What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-03-03 · 142 added, 111 removed, 322 unchanged (44% of the section changed)

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

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

Our results of operations for the year ended December 31, 2020, including a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, can be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.

Funko is a leading pop culture lifestyle brand .

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We create whimsical, fun and unique products that enable fans to express their affinity for their favorite “something”—whether it is a movie, TV show, video game, musician or sports team.

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

Given our diverse product offering, in 2022, we created three new branded categories to better align our product net sales results and execute against our operating objectives.

The Core Collectible branded category includes Pop!

Vinyl, and newer collectible brands such as Soda, Vinyl Gold and Popsies.

The Loungefly branded category includes our softlines products.

The Other branded category includes our Toy and Games brands and our Digital Brands.

Net sales product revenue has been recast into these branded categories for the year ended December 31, 2021.

Key Performance Indicators

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Net sales $ 1,322,706 $ 1,029,293

Net income $ 67,854 $ 9,763

Net (loss) income $ (5,240) $ 67,854

$ 34,962 $ 133,277

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(1) Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA are financial measures not calculated in accordance with U.S.

For a reconciliation of EBITDA and Adjusted EBITDA to net income, the most closely comparable U.S.

For a reconciliation of EBITDA and Adjusted EBITDA to net (loss) income, the most closely comparable U.S.

GAAP financial measure, see “Non-GAAP Financial Measures” in this item.

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To the extent we are unable to offer products that appeal to consumers, our operating results will be adversely affected.

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

brand, which represented approximately 74% and 76% of our sales for the years ended December 31, 2021 and 2020, respectively, and which is sold across multiple product categories.

This is particularly true given the concentration of our sales of products under certain of our brands, particularly our Core Collectible branded products, which represented approximately 75% and 80% of our sales for the years ended December 31, 2022 and 2021, respectively, and which are sold across multiple product categories.

Relationships with Content Providers

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Our top ten customers represented approximately 44% and 45% of our sales for the years ended December 31, 2022 and 2021, respectively.

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

During the years ended December 31, 2022 and 2021, we saw shifts in our client mix as a direct result of the COVID-19 pandemic and the enhanced online presence of our top customers.

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

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

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

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

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

An active property is a property from which we generate sales of products during a given period.

For the years ended December 31, 2021 and 2020, we had sales of our products across 955 and 854 properties, respectively.

For example, in 2022 there was an increase in new originally scripted series and new movie theater releases, which we believe contributed to a higher percent of our sales attributable to current properties than compared to recent historical trends.

Our results of operations may also fluctuate significantly from quarter to quarter or year to year depending on the timing and popularity of new product releases and related content releases.

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

Inventory Management

Inventory consists primarily of figures, plush, apparel, homewares, accessories, games, vinyl records 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.

We order inventory based on assumptions of future demand and maintain 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.

We also monitor our warehouse operations for maximum throughput to minimize carrying costs and aging of on-hand inventory.

We may from time to time, liquidate and/or dispose of inventory to increase warehouse operating efficiency.

Subsequent to the year ended December 31, 2022, the Company approved an inventory reduction plan to improve U.S.

warehouse operational efficiency.

The products were determined to be stated at their net realizable value at December 31, 2022, but were subsequently approved for destruction, and the Company expects an incremental charge for the write-down of products identified to be recorded to cost of sales in the first half of 2023 to be in the range of $30.0 million to $36.0 million.

Taxation and Expenses

After consummation of our IPO on November 6, 2017, we became subject to U.S.

We are subject to U.S.

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

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Components of our Results of Operations

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

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

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

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

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

In 2021, we instituted price increases for certain of our products and we expect to increase prices for certain of our other products in early 2023.

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

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Our cost of sales excludes depreciation and amortization.

Our products are produced by third-party manufacturers primarily in Vietnam, China and Mexico.

Our products are produced and assembled by third-party manufacturers primarily in Vietnam, China and Mexico.

The use of third-party manufacturers enables us to avoid incurring fixed product costs, while maximizing flexibility, capacity and capability.

As part of a continuing effort to reduce manufacturing costs and ensure speed to market, we have historically kept our production concentrated with a small number of manufacturers and factories even as we have grown and diversified.

In recent years, we have worked to improve the efficiency of our supply chain to improve our gross margins.

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

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

branded products.

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

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

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

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

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

In late 2022, ocean freight rates began to stabilize, however difficulties in our warehouse and distribution operations led us to incur a substantial amount of ground transportation and temporary storage costs.

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

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

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

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

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

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

Interest Expense, Net

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following table sets forth information comparing the components of net income for the years ended December 31, 2021 and 2020:

The following table sets forth information comparing the components of net (loss) income for the years ended December 31, 2022 and 2021:

Year Ended December 31, Period over Period Change

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Total operating expenses 1,334,626 933,828 400,798 42.9 %

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

(Loss) income from operations (11,920) 95,465 (107,385) nm

Interest expense, net 10,334 7,167 3,167 44.2 %

Loss on extinguishment of debt — 675 (675) nm

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

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

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

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

Other expense, net 787 2,708 (1,921) (70.9) %

(Loss) income before income taxes (23,041) 84,915 (107,956) nm

Income tax (benefit) expense (17,801) 17,061 (34,862) nm

Net (loss) income (5,240) 67,854 (73,094) nm

net income attributable to non-controlling interests

23,954 5,802 18,152 nm

Net income attributable to Funko, Inc.

2,795 23,954 (21,159) (88.3) %

Net (loss) income attributable to Funko, Inc.

$ (8,035) $ 43,900 $ (51,935) nm

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

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

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

Net sales were $1.3 billion for the year ended December 31, 2022, an increase of 28.5% compared to $1.0 billion for the year ended December 31, 2021.

The increase in net sales was primarily due to increased sales to our mass-market retailers, distributors and e-commerce site customers.

In the year ended December 31, 2022, the number of active properties decre as ed 3.0% to 926 from 955 i n the year ended December 31, 2021, and average net sales per active property increased 32.5% t o $1.4 million for the year ended December 31, 2022 from $1.1 million for the year ended December 31, 2021.

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

On a geographical basis, net sales in the United States increased 30.0% to $966.7 million in the year ended December 31, 2022 as compared to $743.8 million in the year ended December 31, 2021, net sales in Europe increased 22.3% to $262.6 million in the year ended December 31, 2022 from $214.7 million in the year ended December 31, 2021 and net sales in other international locations increased 32.0% to $93.4 million in the year ended December 31, 2022 from $70.7 million in the year ended December 31, 2021.

On a product category basis, net sales of Pop!

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

On a product category basis, net sales of Core Collectible branded products increased 21.6% to $998.4 million in the year ended December 31, 2022 as compared to $820.9 million in the year ended December 31, 2021.

Net sales of Loungefly branded products increased 67.7% to $253.0 million in the year ended December 31, 2022 as compared to $150.8 million in the year ended December 31, 2021.

Net sales of other products increased 23.9% to $71.3 million in the year ended December 31, 2022 as compared to $57.5 million the year ended December 31, 2021.

Although this Management’s Discussion and Analysis generally does not present a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, given our creation of three new branded categories in 2022, we are presenting a discussion of net sales by product category for the year ended December 31, 2021 compared to the year ended December 31, 2020, recast to reflect our new product categories, as follows:

On a product category basis, net sales of Core Collectible branded products increased 55.7% to $820.9 million in the year ended December 31, 2021 as compared to $527.2 million in the year ended December 31, 2020.

Net sales of Loungefly branded products increased 157.6% to $150.8 million in the year ended December 31, 2021 as compared to $95.7 million in the year ended December 31, 2020.

Net sales of other products increased 194.1% to $57.5 million in the year ended December 31, 2021 as compared to $29.6 million the year ended December 31, 2020.

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

Cost of sales (exclusive of depreciation and amortization) was $888.7 million for the year ended December 31, 2022, an increase of 37.1%, compared to $648.3 million for the year ended December 31, 2021.

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

Cost of sales (exclusive of depreciation and amortization) increased primarily as a result of increases in shipping and freight costs outpacing net sales growth over the same time period.

Product costs increased $114.0 million, shipping and freight costs increased $51.2 million and royalty expenses increased $51.8 million.

Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of sales, was 32.8% for the year ended December 31, 2022, compared to 37.0% for the year ended December 31, 2021.

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

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

Gross margin (exclusive of depreciation and amortization) decreased 420 basis points for the year ended December 31, 2022 compared to the year ended December 31, 2021, due primarily to challenges with warehouse operations and increased freight and inventory storage costs.

We expect the elevated warehouse, freight and inventory costs to continue at least through first half of 2023.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses were $398.3 million for the year ended December 31, 2022, an increase of 63.0%, compared to $244.3 million for the year ended December 31, 2021.

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

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

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

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

The increase was driven primarily by a $68.6 million increase in personnel expenses, commissions and stock option expense, a $33.5 million increase in software expenses, primarily as a result of the abandonment of the enterprise resource planning cloud computing arrangement of $32.5 million, a $10.3 million increase in professional fees, primarily as a result of one-time warehouse consolidation, severance and relocation costs, a $9.6 million increase in advertising and marketing, a $9.5 million increase in administrative expenses, primarily as a result of increased bad debt reserves, and a $9.4 million increase in facilities and rent, primarily related to the new U.S.

warehouse and distribution center.

Selling, general, and administrative expenses were 30.1% of sales for the year ended December 31, 2022, compared to 23.7% of sales for the year ended December 31, 2021, primarily due to the increase in general and administrative expenses outpacing net sales.

Depreciation and Amortization

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Interest Expense, Net

Interest expense, net was $7.2 million for the year ended December 31, 2021, a decrease of 33.1%, compared to $10.7 million for the year ended December 31, 2020.

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

Interest expense, net was $10.3 million for the year ended December 31, 2022, an increase of 44.2%, compared to $7.2 million for the year ended December 31, 2021.

The increase in interest expense, net was due to higher average balances of debt outstanding as well as higher interest rates during the year ended December 31, 2022.

Loss on debt extinguishment

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

Income Tax Expense

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

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

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

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

Income Tax (Benefit) Expense

Income tax benefit was $17.8 million for the year ended December 31, 2022, compared to an income tax expense of $17.1 million for the year ended December 31, 2021.

The increase in income tax benefit was primarily due to a decrease in income before income taxes of $108.0 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

The Company also realized a discrete benefit of $11.0 million from the release of a valuation allowance on the outside basis deferred tax asset during the year ended December 31, 2022.

Net (Loss) Income

Net loss was $5.2 million for the year ended December 31, 2022, compared to net income of $67.9 million for the year ended December 31, 2021.

The decrease in net income was primarily the result of the increases in cost of goods sold and selling, general and administrative costs outpacing the increases in net sales for the year ended December 31, 2022 as compared to the year ended December 31, 2021, as discussed above.

Non-GAAP Financial Measures

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

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

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

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

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

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

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

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

We define Adjusted Net (Loss) Income as net (loss) income attributable to Funko, Inc.

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

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

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

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

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

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

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

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

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

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

Some of the limitations are:

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

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

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

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

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

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

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

Year Ended December 31,

(in thousands, except per share data)

Net income attributable to Funko, Inc.

Net (loss) income attributable to Funko, Inc.

$ (8,035) $ 43,900

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16,591 12,994

Loss on extinguishment of debt (3)

Acquisition transaction costs and other expenses (3)

Certain severance, relocation and related costs (4)

Foreign currency transaction loss (5)

Loss on extinguishment of debt (5)

Foreign currency transaction (gain) loss (6)

(3,232) 1,118

Tax receivable agreement liability adjustments (7)

One-time cloud based computing arrangement abandonment (8)

Income tax expense (9)

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Equity-based compensation awards and common units of FAH, LLC that are convertible into Class A common stock

15,437 16,227

Adjusted weighted-average shares of Class A stock outstanding-diluted 51,522 53,829

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(in thousands)

Net income $ 67,854 $ 9,763

Net (loss) income $ (5,240) $ 67,854

Interest expense, net 10,334 7,167

Income tax expense 17,061 2,025

Income tax (benefit) expense (17,801) 17,061

Depreciation and amortization 47,669 41,195

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16,591 12,994

Loss on extinguishment of debt (3)

Acquisition transaction costs and other expenses (3)

Certain severance, relocation and related costs (4)

Foreign currency transaction loss (5)

Loss on extinguishment of debt (5)

Foreign currency transaction (gain) loss (6)

(3,232) 1,118

Tax receivable agreement liability adjustments (7)

One-time cloud based computing arrangement abandonment (8)

Adjusted EBITDA $ 97,425 $ 149,931

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

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

(3) Represents acquisition-related costs related to investment banking and due diligence fees.

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

For the year ended December 31, 2022, includes charges related to residual one-time relocation and severance costs for U.S.

warehouse personnel in connection with the opening of a warehouse and distribution facility in Buckeye, Arizona.

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

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

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

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

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

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

(8) Represents abandoned cloud computing arrangement charge related to the enterprise resource planning project for the year ended December 31, 2022.

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

This adjustment uses an effective tax rate of 25% for the years ended December 31, 2022 and 2021.

For the year ended December 31, 2022, this also includes the $11.0 million discrete benefit from the release of a valuation allowance on the outside basis deferred tax asset.

Liquidity and Financial Condition

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

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

On July 29, 2022, the New Revolving Credit Facility was increased to $215.0 million and on February 28, 2023 the New Revolving Credit Facility was reduced to $180.0 million and thereafter will be reduced to $150.0 million on December 31, 2023.

Currently, we are unable to draw on the New Revolving Credit Facility in amounts in excess of the amount outstanding under the New Revolving Credit Facility on the effective date of the Third Amendment until the end of the Waiver Period as defined herein.

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

On November 25, 2022, the Company entered into a $20.0 million equipment finance agreement ("Equipment Finance Loan").

The Equipment Finance Loan is secured by certain identified assets held within our Buckeye, Arizona warehouse.

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

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

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

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

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

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

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

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

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

These limitations are also more restrictive during the Waiver Period as described herein.

On July 15, 2022, we filed a preliminary shelf registration statement on Form S-3 with the SEC.

The Form S-3 was declared effective by the SEC on July 26, 2022 and will remain effective until through July 25, 2025.

The Form S-3 allows us to offer and sell from time-to-time up to $100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts or units comprised of any combination of these securities for our own account and allows certain selling stockholders to offer and sell 17,318,008 shares of Class A common stock in one or more offerings.

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Year Ended December 31,

Net cash provided by operating activities $ 87,362 $ 108,739

Net cash (used in) provided by operating activities $ (40,134) $ 87,362

Net cash used in investing activities (78,065) (27,381)

Net cash used in financing activities (28,628) (63,338)

Net cash provided by (used in) financing activities 54,639 (28,628)

Effect of exchange rates on cash and cash equivalents (797) (51)

Net increase in cash and cash equivalents $ 31,302 $ 27,026

Net change in cash and cash equivalents $ (64,357) $ 31,302

Operating Activities.

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

Net cash provided by operating activities was $87.4 million for the year ended December 31, 2021, compared to $108.7 million for the year ended December 31, 2020.

Changes in net cash provided by operating activities result primarily from cash received from net sales and cash payments for product costs and royalty expenses paid to our licensors.

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

Net cash used in operating activities was $40.1 million for the year ended December 31, 2022, compared to net cash provided by operating activities of $87.4 million for the year ended December 31, 2021.

Changes in net cash provided by operating activities resulted primarily from cash received from net sales and cash payments for product costs and royalty expenses paid to our licensors.

Other drivers of the changes in net cash provided by operating activities include shipping and freight costs, selling, general and administrative expenses (including personnel expenses and commissions and rent and facilities costs) and interest payments made for our short-term borrowings and long-term debt.

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

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

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

The decrease for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily due to changes in working capital, which decreased net cash provided by operating activities by $51.8 million and were primarily due to decreases in accrued expenses and other liabilities, income taxes payable, increases in prepaid expenses and other assets, and a decrease in net income, excluding non-cash adjustments, driven primarily by a decrease in net income, of $86.4 million, $30.6 million, $11.0 million, and $75.7 million, respectively.

These were partially offset by decreases in accounts receivable and inventory of $75.7 million and $25.0 million, respectively.

Investing Activities .

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

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

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

For the year ended December 31, 2022, net cash used in investing activities was $78.1 million, which was used for the purchase of property and equipment, primarily related to tooling and molds used for the expansion of product lines and warehouse equipment for the U.S.

consolidated warehouse and distribution center.

In addition, we used $14.0 million in net cash for the acquisition of Mondo Collectibles LLC (f/k/a Mondo Tees Buyer, LLC) and $5.5 million in net cash to purchase the remaining membership interests in TokenWave, LLC.

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

Financing Activities .

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

For the year ended December 31, 2022, net cash provided by financing activities was $54.6 million, primarily related to proceeds from net borrowings on the New Revolving Line of Credit of $70.0 million and proceeds of $20.0 million from the Equipment Finance Loan, offset by payments under the Tax Receivable Agreement of $7.7 million, distributions to the Continuing Equity Owners of $10.7 million, and net payments on the Term Loan Facility of $18.0 million.

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

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

Financial Condition

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

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

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

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

In particular, though we were in compliance with the financial and other covenants under the New Credit Agreement as of December 31, 2022, subsequent to such date, our projections indicated that we would be unable to maintain compliance with such financial covenants as of March 31, 2023.

As a result, on February 28, 2023, we entered into an amendment to the New Credit Agreement (the "Third Amendment") to, among other things, (i) modify the financial covenants under the New Credit Agreement for the period beginning on the date of the Third Amendment through the fiscal quarter ending December 31, 2023 (the “Waiver Period”), (ii) reduce the size of the New Revolving Credit Facility from $215.0 million to $180.0 million as of the date of the Third Amendment and thereafter to $150.0 million on December 31, 2023, which reduction shall be permanent after the Waiver Period, (iii) restrict the ability to draw on the New Revolving Credit Facility during the Waiver Period in excess of the amount outstanding on the date of the Third Amendment, (iv) increase the margin payable under the Credit Facilities during the Waiver Period to (a) 4.00% per annum with respect to any Term Benchmark Loan or RFR Loan (each as defined in the New Credit Agreement), and (b) 3.00% per annum with respect to any Canadian Prime Loan or ABR Loan (each as defined in the New Credit Agreement), (iv) allow that any calculation of Consolidated EBITDA (as defined in the New Credit Agreement) that includes the fiscal quarters during the Waiver Period may include certain agreed upon amounts for certain addbacks, (v) further limit our ability to make certain restricted payments, including the ability to pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests, incur additional indebtedness, incur additional liens, enter into sale and leaseback transactions or issue additional equity interests or securities convertible into or exchange for equity interests (other than the issuance of common stock) during the Waiver Period, (vi) require a minimum cash requirement of at least $10.0 million and (vii) require a mandatory prepayment of the New Revolving Credit Facility during the Waiver Period with any cash proceeds in excess of $25.0 million.

Following the Waiver Period, beginning in the fiscal quarter ended March 31, 2024, the Third Amendment resets the maximum Net Leverage Ratio and the minimum Fixed Charge Coverage Ratio (each as defined in the New Credit Agreement) that must be maintained by the Credit Agreement Parties to 2.50:1.00 and 1.25:1.00, respectively, which were the ratios in effect under the New Credit Agreement prior to the Third Amendment.

We cannot assure you that we will be able to maintain compliance with our financial covenants as amended after the Waiver Period, or that we will be able to further amend the New Credit Agreement should similar circumstances arise in the future.

If our operating results fail to improve or if we are otherwise unable to maintain compliance with the financial or other covenants under the New Credit Agreement, our lenders could, among other things, continue to refuse to permit any additional borrowings under the New Revolving Credit Facility, terminate all outstanding commitments thereunder and accelerate all outstanding borrowings and other obligations, which would require us to seek additional financing.

Even in the absence of such event, if we are unable to generate sufficient cash flows from operations in the future, and if availability under our Revolving Credit Facility is not sufficient after the Waiver Period, we may have to obtain additional financing.

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

If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations.

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

We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all, particularly during the Waiver Period.

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

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

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

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

Subject to the interest rates during the Waiver Period as described above, loans under the New Credit Facilities will, at the Borrowers’ option, bear interest at either (i) Term SOFR, EURIBOR, HIBOR, CDOR, SONIA and/or the Central Bank Rate, as applicable, plus (x) 2.50% per annum and (y) solely in the case of Term SOFR based loans, 0.10% per annum or (ii) ABR or the Canadian prime rate, as applicable, plus 1.50% per annum, in each case of clauses (i) and (ii), subject to two 0.25% per annum step-downs based on the achievement of certain leverage ratios following July 29, 2022.

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

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

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

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

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

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

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

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• amend or modify our governing documents.

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

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

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

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

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

These limitations are also more restrictive during the Waiver Period as described herein.

The maximum Net Leverage Ratio and the minimum fixed charge coverage ratio for the fiscal quarter ending December 31, 2022 are 2.50:1.00 and 1.25:1.00, respectively, and such ratios will apply again commencing after the Waiver Period for the fiscal quarter ended March 31, 2024.

As of December 31, 2022 and 2021, we were in compliance with all covenants with the New Credit Facilities.

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

If economic conditions worsen, such as due to the COVID-19 pandemic or international conflict, and negatively impact the Company’s earnings and operating cash flows, this could impact our ability to regain compliance with our amended financial covenants and require the Company to seek additional amendments to our New Credit Agreement.

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

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Offerings of Registered Securities .

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

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

On July 15, 2022, we filed a preliminary shelf registration statement on Form S-3 with the SEC.

The Form S-3 was declared effective by the SEC on July 26, 2022 and will remain effective until through July 25, 2025.

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

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

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

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

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

Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments we will be required to make to the Continuing Equity Owners will be significant.

Any payments made by us to the Continuing Equity Owners under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise have been available to us or to FAH, LLC and, to the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us;

Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments we will be required to make to the TRA Parties will be significant.

Any payments made by us to the TRA Parties under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise have been available to us or to FAH, LLC and, to the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us;

provided however, that nonpayment for a specified period may constitute a material breach under the Tax Receivable Agreement and therefore may accelerate payments due under the Tax Receivable Agreement.

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

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

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

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

Revenue Recognition and Sales Allowance.

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

Royalty expenses for the years ended December 31, 2022 and 2021, were $213.1 million and $161.6 million, respectively.

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We estimate obsolescence based on assumptions regarding future demand.

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

This charge is incremental to normal course reserves.

Goodwill and Intangible Assets.

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Intangible assets acquired include intellectual property (product design), customer relationships, and trade names.

These are definite-lived assets and are amortized on a straight-line basis over their useful lives.

These are definite-lived assets and are amortized on a straight-line basis over their estimated 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.

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Pursuant to the Second Amended and Restated FAH, LLC Agreement, FAH, LLC will generally make pro rata tax distributions to holders of common units in an amount sufficient to fund all or part of their tax obligations with respect to the taxable income of FAH, LLC that is allocated to them.

In connection with the consummation of the IPO, we entered into the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners.

Pursuant to the Tax Receivable Agreement, we are required to make cash payments to the Continuing Equity Owners equal to 85% of the tax benefits, if any, that we realize, or in some circumstances are deemed to realize, as a result of (1) any redemptions funded by us or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock or cash, and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement ("Tax Receivable Agreement Payments”).

Pursuant to the Tax Receivable Agreement, we are required to make cash payments to the TRA Parties equal to 85% of the tax benefits, if any, that we realize, or in some circumstances are deemed to realize, as a result of (1) any redemptions funded by us or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock or cash, and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement ("Tax Receivable Agreement Payments”).

Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of taxable income over the term of the Tax Receivable Agreement and (ii) changes in tax laws.

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As a result of these exchanges, during the years ended December 31, 2022 and 2021, the Company recognized an increase to its net deferred tax assets in the amount of $30.6 million and $17.2 million, respectively, and corresponding Tax Receivable Agreement liabilities of $30.0 million and $20.7 million, respectively, representing 85% of the tax benefits due to the Continuing Equity Owners.

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

In addition, during the year ended December 31, 2022 and 2021, the Company recognized $4.0 million and $1.6 million, respectively of expenses in other expense, net on our consolidated statements of operations related to remeasurement adjustments of Tax Receivable Agreement liabilities.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis