fnko-20210331

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 March 31, 2021


☐			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 jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)


2802 Wetmore Avenue		98201
Everett	Washington
(Address of principal executive offices)		(Zip Code)

(425) 783-3616

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.0001 par value per share	FNKO	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated Filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 4, 2021, the registrant had 37,512,021 shares of Class A common stock, $0.0001 par value per share, and 12,529,497 shares of Class B common stock, $0.0001 par value per share, outstanding.

INDEX


		Page
Part I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 3 1 , 202 1 and 20 20	3

	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Mon ths Ended March 3 1 , 202 1 and 2020	4

	Condensed Consolidated Balance Sheets (unaudited) as of March 3 1 , 202 1 and December 31, 20 20	5

	Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 3 1 , 202 1 and 20 20	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	33

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78

Item 5.	Other Information	78

Item 6.	Exhibits	79

SIGNATURES		80

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, the expected impact of the COVID-19 pandemic on our business, results of operations and financial condition, our business strategy and plans, potential acquisitions, market growth and trends, demand for our products, anticipated future expenses and payments, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including the important factors described in this Quarterly Report on Form 10-Q under Part II. Item 1A. “Risk Factors,” and in our other filings with the Securities and Exchange Commission, that may cause our actual results, performance or achievements to differ materially and adversely from those expressed or implied by the forward-looking statements.

Any forward-looking statements made herein speak only as of the date of this Quarterly Report on Form 10-Q, and you should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or achievements reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations.

Summary of Risk Factors

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. Some of the factors that could materially and adversely affect our business, financial condition, results of operations or prospects include, but are not limited to, the following:

•We are subject to risks related to the retail industry including, but not limited to, the impacts of the COVID-19 pandemic, potential negative impacts of global and regional economic downturns, changes in retail practices, our ability to maintain and further develop relationships with our retail customers and distributors.

•As a purveyor of licensed pop culture consumer products, we are largely dependent on content development and creation by third parties, and are subject to a number of related risks including, but not limited to, the market appeal of the properties we license and the products we create.

•We are subject to several risks related to the operation of our business, including, but not limited to, our ability to execute our business strategy, manage our growth and our inventories, and attract and retain qualified personnel.

•We are subject to risks related to intellectual property, including our ability to obtain, protect and enforce our intellectual property rights and our ability to operate our business without violating the intellectual property rights of other parties.

•Our success is dependent on our ability to manage fluctuations in our business, including fluctuations in gross margin, seasonal impacts and fluctuations due to the timing and popularity of new product releases.

•Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations, including, but not limited to, changes in the global trade markets, as well as fluctuations in foreign currency or tax rates.

•Our business depends in large part on our third-party vendors, manufacturers and outsourcers, and our reputation and ability to effectively operate our business may be harmed by actions taken by these third parties outside of our control.

•We are subject to potential legal risks including, but not limited to, ongoing securities class action litigation, future product liability suits or product recalls, or risks associated with failure to comply to the various laws and regulations to which we are subject, any of which could have a significant adverse effect on our financial condition and results of operations.

•We are subject to risks related to information technology including, but not limited to, risks related to the operation of our e-commerce business, our ability to operate our information systems and our compliance with laws related to privacy and the protection of data.

•Our indebtedness could adversely affect our financial health and competitive position, and we may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

•ACON has significant influence over us, and its interests may conflict with the interests of our other stockholders.

•There are risks related to our organizational structure, including the Tax Receivable Agreement, which confers certain benefits upon the Continuing Equity Owners that will not benefit Class A common stockholders to the same extent as it will benefit the Continuing Equity Owners.

•There are risks associated with the ownership of our Class A common stock including, but not limited to, potential dilution by future issuances and volatility in the price of our Class A common stock.

Part I – FINANCIAL INFORMATION


Item 1.			Financial Statements

FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,
	2021		2020
	(In thousands, except per share data)
Net sales	$	189,177	$	136,700
Cost of sales (exclusive of depreciation and amortization shown separately below)	110,853		81,417
Selling, general, and administrative expenses	51,267		47,313
Depreciation and amortization	10,262		10,989
Total operating expenses	172,382		139,719
Income (loss) from operations	16,795		(3,019)
Interest expense, net	2,237		2,655
Other expense, net	1,179		914
Income (loss) before income taxes	13,379		(6,588)
Income tax expense (benefit)	2,293		(856)
Net income (loss)	11,086		(5,732)
Less: net income (loss) attributable to non-controlling interests	4,572		(1,606)
Net income (loss) attributable to Funko, Inc.	$	6,514	$	(4,126)
Earnings (loss) per share of Class A common stock:
Basic	$	0.18	$	(0.12)
Diluted	$	0.17	$	(0.12)
Weighted average shares of Class A common stock outstanding:
Basic	36,194		34,944
Diluted	37,839		34,944

See accompanying notes to the unaudited condensed consolidated financial statements.

FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Net income (loss)	$	11,086	$	(5,732)
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of tax effect of $(75) and $458 for the three months ended March 31, 2021 and 2020, respectively	423		(2,498)
Comprehensive income (loss)	11,509		(8,230)
Less: Comprehensive income (loss) attributable to non-controlling interests	4,724		(2,528)
Comprehensive income (loss) attributable to Funko, Inc.	$	6,785	$	(5,702)

See accompanying notes to the unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31, 2021		December 31, 2020
	(In thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents	$	74,697	$	52,255
Accounts receivable, net	114,655		131,837
Inventory	61,934		59,773
Prepaid expenses and other current assets	15,658		15,486
Total current assets	266,944		259,351
Property and equipment, net	53,868		56,141
Operating lease right-of-use assets	56,774		58,079
Goodwill	126,801		125,061
Intangible assets, net	201,757		205,541
Deferred tax asset	58,384		54,682
Other assets	4,670		4,735
Total assets	$	769,198	$	763,590
Liabilities and Stockholders’ Equity
Current liabilities:

Current portion of long-term debt, net of unamortized discount	$	14,666	$	10,758
Current portion of operating lease liabilities	14,636		13,840
Accounts payable	31,706		29,199
Income taxes payable	2,217		425
Accrued royalties	33,906		40,525
Accrued expenses and other current liabilities	41,451		43,949

Total current liabilities	138,582		138,696
Long-term debt, net of unamortized discount	168,371		180,012
Operating lease liabilities, net of current portion	55,736		57,512
Deferred tax liability	788		780
Liabilities under tax receivable agreement, net of current portion	67,713		60,297
Other long-term liabilities	4,909		3,848

Commitments and Contingencies (Note 7)

Stockholders’ equity:
Class A common stock, par value $0.0001 per share, 200,000 shares authorized; 36,836 and 35,657 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively	4		4
Class B common stock, par value $0.0001 per share, 50,000 shares authorized; 13,040 and 14,040 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively	1		1
Additional paid-in-capital	222,902		216,141
Accumulated other comprehensive income	1,989		1,718
Retained earnings	30,917		24,403
Total stockholders’ equity attributable to Funko, Inc.	255,813		242,267
Non-controlling interests	77,286		80,178
Total stockholders’ equity	333,099		322,445
Total liabilities and stockholders’ equity	$	769,198	$	763,590

See accompanying notes to the unaudited condensed consolidated financial statements.

FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Operating Activities
Net income (loss)	$	11,086	$	(5,732)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and other	10,586		11,937
Equity-based compensation	2,690		2,413
Amortization of debt issuance costs and debt discounts	322		317

Other	805		851
Changes in operating assets and liabilities:
Accounts receivable, net	17,521		43,760
Inventory	(1,952)		7,312
Prepaid expenses and other assets	1,610		6,437
Accounts payable	2,483		(12,923)
Income taxes payable	1,789		(491)
Accrued royalties	(6,619)		(14,209)
Accrued expenses and other liabilities	(2,856)		(2,720)
Net cash provided by operating activities	37,465		36,952

Investing Activities
Purchases of property and equipment	(3,884)		(4,961)
Other	199		—
Net cash used in investing activities	(3,685)		(4,961)

Financing Activities
Borrowings on line of credit	—		28,267
Payments on line of credit	—		(25,281)

Payments of long-term debt	(7,982)		(2,938)

Distributions to continuing equity owners	(2,445)		(2,675)
Payments under tax receivable agreement	(6)		(166)
Proceeds from exercise of equity-based options	33		41
Net cash used in financing activities	(10,400)		(2,752)

Effect of exchange rates on cash and cash equivalents	(938)		945

Net increase in cash and cash equivalents	22,442		30,184
Cash and cash equivalents at beginning of period	52,255		25,229
Cash and cash equivalents at end of period	$	74,697	$	55,413

See accompanying notes to the unaudited condensed consolidated financial statements.

FUNKO, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Operations

The unaudited condensed consolidated financial statements include Funko, Inc. and its subsidiaries (together, the “Company”) and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany balances and transactions have been eliminated.

The Company was formed as a Delaware corporation on April 21, 2017. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and related transactions in order to carry on the business of Funko Acquisition Holdings, L.L.C. (“FAH, LLC”) and its subsidiaries.

Reorganization transactions occurring at the time of our IPO resulted in Funko, Inc. being the sole managing member of FAH, LLC. As the sole managing member of FAH, LLC, Funko, Inc. operates and controls all of FAH, LLC’s operations and, through FAH, LLC and its subsidiaries, conducts FAH, LLC’s business. Accordingly, the Company consolidates the financial results of FAH, LLC and reports a non-controlling interest in its unaudited condensed consolidated financial statements representing the common units of FAH, LLC interests still held by other owners of FAH, LLC (collectively, the “Continuing Equity Owners”).

Interim Financial Information

In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date of and for the interim periods presented have been included, and such adjustments consist of normal recurring adjustments. Certain prior-year amounts have been reclassified to conform to the current year presentation. The unaudited condensed consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2021, due to seasonality and other factors. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 11, 2021.

2. Significant Accounting Policies

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions.

Significant Accounting Policies

A description of the Company’s significant accounting policies is included in the audited consolidated financial statements within its Annual Report on Form 10–K for the year ended December 31, 2020.

3. Acquisitions

TokenWave LLC. On March 26, 2021, the Company acquired a majority of the membership interests of TokenWave LLC, the developer of TokenHead, a mobile app and website for showcasing and tracking Non-Fungible Token (“NFT”) holdings. This transaction represents an opportunity to expand the Company’s product offerings into digital NFTs. The Company accounted for the acquisition as a business combination. The purchase consideration, fair value of the assets acquired and liabilities assumed, and acquisition related transaction costs were not material. The activity of TokenWave LLC included in the Company’s consolidated statements of operations from the acquisition date to March 31, 2021 was not material.

4. Fair Value Measurements

The Company’s financial instruments, other than those discussed below, include cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities. The carrying amount of these financial instruments approximate fair value due to the short-term nature of these instruments. For financial instruments measured at fair value on a recurring basis, the Company prioritizes the inputs used in measuring fair value according to a three-tier fair value hierarchy defined by U.S. GAAP. For a description of the methods and assumptions that the Company uses to estimate the fair value and determine the classification according to the fair value hierarchy for each financial instrument, see the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2020.

Cash equivalents. As of March 31, 2021, cash equivalents included $39.8 million of highly liquid money market funds, which are classified as Level 1 within the fair value hierarchy.

Debt. The estimated fair value of the Company’s debt instruments, which are classified as Level 3 financial instruments, at March 31, 2021 and December 31, 2020, was approximately $185.9 million and $193.9 million, respectively. The carrying values of the Company’s debt instruments at March 31, 2021 and December 31, 2020, were $183.0 million and $190.8 million, respectively.

5. Debt

Debt consists of the following (in thousands):


	March 31, 2021		December 31, 2020


Term Loan Facility	$	185,893	$	193,875
Debt issuance costs	(2,856)		(3,105)
Total term debt	183,037		190,770
Less: current portion	14,666		10,758
Long-term debt, net	$	168,371	$	180,012

Credit Facilities

On October 22, 2018, the Company entered into a credit agreement (as amended, the “Credit Agreement”) providing for a term loan facility in the amount of $235.0 million (the “Term Loan Facility”) and a revolving credit facility of $50.0 million (the “Revolving Credit Facility”) (together the “Credit Facilities”). On February 11, 2019, the Company amended the Credit Agreement to increase the Revolving Credit Facility to $75.0 million. On September 23, 2019, the Company entered into a second amendment to the Credit Agreement, which extended the maturity date of the Term Loan Facility and the Revolving Credit Facility under the Credit Facilities to September 23, 2024 (the “Maturity Date”), reduced the interest margin applicable to all loans under the Credit Agreement by 0.75% and reduced certain fees incurred under the Credit Agreement. The second amendment also allows the Company to request an additional $25.0 million increase to the Term Loan Facility.

On May 5, 2020 the Company entered into a third amendment to the Credit Agreement, which modified the financial covenants and adjusted the required leverage levels for the Leverage Ratio (as defined in the Credit Agreement) to provide the Company with additional flexibility.

The Term Loan Facility matures on the Maturity Date and amortizes in quarterly installments in aggregate amounts equal to 5.00% of the original principal amount of the Term Loan Facility (the “Original Principal Amount”) in the first and second years of the Term Loan Facility, 10.00% of the Original Principal Amount in the third and fourth years of the Term Loan Facility and 12.50% of the Original Principal Amount in the fifth and sixth years of the Term Loan Facility, with any outstanding balance due and payable on the Maturity Date. The first amortization payment was on December 31, 2018. The Revolving Credit Facility also terminates on the Maturity Date and loans thereunder may be borrowed, repaid, and reborrowed up to such date.

As amended, loans under the Credit Facilities bear interest, at the Company’s option, at either the Euro-Rate (as defined in the Credit Agreement), or in the case of swing loans, the Swing Rate (as defined in the Credit Agreement), plus 3.00% or the Base Rate (as defined in the Credit Agreement) plus 2.00%, with 0.25% step-downs based on the achievement of certain leverage ratios. The Euro-Rate is subject to a 1.00% floor and for loans based on the Euro-Rate, interest payments are due at the end of each applicable interest period.

The Credit Facilities are secured by substantially all of the assets of the Company and any of its existing or future material domestic subsidiaries, subject to customary exceptions. As of March 31, 2021 and December 31, 2020, the Company was in compliance with all of the covenants in its Credit Agreement, as amended.

At March 31, 2021 and December 31, 2020, the Company had $185.9 million and $193.9 million of borrowings outstanding under the Term Loan Facility and no outstanding borrowings under the Revolving Credit Facility, respectively. At both March 31, 2021 and December 31, 2020, the Company had $75.0 million available under the Revolving Credit Facility.

There were no outstanding letters of credit as of March 31, 2021 and December 31, 2020.

6. Liabilities under Tax Receivable Agreement

On November 1, 2017, the Company entered into a tax receivable agreement with FAH, LLC (the “Tax Receivable Agreement”) and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that it realizes, or in some circumstances, is deemed to realize, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of common units of FAH, LLC for Class A common stock of Funko, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement.

During the three months ended March 31, 2021 and 2020, the Company acquired 1.2 million and a nominal amount, respectively of common units of FAH, LLC. As a result of these exchanges, during the three months ended March 31, 2021, the Company recognized an increase to its net deferred tax assets in the amount of $3.8 million.

The following table summarizes changes in the amount of the Company’s Tax Receivable Agreement liability for the three months ended March 31, (in thousands):


	2021		2020
Beginning Balance	$	62,317	$	65,816
Additional liabilities for exchanges	5,973		4

Payments under tax receivable agreement	(6)		(166)
Ending balance	$	68,284	$	65,654

As of March 31, 2021, the Company’s total obligation under the Tax Receivable Agreement, including accrued interest, was $68.3 million, of which $0.6 million was included in accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheets. There were no transactions subject to the Tax Receivable Agreement for which the Company did not recognize the related liability, as the Company concluded that it was probable that the Company would have sufficient future taxable income to utilize all of the related tax benefits. At December 31, 2020, the Company’s total obligation under the Tax Receivable Agreement, including accrued interest, was $62.3 million, of which $2.0 million was included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.

7. Commitments and Contingencies

License Agreements

The Company enters into license agreements with various licensors of copyrighted and trademarked characters and design in connection with the products that it sells. The agreements generally require royalty payments based on product sales and in some cases may require minimum royalty and other related commitments.

Employment Agreements

The Company has employment agreements with certain officers. The agreements include, among other things, an annual bonus based on certain performance metrics of the Company, as defined by the board of directors, and up to one year’s severance pay beyond termination date.

Debt

The Company has entered into a Credit Agreement which includes a Term Loan Facility and a Revolving Credit Facility. See Note 5, Debt.

Tax Receivable Agreement

The Company is party to the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners under certain circumstances. See Note 6, Liabilities under Tax Receivable Agreement.

Legal Contingencies

The Company is involved in claims and litigation in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. For certain pending matters, accruals have not been established because such matters have not progressed sufficiently through discovery, and/or development of important factual information and legal information is insufficient to enable the Company to estimate a range of possible loss, if any. An adverse determination in one or more of these pending matters could have an adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

The Company is, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business. For example, on March 10, 2020, a purported stockholder of the Company filed a putative class action lawsuit in the United States District Court for the Central District of California against the Company and certain of its officers, entitled Ferreira v. Funko, Inc. et al. The complaint alleges that the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as Rule 10b-5 promulgated thereunder, by making allegedly materially misleading statements in its earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, as well as by omitting material facts necessary to make the statements made therein not misleading. The lawsuit seeks, among other things, compensatory damages and attorneys’ fees and costs. Two additional complaints making substantially similar allegations—Nahas v. Funko, Inc. et al. and Dachev v. Funko, Inc. et al.—were filed April 3, 2020 in the United States District Court for the Central District of California and April 9, 2020 in the United States District Court for the Western District of Washington, respectively. On June 25, 2020, the Dachev action was voluntarily dismissed. On June 11, 2020, the Central District of California actions were consolidated for all purposes into one action under the Ferreira caption, and lead plaintiffs and lead counsel were appointed pursuant to the Private Securities Litigation Reform Act. Lead plaintiffs filed the consolidated complaint on July 31, 2020, against the Company and certain of its officers and directors, as well as entities affiliated with ACON Funko Investors, L.L.C. (“ACON”). The consolidated complaint added Section 10(b) and 20(a) claims based on the Company’s earnings announcement and Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, as well as claims under Section 20A of the Exchange Act. All defendants moved to dismiss the consolidated action on October 2, 2020, and briefing on the motions to dismiss concluded on January 29, 2021. On February 25, 2021, the Court granted all defendants’ motions to dismiss the Ferreira action, allowing the lead plaintiffs leave to amend the complaint. Lead plaintiffs filed their amended complaint on March 29, 2021, and the Company expects briefing on the motions to dismiss that complaint to conclude in July 2021.

Five shareholder derivative actions based on the earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 have been brought on behalf of the Company against certain of its directors and officers. Specifically, on April 23, June 5, and June 10, 2020, the actions captioned Cassella v. Mariotti et al., Evans v. Mariotti et al., and Igelido v. Mariotti et al., respectively, were filed in the United States District Court for the Central District of California. On July 6, 2020, these three actions were consolidated for all purposes into one action under the title In re Funko, Inc. Derivative Litigation, and on August 13, 2020, the consolidated action was stayed pending final resolution of the motion to dismiss in the Ferreira action. Additionally, on July 14 and July 31, 2020, the actions captioned Rubin v. Mariotti et al. and Fletcher v. Mariotti et al., respectively, were filed in the United States District Court for the District of Delaware. These two actions were consolidated for all purposes into one action under the title In re Funko, Inc. Stockholder Derivative Litigation on September 8, 2020. On October 30, 2020, the consolidated action was transferred to the United States District Court for the Central District of California. The complaints filed in the shareholder derivative actions have alleged breaches of fiduciary duties, unjust enrichment, waste of corporate assets, insider trading, and violations of the Exchange Act. The actions seek, among other things, payment of damages to the Company and to disgorge the directors and officers from all profits and benefits they obtained due to their alleged wrongful conduct.

Additionally, between November 16, 2017 and June 12, 2018, seven purported stockholders of the Company filed putative class action lawsuits in the Superior Court of Washington in and for King County against the Company, certain of its officers and directors, ACON, Fundamental Capital, LLC and Funko International, LLC (collectively, “Fundamental”), the underwriters of its IPO, and certain other defendants.

On July 2, 2018, the suits were ordered consolidated for all purposes into one action under the title In re Funko, Inc. Securities Litigation. On August 1, 2018, plaintiffs filed a consolidated complaint against the Company, certain of its officers and directors, ACON, Fundamental, and certain other defendants. On October 1, 2018, the Company moved to dismiss the action. The motion was fully briefed as of November 30, 2018, and oral argument on the motion was held on May 3, 2019. On August 2, 2019, the Court granted the Company’s motion to dismiss the action, allowing plaintiffs leave to amend the complaint. The Court found, inter alia, that “Funko’s statements regarding its financial disclosures were not materially false or misleading” and that “plaintiffs have not shown that Funko’s ‘opinion statements’ were false or that such statements were not simply corporate optimism or puffery.” On October 3, 2019, plaintiffs filed a first amended consolidated complaint. The Company moved to dismiss that complaint on December 5, 2019. The motion was fully briefed as of March 17, 2020, and oral argument on the motion was held on May 15, 2020. On August 5, 2020, the Superior Court of Washington in and for King County dismissed the consolidated action with prejudice. Plaintiffs filed a notice of appeal to the Washington Court of Appeals on September 4, 2020 and their opening brief on February 12, 2021. The Company expects briefing on the appeal to conclude mid-2021.

On June 4, 2018, a putative class action lawsuit entitled Kanugonda v. Funko, Inc., et al. was filed in the United States District Court for the Western District of Washington against the Company, certain of its officers and directors, and certain other defendants. On January 4, 2019, a lead plaintiff was appointed in that case. On April 30, 2019, the lead plaintiff filed an amended complaint against the previously named defendants. The parties to the federal action, now captioned Berkelhammer v. Funko, Inc. et al., have agreed to a stay of that action pending developments in the state case.

The complaints in Washington state court and Berkelhammer v. Funko, Inc. et al. allege that the Company violated Sections 11, 12, and 15 of the Securities Act of 1933, as amended, by making allegedly materially misleading statements in documents filed with the U.S. Securities and Exchange Commission in connection with the Company’s IPO and by omitting material facts necessary to make the statements made therein not misleading. The lawsuits seek, among other things, compensatory statutory damages and rescissory damages in account of the consideration paid for the Company’s Class A common stock by the plaintiffs and members of the putative class, as well as attorneys’ fees and costs.

Finally, on December 8, 2020 and February 3, 2021, two purported stockholders of the Company filed complaints against the Company in the Court of Chancery of the State of Delaware to compel inspection of books and records pursuant to 8 Del. C. § 220. Those actions are captioned Silverberg v. Funko, Inc. and De La Combe v. Funko, Inc. On April 21, 2021, the De La Combe action was voluntarily dismissed. The Silverberg action remains pending.

The Company is party to additional legal proceedings incidental to its business. While the outcome of these additional matters could differ from management’s expectations, the Company does not believe that the resolution of such matters is reasonably likely to have a material effect on its results of operations or financial condition.

8. Segments

The Company identifies its segments according to how the business activities are managed and evaluated and for which discrete financial information is available and regularly reviewed by its Chief Operating Decision Maker (the “CODM”) to allocate resources and assess performance. Because its CODM reviews financial performance and allocates resources at a consolidated level on a regular basis, the Company has one segment.

The following tables present summarized product information as a percent of sales:


	Three Months Ended March 31,
	2021		2020
Figures	79.6	%	81.4	%
Other	20.4	%	18.6	%


	Three Months Ended March 31,
	2021		2020
Pop! Branded Products	79.5	%	82.7	%
Loungefly Branded Products	13.0	%	9.9	%
Other	7.5	%	7.4	%

The following tables present summarized geographical information (in thousands):


	Three Months Ended March 31,
	2021		2020
Net sales:
United States	$	136,521	$	98,509
Europe	39,765		25,578
Other International	12,891		12,613
Total net sales	$	189,177	$	136,700


	March 31, 2021		December 31, 2020
Long-term assets:
United States	$	70,364	$	72,813
Vietnam and China	15,284		16,144
United Kingdom	29,664		29,998
Total long-lived assets	$	115,312	$	118,955

9. Income Taxes

Funko, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from FAH, LLC based upon Funko, Inc.’s economic interest held in FAH, LLC. FAH, LLC is treated as a pass-through partnership for income tax reporting purposes. FAH, LLC’s members, including the Company, are liable for federal, state and local income taxes based on their share of FAH, LLC’s pass-through taxable income.

The Company recorded $2.3 million of income tax expense and $0.9 million of income tax benefit for the three months ended March 31, 2021 and 2020, respectively. The Company’s effective tax rate for the three months ended March 31, 2021 was 17.1%. The Company’s effective tax rate is less than the statutory rate of 21% primarily because the Company is not liable for income taxes on the portion of FAH, LLC’s earnings that are attributable to non-controlling interests.

10. Stockholders’ Equity

The following is a reconciliation of changes in stockholders’ equity for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Class A common stock
Beginning balance	$	4	$	3
Shares issued	—		—
Ending balance	$	4	$	3
Class B common stock
Beginning balance	$	1	$	1
Redemption of common units of FAH, LLC	—		—
Ending balance	$	1	$	1
Additional paid-in capital
Beginning balance	$	216,141	$	204,174
Equity-based compensation	2,690		2,413
Shares issued for equity-based compensation awards	33		45
Shares withheld related to net share settlement of equity-based compensation awards	—		(98)
Other	200		—

Redemption of common units of FAH, LLC	6,032		37
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets	(2,194)		(1)
Ending balance	$	222,902	$	206,570
Accumulated other comprehensive (loss) income

SEC Form 10-Q filed by Funko, Inc.