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    FNKO   US3610081057

FUNKO, INC.

(FNKO)
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FUNKO : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/05/2021 | 04:38pm EDT
You should read the following discussion and analysis of our financial condition
and results of operations together with our unaudited condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q, as well as our audited consolidated financial statements
and related notes as disclosed in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("SEC") on March 11, 2021. This discussion
and analysis contains forward-looking statements based upon current plans,
expectations and beliefs involving risks and uncertainties. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of various important factors, including those set forth under "Risk
Factors" included in this Quarterly Report on Form 10-Q.
As used in this Quarterly Report on Form 10-Q, unless the context otherwise
requires, references to:
•"we," "us," "our," the "Company," "Funko" and similar references refer: (1)
following the consummation of the Transactions, to Funko, Inc., and unless
otherwise stated, all of its direct and indirect subsidiaries, including FAH,
LLC and (2) prior to the completion of the Transactions, to FAH, LLC and, unless
otherwise stated, all of its subsidiaries.
•"ACON" refers to ACON Funko Investors, L.L.C., a Delaware limited liability
company, and certain funds affiliated with ACON Funko Investors, L.L.C.
(including any such fund or entity formed to hold shares of Class A common stock
for the Former Equity Owners).
•"Continuing Equity Owners" refers collectively to ACON, Fundamental, the Former
Profits Interests Holders, certain former warrant holders and certain current
and former executive officers, employees and directors and each of their
permitted transferees that owned common units in FAH, LLC after the Transactions
and who may redeem at each of their options (subject in certain circumstances to
time-based vesting requirements) their common units for, at our election, cash
or newly-issued shares of Funko, Inc.'s Class A common stock.
•"FAH, LLC" refers to Funko Acquisition Holdings, L.L.C.
•"FAH LLC Agreement" refers to FAH, LLC's second amended and restated limited
liability company agreement, as amended from time to time.
•"Former Equity Owners" refers to those Original Equity Owners affiliated with
ACON who transferred their indirect ownership interests in common units of FAH,
LLC for shares of Funko, Inc. Class A common stock (to be held by them either
directly or indirectly) in connection with the consummation of the Transactions.
•"Former Profits Interests Holders" refers collectively to certain of our
directors and certain current and former executive officers and employees, in
each case, who, prior to the consummation of the Transactions, held existing
vested and unvested profits interests in FAH, LLC pursuant to FAH, LLC's prior
equity incentive plan and received common units of FAH, LLC in exchange for
their profits interests (subject to any common units received in exchange for
unvested profits interests remaining subject to their existing time-based
vesting requirements) in connection with the Transactions.
•"Fundamental" refers collectively to Fundamental Capital, LLC and Funko
International, LLC.
•"Original Equity Owners" refers to the owners of ownership interests in FAH,
LLC, collectively, prior to the Transactions, which include ACON, Fundamental,
the Former Profits Interests Holders and certain current and former executive
officers, employees and directors.
•"Tax Receivable Agreement" refers to a tax receivable agreement entered into
between Funko, Inc., FAH, LLC and each of the Continuing Equity Owners as part
of the Transactions, defined below.
•"Transactions" refers to certain organizational transactions that we effected
in connection with our initial public offering ("IPO") in November 2017.
                                       19
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Overview

We are a leading pop culture consumer products company. Our business is built on
the belief that everyone is a fan of something, and Funko aims to have something
for every fan. We create whimsical, fun and unique products that enable fans to
express their affinity for their favorite "something"-whether it is a movie, TV
show, video game, musician or sports team. We infuse our distinct designs and
aesthetic sensibility into our extensive portfolio of licensed content over a
wide variety of product categories, including figures, bags, wallets, apparel,
accessories, board games, plush and homewares, which we make available at highly
accessible price points. We believe we sit at the nexus of pop culture-content
providers value us for our ability to connect fans to their properties with our
creative products and broad distribution; retailers value us for our broad
portfolio of licensed pop culture products that we can curate to resonate with
their consumers; and consumers value us for our distinct, stylized products and
the content they represent. We believe our innovative product design and market
positioning have disrupted the licensed product markets and helped to define
today's pop culture products category.
COVID-19
The novel coronavirus ("COVID-19") pandemic has caused and continues to cause
significant loss of life and disruption to the global economy, including the
curtailment of activities by businesses and consumers in much of the world as
governments and others seek to limit the spread of the disease and its variants,
and through business and transportation shutdowns and restrictions on people's
movement and congregation.
As a result of the onset of the pandemic, we experienced weakened demand for our
products, which had a negative impact on our net sales and liquidity in 2020.
Many customers deferred or significantly reduced orders of our product as a
result of government-mandated closures and limitations on in-store occupancy. We
also had experienced key account closures, which drove strategic decisions to
shift the timing of new product delivery to preserve demand.
We are also continually monitoring our suppliers and manufacturers of our
products. In 2020, we faced delays or difficulty sourcing products, in response
to which we shifted a greater amount of our production from China to Vietnam.
Notwithstanding the shift in production to Vietnam, we expect that the cost of
shipping containers will increase over historical levels for the remainder of
2021 due to the global pandemic and other issues impacting global supply chains.
We believe that the greatest impact from the COVID-19 pandemic occurred in the
second quarter of 2020 during which we experienced a significant net sales
decline as compared to the second quarter of 2019. If a significant surge in
COVID-19 or variant strain cases occurs, and is accompanied by additional
closures or a significant halt in reopenings, the remainder of 2021 could
potentially be impacted.
We have taken actions to protect our employees in response to the pandemic,
including closing our corporate offices and requiring our office employees to
work from home. At our distribution centers, certain practices are in effect to
safeguard workers, including but not limited to, required daily health
pre-screening, providing personal protective equipment and operating with a
staggered work schedule, and we are continuing to monitor direction from local
and national governments carefully.
                                       20
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Key Performance Indicators
We consider the following metrics to be key performance indicators to evaluate
our business, develop financial forecasts, and make strategic decisions.
                                                      Three Months Ended June 30,                 Six Months Ended June 30,
                                                        2021                  2020                 2021                  2020
                                                                              (amounts in thousands)
Net sales                                         $      236,110          $  98,099          $      425,287          $ 234,799
Net income (loss)                                 $       20,944          $ (15,009)         $       32,030          $ (20,741)
EBITDA (1)                                        $       37,687          $  (2,950)         $       63,565          $   4,106
Adjusted EBITDA (1)                               $       41,056          $     225          $       70,828          $  10,821


(1)Earnings before interest, taxes, depreciation and amortization ("EBITDA") and
Adjusted EBITDA are financial measures not calculated in accordance with U.S.
generally accepted accounting principles ("U.S. GAAP"), or non-GAAP financial
measures. For a reconciliation of EBITDA and Adjusted EBITDA to net income
(loss), the most closely comparable U.S. GAAP financial measure, see "Non-GAAP
Financial Measures" below.

                                       21
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Results of Operations
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
The following table sets forth information comparing the components of net
income for the three months ended June 30, 2021 and 2020:
                                                 Three Months Ended June 30,                    Period over Period Change
                                                   2021                  2020               Dollar                Percentage
                                                                  (amounts in thousands, except percentages)
Net sales                                    $      236,110          $  98,099          $   138,011                      140.7  %
Cost of sales (exclusive of depreciation and
amortization shown separately below)                143,756             62,182               81,574                      131.2  %
Selling, general, and administrative
expenses                                             54,875             39,110               15,765                       40.3  %
Depreciation and amortization                        10,188             11,071                 (883)                      (8.0) %
Total operating expenses                            208,819            112,363               96,456                       85.8  %
Income (loss) from operations                        27,291            (14,264)              41,555                            nm
Interest expense, net                                 1,973              2,691                 (718)                     (26.7) %
Other income, net                                      (208)              (243)                  35                      (14.4) %
Income (loss) before income taxes                    25,526            (16,712)              42,238                            nm
Income tax expense (benefit)                          4,582             (1,703)               6,285                            nm
Net income (loss)                                    20,944            (15,009)              35,953                            nm
Less: net income (loss) attributable to
non-controlling interests                             7,131             (4,424)              11,555                            nm
Net income (loss) attributable to Funko,
Inc.                                         $       13,813          $ (10,585)         $    24,398                            nm


Net Sales
Net sales were $236.1 million for the three months ended June 30, 2021, an
increase of 140.7%, compared to $98.1 million for the three months ended
June 30, 2020. The three months ended June 30, 2020 saw the greatest impact of
the COVID-19 pandemic with significant declines in net sales due to reduced
customer shipments and non-essential business closures and other social
distancing guidelines. In addition to the impacts of the COVID-19 pandemic on
the three months ended June 30, 2020, the increase in net sales was due
primarily to increased sales to specialty retailer, distributors and
direct-to-consumer customers for the three months ended June 30, 2021 compared
to the three months ended June 30, 2020.
For the three months ended June 30, 2021, the number of active properties
increased 23.4% to 795 as compared to 644 for the three months ended June 30,
2020, and the average net sales per active property increased 95.0% for the
three months ended June 30, 2021 as compared to the three months ended June 30,
2020. An active property is a licensed property from which we generate sales of
products during a given period. While we expect to see growth in the number of
active properties and average sales per active property over time, we expect
that the number of active properties and the average sales per active property
will fluctuate from quarter to quarter based on what is relevant in pop culture
at that time, the types of properties we are producing against and general
economic trends.

                                       22
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On a geographical basis, net sales in the United States increased 109.5% to
$163.2 million in the three months ended June 30, 2021 as compared to $77.9
million in the three months ended June 30, 2020. Net sales in Europe increased
392.8% to $52.0 million in the three months ended June 30, 2021 as compared to
$10.6 million in the three months ended June 30, 2020 and net sales
internationally increased 116.8% to $20.9 million in the three months ended
June 30, 2021 as compared to $9.6 million in the three months ended June 30,
2020. Increases in Europe and other international net sales were due primarily
to increased sales to specialty retailer, distributors and e-commerce sites in
addition to the impacts of the COVID-19 pandemic on the three months ended June
30, 2020.
On a product category basis, net sales of figures increased 141.9% to $187.2
million in the three months ended June 30, 2021 as compared to $77.4 million in
the three months ended June 30, 2020, and net sales of other products increased
136.1% to $48.9 million in the three months ended June 30, 2021 as compared to
$20.7 million in the three months ended June 30, 2020.
On a branded product basis, net sales of Pop! branded products increased 137.3%
to $185.4 million in the three months ended June 30, 2021 as compared to $78.1
million in the three months ended June 30, 2020, Loungefly branded products
increased 132.1% to $29.6 million in the three months ended June 30, 2021 as
compared to $12.7 million in the three months ended June 30, 2020 and net sales
of other branded products increased 192.9% to $21.1 million in the three months
ended June 30, 2021 as compared to $7.2 million in the three months ended
June 30, 2020.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was $143.8 million
for the three months ended June 30, 2021, an increase of 131.2%, compared to
$62.2 million for the three months ended June 30, 2020. Cost of sales (exclusive
of depreciation and amortization) increased primarily as a result of increased
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 39.1% for the three
months ended June 30, 2021, compared to 36.6% for the three months ended
June 30, 2020. The increase in gross margin (exclusive of depreciation and
amortization) for the three months ended June 30, 2021 compared to the three
months ended June 30, 2020 was driven primarily by improved global product
margins offset by an increase in shipping and freight costs as a percentage of
net sales during the three months ended June 30, 2021 due to continued global
supply chain capacity constraints driving increased freight costs.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $54.9 million for the three
months ended June 30, 2021, an increase of 40.3%, compared to $39.1 million for
the three months ended June 30, 2020. The increase was driven primarily by a
$14.2 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 $1.7 million increase in
advertising and marketing costs and $0.6 million increase in product development
costs. These costs were partially offset by a decrease of $1.9 million in
administrative costs. Selling, general and administrative expenses were 23.2%
and 39.9% of net sales for the three months ended June 30, 2021 and 2020,
respectively. The decrease in selling, general and administrative expenses as a
percentage of net sales was due to increased net sales outpacing selling,
general, and administrative expenses.
Depreciation and Amortization
Depreciation and amortization expense was $10.2 million for the three months
ended June 30, 2021, a decrease of 8.0%, compared to $11.1 million for the three
months ended June 30, 2020, primarily related to the type and timing of assets
placed in service.
                                       23
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Interest Expense, Net
Interest expense, net was $2.0 million for the three months ended June 30, 2021,
a decrease of 26.7%, compared to $2.7 million for the three months ended
June 30, 2020. The decrease in interest expense, net was due primarily to a
lower average balance on debt outstanding during the three months ended June 30,
2021 as compared to the three months ended June 30, 2020.
Other income, net
Other income, net was $0.2 million for both the three months ended June 30, 2021
and 2020, respectively, and was primarily related to foreign currency gains and
losses relating to transactions denominated in currencies other than the U.S.
dollar.
Income tax expense (benefit)
Income tax expense was $4.6 million and income tax benefit was $1.7 million for
the three months ended June 30, 2021 and 2020, respectively. The increase for
the three months ended June 30, 2021 from June 30, 2020 was primarily related to
an increase in income before income taxes.
Net income (loss)
Net income was $20.9 million for the three months ended June 30, 2021, compared
to net loss of $15.0 million for the three months ended June 30, 2020. The
increase in net income was primarily due to the increase in net sales, partially
offset by an increase in cost of sales (exclusive of depreciation and
amortization) and selling, general and administrative expenses for the three
months ended June 30, 2021 as compared to the three months ended June 30, 2020,
as discussed above.
                                       24
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Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020 The following table sets forth information comparing the components of net income for the six months ended June 30, 2021 and 2020:

                                                  Six Months Ended June 30,                     Period over Period Change
                                                   2021                  2020               Dollar                Percentage
                                                                  (amounts in thousands, except percentages)
Net sales                                    $      425,287          $ 234,799          $   190,488                       81.1  %
Cost of sales (exclusive of depreciation and
amortization shown separately below)                254,609            143,599              111,010                       77.3  %
Selling, general, and administrative
expenses                                            106,142             86,423               19,719                       22.8  %
Depreciation and amortization                        20,450             22,060               (1,610)                      (7.3) %
Total operating expenses                            381,201            252,082              129,119                       51.2  %
Income (loss) from operations                        44,086            (17,283)              61,369                            nm
Interest expense, net                                 4,210              5,346               (1,136)                     (21.2) %
Other expense, net                                      971                671                  300                       44.7  %
Income (loss) before income taxes                    38,905            (23,300)              62,205                            nm
Income tax expense (benefit)                          6,875             (2,559)               9,434                            nm
Net income (loss)                                    32,030            (20,741)              52,771                            nm
Less: net income (loss) attributable to
non-controlling interests                            11,703             (6,030)              17,733                            nm
Net income (loss) attributable to Funko,
Inc.                                         $       20,327          $ (14,711)         $    35,038                            nm


Net Sales
Net sales were $425.3 million for the six months ended June 30, 2021, an
increase of 81.1%, compared to $234.8 million for the six months ended June 30,
2020. In addition to the impacts of the COVID-19 pandemic on the six months
ended June 30, 2020, the increase in net sales was due primarily to increased
sales to specialty retailer, distributor and direct-to-consumer customers for
the six months ended June 30, 2021 compared to the six months ended June 30,
2020.
For the six months ended June 30, 2021, the number of active properties
increased 15.1% to 846 as compared to 735 for the six months ended June 30,
2020, and the average net sales per active property increased 57.4% for the six
months ended June 30, 2021 as compared to the six months ended June 30, 2020.
On a geographical basis, net sales in the United States increased 69.9% to
$299.7 million in the six months ended June 30, 2021 as compared to $176.4
million in the six months ended June 30, 2020. Net sales in Europe increased
154.0% to $91.8 million in the six months ended June 30, 2021 as compared to
$36.1 million in the six months ended June 30, 2020 and net sales
internationally increased 51.8% to $33.8 million in the six months ended
June 30, 2021 as compared to $22.2 million in the six months ended June 30,
2020. Increases in Europe and other international net sales were due primarily
to increased sales to specialty retailer, distributors and e-commerce sites in
addition to the impacts of the COVID-19 pandemic on the six months ended June
30, 2020.
On a product category basis, net sales of figures increased 79.1% to $337.9
million in the six months ended June 30, 2021 as compared to $188.7 million in
the six months ended June 30, 2020, and net sales of other products increased
89.6% to $87.4 million in the six months ended June 30, 2021 as compared to
$46.1 million in the six months ended June 30, 2020.
                                       25
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On a branded product basis, net sales of Pop! branded products increased 75.6%
to $335.8 million in the six months ended June 30, 2021 as compared to $191.2
million in the six months ended June 30, 2020, Loungefly branded products
increased 106.4% to $54.1 million in the six months ended June 30, 2021 as
compared to $26.2 million in the six months ended June 30, 2020 and net sales of
other branded products increased 104.0% to $35.4 million in the six months ended
June 30, 2021 as compared to $17.4 million in the six months ended June 30,
2020.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was $254.6 million
for the six months ended June 30, 2021, an increase of 77.3%, compared to $143.6
million for the six months ended June 30, 2020. Cost of sales (exclusive of
depreciation and amortization) increased primarily as a result of increased
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 40.1% for the six
months ended June 30, 2021, compared to 38.8% for the six months ended June 30,
2020. The increase in gross margin (exclusive of depreciation and amortization)
for the six months ended June 30, 2021 compared to the six months ended June 30,
2020 was driven primarily by improved global product margins offset by an
increase in shipping and freight costs as a percentage of net sales during the
six months ended June 30, 2021 due to global supply chain capacity constraints
driving increased freight costs.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $106.1 million for the six
months ended June 30, 2021, an increase of 22.8%, compared to $86.4 million for
the six months ended June 30, 2020. The increase was driven primarily by a $18.0
million increase to personnel and related costs (including salary and related
taxes/benefits, commissions, equity-based compensation and variable warehouse
labor and third party logistics expenses), a $2.3 million increase in
advertising and marketing costs and $0.9 million increase in facilities and
rent. These costs were partially offset by a decrease of $1.3 million in
administrative costs and $1.1 million in warehouse and office support. Selling,
general and administrative expenses were 25.0% and 36.8% of net sales for the
six months ended June 30, 2021 and 2020, respectively. The decrease in selling,
general and administrative expenses as a percentage of net sales was due to
increased net sales outpacing selling, general, and administrative expenses.
Depreciation and Amortization
Depreciation and amortization expense was $20.5 million for the six months ended
June 30, 2021, a decrease of 7.3%, compared to $22.1 million for the six months
ended June 30, 2020, primarily related to the type and timing of assets placed
in service.
Interest Expense, Net
Interest expense, net was $4.2 million for the six months ended June 30, 2021, a
decrease of 21.2%, compared to $5.3 million for the six months ended June 30,
2020. The decrease in interest expense, net was due primarily to a lower average
balance on debt outstanding during the six months ended June 30, 2021 as
compared to the six months ended June 30, 2020.
Other expense, net
Other expense, net was $1.0 million and $0.7 million for the six months ended
June 30, 2021 and 2020, respectively. Other expense, net for the six months
ended June 30, 2021 and 2020 was primarily related to foreign currency gains and
losses relating to transactions denominated in currencies other than the U.S.
dollar.
                                       26
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Income tax expense (benefit)
Income tax expense was $6.9 million and income tax benefit was $2.6 million for
the six months ended June 30, 2021 and 2020, respectively. The increase for the
six months ended June 30, 2021 from June 30, 2020 was primarily related to an
increase in income before income taxes.
Net income (loss)
Net income was $32.0 million for the six months ended June 30, 2021, compared to
net loss of $20.7 million for the six months ended June 30, 2020. The increase
in net income was primarily due to the increase in net sales, partially offset
by an increase in cost of sales (exclusive of depreciation and amortization) and
selling, general and administrative expenses for the six months ended June 30,
2021 as compared to the six months ended June 30, 2020, as discussed above.


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Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss) and Adjusted Earnings (Loss)
per Diluted Share (collectively the "Non-GAAP Financial Measures") are
supplemental measures of our performance that are not required by, or presented
in accordance with, U.S. GAAP. The Non-GAAP Financial Measures are not
measurements of our financial performance under U.S. GAAP and should not be
considered as an alternative to net income (loss), earnings (loss) per share or
any other performance measure derived in accordance with U.S. GAAP. We define
EBITDA as net income (loss) before interest expense, net, income tax expense
(benefit), depreciation and amortization. We define Adjusted EBITDA as EBITDA
further adjusted for non-cash charges related to equity-based compensation
programs, certain severance, relocation and related costs, foreign currency
transaction losses (gains) and other unusual or one-time items. We define
Adjusted Net Income (Loss) as net income (loss) attributable to Funko, Inc.
adjusted for the reallocation of income (loss) attributable to non-controlling
interests from the assumed exchange of all outstanding common units and options
in FAH, LLC for newly issued-shares of Class A common stock of Funko, Inc. and
further adjusted for the impact of certain non-cash charges and other items that
we do not consider in our evaluation of ongoing operating performance. These
items include, among other things, non-cash charges related to equity-based
compensation programs, certain severance, relocation and related costs, foreign
currency transaction losses (gains) and other unusual or one-time items, and the
income tax (expense) benefit effect of these adjustments. We define Adjusted
Earnings (Loss) per Diluted Share as Adjusted Net Income (Loss) 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.
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By providing these Non-GAAP Financial Measures, together with reconciliations,
we believe we are enhancing investors' understanding of our business and our
results of operations, as well as assisting investors in evaluating how well we
are executing our strategic initiatives. The Non-GAAP Financial Measures have
limitations as analytical tools, and should not be considered in isolation, or
as an alternative to, or a substitute for net income (loss) or other financial
statement data presented in our unaudited condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q as
indicators of financial performance. Some of the limitations are:
•such measures do not reflect our cash expenditures, or future requirements for
capital expenditures or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working
capital needs;
•such measures do not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments on our debt;
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future and such
measures do not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate such measures differently than we
do, limiting their usefulness as comparative measures.
Due to these limitations, Non-GAAP Financial Measures should not be considered
as measures of discretionary cash available to us to invest in the growth of our
business. We compensate for these limitations by relying primarily on our U.S.
GAAP results and using these non-GAAP measures only supplementally. As noted in
the table below, the Non-GAAP Financial Measures include adjustments for
non-cash charges related to equity-based compensation programs, certain
severance, relocation and related costs, foreign currency transaction losses
(gains) and other unusual or one-time items. It is reasonable to expect that
these items will occur in future periods. However, we believe these adjustments
are appropriate because the amounts recognized can vary significantly from
period to period, do not directly relate to the ongoing operations of our
business and complicate comparisons of our internal operating results and
operating results of other companies over time. Each of the normal recurring
adjustments and other adjustments described herein and in the reconciliation
table below help management with a measure of our core operating performance
over time by removing items that are not related to day-to-day operations.
                                       29
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The following tables reconcile the Non-GAAP Financial Measures to the most directly comparable U.S. GAAP financial performance measure, which is net income (loss), for the periods presented:

                                                    Three Months Ended June 30,                 Six Months Ended June 30,
                                                      2021                  2020                 2021                 2020
                                                                    (In thousands, except per share data)
Net income (loss) attributable to Funko, Inc.   $       13,813          $ (10,585)         $      20,327          $ (14,711)
Reallocation of net income (loss) attributable
to non-controlling interests from the assumed
exchange of common units of FAH, LLC for Class
A common stock (1)                                       7,131             (4,424)                11,703             (6,030)
Equity-based compensation (2)                            3,521              2,625                  6,211              5,038

Certain severance, relocation and related
costs (3)                                                   56                793                     81              1,006
Foreign currency transaction (gain) loss (4)              (208)              (243)                   971                671

Income tax (expense) benefit (5)                        (2,642)             1,681                 (4,667)             1,587
Adjusted net income (loss)                      $       21,671          $ 

(10,153) $ 34,626 $ (12,439) Weighted-average shares of Class A common stock outstanding-basic

                                       37,881             35,033                 37,047             34,988
Equity-based compensation awards and common
units of FAH, LLC that are convertible into
Class A common stock                                    16,317             15,972                 16,537             15,942
Adjusted weighted-average shares of Class A
stock outstanding - diluted                             54,198             51,005                 53,584             50,930
Adjusted earnings (loss) per diluted share      $         0.40          $   (0.20)         $        0.65          $   (0.24)


                                                 Three Months Ended June 30,                 Six Months Ended June 30,
                                                   2021                  2020                 2021                 2020
                                                                         (amounts in thousands)
Net income (loss)                            $       20,944          $ 

(15,009) $ 32,030 $ (20,741) Interest expense, net

                                 1,973              2,691                  4,210              5,346
Income tax expense (benefit)                          4,582             (1,703)                 6,875             (2,559)
Depreciation and amortization                        10,188             11,071                 20,450             22,060
EBITDA                                       $       37,687          $  (2,950)         $      63,565          $   4,106
Adjustments:
Equity-based compensation (2)                         3,521              2,625                  6,211              5,038

Certain severance, relocation and related
costs (3)                                                56                793                     81              1,006
Foreign currency transaction (gain) loss (4)           (208)              (243)                   971                671
Adjusted EBITDA                              $       41,056          $     225          $      70,828          $  10,821


(1)Represents the reallocation of net income (loss) attributable to
non-controlling interests from the assumed exchange of common units of FAH, LLC
for Class A common stock in periods in which income (loss) was attributable to
non-controlling interests.
(2)Represents non-cash charges related to equity-based compensation programs,
which vary from period to period depending on the timing of awards.
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(3)For the three and six months ended June 30, 2021, represents severance,
relocation and related costs associated with residual payment of global
workforce reduction implemented in response to the COVID-19 pandemic. For the
three and 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.
(4)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.
(5)Represents the income tax (expense) benefit effect of the above adjustments.
This adjustment uses an effective tax rate of 25% for all periods presented.
Liquidity and Financial Condition
Introduction
Our primary requirements for liquidity and capital are working capital,
inventory management, capital expenditures, debt service and general corporate
needs.
Notwithstanding our obligations under the Tax Receivable Agreement between
Funko, Inc., FAH, LLC and each of the Continuing Equity Owners, we believe that
our sources of liquidity and capital will be sufficient to finance our continued
operations, growth strategy, our planned capital expenditures and the additional
expenses we expect to incur as a public company for at least the next 12 months.
Liquidity and Capital Resources
The following table shows summary cash flow information for the six months ended
June 30, 2021 and 2020 (in thousands):
                                                                        Six 

Months Ended June 30,

                                                                         2021                 2020
Net cash provided by operating activities                          $      71,431          $  32,208
Net cash used in investing activities                                    (11,129)           (11,676)
Net cash used in financing activities                                    (17,116)            (6,259)
Effect of exchange rates on cash and cash equivalents                         33              1,625
Net increase in cash and cash equivalents                          $      

43,219 $ 15,898



Operating Activities. Net cash provided by operating activities was $71.4
million for the six months ended June 30, 2021, compared to $32.2 million for
the six months ended June 30, 2020. Changes in net cash provided by operating
activities result primarily from cash received from net sales and cash payments
for product costs and royalty expenses paid to our licensors. Other drivers of
the changes in net cash provided by operating activities include shipping and
freight costs, selling, general and administrative expenses (including personnel
expenses and commissions and rent and facilities costs) and interest payments
made for our short-term borrowings and long-term debt. Our accounts receivable
typically are short term and settle in approximately 30 to 90 days.
The increase for the six months ended June 30, 2021 compared to the six months
ended June 30, 2020 was primarily due to the increase in net income, excluding
non-cash adjustments, of $51.0 million. Partially offsetting the increase in net
income was a decrease related to changes in working capital that decreased net
cash provided by operating activities by $11.8 million and was primarily due to
decreases in accounts receivable, net of $61.8 million, inventory of $26.6
million and prepaid expenses and other assets of $10.2 million, partially offset
by a decrease in accrued expense and other current liabilities of $38.1 million,
accounts payable of $25.8 million and accrued royalties of $17.1 million.
                                       31
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Investing Activities. Our net cash used in investing activities primarily
consists of purchases of property and equipment. For the six months ended
June 30, 2021, net cash used in investing activities was $11.1 million and was
primarily related to purchases of tooling and molds used in production for our
product lines. For the six months ended June 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.
Financing Activities. Our financing activities primarily consist of proceeds
from the issuance of long-term debt, net of debt issuance costs, the repayment
of long-term debt, payments and borrowings under our line of credit facility,
distributions to the Continuing Equity Owners and proceeds from the exercise of
equity-based options.
For the six months ended June 30, 2021, net cash used in financing activities
was $17.1 million, primarily related to payments on the Term Loan Facility of
$13.9 million, and distributions to the Continuing Equity Owners of $6.9
million, partially offset by proceeds from exercise of equity-based options of
$3.7 million. For the six months ended June 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.
Credit Facilities
On October 22, 2018, Funko Acquisition Holdings, L.L.C., Funko Holdings LLC,
Funko, LLC and Loungefly, LLC (each, a "Borrower" and collectively, the
"Borrowers"), entered into a new Credit Agreement by and among each Borrower,
certain financial institutions party thereto and PNC 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.
On February 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.
On September 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 to September 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.
On May 5, 2020, the Company entered into a third amendment to the Credit
Agreement (the "Third Amendment"), which modified financial covenants and
adjusted the required leverage levels for the Leverage Ratio to provide the
Company with additional flexibility.

                                       32
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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 of FAH,
LLC and its subsidiaries and distributions we receive from FAH, 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
the FAH LLC Agreement or the Registration Rights Agreement; and
•the ability to make other distributions of up to $25.0 million during any
period of four fiscal quarters in order to pay dividends to the common unit
holders of FAH, 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 on September 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 of June 30, 2021, we had no outstanding
borrowings 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. 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.
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;
                                       33
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•make investments, loans, advances, guarantees and acquisitions;
•pay dividends or make other distributions on equity interests, or redeem,
repurchase or retire equity interests;
•enter into transactions with affiliates;
•enter into 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 requires FAH, LLC and its subsidiaries to
comply on a quarterly basis with a maximum Leverage Ratio and a minimum fixed
charge coverage ratio (in each case, measured on a trailing four-quarter basis).
The maximum Leverage Ratio and the minimum fixed charge coverage ratio for the
fiscal quarter ending June 30, 2021 are 2.75:1.00 and 1.25:1.00, respectively.
As of June 30, 2021 and December 31, 2020, we were in compliance with all
covenants in our Credit Agreement, as amended. We expect to maintain compliance
with our covenants for at least one year from the issuance of these financial
statements based on our current expectations and forecasts. If economic
conditions caused by the COVID-19 global pandemic worsen and the Company's
earnings and operating cash flows do not continue to recover as currently
estimated by management, this could impact our ability to maintain compliance
with our amended financial covenants and require the Company to seek additional
amendments to our 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 of Funko, Inc.
As of June 30, 2021, we had $177.4 million of indebtedness outstanding under our
Term Loan Facility (net of unamortized discount of $2.6 million) and no
outstanding borrowings under our Revolving Credit Facility, leaving
$75.0 million available under our Revolving Credit Facility.
Form S-3 Registration Statement
On April 19, 2019, we filed a preliminary shelf registration statement on Form
S-3 (as amended on May 13, 2019 and August 30, 2019, the "Form S-3") with the
SEC. The Form S-3 was declared effective by the SEC on September 16, 2019. The
Form S-3 allows us to offer and sell from time-to-time up to $100.0 million of
Class A common stock, preferred stock, debt securities, warrants, purchase
contracts or units comprised of any combination of these securities for our own
account and allows certain selling stockholders to offer and sell 27,884,185
shares of Class A common stock in one or more offerings.
The Form S-3 is intended to provide us flexibility to conduct registered sales
of our securities, subject to market conditions and our future capital needs.
The terms of any future offering under the shelf registration statement will be
established at the time of such offering and will be described in a prospectus
supplement filed with the SEC prior to the completion of any such offering.
                                       34
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Future Sources and Uses of Liquidity
As of June 30, 2021, we had $95.5 million of cash and cash equivalents and
$144.3 million of working capital, compared with $52.3 million of cash and cash
equivalents and $120.7 million of working capital as of December 31, 2020.
Working capital is impacted by the seasonal trends of our business and the
timing of new product releases, as well as our current portion of long-term debt
and draw downs on our line of credit.
Sources
As noted above, historically, our primary sources of cash flows have been cash
flows from operating activities and borrowings under our Credit Facilities. We
expect these sources of liquidity to continue to be our primary sources of
liquidity. For a discussion of our Credit Facilities, see "Credit Facilities"
above and Note 5, Debt.
In addition, as described above, on April 19, 2019, we filed a preliminary shelf
registration statement on Form S-3 with the SEC, which was declared effective by
the SEC on September 16, 2019. The terms of any offering under the shelf
registration statement will be established at the time of such offering and will
be described in a prospectus supplement filed with the SEC prior to the
completion of any such offering.
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
expect that the payments we will be required to make to the Continuing Equity
Owners will be significant. Any payments made by us to the Continuing Equity
Owners under the Tax Receivable Agreement will generally reduce the amount of
overall cash flow that might have otherwise have been available to us or to FAH,
LLC and, to the extent that we are unable to make payments under the Tax
Receivable Agreement for any reason, the unpaid amounts generally will be
deferred and will accrue interest until paid by us; provided however, that
nonpayment for a specified period may constitute a material breach under the Tax
Receivable Agreement and therefore may accelerate payments due under the Tax
Receivable Agreement.
Seasonality
While our customers in the retail industry typically operate in highly seasonal
businesses, we have historically experienced only moderate seasonality in our
business. Historically, over 50% of our net sales are made in the third and
fourth quarters, primarily in the period from August through November, as our
customers build up their inventories in anticipation of the holiday season.
Historically, the first quarter of the year has represented the lowest volume of
shipment and sales in our business and in the retail and toy industries
generally and it is also the least profitable quarter due to the various fixed
costs of the business. However, the rapid growth we have experienced in recent
years may have masked the full effects of seasonal factors on our business to
date, and as such, seasonality may have a greater effect on our results of
operations in future periods.
Contractual Obligations
There were no material changes in our commitments during the six months ended
June 30, 2021 under contractual obligations from those disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2020 outside the course of
normal business.
                                       35
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Off-Balance Sheet Arrangements
As of June 30, 2021, 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 with U.S. GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and related disclosures of contingent assets
and liabilities, revenue and expenses at the date of the unaudited condensed
consolidated financial statements. We base our estimates on historical
experience and on various other assumptions in accordance with U.S. GAAP that we
believe to be reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
Critical accounting policies and estimates are those that we consider the most
important to the portrayal of our financial condition and operating results and
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. Our critical accounting policies and estimates include
those related to revenue recognition and sales allowances, royalties, inventory,
goodwill and intangible assets, and income taxes. Changes to these policies and
estimates could have a material adverse effect on our results of operations and
financial condition.
There have been no significant changes to our critical accounting policies to
our disclosure reported in "Critical Accounting Policies and Estimates" in our
Annual Report on Form 10-K for the year ended December 31, 2020.
Item 3.     Quantitative and Qualitative Disclosures about Market Risk.


We are primarily exposed to market risk from changes in interest rates and
foreign currency. These market risks arise in the normal course of business, as
we do not engage in speculative trading activities. In the six months ended June
30, 2021 we entered into additional short-term foreign currency forward exchange
contracts to economically hedge our exposure to foreign currency risk. The
unrealized gain (loss) and realized gain (loss) was not material for the
short-term foreign currency forward exchanges. There have been no other material
changes in our market risk from the disclosure included under "Quantitative and
Qualitative Disclosures of Market Risk" in the Annual Report on Form 10-K for
the year ended December 31, 2020.
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