Funko, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FUNKO, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 CONTENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 80 Consolidated Financial Statements: Consolidated Statements of I ncome 81 Consolidated Statements of Comprehensive Income 82 Consolidated Balance Sheets 83 Consolidated Statements of Stockholders’ Equity 84 Consolidated Statements of Cash Flows 85 Notes to Consolidated Financial Statements 86 79 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Funko, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Funko, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows, for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2015. Seattle, Washington March 3, 2022 80 Table of Contents FUNKO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2021 2020 2019 (in thousands, except per share data) Net sales $ 1,029,293 $ 652,537 $ 795,122 Cost of sales (exclusive of depreciation and amortization shown separately below) 648,302 403,392 512,580 Selling, general, and administrative expenses 244,331 181,234 193,803 Depreciation and amortization 41,195 44,368 42,126 Total operating expenses 933,828 628,994 748,509 Income from operations 95,465 23,543 46,613 Interest expense, net 7,167 10,712 14,342 Loss on extinguishment of debt 675 — — Other expense (income), net 2,708 1,043 ( 25 ) Income before income taxes 84,915 11,788 32,296 Income tax expense 17,061 2,025 4,476 Net income 67,854 9,763 27,820 Less: net income attributable to non-controlling interests 23,954 5,802 16,095 Net income attributable to Funko, Inc. $ 43,900 $ 3,961 $ 11,725 Earnings per share of Class A common stock: Basic $ 1.14 $ 0.11 $ 0.38 Diluted $ 1.08 $ 0.11 $ 0.36 Weighted average shares of Class A common stock outstanding: Basic 38,392 35,271 30,898 Diluted 40,611 35,770 32,926 See accompanying notes to consolidated financial statements. 81 Table of Contents FUNKO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2021 2020 2019 (in thousands) Net income $ 67,854 $ 9,763 $ 27,820 Other comprehensive income: Foreign currency translation (loss) gain, net of tax effect of $ 163 , $( 274 ) and $( 282 ) for the years ended December 31, 2021, 2020 and 2019, respectively ( 683 ) 1,415 1,458 Reclassification of foreign currency translation gain into net income ( 96 ) — — Comprehensive income 67,075 11,178 29,278 Less: Comprehensive income attributable to non-controlling interests 23,815 6,290 16,595 Comprehensive income attributable to Funko, Inc. $ 43,260 $ 4,888 $ 12,683 See accompanying notes to consolidated financial statements. 82 Table of Contents FUNKO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2021 2020 (in thousands, except per share data) Assets Current assets: Cash and cash equivalents $ 83,557 $ 52,255 Accounts receivable, net 187,688 131,837 Inventory 166,428 59,773 Prepaid expenses and other current assets 14,925 15,486 Total current assets 452,598 259,351 Property and equipment, net 58,828 56,141 Operating lease right-of-use assets 53,466 58,079 Goodwill 126,651 125,061 Intangible assets, net 189,619 205,541 Deferred tax asset 74,412 54,682 Other assets 11,929 4,735 Total assets $ 967,503 $ 763,590 Liabilities and Stockholders' Equity Current liabilities: Current portion long-term debt, net of unamortized discount $ 17,395 $ 10,758 Current portion of operating lease liabilities 14,959 13,840 Accounts payable 57,238 29,199 Income taxes payable 15,994 425 Accrued royalties 58,158 40,525 Accrued expenses and other current liabilities 121,267 43,949 Total current liabilities 285,011 138,696 Long-term debt, net of unamortized discount 155,818 180,012 Operating lease liabilities, net of current portion 50,459 57,512 Deferred tax liability 648 780 Liabilities under tax receivable agreement, net of current portion 75,523 60,297 Other long-term liabilities 3,486 3,848 Commitments and contingencies (Note 14) Stockholders' equity: Class A common stock, par value $ 0.0001 per share, 200,000 shares authorized; 40,088 shares and 35,657 shares issued and outstanding as of December 31, 2021 and 2020, respectively 4 4 Class B common stock, par value $ 0.0001 per share, 50,000 shares authorized; 10,691 shares and 14,040 shares issued and outstanding as of December 31, 2021 and 2020, respectively 1 1 Additional paid-in-capital 252,505 216,141 Accumulated other comprehensive income 1,078 1,718 Retained earnings 68,050 24,403 Total stockholders' equity attributable to Funko, Inc. 321,638 242,267 Non-controlling interests 74,920 80,178 Total stockholders' equity 396,558 322,445 Total liabilities and stockholders' equity $ 967,503 $ 763,590 See accompanying notes to consolidated financial statements. 83 Table of Contents FUNKO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Class A Common Stock Class B Common Stock Additional Paid-In Capital Other Comprehensive Income Retained Earnings Non- Controlling Interests Total Shares Amount Shares Amount Period ended December 31, 2018 24,960 $ 2 23,584 $ 2 $ 146,154 $ ( 167 ) $ 8,717 $ 138,546 $ 293,254 Distribution to continuing equity owners — — — — — — — ( 23,924 ) ( 23,924 ) Equity-based compensation — — — — 13,044 — — — 13,044 Activity under equity-based compensation plans 359 — — — 2,218 — — — 2,218 Shares issued for purchase consideration 127 — — — 2,221 — — — 2,221 Cumulative translation adjustment, 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 ) — 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 Activity under equity-based compensation plans 226 — — — 118 — — — 118 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 Distribution to continuing equity owners — — — — — — — ( 9,277 ) ( 9,277 ) Equity-based compensation — — — 12,994 — — — 12,994 Activity under equity-based compensation plans 554 — — 5,956 — — — 5,956 Cumulative translation adjustment, net of tax — — — — — ( 544 ) — ( 139 ) ( 683 ) Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets — — — — ( 3,532 ) — — — ( 3,532 ) Redemption of common units of FAH, LLC 3,877 — ( 3,349 ) — 20,746 — — ( 20,746 ) — Other — — — — 200 ( 96 ) ( 253 ) 950 801 Net income — — — — — — 43,900 23,954 67,854 Period ended December 31, 2021 40,088 $ 4 10,691 $ 1 $ 252,505 $ 1,078 $ 68,050 $ 74,920 $ 396,558 See accompanying notes to consolidated financial statements. 84 Table of Contents FUNKO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2021 2020 2019 (in thousands) Operating Activities Net income $ 67,854 $ 9,763 $ 27,820 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and other 40,056 46,742 44,518 Equity-based compensation 12,994 10,116 13,044 Amortization of debt issuance costs and debt discounts 1,118 1,352 1,210 Loss on debt extinguishment 675 — — Deferred tax expense (benefit) ( 361 ) 3,323 ( 2,293 ) Other 1,403 1,952 635 Changes in operating assets and liabilities: Accounts receivable, net ( 56,648 ) 20,077 ( 3,969 ) Inventory ( 107,166 ) 2,845 25,372 Prepaid expenses and other assets 3,700 12,273 ( 5,824 ) Accounts payable 26,933 ( 13,303 ) 4,629 Income taxes payable 15,585 ( 209 ) ( 3,618 ) Accrued royalties 17,633 5,906 ( 4,403 ) Accrued expenses and other liabilities 63,586 7,902 ( 6,356 ) Net cash provided by operating activities 87,362 108,739 90,765 Investing Activities Purchase of property and equipment ( 27,759 ) ( 18,482 ) ( 42,264 ) Acquisitions, net of cash 199 — ( 6,369 ) Other 179 — — Net cash used in investing activities ( 27,381 ) ( 18,482 ) ( 48,633 ) Financing Activities Borrowings on line of credit — 28,267 42,083 Payments on line of credit — ( 55,103 ) ( 36,383 ) Debt issuance costs ( 1,055 ) ( 569 ) ( 411 ) Proceeds from long-term debt, net 180,000 — — Payment of long-term debt ( 198,375 ) ( 26,438 ) ( 11,750 ) Contingent consideration ( 2,000 ) ( 1,500 ) — Distributions to continuing equity owners ( 9,277 ) ( 3,575 ) ( 23,923 ) Payments under tax receivable agreement ( 1,715 ) ( 4,639 ) ( 173 ) Proceeds from exercise of equity-based options 3,794 219 2,217 Net cash used in financing activities ( 28,628 ) ( 63,338 ) ( 28,340 ) Effect of exchange rates on cash and cash equivalents ( 51 ) 107 ( 2,049 ) Net increase in cash and cash equivalents 31,302 27,026 11,743 Cash and cash equivalents at beginning of period 52,255 25,229 13,486 Cash and cash equivalents at end of period $ 83,557 $ 52,255 $ 25,229 Supplemental Cash Flow Information Cash paid for interest $ 5,679 $ 9,089 $ 12,313 Income tax payments 1,462 4,167 14,125 Accrual for purchases of property and equipment — — 5,362 Establishment of liabilities under tax receivable agreement 20,691 1,000 59,045 Issuance of equity instruments for acquisitions — — 2,221 Tenant allowance — 269 3,201 See accompanying notes to consolidated financial statements. 