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 1, 2023 . This discussion and analysis contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth under "Risk Factors" included in this Quarterly Report on Form 10-Q.
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:
•"we," "us," "our," the "Company," "Funko" and similar references refer:Funko, Inc. , and, unless otherwise stated, all of its direct and indirect subsidiaries, includingFAH, LLC .
•"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, in each case, 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.'s Class A common stock (to be held by them either directly or indirectly) in connection with our IPO. •"Former Profits Interests Holders" refers collectively to certain of our directors and certain current executive officers and employees, in each case, who held existing vested and unvested profits interests 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 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, including figures, plush, accessories, apparel, homewares, vinyl record, poster or digital NFT. We sell our products in numerous countries acrossNorth America ,Europe ,Latin America ,Asia andAfrica , with approximately 29% of our net sales generated outside ofthe United States . We also source and procure inventory, primarily out ofChina ,Vietnam andMexico . As such, we are exposed to and impacted by global macroeconomic factors. Current macroeconomic factors remain very dynamic, such as greater political unrest or instability in Central andEastern Europe (including the ongoing Russia-Ukraine War), theMiddle East , certainSoutheast Asia markets as well as financial instability, rising interest rates and heightened inflation could reduce our net sales or have impacts to our gross margin, net income and cash flows.
In addition, we are operating in a challenging retail environment where retailers have slowed their post-holiday restocking and prioritized lower inventory levels. This has had an impact across our brands and geographies reducing our net sales, gross margin and net income. We expect this trend to continue for at least the second quarter.
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,
2023 2022
(amounts in thousands)
Net sales $ 251,878 $ 308,343
Net (loss) income $ (61,144) $ 14,518
EBITDA (1) $ (51,801) $ 29,877
Adjusted EBITDA (1) $ (14,014) $ 36,253
(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 (loss)
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
2023 2022 Dollar Percentage
(amounts in thousands, except percentages)
Net sales $ 251,878 $ 308,343 $ (56,465) (18.3) %
Cost of sales (exclusive of depreciation and
amortization shown separately below) 202,303 199,649 2,654 1.3 %
Selling, general, and administrative
expenses 100,061 78,420 21,641 27.6 %
Depreciation and amortization 13,976 10,471 3,505 33.5 %
Total operating expenses 316,340 288,540 27,800 9.6 %
(Loss) income from operations (64,462) 19,803 (84,265) nm
Interest expense, net 5,687 1,210 4,477 nm
Loss on extinguishment of debt 494 - 494 nm
Other expense, net 821 397 424 nm
(Loss) income before income taxes (71,464) 18,196 (89,660) nm
Income tax (benefit) expense (10,320) 3,678 (13,998) nm
Net (loss) income (61,144) 14,518 (75,662) nm
Less: net (loss) income attributable to
non-controlling interests (5,833) 4,636 (10,469) nm
Net (loss) income attributable to Funko,
Inc. $ (55,311) $ 9,882 $ (65,193) nm
Net Sales
Net sales were $251.9 million for the three months ended March 31, 2023 , a
decrease of 18.3%, compared to $308.3 million for the three months ended
March 31, 2022 . The decrease in net sales was due primarily to decreased sales
to specialty retailers, e-commerce sites and distributors for the three months
ended March 31, 2023 compared to the three months ended March 31, 2022 .
For the three months ended March 31, 2023 , the number of active properties
decreased 3.5% to 736 as compared to 763 for the three months ended March 31,
2022 , and the average net sales per active property decreased 15.3% for the
three months ended March 31, 2023 as compared to the three months ended
March 31, 2022 . 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 decreased 23.4% to
$177.8 million in the three months ended March 31, 2023 as compared to $232.2
million in the three months ended March 31, 2022 . Net sales in Europe increased
4.0% to $59.3 million in the three months ended March 31, 2023 as compared to
$57.1 million in the three months ended March 31, 2022 , which reflected a $6.3
million unfavorable impact from foreign exchange rates. Net sales in other
international locations decreased 22.8% to $14.8 million in the three months
ended March 31, 2023 as compared to $19.1 million in the three months ended
March 31, 2022 .
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On a branded category basis, net sales of the Core Collectible branded category
decreased 23.4% to $183.5 million in the three months ended March 31, 2023 as
compared to $239.6 million in the three months ended March 31, 2022 . Loungefly
branded category net sales increased 4.1% to $52.2 million in the three months
ended March 31, 2023 as compared to $50.1 million in the three months ended
March 31, 2022 . Other branded category net sales decreased 12.7% to $16.2
million in the three months ended March 31, 2023 as compared to $18.6 million in
the three months ended March 31, 2022 .
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was$202.3 million for the three months endedMarch 31, 2023 , an increase of 1.3%, compared to$199.6 million for the three months endedMarch 31, 2022 . Cost of sales (exclusive of depreciation and amortization) decreased primarily as a result of decreased 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 19.7% for the three months endedMarch 31, 2023 , compared to 35.3% for the three months endedMarch 31, 2022 . The decrease in gross margin (exclusive of depreciation and amortization) for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 was driven primarily by a one-time inventory write-down of$30.1 million . We expect inbound shipping and freight costs to continue to decrease as a result of our inventory destruction plan and removal of holding costs related to shipping containers.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were$100.1 million for the three months endedMarch 31, 2023 , an increase of 27.6%, compared to$78.4 million for the three months endedMarch 31, 2022 . The increase was driven primarily by a$12.8 million increase to personnel and related costs (including salary and related taxes/benefits, commissions, equity-based compensation and variable warehouse labor and third party logistics expenses), a$3.6 million increase in facilities and rent, primarily from ourBuckeye, Arizona warehouse and third party logistics facilities, and a$2.5 million increase in advertising and marketing costs. Selling, general and administrative expenses were 39.7% and 25.4% of net sales for the three months endedMarch 31, 2023 and 2022, respectively.
Depreciation and Amortization
Depreciation and amortization expense was$14.0 million for the three months endedMarch 31, 2023 , an increase of 33.5%, compared to$10.5 million for the three months endedMarch 31, 2022 , primarily related to the type and timing of assets placed in service. Interest Expense, Net Interest expense, net was$5.7 million for the three months endedMarch 31, 2023 , an increase of 370.0%, compared to$1.2 million for the three months endedMarch 31, 2022 . The increase in interest expense, net was due primarily to a higher average balance on debt outstanding during the three months endedMarch 31, 2023 , including$141.0 million outstanding on our New Revolving Credit Facility as compared to no outstanding balance during the three months endedMarch 31, 2022 . Loss on debt extinguishment
As a result of the debt refinancing in
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--------------------------------------------------------------------------------Other expense, net
Other expense, net was$0.8 million and$0.4 million for the three months endedMarch 31, 2023 and 2022, respectively. Other expense, net for the three months endedMarch 31, 2023 and 2022 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$10.3 million for the three months endedMarch 31, 2023 compared to income tax expense of$3.7 million for the three months endedMarch 31, 2022 . The increase in income tax benefit for the three months endedMarch 31, 2023 fromMarch 31, 2022 was related to a decrease in income before income taxes. Net (loss) income Net loss was$61.1 million for the three months endedMarch 31, 2023 , compared to net income of$14.5 million for the three months endedMarch 31, 2022 . The decrease in net income was primarily due to the decrease in net sales, and a one-time inventory write-down charge of$30.1 million for the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 , as discussed above. 23 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income and Adjusted (Loss) 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 (loss) income, (loss) earnings per share or any other performance measure derived in accordance withU.S. GAAP. We define EBITDA as net (loss) 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, loss on extinguishment of debt, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, one-time inventory write-down and other unusual or one-time items. We define Adjusted Net (Loss) Income as net (loss) 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, loss on extinguishment of debt, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, one-time inventory write-down and the income tax expense effect of these adjustments. We define Adjusted (Loss) Earnings per Diluted Share as Adjusted Net (Loss) 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, loss on extinguishment of debt, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, one-time inventory write-down and other unusual or one-time items. It is reasonable to expect that certain of these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other companies over time. Each of the 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,
2023 2022
(In thousands, except per share
data)
Net (loss) income attributable to Funko, Inc. $
(55,311)
(5,833) 4,636
Equity-based compensation (2) 3,642 3,369
Loss on extinguishment of debt (3) 494 -
Acquisition costs and other expenses (4) 1,010 930
Certain severance, relocation and related costs (5) 1,735 1,680
Foreign currency transaction loss (6) 822 397
One-time inventory write-down (7) 30,084 -
Income tax expense (8) (1,901) (2,465)
Adjusted net (loss) income $
(25,258)
40,324
Equity-based compensation awards and common units of
4,364 13,808
Adjusted weighted-average shares of Class A stock outstanding - diluted
51,612 54,132
Adjusted (loss) earnings per diluted share $
(0.49)
Three Months Ended
2023 2022
(amounts in thousands)
Net (loss) income $ (61,144) $ 14,518
Interest expense, net 5,687 1,210
Income tax (benefit) expense (10,320) 3,678
Depreciation and amortization 13,976 10,471
EBITDA $ (51,801) $ 29,877
Adjustments:
Equity-based compensation (2) 3,642 3,369
Loss on extinguishment of debt (3) 494 -
Acquisition costs and other expenses (4) 1,010 930
Certain severance, relocation and related costs (5) 1,735 1,680
Foreign currency transaction loss (6) 822 397
One-time inventory write-down (7) 30,084 -
Adjusted EBITDA $ (14,014) $ 36,253
(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)Represents write-off of unamortized debt financing fees for the three months
ended March 31, 2023 .
(4)For the three months ended March 31, 2023 and 2022 includes
acquisition-related costs related to due diligence fees.
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(5)For the three months ended March 31, 2023 , includes charges related severance
and benefit costs related to reduction-in- force. 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 .
(6)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.
(7)For the three months ended March 31, 2023 , represents a one-time inventory
write-down to improve U.S. warehouse operational efficiency.
(8)Represents the income tax expense effect of the above adjustments. This
adjustment uses an effective tax rate of 25% for all periods presented.
Liquidity and Financial Condition
Introduction
Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, debt service and general corporate needs.
Notwithstanding our obligations under the Tax Receivable Agreement betweenFunko, Inc. ,FAH, LLC and each of the Continuing Equity Owners, and certain transferees of the Continuing Equity Owners have been joined as parties to the Tax Receivable Agreement (the parties entitled to payments under the Tax Receivable Agreement are referred to herein as the "TRA Parties"), 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 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
2023 2022
Net cash used in operating activities $ (30,270) $ (22,955)
Net cash used in investing activities (17,787) (19,474)
Net cash provided by (used in) financing activities 63,509 (7,830)
Effect of exchange rates on cash and cash equivalents 145 (167)
Net change in cash and cash equivalents $ 15,597 Operating Activities. Net cash used in operating activities was$30.3 million for the three months endedMarch 31, 2023 , compared to net cash used of$23.0 million for the three months endedMarch 31, 2022 . 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. 27 -------------------------------------------------------------------------------- The increase in net cash used in operating activities for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 was primarily due to a decrease in net income, excluding non-cash adjustments of$72.9 million . This was offset by changes in working capital that decreased net cash used in operating activities by$65.6 million . Within working capital, the primary drivers were increases in accrued expenses and other current liabilities of$45.7 million and decreases to inventory of$51.9 million and accounts receivable, net of$9.1 million , offset by decreases in accrued royalties of$24.2 million and accounts payable of$10.3 million and increases prepaid expenses and other assets of$4.7 million . Investing Activities. Our net cash used in investing activities primarily consists of purchases of property and equipment. For the three months endedMarch 31, 2023 , net cash used in investing activities was$17.8 million and was primarily related to purchases of tooling and molds used for production of our product lines as well as cash paid for the stock purchase ofMessageMe, Inc. (d/b/a HipDot). 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 of 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, 2023 , net cash provided by financing activities was$63.5 million , primarily related to borrowings on the New Revolving Line of Credit of$71.0 million , offset by payments on the New Term Loan Facility (as defined below) and Equipment Finance Loan of$5.6 million . For the three months endedMarch 31, 2022 , net cash used in financing activities was$7.8 million , primarily related to payments on the Term Loan Facility of$4.5 million and distributions to the TRA Parties of$3.4 million .
Credit Facilities
OnSeptember 17, 2021 , the Company, entered into a new credit agreement (as amended from time to time, 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 a revolving credit facility of$100.0 million (the "New Revolving Credit Facility") (together the "New Credit Facilities"). Proceeds from the New Credit Facilities were primarily used to repay the Company's former credit facilities. OnApril 26, 2022 , the parties to the New Credit Agreement 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 , the parties to the New Credit Agreement 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 (as defined in the New Credit Agreement) option LIBOR to SOFR. 28 -------------------------------------------------------------------------------- OnFebruary 28, 2023 , the Company entered into Amendment No. 3 (the "Third Amendment") to the New Credit Agreement to, among other things, (i) modify the financial covenants under the New Credit Agreement for the period beginning on the date of the Third Amendment through the fiscal quarter endingDecember 31, 2023 (the "Waiver Period"), (ii) reduce the size of the New Revolving Credit Facility from$215.0 million to$180.0 million as of the date of the Third Amendment and thereafter to$150.0 million onDecember 31, 2023 , which reduction shall be permanent after the Waiver Period, (iii) restrict the ability to draw on the New Revolving Credit Facility during the Waiver Period in excess of the amount outstanding on the date of the Third Amendment, (iv) increase the margin payable under the Credit Facilities during the Waiver Period to (a) 4.00% per annum with respect to any Term Benchmark Loan or RFR Loan (each as defined in the New Credit Agreement), and (b) 3.00% per annum with respect to any Canadian Prime Loan or ABR Loan (as defined in the New Credit Agreement), (iv) allow that any calculation of Consolidated EBITDA (each as defined in the New Credit Agreement) that includes the fiscal quarters during the Waiver Period may include certain agreed upon amounts for certain addbacks, (v) further limit our ability to make certain restricted payments, including the ability to pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests, incur additional indebtedness, incur additional liens, enter into sale and leaseback transactions or issue additional equity interests or securities convertible into or exchange for equity interests (other than the issuance of common stock) during the Waiver Period, (vi) require a minimum qualified cash requirement of at least$10.0 million and (vii) require a mandatory prepayment of the New Revolving Credit Facility during the Waiver Period with any qualified cash proceeds in excess of$25.0 million . Following the Waiver Period, beginning in the fiscal quarter endingMarch 31, 2024 , the Third Amendment will reset the maximum Net Leverage Ratio and the minimum Fixed Charge Coverage Ratio (each as defined in the New Credit Agreement) that must be maintained by the Credit Agreement Parties to 2.50:1.00 and 1.25:1.00, respectively, which were the ratios in effect under the New Credit Agreement prior to the Third Amendment. We cannot assure you that we will be able to maintain compliance with our financial covenants as amended after the Waiver Period, or that we will be able to further amend the New Credit Agreement should similar circumstances arise in the future. As ofFebruary 28, 2023 , the Company had$141.0 million in borrowings outstanding under the New Revolving Credit Facility. If our operating results fail to improve or if we are otherwise unable to maintain compliance with the financial or other covenants under the New Credit Agreement, our lenders could, among other things, continue to refuse to permit any additional borrowings under the New Revolving Credit Facility, terminate all outstanding commitments thereunder and accelerate all outstanding borrowings and other obligations, which would require us to seek additional financing. Even in the absence of such event, if we are unable to generate sufficient cash flows from operations in the future, and if availability under our Revolving Credit Facility is not sufficient after the Waiver Period, 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, particularly during the Waiver Period. 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. 29 -------------------------------------------------------------------------------- Subject to the interest rates during the Waiver Period as described above, 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) 4.00% per annum and (y) solely in the case of Term SOFR based loans, 0.10% per annum or (ii) ABR or the Canadian prime rate, as applicable, plus 3.00% per annum, in each case of clauses (i) and (ii), subject to two 0.25% per annum step-downs based on the achievement of certain leverage ratios. Each of Term SOFR, EURIBOR, HIBOR, CDOR and Daily Simple SONIA rates are subject to a 0% floor. For loans based on ABR, the CentralBank Rate or the Canadian prime rate, interest payments are due quarterly. For loans based on SONIA, interest payments are due monthly. For loans based on Term SOFR, EURIBOR, HIBOR or CDOR, interest payments are due at the end of each applicable interest period.
The 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.
These limitations are also more restrictive during the Waiver Period as described herein. In addition, the New Credit Agreement requiresFAH, LLC and its subsidiaries to comply on a quarterly basis with a maximum Net LeverageRatio and a minimum fixed charge coverage ratio (in each case, measured on a trailing four-quarter basis) other than during the Waiver Period. The maximum Net Leverage Ratio and the minimum fixed charge coverage ratio for the fiscal quarter endedDecember 31, 2022 were 2.50:1.00 and 1.25:1.00, respectively, and such ratios will apply again commencing after the Waiver Period for the fiscal quarter endingMarch 31, 2024 . As ofMarch 31, 2023 andDecember 31, 2022 , we were in compliance with all covenants in our respective credit agreements in effect at such time. Subsequent to the Third Amendment, we expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts. If economic conditions worsen, such as due to the COVID-19 pandemic or international conflict, and negatively impact the Company's earnings and operating cash flows, this could impact our ability to regain compliance with our amended financial covenants and require the Company to seek additional amendments to our New Credit Agreement. 30 -------------------------------------------------------------------------------- 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, 2023 , we had$150.5 million of indebtedness outstanding under our New Term Loan Facility (net of unamortized discount of$2.5 million ) and$141.0 million outstanding borrowings under our New Revolving Credit Facility, leaving no availability under our New Revolving Credit Facility.
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 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. 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, 2023 , we had$34.8 million of cash and cash equivalents and$41.6 million of working capital, compared with$19.2 million of cash and cash equivalents and$111.8 million of working capital as ofDecember 31, 2022 . 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 New Revolving Credit Facility.
Sources
As noted above, historically, our primary sources of cash flows have been cash flows from operating activities and borrowings under our credit facilities. We expect these sources of liquidity to continue to be our primary sources of liquidity. For a discussion of our credit facilities, see "Credit Facilities" above and Note 4, Debt. In addition, as described above, 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. 31 --------------------------------------------------------------------------------
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, 2022 . Additional future liquidity needs may include tax distributions, the redemption right held by the Continuing Equity Owners that they may exercise from time to time (should we elect to exchange their common units for a cash payment), payments under the Tax Receivable Agreement and general cash requirements for operations and capital expenditures (including future warehouse management system (WMS), additional platforms to support our direct-to-consumer experience, and capital build out of new leased warehouse and office space). The Continuing Equity Owners may exercise their redemption right for as long as their common units remain outstanding. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments we will be required to make to the TRA Parties will be significant. Any payments made by us to the TRA Parties under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise have been available to us or 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.
32
--------------------------------------------------------------------------------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, 2022 .
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