What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-03 compared with 2021-03-11 · 97 added, 124 removed, 336 unchanged (40% of the section changed)

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Our results of operations for the year ended December 31, 2019, including a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019, have been reported previously under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020.

We are a leading pop culture consumer products company.

Funko is a leading pop culture lifestyle brand .

Our business is built on the principle that almost everyone is a fan of something and the evolution of pop culture is leading to increasing opportunities for fan loyalty.

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Our operating results and prospects will be impacted by developments in the market for pop culture consumer products.

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

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

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

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Our top ten customers represented approximately 45% and 48% of our sales for the years ended December 31, 2021 and 2020, respectively.

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

During the years ended December 31, 2021 and 2020, we saw shifts in our client mix as a direct result of the COVID-19 pandemic and the related retail shutdowns and limited store occupancy upon reopening.

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

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

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

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

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

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

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Sales of a certain product or group of products tied to a particular property can dramatically increase our net sales in any given quarter or year.

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

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

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

Taxation and Expenses

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Components of our Results of Operations

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

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

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

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

We evaluate the need for price increases along with other incentive arrangements and cost of product to help manage gross margins.

In 2021, we instituted price increases for certain of our products and we expect to see the impact of those increases in 2022 and beyond.

Sales terms typically do not allow for a right of return except in relation to a manufacturing defect.

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Our shipping costs, both inbound and outbound, will fluctuate from period to period based on customer mix due to varying shipping terms and other factors.

In 2021, we experienced significant increases in shipping rates dues to the global capacity constraints and the availability of shipping containers.

We anticipate inflationary pressures throughout our supply chain in future periods, specific to shipping and, to a lesser extent, product costs.

Selling, General and Administrative Expenses

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Selling costs generally correlate to revenue timing and therefore experience similar moderate seasonal trends.

We anticipate inflationary pressures paired with the competition for talent to increase wages, commissions and benefits expense in future periods.

We expect general and administrative costs to increase as our business evolves.

We have invested considerably in general and administrative costs to support the growth and anticipated growth of our business and anticipate continuing to do so in the future.

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

Depreciation and Amortization

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Total operating expenses 933,828 628,994 304,834 48.5 %

Income from operations 23,543 46,613 (23,070) (49.5) %

Income from operations 95,465 23,543 71,922 nm

Interest expense, net 7,167 10,712 (3,545) (33.1) %

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

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

Income tax expense 2,025 4,476 (2,451) (54.8) %

Net income 9,763 27,820 (18,057) (64.9) %

Loss on extinguishment of debt 675 — 675 nm

Other expense, net 2,708 1,043 1,665 nm

Income before income taxes 84,915 11,788 73,127 nm

Income tax expense 17,061 2,025 15,036 nm

Net income 67,854 9,763 58,091 nm

net income attributable to non-controlling interests

5,802 16,095 (10,293) (64.0) %

23,954 5,802 18,152 nm

Net income attributable to Funko, Inc.

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

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

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

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

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

$ 43,900 $ 3,961 $ 39,939 nm

Net sales were $1.0 billion for the year ended December 31, 2021, an increase of 57.7% compared to $652.5 million for the year ended December 31, 2020.

In addition to the impacts of the COVID-19 pandemic for the year ended December 31, 2020, the increase in net sales was also due increased sales to our specialty retailers, commerce sites, direct-to-consumer and distributor customers.

In the year ended December 31, 2021, the number of active properties incre as ed 12.0% to 955 from 854 i n the year ended December 31, 2020, and average net sales per active property increased 41.0% t o $1.1 million for the year ended December 31, 2021 from $0.8 million for the year ended December 31, 2020.

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

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

On a geographical basis, net sales in the United States increased 52.2% to $743.8 million in the year ended December 31, 2021 as compared to $488.8 million in the year ended December 31, 2020, net sales in Europe increased 91.7% to $214.7 million in the year ended December 31, 2021 from $112.0 million in the year ended December 31, 2020 and net sales in other international locations increased 36.7% to $70.7 million in the year ended December 31, 2021 from $51.7 million in the year ended December 31, 2020.