85 Table of Contents FUNKO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation and Description of Business The consolidated financial statements include Funko, Inc. and its subsidiaries (together with its subsidiaries, the “Company”) and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany balances and transactions have been eliminated. The Company was formed as a Delaware corporation on April 21, 2017. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and related transactions in order to carry on the business of Funko Acquisition Holdings, L.L.C. (“FAH, LLC”) and its subsidiaries. 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. The Company is headquartered in Everett, Washington and is a leading pop culture consumer products company. The Company designs, sources, and distributes licensed pop culture products. The IPO and related reorganization transactions (the “Transactions”) resulted in the Company being the sole managing member of FAH, LLC. As the sole managing member of FAH, LLC, Funko, Inc. operates and controls all of FAH, LLC’s operations and, through FAH, LLC and its subsidiaries, conducts FAH, LLC’s business. 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 are considered transactions between entities under common control, the financial statements reflect the combined entities for all periods presented. 2. 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 The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions. Cash Equivalents Cash equivalents include amounts due from third-party financial institutions for credit and debit card transactions. These transactions typically settle in less than 5 days and were $ 1.5 million and $ 0.9 million at December 31, 2021 and 2020, respectively. 86 Table of Contents Concentrations of Business and Credit Risk The Company grants credit to its customers on an unsecured basis. 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. As of December 31, 2021 and 2020, the balance of accounts receivable consisted of 18 % and 11 %, respectively, of amounts owed from the largest customer for the given period. The collection of these receivables has been within the terms of the associated customer agreement. For the years ended December 31, 2021, 2020 and 2019 there was no individual customer that generated net sales over 10%. For the year ended December 31, 2021, 26 % of sales were related to the Company’s two largest license agreements ( 13 % each) with no other license agreements accounting 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 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. The Company maintains its cash within bank deposit accounts at high quality, accredited financial institutions. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to significant credit risk on cash. Inventory 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. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to customers, or liquidation, and expected recoverable value of each disposition category. The Company estimates obsolescence based on assumptions regarding future demand. Reserves for excess and obsolete inventories were $ 4.7 million and $ 8.6 million as of December 31, 2021 and 2020, 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 was incremental to normal course reserves. Property and Equipment Property and equipment is stated at historical cost, net of accumulated depreciation, and, if applicable, impairment charges. Depreciation of property and equipment is recorded using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: Asset Lives (in years) Tooling and molds 2 Furniture, fixtures, and warehouse equipment 2 to 7 Computer equipment, software and other 3 to 5 Leasehold improvements 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. GAAP. 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. 87 Table of Contents Revenue Recognition and Sales Allowance Revenue from the sale of Company products is recognized when control of the goods is transferred to the customer, which is upon shipment or upon receipt of finished goods by the customer, depending on the contract terms. The Company routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. 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. The costs of these programs reduce gross sales in the period the related sale is recognized. The Company adjusts its estimates at least quarterly or when facts and circumstances used in the estimate process change; historically these adjustments have not been material. We have made an accounting policy election to exclude from revenue all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (for example, sales, use, value-added, and certain excise taxes). We have elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. Accordingly, shipping and handling activities that are performed by the Company, whether before or after a customer has obtained control of the products, are considered fulfillment costs to satisfy our performance obligation to transfer the products, and are recorded as incurred within cost of sales. We have elected the practical expedient to not recognize a significant financing component for contracts that include payments terms of one year or less. We have also elected the practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less. Shipping Revenue and Costs Shipping and handling costs include inbound freight costs and the cost to ship product to the customer and are included in cost of sales. Shipping fees billed to customers are included in net sales. Royalties We enter into agreements for rights to licensed trademarks, copyrights and likenesses for use in our products. These licensing agreements require the payment of royalty fees to the licensor based on a percentage of revenue. Many licensing agreements also require minimum royalty commitments. 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. As of December 31, 2021 , we recorded a prepaid asset of $ 4.7 million, net of a reserve of $ 0.7 million. 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. 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 income. Royalty expenses for the years ended December 31, 2021 , 2020 and 2019, were $ 162.0 million, $ 105.0 million and $ 126.8 million, respectively. Advertising and Marketing Costs Advertising and marketing costs are expensed when the advertising or marketing event takes place. These costs include the fees to participate in trade shows and Comic-Cons, as well as costs to develop promotional video and other online content created for advertising purposes. These costs are included in selling, general and administrative expenses and for the years ended December 31, 2021 , 2020 and 2019 were $ 17.1 million, $ 7.7 million, and $ 11.3 million, respectively. 88 Table of Contents The Company enters into cooperative advertising arrangements with customers. The fees related to these arrangements are recorded as a reduction of net sales in the accompanying consolidated statements of income because the Company has determined it does not receive an identifiable benefit and cannot reasonably estimate the fair value of these arrangements. Product Design and Development Costs Product design and development costs are recognized in selling, general and administrative expenses in the consolidated statements of income as incurred. Product design and development costs for the years ended December 31, 2021, 2020 and 2019, were $ 6.8 million, $ 5.1 million, and $ 5.2 million, respectively. Foreign Currency We have international sales and operating expenses that are denominated in local functional currencies. The functional currency of our international subsidiaries is the same as the local currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at period-end foreign exchange rates, and revenues and expenses are translated at average rates prevailing throughout the period. Translation adjustments are included in other comprehensive income on the consolidated statements of comprehensive income. Transaction gains and losses including intercompany transactions denominated in a currency other than the functional currency of Funko, Inc. are included in other expense (income), net on our consolidated statements of income. In connection with the settlement and remeasurement of intercompany balances, we recorded a no minal loss, loss of $ 0.4 million and gain of $ 0.7 million for the years ended December 31, 2021, 2020 and 2019, 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 There were no recently adopted accounting standards during the year ended December 31, 2021 that had a material effect of the financial statements. 