10-Q 1 fnko-20220930.htm 10-Q fnko-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number: 001-38274

fnko-20220930_g1.jpg
FUNKO, INC.
(Exact name of registrant as specified in its charter)

Delaware35-2593276
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

2802 Wetmore Avenue98201
EverettWashington
(Address of principal executive offices)(Zip Code)
(425) 783-3616
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock,
$0.0001 par value per share
FNKOThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated Filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 1, 2022, the registrant had 47,183,694 shares of Class A common stock, $0.0001 par value per share, and 3,293,140 shares of Class B common stock, $0.0001 par value per share, outstanding.



INDEX
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, the expected impact of the COVID-19 pandemic and general economic and market conditions on our business, results of operations and financial condition, our business strategy and plans, potential acquisitions, market growth and trends, demand for our products, anticipated future expenses and payments, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including the important factors described in this Quarterly Report on Form 10-Q under Part II. Item 1A. “Risk Factors,” and in our other filings with the U.S. Securities and Exchange Commission, that may cause our actual results, performance or achievements to differ materially and adversely from those expressed or implied by the forward-looking statements.
Any forward-looking statements made herein speak only as of the date of this Quarterly Report on Form 10-Q, and you should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or achievements reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations.
1


Summary of Risk Factors
Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. Some of the factors that could materially and adversely affect our business, financial condition, results of operations or prospects include, but are not limited to, the following:
We are subject to risks related to the retail industry including, but not limited to, the impacts of the COVID-19 pandemic, potential negative impacts of global and regional economic downturns, changes in retail practices, and our ability to maintain and further develop relationships with our retail customers and distributors.
As a purveyor of licensed pop culture consumer products, we are largely dependent on content development and creation by third parties, and are subject to a number of related risks including, but not limited to, the market appeal of the properties we license and the products we create.
We are subject to several risks related to the operation of our business, including, but not limited to, our ability to execute our business strategy, manage our growth and our inventories, and attract and retain qualified personnel.
We are subject to risks related to intellectual property, including our ability to obtain, protect and enforce our intellectual property rights and our ability to operate our business without violating the intellectual property rights of other parties.
Our success is dependent on our ability to manage fluctuations in our business, including fluctuations in gross margin, seasonal impacts and fluctuations due to the timing and popularity of new product releases.
Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations, including, but not limited to, changes in the global trade markets, as well as fluctuations in foreign currency or tax rates.
Our business depends in large part on our third-party vendors, manufacturers and outsourcers, and our reputation and ability to effectively operate our business may be harmed by actions taken by these third parties outside of our control.
We are subject to potential legal risks including, but not limited to, ongoing securities class action litigation, future product liability suits or product recalls, or risks associated with failure to comply to the various laws and regulations to which we are subject, any of which could have a significant adverse effect on our financial condition and results of operations.
We are subject to risks related to information technology including, but not limited to, risks related to the operation of our e-commerce business, our ability and the ability of third parties to operate our information systems and our compliance with laws related to privacy and the protection of data.
Our indebtedness could adversely affect our financial health and competitive position, and we may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
TCG 3.0 Fuji, LP. has significant influence over us, and its interests may conflict with the interests of our other stockholders.
There are risks related to our organizational structure, including the Tax Receivable Agreement, which confers certain benefits upon the Continuing Equity Owners (as defined herein) that will not benefit Class A common stockholders to the same extent as it will benefit the Continuing Equity Owners.
There are risks associated with the ownership of our Class A common stock including, but not limited to, potential dilution by future issuances and volatility in the price of our Class A common stock.
2


Part I – FINANCIAL INFORMATION
Item 1.
Financial Statements

FUNKO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(In thousands, except per share data)
Net sales$365,607 $267,733 $989,666 $693,020 
Cost of sales (exclusive of depreciation and amortization shown separately below)
237,728 171,320 649,974 425,929 
Selling, general, and administrative expenses97,930 59,890 259,043 166,032 
Depreciation and amortization12,555 10,328 34,509 30,778 
Total operating expenses348,213 241,538 943,526 622,739 
Income from operations17,394 26,195 46,140 70,281 
Interest expense, net2,977 1,711 5,854 5,921 
Loss on debt extinguishment 675  675 
Other expense (income), net926 (505)1,758 466 
Income before income taxes13,491 24,314 38,528 63,219 
Income tax expense (benefit) 2,342 5,939 (2,932)12,814 
Net income 11,149 18,375 41,460 50,405 
Less: net income attributable to non-controlling interests
1,519 6,474 7,276 18,177 
Net income attributable to Funko, Inc.$9,630 $11,901 $34,184 $32,228 
Earnings per share of Class A common stock:
Basic$0.21 $0.30 $0.78 $0.85 
Diluted$0.19 $0.28 $0.73 $0.80 
Weighted average shares of Class A common stock outstanding:
Basic46,874 39,448 43,670 37,856 
Diluted49,686 41,796 53,991 40,079 
See accompanying notes to the unaudited condensed consolidated financial statements.
3


FUNKO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(In thousands)
Net income $11,149 $18,375 $41,460 $50,405 
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of tax effect of $1,039 and $159 for the three months ended September 30, 2022 and 2021, respectively, and $2,198 and $180 for the nine months ended September 30, 2022 and 2021, respectively
(3,674)(1,266)(8,335)(739)
Comprehensive income 7,475 17,109 33,125 49,666 
Less: Comprehensive income attributable to non-controlling interests
1,121 6,142 5,870 18,042 
Comprehensive income attributable to Funko, Inc.$6,354 $10,967 $27,255 $31,624 
See accompanying notes to the unaudited condensed consolidated financial statements.
4


FUNKO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,
2022
December 31,
2021
(In thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents$25,050 $83,557 
Accounts receivable, net189,917 187,688 
Inventory265,799 166,428 
Prepaid expenses and other current assets38,480 14,925 
Total current assets519,246 452,598 
Property and equipment, net98,574 58,828 
Operating lease right-of-use assets68,236 53,466 
Goodwill131,297 126,651 
Intangible assets, net180,186 189,619 
Deferred tax asset117,602 74,412 
Other assets21,743 11,929 
Total assets$1,136,884 $967,503 
Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit$90,000 $ 
Current portion of long-term debt, net of unamortized discount17,443 17,395 
Current portion of operating lease liabilities17,807 14,959 
Accounts payable88,101 57,238 
Income taxes payable2,537 15,994 
Accrued royalties70,715 58,158 
Accrued expenses and other current liabilities90,875 121,267 
Total current liabilities377,478 285,011 
Long-term debt, net of unamortized discount142,729 155,818 
Operating lease liabilities, net of current portion79,871 50,459 
Deferred tax liability533 648 
Liabilities under tax receivable agreement, net of current portion100,886 75,523 
Other long-term liabilities2,902 3,486 
Commitments and Contingencies (Note 7)
Stockholders’ equity:
Class A common stock, par value $0.0001 per share, 200,000 shares authorized; 47,095 and 40,088 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
5 4 
Class B common stock, par value $0.0001 per share, 50,000 shares authorized; 3,293 and 10,691 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
 1 
Additional paid-in-capital309,609 252,505 
Accumulated other comprehensive (loss) income(5,851)1,078 
Retained earnings102,234 68,050 
Total stockholders’ equity attributable to Funko, Inc.405,997 321,638 
Non-controlling interests26,488 74,920 
Total stockholders’ equity432,485 396,558 
Total liabilities and stockholders’ equity$1,136,884 $967,503 
See accompanying notes to the unaudited condensed consolidated financial statements.
5


FUNKO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
20222021
(In thousands)
Operating Activities
Net income $41,460 $50,405 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation, amortization and other34,390 30,356 
Equity-based compensation11,999 9,869 
Amortization of debt issuance costs and debt discounts670 893 
Loss on debt extinguishment 675 
Deferred tax expense  994 
Other7,539 (93)
Changes in operating assets and liabilities:
Accounts receivable, net(10,198)(22,223)
Inventory(106,061)(81,770)
Prepaid expenses and other assets(32,310)(1,582)
Accounts payable32,349 33,933 
Income taxes payable(13,303)10,135 
Accrued royalties10,942 7,086 
Accrued expenses and other liabilities(42,159)40,114 
Net cash (used in) provided by operating activities(64,682)78,792 
Investing Activities
Purchases of property and equipment(46,908)(17,434)
Acquisitions of businesses and related intangible assets, net of cash(13,967)199 
Other778 84 
Net cash used in investing activities(60,097)(17,151)
Financing Activities
Borrowings on line of credit90,000  
Debt issuance costs(405)(1,055)
Issuance of long-term debt 180,000 
Payments of long-term debt(13,500)(193,875)
Distributions to continuing equity owners(10,507)(9,284)
Payments under tax receivable agreement (6)
Proceeds from exercise of equity-based options1,209 3,726 
Net cash provided by (used in) financing activities66,797 (20,494)
Effect of exchange rates on cash and cash equivalents(525)(157)
Net change in cash and cash equivalents(58,507)40,990 
Cash and cash equivalents at beginning of period83,557 52,255 
Cash and cash equivalents at end of period$25,050 $93,245 
See accompanying notes to the unaudited condensed consolidated financial statements.
6


FUNKO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations
The unaudited condensed consolidated financial statements include Funko, Inc. and its subsidiaries (together, the “Company”) and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany balances and transactions have been eliminated.
The Company was formed as a Delaware corporation on April 21, 2017. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and related transactions in order to carry on the business of Funko Acquisition Holdings, L.L.C. (“FAH, LLC”) and its subsidiaries.
Reorganization transactions occurring at the time of our IPO resulted in Funko, Inc. being the sole managing member of FAH, LLC. As the sole managing member of FAH, LLC, Funko, Inc. operates and controls all of FAH, LLC’s operations and, through FAH, LLC and its subsidiaries, conducts FAH, LLC’s business. Accordingly, the Company consolidates the financial results of FAH, LLC and reports a non-controlling interest in its unaudited condensed consolidated financial statements representing the common units of FAH, LLC interests still held by other owners of FAH, LLC (collectively, the “Continuing Equity Owners”).
Interim Financial Information
In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date of and for the interim periods presented have been included, and such adjustments consist of normal recurring adjustments. Certain prior-year amounts have been reclassified to conform to the current year presentation. The unaudited condensed consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2022, due to seasonality and other factors. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 3, 2022.
2. Significant Accounting Policies
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions.
Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the audited consolidated financial statements within its Annual Report on Form 10-K for the year ended December 31, 2021.
7


3. Acquisitions
TokenWave LLC. On March 26, 2021, the Company acquired a majority of the membership interests of TokenWave LLC, the developer of TokenHead, a mobile app and website for showcasing and tracking Non-Fungible Token (“NFT”) holdings. This transaction represents an opportunity to expand the Company’s product offerings into digital NFTs. The Company accounted for the acquisition as a business combination. The purchase consideration, fair value of the assets acquired and liabilities assumed, and acquisition related transaction costs were not material. The activity of TokenWave LLC included in the Company’s consolidated statements of operations from the acquisition date to September 30, 2022 was not material. On October 6, 2022, the Company acquired the remaining membership interests of TokenWave LLC, through a combination of cash and stock consideration.
Mondo. On June 8, 2022, the Company acquired 100% of the membership interests in 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. 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. There were no material adjustments recognized in the three months ended September 30, 2022.
Goodwill of $6.2 million is calculated as the excess of the purchase price paid over the net assets acquired. The Company does not expect the Goodwill as recognized, to be deductible for tax purposes. An intangible asset of $2.3 million was preliminarily recognized for the Mondo trade name.
The activity of Mondo as included in the Company’s consolidated statements of operations from the acquisition date to September 30, 2022 was not material.
The following table shows the preliminary purchase price allocation for the Mondo acquisition as of September 30, 2022 (in thousands):
Cash$36 
Accounts receivable1,831 
Inventory3,409 
Other current assets4,308 
Intangible assets2,325 
Goodwill6,187 
Current liabilities(4,092)
Estimated consideration transferred$14,004 
8


4. Fair Value Measurements
The Company’s financial instruments, other than those discussed below, include cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities. The carrying amount of these financial instruments approximate fair value due to the short-term nature of these instruments. For financial instruments measured at fair value on a recurring basis, the Company prioritizes the inputs used in measuring fair value according to a three-tier fair value hierarchy defined by U.S. GAAP. For a description of the methods and assumptions that the Company uses to estimate the fair value and determine the classification according to the fair value hierarchy for each financial instrument, see the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021.
Cash equivalents. As of September 30, 2022 and December 31, 2021, cash equivalents included $0.5 million and $56.9 million, respectively, of highly liquid money market funds, which are classified as Level 1 within the fair value hierarchy.
Debt. The estimated fair value of the Company’s debt instruments, which are classified as Level 3 financial instruments, at September 30, 2022 and December 31, 2021, was approximately $252.0 million and $175.5 million, respectively. The carrying values of the Company’s debt instruments at September 30, 2022 and December 31, 2021, were $250.2 million and $173.2 million, respectively.
5. Debt
Debt consists of the following (in thousands):
September 30, 2022December 31, 2021
Revolving Credit Facility$90,000 $ 
Term loan facility$162,000 $175,500 
Debt issuance costs(1,828)(2,287)
Total term debt160,172 173,213 
Less: current portion
17,443 17,395 
Long-term debt, net$142,729 $155,818 


9


Credit Facilities
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 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 Former Facility Maturity Date. The first amortization payment was on December 31, 2018. The Former Revolving Credit Facility would have terminated on the Former Facility Maturity Date and loans thereunder were eligible to be borrowed, repaid, and reborrowed up to such date.
As amended, loans under the Former Credit Facilities bore interest, at the 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.
10


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. 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 and terminate the 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. 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) Term SOFR, EURIBOR, HIBOR, CDOR, SONIA and/or the Central Bank Rate, as applicable, plus (x) 2.50% per annum and (y) solely in the case of Term SOFR based loans 0.10% per annum or (ii) ABR or the Canadian prime rate, as applicable, plus 1.50% per annum, in each case of clauses (i) and (ii), subject to two 0.25% per annum step-downs based on the achievement of certain leverage ratios following the Second Amendment effective date. Each of Term SOFR, EURIBOR, HIBOR, CDOR and 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. For loans based on Daily Simple SONIA, interest payments are due monthly. For loans based on Term SOFR, EURIBOR, HIBOR or CDOR, interest payments are due at the end of each applicable interest period.
The New Credit 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 September 30, 2022 and December 31, 2021, the Credit Agreement Parties were in compliance with all of the covenants in its New Credit Agreement, as amended.
At September 30, 2022 and December 31, 2021, the Credit Agreement Parties had $162.0 million and $175.5 million of borrowings outstanding under the New Term Loan Facility and $90.0 million and no outstanding borrowings under the New Revolving Credit Facility, respectively. At September 30, 2022 and December 31, 2021, the Credit Agreement Parties had $125.0 million and $100.0 million available under the New Revolving Credit Facility, respectively.
There were no outstanding letters of credit as of September 30, 2022 and December 31, 2021.
11


6. Liabilities under Tax Receivable Agreement
On November 1, 2017, the Company entered into a tax receivable agreement with FAH, LLC (the “Tax Receivable Agreement”) and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that it realizes, or in some circumstances, is deemed to realize, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of common units of FAH, LLC for Class A common stock of Funko, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement.
During the three and nine months ended September 30, 2022 the Company acquired 4.0 thousand and 6.5 million, respectively, common units of FAH, LLC. During the three and nine months ended September 30, 2021 the Company acquired 0.5 million and 3.7 million common units of FAH, LLC. As a result of these exchanges, during the three and nine months ended September 30, 2022, the Company recognized an increase to its net deferred tax assets in the amount of $0.0 million and $30.0 million, respectively, and $1.9 million and $16.5 million for the three and nine months ended September 30, 2021.
The following table summarizes changes in the amount of the Company’s Tax Receivable Agreement liability (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Beginning balance$112,733 $80,500 $82,884 $62,317 
Additional liabilities for exchanges13 1,890 29,862 20,079 
Payments under tax receivable agreement   (6)
Ending balance $112,746 $82,390 $112,746 $82,390 
As of September 30, 2022, the Company’s total obligation under the Tax Receivable Agreement, including accrued interest, was $112.7 million, of which $11.9 million was included in accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheets. There were no transactions subject to the Tax Receivable Agreement for which the Company did not recognize the related liability, as the Company concluded that it was probable that the Company would have sufficient future taxable income to utilize all of the related tax benefits. At December 31, 2021, the Company’s total obligation under the Tax Receivable Agreement, including accrued interest, was $82.9 million, of which $7.4 million was included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.
7. Commitments and Contingencies
License Agreements
The Company enters into license agreements with various licensors of copyrighted and trademarked characters and design in connection with the products that it sells. The agreements generally require royalty payments based on product sales and in some cases may require minimum royalty and other related commitments.
Employment Agreements
The Company has employment agreements with certain officers. The agreements include, among other things, an annual bonus based on certain performance metrics of the Company, as defined by the board of directors, and up to one year’s severance pay beyond termination date.
12


Debt
The Company has entered into the New Credit Agreement which includes a New Term Loan Facility and a New Revolving Credit Facility. See Note 5, Debt.
Tax Receivable Agreement
The Company is party to the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners under certain circumstances. See Note 6, Liabilities under Tax Receivable Agreement.
Leases
The Company has entered into non-cancellable operating leases for office, warehouse, and distribution facilities, with original lease periods expiring through 2032. Some operating leases also contain the option to renew for five-year periods at prevailing market rates at the time of renewal. In addition to minimum rent, certain of the leases require payment of real estate taxes, insurance, common area maintenance charges, and other executory costs. The Company’s lease for the Warehouse and Distribution facility in Buckeye, Arizona, commenced during the nine months ended September 30, 2022. The Company recorded operating lease right-of-use assets obtained in exchange for new operating lease obligations of $21.5 million with $17.2 million in lease incentives obtained.
Legal Contingencies
The Company is involved in claims and litigation in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. For certain pending matters, accruals have not been established because such matters have not progressed sufficiently through discovery, and/or development of important factual information and legal information is insufficient to enable the Company to estimate a range of possible loss, if any. An adverse determination in one or more of these pending matters could have an adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
13


The Company is, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business. For example, on March 10, 2020, a purported stockholder of the Company filed a putative class action lawsuit in the United States District Court for the Central District of California against the Company and certain of its officers, entitled Ferreira v. Funko, Inc. et al. The original complaint alleged that the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as Rule 10b-5 promulgated thereunder. The lawsuit sought, among other things, compensatory damages and attorneys’ fees and costs. Two additional complaints making substantially similar allegations were filed April 3, 2020 in the United States District Court for the Central District of California and April 9, 2020 in the United States District Court for the Western District of Washington, respectively. On June 11, 2020, the Central District of California actions were consolidated for all purposes into one action under the Ferreira caption, and lead plaintiffs and lead counsel were appointed pursuant to the Private Securities Litigation Reform Act; shortly thereafter, the Western District of Washington action was voluntarily dismissed. Lead plaintiffs filed a consolidated complaint on July 31, 2020, against the Company and certain of its officers and directors, as well as entities affiliated with ACON Funko Investors, L.L.C. (“ACON”). The consolidated complaint added Section 10(b) and 20(a) claims based on the Company’s earnings announcement and Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, as well as claims under Section 20A of the Exchange Act. All defendants moved to dismiss the consolidated action, and the Court granted all defendants’ motions to dismiss the Ferreira action on 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. Specifically, the court dismissed with prejudice all claims related to statements regarding Funko’s projected net sales and the claims based on inventory risk warnings in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, but denied the motion to dismiss as to claims based on an inventory risk warning in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. On May 3, 2022, the parties agreed in principle to settle the litigation, subject to court approval. The Court granted preliminary approval of the settlement on July 17, 2022. The hearing for the final approval of the settlement is scheduled for 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. Specifically, on April 23, June 5, and June 10, 2020, the actions captioned Cassella v. Mariotti et al., Evans v. Mariotti et al., and Igelido v. Mariotti et al., respectively, were filed in the United States District Court for the Central District of California. On July 6, 2020, these three actions were consolidated for all purposes into one action under the title In re Funko, Inc. Derivative Litigation, and on August 13, 2020, the consolidated action was stayed pending final resolution of the motion to dismiss in the Ferreira action. On May 9, 2022, another complaint, asserting substantially similar claims, was filed in the U.S. District Court for the Central District of California, captioned Smith v. Mariotti, et al. Defendants have asked the Court to consolidate Smith with the aforementioned cases. On July 20, 2022, the Court declined to consolidate Smith with the previously-pending cases, and lifted the stay of those proceedings that had been in place since 2020. The Company’s response to the complaints in both the consolidated action and Smith v. Mariotti are due on November 7, 2022.
On June 11, 2021, a purported stockholder filed a related derivative action, captioned Silverberg v. Mariotti, et al., in the Court of Chancery of the State of Delaware. That action is currently stayed. On July 5, 2022, two purported stockholders filed an additional derivative action in the Court of Chancery, captioned Fletcher, et al. v. Mariotti. That complaint also asserts claims arising out of same issues and events as Silverberg and the derivative actions pending in the Central District of California.
14


Additionally, between November 16, 2017 and June 12, 2018, seven purported stockholders of the Company filed putative class action lawsuits in the Superior Court of Washington in and for King County against the Company, certain of its officers and directors, ACON, Fundamental Capital, LLC and Funko International, LLC (collectively, “Fundamental”), the underwriters of its IPO, and certain other defendants.
On July 2, 2018, the suits were ordered consolidated for all purposes into one action under the title In re Funko, Inc. Securities Litigation. On August 1, 2018, plaintiffs filed a consolidated complaint against the Company, certain of its officers and directors, ACON, Fundamental, and certain other defendants. On October 1, 2018, the Company moved to dismiss the action. On August 2, 2019, the Court granted the Company’s motion to dismiss the action, allowing plaintiffs leave to amend the complaint. On October 3, 2019, plaintiffs filed a first amended consolidated complaint. The Company moved to dismiss, and on August 5, 2020, the Superior Court of Washington in and for King County dismissed the consolidated action with prejudice. Plaintiffs appealed, and on November 1, 2021, the Court of Appeals reversed the trial court’s dismissal decision in most respects, and remanded the case to the trial court for further proceedings. On January 13, 2022, the Company filed a petition seeking review of the Washington State Court of Appeals’ reversal by the Washington Supreme Court. On May 4, 2022, the Washington State Supreme Court denied the Company’s petition, and the case has been remanded to the Superior Court for further proceedings. The Company filed its answer on September 19, 2022 and discovery is currently ongoing.
On June 4, 2018, a putative class action lawsuit entitled Kanugonda v. Funko, Inc., et al. was filed in the United States District Court for the Western District of Washington against the Company, certain of its officers and directors, and certain other defendants. On January 4, 2019, a lead plaintiff was appointed in that case. On April 30, 2019, the lead plaintiff filed an amended complaint against the previously named defendants. The parties to the federal action, now captioned Berkelhammer v. Funko, Inc. et al., have agreed to a stay of that action through November 2022.
The cases in Washington state court and Berkelhammer v. Funko, Inc. et al. allege that the Company violated Sections 11, 12, and 15 of the Securities Act of 1933, as amended (“Securities Act”), by making allegedly materially misleading statements in documents filed with the SEC in connection with the Company’s IPO and by omitting material facts necessary to make the statements made therein not misleading. The lawsuits seek, among other things, compensatory statutory damages and rescissory damages in account of the consideration paid for the Company’s Class A common stock by the plaintiffs and members of the putative class, as well as attorneys’ fees and costs.
On January 18, 2022, a purported stockholder filed a putative class action lawsuit in the Court of Chancery of the State of Delaware, captioned Shumacher v. Mariotti, et al., relating to the Company’s corporate “Up-C” structure and bringing direct claims for breach of fiduciary against certain current and former officers and directors. On March 31, 2022, the defendants moved to dismiss the action. In response to defendants’ motion to dismiss. Plaintiff filed an Amended Complaint on May 25, 2022. The amendment did not materially change the claims at issue, and the Defendants again moved to dismiss on July 29, 2022. Briefing on the motion to dismiss is ongoing.
The Company is party to additional legal proceedings incidental to its business. While the outcome of these additional matters could differ from management’s expectations, the Company does not believe that the resolution of such matters is reasonably likely to have a material effect on its results of operations or financial condition.
15


8. Segments
The Company identifies its segments according to how the business activities are managed and evaluated and for which discrete financial information is available and regularly reviewed by its Chief Operating Decision Maker (the “CODM”) to allocate resources and assess performance. Because its CODM reviews financial performance and allocates resources at a consolidated level on a regular basis, the Company has one segment.
The following table presents summarized product information as a percent of sales:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Core Collectible77.0 %78.7 %76.2 %80.7 %
Loungefly 17.0 %14.8 %18.4 %14.0 %
Other6.0 %6.5 %5.4 %5.3 %
The following tables present summarized geographical information (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net sales:
United States$262,316 $191,289 $725,677 $490,993 
Europe78,239 58,873 198,688 150,683 
Other International25,052 17,571 65,301 51,344 
Total net sales$365,607 $267,733 $989,666 $693,020 
September 30, 2022December 31, 2021
Long-term assets:
United States$140,848 $81,022 
United Kingdom20,491 26,500 
Vietnam and China27,214 16,701 
Total long-lived assets$188,553 $124,223 

16


9. Income Taxes
Funko, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from FAH, LLC based upon Funko, Inc.’s economic interest held in FAH, LLC. FAH, LLC is treated as a pass-through partnership for income tax reporting purposes. FAH, LLC’s members, including the Company, are liable for federal, state and local income taxes based on their share of FAH, LLC’s pass-through taxable income.
The Company recorded $2.3 million and $5.9 million of income tax expense for the three months ended September 30, 2022 and 2021, respectively, and $2.9 million of income tax benefit and $12.8 million of income tax expense for the nine months ended September 30, 2022 and 2021, respectively. The Company’s effective tax rate for the nine months ended September 30, 2022 was (7.6)%. The Company’s effective tax rate is less than the statutory rate of 21% primarily due to the impact of foreign and state taxes and a discrete benefit of $11.0 million from the release of a valuation allowance on the outside basis deferred tax asset.
The Company is party to the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners under certain circumstances. See Note 6, Liabilities under Tax Receivable Agreement.



17


10. Stockholders’ Equity
The following is a reconciliation of changes in stockholders’ equity for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(In thousands)
Class A common stock
Beginning balance$5 $4 $4 $4 
Shares issued  1  
Ending balance$5 $4 $5 $4 
Class B common stock
Beginning balance$ $1 $1 $1 
Redemption of common units of FAH, LLC  (1) 
Ending balance$ $1 $ $1 
Additional paid-in capital
Beginning balance$304,258 $239,269 $252,505 $216,141 
Equity-based compensation4,677 3,658 11,999 9,869 
Shares issued for equity-based compensation awards650 48 1,209 3,726 
Other   200 
Redemption of common units of FAH, LLC21 2,852 37,922 19,532 
Recapitalization of common units of FAH, LLC  5,873  
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets3 32 101 (3,609)
Ending balance$309,609 $245,859 $309,609 $245,859 
Accumulated other comprehensive income
Beginning balance$(2,575)$2,048 $1,078 $1,718 
Foreign currency translation (loss) gain, net of tax(3,276)(934)(6,929)(604)
Ending balance$(5,851)$1,114 $(5,851)$1,114 
Retained earnings
Beginning balance$92,604 $44,730 $68,050 $24,403 
Net income attributable to Funko, Inc.9,630 11,901 34,184 32,228 
Ending balance$102,234 $56,631 $102,234 $56,631 
Non-controlling interests
Beginning balance$25,671 $69,346 $74,920 $80,178 
Distributions to Continuing Equity Owners(283)(2,371)(10,507)(9,284)
Other   861 
Redemption of common units of FAH, LLC(21)(2,852)(37,922)(19,532)
Recapitalization of common units of FAH, LLC  (5,873) 
Foreign currency translation (loss) gain, net of tax(398)(332)(1,406)(135)
Net income attributable to non-controlling interests1,519 6,474 7,276 18,177 
Ending balance$26,488 $70,265 $26,488 $70,265 
Total stockholders’ equity$432,485 $373,874 $432,485 $373,874 
18


The following is a reconciliation of changes in Class A and Class B common shares outstanding for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(In thousands)
Class A common shares outstanding
Beginning balance46,832 39,245 40,088 35,657 
Shares issued for equity-based compensation awards
259 12 507 419 
Redemption of common units of FAH, LLC4 492 6,500 3,673 
Ending balance47,095 39,749 47,095 39,749 
Class B common shares outstanding
Beginning balance3,293 11,201 10,691 14,040 
Redemption of common units of FAH, LLC (345)(6,488)(3,184)
Recapitalization of Class B common shares  (910) 
Ending balance3,293 10,856 3,293 10,856 
Total Class A and Class B common shares outstanding
50,388 50,605 50,388 50,605 

11. Non-controlling interests
Funko, Inc. is the sole managing member of FAH, LLC and as a result consolidates the financial results of FAH, LLC and reports a non-controlling interest representing the common units of FAH, LLC held by the Continuing Equity Owners. Changes in Funko, Inc.’s ownership interest in FAH, LLC while Funko, Inc. retains its controlling interest in FAH, LLC will be accounted for as equity transactions. As such, future redemptions or direct exchanges of common units of FAH, LLC by the Continuing Equity Owners will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when FAH, LLC has positive or negative net assets, respectively.
Net income and comprehensive income are attributed between Funko, Inc. and non-controlling interest holders based on each party’s relative economic ownership interest in FAH, LLC. As of September 30, 2022 and December 31, 2021, Funko, Inc. owned 47.1 million and 40.1 million of FAH, LLC common units, respectively, representing a 91.6% and 77.3% economic ownership interest in FAH, LLC, respectively.
Net income and comprehensive income of FAH, LLC excludes certain activity attributable to Funko, Inc., including equity-based compensation expense for share-based compensation awards issued by Funko, Inc. and income tax expense (benefit) for corporate, federal, state and local taxes attributable to Funko, Inc. The following represents the amounts excluded from the computation of net income and comprehensive income of FAH, LLC for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(In thousands)
Funko, Inc.
Equity-based compensation$4,677 $3,658 $11,999 $9,869 
Income tax expense (benefit)$1,459 $5,257 $(5,216)$11,050 
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12. Earnings per Share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to Funko, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to Funko, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock (in thousands, except shares and per share amounts):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Numerator:
Net income $11,149 $18,375 $41,460 $50,405 
Less: net income attributable to
  non-controlling interests
1,519 6,474 7,276 18,177 
Net income attributable to Funko, Inc. — basic and diluted$9,630 $11,901 $34,184 $32,228 
Add: Reallocation of net income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock
  5,397  
Net income attributable to Funko, Inc. — diluted$9,630 $11,901 $39,581 $32,228 
Denominator:
Weighted-average shares of Class A common stock outstanding — basic46,874,285 39,448,391 43,670,297 37,856,435 
Add: Dilutive common units of FAH, LLC that are convertible into Class A common stock
146,109 227,537 8,005,100 227,500 
Add: Dilutive Funko, Inc. equity compensation awards
2,665,985 2,120,455 2,315,109 1,994,936 
Weighted-average shares of Class A common stock outstanding — diluted49,686,379 41,796,383 53,990,506 40,078,871 
Earnings per share of Class A common stock — basic$0.21 $0.30 $0.78 $0.85 
Earnings per share of Class A common stock — diluted$0.19 $0.28 $0.73 $0.80 
20


For the three months ended September 30, 2022 and 2021, an aggregate of 6.0 million and 13.9 million, respectively, and for the nine months ended September 30, 2022 and 2021, an aggregate of 1.9 million and 15.0 million, respectively, of potentially dilutive securities were excluded from the weighted-average in the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive. For the three months ended September 30, 2022 and 2021, anti-dilutive securities included 4.3 million and 12.3 million, respectively, and for the nine months ended September 30, 2022 and 2021, anti-dilutive securities included 0.0 million and 13.7 million, respectively, of common units of FAH, LLC that are convertible into Class A common stock, but were excluded from the computations of diluted earnings per share because the effect would have been anti-dilutive under the if-converted method.
Shares of the Company’s Class B common stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.
21


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 filed with the Securities and Exchange Commission (“SEC”) on March 3, 2022. 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,theCompany,” “Funko” and similar references refer: Funko, Inc., and unless otherwise stated, all of its 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 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. Class A common stock (to be held by them either directly or indirectly) in connection with the consummation of our IPO.
Former Profits Interests Holders” refers collectively to certain of our directors and certain current and former 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” refers to a tax receivable agreement entered into between Funko, Inc., FAH, LLC and each of the Continuing Equity Owners and certain transferees.
“TCG” refers to TCG 3.0 Fuji, LP.
22


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.
Given our diverse product offering, in 2022, we created three new branded categories to better align our product net sales results and execute against our operating objectives. The Core Collectible branded category includes Pop! Vinyl, and newer collectible brands such as Soda, Vinyl Gold and Popsies. The Loungefly branded category includes our softlines products. The Other branded category includes our Toy and Games brands and our Digital Brands. Net sales product revenue has been recast into these branded categories for the three and nine months ended September 30, 2021.
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 September 30,Nine Months Ended September 30,
2022202120222021
(amounts in thousands)
Net sales$365,607 $267,733 $989,666 $693,020 
Net income $11,149 $18,375 $41,460 $50,405 
EBITDA (1)
$29,023 $36,353 $78,891 $99,918 
Adjusted EBITDA (1)
$35,697 $40,181 $103,701 $111,009 
(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”). For a reconciliation of EBITDA and Adjusted EBITDA to net income, the most closely comparable U.S. GAAP financial measure, see “Non-GAAP Financial Measures” below.

23


Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following table sets forth information comparing the components of net income for the three months ended September 30, 2022 and 2021:
Three Months Ended September 30,Period over Period Change
20222021DollarPercentage
(amounts in thousands, except percentages)
Net sales$365,607 $267,733 $97,874 36.6 %
Cost of sales (exclusive of depreciation and amortization shown separately below)237,728 171,320 66,408 38.8 %
Selling, general, and administrative expenses97,930 59,890 38,040 63.5 %
Depreciation and amortization12,555 10,328 2,227 21.6 %
Total operating expenses348,213 241,538 106,675 44.2 %
Income from operations17,394 26,195 (8,801)(33.6)%
Interest expense, net2,977 1,711 1,266 74.0 %
Loss on debt extinguishment— 675 (675)nm
Other expense (income), net926 (505)1,431 nm
Income before income taxes13,491 24,314 (10,823)(44.5)%
Income tax expense 2,342 5,939 (3,597)(60.6)%
Net income11,149 18,375 (7,226)(39.3)%
Less: net income attributable to non-controlling interests
1,519 6,474 (4,955)(76.5)%
Net income attributable to Funko, Inc.$9,630 $11,901 $(2,271)(19.1)%
Net Sales
Net sales were $365.6 million for the three months ended September 30, 2022, an increase of 36.6%, compared to $267.7 million for the three months ended September 30, 2021. The increase in net sales was due primarily to increased sales to distributors and mass-market retailer customers for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.
For the three months ended September 30, 2022, the number of active properties decreased 5.5% to 762 as compared to 806 for the three months ended September 30, 2021, and the average net sales per active property increased 44.4% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. An active property is a licensed property from which we generate sales of products during a given period. While we expect to see growth in the number of active properties and average sales per active property over time, 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.

24


On a geographical basis, net sales in the United States increased 37.1% to $262.3 million in the three months ended September 30, 2022 as compared to $191.3 million in the three months ended September 30, 2021. Net sales in Europe increased 32.9% to $78.2 million in the three months ended September 30, 2022 as compared to $58.9 million in the three months ended September 30, 2021 and net sales in other international locations increased 42.6% to $25.1 million in the three months ended September 30, 2022 as compared to $17.6 million in the three months ended September 30, 2021. Increases in United States net sales were primarily due to increased sales to distributors and mass-market retailers. Increases in Europe and other international net sales were due primarily to increased sales to specialty retailer and direct to consumer customers.
On a branded product basis, net sales of Core Collectible branded products increased 33.7% to $281.5 million in the three months ended September 30, 2022 as compared to $210.6 million in the three months ended September 30, 2021, primarily from Pop! Vinyl. Loungefly branded products increased 57.3% to $62.2 million in the three months ended September 30, 2022 as compared to $39.6 million in the three months ended September 30, 2021 across all sales channels, with the primary driver through theme parks. Net sales of other branded products increased 24.6% to $21.8 million in the three months ended September 30, 2022 as compared to $17.5 million in the three months ended September 30, 2021, primarily through Digital Brands.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was $237.7 million for the three months ended September 30, 2022, an increase of 38.8%, compared to $171.3 million for the three months ended September 30, 2021. Cost of sales (exclusive of depreciation and amortization) increased primarily as a result of increased sales, as discussed above, and higher product costs.
Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of net sales, was 35.0% for the three months ended September 30, 2022, compared to 36.0% for the three months ended September 30, 2021. The decrease in gross margin (exclusive of depreciation and amortization) for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was driven by an increase in product costs outpacing previous price increases on certain products during the three months ended September 30, 2022. In 2021, we increased prices for a portion of our products, that went into full effect in 2022, and we expect to expand that price increase more comprehensively in the year ending December 31, 2023.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $97.9 million for the three months ended September 30, 2022, an increase of 63.5%, compared to $59.9 million for the three months ended September 30, 2021. The increase was driven primarily by a $21.7 million increase 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 $5.3 million increase in advertising and marketing costs, a $3.2 million increase in facilities and rent costs, a $1.8 million increase in administrative costs, which include credit card processing fees and provisions for bad debt and a $1.7 million increase in professional fees, which include consulting and legal fees. The increase to personnel and related costs was due to, and we expect personnel and related costs to remain elevated through at least the end of 2022 in connection with, the final transitions of our U.S. distribution warehouses, additional personnel to support strategic initiatives and overall business growth and additional inflationary pressures to increase wages, commissions and benefits expenses. We also expect elevated consulting costs related to our enterprise resource planning (“ERP”) implementation as we expect to finalize the remaining steps in 2023.
25


Selling, general and administrative expenses were 26.8% and 22.4% of net sales for the three months ended September 30, 2022 and 2021, respectively. The increase in selling, general and administrative expenses as a percentage of net sales was due to increased infrastructure projects (including human capital) and investment into the business to support future operations.
Depreciation and Amortization
Depreciation and amortization expense was $12.6 million for the three months ended September 30, 2022, an increase of 21.6%, compared to $10.3 million for the three months ended September 30, 2021, primarily related to the type and timing of assets placed in service.
Interest Expense, Net
Interest expense, net was $3.0 million for the three months ended September 30, 2022, an increase of 74.0%, compared to $1.7 million for the three months ended September 30, 2021. The increase in interest expense, net was due primarily to a higher average balance on debt outstanding during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.
Loss on debt extinguishment
As a result of the Company’s debt refinancing in September 2021, a $0.7 million loss on debt extinguishment was recorded in the three months ended September 30, 2021 as unamortized debt financing fees were written-off.
Other expense (income), net
Other expense, net was $0.9 million and other income, net was $0.5 million for the three months ended September 30, 2022 and 2021, respectively. The increase in other expense, net for the three months ended September 30, 2022 from the three months ended September 30, 2021 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 $2.3 million and $5.9 million for the three months ended September 30, 2022 and 2021, respectively. The decrease for the three months ended September 30, 2022 from the three months ended September 30, 2021 was primarily related to a decrease in income before income taxes.
Net income
Net income was $11.1 million for the three months ended September 30, 2022, compared to net income of $18.4 million for the three months ended September 30, 2021. The decrease in net income was primarily due to increases in cost of sales (exclusive of depreciation and amortization) and selling, general and administrative expenses for the three months ended September 30, 2022 outpacing net sales increase as compared to the three months ended September 30, 2021, as discussed above.
26


Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The following table sets forth information comparing the components of net income for the nine months ended September 30, 2022 and 2021:
Nine Months Ended September 30,Period over Period Change
20222021DollarPercentage
(amounts in thousands, except percentages)
Net sales$989,666 $693,020 $296,646 42.8 %
Cost of sales (exclusive of depreciation and amortization shown separately below)649,974 425,929 224,045 52.6 %
Selling, general, and administrative expenses259,043 166,032 93,011 56.0 %
Depreciation and amortization34,509 30,778 3,731 12.1 %
Total operating expenses943,526 622,739 320,787 51.5 %
Income from operations46,140 70,281 (24,141)nm
Interest expense, net5,854 5,921 (67)(1.1)%
Loss on debt extinguishment— 675 (675)nm
Other expense, net1,758 466 1,292 277.3 %
Income before income taxes38,528 63,219 (24,691)nm
Income tax expense (benefit) (2,932)12,814 (15,746)nm
Net income 41,460 50,405 (8,945)nm
Less: net income attributable to non-controlling interests7,276 18,177 (10,901)nm
Net income attributable to Funko, Inc.$34,184 $32,228 $1,956 nm
Net Sales
Net sales were $989.7 million for the nine months ended September 30, 2022, an increase of 42.8%, compared to $693.0 million for the nine months ended September 30, 2021. The increase in net sales was due primarily to increased sales to mass-market retailers, specialty retailer, and e-commerce site customers for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
For the nine months ended September 30, 2022, the number of active properties increased 0.2% to 898 as compared to 896 for the nine months ended September 30, 2021, and the average net sales per active property increased 42.5% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
On a geographical basis, net sales in the United States increased 47.8% to $725.7 million in the nine months ended September 30, 2022 as compared to $491.0 million in the nine months ended September 30, 2021. Net sales in Europe increased 31.9% to $198.7 million in the nine months ended September 30, 2022 as compared to $150.7 million in the nine months ended September 30, 2021 and net sales in other international locations increased 27.2% to $65.3 million in the nine months ended September 30, 2022 as compared to $51.3 million in the nine months ended September 30, 2021. Increases in United States net sales were due primarily to increased sales to mass-market retailers, e-commerce sites and distributor customers. Increases in Europe and other international net sales were due primarily to increased sales to specialty retailer, e-commerce sites and direct-to-consumer.
27


On a branded product basis, net sales of Core Collectible branded products increased 34.8% to $754.2 million in the nine months ended September 30, 2022 as compared to $559.5 million in the nine months ended September 30, 2021, Loungefly branded products increased 88.2% to $182.3 million in the nine months ended September 30, 2022 as compared to $96.9 million in the nine months ended September 30, 2021 and net sales of other branded products increased 45.0% to $53.1 million in the nine months ended September 30, 2022 as compared to $36.6 million in the nine months ended September 30, 2021.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was $650.0 million for the nine months ended September 30, 2022, an increase of 52.6%, compared to $425.9 million for the nine months ended September 30, 2021. Cost of sales (exclusive of depreciation and amortization) increased primarily as a result of increased sales, as discussed above, and higher product costs and higher shipping and inbound freight costs as a percentage of sales.
Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of net sales, was 34.3% for the nine months ended September 30, 2022, compared to 38.5% for the nine months ended September 30, 2021. The decrease in gross margin (exclusive of depreciation and amortization) for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was driven primarily by an increase in shipping and freight costs as a percentage of net sales during the nine months ended September 30, 2022 due to global supply chain capacity constraints driving increased freight costs, and increased product costs outpacing previous price increases on certain products. In 2021, we increased prices for a portion of our products, that went into full effect in 2022, and we expect to expand that price increase more comprehensively in the year ending December 31, 2023.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $259.0 million for the nine months ended September 30, 2022, an increase of 56.0%, compared to $166.0 million for the nine months ended September 30, 2021. The increase was driven primarily by a $51.2 million increase 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 $11.3 million increase in professional fees, which include consulting and legal fees, a $9.7 million increase in advertising and marketing costs and a $6.0 million increase in facilities and rent. The increase to personnel and related costs was due to, and we expect personnel and related costs to remain elevated through at least the end of 2022 in connection with, the final transitions of our U.S. distribution warehouses, additional personnel to support strategic initiatives and overall business growth and additional inflationary pressures to increase wages, commissions and benefits expenses. We also expect elevated consulting costs related to our enterprise resource planning (“ERP”) implementation as we expect to finalize the remaining steps in 2023. Selling, general and administrative expenses were 26.2% and 24.0% of net sales for the nine months ended September 30, 2022 and 2021, respectively. The increase in selling, general and administrative expenses as a percentage of net sales was due to increased infrastructure projects (including human capital) and investment into the business to support future operations.
Depreciation and Amortization
Depreciation and amortization expense was $34.5 million for the nine months ended September 30, 2022, an increase of 12.1%, compared to $30.8 million for the nine months ended September 30, 2021, primarily related to the type and timing of assets placed in service.
28


Interest Expense, Net
Interest expense, net was $5.9 million for the nine months ended September 30, 2022, a decrease of 1.1%, compared to $5.9 million for the nine months ended September 30, 2021. The decrease in interest expense, net was due primarily to a lower average interest rate on debt outstanding during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
Other expense, net
Other expense, net was $1.8 million and $0.5 million for the nine months ended September 30, 2022 and 2021, respectively. Other expense, net for the nine months ended September 30, 2022 and 2021 was primarily related to foreign currency gains and losses relating to transactions denominated in currencies other than the U.S. dollar.
Loss on debt extinguishment
As a result of the Company’s debt refinancing in September 2021, $0.7 million loss on debt extinguishment was recorded in the nine months ended September 30, 2021 as unamortized debt financing fees were written-off.
Income tax expense (benefit)
Income tax benefit was $2.9 million and income tax expense was $12.8 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease for the nine months ended September 30, 2022 from the nine months ended September 30, 2021 was primarily related to the Company’s realized discrete benefit of $11.0 million from the release of a valuation allowance on the outside basis deferred tax asset.
Net income
Net income was $41.5 million for the nine months ended September 30, 2022, compared to $50.4 million for the nine months ended September 30, 2021. The decrease in net income was primarily due to the increases in cost of sales (exclusive of depreciation and amortization) and selling, general and administrative expenses outpacing the increase in net sales for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, as discussed above.


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Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per Diluted Share (collectively the “Non-GAAP Financial Measures”) are supplemental measures of our performance that are not required by, or presented in accordance with, U.S. 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, earnings per share or any other performance measure derived in accordance with U.S. GAAP. We define EBITDA as net income before interest expense, net, income tax expense (benefit), depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted for non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, certain severance, relocation and related costs, loss on debt extinguishment, foreign currency transaction losses (gains) and other unusual or one-time items. We define Adjusted Net Income as net income attributable to Funko, Inc. adjusted for the reallocation of income attributable to non-controlling interests from the assumed exchange of all outstanding common units and options in FAH, LLC for newly issued-shares of Class A common stock of Funko, Inc. and further adjusted for the impact of certain non-cash charges and other items that we do not consider in our evaluation of ongoing operating performance. These items include, among other things, non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, certain severance, relocation and related costs, loss on debt extinguishment, foreign currency transaction losses (gains) and other unusual or one-time items, and the income tax (expense) benefit effect of these adjustments. We define Adjusted Earnings per Diluted Share as Adjusted Net Income divided by the weighted-average shares of Class A common stock outstanding, assuming (1) the full exchange of all outstanding common units and options in FAH, LLC for newly issued-shares of Class A common stock of Funko, Inc. 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.
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