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:
•"ACON" refers to
•"ACON Sale" refers to the sale by ACON and certain of its affiliates to TCG of an aggregate of 12,520,559 shares of our Class A common stock pursuant to a Stock Purchase Agreement, dated as ofMay 3, 2022 , by and among ACON, certain affiliates of ACON and TCG. •"Continuing Equity Owners" refers collectively toACON Funko Investors, L.L.C. , Fundamental, the Former Profits Interests Holders, certain former warrant holders and certain current and former executive officers, employees and directors and each of their permitted transferees that owned common units inFAH, LLC after our initial public offering ("IPO") and who may redeem at each of their options, their common units for, at our election, cash or newly-issued shares 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 IPO. •"Former Profits Interests Holders" refers collectively to certain of our directors and certain current executive officers and employees, in each case, who held existing vested and unvested profits interests inFAH, LLC pursuant toFAH, LLC's existing equity incentive plan and who received common units ofFAH, LLC in exchange for their profits interests (subject to the common units received in exchange for unvested profits interests remaining subject to their existing time-based vesting requirements) in connection with our IPO.
•"Fundamental" refers collectively to
•"Original Equity Owners" refers to the owners of ownership interests inFAH, LLC , collectively, prior to the IPO, which include ACON, Fundamental, the Former Profits Interests Holders and certain current and former executive officers, employees and directors.
•"Tax Receivable Agreement" refers to a tax receivable agreement entered into
between
•"TCG" refers to TCG 3.0
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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 2022, we created three new branded categories to better align our product net sales results and execute against our operating objectives. The Core Collectible branded category includes Pop! Vinyl, and newer collectible brands such as Soda, Vinyl Gold and Popsies. The Loungefly branded category includes our softlines products. The Other branded category includes our Toy and Games brands and our Digital Brands. Net sales product revenue has been recast into these branded categories for the three and six months endedJune 30, 2021 .
Key Performance Indicators
We consider the following metrics to be key performance indicators to evaluate our business, develop financial forecasts, and make strategic decisions.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(amounts in thousands)
Net sales $ 315,716 $ 236,110 $ 624,059 $ 425,287
Net income $ 15,793 $ 20,944 $ 30,311 $ 32,030
EBITDA (1) $ 19,991 $ 37,687 $ 49,868 $ 63,565
Adjusted EBITDA (1) $ 31,751 $ 41,056 $ 68,004 $ 70,828
(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 June 30, Period over Period Change
2022 2021 Dollar Percentage
(amounts in thousands, except percentages)
Net sales $ 315,716 $ 236,110 $ 79,606 33.7 %
Cost of sales (exclusive of depreciation and
amortization shown separately below) 212,597 143,756 68,841 47.9 %
Selling, general, and administrative
expenses 82,693 54,875 27,818 50.7 %
Depreciation and amortization 11,483 10,188 1,295 12.7 %
Total operating expenses 306,773 208,819 97,954 46.9 %
Income from operations 8,943 27,291 (18,348) (67.2) %
Interest expense, net 1,667 1,973 (306) (15.5) %
Other expense (income), net 435 (208) 643 nm
Income before income taxes 6,841 25,526 (18,685) (73.2) %
Income tax (benefit) expense (8,952) 4,582 (13,534) nm
Net income 15,793 20,944 (5,151) (24.6) %
Less: net income attributable to
non-controlling interests 1,121 7,131 (6,010) (84.3) %
Net income attributable to
6.2 %
Net Sales
Net sales were $315.7 million for the three months ended June 30, 2022 , an
increase of 33.7%, compared to $236.1 million for the three months ended
June 30, 2021 . The three months ended June 30, 2021 saw lingering effects of the
COVID-19 pandemic with declines in net sales. In addition to the impacts of the
COVID-19 pandemic on the three months ended June 30, 2021 , the increase in net
sales was due primarily to increased sales to specialty retailers, e-commerce
sites and mass-market retailers for the three months ended June 30, 2022
compared to the three months ended June 30, 2021 .
For the three months ended June 30, 2022 , the number of active properties
decreased 4.2% to 762 as compared to 795 for the three months ended June 30,
2021 , and the average net sales per active property increased 39.5% for the
three months ended June 30, 2022 as compared to the three months ended June 30,
2021 . An active property is a licensed property from which we generate sales of
products during a given period. While we expect to see growth in the number of
active properties and average sales per active property over time, we expect
that the number of active properties and the average sales per active property
will fluctuate from quarter to quarter based on what is relevant in pop culture
at that time, the types of properties we are producing against and general
economic trends.
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On a geographical basis, net sales in the United States increased 41.7% to
$231.2 million in the three months ended June 30, 2022 as compared to $163.2
million in the three months ended June 30, 2021 . Net sales in Europe increased
21.8% to $63.4 million in the three months ended June 30, 2022 as compared to
$52.0 million in the three months ended June 30, 2021 and net sales in other
international locations increased 1.2% to $21.1 million in the three months
ended June 30, 2022 as compared to $20.9 million in the three months ended
June 30, 2021 .
On a branded product basis, net sales of Core Collectible branded category
increased 21.3% to $233.0 million in the three months ended June 30, 2022 as
compared to $192.1 million in the three months ended June 30, 2021 , Loungefly
branded products net sales increased 114.3% to $70.0 million in the three months
ended June 30, 2022 as compared to $32.7 million in the three months ended
June 30, 2021 and net sales of other branded products increased 11.6% to $12.7
million in the three months ended June 30, 2022 as compared to $11.4 million in
the three months ended June 30, 2021 .
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was$212.6 million for the three months endedJune 30, 2022 , an increase of 47.9%, compared to$143.8 million for the three months endedJune 30, 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 32.7% for the three months endedJune 30, 2022 , compared to 39.1% for the three months endedJune 30, 2021 . The decrease in gross margin (exclusive of depreciation and amortization) for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was driven primarily by an increase in shipping and freight costs as a percentage of net sales during the three months endedJune 30, 2022 due to continued global supply chain capacity constraints and fuel-based surcharges 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$82.7 million for the three months endedJune 30, 2022 , an increase of 50.7%, compared to$54.9 million for the three months endedJune 30, 2021 . The increase was driven primarily by a$12.1 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$6.5 million increase in professional fees, which included one-time transaction expenses for the consolidation of theWashington state based warehouse and distribution centers and move toArizona , a$3.2 million increase in advertising and marketing costs and a$3.0 million increase in rent, facility and warehouse support as the newBuckeye warehouse and distribution facility began operations during the quarter. We expect personnel and related costs to remain elevated through at least the end of 2022 to support the final transitions of ourU.S. distribution warehouses, additional personnel to support strategic initiatives and overall business growth and due to additional inflationary pressures to increase wages, commissions and benefits expenses. We also expect elevated costs related to our enterprise resource planning ("ERP") implementation as we expect to finalize the remaining steps in early 2023. Selling, general and administrative expenses were 26.2% and 23.2% of net sales for the three months endedJune 30, 2022 and 2021, respectively. 25 --------------------------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense was$11.5 million for the three months endedJune 30, 2022 , an increase of 12.7%, compared to$10.2 million for the three months endedJune 30, 2021 , 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 endedJune 30, 2022 , a decrease of 15.5%, compared to$2.0 million for the three months endedJune 30, 2021 . The decrease in interest expense, net was due primarily a lower average balance on term debt outstanding as well as lower average interest rates during the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 .
Other expense (income), net
Other expense, net was$0.4 million for the three months endedJune 30, 2022 , compared to other income of$0.2 million for the three months endedJune 30, 2021 . Other expense (income), net for the three months endedJune 30, 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 (benefit) expense
Income tax benefit was$9.0 million and income tax expense was$4.6 million for the three months endedJune 30, 2022 and 2021, respectively. During the three months endedJune 30, 2022 , the Company realized a discrete benefit of$11.0 million from the release of a valuation allowance on the outside basis deferred tax asset. Net income Net income was$15.8 million for the three months endedJune 30, 2022 , compared to$20.9 million for the three months endedJune 30, 2021 . The decrease in net income was primarily due to the increases in cost of sales (exclusive of depreciation and amortization) and selling, general and administrative expenses outpacing the increase in net sales for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 , as discussed above. 26 --------------------------------------------------------------------------------
Six Months Ended
The following table sets forth information comparing the components of net
income for the six months ended
Six Months Ended June 30, Period over Period Change
2022 2021 Dollar Percentage
(amounts in thousands, except percentages)
Net sales $ 624,059 $ 425,287 $ 198,772 46.7 %
Cost of sales (exclusive of depreciation and
amortization shown separately below) 412,246 254,609 157,637 61.9 %
Selling, general, and administrative
expenses 161,113 106,142 54,971 51.8 %
Depreciation and amortization 21,954 20,450 1,504 7.4 %
Total operating expenses 595,313 381,201 214,112 56.2 %
Income from operations 28,746 44,086 (15,340) (34.8) %
Interest expense, net 2,877 4,210 (1,333) (31.7) %
Other expense, net 832 971 (139) (14.3) %
Income before income taxes 25,037 38,905 (13,868) (35.6) %
Income tax (benefit) expense (5,274) 6,875 (12,149) nm
Net income 30,311 32,030 (1,719) (5.4) %
Less: net income attributable to
non-controlling interests 5,757 11,703 (5,946) (50.8) %
Net income attributable to
20.8 %
Net Sales
Net sales were $624.1 million for the six months ended June 30, 2022 , an
increase of 46.7%, compared to $425.3 million for the six months ended June 30,
2021 . In addition to the impacts of the COVID-19 pandemic on the six months
ended June 30, 2021 , the increase in net sales was due primarily to increased
sales to specialty retailers, mass-market retailers, and e-commerce sites for
the six months ended June 30, 2022 compared to the six months ended June 30,
2021 .
For the six months ended June 30, 2022 , the number of active properties
increased 0.6% to 851 as compared to 846 for the six months ended June 30, 2021 ,
and the average net sales per active property increased to 45.9% for the six
months ended June 30, 2022 as compared to the six months ended June 30, 2021 .
On a geographical basis, net sales in the United States increased 54.6% to
$463.4 million in the six months ended June 30, 2022 as compared to $299.7
million in the six months ended June 30, 2021 . Net sales in Europe increased
31.2% to $120.4 million in the six months ended June 30, 2022 as compared to
$91.8 million in the six months ended June 30, 2021 and net sales in other
international locations increased 19.2% to $40.2 million in the six months ended
June 30, 2022 as compared to $33.8 million in the six months ended June 30,
2021 . Increases in net sales in Europe and other international locations were
due primarily to increased sales to specialty retailers, mass-market retailers
and direct to consumer customers in addition to the impacts of the COVID-19
pandemic on the six months ended June 30, 2021 .
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On a branded product basis, net sales of Core Collectible branded products
increased 35.5% to $472.7 million in the six months ended June 30, 2022 as
compared to $348.9 million in the six months ended June 30, 2021 , Loungefly
branded products increased 109.6% to $120.1 million in the six months ended
June 30, 2022 as compared to $57.3 million in the six months ended June 30, 2021
and net sales of other branded products increased 63.6% to $31.3 million in the
six months ended June 30, 2022 as compared to $19.1 million in the six months
ended June 30, 2021 .
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was$412.2 million for the six months endedJune 30, 2022 , an increase of 61.9%, compared to$254.6 million for the six months endedJune 30, 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 33.9% for the six months endedJune 30, 2022 , compared to 40.1% for the six months endedJune 30, 2021 . The decrease in gross margin (exclusive of depreciation and amortization) for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was driven primarily by an increase in shipping and freight costs as a percentage of net sales during the six months endedJune 30, 2022 due to global supply chain capacity constraints and fuel-based surcharges 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$161.1 million for the six months endedJune 30, 2022 , an increase of 51.8%, compared to$106.1 million for the six months endedJune 30, 2021 . The increase was driven primarily by a$29.6 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$9.8 million increase in professional fees, which included one-time transaction expenses for the consolidation of theWashington state based warehouses and distributions centers and move toArizona , a$4.8 million increase in rent, facility and warehouse support as the newBuckeye warehouse and distribution facility began operations, a$4.3 million increase in advertising and marketing costs and a$2.8 million increase in administrative costs, primarily related to increased credit card fees and provisional allowance for bad debt expense. We expect personnel and related costs to remain elevated through at least the end of 2022 to support the final transitions of ourU.S. distribution warehouses, additional personnel to support strategic initiatives and overall business growth and due to additional inflationary pressures to increase wages, commissions and benefits expenses. We also expect elevated costs related to our enterprise resource planning ("ERP") implementation as we expect to finalize the remaining steps in early 2023. Selling, general and administrative expenses were 25.8% and 25.0% of net sales for the six months endedJune 30, 2022 and 2021, respectively.
Depreciation and Amortization
Depreciation and amortization expense was$22.0 million for the six months endedJune 30, 2022 , an increase of 7.4%, compared to$20.5 million for the six months endedJune 30, 2021 , primarily related to the type and timing of assets placed in service. 28 --------------------------------------------------------------------------------
Interest Expense, Net
Interest expense, net was$2.9 million for the six months endedJune 30, 2022 , a decrease of 31.7%, compared to$4.2 million for the six months endedJune 30, 2021 . The decrease in interest expense, net was due primarily to a lower average balance on term debt outstanding as well as lower average interest rates during the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . Other expense, net Other expense, net was$0.8 million and$1.0 million for the six months endedJune 30, 2022 and 2021, respectively. Other expense, net for the six months endedJune 30, 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 (benefit) expense Income tax benefit was$5.3 million and income tax expense was$6.9 million for the six months endedJune 30, 2022 and 2021, respectively. During the six months endedJune 30, 2022 , the Company realized a discrete benefit of$11.0 million from the release of a valuation allowance on the outside basis deferred tax asset.
Net income
Net income was$30.3 million for the six months endedJune 30, 2022 , compared to$32.0 million for the six months endedJune 30, 2021 . The decrease in net income was primarily due to the increases in cost of sales (exclusive of depreciation and amortization) and selling, general and administrative expenses outpacing the increase in net sales, for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 , as discussed above. 29 --------------------------------------------------------------------------------
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 (benefit) 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 losses (gains) 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 losses (gains) and other unusual or one-time items, 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 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. 31 --------------------------------------------------------------------------------
The following tables reconcile the Non-GAAP Financial Measures to the most
directly comparable
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In thousands, except per share data)
Net income attributable to Funko, Inc. $ 14,672 $ 13,813 $ 24,554 $ 20,327
Reallocation of net income attributable to
non-controlling interests from the assumed
exchange of common units of FAH, LLC for Class
A common stock (1) 1,121 7,131 5,757 11,703
Equity-based compensation (2) 3,953 3,521 7,322 6,211
Acquisition transaction costs and other
expenses (3) 1,920 - 2,850 -
Certain severance, relocation and related
costs (4) 5,453 56 7,133 81
Foreign currency transaction (gain) loss (5) 434 (208) 831 971
Income tax expense (6) (13,602) (2,642) (16,067) (4,667)
Adjusted net income $ 13,951 $ 21,671 $ 32,380 $ 34,626
Weighted-average shares of Class A common stock
outstanding-basic 43,741 37,881 42,042 37,047
Equity-based compensation awards and common
units of FAH, LLC that are convertible into
Class A common stock 10,083 16,317 11,935 16,537
Adjusted weighted-average shares of Class A
stock outstanding - diluted 53,824 54,198 53,977 53,584
Adjusted earnings per diluted share $ 0.26 $ 0.40 $ 0.60 $ 0.65
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(amounts in thousands)
Net income $ 15,793 $ 20,944 $ 30,311 $ 32,030
Interest expense, net 1,667 1,973 2,877 4,210
Income tax (benefit) expense (8,952) 4,582 (5,274) 6,875
Depreciation and amortization 11,483 10,188 21,954 20,450
EBITDA $ 19,991 $ 37,687 $ 49,868 $ 63,565
Adjustments:
Equity-based compensation (2) 3,953 3,521 7,322 6,211
Acquisition transaction costs and other
expenses (3) 1,920 - 2,850 -
Certain severance, relocation and related
costs (4) 5,453 56 7,133 81
Foreign currency transaction (gain) loss (5) 434 (208) 831 971
Adjusted EBITDA $ 31,751 $ 41,056 $ 68,004 $ 70,828
32-------------------------------------------------------------------------------- (1)Represents the reallocation of net income attributable to non-controlling interests from the assumed exchange of common units ofFAH, 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 and six months endedJune 30, 2022 includes acquisition-related costs related to investment banking and due diligence fees. (4)For the three and six months endedJune 30, 2022 , includes charges related to one-time relocation costs forU.S. warehouse personnel and inventory in connection with the new opening of a warehouse and distribution facility inBuckeye, Arizona . For the three and six months endedJune 30, 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 gains and losses on transactions denominated other than inU.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. For the three and six months endedJune 30, 2022 , this also includes the$11.0 million discrete benefit from the release of a valuation allowance on the outside basis deferred tax asset.
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 (the "New Revolving Credit Facility") as amended by the Second Amendment, which, among other things, increased the New Revolving Credit Facility to$215.0 million , 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 New 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. 33 --------------------------------------------------------------------------------
Liquidity and Capital Resources
The following table shows summary cash flow information for the six months ended
Six
Months Ended
2022 2021
Net cash (used in) provided by operating activities $ (30,139) $ 71,431
Net cash used in investing activities (47,620) (11,129)
Net cash provided by (used in) financing activities 51,335 (17,116)
Effect of exchange rates on cash and cash equivalents (942) 33
Net change in cash and cash equivalents $
(27,366)
Operating Activities. Net cash used in operating activities was$30.1 million for the six months endedJune 30, 2022 , compared to net cash provided by operating activities of$71.4 million for the six months endedJune 30, 2021 . 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 decrease for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily due to a decrease related to changes in working capital that decreased net cash provided by operating activities by$103.8 million . The working capital decrease was primarily due to decreases in inventory of$42.5 million and prepaid expenses and other assets of$30.1 million , and an increase in accrued expense and other current liabilities of$45.8 million , income taxes payable of$20.9 million , and accrued royalties of$11.3 million , partially offset by a decrease in accounts payable of$49.4 million . Timing of the receipt of inventory due to the global supply chain capacity constraints and resultant downstream invoice payment have contributed significantly to the decrease in working capital. Investing Activities. Our net cash used in investing activities primarily consists of purchases of property and equipment. For the six months endedJune 30, 2022 , net cash used in investing activities was$47.6 million , which primarily related to purchases of tooling and molds used in production for our product lines and warehouse equipment for theU.S. consolidated warehouse and distribution center inBuckeye, Arizona . In addition, we used$14.0 million in net cash for the acquisition of Mondo. For the six months endedJune 30, 2021 , net cash used in investing activities was$11.1 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 six months endedJune 30, 2022 , net cash provided by financing activities was$51.3 million , primarily related to a draw of$70.0 million on the New Revolving Credit Facility, offset by payments on the Term Loan Facility of$9.0 million , and distributions to the Continuing Equity Owners of$10.2 million . For the six months endedJune 30, 2021 , net cash used in financing activities was$17.1 million , primarily related to payments on the Term Loan Facility of$13.9 million and distributions to the Continuing Equity Owners of$6.9 million , partially offset by proceeds from the exercise of equity-based options of$3.7 million . 34 --------------------------------------------------------------------------------
Credit Facilities
OnSeptember 17, 2021 ,FAH, LLC and certain of its material domestic subsidiaries from time to time (collectively, "we" or the "Credit Agreement Parties") entered into a new credit agreement (the "New Credit Agreement") withJPMorgan Chase Bank, N.A .,PNC Bank, National Association ,KeyBank National Association ,Citizens Bank, N.A. ,Bank of the West ,HSBC Bank USA, National Association ,Bank of America, N.A .,U.S. Bank National Association ,MUFG Union Bank, N.A. , andWells Fargo Bank, National Association (collectively, the "Initial Lenders") andJPMorgan Chase Bank, N.A . as administrative agent, providing for a term loan facility in the amount of$180.0 million (the "New Term Loan Facility") and the New Revolving Credit Facility in the amount of$100.0 million (together the "New Credit Facilities"). OnApril 26, 2022 , we entered into Amendment No. 1 to the New Credit Agreement (the "First Amendment") with theInitial Lenders andJPMorgan Chase Bank, N.A . as administrative agent, which allows for additional Restricted Payments (as defined in the First Amendment) using specified funding sources. OnJuly 29, 2022 , we entered into Amendment No. 2 to the New Credit Agreement (the "Second Amendment") with theInitial Lenders andGoldman Sachs Bank USA (collectively, the "Lenders") andJPMorgan Chase Bank, N.A . as administrative agent, which increases the New Revolving Credit Facility to$215.0 million and converts the New Credit Facility interest rate index from Borrower option LIBOR to SOFR. 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. Prior to the Second Amendment, loans under the New Credit Facilities, at the Borrowers' option, bore interest at either (i) LIBOR, EURIBOR, HIBOR, CDOR, Daily Simple SONIA and/or the CentralBank Rate , as applicable, plus 2.50% per annum or (ii) ABR or the Canadian prime rate, as applicable, plus 1.50% per annum, in each case of clauses (i) and (ii), subject to two 0.25% per annum step-downs based on the achievement of certain leverage ratios following the Closing Date. Each of LIBOR, EURIBOR, HIBOR, CDOR and Daily Simple SONIA rates were subject to a 0% floor. For loans based on ABR, the CentralBank Rate or the Canadian prime rate, interest payments were due quarterly. For loans based on Daily Simple SONIA, interest payments were due monthly. For loans based on LIBOR, EURIBOR, HIBOR or CDOR, interest payments were due at the end of each applicable interest period. Following the effectiveness of the Second Amendment, loans under the New Credit Facilities will, at the Borrowers' option, bear interest at either (i) Term SOFR, EURIBOR, HIBOR, CDOR, SONIA and/or the CentralBank Rate , as applicable, plus (x) 2.50% per annum and (y) solely in the case of Term SOFR based loans, 0.10% per annum or (ii) ABR or the Canadian prime rate, as applicable, plus 1.50% per annum, in each case of clauses (i) and (ii), subject to two 0.25% per annum step-downs based on the achievement of certain leverage ratios following the Second Amendment effective date. Each of Term SOFR, EURIBOR, HIBOR, CDOR and SONIA rates are subject to a 0% floor. For loans based on ABR, theCentral Bank Rate or the Canadian prime rate, interest payments are due quarterly. For loans based on SONIA, interest payments are due monthly. For loans based on Term SOFR, EURIBOR, HIBOR or CDOR, interest payments are due at the end of each applicable interest period. 35
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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 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 endingJune 30, 2022 are 2.50:1.00 and 1.25:1.00, respectively. As ofJune 30, 2022 andDecember 31, 2021 , we were in compliance with all covenants in New Credit Agreement. 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, including as a result of the COVID-19 global pandemic, rising inflation or rising interest rates, 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 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 ofJune 30, 2022 , we had$164.5 million of indebtedness outstanding under our Term Loan Facility (net of unamortized discount of$2.0 million ) and$70.0 million outstanding borrowings under our New Revolving Credit Facility, leaving$30.0 million available under our New Revolving Credit Facility. 36 --------------------------------------------------------------------------------
Form S-3 Registration Statement
OnJuly 15, 2022 , we filed a preliminary shelf registration statement on Form S-3 with theSEC . The Form S-3 was declared effective by theSEC onJuly 26, 2022 and will remain effective until throughJuly 25, 2025 . The Form S-3 allows us to offer and sell from time-to-time up to$100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts or units comprised of any combination of these securities for our own account and allows certain selling stockholders to offer and sell 17,318,008 shares of Class A common stock in one or more offerings. The Form S-3 is intended to provide us flexibility to conduct registered sales of our securities, subject to market conditions and our future capital needs. The terms of any future offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with theSEC prior to the completion of any such offering.
Future Sources and Uses of Liquidity
As ofJune 30, 2022 , we had$56.2 million of cash and cash equivalents and$140.3 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 we may also choose to raise equity financing, and as described above, onJuly 15, 2022 , we filed a preliminary shelf registration statement on Form S-3 with theSEC . which was declared effective by theSEC onJuly 26, 2022 . The terms of any offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with theSEC prior to the completion of any such offering. 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 impose 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, particularly in light of the economic uncertainty due to rising interest rates, rising inflation and the ongoing COVID-19 pandemic.
Uses
As noted above, our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, debt service and general corporate needs. In the three months endedJune 30, 2022 , we acquiredMondo Tees Buyer, LLC ("Mondo"), a high-end pop culture collectibles company that creates vinyl records, posters, soundtracks, toys, apparel, books, games and other collectibles for preliminary purchase consideration of$14.0 million in cash. 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 . 37 -------------------------------------------------------------------------------- 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 . 38
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