S-1 1 sp_1.htm S-1 SP_1

 

As filed with the Securities and Exchange Commission on November 24, 2015

Registration No. 333  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM S‑1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


FANTEX, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

7389
(Primary Standard Industrial
Classification Code No.)

80‑0884134
(I.R.S. Employer
Identification No.)

Fantex, Inc.

330 Townsend Street, Suite 234

San Francisco, CA 94107

(415) 592‑5950

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


Cornell “Buck” French

Chief Executive Officer

Fantex, Inc.

330 Townsend Street, Suite 234

San Francisco, California 94107

(415) 592‑5950

(Name, address, including zip code, and telephone number, including area code, of agent for service)


 

 

Copies to:

Patrick A. Pohlen, Esq.
Jim Morrone, Esq.
Latham & Watkins LLP
140 Scott Drive
Menlo Park, California 94025
(650) 328‑4600

David G. Peinsipp, Esq.

Robert W. Phillips, Esq.

J. Carlton Fleming, Esq.
Cooley LLP
101 California Street, 5th Floor
San Francisco, California 94111
(415) 693-2000

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 

If this Form is a post‑effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 

If this Form is a post‑effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non‑accelerated filer 
(Do not check if a
smaller reporting company)

Smaller reporting company 

 


 

 

 

 

 

 

 

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered

 

Proposed Maximum Aggregate Offering Price(1)(2)(3)

 

Amount of
Registration Fee

Fantex Sports Portfolio 1 Units (the “Units”), each consisting of 0.047 shares of Fantex Series Vernon Davis Convertible Tracking Stock, par value $0.0001 per share, 0.127 shares of Fantex Series EJ Manuel Convertible Tracking Stock, par value $0.0001 per share, 0.040 shares of Fantex Series Mohamed Sanu Convertible Tracking Stock, par value $0.0001 per share, 0.277 shares of Fantex Series Alshon Jeffery Convertible Tracking Stock, par value $0.0001 per share, 0.117 shares of Fantex Series Michael Brockers Convertible Tracking Stock, par value $0.0001 per share,  0.089 shares of Fantex Series Jack Mewhort Convertible Tracking Stock, par value $0.0001 per share, and 0.683 shares of Fantex Series Professional Sports Convertible Tracking Stock, par value $0.0001 per share. 

$29,462,400

 

$2,966.86

Fantex Series Vernon Davis Convertible Tracking Stock(4)

 

Fantex Series EJ Manuel Convertible Tracking Stock(4)

 

Fantex Series Mohamed Sanu Convertible Tracking Stock(4)

 

Fantex Series Alshon Jeffery Convertible Tracking Stock(4)

 

Fantex Series Michael Brockers Convertible Tracking Stock(4)

 

Fantex Series Jack Mewhort Convertible Tracking Stock(4)

 

Fantex Series Professional Sports Convertible Tracking Stock

 

Platform Common Stock, par value $0.0001 per share(5)

 

Total

$29,462,400

 

$2,966.86

(1)

Includes 198,400 Units subject to a conditional option that may be granted to the underwriters to cover over-allotments, if any.

(2)

Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(o) under the Securities Act. 

(3)

An indeterminate amount of securities are being registered hereby to be offered solely for market-making purposes by specified affiliates of the registrant. Pursuant to Rule 457(q) under the Securities Act, no filing fee is required. 

(4)

Consists of shares to be sold by the selling stockholders, as defined in the accompanying prospectus, as part of the Units sold.

(5)

Represents up to 50,000,000 shares of platform common stock of Fantex, Inc. issuable upon the conversion of shares of one or more of the tracking stocks that comprise the Units. The precise number of shares of platform common stock to be registered is not presently determinable because the conversion ratio as of the conversion date, if any, of any of the tracking stocks that comprise the Units is not currently known. Pursuant to Rule 457(i) under the Securities Act the registration fee is calculated on the basis of the proposed offering price of the Units alone because no additional consideration is to be received in connection with the future conversion, if any, of the tracking stocks that comprise the Units into platform common stock.