3. Acquisitions On March 26, 2021, the Company acquired a majority of the membership interests of TokenWave LLC, the developer of TokenHead, a mobile app and website for showcasing and tracking Non-Fungible Token (“NFT”) holdings. This transaction represented an opportunity to expand the Company’s product offerings into digital NFTs. The Company accounted for the acquisition as a business combination. The purchase consideration, fair value of the assets acquired and liabilities assumed, and acquisition related transaction costs were not material. The activity of TokenWave LLC included in the Company’s consolidated statements of income from the acquisition date to December 31, 2021 was not material. 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. The total purchase consideration of $ 11.9 million was allocated on a 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 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 income from the acquisition date to December 31, 2019 was not material. 89 Table of Contents The purchase consideration allocated to the Forrest-Pruzan Acquisition was as follows: Purchase Consideration at Fair Value (in thousands) Cash paid $ 6,500 Fair value of class A common stock issued 2,221 Cash holdback 1,400 Fair value of cash consideration due February 11, 2021 1,815 Total transaction price $ 11,936 Less: Noncompetition agreements ( 290 ) Consideration transferred $ 11,646 4. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. 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. 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, 2021, 2020 and 2019. The following table presents the balances of goodwill as of 2021 and 2020 (in thousands): Goodwill Balance as of January 1, 2020 $ 124,835 Foreign currency remeasurement 226 Balance as of December 31, 2020 $ 125,061 Acquisition 1,662 Foreign currency remeasurement ( 72 ) Balance as of December 31, 2021 $ 126,651 Intangible assets acquired in a business combination are recognized separately from goodwill and are initially recognized at their fair value at the acquisition date. Intangible assets acquired include intellectual property (product design), customer, licensor and supplier relationships, trade names, and noncompetition agreements. These are definite-lived assets and are amortized on a straight-line basis over their useful lives. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset 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. As of December 31, 2021, there were also $ 0.1 million in indefinite-lived assets not subject to amortization but tested for impairment. No impairment charges relating to intangible assets were recorded in the years ended December 31, 2021, 2020 and 2019. 90 Table of Contents The following table provides the details of identified intangible assets, by major class, for the periods indicated (in thousands): December 31, 2021 December 31, 2020 Estimated Useful Life (Years) Gross Carrying Amount Accumulated Amortization Intangible Assets, Net Gross Carrying Amount Accumulated Amortization Intangible Assets, Net Intangible assets subject to amortization: Intellectual property 3 - 20 $ 115,331 $ ( 36,060 ) $ 79,271 $ 115,131 $ ( 30,008 ) $ 85,123 Trade names 10 - 20 83,358 ( 25,985 ) 57,373 83,359 ( 21,717 ) 61,642 Customer relationships 3 - 20 71,699 ( 24,912 ) 46,787 71,736 ( 20,301 ) 51,435 Licensor relationships 10 - 20 11,276 ( 5,186 ) 6,090 11,301 ( 4,068 ) 7,233 Supplier relationships 2 322 ( 322 ) — 325 ( 325 ) — Noncompetition agreements 3 290 ( 278 ) 12 290 ( 182 ) 108 Total $ 282,276 $ ( 92,743 ) $ 189,533 $ 282,142 $ ( 76,601 ) $ 205,541 Amortization expense for the years ended December 31, 2021, 2020 and 2019 was $ 16.2 million, $ 16.0 million, and $ 15.9 million, respectively. The future five-year amortization of intangibles subject to amortization at December 31, 2021 was as follows (in thousands): Amortization 2022 $ 15,107 2023 14,893 2024 14,873 2025 14,873 2026 14,815 Thereafter 114,972 Total $ 189,533 5. 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, existing economic conditions and supportable forecasted changes. The Company evaluates its general portion of the allowance for doubtful accounts 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 portion of the allowance for doubtful accounts, 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. 91 Table of Contents Accounts receivable, net consisted of the following (in thousands): December 31, 2021 2020 Accounts receivable $ 190,844 $ 135,417 Less: Allowance for doubtful accounts ( 3,156 ) ( 3,580 ) Accounts receivable, net $ 187,688 $ 131,837 Accounts receivable includes a $ 0.8 million tenant improvement receivable from a lessor as of both December 31, 2021 and 2020. In addition, accounts receivable as of December 31, 2021 includes an income tax receivable of $ 0.3 million. The remaining balance is customer receivables. Bad debt expense was $ 0.9 million, $ 2.4 million and $ 1.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. Activity in our allowance for doubtful accounts was as follows (in thousands): December 31, 2021 2020 Allowance for doubtful accounts - beginning $ 3,580 $ 2,354 Charged to costs 895 2,396 Write offs ( 1,319 ) ( 1,170 ) Allowance for doubtful accounts - ending $ 3,156 $ 3,580 6. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2021 2020 Prepaid deposits for inventory and molds $ 1,111 $ 1,373 Prepaid royalties, net 4,746 6,260 Other prepaid expenses and current assets 9,068 7,853 Prepaid expenses and other current assets $ 14,925 $ 15,486 7. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2021 2020 Tooling and molds $ 119,915 $ 102,865 Leasehold improvements 44,112 42,573 Computer equipment, software and other 13,007 11,310 Furniture, fixtures and warehouse equipment 12,177 11,762 Construction in progress 7,194 318 $ 196,405 $ 168,828 Less: Accumulated depreciation ( 137,577 ) ( 112,687 ) Property and equipment, net $ 58,828 $ 56,141 Depreciation expense for the years ended December 31, 2021, 2020 and 2019 was $ 25.0 million, $ 28.3 million, and $ 26.2 million, respectively. 92 Table of Contents 8. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2021 2020 Accrued payroll and compensation $ 23,439 $ 13,338 Accrued shipping & freight costs 42,649 4,733 Accrued sales taxes 1,978 757 Current liabilities under tax receivable agreement 7,362 2,020 Other current liabilities 45,839 23,101 Accrued liabilities and other current liabilities $ 121,267 $ 43,949 9. Fair Value Measurements The Company’s financial instruments, other than those discussed below, include cash, accounts receivable, accounts payable, and accrued liabilities. The carrying amount of these financial instruments approximate fair value due to the short-term nature of these instruments. For financial instruments measured at fair value on a recurring basis, the Company prioritizes the inputs used in measuring fair value according to a three-tier fair value hierarchy defined by U.S. GAAP. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; 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. Cash equivalents. As of December 31, 2021 and 2020, cash equivalents included $ 56.9 million and $ 34.5 million, respectively, of highly liquid money market funds, which are classified as Level 1 within the fair value hierarchy. Debt. The estimated fair values of the Company’s debt instruments, which are classified as Level 3 financial instruments, at December 31, 2021 and 2020, was approximately $ 175.5 million and $ 193.9 million, respectively. The carrying values of the Company’s debt instruments at December 31, 2021 and 2020, were $ 173.2 million and $ 190.8 million, respectively. The estimated fair value of the Company’s debt instruments primarily reflects assumptions regarding credit spreads for similar floating-rate instruments with similar terms and maturities and our standalone credit risk. 93 Table of Contents 10. Debt Debt consists of the following (in thousands): December 31, 2021 2020 Term Loan Facility 175,500 193,875 Debt issuance costs ( 2,287 ) ( 3,105 ) Total term debt 173,213 190,770 Less: current portion 17,395 10,758 Long-term debt, net $ 155,818 $ 180,012 Maturities of long-term debt for each of the next five years and thereafter are as follows (in thousands): Term Loan Facility 2022 $ 18,000 2023 18,000 2024 18,000 2025 18,000 2026 103,500 Total $ 175,500 Former Credit Facilities On October 22, 2018, the Company entered into a credit agreement (as amended, the “Former Credit Agreement”) providing for a term loan facility in the amount of $ 235.0 million (the “Former Term Loan Facility”) and a revolving credit facility of $ 50.0 million (the “Former Revolving Credit Facility”) (together the “Former Credit Facilities”). On February 11, 2019, the Company amended the Former Credit Agreement to increase the Former Revolving Credit Facility to $ 75.0 million. On September 23, 2019, the Company entered into a second amendment to the Former Credit Agreement, which extended the maturity date of the Former Term Loan Facility and the Former Revolving Credit Facility under the Former Credit Facilities to September 23, 2024 (the “Former Facility Maturity Date”), reduced the interest margin applicable to all loans under the Former Credit Agreement by 0.75 % and reduced certain fees incurred under the Former Credit Agreement. The second amendment also allowed the Company to request an additional $ 25.0 million increase to the Former Term Loan Facility. On May 5, 2020 the Company entered into a third amendment to the Former Credit Agreement, which modified the financial covenants and adjusted the required leverage levels for the Leverage Ratio (as defined in the Former Credit Agreement) to provide the Company with additional flexibility. The Former Term Loan Facility amortized in quarterly installments in aggregate amounts equal to 5.00 % of the original principal amount of the Former Term Loan Facility in the first and second years of the Former Term Loan Facility, 10.00 % of the original principal amount of the Former Term Loan Facility in the third and fourth years of the Former Term Loan Facility and 12.50 % of the original principal amount of the Former Term Loan Facility in the fifth year of the Former Term Loan Facility, with any outstanding balance due and payable on the Maturity Date. The first amortization payment was on December 31, 2018. The Former Revolving Credit Facility would have terminated on the Former Facility Maturity Date and loans thereunder were eligible to be borrowed, repaid, and reborrowed up to such date. As amended, loans under the Credit Facilities bore 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. The Euro-Rate was subject to a 1.00 % floor and for loans based on the Euro-Rate, interest payments were due at the end of each applicable interest period. The Former Credit Facilities were secured by substantially all of the assets of the Company and its material domestic subsidiaries, subject to customary exceptions. As of December 31, 2020, the Company was in compliance with all of the covenants in its Former Credit Agreement. 94 Table of Contents In September 2021, all of the outstanding aggregate principal balance and accrued interest of $ 180.1 million on the Company’s Former Term Loan Facility was repaid, and the Company recorded a $ 0.7 million loss on debt extinguishment as a result of the write-off of unamortized deferred financing fees. New Credit Facilities 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 Former Credit Facilities. 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 commences 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 % 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 Facilities are secured by substantially all of the assets of the Company and any of its existing or future material domestic subsidiaries, subject to customary exceptions. As of December 31, 2021, the Company was in compliance with all of the covenants in its New Credit Agreement. At December 31, 2021 and 2020, the Company had $ 175.5 million and $ 193.9 million of borrowings outstanding under the New Term Loan Facility and Former Term Loan Facility, respectively, and no outstanding borrowings under the New Revolving Credit Facility and Former Revolving Credit Facility, respectively. At December 31, 2021 and 2020, the Company had $ 100.0 million and $ 75.0 million available under the New Revolving Credit Facility and Former Revolving Credit Facility, respectively. There were no outstanding letters of credit as of December 31, 2021 and 2020. 11. Leases 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 years 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 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 income, was $ 16.5 million, $ 15.3 million and $ 14.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. 95 Table of Contents During the years ended December 31, 2021 and 2020, operating cash outflows relating to operating lease liabilities was $ 14.4 million and $ 11.6 million, respectively and operating lease right-of-use assets obtained in exchange for new operating lease obligations was $ 4.0 million, with no lease incentives obtained and $ 5.8 million, net of lease incentives obtained of $ 0.3 million, respectively. As of December 31, 2021 and 2020, the Company’s operating leases had a weighted-average remaining term of 7.0 years and 7.3 years, respectively and weighted-average discount rate of 6.22 % and 6.28 %, 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. The lease agreement was terminated in December 2021. 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 years ended December 31, 2021 and 2020 was $ 0.3 million and $ 0.3 million, respectively, included as a reduction of selling, general and administrative expenses on the consolidated statements of income. The future payments on the Company’s operating lease liabilities as of December 31, 2021 were as follows (in thousands): 2022 $ 15,445 2023 12,582 2024 12,013 2025 10,504 2026 9,303 Thereafter 20,489 Total lease payments 80,336 Less: imputed interest ( 14,918 ) Total $ 65,418 Not included in the lease payments table above are future payments related to Warehouse and Distribution lease in Buckeye, Arizona. The Company expects lease commencement to occur in mid-2022 and extend through October 2032. The 862,000 square foot building is expected to add approximately $ 1.5 million, $ 4.6 million, $ 4.7 million, $ 4.8 million, $ 4.9 million and $ 31.2 million in minimum rental expense for 2022, 2023, 2024, 2025, 2026 and thereafter, respectively. 12. Income Taxes Income before income taxes consisted of (in thousands): Year Ended December 31, 2021 2020 2019 Domestic $ 72,758 $ 4,149 $ 21,414 Foreign 12,157 7,639 10,882 Income before income taxes $ 84,915 $ 11,788 $ 32,296 Income Tax Expense Funko, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from FAH, LLC based upon Funko, Inc.’s economic interest held in FAH, LLC. FAH, LLC is treated as a pass-through partnership for income tax reporting purposes. 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. 96 Table of Contents The components of the Company’s income tax expense consisted of the following (in thousands): Year Ended December 31, 2021 2020 2019 Current income taxes: Federal $ 12,894 $ ( 3,030 ) $ 4,216 State and local 1,825 59 601 Foreign 2,703 1,673 1,952 Current income taxes $ 17,422 $ ( 1,298 ) $ 6,769 Deferred income taxes: Federal $ ( 185 ) $ 2,585 $ ( 2,333 ) State and local ( 18 ) 206 ( 185 ) Foreign ( 158 ) 532 225 Deferred income taxes ( 361 ) 3,323 ( 2,293 ) Income tax expense $ 17,061 $ 2,025 $ 4,476 A reconciliation of income tax expense from operations computed at the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: Year Ended December 31, 2021 2020 2019 Expected U.S. federal income taxes at statutory rate 21.0 % 21.0 % 21.0 % State and local income taxes, net of federal benefit 1.7 2.5 1.0 Foreign taxes 2.5 18.7 5.9 Foreign tax credit — ( 9.3 ) — Non-deductible expenses ( 1.1 ) 1.6 ( 0.8 ) Change in valuation allowance 2.3 5.4 4.9 Non-controlling interest ( 6.0 ) ( 12.7 ) ( 10.8 ) Share-based Compensation 0.1 5.1 ( 2.6 ) Return to Provision 1.5 ( 15.1 ) ( 3.0 ) Other, net ( 1.9 ) — ( 1.7 ) Income tax expense 20.1 % 17.2 % 13.9 % The Company’s annual effective tax rate in 2021, 2020 and 2019 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. 