Funko, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”). This discussion and analysis contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth under “Risk Factors” included in this Quarterly Report on Form 10-Q. As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to: • “we,” “us,” “our,” the “Company,” “Funko” and similar references refer: Funko, Inc., and, unless otherwise stated, all of its direct and indirect subsidiaries, including FAH, LLC. • “ACON” refers to ACON Funko Investors, L.L.C., a Delaware limited liability company, and certain funds affiliated with ACON Funko Investors, L.L.C. (including each of the Former Equity Owners). • “ ACON Sale ” refers to the sale by ACON and certain of its affiliates to TCG of an aggregate of 12,520,559 shares of our Class A common stock pursuant to a Stock Purchase Agreement, dated as of May 3, 2022, by and among ACON, certain affiliates of ACON and TCG . • “Continuing Equity Owners” refers collectively to ACON Funko Investors, L.L.C., Fundamental, the Former Profits Interests Holders, certain former warrant holders and certain current and former executive officers, employees and directors and each of their permitted transferees, in each case, that owned common units in FAH, LLC after our initial public offering (“IPO”) and who may redeem at each of their options, their common units for, at our election, cash or newly-issued shares of Funko, Inc.’s Class A common stock. • “FAH, LLC” refers to Funko Acquisition Holdings, L.L.C., a Delaware limited liability company. • “FAH LLC Agreement” refers to FAH, LLC’s second amended and restated limited liability company agreement, as amended from time to time. • “Former Equity Owners” refers to those Original Equity Owners affiliated with ACON who transferred their indirect ownership interests in common units of FAH, LLC for shares of Funko, Inc.’s Class A common stock (to be held by them either directly or indirectly) in connection with our IPO. • “Former Profits Interests Holders” refers collectively to certain of our directors and certain current executive officers and employees, in each case, who held existing vested and unvested profits interests in FAH, LLC pursuant to FAH, LLC’s prior equity incentive plan and received common units of FAH, LLC in exchange for their profits interests (subject to any common units received in exchange for unvested profits interests remaining subject to their existing time-based vesting requirements) in connection with our IPO. • “ Fundamental ” refers collectively to Fundamental Capital, LLC and Funko International, LLC. • “Original Equity Owners” refers to the owners of ownership interests in FAH, LLC, collectively, prior to the IPO, which include ACON, Fundamental, the Former Profits Interests Holders and certain current and former executive officers, employees and directors. • “Tax Receivable Agreement” or “TRA” refers to a tax receivable agreement entered into between Funko, Inc., FAH, LLC and each of the Continuing Equity Owners and certain transferees. 23 Overview Funko is a leading pop culture lifestyle brand. Our business is built on the principle that almost everyone is a fan of something and the evolution of pop culture is leading to increasing opportunities for fan loyalty. 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 and digital collectibles. We sell our products in numerous countries across North America, Europe, Latin America, Asia and Africa, with approximately 34% 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, including uncertainty around freight costs and consumer spending, and heightened interest rates and 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 We consider the following metrics to be key performance indicators to evaluate our business, develop financial forecasts, and make strategic decisions. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (amounts in thousands) Net sales $ 247,657 $ 240,028 $ 463,356 $ 491,906 Net income (loss) $ 5,419 $ (75,862) $ (18,247) $ (137,006) EBITDA (1) $ 26,708 $ 84,398 $ 25,832 $ 32,596 Adjusted EBITDA (1) $ 27,917 $ (7,634) $ 37,491 $ (21,649) (1) Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA are financial measures not calculated in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), or non-GAAP financial measures. For a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most closely comparable U.S. GAAP financial measure, see “Non-GAAP Financial Measures” below. 24 Results of Operations Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 The following table sets forth information comparing the components of net income for the three months ended June 30, 2024 and 2023: Three Months Ended June 30, Period over Period Change 2024 2023 Dollar Percentage (amounts in thousands, except percentages) Net sales $ 247,657 $ 240,028 $ 7,629 3.2 % Cost of sales (exclusive of depreciation and amortization) 143,609 170,019 (26,410) (15.5) % Selling, general, and administrative expenses 77,897 85,632 (7,735) (9.0) % Depreciation and amortization 15,419 14,893 526 3.5 % Total operating expenses 236,925 270,544 (33,619) (12.4) % Income (loss) from operations 10,732 (30,516) 41,248 nm Interest expense, net 5,081 7,264 (2,183) (30.1) % Gain on tax receivable agreement liability adjustment — (99,620) 99,620 nm Other income, net (557) (401) (156) 38.9 % Income (loss) before income taxes 6,208 62,241 (56,033) (90.0) % Income tax expense 789 138,103 (137,314) (99.4) % Net income (loss) 5,419 (75,862) 81,281 nm Less : net income (loss) attributable to non-controlling interests 304 (2,864) 3,168 nm Net income (loss) attributable to Funko, Inc. $ 5,115 $ (72,998) $ 78,113 nm Net Sales Net sales were $247.7 million for the three months ended June 30, 2024, an increase of 3.2%, compared to $240.0 million for the three months ended June 30, 2023. The increase in net sales was due primarily to increased sales to direct-to-consumer customers, mass-market retailers and distributors for the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily as a result of strategic focus to grow direct-to-consumer sales and certain customers placing orders earlier than usual to secure vessel space. Our top ten wholesale customers represented approximately 32% and 35% of our sales for the three months ended June 30, 2024 and 2023, respectively. For the three months ended June 30, 2024, the number of active properties decreased 0.8% to 750 as compared to 756 for the three months ended June 30, 2023, and the average net sales per active property increased 4.0% for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. An active property is a licensed property from which we generate sales of products during a given period. We expect that the number of active properties and the average sales per active property will fluctuate from quarter to quarter based on what is relevant in pop culture at that time, the types of properties we are producing against and general economic trends. 25 On a geographical basis, net sales in the United States decreased 4.7% to $163.0 million in the three months ended June 30, 2024 as compared to $171.1 million in the three months ended June 30, 2023. Net sales in Europe increased 20.8% to $60.4 million in the three months ended June 30, 2024 as compared to $50.0 million in the three months ended June 30, 2023 and net sales in other international locations increased 27.7% to $24.3 million in the three months ended June 30, 2024 as compared to $19.0 million in the three months ended June 30, 2023. On a branded product basis, net sales of the Core Collectible branded category increased 6.4% to $186.7 million in the three months ended June 30, 2024 as compared to $175.5 million in the three months ended June 30, 2023, Loungefly branded products net sales decreased 13.4% to $41.5 million in the three months ended June 30, 2024 as compared to $47.9 million in the three months ended June 30, 2023 and net sales of other branded products increased 16.9% to $19.4 million in the three months ended June 30, 2024 as compared to $16.6 million in the three months ended June 30, 2023. Cost of Sales and Gross Margin (exclusive of depreciation and amortization) Cost of sales (exclusive of depreciation and amortization) was $143.6 million for the three months ended June 30, 2024, a decrease of 15.5%, compared to $170.0 million for the three months ended June 30, 2023. Cost of sales (exclusive of depreciation and amortization) decreased primarily as a result of lower costs as a percentage of net sales as described below. Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales (exclusive depreciation and amortization) as a percentage of net sales, was 42.0% for the three months ended June 30, 2024, compared to 29.2% for the three months ended June 30, 2023. The increase for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was driven primarily by a recapture of inventory write-downs as aged inventory was able to be sold at better than expected margins and lower shipping and freight costs associated with inventory that was sold during the three months ended June 30, 2024. Selling, General, and Administrative Expenses Selling, general, and administrative expenses were $77.9 million for the three months ended June 30, 2024, a decrease of 9.0%, compared to $85.6 million for the three months ended June 30, 2023. The decrease was driven primarily by a $7.7 million decrease in personnel and related costs (including salary and related taxes/benefits, commissions, equity-based compensation and variable warehouse labor and third-party logistics expenses), a $2.8 million decrease in professional fees, primarily related to a one-time legal settlement and reduction in acquisition related activities, offset by a $3.5 million increase in advertising and marketing to support direct-to-consumer sales growth. Selling, general and administrative expenses were 31.5% and 35.7% of net sales for the three months ended June 30, 2024 and 2023, respectively. Depreciation and Amortization Depreciation and amortization expense was $15.4 million for the three months ended June 30, 2024, an increase of 3.5%, compared to $14.9 million for the three months ended June 30, 2023, primarily related to the type and timing of assets placed in service. Interest Expense, Net Interest expense, net was $5.1 million for the three months ended June 30, 2024, a decrease of 30.1%, compared to $7.3 million for the three months ended June 30, 2023. The decrease in interest expense, net was due primarily to a lower average balance on debt outstanding, including $107.7 million outstanding on the revolving line of credit during the three months ended June 30, 2024, as compared to $141.0 million for the three months ended June 30, 2023. 26 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 $99.6 million during the three months ended June 30, 2023. Other income, net Other income, net was $0.6 million for the three months ended June 30, 2024, compared to $0.4 million for the three months ended June 30, 2023. Other income, net for the three months ended June 30, 2024 and 2023 was primarily related to foreign currency gains and losses relating to transactions denominated in currencies other than the U.S. dollar. Income tax expense Income tax expense was $0.8 million for the three months ended June 30, 2024 and $138.1 million for the three months ended June 30, 2023. The decrease in income tax expense for the three months ended June 30, 2024 from June 30, 2023 was related to recognizing a full valuation allowance on the Company’s deferred tax assets during the three months ended June 30, 2023. Net income (loss) Net income was $5.4 million for the three months ended June 30, 2024, compared to net loss of $75.9 million for the three months ended June 30, 2023. The increase in net income for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 was primarily due to the tax impact related to recognizing a deferred tax asset valuation allowance, partially offset by a gain on the Tax Receivable Agreement liability adjustment, as discussed above. 27 Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023 The following table sets forth information comparing the components of net income for the six months ended June 30, 2024 and 2023: Six Months Ended June 30, Period over Period Change 2024 2023 Dollar Percentage (amounts in thousands, except percentages) Net sales $ 463,356 $ 491,906 $ (28,550) (5.8) % Cost of sales (exclusive of depreciation and amortization) 273,036 372,322 (99,286) (26.7) % Selling, general, and administrative expenses 163,492 185,693 (22,201) (12.0) % Depreciation and amortization 30,998 28,869 2,129 7.4 % Total operating expenses 467,526 586,884 (119,358) (20.3) % Loss from operations (4,170) (94,978) 90,808 (95.6) % Interest expense, net 11,392 12,950 (1,558) (12.0) % Loss on debt extinguishment — 494 (494) nm Gain on tax receivable agreement liability adjustment — (99,620) 99,620 nm Other expense, net 996 421 575 nm Loss before income taxes (16,558) (9,223) (7,335) 79.5 % Income tax expense 1,689 127,783 (126,094) (98.7) % Net loss (18,247) (137,006) 118,759 (86.7) % Less : net loss attributable to non-controlling interests (699) (8,697) 7,998 (92.0) % Net loss attributable to Funko, Inc. $ (17,548) $ (128,309) $ 110,761 (86.3) % Net Sales Net sales were $463.4 million for the six months ended June 30, 2024, a decrease of 5.8%, compared to $491.9 million for the six months ended June 30, 2023. The decrease in net sales was due primarily to decreased sales to e-commerce sites and specialty retailers for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily as a result of the available content slate and performance of certain exclusive products. Our top ten wholesale customers represented approximately 31% and 32% of our sales for the six months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024, the number of active properties increased 0.1% to 825 as compared to 824 for the six months ended June 30, 2023, and the average net sales per active property decreased 5.9% for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. On a geographical basis, net sales in the United States decreased 11.2% to $309.4 million in the six months ended June 30, 2024 as compared to $348.3 million in the six months ended June 30, 2023. Net sales in Europe increased 5.7% to $114.6 million in the six months ended June 30, 2024 as compared to $108.4 million in the six months ended June 30, 2023 and net sales in other international locations increased 11.8% to $39.3 million in the six months ended June 30, 2024 as compared to $35.2 million in the six months ended June 30, 2023. 28 On a branded product basis, net sales of Core Collectible branded products decreased 4.4% to $343.9 million in the six months ended June 30, 2024 as compared to $359.5 million in the six months ended June 30, 2023, Loungefly branded products decreased 17.1% to $82.2 million in the six months ended June 30, 2024 as compared to $99.1 million in the six months ended June 30, 2023 and net sales of other branded products increased 12.2% to $37.3 million in the six months ended June 30, 2024 as compared to $33.3 million in the six months ended June 30, 2023. Cost of Sales and Gross Margin (exclusive of depreciation and amortization) Cost of sales (exclusive of depreciation and amortization) was $273.0 million for the six months ended June 30, 2024, a decrease of 26.7%, compared to $372.3 million for the six months ended June 30, 2023. Cost of sales (exclusive of depreciation and amortization) decreased primarily as a result of lower costs as a percentage of net sales as described below. Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales (exclusive of depreciation and amortization) as a percentage of net sales, was 41.1% for the six months ended June 30, 2024, compared to 24.3% for the six months ended June 30, 2023. The increase for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was driven primarily by a one-time inventory write-down of $30.1 million recognized during the six months ended June 30, 2023 as well as a recapture of inventory write-downs as aged inventory was able to be sold at better than expected margins and lower shipping and freight costs associated with inventory that was sold during the six months ended June 30, 2024. Selling, General, and Administrative Expenses Selling, general, and administrative expenses were $163.5 million for the six months ended June 30, 2024, a decrease of 12.0%, compared to $185.7 million for the six months ended June 30, 2023. The decrease was driven primarily by a $22.0 million decrease to personnel and related costs (including salary and related taxes/benefits, commissions, equity-based compensation and variable warehouse labor and third-party logistics expenses), a $3.7 million decrease in