The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 


 

Table of Contents

The information contained in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED NOVEMBER 24, 2015

PRELIMINARY PROSPECTUS

Minimum Offering of 1,984,000 Units

Maximum Offering of 2,182,400 Units

Picture 9

Fantex Sports Portfolio 1 Units

 

We and the selling stockholders are offering hereby, on a best efforts basis, a minimum of 1,984,000 Fantex Sports Portfolio 1 Units (each, a “Unit” and together, the “Units”) and a maximum of 2,182,400 Units.  We expect the initial public offering price of the Units to be between $12.50 and $14.50 per Unit.  Until the underwriters sell at least 1,984,000 Units, funds received from the offering will be deposited into an interest bearing escrow account pending the closing of the offering in accordance with Rule 15c24 of the Securities Exchange Act of 1934, as amended. If the underwriters do not sell at least 1,984,000 Units within 30 days after the date this registration statement becomes effective with the Securities and Exchange Commission, all funds will be promptly returned to investors with interest and without deduction. Each Unit consists of 0.047 shares of Fantex Series Vernon Davis Convertible Tracking Stock (“Fantex Series Vernon Davis”), 0.127 shares of Fantex Series EJ Manuel Convertible Tracking Stock (“Fantex Series EJ Manuel”), 0.040 shares of Fantex Series Mohamed Sanu Convertible Tracking Stock (“Fantex Series Mohamed Sanu”), 0.277 shares of Fantex Series Alshon Jeffery Convertible Tracking Stock (“Fantex Series Alshon Jeffery”), 0.117 shares of Fantex Series Michael Brockers Convertible Tracking Stock (“Fantex Series Michael Brockers”), 0.089 shares of Fantex Series Jack Mewhort Convertible Tracking Stock (“Fantex Series Jack Mewhort”) and 0.683 shares of Fantex Series Professional Sports Convertible Tracking Stock (“Fantex Series Professional Sports”). A Unit cannot be separated into its component parts at any time. In this prospectus, we sometimes refer to the convertible tracking stocks that comprise the Units as the “Unit Tracking Stocks,” and to our convertible tracking stocks more generally as our “tracking stocks.”

As part of the Units offered, we are offering an aggregate of 1,355,028 shares of Fantex Series Professional Sports, and as part of the Units offered, the selling stockholders are offering an aggregate of 93,140 shares of Fantex Series Vernon Davis, 252,667 shares of Fantex Series EJ Manuel, 80,331 shares of Fantex Series Mohamed Sanu, 549,085 shares of Fantex Series Alshon Jeffery, 232,630 shares of Fantex Series Michael Brockers and 175,940 shares of Fantex Series Jack Mewhort. We will not receive any proceeds from the shares of Fantex Series Vernon Davis, Fantex Series EJ Manuel, Fantex Series Mohamed Sanu, Fantex Series Alshon Jeffery, Fantex Series Michael Brockers and Fantex Series Jack Mewhort  included in the Units, or 44.9% of the proceeds from this offering, and the selling stockholders will not receive any proceeds from the shares of Fantex Series Professional Sports included in the Units, or 55.1% of the proceeds from this offering. 

There is no established trading market for these Units. We intend to apply to list the Units on the NASDAQ Capital Market under the symbol “FXSP.” Shares of our Fantex Series Vernon Davis, Fantex Series EJ Manuel, Fantex Series Mohamed Sanu, Fantex Series Alshon Jeffery, Fantex Series Michael Brockers and Fantex Series Jack Mewhort are quoted on the website of our affiliated broker-dealer, Fantex Brokerage Services, LLC (“FBS”), under the symbols “VNDSL,” “EJMLL,” “SANUL,” “JEFFL,” “BRKSL” and “JKMTL,” respectively. On November 13, 2015, the last reported sales prices of Fantex Series Vernon Davis, Fantex Series EJ Manuel, Fantex Series Mohamed Sanu, Fantex Series Alshon Jeffery, Fantex Series Michael Brockers and Fantex Series Jack Mewhort on the FBS alternative trading system were $8.00 per share, $7.00 per share, $10.00 per share, $11.00 per share, $9.00 per share and $11.00 per share, respectively.

The securities that are included in the Units are tracking stocks. Neither our tracking stocks nor the Units represent an interest in a separate legal entity. Each of our tracking stocks is intended to track and reflect the separate economic performance of one or more specific brand contracts we have signed with an athlete, entertainer or other high profile individual. However, holders of any Units or tracking stocks will not have a direct investment in the associated brand, brand contract or individual. Rather, an investment in a tracking stock, including through purchase of any Units, will represent an ownership interest in our company as a whole, which will expose holders to additional risks associated with any individual tracking stock that exists at the time of any investment or that we may establish and issue in the future. Our contract parties are, and we expect they will continue to be, individuals and legal entities that are separate and independent from us, with separate ownership, management and operations. The creation or issuance of a tracking stock or Unit will not result in an actual transfer of our assets or the creation of a separate legal entity.

This is also an offering of shares of our platform common stock into which the shares of the Unit Tracking Stocks are convertible. References in this prospectus to an offering of Units shall be deemed also to include the underlying shares of platform common stock into which the shares of our Unit Tracking Stocks are convertible. The platform common stock is intended to track and reflect the economic performance of all of our tracking stocks currently existing and those we may issue in the future. We will attribute to our tracking stocks and the platform common stock certain assets and expenses, including in certain cases expenses related to other series of common stock of Fantex that may be issued from time to time in the future. Our board of directors at its sole discretion may convert the shares of any tracking stock, including the Unit Tracking Stocks that comprise the Units, into platform common stock at any time following the two year anniversary of the filing of a certificate of designations creating that tracking stock. See “Description of Capital Stock” and “Management and Attribution Policies” included or incorporated by reference in this prospectus.

Holders of shares of our platform common stock and any of our tracking stocks, including through the purchase of Units, are each entitled to one vote per whole share of tracking stock held and fractional votes for fractional shares held (whether directly or through the Unit). Following the consummation of this offering, Fantex Holdings, Inc. (“Fantex Holdings”), our parent company, will hold all 100,000,000 outstanding shares of our platform common stock, and thus will hold substantially all of the voting power of our outstanding common stock.

Certain persons are prohibited from purchasing or beneficially owning Units. If such persons purchase or beneficially own Units, we will have the right, under certain circumstances, to restrict such persons from purchasing or transferring Units and to redeem all (or less than all in our sole discretion) of the shares of tracking stock that comprise the Units owned by such person at a price per share equal to par value, or $0.0001 per share. For further information, please see the sections entitled “Description of Capital Stock” and “Risk Factors.”

We are an “emerging growth company,” as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, we are subject to reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.” We have not generated profits and have substantially relied on money obtained from our parent, Fantex Holdings, to conduct our operations.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

 

Per Unit(1)

Amounts if minimum shares sold

Amounts if maximum shares sold

Initial public offering price

$

$

$

Underwriting discounts and commissions(2)

$

$

Proceeds to Fantex, before expenses

$  

$

$

Proceeds to selling stockholders, before expenses

$  

$

$  

(1)

The platform common stock will be issued for no separate consideration, but will be issued only upon the conversion of one or more of the Unit Tracking Stocks that comprise the Units.

(2)

See “Underwriting (Conflicts of Interest).”

In the event that the underwriters locate qualified purchasers for at least 1,984,000 Units, we and the selling stockholders have granted the underwriters an option for a period of 30 days from the date of the prospectus to purchase up to 198,400 additional Units at the initial public offering price, less the underwriting discounts and commissions

This offering is highly speculative and the securities involve a high degree of risk. Investing in Units should be considered only by persons who can afford the loss of their entire investment. See “Risk Factors” beginning on page 21.

This offering will terminate upon the earlier to occur of (i) 30 days after this registration statement becomes effective with the Securities and Exchange Commission, or (ii) the date on which all shares offered hereby have been sold.

 

 

 

 

UBS Investment Bank

Fantex Brokerage Services, LLC

 

 

 

The date of this prospectus is                         , 201 .


 

 

TABLE OF CONTENTS

 

    

Page

 

Where You Can Find More Information; Information Incorporated by Reference

 

 

Prospectus Summary

 

 

Risk Factors 

 

21 

 

Special Note Regarding Forward‑Looking Statements and Industry Data 

 

62 

 

Use of Proceeds 

 

63 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer of Purchases of Equity Securities 

 

64 

 

Dividend Policy 

 

67 

 

Capitalization 

 

69 

 

Dilution 

 

71 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

73 

 

Business 

 

118 

 

Transactions with Related Persons 

 

173 

 

Principal and Selling Stockholders 

 

175 

 

Description of Capital Stock 

 

177 

 

Underwriting (Conflicts of Interest) 

 

186 

 

Shares Eligible for Future Sale 

 

193 

 

Material U.S. Federal Income Tax Considerations 

 

195 

 

Legal Matters 

 

200 

 

Experts 

 

200 

 

Index to Statement of Cash Receipts from Included Contracts for Jack Mewhort 

 

SR-JM-1

 

Index to Statements of Cash Receipts from Included Contracts for Kendall Wright 

 

SR-KW-1

 

Index to Statement of Cash Receipts from Included Contracts for Andrew Heaney 

 

SR-AH-1

 

Index to Statements of Cash Receipts from Included Contracts for Terrance Williams 

 

SR-TW-1

 

Index to Statement of Cash Receipts from Included Contracts for Ryan Shazier 

 

SR-RS-1

 


We have not, the selling stockholders have not and the underwriters have not, authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we, the selling stockholders nor the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, Units only in jurisdictions where offers and sales are permitted. The information in this prospectus is complete and accurate only as of November 24, 2015 regardless of the time of delivery of this prospectus or any sale of Units. Our business, financial condition, results of operations and prospects may have changed since that date. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer thereof is not permitted.

 

This prospectus has been prepared by Fantex and may be used by FBS in connection with offers and sales of these securities in secondary market transactions in these securities, including market‑making transactions as may be effected from time to time. However, FBS is not obligated to make a market in the Units and if it does so, it may discontinue any market‑making at any time without notice, in its sole discretion. If FBS decides to make a market in the Units, it will amend its Form ATS filed with the Securities and Exchange Commission (the SEC), to reflect such change. To the extent FBS chooses to act as a market‑maker, it may act as principal or agent in such transactions, including as agent for the counterparty when acting as principal or as agent for both counterparties, and may receive compensation in the form of discounts and commissions, including from both counterparties, when it acts as agent for both. Such sales will be made at prevailing market prices at the time of sale, at prices related thereto or at negotiated prices. Fantex and the selling stockholders will not receive any proceeds from such secondary market offers and sales. All such transactions with respect to these securities that are made pursuant to a prospectus after the effectiveness of the registration statement of which this prospectus is a part are being made solely pursuant to this prospectus, as it may be supplemented from time to time. This delivery requirement is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

Neither we, the selling stockholders, nor the underwriters have undertaken any efforts to qualify this offering for offers to investors in any jurisdiction outside the United States. Investors must have a U.S. mailing address (other than a P.O. Box) and a U.S. social security number and/or a U.S. tax identification number to be eligible to participate in this offering. 

 

i


 

 

WHERE YOU CAN FIND MORE INFORMATION; INFORMATION INCORPORATED BY REFERENCE

Available Information

We have filed with the SEC a registration statement on Form S‑1 under the Securities Act of 1933, as amended (the “Securities Act”), with respect to the Units being offered by this prospectus. This prospectus, which constitutes part of that registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules that are part of the registration statement. Some items included in the registration statement are omitted from the prospectus in accordance with the rules and regulations of the SEC. For further information with respect to us and the Units offered in this prospectus, we refer you to the registration statement and the accompanying exhibits and schedules. Statements contained in this prospectus regarding the contents of any contract, agreement or any other document to which reference is made are summaries of the material terms of these contracts, agreements or other documents. With respect to each of these contracts, agreements or other documents filed as an exhibit to the registration statement, reference is made to such exhibit for a more complete description of the matter involved.

A copy of the registration statement and the accompanying exhibits and schedules and any other document we file may be inspected without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549 and copies of all or any part of the registration statement may be obtained from such office upon the payment of the fees prescribed by the SEC. The public may obtain information on the operation of the public reference facilities in Washington, D.C. by calling the SEC at 1‑800‑SEC‑0330. Our filings with the SEC are available to the public from the SECs website at www.sec.gov.

We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), applicable to a company with securities registered pursuant to Section 12 of the Exchange Act. In accordance therewith, we file proxy statements, periodic information and other information with the SEC. All documents filed with the SEC are available for inspection and copying at the public reference room and website of the SEC referred to above. We maintain a website at www.fantexbrands.com. You may access our reports, proxy statements and other information free of charge at this website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus, except as specifically stated below.

Information Incorporated by Reference

The SEC allows us to “incorporate by reference” information into this prospectus, which means we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this prospectus. The following documents filed with the SEC are hereby incorporated by reference in this prospectus:

 

·

our Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the SEC on March 27, 2015;

·

our Definitive Proxy Statement on Schedule 14A, as filed with the SEC on April 10, 2015;

·

our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2015, as filed with the SEC on May 13, 2015, for the quarter ended June 30, 2015, as filed with the SEC on August 14, 2015 and for the quarter ended September 30, 2015, as filed with the SEC on November 13, 2015;

·

our Current Reports on Form 8-K as filed with the SEC on January 13, 2015, March 19, 2015, April 17, 2015, June 1, 2015, July 14, 2015, September 11, 2015,  September 22, 2015 and September 24, 2015; and

·

the description of common stock contained in our Forms 8-A as filed with the SEC on May 2, 2014, July 28, 2014, November 7, 2014, March 20, 2015, June 1, 2015 and July 15, 2015. 

