FUNKO, INC. 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 theSecurities and Exchange Commission ("SEC") onMarch 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," the "Company," "Funko" and similar references refer: (1) following the consummation of the Transactions, toFunko, Inc. , and unless otherwise stated, all of its direct and indirect subsidiaries, includingFAH, LLC and (2) prior to the completion of the Transactions, toFAH, LLC and, unless otherwise stated, all of its subsidiaries. •"ACON" refers toACON Funko Investors, L.L.C. , aDelaware limited liability company, and certain funds affiliated withACON 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 inFAH, 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 ofFunko, Inc.'s Class A common stock.
•"
•"
•"Former Equity Owners" refers to those Original Equity Owners affiliated with ACON who transferred their indirect ownership interests in common units ofFAH, LLC for shares ofFunko, 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 inFAH, LLC pursuant toFAH, LLC's prior equity incentive plan and received common units ofFAH, 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
•"Original Equity Owners" refers to the owners of ownership interests inFAH, 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 betweenFunko, 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
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--------------------------------------------------------------------------------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 the first quarter of 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 which today is comprised of our games and Digital Pop! NFT businesses, respectively. Net sales product revenue has been recast into these branded categories for the three months endedMarch 31, 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 March 31,
2022 2021
(amounts in thousands)
Net sales $ 308,343 $ 189,177
Net income $ 14,518 $ 11,086
EBITDA (1) $ 29,877 $ 25,878
Adjusted EBITDA (1) $ 36,253 $ 29,772
(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, the
most closely comparable U.S. GAAP financial measure, see "Non-GAAP Financial
Measures" below.
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Results of Operations
Three Months Ended
The following table sets forth information comparing the components of net
income for the three months ended
Three Months Ended March 31, Period over Period Change
2022 2021 Dollar Percentage
(amounts in thousands, except percentages)
Net sales $ 308,343 $ 189,177 $ 119,166 63.0 %
Cost of sales (exclusive of depreciation and
amortization shown separately below) 199,649 110,853 88,796 80.1 %
Selling, general, and administrative
expenses 78,420 51,267 27,153 53.0 %
Depreciation and amortization 10,471 10,262 209 2.0 %
Total operating expenses 288,540 172,382 116,158 67.4 %
Income from operations 19,803 16,795 3,008 17.9 %
Interest expense, net 1,210 2,237 (1,027) (45.9) %
Other expense, net 397 1,179 (782) (66.3) %
Income before income taxes 18,196 13,379 4,817 36.0 %
Income tax expense 3,678 2,293 1,385 60.4 %
Net income 14,518 11,086 3,432 31.0 %
Less: net income attributable to
non-controlling interests 4,636 4,572 64 1.4 %
Net income attributable to
51.7 %
Net Sales
Net sales were $308.3 million for the three months ended March 31, 2022 , an
increase of 63.0%, compared to $189.2 million for the three months ended
March 31, 2021 . The three months ended March 31, 2021 saw lingering effects of
the COVID-19 pandemic with declines in net sales with limited in-store
occupancy. In addition to the impacts of the COVID-19 pandemic on the three
months ended March 31, 2021 , the increase in net sales was due primarily to
increased sales to mass-market retailers, e-commerce sites and specialty
retailers for the three months ended March 31, 2022 compared to the three months
ended March 31, 2021 .
For the three months ended March 31, 2022 , the number of active properties
increased 0.1% to 763 as compared to 762 for the three months ended March 31,
2021 , and the average net sales per active property increased 62.8% for the
three months ended March 31, 2022 as compared to the three months ended
March 31, 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.
On a geographical basis, net sales in the United States increased 70.1% to
$232.2 million in the three months ended March 31, 2022 as compared to $136.5
million in the three months ended March 31, 2021 . Net sales in Europe increased
43.5% to $57.1 million in the three months ended March 31, 2022 as compared to
$39.8 million in the three months ended March 31, 2021 and net sales in other
international locations increased 48.3% to $19.1 million in the three months
ended March 31, 2022 as compared to $12.9 million in the three months ended
March 31, 2021 .
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On a branded category basis, net sales of Core Collectible branded category
increased 52.8% to $239.6 million in the three months ended March 31, 2022 as
compared to $156.8 million in the three months ended March 31, 2021 . Loungefly
branded category net sales increased 103.5% to $50.1 million in the three months
ended March 31, 2022 as compared to $24.6 million in the three months ended
March 31, 2021 . Other branded category net sales increased 140.0% to $18.6
million in the three months ended March 31, 2022 as compared to $7.7 million in
the three months ended March 31, 2021 .
On a product category basis, net sales of figures increased 59.4% to $240.1
million in the three months ended March 31, 2022 as compared to $150.6 million
in the three months ended March 31, 2021 , and net sales of other products
increased 77.1% to $68.2 million in the three months ended March 31, 2022 as
compared to $38.5 million in the three months ended March 31, 2021 .
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was$199.6 million for the three months endedMarch 31, 2022 , an increase of 80.1%, compared to$110.9 million for the three months endedMarch 31, 2021 . Cost of sales (exclusive of depreciation and amortization) increased primarily as a result of increased sales, as discussed above, as well as higher costs as a percentage of net sales as described below. Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of net sales, was 35.3% for the three months endedMarch 31, 2022 , compared to 41.4% for the three months endedMarch 31, 2021 . The decrease in gross margin (exclusive of depreciation and amortization) for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 was driven primarily by an increase in shipping and freight costs as a percentage of net sales during the three months endedMarch 31, 2022 due to global supply chain capacity constraints driving increased freight costs. We have experienced and anticipate that we will continue to experience inflationary pressures on inbound shipping and product costs which we have partially mitigated through price increases of certain products.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were$78.4 million for the three months endedMarch 31, 2022 , an increase of 53.0%, compared to$51.3 million for the three months endedMarch 31, 2021 . The increase was driven primarily by a$17.4 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), and a$2.3 million increase in administrative costs. We expect personnel and related costs to remain elevated through at least the second quarter of 2022 to support the transition of ourU.S. distribution warehouses and due to additional inflationary pressures to increase wages, commissions and benefits expenses. Selling, general and administrative expenses were 25.4% and 27.1% of net sales for the three months endedMarch 31, 2022 and 2021, respectively.
Depreciation and Amortization
Depreciation and amortization expense was$10.5 million for the three months endedMarch 31, 2022 , an increase of 2.0%, compared to$10.3 million for the three months endedMarch 31, 2021 , primarily related to the type and timing of assets placed in service. Interest Expense, Net Interest expense, net was$1.2 million for the three months endedMarch 31, 2022 , a decrease of 45.9%, compared to$2.2 million for the three months endedMarch 31, 2021 . The decrease in interest expense, net was due primarily a lower average balance on debt outstanding during the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . 22 --------------------------------------------------------------------------------
Other expense, net
Other expense, net was$0.4 million and$1.2 million for the three months endedMarch 31, 2022 and 2021, respectively. Other expense, net for the three months endedMarch 31, 2022 and 2021 was primarily related to foreign currency gains and losses relating to transactions denominated in currencies other than theU.S. dollar. Income tax expense Income tax expense was$3.7 million and$2.3 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase for the three months endedMarch 31, 2022 fromMarch 31, 2021 was primarily related to an increase in income before income taxes.
Net income
Net income was$14.5 million for the three months endedMarch 31, 2022 , compared to$11.1 million for the three months endedMarch 31, 2021 . 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 three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 , as discussed above. 23 --------------------------------------------------------------------------------
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 underU.S. GAAP and should not be considered as an alternative to net income, earnings per share or any other performance measure derived in accordance withU.S. GAAP. We define EBITDA as net income before interest expense, net, income tax expense, depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted for non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses and other unusual or one-time items. We define Adjusted Net Income as net income attributable toFunko, Inc. adjusted for the reallocation of income attributable to non-controlling interests from the assumed exchange of all outstanding common units and options inFAH, LLC for newly issued-shares of Class A common stock ofFunko, 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, foreign currency transaction gains and losses and the income tax expense 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 inFAH, LLC for newly issued-shares of Class A common stock ofFunko, 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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By providing these Non-GAAP Financial Measures, together with reconciliations,
we believe we are enhancing investors' understanding of our business and our
results of operations, as well as assisting investors in evaluating how well we
are executing our strategic initiatives. The Non-GAAP Financial Measures have
limitations as analytical tools, and should not be considered in isolation, or
as an alternative to, or a substitute for net income or other financial
statement data presented in our unaudited condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q as
indicators of financial performance. Some of the limitations are:
•such measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working capital needs;
•such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.
Due to these limitations, Non-GAAP Financial Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on ourU.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, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses 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. 25 --------------------------------------------------------------------------------
The following tables reconcile the Non-GAAP Financial Measures to the most
directly comparable
Three Months Ended March 31,
2022 2021
(In thousands, except per share data)
Net income attributable to Funko, Inc. $
9,882
4,636 4,572
Equity-based compensation (2) 3,369 2,690
Acquisition costs and other expenses (3) 930 -
Certain severance, relocation and related costs (4) 1,680 25
Foreign currency transaction loss (5) 397 1,179
Income tax expense (6) (2,465) (2,025)
Adjusted net income $ 18,429 $ 12,955
Weighted-average shares of Class A common stock outstanding-basic 40,324 36,194
Equity-based compensation awards and common units of
13,808 16,765
Adjusted weighted-average shares of Class A stock outstanding - diluted
54,132 52,959
Adjusted earnings per diluted share $ 0.34 $ 0.24
Three Months Ended March 31,
2022 2021
(amounts in thousands)
Net income $ 14,518 $ 11,086
Interest expense, net 1,210 2,237
Income tax expense 3,678 2,293
Depreciation and amortization 10,471 10,262
EBITDA $ 29,877 $ 25,878
Adjustments:
Equity-based compensation (2) 3,369 2,690
Acquisition costs and other expenses (3) 930 -
Certain severance, relocation and related costs (4) 1,680 25
Foreign currency transaction loss (5) 397 1,179
Adjusted EBITDA $ 36,253 $ 29,772
(1)Represents the reallocation of net income 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 was attributable to non-controlling
interests.
(2)Represents non-cash charges related to equity-based compensation programs,
which vary from period to period depending on the timing of awards.
(3)For the three months ended March 31, 2022 includes acquisition-related costs
related to investment banking and due diligence fees.
(4)For the three months ended March 31, 2022 , includes charges related to
one-time relocation costs for U.S. warehouse personnel in connection with the
new opening of a warehouse and distribution facility in Buckeye, Arizona . For
the three months ended March 31, 2021 , represents severance, relocation and
related costs associated with residual payment of global workforce reduction
implemented in response to the COVID-19 pandemic.
(5)Represents both unrealized and realized foreign currency 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.
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--------------------------------------------------------------------------------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 betweenFunko, 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. However, we cannot assure you that our cash provided by operating activities, cash and cash equivalents or cash available under our Revolving Credit Facility will be sufficient to meet our future needs. If we are unable to generate sufficient cash flows from operations in the future, and if availability under our Revolving Credit Facility is not sufficient, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all.
Liquidity and Capital Resources
The following table shows summary cash flow information for the three months
ended
Three
Months Ended
2022 2021
Net cash (used in) provided by operating activities
(19,474) (3,685)
Net cash used in financing activities (7,830) (10,400)
Effect of exchange rates on cash and cash equivalents (167) (938)
Net change in cash and cash equivalents $
(50,426)
Operating Activities. Net cash used in operating activities was$23.0 million for the three months endedMarch 31, 2022 , compared to net cash provided of$37.5 million for the three months endedMarch 31, 2021 . Changes in net cash used in or 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 decrease in net cash provided by operating activities for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 was primarily due to changes in working capital that decreased net cash provided by operating activities by$63.2 million . Within working capital the primary drivers were increases in accrued expenses and other current liabilities of$49.3 million and accounts payable of$4.4 million , decreases in accounts receivable, net of$18.6 million and prepaid expenses and other assets of$5.0 million , offset by a decrease in accrued royalties of$8.1 million , an increase in inventory of$5.8 million , and an increase in net income, excluding non-cash adjustments of$2.7 million . 27 -------------------------------------------------------------------------------- Investing Activities. Our net cash used in investing activities primarily consists of purchases of property and equipment. For the three months endedMarch 31, 2022 , net cash used in investing activities was$19.5 million and was primarily related to purchases of equipment for our new distribution facility inBuckeye, Arizona and tooling and molds used for production our product lines. For the three months endedMarch 31, 2021 , net cash used in investing activities was$3.7 million and was primarily related to purchases of tooling and molds used for 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 three months endedMarch 31, 2022 , net cash used in financing activities was$7.8 million , primarily related to payments on the New Term Loan Facility (as defined below) of$4.5 million , and distributions to the Continuing Equity Owners of$3.4 million . For the three months endedMarch 31, 2021 , net cash used in financing activities was$10.4 million , primarily related to payments on the Term Loan Facility of$8.0 million and distributions to the Continuing Equity Owners of$2.4 million . Credit Facilities OnSeptember 17, 2021 , we 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"). OnApril 26, 2022 , we entered into Amendment No. 1 to the New Credit Agreement (the "Amended New Credit Agreement"), which allows for additional Restricted Payments (as defined in the Amended New Credit Agreement) using specified funding sources. 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. The New Term Loan Facility matures onSeptember 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 onDecember 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 CentralBank 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 CentralBank 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;
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--------------------------------------------------------------------------------•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 requiresFAH, 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 endingMarch 31, 2022 are 2.50:1.00 and 1.25:1.00, respectively. As ofMarch 31, 2022 andDecember 31, 2021 , 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 negatively impact the Company's earnings and operating cash flows, 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. 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 ofFunko, Inc. As ofMarch 31, 2022 , we had$168.9 million of indebtedness outstanding under our New Term Loan Facility (net of unamortized discount of$2.1 million ) and no outstanding borrowings under our New Revolving Credit Facility, leaving$100.0 million available under our New Revolving Credit Facility. 29 --------------------------------------------------------------------------------
Form S-3 Registration Statement
OnApril 19, 2019 , we filed a preliminary shelf registration statement on Form S-3 (as amended onMay 13, 2019 andAugust 30, 2019 , the "Form S-3") with theSEC . The Form S-3 was declared effective by theSEC onSeptember 16, 2019 and will remain effective until throughSeptember 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 theSEC prior to the completion of any such offering.
Future Sources and Uses of Liquidity
As ofMarch 31, 2022 , we had$33.1 million of cash and cash equivalents and$164.5 million of working capital, compared with$83.6 million of cash and cash equivalents and$167.6 million of working capital as ofDecember 31, 2021 . 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, onApril 19, 2019 , we filed a preliminary shelf registration statement on Form S-3 with theSEC , which was declared effective by theSEC onSeptember 16, 2019 . 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 theSEC prior to the completion of any such offering.
Uses
As noted above, our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, debt service and general corporate needs. There have been no material changes to our liquidity and capital commitments as described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 30 -------------------------------------------------------------------------------- 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 toFAH, LLC and, to the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us; provided however, that nonpayment for a specified period may constitute a material breach under the Tax Receivable Agreement and therefore may accelerate payments due under the Tax Receivable Agreement.
Seasonality
While our customers in the retail industry typically operate in highly seasonal businesses, we have historically experienced only moderate seasonality in our business. Historically, over 50% of our net sales are made in the third and fourth quarters, primarily in the period from August through November, as our customers build up their inventories in anticipation of the holiday season. Historically, the first quarter of the year has represented the lowest volume of shipment and sales in our business and in the retail and toy industries generally and it is also the least profitable quarter due to the various fixed costs of the business. However, the rapid growth we have experienced in recent years may have masked the full effects of seasonal factors on our business to date, and as such, seasonality may have a greater effect on our results of operations in future periods.
Critical Accounting Policies and Estimates
Discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements which have been prepared in accordance withU.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 withU.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 endedDecember 31, 2021 . 31
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