97 Table of Contents Deferred Income Taxes The significant items comprising deferred tax assets and liabilities is as follows (in thousands): December 31, 2021 2020 Deferred tax assets: Investment in partnership $ 64,335 $ 46,582 Tax Receivable Agreement liability 19,105 14,087 Stock-based compensation 6,197 4,195 Foreign Tax Credit — 1,090 Other carryforwards — 898 Net operating loss carryforward — 756 Gross deferred tax assets 89,637 67,608 Valuation allowance ( 14,829 ) ( 12,367 ) Deferred tax assets, net of valuation allowance 74,808 55,241 Deferred tax liabilities: Property and equipment ( 701 ) ( 833 ) Other ( 343 ) ( 506 ) Gross deferred tax liabilities ( 1,044 ) ( 1,339 ) Net deferred tax assets $ 73,764 $ 53,902 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. As of December 31, 2021 and 2020, the Company recognized a deferred tax asset of $ 64.3 million and $ 46.6 million, respectively, associated with the basis difference in its investment in FAH, LLC upon acquiring these LLC interests. However, a portion of the total basis difference will only reverse upon the eventual sale of its interest in FAH, LLC, which we expect would result in a capital loss. As of December 31, 2021 and 2020, the Company has a valuation allowance in the amount of $ 14.8 million and $ 12.4 million, respectively, against the deferred tax asset. Uncertain Tax Positions The Company regularly evaluates the likelihood of realizing the benefit from income tax positions that we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available. If the Company determines it is more likely than not that the position will be sustained, a benefit will be recognized at the largest amount that we believe is cumulatively greater than 50% likely to be realized. The following table summarizes changes in the amount of the Company’s unrecognized tax benefits for uncertain tax positions for the three years ended December 31, 2021, 2020 and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 Unrecognized tax benefits at January 1 $ 490 $ 490 $ 490 Decreases for positions taken in current year ( 490 ) — — Unrecognized tax benefits at December 31 $ — $ 490 $ 490 Of the $ 0.5 million of unrecognized tax benefits as of December 31, 2020 and 2019, $ 0.2 million would impact the effective tax rate if recognized. Interest and penalties related to income tax matters are classified as a component of income tax expense. As of December 31, 2021, and 2020, we have not recorded any interest or penalties as the amounts were not material. Unrecognized tax benefits are recorded in other long-term liabilities on the consolidated balance sheets. 98 Table of Contents Other Matters The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to U.S. federal, state, and local income tax examinations by tax authorities for years after 2018 and subject to examination for all foreign income tax returns for fiscal 2021 and 2020. There were no open tax examinations at December 31, 2021 and 2020. Tax Receivable Agreement The Company is party to the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners under certain circumstances. See Note 13, Liabilities under Tax Receivable Agreement. 13. Liabilities under Tax Receivable Agreement On November 1, 2017, the Company entered into the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85 % of the amount of tax benefits, if any, that it realizes, or in some circumstances, is deemed to realize, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of common units for Class A common stock or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. FAH, LLC intends to have in effect an election under Section 754 of the Internal Revenue Code effective for each taxable year in which a redemption or exchange (including deemed exchange) of common units for cash or stock occurs. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in FAH, LLC. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement are assignable, including to transferees of common units in FAH, LLC (other than the Company as transferee pursuant to a redemption or exchange of common units in FAH, LLC). The Company expects to benefit from the remaining 15 % of the tax benefits, if any, that the Company may realize. The Company is not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transaction that gave rise to the payment are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) the generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If the Company does not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then it would not be required to make the related Tax Receivable Agreement payments. During years ended December 31, 2021 and 2020, the Company acquired an aggregate of 3.9 million and 0.5 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, 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, 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, 2021, 2020 and 2019, as we concluded that it was probable that the Company would have sufficient future taxable income to utilize all of the related tax benefits. 99 Table of Contents The following table summarizes changes in the amount of the Company’s Tax Receivable Agreement liability for the three years ended December 31, 2021, 2020 and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 Beginning Balance $ 62,318 $ 65,816 $ 6,771 Additional liabilities for exchanges 20,691 1,000 59,045 Adjustment to remeasurement of liabilities 1,590 87 152 Payments under tax receivable agreement ( 1,715 ) ( 4,585 ) ( 152 ) Ending balance $ 82,884 $ 62,318 $ 65,816 The future payments on the Company’s tax receivable agreement liabilities as of December 31, 2021 are expected to be (in thousands): 2022 $ 7,362 2023 4,835 2024 4,902 2025 5,003 2026 5,119 Thereafter 55,663 Total $ 82,884 14. Commitments and Contingencies License Agreements The Company enters into license agreements with various licensors of copyrighted and trademarked characters and design in connection with the products that it sells. The agreements generally require royalty payments based on product sales and in some cases may require minimum royalty and other related commitments. The Company is expected to incur $ 11.2 million in minimum guaranteed royalty payments under licensing arrangements, including, $ 5.3 million in 2022, $ 4.3 million in 2023 and $ 1.7 million in 2024. Employment Agreements The Company has employment agreements with certain officers. The agreements include, among other things, an annual bonus based on certain performance metrics of the Company, as defined by the board, and up to one year ’s severance pay beyond termination date. Debt The Company has entered into a credit agreement which includes a term loan facility and a revolving credit facility. See Note 10, Debt. Leases The Company has entered into non-cancellable operating leases for office, warehouse, and distribution facilities, with original lease periods expiring through 2032. 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. See Note 11, Leases. 100 Table of Contents Liabilities under Tax Receivable Agreement The Company is party to the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners under certain circumstances. See Note 13, Liabilities under Tax Receivable Agreement. Legal Contingencies The Company is involved in claims and litigation in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. For certain pending matters, accruals have not been established because such matters have not progressed sufficiently through discovery, and/or development of important factual information and legal information is insufficient to enable the Company to estimate a range of possible loss, if any. 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 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 the Company and certain of its officers, entitled Ferreira v. Funko, Inc. et al. The original complaint alleged that the Company 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 its 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 sought, among other things, compensatory damages and attorneys’ fees and costs. Two additional complaints making substantially similar allegations 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 lead plaintiffs and lead counsel were appointed pursuant to the Private Securities Litigation Reform Act; shortly thereafter, the Western District of Washington action was voluntarily dismissed. Lead plaintiffs filed the consolidated complaint on July 31, 2020, against the Company and certain of its officers and directors, as well as entities affiliated with ACON Funko Investors, L.L.C. (“ACON”). The consolidated complaint added Section 10(b) and 20(a) claims based on the Company’s 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 Exchange Act. All defendants moved to dismiss the consolidated action on October 2, 2020. On February 25, 2021, the Court granted all defendants’ motions to dismiss the Ferreira action, allowing the lead plaintiffs leave to amend the complaint. Lead plaintiffs filed their amended complaint on March 29, 2021, and all defendants moved to dismiss. On October 25, 2021, the Court issued an order granting defendants’ motion in part and denying the motion in part. Specifically, the court dismissed with prejudice all claims related to statements regarding Funko’s projected net sales and the claims based on inventory risk warnings in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, but denied the motion to dismiss as to claims based on inventory risk warnings in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. Several 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 its directors and officers. Specifically, on April 23, June 5, and June 10, 2020, the actions captioned Cassella v. Mariotti et al. , Evans 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 and were subsequently transferred to the United States District Court for the Central District of California. On April 23, 2021, both cases pending under the “Stockholder Derivative Litigation” caption were voluntarily dismissed, without prejudice. 