On a product category basis, net sales of Pop!

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

branded products increased 54.3% to $767.6 million in the year ended December 31, 2021 as compared to $497.3 million in the year ended December 31, 2020.

Net sales of Loungefly branded products increased 65.7% to $140.6 million in the year ended December 31, 2021 as compared to $84.8 million in the year ended December 31, 2020.

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

Net sales of other products increased 72.1% to $121.2 million in the year ended December 31, 2021 as compared to $70.4 million the year ended December 31, 2020.

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

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

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

Cost of sales (exclusive of depreciation and amortization) was $648.3 million for the year ended December 31, 2021, an increase of 60.7%, compared to $403.4 million for the year ended December 31, 2020.

Cost of sales (exclusive of depreciation and amortization) increased primarily as a result of the increase in net sales, which drove a $113.6 million increase in product costs, a $75.6 million increase in shipping and freight costs and a $56.6 million increase in royalty expenses.

Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of sales, was 37.0% for the year ended December 31, 2021, compared to 38.2% for the year ended December 31, 2020.

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

Gross margin (exclusive of depreciation and amortization) decreased 120 basis points for the year ended December 31, 2021 compared to the year ended December 31, 2020, due primarily to global supply chain capacity constraints driving increased freight costs, partially offset by improved global product margins.

We expect the increased freight costs to continue at least through early 2022.

Selling, General, and Administrative Expenses

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

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

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

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

Selling, general, and administrative expenses were $244.3 million for the year ended December 31, 2021, an increase of 34.8%, compared to $181.2 million for the year ended December 31, 2020.

The increase was driven primarily by a $38.8 million increase in personnel expenses and commissions, a $9.4 million increase in advertising and marketing, a $4.2 million increase in professional fees, a $3.3 million increase in facilities and rent, and a $2.9 million increase in equity-based compensation.

In 2020, selling, general, and administrative expenses decreased in response to the COVID-19 pandemic and efforts to reduce costs and preserve liquidity.

For the year ended December 31, 2021, such restrictions were lifted to support current year and future net sales growth opportunities.

Selling, general, and administrative expenses were 23.7% of sales for the year ended December 31, 2021, compared to 27.8% of sales for the year ended December 31, 2020, primarily due to the increase in net sales outpacing selling, general and administrative expenses.

Depreciation and Amortization

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

Depreciation and amortization expense was $41.2 million for the year ended December 31, 2021, compared to $44.4 million for the year ended December 31, 2020, primarily driven by the type and timing of assets placed into service.

Interest Expense, Net

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The decrease in interest expense, net was due to lower interest rates and lower average balances of debt outstanding during the year ended December 31, 2021.

Loss on debt extinguishment

As a result of the debt refinancing in September 2021, $0.7 million loss on debt extinguishment was recorded for the year ended December 31, 2021 as unamortized debt financing fees were written-off.

Income Tax Expense

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

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

Income tax expense was $17.1 million for the year ended December 31, 2021, compared to $2.0 million for the year ended December 31, 2020.

The increase was primarily due to an increase in income before income taxes of $73.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Net income was $67.9 million for the year ended December 31, 2021, compared to $9.8 million for the year ended December 31, 2020.

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

The increase in net income was primarily the result of the increase in net sales and decreases in interest expense, net, offset by increases in cost of goods sold, selling, general and administrative for the year ended December 31, 2021 as compared to the year ended December 31, 2020, as discussed above.

Non-GAAP Financial Measures

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

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

We define Adjusted EBITDA as EBITDA further adjusted for non-cash charges related to equity-based compensation programs, loss of extinguishment of debt, certain severance, relocation and related costs, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments, and other unusual or one-time items.

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

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

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

These items include, among other things, reallocation of net income attributable to non-controlling interests, non-cash charges related to equity-based compensation programs, loss on extinguishment of debt, certain severance, relocation and related costs, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments, and the income tax expense effect of these adjustments.

