

In November 2017, all of the outstanding aggregate principal balance and accrued interest on the Subordinated Promissory Notes of $ 20.9 million was repaid in connection with Funko, Inc.’s IPO.

The Company has entered into non-cancellable operating leases for office, warehouse, and distribution facilities, with original lease periods expiring through 2032.

Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets;

the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

The Company combines lease and non-lease components for new and reassessed leases.

Some operating leases also contain the option to renew for five-year periods at prevailing market rates at the time of renewal.

In addition to minimum rent, certain of the leases require payment of real estate taxes, insurance, common area maintenance charges, and other executory costs.

For the year ended December 31, 2019, d ifferences between rent expense and rent paid are recognized as adjustments to operating lease right-of-use assets on the audited consolidated balance sheets.

For certain leases the Company receives lease incentives, such as tenant improvement allowances, and records those as adjustments to operating lease right-of-use assets and operating leases liabilities on the audited consolidated balance sheets and amortize the lease incentives on a straight-line basis over the lease term as an adjustment to rent expense.

For the years ended December 31, 2018 and 2017, differences between rent expense and rent paid was recorded as deferred rent on the consolidated balance sheets.

In addition, for the years ended December 31, 2018 and 2017, tenant improvement allowances were recorded as deferred rent on the consolidated balance sheets and amortized

on a straight-line basis over the lease term as a reduction of rent expense.

Rent expense was $ 14.9 million, $ 11.7 million and $ 6.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

As of December 31, 2019, the Company had recorded operating lease liabilities of $ 72.9 million and operating lease right-of-use assets of $62.9 million.

During the year ended December 31, 2019, operating cash outflows relating to operating lease liabilities was $ 8.3 million and operating lease right-of-use assets obtained in exchange for new operating lease obligations was $ 33.3 million, net of lease incentives obtained of $ 3.2 million.

As of December 31, 2019, the Company’s operating leases had a weighted-average remaining term of 7.9 years and weighted-average discount rate of 6.55 %.

For the year ended December 31, 2020 and 2019, d ifferences between rent expense and rent paid are recognized as adjustments to operating lease right-of-use assets on the consolidated balance sheets.

For certain leases the Company receives lease incentives, such as tenant improvement allowances, and records those as adjustments to operating lease right-of-use assets and operating leases liabilities on the consolidated balance sheets and amortize the lease incentives on a straight-line basis over the lease term as an adjustment to rent expense.

Rent expense, included in selling, general and administrative expenses on the consolidated statements of operations, was $ 15.3 million, $ 14.9 million and $ 11.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020 and 2019, the Company had recorded operating lease liabilities of $ 71.4 million and $ 72.9 million, respectively and operating lease right-of-use assets of $ 58.1 million and $ 62.9 million respectively.

During the years ended December 31, 2020 and 2019, operating cash outflows relating to operating lease liabilities was $ 11.6 million and $ 8.3 million, respectively and operating lease right-of-use assets obtained in exchange for new operating lease obligations was $ 5.8 million and $ 33.3 million, respectively, net of lease incentives obtained of $ 0.3 million and $ 3.2 million, respectively.

As of December 31, 2020 and 2019, the Company’s operating leases had a weighted-average remaining term of 7.3 years and 7.9 years, respectively and weighted-average discount rate of 6.28 % and 6.55 %, respectively.

Excluded from the measurement of operating lease liabilities and operating lease right-of-use assets were certain warehouse and distribution contracts that either qualify for the short-term lease recognition exception and/or do not give the Company the right to control the warehouse and/or distribution facilities underlying the contract.

During the year ended December 31, 2020, the Company recognized an impairment loss of $ 1.4 million related to the right of use lease asset in Bath, England.

The related lease liability was remeasured and reduced by $ 0.9 million.

In January 2020, the Company has also entered into a non-cancellable operating sub-lease for office space expiring in 2024.

Rental income recognized for the year ended December 31, 2020 was $ 0.3 million, included as a reduction of selling, general and administrative expenses on the consolidated statements of operations.

The future payments on the Company’s operating lease liabilities as of December 31, 2020 were as follows (in thousands):

14 unchanged sentences

FAH, LLC’s members, including the Company, are liable for federal, state and local income taxes based on their share of FAH, LLC’s pass-through taxable income.

The results for the year ended December 31, 2017 reflect the U.K.

Corporation Tax attributable to Funko UK, Ltd., but do not reflect the U.S.

tax expense of FAH, LLC prior to the IPO, which as a pass-through entity, was not subject to U.S.

The components of the Company’s income tax expense consisted of the following (in thousands):

24 unchanged sentences

Foreign taxes

Foreign tax credit ( 9.3 ) — —

Non-deductible expenses

1.6 ( 0.8 ) 4.3

Enactment of the Tax Cuts and Jobs Act — — 64.7

Change in valuation allowance

4.9 — ( 69.2 )

Non-controlling interest

1 unchanged sentence

Share-based Compensation 5.1 ( 2.6 ) —

LLC flow-through structure

Return to Provision ( 15.1 ) ( 3.0 ) ( 1.7 )

2 unchanged sentences

17.2 % 13.9 % 17.8 %

Our effective income tax rate for 2019 and 2018 was 13.9 % and 17.8 %, respectively.

The Company’s annual effective tax rate in 2020, 2019 and 2018 was less than the statutory rate of 21 %, primarily because the Company is not liable for income taxes on the portion of FAH, LLC’s earnings that are attributable to non-controlling interests.

In addition, the 2017 effective tax rate was impacted by the Tax Act and LLC flow through structure.

The Tax Act reduces the U.S.

federal corporate tax rate to 21 %, which negatively impacted our effective tax rate by reducing our deferred tax assets.

The non-controlling interest benefited our effective tax rate by reducing our allocable share of taxable income subject to U.S.

federal, state and local income taxes.

In 2017, the LLC flow-through structure benefited our effective tax rate 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.

Deferred Income Taxes

4 unchanged sentences

Tax Receivable Agreement liability

14,087 14,929

Stock-based compensation

Foreign Tax Credit 1,090 208

Property and equipment

Other carryforwards 898 —

Net operating loss carryforward 756 —

Gross deferred tax assets

6 unchanged sentences

Investment in partnership

( 2,246 ) ( 4,146 )

Property and equipment

( 833 ) ( 341 )

Other ( 506 ) ( 232 )

1 unchanged sentence

( 1,339 ) ( 2,819 )

Net deferred tax liabilities

$ 57,206 $ 7,402

As of December 31, 2019 and 2018, the Company did not have any federal or state net operating loss carryforwards for income tax purposes.

Net deferred tax assets $ 53,902 $ 57,206

As of December 31, 2020 the Company had other carryforwards of $ 0.9 million and a net operating loss carryforward of $ 0.8 million.

As of 2019, the Company did no t have any federal or state net operating loss carryforwards nor other carryforwards for income tax purposes.

The Company evaluates its ability to realize deferred tax assets on a quarterly basis and establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset may not be realized.

2 unchanged sentences

As of December 31, 2020 and 2019, the Company established a valuation allowance in the amount of $ 12.4 million and $ 11.2 million, respectively, against the deferred tax asset.

Accounting for the Tax Cuts and Jobs Act

In December 2017, the Tax Act was passed.

The Tax Act changed existing U.S.

tax law, including U.S.

corporate tax rates, business-related exclusions, and deductions and credits.

The accounting for the income tax effects of the Tax Act has been completed.

The significant impacts from the Tax Act are primarily due to the lower U.S.

federal corporate tax rate of 21 %.

The impact to the consolidated statement of operations was an additional $ 4.7 million of income tax expense recorded for the year ended December 31, 2017.

This expense reflects the revaluation of our net deferred tax assets based on a U.S.

federal corporate tax rate of 21 %.

Uncertain Tax Positions

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During years ended December 31, 2020 and 2019, the Company acquired an aggregate of 0.5 million and 9.5 million common units of FAH, LLC, respectively, in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in FAH, LLC subject to the provisions of the Tax Receivable Agreement.

As a result of these exchanges, during the years ended December 31, 2019 and 2018, the Company recognized an increase to its net deferred tax assets in the amount of $ 48.1 million and $ 7.0 million, respectively, and corresponding Tax Receivable Agreement liabilities of $ 59.0 million and $ 6.8 million, respectively, representing 85 % of the aggregate tax benefits

we expect to realize from the tax basis increases related to the redemption of FAH, LLC common units, after concluding it was probable that such Tax Receivable Agreement payments would be paid in the future based on our estimate of future taxable income.

The Company did not record any liabilities for the Tax Receivable Agreement during the year ended December 31, 2017.

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.

There were no remeasurement adjustments made to Tax Receivable Agreement liabilities during the years ended December 31, 2018 and 2017.

There were $ 0.2 million payments made pursuant to the Tax Receivable Agreement during the year ended December 31, 2019.

There were no payments made during the years ended December 31, 2018 and 2017.

As of December 31, 2019 and 2018, the Company’s total obligation under the Tax Receivable Agreement was $ 65.8 million and $ 6.8 million, respectively, of which $ 4.3 million and $ 0.3 million, respectively, was included in Accrued expenses and other current liabilities consolidated balance sheets.

There were no transactions subject to the Tax Receivable Agreement for which the Company did not recognize the related liability, as we concluded that it was probable that the Company would have sufficient future taxable income to utilize all of the related tax benefits.

The Company did not have any obligations under the Tax Receivable Agreement as of December 31, 2017.

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, representing 85 % of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of FAH, LLC common units, after concluding it was probable that such Tax Receivable Agreement payments would be paid in the future based on our estimate of future taxable income.

There were no transactions subject to the Tax Receivable Agreement for which the Company did not recognize the related liability during the years ended December 31, 2020, 2019 and 2018, as we concluded that it was probable that the Company would have sufficient future taxable income to utilize all of the related tax benefits.

The following table summarizes changes in the amount of the Company’s Tax Receivable Agreement liability for the three years ended December 31, 2020, 2019 and 2018 (in thousands):

Year Ended December 31,

2020 2019 2018

Beginning Balance $ 65,816 $ 6,771 $ —

Additional liabilities for exchanges 1,000 59,045 6,771

Adjustment to remeasurement of liabilities 87 152 —

Payments under tax receivable agreement ( 4,586 ) ( 152 ) —

Ending balance $ 62,317 $ 65,816 $ 6,771

Commitments and Contingencies

1 unchanged sentence

2021 2022 2023 2024 2025 Thereafter Total

Long term debt and related

$ 26,825 $ 34,532 $ 34,683 $ 37,565 $ 132,849 $ — $ 266,454

Long term debt $ 11,750 $ 24,969 $ 29,375 $ 127,781 $ — $ — $ 193,875

Operating leases 14,315 14,312 11,952 11,279 10,028 27,614 89,500

5 unchanged sentences

4,985 231 63 — — — 5,279

New Revolving Credit

25,822 — — — — — 25,822

Total $ 33,070 $ 44,862 $ 45,041 $ 142,784 $ 13,832 $ 71,382 $ 350,971

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

See Note 10, Debt.

(1) See Note 13, Liabilities under Tax Receivable Agreement.

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

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

License Agreements

1 unchanged sentence

The agreements generally require royalty payments based on product sales and in some cases may require minimum royalty and other related commitments.

In January 2019, we renewed our licensing agreements with Disney and its controlled affiliates, LucasFilm and Marvel.

As of December 31, 2018, we recorded a $ 2.0 million consent fee under our existing licensing agreements with Disney, which we subsequently paid.

Employment Agreements

14 unchanged sentences

An adverse determination in one or more of these pending matters could have an adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

The Company is, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business.

For example, on November 16, 2017, a purported stockholder of the Company filed a putative class action lawsuit in the Superior Court of Washington in and for King County against the Company, certain of its officers and directors, and the underwriters of its IPO, entitled Robert Lowinger v.

In January and March 2018, five additional putative class action lawsuits were filed in Washington state court, four in the Superior Court of Washington in and for King County and one in the Superior Court of Washington in and for Snohomish County.

Two of the King County lawsuits, Surratt v.

(filed on January 16, 2018) and Baskin v.

(filed on January 30, 2018), were filed against the Company and certain of its officers and directors.

The other two King County lawsuits, The Ronald and Maxine Linde Foundation v.

(filed on January 18, 2018) and Lovewell v.

et al (filed on March 27, 2018), were filed against the Company, certain of its officers and directors, ACON, Fundamental and certain other defendants.

The Snohomish County lawsuit, Berkelhammer v.

(filed on March 13, 2018), was filed against us, certain of the Company's officers and directors, and ACON.

On May 8, 2018, the Berkelhammer action was voluntarily dismissed, and on May 15, 2018 a substantially similar action was filed by the same plaintiff in the Superior Court of Washington in and for King County.

On April 2, 2018, a putative class action lawsuit entitled Jacobs v.

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

On May 21, 2018, the Jacobs action was voluntarily dismissed, and on June 12, 2018 a substantially similar action was filed by the same plaintiff in the Superior Court of Washington in and for King County.

On July 2, 2018, all of the above-referenced suits were ordered consolidated for all purposes into one action under the title In re Funko, Inc.

Securities Litigation in the Superior Court of Washington in and for King County.

On August 1, 2018, plaintiffs filed a consolidated complaint against the Company, certain of its officers and directors, ACON, Fundamental, and certain other defendants.

On October 1, 2018, the Company moved to dismiss that action.

Plaintiffs filed their opposition to the Company's motion to dismiss on October 31, 2018, and the Company filed its reply to plaintiffs’ opposition on November 30, 2018.

Oral argument on the motion to dismiss was held on May 3, 2019.

On August 2, 2019, the Superior Court of Washington in and for King County dismissed the consolidated action, allowing plaintiffs leave to amend the complaint.

The Court found, inter alia, that “Funko’s statements regarding its financial disclosures were not materially false or misleading” and that “plaintiffs have not shown that

Funko’s ‘opinion statements’ were false or that such statements were not simply corporate optimism or puffery.” On October 3, 2019, plaintiffs filed a first amended consolidated complaint.

The Company moved to dismiss that complaint on December 5, 2019.

The Company anticipates that the motion will be fully briefed by March 11, 2020, and that oral argument on the motion will take place March 27, 2020.

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

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

We are, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business.

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

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

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

Two additional complaints making substantially similar allegations— Nahas v.

and Dachev v.

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

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

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

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

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

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

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

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

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

Mariotti et al.

, and Igelido v.

Mariotti et al.

, respectively, were filed in the United States District Court for the Central District of California.

On July 6, 2020, these three actions were consolidated for all purposes into one action under the title In re Funko, Inc.

Derivative Litigation , and on August 13, 2020, the consolidated action was stayed pending final resolution of the motion to dismiss in the Ferreira action.

Additionally, on July 14 and July 31, 2020, the actions captioned Rubin v.

Mariotti et al.

and Fletcher v.

Mariotti et al.

, respectively, were filed in the United States District Court for the District of Delaware.

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

Stockholder Derivative Litigation on September 8, 2020.

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

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

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

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

On July 2, 2018, the suits were ordered consolidated for all purposes into one action under the title In re Funko, Inc.

Securities Litigation .

On August 1, 2018, plaintiffs filed a consolidated complaint against us, certain of our officers and directors, ACON, Fundamental, and certain other defendants.

On October 1, 2018, we moved to dismiss the action.

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

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

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

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

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

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

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

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

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

Funko, Inc., et al.

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

On January 4, 2019, a lead plaintiff was appointed in that case.

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The parties to the federal action, now captioned Berkelhammer v.

have agreed to a stay of

that action pending developments in the state case.

The complaints in both state and federal court allege that we violated Sections 11, 12, and 15 of the Securities Act of 1933, as amended, by making allegedly materially misleading statements and by omitting material facts necessary to make the statements made therein not misleading.

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

The Company believes it has meritorious defenses to the claims of the plaintiff and members of the class and any liability for the alleged claims is not currently probable or reasonably estimable.

The Company identifies its reportable segments according to how the business activities are managed and evaluated and for which discrete financial information is available and for which is regularly reviewed by its Chief Operating Decision Maker (“CODM”) to allocate resources and assess performance.

Because its CODM reviews financial performance and allocates resources at a consolidated level on a regular basis, it has one reportable segment.

The following table is a summary of product categories as a percent of sales:

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

The complaints in Washington state court and Berkelhammer v.

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

Securities and Exchange Commission in connection with our IPO and by omitting material facts necessary to make the statements made therein not misleading.

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

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

Those actions, captioned Silverberg v.

and De La Combe v.

, respectively, are pending.

We are party to additional legal proceedings incidental to our business.

While the outcome of these additional matters could differ from management’s expectations, we do not believe that the resolution of such matters is reasonably likely to have a material effect on our results of operations or financial condition.

The Company identifies its segments according to how the business activities are managed and evaluated and for which discrete financial information is available and for which is regularly reviewed by its Chief Operating Decision Maker (“CODM”) to allocate resources and assess performance.

Because its CODM reviews financial performance and allocates resources at a consolidated level on a regular basis, it has one segment.

The following tables present summarized product information as a percent of sales:

Year ended December 31,

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22.8 % 19.2 % 18.4 %

The following tables present summarized geographical information (in thousands):

Year ended December 31,

2020 2019 2018

United States

Branded Products 76.2 % 78.6 % 76.1 %

Loungefly Branded Products 13.0 % 9.1 % 5.6 %

10.8 % 12.3 % 18.3 %

International

The following tables present summarized geographical information (in thousands):

Year ended December 31,

2020 2019 2018

United States $ 488,823 $ 523,897 $ 466,044

Europe 111,997 198,203 149,260

Other International 51,717 73,022 70,769

Total net sales

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United Kingdom

29,998 35,396

Total long-lived assets

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Related Party Transactions

Members’ Equity Contribution

On June 26, 2017, the Company issued 5,000 Class A units in exchange for a contribution of $ 5.0 million from several members of management and ACON.

As a result of this issuance, the Company recorded equity-based compensation expense in the consolidated statements of operations of $ 2.2 million.

ACON Equity Management Agreement

On October 31, 2015, the Company entered into a management services agreement with ACON Equity Management, L.L.C.

(“ACON Equity Management”), which requires payment of a monitoring fee equal to the greater of (1) $ 500,000 and (2) 2 % prior year Adjusted EBITDA, up to a maximum fee of $ 2.0 million.

Pursuant to the management services agreement, Funko, LLC also agreed to pay ACON Equity Management a one-time advisory fee of $ 2.0 million, and agreed to reimburse ACON Equity Management for certain costs and expenses in connection with ACON Equity Management’s performance under the agreement.

In connection with the IPO, on November 6, 2017, the management fee agreement terminated.

ACON Equity Management waived the $ 5.8 million termination fee.

The Company had no management fees for the year ended December 31, 2019 and 2018, respectively.

The Company recognized $ 1.7 million in management fees for the years ended December 31, 2017.

These fees are recorded within selling, general and administrative expenses.

As of December 31, 2019 and 2018, there were no amounts due to ACON Equity Management.

Promissory and Subordinated Promissory Notes

In October 2015, the Company entered into subscription agreements with several members of management (the “Purchasers”) to purchase FAH, LLC Class A units having an aggregate purchase price of $ 0.9 million.

Funko, LLC entered into a secured promissory note with each Purchaser in an amount equal to the purchase price of the Class A units purchased by such individual.

Amounts outstanding under the promissory notes were collateralized by all direct or indirect ownership interests of the Purchasers in FAH, LLC.

The promissory notes had an 8 % interest rate compounded on an annual basis, and were recorded as a non-cash transaction within members’ equity.

The Company recognized interest on a cash basis when principal payments were made, and recorded a nominal amount of interest income for the year ended December 31, 2017.

On October 5, 2017, outstanding aggregate principal and accrued interest of $ 0.2 million was forgiven for certain of FAH, LLC’s officers and executives.

The remaining promissory notes were repaid as part of the reorganization Transactions, as defined below in “Reorganization Transactions.”

See discussion of the Subordinated Promissory Notes in Note 10, Debt.

The Subordinated Promissory Notes were repaid in November 2017, with proceeds from the IPO.

Other Agreements

In June 2017, in connection with the Loungefly Acquisition, the Company assumed a lease for the Loungefly headquarters and warehouse operations with 20310 Plummer Street LLC and entered into a global sourcing agreement with Sure Star Development Ltd.

Both entities are owned by certain of the Company’s employees, who were the former owners of Loungefly.

For the period from January 1, 2018 through July 12, 2018 and for the year ended December 31, 2017, the Company recorded $ 0.2 million and $ 0.2 million in rental expense related to the lease, which was recorded in selling, general and administrative expenses in the Company’s consolidated statements of operations.

The entities ceased to be related parties after July 12, 2018.

The Company sells products to Forbidden Planet, a U.K.

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For the years ended December 31, 2020 and 2019, the Company recorded approximately $ 2.0 million and $ 2.3 million, respectively, in net sales from business with Forbidden Planet.

At December 31, 2019 and 2018, accounts receivable from Forbidden Planet were $ 0.2 million and $ 0.8 million on the consolidated balance sheet, respectively.

At December 31, 2020 and 2019, accounts receivable from Forbidden Planet were $ 0.5 million and $ 0.2 million on the consolidated balance sheets, respectively.

In February 2019, in connection with the Forrest-Pruzan Acquisition, the Company assumed two leases of office space with Roll and Move, LLC and Roll and Move II LLC, both of which are owned by certain former owners of Forrest-Pruzan Creative LLC, one of whom remains an employee of the Company.

For the year ended December 31, 2019, the Company obtained operating lease right-of-use assets in exchange for new operating lease obligations of $ 1.0 million and recorded $ 0.2 million of rental expense related to the leases, which was recorded in selling, general and administrative expenses in the Company’s audited consolidated statements of operations.

On October 12, 2019, one of the leases was modified, which had the effect of reducing the carrying value of the lease liability and associated right-of-use asset by $ 0.4 million.

At December 31, 2019, the Company had recorded operating lease right-of-use assets and operating lease liabilities of $ 0.6 million related to the leases.

For both of the years ended December 31, 2020 and 2019, the Company recorded $ 0.2 million, of rental expense related to the leases, which was recorded in selling, general and administrative expenses in the Company’s consolidated statements of operations.

Employee Benefit Plans

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Stockholders’ Equity

In connection with the Company’s IPO, the Company’s board of directors approved an amended and restated certificate of incorporation (the “Amended and Restated Certificate of Incorporation”), which became effective on November 1, 2017.

The Amended and Restated Certificate of Incorporation authorizes the issuance of up to 200,000,000 shares of Class A common stock, up to 50,000,000 shares of Class B common stock and 20,000,000 shares of preferred stock, each having a par value of $ 0.0001 per share.

12 unchanged sentences

FAH, LLC Recapitalization

As noted above, the FAH LLC Agreement, among other things, appointed the Company as FAH, LLC’s sole managing member and reclassified all outstanding membership interests in FAH, LLC as non-voting common units.

The FAH LLC Agreement, among other things, appointed the Company as FAH, LLC’s sole managing member and reclassified all outstanding membership interests in FAH, LLC as non-voting common units.

As the sole managing member of FAH, LLC, the Company controls the management of FAH, LLC.

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Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of common units pursuant to the terms of the FAH LLC Agreement, a number of shares of our Class B common stock registered in the name of the redeeming or exchanging Continuing Equity Owner will be cancelled for no consideration on a one-for-one basis with the number of common units so redeemed or exchanged.

Initial Public Offering

As noted above, on November 6, 2017, the Company completed its IPO of 10,416,666 shares of Class A common stock at a public offering price of $ 12.00 per share and received approximately $ 117.3 million in net proceeds, after deducting underwriting discounts and commissions.

The Company 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 initial public offering price per share of Class A common stock sold in the IPO less underwriting discounts and commissions.

Immediately following the completion of the IPO, there were 24,975,932 shares of Class B common stock outstanding and 23,337,705 shares of Class A common stock outstanding, comprised of 10,416,666 shares issued in connection with the IPO and 12,921,039 shares issued in connection with the Transactions described above.

Equity-Based Compensation

1 unchanged sentence

On October 23, 2017, the Company adopted the Funko, Inc.

2017 Incentive Award Plan (the “2017 Plan”), which became effective on November 1, 2017, upon the effectiveness of the registration statement on Form S-1 (File No.

333-220856), as amended, filed with the SEC in connection with the IPO.

2017 Incentive Award Plan (the “2017 Plan”).

The Company reserved a total of 5,518,518 shares of Class A common stock for issuance pursuant to the 2017 Plan.

4 unchanged sentences

2019 Incentive Award Plan (the "2019 Plan").

We have also reserved for issuance an aggregate number of shares under the 2019 Plan equal to the sum of (i) 3,000,0000 shares of our Class A common stock and (ii) an annual increase on the first day of each calendar year beginning on January 1, 2020 and ending on and including January 1, 2029,

equal to the lesser of (A) 2 % of the shares of Class A Common Stock outstanding as of the last day of the immediately preceding fiscal year on a fully-diluted basis and (B) such lesser number of shares of Class A common stock as determined by our board of directors.

A summary of 2017 Plan stock option activity for the year ended December 31, 2019 is as follows:

We have also reserved for issuance an aggregate number of shares under the 2019 Plan equal to the sum of (i) 3,000,000 shares of our Class A common stock and (ii) an annual increase on the first day of each calendar year beginning on January 1, 2020 and ending on and including January 1, 2029, equal to the lesser of (A) 2 % of the shares of Class A Common Stock outstanding as of the last day of the immediately preceding fiscal year on a fully-diluted basis and (B) such lesser number of shares of Class A common stock as determined by our board of directors.

The number of unissued common shares reserved for future grants under the 2017 Plan and 2019 Plan was 686,263 and 2,291,785 , respectively as of December 31, 2020.

A summary of stock option activity for the year ended December 31, 2020 is as follows:

Options Weighted

8 unchanged sentences

Options exercisable at December 31, 2020 1,361 $ 14.80 $ — 7.48

A summary of 2017 Plan restricted stock unit activity for the year ended December 31, 2019 is as follows:

A summary of restricted stock unit activity for the year ended December 31, 2020 is as follows:

Restricted Stock Units Weighted Average

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Unvested at December 31, 2020 1,868 $ 12.58 $ 19,394 2.37

As of December 31, 2019, the Company had not issued any awards under the 2019 Plan.

Options to purchase common units in FAH, LLC.

19 unchanged sentences

Unvested at December 31, 2020 — $ —

The following table presents information on stock option exercises (in thousands):

Year ended December 31,

2020 2019 2018

Cash received for exercise price $ 219 $ 2,217 $ 23

Intrinsic value $ 957 $ 3,404 $ 62

Equity-based compensation expense .

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• Dividend yield —the Company does not plan to pay dividends in the foreseeable future

For each of the options granted under the 2017 Plan, the following were the weighted-average of the option pricing model inputs:

For each of the options granted under the 2017 Plan and 2019 Plan, the following were the weighted-average of the option pricing model inputs:

Year ended December 31,

4 unchanged sentences

Dividend yield — % — % — %

The weighted-average fair value of stock options granted for the years ended December 31, 2020, 2019 and 2018 was $ 1.90 , $ 8.35 , and $ 5.31 per share, respectively.

Equity-based compensation expense is recognized on a straight-line basis over the vesting period of the award.

The Company records equity-based compensation to selling, general and administrative expense on the consolidated statement of operations.

Equity-based compensation for the years ended December 31, 2019, 2018 and 2017 were $ 13.0 million, $ 9.1 million and $ 5.4 million, respectively.

The Company records equity-based compensation to selling, general and administrative expense on the consolidated statements of operations.

Equity-based compensation for the years ended December 31, 2020, 2019 and 2018 was $ 10.1 million, $ 13.0 million and $ 9.1 million, respectively.

As of December 31, 2020, there was $ 20.8 million of total unrecognized equity-based compensation expense that the Company expected to recognize over a remaining weighted-average period of 2.3 years.

Of this, $ 10.7 million is related to options to purchase Class A common stock in Funko, Inc., $ 18.2 million related to unvested restricted stock units in Class A common stock of Funko, Inc.

and $ 0.1 million is related to unvested common units in FAH, LLC.

Of this, $ 6.9 million is related to options to purchase Class A common stock in Funko, Inc.

and $ 13.9 million is related to unvested restricted stock units in Class A common stock of Funko, Inc.

As of December 31, 2020, the Company expected to recognize these costs over a remaining weighted average period of 2.2 years for options to purchase Class A units in Funko, Inc., and 2.4 years for unvested restricted stock units in Class A common stock of Funko, Inc.

and 0.7 years for unvested common units in FAH, LLC.

Non-controlling Interests

In connection with the Transactions described in Note 18, Stockholders’ Equity, the Company became the sole managing member of FAH, LLC and as a result consolidates the financial results of FAH, LLC.

The Company is the sole managing member of FAH, LLC and as a result consolidates the financial results of FAH, LLC.

The Company reports a non-controlling interest representing the common units of FAH, LLC held by the Continuing Equity Owners.

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retains its controlling interest in FAH, LLC will be accounted for as equity transactions.

As such, future redemptions or direct exchanges of common

units of FAH, LLC by the Continuing Equity Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when FAH, LLC has positive or negative net assets, respectively.

The Company used the net proceeds from its IPO to purchase 10,416,666 newly-issued common units of FAH, LLC.

Additionally, in connection with the Transactions, certain funds affiliated with the Former Equity Owners exchanged their indirect ownership interests in common units of FAH, LLC for 12,921,039 shares of Class A common stock on a one-for-one basis.

As such, future redemptions or direct exchanges of common units of FAH, LLC by the Continuing Equity Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when FAH, LLC has positive or negative net assets, respectively.

Net income and comprehensive income are attributed between Funko, Inc.

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Net income and comprehensive income of FAH, LLC excludes certain activity attributable to Funko, Inc., including $ 10.0 million, $ 10.8 million and $ 6.4 million of equity-based compensation expense for share-based compensation awards issued by Funko, Inc.

for the years ended December 31, 2019, 2018 and 2017, respectively, and $ 2.2 million, $ 3.6 million and $ 0.5 million of income tax expense for corporate, federal, state and local taxes attributable to Funko, Inc.

for the years ended December 31, 2020, 2019 and 2018, respectively, and $ 0.4 million of income tax benefit, $ 2.2 million and $ 3.6 million of income tax expense for corporate, federal, state and local taxes attributable to Funko, Inc.

for the years ended December 31, 2020, 2019 and 2018, respectively.

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by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.

As described in Note 18, Stockholders’ Equity, on November 1, 2017, the LLC Agreement was amended and restated to, among other things, (i) provide for a new single class of common membership interests, the common units of FAH, LLC, and (ii) exchange all of the then-existing membership interests of the Original Equity Owners for common units of FAH, LLC.

This Recapitalization changed the relative membership rights of the Original Equity Owners such that retroactive application of the Recapitalization to periods prior to the IPO for the purposes of calculating earnings per share would not be appropriate.

Prior to the IPO, the FAH, LLC membership structure included Class A Units, Profits Units and HR Units.

The Company analyzed the calculation of earnings per unit for periods prior to the IPO using the two-class method and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements.

Therefore, earnings per share information has not been presented for periods prior to the IPO on November 6, 2017.

The basic and diluted earnings per share period for the year ended December 31, 2017 represents only the period of November 6, 2017 to December 31, 2017.

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock:

Year Ended December 31, 2019 Year Ended December 31, 2018 Period from

Year Ended December 31, 2020 Year Ended December 31, 2019 Year Ended December 31, 2018

(in thousands, except per share data)

Net income $ 9,763 $ 27,820 $ 25,062

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304,327 1,064,145 1,381,637

Dilutive Funko, Inc.

equity compensation awards

194,891 964,059 357,396

Weighted-average shares of Class A common stock outstanding

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Earnings per share of Class A common stock — diluted $ 0.11 $ 0.36 $ 0.29

For the years ended December 31, 2019 and 2018 and the period of November 6, 2017 to December 31, 2017 an aggregate of 20.1 million, 25.7 million and 1.8 million of potentially dilutive securities, respectively, were excluded from the weighted-average in the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive.

For the years ended December 31, 2019 and 2018, anti-dilutive securities included 19.1 million and 25.1 million of common units of FAH, LLC that are convertible into Class A common stock, but were excluded from the computations of diluted earnings per share because the effect would have been anti-dilutive under the if-converted method.

For the years ended December 31, 2020, 2019 and December 31, 2018 an aggregate of 19.7 million, 20.1 million and 25.7 million of potentially dilutive securities, respectively, were excluded from the weighted-average in the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive.

For the years ended December 31, 2020, 2019 and 2018 anti-dilutive securities included 15.8 million, 19.1 million and 25.1 million of common units of FAH, LLC that are convertible into Class A common stock, but were excluded from the computations of diluted earnings per share because the effect would have been anti-dilutive under the if-converted method.

Shares of the Company’s Class B common stock do not participate in the earnings or losses of the Company and are therefore not participating securities.

As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.

Quarterly Financial Information (Unaudited)

Three Months Ended

31, 2019 Sept.

31, 2019 June 30,

2019 March 31,

31, 2018 Sept.

31, 2018 June 30,

2018 March 31,

Condensed Financial Information of Registrant

CONDENSED STATEMENTS OF OPERATIONS

(PARENT COMPANY ONLY)

Year Ended December 31,

2020 2019 2018

(in thousands)

Net sales $ 213,551 $ 223,307 $ 191,199 $ 167,065 $ 233,224 $ 176,915 $ 138,723 $ 137,211

Cost of sales (exclusive of depreciation and amortization) 151,125 137,801 119,998 103,656 149,172 109,046 85,884 86,644

Intercompany revenue $ 307 $ 739 $ 1

Selling, general, and administrative expenses 10,269 11,211 6,397

income ( 6,288 ) 15,548 11,415 7,145 15,519 7,551 274 1,719

Net (loss) income attributable to non-controlling interests ( 2,047 ) 6,909 6,283 4,950 10,292 5,981 204 1,122

Net (loss) income attributable to Funko, Inc.

Total operating expenses 10,269 11,211 6,397

Loss from operations ( 9,962 ) ( 10,472 ) ( 6,396 )

Interest (expense) income, net ( 36 ) — 26

Tax receivable agreement liability adjustment ( 87 ) ( 152 ) —

Equity in net income of subsidiaries 13,674 24,525 17,432

Income before income taxes 3,589 13,901 11,062

Income tax (benefit) expense ( 372 ) 2,176 3,599

Net income $ 3,961 $ 11,725 $ 7,463

See accompanying Notes to Condensed Financial Information

Condensed Financial Information of Registrant (continued)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(PARENT COMPANY ONLY)

Year Ended December 31,

2020 2019 2018

Earnings (loss) per share of Class A common stock — basic $ ( 0.12 ) $ 0.27 $ 0.17 $ 0.08 $ 0.21 $ 0.07 $ — $ 0.03

Earnings (loss) per share of Class A common stock — diluted $ ( 0.12 ) $ 0.25 $ 0.16 $ 0.08 $ 0.20 $ 0.06 $ — $ 0.02

(in thousands)

Net income $ 3,961 $ 11,725 $ 7,463

Other comprehensive income:

Foreign currency translation gain (loss), net of tax effect of $( 274 ),

$( 282 ) and $ 51 for the years ended December 31, 2020, 2019 and

2018, respectively

927 958 ( 973 )

Comprehensive income attributable to

$ 4,888 $ 12,683 $ 6,490

See accompanying Notes to Condensed Financial Information

Condensed Financial Information of Registrant (continued)

CONDENSED BALANCE SHEETS

(PARENT COMPANY ONLY)

(in thousands, except per share data)

Current assets:

Cash and cash equivalents $ 34,568 $ 336

Income tax receivable 294 3,816

Total current assets 34,862 4,152

Intercompany receivable 117,995 144,102

Deferred tax asset 54,734 57,547

Investment in subsidiaries 97,523 85,916

Total assets $ 305,114 $ 291,717

Liabilities and Stockholders' Equity

Current liabilities:

Current portion of liabilities under tax receivable agreement 2,020 4,262

Accrued expenses and other current liabilities 40 —

Total current liabilities 2,060 4,262

Liabilities under tax receivable agreement, net of current portion 60,297 61,554

Other long-term liabilities 490 490

Commitments and contingencies

Stockholders' equity:

Class A common stock, par value $ 0.0001 per share, 200,000 shares authorized;

35,657 shares and 34,918 shares issued and outstanding as of December 31, 2020 and 2019, respectively

Class B common stock, par value $ 0.0001 per share, 50,000 shares authorized;

14,040 shares and 14,515 shares issued and outstanding as of December 31, 2020 and 2019, respectively

Additional paid-in-capital 216,141 204,174

Accumulated other comprehensive income 1,718 791

Retained earnings 24,403 20,442

Total stockholders' equity 242,267 225,411

Total liabilities and stockholders' equity $ 305,114 $ 291,717

See accompanying Notes to Condensed Financial Information

Condensed Financial Information of Registrant (continued)

CONDENSED STATEMENTS OF CASH FLOWS

(PARENT COMPANY ONLY)

Year Ended December 31,

2020 2019 2018

(in thousands)

Operating Activities

Net income $ 3,961 $ 11,725 $ 7,463

Adjustments to reconcile net income to net cash provided by

operating activities:

Equity in net income of subsidiaries ( 13,674 ) ( 24,525 ) ( 17,432 )

Equity-based compensation 10,007 10,827 6,366

Deferred tax expense (benefit) 2,792 ( 2,518 ) ( 873 )

Tax receivable liability adjustment 87 152 —

Changes in operating assets and liabilities:

Income tax receivable 3,521 ( 3,816 ) —

Due from related parties, net 26,007 ( 19,182 ) ( 5,040 )

Prepaid expenses and other assets — ( 2,336 ) —

Income taxes payable — ( 3,497 ) 2,495

Accrued expenses and other liabilities 304 1,985 547

Net cash provided by (used in) operating activities 33,005 ( 31,185 ) ( 6,474 )

Financing Activities

Tax distribution received from FAH, LLC 5,825 29,502 6,495

Tax receivable agreement payments ( 4,639 ) ( 173 ) —

Proceeds from exercise of equity-based options 41 2,148 23

Net cash provided by financing activities 1,227 31,477 6,518

Net increase in cash and cash equivalents 34,232 292 44

Cash and cash equivalents at beginning of period 336 44 —

Cash and cash equivalents at end of period $ 34,568 $ 336 $ 44

Supplemental Cash Flow Information

Income tax payments $ 2,116 $ 11,969 $ 1,430

Establishment of liabilities under tax receivable agreement 1,000 59,045 6,771

Issuance of equity instruments for acquisitions — 2,221 —

See accompanying Notes to Condensed Financial Information

Condensed Financial Information of Registrant (continued)

NOTES TO CONDENSED FINANCIAL INFORMATION

(PARENT COMPANY ONLY)

December 31, 2020

(the “Parent Company”) was formed on April 21, 2017 as a Delaware corporation and is a holding company with no direct operations.

The Parent Company's assets consist primarily of cash and cash equivalents, its equity interest in FAH, LLC, and certain deferred tax assets.

The Parent Company also had three wholly owned subsidiaries with direct ownership interest in FAH, LLC until the subsidiaries were dissolved and liquidated on June 30, 2020.

The Parent Company's cash inflows are primarily from distributions and other transfers from FAH, LLC.

The amounts available to the Parent Company to fulfill cash commitments are subject to certain restrictions in FAH, LLC’s Credit Facilities.

See Note 10 to the Funko, Inc.

consolidated financial statements, appearing elsewhere in this Form 10-K.

Basis of Presentation

These condensed Parent Company financial statements should be read in conjunction with the consolidated financial statements of Funko, Inc.

and its subsidiaries and the accompanying notes thereto, included in this Form 10-K.

For purposes of this condensed financial information, the Parent Company's interest in FAH, LLC is recorded based upon its proportionate share of FAH, LLC's net assets (similar to presenting them on the equity method).

The Parent Company is the sole managing member of FAH, LLC, and pursuant to the Amended and Restated LLC Agreement of FAH, LLC (the “LLC Agreement”), receives compensation in the form of reimbursements for all costs associated with being a public company.

Intercompany revenue consists of these reimbursement payments and is recognized when the corresponding expense to which it relates is recognized.

Certain intercompany balances presented in these condensed Parent Company financial statements are eliminated in the consolidated financial statements.

For the years ended December 31, 2020, 2019, and 2018, the full amounts of intercompany revenue and equity in net income of subsidiaries in the Parent Company Statements of Operations were eliminated in consolidation.

An intercompany receivable was owed to the Parent Company by FAH, LLC of $ 118.0 million and $ 144.1 million as of December 31, 2020 and 2019, respectively.

Related party amounts that were not eliminated in the consolidated financial statements include the Parent Company's liabilities under the tax receivable agreement, which totaled $ 62.3 million and $ 65.8 million as of December 31, 2020 and 2019, respectively.

Commitments and Contingencies

The Parent Company is party to a tax receivable agreement with certain holders of common units in FAH, LLC (the "Continuing Equity Owners") that provides for the payment by the Parent Company to the Continuing Equity Owners of 85 % of the amount of any tax benefits that the Parent Company actually realizes, or in some cases is deemed to realize, as a result of certain transactions.

See Note 13 to the Funko, Inc.

consolidated financial statements, appearing elsewhere in this Form 10-K, for more information regarding the Parent Company's tax receivable agreement.

As described in Note 13 to the Funko, Inc.

consolidated financial statements, appearing elsewhere in the Form 10-K, amounts payable under the tax receivable agreement are contingent upon, among other things, (i) generation of future taxable income of Funko, Inc.

over the term of the tax receivable agreement and (ii) future changes in tax laws.

As of December 31, 2020 and 2019, liabilities under the tax receivable agreement totaled $ 62.3 million and $ 65.8 million, respectively.

See Note 14 to the Funko, Inc.

consolidated financial statements, appearing elsewhere in this Form 10-K, for information regarding pending and threatened litigation.

Pursuant to the LLC Agreement, the Parent Company receives reimbursements for all costs associated with being a public company, which includes costs of litigation.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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What changed 10-K

Item 8. Financial Statements and Supplementary Data