rent, facility and warehouse support, primarily related to third-party logistics rent, offset by a $3.9 million increase in advertising and marketing costs, primarily to support direct-to-consumer sales growth. Selling, general and administrative expenses were 35.3% and 37.7% of net sales for the six months ended June 30, 2024 and 2023, respectively. Depreciation and Amortization Depreciation and amortization expense was $31.0 million for the six months ended June 30, 2024, an increase of 7.4%, compared to $28.9 million for the six months ended June 30, 2023, primarily related to the type and timing of assets placed in service. Interest Expense, Net Interest expense, net was $11.4 million for the six months ended June 30, 2024, a decrease of 12.0%, compared to $13.0 million for the six months ended June 30, 2023. The decrease in interest expense, net was due primarily to a lower average balance on debt outstanding during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. Loss on debt extinguishment As a result of the debt refinancing in February 2023, a $0.5 million loss on debt extinguishment was recorded for the six months ended June 30, 2023, as unamortized debt financing fees were written-off. 29 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 $99.6 million during the six months ended June 30, 2023. Other expense, net Other expense, net was $1.0 million and $0.4 million for the six months ended June 30, 2024 and 2023, respectively. Other expense, net for the six months ended June 30, 2024 and 2023 was primarily related to foreign currency gains and losses relating to transactions denominated in currencies other than the U.S. dollar. Income tax expense Income tax expense was $1.7 million for the six months ended June 30, 2024 and $127.8 million for the six months ended June 30, 2023. The decrease in income tax expense for the six months ended June 30, 2024 from June 30, 2023 was related to recognizing a full valuation allowance on the Company’s deferred tax assets during the six months ended June 30, 2023. Net loss Net loss was $18.2 million for the six months ended June 30, 2024, compared to $137.0 million for the six months ended June 30, 2023. The decrease in net loss for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 was primarily due to the decrease in cost of sales (exclusive of depreciation and amortization), and selling, general and administrative expenses and tax impact related to recognizing a deferred tax asset valuation allowance, partially offset by a gain on the Tax Receivable Agreement liability adjustment, as discussed above. 30 Non-GAAP Financial Measures EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss) and Adjusted Earnings (Loss) 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. GAAP. The Non-GAAP Financial Measures are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to net income (loss), earnings (loss) per share or any other performance measure derived in accordance with U.S. GAAP. We define EBITDA as net income (loss) before interest expense, net, income tax expense, depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted for non-cash charges related to equity-based compensation programs, loss on extinguishment of debt, 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, income tax expense and other unusual or one-time items. We define Adjusted Net Income (Loss) as net income (loss) attributable to Funko, Inc. adjusted for the reallocation of income (loss) 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, loss on extinguishment of debt, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, inventory write-down and the income tax expense effect of these adjustments. We define Adjusted Earnings (Loss) per Diluted Share as Adjusted Net Income (Loss) 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. We caution investors that amounts presented in accordance with our definitions of the Non-GAAP Financial Measures may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate the Non-GAAP Financial Measures in the same manner. We present the Non-GAAP Financial Measures because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these Non-GAAP Financial Measures as a reasonable basis for comparing our ongoing results of operations. Management uses the Non-GAAP Financial Measures: • as a measurement of operating performance because they assist us in comparing the operating performance of our business on a consistent basis, as they remove the impact of items not directly resulting from our core operations; • for planning purposes, including the preparation of our internal annual operating budget and financial projections; • as a consideration to assess incentive compensation for our employees; • to evaluate the performance and effectiveness of our operational strategies; and • to evaluate our capacity to expand our business. 31 By providing these Non-GAAP Financial Measures, together with reconciliations, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. The Non-GAAP Financial Measures have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q as indicators of financial performance. Some of the limitations are: • such measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; • such measures do not reflect changes in, or cash requirements for, our working capital needs; • such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and • other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures. Due to these limitations, Non-GAAP Financial Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, the Non-GAAP Financial Measures include adjustments for non-cash charges related to equity-based compensation programs, loss on extinguishment of debt, 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 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. Each of the adjustments described herein and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations. The following tables reconcile the Non-GAAP Financial Measures to the most directly comparable U.S. GAAP financial performance measure, which is net income (loss) and earnings (loss) per diluted share, for the periods presented: 32 Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands, except per share data) Net income (loss) attributable to Funko, Inc. $ 5,115 $ (72,998) $ (17,548) $ (128,309) Reallocation of net income (loss) attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock (1) 304 (2,864) (699) (8,697) Equity-based compensation (2) 3,276 4,795 7,100 8,437 Loss on extinguishment of debt (3) — — — 494 Acquisition transaction costs and other expenses (4) (1,605) 444 1,579 1,454 Certain severance, relocation and related costs (5) 101 346 1,967 2,081 Foreign currency transaction (gain) loss (6) (563) (401) 1,013 421 Inventory write-down (7) — — — 30,084 Tax receivable agreement liability adjustments (8) — (99,620) — (99,620) One-time disposal costs for unfinished inventory held at offshore factories (9) — 2,404 — 2,404 Income tax expense (10) (1,065) 145,551 2,914 143,650 Adjusted net income (loss) $ 5,563 $ (22,343) $ (3,674) $ (47,601) Weighted-average shares of Class A common stock outstanding-basic 52,107 47,428 51,406 47,338 Equity-based compensation awards and common units of FAH, LLC that are convertible into Class A common stock 2,473 4,481 2,350 4,423 Adjusted weighted-average shares of Class A stock outstanding - diluted 54,580 51,909 53,756 51,761 Earnings (loss) per diluted share $ 0.10 $ (1.54) $ (0.34) $ (2.71) Adjusted earnings (loss) per diluted share $ 0.10 $ (0.43) $ (0.07) $ (0.92) 33 Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (amounts in thousands) Net income (loss) $ 5,419 $ (75,862) $ (18,247) $ (137,006) Interest expense, net 5,081 7,264 11,392 12,950 Income tax expense 789 138,103 1,689 127,783 Depreciation and amortization 15,419 14,893 30,998 28,869 EBITDA $ 26,708 $ 84,398 $ 25,832 $ 32,596 Adjustments: Equity-based compensation (2) 3,276 4,795 7,100 8,437 Loss on extinguishment of debt (3) — — — 494 Acquisition transaction costs and other expenses (4) (1,605) 444 1,579 1,454 Certain severance, relocation and related costs (5) 101 346 1,967 2,081 Foreign currency transaction (gain) loss (6) (563) (401) 1,013 421 Inventory write-down (7) — — — 30,084 Tax receivable agreement liability adjustments (8) — (99,620) — (99,620) One-time disposal costs for unfinished inventory held at offshore factories (9) — 2,404 — 2,404 Adjusted EBITDA $ 27,917 $ (7,634) $ 37,491 $ (21,649) (1) Represents the reallocation of net income (loss) attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock in periods in which income (loss) 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 the timing of awards. (3) Represents write-off of unamortized debt financing fees for the six months ended June 30, 2023. (4) For the three and six months ended June 30, 2024, includes one-time legal settlement gain and contract settlement agreements of related services to and fair market value adjustments of certain assets held for sale. For the three months ended June 30, 2023 includes one-time bank monitoring fees. For the six months ended June 30, 2023, includes acquisition-related costs related to investment banking and due diligence fees. (5) For the three and six months ended June 30, 2024, includes charges related severance and benefit costs related to certain management departures. For the three months ended June 30, 2023, includes charges to remove leasehold improvements and return multiple Washington-based warehouses. For the six months ended June 30, 2023, includes charges related to severance and benefit costs for a reduction-in-force. (6) Represents both unrealized and realized foreign currency gains and losses on transactions denominated other than in U.S. dollars, including derivative gains and losses on foreign currency forward exchange contracts. (7) For the six months ended June 30, 2023, represents a one-time inventory write-down to improve U.S. warehouse operational efficiency. (8) Represents 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. (9) For the three and six months ended June 30, 2023, represents one-time disposal costs related to unfinished inventory held at offshore factories. (10) Represents the income tax expense effect of the above adjustments, except for the tax liability receivable adjustment. This adjustment uses an effective tax rate of 25% for all periods presented. For the three and six months ended June 30, 2023, this also includes $123.2 million recognized valuation allowance on the Company’s deferred tax assets. 34 Liquidity and Financial Condition Introduction Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, debt service and general corporate needs. 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 June 30, 2024, 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. Liquidity and Capital Resources The following table shows summary cash flow information for the six months ended June 30, 2024 and 2023 (in thousands): Six Months Ended June 30, 2024 2023 Net cash provided by (used in) operating activities $ 60,395 $ (12,036) Net cash used in investing activities (5,989) (27,566) Net cash (used in) provided by financing activities (49,285) 56,969 Effect of exchange rates on cash and cash equivalents (23) 260 Net change in cash and cash equivalents $ 5,098 $ 17,627 Operating Activities. Net cash provided by operating activities was $60.4 million for the six months ended June 30, 2024, compared to net cash used in operating activities of $12.0 million for the six months ended June 30, 2023. Changes in net cash provided by operating activities result primarily from cash received from net sales and cash payments for product costs and royalty expenses paid to our licensors. Timing of those cash payments can vary throughout the year based on our inventory buy-in and licensor contracts. Other drivers of the changes in net cash provided by operating activities include shipping and freight costs, selling, general and administrative expenses (including personnel expenses and commissions and rent and facilities costs) and interest payments made for our short-term borrowings and long-term debt. Our accounts receivable typically are short term and settle in approximately 30 to 90 days (average 55 days). The increase in net cash provided by (used in) operating activities for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to a decrease related to changes in working capital that increased net cash provided by operating activities by $27.2 million. The working capital decrease was primarily due to decreases in inventory of $51.5 million and accounts receivable of $25.0 million, offset by increases in prepaid expenses and other assets of $27.0 million, and decreases in accrued royalties of $13.5 million and accrued expense and other current liabilities of $11.7 million. 35 Investing Activities . Our net cash used in investing activities primarily consists of purchases of property and equipment. For the six months ended June 30, 2024, net cash used in investing activities was $6.0 million, which primarily related to purchases of tooling and molds used in production for our product lines, offset by proceeds from the sale of inventory and certain intellectual property marketed under and related to Funko Games. For the six months ended June 30, 2023, net cash used in investing activities was $27.6 million and was primarily related to purchases of tooling and molds used in production our product lines. In addition, we used $5.3 million in net cash for the purchase of the stock of MessageMe, Inc. (d/b/a HipDot). Financing Activities . Our financing activities primarily consist of proceeds from 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, payments to the TRA Parties and proceeds from the exercise of equity-based options. For the six months ended June 30, 2024, net cash used in financing activities was $49.3 million, primarily related to payments of $30.5 million on the Revolving Credit Facility and payments on the Term Loan Facility and Equipment Finance Loan of $19.6 million. For the six months ended June 30, 2023, net cash provided by financing activities was $57.0 million, primarily related to a draw of $71.0 million on the Revolving Credit Facility, offset by payments on the Term Loan Facility and Equipment Finance Loan of $11.3 million. 36 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 (the “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 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 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 Revolving Credit Facility was reduced to $180.0 million and again to $150.0 million on December 31, 2023. On June 11, 2024 (the “Consent Effective Date"), the Credit Agreement Parties entered into that certain Limited Waiver and Limited Consent (the “Limited Waiver and Limited Consent”), with the lenders party thereto (the “Required Lenders”) and the Administrative Agent. Pursuant to the Limited Waiver and Limited Consent, the Administrative Agent and the Required Lenders have agreed to irrevocably and permanently waive, from any time prior to or after the Consent Effective Date, the Credit Agreement Parties’ compliance with the covenant to maintain a minimum threshold of Qualified Cash (as defined in the Credit Agreement). 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. 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. 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, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all. 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 matures on the Maturity Date and loans thereunder may be borrowed, repaid, and reborrowed up to such date. 37 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) 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% 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 February 28, 2023. Each of Term SOFR, EURIBOR, HIBOR, CDOR and Daily Simple SONIA rates are subject to a 0.00% floor. For loans based on ABR, the Central Bank Rate or the Canadian prime rate, interest payments are due quarterly. For loans based on SONIA, interest payments are due monthly. For loans based on Term SOFR, EURIBOR, HIBOR or CDOR, interest payments are due at the end of each applicable interest period. The Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to: • incur additional indebtedness; • incur certain liens; • consolidate, merge or sell or otherwise dispose of our assets; • make investments, loans, advances, guarantees and acquisitions; • pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests; • enter into transactions with affiliates; • enter into sale and leaseback transactions in respect to real property; • enter into swap agreements; • enter into agreements restricting our subsidiaries’ ability to pay dividends; • issue or sell equity interests or securities convertible into or exchangeable for equity interests; • redeem, repurchase or refinance other indebtedness; and • amend or modify our governing documents. 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). The maximum Net Leverage Ratio and the minimum fixed charge coverage ratio for the fiscal quarter ended June 30, 2024 are 2.50:1.00 and 1.25:1.00, respectively. The Credit Facilities are secured by substantially all of the assets of the borrowers under the Credit Facilities and any of its existing or future material domestic subsidiaries, subject to customary exceptions. As of June 30, 2024, the Credit Agreement Parties were in compliance with all of the covenants in the Credit Agreement and 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. 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. 38 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 June 30, 2024, we had $120.9 million of indebtedness outstanding under our Term Loan Facility (net of unamortized discount of $1.4 million) and $90.0 million outstanding borrowings under our Revolving Credit Facility, leaving $60.0 million available under our Revolving Credit Facility. Form S-3 Registration Statement On July 15, 2022, we filed a preliminary shelf registration statement on Form S-3 with the SEC. The Form S-3 was declared effective by the SEC on July 26, 2022 and it will remain effective through July 25, 2025. The Form S-3 allows us to offer and sell from time-to-time up to $100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts or units comprised of any combination of these securities for our own account and allows certain selling stockholders to offer and sell 17,318,008 shares of Class A common stock in one or more offerings. The Form S-3 is intended to provide us flexibility to conduct registered sales of our securities, subject to market conditions and our future capital needs. The terms of any future offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering. Future Sources and Uses of Liquidity As of June 30, 2024, we had $41.6 million of cash and cash equivalents and $(26.3) million of working capital, compared with $36.5 million of cash and cash equivalents and $(16.0) million of working capital as of December 31, 2023. Working capital is impacted by the seasonal trends of our business and the timing of new product releases, as well as our current portion of long-term debt and draw downs on our Revolving Credit Facility. Sources As noted above, historically, our primary sources of cash flows have been cash flows from operating activities and borrowings under our credit facilities. We expect these sources of liquidity to continue to be our primary sources of liquidity. For a discussion of our credit facilities, see “Credit Facilities” above and Note 4, Debt. In addition, as described above, on July 15, 2022, we filed a preliminary shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC on July 26, 2022. The terms of any offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering. Uses As noted above, our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, debt service and general corporate needs. There have been no material changes to our liquidity and capital commitments as described in our Annual Report on Form 10-K for the year ended December 31, 2023. 39 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, which will be contingent on future realizability of the Company’s deferred tax assets. Any payments made by us to the TRA Parties under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise have been available to us or to FAH, LLC and, to the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us; provided however, that nonpayment for a specified period may constitute a material breach under the Tax Receivable Agreement and therefore may accelerate payments due under the Tax Receivable Agreement. Seasonality While our customers in the retail industry typically operate in highly seasonal businesses, we have historically experienced only moderate seasonality in our business. Historically, over 50% of our net sales are made in the third and fourth quarters, primarily in the period from August through November, as our customers build up their inventories in anticipation of the holiday season. Historically, the first quarter of the year has represented the lowest volume of shipment and sales in our business and in the retail and toy industries generally and it is also the least profitable quarter due to the various fixed costs of the business. However, the rapid growth we have experienced in recent years may have masked the full effects of seasonal factors on our business to date, and as such, seasonality may have a greater effect on our results of operations in future periods. Critical Accounting Policies and Estimates Discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities, revenue and expenses at the date of the unaudited condensed consolidated financial statements. We base our estimates on historical experience and on various other assumptions in accordance with U.S. GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and operating results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to revenue recognition and sales allowances, royalties, inventory, goodwill and intangible assets, and income taxes. Changes to these policies and estimates could have a material adverse effect on our results of operations and financial condition. There have been no significant changes to our critical accounting policies to our disclosure reported in “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023. 40