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 5, 2020 . This discussion and analysis contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth under "Risk Factors" included in this Quarterly Report on Form 10-Q. As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to: •"we," "us," "our," the "Company," "Funko" and similar references refer: (1) following the consummation of the Transactions, toFunko, Inc. , and, unless otherwise stated, all of its direct and indirect subsidiaries, includingFAH, LLC and (2) prior to the completion of the Transactions, toFAH, LLC and, unless otherwise stated, all of its subsidiaries. •"ACON" refers toACON Funko Investors, L.L.C. , aDelaware limited liability company, and certain funds affiliated withACON Funko Investors, L.L.C. (including any such fund or entity formed to hold shares of Class A common stock for the Former Equity Owners). •"Continuing Equity Owners" refers collectively to ACON, Fundamental, the Former Profits Interests Holders, the Warrant Holders and certain current and former executive officers, employees and directors and each of their permitted transferees that own common units inFAH, LLC after the Transactions and who may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their common units for, at our election, cash or newly-issued shares ofFunko, Inc.'s Class A common stock. •"Credit Facilities" refers to the Company's credit agreement, datedOctober 22, 2018 (as amended, the "Credit Agreement"), providing for a term loan facility in the amount of$235.0 million (the "Term Loan Facility") and a revolving credit facility of$50.0 million (which was increased to$75.0 million onFebruary 11, 2019 ) (the "Revolving Credit Facility"). •"FAH, LLC " refers toFunko Acquisition Holdings, L.L.C. •"FAH LLC Agreement" refers toFAH, LLC's second amended and restated limited liability company agreement, as amended from time to time. •"Former Equity Owners" refers to those Original Equity Owners affiliated with ACON who transferred their indirect ownership interests in common units ofFAH, LLC for shares ofFunko, Inc.'s Class A common stock (to be held by them either directly or indirectly) in connection with the consummation of the Transactions. •"Former Profits Interests Holders" refers collectively to certain of our directors and certain current executive officers and employees, in each case, who, prior to the consummation of the Transactions, held existing vested and unvested profits interests inFAH, LLC pursuant toFAH, LLC's prior equity incentive plan and received common units ofFAH, LLC in exchange for their profits interests (subject to any common units received in exchange for unvested profits interests 17 -------------------------------------------------------------------------------- remaining subject to their existing time-based vesting requirements) in connection with the Transactions. •"Fundamental" refers collectively toFundamental Capital, LLC andFunko International, LLC . •"Original Equity Owners" refers to the owners of ownership interests inFAH, LLC , collectively, prior to the Transactions, which include ACON, Fundamental, the Former Profits Interests Holders and certain current and former executive officers, employees and directors. •"Tax Receivable Agreement" refers to a tax receivable agreement entered into betweenFunko, Inc. ,FAH, LLC and each of the Continuing Equity Owners as part of the Transactions, defined below. •"Transactions" refers to certain organizational transactions that we effected in connection with our initial public offering ("IPO") inNovember 2017 . •"Warrant Holders" refers to lenders under our former senior secured credit facilities, which were terminated onOctober 22, 2018 , that previously held warrants to purchase ownership interests inFAH, LLC , which were converted into common units ofFAH, LLC in connection with the consummation of the Transactions. Overview We are a leading pop culture consumer products company. 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 and homewares. We were founded in 1998 as a consumer products company focused on designing and selling nostalgic bobble head figures. In 2005, we were acquired by a small group of investors led byBrian Mariotti , who took over day-to-day operations and has served as our chief executive officer since that time. Under Brian's leadership, we have significantly broadened and deepened our relationships with content providers. Content providers trust us to create unique extensions of their intellectual property that extend the relevance of their content with consumers through ongoing engagement, helping to maximize the lifetime value of their content. We strive to license every pop culture property that we believe is relevant to consumers. Domestically, we primarily sell our products to specialty retailers, mass-market retailers, and e-commerce sites. Internationally, we sell our products directly to similar retailers, primarily inEurope , through our subsidiaryFunko UK, Ltd. We also sell our products to distributors for sale to small retailers inthe United States and in certain countries internationally, typically where we do not have a direct presence. We also sell certain of our products directly to consumers through our e-commerce business and, to a lesser extent, at specialty licensing and comic book shows, conventions and exhibitions in cities throughoutthe United States , including at Comic-Con events. OnNovember 6, 2017 , we completed our IPO of 10,416,666 shares of Class A common stock at an initial public offering price of$12.00 per share and received approximately$117.3 million in net proceeds after deducting underwriting discounts and commissions. We used the net proceeds to purchase 10,416,666 newly issued common units directly fromFAH, LLC at a price per unit equal to the price per share of Class A common stock in the IPO less underwriting discounts and commissions. AtJune 30, 2020 , we held 35.5 million common units, representing an approximately 69.5% interest inFAH, LLC . 18 --------------------------------------------------------------------------------
COVID-19
The novel coronavirus ("COVID-19") has caused and continues to cause significant
loss of life and disruption to the global economy, including the curtailment of
activities by businesses and consumers in much of the world as governments and
others seek to limit the spread of the disease, and through business and
transportation shutdowns and restrictions on people's movement and congregation.
As a result of the pandemic, we have experienced, and continue to experience,
weakened demand for our products, which has had a negative impact on our net
sales in the three and six months ended June 30, 2020 and into the third quarter
of 2020. Many of our customers have been unable to sell our products in their
stores for nearly all of the second quarter of 2020, due to government-mandated
closures and have deferred or significantly reduced orders for our products.
While some of these closures have been lifted, due to the surge of cases in
certain areas we expect to see additional closures, stores that reopened to
close back down and/or delays in planned reopenings. As such, we expect these
trends to continue until such closures are significantly reduced. In addition,
the pandemic has reduced foot traffic in the stores where our products are sold
that remain open, and the global economic impact of the pandemic has temporarily
reduced consumer demand for our products as they focus on purchasing essential
goods. At the end of the second quarter and in the beginning of the third
quarter we began seeing a number of our key accounts reopening but operating at
significantly reduced volumes.
In Europe , as a result of the impacts of COVID-19 and key account closures
during the latter part of the first quarter and during the second quarter, we
made the strategic decision to shift any new products that were initially
planned to arrive on retailer shelves in the second quarter of 2020 into the
third quarter of 2020 to preserve demand for these new items. As such, the
shipments in the region during the second quarter of 2020 were minimal.
Given these factors, we believe that the greatest impact from the COVID-19
pandemic in fiscal 2020 occurred in the second quarter of 2020 during which we
experienced a significant net sales decline as compared to the second quarter of
2019. We expect any recovery in the second half of the year to be gradual due to
general uncertainty in both the U.S. and international markets. However, if
there is a significant surge in COVID-19 cases accompanied by additional
closures or a significant halt in reopenings, the remainder of 2020 could
potentially be impacted to an even greater extent than the first half.
In addition, in the three and six months ended June 30, 2020 , certain of our
suppliers and the manufacturers of certain of our products were adversely
impacted by COVID-19. As a result, we faced delays or difficulty sourcing
products, which negatively affected our business and financial results. In
response, we shifted a greater amount of our production from China to Vietnam .
Even if we are able to find alternate sources for such products, they may cost
more and cause delays in our supply chain, which could adversely impact our
profitability and financial condition.
We have taken actions to protect our employees in response to the pandemic,
including closing our corporate offices and requiring our office employees to
work from home. At our distribution centers, certain practices are in effect to
safeguard workers, including but not limited to, required daily health
pre-screening, providing personal protective equipment and operating with a
staggered work schedule, and we are continuing to monitor direction from local
and national governments carefully.
As a result of the impact of COVID-19 on our financial results for the three and
six months ended June 30, 2020 , and the anticipated future impact of the
pandemic, we have implemented cost control measures and cash management actions,
including:
•Furloughing and laying off a significant portion of our employees;
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•Implementing 20% salary reductions across our executive team and other members
of upper level management until the end of the second quarter of 2020;
•Executing reductions in operating expenses, planned inventory levels and
non-product development capital expenditures; and
•Proactively managing working capital, including reducing incoming inventory to
align with anticipated sales.
In addition, given the rapidly changing environment and level of uncertainty
being created by the COVID-19 pandemic and the associated impact on future
earnings, on May 5, 2020 , we amended our Credit Agreement (the "Third
Amendment") in order to modify the financial covenants and provide operating
flexibility during the COVID-19 crisis. See "Liquidity and Capital Resources"
below for discussion of the Third Amendment.
As of June 30, 2020 , we had $45.9 million available under the Revolving Credit
Facility.
Key Performance Indicators
We consider the following metrics to be key performance indicators to evaluate
our business, develop financial forecasts, and make strategic decisions.
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(amounts in thousands)
Net sales $ 98,099 $ 191,199 $ 234,799 $ 358,264
Net (loss) income $ (15,009) $ 11,415 $ (20,741) $ 18,560
EBITDA (1) $ (2,950) $ 27,773 $ 4,106 $ 50,649
Adjusted EBITDA (1) $ 225 $ 31,371 $ 10,821 $ 56,710
(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.
20-------------------------------------------------------------------------------- Results of Operations Three Months EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 The following table sets forth information comparing the components of net (loss) income for the three months endedJune 30, 2020 and 2019: Three Months Ended June 30, Period over Period Change 2020 2019 Dollar Percentage (amounts in thousands, except percentages) Net sales$ 98,099 $ 191,199 $ (93,100) (48.7) % Cost of sales (exclusive of depreciation and amortization shown separately below) 62,182 119,998 (57,816) (48.2) % Selling, general, and administrative expenses 39,110 43,647 (4,537) (10.4) % Depreciation and amortization 11,071 10,425 646 6.2 % Total operating expenses 112,363 174,070 (61,707) (35.4) % (Loss) income from operations (14,264) 17,129 (31,393) (183.3) % Interest expense, net 2,691 3,763 (1,072) (28.5) % Other (income) expense, net (243) (219) (24) 11.0 % (Loss) income before income taxes (16,712) 13,585 (30,297) (223.0) % Income tax (benefit) expense (1,703) 2,170 (3,873) (178.5) % Net (loss) income (15,009) 11,415 (26,424) (231.5) % Less: net (loss) income attributable to non-controlling interests (4,424) 6,283 (10,707) (170.4) %
Net (loss) income attributable to
(306.3) %
Net Sales
Net sales were $98.1 million for the three months ended June 30, 2020 , a
decrease of 48.7%, compared to $191.2 million for the three months ended
June 30, 2019 . The decrease in net sales was due primarily to impacts from the
COVID-19 pandemic, including reduced shipments to our customers as non-essential
business closures and social distancing guidelines were in effect for the three
months ended June 30, 2020 compared to the three months ended June 30, 2019 .
For the three months ended June 30, 2020 , the number of active properties
increased 8.8% to 644 as compared to 592 for the three months ended June 30,
2019 , and the average net sales per active property decreased 52.9% for the
three months ended June 30, 2020 as compared to the three months ended June 30,
2019 due primarily to the impacts from the COVID-19 pandemic. 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 year to
year or 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 36.5% to $77.9
million in the three months ended June 30, 2020 as compared to $122.7 million in
the three months ended June 30, 2019 , and net sales internationally decreased
70.5% to $20.2 million in the three months ended June 30, 2020 as compared to
$68.5 million in the three months ended June 30, 2019 , driven primarily by
decreased sales in Europe . The decreases reflect the significant impacts from
the COVID-19 pandemic as non-
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essential business closures impacted domestic and overseas markets throughout
the quarter. On a product category basis, net sales of figures decreased 51.5%
to $77.4 million in the three months ended June 30, 2020 as compared to $159.7
million in the three months ended June 30, 2019 , and net sales of other products
decreased 34.3% to $20.7 million in the three months ended June 30, 2020 as
compared to $31.5 million in the three months ended June 30, 2019 , which
reflects sales declines in nearly all product categories due to the impacts from
the COVID-19 pandemic.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was $62.2 million for
the three months ended June 30, 2020 , a decrease of 48.2%, compared to $120.0
million for the three months ended June 30, 2019 . Cost of sales (exclusive of
depreciation and amortization) decreased primarily as a result of lower sales,
as discussed above.
Gross margin (exclusive of depreciation and amortization), calculated as net
sales less cost of sales as a percentage of net sales, was 36.6% for the three
months ended June 30, 2020 , compared to 37.2% for the three months ended
June 30, 2019 . The decrease in gross margin (exclusive of depreciation and
amortization) for the three months ended June 30, 2020 compared to the three
months ended June 30, 2019 was driven primarily by increased shipping and
freight costs as a percentage of net sales during the three months ended June
30, 2020 due to lower sales volumes and higher volume of domestic shipments,
partially offset by improved product margins and enhanced inventory management
processes implemented in the second half of 2019.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $39.1 million for the three
months ended June 30, 2020 , a decrease of 10.4%, compared to $43.6 million for
the three months ended June 30, 2019 . The decrease was driven primarily by a
$5.6 million decrease in personnel and related costs (including salary and
related taxes/benefits, commissions and equity based compensation expense) and a
$1.3 million , decrease in advertising and marketing costs partially offset by a
$1.4 million increase in bad debt expense, additional expenses generally related
to COVID-19 business interruptions and our remote working environment, and lower
sales volumes. Selling, general and administrative expenses were 39.9% and 22.8%
of net sales for the three months ended June 30, 2020 and 2019, respectively.
Depreciation and Amortization
Depreciation and amortization expense was $11.1 million for the three months
ended June 30, 2020 , an increase of 6.2%, compared to $10.4 million for the
three months ended June 30, 2019 , primarily driven by an increase in
depreciation on our office and warehouse facilities, including the addition of
our Hollywood retail store.
Interest Expense, Net
Interest expense, net was $2.7 million for the three months ended June 30, 2020 ,
a decrease of 28.5%, compared to $3.8 million for the three months ended
June 30, 2019 . The decrease in interest expense, net was due primarily to lower
interest rates on debt outstanding during the three months ended June 30, 2020
as compared to the interest rates on debt outstanding during the three months
ended June 30, 2019 , as a result of the second and third amendments to the
Credit Facilities entered into on September 23, 2019 and May 5, 2020 ,
respectively.
Other (income) expense, net
Other income, net was $0.2 million for both the three months ended June 30, 2020
and 2019. Other income, net for the three months ended June 30, 2020 and 2019
was primarily related to foreign currency gains and losses relating to
transactions denominated in currencies other than the U.S. dollar.
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Net (loss) income
Net loss was $15.0 million for the three months ended June 30, 2020 , compared to
net income of $11.4 million for the three months ended June 30, 2019 . The
increase in net loss was primarily due to the decrease in net sales partially
offset by a decrease in cost of sales (exclusive of depreciation and
amortization) and selling, general and administrative expenses for the three
months ended June 30, 2020 as compared to the three months ended June 30, 2019 ,
as discussed above.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The following table sets forth information comparing the components of net
(loss) income for the six months ended June 30, 2020 and 2019:
Six Months Ended June 30, Period over Period Change
2020 2019 Dollar Percentage
(amounts in thousands, except percentages)
Net sales $ 234,799 $ 358,264 $ (123,465) (34.5) %
Cost of sales (exclusive of depreciation and
amortization shown separately below) 143,599 223,654 (80,055) (35.8) %
Selling, general, and administrative expenses 86,423 84,115 2,308 2.7 %
Depreciation and amortization 22,060 20,655 1,405 6.8 %
Total operating expenses 252,082 328,424 (76,342) (23.2) %
(Loss) income from operations (17,283) 29,840 (47,123) (157.9) %
Interest expense, net 5,346 7,835 (2,489) (31.8) %
Other (income) expense, net 671 (154) 825 (535.7) %
(Loss) income before income taxes (23,300) 22,159 (45,459) (205.1) %
Income tax (benefit) expense (2,559) 3,599 (6,158) (171.1) %
Net (loss) income (20,741) 18,560 (39,301) (211.8) %
Less: net (loss) income attributable to
non-controlling interests (6,030) 11,233 (17,263) (153.7) %
Net (loss) income attributable to Funko, Inc. $ (14,711) $ 7,327 $ (22,038) (300.8) %
Net Sales
Net sales were $234.8 million for the six months ended June 30, 2020 , a decrease
of 34.5%, compared to $358.3 million for the six months ended June 30, 2019 . The
decrease in net sales was due primarily to the COVID-19 pandemic which
negatively impacted net sales for the majority of the six months ended June 30,
2020 compared to the six months ended June 30, 2019 . During the six months ended
June 30, 2020 , we experienced reduced shipments to our customers as well as
supply chain disruptions as non-essential business closures and social
distancing guidelines related to the COVID-19 pandemic were in effect for the
majority of the period.
For the six months ended June 30, 2020 , the number of active properties
increased 10.9% to 735 as compared to 663 for the six months ended June 30,
2019 , and the average net sales per active property decreased 41.0% for the six
months ended June 30, 2020 as compared to the six months ended June 30, 2019 ,
primarily due to the impacts from the COVID-19 pandemic. 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 year to
year or quarter to
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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 23.8% to
$176.4 million in the six months ended June 30, 2020 as compared to $231.5
million in the six months ended June 30, 2019 , and net sales internationally
decreased 53.9% to $58.4 million in the six months ended June 30, 2020 as
compared to $126.7 million in the six months ended June 30, 2019 , driven
primarily by decreased sales in Europe . The decreases reflect the significant
impacts from the COVID-19 pandemic as non-essential business closures impacted
all our markets with overseas markets, especially within Europe , impacted
earlier in the period. On a product category basis, net sales of figures
decreased 36.2% to $188.7 million in the six months ended June 30, 2020 as
compared to $295.8 million in the six months ended June 30, 2019 , and net sales
of other products decreased 26.1% to $46.1 million in the six months ended
June 30, 2020 as compared to $62.4 million in the six months ended June 30,
2019 , primarily due to declines in most product categories resulting from the
COVID-19 pandemic.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was $143.6 million
for the six months ended June 30, 2020 , a decrease of 35.8%, compared to $223.7
million for the six months ended June 30, 2019 . Cost of sales (exclusive of
depreciation and amortization) decreased primarily as a result of lower sales
stemming from the COVID-19 pandemic, as discussed above.
Gross margin (exclusive of depreciation and amortization), calculated as net
sales less cost of sales as a percentage of net sales, was 38.8% for the six
months ended June 30, 2020 , compared to 37.6% for the six months ended June 30,
2019 . The increase in gross margin (exclusive of depreciation and amortization)
for the six months ended June 30, 2020 compared to the six months ended June 30,
2019 was driven primarily by improved product margins and enhanced inventory
management processes implemented in the second half of 2019.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $86.4 million for the six
months ended June 30, 2020 , an increase of 2.7%, compared to $84.1 million for
the six months ended June 30, 2019 . The increase was driven primarily by a $2.4
million increase in rent and related facilities costs, a $1.8 million increase
in bad debt expense, a $1.3 million increase in professional fees, additional
expenses generally related to COVID-19 business interruptions and our remote
working environment, and lower sales volumes, partially offset by a $2.0 million
decrease in personnel and related costs (including salary and related
taxes/benefits, commissions and equity based compensation expense) and a $1.2
million decrease in advertising and marketing costs. Selling, general and
administrative expenses were 36.8% and 23.5% of net sales for the six months
ended June 30, 2020 and 2019, respectively.
Depreciation and Amortization
Depreciation and amortization expense was $22.1 million for the six months ended
June 30, 2020 , an increase of 6.8%, compared to $20.7 million for the six months
ended June 30, 2019 , primarily driven by an increase in depreciation on our
office and warehouse facilities, including the addition of our Hollywood retail
store.
Interest Expense, Net
Interest expense, net was $5.3 million for the six months ended June 30, 2020 , a
decrease of 31.8%, compared to $7.8 million for the six months ended June 30,
2019 . The decrease in interest expense, net was due primarily to lower interest
rates on debt outstanding during the six months ended June 30, 2020 as compared
to the interest rates on debt outstanding during the six months ended June 30,
2019 as a
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result of the second and third amendments to the Credit Facilities entered into
on September 23, 2019 and May 5, 2020 , respectively.
Other (income) expense, net
Other expense, net was $0.7 million for the six months ended June 30, 2020 ,
compared to other income of $0.2 million for the six months ended June 30, 2019 .
Other (income) expense, net for the six months ended June 30, 2020 and 2019 was
primarily related to foreign currency gains and losses relating to transactions
denominated in currencies other than the US dollar.
Net (loss) income
Net loss was $20.7 million for the six months ended June 30, 2020 , compared to
net income of $18.6 million for the six months ended June 30, 2019 , primarily
due to the decrease in net sales and increase in selling, general and
administrative expenses, partially offset by the decrease in cost of sales
(exclusive of depreciation and amortization), for the six months ended June 30,
2020 as compared to the six months ended June 30, 2019 , as discussed above.
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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 under U.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 with U.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, acquisition transaction costs and other expenses, certain severance,
relocation and related costs, foreign currency transaction gains and losses and
other unusual or one-time items. We define Adjusted Net (Loss) Income as net
(loss) income attributable to Funko, Inc. adjusted for the reallocation of
(loss) income attributable to non-controlling interests from the assumed
exchange of all outstanding common units and options in FAH, LLC for newly
issued-shares of Class A common stock of Funko, Inc. and further adjusted for
the impact of certain non-cash charges and other items that we do not consider
in our evaluation of ongoing operating performance. These items include, among
other things, non-cash charges related to equity-based compensation programs,
acquisition transaction costs and other expenses, certain severance, relocation
and related costs, foreign currency transaction gains and losses and other
unusual or one-time items, and the income tax (benefit) 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 in FAH, LLC for newly issued-shares of Class A common stock of Funko,
Inc. and (2) the dilutive effect of stock options and unvested common units, if
any. We caution investors that amounts presented in accordance with our
definitions of the Non-GAAP Financial Measures may not be comparable to similar
measures disclosed by our competitors, because not all companies and analysts
calculate the Non-GAAP Financial Measures in the same manner. We present the
Non-GAAP Financial Measures because we consider them to be important
supplemental measures of our performance and believe they are frequently used by
securities analysts, investors, and other interested parties in the evaluation
of companies in our industry. Management believes that investors' understanding
of our performance is enhanced by including these Non-GAAP Financial Measures as
a reasonable basis for comparing our ongoing results of operations.
Management uses the Non-GAAP Financial Measures:
•as a measurement of operating performance because they assist us in comparing
the operating performance of our business on a consistent basis, as they remove
the impact of items not directly resulting from our core operations;
•for planning purposes, including the preparation of our internal annual
operating budget and financial projections;
•as a consideration to assess incentive compensation for our employees;
•to evaluate the performance and effectiveness of our operational strategies;
and
•to evaluate our capacity to expand our business.
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. In addition, our Credit Facilities use
Adjusted EBITDA to measure our compliance with covenants such as a senior
leverage ratio. 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 (loss) income or other financial statement data
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presented in our unaudited condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q as indicators of financial
performance. Some of the limitations are:
•such measures do not reflect our cash expenditures, or future requirements for
capital expenditures or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working
capital needs;
•such measures do not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments on our debt;
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future and such
measures do not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate such measures differently than we
do, limiting their usefulness as comparative measures.
Due to these limitations, Non-GAAP Financial Measures should not be considered
as measures of discretionary cash available to us to invest in the growth of our
business. We compensate for these limitations by relying primarily on our U.S.
GAAP results and using these non-GAAP measures only supplementally. As noted in
the table below, the Non-GAAP Financial Measures include adjustments for
non-cash charges related to equity-based compensation programs, acquisition
transaction costs and other expenses, certain severance, relocation and related
costs, foreign currency transaction gains and losses and other unusual or
one-time items. It is reasonable to expect that these items will occur in future
periods. However, we believe these adjustments are appropriate because the
amounts recognized can vary significantly from period to period, do not directly
relate to the ongoing operations of our business and complicate comparisons of
our internal operating results and operating results of other companies over
time. Each of the normal recurring adjustments and other adjustments described
herein and in the reconciliation table below help management with a measure of
our core operating performance over time by removing items that are not related
to day-to-day operations.
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The following tables reconcile the Non-GAAP Financial Measures to the most
directly comparable
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(In thousands, except per share data)
Net (loss) income attributable to Funko, Inc. $ (10,585) $ 5,132 $ (14,711) $ 7,327
Reallocation of net (loss) income attributable
to non-controlling interests from the assumed
exchange of common units of FAH, LLC for Class
A common stock (1) (4,424) 6,283 (6,030) 11,233
Equity-based compensation (2) 2,625 3,367 5,038 6,115
Acquisition transaction costs and other
expenses (3) - 450 - 100
Certain severance, relocation and related
costs (4) 793 - 1,006 -
Foreign currency transaction (gain) loss (5) (243) (219) 671 (154)
Income tax benefit (expense) (6) 1,681 (2,126) 1,587 (3,456)
Adjusted net (loss) income $ (10,153) $ 12,887 $ (12,439) $ 21,165
Weighted-average shares of Class A common
stock outstanding-basic 35,033 29,910 34,988 28,284
Equity-based compensation awards and common
units of FAH, LLC that are convertible into
Class A common stock 15,972 22,248 15,942 23,612
Adjusted weighted-average shares of Class A
stock outstanding - diluted 51,005 52,158 50,930 51,896
Adjusted (loss) earnings per diluted share
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Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(amounts in thousands)
Net (loss) income $ (15,009) $ 11,415 $ (20,741) $ 18,560
Interest expense, net 2,691 3,763 5,346 7,835
Income tax (benefit) expense (1,703) 2,170 (2,559) 3,599
Depreciation and amortization 11,071 10,425 22,060 20,655
EBITDA $ (2,950) $ 27,773 $ 4,106 $ 50,649
Adjustments:
Equity-based compensation (2) 2,625 3,367 5,038 6,115
Acquisition transaction costs and other
expenses (3) - 450 - 100
Certain severance, relocation and related
costs (4) 793 - 1,006 -
Foreign currency transaction (gain) loss
(5) (243) (219) 671 (154)
Adjusted EBITDA $ 225 $ 31,371 $ 10,821 $ 56,710
(1)Represents the reallocation of net (loss) 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 (loss) was attributable to
non-controlling interests.
(2)Represents non-cash charges related to equity-based compensation programs,
which vary from period to period depending on the timing of awards.
(3)Represents legal, accounting, and other related costs incurred in connection
with acquisitions and other potential transactions. For the three and six months
ended June 30, 2019 , includes the accrual of a contingent liability of $0.5
million related to potential penalties that may be assessed by U.S. Customs in
connection with the underpayment of customs duties at Loungefly. For the six
months ended June 30, 2019 , this accrual was partially offset by a $0.4 million
reversal of a pre-acquisition contingent loss related to our Loungefly
acquisition.
(4)For the three and six months ended June 30, 2020 , represents severance,
relocation and related costs associated with the consolidation of our warehouse
facilities in the United Kingdom and charges related to the global workforce
reduction implemented in response to the COVID-19 pandemic.
(5)Represents both unrealized and realized foreign currency gains and losses on
transactions denominated other than in U.S. dollars, including derivative gains
and losses on foreign currency forward exchange contracts.
(6)Represents the income tax expense effect of the above adjustments. This
adjustment uses an effective tax rate of 25% for all periods presented.
Liquidity and Financial Condition
Introduction
Our primary requirements for liquidity and capital are working capital,
inventory management, capital expenditures, debt service and general corporate
needs.
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Notwithstanding our obligations under the Tax Receivable Agreement between
Funko, Inc. , FAH, LLC and each of the Continuing Equity Owners, we believe that
our sources of liquidity and capital will be sufficient to finance our continued
operations, growth strategy, our planned capital expenditures and the additional
expenses we expect to incur as a public company for at least the next 12 months.
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 long-term future needs beyond the next 12 months,
particularly in light of the ongoing nature of the COVID-19 pandemic and its
continuing impact on the global economy and consumer demand. In addition to the
flexibility provided by the Third Amendment (as described below), we are
currently evaluating additional options to improve our liquidity, such as the
issuance of additional unsecured and secured debt, equity securities and
equity-linked securities. There can be no assurance as to the timing of any such
issuance, which may be in the near term, and any such financing may be material
in nature and could result in significant additional borrowings or issuances of
equity or equity-linked securities. If we obtain additional capital by issuing
equity, the interests of our existing stockholders will be diluted, which may be
significant. 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 six months ended
June 30, 2020 and 2019 (in thousands):
Six
Months Ended
2020 2019
Net cash provided by operating activities $ 32,208 $ 47,954
Net cash used in investing activities (11,676) (18,099)
Net cash used in financing activities (6,259) (23,721)
Effect of exchange rates on cash and cash equivalents 1,625 (135)
Net increase in cash and cash equivalents $ 15,898 Operating Activities. Net cash provided by operating activities was$32.2 million for the six months endedJune 30, 2020 , compared to$48.0 million for the six months endedJune 30, 2019 . 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, 2020 compared to the six months endedJune 30, 2019 was primarily due to the decrease in net income, excluding non-cash adjustments, of$37.8 million , driven primarily by a decrease in net sales due to the impact of the COVID-19 pandemic as well as an increase in selling, general and administrative expenses, partially offset by a decrease in interest expense, net and a decrease in cost of sales (exclusive of depreciation and amortization). Partially offsetting the decrease in net income was an increase related to changes in working capital which increased net cash provided by operating activities by$22.0 million and were primarily due to decreases in accounts receivable, net of$40.2 million and prepaid expenses and other assets of$12.5 million and an increase in income taxes payable of$3.0 million , partially offset by a decrease in accounts payable of$14.1 million , an increase in inventory of$11.1 million , and decreases to accrued royalties and accrued expenses and other liabilities of$6.3 million and$2.1 million , respectively. 30 -------------------------------------------------------------------------------- Investing Activities. Our net cash used in investing activities primarily consists of acquisitions, net of cash, and purchases of property and equipment. For the six months endedJune 30, 2020 , net cash used in investing activities was$11.7 million and was primarily related to purchases of tooling and molds used in production our product lines. For the six months endedJune 30, 2019 , net cash used in investing activities was$18.1 million and was primarily comprised of$11.7 million for purchases of property and equipment primarily relating to tooling and molds and initial cash consideration, net of cash acquired of$6.4 million for the Forrest-Pruzan acquisition. 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. We do not anticipate any future financing activity related to contributions from the Continuing Equity Owners. For the six months endedJune 30, 2020 , net cash used in financing activities was$6.3 million , primarily related to payments on the Term Loan Facility of$5.9 million and distributions to the Continuing Equity Owners of$2.7 million , partially offset by net borrowings on the Revolving Credit Facility of$3.0 million . For the six months endedJune 30, 2019 , net cash used in financing activities was$23.7 million , primarily related to distributions to the Continuing Equity Owners of$18.1 million , payments on the Term Loan Facility of$5.9 million , and net payments on the Revolving Credit Facility of$0.8 million partially offset by proceeds from the exercise of equity based options of$1.4 million . Credit Facilities OnOctober 22, 2018 (the "Closing Date"),Funko Acquisition Holdings, L.L.C., Funko Holdings LLC, Funko, LLC andLoungefly, LLC (each, a "Borrower" and collectively, the "Borrowers"), entered into a new Credit Agreement by and among each Borrower, certain financial institutions party thereto andPNC Bank, National Association , as administrative agent and collateral agent, providing for a Term Loan Facility in the amount of$235.0 million and a Revolving Credit Facility of$50.0 million . Proceeds from the Credit Facilities were primarily used to repay our prior senior secured credit facilities. OnFebruary 11, 2019 , the Company amended its Credit Agreement to increase the Revolving Credit Facility to$75.0 million , reflecting the incremental capacity of$25.0 million contemplated under the Credit Facilities prior to such amendment. OnSeptember 23, 2019 , the Company entered into a second amendment to the Credit Agreement (the "Second Amendment"). The Second Amendment extended the maturity date of the Term Loan Facility and Revolving Credit Facility under the Credit Agreement toSeptember 23, 2024 , reduced the interest margin applicable to all loans under the Credit Agreement by 0.75% and reduced certain fees incurred under the Credit Agreement. The Second Amendment also allows the Company to request that the Term Loan Facility be increased by an additional$25.0 million . OnMay 5, 2020 , the Company entered into the Third Amendment, which amended and modified the Credit Agreement, to, among other things, (i) waive the financial covenants under the Credit Agreement for the fiscal quarters endingJune 30, 2020 andSeptember 30, 2020 (the "Waiver Period"), (ii) add a requirement to maintain a minimum liquidity of at least$30 million until the Leverage Ratio (as defined in the Credit Agreement) is less than 2.50 to 1.00 for a period of four consecutive fiscal quarters, (iii) hold the incurrence ratios for certain restricted payments, investments and dispositions at the levels applicable prior to the effectiveness of the Third Amendment, (iv) increase the interest and fees payable under the Credit Agreement from the date of Third Amendment through (but excluding) the first date on which the Company receives cumulative net cash proceeds of at least$50 million from certain issuances of 31 -------------------------------------------------------------------------------- permitted equity or convertible subordinated debt and (v) allow that any calculation of Consolidated EBITDA (as defined in the Credit Agreement) that includes the fiscal quarter endedDecember 31, 2019 may include non-cash expenses for inventory write-downs incurred by the Company during such quarter. Following the Waiver Period, the Third Amendment adjusts the required leverage levels for the Leverage Ratio to provide the Company with additional flexibility when it is re-imposed at the end of the Waiver Period. The Credit Facilities are secured by substantially all assets of the Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions. We are a holding company with no material assets and we do not conduct any business operations of our own. We have no independent means of generating revenue or cash flow, and our ability to pay dividends in the future, if any, is dependent upon the financial results and cash flows ofFAH, LLC and its subsidiaries and distributions we receive fromFAH, LLC . Under the terms of the Credit Facilities, our operating subsidiaries are currently limited in their ability to pay cash dividends to the Company, subject to certain customary exceptions, including: •the ability to pay, so long as there is no current or ongoing event of default, amounts required to be paid under the Tax Receivable Agreement, certain expenses associated with being a public company and reimbursement of expenses required by theFAH LLC Agreement or the Registration Rights Agreement; and •other than during the period commencing on (and including) the Third Amendment closing date and ending on (and including)September 30, 2020 , the ability to make other distributions of up to$25.0 million during any period of four fiscal quarters in order to pay dividends to the common unit holders ofFAH, LLC (including the Company) as long as the funds received by the Company are used to pay dividends to the Company's stockholders, the Leverage Ratio (as defined in the Credit Agreement) is not greater than a ratio that is 0.50:1.00 less than the Leverage Ratio under the Pro Forma Financial Covenant Requirement (as defined in the Credit Agreement) for the applicable fiscal quarter and there is remaining Availability (as defined in the Credit Agreement) under the Credit Facilities of at least$25.0 million . We expect these limitations to continue in the future under the terms of the Credit Agreement and that they may continue under the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. The Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions, guarantee repayment of the Credit Facilities. The Term Loan Facility matures onSeptember 23, 2024 (the "Maturity Date"). The Term Loan Facility amortizes in quarterly installments in aggregate amounts equal to 5.00% of the original principal amount of the Term Loan Facility ("Original Principal Amount") in the first and second years of the Term Loan Facility, 10.00% of the Original Principal Amount in the third and fourth years of the Term Loan Facility and 12.50% of the Original Principal Amount in the fifth and sixth year of the Term Loan Facility, with any outstanding balance due and payable on the Maturity Date. The Revolving Credit Facility terminates on the Maturity Date and loans thereunder may be borrowed, repaid, and reborrowed up to such date. As ofJune 30, 2020 ,$29.1 million was outstanding under the Revolving Credit Facility. As amended, loans under the Credit Facilities, at the Borrowers' option, bear interest at either the Euro-Rate (as defined in the Credit Agreement) or, in the case of swing loans, the Swing Rate (as defined in the Credit Agreement), plus 3.00% or the Base Rate (as defined in the Credit Agreement) plus 2.00%, with 0.25% step-downs based on the achievement of certain leverage ratios following the Closing Date. The Euro-Rate is subject to a 1.00% floor and for loans based on the Euro-Rate, interest payments are due at the end of each applicable interest period. 32 -------------------------------------------------------------------------------- The Credit Agreement governing the Credit Facilities 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; •alter the business conducted by us and our subsidiaries; •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 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 Credit Agreement requiresFAH, LLC and its subsidiaries to comply on a quarterly basis with a maximum senior leverage ratio and a minimum fixed charge coverage ratio (in each case, measured on a trailing four-quarter basis), except as described above in connection with the Waiver Period. As ofJune 30, 2020 andDecember 31, 2019 , we were in compliance with all covenants in our Credit Agreement, as amended. In accordance with the Third Amendment, the financial covenants under the Credit Agreement have been waived during the Waiver Period. After the Waiver Period ends, we expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts. If economic conditions caused by the COVID-19 global pandemic worsen and the Company's earnings and operating cash flows do not start to recover as currently estimated by management, this could impact our ability to maintain compliance with our amended financial covenants and require the Company to seek additional amendments to our Credit Agreement. The Credit Agreement also contains certain customary representations and warranties and affirmative covenants, and certain reporting obligations. In addition, the lenders under the 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 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, 2020 , we had$239.9 million of indebtedness outstanding under our Credit Facilities, consisting of$210.8 million outstanding under our Term Loan Facility (net of unamortized discount of 33 --------------------------------------------------------------------------------$3.6 million ) and$29.1 million outstanding under our Revolving Credit Facility, leaving$45.9 million available under our Revolving Credit Facility. Form S-3 Registration Statement OnApril 20, 2019 , we filed a preliminary shelf registration statement on Form S-3 (as amended onMay 13, 2019 andAugust 30, 2019 , the "Form S-3") with theSEC . The Form S-3 was declared effective by theSEC onSeptember 16, 2019 . The Form S-3 allows us to offer and sell from time-to-time up to$100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts or units comprised of any combination of these securities for our own account and allows certain selling stockholders to offer and sell 27,884,185 shares of Class A common stock in one or more offerings. The Form S-3 is intended to provide us flexibility to conduct registered sales of our securities, subject to market conditions and our future capital needs. The terms of any future offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with theSEC prior to the completion of any such offering. Future Sources and Uses of Liquidity As ofJune 30, 2020 , we had$41.1 million of cash and cash equivalents and$80.0 million of working capital, compared with$25.2 million of cash and cash equivalents and$101.6 million of working capital as ofDecember 31, 2019 . 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 "Financial Condition" above and Note 4, Debt. In addition, as described above, onApril 20, 2019 , we filed a preliminary shelf registration statement on Form S-3 with theSEC , which was declared effective by theSEC onSeptember 16, 2019 . The terms of any offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with theSEC prior to the completion of any such offering. We cannot assure you that our cash provided by operating activities or cash available under our Credit Facilities will be sufficient to meet our long-term future needs beyond the next 12 months, particularly in light of the ongoing nature of the COVID-19 pandemic and its continuing impact on the global economy and consumer demand. We are currently evaluating additional options to improve our liquidity, such as the issuance of additional unsecured and secured debt, equity securities and equity-linked securities. However, the disruption and volatility in the global capital markets caused by COVID-19 could impact our ability to access the capital markets, and could therefore have a material adverse effect on our future liquidity. Uses Additional future liquidity needs may include public company costs, tax distributions, the redemption right held by the Continuing Equity Owners that they may exercise from time to time (should we elect to exchange their common units for a cash payment), payments under the Tax Receivable Agreement and general cash requirements for operations and capital expenditures. 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 34 -------------------------------------------------------------------------------- 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. Contractual Obligations There were no material changes in our commitments during the six months endedJune 30, 2020 under contractual obligations from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 outside the course of normal business. Off-Balance Sheet Arrangements As ofJune 30, 2020 , we did not have any off-balance sheet arrangements. 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, equity-based compensation 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, 2019 except as disclosed in Note 2, Significant Accounting Policies. 35
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