We define Adjusted Earnings per Diluted Share as Adjusted Net Income divided by the weighted-average shares of Class A common stock outstanding, assuming (1) the full exchange of all outstanding common units and options in FAH, LLC for newly issued-shares of Class A common stock of Funko, Inc.

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

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

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

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

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12,994 10,116

Acquisition transaction costs and other expenses (3)

Customs investigation and related costs (4)

Loss on extinguishment of debt (3)

Certain severance, relocation and related costs (4)

Foreign currency transaction loss (gain) (6)

Foreign currency transaction loss (5)

Tax receivable agreement liability adjustments (6)

One-time inventory write-down (7)

Income tax expense (7)

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Adjusted weighted-average shares of Class A stock outstanding-diluted 53,829 51,498

51,498 52,065

Adjusted earnings per diluted share $ 1.42 $ 0.37

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12,994 10,116

Acquisition transaction costs and other expenses (3)

Customs investigation and related costs (4)

Loss on extinguishment of debt (3)

Certain severance, relocation and related costs (4)

Foreign currency transaction loss (gain) (6)

Foreign currency transaction loss (5)

Tax receivable agreement liability adjustments (6)

One-time inventory write-down (7)

Adjusted EBITDA $ 149,931 $ 80,216

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

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

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

For the year ended December 31, 2019, includes the accrual of a contingent liability of $0.5 million related to potential penalties that may be assessed by U.S.

Customs in connection with the underpayment of customs duties at Loungefly.

(3) Represents write-off of unamortized debt financing fees for the year ended December 31, 2021.

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

For the year ended December 31, 2021, includes charges related to one-time relocation costs for U.S.

warehouse personnel in connection with the new opening of a warehouse and distribution facility in Buckeye, Arizona and residual severance payments related to the global workforce reduction implemented in response to the COVID-19 pandemic.

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

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

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

(7) Represents a one-time $16.8 million charge for the year ended December 31, 2019 to cost of goods sold for additional inventory reserves to dispose of certain inventory items.

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

(6) Represents recognized adjustments to the tax receivable agreement liability.

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

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

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

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

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

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

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

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

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

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

On September 17, 2021, the Company, entered into a new credit agreement (the “New Credit Agreement”) providing for a term loan facility in the amount of $180.0 million (the “New Term Loan Facility”) and a revolving credit facility of $100.0 million (the “New Revolving Credit Facility”) (together the “New Credit Facilities”).

Proceeds from the New Credit Facilities were primarily used to repay the Company’s $235.0 million term loan facility (the "Former Term Loan Facility") and its $75.0 million revolving credit facility (the “Former Revolving Credit Facility” and together with the Former Term Loan Facility, the “Former Credit Facilities”).

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

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

We have no independent means of generating revenue or cash flow, and our ability to pay dividends in the future, if any, is dependent upon the financial results and cash flows of FAH, LLC and its subsidiaries and distributions we receive from FAH, LLC.

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

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

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

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

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

See Note 3, Acquisitions for further information.

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

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

• the ability to make other distributions of up to $25.0 million during any period of four consecutive fiscal quarters as long as after giving pro forma effect to such distribution (i) no event of default then exists or would result therefrom and (ii) the Net Leverage Ratio (as defined in the New Credit Agreement) is not greater than a ratio that is 0.50:1.00 less than the Net Leverage Ratio set forth in the financial covenant for the applicable fiscal quarter.

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

On April 19, 2019, we filed a preliminary shelf registration statement on Form S-3 (as amended on May 13, 2019 and August 30, 2019, the “Form S-3”) with the SEC.

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

The Form S-3 was declared effective by the SEC on September 16, 2019 and will remain effective until through September 15, 2022.

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

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

The Form S-3 is intended to provide us flexibility to conduct registered sales of our securities, subject to market conditions and our future capital needs.

