Funko, Inc. 10-Q

Item 1. Financial Statements FUNKO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, 2022 2021 (In thousands, except per share data) Net sales $ 308,343 $ 189,177 Cost of sales (exclusive of depreciation and amortization shown separately below) 199,649 110,853 Selling, general, and administrative expenses 78,420 51,267 Depreciation and amortization 10,471 10,262 Total operating expenses 288,540 172,382 Income from operations 19,803 16,795 Interest expense, net 1,210 2,237 Other expense, net 397 1,179 Income before income taxes 18,196 13,379 Income tax expense 3,678 2,293 Net income 14,518 11,086 Less: net income attributable to non-controlling interests 4,636 4,572 Net income attributable to Funko, Inc. $ 9,882 $ 6,514 Earnings per share of Class A common stock: Basic $ 0.25 $ 0.18 Diluted $ 0.23 $ 0.17 Weighted average shares of Class A common stock outstanding: Basic 40,324 36,194 Diluted 42,529 37,839 See accompanying notes to the unaudited condensed consolidated financial statements. 3 FUNKO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended March 31, 2022 2021 (In thousands) Net income $ 14,518 $ 11,086 Other comprehensive income: Foreign currency translation (loss) gain, net of tax effect of $ 300 and $( 75 ) for the three months ended March 31, 2022 and 2021, respectively ( 1,282 ) 423 Comprehensive income 13,236 11,509 Less: Comprehensive income attributable to non-controlling interests 4,290 4,724 Comprehensive income attributable to Funko, Inc. $ 8,946 $ 6,785 See accompanying notes to the unaudited condensed consolidated financial statements. 4 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, 2022 December 31, 2021 (In thousands, except per share amounts) Assets Current assets: Cash and cash equivalents $ 33,131 $ 83,557 Accounts receivable, net 188,219 187,688 Inventory 161,502 166,428 Prepaid expenses and other current assets 20,172 14,925 Total current assets 403,024 452,598 Property and equipment, net 84,076 58,828 Operating lease right-of-use assets 75,250 53,466 Goodwill 126,547 126,651 Intangible assets, net 185,951 189,619 Deferred tax asset 77,300 74,412 Other assets 13,183 11,929 Total assets $ 965,331 $ 967,503 Liabilities and Stockholders’ Equity Current liabilities: Current portion of long-term debt, net of unamortized discount $ 17,411 $ 17,395 Current portion of operating lease liabilities 16,528 14,959 Accounts payable 54,946 57,238 Income taxes payable 17,978 15,994 Accrued royalties 59,664 58,158 Accrued expenses and other current liabilities 71,993 121,267 Total current liabilities 238,520 285,011 Long-term debt, net of unamortized discount 151,457 155,818 Operating lease liabilities, net of current portion 83,269 50,459 Deferred tax liability 630 648 Liabilities under tax receivable agreement, net of current portion 77,773 75,523 Other long-term liabilities 3,934 3,486 Commitments and Contingencies (Note 7) Stockholders’ equity: Class A common stock, par value $ 0.0001 per share, 200,000 shares authorized; 40,797 and 40,088 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively 4 4 Class B common stock, par value $ 0.0001 per share, 50,000 shares authorized; 10,007 and 10,691 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively 1 1 Additional paid-in-capital 260,090 252,505 Accumulated other comprehensive income 142 1,078 Retained earnings 77,932 68,050 Total stockholders’ equity attributable to Funko, Inc. 338,169 321,638 Non-controlling interests 71,579 74,920 Total stockholders’ equity 409,748 396,558 Total liabilities and stockholders’ equity $ 965,331 $ 967,503 See accompanying notes to the unaudited condensed consolidated financial statements. 5 FUNKO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, 2022 2021 (In thousands) Operating Activities Net income $ 14,518 $ 11,086 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization and other 10,141 10,586 Equity-based compensation 3,369 2,690 Amortization of debt issuance costs and debt discounts 217 322 Other ( 9 ) 805 Changes in operating assets and liabilities: Accounts receivable, net ( 1,108 ) 17,521 Inventory 3,894 ( 1,952 ) Prepaid expenses and other assets ( 3,408 ) 1,610 Accounts payable ( 1,876 ) 2,483 Income taxes payable 1,991 1,789 Accrued royalties 1,506 ( 6,619 ) Accrued expenses and other liabilities ( 52,190 ) ( 2,856 ) Net cash (used in) provided by operating activities ( 22,955 ) 37,465 Investing Activities Purchases of property and equipment ( 19,182 ) ( 3,884 ) Other ( 292 ) 199 Net cash used in investing activities ( 19,474 ) ( 3,685 ) Financing Activities Payments of long-term debt ( 4,500 ) ( 7,982 ) Distributions to continuing equity owners ( 3,408 ) ( 2,445 ) Payments under tax receivable agreement — ( 6 ) Proceeds from exercise of equity-based options 78 33 Net cash used in financing activities ( 7,830 ) ( 10,400 ) Effect of exchange rates on cash and cash equivalents ( 167 ) ( 938 ) Net change in cash and cash equivalents ( 50,426 ) 22,442 Cash and cash equivalents at beginning of period 83,557 52,255 Cash and cash equivalents at end of period $ 33,131 $ 74,697 See accompanying notes to the unaudited condensed consolidated financial statements. 