What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2024-03-07 compared with 2023-03-01 · 195 added, 203 removed, 933 unchanged (30% of the section changed)

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

To the Shareholders and the Board of Directors of Funko, Inc.

Opinion on the Financial Statements

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Measurement of deferred tax assets related to the Company’s investment in Funko Acquisition Holdings, L.L.C.

Description of the Matter As discussed in Note 12 of the consolidated financial statements, the noncontrolling interest holders of Funko Acquisition Holdings, L.L.C.

(“LLC”) may redeem their equity interests in Funko Acquisition Holdings LLC (“LLC interests”) for shares of the Company’s Class A common stock as part of the Tax Receivable Agreement (“TRA”).

For income tax purposes, these redemptions are treated as direct purchases of LLC equity and are recorded at their fair market value upon the date of the redemption.

The resulting incremental tax basis in excess of the book basis arising from a redemption represents a deductible temporary difference for which a deferred tax asset is recorded.

At December 31, 2022, the Company’s total deferred tax asset related to the basis difference in its investment in LLC was $26.9 million.

The basis difference in the Company’s investment in LLC changes through redemptions of LLC interests and other qualifying transactions.

Auditing management’s accounting for the additional outside basis adjustments arising as a result of TRA exchanges is especially complex and challenging.

It requires the Company’s accounting to timely identify all historical basis differences and subsequent adjustments related to the redemptions, described above, and the related TRA payments to the LLC holders.

How We Addressed the Matter in Our Audit To test the completeness and accuracy of the deferred tax asset related to the basis difference in the investment in the LLC, we performed audit procedures that included, among others, testing redemptions of LLC interests on a sample basis by inspection of redemption notices, and obtaining external confirmation of the Company’s shares issued and outstanding with the stock transfer agent.

Further, to test the measurement of the deferred tax asset, for a selection of redemptions, we recalculated the change in tax basis resulting from the redemptions, including the determination of fair value and validating the Company’s underlying assumptions used in the calculation have not changed outside of expectations.

We also evaluated the Company’s disclosures included in Note 12 to the consolidated financial statements in relation to these matters.

Measurement of the Tax Receivable Agreement Liability

Description of the Matter As discussed in Note 13 of the consolidated financial statements, the Company has a Tax Receivable Agreement which is a contractual commitment to distribute 85% of any tax benefits (“TRA Payment”), realized or deemed to be realized by the Company to the parties to the TRA.

The TRA payments are contingent upon, among other things, the generation of future taxable income over the term of the TRA and future changes in tax laws.

At December 31, 2022, the Company’s liability due to the holders of the LLC interests under the TRA (“TRA liability”) was $109.2 million.

Auditing management’s accounting for the additional outside basis adjustments arising as a result of TRA exchanges is especially complex and challenging.

It requires the Company’s accounting to timely identify all historical basis differences and subsequent adjustments related to the redemptions, described above, and the related TRA payments.

How We Addressed the Matter in Our Audit To test the measurement of the Company’s TRA liability, our audit procedures included, among others, testing the calculation of the outside basis adjustments as a result of redemptions and TRA payments, which give rise to the TRA liability.

We recalculated the Company’s share of the tax basis in the net assets of Funko Acquisition Holdings, L.L.C.

To test the Company’s position that there is sufficient future taxable income to realize the tax benefits related to the redemptions discussed above, we evaluated the assumptions used by management to develop the projections of future taxable income.

For example, we compared the projections of future taxable income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends.

We also assessed the historical accuracy of management’s projections and reconciled the projections of future taxable income with forecasted financial information prepared by the Company, ensuring this information is consistent with forecasts used for internal and external reporting.

We recalculated the TRA liability and compared the calculation to the terms set out in the TRA.

We tested the classification of the TRA liability between current and non-current assets is appropriate, based upon the expected TRA payments within 12 months of the balance sheet date.

We also evaluated the Company’s disclosures included in Note 13 to the consolidated financial statements in relation to these matters.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Estimate of Reserve for Sales Allowances

Description of the Matter As discussed in Note 2 of the consolidated financial statements, the Company estimates costs of various incentives, including sales incentives, customer promotions, allowances for returns and defective merchandise (i.e., “sales allowances").

As of December 31, 2023, the estimated reserve for sales allowances the Company was $44.1 million which reduces gross sales in the period the related sale was recognized.

In accounting for the reserve for sales allowances, significant judgement is required in determining the timing of when claims will be received from customers and the percentage of sales with expected future claims based on historical trends and information from customers, such as agreed upon customer contract terms as well as historical experience from customers.

Auditing the Company’s estimate of the reserve for sales allowances is complex and highly judgmental due to the significant judgements required for timing of when claims, contractual and non-contractual, will be made by the customer, magnitude of claims that will be received, and assumptions about which claims the Company will grant.

The reserve for sales allowances reflects management’s assumptions about future claim activity and changes in those assumptions could have a material effect on revenue recognized.

How We Addressed the Matter in Our Audit As a result of the material weaknesses, we tested the reserve for sales allowances as of December 31, 2023, and increased the extent of our procedures to test the completeness and accuracy of the data used in the calculation of the reserve.

Additional procedures included obtaining and assessing the terms of contractual arrangements with customers, confirming directly with sales representatives whether there were any additional agreements entered into with customers from those included in the calculation, agreeing historical claims data used in the calculation to supporting evidence, and independently determining the time period between the receipt of historical claims from the customer and the period in which the related sales were recognized.

/s/ Ernst & Young LLP

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Loss on extinguishment of debt 494 — 675

Other expense, net 787 2,708 1,043

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

Other (income) expense, net ( 127 ) 787 2,708

(Loss) income before income taxes ( 31,941 ) ( 23,041 ) 84,915

Income tax (benefit) expense ( 17,801 ) 17,061 2,025

Income tax expense (benefit) 132,497 ( 17,801 ) 17,061

Net (loss) income ( 164,438 ) ( 5,240 ) 67,854

net income attributable to non-controlling

net (loss) income attributable to non-controlling

( 10,359 ) 2,795 23,954

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Comprehensive (loss) income ( 161,821 ) ( 9,935 ) 67,075

Comprehensive income attributable to

Comprehensive (loss) income attributable to

non-controlling interests

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Accounts receivable, net 130,831 167,895

Inventory 246,429 166,428

Inventory, net 119,458 246,429

Prepaid expenses and other current assets 56,134 39,648

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Intangible assets, net 167,388 181,284

Deferred tax asset 123,893 74,412

Deferred tax asset, net of valuation allowance — 123,893

Other assets 7,752 8,112

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Additional paid-in-capital 326,180 310,807

Accumulated other comprehensive (loss) income ( 2,603 ) 1,078

Retained earnings 60,015 68,050

Accumulated other comprehensive loss ( 180 ) ( 2,603 )

(Accumulated deficit) retained earnings ( 94,064 ) 60,015

Total stockholders' equity attributable to Funko, Inc.

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Comprehensive

Income (Loss) Retained

Earnings Non-

Income (Loss) Retained Earnings (Accumulated Deficit) Non-

Controlling Interests Total

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Activity under equity-based compensation plans 554 — — 5,956 — — — 5,956

Shares issued for purchase consideration 127 — — — 2,221 — — — 2,221

Cumulative translation adjustment,

net of tax — — — — — 927 — 488 1,415

Cumulative translation adjustment, net of tax — — — — — ( 544 ) — ( 139 ) ( 683 )

Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets — — — — ( 3,532 ) — — — ( 3,532 )

Redemption of common units of

FAH, LLC 513 1 ( 475 ) — 2,269 — — ( 2,269 ) 1

Redemption of common units of FAH, LLC 3,877 — ( 3,349 ) — 20,746 — — ( 20,746 ) —

Other — — — — 200 ( 96 ) ( 253 ) 950 801

Net income — — — — — — 43,900 23,954 67,854

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Activity under equity-based compensation plans 533 — — — 1,936 — — — 1,936

Cumulative translation adjustment,

net of tax — — — — — ( 544 ) — ( 139 ) ( 683 )

Acquisition of non-controlling interest of TokenWave, LLC 71 — — — ( 4,781 ) — — ( 732 ) ( 5,513 )

Cumulative translation adjustment, net of tax — — — — — ( 3,681 ) — ( 1,014 ) ( 4,695 )

Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets — — — — 761 — — — 761

Redemption of common units of

FAH, LLC 3,877 — ( 3,349 ) — 20,746 — — ( 20,746 ) —

Net income — — — — — — 43,900 23,954 67,854

Recapitalization of common units of FAH, LLC — — ( 910 ) — 5,873 ( 5,873 ) —

Redemption of common units of FAH, LLC 6,500 1 ( 6,488 ) ( 1 ) 37,922 — — ( 37,922 ) —

Net (loss) income — — — — — — ( 8,035 ) 2,795 ( 5,240 )

Period ended December 31, 2022 47,192 $ 5 3,293 $ — $ 310,807 $ ( 2,603 ) $ 60,015 $ 21,465 $ 389,689

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Activity under equity-based compensation plans 1,601 — — — 756 — — — 756

Acquisition of non-controlling interest of TokenWave, LLC 71 — — — ( 4,781 ) — — ( 732 ) ( 5,513 )

Cumulative translation adjustment,

net of tax — — — — — ( 3,681 ) — ( 1,014 ) ( 4,695 )

Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets — — — — 761 — — — 761

Recapitalization of common units of FAH, LLC — — ( 910 ) — 5,873 ( 5,873 ) —

Redemption of common units of

FAH, LLC 6,500 1 ( 6,488 ) ( 1 ) 37,922 — — ( 37,922 ) —

Net (loss) income — — — — — — ( 8,035 ) 2,795 ( 5,240 )

Cumulative translation adjustment, net of tax — — — — — 2,423 — 194 2,617

Redemption of common units of FAH, LLC 1,756 — ( 1,016 ) — 4,083 — — ( 4,083 ) —

Net loss — — — — — — ( 154,079 ) ( 10,359 ) ( 164,438 )

Period ended December 31, 2023 50,549 $ 5 2,277 $ — $ 326,180 $ ( 180 ) $ ( 94,064 ) $ 6,099 $ 238,040

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Loss on debt extinguishment 494 — 675

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

Deferred tax expense (benefit) 123,124 ( 17,414 ) ( 361 )

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Accrued expenses and other liabilities ( 34,927 ) ( 22,841 ) 63,586

Net cash (used in) provided by operating activities ( 40,134 ) 87,362 108,739

Net cash provided by (used in) operating activities 30,935 ( 40,134 ) 87,362

Investing Activities

Purchase of property and equipment ( 35,131 ) ( 59,148 ) ( 27,759 )

Acquisitions, net of cash ( 19,479 ) 199 —

Acquisitions of business and intangible assets, net of cash acquired ( 5,364 ) ( 19,479 ) 199

Other 699 562 179

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For the years ended December 31, 2023, 2022 and 2021, there was no individual customer that generated net sales over 10%.

For the year ended December 31, 2022, 13 % of sales were related to the largest license agreement with no other license agreements accounting for more than 10% of sales.

For the year ended December 31, 2023, no individual license agreement accounted for more than 10% of sales.

For the year ended December 31, 2022, 13 % of sales were related to the Company’s largest license agreements with no other license agreements accounting for more than 10% of sales.

For the year ended December 31, 2021, 26 % of sales were related to the Company’s two largest license agreements ( 13 % each) with no other license agreements accounting for more than 10% of sales.

For the year ended December 31, 2020, 12 % and 11 % of sales were related to the Company’s two largest license agreements with no other license agreements accounting for more than 10% of sales.

The Company maintains its cash within bank deposit accounts at high quality, accredited financial institutions.

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The Company has not experienced any credit losses in such accounts and does not believe it is exposed to significant credit risk on cash.

Inventory 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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Reserves for excess and obsolete inventories were $ 25.5 million and $ 16.9 million as of December 31, 2023 and 2022, respectively.

During the year ended December 31, 2023, the Company approved an inventory reduction plan to improve U.S.

warehouse operational efficiency.

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, during the quarter ended March 31, 2023.

The physical destruction plan was completed during the third quarter of 2023.

Property and Equipment

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The Company capitalizes eligible costs associated with cloud computing arrangements over the term of the arrangement, plus reasonably certain renewals, and intends to recognize those costs on a straight-line basis in the same line item in the consolidated statement of operations as the expense for fees associated with the cloud computing arrangement once the capitalized project is ready for intended use.

Cloud computing arrangement costs, included in prepaid expenses and other current assets were $ 2.1 million and $ 1.4 million and other non-current assets were $ 3.0 million and $ 6.9 million as of December 31, 2022 and December 31, 2021, respectively.

No amortization expense associated with the cloud computing arrangements was recorded in the years ended December 31, 2022, 2021, or 2020.

Cloud computing arrangement costs, included in prepaid expenses and other current assets were $ 2.7 million, and $ 2.1 million and other assets were $ 3.1 million and $ 3.0 million as of December 31, 2023 and 2022, respectively.

Amortization expense associated with the cloud computing arrangements of $ 2.2 million was recorded in the year ended December 31, 2023, and no amortization expense was recorded for the years ended December 31, 2022 or 2021.

The Company incurred an abandonment charge of $ 32.5 million during the year ended December 31, 2022, as it was determined the enterprise resource planning cloud computing arrangement was no longer feasible for its intended use.

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Revenue from the sale of Company products is recognized when control of the goods is transferred to the customer, which is upon shipment or upon receipt of finished goods by the customer, depending on the contract terms.

Deferred revenue is recognized when the Company collects cash from the customer and had not yet filled is obligation for delivery of product or service.

Deferred revenue is recorded within accrued expenses and other current liabilities on the Company's consolidated balance sheets.

The Company routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise.

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The Company adjusts its estimates at least quarterly or when facts and circumstances used in the estimate process change.

historically these adjustments have not been material.

As of December 31, 2023 and 2022, we had reserves for sales allowances of $ 44.1 million and $ 57.3 million, respectively.

We have made an accounting policy election to exclude from revenue, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (for example, sales, use, value-added, and certain excise taxes).

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are included in other expense, net on our consolidated statements of operations.

In connection with the settlement and remeasurement of intercompany balances, we recorded a $ 0.1 million gain, a no minal loss, and loss of $ 0.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

In connection with the settlement and remeasurement of intercompany balances, we recorded a $ 0.7 million gain, a $ 0.1 million gain and a no minal loss for the years ended December 31, 2023, 2022 and 2021, respectively.

The income tax effects related to the unrealized foreign currency component of other comprehensive (loss) income are reclassified to earnings only when the net investment is sold, or when a liquidation of the respective net investment in the foreign entity is substantially completed.

Deferred Tax Assets and 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.

There was no change to that assessment as of 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.

There was no change to that assessment as of December 31, 2023.

Assets Held-for-Sale

The Company evaluates the held-for-sale criteria under ASC 350 when it commits to a plan to sell an asset or disposal group.

Assets that qualify as held-for-sale are reported at the lower of its carrying value or its fair value less cost to sell.

Assets held-for-sale are included within prepaid expenses and other current assets on the Company's consolidated balance sheets .

Recently Adopted Accounting Standards

In March 2022, the Securities and Exchange Commission issued Staff Accounting Bulletin No.

121, Accounting for Obligations to Safeguard Crypto-Assets an Entity Holds for its Platform Users.

Funko, LLC through its wholly-owned subsidiary TokenWave, LLC, operates the Droppp.io platform, to facilitate the buying and selling of its NFTs.

The Company has recorded a $ 11.3 million safeguarding asset and corresponding liability, recorded in other current assets and other current liabilities in the consolidated balance sheets, respectively, based on the fair value of the platform users' accounts at December 31, 2022.

This asset (and liability) is remeasured at each reporting period.

The Company has not incurred a loss related to its safeguarding of user accounts for the year ended December 31, 2022.

There were no other recently adopted accounting standards during the year ended December 31, 2022 that had a material effect on the financial statements.

On March 26, 2021, the Company acquired a majority of the membership interests of TokenWave LLC, the developer of TokenHead, a mobile app and website for showcasing and tracking Non-Fungible Token (“NFT”) holdings.

This transaction represented an opportunity to expand the Company’s product offerings into digital NFTs.

The Company accounted for the acquisition as a business combination.

The purchase consideration, fair value of the assets acquired and liabilities assumed, and acquisition related transaction costs were not material.

On October 6, 2022, the Company acquired the remaining membership interests of TokenWave LLC, through a combination of cash and stock consideration, which was accounted for as an equity transaction.

On June 8, 2022, the Company acquired 100 % of the membership interests in Mondo Collectibles, LLC (f/k/a Mondo Tees Buyer, LLC) (“Mondo”), a high-end pop culture collectibles company that creates vinyl records, posters, soundtracks, toys, apparel, books, games and other collectibles.

This transaction represents an opportunity to expand the Company’s product offerings into vinyl records, posters and other high-end collectibles.

There were no recently adopted accounting standards during the year ended December 31, 2023 that had a material effect on the financial statements.

Accounting Pronouncements Not Yet Adopted

In December 2023, the Financial Accounting Standards Board issued an Accounting Standards Update ("ASU") amending existing crypto asset disclosures, primarily requiring detailed disclosures about the types of crypto assets held by entities and the changes in those holdings.

The ASU is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the ASU to determine its impact on crypto asset disclosures.

In December 2023, the Financial Accounting Standards Board issued an ASU amending existing income tax disclosure guidance, primarily requiring more detailed disclosure for income taxes paid by jurisdiction and the effective tax rate reconciliation.

The ASU is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted and it can be applied on either a prospective or retroactive basis.

The Company is currently evaluating the ASU to determine its impact on income tax disclosures.

On January 19, 2023, the Company acquired 100 % of the stock outstanding in MessageMe, Inc.

(d/b/a HipDot), a cosmetics company with innovative licensed collaborations in unique form factors.

The final purchase consideration was $ 6.0 million in cash.

The Company recognized an intangible asset of $ 1.8 million, with a useful life of 10 years for the HipDot trade name, cash of $ 0.6 million, liabilities of $ 0.5 million and the remaining $ 4.1 million was allocated to Goodwill.

On June 8, 2022, the Company acquired 100 % of the membership interests in Mondo Collectibles, LLC (f/k/a Mondo Tees Buyer, LLC) (“Mondo”), a high-end pop culture collectibles company that creates vinyl records, posters, toys, apparel, books, games and other collectibles.

This transaction represented an opportunity to expand the Company’s product offerings into vinyl records, posters and other high-end collectibles.

The Company accounted for the acquisition as a business combination.

The preliminary purchase consideration consists of $ 14.0 million in cash.

The Company is still in the process of completing the allocation of the purchase price to the fair value of the assets and liabilities acquired, and the difference between the estimated and final values could be material.

The final purchase consideration was $ 14.0 million in cash.

Goodwill of $ 5.5 million is calculated as the excess of the purchase price paid over the net assets acquired.

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The activity of Mondo as included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2023 was not material.

The following table shows the preliminary purchase price allocation for the Mondo consideration and any fair value adjustment made through December 31, 2022 (in thousands):

The following table shows the final purchase price allocation for the Mondo acquisition as of June 8, 2022 (in thousands):

Assets (Liabilities) Acquired (Assumed)

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Acquisition 4,065

Reclassification to assets held-for-sale ( 2,162 )

Foreign currency remeasurement 512

Balance as of December 31, 2023 $ 133,795

The Company’s long-lived asset groups, which includes intangible assets, property and equipment and operating lease right-of-use assets net of operating lease liabilities, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group might not be recoverable.

The Company’s long-lived asset group, which includes intangible assets, property and equipment and operating lease right-of-use assets net of operating lease liabilities, is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group might not be recoverable.

Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset (or asset group), a significant change in the extent or manner in which an asset (or asset group) is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable.

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As of December 31, 2023 and 2022, there were also $ 0.1 million in indefinite-lived assets not subject to amortization but tested for impairment.

There were $ 0.2 million impairment charges relating to indefinite-lived intangible assets recorded in the years ended December 31, 2022 and no impairment charges were recorded in the years ended December 31, 2021 and 2020.

The following table provides the details of identified intangible assets, by major class, for the periods indicated (in thousands):

There were no , $ 0.2 million and no impairment charges relating to indefinite-lived intangible assets recorded in the years ended December 31, 2023, 2022 and 2021, respectively.

The following table provides the details of remaining identified intangible assets, by major class, for the periods indicated (in thousands):

December 31, 2023 December 31, 2022

9 unchanged sentences

11,116 ( 7,330 ) 3,786 10,991 ( 6,145 ) 4,846

Noncompetition agreements 3 290 ( 290 ) — 290 ( 278 ) 12

Total $ 290,438 $ ( 123,138 ) $ 167,300 $ 288,328 $ ( 107,184 ) $ 181,144

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Accounts receivable, net, primarily represent customer receivables, recorded at invoiced amount, net of a sales allowance and an allowance for doubtful accounts.

A sales allowance is determined based on various factors, including the overall business environment, historical trends and information from customers, such as agreed upon customer contract terms as well as historical experience from the customer.

An allowance for doubtful accounts is determined based on various factors, including specific identification of balances at risk for not being collected, historical experience, existing economic conditions and supportable forecasted changes.

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Accounts receivable $ 180,000 $ 232,816

Allowance for sales discounts

( 44,121 ) ( 57,332 )

Allowance for doubtful accounts

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Prepaid royalties, net

25,079 12,985

Crypto asset safeguarding asset 6,060 11,271

Assets held-for-sale 8,694 —

Other prepaid expenses and current assets

13,873 12,892

Prepaid expenses and other current assets

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Crypto asset safeguarding liability 6,060 11,271

Deferred revenue 9,914 8,674

Other current liabilities

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The crypto asset safeguarding liability and corresponding safeguarding asset are measured and recorded at fair value on a recurring basis using prices available in the market the Company determines to be the principal market at the balance sheet date.

As of December 31, 2022, the estimated fair value of the crypto asset safeguarding liability and corresponding asset was $ 11.3 million, classified at Level 1 within the fair value hierarchy.

The Company utilizes recent blockchain sales data through its own Droppp Marketplace to value the NFTs held in platform users' accounts for which it holds the cryptographic key information.

As of December 31, 2023 and 2022, the estimated fair value of the crypto asset safeguarding liability and corresponding asset was $ 6.1 million and $ 11.3 million, respectively classified at Level 2 within the fair value hierarchy.

The estimated fair values of the Company’s debt instruments, which are classified as Level 3 financial instruments, at December 31, 2023 and 2022, was approximately $ 154.9 million and $ 177.5 million, respectively.

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2024 $ 22,850

New Credit Facilities

On September 17, 2021, the Credit Agreement Parties entered into a new credit agreement (as amended from time to time, the “New Credit Agreement”) with JPMorgan Chase Bank, N.A., PNC Bank, National Association, KeyBank National Association, Citizens Bank, N.A., Bank of the West, HSBC Bank USA, National Association, Bank of America, N.A., U.S.

Credit Facilities

On September 17, 2021, FAH, LLC and certain of its material domestic subsidiaries from time to time (the “Credit Agreement Parties”) entered into a new credit agreement (as amended from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A., PNC Bank, National Association, KeyBank National Association, Citizens Bank, N.A., Bank of the West, HSBC Bank USA, National Association, Bank of America, N.A., U.S.

Bank National Association, MUFG Union Bank, N.A., and Wells Fargo Bank, National Association (collectively, the “Initial Lenders”) and JPMorgan Chase Bank, N.A.

as administrative agent, providing for a term loan facility in the amount of $ 180.0 million (the “New Term Loan Facility”) and a revolving credit facility of $ 100.0 million (the “New Revolving Credit Facility”) (together the “New Credit Facilities”).

Proceeds from the New Credit Facilities were primarily used to repay the Former Credit Facilities.

as administrative agent, 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 credit facilities.

On April 26, 2022, the Credit Agreement Parties entered into Amendment No.

1 to the New Credit Agreement (the “First Amendment”) with the Initial Lenders and JPMorgan Chase Bank, N.A.

1 to the Credit Agreement (the “First Amendment”) with the Initial Lenders and JPMorgan Chase Bank, N.A.

as administrative agent, which allows for additional Restricted Payments (as defined in the First Amendment) using specified funding sources.

On July 29, 2022, the Credit Agreement Parties entered into Amendment No.

2 to the New Credit Agreement (the “Second Amendment”) with the Initial Lenders and Goldman Sachs Bank USA (collectively, the “Lenders”) and JPMorgan Chase Bank, N.A.

as administrative agent, which increases the New Revolving Credit Facility to $ 215.0 million and converts the New Credit Facility interest rate index from Borrower (as defined in the New Credit Agreement) option LIBOR to SOFR.

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

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

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

Loans under the New Credit Facilities will, at the Borrowers’ option, bear interest at either (i) SOFR, EURIBOR, HIBOR, CDOR, Daily Simple 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 %, 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 Term SOFR, EURIBOR, HIBOR, CDOR and Daily Simple SONIA rates are subject to a 0 % floor.

2 to the Credit Agreement (the “Second Amendment”) with the Initial Lenders and Goldman Sachs Bank USA (collectively, the “Lenders”) and JPMorgan Chase Bank, N.A.

as administrative agent, which increased the Revolving Credit Facility to $ 215.0 million and converted the Credit Facility interest rate index from Borrower (as defined in the Credit Agreement) option LIBOR to SOFR.

On February 28, 2023, the Credit Agreement Parties entered into an Amendment No.

3 (the “Third Amendment”) to the Credit Agreement to, among other things, (i) modify the financial covenants under the 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 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 is permanent after the Waiver Period, (iii) restrict the ability to draw on the 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 Credit Agreement), and (b) 3.00 % per annum with respect to any Canadian Prime Loan or ABR Loan (as defined in the Credit Agreement), (v) allow that any calculation of Consolidated EBITDA (each as defined in the Credit Agreement) that includes the fiscal quarters during the Waiver Period may include certain agreed upon amounts for certain addbacks, (vi) 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, (vii) require a minimum qualified cash requirement of at least $ 10.0 million and (viii) require a mandatory prepayment of the Revolving Credit Facility during the Waiver Period with any qualified cash proceeds in excess of $ 25.0 million.

Beginning in the fiscal quarter ending March 31, 2024, the Third Amendment resets the maximum Net Leverage Ratio and the minimum Fixed Charge Coverage Ratio (each as defined in the 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 Credit Agreement prior to the Third Amendment.

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) SOFR, EURIBOR, HIBOR, CDOR, Daily Simple SONIA and/or the Central Bank Rate, as applicable, plus (x) 4.00 % 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 3.00 %, in each case of clauses (i) and (ii), subject to two 0.25 % step-downs based on the achievement of certain leverage ratios following February 28, 2023.

Each of SOFR, EURIBOR, HIBOR, CDOR and Daily Simple SONIA rates are subject to a 0 % floor.

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

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

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

As of December 31, 2022 and 2021, the Company was in compliance with all of the covenants in its New Credit Agreement.

At December 31, 2022 and 2021, the Company had $ 157.5 million and $ 175.5 million of borrowings outstanding under the New Term Loan Facility, respectively, and $ 70.0 million and no outstanding borrowings under the New Revolving Credit Facility, respectively.

Outstanding borrowings under the New Revolving Credit Facility at December 31, 2022 are due within 30 days of each draw.

At December 31, 2022 and 2021, the Company had $ 145.0 million and $ 100.0 million available under the New Revolving Credit Facility and Former Revolving Credit Facility, respectively.

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

As of December 31, 2023, the Credit Agreement Parties were in compliance with the modified covenants that were amended pursuant to the Third Amendment and within the Waiver Period and as of December 31, 2022, the Credit Agreement Parties were in compliance with all of the covenants in its Credit Agreement.

At December 31, 2023 and 2022, the Credit Agreement Parties had $ 139.5 million and $ 157.5 million of borrowings outstanding under the Term Loan Facility, respectively, and $ 120.5 million and $ 70.0 million outstanding borrowings under the Revolving Credit Facility, respectively.

Outstanding borrowings under the Revolving Credit Facility at December 31, 2023 are due within 30 days of the applicable draw.

At December 31, 2023 and 2022, the Company had $ 20.5 million and $ 145.0 million available under the Revolving Credit Facility, respectively.

There were no outstanding letters of credit as of December 31, 2023 and 2022.

Subsequent to December 31, 2022, our projections indicated that we would be unable to maintain compliance with the financial covenants under the New Credit Agreement as of March 31, 2023 and, on February 28, 2023, we entered into a further amendment (the “Third Amendment”) to the New Credit Agreement 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 (as defined in the New Credit Agreement), (iv) allow that any calculation of Consolidated EBITDA (each 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.

As of February 28, 2023, the Company had $ 157.5 million and $ 141.0 million in borrowings outstanding under the New Term Loan Facility and New Revolving Credit Facility, respectively.

Former Credit Facilities

On October 22, 2018, FAH, LLC and certain of its material domestic subsidiaries from time to time (collectively the “Credit Agreement Parties”) entered into a credit agreement (as amended, the “Former Credit Agreement”) providing for a term loan facility in the amount of $ 235.0 million (the “Former Term Loan Facility”) and a revolving credit facility of $ 50.0 million (the “Former Revolving Credit Facility”) (together the “Former Credit Facilities”).

On February 11, 2019, the Credit Agreement Parties amended the Former Credit Agreement to increase the Former Revolving Credit Facility to $ 75.0 million.

On September 23, 2019, the Credit Agreement Parties entered into a second amendment to the Former Credit Agreement, which extended the maturity date of the Former Term Loan Facility and the Former Revolving Credit Facility under the Former Credit Facilities to September 23, 2024 (the “Former Facility Maturity Date”), reduced the interest margin applicable to all loans under the Former Credit Agreement by 0.75 % and reduced certain fees incurred under the Former Credit Agreement.

The second amendment also allowed the Credit Agreement Parties to request an additional $ 25.0 million increase to the Former Term Loan Facility.

On May 5, 2020 the Credit Agreement Parties entered into a third amendment to the Former Credit Agreement, which modified the financial covenants and adjusted the required leverage levels for the Leverage Ratio (as defined in the Former Credit Agreement) to provide the Credit Agreement Parties with additional flexibility.

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

The first amortization payment was on December 31, 2018.

The Former Revolving Credit Facility would have terminated on the Former Facility Maturity Date and loans thereunder were eligible to be borrowed, repaid, and reborrowed up to such date.

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

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

The Former Credit Facilities were secured by substantially all of the assets of FAH, LLC and its material domestic subsidiaries, subject to customary exceptions.

In September 2021, all of the outstanding aggregate principal balance and accrued interest of $ 180.1 million on the Credit Agreement Parties' Former Term Loan Facility was repaid, and the Credit Agreement Parties recorded a $ 0.7 million loss on debt extinguishment as a result of the write-off of unamortized deferred financing fees.

Equipment Finance Loan

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

At December 31, 2022, the Company had $ 20.0 million outstanding under the Equipment Finance Loan.

At December 31, 2023 and 2022, the Company had $ 15.4 million and $ 20.0 million outstanding under the Equipment Finance Loan, respectively.

The Company has entered into non-cancellable operating leases for office, warehouse, and distribution facilities, with original lease periods expiring through 2032.

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Rent expense, included in selling, general and administrative expenses on the consolidated statements of operations, was $ 29.4 million, $ 24.5 million and $ 16.5 million for the years ended December 31, 2023, 2022 and 2021, respectively.

During the years ended December 31, 2022 and 2021, operating cash outflows relating to operating lease liabilities was $ 16.0 million and $ 14.4 million, respectively and operating lease right-of-use assets obtained in exchange for new operating lease obligations was $ 54.1 million, net of lease incentives obtained of $ 17.2 million and $ 4.0 million, with no lease incentives obtained, respectively.

During the year ended December 31, 2023, the Company terminated an agreement for a lease that had not commenced and incurred a charge of approximately $ 4.2 million.

During the years ended December 31, 2023 and 2022, operating cash outflows relating to operating lease liabilities were $ 19.5 million and $ 16.0 million, respectively.

Operating lease right-of-use assets obtained in exchange for new operating lease obligations was $ 0.9 million during the year ended December 31, 2023.

Operating lease right-of-use assets obtained in exchange for new operating lease obligations was $ 54.1 million, with $ 17.2 million lease incentives obtained, during the year ended December 31, 2022.

As of December 31, 2023 and 2022, the Company’s operating leases had a weighted-average remaining term of 6.7 years and 7.4 years, respectively, and weighted-average discount rates of 5.78 % and 5.76 %, respectively.

Excluded from the measurement of operating lease liabilities and operating lease right-of-use assets were certain warehouse and distribution contracts that either qualify for the short-term lease recognition exception and/or do not give the Company the right to control the warehouse and/or distribution facilities underlying the contract.

During the year ended December 31, 2020, the Company recognized an impairment loss of $ 1.4 million related to the right of use lease asset in Bath, England.

The related lease liability was remeasured and reduced by $ 0.9 million.

The lease agreement was terminated in December 2021.

In January 2020, the Company entered into a non-cancellable operating sub-lease for office space expiring in 2024.

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is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from FAH, LLC based upon Funko, Inc.’s economic interest held in FAH, LLC.

FAH, LLC is treated as a pass-through

partnership for income tax reporting purposes.

FAH, LLC is treated as a pass-through partnership for income tax reporting purposes.

FAH, LLC’s members, including the Company, are liable for federal, state and local income taxes based on their share of FAH, LLC’s pass-through taxable income (loss).

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123,124 ( 17,414 ) ( 361 )

Income tax (benefit) expense $ ( 17,801 ) $ 17,061 $ 2,025

Income tax expense (benefit) $ 132,497 $ ( 17,801 ) $ 17,061

A reconciliation of income tax expense (benefit) from operations computed at the U.S.

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Change in valuation allowance

( 340.5 ) 47.2 2.3

Non-controlling interest

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3.3 1.5 ( 1.9 )

Income tax (benefit) expense 77.3 % 20.1 % 17.2 %

The Company’s annual effective tax rate in 2022 is different than the statutory rate of 21% primarily due to a partial release of the valuation allowance, the limitation of future share based compensation pursuant to Section 162(m) of the Internal Revenue Code (the "Code"), and the Company is not liable for income taxes on the portion of FAH, LLC’s earnings that are attributable to non-controlling interests.

The Company's annual effective tax rate for 2021 and 2020 was less than the statutory rate of 21%, primarily because the Company is not liable for income taxes on the portion of FAH, LLC’s earnings that are attributable to non-controlling interests.

Income tax expense ( 414.8 ) % 77.3 % 20.1 %

The Company’s annual effective tax rate in 2023 is different than the statutory rate of 21% due to the valuation allowance.

The Company's annual effective tax rate for 2022 is different than the statutory rate of 21%, primarily due to a partial release of the valuation allowance, the limitation of future share based compensation pursuant to Section 162(m) of the Internal Revenue Code (the "Code"), and the Company is not liable for income taxes on the portion of FAH, LLC’s earnings that are attributable to non-controlling interests.

The Company's annual effective tax rate in 2021 was less than the statutory rate of 21%, primarily because the Company is not liable for income taxes on the portion of FAH, LLC’s earnings that are attributable to non-controlling interests.

Deferred Income Taxes

4 unchanged sentences

Tax receivable agreement liability 2,150 26,860

26,860 19,105

Stock-based compensation

1 unchanged sentence

Other carryforwards 146 826

Net operating loss carryforward 34,867 —

Gross deferred tax assets

3 unchanged sentences

Deferred tax assets, net of valuation allowance

123,893 74,808

Deferred tax liabilities:

1 unchanged sentence

( 402 ) ( 382 )

Other — ( 343 )

Gross deferred tax liabilities

2 unchanged sentences

The Company evaluates its ability to realize deferred tax assets on a quarterly basis and establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset may not be realized.

As of December 31, 2022 and 2021, the Company recognized a deferred tax asset of $ 93.9 million and $ 64.3 million, respectively, associated with the basis difference in its investment in FAH, LLC upon acquiring these LLC interests.

As of December 31, 2022, the Company recognized a deferred tax asset of $ 93.9 million, associated with the basis difference in its investment in FAH, LLC upon acquiring these LLC interests.

However, a portion of the total basis difference will only reverse upon the eventual sale of its interest in FAH, LLC, which we expect would result in a capital loss.

As of December 31, 2022 and 2021, the Company has a valuation allowance in the amount of $ 4.0 million and $ 14.8 million, respectively, against the deferred tax asset.

As of December 31, 2022, the Company has a valuation allowance in the amount of $ 4.0 million, against the deferred tax asset.

The Company released $ 11.0 million valuation allowance during the year ended December 31, 2022, related to a discrete benefit on the outside basis deferred tax asset.

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If the Company determines it is more likely than not that the position will be sustained, a benefit will be recognized at the largest amount that we believe is cumulatively greater than 50% likely to be realized.

The following table summarizes changes in the amount of the Company’s unrecognized tax benefits for uncertain tax positions for the three years ended December 31, 2022, 2021 and 2020 (in thousands):

Year Ended December 31,

2022 2021 2020

Unrecognized tax benefits at January 1 $ — $ 490 $ 490

Decreases for positions taken in current year — ( 490 ) —

Unrecognized tax benefits at December 31 $ — $ — $ 490

Of the $ 0.5 million of unrecognized tax benefits as of December 31, 2020, $ 0.2 million would impact the effective tax rate if recognized.

There are no unrecognized tax benefits for uncertain tax positions for the three years ended December 31, 2023, 2022 and 2021.

Interest and penalties related to income tax matters are classified as a component of income tax expense (benefit).

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federal, state, and local income tax examinations by tax authorities for years after 2019 and subject to examination for all foreign income tax returns for fiscal 2023 and 2022.

There was an open tax examination with the California Franchise Tax Board for the tax year 2019 at December 31, 2022.

There were no open tax examinations at December 31, 2023.

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In general, the TRA Parties’ rights under the Tax Receivable Agreement are assignable, including to transferees of common units in FAH, LLC (other than the Company as transferee pursuant to a redemption or exchange of common units in FAH, LLC).

The Company expects to benefit from the remaining 15 % of the tax benefits, if any, that the Company may realize.

The Company is not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transaction that gave rise to the payment are realized.

The Company may expect to benefit from the remaining 15 % of the tax benefits, if any, that the Company may realize.

The Company is generally not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with a relevant transaction that gave rise to the payment are realized.

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

1 unchanged sentence

During years ended December 31, 2023 and 2022, the Company acquired an aggregate of 1.8 million and 6.5 million common units of FAH, LLC, respectively, in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in FAH, LLC subject to the provisions of the Tax Receivable Agreement.

As a result of these exchanges, during the years ended December 31, 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, representing 85 % of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of FAH, LLC common units, after concluding it was probable that such Tax Receivable Agreement payments would be paid in the future based on our estimate of future taxable income.

There were no transactions subject to the Tax Receivable Agreement for which the Company did not recognize the related liability during the years ended December 31, 2022, 2021 and 2020, as we concluded that it was probable that the Company would have sufficient future taxable income to utilize all of the related tax benefits.

The following table summarizes changes in the amount of the Company’s Tax Receivable Agreement liability for the three years ended December 31, 2022, 2021 and 2020 (in thousands):

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, representing 85 % of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of FAH, LLC common units.

There were no transactions subject to the Tax Receivable Agreement for which the Company did not recognize the related liability during the years ended December 31, 2022 and 2021, as we concluded at such time that it was probable that the Company would have sufficient future taxable income to utilize all of the related tax benefits.

The following table summarizes changes in the amount of the Company’s Tax Receivable Agreement liability (in thousands):

Year Ended December 31,

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Ending balance $ 8,960 $ 109,187 $ 82,884

The future payments on the Company’s tax receivable agreement liabilities as of December 31, 2022 are expected to be (in thousands):

Thereafter 72,653

Total $ 109,187

Commitments and Contingencies

2 unchanged sentences

The agreements generally require royalty payments based on product sales and in some cases may require minimum royalty and other related commitments.

The Company is expected to incur $ 112.3 million in minimum guaranteed royalty payments under licensing arrangements, including $ 33.8 million in 2023, $ 42.3 million in 2024 and $ 36.2 million in 2025.

The Company is expected to incur $ 80.4 million in minimum guaranteed royalty payments under licensing arrangements, including $ 31.1 million in 2024, $ 48.8 million in 2025, $ 0.2 million in 2026 and $ 0.2 million in 2027.

Employment Agreements

1 unchanged sentence

The agreements include, among other things, an annual bonus based on certain performance metrics of the Company, as defined by the board, and up to one year ’s severance pay beyond termination date.

The Company has entered into a New Credit Facility which includes a term loan facility and a revolving credit facility.

The Company has entered into a Credit Facility which includes a term loan facility and a revolving credit facility.

The Company has also entered into an Equipment Finance Loan.

6 unchanged sentences

The Company is party to the Tax Receivable Agreement with FAH, LLC and each of the TRA Parties that provides for the payment by the Company to the TRA Parties under certain circumstances.

The Company is expected to incur $ 9.0 million in 2024.

See Note 13, Liabilities under Tax Receivable Agreement.

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The Company is, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business.

For example, on March 10, 2020, a purported stockholder of the Company filed a putative class action lawsuit in the United States District Court for the Central District of California against the Company and certain of its officers, entitled Ferreira v.

The original complaint alleged that the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as Rule 10b-5 promulgated thereunder.

The lawsuit sought, among other things, compensatory damages and attorneys’ fees and costs.

Two additional complaints making substantially similar allegations were filed April 3, 2020 in the United States District Court for the Central District of California and April 9, 2020 in the United States District Court for the Western District of Washington, respectively.

On June 11, 2020, the Central District of California actions were consolidated for all purposes into one action under the Ferreira caption, and lead plaintiffs and lead counsel were appointed pursuant to the Private Securities Litigation Reform Act;

shortly thereafter, the Western District of Washington action was voluntarily dismissed.

Lead plaintiffs filed a consolidated complaint on July 31, 2020, against the Company and certain of its officers and directors, as well as entities affiliated with ACON Funko Investors, L.L.C.

The consolidated complaint added Section 10(b) and 20(a) claims based on the Company’s earnings announcement and Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, as well as claims under Section 20A of the Exchange Act.

All defendants moved to dismiss the consolidated action, and the Court granted all defendants’ motions to dismiss the Ferreira action on February 25, 2021, allowing the lead plaintiffs leave to amend the complaint.

Lead plaintiffs filed an amended complaint on March 29, 2021, and all defendants moved to dismiss.

On October 25, 2021, the Court issued an order granting defendants’ motion in part and denying the motion in part.

On May 3, 2022, the parties agreed in principle to settle the litigation.

The Court granted preliminary approval of the settlement on July 17, 2022, and granted final approval on November 7, 2022.

The cost of settlement was paid by the Company’s director and officer liability insurance.

Several stockholder derivative actions based on the earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 have been brought on behalf of the Company against certain of its directors and officers.

For example, several stockholder derivative actions based on the earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 have been brought on behalf of the Company against certain of its directors and officers.

Specifically, on April 23, June 5, and June 10, 2020, the actions captioned Cassella v.

5 unchanged sentences

On July 6, 2020, these three actions were consolidated for all purposes into one action under the title In re Funko, Inc.

Derivative Litigation , and on August 13, 2020, the consolidated action was stayed pending final resolution of the motion to dismiss in the Ferreira action.

Derivative Litigation , and on August 13, 2020, the consolidated action was stayed.

On May 9, 2022, another complaint, asserting substantially similar claims, was filed in the U.S.

1 unchanged sentence

Mariotti , et al.

The Company’s response to the complaints in both the consolidated action and Smith v.

Mariotti are scheduled to be submitted o n March 10, 2023.

On July 5, 2022, two purported stockholders filed an additional derivative action in the Court of Chancery of the State of Delaware, captioned Fletcher, et al.

In March 2023, the Company reached a non-monetary settlement in principle in In re Funko, Inc.

Derivative Litigation , Smith v.

Mariotti , and Fletcher, et al.

Mariotti and the actions were stayed pending finalization of the settlement.

On March 4, 2024, plaintiffs filed a motion for preliminary approval of the settlement with the Court.

As part of the settlement, the plaintiffs agreed to dismiss their claims on behalf of the corporation in exchange for a set of corporate governance reforms and attorney’s fees and expenses.

The attorney’s fees and expenses will be paid out of Funko’s directors and officers insurance.The motion for preliminary approval of the settlement remains pending.

On June 11, 2021, a purported stockholder filed a related derivative action, captioned Silverberg v.

1 unchanged sentence

, in the Court of Chancery of the State of Delaware.

On July 5, 2022, two purported stockholders filed an additional derivative action in the Court of Chancery, captioned Fletcher, et al.

That complaint also asserts claims arising out of same issues and events as the Silverberg litigation and the derivative actions pending in the Central District of California.

Additionally, between November 16, 2017 and June 12, 2018, seven purported stockholders of the Company filed putative class action lawsuits in the Superior Court of Washington in and for King County against the Company, certain of its officers and directors, ACON, Fundamental Capital, LLC and Funko International, LLC (collectively, “Fundamental”), the underwriters of its IPO, and certain other defendants.

The Company moved to dismiss the Silverberg complaint on April 3, 2023.

Plaintiff responded on May 3, 2023, and briefing was completed on May 25, 2023.

The motion remains pending before the Court of Chancery.

Additionally, between November 16, 2017 and June 12, 2018, seven purported stockholders of the Company filed putative class action lawsuits in the Superior Court of Washington in and for King County against the Company, certain of its officers and directors, ACON, Fundamental Capital, the underwriters of its IPO, and certain other defendants.

On July 2, 2018, the suits were ordered consolidated for all purposes into one action under the title In re Funko, Inc.

1 unchanged sentence

On August 1, 2018, plaintiffs filed a consolidated complaint against the Company, certain of its officers and directors, ACON, Fundamental, and certain other defendants.

The Company moved twice, and the Court twice granted the Company's motions to dismiss, the second time with prejudice.

The Company moved to dismiss twice, and the Court twice granted the Company's motions to dismiss, the second time with prejudice.

Plaintiffs appealed, and on November 1, 2021, the Court of Appeals reversed the trial court’s dismissal decision in most respects.

1 unchanged sentence

The Company filed its answer on September 19, 2022 and discovery is currently ongoing.

Plaintiffs filed a motion for class certification on July 7, 2023, and briefing was completed on the class certification motion on October 25, 2023.

On November 6, 2023, the Washington Superior Court granted Plaintiffs’ motion for class certification.

On June 4, 2018, a putative class action lawsuit entitled Kanugonda v.

3 unchanged sentences

On April 30, 2019, the lead plaintiff filed an amended complaint against the previously named defendants.

The Company must respond to the Compliant in the federal action, now captioned Berkelhammer v.

, by March 13, 2023.

The Company moved to dismiss the Complaint in the federal action, now captioned Berkelhammer v.

, on June 14, 2023.

Plaintiff filed an opposition on July 27, 2023, cross moving for an order voluntarily dismissing the action without prejudice so that he can pursue status as a class representative in In re Funko, Inc.

Securities Litigation , or in the alternative, a court order denying defendants’ motion to dismiss.

Briefing completed on August 18, 2023.

On October 13, 2023, the District Court granted plaintiff’s motion for voluntary dismissal without prejudice, denied defendants’ motion to dismiss, and dismissed the action.

The cases in Washington state court and Berkelhammer v.

11 unchanged sentences

Briefing on the motion to dismiss was completed on February 8, 2023;

briefing on Plaintiff’s fee application is expected to be completed on March 10, 2023.

briefing on Plaintiff’s fee application was completed on April 10, 2023.

The Court heard oral argument on both motions on July 24, 2023.

On December 18, 2023, the Court denied Defendants’ motion to dismiss and denied Plaintiffs’ application for an interim fee.

We filed our answer on January 26, 2024, and discovery is currently ongoing.

On June 2, 2023, a purported stockholder filed a putative class action lawsuit in the United States District Court for the Western District of Washington, captioned Studen v.

The Complaint alleges that the Company and certain individual defendants violated Sections 10(b) and 20(a) of the Exchange Act, as amended, as well as Rule 10b-5 promulgated thereunder by making allegedly materially misleading statements in documents filed with the SEC, as well as in earnings calls and presentations to investors, regarding a planned upgrade to its enterprise resource planning system and the relocation of a distribution center, as well as by omitting material facts about the same subjects necessary to make the statements made therein not misleading.

The lawsuits seek, among other things, compensatory damages and attorneys’ fees and costs.

On August 17, 2023, the Court appointed lead plaintiff, and on August 29, 2023, the parties submitted a joint stipulated scheduling order.

Plaintiff’s amended complaint was filed October 19, 2023.

The amendment adds additional allegations by including accounts from purported former employees and contractors.

Plaintiff seeks to represent a putative class of investors who purchased or acquired Funko common stock between March 3, 2022 and March 1, 2023.

The Company moved to dismiss on December 15, 2023, and the motion will be fully briefed by March 22, 2024.

The Company is party to additional legal proceedings incidental to its business.

1 unchanged sentence

The Company identifies its segments according to how the business activities are managed and evaluated and for which discrete financial information is available and for which is regularly reviewed by its Chief Operating Decision Maker (“CODM”) to allocate resources and assess performance.

Due to a change in executive management during the year ended December 31, 2023, we have redefined our named CODM from our prior Chief Executive Officer to our current Chief Financial Officer and Chief Operating Officer.

Because its CODM reviews financial performance and allocates resources at a consolidated level on a regular basis, the Company has one segment.

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At December 31, 2023 and 2022, accounts receivable from Forbidden Planet were $ 0.5 million and $ 0.2 million on the consolidated balance sheets, respectively.

In February 2019, in connection with the Forrest-Pruzan Acquisition, the Company assumed two leases of office space with Roll and Move, LLC and Roll and Move II LLC, both of which are owned by certain former owners of Forrest-Pruzan Creative LLC, one of whom remains an employee of the Company.

In 2022, the Company leased another space with the same landlord.

For the years ended December 31, 2022, 2021 and 2020, the Company recorded $ 0.3 million, $ 0.3 million and $ 0.2 million, of rental expense related to the leases, which was recorded in selling, general and administrative expenses in the Company’s consolidated statements of operations.

For the years ended December 31, 2022 and 2021, the Company recorded $ 0.3 million, respectively of rental expense related to the leases, which was recorded in selling, general and administrative expenses in the Company’s consolidated statements of operations.

The relationship was no longer a related party during the year ended December 31, 2023.

Employee Benefit Plans

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Options exercisable at December 31, 2023 1,811 $ 14.90 $ 770 5.72

Stock options awarded to employees under the 2017 Plan and 2019 Plan are generally granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant, vest over four years , and have ten years contractual terms.

A summary of restricted stock unit activity for the year ended December 31, 2023 is as follows:

13 unchanged sentences

Granted 114 9.77

Vested ( 12 ) 17.09

Forfeited ( 56 ) 13.01

Unvested at December 31, 2023 113 $ 12.10 1.75

1 unchanged sentence

The number of units subject to future vesting is based on annual Company achieved factors, such as Net Sales and Adjusted EBITDA Margin.

Unvested units are expected to vest at the determination date of December 31, 2024.

Achievement is estimated at 100 % of the units granted as of December 31, 2022.

Unvested units are expected to vest at the determination date of December 31, 2024 or December 31, 2025, depending on the grant.

Achievement is estimated at a weighted average 73.5 % of the units granted as of December 31, 2023.

Options to purchase common units in FAH, LLC.

8 unchanged sentences

Exercised ( 146 ) 0.05 1,078

Cancelled ( 15 ) —

Outstanding at December 31, 2023 — — — 0.00

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Net (loss) income and comprehensive (loss) income of FAH, LLC excludes certain activity attributable to Funko, Inc., including $ 10.5 million, $ 16.6 million and $ 13.0 million of equity-based compensation expense for share-based compensation awards issued by Funko, Inc.

for the years ended December 31, 2022, 2021 and 2020, respectively, and $ 20.5 million of income tax benefit, $ 14.3 million income tax expense and $ 0.4 million of income tax benefit for corporate, federal, state and local taxes attributable to Funko, Inc.

for the years ended December 31, 2023, 2022 and 2021, respectively, and $ 128.7 million of income tax expense, $ 20.5 million income tax benefit and $ 14.3 million of income tax expense for corporate, federal, state and local taxes attributable to Funko, Inc.

for the years ended December 31, 2023, 2022 and 2021, respectively.

9 unchanged sentences

Net (loss) income $ ( 164,438 ) $ ( 5,240 ) $ 67,854

net income attributable to non-controlling interests

net (loss) income attributable to non-controlling interests

( 10,359 ) 2,795 23,954

8 unchanged sentences

Class A common stock

— 227,500 304,327

Dilutive Funko, Inc.

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(Loss) earnings per share of Class A common stock — diluted $ ( 3.19 ) $ ( 0.18 ) $ 1.08

For the years ended December 31, 2022, 2021 and December 31, 2020 an aggregate of 11.6 million, 14.7 million and 19.7 million of potentially dilutive securities, respectively, were excluded from the weighted-average in the computation of diluted (loss) earnings per share of Class A common stock because the effect would have been anti-dilutive.

For the years ended December 31, 2023, 2022 and 2021 an aggregate of 9.9 million, 11.6 million and 14.7 million of potentially dilutive securities, respectively, were excluded from the weighted-average in the computation of diluted (loss) earnings per share of Class A common stock because the effect would have been anti-dilutive.

For the years ended December 31, 2023, 2022 and 2021 anti-dilutive securities included 4.0 million, 7.0 million and 13.2 million of common units of FAH, LLC that are convertible into Class A common stock, but were excluded from the computations of diluted (loss) earnings per share because the effect would have been anti-dilutive under the if-converted method.

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As such, separate presentation of basic and diluted (loss) earnings per share of Class B common stock under the two-class method has not been presented.

Subsequent Event

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.

Condensed Financial Information of Registrant

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(Loss) income before income taxes ( 25,381 ) ( 28,572 ) 58,248

Income tax (benefit) expense ( 20,537 ) 14,348 ( 372 )

Income tax expense (benefit) 128,698 ( 20,537 ) 14,348

Net (loss) income $ ( 154,079 ) $ ( 8,035 ) $ 43,900

23 unchanged sentences

Intercompany receivable 118,783 119,219

Deferred tax asset 123,893 74,464

Deferred tax asset, net of valuation allowance — 123,893

Investment in subsidiaries 118,443 225,858

2 unchanged sentences

Current liabilities:

Tax payable $ — $ 14,684

Current portion of liabilities under tax receivable agreement $ 8,960 $ 9,567

Accrued expenses and other current liabilities 370 —

Total current liabilities 9,330 9,567

8 unchanged sentences

Accumulated other comprehensive (loss) income ( 180 ) ( 2,603 )

Retained earnings 60,015 68,050

(Accumulated deficit) retained earnings ( 94,064 ) 60,015

Total stockholders' equity 231,941 368,224

9 unchanged sentences

Net (loss) income $ ( 154,079 ) $ ( 8,035 ) $ 43,900

Adjustments to reconcile net (loss) income to net cash (used in) provided by

Adjustments to reconcile net (loss) income to net cash provided by (used in)

operating activities:

9 unchanged sentences

Accrued expenses and other liabilities 370 11,190 ( 571 )

Net cash (used in) provided by operating activities ( 19,617 ) 1,123 33,005

Net cash provided by (used in) operating activities 2,078 ( 19,617 ) 1,123

Investing Activities

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(the “Parent Company”) was formed on April 21, 2017 as a Delaware corporation and is a holding company with no direct operations.

The Parent Company's assets consist primarily of cash and cash equivalents, its equity interest in FAH, LLC, and certain deferred tax assets.

The Parent Company's assets consist primarily of cash and cash equivalents, its equity interest in FAH, LLC, and certain deferred tax assets, net of valuation allowance.

The Parent Company's cash inflows are primarily from distributions and other transfers from FAH, LLC.

28 unchanged sentences

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 8. Financial Statements and Supplementary Data