Executive Summary [Fourth Quarter 2023 Financial Highlights](index=1&type=section&id=Fourth-Quarter%20Financial%20Results%20Summary%3A%202023%20vs%202022) In Q4 2023, Funko's net sales decreased by **12.6%** year-over-year to **$291.2 million**. Despite the sales decline, gross margin saw a significant improvement to **37.6%** from **28.3%**. The company narrowed its net loss to **$10.8 million** from **$42.2 million** in the prior-year period and achieved a positive Adjusted EBITDA of **$23.5 million**, a strong recovery from a negative **$6.3 million** in Q4 2022 Q4 2023 vs Q4 2022 Financial Results (in millions) | Metric | Q4 2023 | Q4 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $291.2 | $333.0 | -12.6% | | Gross Profit | $109.4 | $94.3 | +16.0% | | Gross Margin | 37.6% | 28.3% | +9.3pp | | Net Loss | ($10.8) | ($42.2) | Improved | | Adjusted Net Income (Loss) | $0.5 | ($17.9) | Improved | | Adjusted EBITDA | $23.5 | ($6.3) | Improved | [Full Year 2023 Financial Highlights](index=1&type=section&id=Full-Year%20Financial%20Results%20Summary%3A%202023%20vs%202022) For the full year 2023, net sales declined to **$1.1 billion** from **$1.3 billion** in 2022. The company reported a significant net loss of **$154.1 million**, a sharp increase from the **$8.0 million** loss in the previous year. Adjusted EBITDA fell substantially to **$27.2 million** from **$97.4 million** in 2022, reflecting operational challenges and restructuring costs throughout the year Full Year 2023 vs Full Year 2022 Financial Results (in billions/millions) | Metric | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1.1 | $1.3 | -15.1% | | Gross Profit | $333.0 | $434.0 | -23.3% | | Gross Margin | 30.4% | 32.8% | -2.4pp | | Net Loss | ($154.1) | ($8.0) | Worsened | | Adjusted Net Loss | ($45.4) | $29.6 (Income) | Worsened | | Adjusted EBITDA | $27.2 | $97.4 | -72.1% | [Management Commentary](index=1&type=section&id=Management%20Commentary) The Interim CEO stated that the company successfully completed a comprehensive plan in 2023 to reduce costs, improve operational efficiency, and focus on core products, addressing inventory issues and workforce size. Q4 results were at the upper end of guidance, driven by strong Direct-to-Consumer (DTC) growth. Despite facing headwinds in 2024 from a softer content schedule and shipping uncertainties, management expects significant bottom-line improvement, supported by further DTC expansion - Successfully completed a comprehensive plan in 2023 to reduce costs, improve operational efficiencies, and focus on core products, addressing inventory issues and workforce size[4](index=4&type=chunk) - Q4 2023 net sales and adjusted EBITDA were at the upper end of guidance, fueled by a nearly **30%** increase in the direct-to-consumer (DTC) business, which comprised **26%** of total revenue[6](index=6&type=chunk) - The company anticipates **significant bottom-line improvement in 2024** despite headwinds from Hollywood strikes and Red Sea shipping issues, focusing on DTC expansion and limited-edition products[8](index=8&type=chunk) [Leadership Update](index=2&type=section&id=Leadership%20Update) The company announced the resignation of Steve Nave, Chief Financial Officer (CFO) and Chief Operating Officer, effective March 15, 2024. Deputy CFO Yves LePendeven will assume the role of Acting CFO - **Steve Nave**, Funko's **CFO and COO**, is resigning effective **March 15, 2024**[9](index=9&type=chunk) - **Yves LePendeven**, the company's **Deputy CFO**, will serve as **Acting CFO** upon Mr. Nave's departure[9](index=9&type=chunk) Detailed Financial Performance [Fourth Quarter 2023 Net Sales Analysis](index=2&type=section&id=Fourth%20Quarter%202023%20Net%20Sales%20by%20Category%20and%20Geography) In Q4 2023, total net sales fell **12.6%** YoY. By product category, Core Collectibles and Loungefly branded products saw declines of **12.6%** and **25.1%** respectively, while the 'Other' category grew by **44.0%**. Geographically, a strong **26.3%** sales growth in Europe was offset by an **18.0%** decline in the United States and a **48.5%** drop in Other International markets Q4 Net Sales by Product Brand (in thousands) | Brand Category | Q4 2023 | Q4 2022 | % Change | | :--- | :--- | :--- | :--- | | Core Collectibles | $212,776 | $243,340 | -12.6% | | Loungefly Branded Products | $54,908 | $73,346 | -25.1% | | Other | $23,552 | $16,354 | +44.0% | | **Total Net Sales** | **$291,236** | **$333,040** | **-12.6%** | Q4 Net Sales by Geography (in thousands) | Geography | Q4 2023 | Q4 2022 | % Change | | :--- | :--- | :--- | :--- | | United States | $197,368 | $240,647 | -18.0% | | Europe | $78,138 | $61,869 | +26.3% | | Other International | $15,730 | $30,524 | -48.5% | | **Total Net Sales** | **$291,236** | **$333,040** | **-12.6%** | [Balance Sheet Highlights](index=3&type=section&id=Balance%20Sheet%20Highlights) As of December 31, 2023, Funko significantly improved its balance sheet health by more than halving its inventory to **$119.5 million** from **$246.4 million** at the end of 2022. Cash and cash equivalents nearly doubled to **$36.5 million**, while total debt saw a moderate increase to **$273.6 million** Balance Sheet Highlights (Year-End, in millions) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $36.5 | $19.2 | | Inventories | $119.5 | $246.4 | | Total debt | $273.6 | $245.8 | - Inventory levels were substantially lowered to **$119 million** at year-end 2023, down from **$246 million** at the end of 2022 and **$162 million** at the end of Q3 2023[7](index=7&type=chunk) 2024 Outlook and Guidance [Full Year 2024 Outlook](index=3&type=section&id=2024%20Full%20Year%20Outlook) For the full year 2024, Funko anticipates net sales to be in the range of **$1.047 billion to $1.103 billion**. The company projects a significant recovery in profitability, with Adjusted EBITDA expected to be between **$65 million and $85 million** Full Year 2024 Guidance (in billions/millions) | Metric | Outlook | | :--- | :--- | | Net Sales | $1.047 to $1.103 | | Adjusted EBITDA | $65 to $85 | [First Quarter 2024 Guidance](index=3&type=section&id=2024%20First%20Quarter%20Guidance) For the first quarter of 2024, the company guides for net sales between **$214 million and $227 million**. It expects an adjusted net loss per share in the range of **$0.32 to $0.24** and Adjusted EBITDA between **$0 million and $5 million** Q1 2024 Guidance (in millions, except per share) | Metric | Outlook | | :--- | :--- | | Net Sales | $214 to $227 | | Gross Margin % | ~37% | | SG&A Expense | $87 to $88 | | Adjusted Net Loss | ($17) to ($13) | | Adjusted Net Loss per Share | ($0.32) to ($0.24) | | Adjusted EBITDA | $0 to $5 | Financial Statements [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For the full year 2023, Funko reported net sales of **$1.1 billion** and a net loss attributable to the company of **$154.1 million**, or (**$3.19**) per share. This compares to net sales of **$1.3 billion** and a net loss of **$8.0 million**, or (**$0.18**) per share, in 2022. The increased loss was driven by lower sales, non-recurring charges, and higher interest expense Annual Income Statement Highlights (in thousands) | Metric | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net sales | $1,096,086 | $1,322,706 | | (Loss) income from operations | ($103,827) | ($11,920) | | Net (loss) attributable to Funko, Inc. | ($154,079) | ($8,035) | | Diluted (Loss) per share | ($3.19) | ($0.18) | [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The company's balance sheet at year-end 2023 showed total assets of **$804.6 million**, down from **$1.09 billion** in 2022, largely due to a significant reduction in inventory from **$246.4 million** to **$119.5 million**. Total liabilities stood at **$566.6 million**, while total stockholders' equity decreased to **$238.0 million** from **$389.7 million** Year-End Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $36,453 | $19,200 | | Inventory, net | $119,458 | $246,429 | | Total assets | $804,645 | $1,091,145 | | Total current liabilities | $358,832 | $361,397 | | Total stockholders' equity | $238,040 | $389,689 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) In 2023, Funko generated **$30.9 million** in cash from operating activities, a significant improvement from the **$40.1 million** used in 2022, primarily driven by a **$122.5 million** positive change from inventory reduction. Cash used in investing was **$39.8 million**, and cash provided by financing was **$25.6 million**. The company ended the year with a cash balance of **$36.5 million** Annual Cash Flow Summary (in thousands) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $30,935 | ($40,134) | | Net cash used in investing activities | ($39,796) | ($78,065) | | Net cash provided by financing activities | $25,596 | $54,639 | | Net change in cash and cash equivalents | $17,253 | ($64,357) | | Cash and cash equivalents at end of period | $36,453 | $19,200 | Non-GAAP Reconciliations [Reconciliation to Adjusted Net Income (Loss)](index=9&type=section&id=Reconciliation%20of%20Net%20%28loss%29%20income%20to%20Adjusted%20net%20income%20%28loss%29) For the full year 2023, Funko's GAAP net loss of **$154.1 million** was adjusted to a non-GAAP adjusted net loss of **$45.4 million**. Significant adjustments included a **$100.2 million** gain from a tax receivable agreement liability adjustment, a **$30.3 million** inventory write-down, and a **$147.6 million** income tax expense adjustment which includes a large valuation allowance on deferred tax assets FY 2023 Reconciliation to Adjusted Net Loss (in thousands) | Description | Amount | | :--- | :--- | | Net loss attributable to Funko, Inc. (GAAP) | ($154,079) | | Tax receivable agreement liability adjustment | ($100,223) | | Inventory write-down | $30,338 | | One-time disposal costs (inventory) | $8,687 | | Acquisition costs and other expenses | $14,241 | | Severance, relocation and related costs | $6,486 | | Income tax expense adjustment | $147,630 | | **Adjusted net loss (Non-GAAP)** | **($45,397)** | [Reconciliation to Adjusted EBITDA](index=11&type=section&id=Reconciliation%20of%20Net%20%28loss%29%20income%20to%20Adjusted%20EBITDA) The company's full-year 2023 Adjusted EBITDA was **$27.2 million**, a sharp decline from **$97.4 million** in 2022. The calculation starts with a GAAP net loss of **$164.4 million** and adds back interest, taxes, D&A, and other non-recurring or non-cash items. Key add-backs for 2023 included D&A (**$59.8 million**), inventory write-downs and disposal costs (totaling **$39.0 million**), and equity-based compensation (**$10.5 million**), while a large gain on the tax receivable agreement liability (**$100.2 million**) was subtracted FY 2023 Reconciliation to Adjusted EBITDA (in thousands) | Description | Amount | | :--- | :--- | | Net loss (GAAP) | ($164,438) | | Interest expense, net | $27,970 | | Income tax expense | $132,497 | | Depreciation and amortization | $59,763 | | **EBITDA** | **$55,792** | | Adjustments (net) | ($28,589) | | **Adjusted EBITDA (Non-GAAP)** | **$27,203** | - Major adjustments to derive Adjusted EBITDA included adding back **inventory write-downs ($30.3 million)** and **one-time disposal costs ($8.7 million)**, and subtracting a **gain on the tax receivable agreement liability adjustment ($100.2 million)**[27](index=27&type=chunk)[28](index=28&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________________________________________________________________ FORM 10-K ___________________________________________________________________________________ (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the ...

```markdown Part I [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for Funko, Inc. and its subsidiaries, including statements of operations, comprehensive (loss) income, balance sheets, and cash flows, along with detailed notes explaining significant accounting policies, debt, tax receivable agreements, commitments, segments, income taxes, stockholders' equity, non-controlling interests, and earnings per share [Condensed Consolidated Statements of Operations (unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(unaudited)) For the three months ended September 30, 2023, Funko reported a **net loss** of **$16.2 million**, a **significant decline** from a **net income** of **$11.1 million** in the prior year period. Net sales **decreased** by **14.4%** to **$312.9 million**. For the nine months ended September 30, 2023, the company incurred a **net loss** of **$153.2 million**, compared to a **net income** of **$41.5 million** in the same period of 2022, with net sales **decreased** by **18.7%** to **$804.9 million** | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $312,944 | $365,607 | $804,850 | $989,666 | | (Loss) income from operations | $(5,449) | $17,394 | $(100,427) | $46,140 | | Net (loss) income | $(16,224) | $11,149 | $(153,230) | $41,460 | | Net (loss) income attributable to Funko, Inc. | $(15,009) | $9,630 | $(143,318) | $34,184 | | Basic EPS | $(0.31) | $0.21 | $(3.01) | $0.78 | | Diluted EPS | $(0.31) | $0.19 | $(3.01) | $0.73 | [Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20(Loss)%20Income%20(unaudited)) The company reported a comprehensive **loss** of **$19.1 million** for the three months ended September 30, 2023, compared to comprehensive **income** of **$7.5 million** in the prior year. For the nine months ended September 30, 2023, the comprehensive **loss** was **$153.6 million**, a **significant reversal** from comprehensive **income** of **$33.1 million** in the same period of 2022, primarily due to **net losses** and foreign currency translation **losses** | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net (loss) income | $(16,224) | $11,149 | $(153,230) | $41,460 | | Foreign currency translation gain (loss), net of tax | $(2,839) | $(3,674) | $(391) | $(8,335) |\ | Comprehensive (loss) income | $(19,063) | $7,475 | $(153,621) | $33,125 | | Comprehensive (loss) income attributable to Funko, Inc. | $(17,613) | $6,354 | $(143,745) | $27,255 | [Condensed Consolidated Balance Sheets (unaudited)](index=8&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(unaudited)) As of September 30, 2023, total assets **decreased** to **$880.0 million** from **$1,091.1 million** at December 31, 2022, primarily driven by a reduction in inventory and deferred tax assets. Total liabilities **increased** to **$421.7 million** from **$361.4 million**, mainly due to an **increase** in the line of credit. Total stockholders' equity **decreased significantly** to **$242.8 million** from **$389.7 million** | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $31,885 | $19,200 | | Inventory | $162,062 | $246,429 | | Total current assets | $404,929 | $473,172 | | Total assets | $880,043 | $1,091,145 | | Line of credit | $141,000 | $70,000 | | Total current liabilities | $421,734 | $361,397 | | Liabilities under tax receivable agreement, net of current portion | $0 | $99,620 | | Total stockholders' equity | $242,766 | $389,689 | [Condensed Consolidated Statements of Cash Flows (unaudited)](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(unaudited)) For the nine months ended September 30, 2023, net cash used in operating activities **significantly decreased** to **$2.9 million** from **$64.7 million** in the prior year, primarily due to favorable changes in working capital, including a substantial reduction in inventory. Net cash used in investing activities **decreased** to **$35.6 million** from **$60.1 million**. Net cash provided by financing activities was **$51.3 million**, down from **$66.8 million** in 2022 | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(2,867) | $(64,682) | | Net cash used in investing activities | $(35,584) | $(60,097) | | Net cash provided by financing activities | $51,309 | $66,797 | | Net change in cash and cash equivalents | $12,685 | $(58,507) | | Cash and cash equivalents at end of period | $31,885 | $25,050 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed explanations for the financial statements, covering the company's organizational structure, significant accounting policies including a **$30.1 million** inventory write-down and a **$123.2 million** deferred tax asset valuation allowance, fair value measurements, debt facilities and amendments, changes in tax receivable agreement liability, various commitments and legal contingencies, segment information, income tax details, stockholders' equity changes, non-controlling interests, and earnings per share calculations [1. Organization and Operations](index=10&type=section&id=1.%20Organization%20and%20Operations) Funko, Inc. was formed in 2017 for its IPO and consolidates the financial results of FAH, LLC, reporting a non-controlling interest for units held by other owners. Interim financial results are not necessarily indicative of the full year due to seasonality - Funko, Inc. consolidates FAH, LLC's operations and reports **non-controlling interests** for common units held by other owners[25](index=25&type=chunk) - Interim results are not indicative of full-year performance due to seasonality and other factors[26](index=26&type=chunk) [2. Significant Accounting Policies](index=10&type=section&id=2.%20Significant%20Accounting%20Policies) Key accounting policies involve estimates affecting financial statements. During the nine months ended September 30, 2023, Funko recorded a **$30.1 million** one-time inventory write-down for operational efficiency and established a **full valuation allowance** of **$123.2 million** against deferred tax assets due to cumulative pre-tax **losses**, leading to a **$99.6 million** gain on tax receivable agreement liability adjustment - The Company recorded a **$30.1 million** one-time inventory write-down in cost of sales during the nine months ended September 30, 2023, to improve U.S. warehouse operational efficiency[29](index=29&type=chunk) - A **full valuation allowance** of **$123.2 million** was established against deferred tax assets due to the Company's three-year cumulative pre-tax **loss** position, reducing the carrying balance to **$0**[30](index=30&type=chunk) - The Tax Receivable Agreement (TRA) liability was **reduced** by **$99.6 million**, recognizing a gain, as payments related to unrealized tax benefits were no longer probable and estimable due to the deferred tax asset **valuation allowance**[31](index=31&type=chunk) [3. Fair Value Measurements](index=11&type=section&id=3.%20Fair%20Value%20Measurements) Funko's financial instruments, including cash equivalents, crypto asset safeguarding liability, and debt, are measured at fair value using a three-tier hierarchy. Cash equivalents, primarily money market funds, are Level 1. Crypto asset safeguarding liability and corresponding assets are Level 2, valued at **$13.0 million** as of September 30, 2023. Debt instruments are classified as Level 3, with an estimated fair value of **$160.6 million** compared to a carrying value of **$158.5 million** as of September 30, 2023 | Financial Instrument | Classification | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------- | :------------- | :-------------------------------- | :-------------------------------- | | Cash equivalents | Level 1 | $10,800 | $500 | | Crypto asset safeguarding liability and asset | Level 2 | $13,000 | $11,300 | | Debt (estimated fair value) | Level 3 | $160,600 | $177,500 | | Debt (carrying value) | Level 3 | $158,500 | $175,800 | [4. Debt](index=12&type=section&id=4.%20Debt) Funko's debt includes a Revolving Credit Facility and a Term Loan Facility, totaling **$285.0 million** outstanding as of September 30, 2023, along with an Equipment Finance Loan of **$16.6 million**. The New Credit Agreement was amended in February 2023 (Third Amendment) to modify financial covenants, reduce the Revolving Credit Facility size, restrict draws, and **increase** interest margins during a 'Waiver Period' through December 31, 2023. The company was in **compliance** with modified covenants as of September 30, 2023 | Debt Type (in thousands) | September 30, 2023 | December 31, 2022 | | :----------------------- | :----------------- | :---------------- | | Revolving Credit Facility | $141,000 | $70,000 | | Term Loan Facility | $144,000 | $157,500 | | Equipment Finance Loan | $16,589 | $20,000 | | Total term debt | $158,516 | $175,819 | | Long-term debt, net | $136,539 | $153,778 | - The New Revolving Credit Facility was **reduced** from **$215.0 million** to **$180.0 million** (and to **$150.0 million** by December 31, 2023) and interest margins **increased** during the Waiver Period (through December 31, 2023)[38](index=38&type=chunk) - As of September 30, 2023, the Credit Agreement Parties were in **compliance** with the modified covenants[41](index=41&type=chunk) [5. Liabilities under Tax Receivable Agreement](index=14&type=section&id=5.%20Liabilities%20under%20Tax%20Receivable%20Agreement) The Tax Receivable Agreement (TRA) requires Funko to pay TRA Parties **85%** of realized tax benefits. The TRA liability was **significantly reduced** from **$109.2 million** at December 31, 2022, to **$9.6 million** as of September 30, 2023, due to the Company determining that future payments related to unrealized tax benefits are no longer probable and estimable after establishing a **full valuation allowance** on deferred tax assets | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $9,562 | $112,733 | $109,187 | $82,884 | | Liability reduction | — | — | $(99,620) | — | | Ending balance | $9,562 | $112,746 | $9,562 | $112,746 | - The total obligation under the Tax Receivable Agreement, including accrued interest, was **$9.8 million** as of September 30, 2023, down from **$109.2 million** at December 31, 2022[49](index=49&type=chunk) - The reduction in TRA liability was due to the determination that payments related to unrealized tax benefits are no longer probable and estimable following the establishment of a **full valuation allowance** on deferred tax assets[49](index=49&type=chunk) [6. Commitments and Contingencies](index=15&type=section&id=6.%20Commitments%20and%20Contingencies) Funko is subject to various commitments and contingencies, including license agreements with royalty payments, employment agreements, debt obligations, and operating leases. The company recorded a **$6.2 million** charge for lease termination in the nine months ended September 30, 2023. Funko is also involved in several legal proceedings, including ongoing stockholder derivative actions and class action lawsuits, with some settlements in principle reached and others pending - The Company recorded a **$6.2 million** charge related to the termination of a lease agreement and related expenses during the three and nine months ended September 30, 2023[54](index=54&type=chunk) - Funko is involved in multiple stockholder derivative actions and class action lawsuits, with non-monetary settlements in principle reached for some cases (In re Funko, Inc. Derivative Litigation, Smith v. Mariotti, and Fletcher, et al. v. Mariotti)[56](index=56&type=chunk) - A class action lawsuit (In re Funko, Inc. Securities Litigation) alleging violations of the Securities Act of 1933 is ongoing in Washington state court, with discovery in progress and a class certification motion filed[59](index=59&type=chunk)[61](index=61&type=chunk) [7. Segments](index=18&type=section&id=7.%20Segments) Funko operates as a single segment, with its Chief Operating Decision Maker reviewing performance at a consolidated level. Product sales are categorized into Core Collectible (**74.5%** of sales for Q3 2023), Loungefly (**18.4%**), and Other (**7.1%**). Geographically, the United States remains the largest market, though sales **decreased** by **20.4%** in Q3 2023, while Europe saw a **6.6% increase** - Funko operates as a **single reportable segment**[65](index=65&type=chunk) | Product Category | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Core Collectible | 74.5% | 77.2% | 73.4% | 76.3% | | Loungefly | 18.4% | 16.3% | 19.8% | 18.2% | | Other | 7.1% | 6.5% | 6.8% | 5.5% | | Geographical Net Sales (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | $208,895 | $262,316 | $557,899 | $725,677 | | Europe | $83,398 | $78,239 | $193,229 | $198,688 | | Other International | $20,651 | $25,052 | $53,722 | $65,301 | [8. Income Taxes](index=19&type=section&id=8.%20Income%20Taxes) Funko, Inc. is taxed as a corporation, with FAH, LLC as a pass-through entity. For the nine months ended September 30, 2023, the company recorded a **significant income tax expense** of **$130.9 million**, compared to a **$2.9 million benefit** in 2022. This **increase** is primarily due to recognizing a **full valuation allowance** on deferred tax assets, resulting in an effective tax rate of (**584.9%**) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense (benefit) | $3,076 | $2,342 | $130,859 | $(2,932) | - The effective tax rate for the nine months ended September 30, 2023, was (**584.9%**), primarily due to the establishment of a **full valuation allowance** against deferred tax assets[70](index=70&type=chunk) [9. Stockholders' Equity](index=20&type=section&id=9.%20Stockholders'%20Equity) Total stockholders' equity **decreased** from **$389.7 million** at December 31, 2022, to **$242.8 million** at September 30, 2023, primarily due to a **net loss** attributable to Funko, Inc. of **$143.3 million** for the nine months ended September 30, 2023. Class A common shares outstanding **increased** to **48.7 million**, while Class B common shares remained at **3.3 million** | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :---------------- | | Total stockholders' equity | $242,766 | $389,689 | | Net (loss) income attributable to Funko, Inc. (9 months) | $(143,318) | $34,184 | | Class A common shares outstanding | 48,727 | 47,192 | | Class B common shares outstanding | 3,293 | 3,293 | [10. Non-controlling interests](index=21&type=section&id=10.%20Non-controlling%20interests) Funko, Inc. holds a **91.7%** economic ownership interest in FAH, LLC as of September 30, 2023, up from **91.6%** at December 31, 2022. Net loss and comprehensive loss are attributed based on this economic interest. Excluded from FAH, LLC's net income are equity-based compensation, income tax expense, and tax receivable agreement liability adjustments - Funko, Inc. owned **91.7%** economic interest in FAH, LLC as of September 30, 2023 (vs. **91.6%** at Dec 31, 2022)[76](index=76&type=chunk) | Excluded Activity (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Equity-based (recapture of) compensation expense | $(916) | $4,677 | $7,521 | $11,999 | | Income tax expense (benefit) | $2,257 | $1,459 | $128,780 | $(5,216) | | Tax receivable agreement liability adjustment | — | — | $(99,620) | — | [11. Earnings per Share](index=22&type=section&id=11.%20Earnings%20per%20Share) Basic and diluted **loss** per share for Class A common stock were **$(0.31)** for the three months ended September 30, 2023, and **$(3.01)** for the nine months ended September 30, 2023, reflecting the **net loss** attributable to Funko, Inc. Potentially dilutive securities were excluded from diluted EPS calculations when their effect was **anti-dilutive** | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $(0.31) | $0.21 | $(3.01) | $0.78 | | Diluted EPS | $(0.31) | $0.19 | $(3.01) | $0.73 | - For the three and nine months ended September 30, 2023, **10.3 million** and **10.6 million** potentially dilutive securities, respectively, were excluded from diluted EPS computation due to their **anti-dilutive effect**[79](index=79&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Funko's financial condition and operational results, highlighting a **challenging retail environment**, **decreased** net sales, and **significant net losses** for both the three and nine months ended September 30, 2023. It also details liquidity, capital resources, debt covenant modifications, and critical accounting policies, including a substantial inventory write-down and deferred tax asset **valuation allowance** [Overview](index=25&type=section&id=Overview) Funko, a pop culture lifestyle brand, faces a **challenging retail environment** with slowed restocking, lower inventory levels, and order cancellations impacting net sales, gross margin, and **net income**. The company is exposed to global macroeconomic factors and has strategically adjusted inventory. Key performance indicators show **significant declines** in net sales and a shift from **net income** to **net loss** for the periods presented - Funko operates in a **challenging retail environment** characterized by slower inventory restocking, lower inventory levels, and order cancellations, impacting net sales, gross margin, and **net income**[85](index=85&type=chunk) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $312,944 | $365,607 | $804,850 | $989,666 | | Net (loss) income | $(16,224) | $11,149 | $(153,230) | $41,460 | | EBITDA | $9,918 | $29,023 | $42,514 | $78,891 | | Adjusted EBITDA | $25,394 | $35,697 | $3,745 | $103,701 | [Results of Operations](index=26&type=section&id=Results%20of%20Operations) Funko experienced a **significant decline** in net sales and a shift to **net loss** for both the three and nine months ended September 30, 2023, compared to the prior year. This was driven by **decreased** sales to retailers, higher inventory reserves, **increased** selling, general, and administrative expenses as a percentage of sales, and higher interest expenses. A **gain** on tax receivable agreement liability adjustment partially offset the nine-month **loss** [Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022](index=26&type=section&id=Three%20Months%20Ended%20September%2030%2C%202023%20Compared%20to%20Three%20Months%20Ended%20September%2030%2C%202022) Net sales **decreased** by **14.4%** to **$312.9 million**, primarily due to slower inventory restocking and a **challenging retail environment**. This led to a **net loss** of **$16.2 million**, compared to a **net income** of **$11.1 million** in the prior year. Gross margin **declined** to **33.2%** from **35.0%** due to **increased** inventory reserves and disposal costs. Interest expense **surged** by **155.3%** due to higher debt balances and rates | Metric (in thousands) | 2023 | 2022 | Dollar Change | Percentage Change | | :-------------------- | :---------- | :---------- | :------------ | :---------------- | | Net sales | $312,944 | $365,607 | $(52,663) | (14.4)% | | Cost of sales | $208,936 | $237,728 | $(28,792) | (12.1)% | | SG&A expenses | $93,992 | $97,930 | $(3,938) | (4.0)% | | Depreciation & amortization | $15,465 | $12,555 | $2,910 | 23.2% | | (Loss) income from operations | $(5,449) | $17,394 | $(22,843) | nm | | Interest expense, net | $7,601 | $2,977 | $4,624 | nm | | Net (loss) income | $(16,224) | $11,149 | $(27,373) | nm | - Gross margin (exclusive of depreciation and amortization) **decreased** to **33.2%** from **35.0%**, driven by **increased** inventory reserves and disposal of finished inventory[95](index=95&type=chunk) - Net sales in the United States **decreased** **20.4%** to **$208.9 million**, while Europe **increased** **6.6%** to **$83.4 million**[92](index=92&type=chunk) [Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022](index=29&type=section&id=Nine%20Months%20Ended%20September%2030%2C%202023%20Compared%20to%20Nine%20Months%20Ended%20September%2030%2C%202022) Net sales **decreased** by **18.7%** to **$804.9 million**, leading to a **net loss** of **$153.2 million**, a **significant reversal** from a **$41.5 million net income** in the prior year. Gross margin fell to **27.8%** from **34.3%** due to inventory write-downs and adjustments. Selling, general, and administrative expenses **increased** by **8.0%**, and interest expense **surged** by **251.1%**. A **$99.6 million gain** on tax receivable agreement liability adjustment partially mitigated the **loss** | Metric (in thousands) | 2023 | 2022 | Dollar Change | Percentage Change | | :-------------------- | :---------- | :---------- | :------------ | :---------------- | | Net sales | $804,850 | $989,666 | $(184,816) | (18.7)% | | Cost of sales | $581,258 | $649,974 | $(68,716) | (10.6)% | | SG&A expenses | $279,685 | $259,043 | $20,642 | 8.0% | | Depreciation & amortization | $44,334 | $34,509 | $9,825 | 28.5% | | (Loss) income from operations | $(100,427) | $46,140 | $(146,567) | nm | | Interest expense, net | $20,551 | $5,854 | $14,697 | nm | | Gain on tax receivable agreement liability | $(99,620) | — | $(99,620) | nm | | Net (loss) income | $(153,230) | $41,460 | $(194,690) | nm | - Gross margin (exclusive of depreciation and amortization) **decreased** to **27.8%** from **34.3%**, primarily due to **increased** inventory reserves and disposal of finished inventory[109](index=109&type=chunk) - Income tax expense **increased significantly** to **$130.9 million** from a **$2.9 million benefit**, mainly due to recognizing a **full valuation allowance** on deferred tax assets[116](index=116&type=chunk) [Non-GAAP Financial Measures](index=32&type=section&id=Non-GAAP%20Financial%20Measures) Funko uses non-GAAP financial measures like EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, and Adjusted (Loss) Earnings per Diluted Share to evaluate performance, excluding non-cash charges and one-time items. For the nine months ended September 30, 2023, Adjusted EBITDA was **$3.7 million**, a **substantial decrease** from **$103.7 million** in 2022, and Adjusted **Loss** per Diluted Share was **$(0.88)** - Non-GAAP measures (EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, Adjusted (Loss) EPS) are used to assess performance by removing non-core operational impacts[119](index=119&type=chunk)[120](index=120&type=chunk) | Metric (in thousands, except per share data) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Adjusted net income | $1,746 | $15,124 | $(45,855) | $47,503 | | Adjusted earnings (loss) per diluted share | $0.03 | $0.28 | $(0.88) | $0.88 | | EBITDA | $9,918 | $29,023 | $42,514 | $78,891 | | Adjusted EBITDA | $25,394 | $35,697 | $3,745 | $103,701 | [Liquidity and Financial Condition](index=36&type=section&id=Liquidity%20and%20Financial%20Condition) Funko's liquidity is primarily driven by working capital, inventory management, capital expenditures, and debt service. Net cash used in operating activities **decreased significantly** to **$2.9 million** for the nine months ended September 30, 2023, largely due to improved working capital from inventory reduction. The company's credit facilities were amended to modify covenants and reduce the revolving credit facility size, with **compliance** maintained as of September 30, 2023. Future liquidity needs include tax distributions and potential TRA payments [Introduction](index=36&type=section&id=Introduction) Funko's liquidity needs are primarily for working capital, inventory, capital expenditures, debt service, and general corporate purposes. The company believes current liquidity sources will be sufficient for the next 12 months, but acknowledges potential needs for additional financing if cash flows are insufficient - **Primary liquidity requirements** include working capital, inventory management, capital expenditures, debt service, and general corporate needs[133](index=133&type=chunk) - The company believes current liquidity sources will be **sufficient for the next 12 months** but **may need additional financing** if cash flows are insufficient[134](index=134&type=chunk)[135](index=135&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) Net cash used in operating activities **decreased** to **$2.9 million** for the nine months ended September 30, 2023, from **$64.7 million** in 2022, driven by a **$236.0 million increase** in cash from working capital changes, particularly a **$190.9 million increase** from inventory. Net cash used in investing activities was **$35.6 million**, and net cash provided by financing activities was **$51.3 million** | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(2,867) | $(64,682) | | Net cash used in investing activities | $(35,584) | $(60,097) | | Net cash provided by financing activities | $51,309 | $66,797 | | Net change in cash and cash equivalents | $12,685 | $(58,507) | | Cash and cash equivalents at end of period | $31,885 | $25,050 | - The **decrease** in net cash used in operating activities was primarily due to a **$236.0 million increase** in cash from working capital changes, including a **$190.9 million increase** from inventory[137](index=137&type=chunk) - Financing activities included a **$71.0 million** draw on the New Revolving Credit Facility and **$16.9 million** in debt payments[140](index=140&type=chunk) [Credit Facilities](index=37&type=section&id=Credit%20Facilities) Funko's New Credit Facilities, including a Term Loan Facility and Revolving Credit Facility, were amended in February 2023 (Third Amendment). This amendment modified financial covenants, reduced the Revolving Credit Facility size, restricted draws, and **increased** interest margins during a 'Waiver Period' through December 31, 2023. The company was in **compliance** with these modified covenants as of September 30, 2023, but faces risks if operating results do not improve after the waiver period - The Third Amendment to the New Credit Agreement modified financial covenants, **reduced** the New Revolving Credit Facility to **$180.0 million** (and **$150.0 million** by Dec 31, 2023), restricted draws, and **increased** interest margins during the Waiver Period (through Dec 31, 2023)[143](index=143&type=chunk) - As of September 30, 2023, Funko had **$144.0 million** outstanding under the New Term Loan Facility and **$141.0 million** outstanding under the New Revolving Credit Facility, with **$0.0 million** available under the latter[151](index=151&type=chunk) - The company was in **compliance** with all covenants as of September 30, 2023, but **future compliance is uncertain** if economic conditions worsen[149](index=149&type=chunk)[144](index=144&type=chunk) [Form S-3 Registration Statement](index=40&type=section&id=Form%20S-3%20Registration%20Statement) Funko filed an **effective Form S-3** shelf registration statement on July 26, 2022, allowing it to offer and sell up to **$100.0 million** of various securities for its own account and certain selling stockholders to sell **17,318,008 shares** of Class A common stock. This provides **flexibility for future capital needs**, with specific terms to be determined at the time of any offering - An **effective Form S-3** allows Funko to offer and sell up to **$100.0 million** of securities and certain selling stockholders to sell **17,318,000 shares** of Class A common stock[152](index=152&type=chunk) - The Form S-3 provides **flexibility for future capital needs**, with offering terms to be established at the time of sale[153](index=153&type=chunk) [Future Sources and Uses of Liquidity](index=40&type=section&id=Future%20Sources%20and%20Uses%20of%20Liquidity) Primary sources of liquidity are operating cash flows and credit facilities. As of September 30, 2023, cash and cash equivalents were **$31.9 million**, with working capital at **$(16.8) million**. Future uses include working capital, inventory, capital expenditures, debt service, and potential **significant payments** under the Tax Receivable Agreement if deferred tax assets become realizable | Metric (in millions) | September 30, 2023 | December 31, 2022 | | :------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $31.9 | $19.2 | | Working capital | $(16.8) | $111.8 | - Future liquidity needs include tax distributions, redemptions by Continuing Equity Owners, payments under the Tax Receivable Agreement, and capital expenditures for WMS integration and new facilities[157](index=157&type=chunk) - If deferred tax assets become realizable, the company will record a **significant liability** related to the Tax Receivable Agreement[157](index=157&type=chunk) [Seasonality](index=41&type=section&id=Seasonality) Funko historically experiences moderate seasonality, with **over 50%** of net sales occurring in the third and fourth quarters due to holiday inventory build-up. The first quarter typically has the **lowest volume** of shipments and sales, and is the **least profitable**. Rapid growth in recent years may have masked the full effects of seasonality, which could have a greater impact in future periods - Historically, **over 50%** of net sales occur in the third and fourth quarters (August-November) due to holiday season inventory build-up[158](index=158&type=chunk) - The first quarter typically represents the **lowest volume** of shipments and sales, and is the **least profitable**[158](index=158&type=chunk) - Rapid growth may have masked full seasonal effects, suggesting seasonality could have a greater impact in future periods[158](index=158&type=chunk) [Critical Accounting Policies and Estimates](index=41&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Critical accounting policies include revenue recognition, royalties, inventory, goodwill, intangible assets, and income taxes. The company established a **full valuation allowance** of **$123.2 million** against deferred tax assets due to a three-year cumulative pre-tax **loss**, impacting the Tax Receivable Agreement liability. **No significant changes** to critical accounting policies were reported since the 2022 Annual Report on Form 10-K - Critical accounting policies and estimates include revenue recognition, sales allowances, royalties, inventory, goodwill and intangible assets, and income taxes[160](index=160&type=chunk) - A **full valuation allowance** of **$123.2 million** was established against deferred tax assets due to the Company's three-year cumulative pre-tax **loss** position, leading to a **$99.6 million gain** on the Tax Receivable Agreement liability adjustment[161](index=161&type=chunk)[163](index=163&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Funko is exposed to market risks from changes in interest rates, foreign currency, and inflation, which arise in the normal course of business. There have been **no material changes** to these market risks since the disclosure in the Annual Report on Form 10-K for the year ended December 31, 2022 - Funko is exposed to market risks from changes in interest rates, foreign currency, and inflation[165](index=165&type=chunk) - **No material changes** in market risk have occurred since the previous annual report[165](index=165&type=chunk) [Item 4. Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) Funko's management concluded that its disclosure controls and procedures were **not effective** as of September 30, 2023, due to previously identified **material weaknesses** in internal control over financial reporting. **Remediation efforts** are ongoing, focusing on risk assessment, control design, user access, system change approvals, and personnel expertise, with **full remediation** expected to continue throughout 2023 [Limitations on Effectiveness of Disclosure Controls and Procedures](index=43&type=section&id=Limitations%20on%20Effectiveness%20of%20Disclosure%20Controls%20and%20Procedures) Management acknowledges that disclosure controls and procedures can only provide **reasonable assurance** of achieving control objectives, given resource constraints and the need for judgment in evaluating benefits versus costs - Disclosure controls and procedures provide only **reasonable assurance** due to inherent limitations and resource constraints[166](index=166&type=chunk) [Evaluation of Disclosure Controls and Procedures](index=43&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) As of September 30, 2023, management, including the Interim CEO and CFO, concluded that disclosure controls and procedures were **not effective** due to **material weaknesses** in internal control over financial reporting previously reported in the 2022 Annual Report on Form 10-K - Disclosure controls and procedures were **not effective** as of September 30, 2023, due to **material weaknesses** in internal control over financial reporting[167](index=167&type=chunk) [Remediation Efforts to Address the Material Weaknesses](index=43&type=section&id=Remediation%20Efforts%20to%20Address%20the%20Material%20Weaknesses) **Remediation efforts** are ongoing throughout 2023 and include rigorous risk assessment, enhancing control design, improving user access privileges, reviewing changes to IT systems, and investing in training and hiring personnel with appropriate expertise. **Full remediation** requires controls to operate effectively for a sufficient period and management's conclusion through testing - Performing rigorous scoping and risk assessment - Utilizing a SOX Steering Committee for risk analysis and reporting to the Audit Committee - Enhancing control activities design for precision and improving documentation retention - Designing and implementing controls for user access privilege review and segregation of duties - Designing and implementing controls for review and approval of changes to key financial IT systems - Investing in training and hiring personnel with expertise for timely and thorough monitoring of internal controls - **Remediation efforts** are **ongoing** throughout 2023, and **material weaknesses** will **not be considered fully remediated** until controls operate effectively for a sufficient period and are tested[168](index=168&type=chunk) [Changes in Internal Control over Financial Reporting](index=44&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) Aside from **ongoing remediation efforts** for identified **material weaknesses**, there were **no other changes** in Funko's internal control over financial reporting during the quarter ended September 30, 2023, that materially affected or are reasonably likely to materially affect these controls - **No material changes** in internal control over financial reporting occurred during Q3 2023, other than **ongoing remediation efforts** for previously identified **material weaknesses**[169](index=169&type=chunk) Part II [Item 1. Legal Proceedings](index=44&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 6, 'Commitments and Contingencies - Legal Contingencies,' in the financial statements for a detailed discussion of Funko's **material legal proceedings** - Details on **material legal proceedings** are provided in Note 6, 'Commitments and Contingencies - Legal Contingencies,' of the unaudited condensed consolidated financial statements[170](index=170&type=chunk) [Item 1A. Risk Factors](index=44&type=section&id=Item%201A.%20Risk%20Factors) Funko's business faces numerous **significant risks**, including those related to executing its business strategy, managing inventory, dependence on third-party content and licenses, competitive pressures, macroeconomic downturns, and operational challenges. Organizational structure risks involve TCG's **influence** and potential conflicts of interest, while ownership risks include potential dilution and stock price volatility. General risks encompass foreign currency fluctuations, cybersecurity threats, and **compliance** with evolving regulations [BUSINESS, ECONOMIC, MARKET AND OPERATING RISKS](index=44&type=section&id=BUSINESS%2C%20ECONOMIC%2C%20MARKET%20AND%20OPERATING%20RISKS) Funko's business faces risks from its ability to execute strategy, manage inventory, and adapt to rapidly changing consumer preferences in pop culture. Dependence on short-term license agreements, global economic downturns, and intense competition pose **significant threats**. Operational challenges include reliance on third-party manufacturers, supply chain disruptions, and the impact of climate change and ESG initiatives. Changes in leadership and the highly seasonal nature of the business also contribute to operational volatility - Inability to execute business strategy, manage growth, and attract/retain qualified personnel - Dependence on third-party content development and market appeal of licensed properties - Risks related to the retail industry, including economic downturns and changes in retail practices - Challenges in obtaining, protecting, and enforcing intellectual property rights - Fluctuations in gross margin, seasonal impacts, and timing/popularity of new product releases - Risks from international operations, including trade markets, currency, and tax rate fluctuations - Reliance on third-party vendors, manufacturers, and outsourcers - Potential legal risks, including ongoing litigation, product liability, and regulatory non-compliance - The company incurred a **$30.1 million** inventory write-down and **$8.6 million** in disposal costs for unfinished/finished goods in the nine months ended September 30, 2023, due to operational efficiency initiatives and customer order cancellations[177](index=177&type=chunk) - Changes in leadership, including the resignation of the former CEO, could **materially impact** relationships with licensors and overall business operations[182](index=182&type=chunk)[222](index=222&type=chunk) [ORGANIZATIONAL STRUCTURE RISKS](index=75&type=section&id=ORGANIZATIONAL%20STRUCTURE%20RISKS) Funko's organizational structure presents risks due to TCG's **significant influence** over stockholder decisions and potential conflicts of interest with other stockholders, particularly regarding the Tax Receivable Agreement (TRA). The TRA requires **substantial cash payments** for tax benefits, which may **not be fully realized**, and obligations can accelerate under certain circumstances, potentially exceeding actual tax savings and **negatively impacting liquidity** - TCG has **significant influence** over stockholder decisions, including mergers, asset sales, and director elections, potentially **conflicting with other stockholders' interests**[292](index=292&type=chunk)[294](index=294&type=chunk) - The Tax Receivable Agreement (TRA) requires Funko to make **cash payments** to TRA Parties equal to **85%** of realized tax benefits, which could be **significant** and may **not be fully realized**[303](index=303&type=chunk) - TRA payments can **accelerate upon certain events** (e.g., change of control, material breach), potentially requiring immediate **substantial cash payments** that may **exceed actual tax benefits** and **negatively impact liquidity**[304](index=304&type=chunk)[305](index=305&type=chunk) [OWNERSHIP OF OUR CLASS A COMMON STOCK RISKS](index=82&type=section&id=OWNERSHIP%20OF%20OUR%20CLASS%20A%20COMMON%20STOCK%20RISKS) Risks associated with Class A common stock ownership include potential dilution from future issuances (e.g., incentive plans, acquisitions, or Form S-3 offerings) and stock price volatility due to various factors, including operating performance, market expectations, and external events. The company does **not intend to pay dividends** in the foreseeable future, and Delaware law and corporate provisions may prevent stockholder-initiated changes in direction or management. **Material weaknesses** in internal control over financial reporting also pose risks to accurate financial reporting and investor confidence - Future issuances of Class A common stock (e.g., from incentive plans, acquisitions, or Form S-3 offerings) could **dilute existing stockholders' ownership**[310](index=310&type=chunk)[312](index=312&type=chunk) - The company does **not intend to pay dividends** on Class A common stock for the foreseeable future, **retaining earnings for business growth and debt repayment**[313](index=313&type=chunk) - **Material weaknesses** in internal control over financial reporting could lead to **errors in financial statements**, restatements, **failure to meet reporting obligations**, and a **decline in stock price**[323](index=323&type=chunk)[324](index=324&type=chunk) [GENERAL RISKS](index=87&type=section&id=GENERAL%20RISKS) General risks include the **significant impact** of foreign currency exchange rate changes on reported financial performance, the potential for business disruption and harm from compromised electronic data due to cyberattacks or security incidents, and the adverse effects of non-compliance with anti-corruption, anti-bribery, and data privacy laws. Additionally, a new **1%** U.S. federal excise tax on stock repurchases could **increase costs**, and impairment in goodwill or other assets could **negatively affect financial condition** - Changes in foreign currency exchange rates can **significantly impact reported financial performance**, with **depreciation in key currencies negatively affecting sales and earnings**[326](index=326&type=chunk) - Compromised electronic data from cyberattacks or security incidents could **disrupt operations**, **harm customers**, **damage reputation**, and lead to **litigation or regulatory actions**[328](index=328&type=chunk)[329](index=329&type=chunk) - Failure to comply with anti-corruption, anti-bribery (e.g., FCPA, U.K. Bribery Act), and data privacy laws (e.g., GDPR, CCPA) could result in **fines, criminal penalties, negative publicity, and adverse financial effects**[337](index=337&type=chunk)[339](index=339&type=chunk)[340](index=340&type=chunk) [Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities](index=91&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%2C%20Use%20of%20Proceeds%2C%20and%20Issuer%20Purchases%20of%20Equity%20Securities) This section states that there were **no unregistered sales** of equity securities, use of proceeds, or issuer purchases of equity securities during the reporting period - **No unregistered sales** of equity securities, use of proceeds, or issuer purchases of equity securities occurred[342](index=342&type=chunk) [Item 5. Other Information](index=92&type=section&id=Item%205.%20Other%20Information) Several executive officers, including the Chief Commercial Officer, Chief Legal Officer, and President, adopted Rule 10b5-1(c) trading plans in September 2023 to sell a specified number of Class A common stock shares between January and December 2024 - Andy Oddie (Chief Commercial Officer) adopted a trading plan to sell up to **218,768 shares** between January 2, 2024, and December 31, 2024 - Tracy Daw (Chief Legal Officer) adopted a trading plan to sell up to **219,110 shares** between January 2, 2024, and June 28, 2024 - Andrew Perlmutter (President) adopted a trading plan to sell up to **289,022 shares** between January 2, 2024, and June 3, 2024 [Item 6. Exhibits](index=92&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including organizational documents, employment agreements, certifications, and XBRL interactive data files - The exhibits include organizational documents (Amended and Restated Certificate of Incorporation, Bylaws), employment agreements (e.g., with Andrew Perlmutter, Brian Mariotti, Michael Lunsford), certifications (Interim CEO, CFO), and XBRL interactive data files[345](index=345&type=chunk)[348](index=348&type=chunk) [SIGNATURES](index=94&type=section&id=SIGNATURES) The report was signed by Steve Nave, Chief Financial Officer and Chief Operating Officer of Funko, Inc., on November 2, 2023, certifying compliance with the Securities Exchange Act of 1934 - The report was signed by Steve Nave, Chief Financial Officer and Chief Operating Officer, on November 2, 2023[350](index=350&type=chunk) ```

Funko, Inc. (NASDAQ:FNKO) Q2 2023 Earnings Conference Call August 3, 2023 4:30 PM ET Company Participants Rob Jeffrey - Director of Investor Relations Michael Lunsford - Interim Chief Executive Officer Steve Nave - Chief Operating Officer and Chief Financial Officer Conference Call Participants Linda Bolton-Weiser - D.A. Davidson Operator Ladies and gentlemen, Good afternoon and welcome to Funko's 29 Free Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only m ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________to _____________ Commission file number: 001-38274 FUNKO, INC. (Exact name of registrant as specified in its charter) Delaware 35-2593276 (State or other jur ...

Financial Data and Key Metrics Changes - In Q1, the company reported net sales of $252 million, at the top end of guidance, with a direct-to-consumer (D2C) channel growth of 61% to $42 million [16][21][22] - The wholesale business declined by 26% year-over-year to $210 million due to cautiousness from retailers regarding restocking and inventory levels [16][17] - Gross margin was 20%, impacted by a $30 million inventory write-down; adjusted gross margin would have been approximately 32% without this write-down [16][17] - Adjusted EBITDA was negative $14 million, exceeding expectations by more than $30 million [16][17] Business Line Data and Key Metrics Changes - Core collectible brands' net sales decreased by 23% to $183 million, while the Loungefly brand grew by 4% to $52 million [16][17] - Other brands, including toys and games, saw a decline of 13% to $16 million [16] Market Data and Key Metrics Changes - Net sales in the US declined by 23% to $178 million, while European sales grew by 4% to $59 million; other international regions saw a 23% decline to $15 million [16][17] - D2C now represents approximately 17% of net sales, highlighting strong brand enthusiasm despite a challenging retail climate [21][22] Company Strategy and Development Direction - The company is focusing on operational improvements and has made significant progress in cost reductions, aiming for annualized improvements of $150 million to $180 million [25][26] - A strategic partnership with Fanatics was launched, targeting the sports collectibles market, with plans for expansion in upcoming NFL and NBA seasons [12][21] - The company is taking a cautious approach for the second half of the year, reflecting macroeconomic uncertainties and adjusting full-year sales guidance to a decline of 5% to 10% [17][21] Management's Comments on Operating Environment and Future Outlook - Management noted that while the brand has shown resilience, external factors are impacting short-term performance, leading to a more conservative outlook for the second half of the year [12][21] - The company remains confident in its ability to navigate through macro uncertainties and is focused on long-term value creation for shareholders [12][17] Other Important Information - The company completed a 10% workforce reduction to better position itself for future growth initiatives [15] - Inventory at the end of the quarter totaled $192 million, a decrease of 22% sequentially but an increase of 19% year-over-year [17] Q&A Session Questions and Answers Question: What allowed the company to clear out inventory more quickly? - Management indicated that they acquired short-term expansion space in Arizona to stage inventory and found a third-party agent to accept trailers on behalf of carriers, which helped eliminate per diem charges [27][33] Question: What contributed to the change in revenue guidance for the back half of the year? - Management explained that the sales drop was a reaction to macro-level conversations with retail partners, who are reducing inventory across all categories due to cautiousness [36][38] Question: Why did Loungefly perform better than other product categories? - Management did not provide specific details on this question during the call, indicating that further granularity would not be available at that time [39][45]

Part I – FINANCIAL INFORMATION This section provides Funko, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the three months ended March 31, 2023 and 2022, along with disclosures on market risk and internal controls [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents Funko, Inc.'s unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022, including statements of operations, comprehensive (loss) income, balance sheets, and cash flows, with detailed notes on accounting policies and other financial aspects [Condensed Consolidated Statements of Operations (unaudited)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(unaudited)) This table presents the unaudited condensed consolidated statements of operations for Funko, Inc., detailing net sales, cost of sales, operating expenses, and net (loss) income for the three months ended March 31, 2023 and 2022 | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $251,878 | $308,343 | | Cost of sales | $202,303 | $199,649 | | Operating expenses | $316,340 | $288,540 | | (Loss) income from operations | $(64,462) | $19,803 | | Net (loss) income | $(61,144) | $14,518 | | Net (loss) income attributable to Funko, Inc. | $(55,311) | $9,882 | | Basic (Loss) Earnings per share of Class A common stock | $(1.17) | $0.25 | | Diluted (Loss) Earnings per share of Class A common stock | $(1.17) | $0.23 | [Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20(Loss)%20Income%20(unaudited)) This table outlines Funko, Inc.'s unaudited condensed consolidated statements of comprehensive (loss) income, including net (loss) income and foreign currency translation adjustments for the three months ended March 31, 2023 and 2022 | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income | $(61,144) | $14,518 | | Foreign currency translation (loss) gain, net of tax effect | $1,054 | $(1,282) | | Comprehensive (loss) income | $(60,090) | $13,236 | | Comprehensive (loss) income attributable to Funko, Inc. | $(54,373) | $8,946 | [Condensed Consolidated Balance Sheets (unaudited)](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(unaudited)) This table provides Funko, Inc.'s unaudited condensed consolidated balance sheets, detailing assets, liabilities, and stockholders' equity as of March 31, 2023, and December 31, 2022 | Metric (in thousands of dollars) | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $34,797 | $19,200 | | Inventory | $191,558 | $246,429 | | Total current assets | $436,158 | $473,172 | | Total assets | $1,058,594 | $1,091,145 | | Line of credit | $141,000 | $70,000 | | Total current liabilities | $394,580 | $361,397 | | Total liabilities and stockholders' equity | $1,058,594 | $1,091,145 | [Condensed Consolidated Statements of Cash Flows (unaudited)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(unaudited)) This table presents Funko, Inc.'s unaudited condensed consolidated statements of cash flows, summarizing cash activities from operations, investing, and financing for the three months ended March 31, 2023 and 2022 | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(30,270) | $(22,955) | | Net cash used in investing activities | $(17,787) | $(19,474) | | Net cash provided by (used in) financing activities | $63,509 | $(7,830) | | Net change in cash and cash equivalents | $15,597 | $(50,426) | | Cash and cash equivalents at end of period | $34,797 | $33,131 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed notes explaining Funko, Inc.'s organization, significant accounting policies, fair value measurements, debt, tax receivable agreement liabilities, commitments, contingencies, segments, income taxes, stockholders' equity, non-controlling interests, and earnings per share [1. Organization and Operations](index=9&type=section&id=1.%20Organization%20and%20Operations) This note describes Funko, Inc.'s formation as a Delaware corporation for an IPO and its consolidation of FAH, LLC's financial results, reporting non-controlling interests - Funko, Inc. was formed as a Delaware corporation on April 21, 2017, to complete an IPO and related transactions, carrying on the business of Funko Acquisition Holdings, L.L.C. (FAH, LLC) and its subsidiaries[23](index=23&type=chunk) - The Company consolidates the financial results of FAH, LLC and reports a non-controlling interest representing the common units of FAH, LLC held by other owners[24](index=24&type=chunk) [2. Significant Accounting Policies](index=9&type=section&id=2.%20Significant%20Accounting%20Policies) This note details significant accounting policies, including a one-time inventory write-down recorded in Q1 2023 to improve warehouse efficiency - During the three months ended March 31, 2023, the Company recorded a **one-time inventory write-down of $30.1 million**, included in cost of sales, as part of an inventory reduction plan to improve U.S. warehouse operational efficiency[28](index=28&type=chunk) [3. Fair Value Measurements](index=10&type=section&id=3.%20Fair%20Value%20Measurements) This note provides fair value measurements for crypto asset safeguarding liability, corresponding assets, and debt instruments as of March 31, 2023, and December 31, 2022 | Metric (in thousands of dollars) | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Crypto asset safeguarding liability and corresponding asset (Fair Value) | $16,600 | $11,300 | | Debt instruments (Fair Value) | $171,900 | $177,500 | | Debt instruments (Carrying Value) | $169,400 | $175,800 | [4. Debt](index=10&type=section&id=4.%20Debt) This note details the Company's debt structure, including revolving credit, term loan, and equipment finance facilities, and outlines modifications to financial covenants and interest margins | Debt Type (in thousands of dollars) | March 31, 2023 | December 31, 2022 | | :----------------------- | :------------- | :---------------- | | Revolving Credit Facility | $141,000 | $70,000 | | Term Loan Facility | $153,000 | $157,500 | | Equipment Finance Loan | $18,879 | $20,000 | | Total term debt | $169,364 | $175,819 | - On February 28, 2023, Amendment No. 3 to the New Credit Agreement modified financial covenants, reduced the Revolving Credit Facility size from **$215.0 million to $180.0 million** (and **$150.0 million by December 31, 2023**), restricted draws, and increased interest margins during the Waiver Period (through December 31, 2023)[36](index=36&type=chunk) - As of March 31, 2023, the Company had **$141.0 million outstanding** under the New Revolving Credit Facility with **no availability remaining**, compared to **$70.0 million outstanding** and **$145.0 million available** as of December 31, 2022[40](index=40&type=chunk) [5. Liabilities under Tax Receivable Agreement](index=12&type=section&id=5.%20Liabilities%20under%20Tax%20Receivable%20Agreement) This note details the liabilities under the Tax Receivable Agreement, including the beginning and ending balances and payments made | Metric (in thousands of dollars) | 2023 | 2022 | | :-------------------- | :-------- | :------- | | Beginning Balance | $109,187 | $82,884 | | Additional liabilities for exchanges | — | $2,672 | | Payments under tax receivable agreement | $(5) | — | | Ending balance | $109,182 | $85,556 | - As of March 31, 2023, the total obligation under the Tax Receivable Agreement was **$109.2 million**, with **$9.6 million** included in current liabilities[46](index=46&type=chunk) [6. Commitments and Contingencies](index=13&type=section&id=6.%20Commitments%20and%20Contingencies) This note discusses the Company's involvement in various legal proceedings, including securities class action and derivative lawsuits, and a contingent liability for potential customs duty underpayments - The Company is involved in various legal proceedings, including ongoing securities class action and derivative lawsuits, which could have an adverse effect on its financial position, results of operations, or cash flows[52](index=52&type=chunk)[53](index=53&type=chunk)[55](index=55&type=chunk)[58](index=58&type=chunk)[59](index=59&type=chunk)[61](index=61&type=chunk) - A non-monetary settlement in principle has been reached for the consolidated derivative actions (In re Funko, Inc. Derivative Litigation, Smith v. Mariotti, and Fletcher, et al. v. Mariotti)[55](index=55&type=chunk) - The Company has recorded a contingent liability of **$1.0 million** related to potential penalties from U.S. Customs for historical underpayments of customs duties by its subsidiary, Loungefly[57](index=57&type=chunk)[222](index=222&type=chunk) [7. Segments](index=16&type=section&id=7.%20Segments) This note clarifies that the Company operates as a single segment and provides a breakdown of net sales by product category and geographical region - The Company operates as a single segment, with financial performance reviewed at a consolidated level[63](index=63&type=chunk) Product Category (% of sales) | Product Category | Three Months Ended March 31, 2023 (% of sales) | Three Months Ended March 31, 2022 (% of sales) | | :--------------- | :--------------------------------------------- | :--------------------------------------------- | | Core Collectible | 72.9 % | 77.8 % | | Loungefly | 20.7 % | 16.2 % | | Other | 6.4 % | 6.0 % | Geographical Net Sales (in thousands of dollars) | Geographical Net Sales (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | United States | $177,785 | $232,165 | | Europe | $59,336 | $57,057 | | Other International | $14,757 | $19,121 | | Total net sales | $251,878 | $308,343 | [8. Income Taxes](index=17&type=section&id=8.%20Income%20Taxes) This note presents the income tax (benefit) expense and effective tax rate for the three months ended March 31, 2023 and 2022, explaining the factors influencing the effective tax rate | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Income tax (benefit) expense | $(10,320) | $3,678 | | Effective tax rate | 14.4% | N/A | - The effective tax rate for Q1 2023 was **14.4%**, lower than the statutory rate of **21%** primarily due to foreign income taxes and the portion of FAH, LLC's earnings attributable to non-controlling interests[66](index=66&type=chunk) [9. Stockholders' Equity](index=18&type=section&id=9.%20Stockholders'%20Equity) This note provides key metrics related to stockholders' equity, including total equity, retained earnings, and net (loss) income attributable to Funko, Inc. | Metric (in thousands of dollars) | March 31, 2023 | March 31, 2022 | | :-------------------- | :------------- | :------------- | | Total stockholders' equity | $333,329 | $409,748 | | Retained earnings (Ending balance) | $4,704 | $77,932 | | Net (loss) income attributable to Funko, Inc. | $(55,311) | $9,882 | [10. Non-controlling interests](index=19&type=section&id=10.%20Non-controlling%20interests) This note details Funko, Inc.'s economic interest in FAH, LLC as of March 31, 2023, and December 31, 2022 - As of March 31, 2023, Funko, Inc. owned **91.4% economic interest** in FAH, LLC, down from **91.6%** at December 31, 2022[72](index=72&type=chunk) [11. Earnings per Share](index=20&type=section&id=11.%20Earnings%20per%20Share) This note presents basic and diluted earnings per share for Funko, Inc., along with the weighted-average shares outstanding and details on excluded anti-dilutive securities | Metric (in thousands, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income attributable to Funko, Inc. | $(55,311) | $9,882 | | Weighted-average shares of Class A common stock outstanding — basic | 47,247,676 | 40,323,886 | | Weighted-average shares of Class A common stock outstanding — diluted | 47,247,676 | 42,528,956 | | (Loss) earnings per share of Class A common stock — basic | $(1.17) | $0.25 | | (Loss) earnings per share of Class A common stock — diluted | $(1.17) | $0.23 | - For Q1 2023, **10.5 million** potentially dilutive securities were excluded from diluted EPS computation as their effect would have been anti-dilutive, including **4.4 million** common units of FAH, LLC[76](index=76&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Funko's financial condition and results of operations for the three months ended March 31, 2023, compared to the same period in 2022, covering key performance indicators, revenue, expenses, non-GAAP measures, liquidity, capital resources, and seasonality [Overview](index=22&type=section&id=Overview) This overview describes Funko as a leading pop culture lifestyle brand operating in a challenging retail environment with slowed restocking and prioritized lower inventory levels - Funko is a leading pop culture lifestyle brand, creating licensed consumer products across various categories, with approximately **29% of net sales** generated outside the United States[81](index=81&type=chunk)[82](index=82&type=chunk) - The Company is operating in a challenging retail environment with slowed post-holiday restocking and prioritized lower inventory levels, impacting net sales, gross margin, and net income, a trend expected to continue into Q2[83](index=83&type=chunk) [Key Performance Indicators](index=22&type=section&id=Key%20Performance%20Indicators) This table presents key performance indicators for Funko, Inc., including net sales, net (loss) income, EBITDA, and Adjusted EBITDA for the three months ended March 31, 2023 and 2022 | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $251,878 | $308,343 | | Net (loss) income | $(61,144) | $14,518 | | EBITDA | $(51,801) | $29,877 | | Adjusted EBITDA | $(14,014) | $36,253 | [Results of Operations](index=23&type=section&id=Results%20of%20Operations) This section provides a detailed analysis of Funko, Inc.'s financial performance, examining net sales, cost of sales, gross margin, operating expenses, interest expense, and net (loss) income for the three months ended March 31, 2023 and 2022 [Net Sales](index=23&type=section&id=Net%20Sales) This section analyzes the decrease in net sales, attributing it primarily to reduced sales to specialty retailers, e-commerce sites, and distributors, and provides a breakdown by geography and product category Net Sales Performance | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Period over Period Change (Dollar) | Period over Period Change (Percentage) | | :----- | :-------------------------------- | :-------------------------------- | :--------------------------------- | :------------------------------------- | | Net sales | $251,878 | $308,343 | $(56,465) | (18.3)% | - The decrease in net sales was primarily due to decreased sales to specialty retailers, e-commerce sites, and distributors[88](index=88&type=chunk) - Active properties decreased by **3.5%** to **736**, and average net sales per active property decreased by **15.3%** year-over-year[89](index=89&type=chunk) Geographical Net Sales (in millions of dollars) | Geographical Net Sales (in millions of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | United States | $177.8 | $232.2 | (23.4)% | | Europe | $59.3 | $57.1 | 4.0% | | Other International | $14.8 | $19.1 | (22.8)% | Branded Category Net Sales (in millions of dollars) | Branded Category Net Sales (in millions of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Core Collectible | $183.5 | $239.6 | (23.4)% | | Loungefly | $52.2 | $50.1 | 4.1% | | Other | $16.2 | $18.6 | (12.7)% | [Cost of Sales and Gross Margin (exclusive of depreciation and amortization)](index=24&type=section&id=Cost%20of%20Sales%20and%20Gross%20Margin%20(exclusive%20of%20depreciation%20and%20amortization)) This section details the cost of sales and gross margin, highlighting a significant decrease in gross margin primarily due to a one-time inventory write-down | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | | Cost of sales (exclusive of depreciation and amortization) | $202.3 million | $199.6 million | 1.3% | | Gross margin (exclusive of depreciation and amortization) | 19.7% | 35.3% | (15.6) pp | - The decrease in gross margin was primarily driven by a **one-time inventory write-down of $30.1 million**[93](index=93&type=chunk) [Selling, General, and Administrative Expenses](index=24&type=section&id=Selling,%20General,%20and%20Administrative%20Expenses) This section analyzes the increase in selling, general, and administrative expenses, attributing it to higher personnel costs, facilities and rent, and advertising and marketing | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | | SG&A expenses | $100.1 million | $78.4 million | 27.6% | | SG&A as % of net sales | 39.7% | 25.4% | 14.3 pp | - The increase in SG&A was driven by a **$12.8 million increase in personnel costs**, a **$3.6 million increase in facilities and rent**, and a **$2.5 million increase in advertising and marketing costs**[94](index=94&type=chunk) [Depreciation and Amortization](index=24&type=section&id=Depreciation%20and%20Amortization) This section presents the depreciation and amortization expenses for the three months ended March 31, 2023 and 2022 | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | | Depreciation and amortization | $14.0 million | $10.5 million | 33.5% | [Interest Expense, Net](index=24&type=section&id=Interest%20Expense,%20Net) This section details the increase in net interest expense, primarily due to a higher average balance on outstanding debt, including the New Revolving Credit Facility | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | | Interest expense, net | $5.7 million | $1.2 million | 370.0% | - The increase in interest expense was primarily due to a higher average balance on debt outstanding, including **$141.0 million** on the New Revolving Credit Facility in Q1 2023 compared to no outstanding balance in Q1 2022[96](index=96&type=chunk) [Loss on debt extinguishment](index=24&type=section&id=Loss%20on%20debt%20extinguishment) This section explains the $0.5 million loss on debt extinguishment recorded in Q1 2023 due to the write-off of unamortized debt financing fees from a February 2023 refinancing - A **$0.5 million loss on debt extinguishment** was recorded for Q1 2023 due to the write-off of unamortized debt financing fees from the February 2023 debt refinancing[97](index=97&type=chunk) [Other expense, net](index=25&type=section&id=Other%20expense,%20net) This section presents the net other expense, primarily related to foreign currency gains and losses | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----- | :-------------------------------- | :-------------------------------- | | Other expense, net | $0.8 million | $0.4 million | - Other expense, net was primarily related to foreign currency gains and losses[98](index=98&type=chunk) [Income tax (benefit) expense](index=25&type=section&id=Income%20tax%20(benefit)%20expense) This section details the income tax (benefit) expense, noting the shift from expense to benefit due to a decrease in income before income taxes | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----- | :-------------------------------- | :-------------------------------- | | Income tax (benefit) expense | $(10.3) million | $3.7 million | - The shift from income tax expense to benefit was related to a decrease in income before income taxes[99](index=99&type=chunk) [Net (loss) income](index=25&type=section&id=Net%20(loss)%20income) This section presents the net (loss) income, attributing the decrease primarily to reduced net sales and a significant one-time inventory write-down | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----- | :-------------------------------- | :-------------------------------- | | Net (loss) income | $(61.1) million | $14.5 million | - The decrease in net income was primarily due to decreased net sales and a **$30.1 million one-time inventory write-down**[100](index=100&type=chunk) [Non-GAAP Financial Measures](index=26&type=section&id=Non-GAAP%20Financial%20Measures) This section explains the Company's use of non-GAAP financial measures (EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, and Adjusted (Loss) Earnings per Diluted Share) to evaluate performance and make strategic decisions - The Company uses non-GAAP financial measures (EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, and Adjusted (Loss) Earnings per Diluted Share) to evaluate performance, develop forecasts, and make strategic decisions, as they remove the impact of items not directly resulting from core operations[102](index=102&type=chunk)[103](index=103&type=chunk)[105](index=105&type=chunk) Non-GAAP Financial Metrics | Metric (in thousands of dollars, except per share data) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------- | :-------------------------------- | :-------------------------------- | | Adjusted net (loss) income | $(25,258) | $18,429 | | Adjusted weighted-average shares of Class A stock outstanding - diluted | 51,612 | 54,132 | | Adjusted (loss) earnings per diluted share | $(0.49) | $0.34 | | EBITDA | $(51,801) | $29,877 | | Adjusted EBITDA | $(14,014) | $36,253 | [Liquidity and Financial Condition](index=29&type=section&id=Liquidity%20and%20Financial%20Condition) This section discusses Funko's liquidity and capital requirements, including working capital, inventory management, capital expenditures, and debt service, and assesses the sufficiency of its liquidity sources [Introduction](index=29&type=section&id=Introduction) This introduction outlines Funko's primary liquidity and capital requirements, including working capital, inventory management, capital expenditures, and debt service, and assesses the sufficiency of its liquidity sources - Primary liquidity and capital requirements include working capital, inventory management, capital expenditures, debt service, and general corporate needs[109](index=109&type=chunk) - The Company believes its liquidity sources will be sufficient for continued operations and growth for at least the next 12 months, but cannot assure sufficient cash flows or additional financing on favorable terms[110](index=110&type=chunk)[111](index=111&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) This section details the Company's cash flow activities, highlighting changes in operating, investing, and financing cash flows, and the impact of working capital and debt borrowings Cash Flow Activity (in thousands of dollars) | Cash Flow Activity (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(30,270) | $(22,955) | | Net cash used in investing activities | $(17,787) | $(19,474) | | Net cash provided by (used in) financing activities | $63,509 | $(7,830) | | Net change in cash and cash equivalents | $15,597 | $(50,426) | - The increase in net cash used in operating activities for Q1 2023 was primarily due to a decrease in net income, partially offset by favorable changes in working capital, including a **$51.9 million decrease in inventory**[113](index=113&type=chunk) - Net cash provided by financing activities in Q1 2023 was **$63.5 million**, mainly from **$71.0 million in borrowings** on the New Revolving Line of Credit, offset by debt payments[116](index=116&type=chunk) [Credit Facilities](index=30&type=section&id=Credit%20Facilities) This section describes the modifications to the New Credit Agreement, including changes to financial covenants, revolving credit facility size, draw restrictions, and interest margins, and details the Company's outstanding indebtedness and restrictive covenants - On February 28, 2023, Amendment No. 3 to the New Credit Agreement modified financial covenants, reduced the New Revolving Credit Facility size, restricted draws, and increased interest margins during the Waiver Period (through December 31, 2023)[118](index=118&type=chunk) - As of March 31, 2023, the Company had **$291.5 million of indebtedness outstanding** under its New Credit Facilities, with **no availability remaining** under the New Revolving Credit Facility[125](index=125&type=chunk) - The New Credit Agreement contains restrictive covenants that limit the Company's ability to incur additional debt, make investments, pay dividends, and other activities, with further restrictions during the Waiver Period[122](index=122&type=chunk)[123](index=123&type=chunk)[258](index=258&type=chunk)[259](index=259&type=chunk) [Form S-3 Registration Statement](index=33&type=section&id=Form%20S-3%20Registration%20Statement) This section notes the effective Form S-3 shelf registration statement, allowing the Company to offer and sell up to $100.0 million of various securities and certain selling stockholders to sell 17,318,008 shares of Class A common stock - A Form S-3 shelf registration statement, effective July 26, 2022, allows the Company to offer and sell up to **$100.0 million of various securities** and certain selling stockholders to sell **17,318,008 shares of Class A common stock**[126](index=126&type=chunk)[281](index=281&type=chunk) [Future Sources and Uses of Liquidity](index=33&type=section&id=Future%20Sources%20and%20Uses%20of%20Liquidity) This section outlines the Company's cash and working capital positions, identifying primary cash flow sources and future liquidity needs, including tax distributions, TRA payments, and capital expenditures Liquidity Metrics (in millions of dollars) | Metric (in millions of dollars) | March 31, 2023 | December 31, 2022 | | :------------------- | :------------- | :---------------- | | Cash and cash equivalents | $34.8 | $19.2 | | Working capital | $41.6 | $111.8 | - Primary sources of cash flows are operating activities and credit facilities; future liquidity needs include tax distributions, TRA payments, and capital expenditures for WMS and direct-to-consumer platforms[129](index=129&type=chunk)[131](index=131&type=chunk) [Seasonality](index=34&type=section&id=Seasonality) This section discusses the historical seasonality of Funko's net sales, with over 50% occurring in the third and fourth quarters due to the holiday season, and notes that rapid growth may have masked its full effects - Historically, over **50% of net sales** occur in the third and fourth quarters (August through November) due to the holiday season, making the first quarter the least profitable[132](index=132&type=chunk)[195](index=195&type=chunk) - Rapid growth in recent years may have masked the full effects of seasonality, which could have a greater impact on future results[132](index=132&type=chunk)[197](index=197&type=chunk) [Critical Accounting Policies and Estimates](index=35&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section identifies key accounting policies and estimates, including revenue recognition, sales allowances, royalties, inventory, goodwill, intangible assets, and income taxes, noting no significant changes since the 2022 Annual Report - Key accounting policies and estimates include revenue recognition, sales allowances, royalties, inventory, goodwill and intangible assets, and income taxes[134](index=134&type=chunk) - There have been no significant changes to critical accounting policies and estimates since the Annual Report on Form 10-K for 2022[135](index=135&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=35&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The Company is exposed to market risks from changes in interest rates, foreign currency, and inflation, arising from normal business operations, with no material changes since the previous annual report - The Company is exposed to market risk from changes in interest rates, foreign currency, and inflation, with no material changes from the prior year's disclosure[136](index=136&type=chunk) [Item 4. Controls and Procedures](index=36&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2023, due to previously identified material weaknesses in internal control over financial reporting, with ongoing remediation efforts - As of March 31, 2023, disclosure controls and procedures were **not effective** due to material weaknesses in internal control over financial reporting[139](index=139&type=chunk) - Remediation efforts include rigorous risk assessment, enhancing control design, improving user access management, reviewing changes to IT systems, and investing in training and hiring personnel[140](index=140&type=chunk) - Remediation is expected to continue throughout 2023, and material weaknesses will not be considered remediated until controls operate effectively for a sufficient period[140](index=140&type=chunk) Part II – OTHER INFORMATION This section provides additional information beyond the financial statements, including legal proceedings, risk factors, unregistered sales of equity securities, other information, and a list of exhibits [Item 1. Legal Proceedings](index=37&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 6, "Commitments and Contingencies - Legal Contingencies," for a detailed discussion of the Company's material legal proceedings - Material legal proceedings are discussed in Note 6 'Commitments and Contingencies - Legal Contingencies' of the unaudited condensed consolidated financial statements[142](index=142&type=chunk) [Item 1A. Risk Factors](index=37&type=section&id=Item%201A.%20Risk%20Factors) This section outlines significant risks and uncertainties that could materially affect Funko's business, financial condition, and results of operations, categorized into business, economic, market, operating, organizational structure, and ownership risks [BUSINESS, ECONOMIC, MARKET AND OPERATING RISKS](index=37&type=section&id=BUSINESS,%20ECONOMIC,%20MARKET%20AND%20OPERATING%20RISKS) This section details risks related to Funko's business strategy, inventory management, growth, macroeconomic pressures, consumer preferences, reliance on licenses, competition, gross margin fluctuations, supply chain, international operations, and indebtedness - The Company's success depends on its ability to execute its business strategy, manage inventories effectively, and manage growth, which is challenged by macroeconomic pressures and rapid changes in consumer preferences[144](index=144&type=chunk)[146](index=146&type=chunk)[150](index=150&type=chunk) - Reliance on short-term license agreements (2-3 years) and concentration with top licensors (Disney, LucasFilm, Marvel collectively **41% of sales in Q1 2023**) poses risks if agreements are terminated or renewed on less favorable terms[151](index=151&type=chunk)[152](index=152&type=chunk) - Global and regional economic downturns, inflation, and changes in the retail industry (e.g., store closures, shifts to e-commerce) can negatively impact sales, gross margin, and profitability[157](index=157&type=chunk)[160](index=160&type=chunk)[164](index=164&type=chunk)[165](index=165&type=chunk) - The industry is highly competitive with low barriers to entry, and the Company faces risks from competitors, potential loss of shelf space, and intense competition for licensed properties[169](index=169&type=chunk)[170](index=170&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) - Gross margin is not sustainable and can fluctuate due to product mix, costs, price competition, and the **$30.1 million inventory write-down** in Q1 2023[174](index=174&type=chunk)[175](index=175&type=chunk)[180](index=180&type=chunk) - Dependence on third-party content development and rapidly shifting consumer tastes for pop culture products creates risks for product popularity and sales, especially for Core Collectibles (**73% of Q1 2023 sales**)[177](index=177&type=chunk)[178](index=178&type=chunk)[181](index=181&type=chunk) - Reliance on third-party manufacturers (Vietnam, China, Mexico) and concentration in certain geographic regions (Everett, WA; Buckeye, AZ) exposes the Company to supply chain disruptions, compliance risks, and adverse local conditions[198](index=198&type=chunk)[200](index=200&type=chunk)[205](index=205&type=chunk)[207](index=207&type=chunk) - International operations are subject to currency fluctuations, political instability, trade restrictions (e.g., tariffs, Uyghur Forced Labor Prevention Act), and compliance with diverse laws[208](index=208&type=chunk)[209](index=209&type=chunk)[211](index=211&type=chunk)[212](index=212&type=chunk) - The Company's indebtedness (**$291.5 million as of March 31, 2023**) and restrictive covenants in credit facilities could adversely affect financial health and competitive position, limiting operational flexibility and future financing options[254](index=254&type=chunk)[257](index=257&type=chunk)[258](index=258&type=chunk)[259](index=259&type=chunk)[260](index=260&type=chunk) [ORGANIZATIONAL STRUCTURE RISKS](index=68&type=section&id=ORGANIZATIONAL%20STRUCTURE%20RISKS) This section addresses risks related to the Company's organizational structure, including TCG's significant influence, potential conflicts of interest, dependence on FAH, LLC distributions, and obligations under the Tax Receivable Agreement - TCG has significant influence over stockholder decisions and director appointments, with its interests potentially conflicting with other stockholders[262](index=262&type=chunk)[263](index=263&type=chunk) - The Company's certificate of incorporation allows directors or stockholders not employed by the Company to pursue corporate opportunities for their own benefit, potentially leading to lost opportunities[266](index=266&type=chunk)[267](index=267&type=chunk) - The Company's primary asset is its interest in FAH, LLC, and its ability to pay taxes and expenses (including TRA payments) depends on distributions from FAH, LLC, which may be subject to limitations[268](index=268&type=chunk)[269](index=269&type=chunk) - The Tax Receivable Agreement (TRA) requires significant cash payments to TRA Parties for tax benefits, which may be accelerated in certain circumstances and could exceed actual tax benefits realized, without reimbursement for disallowed benefits[272](index=272&type=chunk)[273](index=273&type=chunk)[274](index=274&type=chunk)[275](index=275&type=chunk) [OWNERSHIP OF OUR CLASS A COMMON STOCK RISKS](index=75&type=section&id=OWNERSHIP%20OF%20OUR%20CLASS%20A%20COMMON%20STOCK%20RISKS) This section discusses risks associated with the ownership of Class A common stock, including potential dilution from common unit redemptions, the Company's dividend policy, and provisions in its charter and bylaws that may limit stockholder influence - Continuing Equity Owners have the right to redeem common units for Class A common stock or cash, potentially leading to future dilution and affecting stock price[277](index=277&type=chunk)[279](index=279&type=chunk) - The Company does not intend to pay dividends on Class A common stock for the foreseeable future, retaining earnings for growth and debt repayment, which may limit investor returns[282](index=282&type=chunk) - Delaware law and certain provisions in the Company's charter and bylaws may prevent efforts by stockholders to change the direction or management of the company[283](index=283&type=chunk)[285](index=285&type=chunk) - The Company has identified material weaknesses in internal control over financial reporting, which could lead to inaccurate financial reporting, investor confidence loss, and regulatory sanctions[291](index=291&type=chunk)[292](index=292&type=chunk)[293](index=293&type=chunk) [GENERAL RISKS](index=80&type=section&id=GENERAL%20RISKS) This section covers general risks, including foreign currency exchange rate fluctuations, cybersecurity incidents, asset impairment, stock price volatility, non-compliance with anti-corruption laws, and evolving privacy and data protection regulations - Changes in foreign currency exchange rates, particularly the depreciation of the euro and British pound sterling against the U.S. dollar, can significantly impact reported financial performance[295](index=295&type=chunk) - Compromise of electronic data, including proprietary and personal information, due to cyberattacks or security incidents, could disrupt operations, harm reputation, and lead to litigation or regulatory actions[296](index=296&type=chunk)[299](index=299&type=chunk) - Impairment in the value of goodwill or other assets, resulting from adverse changes in valuation assumptions, could adversely affect financial condition and results of operations[300](index=300&type=chunk) - The Class A common stock price may be volatile due to various factors, including operating performance, market expectations, industry conditions, and general economic and political events[301](index=301&type=chunk)[302](index=302&type=chunk)[303](index=303&type=chunk)[305](index=305&type=chunk) - Failure to comply with anti-corruption and anti-bribery laws (e.g., FCPA, U.K. Bribery Act) could result in substantial fines, penalties, and reputational damage, especially given operations in high-risk regions[307](index=307&type=chunk) - Non-compliance with evolving privacy and data protection laws (e.g., GDPR, CCPA, CPRA) could lead to significant costs, liabilities, litigation, and damage to reputation[309](index=309&type=chunk)[310](index=310&type=chunk)[311](index=311&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=85&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds were reported[312](index=312&type=chunk) [Item 5. Other Information](index=85&type=section&id=Item%205.%20Other%20Information) This section indicates that there is no other information to report for the period - No other information was reported[312](index=312&type=chunk) [Item 6. Exhibits](index=86&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including organizational documents, employment agreements, credit agreement amendments, certifications, and XBRL-related documents - Exhibits include Amended and Restated Certificate of Incorporation and Bylaws, Employment Agreements, Amendment No. 3 to Credit Agreement, CEO/CFO Certifications, and Inline XBRL documents[315](index=315&type=chunk)[316](index=316&type=chunk)[317](index=317&type=chunk) SIGNATURES This section confirms the report was signed on May 4, 2023, by Steve Nave, Chief Financial Officer and Chief Operating Officer - The report was signed on May 4, 2023, by Steve Nave, Chief Financial Officer and Chief Operating Officer[319](index=319&type=chunk)

2 Unless otherwise indicated, information contained in this presentation concerning our industry, competitive position and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and other third-party sources, as well as data from our internal research, and are based on assumptions made by us u ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________________________________________________________________ FORM 10-K ___________________________________________________________________________________ (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 OR Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of ...

November 3, 2022 Third Quarter 2022 Earnings 2 2 HOLLYWOOD UPDATE Cautionary Notes This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this presentation, including statements regarding our future results of operations and financial position, industry dynamics, our mission, growth opportunities, business strategy and plans and our objectives for future operations ...