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

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

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

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

The decrease for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to changes in working capital, which decreased net cash provided by operating activities by $71.9 million and were primarily due to increases in accounts receivable, net, inventory, and prepaid expenses and other assets of $76.7 million, $110.0 million and $8.6 million, respectively, and increases in accrued expenses and other liabilities, accounts payable, accrued royalties, and income taxes payable of $55.7 million, $40.2 million, $11.7 million and $15.8 million, respectively.

The decrease in net cash provided by operating activities was also offset by an increase in net income, excluding non-cash adjustments of $50.5 million, driven primarily by an increase in net sales.

Investing Activities .

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For the year ended December 31, 2021, net cash used in investing activities was $27.4 million, which was used for the purchase of property and equipment, primarily related to tooling and molds used for the expansion of product lines.

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

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

Financing Activities .

Our financing activities primarily consist of proceeds from stock issuances, the issuance of long-term debt, net of debt issuance costs, the repayment of long-term debt, payments and borrowings under our line of credit facility, contributions from, and distributions to, members and the payment of contingent consideration.

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

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

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

Our financing activities primarily consist of proceeds from stock issuances, the issuance of long-term debt, net of debt issuance costs, the repayment of long-term debt, payments and borrowings under our line of credit facility, distributions to members and the payment of contingent consideration.

For the year ended December 31, 2021, net cash used in financing activities was $28.6 million, primarily related to payments under the Tax Receivable Agreement of $1.7 million, distributions to the Continuing Equity Owners of $9.3 million, and net payments on the Term Loan Facility of $18.4 million, partially offset by $3.8 million proceeds from the exercise of equity-based options.

For the year ended December 31, 2020, net cash used in financing activities was $63.3 million, primarily related to payments under the Tax Receivable Agreement of $4.6 million, distributions to the Continuing Equity Owners of $3.6 million, net payments on the Term Loan Facility of $26.4 million, and net payments on the Revolving Credit Facility of $26.8 million, partially offset by $0.2 million proceeds from the exercise of equity-based options.

Financial Condition

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

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

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

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

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

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

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

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

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

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

As noted above, on September 17, 2021, we entered into the New Credit Facilities which, as amended, are secured by substantially all assets of the Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions.

The New Term Loan Facility matures on September 17, 2026 (the “Maturity Date”) and amortizes in quarterly installments in aggregate amounts equal to 2.50% of the original principal amount of the New Term Loan Facility, with any outstanding balance due and payable on the Maturity Date.

The first amortization payment commenced with the quarter ending on December 31, 2021.

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

Loans under the New Credit Facilities will, at the Borrowers’ option, bear interest at either (i) LIBOR, EURIBOR, HIBOR, CDOR, Daily Simple SONIA and/or the Central Bank Rate, as applicable, plus 2.50% or (ii) ABR or the Canadian prime rate, as applicable, plus 1.50%, in each case of clauses (i) and (ii), subject to two 0.25% step-downs based on the achievement of certain leverage ratios following the Closing Date.

Each of LIBOR, EURIBOR, HIBOR, CDOR and Daily Simple SONIA rates are subject to a 0.00% floor.

For loans based on ABR, the Central Bank Rate or the Canadian prime rate, interest payments are due quarterly.

For loans based on Daily Simple SONIA, interest payments are due monthly.

For loans based on LIBOR, EURIBOR, HIBOR or CDOR, interest payments are due at the end of each applicable interest period.

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

• incur additional indebtedness;

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

• alter the business conducted by us and our subsidiaries;

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

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• enter into transactions with affiliates;

• enter into sale and leaseback transactions in respect to real property;

• enter into swap agreements;

• enter into agreements restricting our subsidiaries’ ability to pay dividends;

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• amend or modify our governing documents.

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

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

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

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

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

The maximum Net Leverage Ratio and the minimum fixed charge coverage ratio for the fiscal quarter ending December 31, 2021 are 2.50:1.00 and 1.25:1.00, respectively.

As of December 31, 2021 and December 31, 2020, we were in compliance with all covenants in our respective credit agreements in effect at such time.

