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 11, 2021. 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: (1)
following the consummation of the Transactions, to Funko, Inc., and unless
otherwise stated, all of its direct and indirect subsidiaries, including FAH,
LLC and (2) prior to the completion of the Transactions, to FAH, LLC and, unless
otherwise stated, all of its subsidiaries.
•"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 any such fund or entity formed to hold shares of Class A common stock
for the Former Equity Owners).
•"Continuing Equity Owners" refers collectively to ACON, 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 the Transactions
and who may redeem at each of their options (subject in certain circumstances to
time-based vesting requirements) 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.
•"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 the Transactions.
•"Former Profits Interests Holders" refers collectively to certain of our
directors and certain current and former executive officers and employees, in
each case, who, prior to the consummation of the Transactions, 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 the Transactions.
•"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 Transactions, 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 as part
of the Transactions, defined below.
•"Transactions" refers to certain organizational transactions that we effected
in connection with our initial public offering ("IPO") in November 2017.
                                       19
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Overview


We are a leading pop culture consumer products company. Our business is built on
the belief that everyone is a fan of something, and Funko aims to have something
for every fan. 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 our extensive portfolio of licensed content over a
wide variety of product categories, including figures, bags, wallets, apparel,
accessories, board games, plush, homewares and digital NFTs, which we make
available at highly accessible price points. We believe we sit at the nexus of
pop culture-content providers value us for our ability to connect fans to their
properties with our creative products and broad distribution; retailers value us
for our broad portfolio of licensed pop culture products that we can curate to
resonate with their consumers; and consumers value us for our distinct, stylized
products and the content they represent. We believe our innovative product
design and market positioning have disrupted the licensed product markets and
helped to define today's pop culture products category.
COVID-19
The novel coronavirus ("COVID-19") pandemic has caused and continues to cause
significant loss of life and disruption to the global economy, including the
curtailment of activities by businesses and consumers in much of the world as
governments and others seek to limit the spread of the disease and its variants,
and through business and transportation shutdowns and restrictions on people's
movement and congregation.
As a result of the onset of the pandemic, we experienced weakened demand for our
products, which had a negative impact on our net sales and liquidity in 2020.
Many customers deferred or significantly reduced orders of our product as a
result of government-mandated closures and limitations on in-store occupancy. We
also had experienced temporary key account closures, which drove strategic
decisions to shift the timing of new product delivery to preserve demand.
We are also continually monitoring our suppliers and manufacturers of our
products. In 2020, we faced delays or difficulty sourcing products, in response
to which we shifted a greater amount of our production from China to Vietnam.
Notwithstanding the shift in production to Vietnam, we are experiencing and
continue to expect that the cost of shipping containers will increase over
historical levels for the remainder of 2021 and at least through early 2022 due
to the global pandemic and other issues impacting global supply chains. Although
we have been absorbing these costs through the end of the third quarter 2021, we
have recently increased prices of certain of our products to help cover the
increased costs and inflationary pressures.

We believe that the greatest impact from the COVID-19 pandemic occurred in the
second quarter of 2020 during which we experienced a significant net sales
decline as compared to the second quarter of 2019. If a significant surge in
COVID-19 or variant strain cases occurs, and is accompanied by additional
closures or a significant halt in reopenings, the remainder of 2021 or 2022
could potentially be impacted.
We have taken actions to protect our employees in response to the pandemic,
including closing our corporate offices and requiring our office employees to
work from home. At our distribution centers, certain practices are in effect to
safeguard workers, including but not limited to, required daily health
pre-screening, and providing personal protective equipment, and we are
continuing to monitor direction from local and national governments carefully.
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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,
                                                      2021                2020               2021                2020
                                                                          (amounts in thousands)
Net sales                                         $  267,733          $ 191,229          $  693,020          $ 426,028
Net income (loss)                                 $   18,375          $  15,597          $   50,405          $  (5,144)
EBITDA (1)                                        $   36,353          $  31,779          $   99,918          $  35,885
Adjusted EBITDA (1)                               $   40,181          $  36,191          $  111,009          $  47,012


(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.

                                       21
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Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020
The following table sets forth information comparing the components of net
income for the three months ended September 30, 2021 and 2020:
                                             Three Months Ended September 30,               Period over Period Change
                                                 2021                2020               Dollar                Percentage
                                                                (amounts in thousands, except percentages)
Net sales                                    $  267,733          $ 191,229          $    76,504                       40.0  %
Cost of sales (exclusive of depreciation and
amortization shown separately below)            171,320            117,504               53,816                       45.8  %
Selling, general, and administrative
expenses                                         59,890             41,167               18,723                       45.5  %
Depreciation and amortization                    10,328             11,887               (1,559)                     (13.1) %
Total operating expenses                        241,538            170,558               70,980                       41.6  %
Income from operations                           26,195             20,671                5,524                       26.7  %
Interest expense, net                             1,711              2,875               (1,164)                     (40.5) %
Loss on debt extinguishment                         675                  -                  675                            nm
Other (income) expense, net                        (505)               779               (1,284)                           nm
Income before income taxes                       24,314             17,017                7,297                       42.9  %
Income tax expense                                5,939              1,420                4,519                            nm
Net income                                       18,375             15,597                2,778                       17.8  %
Less: net income attributable to
non-controlling interests                         6,474              5,801                  673                       11.6  %

Net income attributable to Funko, Inc. $ 11,901 $ 9,796

         $     2,105                       21.5  %


Net Sales
Net sales were $267.7 million for the three months ended September 30, 2021, an
increase of 40.0%, compared to $191.2 million for the three months ended
September 30, 2020. The three months ended September 30, 2020 saw lingering
effects of the COVID-19 pandemic with declines in net sales due to reduced
customer shipments, non-essential business closures and other social distancing
guidelines. In addition to the impacts of the COVID-19 pandemic on the three
months ended September 30, 2020, the increase in net sales was due primarily to
increased sales to specialty retailer, e-commerce sites and direct-to-consumer
customers for the three months ended September 30, 2021 compared to the three
months ended September 30, 2020.
For the three months ended September 30, 2021, the number of active properties
increased 12.7% to 806 as compared to 715 for the three months ended
September 30, 2020, and the average net sales per active property increased
24.2% for the three months ended September 30, 2021 as compared to the three
months ended September 30, 2020. 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.

                                       22
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On a geographical basis, net sales in the United States increased 35.7% to
$191.3 million in the three months ended September 30, 2021 as compared to
$140.9 million in the three months ended September 30, 2020. Net sales in Europe
increased 65.7% to $58.9 million in the three months ended September 30, 2021 as
compared to $35.5 million in the three months ended September 30, 2020 and net
sales in other international locations increased 19.1% to $17.6 million in the
three months ended September 30, 2021 as compared to $14.8 million in the three
months ended September 30, 2020. Increases in United States net sales were
primarily due to increased sales to specialty retailers, e-commerce sites and
direct-to-consumer. Increases in Europe and other international net sales were
due primarily to increased sales to specialty retailer, distributors and
e-commerce sites. These increases were in addition to the impacts of the
COVID-19 pandemic on the three months ended September 30, 2020.
On a product category basis, net sales of figures increased 42.0% to $206.0
million in the three months ended September 30, 2021 as compared to $145.0
million in the three months ended September 30, 2020, and net sales of other
products increased 33.8% to $61.8 million in the three months ended
September 30, 2021 as compared to $46.2 million in the three months ended
September 30, 2020.
On a branded product basis, net sales of Pop! branded products increased 41.3%
to $193.1 million in the three months ended September 30, 2021 as compared to
$136.7 million in the three months ended September 30, 2020, Loungefly branded
products increased 36.3% to $36.8 million in the three months ended
September 30, 2021 as compared to $27.0 million in the three months ended
September 30, 2020 and net sales of other branded products increased 37.3% to
$37.8 million in the three months ended September 30, 2021 as compared to $27.5
million in the three months ended September 30, 2020.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was $171.3 million
for the three months ended September 30, 2021, an increase of 45.8%, compared to
$117.5 million for the three months ended September 30, 2020. Cost of sales
(exclusive of depreciation and amortization) increased primarily as a result of
increased sales, as discussed above, 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 36.0% for the three
months ended September 30, 2021, compared to 38.6% for the three months ended
September 30, 2020. The decrease in gross margin (exclusive of depreciation and
amortization) for the three months ended September 30, 2021 compared to the
three months ended September 30, 2020 was driven by an increase in shipping and
inbound freight costs as a percentage of net sales during the three months ended
September 30, 2021 due to continued global supply chain capacity constraints
driving increased freight costs, offset partially by improved global product
margins. We expect the increased freight costs to continue at least through
early 2022.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $59.9 million for the three
months ended September 30, 2021, an increase of 45.5%, compared to $41.2 million
for the three months ended September 30, 2020. The increase was driven primarily
by a $9.9 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 $2.4 million increase in
advertising and marketing costs, $1.9 million increase in administrative costs,
which include credit card processing fees and provisions for bad debt and a $1.4
million increase in professional fees, which include consulting and legal fees.
Selling, general and administrative expenses were 22.4% and 21.5% of net sales
for the three months ended September 30, 2021 and 2020, 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.
                                       23
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Depreciation and Amortization
Depreciation and amortization expense was $10.3 million for the three months
ended September 30, 2021, a decrease of 13.1%, compared to $11.9 million for the
three months ended September 30, 2020, primarily related to the type and timing
of assets placed in service.
Interest Expense, Net
Interest expense, net was $1.7 million for the three months ended September 30,
2021, a decrease of 40.5%, compared to $2.9 million for the three months ended
September 30, 2020. The decrease in interest expense, net was due primarily to a
lower average balance on debt outstanding during the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020.
Loss on debt extinguishment
As a result of the debt refinancing in September 2021, $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 (income) expense, net
Other income, net was $0.5 million and other expense, net was $0.8 million for
the three months ended September 30, 2021 and 2020, respectively. The increase
for the three months ended September 30, 2021 from the three months ended
September 30, 2020 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 $5.9 million and $1.4 million for the three months ended
September 30, 2021 and 2020, respectively. The increase for the three months
ended September 30, 2021 from the three months ended September 30, 2020 was
primarily related to an increase in income before income taxes.
Net income
Net income was $18.4 million for the three months ended September 30, 2021,
compared to net income of $15.6 million for the three months ended September 30,
2020. The increase in net income was primarily due to the increase in net sales,
partially offset by increases in cost of sales (exclusive of depreciation and
amortization) and selling, general and administrative expenses for the three
months ended September 30, 2021 as compared to the three months ended
September 30, 2020, as discussed above.
                                       24
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Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
The following table sets forth information comparing the components of net
income (loss) for the nine months ended September 30, 2021 and 2020:
                                             Nine Months Ended September 30,                Period over Period Change
                                                 2021                2020               Dollar                Percentage
                                                                (amounts in thousands, except percentages)
Net sales                                    $  693,020          $ 426,028          $   266,992                       62.7  %
Cost of sales (exclusive of depreciation and
amortization shown separately below)            425,929            261,103              164,826                       63.1  %
Selling, general, and administrative
expenses                                        166,032            127,590               38,442                       30.1  %
Depreciation and amortization                    30,778             33,947               (3,169)                      (9.3) %
Total operating expenses                        622,739            422,640              200,099                       47.3  %
Income from operations                           70,281              3,388               66,893                            nm
Interest expense, net                             5,921              8,221               (2,300)                     (28.0) %
Loss on debt extinguishment                         675                  -                  675                            nm
Other expense, net                                  466              1,450                 (984)                     (67.9) %
Income (loss) before income taxes                63,219             (6,283)              69,502                            nm
Income tax expense (benefit)                     12,814             (1,139)              13,953                            nm
Net income (loss)                                50,405             (5,144)              55,549                            nm
Less: net income (loss) attributable to
non-controlling interests                        18,177               (229)              18,406                            nm
Net income (loss) attributable to Funko,
Inc.                                         $   32,228          $  (4,915)         $    37,143                            nm


Net Sales
Net sales were $693.0 million for the nine months ended September 30, 2021, an
increase of 62.7%, compared to $426.0 million for the nine months ended
September 30, 2020. In addition to the impacts of the COVID-19 pandemic on the
nine months ended September 30, 2020, the increase in net sales was due
primarily to increased sales to specialty retailer, e-commerce sites and
direct-to-consumer customers for the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020.
For the nine months ended September 30, 2021, the number of active properties
increased 11.3% to 896 as compared to 805 for the nine months ended
September 30, 2020, and the average net sales per active property increased
46.1% for the nine months ended September 30, 2021 as compared to the nine
months ended September 30, 2020.
On a geographical basis, net sales in the United States increased 54.7% to
$491.0 million in the nine months ended September 30, 2021 as compared to $317.3
million in the nine months ended September 30, 2020. Net sales in Europe
increased 110.2% to $150.7 million in the nine months ended September 30, 2021
as compared to $71.7 million in the nine months ended September 30, 2020 and net
sales in other international locations increased 38.8% to $51.3 million in the
nine months ended September 30, 2021 as compared to $37.0 million in the nine
months ended September 30, 2020. Increases in United States net sales were due
primarily to increased sales to specialty retailer, e-commerce sites and
direct-to-consumer. Increases in Europe and other international net sales were
due primarily to increased sales to specialty retailer, distributors and
e-commerce sites. These increases were in addition to the impacts of the
COVID-19 pandemic on the nine months ended September 30, 2020.
                                       25
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On a product category basis, net sales of figures increased 63.0% to $543.8
million in the nine months ended September 30, 2021 as compared to $333.7
million in the nine months ended September 30, 2020, and net sales of other
products increased 61.6% to $149.2 million in the nine months ended
September 30, 2021 as compared to $92.3 million in the nine months ended
September 30, 2020.
On a branded product basis, net sales of Pop! branded products increased 61.3%
to $528.9 million in the nine months ended September 30, 2021 as compared to
$327.9 million in the nine months ended September 30, 2020, Loungefly branded
products increased 70.8% to $90.9 million in the nine months ended September 30,
2021 as compared to $53.2 million in the nine months ended September 30, 2020
and net sales of other branded products increased 63.1% to $73.2 million in the
nine months ended September 30, 2021 as compared to $44.9 million in the nine
months ended September 30, 2020.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was $425.9 million
for the nine months ended September 30, 2021, an increase of 63.1%, compared to
$261.1 million for the nine months ended September 30, 2020. Cost of sales
(exclusive of depreciation and amortization) increased primarily as a result of
increased sales, as discussed above, 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 38.5% for the nine
months ended September 30, 2021, compared to 38.7% for the nine months ended
September 30, 2020. The decrease in gross margin (exclusive of depreciation and
amortization) for the nine months ended September 30, 2021 compared to the nine
months ended September 30, 2020 was driven primarily by an increase in shipping
and freight costs as a percentage of net sales during the nine months ended
September 30, 2021 due to global supply chain capacity constraints driving
increased freight costs, partially offset by improved global product margins. We
expect the increased freight costs to continue at least through early 2022.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $166.0 million for the nine
months ended September 30, 2021, an increase of 30.1%, compared to $127.6
million for the nine months ended September 30, 2020. The increase was driven
primarily by a $27.8 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 $4.7 million
increase in advertising and marketing costs and $2.3 million increase in
facilities and rent. These costs were partially offset by a decrease of $1.0
million in warehouse and office support. Selling, general and administrative
expenses were 24.0% and 29.9% of net sales for the nine months ended
September 30, 2021 and 2020, respectively. The decrease in selling, general and
administrative expenses as a percentage of net sales was due to increased net
sales outpacing selling, general, and administrative expenses.
Depreciation and Amortization
Depreciation and amortization expense was $30.8 million for the nine months
ended September 30, 2021, a decrease of 9.3%, compared to $33.9 million for the
nine months ended September 30, 2020, primarily related to the type and timing
of assets placed in service.
Interest Expense, Net
Interest expense, net was $5.9 million for the nine months ended September 30,
2021, a decrease of 28.0%, compared to $8.2 million for the nine months ended
September 30, 2020. The decrease in interest expense, net was due primarily to a
lower average balance on debt outstanding during the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020.
                                       26
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Other expense, net
Other expense, net was $0.5 million and $1.5 million for the nine months ended
September 30, 2021 and 2020, respectively. Other expense, net for the nine
months ended September 30, 2021 and 2020 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 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 expense was $12.8 million and income tax benefit was $1.1 million for
the nine months ended September 30, 2021 and 2020, respectively. The increase
for the nine months ended September 30, 2021 from the nine months ended
September 30, 2020 was primarily related to an increase in income before income
taxes.
Net income (loss)
Net income was $50.4 million for the nine months ended September 30, 2021,
compared to net loss of $5.1 million for the nine months ended September 30,
2020. The increase in net income was primarily due to the increase in net sales,
partially offset by an increase in cost of sales (exclusive of depreciation and
amortization) and selling, general and administrative expenses for the nine
months ended September 30, 2021 as compared to the nine months ended
September 30, 2020, as discussed above.


                                       27
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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 (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 (benefit), depreciation and
amortization. We define Adjusted EBITDA as EBITDA further adjusted for non-cash
charges related to equity-based compensation programs, 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 (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, 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.
                                       28
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By providing these Non-GAAP Financial Measures, together with reconciliations,
we believe we are enhancing investors' understanding of our business and our
results of operations, as well as assisting investors in evaluating how well we
are executing our strategic initiatives. The Non-GAAP Financial Measures have
limitations as analytical tools, and should not be considered in isolation, or
as an alternative to, or a substitute for net income (loss) 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, certain
severance, relocation and related costs, loss on debt extinguishment, foreign
currency transaction losses (gains) and other unusual or one-time items. It is
reasonable to expect that 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 normal
recurring adjustments and other 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.
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The following tables reconcile the Non-GAAP Financial Measures to the most directly comparable U.S. GAAP financial performance measure, which is net income (loss), for the periods presented:


                                                 Three Months Ended September         Nine Months Ended September
                                                             30,                                  30,
                                                    2021              2020               2021              2020
                                                               (In thousands, except per share data)
Net income (loss) attributable to Funko, Inc.   $  11,901          $  9,796          $  32,228          $ (4,915)
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)                                  6,474             5,801             18,177              (229)
Equity-based compensation (2)                       3,658             2,456              9,869             7,494

Certain severance, relocation and related
costs (3)                                               -             1,178                 81             2,184
Loss on debt extinguishment (4)                       675                 -                675                 -
Foreign currency transaction (gain) loss (5)         (505)              778                466             1,449

Income tax expense (6)                             (1,097)           (3,937)            (5,764)           (2,350)
Adjusted net income                             $  21,106          $ 16,072          $  55,732          $  3,633
Weighted-average shares of Class A common stock
outstanding-basic                                  39,448            35,483             37,856            35,155
Equity-based compensation awards and common
units of FAH, LLC that are convertible into
Class A common stock                               14,634            16,047             15,882            15,770
Adjusted weighted-average shares of Class A
stock outstanding - diluted                        54,082            51,530             53,738            50,925
Adjusted earnings per diluted share             $    0.39          $   0.31          $    1.04          $   0.07


                                               Three Months Ended September
                                                           30,                     Nine Months Ended September 30,
                                                  2021              2020               2021               2020
                                                                     (amounts in thousands)
Net income (loss)                             $  18,375          $ 15,597          $   50,405          $ (5,144)
Interest expense, net                             1,711             2,875               5,921             8,221
Income tax expense (benefit)                      5,939             1,420              12,814            (1,139)
Depreciation and amortization                    10,328            11,887              30,778            33,947
EBITDA                                        $  36,353          $ 31,779          $   99,918          $ 35,885
Adjustments:
Equity-based compensation (2)                     3,658             2,456               9,869             7,494

Certain severance, relocation and related
costs (3)                                             -             1,178                  81             2,184
Loss on debt extinguishment (4)                     675                 -                 675                 -
Foreign currency transaction (gain) loss (5)       (505)              778                 466             1,449
Adjusted EBITDA                               $  40,181          $ 36,191          $  111,009          $ 47,012


(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.
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(3)For the nine months ended September 30, 2021, represents severance,
relocation and related costs associated with residual payment of global
workforce reduction implemented in response to the COVID-19 pandemic. For the
three and nine months ended September 30, 2020, represents severance, relocation
and related costs associated with the consolidation of our warehouse facilities
in the United Kingdom and charges related to the global workforce reduction
implemented in response to the COVID-19 pandemic.
(4)Represents write-off of unamortized debt financing fees for the three and
nine months ended September 30, 2021.
(5)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.
(6)Represents the income tax expense effect of the above adjustments. This
adjustment uses an effective tax rate of 25% for all periods presented.
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.
Notwithstanding our obligations under the Tax Receivable Agreement between
Funko, Inc., FAH, LLC and each of the Continuing Equity Owners, we believe that
our sources of liquidity and capital will be sufficient to finance our continued
operations, growth strategy, our planned capital expenditures and the additional
expenses we expect to incur as a public company for at least the next 12 months.
Liquidity and Capital Resources
The following table shows summary cash flow information for the nine months
ended September 30, 2021 and 2020 (in thousands):
                                                                   Nine

Months Ended September 30,


                                                                       2021                2020
Net cash provided by operating activities                          $   78,792          $  60,345
Net cash used in investing activities                                 (17,151)           (14,704)
Net cash used in financing activities                                 (20,494)           (39,662)
Effect of exchange rates on cash and cash equivalents                    (157)               687
Net increase in cash and cash equivalents                          $

40,990 $ 6,666




Operating Activities. Net cash provided by operating activities was $78.8
million for the nine months ended September 30, 2021, compared to $60.3 million
for the nine months ended September 30, 2020. Changes in net cash provided by
operating activities result primarily from cash received from net sales and cash
payments for product costs and royalty expenses paid to our licensors. Other
drivers of the changes in net cash provided by operating activities include
shipping and freight costs, selling, general and administrative expenses
(including personnel expenses and commissions and rent and facilities costs) and
interest payments made for our short-term borrowings and long-term debt. Our
accounts receivable typically are short term and settle in approximately 30 to
90 days.
The increase for the nine months ended September 30, 2021 compared to the nine
months ended September 30, 2020 was primarily due to the increase in net income,
excluding non-cash adjustments, of $50.9 million. Partially offsetting the
increase in net income was a decrease related to changes in working capital that
decreased net cash provided by operating activities by $32.4 million and was
primarily due to decreases in accounts receivable, net of $35.7 million,
inventory of $70.7 million and prepaid expenses and other assets of $16.7
million, partially offset by a decrease in accrued expense and other current
liabilities of $34.5 million, accounts payable of $35.5 million, income taxes
payable of $10.6 million and accrued royalties of $10.1 million.
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Investing Activities. Our net cash used in investing activities primarily
consists of purchases of property and equipment. For the nine months ended
September 30, 2021, net cash used in investing activities was $17.2 million and
was primarily related to purchases of tooling and molds used in production for
our product lines. For the nine months ended September 30, 2020, net cash used
in investing activities was $14.7 million and was primarily related to purchases
of tooling and molds used in production our product lines.
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,
distributions to the Continuing Equity Owners and proceeds from the exercise of
equity-based options.
For the nine months ended September 30, 2021, net cash used in financing
activities was $20.5 million, primarily related to payments of $193.9 million of
the Company's former $235.0 million term loan facility (the "Former Term Loan
Facility") and distributions to the Continuing Equity Owners of $9.3 million,
offset by issuance of new term debt of $180.0 million and proceeds from exercise
of equity-based options of $3.7 million. For the nine months ended September 30,
2020, net cash used in financing activities was $39.7 million, primarily related
to payments on the Former Term Loan Facility of $8.8 million, distributions to
the Continuing Equity Owners of $3.5 million and net repayments on the Revolving
Credit Facility of $26.8 million.
Credit Facilities
On September 17, 2021, the Company, entered into a new credit agreement (the
"New Credit Agreement") providing for a term loan facility in the amount of
$180.0 million (the "New Term Loan Facility") and a revolving credit facility of
$100.0 million (the "New Revolving Credit Facility") (together the "New Credit
Facilities"). Proceeds from the New Credit Facilities were primarily used to
repay the Company's Former Term Loan Facility and its $75.0 million revolving
credit facility (the "Former Revolving Credit Facility" and together with the
Former Term Loan Facility, the "Former Credit Facilities"). The New Credit
Facilities are secured by substantially all assets of the Borrowers and any of
their existing or future material domestic subsidiaries, subject to customary
exceptions.
We are a holding company with no material assets, and we do not conduct any
business operations of our own. We have no independent means of generating
revenue or cash flow, and our ability to pay dividends in the future, if any, is
dependent upon the financial results and cash flows of FAH, LLC and its
subsidiaries and distributions we receive from FAH, LLC. Under the terms of the
Credit Facilities, our subsidiaries are currently limited in their ability to
pay cash dividends to the Company, subject to certain customary exceptions,
including among others:
•the ability to pay, so long as there is no current or ongoing event of default,
amounts required to be paid under the Tax Receivable Agreement, certain expenses
associated with being a public company and reimbursement of expenses required by
the FAH LLC Agreement or the Registration Rights Agreement; and
•the ability to make other distributions of up to $25.0 million during any
period of four consecutive fiscal quarters as long as after giving pro forma
effect to such distribution (i) no event of default then exists or would result
therefrom and (ii) the Net Leverage Ratio (as defined in the New Credit
Agreement) is not greater than a ratio that is 0.50:1.00 less than the Net
Leverage Ratio set forth in the financial covenant for the applicable fiscal
quarter.
We expect these limitations to continue in the future under the terms of our New
Credit Agreement and that they may continue under the terms of any future credit
agreement or any future debt or preferred equity securities of ours or of our
subsidiaries.
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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 commences 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) LIBOR, EURIBOR, HIBOR, CDOR, Daily Simple SONIA and/or
the Central Bank Rate, as applicable, plus 2.50% or (ii) ABR or the Canadian
prime rate, as applicable, plus 1.50%, in each case of clauses (i) and (ii),
subject to two 0.25% step-downs based on the achievement of certain leverage
ratios following the Closing Date. Each of LIBOR, EURIBOR, HIBOR, CDOR and Daily
Simple SONIA rates are subject to a 0.00% floor. For loans based on ABR, the
Central Bank Rate or the Canadian prime rate, interest payments are due
quarterly. For loans based on Daily Simple SONIA, interest payments are due
monthly. For loans based on LIBOR, EURIBOR, HIBOR or CDOR, interest payments are
due at the end of each applicable interest period.
The New 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 New Credit Agreement requires FAH, LLC and its subsidiaries to
comply on a quarterly basis with a maximum Net Leverage Ratio and a minimum
fixed charge coverage ratio (in each case, measured on a trailing four-quarter
basis). The maximum Net Leverage Ratio and the minimum fixed charge coverage
ratio for the fiscal quarter ending September 30, 2021 are 2.50:1.00 and
1.25:1.00, respectively.
As of September 30, 2021 and December 31, 2020, we were in compliance with all
covenants in our respective credit agreements in effect at such time. We expect
to maintain compliance with our covenants for at least one year from the
issuance of these financial statements based on our current expectations and
forecasts. If economic conditions caused by the COVID-19 global pandemic worsen
and the Company's earnings and operating cash flows do not continue to recover
as currently estimated by management, this could impact our ability to maintain
compliance with our amended financial covenants and require the Company to seek
additional amendments to our New Credit Agreement.
                                       33
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The New Credit Agreement also contains certain customary representations and
warranties and affirmative covenants, and certain reporting obligations. In
addition, the lenders under the New Credit Facilities will be permitted to
accelerate all outstanding borrowings and other obligations, terminate
outstanding commitments and exercise other specified remedies upon the
occurrence of certain events of default (subject to certain grace periods and
exceptions), which include, among other things, payment defaults, breaches of
representations and warranties, covenant defaults, certain cross-defaults and
cross-accelerations to other indebtedness, certain events of bankruptcy and
insolvency, certain material monetary judgments and changes of control. The New
Credit Agreement defines "change of control" to include, among other things, any
person or group other than ACON and its affiliates becoming the beneficial owner
of more than 35% of the voting power of the equity interests of Funko, Inc.
As of September 30, 2021, we had $177.6 million of indebtedness outstanding
under our New Term Loan Facility (net of unamortized discount of $2.5 million)
and no outstanding borrowings under our New Revolving Credit Facility, leaving
$100.0 million available under our New Revolving Credit Facility.
Form S-3 Registration Statement
On April 19, 2019, we filed a preliminary shelf registration statement on Form
S-3 (as amended on May 13, 2019 and August 30, 2019, the "Form S-3") with the
SEC. The Form S-3 was declared effective by the SEC on September 16, 2019 and
will remain effective until through September 15, 2022. 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 27,884,185 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 September 30, 2021, we had $93.2 million of cash and cash equivalents and
$167.8 million of working capital, compared with $52.3 million of cash and cash
equivalents and $120.7 million of working capital as of December 31, 2020.
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 line of credit.
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 5, Debt.
In addition, as described above, on April 19, 2019, we filed a preliminary shelf
registration statement on Form S-3 with the SEC, which was declared effective by
the SEC on September 16, 2019 and will remain effective until through September
15, 2022. The terms of any offering under the shelf registration statement will
be established at the time of such offering and will be described in a
prospectus supplement filed with the SEC prior to the completion of any such
offering.

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Uses


Additional future liquidity needs may include public company costs, tax
distributions, the redemption right held by the Continuing Equity Owners that
they may exercise from time to time (should we elect to exchange their common
units for a cash payment), payments under the Tax Receivable Agreement and
general cash requirements for operations and capital expenditures (including
future enterprise resource planning (ERP) system, additional platforms to
support our direct-to-consumer experience, and capital build out of new leased
warehouse and office space) . The Continuing Equity Owners may exercise their
redemption right for as long as their common units remain outstanding. Although
the actual timing and amount of any payments that may be made under the Tax
Receivable Agreement will vary, we expect that the payments we will be required
to make to the Continuing Equity Owners will be significant. Any payments made
by us to the Continuing Equity Owners under the Tax Receivable Agreement will
generally reduce the amount of overall cash flow that might have otherwise have
been available to us or to FAH, LLC and, to the extent that we are unable to
make payments under the Tax Receivable Agreement for any reason, the unpaid
amounts generally will be deferred and will accrue interest until paid by us;
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.
Contractual Obligations
With our New Credit Facilities, our future minimum commitments of our term debt
changes from what was disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2020. 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. We
also continue to support our growth initiatives through entering into additional
leases or extending current leases for warehouse and office space. There were no
other material changes in our commitments during the nine months ended
September 30, 2021 under contractual obligations from those disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2020 outside the
course of normal business.


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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, 2020.

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