6 FUNKO, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Operations The unaudited condensed consolidated financial statements include Funko, Inc. and its subsidiaries (together, 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. Reorganization transactions occurring at the time of our IPO resulted in Funko, Inc. 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 unaudited condensed consolidated financial statements representing the common units of FAH, LLC interests still held by other owners of FAH, LLC (collectively, the “Continuing Equity Owners”). Interim Financial Information In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date of and for the interim periods presented have been included, and such adjustments consist of normal recurring adjustments. Certain prior-year amounts have been reclassified to conform to the current year presentation. The unaudited condensed consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2022, due to seasonality and other factors. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 3, 2022. 2. Significant Accounting Policies Use of Estimates The preparation of the Company’s unaudited condensed 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. Significant Accounting Policies A description of the Company’s significant accounting policies is included in the audited consolidated financial statements within its Annual Report on Form 10–K for the year ended December 31, 2021. 7 3. Acquisitions TokenWave LLC . 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 represents 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 operations from the acquisition date to March 31, 2022 was not material. 4. Fair Value Measurements The Company’s financial instruments, other than those discussed below, include cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities. The carrying amount of these financial instruments approximates 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. For a description of the methods and assumptions that the Company uses to estimate the fair value and determine the classification according to the fair value hierarchy for each financial instrument, see the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021. Cash equivalents. As of March 31, 2022 and December 31, 2021, cash equivalents included $ 0.9 million and $ 56.9 million, respectively, of highly liquid money market funds, which are classified as Level 1 within the fair value hierarchy. Debt. The estimated fair value of the Company’s debt instruments, which are classified as Level 3 financial instruments, at March 31, 2022 and December 31, 2021, was approximately $ 171.0 million and $ 175.5 million, respectively. The carrying values of the Company’s debt instruments at March 31, 2022 and December 31, 2021, were $ 168.9 million and $ 173.2 million, respectively. 5. Debt Debt consists of the following (in thousands): March 31, 2022 December 31, 2021 Term Loan Facility $ 171,000 $ 175,500 Debt issuance costs ( 2,132 ) ( 2,287 ) Total term debt 168,868 173,213 Less: current portion 17,411 17,395 Long-term debt, net $ 151,457 $ 155,818 8 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 Former 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. 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. 9 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 commenced with the quarter ending on December 31, 2021. The New Revolving Credit Facility also terminates on the Maturity Date and loans thereunder may be borrowed, repaid, and reborrowed up to such date. Loans under the New Credit Facilities will, at the Borrowers’ option, bear interest at either (i) LIBOR, EURIBOR, HIBOR, CDOR, Daily Simple SONIA and/or the Central Bank Rate, as applicable, plus 2.50 % or (ii) ABR or the Canadian prime rate, as applicable, plus 1.50 %, in each case of clauses (i) and (ii), subject to two 0.25 % step-downs based on the achievement of certain leverage ratios following the Closing Date. Each of LIBOR, EURIBOR, HIBOR, CDOR and Daily Simple SONIA rates are subject to a — % 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 March 31, 2022 and December 31, 2021, the Company was in compliance with all of the covenants in its New Credit Agreement. At March 31, 2022 and December 31, 2021, the Company had $ 171.0 million and $ 175.5 million of borrowings outstanding under the New Term Loan Facility, respectively, and no outstanding borrowings under the New Revolving Credit Facility. At both March 31, 2022 and December 31, 2021, the Company had $ 100.0 million available under the New Revolving Credit Facility. There were no outstanding letters of credit as of March 31, 2022 and December 31, 2021. 