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

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

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

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

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

If economic conditions caused by the COVID-19 global pandemic worsen and negatively impact the Company’s earnings and operating cash flows, this could impact our ability to maintain compliance with our amended financial covenants and require the Company to seek additional amendments to our New Credit Agreement.

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

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

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

As of December 31, 2021, we had $83.6 million of cash and cash equivalents and $167.6 million of working capital, compared with $52.3 million of cash and cash equivalents and $120.7 million of working capital as of December 31, 2020.

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Credit Facilities .

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

On September 17, 2021, the Company entered into the New Credit Facilities.

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

Offerings of Registered Securities .

In addition, as described above, on April 20, 2019, we filed a preliminary shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC on September 16, 2019.

In addition, as described above, on April 20, 2019, we filed a preliminary shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC on September 16, 2019 and will remain effective until through September 15, 2022.

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

The terms of any offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering.

As noted above, our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, debt service and general corporate needs.

For a description of the Company's future maturities of debt, see Note 10, Debt, and for a description of the Company's operating lease agreements, see Note 11, Leases.

See Note 13 "Liabilities under Tax Receivable Agreement" in the Notes to Consolidated Financial Statements included in this Form 10-K for a discussion of our obligations under the Tax Receivable Agreement.

See Note 14 "Commitments and Contingencies" in the Notes to Consolidated Financial Statements included in this Form 10-K for a discussion of other material contractual obligations.

Additional future liquidity needs may include public company costs, tax distributions, the redemption right held by the Continuing Equity Owners that they may exercise from time to time (should we elect to exchange their common units for a cash payment), payments under the Tax Receivable Agreement and general cash requirements for operations and capital expenditures (including future enterprise resource planning (ERP) system, additional platforms to support our direct-to-consumer experience, and capital build out of new leased warehouse and office space).

The Continuing Equity Owners may exercise their redemption right for as long as their common units remain outstanding.

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However, the rapid growth we have experienced in recent years may have masked the full effects of seasonal factors on our business to date, and as such, seasonality may have a greater effect on our results of operations in future periods.

Contractual Obligations

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

2021 2022 2023 2024 2025 Thereafter Total

Long term debt and related interest (1)

$ 22,537 $ 34,683 $ 37,565 $ 132,849 $ — $ — $ 227,634

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

Liabilities under tax

receivable agreement (2)

2,020 5,350 3,651 3,724 3,804 43,768 62,317

Minimum royalty

obligations (3)

4,985 231 63 — — — 5,279

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

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

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

(2) Represents amounts owed under our Tax Receivable Agreement.

See Note 13, Liabilities under Tax Receivable Agreement for additional information.

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

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

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The JOBS Act permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

We have chosen to “opt out” of this provision and, as a result, we will adopt new or revised accounting standards upon or prior to required public company adoption dates.

We have chosen to “opt out” of this provision and, as a result, we have adopted, or will adopt, new or revised accounting standards upon or prior to required public company adoption dates.

This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

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As of December 31, 2020, we recorded a prepaid asset of $6.3 million, net of a reserve of $1.0 million.

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

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

In situations where a minimum commitment is not expected to be met based on expected revenues, we will accrue up to the minimum amount when it is reasonably certain that revenues generated will not meet the minimum commitment.

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

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

Royalty expenses for the years ended December 31, 2021 and 2020, were $162.0 million and $105.0 million, respectively.

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We estimate obsolescence based on assumptions regarding future demand.

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

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

This charge is incremental to normal course reserves.

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As a result of these exchanges, during the years ended December 31, 2021 and 2020, the Company recognized an increase to its net deferred tax assets in the amount of $17.2 million and $0.5 million, respectively, and corresponding Tax Receivable Agreement liabilities of $20.7 million and $1.0 million, respectively, representing 85% of the tax benefits due to the Continuing Equity Owners.

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

In addition, during the year ended December 31, 2021 and 2020, the Company recognized $1.6 million and $0.1 million, respectively of expenses in other expense (income), net on our consolidated statements of income related to remeasurement adjustments of Tax Receivable Agreement liabilities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis