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What changed in Funko, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Funko, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+490 added−474 removedSource: 10-K (2024-03-07) vs 10-K (2023-03-01)

Top changes in Funko, Inc.'s 2023 10-K

490 paragraphs added · 474 removed · 389 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

80 edited+14 added−23 removed106 unchanged
Biggest changeSee Item 1A, “Risk Factors.” 14 Table of Contents Information about our Executive Officers and Board of Directors The following table provides information regarding our executive officers and members of our board of directors (ages as of March 1, 2023): Name Age Position(s) Brian Mariotti 55 Chief Executive Officer, Director Andrew Perlmutter 45 President, Director Steve Nave 52 Chief Financial Officer and Chief Operating Officer Tracy Daw 57 Chief Legal Officer and Secretary Andy Oddie 50 Chief Revenue Officer Charles Denson 66 Chairman of the Board of Directors Diane Irvine 64 Director Sarah Kirshbaum Levy 52 Director Michael Lunsford 55 Director Jesse Jacobs 47 Director Richard Paul 42 Director Trevor Edwards 60 Director Executive Officers Brian Mariotti has served as Funko, Inc.'s Chief Executive Officer since December 2022 as well as from April 2017 to January 2022 and has been a member of the Funko, Inc board of directors since its formation in April 2017.
Biggest changeSee Item 1A, “Risk Factors.” 14 Table of Contents Information about our Executive Officers and Board of Directors The following table provides information regarding our executive officers and members of our board of directors (ages as of March 7, 2024): Name Age Position(s) Michael Lunsford 56 Interim Chief Executive Officer, Director Andrew Perlmutter 46 President, Director Steve Nave 53 Chief Financial Officer and Chief Operating Officer Tracy Daw 58 Chief Legal Officer and Secretary Andy Oddie 51 Chief Commercial Officer Charles Denson 67 Chairman of the Board of Directors Trevor Edwards 61 Director Diane Irvine 65 Director Jesse Jacobs 48 Director Michael Kerns 47 Director Sarah Kirshbaum Levy 53 Director Executive Officers Michael Lunsford has served as Funko, Inc.'s Interim Chief Executive Officer since July 2023 and on the board of directors of Funko, Inc. since October 2018.
These license agreements typically provide that our licensors own intellectual property rights in the products we design and sell under the license, and as a result, upon termination of the license, we no longer have the right to sell these products. A number of these license agreements relate to properties that are significant to our business and operations.
These license agreements typically provide that our licensors own the intellectual property rights in the products we design and sell under the license, and as a result, upon termination of the license, we no longer have the right to sell these products. A number of these license agreements relate to properties that are significant to our business and operations.
In addition, our online products and services, including our e-commerce and digital communications activities, are or may be subject to U.S. and non-U.S. data privacy and cybersecurity laws, such as the U.S. Children’s Online Privacy Protection Act, the California Consumer Privacy Protection Act (“CCPA”), and the EU/UK General Data Protection Regulation (“GDPR”).
In addition, our online products and services, including our e-commerce and digital communications activities, are or may be subject to U.S. and non-U.S. data privacy and cybersecurity laws, such as the U.S. Children’s Online Privacy Protection Act, the California Consumer Privacy Act (“CCPA”), and the EU/UK General Data Protection Regulation (“GDPR”).
Lunsford served as an Advisor and Vice President of McClatchy, Inc. from 2017 to September 2020. Mr. Lunsford previously served as the Chief Executive Officer of SK Planet, Inc. from 2013 until 2018 and as interim Chief Executive Officer of shopkick, Inc. in 2016. From 2008 to 2013, Mr.
Mr. Lunsford served as an Advisor and Vice President of McClatchy, Inc. from 2017 to September 2020. Mr. Lunsford previously served as the Chief Executive Officer of SK Planet, Inc. from 2013 until 2018 and as interim Chief Executive Officer of shopkick, Inc. in 2016. From 2008 to 2013, Mr.
Sales We sell our products to a diverse network of customers throughout the world as well as directly to our consumers primarily through our own websites and two flagship retail stores. Domestically, we sell our products to specialty retailers, mass-market retailers and e-commerce sites. Our key retail partners in the United States include Amazon, GameStop, Hot Topic, Target and Walmart.
Sales We sell our products to a diverse network of customers throughout the world as well as directly to our consumers primarily through our own websites and two flagship retail stores. Domestically, we sell our products to specialty retailers, mass-market retailers and e-commerce sites. Our key retail partners in the United States include Target, Amazon, GameStop and Hot Topic.
Many of our licensed properties are "evergreen" in nature—properties that are not tied to a current or new content release, such as Mickey Mouse, Harry Potter or classic Batman. We have visibility into the new release schedule of our content providers and our expansive license portfolio allows us to dynamically manage new product creation.
Many of our licensed properties are "evergreen" in nature—properties that are not tied to a current or new content release, such as Mickey Mouse, Harry Potter or classic Batman. We often have visibility into the new release schedule of our content providers and our expansive license portfolio allows us to dynamically manage new product creation.
Our key retail partners in the United States include Amazon, GameStop, Hot Topic, Target and Walmart. Internationally, we sell our products directly to similar retailers, primarily in Europe, through our subsidiary Funko UK, Ltd. Our key international retail customers include Amazon, GameStop, and Fnac.
Our key retail partners in the United States include Target, Amazon, GameStop and Hot Topic. Internationally, we sell our products directly to similar retailers, primarily in Europe, through our subsidiary Funko UK, Ltd. Our key international retail customers include Amazon, GameStop, and Fnac.
We compete with toy, board game and fashion accessory companies across our product categories, some of which have substantially more resources, stronger name recognition, and longer operating histories than us, and which benefit from greater economies of scale. We also increasingly compete with large toy and board game companies for shelf space at leading mass market and other retailers.
We compete with toy and fashion accessory companies across our product categories, some of which have substantially more resources, stronger name recognition, and longer operating histories than us, and which benefit from greater economies of scale. We also increasingly compete with large toy companies for shelf space at leading mass market and other retailers.
We also compete with numerous smaller domestic and foreign collectible toy, board game and fashion accessory designers and manufacturers across our product categories. Our competitive advantage is based primarily on the creativity and quality of the design of our products, our price points, our broad consumer appeal, our license portfolio and our ability to bring new products to market quickly.
We also compete with numerous smaller domestic and foreign collectible toy and fashion accessory designers and manufacturers across our product categories. Our competitive advantage is based primarily on the creativity and quality of the design of our products, our price points, our broad consumer appeal, our license portfolio and our ability to bring new products to market quickly.
Daw was a member of the law firm of Sidley Austin LLP, where he was a partner. Mr. Daw received a J.D. from the University of Michigan Law School and a B.S. in Industrial and Labor Relations from Cornell University. Andy Oddie has served as Chief Revenue Officer since May 2022.
Daw was a member of the law firm of Sidley Austin LLP, where he was a partner. Mr. Daw received a J.D. from the University of Michigan Law School and a B.S. in Industrial and Labor Relations from Cornell University. Andy Oddie has served as Chief Commercial Officer since May 2022.
We strive to have something for everyone by offering figures and other product categories including bags, wallets, apparel, board games, plush, accessories, homewares and more. We expect to continue to look for ways to diversify our product offerings to reach an even broader group of consumers.
We strive to have something for everyone by offering figures and other product categories including bags, wallets, apparel, plush, accessories, homewares and more. We expect to continue to look for ways to diversify our product offerings to reach an even broader group of consumers.
Because of the strength of our in-house creative team, we are able to move from product design to pre-selling a new product in as few as 24 hours. 10 Table of Contents Manufacturing and Materials Our products are produced by third-party manufacturers primarily in Vietnam and China, which we choose on the basis of performance, capacity, capability and price.
Because of the strength of our in-house creative team, we are able to move from product design to pre-selling a new product in as few as 24 hours. Manufacturing and Materials Our products are produced by third-party manufacturers primarily in Vietnam and China, which we choose on the basis of performance, capacity, capability and price.
Our license agreements require us to make royalty payments to the licensor based on our sales of the licensed product and, in some cases, require us to incur other charges. For the years ended December 31, 2022, 2021 and 2020, the average royalty rate was 16.1%, 15.7% and 16.1%, respectively.
Our license agreements require us to make royalty payments to the licensor based on our sales of the licensed product and, in some cases, require us to incur other charges. For the years ended December 31, 2023, 2022 and 2021, the average royalty rate was 16.4%, 16.1% and 15.7%, respectively.
Additionally, the portion of our sales related to evergreen properties for the years ended December 31, 2022, 2021 and 2020 was approximately 64%, 67% and 66%, respectively. Broad Portfolio of Brands We create products to attract a broad array of fans across consumer demographic groups.
Additionally, the portion of our sales related to evergreen properties for the years ended December 31, 2023, 2022 and 2021 was approximately 67%, 64% and 67%, respectively. Broad Portfolio of Brands We create products to attract a broad array of fans across consumer demographic groups.
We believe these merchandising strategies create a sense of urgency with consumers that encourages repeat visits to our retail customers. 6 Table of Contents Additionally, we are continuing to invest in our direct-to-consumer channel to expand our reach and further strengthen our relationship with our fan base.
We believe these merchandising strategies create a sense of urgency with consumers that encourages repeat visits to our retail customers. Additionally, we are continuing to invest in our direct-to-consumer channel to expand our reach and further strengthen our relationship with our fan base.
Unexpected changes in these factors could result in a lack of product availability or excess inventory of a particular product. Although we do not conduct the day-to-day manufacturing of our products, we are responsible for designing both the product and the packaging.
Unexpected changes in these factors could result in a lack of product availability or excess inventory of a particular product. 10 Table of Contents Although we do not conduct the day-to-day manufacturing of our products, we are responsible for designing both the product and the packaging.
The Pop! brand has also been applied across many of our other product categories, including games, plush, accessories, apparel and homewares. Core Collectible branded products, which include Pop! Vinyl, represented 76%, 80% and 81% of our sales in 2022, 2021 and 2020, respectively. Our Loungefly branded products are generally fashion accessories including stylized handbags, backpacks, wallets, clothing, and other accessories.
The Pop! brand has also been applied across many of our other product categories, including games, plush, accessories, apparel and homewares. Core Collectible branded products, which include Pop! Vinyl, represented 73%, 76% and 80% of our sales in 2023, 2022 and 2021, respectively. Our Loungefly branded products are generally fashion accessories including stylized handbags, backpacks, wallets, clothing, and other accessories.
Our flexible and low-fixed cost production model enables us to move from product design of a figure to shipping, with a minimal upfront investment for most figures of $5,000 to $7,500 in tooling, molds and internal design costs.
Our flexible and low-fixed cost production model enables us to move from product design of a figure to shipping, with a minimal upfront investment for most figures of $5,000 to $10,000 in tooling, molds and internal design costs.
See Item 1A, “Risk Factors.” Government Regulation Our products sold in the United States are subject to the provisions of multiple statues, including the Consumer Product Safety Act (“CPSA”), the Federal Hazardous Substances Act (“FHSA”), the Consumer Product Safety Improvement Act of 2008 (“CPSIA”) and the Flammable Fabrics Act (“FFA”), and the regulations promulgated pursuant to such statutes.
See Item 1A, “Risk Factors.” 12 Table of Contents Government Regulation Our products sold in the United States are subject to the provisions of multiple statutes, including the Consumer Product Safety Act (“CPSA”), the Federal Hazardous Substances Act (“FHSA”), the Consumer Product Safety Improvement Act of 2008 (“CPSIA”) and the Flammable Fabrics Act (“FFA”), and the regulations promulgated pursuant to such statutes.
Oddie has over 25 years’ experience in selling, manufacturing and marketing pop culture merchandise, and has held active board positions at key companies in the sector such as Forbidden Planet International, Forbidden Planet New York and Underground Toys Limited.
Oddie has over 25 years of experience in selling, manufacturing and marketing pop culture merchandise, and has held active board positions at key companies in the sector such as Forbidden Planet International, Forbidden Planet New York and Underground Toys Limited.
Prior to his appointment as Chief Revenue Officer, he served as Managing Director, EMEA, since joining the company in January 2017. Mr.
Prior to his appointment as Chief Commercial Officer, he served as Managing Director, EMEA, since joining the company in January 2017. Mr.
We also sell our products directly to consumers through our e-commerce business, two flagship retail stores and, to a lesser extent, at specialty licensing and comic book shows, conventions and exhibitions in cities throughout the United States, including at Comic-Con events. Our direct-to-consumer sales accounted for approximately 11%, 11% and 8% of our sales for 2022, 2021 and 2020, respectively.
We also sell our products directly to consumers through our e-commerce business, two flagship retail stores and, to a lesser extent, at specialty licensing and comic book shows, conventions and exhibitions in cities throughout the United States, including at Comic-Con events. Our direct-to-consumer sales accounted for approximately 21%, 13% and 11% of our sales for 2023, 2022, and 2021, respectively.
In 2022, we completed our acquisition of Mondo Collectibles, a boutique collectibles brand specializing in limited addition vinyl records and art prints, as well as high-end collectibles. We expect to continue to develop new product designs and lines, which may develop into proprietary brands in the future. Our Licenses Licensors.
In 2022, we completed our acquisition of Mondo Collectibles, a boutique collectibles brand specializing in high-end collectibles as well as limited edition art prints and vinyl records. We expect to continue to develop new product designs and lines, which may develop into proprietary brands in the future. 8 Table of Contents Our Licenses Licensors.
This allows our business to be diversified across properties, as well as evergreen and current content. 5 Table of Contents For the years ended December 31, 2022, 2021 and 2020, no single property accounted for more than 7% of our sales, and the portion of our sales for the years ended December 31, 2022, 2021 and 2020 attributable to our top five properties was 18%, 20% and 22%, respectively.
This allows our business to be diversified across properties, as well as evergreen and current content. 5 Table of Contents For the years ended December 31, 2023, 2022 and 2021, no single property accounted for more than 6% of our sales, and the portion of our sales for the years ended December 31, 2023, 2022 and 2021 attributable to our top five properties was 17%, 18% and 20%, respectively.
Our royalty expense for any given year will vary depending on the mix of products and properties sold during that year. For the years ended December 31, 2022, 2021 and 2020, we incurred royalty expenses of $213.1 million, $161.6 million and $105.0 million, respectively. Our licenses are generally not exclusive.
Our royalty expense for any given year will vary depending on the mix of products and properties sold during that year. For the years ended December 31, 2023, 2022 and 2021, we incurred royalty expenses of $179.7 million, $213.1 million and $161.6 million, respectively. Our licenses are generally not exclusive.
For the years ended December 31, 2022, 2021 and 2020 approximately 53%, 59% and 64%, respectively, of our net sales were made in the third and fourth quarters, as our customers build up their inventories in anticipation of the holiday season.
For the years ended December 31, 2023, 2022 and 2021 approximately 55%, 53% and 59%, respectively, of our net sales were generated in the third and fourth quarters, as our customers build up their inventories in anticipation of the holiday season.
Pop!, introduced in 2010, is our most well-recognized brand. The Pop! Vinyl stylized design incorporates a rounded square head that typically consists of no mouth and a very simple nose. Our standard Pop! Vinyl figure stands about four inches tall.
Currently, our principal proprietary brands include Pop!, Loungefly and Mondo. Pop!, introduced in 2010, is our most well-recognized brand. The Pop! Vinyl stylized design incorporates a rounded square head that typically consists of no mouth and a very simple nose. Our standard Pop! Vinyl figure stands about four inches tall.
For the year ended December 31, 2020, 12% and 11% of sales were related to the Company’s two largest license agreements with no other license agreements accounting for more than 10% of sales. Licensed Properties. We strive to license every pop culture property that we believe is relevant to consumers.
For the year ended December 31, 2021, 26% of sales were related to the Company’s two largest license agreements (13% each) with no other license agreements accounting for more than 10% of sales. Licensed Properties. We strive to license every pop culture property that we believe is relevant to consumers.
We infuse our distinct designs and aesthetic sensibility into our extensive portfolio of licensed content over a wide variety of product categories, including figures, bags, wallets, apparel, accessories, board games, plush, homewares, vinyl records, posters and digital non-fungible tokens ("NFTs"), which we make available at highly accessible price points.
We infuse our distinct designs and aesthetic sensibility into our extensive portfolio of licensed content over a wide variety of product categories, including figures, bags, wallets, apparel, accessories, plush, homewares, and digital non-fungible tokens ("NFTs"), which we make available at highly accessible price points under our Funko, Loungefly and Mondo brands.
Brand Marketing from 2000 to 2002; Vice President, EMEA Marketing from 1999 to 2000; Director of Marketing for Europe from 1997 to 1999; and Director of Marketing for the Americas from 1995 to 1997. Prior to NIKE, Mr. Edwards worked at Colgate-Palmolive in Global Marketing. Mr. Edwards served on the board of directors of Mattel Inc. from 2012 to 2018.
Brand Marketing from 2000 to 2002; Vice President, EMEA Marketing from 1999 to 2000; Director of Marketing for Europe from 1997 to 1999; and Director of Marketing for the Americas from 1995 to 1997. Prior to NIKE, Mr. Edwards worked at Colgate-Palmolive in Global Marketing. Mr.
Examples of our current TV and video game properties include The Mandalorian, Dragon Ball Z, Naruto, My Hero Academia, and Stranger Things. Examples of our current video game properties are Fortnite, Overwatch and Five Nights at Freddy’s.
Examples of our current TV properties include One Piece, The Mandalorian, Demon Slayer, Naruto, My Hero Academia, and Stranger Things. Examples of our current video game properties are Fortnite, Overwatch and Five Nights at Freddy’s.
In addition to offering multiple properties and product categories, we create and sell a variety of unique brands that have their own look and feel. Our brand portfolio includes Core Collectibles (which include Pop!
In addition to offering multiple properties and product categories, we create and sell a variety of unique brands that have their own look and feel. Our brand portfolio includes Core Collectibles (which include Pop! Vinyl, as well as other branded lines such as Soda, Bitty Pop!, and Pop!
Loungefly branded products represented 19%, 15% and 15% in 2022, 2021 and 2020, respectively. Other brands we market under include Mystery Minis, Paka Paka, and Popsies. In addition, we also develop product lines that we market under the broader Funko brand, such as Funko Games, Funko action figures, Funko Soda, Funko Plush, and Funko Gold product lines.
Loungefly branded products represented 20%, 19% and 15% in 2023, 2022 and 2021, respectively. Other brands we market under include Mystery Minis, Bitty Pop!, and Pop! Yourself. In addition, we also develop product lines that we market under the broader Funko brand, such as Funko action figures, Funko Soda, and Funko Plush product lines.
Additionally, products that we design and sell based on current television series or new video game titles are expected to have a market demand depending on the popularity and longevity of the title, which is generally expected to be multiple years.
Examples of new movie releases are Spider-Man Across the Spider-Verse and Guardians of the Galaxy Vol. 3. Additionally, products that we design and sell based on current television series or new video game titles are expected to have a market demand depending on the popularity and longevity of the title, which is generally expected to be multiple years.
For the year ended December 31, 2021, 26% of sales were related to the Company’s two largest license agreements (13% each) with no other license agreements accounting for more than 10% of sales.
For the year ended December 31, 2022, 13% of sales were related to the Company's largest license agreement, with no other license agreement accounting for more than 10% of sales.
As of December 31, 2022, we owned approximately 106 registered U.S. trademarks, 247 registered international trademarks, 31 pending U.S. trademark applications and 94 pending international trademark applications. Most of our products are produced and sold under trademarks owned by or licensed to us.
As of December 31, 2023, we owned approximately 118 registered U.S. trademarks, 300 registered international trademarks, 8 pending U.S. trademark applications and 68 pending international trademark applications. Most of our products are produced and sold under trademarks owned by or licensed to us.
Examples of our classic evergreen properties include Star Wars Classic, Harry Potter, DC Comics, Marvel Comics, Pokémon and WWE. • Current Releases. Properties in the current release category typically are tied to new movie releases, current television series or new video game titles. These properties are intended to capitalize on the excitement of fans surrounding the launch of new content.
Examples of our classic evergreen properties include Star Wars Classic, Harry Potter, DC Comics, Marvel Comics, Pokémon and WWE. 9 Table of Contents • Current Releases. Properties in the current release category typically are tied to new movie releases, current television series or new video game titles.
Lunsford received an M.B.A. and a B.A. in Economics from The University of North Carolina. We believe Mr. Lunsford’s broad management, retail and e-commerce experience make him well-qualified to serve on our board of directors. Jesse Jacobs has served on the board of directors of Funko, Inc. since May 2022. Mr.
Lunsford received an M.B.A. and a B.A. in Economics from The University of North Carolina. We believe Mr. Lunsford’s broad management, retail and e-commerce experience make him well-qualified to serve as a member of our board of directors.
In 2022, we had license agreements with over 250 content providers covering over 1,000 licensed properties. We believe our numerous licensing relationships have allowed us to build one of the largest portfolios of licensed property in our industry, from which we can create multiple products based on each character within those properties.
We believe our numerous licensing relationships have allowed us to build one of the largest portfolios of licensed property in our industry, from which we can create multiple products based on each character within those properties.
Our core benefits packages are supplemented with specific programs centered around voluntary benefits, paid time away from work and employee physical and mental well-being. As of December 31, 2022, we employed 1,466 full-time employees. We employed 1,223 people in North America, 220 people in Europe and 23 people in Asia.
Our core benefits packages are supplemented with specific programs centered around voluntary benefits, paid time away from work, training and employee physical and mental well-being. 13 Table of Contents As of December 31, 2023, we employed 1,269 full-time employees. We employed 1,036 people in North America, 211 people in Europe and 22 people in Asia.
No single customer accounted for over 10% of revenues during these periods. We maintain a full-time sales staff, many of whom make on-site visits to our customers for the purpose of showing products and soliciting orders.
We maintain a full-time sales staff, many of whom make on-site visits to our customers for the purpose of showing products and soliciting orders.
We have the ability to leverage evergreen or back catalog content by creating fun, whimsical and nostalgic programs to be sold at retail that resonate with fans. Our evergreen programs include new versions of well-known characters such as our Marvel Venomized line or, products built around nostalgic content or places such as Disney theme parks.
We have the ability to leverage evergreen or back catalog content by creating fun, whimsical and nostalgic programs to be sold at retail that resonate with fans. Our evergreen programs include new versions of well-known characters or new product form factors such as Bitty Pop!.
Some of these products could directly compete with our products and could be sold to our customers or directly to consumers at lower prices than those at which our products are sold. 12 Table of Contents Although we believe we have one of the largest portfolios of licensed content in the pop culture industry, with strong relationships with many of our licensors, we must vigorously compete to obtain these licenses from leading content providers on commercially reasonable terms, and to expand our license rights into additional licensed product categories.
Although we believe we have one of the largest portfolios of licensed content in the pop culture industry, with strong relationships with many of our licensors, we must vigorously compete to obtain these licenses from leading content providers on commercially reasonable terms, and to expand our license rights into additional licensed product categories.
Edwards extensive marketing and brand management experience, as well as public company leadership experience, make him well-qualified to serve on the Board. 17 Table of Contents Segment Information We identify our segments according to how the business activities are managed and evaluated, for which discrete financial information is available and is regularly reviewed by our Chief Operating Decision Maker (“CODM”) to allocate resources and assess performance.
Levy’s extensive experience in entertainment and media, in particular her familiarity with consumer products licensing, make her well-qualified to serve on our board of directors. 17 Table of Contents Segment Information We identify our segments according to how the business activities are managed and evaluated, for which discrete financial information is available and is regularly reviewed by our Chief Operating Decision Maker (“CODM”) to allocate resources and assess performance.
Because our CODM reviews financial performance and allocates resources at a consolidated level on a regular basis, we have one segment. Our History Funko, Inc. was formed as a Delaware corporation on April 21, 2017 for the purpose of completing our IPO. FAH LLC, a holding company with no operating assets or operations, was formed on September 24, 2015.
Our History Funko, Inc. was formed as a Delaware corporation on April 21, 2017 for the purpose of completing our IPO. FAH LLC, a holding company with no operating assets or operations, was formed on September 24, 2015.
The portion of sales attributed to Core Collectible branded products in the years ended December 31, 2022, 2021 and 2020 was 76%, 80% and 81%, respectively. The portion of sales attributed to Loungefly branded products in the years ended December 31, 2022, 2021 and 2020 was 19%, 15% and 15%, respectively.
The portion of sales attributed to Loungefly branded products in the years ended December 31, 2023, 2022 and 2021 was 20%, 19% and 15%, respectively. The portion of sales attributable to Other branded products in the years ended December 31, 2023, 2022 and 2021 was 7%, 5%, and 5%.
We plan to build a robust online platform and to enhance our digital capabilities to provide the infrastructure to scale this business over the long-term.
We plan to build a robust online platform and to enhance our digital capabilities to provide the infrastructure to scale this business over the long-term. In 2023, we launched a website platform in the U.S. that consolidated our brands under one online shopping cart.
Products that we design and sell based on new movie releases are expected to have a limited duration of market demand, depending on the popularity of the title. Examples of new movie releases are Doctor Strange and Jurassic World 3.
These properties are intended to capitalize on the excitement of fans surrounding the launch of new content. Products that we design and sell based on new movie releases are expected to have a limited duration of market demand, depending on the popularity of the title.
The reserves are determined as a percentage of sales based upon either historical experience or upon estimates or programs agreed upon by our customers and us. As of December 31, 2022 and 2021, we had reserves for sales allowances of $57.3 million and $40.6 million, respectively.
The reserves are determined as a percentage of sales based upon either historical experience or upon estimates or programs agreed upon by our customers and us.
We continue to introduce innovative products designed to facilitate fan engagement across different price points and categories. Our fans routinely express their passion for our products and brands through social media and live pop culture events, such as Comic-Con or our own Funko events.
Our fans routinely express their passion for our products and brands through social media and live pop culture events, such as Comic-Con or our own Funko themed events.
Increase our Direct-to-Consumer Business We view our direct-to-consumer business, which includes our e-commerce websites, www.funko.com, www.funkoeurope.com, www.loungefly.com, and www.mondoshop.com and two flagship retail stores, as a significant growth opportunity and an important vehicle for expanding our reach and broadening our relationship with our fans.
We believe there are opportunities to further grow our sales in other regions, such as Latin America, Canada, Oceania and APAC, by expanding our direct sales to retailers or through distributor relationships. 7 Table of Contents Increase our Direct-to-Consumer Business We view our direct-to-consumer business, which includes our e-commerce websites, www.funko.com, www.funkoeurope.com, www.loungefly.com, and www.mondoshop.com and two flagship retail stores, as a significant growth opportunity and an important vehicle for expanding our reach and broadening our relationship with our fans.
Irvine received an M.S. in Taxation and a Doctor of Humane Letters from Golden Gate University, and a B.S. in Accounting from Illinois State University. We believe Ms.
Irvine received an M.S. in Taxation and a Doctor of Humane Letters from Golden Gate University, and a B.S. in Accounting from Illinois State University. We believe Ms. Irvine’s extensive public company management experience and financial expertise make her well-qualified to serve on our board of directors.
Over time, many of our consumers evolve from occasional buyers to more frequent purchasers, whom we categorize as enthusiasts or collectors. We estimate that enthusiasts, who are more engaged in pop culture, and collectors, who regularly purchase our products and self-identify as collectors, each make up approximately one-third of our consumers.
We estimate that enthusiasts, who are more engaged in pop culture, and collectors, who regularly purchase our products and self-identify as collectors, each make up approximately one-third of our consumers. We create products to appeal to a broad array of fans across consumer demographic groups.
Jacobs is a Partner at The Chernin Group, LLC, which he co-founded with Peter Chernin in 2010, leading the company's investments, operations, and team building. Prior to founding The Chernin Group, Mr. Jacobs was a senior member of the media, entertainment, and sports advisory, investing and financing team at Goldman Sachs. Mr.
Jesse Jacobs has served on the board of directors of Funko, Inc. since May 2022. Mr. Jacobs is a Partner at The Chernin Group, LLC, which he co-founded with Peter Chernin in 2010, leading the company's investments, operations, and team building. Prior to founding The Chernin Group, Mr.
Funko continues to acquire new fans through high profile social media sites such as Facebook, Twitter, Instagram, TikTok and YouTube. As of December 31, 2022, Funko’s Twitter handle, @OriginalFunko, had over one million followers. We continue to expand our reach globally through our compelling content, events and personal engagement with our fan base.
Our ability to effectively engage with our customers has resulted in a deep affinity for Funko and our products. Funko continues to acquire new fans through high profile social media sites such as Facebook, X (formerly Twitter), Instagram, TikTok and YouTube. We continue to expand our reach globally through our compelling content, events and personal engagement with our fan base.
Marketing We believe Funko’s trendsetting and nostalgia-based product assortment is a unique voice in the pop culture marketplace, and that our expansive retailer presence, high engagement rates across our owned channels, and devout fan base create fervor for the Funko brand. Our ability to effectively engage with our customers has resulted in a deep affinity for Funko and our products.
As of December 31, 2023 and 2022, we had reserves for sales allowances of $44.1 million and $57.3 million, respectively. 11 Table of Contents Marketing We believe Funko’s trendsetting and nostalgia-based product assortment is a unique voice in the pop culture marketplace, and that our expansive retailer presence, high engagement rates across our owned channels, and devout fan base create fervor for the Funko brand.
Our direct-to-consumer channel includes our own e-commerce websites in the U.S. and Europe as well as our two flagship retail stores located in the U.S. We also recently launched a co-branded store, Tha Dogg House, in Inglewood, California and a secondary market resale channel directly through eBay.
Our direct-to-consumer channel includes our own e-commerce websites in the U.S. and Europe as well as our two flagship retail stores located in the U.S.
Leading Design and Creative Capabilities Our in-house creative team layers our own whimsical, fun and distinct stylization onto content providers’ characters, creating unique products for which there is substantial consumer demand. We believe content providers trust us with their properties, and consumers passionately engage with our products and brands because of our creativity.
In 2022, we launched a secondary market resale channel directly through eBay. 6 Table of Contents Leading Design and Creative Capabilities Our in-house creative team layers our own whimsical, fun and distinct stylization onto content providers’ characters, creating unique products for which there is substantial consumer demand.
As a result of our creative capabilities and broad portfolio of licenses, we create a substantial number of new products each year.
With the help of our in-house creative team, we have also developed our own proprietary intellectual property, such as our Pop! Yourself. As a result of our creative capabilities and broad portfolio of licenses, we create a substantial number of new products each year.
Within anime, we continue to add new license relationships with multiple new properties. In the sports category, we are continuing to leverage our broad range of sports licenses. In 2021, we launched Funko Gold, which is initially focused on sports and music figures in a head-to-toe stylized look.
Within anime, we continue to add new license relationships with multiple new properties. In the sports category, we are continuing to leverage our broad range of sports licenses. Additionally, within the music category, we are expanding our license base to include more artists.
Irvine’s extensive public company management experience and financial expertise make her well-qualified to serve on our board of directors. 16 Table of Contents Sarah Kirshbaum Levy has served on the board of directors of Funko, Inc. since September 2019. Ms.
Edwards extensive marketing and brand management experience, as well as public company leadership experience, make him well-qualified to serve on the board. 16 Table of Contents Diane Irvine has served on the board of directors of Funko, Inc. and FAH, LLC since August 2017. Ms.
We create products to appeal to a broad array of fans across consumer demographic groups. Although we have recently increased our prices, we strive to keep our products at an accessible price point, generally under $15 for our figures, which allows our fans to express their fandom frequently and impulsively.
We strive to keep our products at an accessible price point, generally under $15 for our figures, which allows our fans to express their fandom frequently and impulsively. We continue to introduce innovative products designed to facilitate fan engagement across different price points and categories.
Denson also serves on the board of directors of several privately held organizations. Mr. Denson received a B.A. in Business from Utah State University. We believe Mr. Denson’s extensive experience in brand building, brand management and organizational leadership in the public company context makes him well-qualified to serve as the Chairman of our board of directors.
Denson’s extensive experience in brand building, brand management and organizational leadership in the public company context makes him well-qualified to serve as the Chairman of our board of directors. Trevor Edwards has served on the board of directors of Funko, Inc. since July 2022. Mr.
We expect to continue to utilize our in-house creative team to create new designs, products and brands that resonate with our core consumers. 7 Table of Contents Diversify our Revenue Streams through Product Innovation We are leveraging Funko’s pop culture platform to diversify our revenue streams across product categories, channels and geographies.
We expect to continue to utilize our in-house creative team to create new designs, products and brands that resonate with our core consumers. Extend Funko’s International Reach We believe the rise of pop culture and deep fan loyalty are global.
Sales generated from customers outside of the United States accounted for approximately 27%, 28% and 25% of our sales for the years ended December 31, 2022, 2021 and 2020, respectively. We are continuing to invest in the growth of our international business, primarily in Europe, both directly and through third party distributors.
We believe our sales are currently underpenetrated internationally as we generate the majority of our net sales in the United States. Sales generated from customers outside of the United States accounted for approximately 31%, 27% and 28% of our sales for the years ended December 31, 2023, 2022 and 2021, respectively.
Our current products are principally figures, fashion accessories, apparel, board games, plush products, accessories, homewares, vinyl records and NFTs. 8 Table of Contents Our Brands and Designs Under the Funko brand, we have multiple proprietary brands under which most of our products are marketed. Currently, our principal proprietary brands include Pop! and Loungefly.
Additionally, by utilizing our in-house creative team we have the ability to develop our own content and intellectual property. Our current products are principally figures, fashion accessories, apparel, plush products, accessories, homewares, and NFTs. Our Brands and Designs Under the Funko brand, we have multiple proprietary brands under which most of our products are marketed.
In 2020, we relaunched www.funko.com with an expanded product offering, and enhanced features and functionality to serve our customers in the U.S., and also launched www.funkoeurope.com to serve our customers in the UK and several countries in Europe. We are also planning to launch a website platform in 2023 that will consolidate our brands under one online shopping cart.
We intend to continue to increase our focus on these efforts in the future. In 2023, we relaunched our U.S. website platform that consolidated www.funko.com and www.loungefly.com under one online shopping cart. We also utilize www.funkoeurope.com to serve customers in the UK and several countries in Europe.
Additionally, there has been an increase in high-quality scripted television series as content providers vie for binge worthy shows to attract consumers. For example, in 2022 there were nearly 600 original scripted series in the U.S., a 7% increase over 2021, according to FX networks research. We expect content providers to continue to invest in new high-quality original content.
Additionally, there has been an increase in high-quality scripted television series in recent years as content providers vie for binge worthy shows to attract consumers. Although recent strikes by the Writers Guild of America and the Screen Actors Guild have interrupted content creation, we expect content providers to continue to invest in new high-quality original content.
This represents a cultural shift supporting the acceptability of fan affinity for pop culture content across all demographic categories of fans. Our Strategic Differentiation Deep and Extensive Licensing Partnerships We have strong licensing relationships with many established content providers and strive to partner with content providers across multiple genres, including movies, television, video games, anime, sports, and music.
Our Strategic Differentiation Deep and Extensive Licensing Partnerships We have strong licensing relationships with many established content providers and strive to partner with content providers across multiple genres, including movies, television, video games, anime, sports, and music. In 2023, we had license agreements with over 250 content providers covering approximately 900 active licensed properties.
In addition, our creativity and designs allow us to reinvigorate classic evergreen content by infusing a fresh, unique aesthetic into characters that enjoy enduring passion and nostalgia from fans. With the help of our in-house creative team, we have also begun to develop our own proprietary intellectual property as well as various non-licensed board games.
We believe content providers trust us with their properties, and consumers passionately engage with our products and brands because of our creativity. In addition, our creativity and designs allow us to reinvigorate classic evergreen content by infusing a fresh, unique aesthetic into characters that enjoy enduring passion and nostalgia from fans.
We are subject to various other federal, state, local and international laws and regulations applicable to our business, including export controls, and have established processes for compliance with these laws and regulations. 13 Table of Contents Human Capital Our workforce is critical to our success.
We are subject to various other federal, state, local and international laws and regulations applicable to our business, including export controls, and have established processes for compliance with these laws and regulations. These laws and regulations are constantly evolving and may be interpreted, applied, created, superseded, or amended in a manner that could harm our business.
Levy has served as the Chief Executive Officer and a director of Betterment, LLC, a financial advisory company, since December 2020. Ms.
Sarah Kirshbaum Levy has served on the board of directors of Funko, Inc. since September 2019. Ms. Levy has served as the Chief Executive Officer and a director of Betterment, LLC, the largest independent digital wealth management platform, since December 2020. Ms.
Three of the top U.S. pop culture-related conventions, including New York Comic Con, Comic Con International: San Diego and Anime Expo 2022, drew more than half a million attendees in 2022, matching pre-pandemic attendance and reaching capacity at each event location.
Three of the top U.S. pop culture-related conventions, including New York Comic Con, Comic Con International: San Diego and Anime Expo 2023, drew sell-out crowds and reaching capacity at each event location. This represents a cultural shift supporting the acceptability of fan affinity for pop culture content across all demographic categories of fans.
For the years ended December 31, 2022, 2021 and 2020, we recorded reserves of $0.8 million, $0.7 million and $1.0 million, respectively, related to prepaid royalties we estimated would not be recovered through sales. 9 Table of Contents For the year ended December 31, 2022, 13% of sales were related to the Company's largest license agreement, with no other license agreement accounting for more than 10% of sales.
Historically, we have a strong track record for meeting minimum guarantees under our license agreements. For the years ended December 31, 2023, 2022 and 2021, we recorded reserves of $4.5 million, $0.8 million and $0.7 million, respectively, related to prepaid royalties we estimated would not be recovered through sales.
In 2020, we launched our own e-commerce website in Europe, www.funkoeurope.com, which initially served the U.K., Ireland, Spain, Germany, France and Italy, and has since expanded into twenty-three additional countries throughout Europe.
We are continuing to invest in the growth of our international business, primarily in Europe, both directly and through third party distributors. In 2020, we launched our own e-commerce website in Europe, www.funkoeurope.com which has since expanded into additional countries throughout Europe.
Jacobs began his career in NFL, MLB, and NHL sports television production at the inception of Fox Sports and then for CBS Sports in the Olympics. Mr. Jacobs is on the board of directors of The Chernin Group, Barstool Sports, Hodinkee, Exploding Kittens, Goldin Auctions, Collectors Universe, Equip, Words + Pictures, LLC and is a board observer of Scopely. Mr.
Jacobs was a senior member of the media, entertainment, and sports advisory, investing and financing team at Goldman Sachs. Mr. Jacobs began his career in NFL, MLB, and NHL sports television production at the inception of Fox Sports and then for CBS Sports in the Olympics.
Mr. Edwards received a BBA and MBA from Bernard Baruch College. The board believes Mr.
Edwards currently serves on the board of directors of VF Corporation, a leading apparel, footwear and accessories company, and previously served on the board of directors of Mattel Inc. from 2012 to 2018. Mr. Edwards received a BBA and MBA from Bernard Baruch College. The board believes Mr.
We are also planning to launch a website platform in 2023 that will consolidate our brands under one online shopping cart. 11 Table of Contents We believe we have a diverse customer base, with our top ten customers representing approximately 44%, 45% and 48%, of our 2022, 2021, and 2020 sales, respectively.
We believe we have a diverse customer base, with our top ten customers representing approximately 43%, 44% and 45%, of our 2023, 2022, and 2021 sales, respectively. No single customer accounted for over 10% of revenues during these periods.
Vinyl, as well as other branded lines such as Soda, Vinyl Gold, and Popsies), Loungefly (softlines including bags, wallets, backpacks and apparel) and Other (which includes our Toys and Games and emerging brands, such as Digital Pop! and Mondo).
Yourself), Loungefly (softlines including bags, wallets, backpacks and apparel) and Other (which includes our emerging brands, such as Digital Pop! and Mondo). The portion of sales attributed to Core Collectible branded products in the years ended December 31, 2023, 2022 and 2021 was 73%, 76% and 80%, respectively.
The portion of sales attributable to Other branded products in the years ended December 31, 2022, 2021 and 2020 was 5%, 5%, and 4%. Broad Consumer Appeal and Engagement Fans are increasingly looking for ways to express their affinity for and engage with their favorite pop culture content.
Broad Consumer Appeal and Engagement Fans are increasingly looking for ways to express their affinity for and engage with their favorite pop culture content. Over time, many of our consumers evolve from occasional buyers to more frequent purchasers, whom we categorize as enthusiasts or collectors.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeOur Tax Receivable Agreement requires us to make cash payments in respect of certain tax benefits to which we may become entitled, the amounts that we may be required to pay could be significant, and we may not realize such tax benefits.
Biggest changeNo adjustments are or will be made as a result of such cash balances to the consideration that the Continuing Equity Owners receive in connection with an election to have their common units redeemed in exchange for, at our election, a newly-issued share of our Class A common stock or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each common unit redeemed. 47 Table of Contents Our Tax Receivable Agreement requires us to make cash payments in respect of certain tax benefits to which we may become entitled, the amounts that we may be required to pay could be significant, and we may not realize such tax benefits.
Our future growth, profitability and cash flows depend upon our ability to successfully manage our operations and execute our business strategy, which is dependent upon a number of factors, including our ability to: • expand our market presence in existing sales channels and enter additional sales channels; • anticipate, gauge and respond to rapidly changing consumer preferences and pop culture trends; • acquire or enter into new licenses in existing product categories or in new product categories and renew existing licenses; 18 Table of Contents • expand our geographic presence to take advantage of opportunities outside of the United States; • enhance and maintain favorable brand recognition for our Company and product offerings; • maintain and expand margins through sales growth and efficiency initiatives; • effectively manage our relationships with third-party manufacturers; • effectively manage our debt, working capital and capital investments to maintain and improve the generation of cash flow; and • execute any acquisitions quickly and efficiently and integrate businesses successfully.
Our future growth, profitability and cash flows depend upon our ability to successfully manage our operations and execute our business strategy, which is dependent upon a number of factors, including our ability to: • expand our market presence in existing sales channels and enter additional sales channels; • anticipate, gauge and respond to rapidly changing consumer preferences and pop culture trends; 18 Table of Contents • acquire or enter into new licenses in existing product categories or in new product categories and renew existing licenses; • expand our geographic presence to take advantage of opportunities outside of the United States; • enhance and maintain favorable brand recognition for our Company and product offerings; • maintain and expand margins through sales growth and efficiency initiatives; • effectively manage our relationships with third-party manufacturers; • effectively manage our debt, working capital and capital investments to maintain and improve the generation of cash flow; and • execute any acquisitions quickly and efficiently and integrate businesses successfully.
A decrease in gross margin can be the result of numerous factors, including, but not limited to: • changes in customer, geographic, or product mix; • introduction of new products, including our expansion into additional product categories; • increases in the royalty rates under our license agreements; • inability to meet minimum guaranteed royalties; • increases in, or our inability to reduce, our costs, including as a result of inflation; • entry into new markets or growth in lower margin markets; • increases in raw materials, labor or other manufacturing- and inventory-related costs; • increases in transportation costs, including the cost of fuel, and increased shipping costs to meet customer demand; • increased price competition; 24 Table of Contents • changes in the dynamics of our sales channels, including those affecting the retail industry and the financial health of our customers; • inability to increase prices in order to meet increased costs; • increases in sales discounts and allowances provided to our customers; • acquisitions of companies with a lower gross margin than ours; and • overall execution of our business strategy and operating plan.
A decrease in gross margin can be the result of numerous factors, including, but not limited to: • changes in customer, geographic, or product mix; • introduction of new products, including our expansion into additional product categories; • increases in the royalty rates under our license agreements; 24 Table of Contents • inability to meet minimum guaranteed royalties; • increases in, or our inability to reduce, our costs, including as a result of inflation; • entry into new markets or growth in lower margin markets; • increases in raw materials, labor or other manufacturing- and inventory-related costs; • increases in transportation costs, including the cost of fuel, and increased shipping costs to meet customer demand; • increased price competition; • changes in the dynamics of our sales channels, including those affecting the retail industry and the financial health of our customers; • inability to increase prices in order to meet increased costs; • increases in sales discounts and allowances provided to our customers; • acquisitions of companies with a lower gross margin than ours; and • overall execution of our business strategy and operating plan.
On September 17, 2021, we entered into a new credit agreement (the "New Credit Agreement"), providing for a term loan facility in the amount of $180.0 million (the "New Term Loan Facility") and a revolving credit facility of $100.0 million (the "New Revolving Credit Facility" and together with the New Term Loan Facility, the " New Credit Facilities").
On September 17, 2021, we entered into a new credit agreement (the "Credit Agreement"), providing for a term loan facility in the amount of $180.0 million (the "Term Loan Facility") and a revolving credit facility of $100.0 million (the "Revolving Credit Facility" and together with the Term Loan Facility, the "Credit Facilities").
We are constantly evaluating our tax return positions, and changes in our return positions could affect our liabilities and risks that we face in connection with determining our the taxes we owe and the amounts that we are required to pay in connection with the Tax Receivable Agreement.
We are constantly evaluating our tax return positions, and changes in our return positions could affect our liabilities and risks that we face in connection with determining the taxes we owe and the amounts that we are required to pay in connection with the Tax Receivable Agreement.
We are subject to laws, rules, and regulations in the United States, the European Union, and other jurisdictions relating to the collection, use, and security of personal information and data. Such data privacy laws, regulations, and other obligations may require us to change our business practices and may negatively impact our ability to expand our business and pursue business opportunities.
We are subject to laws, rules, and regulations in the United States, the European Union, and other jurisdictions relating to the collection, use, and security of personal information. Such data privacy laws, regulations, and other obligations may require us to change our business practices and may negatively impact our ability to expand our business and pursue business opportunities.
Pursuant to the New Stockholders Agreement, TCG has the right to designate certain of our directors, which we refer to as the TCG Directors, which will be two TCG Directors for as long as the TCG Related Parties (as defined in the New Stockholders Agreement) beneficially own directly or indirectly, in the aggregate at least 20% of our Class A common stock, and one TCG Director for as long as the TCG Related Parties beneficially own directly or indirectly, in the aggregate, less than 20% but at least 10% or more of our Class A common stock (assuming in each such case that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis).
Pursuant to the Stockholders Agreement, TCG has the right to designate certain of our directors, which we refer to as the TCG Directors, which will be two TCG Directors for as long as the TCG Related Parties (as defined in the Stockholders Agreement) beneficially own directly or indirectly, in the aggregate at least 20% of our Class A common stock, and one TCG Director for as long as the TCG Related Parties beneficially own directly or indirectly, in the aggregate, less than 20% but at least 10% or more of our Class A common stock (assuming in each such case that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis).
The factors affecting the further development of blockchain networks and digital assets, include, without limitation: • worldwide growth in the adoption and use of digital assets and other blockchain technologies; • government and quasi-government regulation of digital assets and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems; • the maintenance and development of the open-source software protocol of blockchain networks; • changes in consumer demographics and public tastes and preferences; • the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using government-backed currencies or existing networks; • the extent to which current purchaser interest in cryptocurrencies represents a speculative “bubble;” • the extent to which historic price volatility in cryptocurrencies and digital assets continues into the future; • general economic conditions in the United States and the world; • the regulatory environment relating to cryptocurrencies and blockchains; and • a decline in the popularity or acceptance of cryptocurrencies or other blockchain-based tokens. 38 Table of Contents Moreover, if and to the extent we are unable to successfully expand our NFT and digital collectible business, we may incur unanticipated costs and losses, and face other adverse consequences, such as negative reputational effects.
The factors affecting the further development of blockchain networks and digital assets, include, without limitation: • worldwide growth in the adoption and use of digital assets and other blockchain technologies; • government and quasi-government regulation of digital assets and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems; • the maintenance and development of the open-source software protocol of blockchain networks; • changes in consumer demographics and public tastes and preferences; • the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using government-backed currencies or existing networks; • the extent to which current purchaser interest in cryptocurrencies represents a speculative “bubble;” • the extent to which historic price volatility in cryptocurrencies and digital assets continues into the future; • general economic conditions in the United States and the world; • the regulatory environment relating to cryptocurrencies and blockchains; and • a decline in the popularity or acceptance of cryptocurrencies or other blockchain-based tokens. 39 Table of Contents Moreover, if and to the extent we are unable to successfully expand our NFT and digital collectible business, we may incur unanticipated costs and losses, and face other adverse consequences, such as negative reputational effects.
These systems are subject to damage or interruption from power outages, computer and telecommunications failures, usage errors by our employees, software bugs or misconfigurations, cybersecurity attacks, computer viruses, malware and other security breaches, as well as catastrophic events such as hurricanes, fires, floods, earthquakes, tornadoes, acts of war or terrorism and global pandemics.
These IT Systems are subject to damage or interruption from power outages, computer and telecommunications failures, usage errors by our employees, software bugs or misconfigurations, cybersecurity attacks, computer viruses, malware and other security breaches, as well as catastrophic events such as hurricanes, fires, floods, earthquakes, tornadoes, acts of war or terrorism and global pandemics.
In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances, including in the event we are unable to maintain compliance with the financial or other covenants contained in the New Credit Agreement, and may determine to engage in equity or debt financings or enter into credit facilities or refinance existing indebtedness for other reasons.
In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances, including in the event we are unable to maintain compliance with the financial or other covenants contained in the Credit Agreement, and may determine to engage in equity or debt financings or enter into credit facilities or refinance existing indebtedness for other reasons.
This would permit the lending banks under such facilities to take certain actions, including halting future borrowings under the New Revolving Credit Facility, terminating all outstanding commitments and declaring all amounts due under our New Credit Agreement to be immediately due and payable, including all outstanding borrowings, accrued and unpaid interest thereon, and prepayment premiums with respect to such borrowings and any terminated commitments.
This would permit the lending banks under such facilities to take certain actions, including halting future borrowings under the Revolving Credit Facility, terminating all outstanding commitments and declaring all amounts due under our Credit Agreement to be immediately due and payable, including all outstanding borrowings, accrued and unpaid interest thereon, and prepayment premiums with respect to such borrowings and any terminated commitments.
The characteristics of particular digital assets within this broad asset class may differ significantly. We receive payments in digital assets in connection with our secondary sales on our NFT and digital collectibles business. We also purchase digital assets for use as a currency for certain expenses related to our NFT and digital collectibles business.
The characteristics of particular digital assets within this broad asset class may differ significantly. We receive payments in digital assets in connection with our secondary sales in our NFT and digital collectibles business. We also purchase digital assets for use as a currency for certain expenses related to our NFT and digital collectibles business.
Accordingly, TCG currently has significant influence over substantially all transactions and other matters submitted to a vote of our stockholders, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, the issuance or redemption of certain additional equity interests, and the election of directors.
TCG currently has significant influence over substantially all transactions and other matters submitted to a vote of our stockholders, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, the issuance or redemption of certain additional equity interests, and the election of directors.
We cannot be certain that the products and offerings of companies we may acquire, or acquire an interest in, will achieve or maintain popularity with consumers in the future or that any such acquired companies or investments will allow us to more effectively distribute our products, market our products, develop our competencies or grow our business. 37 Table of Contents For example, in the first quarter of 2021 we acquired a majority interest and in October 2022 acquired the remainder of the membership interests in TokenWave LLC, the developer of a mobile application for tracking and displaying NFTs, to accelerate our entry into the digital collectible space.
We cannot be certain that the products and offerings of companies we may acquire, or acquire an interest in, will achieve or maintain popularity with consumers in the future or that any such acquired companies or investments will allow us to more effectively distribute our products, market our products, develop our competencies or grow our business. 38 Table of Contents For example, in the first quarter of 2021 we acquired a majority interest and in October 2022 acquired the remainder of the membership interests in TokenWave LLC, the developer of a mobile application for tracking and displaying NFTs, to accelerate our entry into the digital collectible space.
Proceeds from the New Term Loan Facility were primarily used to repay the Company’s former term loan facility. On July 29, 2022, the New Credit Agreement was further amended by the Second Amendment, which, among other things, increased the New Revolving Credit Facility to $215.0 million.
Proceeds from the Term Loan Facility were primarily used to repay the Company’s former term loan facility. On July 29, 2022, the Credit Agreement was further amended by the Second Amendment, which, among other things, increased the Revolving Credit Facility to $215.0 million.
In addition to royalty payments, these agreements as a whole impose numerous other obligations on us, including, among other things, obligations to: • maintain the integrity of the applicable intellectual property; • obtain the licensor’s approval of the products we develop under the license prior to making any sales; 20 Table of Contents • permit the licensor’s involvement in, or obtain the licensor’s approval of, advertising, packaging and marketing plans; • maintain minimum sales levels or make minimum guaranteed royalty payments; • actively promote the sale of the licensed product and maintain the availability of the licensed product throughout the license term; • spend a certain percentage of our sales of the licensed product on marketing and advertising for the licensed product; • sell the products we develop under the license only within a specified territory or within specified sales channels; • indemnify the licensor in the event of product liability or other claims related to the licensed product and advertising or other materials used to promote the licensed product; • sell the licensed products to the licensor at a discounted price or at the lowest price charged to our customers; • obtain the licensor’s consent prior to assigning or sub-licensing to third parties; and • provide notice to, obtain approval from, or, in limited circumstances, make certain payments to the licensor in connection with certain changes in control.
In addition to royalty payments, these agreements as a whole impose numerous other obligations on us, including, among other things, obligations to: • maintain the integrity of the applicable intellectual property; • obtain the licensor’s approval of the products we develop under the license prior to making any sales; • permit the licensor’s involvement in, or obtain the licensor’s approval of, advertising, packaging and marketing plans; • maintain minimum sales levels or make minimum guaranteed royalty payments; • actively promote the sale of the licensed product and maintain the availability of the licensed product throughout the license term; • spend a certain percentage of our sales of the licensed product on marketing and advertising for the licensed product; • sell the products we develop under the license only within a specified territory or within specified sales channels; • indemnify the licensor in the event of product liability or other claims related to the licensed product and advertising or other materials used to promote the licensed product; • sell the licensed products to the licensor at a discounted price or at the lowest price charged to our customers; • obtain the licensor’s consent prior to assigning or sub-licensing to third parties; and • provide notice to, obtain approval from, or, in limited circumstances, make certain payments to the licensor in connection with certain changes in control.
Furthermore, as laws and regulations rapidly evolve to govern the use of these platforms, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and result of operations. 39 Table of Contents Failure to successfully operate our information systems and implement new technology effectively could disrupt our business or reduce our sales or profitability.
Furthermore, as laws and regulations rapidly evolve to govern the use of these platforms, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and result of operations. 40 Table of Contents Failure to successfully operate our information systems and implement new technology effectively could disrupt our business or reduce our sales or profitability.
The amount of the cash payments that we may be required to make under the Tax Receivable Agreement could be significant. Payments under the Tax Receivable Agreement will generally be based on the tax reporting positions that we determine, which are subject to challenge by taxing authorities.
However, the amount of the cash payments that we may be required to make under the Tax Receivable Agreement could be significant. Payments under the Tax Receivable Agreement will generally be based on the tax reporting positions that we determine, which are subject to challenge by taxing authorities.
Many factors, which are outside our control, may cause the market price of our Class A common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section, as well as the following: • our operating and financial performance and prospects; • our quarterly or annual earnings or those of other companies in our industry compared to market expectations; • conditions that impact demand for our products; • future announcements concerning our business, our customers’ businesses or our competitors’ businesses; • the public’s reaction to our press releases, other public announcements and filings with the SEC; • the size of our public float; • coverage by or changes in financial estimates by securities analysts or failure to meet their expectations; • market and industry perception of our success, or lack thereof, in pursuing our growth strategy; • short sales of our stock or trading phenomena such as "short squeezes"; • strategic actions by us or our competitors, such as acquisitions or restructurings; • changes in laws or regulations which adversely affect our industry, our licensors or us; • changes in accounting standards, policies, guidance, interpretations or principles; • changes in senior management or key personnel; • issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock; • changes in our dividend policy; • adverse resolution of new or pending litigation against us; • the imposition of fines or other remedial measures as a result of regulatory violations or civil liability such as due to the underpayment of customs duties at Loungefly; and • changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war, pandemics such as COVID-19, and responses to such events.
Many factors, which are outside our control, may cause the market price of our Class A common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section, as well as the following: • our operating and financial performance and prospects; 54 Table of Contents • our quarterly or annual earnings or those of other companies in our industry compared to market expectations; • conditions that impact demand for our products; • future announcements concerning our business, our customers’ businesses or our competitors’ businesses; • the public’s reaction to our press releases, other public announcements and filings with the SEC; • the size of our public float; • coverage by or changes in financial estimates by securities analysts or failure to meet their expectations; • market and industry perception of our success, or lack thereof, in pursuing our growth strategy; • short sales of our stock or trading phenomena such as "short squeezes"; • strategic actions by us or our competitors, such as acquisitions or restructurings; • changes in laws or regulations which adversely affect our industry, our licensors or us; • changes in accounting standards, policies, guidance, interpretations or principles; • changes in senior management or key personnel; • issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock; • changes in our dividend policy; • adverse resolution of new or pending litigation against us; • the imposition of fines or other remedial measures as a result of regulatory violations or civil liability such as due to the underpayment of customs duties at Loungefly; and • changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war, pandemics and responses to such events.
In addition, the process of implementing any new technology systems involves inherent costs and risks, including potential delays and system failures, the potential disruption of our internal control structure, the diversion of management’s time and attention, and the need to re-train or hire new employees, any of which could disrupt our business operations and have a material adverse effect on our business, financial condition and results of operations. 40 Table of Contents Our indebtedness could adversely affect our financial health and competitive position.
In addition, the process of implementing any new technology systems involves inherent costs and risks, including potential delays and system failures, the potential disruption of our internal control structure, the diversion of management’s time and attention, and the need to re-train or hire new employees, any of which could disrupt our business operations and have a material adverse effect on our business, financial condition and results of operations. 41 Table of Contents Our indebtedness could adversely affect our financial health and competitive position.
Additionally, we are required to take all commercially reasonable action to cause (1) the board of directors to be comprised of at least seven directors or such other number of directors as our board of directors may determine; (2) the individuals designated in accordance with the terms of the New Stockholders Agreement to be included in the slate of nominees to be elected to the board of directors at each annual meeting of our stockholders at which a director’s term expires; and (3) the individuals designated in accordance with the terms of the New Stockholders Agreement to fill the applicable vacancies on the board of directors.
Additionally, we are required to take all commercially reasonable action to cause (1) the board of directors to be comprised of at least seven directors or such other number of directors as our board of directors may determine; (2) the individuals designated in accordance with the terms of the Stockholders Agreement to be included in the slate of nominees to be elected to the board of directors at each annual meeting of our stockholders at which a director’s term expires; and (3) the individuals designated in accordance with the terms of the Stockholders Agreement to fill any applicable vacancies on the board of directors.
In addition, the New Credit Agreement contains, and any agreements evidencing or governing other future indebtedness may contain, certain restrictive covenants that limit our ability, among other things, to engage in certain activities that are in our long-term best interests, including our ability to: • incur additional indebtedness; • incur certain liens; 41 Table of Contents • consolidate, merge or sell or otherwise dispose of our assets; • make investments, loans, advances, guarantees and acquisitions; • pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests; • enter into transactions with our affiliates; • enter into sale and leaseback transactions in respect to real property; • enter into swap agreements; • enter into agreements restricting our subsidiaries’ ability to pay dividends; • issue or sell equity interests or securities convertible into or exchangeable for equity interests; • redeem, repurchase or refinance our other indebtedness; and • amend or modify our governing documents.
In addition, the Credit Agreement contains, and any agreements evidencing or governing other future indebtedness may contain, certain restrictive covenants that limit our ability, among other things, to engage in certain activities that are in our long-term best interests, including our ability to: • incur additional indebtedness; • incur certain liens; • consolidate, merge or sell or otherwise dispose of our assets; • make investments, loans, advances, guarantees and acquisitions; 42 Table of Contents • pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests; • enter into transactions with our affiliates; • enter into sale and leaseback transactions in respect to real property; • enter into swap agreements; • enter into agreements restricting our subsidiaries’ ability to pay dividends; • issue or sell equity interests or securities convertible into or exchangeable for equity interests; • redeem, repurchase or refinance our other indebtedness; and • amend or modify our governing documents.
For example, our operations are subject to the GDPR, which imposes data privacy and security requirements on companies doing business in the European Union, including: providing detailed disclosures about how personal data is collected and processed; demonstrating an appropriate legal basis; granted new rights for data subjects in regard to their personal data; and imposing limitations on retention of personal data; and maintaining a record of data processing.
For example, our operations are subject to the GDPR, which imposes data privacy and security requirements on companies doing business in the European Union, including: providing detailed disclosures about how personal data is collected and processed; demonstrating an appropriate legal basis; granting new rights for data subjects in regard to their personal data; and imposing limitations on retention of personal data; and maintaining a record of data processing.
Such cost increases and weakened economic conditions may result from any number of factors, including pandemics, terrorist attacks, wars and other conflicts, natural disasters, increases in critical commodity prices or labor costs, sovereign debt defaults or the prospect of such events. General inflation in the United States, Europe and other geographies has risen to levels not experienced in recent decades.
Such cost increases and weakened economic conditions may result from any number of factors, including pandemics, terrorist attacks, wars and other conflicts, natural disasters, increases in critical commodity prices or labor costs, sovereign debt defaults or the prospect of such events. General inflation in the United States, Europe and other geographies has recently risen to levels not experienced in decades.
Pursuant to the Tax Receivable Agreement, we will be required to make cash payments to the TRA Parties equal to 85% of the tax benefits, if any, that we realize, or in some circumstances are deemed to realize as a result of (1) any future redemptions funded by us or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock or cash, and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement.
Pursuant to the Tax Receivable Agreement, we are required to make cash payments to the TRA Parties equal to 85% of the tax benefits, if any, that we realize, or in some circumstances are deemed to realize as a result of (1) any future redemptions funded by us or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock or cash, and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement.
As a result of potential differences in the amount of net taxable income allocable to us and to the Continuing Equity Owners and certain of their transferees, as well as the use of an assumed tax rate in calculating FAH, LLC’s distribution obligations, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement.
As a result of potential differences in the amount of net taxable income allocable to us and to the Continuing Equity Owners and certain of their transferees, as well as the use of an assumed tax rate in calculating FAH, LLC’s distribution obligations (and certain other considerations), we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement.
Accordingly, our success will depend, in part, on our ability to continually design and introduce new products that consumers find appealing. To the extent we are unable to do so, our sales and profitability will be adversely affected. This is particularly true given the concentration of our sales under certain of our brand categories, particularly Core Collectible.
Accordingly, our success will depend, in part, on our ability to continually design and introduce new products that consumers find appealing. To the extent we are unable to do so, our sales and profitability will be adversely affected. This is particularly true given the concentration of our sales under certain of our brand categories, particularly Core Collectibles.
Any sales in connection with the Registration Rights Agreement, or the prospect of any such sales, could materially impact the market price of our Class A common stock and could impair our ability to raise capital through future sales of equity securities. 49 Table of Contents We do not intend to pay dividends on our Class A common stock for the foreseeable future.
Any sales in connection with the Registration Rights Agreement, or the prospect of any such sales, could materially impact the market price of our Class A common stock and could impair our ability to raise capital through future sales of equity securities. 50 Table of Contents We do not intend to pay dividends on our Class A common stock for the foreseeable future.
These collection responsibilities and the complexity associated with tax collection, remittance and audit requirements would also increase the costs associated with our e-commerce business. Furthermore, our e-commerce operations subject us to risks related to the computer systems that operate our websites and related support systems, such as system failures, viruses, computer hackers, cyberattacks and similar disruptions, or the perception thereof.
These collection responsibilities and the complexity associated with tax collection, remittance and audit requirements increase the costs associated with our e-commerce business. Furthermore, our e-commerce operations subject us to risks related to the computer systems that operate our websites and related support systems, such as system failures, viruses, computer hackers, cyberattacks and similar disruptions, or the perception thereof.
Use of social media may materially and adversely affect our reputation or subject us to fines or other penalties. We rely to a large extent on our online presence to reach consumers and use third-party social media platforms as marketing tools. For example, we maintain Facebook, Twitter, Instagram, TikTok and YouTube accounts.
Use of social media may materially and adversely affect our reputation or subject us to fines or other penalties. We rely to a large extent on our online presence to reach consumers and use third-party social media platforms as marketing tools. For example, we maintain Facebook, X (formerly Twitter), Instagram, TikTok and YouTube accounts.
Funds we receive from FAH, LLC to satisfy its tax distribution obligations will not be available for reinvestment in our business.
Funds we receive from FAH, LLC to satisfy its tax distribution obligations generally will not be available for reinvestment in our business.
The loss of any member of our senior management team, or of any other key employees, or the inability to successfully complete planned management transitions, could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, financial condition and results of operations.
The loss or temporary absence of any member of our senior management team, or of any other key employees, or the inability to successfully complete planned management transitions, could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, financial condition and results of operations.
See also “If we are unable to obtain, maintain and protect our intellectual property rights, in particular trademarks and copyrights, or if our licensors are unable to maintain and protect their intellectual property rights that we use in connection with our products, our ability to compete could be negatively impacted.” Global and regional economic downturns that negatively impact the retail and credit markets, or that otherwise damage the financial health of our retail customers and consumers, can harm our business and financial performance.
See also “If we are unable to obtain, maintain and protect our intellectual property rights, in particular trademarks and copyrights, or if our licensors are unable to maintain and protect their intellectual property rights that we use in connection with our products, our ability to compete could be negatively impacted.” 21 Table of Contents Global and regional economic downturns that negatively impact the retail and credit markets, or that otherwise damage the financial health of our retail customers and consumers, can harm our business and financial performance.
We rely extensively on various information technology systems and software applications, including our enterprise resource planning software, to manage many aspects of our business, including product development, management of our supply chain, sale and delivery of our products, financial reporting and various other processes and transactions.
We rely extensively on various information technology systems and software applications, including our enterprise resource planning software (collectively, "IT Systems"), to manage many aspects of our business, including product development, management of our supply chain, sale and delivery of our products, financial reporting and various other processes and transactions.
We are critically dependent on the integrity, security and consistent operations of these systems and related back-up systems.
We are critically dependent on the integrity, security and consistent operations of these IT Systems and related back-up systems.
See “Ownership of Our Class A Common Stock Risks.” 45 Table of Contents In certain circumstances, FAH, LLC will be required to make distributions to us and the Continuing Equity Owners and certain of their transferees, and the distributions that FAH, LLC will be required to make may be substantial.
See “Ownership of Our Class A Common Stock Risks.” 46 Table of Contents In certain circumstances, FAH, LLC will be required to make distributions to us and the Continuing Equity Owners and certain of their transferees, and the distributions that FAH, LLC will be required to make may be substantial.
These international sales and manufacturing operations, including operations in emerging markets, are subject to risks that may significantly harm our sales, increase our costs or otherwise damage our business, including: • currency conversion risks and currency fluctuations; • limitations on the repatriation of earnings; 31 Table of Contents • potential challenges to our transfer pricing determinations and other aspects of our cross-border transactions, which can materially increase our taxes and other costs of doing business; • political instability, civil unrest, war and economic instability, such as the current situation with Ukraine and Russia and any impacts on surrounding regions; • greater difficulty enforcing intellectual property rights and weaker laws protecting such rights; • complications in complying with different laws and regulations in varying jurisdictions, including the U.S.
These international sales and manufacturing operations, including operations in emerging markets, are subject to risks that may significantly harm our sales, increase our costs or otherwise damage our business, including: • currency conversion risks and currency fluctuations; • limitations on the repatriation of earnings; • potential challenges to our transfer pricing determinations and other aspects of our cross-border transactions, which can materially increase our taxes and other costs of doing business; • political instability, civil unrest, war and economic instability, such as the current situation with Ukraine and Russia or Israel and Hamas and any impacts on surrounding regions; • greater difficulty enforcing intellectual property rights and weaker laws protecting such rights; • complications in complying with different laws and regulations in varying jurisdictions, including the U.S.
In addition, the New Stockholders Agreement provides that for as long as the TCG Related Parties, beneficially own, directly or indirectly, in the aggregate, 22% or more of all issued and outstanding shares of our Class A common stock (assuming that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis), we will not take, and will cause our subsidiaries not to take, certain actions or enter into certain transactions (whether by merger, consolidation, or otherwise) without the prior written approval of TCG, including: • entering into any transaction or series of related transactions in which any person or group (other than the TCG Related Parties and any group that includes the TCG Related Parties, acquires, directly or indirectly, in excess of 50% of the then outstanding shares of any class of our or our subsidiaries’ capital stock, or following which any such person or group has the direct or indirect power to elect a majority of the members of our board of directors or to replace us as the sole manager of FAH, LLC (or to add another person as co-manager of FAH, LLC); 43 Table of Contents • the reorganization, voluntary bankruptcy, liquidation, dissolution or winding up of us or any of our subsidiaries; • the sale, lease or exchange of all or substantially all of our and our subsidiaries’ property and assets; • the resignation, replacement or removal of us as the sole manager of FAH, LLC, or the appointment of any additional person as a manager of FAH, LLC; • the creation of a new class or series of capital stock or other equity securities of us or, in the event such creation would materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, any of our subsidiaries; • the issuance of additional shares of Class A common stock, Class B common stock, preferred stock or other equity securities of us other than (x) under any stock option or other equity compensation plan approved by our board of directors or the compensation committee, or (y) pursuant to the exercise or conversion of any options, warrants or other securities existing as of the date of the New Stockholders Agreement or, in the event such creation would materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, equity securities of any of our subsidiaries; • any amendment or modification of our certificate of incorporation or bylaws or any similar organizational documents of any of our subsidiaries that would, in either case, materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, and • except to the extent of the express restrictions applicable to TCG and its controlled affiliates in the New Stockholders Agreement, any action to adopt, approve or implement any plan, agreement or provision that would, among other things, impair certain rights of TCG under the terms of the New Stockholders Agreement.
In addition, the Stockholders Agreement provides that for as long as the TCG Related Parties beneficially own, directly or indirectly, in the aggregate, 22% or more of all issued and outstanding shares of our Class A common stock (assuming that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis), we will not take, and will cause our subsidiaries not to take, certain actions or enter into certain transactions (whether by merger, consolidation, or otherwise) without the prior written approval of TCG, including: • entering into any transaction or series of related transactions in which any person or group (other than the TCG Related Parties and any group that includes the TCG Related Parties), acquires, directly or indirectly, in excess of 50% of the then outstanding shares of any class of our or our subsidiaries’ capital stock, or following which any such person or group has the direct or indirect power to elect a majority of the members of our board of directors or to replace us as the sole manager of FAH, LLC (or to add another person as co-manager of FAH, LLC); • the reorganization, voluntary bankruptcy, liquidation, dissolution or winding up of us or any of our subsidiaries; • the sale, lease or exchange of all or substantially all of our and our subsidiaries’ property and assets; • the resignation, replacement or removal of us as the sole manager of FAH, LLC, or the appointment of any additional person as a manager of FAH, LLC; • the creation of a new class or series of capital stock or other equity securities of us or, in the event such creation would materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, any of our subsidiaries; 44 Table of Contents • the issuance of additional shares of Class A common stock, Class B common stock, preferred stock or other equity securities of us other than (x) under any stock option or other equity compensation plan approved by our board of directors or the compensation committee, or (y) pursuant to the exercise or conversion of any options, warrants or other securities existing as of the date of the Stockholders Agreement or, in the event such creation would materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, equity securities of any of our subsidiaries; • any amendment or modification of our certificate of incorporation or bylaws or any similar organizational documents of any of our subsidiaries that would, in either case, materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, and • except to the extent of the express restrictions applicable to TCG and its controlled affiliates in the Stockholders Agreement, any action to adopt, approve or implement any plan, agreement or provision that would, among other things, negatively affect TCG’s or its controlled affiliates’ ability to continue to hold or acquire additional shares of our capital stock or other securities.
We moved to dismiss twice, and the Court twice granted our motions to dismiss, the second time with prejudice. Plaintiffs appealed and on November 1, 2021, the Court of Appeals reversed the trial court’s dismissal decision in most respects.
The Company moved to dismiss twice, and the Court twice granted our motions to dismiss, the second time with prejudice. Plaintiffs appealed and on November 1, 2021, the Court of Appeals reversed the trial court’s dismissal decision in most respects.
In addition, we have recently implemented, and expect to continue to invest in and implement, modifications and upgrades to our information technology systems and procedures to support our growth and the development of our e-commerce business. These modifications and upgrades could require substantial investment and may not improve our profitability at a level that outweighs their costs, or at all.
In addition, we have recently implemented, and expect to continue to invest in and implement, modifications and upgrades to our IT Systems and procedures to support our growth and the development of our e-commerce business. These modifications and upgrades could require substantial investment and may not improve our profitability at a level that outweighs their costs, or at all.
Accordingly, we may lose a corporate opportunity or suffer competitive harm, which could negatively impact our business or prospects. Our principal asset consists of our interest in FAH, LLC, and accordingly, we depend on distributions from FAH, LLC to pay taxes and expenses, including payments under the Tax Receivable Agreement.
Accordingly, we may lose a corporate opportunity or suffer competitive harm, which could negatively impact our business or prospects. 45 Table of Contents Our principal asset consists of our interest in FAH, LLC, and accordingly, we depend on distributions from FAH, LLC to pay taxes and expenses, including payments under the Tax Receivable Agreement.
To the extent our e-commerce business does not generate more net sales than costs, our business, financial condition and results of operations will be adversely affected. 35 Table of Contents We could be subject to future product liability suits or product recalls which could have a significant adverse effect on our financial condition and results of operations.
To the extent our e-commerce business does not generate more net sales than costs, our business, financial condition and results of operations will be adversely affected. We could be subject to future product liability suits or product recalls which could have a significant adverse effect on our financial condition and results of operations.
Bribery Act of 2010, similar anti-bribery and anti-corruption laws and local and international environmental, labor, health and safety laws, and in dealing with changes in governmental policies and the evolution of laws and regulations and related enforcement; • difficulties understanding the retail climate, consumer trends, local customs and competitive conditions in foreign markets which may be quite different from the United States; • changes in international labor costs and other costs of doing business internationally; • the imposition of and changes in tariffs, quotas, border adjustment taxes or other protectionist measures by any major country or market in which we operate, which could make it significantly more expensive and difficult to import products into that country or market, raise the cost of such products, decrease our sales of such products or decrease our profitability; • proper payment of customs duties and/or excise taxes; • natural disasters and pandemics, including related to the COVID-19 pandemic, the greater difficulty and cost in recovering therefrom; • transportation delays and interruptions; • difficulties in moving materials and products from one country to another, including port congestion, strikes or other labor disruptions and other transportation delays and interruptions; and • increased investment and operational complexity to make our products compatible with systems in various countries and compliant with local laws.
Bribery Act of 2010, similar anti-bribery and anti-corruption laws and local and international environmental, labor, health and safety laws, and in dealing with changes in governmental policies and the evolution of laws and regulations and related enforcement; 32 Table of Contents • difficulties understanding the retail climate, consumer trends, local customs and competitive conditions in foreign markets which may be quite different from the United States; • changes in international labor costs and other costs of doing business internationally; • the imposition of and changes in tariffs, quotas, border adjustment taxes or other protectionist measures by any major country or market in which we operate, which could make it significantly more expensive and difficult to import products into that country or market, raise the cost of such products, decrease our sales of such products or decrease our profitability; • proper payment of customs duties and/or excise taxes; • natural disasters and pandemics, including related to COVID-19, the greater difficulty and cost in recovering therefrom; • transportation delays and interruptions; • difficulties in moving materials and products from one country to another, including port congestion, strikes or other labor disruptions, trade route disruptions due to geopolitical tensions and other transportation delays and interruptions; and • increased investment and operational complexity to make our products compatible with systems in various countries and compliant with local laws.
The occurrence of any of these events would have an adverse effect on our business, cash flows, financial condition and results of operations. If we do not effectively maintain and further develop our relationships with retail customers and distributors, our growth prospects, business and results of operations could be harmed.
The occurrence of any of these events would have an adverse effect on our business, cash flows, financial condition and results of operations. 22 Table of Contents If we do not effectively maintain and further develop our relationships with retail customers and distributors, our growth prospects, business and results of operations could be harmed.
Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations. We operate facilities and sell products in numerous countries outside the United States. Sales to our international customers comprised approximately 27%, 28% and 25% of our sales for the years ended December 31, 2022, 2021 and 2020, respectively.
Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations. We operate facilities and sell products in numerous countries outside the United States. Sales to our international customers comprised approximately 31%, 27% and 28% of our sales for the years ended December 31, 2023, 2022 and 2021, respectively.
The efficient operation and successful growth of our business depends on these information systems, including our ability to operate and upgrade them effectively and to select and implement adequate disaster recovery systems successfully.
The efficient operation and successful growth of our business depends on these IT Systems, including our ability to operate and upgrade them effectively and to select and implement adequate disaster recovery systems successfully.
We have generally experienced rapid growth over the last several years, which has placed a strain on our managerial, operational, product design and development, sales and marketing, administrative and financial infrastructure. For example, we increased our total number of full-time employees from 702 as of December 31, 2018 to 1,466 as of December 31, 2022.
We have generally experienced rapid growth over the last several years, which has placed a strain on our managerial, operational, product design and development, sales and marketing, administrative and financial infrastructure. For example, we increased our total number of full-time employees from 702 as of December 31, 2018 to 1,269 as of December 31, 2023.
While we may enter into additional license agreements in the future, the terms of such license agreements may be less favorable than the terms of our existing license agreements. Our license agreements are complex, and typically grant our licensors the right to audit our compliance with the terms and conditions of such agreements.
While we may enter into additional license agreements in the future, the terms of such license agreements may be less favorable than the terms of our existing license agreements. 20 Table of Contents Our license agreements are complex, and typically grant our licensors the right to audit our compliance with the terms and conditions of such agreements.
Similarly, in the year ended December 31, 2022, we acquired Mondo Collectibles, LLC (f/k/a Mondo Tees Buyer, LLC) (“Mondo”), a high-end pop culture collectibles company that creates vinyl records, posters, soundtracks, toys, apparel, books, games and other collectibles for preliminary purchase consideration of $14.0 million in cash.
Similarly, in the year ended December 31, 2022, we acquired Mondo Collectibles, LLC (f/k/a Mondo Tees Buyer, LLC) (“Mondo”), a high-end pop culture collectibles company that creates vinyl records, posters, soundtracks, toys, apparel, books, games and other collectibles for $14.0 million in cash.
The payments under the Tax Receivable Agreement are also not conditioned upon the TRA Parties maintaining a continued ownership interest in FAH, LLC. 46 Table of Contents The amounts that we may be required to pay to the TRA Parties under the Tax Receivable Agreement may be accelerated in certain circumstances and may also significantly exceed the actual tax benefits that we ultimately realize.
The payments under the Tax Receivable Agreement are also not conditioned upon the TRA Parties maintaining a continued ownership interest in FAH, LLC. The amounts that we may be required to pay to the TRA Parties under the Tax Receivable Agreement may be accelerated in certain circumstances and may also significantly exceed the actual tax benefits that we ultimately realize.
Moreover, while we have separate licensing arrangements with Disney, LucasFilm and Marvel, these parties are all under common ownership by Disney and collectively these licensors accounted for approximately 44%, 43% and 41% of our sales for the years ended December 31, 2022, 2021 and 2020, respectively.
Moreover, while we have separate licensing arrangements with Disney, LucasFilm and Marvel, these parties are all under common ownership by Disney and collectively these licensors accounted for approximately 38%, 44% and 43% of our sales for the years ended December 31, 2023, 2022 and 2021, respectively.
Following the Capital Contribution, (i) the common units of FAH, LLC were recapitalized through a reverse unit split in order to maintain a one-to-one ratio between the number of common units owned by us and the number of outstanding shares of our Class A common stock in accordance with the FAH LLC Agreement, and (ii) approximately 0.9 million outstanding shares of our Class B common stock were cancelled in order to maintain a one-to-one ratio between the number of shares of Class B common stock and the number of common units (other than common units issuable upon the exercise of options), in each case, held by the Continuing Equity Owners, in accordance with our amended and restated certificate of incorporation (clauses (i) and (ii) together, the “Recapitalization”).
Following the Capital Contribution, (i) the common units of FAH, LLC were recapitalized through a reverse unit split in order to maintain a one-to-one ratio between the number of common units owned by us and the number of outstanding shares of our Class A common stock in accordance with the FAH LLC Agreement, and (ii) approximately 0.9 million outstanding shares of our Class B common stock were cancelled in order to maintain a one-to-one ratio between the number of shares of Class B common stock and the number of common units, in each case, held by the Continuing Equity Owners, in accordance with our amended and restated certificate of incorporation (clauses (i) and (ii) together, the “Recapitalization”).
Any actual or perceived inability to comply with applicable privacy or data protection laws, regulations, or other obligations could result in significant cost and liability, litigation or governmental investigations, damage our reputation, and adversely affect our business. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 56 Table of Contents
Any actual or perceived inability to comply with applicable privacy or data protection laws, regulations, or other obligations could result in significant cost and liability, litigation or governmental investigations, damage our reputation, and adversely affect our business. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
Threat actors are becoming more sophisticated and increasingly using techniques designed to circumvent security controls, to evade detection and to obfuscate or remove forensic evidence, which means we may be unable to timely or effectively detect, identify, contain, or remediate future attacks or incidents.
Threat actors are becoming more sophisticated and increasingly using techniques and tools, including artificial intelligence, designed to circumvent security controls, to evade detection and to obfuscate or remove forensic evidence, which means we may be unable to timely or effectively detect, identify, contain, or remediate future attacks or incidents.
Our top ten customers represented approximately 44%, 45% and 48% of our sales for the years ended December 31, 2022, 2021 and 2020, respectively. We depend on retailers to provide adequate and attractive space for our products and point of purchase displays in their stores.
Our top ten customers represented approximately 43%, 44% and 45% of our sales for the years ended December 31, 2023, 2022 and 2021, respectively. We depend on retailers to provide adequate and attractive space for our products and point of purchase displays in their stores.
This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims.
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims.
Subsequent to December 31, 2022, our projections indicated that we would be unable to maintain compliance with the financial covenants under the New Credit Agreement as of March 31, 2023 and, on February 28, 2023, we entered into a further amendment (the "Third Amendment") to the New Credit Agreement to, among other things, (i) modify the financial covenants under the New Credit Agreement for the period beginning on the date of the Third Amendment through the fiscal quarter ending December 31, 2023 (the “Waiver Period”), (ii) reduce the size of the New Revolving Credit Facility from $215 million to $180.0 million as of the date of the Third Amendment and thereafter to $150.0 million on December 31, 2023, which reduction shall be permanent after the Waiver Period, (iii) restrict the ability to draw on the New Revolving Credit Facility during the Waiver Period in excess of the amount outstanding on the date of the Third Amendment, (iv) increase the margin payable under the Credit Facilities during the Waiver Period to (a) 4.00% per annum with respect to any Term Benchmark Loan or RFR Loan (each as defined in the New Credit Agreement), and (b) 3.00% per annum with respect to any Canadian Prime Loan or ABR Loan (each as defined in the New Credit Agreement), (iv) allow that any calculation of Consolidated EBITDA (as defined in the New Credit Agreement) that includes the fiscal quarters during the Waiver Period may include certain agreed upon amounts for certain addbacks, (v) further limit our ability to make certain restricted payments, including the ability to pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests, incur additional indebtedness, incur additional liens, enter into sale and leaseback transactions or issue additional equity interests or securities convertible into or exchange for equity interests (other than the issuance of common stock) during the Waiver Period, (vi) require a minimum cash requirement of at least $10.0 million and (vii) require a mandatory prepayment of the New Revolving Credit Facility during the Waiver Period with any cash proceeds in excess of $25.0 million.
On February 28, 2023, we entered into a further amendment (the "Third Amendment") to the Credit Agreement to, among other things, (i) modify the financial covenants under the Credit Agreement for the period beginning on the date of the Third Amendment through the fiscal quarter ended December 31, 2023 (the “Waiver Period”), (ii) reduce the size of the Revolving Credit Facility from $215 million to $180.0 million as of the date of the Third Amendment and thereafter to $150.0 million on December 31, 2023, which reduction is permanent after the Waiver Period, (iii) restrict the ability to draw on the Revolving Credit Facility during the Waiver Period in excess of the amount outstanding on the date of the Third Amendment, (iv) increase the margin payable under the Credit Facilities during the Waiver Period to (a) 4.00% per annum with respect to any Term Benchmark Loan or RFR Loan (each as defined in the Credit Agreement), and (b) 3.00% per annum with respect to any Canadian Prime Loan or ABR Loan (each as defined in the Credit Agreement), (v) allow that any calculation of Consolidated EBITDA (as defined in the Credit Agreement) that includes the fiscal quarters during the Waiver Period may include certain agreed upon amounts for certain addbacks, (vi) further limit our ability to make certain restricted payments, including the ability to pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests, incur additional indebtedness, incur additional liens, enter into sale and leaseback transactions or issue additional equity interests or securities convertible into or exchange for equity interests (other than the issuance of common stock) during the Waiver Period, (vii) require a minimum qualified cash requirement of at least $10.0 million and (viii) require a mandatory prepayment of the Revolving Credit Facility during the Waiver Period with any qualified cash proceeds in excess of $25.0 million.
Additionally, a new law, the California Privacy Rights Act (the “CPRA”), imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data.
Additionally, the California Privacy Rights Act (the “CPRA”), imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data processing, and opt outs for certain disclosures of data and uses of sensitive data.
In addition, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including, but not limited to, the following: • our board of directors is classified into three classes, each of which serves for a staggered three-year term; • only the chairperson of our board of directors or a majority of our board of directors may call special meetings of our stockholders; • we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; • any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may not be taken by written consent in lieu of a meeting; • our amended and restated certificate of incorporation and our amended and restated bylaws may be amended or repealed by the affirmative vote of the holders of at least 66 2 / 3 % of the votes which all our stockholders would be entitled to cast in any annual election of directors and our amended and restated bylaws may also be amended or repealed by a majority vote of our board of directors; • we require advance notice and duration of ownership requirements for stockholder proposals; and • we have opted out of Section 203 of the Delaware General Corporation Law of the State of Delaware, or the DGCL, however, our amended and restated certificate of incorporation contains provisions that are similar to Section 203 of the DGCL (except with respect to ACON and Fundamental and any of their respective affiliates and any of their respective direct or indirect transferees of Class B common stock).
In addition, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including, but not limited to, the following: • our board of directors is classified into three classes, each of which serves for a staggered three-year term; • only the chairperson of our board of directors or a majority of our board of directors may call special meetings of our stockholders; • we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; • any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may not be taken by written consent in lieu of a meeting; • our amended and restated certificate of incorporation and our amended and restated bylaws may be amended or repealed by the affirmative vote of the holders of at least 66 2 / 3 % of the votes which all our stockholders would be entitled to cast in any annual election of directors and our amended and restated bylaws may also be amended or repealed by a majority vote of our board of directors; • we require advance notice and duration of ownership requirements for stockholder proposals; and • we have opted out of Section 203 of the Delaware General Corporation Law of the State of Delaware, or the DGCL, however, our amended and restated certificate of incorporation contains provisions that are similar to Section 203 of the DGCL (except with respect to TCG and certain other parties, including certain affiliates, associates and transferees of TCG).
In the case that a minimum royalty guarantee is not expected to be met through sales, we will accrue up to the minimum amount required to be paid. As of December 31, 2022 and 2021, we recorded reserves of $0.8 million, and $0.7 million, respectively, related to prepaid royalties we estimated would not be recovered through sales.
In the case that a minimum royalty guarantee is not expected to be met through sales, we will accrue up to the minimum amount required to be paid. As of December 31, 2023 and 2022, we recorded reserves of $4.5 million and $0.8 million, respectively, related to prepaid royalties we estimated would not be recovered through sales.
While we obtain assurances from those parties that they have systems and processes in place to protect such data, and where applicable, that they will take steps to assure the protections of such data by third parties, nonetheless those partners may also be subject to data intrusion or otherwise compromise the protection of such data.
While we seek to obtain assurances from those parties that they have systems and processes in place designed to protect such data, and where applicable, that they will take steps to assure the protections of such data by third parties, nonetheless those partners may also be subject to cybersecurity risks or otherwise compromise the protection of such data.
As a result of the foregoing, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits.
As a result of the foregoing, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement (calculated utilizing the assumptions described above), which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits.
Any compromise of the confidential data of our customers, consumers, suppliers, partners, employees or ourselves, or failure to prevent or mitigate the loss of or damage to this data through breach of our information technology systems or other means could substantially disrupt our operations, harm our customers, consumers and other business partners, damage our reputation, violate applicable laws and regulations and subject us to litigation or regulatory actions, to additional costs for remediation and compliance, as well to liabilities and loss of business that could be material.
Any compromise of the confidential data of our customers, consumers, suppliers, partners, employees or ourselves, or failure to prevent or mitigate the loss of or damage to this data through breach of our IT Systems or other means could substantially disrupt our operations, harm our customers, consumers and other business partners, damage our reputation, violate applicable laws and regulations and subject us to litigation (including class action lawsuits) or regulatory actions, to additional costs for remediation and compliance, as well as to liabilities and loss of business that could be material.
Following the Waiver Period, beginning in the fiscal quarter ended March 31, 2024, the Third Amendment resets the maximum Net Leverage Ratio and the minimum Fixed Charge Coverage Ratio (each as defined in the New Credit Agreement) that must be maintained by the Credit Agreement Parties to 2.50:1.00 and 1.25:1.00, respectively, which were the ratios in effect under the New Credit Agreement prior to the Third Amendment.
Following the Waiver Period, beginning in the fiscal quarter ending March 31, 2024, the Third Amendment will reset the maximum Net Leverage Ratio and the minimum Fixed Charge Coverage Ratio (each as defined in the Credit Agreement) that must be maintained by the Credit Agreement Parties to 2.50:1.00 and 1.25:1.00, respectively, which were the ratios in effect under the Credit Agreement prior to the Third Amendment.
As a result of increased inflation or supply constraints, like we are currently facing, we have increased prices of certain products, and may in the future need to increase our prices further in order to cover increased costs of goods sold, which may reduce demand for our products and may not fully offset our increased costs.
As a result of increased inflation or supply constraints, like we have previously faced, we have increased prices of certain products, and may in the future need to increase our prices further in order to cover increased costs of goods sold, which may reduce demand for our products and may not fully offset our increased costs.
The lawsuits seek, among other things, compensatory statutory damages and rescissory damages in account of the consideration paid for our Class A common stock by the plaintiffs and members of the putative class, as well as attorneys’ fees and costs.
The lawsuit seeks, among other things, compensatory statutory damages and rescissory damages in account of the consideration paid for our Class A common stock by the plaintiffs and members of the putative class, as well as attorneys’ fees and costs.
At December 31, 2022, we determined the enterprise resource planning software was not feasible for its intended purpose and abandoned the cloud computing arrangement, incurring a $32.5 million write-down.
During the year ended December 31, 2022, we determined the enterprise resource planning software was not feasible for its intended purpose and abandoned the cloud computing arrangement, incurring a $32.5 million write-down.
Our top ten licensors collectively accounted for approximately 74% of our sales for the years ended December 31, 2022, 2021 and 2020, respectively.
Our top ten licensors collectively accounted for approximately 68%, 74% and 74% of our sales for the years ended December 31, 2023, 2022 and 2021, respectively.
No assurance can be given that our investment in TokenWave LLC, or our development or future launch of NFT or digital collectible products, will be successful.
No assurance can be given that our investment in TokenWave LLC, or our future launches of NFT or digital collectible products, will be successful.
Approximately 53.0%, 59.0% and 64.0%, of our net sales for the years ended December 31, 2022, 2021 and 2020, respectively, were made in the third and fourth quarters, as our customers build up their inventories in anticipation of the holiday season.
Approximately 55%, 53% and 59%, of our net sales for the years ended December 31, 2023, 2022 and 2021, respectively, were made in the third and fourth quarters, as our customers build up their inventories in anticipation of the holiday season.
In addition, we may decide to divest or discontinue certain brands or products or streamline operations and incur other costs or special charges in doing so. We may also decide to discontinue certain programs or sales to certain retailers based on anticipated strategic benefits.
In addition, we have in the past decided and may in the future decide to divest or discontinue certain brands or products or streamline operations and incur other costs or special charges in doing so. We may also decide to discontinue certain programs or sales to certain retailers based on anticipated strategic benefits.
Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Equity Owners and certain of their transferees that will not benefit the holders of our Class A common stock to the same extent as it will benefit such Continuing Equity Owners and transferees.
Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the TRA Parties and the Continuing Equity Owners and certain of their transferees that will not benefit the holders of our Class A common stock to the same extent.
For example, the Continuing Equity Owners and such transferees may have different interests in the tax positions or other actions that we take which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, and whether and when we should terminate the Tax Receivable Agreement and accelerate our obligations thereunder.
For example, the TRA Parties may have different interests in the tax positions or other actions that we take which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, and whether and when we should terminate the Tax Receivable Agreement and accelerate our obligations thereunder.
Any of the foregoing could materially adversely affect our business, financial condition and results of operations. 55 Table of Contents A failure to comply with laws and regulations relating to privacy and the protection of data relating to individuals may result in negative publicity, claims, investigations and litigation, and adversely affect our financial performance.
Any of the foregoing could materially adversely affect our business, financial condition and results of operations. 56 Table of Contents A failure to comply with laws and regulations relating to privacy and the protection of personal information may result in negative publicity, claims, investigations and litigation, and adversely affect our financial performance.
See “Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations.” We are subject to a series of risks related to climate change. There are inherent climate-related risks wherever business is conducted.
As a result, we are subject to various risks resulting from our international operations. See “Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations.” We are subject to a series of risks related to climate change. There are inherent climate-related risks wherever business is conducted.
Disruptive attacks, such as through ransomware and other extortion-based tactics, that can temporarily or permanently disable operations are becoming increasingly prevalent.
Disruptive attacks, such as through ransomware and other extortion-based tactics, that can temporarily or permanently disable operations or otherwise disrupt our business are becoming increasingly prevalent.
If we were to conduct repurchases of our stock or other transactions covered by the excise tax described above, we could potentially be subject to this excise tax, which could increase our costs and adversely affect our operating results.
If we were to conduct repurchases of our stock or other transactions covered by the excise tax described above, we could potentially be subject to this excise tax, which could increase our costs and adversely affect our operating results. Our ability to use certain tax attributes may be limited.
Though we currently use third-party vendors to process and store credit card data in connection with our e-commerce business, to the extent we process or store such data ourselves in the future, we may be subject to various aspects of the PCI DSS, and fines, penalties, and a loss of the ability to process credit card payments could result from any failure to comply with the PCI DSS.
Though we currently use third-party vendors to process and store credit card data in connection with our e-commerce business, we are subject to various aspects of the PCI DSS, and fines, penalties, and a loss of the ability to process credit card payments could result from any failure to comply with the PCI DSS.
As of December 31, 2022, the Company had $20.0 million outstanding under the Equipment Finance Loan. In order to service this indebtedness and any additional indebtedness we may incur in the future, we need to generate cash.
As of December 31, 2023, the Company had $15.4 million outstanding under the Equipment Finance Loan. In order to service this indebtedness and any additional indebtedness we may incur in the future, we need to generate cash.
As of December 31, 2022, we had a reserve of $19.4 million on our balance sheet related to ongoing and future royalty audits, based on estimates of the costs we expect to incur.
As of December 31, 2023, we had a reserve of $18.1 million on our balance sheet related to ongoing and future royalty audits, based on estimates of the costs we expect to incur.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeProperty Location Approximate Square Footage Lease Expiration Date Offices, Warehouse and Distribution Facility Everett, Washington 201,000 January 31, 2024 Warehouse and Distribution Facility Everett, Washington 119,000 January 31, 2023 Corporate Headquarters and Retail Store Everett, Washington 99,000 January 31, 2027 Warehouse and Distribution Facility Everett, Washington 83,000 January 31, 2023 Administrative Offices Everett, Washington 82,000 January 31, 2032 Office and Warehouse Facility Everett, Washington 21,000 January 31, 2025 Administrative Offices, Licensing and Apparel Sales Burbank, California 43,000 December 31, 2026 Retail Store Hollywood, California 40,000 March 31, 2030 Administrative Offices San Diego, California 14,000 November 30, 2029 Warehouse and Distribution Facility Buckeye, Arizona 862,000 October 31, 2032 Warehouse and Administrative Offices Coventry, England 349,000 July 7, 2029 Sales and Administrative Offices London, United Kingdom 11,000 June 27, 2027 For leases that are scheduled to expire during the next 12 months, we may negotiate new lease agreements, renew existing lease agreements or use alternate facilities.
Biggest changeThe table below sets forth certain information regarding our material properties, all of which are leased: Property Location Approximate Square Footage Lease Expiration Date Offices, Warehouse and Distribution Facility Everett, Washington 201,000 January 31, 2024 Corporate Headquarters and Retail Store Everett, Washington 99,000 January 31, 2027 Administrative Offices Everett, Washington 82,000 January 31, 2032 Office and Warehouse Facility Everett, Washington 21,000 January 31, 2025 Administrative Offices, Licensing and Apparel Sales Burbank, California 43,000 December 31, 2026 Retail Store Hollywood, California 40,000 March 31, 2030 Administrative Offices San Diego, California 14,000 November 30, 2029 Warehouse and Distribution Facility Buckeye, Arizona 862,000 October 31, 2032 Warehouse and Administrative Offices Coventry, England 349,000 July 7, 2029 Sales and Administrative Offices London, United Kingdom 11,000 June 27, 2027 For leases that are scheduled to expire during the next 12 months, we may negotiate new lease agreements, renew existing lease agreements or use alternate facilities.
LEGAL PROCEEDINGS See Note 14 "Commitments and Contingencies - Legal Contingencies" in the Notes to Consolidated Financial Statements included in this Form 10-K for a discussion of material legal proceedings. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 57 Table of Contents PART II
LEGAL PROCEEDINGS See Note 14 "Commitments and Contingencies - Legal Contingencies" in the Notes to Consolidated Financial Statements included in this Form 10-K for a discussion of material legal proceedings. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 59 Table of Contents PART II
ITEM 2. PROPERTIES As of December 31, 2022, our leased properties primarily consist of office space, warehouses and distribution facilities. The table below sets forth certain information regarding our material properties, all of which are leased.
ITEM 2. PROPERTIES As of December 31, 2023, our leased properties primarily consist of office space, warehouses and distribution facilities.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe comparisons reflected in the graph and table are not intended to forecast the future performance of our stock and may not be indicative of our future performance. 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 Funko, Inc. 100.00 197.74 258.05 156.09 282.71 164.06 Russell 2000 100.00 88.99 111.70 134.00 153.85 122.41 Russell 2000 Consumer Discretionary 100.00 130.98 113.10 143.59 184.39 127.93 59 Table of Contents ITEM 6. [RESERVED.] 60 Table of Contents
Biggest changeThe comparisons reflected in the graph and table are not intended to forecast the future performance of our stock and may not be indicative of our future performance. 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Funko, Inc. 100.00 130.49 78.94 142.97 82.97 58.78 Russell 2000 100.00 125.52 150.58 172.90 137.56 160.85 Russell 2000 Consumer Discretionary 100.00 86.35 109.63 140.78 97.67 122.83 61 Table of Contents ITEM 6. [RESERVED.] 62 Table of Contents
The graph and the table assume that $100 was invested on December 31, 2017 in each of our Class A common stock, the Russell 2000 Index, and the Russell 2000 Consumer Discretionary Index, and that any dividends were reinvested.
The graph and the table assume that $100 was invested on December 31, 2018 in each of our Class A common stock, the Russell 2000 Index, and the Russell 2000 Consumer Discretionary Index, and that any dividends were reinvested.
Issuer Purchases of Equity Securities There were no share repurchases during the fourth quarter of the fiscal year ended December 31, 2022.
Issuer Purchases of Equity Securities There were no share repurchases during the fourth quarter of the fiscal year ended December 31, 2023.
Any such determination will also depend upon our business prospects, results of operations, financial condition, cash requirements and availability and other factors that our board of directors may deem relevant. 58 Table of Contents Stock Performance Graph The following graph and table illustrate the total return from December 31, 2017 through December 31, 2022, for (i) our Class A common stock, (ii) the Russell 2000 Index, and (iii) the Russell 2000 Consumer Discretionary Index.
Any such determination will also depend upon our business prospects, results of operations, financial condition, cash requirements and availability and other factors that our board of directors may deem relevant. 60 Table of Contents Stock Performance Graph The following graph and table illustrate the total return from December 31, 2018 through December 31, 2023, for (i) our Class A common stock, (ii) the Russell 2000 Index, and (iii) the Russell 2000 Consumer Discretionary Index.
There is no established public trading market for our Class B common stock. Holders of Record As of February 27, 2023, there were 27 stockholders of record of our Class A common stock. As of February 27, 2023, there were 12 stockholders of record of our Class B common stock.
There is no established public trading market for our Class B common stock. Holders of Record As of March 5, 2024, there were 36 stockholders of record of our Class A common stock. As of March 5, 2024, there were 11 stockholders of record of our Class B common stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeGAAP financial performance measure, which is net (loss) income, for the periods presented: Year Ended December 31, 2022 2021 (in thousands, except per share data) Net (loss) income attributable to Funko, Inc. $ (8,035) $ 43,900 Reallocation of net income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock (1) 2,795 23,954 Equity-based compensation (2) 16,591 12,994 Acquisition transaction costs and other expenses (3) 2,850 — Certain severance, relocation and related costs (4) 9,775 277 Loss on extinguishment of debt (5) — 675 Foreign currency transaction (gain) loss (6) (3,232) 1,118 Tax receivable agreement liability adjustments (7) 3,987 1,590 One-time cloud based computing arrangement abandonment (8) 32,492 — Income tax expense (9) (27,657) (8,331) Adjusted net income $ 29,566 $ 76,177 Weighted-average shares of Class A common stock outstanding-basic 44,555 38,392 Equity-based compensation awards and common units of FAH, LLC that are convertible into Class A common stock 6,967 15,437 Adjusted weighted-average shares of Class A stock outstanding-diluted 51,522 53,829 Adjusted earnings per diluted share $ 0.57 $ 1.42 Year Ended December 31, 2022 2021 (in thousands) Net (loss) income $ (5,240) $ 67,854 Interest expense, net 10,334 7,167 Income tax (benefit) expense (17,801) 17,061 Depreciation and amortization 47,669 41,195 EBITDA $ 34,962 $ 133,277 Adjustments: Equity-based compensation (2) 16,591 12,994 Acquisition transaction costs and other expenses (3) 2,850 — Certain severance, relocation and related costs (4) 9,775 277 Loss on extinguishment of debt (5) — 675 Foreign currency transaction (gain) loss (6) (3,232) 1,118 Tax receivable agreement liability adjustments (7) 3,987 1,590 One-time cloud based computing arrangement abandonment (8) 32,492 — Adjusted EBITDA $ 97,425 $ 149,931 (1) Represents the reallocation of net income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC in periods in which income was attributable to non-controlling interests.
Biggest changeGAAP financial performance measure, which is net loss, for the periods presented: Year Ended December 31, 2023 2022 (in thousands, except per share data) Net loss attributable to Funko, Inc. $ (154,079) $ (8,035) Reallocation of net (loss) income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock (1) (10,359) 2,795 Equity-based compensation (2) 10,534 16,591 Acquisition transaction costs and other expenses (3) 14,241 2,850 Certain severance, relocation and related costs (4) 6,486 9,775 Loss on extinguishment of debt (5) 494 — Foreign currency transaction loss (gain) (6) 854 (3,232) Tax receivable agreement liability adjustments (7) (100,223) 3,987 One-time cloud based computing arrangement abandonment (8) — 32,492 One-time disposal costs for finished goods held at offshore factories (9) 6,283 — One-time disposal costs for unfinished goods held at offshore factories (10) 2,404 — Inventory write-down (11) 30,338 — Income tax expense (benefit) (12) 147,630 (27,657) Adjusted net (loss) income $ (45,397) $ 29,566 Weighted-average shares of Class A common stock outstanding-basic 48,332 44,555 Equity-based compensation awards and common units of FAH, LLC that are convertible into Class A common stock 4,021 6,967 Adjusted weighted-average shares of Class A stock outstanding-diluted 52,353 51,522 Adjusted (loss) earnings per diluted share $ (0.87) $ 0.57 Year Ended December 31, 2023 2022 (in thousands) Net loss $ (164,438) $ (5,240) Interest expense, net 27,970 10,334 Income tax expense (benefit) 132,497 (17,801) Depreciation and amortization 59,763 47,669 EBITDA $ 55,792 $ 34,962 Adjustments: Equity-based compensation (2) 10,534 16,591 Acquisition transaction costs and other expenses (3) 14,241 2,850 Certain severance, relocation and related costs (4) 6,486 9,775 Loss on extinguishment of debt (5) 494 — Foreign currency transaction loss (gain) (6) 854 (3,232) Tax receivable agreement liability adjustments (7) (100,223) 3,987 One-time cloud based computing arrangement abandonment (8) — 32,492 One-time disposal costs for finished goods held at offshore factories (9) 6,283 — One-time disposal costs for unfinished goods held at offshore factories (10) 2,404 — Inventory write-down (11) 30,338 — Adjusted EBITDA $ 27,203 $ 97,425 72 Table of Contents (1) Represents the reallocation of net (loss) income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC in periods in which income was attributable to non-controlling interests.
GAAP. The Non-GAAP Financial Measures are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to net (loss) income, earnings per share or any other performance measure derived in accordance with U.S. GAAP. We define EBITDA as net (loss) income before interest expense, net, income tax expense (benefit), depreciation and amortization.
GAAP. The Non-GAAP Financial Measures are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to net (loss) income, (loss) earnings per share or any other performance measure derived in accordance with U.S. GAAP. We define EBITDA as net (loss) income before interest expense, net, income tax expense (benefit), depreciation and amortization.
We define Adjusted Net (Loss) Income as net (loss) income attributable to Funko, Inc. adjusted for the reallocation of income attributable to non-controlling interests from the assumed exchange of all outstanding common units and options in FAH, LLC for newly issued-shares of Class A common stock of Funko, Inc. and further adjusted for the impact of certain non-cash charges and other items that we do not consider in our evaluation of ongoing operating performance.
We define Adjusted Net (Loss) Income as net loss attributable to Funko, Inc. adjusted for the reallocation of income attributable to non-controlling interests from the assumed exchange of all outstanding common units and options in FAH, LLC for newly issued-shares of Class A common stock of Funko, Inc. and further adjusted for the impact of certain non-cash charges and other items that we do not consider in our evaluation of ongoing operating performance.
We define Adjusted Earnings per Diluted Share as Adjusted Net (Loss) Income divided by the weighted-average shares of Class A common stock outstanding, assuming (1) the full exchange of all outstanding common units and options in FAH, LLC for newly issued-shares of Class A common stock of Funko, Inc. and (2) the dilutive effect of stock options and unvested common units, if any.
We define Adjusted (Loss) Earnings per Diluted Share as Adjusted Net (Loss) Income divided by the weighted-average shares of Class A common stock outstanding, assuming (1) the full exchange of all outstanding common units and options in FAH, LLC for newly issued-shares of Class A common stock of Funko, Inc. and (2) the dilutive effect of stock options and unvested common units, if any.
The Form S-3 allows us to offer and sell from time-to-time up to $100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts or units comprised of any combination of these securities for our own account and allows certain selling stockholders to offer and sell 17,318,008 shares of Class A common stock in one or more offerings.
The Form S-3 allows us to offer and sell from time-to-time up to $100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts or units comprised of any combination of these securities for our own account and allows certain selling stockholders to offer and sell 17,318,008 shares of Class A common stock in one or more offerings.
In addition, the lenders under the New Credit Facilities will be permitted to accelerate all outstanding borrowings and other obligations, terminate outstanding commitments and exercise other specified remedies upon the occurrence of certain events of default (subject to certain grace periods and exceptions), which include, among other things, payment defaults, breaches of representations and warranties, covenant defaults, certain cross-defaults and cross-accelerations to other indebtedness, certain events of bankruptcy and insolvency, certain material monetary judgments and changes of control.
In addition, the lenders under the Credit Facilities will be permitted to accelerate all outstanding borrowings and other obligations, terminate outstanding commitments and exercise other specified remedies upon the occurrence of certain events of default (subject to certain grace periods and exceptions), which include, among other things, payment defaults, breaches of representations and warranties, covenant defaults, certain cross-defaults and cross-accelerations to other indebtedness, certain events of bankruptcy and insolvency, certain material monetary judgments and changes of control.
It is reasonable to expect that these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other companies over time.
It is reasonable to expect that certain of these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other companies over time.
The New Credit Facilities are secured by substantially all assets of the borrowers under the New Credit Facilities and any of their existing or future material domestic subsidiaries, subject to customary exceptions. On November 25, 2022, the Company entered into a $20.0 million equipment finance agreement ("Equipment Finance Loan").
The Credit Facilities are secured by substantially all assets of the borrowers under the Credit Facilities and any of their existing or future material domestic subsidiaries, subject to customary exceptions. On November 25, 2022, the Company entered into a $20.0 million equipment finance agreement ("Equipment Finance Loan").
Management uses the Non-GAAP Financial Measures: • as a measurement of operating performance because they assist us in comparing the operating performance of our business on a consistent basis, as they remove the impact of items not directly resulting from our core operations; • for planning purposes, including the preparation of our internal annual operating budget and financial projections; • as a consideration to assess incentive compensation for our employees; • to evaluate the performance and effectiveness of our operational strategies; and • to evaluate our capacity to expand our business. 69 Table of Contents By providing these Non-GAAP Financial Measures, together with reconciliations, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.
Management uses the Non-GAAP Financial Measures: • as a measurement of operating performance because they assist us in comparing the operating performance of our business on a consistent basis, as they remove the impact of items not directly resulting from our core operations; • for planning purposes, including the preparation of our internal annual operating budget and financial projections; • as a consideration to assess incentive compensation for our employees; • to evaluate the performance and effectiveness of our operational strategies; and • to evaluate our capacity to expand our business. 70 Table of Contents By providing these Non-GAAP Financial Measures, together with reconciliations, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.
Our net cash (used in) provided by operating activities consists of net (loss) income adjusted for certain non-cash items, including depreciation and amortization, equity-based compensation, accretion of discount on long-term debt, as well as the effect of changes in working capital and other activities.
Our net cash provided by (used in) operating activities consists of net loss adjusted for certain non-cash items, including depreciation and amortization, equity-based compensation, accretion of discount on long-term debt, as well as the effect of changes in working capital and other activities.
Additionally, we will estimate the amount of Tax Receivable Agreement Payments expected to be paid within the next 12 months and classify this amount as current on our consolidated balance sheets. This determination is based on our estimate of taxable income for the next fiscal year.
Additionally, we estimate the amount of Tax Receivable Agreement Payments expected to be paid within the next 12 months and classify this amount as current on our consolidated balance sheets. This determination is based on our estimate of taxable income for the next fiscal year.
We expect these sources of liquidity to continue to be our primary sources of liquidity. Credit Facilities . On September 17, 2021, the Company entered into the New Credit Facilities. For a discussion of our Credit Facilities, see Note 10, Debt of the notes to our consolidated financial statements. Offerings of Registered Securities .
We expect these sources of liquidity to continue to be our primary sources of liquidity. Credit Facilities . On September 17, 2021, the Company entered into the Credit Facilities. For a discussion of our Credit Facilities, see Note 10, Debt of the notes to our consolidated financial statements. Offerings of Registered Securities .
The New Credit Agreement defines “change of control” to include, among other things, any person or group other than ACON and its affiliates becoming the beneficial owner of more than 35% of the voting power of the equity interests of Funko, Inc.
The Credit Agreement defines “change of control” to include, among other things, any person or group other than ACON and its affiliates becoming the beneficial owner of more than 35% of the voting power of the equity interests of Funko, Inc.
Each of the normal recurring adjustments and other adjustments described herein and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations. 70 Table of Contents The following tables reconcile the Non-GAAP Financial Measures to the most directly comparable U.S.
Each of the normal recurring adjustments and other adjustments described herein and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations. 71 Table of Contents The following tables reconcile the Non-GAAP Financial Measures to the most directly comparable U.S.
For the year ended December 31, 2022, this also includes the $11.0 million discrete benefit from the release of a valuation allowance on the outside basis deferred tax asset. 72 Table of Contents Liquidity and Financial Condition Introduction Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, debt service and general corporate needs.
For the year ended December 31, 2022, this also includes the $11.0 million discrete benefit from the release of a valuation allowance on the outside basis deferred tax asset. 73 Table of Contents Liquidity and Financial Condition Introduction Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, debt service and general corporate needs.
See Item 1A, “Risk Factors.” 62 Table of Contents Content Mix The timing and mix of products we sell in any given quarter or year will depend on various factors, including the timing and popularity of new releases by third-party content providers and our ability to license properties based on these releases.
See Item 1A, “Risk Factors.” 64 Table of Contents Content Mix The timing and mix of products we sell in any given quarter or year will depend on various factors, including the timing and popularity of new releases by third-party content providers and our ability to license properties based on these releases.
Cost of Sales Cost of sales consists primarily of product costs, royalty expenses paid to our licensors and the cost to ship our products, including both inbound freight and outbound products to our customers. Our cost of sales excludes depreciation and amortization. Our products are produced and assembled by third-party manufacturers primarily in Vietnam, China and Mexico.
Cost of Sales Cost of sales consists primarily of product costs, royalty expenses paid to our licensors, the cost to ship our products, including both inbound freight and outbound products to our customers and inventory management. Our cost of sales excludes depreciation and amortization. Our products are produced and assembled by third-party manufacturers primarily in Vietnam, China and Mexico.
Under the terms of the New Credit Facilities, our subsidiaries are currently limited in their ability to pay cash dividends to the Company, subject to certain customary exceptions, including among others: • the ability to pay, so long as there is no current or ongoing event of default, amounts required to be paid under the Tax Receivable Agreement, certain expenses associated with being a public company and reimbursement of expenses required by the FAH LLC Agreement or the Registration Rights Agreement; and • the ability to make other distributions of up to $25.0 million during any period of four consecutive fiscal quarters as long as after giving pro forma effect to such distribution (i) no event of default then exists or would result therefrom and (ii) the Net Leverage Ratio (as defined in the New Credit Agreement) is not greater than a ratio that is 0.50:1.00 less than the Net Leverage Ratio set forth in the financial covenant for the applicable fiscal quarter, provided that we do not have the ability to make such distributions during the Waiver Period.
Under the terms of the Credit Facilities, our subsidiaries are currently limited in their ability to pay cash dividends to the Company, subject to certain customary exceptions, including among others: • the ability to pay, so long as there is no current or ongoing event of default, amounts required to be paid under the Tax Receivable Agreement, certain expenses associated with being a public company and reimbursement of expenses required by the FAH LLC Agreement or the Registration Rights Agreement; and • the ability to make other distributions of up to $25.0 million during any period of four consecutive fiscal quarters as long as after giving pro forma effect to such distribution (i) no event of default then exists or would result therefrom and (ii) the Net Leverage Ratio (as defined in the Credit Agreement) is not greater than a ratio that is 0.50:1.00 less than the Net Leverage Ratio set forth in the financial covenant for the applicable fiscal quarter.
GAAP financial measure, see “Non-GAAP Financial Measures” in this item. 61 Table of Contents Factors Affecting our Business Growth in the Market for Pop Culture Consumer Products Our operating results and prospects will be impacted by developments in the market for pop culture consumer products.
GAAP financial measure, see “Non-GAAP Financial Measures” in this item. 63 Table of Contents Factors Affecting our Business Growth in the Market for Pop Culture Consumer Products Our operating results and prospects will be impacted by developments in the market for pop culture consumer products.
Our results of operations for the year ended December 31, 2020, including a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, can be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.
Our results of operations for the year ended December 31, 2021, including a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, can be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022.
Additional future liquidity needs may include tax distributions, the redemption right held by the Continuing Equity Owners that they may exercise from time to time (should we elect to exchange their common units for a cash payment), payments under the Tax Receivable Agreement and general cash requirements for operations and capital expenditures (including future warehouse management system (WMS), additional platforms to support our direct-to-consumer experience, and capital build out of new leased warehouse and office space).
Additional future liquidity needs may include tax distributions, the redemption right held by the Continuing Equity Owners that they may exercise from time to time (should we elect to exchange their common units for a cash payment), payments under the Tax Receivable Agreement and general cash requirements for operations and capital expenditures (including a future enterprise resource management system (ERP), additional platforms to support our direct-to-consumer experience, and capital build out of new leased warehouse and office space).
Royalty expenses for the years ended December 31, 2022 and 2021, were $213.1 million and $161.6 million, respectively. 79 Table of Contents Inventory. Inventory consists primarily of figures, plush and accessories and other finished goods, and is accounted for using the first-in, first-out, or FIFO, method. Inventory costs include direct product costs and freight costs.
Royalty expenses for the years ended December 31, 2023, 2022 and 2021 were $179.7 million, $213.1 million and $161.6 million, respectively. 79 Table of Contents Inventory. Inventory consists primarily of figures, plush and accessories and other finished goods, and is accounted for using the first-in, first-out, or FIFO, method. Inventory costs include direct product costs and freight costs.
Even in the absence of such event, if we are unable to generate sufficient cash flows from operations in the future, and if availability under our Revolving Credit Facility is not sufficient after the Waiver Period, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted.
Even in the absence of such event, if we are unable to generate sufficient cash flows from operations in the future, and if availability under our Revolving Credit Facility is not sufficient we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted.
Retail Industry Dynamics; Relationships with Retail Customers Historically, substantially all of our sales have been derived from our retail customers and distributors, upon which we rely to reach the consumers who are the ultimate purchasers of our products. Our top ten customers represented approximately 44% and 45% of our sales for the years ended December 31, 2022 and 2021, respectively.
Retail Industry Dynamics; Relationships with Retail Customers Historically, substantially all of our sales have been derived from our retail customers and distributors, upon which we rely to reach the consumers who are the ultimate purchasers of our products. Our top ten customers represented approximately 43% and 44% of our sales for the years ended December 31, 2023 and 2022, respectively.
Inventory Management Inventory consists primarily of figures, plush, apparel, homewares, accessories, games, vinyl records and other finished goods, and is accounted for using the first-in, first-out (“FIFO”) method. Inventory costs include direct product costs and freight costs.
Inventory Management Inventory consists primarily of figures, plush, apparel, homewares, accessories and other finished goods, and is accounted for using the first-in, first-out (“FIFO”) method. Inventory costs include direct product costs and freight costs.
Subject to the interest rates during the Waiver Period as described above, loans under the New Credit Facilities will, at the Borrowers’ option, bear interest at either (i) Term SOFR, EURIBOR, HIBOR, CDOR, SONIA and/or the Central Bank Rate, as applicable, plus (x) 2.50% per annum and (y) solely in the case of Term SOFR based loans, 0.10% per annum or (ii) ABR or the Canadian prime rate, as applicable, plus 1.50% per annum, in each case of clauses (i) and (ii), subject to two 0.25% per annum step-downs based on the achievement of certain leverage ratios following July 29, 2022.
Loans under the Credit Facilities will, at the Borrowers’ option, bear interest at either (i) Term SOFR, EURIBOR, HIBOR, CDOR, SONIA and/or the Central Bank Rate, as applicable, plus (x) 2.50% per annum and (y) solely in the case of Term SOFR based loans, 0.10% per annum or (ii) ABR or the Canadian prime rate, as applicable, plus 1.50% per annum, in each case of clauses (i) and (ii), subject to two 0.25% per annum step-downs based on the achievement of certain leverage ratios following July 29, 2022.
On September 17, 2021, the Company entered into a new credit agreement (the “New Credit Agreement”) providing for a term loan facility in the amount of $180.0 million (the “New Term Loan Facility”) and a revolving credit facility of $100.0 million (the “New Revolving Credit Facility”) (together the “New Credit Facilities”).
On September 17, 2021, the Company entered into a new credit agreement (the “Credit Agreement”) providing for a term loan facility in the amount of $180.0 million (the “Term Loan Facility”) and a revolving credit facility of $100.0 million (the “Revolving Credit Facility”) (together the “Credit Facilities”).
The majority of revenue is recognized upon shipment of products to the customer. We routinely enter into arrangements with our customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. The estimated costs of these programs reduce gross sales in the period the related sale is recognized.
We routinely enter into arrangements with our customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. The estimated costs of these programs reduce gross sales in the period the related sale is recognized.
As a result of these exchanges, during the years ended December 31, 2022 and 2021, the Company recognized an increase to its net deferred tax assets in the amount of $30.6 million and $17.2 million, respectively, and corresponding Tax Receivable Agreement liabilities of $30.0 million and $20.7 million, respectively, representing 85% of the tax benefits due to the Continuing Equity Owners.
As a result of these exchanges, during the years ended December 31, 2023 and 2022, the Company recognized an increase to its net deferred tax assets in the amount of $0.0 million and $30.6 million, respectively, and corresponding Tax Receivable Agreement liabilities of $0.0 million and $30.0 million, respectively, representing 85% of the tax benefits due to the Continuing Equity Owners.
The maximum Net Leverage Ratio and the minimum fixed charge coverage ratio for the fiscal quarter ending December 31, 2022 are 2.50:1.00 and 1.25:1.00, respectively, and such ratios will apply again commencing after the Waiver Period for the fiscal quarter ended March 31, 2024.
The maximum Net Leverage Ratio and the minimum fixed charge coverage ratio for the fiscal quarter ending December 31, 2022 are 2.50:1.00 and 1.25:1.00, respectively, and such ratios will apply again commencing with the fiscal quarter ending March 31, 2024.
During years ended December 31, 2022 and 2021, the Company acquired an aggregate of 6.5 million and 3.9 million common units of FAH, LLC, respectively, in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in FAH, LLC subject to the provisions of the Tax Receivable Agreement.
During years ended December 31, 2023 and 2022, the Company acquired an aggregate of 1.8 million and 6.5 million common units of FAH, LLC, respectively, in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in FAH, LLC subject to the provisions of the Tax Receivable Agreement.
In late 2022, ocean freight rates began to stabilize, however difficulties in our warehouse and distribution operations led us to incur a substantial amount of ground transportation and temporary storage costs. We anticipate inflationary pressures throughout our supply chain in future periods, specific to shipping and, to a lesser extent, product costs.
In late 2022, difficulties in our warehouse and distribution operations led us to incur a substantial amount of ground transportation and temporary storage costs. We anticipate inflationary pressures throughout our supply chain in future periods, specific to shipping and, to a lesser extent, product costs.
If our operating results fail to improve or if we are otherwise unable to maintain compliance with the financial or other covenants under the New Credit Agreement, our lenders could, among other things, continue to refuse to permit any additional borrowings under the New Revolving Credit Facility, terminate all outstanding commitments thereunder and accelerate all outstanding borrowings and other obligations, which would require us to seek additional financing.
If our operating results fail to improve or if we are otherwise unable to maintain compliance with the financial or other covenants under the Credit Agreement, our lenders could, among other things, terminate all outstanding commitments thereunder and accelerate all outstanding borrowings and other obligations, which would require us to seek additional financing.
If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all, particularly during the Waiver Period.
If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all.
This is particularly true given the concentration of our sales of products under certain of our brands, particularly our Core Collectible branded products, which represented approximately 75% and 80% of our sales for the years ended December 31, 2022 and 2021, respectively, and which are sold across multiple product categories.
This is particularly true given the concentration of our sales of products under certain of our brands, particularly our Core Collectible branded products, which represented approximately 73% and 76% of our sales for the years ended December 31, 2023 and 2022, respectively, and which are sold across multiple product categories.
We have diversified our product offerings across property categories. We have visibility into the new release schedule of many our content providers and our expansive license portfolio allows us to dynamically manage new product creation. This insight allows us to adjust the mix of products based on classic evergreen properties and new releases, depending on the media release cycle.
We often have visibility into the new release schedule of many our major content providers and our expansive license portfolio allows us to dynamically manage new product creation. This insight allows us to adjust the mix of products based on classic evergreen properties and new releases, depending on the media release cycle.
Therefore, we only recognize a liability for Tax Receivable Agreement Payments if we determine that it is probable that we will generate sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires judgment.
Therefore, we only recognize a liability for Tax Receivable Agreement Payments if we determine that it is probable that we will generate sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits.
We infuse our distinct designs and aesthetic sensibility into one of the industry’s largest portfolios of licensed content over a wide variety of product categories, including figures, plush, accessories, apparel, homewares, vinyl record, poster or digital NFT.
We infuse our distinct designs and aesthetic sensibility into one of the industry’s largest portfolios of licensed content over a wide variety of product categories, including figures, plush, accessories, apparel, homewares and digital NFTs.
On July 29, 2022, the New Revolving Credit Facility was increased to $215.0 million and on February 28, 2023 the New Revolving Credit Facility was reduced to $180.0 million and thereafter will be reduced to $150.0 million on December 31, 2023.
On July 29, 2022, the Revolving Credit Facility was increased to $215.0 million and on February 28, 2023 the Revolving Credit Facility was reduced to $180.0 million and again to $150.0 million on December 31, 2023.
Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of sales, was 32.8% for the year ended December 31, 2022, compared to 37.0% for the year ended December 31, 2021.
Gross margin (exclusive of depreciation and amortization), calculated as net sales less cost of sales as a percentage of sales, was 30.4% for the year ended December 31, 2023, compared to 32.8% for the year ended December 31, 2022.
Depreciation and Amortization Depreciation and amortization expense was $47.7 million for the year ended December 31, 2022, compared to $41.2 million for the year ended December 31, 2021, primarily driven by the type and timing of assets placed into service.
Depreciation and Amortization Depreciation and amortization expense was $59.8 million for the year ended December 31, 2023, compared to $47.7 million for the year ended December 31, 2022, primarily driven by the type and timing of assets placed into service.
Interest Expense, Net Interest expense, net was $10.3 million for the year ended December 31, 2022, an increase of 44.2%, compared to $7.2 million for the year ended December 31, 2021. The increase in interest expense, net was due to higher average balances of debt outstanding as well as higher interest rates during the year ended December 31, 2022.
Interest Expense, Net Interest expense, net was $28.0 million for the year ended December 31, 2023, an increase of 170.7%, compared to $10.3 million for the year ended December 31, 2022. The increase in interest expense, net was due to higher average balances of debt outstanding as well as higher interest rates during the year ended December 31, 2023.
Credit card fees, insurance, legal expenses, other professional expenses and other miscellaneous operating costs are also included in selling, general and administrative expenses. Selling costs generally correlate to revenue timing and therefore experience similar moderate seasonal trends. We expect general and administrative costs to increase as our business evolves.
Credit card fees, insurance, legal expenses, other professional expenses and other miscellaneous operating costs are also included in selling, general and administrative expenses. Selling costs generally correlate to revenue timing and therefore experience similar moderate seasonal trends.
As of December 31, 2021, we recorded a prepaid asset of $4.7 million, net of a reserve of $0.7 million. We record a royalty liability as revenues are recognized based on the terms of the licensing agreement.
As of December 31, 2022, we recorded a prepaid asset of $13.0 million, net of a reserve of $0.8 million. We record a royalty liability as revenues are recognized based on the terms of the licensing agreement.
Proceeds from the New Credit Facilities were primarily used to repay the Company’s $235.0 million term loan facility (the "Former Term Loan Facility") and its $75.0 million revolving credit facility (the “Former Revolving Credit Facility” and together with the Former Term Loan Facility, the “Former Credit Facilities”).
Proceeds from the Credit Facilities were primarily used to repay the Company’s former $235.0 million term loan facility and its former $75.0 million revolving credit facility.
Net cash used in operating activities was $40.1 million for the year ended December 31, 2022, compared to net cash provided by operating activities of $87.4 million for the year ended December 31, 2021.
Net cash provided by operating activities was $30.9 million for the year ended December 31, 2023, compared to net cash used in operating activities of $40.1 million for the year ended December 31, 2022.
For the year ended December 31, 2022, includes charges related to residual one-time relocation and severance costs for U.S. warehouse personnel in connection with the opening of a warehouse and distribution facility in Buckeye, Arizona.
For the year ended December 31, 2022, includes charges related to residual one-time relocation and severance costs for U.S. warehouse personnel in connection with the opening of a warehouse and distribution facility in Buckeye, Arizona. (5) Represents write-off of unamortized debt financing fees for the year ended December 31, 2023.
In addition, during the year ended December 31, 2022 and 2021, the Company recognized $4.0 million and $1.6 million, respectively of expenses in other expense, net on our consolidated statements of operations related to remeasurement adjustments of Tax Receivable Agreement liabilities. 81 Table of Contents
In addition, during the year ended December 31, 2023, the Company recognized a gain of $100.2 million and during the year ended December 31, 2022 and 2021, the Company recognized an expense of $4.0 million and $1.6 million, recorded within other (income) expense, net on our consolidated statements of operations related to remeasurement adjustments of Tax Receivable Agreement liabilities. 81 Table of Contents
The terms of any future offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering. 73 Table of Contents Liquidity and Capital Resources The following table shows summary cash flow information for the years ended December 31, 2022 and 2021 (in thousands): Year Ended December 31, 2022 2021 Net cash (used in) provided by operating activities $ (40,134) $ 87,362 Net cash used in investing activities (78,065) (27,381) Net cash provided by (used in) financing activities 54,639 (28,628) Effect of exchange rates on cash and cash equivalents (797) (51) Net change in cash and cash equivalents $ (64,357) $ 31,302 Operating Activities.
The terms of any future offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering. 74 Table of Contents Liquidity and Capital Resources The following table shows summary cash flow information for the years ended December 31, 2023 and 2022 (in thousands): Year Ended December 31, 2023 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 Effect of exchange rates on cash and cash equivalents 518 (797) Net change in cash and cash equivalents $ 17,253 $ (64,357) Operating Activities.
If we determine that it is probable that the expected revenue will not be realized, a reserve is recorded against the prepaid asset for the non-recoverable portion. As of December 31, 2022, we recorded a prepaid asset of $13.0 million , net of a reserve of $0.8 million .
If we determine that it is probable that the expected revenue will not be realized, a reserve is recorded against the prepaid asset for the non-recoverable portion. As of December 31, 2023, we recorded a prepaid asset of $25.1 million , net of a reserve of $4.5 million .
For the year ended December 31, 2022, net cash provided by financing activities was $54.6 million, primarily related to proceeds from net borrowings on the New Revolving Line of Credit of $70.0 million and proceeds of $20.0 million from the Equipment Finance Loan, offset by payments under the Tax Receivable Agreement of $7.7 million, distributions to the Continuing Equity Owners of $10.7 million, and net payments on the Term Loan Facility of $18.0 million. 74 Table of Contents For the year ended December 31, 2021, net cash used in financing activities was $28.6 million, primarily related to payments under the Tax Receivable Agreement of $1.7 million, distributions to the Continuing Equity Owners of $9.3 million, and net payments on the Term Loan Facility of $18.4 million, partially offset by $3.8 million proceeds from the exercise of equity-based options.
For the year ended December 31, 2022, net cash provided by financing activities was $54.6 million, primarily related to proceeds from net borrowings on the Revolving Line of Credit of $70.0 million and proceeds of $20.0 million from the Equipment Finance Loan, offset by payments under the Tax Receivable Agreement of $7.7 million, distributions to the Continuing Equity Owners of $10.7 million, and net payments on the Term Loan Facility of $18.0 million.
As noted in the table below, the Non-GAAP Financial Measures include adjustments for non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, certain severance, relocation and related costs, loss on extinguishment of debt, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments and other unusual or one-time items.
As noted in the table below, the Non-GAAP Financial Measures include adjustments for non-cash charges related to equity-based compensation programs, loss on debt extinguishment, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, inventory write-down, tax receivable agreement liability adjustments, one-time cloud-based computing arrangement abandonment expenses, one-time disposal costs for unfinished and finished goods held at offshore factories and other unusual or one-time items.
As of December 31, 2022 and 2021, we were in compliance with all covenants with the New Credit Facilities. Subsequent to the Third Amendment, we expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts.
As of December 31, 2023 and 2022, we were in compliance with all covenants in our respective credit agreements in effect at such time. We expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts.
We define Adjusted EBITDA as EBITDA further adjusted for non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, certain severance, relocation and related costs, loss on extinguishment of debt, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments, and other unusual or one-time items.
We define Adjusted EBITDA as EBITDA further adjusted for non-cash charges related to equity-based compensation programs, loss on debt extinguishment, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, inventory write-down, tax receivable agreement liability adjustments, one-time cloud-based computing arrangement abandonment expenses, one-time disposal costs for unfinished and finished goods held at offshore factories and other unusual or one-time items.
The decrease in net income was primarily the result of the increases in cost of goods sold and selling, general and administrative costs outpacing the increases in net sales for the year ended December 31, 2022 as compared to the year ended December 31, 2021, as discussed above. 68 Table of Contents Non-GAAP Financial Measures EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per Diluted Share (collectively the “Non-GAAP Financial Measures”) are supplemental measures of our performance that are not required by, or presented in accordance with, U.S.
The increase in net loss was primarily the result of lower net sales and nonrecurring events for the year ended December 31, 2023 as compared to the year ended December 31, 2022, as discussed above. 69 Table of Contents Non-GAAP Financial Measures EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income and Adjusted (Loss) Earnings per Diluted Share (collectively the “Non-GAAP Financial Measures”) are supplemental measures of our performance that are not required by, or presented in accordance with, U.S.
The New Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to: • incur additional indebtedness; • incur certain liens; • consolidate, merge or sell or otherwise dispose of our assets; • make investments, loans, advances, guarantees and acquisitions; • pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests; • enter into transactions with affiliates; • enter into sale and leaseback transactions in respect to real property; • enter into swap agreements; • enter into agreements restricting our subsidiaries’ ability to pay dividends; • issue or sell equity interests or securities convertible into or exchangeable for equity interests; • redeem, repurchase or refinance other indebtedness; and • amend or modify our governing documents.
The Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to: • incur additional indebtedness; • incur certain liens; • consolidate, merge or sell or otherwise dispose of our assets; • make investments, loans, advances, guarantees and acquisitions; • pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests; • enter into transactions with affiliates; • enter into sale and leaseback transactions in respect to real property; • enter into swap agreements; • enter into agreements restricting our subsidiaries’ ability to pay dividends; • issue or sell equity interests or securities convertible into or exchangeable for equity interests; • redeem, repurchase or refinance other indebtedness; and • amend or modify our governing documents. 76 Table of Contents In addition, the Credit Agreement requires FAH, LLC and its subsidiaries to comply on a quarterly basis with a maximum Net Leverage Ratio and a minimum fixed charge coverage ratio (in each case, measured on a trailing four-quarter basis).
Our intangible assets, which are being amortized over a range of two to 20 years, are mainly comprised of trade names, customer relationships and intellectual property we recognized as part of the ACON Acquisition and, to a lesser extent, the 2017 acquisition of Underground Toys, the 2017 acquisition of Loungefly, the 2019 acquisition of Forrest-Pruzan and the 2022 acquisition of Mondo.
Our intangible assets, which are being amortized over a range of two to 20 years, are primarily comprised of trade names, customer relationships and intellectual property we recognized as part of the ACON Acquisition.
Amortization relates to definite-lived intangible assets that are expensed on a straight-line basis over the estimated useful lives.
Depreciation and Amortization Depreciation expense is recognized on a straight-line basis over the estimated useful lives of our property and equipment. Amortization relates to definite-lived intangible assets that are expensed on a straight-line basis over the estimated useful lives.
On July 15, 2022, we filed a preliminary shelf registration statement on Form S-3 with the SEC. The Form S-3 was declared effective by the SEC on July 26, 2022 and will remain effective until through July 25, 2025.
The Form S-3 was declared effective by the SEC on July 26, 2022 and will remain effective until through July 25, 2025.
These items include, among other things, non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, certain severance, relocation and related costs, loss on extinguishment of debt, foreign currency transaction gains and losses, Tax Receivable Agreement liability adjustments, and the income tax expense (benefit) effect of these adjustments.
These items include, among other things, non-cash charges related to equity-based compensation programs, loss on debt extinguishment, acquisition transaction costs and other expenses, certain severance, relocation and related costs, foreign currency transaction gains and losses, inventory write-down, tax receivable agreement liability adjustments, one-time cloud-based computing arrangement abandonment expenses, one-time disposal costs for unfinished and finished goods held at offshore factories and the income tax expense effect of these adjustments.
As of December 31, 2022, we had $19.2 million of cash and cash equivalents and $111.8 million of working capital, compared with $83.6 million of cash and cash equivalents and $167.6 million of working capital as of December 31, 2021.
As of December 31, 2023, we had $36.5 million of cash and cash equivalents and $(16.0) million of working capital, compared with $19.2 million of cash and cash equivalents and $111.8 million of working capital as of December 31, 2022.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization) Cost of sales (exclusive of depreciation and amortization) was $888.7 million for the year ended December 31, 2022, an increase of 37.1%, compared to $648.3 million for the year ended December 31, 2021.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization) Cost of sales (exclusive of depreciation and amortization) was $763.1 million for the year ended December 31, 2023, a decrease of 14.1%, compared to $888.7 million for the year ended December 31, 2022.
Year Ended December 31, 2022 2021 (in thousands) Net sales $ 1,322,706 $ 1,029,293 Net (loss) income $ (5,240) $ 67,854 EBITDA (1) $ 34,962 $ 133,277 Adjusted EBITDA (1) $ 97,425 $ 149,931 (1) Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA are financial measures not calculated in accordance with U.S. GAAP.
Year Ended December 31, 2023 2022 (in thousands) Net sales $ 1,096,086 $ 1,322,706 Net loss $ (164,438) $ (5,240) EBITDA (1) $ 55,792 $ 34,962 Adjusted EBITDA (1) $ 27,203 $ 97,425 (1) Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA are financial measures not calculated in accordance with U.S. GAAP.
In addition, the efforts of our senior management team have been integral to our relationships with our licensors. Inability to license newer pop culture properties, the termination or lack of renewal of one or more of our license agreements, or the renewal of a license agreement on less favorable terms, could adversely affect our business.
Inability to license newer pop culture properties, the termination or lack of renewal of one or more of our license agreements, or the renewal of a license agreement on less favorable terms, including as a result of members of our senior management team departing the Company, could adversely affect our business.
The first amortization payment commenced with the quarter ending on December 31, 2021. The New Revolving Credit Facility also terminates on the Maturity Date and loans thereunder may be borrowed, repaid, and reborrowed up to such date.
The Revolving Credit Facility also terminates on the Maturity Date and loans thereunder may be borrowed, repaid, and reborrowed up to such date.
Sales terms typically do not allow for a right of return except in relation to a manufacturing defect. Shipping costs billed to our customers are included in net sales, while shipping and handling costs, which include inbound freight costs and the cost to ship products to our customers, are included in cost of sales.
Shipping costs billed to our customers are included in net sales, while shipping and handling costs, which include inbound freight costs and the cost to ship products to our customers, are included in cost of sales.
If we determine we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, which would have an adverse effect on our results of operations and earnings.
If we determine we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, as we did during the year ended December 31, 2023.
In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected revenue growth, and operating margins, among others. 80 Table of Contents Upon redemption or exchange of common units in FAH, LLC, we record a liability relating to the obligation if we believe that it is probable that we would have sufficient future taxable income to utilize the related tax benefits.
Upon redemption or exchange of common units in FAH, LLC, we record a liability relating to the obligation if we believe that it is probable that we would have sufficient future taxable income to utilize the related tax benefits.
We cannot assure you that we will be able to maintain compliance with our financial covenants as amended after the Waiver Period, or that we will be able to further amend the New Credit Agreement should similar circumstances arise in the future.
In particular, though we were in compliance with the financial and other covenants under the Credit Agreement as of December 31, 2023, we cannot assure you that we will be able to maintain compliance with our financial covenants, or that we will be able to further amend the Credit Agreement should circumstances arise in the future.
Pursuant to the Tax Receivable Agreement, we are required to make cash payments to the TRA Parties equal to 85% of the tax benefits, if any, that we realize, or in some circumstances are deemed to realize, as a result of (1) any redemptions funded by us or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock or cash, and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement ("Tax Receivable Agreement Payments”).
Pursuant to the Second Amended and Restated FAH, LLC Agreement, FAH, LLC will generally make pro rata tax distributions to holders of common units in an amount sufficient to fund all or part of their tax obligations with respect to the taxable income of FAH, LLC that is allocated to them. 80 Table of Contents Pursuant to the Tax Receivable Agreement, we are required to make cash payments to the TRA Parties equal to 85% of the tax benefits, if any, that we realize, or in some circumstances are deemed to realize, as a result of (1) any redemptions funded by us or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock or cash, and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement ("Tax Receivable Agreement Payments”).
For the year ended December 31, 2021, net cash used in investing activities was $27.4 million and was used for the purchase of property and equipment, primarily related to tooling and molds used for the expansion of product lines. Financing Activities .
For the year ended December 31, 2022, net cash used in investing activities was $78.1 million and was primarily related to purchases of tooling and molds used in our production product lines and for the acquisition of Mondo. Financing Activities .
(5) Represents write-off of unamortized debt financing fees for the year ended December 31, 2021. (6) Represents both unrealized and realized foreign currency losses (gains) on transactions other than in U.S. dollars. 71 Table of Contents (7) Represents recognized adjustments to the tax receivable agreement liability.
(6) Represents both unrealized and realized foreign currency losses (gains) on transactions other than in U.S. dollars. (7) Represents recognized adjustments to the tax receivable agreement liability.
Selling, General, and Administrative Expenses Selling, general, and administrative expenses were $398.3 million for the year ended December 31, 2022, an increase of 63.0%, compared to $244.3 million for the year ended December 31, 2021.
Selling, General, and Administrative Expenses Selling, general, and administrative expenses were $377.1 million for the year ended December 31, 2023, a decrease of 5.3%, compared to $398.3 million for the year ended December 31, 2022.
Selling, general, and administrative expenses were 30.1% of sales for the year ended December 31, 2022, compared to 23.7% of sales for the year ended December 31, 2021, primarily due to the increase in general and administrative expenses outpacing net sales.
Selling, general, and administrative expenses were 34.4% of sales for the year ended December 31, 2023, compared to 30.1% of sales for the year ended December 31, 2022, primarily due to the non-recurring events described above.
We may from time to time, liquidate and/or dispose of inventory to increase warehouse operating efficiency. Subsequent to the year ended December 31, 2022, the Company approved an inventory reduction plan to improve U.S. warehouse operational efficiency.
We may from time to time, liquidate and/or dispose of inventory to increase warehouse operating efficiency. During the year ended December 31, 2023, the Company approved an inventory reduction plan to improve U.S. warehouse operational efficiency. The Company recorded a $30.3 million inventory write-down included in cost of sales as presented in the condensed consolidated statements of operations.
We evaluate the need for price increases along with other incentive arrangements and cost of product to help manage gross margins. In 2021, we instituted price increases for certain of our products and we expect to increase prices for certain of our other products in early 2023.
We evaluate the need for price increases along with other incentive arrangements and cost of product to help manage gross margins. In 2022 and 2023, we instituted price increases for our products. Sales terms typically do not allow for a right of return except in relation to a manufacturing defect.
If economic conditions worsen, such as due to the COVID-19 pandemic or international conflict, and negatively impact the Company’s earnings and operating cash flows, this could impact our ability to regain compliance with our amended financial covenants and require the Company to seek additional amendments to our New Credit Agreement. 76 Table of Contents The New Credit Agreement also contains certain customary representations and warranties and affirmative covenants, and certain reporting obligations.
If economic conditions worsen and negatively impact the Company’s earnings and operating cash flows, this could impact our ability to regain compliance with our amended financial covenants and require the Company to seek additional amendments to our Credit Agreement or cause us to default on our obligations under the Credit Agreement.
The Continuing Equity Owners may exercise their redemption right for as long as their common units remain outstanding. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments we will be required to make to the TRA Parties will be significant.
Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments we will be required to make to the TRA Parties will be significant, which will be contingent on future realizability of the Company's deferred tax assets.
As noted above, on September 17, 2021, we entered into the New Credit Facilities which, as amended, are secured by substantially all assets of the Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions. 75 Table of Contents The New Term Loan Facility matures on September 17, 2026 (the “Maturity Date”) and amortizes in quarterly installments in aggregate amounts equal to 2.50% of the original principal amount of the New Term Loan Facility, with any outstanding balance due and payable on the Maturity Date.
As noted above, on September 17, 2021, we entered into the Credit Facilities which, as amended, are secured by substantially all assets of the Borrowers and any of their existing or future material domestic subsidiaries, subject to customary exceptions.
During the years ended December 31, 2022 and 2021, we saw shifts in our client mix as a direct result of the COVID-19 pandemic and the enhanced online presence of our top customers. We depend on retailers to provide adequate and attractive space for our products and point of purchase displays in their stores.
During the years ended December 31, 2023 and 2022, we saw shifts in our client mix as a direct result of our growing direct-to-consumer business and enhanced online presence of our top customers.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeAs of December 31, 2022 , we had $225.8 million of variable rate debt outstanding under our Credit Facilities, consisting of $155.8 million outstanding under the Term Loan Facility (net of unamortized discount of $1.7 million) in outstanding variable rate borrowings. We had $70.0 million outstanding variable rate borrowings under our Revolving Credit Facility.
Biggest changeAs of December 31, 2023 , we had $258.1 million of variable rate debt outstanding under our Credit Facilities, consisting of $137.6 million outstanding under the Term Loan Facility (net of unamortized discount of $1.9 million) in outstanding variable rate borrowings. We had $120.5 million outstanding variable rate borrowings under our Revolving Credit Facility.
In addition, we have another international subsidiary in Hong Kong that primarily incur operating expenses in local currency and use the local currency as each subsidiary's functional currency. Therefore, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, principally the British pound and euro.
In addition, we have another international subsidiary in Hong Kong that primarily incurs operating expenses in local currency and use the local currency as each subsidiary's functional currency. Therefore, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, principally the British pound and euro.
Based upon a sensitivity analysis of our debt levels on December 31, 2022 , an increase or decrease of 1% in the effective interest rate would cause an increase or decrease in interest expense of approximately $1.6 million over the next 12 months.
Based upon a sensitivity analysis of our debt levels on December 31, 2023 , an increase or decrease of 1% in the effective interest rate would cause an increase or decrease in interest expense of approximately $1.4 million over the next 12 months.

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