6. Liabilities under Tax Receivable Agreement On November 1, 2017, the Company entered into a tax receivable agreement with FAH, LLC (the “Tax Receivable Agreement”) 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 of FAH, LLC for Class A common stock of Funko, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. During the three months ended March 31, 2022 and 2021, the Company acquired 0.7 million and 1.2 million, respectively of common units of FAH, LLC. As a result of these exchanges, during the three months ended March 31, 2022 and 2021, the Company recognized an increase to its net deferred tax assets in the amount of $ 2.6 million and $ 3.8 million, respectively. 10 The following table summarizes changes in the amount of the Company’s Tax Receivable Agreement liability for the three months ended March 31, (in thousands): 2022 2021 Beginning Balance $ 82,884 $ 62,317 Additional liabilities for exchanges 2,672 5,973 Payments under tax receivable agreement — ( 6 ) Ending balance $ 85,556 $ 68,284 As of March 31, 2022, the Company’s total obligation under the Tax Receivable Agreement, including accrued interest, was $ 85.6 million, of which $ 7.8 million was included in accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheets. There were no transactions subject to the Tax Receivable Agreement for which the Company did not recognize the related liability, as the Company concluded that it was probable that the Company would have sufficient future taxable income to utilize all of the related tax benefits. At December 31, 2021, the Company’s total obligation under the Tax Receivable Agreement, including accrued interest, was $ 82.9 million, of which $ 7.4 million was included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. 7. 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. 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 of directors, and up to one year ’s severance pay beyond termination date. Debt The Company has entered into a New Credit Agreement which includes a New Term Loan Facility and a New Revolving Credit Facility. See Note 5, Debt. 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 6, Liabilities under Tax Receivable Agreement. 11 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. The Company’s lease for the Warehouse and Distribution facility in Buckeye, Arizona, commenced during the three months ended March 31, 2022. The Company recorded operating lease right-of-use assets obtained in exchange for new operating lease obligations of $ 21.5 million with $ 17.2 million in lease incentives obtained. 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. 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 a 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, and the Court granted all defendants’ motions to dismiss the Ferreira action on October 20, 2020, allowing the lead plaintiffs leave to amend the complaint. Lead plaintiffs filed an 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 an inventory risk warning in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. On May 3, 2022, the parties agreed in principle to settle the litigation, subject to court approval. The cost of settlement will be covered by the Company’s director and officer liability insurance. 12 Several stockholder 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. On June 11, 2021, a purported stockholder filed a related derivative action, captioned Silverberg v. Mariotti, et al. , in the Court of Chancery of the State of Delaware. That action was stayed pending resolution of Ferreira v. Funko, Inc., et al. , Case No. 2:20-cv-02319. 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. 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, 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. On May 4, 2022, the Washington State Supreme Court denied the Company’s petition. 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. 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 (“Securities Act”), 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 January 18, 2022, a purported stockholder filed a putative class action lawsuit in the Court of Chancery of the State of Delaware, captioned Shumacher v. Mariotti, et al. , 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 March 31, 2022, the Company moved to dismiss the action. That motion is pending. 13 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. 8. 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 regularly reviewed by its Chief Operating Decision Maker (the “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. The following tables present summarized product information as a percent of sales: Three Months Ended March 31, 2022 2021 Figures 77.9 % 79.6 % Other 22.1 % 20.4 % Three Months Ended March 31, 2022 2021 Core Collectible 77.8 % 82.9 % Loungefly 16.2 % 13.0 % Other 6.0 % 4.1 % The following tables present summarized geographical information (in thousands): Three Months Ended March 31, 2022 2021 Net sales: United States $ 232,165 $ 136,521 Europe 57,057 39,765 Other International 19,121 12,891 Total net sales $ 308,343 $ 189,177 March 31, 2022 December 31, 2021 Long-term assets: United States $ 128,687 $ 81,022 Vietnam and China 18,774 16,701 United Kingdom 25,048 26,500 Total long-lived assets $ 172,509 $ 124,223 14 9. Income Taxes 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. The Company recorded $ 3.7 million and $ 2.3 million of income tax expense for the three months ended March 31, 2022 and 2021, respectively. The Company’s effective tax rate for the three months ended March 31, 2022 was 20.2 %. The Company’s effective tax rate is 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. 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 6, Liabilities under Tax Receivable Agreement. 15 10 . Stockholders’ Equity The following is a reconciliation of changes in stockholders’ equity for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 (In thousands) Class A common stock Beginning balance 4 $ 4 Shares issued — — Ending balance $ 4 $ 4 Class B common stock Beginning balance $ 1 $ 1 Redemption of common units of FAH, LLC — — Ending balance $ 1 $ 1 Additional paid-in capital Beginning balance $ 252,505 $ 216,141 Equity-based compensation 3,369 2,690 Shares issued for equity-based compensation awards 77 33 Other — 200 Redemption of common units of FAH, LLC 4,223 6,032 Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets ( 84 ) ( 2,194 ) Ending balance $ 260,090 $ 222,902 Accumulated other comprehensive (loss) income Beginning balance $ 1,078 $ 1,718 Foreign currency translation (loss) gain, net of tax ( 936 ) 271 Ending balance $ 142 $ 1,989 Retained earnings Beginning balance $ 68,050 $ 24,403 Net income attributable to Funko, Inc. 9,882 6,514 Ending balance $ 77,932 $ 30,917 Non-controlling interests Beginning balance $ 74,920 $ 80,178 Distributions to Continuing Equity Owners ( 3,408 ) ( 2,445 ) Other — 861 Redemption of common units of FAH, LLC ( 4,223 ) ( 6,032 ) Foreign currency translation (loss) gain, net of tax ( 346 ) 152 Net income attributable to non-controlling interests 4,636 4,572 Ending balance $ 71,579 $ 77,286 Total stockholders’ equity $ 409,748 $ 333,099 16 The following is a reconciliation of changes in Class A and Class B common shares outstanding for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 (In thousands) Class A common shares outstanding Beginning balance 40,088 35,657 Shares issued for equity-based compensation awards 25 17 Redemption of common units of FAH, LLC 684 1,162 Ending balance 40,797 36,836 Class B common shares outstanding Beginning balance 10,691 14,040 Redemption of common units of FAH, LLC ( 684 ) ( 1,000 ) Ending balance 10,007 13,040 Total Class A and Class B common shares outstanding 50,804 49,876 11. Non-controlling interests Funko, Inc. is the sole managing member of FAH, LLC and as a result consolidates the financial results of FAH, LLC and 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 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 non-controlling interest holders based on each party’s relative economic ownership interest in FAH, LLC. As of March 31, 2022 and December 31, 2021, Funko, Inc. owned 40.8 million and 40.1 million of FAH, LLC common units, respectively, representing a 78.5 % and 77.3 % economic ownership interest in FAH, LLC, respectively. Net income and comprehensive income of FAH, LLC excludes certain activity attributable to Funko, Inc., including equity-based compensation expense for share-based compensation awards issued by Funko, Inc. and income tax expense for corporate, federal, state and local taxes attributable to Funko, Inc. The following represents the amounts excluded from the computation of net income and comprehensive income of FAH, LLC: Three Months Ended March 31, 2022 2021 (In thousands) Funko, Inc. Equity-based compensation $ 3,369 $ 2,690 Income tax expense $ 3,008 $ 1,825 17 12. Earnings per Share Basic earnings per share of Class A common stock is computed by dividing net income attributable 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 attributable 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 (in thousands, except shares and per share amounts): Three Months Ended March 31, 2022 2021 Numerator: Net income $ 14,518 $ 11,086 Less : net income attributable to non-controlling interests 4,636 4,572 Net income attributable to Funko, Inc. — basic and diluted $ 9,882 $ 6,514 Denominator: Weighted-average shares of Class A common stock outstanding — basic 40,323,886 36,193,572 Add: Dilutive common units of FAH, LLC that are convertible into Class A common stock 160,971 227,323 Add : Dilutive Funko, Inc. equity compensation awards 2,044,099 1,418,146 Weighted-average shares of Class A common stock outstanding — diluted 42,528,956 37,839,041 Earnings per share of Class A common stock — basic $ 0.25 $ 0.18 Earnings per share of Class A common stock — diluted $ 0.23 $ 0.17 For the three months ended March 31, 2022 and 2021, an aggregate of 13.5 million and 16.3 million, respectively, of potentially dilutive securities 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 three months ended March 31, 2022 and 2021, anti-dilutive securities included 11.6 million and 15.1 million, respectively, 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. 18