What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-07 compared with 2023-03-01 · 149 added, 140 removed, 324 unchanged (47% of the section changed)

7 unchanged sentences

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, homewares, vinyl record, poster or digital NFT.

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.

We sell our products in numerous countries across North America, Europe, Latin America, Asia and Africa, with approximately 31% of our net sales generated outside of the United States.

We also source and procure inventory, primarily out of Vietnam, China and Mexico.

As such, we are exposed to and impacted by global macroeconomic factors.

Current macroeconomic factors remain very dynamic, such as greater political unrest or instability in Central and Eastern Europe (including the ongoing Russia-Ukraine War), the Middle East (including the Israel–Hamas War), and certain Southeast Asia regions as well as financial instability, rising interest rates and heightened inflation that could reduce our net sales or have impacts to our gross margin, net income and cash flows.

In addition, we have been and continue to be operating in a challenging retail environment where retailers have slowed their restocking, prioritized lower inventory levels and, in some cases, have canceled their orders.

This has had an impact across our brands and geographies of reducing our net sales, gross margin and net income.

We have strategically adjusted our inventory buy-in to focus on core products in order to help mitigate this impact.

Key Performance Indicators

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Net sales $ 1,096,086 $ 1,322,706

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

Net loss $ (164,438) $ (5,240)

$ 55,792 $ 34,962

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Although we have a successful track record of renewing and extending the scope of licenses, our license agreements typically have short terms (between two and three years), are not automatically renewable and, in some cases, give the licensor the right to terminate the license agreement at will.

In addition, the efforts of our senior management team have been integral to our relationships with our licensors.

Inability to license newer pop culture properties, the termination or lack of renewal of one or more of our license agreements, or the renewal of a license agreement on less favorable terms, could adversely affect our business.

In addition, the efforts of our current and former senior management team have been integral to our relationships with our licensors.

Retail Industry Dynamics;

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Our top ten customers represented approximately 43% and 44% of our sales for the years ended December 31, 2023 and 2022, respectively.

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.

During the years ended December 31, 2023 and 2022, we saw shifts in our client mix as a direct result of our growing direct-to-consumer business and enhanced online presence of our top customers.

Notwithstanding the growth of our direct-to-consumer business, we continue to depend on retailers and, in particular, rely on retailers to provide adequate and attractive space for our products and point of purchase displays in their stores.

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

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The timing and mix of products we sell in any given quarter or year will depend on various factors, including the timing and popularity of new releases by third-party content providers and our ability to license properties based on these releases.

We have diversified our product offerings across property categories.

We have visibility into the new release schedule of many our content providers and our expansive license portfolio allows us to dynamically manage new product creation.

We often have visibility into the new release schedule of many our major content providers and our expansive license portfolio allows us to dynamically manage new product creation.

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 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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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 consists primarily of figures, plush, apparel, homewares, accessories 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.

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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.

During the year ended December 31, 2023, 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.

The Company recorded a $30.3 million inventory write-down included in cost of sales as presented in the condensed consolidated statements of operations.

The units were identified and recorded based on an estimate of product costs, associated capitalized freight, net of allocated inventory reserves of the identified units and an estimate of physical destruction costs

Taxation and Expenses

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We have caused and intend to continue to cause FAH, LLC to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement.

During the year ended December 31, 2023, the Company determined that based on all the available evidence, including the Company’s three-year cumulative pre-tax loss position, it is not more likely than not that the results of operations will generate sufficient taxable income to realize its deferred tax assets.

Consequently, the Company established a full valuation allowance of $123.2 million against its deferred tax assets, thus reducing the carrying balance to $0, and recognized a corresponding increase to tax expense in the consolidated statements of operations and comprehensive (loss) income in the year ended December 31, 2023.

As a result of the full valuation allowance on the deferred tax assets, and projected inability to fully utilize all or part of the related tax benefits, the Company determined that certain payments to the TRA Parties related to unrealized tax benefits under the TRA are no longer probable and estimable.

Based on this assessment, the Company reduced its TRA Liability as of June 30, 2023, to $9.6 million, and recognized a gain of $99.6 million within the accompanying consolidated statements of operations and comprehensive (loss) income.

The Company performed a true-up in the fourth quarter of 2023 based on the filed 2022 consolidated tax return and recognized a further reduction in TRA liability and corresponding $603 thousand gain within the accompanying consolidated statements of operations and comprehensive (loss) income.

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, vinyl records, posters 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, homewares, and NFTs, primarily to retail customers and distributors.

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

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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 increase prices for certain of our other products in early 2023.

In 2022 and 2023, we instituted price increases for our products.

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

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Cost of Sales

Cost of sales consists primarily of product costs, royalty expenses paid to our licensors and the cost to ship our products, including both inbound freight and outbound products to our customers.

Cost of sales consists primarily of product costs, royalty expenses paid to our licensors, the cost to ship our products, including both inbound freight and outbound products to our customers and inventory management.

Our cost of sales excludes depreciation and amortization.

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

In 2021, we experienced significant increases in shipping rates 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 contract a portion of our freight needs and the remainder is acquired through the spot market, where there may be varying costs and transit times.

In late 2022, 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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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, the 2019 acquisition of Forrest-Pruzan and the 2022 acquisition of Mondo.

Our intangible assets, which are being amortized over a range of two to 20 years, are primarily comprised of trade names, customer relationships and intellectual property we recognized as part of the ACON Acquisition.

Interest Expense, Net

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

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

The following table sets forth information comparing the components of net loss for the years ended December 31, 2023 and 2022:

Year Ended December 31, Period over Period Change

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Total operating expenses 1,199,913 1,334,626 (134,713) (10.1) %

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

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

Loss from operations (103,827) (11,920) (91,907) nm

Interest expense, net 27,970 10,334 17,636 nm

Loss on extinguishment of debt 494 — 494 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

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

Net (loss) income attributable to Funko, Inc.

Gain on tax receivable agreement liability adjustment (100,223) — (100,223) nm

Other (income) expense, net (127) 787 (914) nm

Loss before income taxes (31,941) (23,041) (8,900) nm

Income tax expense (benefit) 132,497 (17,801) 150,298 nm

Net loss (164,438) (5,240) (159,198) nm

net (loss) income attributable to non-controlling interests

(10,359) 2,795 (13,154) nm

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 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 loss attributable to Funko, Inc.

$ (154,079) $ (8,035) $ (146,044) nm

Net sales were $1.1 billion for the year ended December 31, 2023, a decrease of 17.1% compared to $1.3 billion for the year ended December 31, 2022.

The decrease in net sales was primarily due to decreased sales to our mass-market retailers, e-commerce sites, and distributor customers, primarily as a result of slower inventory restocking and an overall challenging retail environment.

On a geographical basis, net sales in the United States decreased 21.8% to $755.6 million in the year ended December 31, 2023 as compared to $966.3 million in the year ended December 31, 2022, net sales in Europe increased 3.0% to $268.5 million in the year ended December 31, 2023 from $260.6 million in the year ended December 31, 2022 and net sales in other international locations decreased 24.9% to $72.0 million in the year ended December 31, 2023 from $95.8 million in the year ended December 31, 2022.

On a product category basis, net sales of Core Collectible branded products decreased 19.6% to $803.2 million in the year ended December 31, 2023 as compared to $998.4 million in the year ended December 31, 2022.

Net sales of Loungefly branded products decreased 15.2% to $214.5 million in the year ended December 31, 2023 as compared to $253.0 million in the year ended December 31, 2022.

Net sales of other products increased 10.0% to $78.4 million in the year ended December 31, 2023 as compared to $71.3 million the year ended December 31, 2022.

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 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.

Cost of sales (exclusive of depreciation and amortization) was $763.1 million for the year ended December 31, 2023, a decrease of 14.1%, compared to $888.7 million for the year ended December 31, 2022.

Cost of sales (exclusive of depreciation and amortization) decreased primarily as a result of lower net sales.

Product costs decreased $83.8 million or 18.4%, shipping and freight costs decreased $59.9 million or 31.5% and license and royalty costs decreased $33.4 million or 15.7%, partially offset by increases in other costs of $52.4 million, which included domestic inventory and one-time offshore finished and unfinished goods write-offs and increased inventory reserves.

Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of sales, was 30.4% for the year ended December 31, 2023, compared to 32.8% for the year ended December 31, 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.

Gross margin (exclusive of depreciation and amortization) decreased 240 basis points for the year ended December 31, 2023 compared to the year ended December 31, 2022, due to the factors noted above.

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 $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.

Selling, general, and administrative expenses were $377.1 million for the year ended December 31, 2023, a decrease of 5.3%, compared to $398.3 million for the year ended December 31, 2022.

The decrease was driven primarily by a $28.8 million decrease in software expense, resulting mostly from the abandonment of an enterprise resource planning cloud computing arrangement of $32.5 million in 2022 and a $9.6 million decrease in personnel expenses, commissions and stock option expense, offset by an increase of $13.6 million in professional fees, primarily related to non-recurring severance payments, termination of a lease agreement and related expenses and impairment of assets held-for-sale.

Selling, general, and administrative expenses were 34.4% of sales for the year ended December 31, 2023, compared to 30.1% of sales for the year ended December 31, 2022, primarily due to the non-recurring events described above.

Depreciation and Amortization

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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 (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.

As a result of the debt amendment in February 2023, a $0.5 million loss on debt extinguishment was recorded for the year ended December 31, 2023 as unamortized debt financing fees were written-off.

Gain on Tax Receivable Agreement Liability Adjustment

As a result of recognizing a full valuation allowance related to the Company’s deferred tax assets, the Company determined as of June 30, 2023 that no future tax benefits were expected to be realized under the Tax Receivable Agreement.

The long-term portion of the tax receivable agreement liability was reduced and we recorded a gain of $102.2 million during the year ended December 31, 2023.

Other (Income) Expense, Net

Other income, net was $0.1 million and other expense, net was $0.8 million for the years ended December 31, 2023 and 2022, respectively.

Other (income) expense, net for the years ended December 31, 2023 and 2022 was primarily related to foreign currency gains and losses relating to transactions denominated in currencies other than the U.S.

Income Tax Expense (Benefit)

Income tax expense was $132.5 million for the year ended December 31, 2023, compared to an income tax benefit of $17.8 million for the year ended December 31, 2022.

The increase in income tax expense was related to recognizing a full valuation allowance on the Company’s deferred tax assets.

Net loss was $164.4 million for the year ended December 31, 2023, compared to $5.2 million for the year ended December 31, 2022.

The increase in net loss was primarily the result of lower net sales and nonrecurring events for the year ended December 31, 2023 as compared to the year ended December 31, 2022, as discussed above.

Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per Diluted Share (collectively the “Non-GAAP Financial Measures”) are supplemental measures of our performance that are not required by, or presented in accordance with, U.S.

EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income and Adjusted (Loss) Earnings per Diluted Share (collectively the “Non-GAAP Financial Measures”) are supplemental measures of our performance that are not required by, or presented in accordance with, U.S.

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 (loss) income, earnings per share or any other performance measure derived in accordance with U.S.

GAAP and should not be considered as an alternative to net (loss) income, (loss) 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.

We define Adjusted EBITDA as EBITDA further adjusted for non-cash charges related to equity-based compensation programs, loss on debt extinguishment, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, inventory write-down, tax receivable agreement liability adjustments, one-time cloud-based computing arrangement abandonment expenses, one-time disposal costs for unfinished and finished goods held at offshore factories and other unusual or one-time items.

We define Adjusted Net (Loss) Income as net loss 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, 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.

These items include, among other things, non-cash charges related to equity-based compensation programs, loss on debt extinguishment, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, inventory write-down, tax receivable agreement liability adjustments, one-time cloud-based computing arrangement abandonment expenses, one-time disposal costs for unfinished and finished goods held at offshore factories and the income tax expense effect of these adjustments.

We define Adjusted (Loss) 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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GAAP results and using these non-GAAP measures only supplementally.

As noted in the table below, the Non-GAAP Financial Measures include adjustments for non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, 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.

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 debt extinguishment, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, inventory write-down, tax receivable agreement liability adjustments, one-time cloud-based computing arrangement abandonment expenses, one-time disposal costs for unfinished and finished goods held at offshore factories and other unusual or one-time items.

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

However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other companies over time.

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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 (loss) income, for the periods presented:

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

Year Ended December 31,

(in thousands, except per share data)

Net (loss) income attributable to Funko, Inc.

Net loss attributable to Funko, Inc.

$ (154,079) $ (8,035)

Reallocation of net income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock (1)

Reallocation of net (loss) income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock (1)

(10,359) 2,795

Equity-based compensation (2)

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Loss on extinguishment of debt (5)

Foreign currency transaction (gain) loss (6)

(3,232) 1,118

Foreign currency transaction loss (gain) (6)

Tax receivable agreement liability adjustments (7)

(100,223) 3,987

One-time cloud based computing arrangement abandonment (8)

Income tax expense (9)

One-time disposal costs for finished goods held at offshore factories (9)

One-time disposal costs for unfinished goods held at offshore factories (10)

Inventory write-down (11)

Income tax expense (benefit) (12)

147,630 (27,657)

Adjusted net income $ 29,566 $ 76,177

Adjusted net (loss) income $ (45,397) $ 29,566

Weighted-average shares of Class A common stock outstanding-basic

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Adjusted weighted-average shares of Class A stock outstanding-diluted 52,353 51,522

Adjusted earnings per diluted share $ 0.57 $ 1.42

Adjusted (loss) earnings per diluted share $ (0.87) $ 0.57

Year Ended December 31,

(in thousands)

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

Net loss $ (164,438) $ (5,240)

Interest expense, net 27,970 10,334

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

Income tax expense (benefit) 132,497 (17,801)

Depreciation and amortization 59,763 47,669

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Loss on extinguishment of debt (5)

Foreign currency transaction (gain) loss (6)

(3,232) 1,118

Foreign currency transaction loss (gain) (6)

Tax receivable agreement liability adjustments (7)

(100,223) 3,987

One-time cloud based computing arrangement abandonment (8)

One-time disposal costs for finished goods held at offshore factories (9)

One-time disposal costs for unfinished goods held at offshore factories (10)

Inventory write-down (11)

Adjusted EBITDA $ 27,203 $ 97,425

(1) Represents the reallocation of net income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC in periods in which income was attributable to non-controlling interests.

(1) Represents the reallocation of net (loss) income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC in periods in which income was attributable to non-controlling interests.

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

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

(3) For the year ended December 31, 2023, includes costs related to the termination of a lease agreement and related expenses, fair market value adjustments for assets held for sale, partially offset by acquisition-related benefits.

For the year ended December 31, 2022, includes 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, 2023, includes charges to remove leasehold improvements and return multiple Washington-based warehouses, and charges related to severance and benefit costs for reductions-in-force.

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.

(5) Represents write-off of unamortized debt financing fees for the year ended December 31, 2023.

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

For the year ended December 31, 2023, reflects a reduction of the tax receivable agreement liability as a result of recognizing a full valuation allowance of the Company's deferred tax assets and anticipated inability to realize future tax benefits.

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

(9) Represents one-time disposal costs related to unfinished goods held at offshore factories for the year ended December 31, 2023.

(10) Represents one-time disposal costs related to finished goods held at offshore factories primarily due to customer order cancellations for the year ended December 31, 2023.

(11) Represents an inventory write-down, outside of normal business operations, to improve U.S.

warehouse operational efficiency, for the year ended December 31, 2023.

(12) 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, 2023 and 2022.

For the year ended December 31, 2023, this also includes $123.2 million recognized valuation allowance on the Company’s deferred tax assets.

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.

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

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

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

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

Proceeds from the Credit Facilities were primarily used to repay the Company’s former $235.0 million term loan facility and its former $75.0 million revolving credit facility.

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

The Credit Facilities are secured by substantially all assets of the borrowers under the 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").

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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 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:

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

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

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

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.

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

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

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Year Ended December 31,

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

Net cash provided by (used in) operating activities $ 30,935 $ (40,134)

Net cash used in investing activities (39,796) (78,065)

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

Net cash provided by financing activities 25,596 54,639

Effect of exchange rates on cash and cash equivalents 518 (797)

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Operating Activities.

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.

Our net cash provided by (used in) operating activities consists of net loss 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 $30.9 million for the year ended December 31, 2023, compared to net cash used in operating activities of $40.1 million for the year ended December 31, 2022.

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.

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

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.

The increase for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to changes in working capital, which increased net cash provided by operating activities by $186.8 million and were primarily due to increases in inventory of $204.7 million and accounts receivable of $21.4 million and a decrease to income taxes payable of $15.1 million.

These were offset by increases in accounts payable of $29.0 million, accrued royalties of $23.8 million and accrued expenses and other liabilities of $12.1 million and a decrease in net income, excluding non-cash adjustments.

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, 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.

For the year ended December 31, 2023, net cash used in investing activities was $39.8 million, which was used for the purchase of property and equipment, primarily related to tooling and molds.

In addition, we used $5.4 million in net cash for the acquisition of MessageMe, Inc.

(d/b/a HipDot).

For the year ended December 31, 2022, net cash used in investing activities was $78.1 million and was primarily related to purchases of tooling and molds used in our production product lines and for the acquisition of Mondo.

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, 2023, net cash provided by financing activities was $25.6 million, primarily related to proceeds from net borrowings on the Revolving Line of Credit of $50.5 million, partially offset by payments under the Term Loan and Equipment Financing Loan of $22.6 million.

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 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.

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, 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.

We believe that our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and our planned capital expenditures 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.

In particular, though we were in compliance with the financial and other covenants under the Credit Agreement as of December 31, 2023, we cannot assure you that we will be able to maintain compliance with our financial covenants, or that we will be able to further amend the Credit Agreement should 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 Credit Agreement, our lenders could, among other things, terminate all outstanding commitments thereunder and accelerate all outstanding borrowings and other obligations, which would require us to seek 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, 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.

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.

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.

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

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

The 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 Term Loan Facility, with any outstanding balance due and payable on the Maturity Date.

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

The 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 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.

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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:

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

• incur additional indebtedness;

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• amend or modify our governing documents.

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

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) other than during the Waiver Period.

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.

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

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

In addition, the 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).

As of December 31, 2023 and 2022, 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 worsen 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 Credit Agreement or cause us to default on our obligations under the Credit Agreement.

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

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

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

As of December 31, 2023, we had $36.5 million of cash and cash equivalents and $(16.0) million of working capital, compared with $19.2 million of cash and cash equivalents and $111.8 million of working capital as of December 31, 2022.

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Credit Facilities .

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

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

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

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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 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).

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 a future enterprise resource management system (ERP), 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 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;

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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.

Royalty expenses for the years ended December 31, 2023, 2022 and 2021 were $179.7 million, $213.1 million and $161.6 million, respectively.

Inventory consists primarily of figures, plush and accessories and other finished goods, and is accounted for using the first-in, first-out, or FIFO, method.

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In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis.

If we determine we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, which would have an adverse effect on our results of operations and earnings.

In accordance with ASC 740, we recognize, in our consolidated financial statements, the impact of our tax positions that are more likely than not to be sustained upon examination based on the technical merits of the positions.

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Therefore, we only recognize a liability for Tax Receivable Agreement Payments if we determine that it is probable that we will generate sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits.

Estimating future taxable income is inherently uncertain and requires judgment.

In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected revenue growth, and operating margins, among others.

A gain was recorded during the year ended December 31, 2023 in the consolidated statement of operations as a result of the derecognition of the TRA liability.

Upon redemption or exchange of common units in FAH, LLC, we record a liability relating to the obligation if we believe that it is probable that we would have sufficient future taxable income to utilize the related tax benefits.

If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would derecognize any portion of the liability related to the benefits not expected to be utilized.

Additionally, we will estimate the amount of Tax Receivable Agreement Payments expected to be paid within the next 12 months and classify this amount as current on our consolidated balance sheets.

Additionally, we estimate the amount of Tax Receivable Agreement Payments expected to be paid within the next 12 months and classify this amount as current on our consolidated balance sheets.

This determination is based on our estimate of taxable income for the next fiscal year.

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As a result of these exchanges, during the years ended December 31, 2023 and 2022, the Company recognized an increase to its net deferred tax assets in the amount of $0.0 million and $30.6 million, respectively, and corresponding Tax Receivable Agreement liabilities of $0.0 million and $30.0 million, respectively, representing 85% of the tax benefits due to the Continuing Equity Owners.

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.

In addition, during the year ended December 31, 2023, the Company recognized a gain of $100.2 million and during the year ended December 31, 2022 and 2021, the Company recognized an expense of $4.0 million and $1.6 million, recorded within other (income) 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