101 Table of Contents 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 the Company, certain of its officers and directors, ACON, Fundamental Capital, LLC and Funko International, LLC (collectively, “Fundamental”), the underwriters of its 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 the Company, certain of its officers and directors, ACON, Fundamental, and certain other defendants. On October 1, 2018, the Company 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 the Company’s motion to dismiss the action, allowing plaintiffs leave to amend the complaint. On October 3, 2019, plaintiffs filed a first amended consolidated complaint. The Company moved to dismiss that complaint on December 5, 2019 and on August 5, 2020, the Superior Court of Washington in and for King County dismissed the consolidated action with prejudice. Plaintiffs appealed, and on November 1, 2021, the Court of Appeals reversed the trial court’s dismissal decision in most respects, and remanded the case to the trial court for further proceedings. On January 13, 2022, the Company filed a petition seeking review of the Washington State Court of Appeals’ reversal by the Washington Supreme Court. That petition is pending, and accordingly the case has not yet been remanded to the trial court. 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 the Company, certain of its officers and directors, and certain other defendants. On January 4, 2019, a lead plaintiff was appointed in that case. On April 30, 2019, the lead plaintiff filed an amended complaint against the previously named defendants. The parties to the federal action, now captioned Berkelhammer v. Funko, Inc. et al. , have agreed to a stay of that action pending developments in the state case. The cases in Washington state court and Berkelhammer v. Funko, Inc. et al. allege that the Company 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 the Company’s 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 the Company’s Class A common stock by the plaintiffs and members of the putative class, as well as attorneys’ fees and costs. On June 11, 2021, one of those purported stockholders filed a related derivative action, captioned Silverberg v. Mariotti, et al. , was filed in the Court of Chancery of the State of Delaware. In response, on July 8, 2021, the Company moved to stay and dismiss the action. On December 1, 2021, Silverberg stipulated to a stay of the action pending resolution of Ferreira v. Funko, Inc., et al. , Case No. 2:20-cv-02319. On January 18, 2022, a stockholder filed a putative class action lawsuit in the Court of Chancery of the State of Delaware relating to the Company’s corporate “Up-C” structure and bringing direct claims for breach of fiduciary against certain current and former officers and directors. On February 14, 2022, the Company moved to dismiss the complaint. A briefing schedule on the motion to dismiss has not yet been set. The Company is party to additional legal proceedings incidental to its business. While the outcome of these additional matters could differ from management’s expectations, the Company does not believe that the resolution of such matters is reasonably likely to have a material effect on its results of operations or financial condition. 15. Segments 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, the Company has one segment. 102 Table of Contents The following tables present summarized product information as a percent of sales: Year ended December 31, 2021 2020 2019 Figures 77.6 % 77.2 % 80.8 % Other 22.4 % 22.8 % 19.2 % Year ended December 31, 2021 2020 2019 Pop! Branded Products 74.5 % 76.2 % 78.6 % Loungefly Branded Products 13.7 % 13.0 % 9.1 % Other 11.8 % 10.8 % 12.3 % The following tables present summarized geographical information (in thousands): Year ended December 31, 2021 2020 2019 Net sales: United States $ 743,846 $ 488,823 $ 523,897 Europe 214,732 111,997 198,203 Other International 70,715 51,717 73,022 Total net sales $ 1,029,293 $ 652,537 $ 795,122 December 31, 2021 2020 Long-lived assets: United States $ 81,022 $ 72,813 Vietnam and China 16,701 16,144 United Kingdom 26,500 29,998 Total long-lived assets $ 124,223 $ 118,955 16. Related Party Transactions The Company sells products to Forbidden Planet, a U.K. retailer through its wholly owned subsidiary Funko UK, Ltd. One of the investors in Forbidden Planet is an employee of Funko UK, Ltd. For the years ended December 31, 2021, 2020 and 2019, the Company recorded approximately $ 0.8 million, $ 2.0 million and $ 2.3 million, respectively, in net sales from business with Forbidden Planet. At December 31, 2021 and 2020, accounts receivable from Forbidden Planet were $ 0.4 million and $ 0.5 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 years ended December 31, 2021 and 2020, the Company recorded $ 0.3 million and $ 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 Income. 103 Table of Contents 17. Employee Benefit Plans We currently maintain the Funko 401(k) Plan, a defined contribution retirement and savings plan, for the benefit of our employees, including our named executive officers, who satisfy certain eligibility requirements. Our named executive officers are eligible to participate in the 401(k) Plan on the same terms as other full-time employees. The Code allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) Plan. Currently, we match contributions made by participants in the 401(k) Plan up to 4 % of the employee earnings, and these matching contributions are fully vested as of the date on which the contribution is made. We believe that providing a vehicle for tax-deferred retirement savings though our 401(k) Plan, and making fully vested matching contributions, adds to the overall desirability of our compensation package and further incentivizes our employees, including our named executive officers, in accordance with our compensation policies. The Company’s employer matching contributions were $ 1.8 million, $ 1.5 million and $ 1.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. 104 Table of Contents 18. Stockholders’ Equity 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. Shares of Class A common stock have both economic and voting rights. Shares of Class B common stock have no economic rights, but do have voting rights. Holders of shares of Class A common stock and Class B common stock are entitled to one vote per share on all matters presented to stockholders. The Company’s board of directors has the discretion to determine the rights, preferences, privileges, restrictions and liquidation preferences of any series of preferred stock. Reorganization Transactions On November 1, 2017, in connection with the completion of the IPO, the Company completed a series of reorganization Transactions. The Transactions included the following: • The amendment and restatement of the existing FAH, LLC limited liability company agreement (the “FAH LLC Agreement”) to, among other things, (i) convert all existing ownership interests (including vested profits interests and all unvested profits interests and existing warrants to purchase ownership interests in FAH, LLC) into common units of FAH, LLC (subject to common units received in exchange for unvested profits interests remaining subject to time-based vesting requirements), and (ii) appoint the Company as FAH, LLC’s sole managing member upon its acquisition of common units in connection with the IPO; • The amendment and restatement of the Company’s certificate of incorporation to, among other things, provide (i) for Class A common stock, with each share of Class A common stock entitling its holders to one vote per share on all matters presented to stockholders generally and (ii) for Class B common stock, with each share of Class B common stock entitling its holders to one vote per share on all matters presented to stockholders generally and that shares of Class B common stock may only be held by the Continuing Equity Owners and their permitted transferees; • Certain funds affiliated with ACON Funko Investors (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; and • The Company entered into (i) a stockholders’ agreement with ACON Funko Investors and the Former Equity Owners, Fundamental Capital, LLC and Funko International, LLC (collectively, “Fundamental”) and Brian Mariotti, the Company’s Chief Creative Officer, (ii) a registration rights agreement with certain of the Original Equity Owners (including each of the Company’s executive officers), and (iii) a tax receivable agreement (the “Tax Receivable Agreement”) with FAH, LLC and each of the Continuing Equity Owners. The Transactions were effected on November 1, 2017, prior to the time the Company’s Class A common stock was registered under the Exchange Act, and prior to the completion of the IPO. 105 Table of Contents FAH, LLC Recapitalization 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. As a result, the Company consolidates FAH, LLC’s financial results and reports a non-controlling interest related to the economic interest of FAH, LLC held by the Continuing Equity Owners. The Amended and Restated Certificate of Incorporation and the FAH LLC Agreement discussed above requires FAH, LLC and the Company to, at all times, maintain (i) a one-to-one ratio between the number of shares of Class A common stock issued by the Company and the number of common units owned by the Company and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and the number of common units owned by the Continuing Equity Owners (other than common units issuable upon the exercise of options and common units that are subject to time-based vesting requirements (the “Excluded Common Units”)). The Company may issue shares of Class B common stock only to the extent necessary to maintain the one-to-one ratio between the number of common units of FAH, LLC held by the Continuing Equity Owners (other than the Excluded Common Units) and the number of shares of Class B common stock issued to the Continuing Equity Owners. Shares of Class B common stock are transferable only together with an equal number of common units of FAH, LLC. Only permitted transferees of common units held by the Continuing Equity Owners will be permitted transferees of Class B common stock. The Continuing Equity Owners may from time to time at each of their options (subject, in certain circumstances, to time-based vesting requirements) require FAH, LLC to redeem all or a portion of their common units in exchange for, at the Company’s election, newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each common unit redeemed, in each case in accordance with the terms of the FAH LLC Agreement; provided that, at the Company’s election, the Company may effect a direct exchange of such Class A common stock or such cash, as applicable, for such common units. The Continuing Equity Owners may exercise such redemption right for as long as their common units remain outstanding. 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. Equity-Based Compensation Funko, Inc. 2017 Incentive Award Plan . On October 23, 2017, the Company adopted the Funko, Inc. 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. In connection with the IPO, the Company granted 1,028,500 options to purchase shares of Class A common stock to certain of its directors, executive officers and employees. Subsequent to the IPO, the Company has granted options to purchase shares of Class A common stock and restricted stock units on Class A common stock to certain of its directors, executive officers and employees under the 2017 Plan. Funko, Inc. 2019 Incentive Award Plan . Effective April 18, 2019, the Company adopted the Funko, Inc. 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) 3,000,000 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 736,917 and 1,077,464 , respectively as of December 31, 2021. 106 Table of Contents A summary of stock option activity for the year ended December 31, 2021 is as follows: Funko, Inc. Stock Options Weighted Average Exercise Price Aggregate Intrinsic Value Remaining Contractual Life (in thousands) (in thousands) (years) Outstanding at December 31, 2020 2,905 $ 13.05 $ 4,069 8.05 Granted 821 19.82 — Exercised ( 268 ) 14.12 2,543 Forfeited ( 216 ) 15.20 812 Outstanding at December 31, 2021 3,242 14.54 15,973 7.61 Options exercisable at December 31, 2021 1,760 $ 13.48 $ 10,152 6.81 Stock options awarded to employees under the 2017 Plan and 2019 Plan are generally granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant, vest over four years , and have ten years contractual terms. A summary of restricted stock unit activity for the year ended December 31, 2021 is as follows: Funko, Inc. Restricted Stock Units Weighted Average Grant Date Fair Value Remaining Contractual Life (in thousands) (years) Unvested at December 31, 2020 1,868 $ 12.58 2.37 Granted 638 16.41 Vested ( 284 ) 9.43 Forfeited ( 81 ) 11.29 Unvested at December 31, 2021 2,141 $ 14.18 2.22 Options to purchase common units in FAH, LLC. In connection with the IPO, existing options to purchase Class A units in FAH, LLC were converted into 555,867 options to purchase common units in FAH, LLC. A summary of FAH, LLC stock option activity for the year ended December 31, 2021 is as follows: FAH, LLC Stock Options Weighted Average Exercise Price Aggregate Intrinsic Value Remaining Contractual Life (in thousands) (in thousands) (years) Outstanding at December 31, 2020 228 0.05 2,437 2.41 Outstanding at December 31, 2021 228 $ 0.05 $ 4,278 1.41 Options exercisable at December 31, 2021 228 $ 0.05 $ 4,278 1.41 Unvested common units in FAH, LLC. In connection with the IPO, unvested common units to purchase profit interests in FAH, LLC were converted into 1,901,327 unvested common units of FAH, LLC. There were no unvested common units of FAH, LLC as of December 31, 2020. 107 Table of Contents The following table presents information on stock option exercises (in thousands): Year ended December 31, 2021 2020 2019 Cash received for exercise price $ 3,794 $ 219 $ 2,217 Intrinsic value 2,543 957 3,404 Equity-based compensation expense . The Company measures and recognizes expense for its equity-based compensation granted to employees and directors based on the fair value of the awards on the grant date. The fair value of restricted stock units is based on the market price of Class A common stock on the date of grant. The fair value of option awards is estimated at the grant date using the Black-Scholes option pricing model that requires management to apply judgment and make estimates, including: • Volatility —this is estimated based primarily on historical volatilities of a representative group of publicly traded consumer product companies with similar characteristics • Risk-free interest rate —this is the U.S. Treasury rate as of the grant date having a term equal to the expected term of the award • Expected term —represents the estimated period of time until an award is exercised and was calculated based on the simplified method • Dividend yield —the Company does not plan to pay dividends in the foreseeable future 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, 2021 2020 2019 Expected term (years) 6.06 6.05 6.07 Expected volatility 48.6 % 45.6 % 38.7 % Risk-free interest rate 1.0 % 0.5 % 2.4 % Dividend yield — % — % — % The weighted-average fair value of stock options granted for the years ended December 31, 2021, 2020 and 2019 was $ 9.26 , $ 1.90 and $ 8.35 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 statements of income. Equity-based compensation for the years ended December 31, 2021, 2020 and 2019 was $ 13.0 million, $ 10.1 million and $ 13.0 million, respectively. As of December 31, 2021, there was $ 24.0 million of total unrecognized equity-based compensation expense that the Company expected to recognize over a remaining weighted-average period of 2.4 years. Of this, $ 9.1 million is related to options to purchase Class A common stock in Funko, Inc. and $ 15.0 million is related to unvested restricted stock units in Class A common stock of Funko, Inc. As of December 31, 2021, the Company expected to recognize these costs over a remaining weighted average period of 2.6 years for options to purchase Class A shares in Funko, Inc., and 2.2 years for unvested restricted stock units in Class A common stock of Funko, Inc. 108 Table of Contents 19. Non-controlling Interests 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. Changes in Funko, Inc.’s ownership interest in FAH, LLC while Funko, Inc. 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. Net income and comprehensive income are attributed between Funko, Inc. and noncontrolling interest holders based on each party’s relative economic ownership interest in FAH, LLC. As of December 31, 2021, 2020 and 2019, Funko, Inc. owned 40.1 million, 35.7 million and 34.9 million of FAH, LLC common units, respectively, representing a 77.3 %, 69.5 % and 68.7 % economic ownership interest in FAH, LLC, respectively. Net income and comprehensive income of FAH, LLC excludes certain activity attributable to Funko, Inc., including $ 13.0 million, $ 10.0 million and $ 10.8 million of equity-based compensation expense for share-based compensation awards issued by Funko, Inc. for the years ended December 31, 2021, 2020 and 2019, respectively, and $ 14.3 million of income tax expense, $ 0.4 million income tax benefit and $ 2.2 million of income tax expense for corporate, federal, state and local taxes attributable to Funko, Inc. for the years ended December 31, 2021, 2020 and 2019, respectively. 109 Table of Contents 20. Earnings per Share Basic and Diluted Earnings per Share Basic earnings per share of Class A common stock is computed by dividing net income available to Funko, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available to Funko, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. 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, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019 (in thousands, except per share data) Numerator: Net income $ 67,854 $ 9,763 $ 27,820 Less: net income attributable to non-controlling interests 23,954 5,802 16,095 Net income attributable to Funko, Inc. — basic $ 43,900 $ 3,961 $ 11,725 Add : Reallocation of net income attributable to non- controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock — — — Net income attributable to Funko, Inc. — diluted $ 43,900 $ 3,961 $ 11,725 Denominator: Weighted-average shares of Class A common stock outstanding — basic 38,392,390 35,270,795 30,897,569 Add: Dilutive common units of FAH, LLC that are convertible into Class A common stock 227,500 304,327 1,064,145 Add: Dilutive Funko, Inc. equity compensation awards 1,990,728 194,891 964,059 Weighted-average shares of Class A common stock outstanding — diluted 40,610,618 35,770,013 32,925,773 Earnings per share of Class A common stock — basic $ 1.14 $ 0.11 $ 0.38 Earnings per share of Class A common stock — diluted $ 1.08 $ 0.11 $ 0.36 For the years ended December 31, 2021, 2020 and December 31, 2019 an aggregate of 14.7 million, 19.7 million and 20.1 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, 2021, 2020 and 2019 anti-dilutive securities included 13.2 million, 15.8 million and 19.1 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. 110 Table of Contents Schedule I: Condensed Financial Information of Registrant FUNKO, INC. CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY) Year Ended December 31, 2021 2020 2019 (in thousands) Intercompany revenue $ 82 $ 307 $ 739 Selling, general, and administrative expenses 13,163 10,269 11,211 Total operating expenses 13,163 10,269 11,211 Loss from operations ( 13,081 ) ( 9,962 ) ( 10,472 ) Interest (expense) income, net 3 ( 36 ) — Tax receivable agreement liability adjustment ( 1,590 ) ( 87 ) ( 152 ) Equity in net income of subsidiaries 72,916 13,674 24,525 Income before income taxes 58,248 3,589 13,901 Income tax expense (benefit) 14,348 ( 372 ) 2,176 Net income $ 43,900 $ 3,961 $ 11,725 See accompanying notes to condensed financial information 111 Table of Contents Schedule I: Condensed Financial Information of Registrant (continued) FUNKO, INC. CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (PARENT COMPANY ONLY) Year Ended December 31, 2021 2020 2019 (in thousands) Net income $ 43,900 $ 3,961 $ 11,725 Other comprehensive income: Foreign currency translation (loss) gain, net of tax effect of $ 163 , $( 274 ) and $( 282 ) for the years ended December 31, 2021, 2020 and 2019, respectively ( 544 ) 927 958 Reclassification of foreign currency translation gain into net income $ ( 96 ) $ — $ — Comprehensive income attributable to Funko, Inc. $ 43,260 $ 4,888 $ 12,683 See accompanying notes to condensed financial information 112 Table of Contents Schedule I: Condensed Financial Information of Registrant (continued) FUNKO, INC. CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) December 31, 2021 2020 (in thousands, except per share data) Assets Current assets: Cash and cash equivalents $ 61,943 $ 34,568 Income tax receivable — 294 Total current assets 61,943 34,862 Intercompany receivable 116,746 117,995 Deferred tax asset 74,464 54,734 Investment in subsidiaries 166,054 97,523 Total assets $ 419,207 $ 305,114 Liabilities and Stockholders' Equity Current liabilities: Tax payable $ 14,684 $ — Current portion of liabilities under tax receivable agreement 7,362 2,020 Accrued expenses and other current liabilities — 40 Total current liabilities 22,046 2,060 Liabilities under tax receivable agreement, net of current portion 75,523 60,297 Other long-term liabilities — 490 Commitments and contingencies Stockholders' equity: Class A common stock, par value $ 0.0001 per share, 200,000 shares authorized; 40,088 shares and 35,657 shares issued and outstanding as of December 31, 2021 and 2020, respectively 4 4 Class B common stock, par value $ 0.0001 per share, 50,000 shares authorized; 10,691 shares and 14,040 shares issued and outstanding as of December 31, 2021 and 2020, respectively 1 1 Additional paid-in-capital 252,505 216,141 Accumulated other comprehensive income 1,078 1,718 Retained earnings 68,050 24,403 Total stockholders' equity 321,638 242,267 Total liabilities and stockholders' equity $ 419,207 $ 305,114 See accompanying notes to condensed financial information 113 Table of Contents Schedule I: Condensed Financial Information of Registrant (continued) FUNKO, INC. CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) Year Ended December 31, 2021 2020 2019 (in thousands) Operating Activities Net income $ 43,900 $ 3,961 $ 11,725 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiaries ( 72,916 ) ( 13,674 ) ( 24,525 ) Equity-based compensation 12,994 10,007 10,827 Deferred tax expense (benefit) ( 203 ) 2,792 ( 2,518 ) Tax receivable liability adjustment 1,590 87 152 Changes in operating assets and liabilities: Income tax receivable 294 3,521 ( 3,816 ) Due from related parties, net 1,351 26,007 ( 19,182 ) Prepaid expenses and other assets — — ( 2,336 ) Income taxes payable 14,684 — ( 3,497 ) Accrued expenses and other liabilities ( 571 ) 304 1,985 Net cash provided by (used in) operating activities 1,123 33,005 ( 31,185 ) Financing Activities Tax distribution received from FAH, LLC 24,173 5,825 29,502 Tax receivable agreement payments ( 1,715 ) ( 4,639 ) ( 173 ) Proceeds from exercise of equity-based options 3,794 41 2,148 Net cash provided by financing activities 26,252 1,227 31,477 Net increase in cash and cash equivalents 27,375 34,232 292 Cash and cash equivalents at beginning of period 34,568 336 44 Cash and cash equivalents at end of period $ 61,943 $ 34,568 $ 336 Supplemental Cash Flow Information Income tax payments $ 23 $ 2,116 $ 11,969 Establishment of liabilities under tax receivable agreement 20,691 1,000 59,045 Issuance of equity instruments for acquisitions — — 2,221 See accompanying notes to condensed financial information 114 Table of Contents Schedule I: Condensed Financial Information of Registrant (continued) FUNKO, INC. NOTES TO CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) December 31, 2021 1. Organization Funko, Inc. (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. 2. 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, 2021, 2020, and 2019, 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 $ 116.7 million and $ 118.0 million as of December 31, 2021 and 2020, 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 $ 82.9 million and $ 62.3 million as of December 31, 2021 and 2020, respectively. 3. 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, 2021 and 2020, liabilities under the tax receivable agreement totaled $ 82.9 million and $ 62.3 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. 115 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable.