Entity information:

• Entity registrant name: FUNKO, INC.
• CIK: 0001704711
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1704711/000156459018006124/0001564590-18-006124-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1704711/000156459018006124/fnko-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1704711/000156459018006124/fnko-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001704711
• Generator: Donnelley Financial Solutions
• Total assets: 630,313,000
• Income tax expense (benefit): 1,540,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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11. Income Taxes

Accounting for the Tax Cuts and Jobs Act

In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was passed. The Tax Act changes existing U.S. tax law, including changes to U.S. corporate tax rates, business-related exclusions, and deductions and credits. The Tax Act also has international tax consequences. Also in December 2017, the SEC Issued Staff Accounting Bulletin No. 118 to address situations where the accounting under ASC Topic 740 is incomplete for certain income tax effects of the Tax Act upon issuance of an entity’s financial statements for the reporting period in which the Tax Act was enacted. This guidance addresses the recognition of taxes payable or refundable for the current year and the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. ASC Topic 740 also addresses the accounting for income taxes upon a change in tax laws or tax rates. The income tax accounting effect of a change in tax laws or tax rates includes, for example, adjusting (or re-measuring) deferred tax assets and liabilities, as well as evaluating whether a valuation allowance is needed for deferred tax assets. This guidance also clarifies that disclosure should be provided when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740 for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. This guidance is effective upon publication.

While analysis and interpretation of this legislation is provisional, based on the Company’s current evaluation, the significant impacts from the Tax Act are primarily due to the lower U.S. federal corporate tax rate of 21%. The impact to the consolidated statement of operations was an additional $4.6 million of provisional income tax expense recorded for the year ended December 31, 2017. This expense reflects the revaluation of our net deferred tax assets based on a U.S. federal corporate tax rate of 21%. The Company continues to assess and analyze the potential impacts of the Tax Act which could potentially impact the measurement of our tax balances.

Income (loss) before income taxes consisted of (in thousands):

 

 

Income Taxes

The components of the Company’s income tax expense consisted of the following (in thousands):

 

 

A reconciliation of income tax expense from operations computed at the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

 

Our effective income tax rate for 2017 was 21.6%. The decrease in our effective income tax rate in 2017 compared to the statutory rate was primarily due to the Tax Act, the non-controlling interest, and the LLC flow-through structure. The Tax Act reduces the U.S. federal corporate tax rate to 21%, which negatively impacted our effective tax rate by reducing our deferred tax assets. The non-controlling interest benefited our effective tax rate by reducing our allocable share of taxable income subject to U.S. federal, state and local income taxes. The LLC flow-through structure benefited our effective tax rate as prior to the IPO we were subject to certain LLC entity-level taxes and foreign taxes but generally not subject to entity-level U.S. federal income taxes.

Deferred Income Taxes

The significant items comprising deferred tax assets and liabilities is as follows (in thousands):

 

 

As of December 31, 2017, the Company did not have any federal or state net operating loss carryforwards for income tax purposes.

The Company evaluates its ability to realize deferred tax assets on a quarterly basis and establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset may not be realized. The Company recognized a deferred tax asset of $13.4 million associated with the basis difference in its investment in FAH, LLC upon acquiring these LLC interests. However, a portion of the total basis difference will only reverse upon the eventual sale of its interest in FAH, LLC, which we expect would result in a capital loss. As of December 31, 2017, the Company established a valuation allowance in the amount of $8.9 million against the deferred tax asset.

Uncertain Tax Positions

The Company regularly evaluates the likelihood of realizing the benefit from income tax positions that we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available. If the Company determines it is more likely than not that the position will be sustained, a benefit will be recognized at the largest amount that we believe is cumulatively greater than 50% likely to be realized. Interest and penalties related to income tax matters are classified as a component of income tax expense. Unrecognized tax benefits are recorded in other long-term liabilities on the consolidated balance sheets. We had no uncertain tax positions as of December 31, 2017.

Other Matters

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to U.S. federal, state, and local income tax examinations by tax authorities for years after 2013 and subject to examination for all foreign income tax returns for fiscal 2017. There were no open tax examinations at December 31, 2017.

Tax Receivable Agreement

On November 1, 2017, the Company entered into the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that it realizes, or in some circumstances, is deemed to realize, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of common units for Class A common stock or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. FAH, LLC intends to have in effect an election under Section 754 of the Internal Revenue Code effective for each taxable year in which a redemption or exchange (including deemed exchange) of common units for cash or stock occurs. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in FAH, LLC. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement are assignable, including to transferees of common units in FAH, LLC (other than the Company as transferee pursuant to a redemption or exchange of common units in FAH, LLC). The Company expects to benefit from the remaining 15% of the tax benefits, if any, that the Company may realize. At December 31, 2017, the Company did not have any obligations recorded under the Tax Receivable Agreement.