1


 

We will provide without charge to each person, including any beneficial owner, to whom this prospectus is delivered, upon his or her written or oral request, a copy of any or all of the reports or documents referred to above that have been incorporated by reference into this prospectus, excluding exhibits to those documents unless they are specifically incorporated by reference into those documents. You may request a copy of these filings, by contacting:

 

Fantex, Inc.

330 Townsend Street,  Suite 234

San Francisco, CA 94107

Telephone: (415) 592‑5950

Attention: Investor Relations

 

You may also access these filings on our website at www.fantexbrands.com. We do not incorporate the information on our website into this prospectus and you should not consider any information on, or that can be accessed through, our website as part of this prospectus, other than those filings with the SEC that we specifically incorporate by reference into this prospectus.

 

 

2


 

 

PROSPECTUS SUMMARY

The following summary highlights certain information about us and this offering contained or incorporated by reference in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere or incorporated by reference in this prospectus. This summary does not contain all of the information that may be important to you. You should read and carefully consider the following summary together with the entire prospectus, including the documents incorporated by reference herein, before deciding to invest in our Fantex Sports Portfolio 1 Units. Some of the statements in this prospectus constitute forward‑looking statements that involve risks and uncertainties. See Special Note Regarding Forward‑Looking Statements and Industry Data. Our actual results could differ materially from those anticipated in such forward‑looking statements as a result of certain factors, including those discussed in the Risk Factors and other sections of this prospectus and in the information incorporated by reference herein.

We are a company whose focus is on acquiring minority interests in the future income of professional athletes and assisting such individuals in growing these income streams. We focus our business on three core areas:

·

targeting, evaluating, and assessing athletes with the potential to generate significant income (“brand income”);

·

acquiring minority interests in such brand income; and

·

assisting Fantex athletes in increasing the potential value of their future brand income, primarily through mentoring and network/audience development.

We currently have brand contracts with Vernon Davis, EJ Manuel, Mohamed Sanu, Alshon Jeffery, Michael Brockers, Jack Mewhort, Kendall Wright, Andrew Heaney,  Terrance Williams and Ryan Shazier, as discussed elsewhere or incorporated by reference in this prospectus. We intend to enter into additional brand contracts in the future with other individuals with the potential to generate significant brand income, and in some cases, with the affiliates of these individuals, whom we refer to, together with the individual, as the contract party. We are actively pursuing these additional brand contracts, but as of the date of this prospectus we have no current commitments to enter into any such additional brand contracts. All of our brand contracts, including those that we enter into in the future with other contract parties, are or are expected to be contingent upon obtaining financing to fund the acquisition of the minority interest in the respective brands, and we intend to finance the acquisition of additional brands through the issuance of additional tracking stocks and/or Units comprised of tracking stocks, linked to the value of such brands.

Evaluation, Acquisition and Enhancement of Brands

Prior to entering into a brand contract, we conduct a detailed evaluation of the brand and the contract party to determine whether, in our opinion, the brand would be a suitable brand with the potential to generate significant brand income based on the criteria set forth below. We consider a brand to be a distillation of a complex set of associations people make with respect to an individual, including athletic performance, appearance, history and personal story, products or services such individual is associated with, public statements or positions on matters of public concern, how an individual acts or the image such individual projects to the world. We seek brands that convey images and associations that we believe will be recognized and valued in the marketplace.

As part of our brand evaluation, we review the brands reputation and relative standing in its principal field, such as a professional athlete in the National Football League (the “NFL”) or Major League Baseball (“MLB”), collect and analyze widely followed statistics, review existing contracts and potential for future contracts, assess the character and reputation of the contract party, assess potential future cash flow expected to be generated by the contract party as well as examine the brands current positioning and marketing footprint (such as, for example, if they are on social media, the reach (number of followers), engagement level (participation level of followers), and potential for growth). This evaluation provides a framework to develop further marketing strategies to aid us in our efforts to enhance the value of the brand.

We believe we have extensive industry contacts among the board of directors, employees, consultants and advisors of our company and our affiliates, our parent company, Fantex Holdings Inc. (“Fantex Holdings” or “our

3


 

parent”) and Fantex Brokerage Services, LLC (“FBS”), which we utilize to access individuals and brands that meet our criteria. Through our contacts we seek to establish working relationships with these brands and their key advisors to begin the process of educating them about our business and the benefits of a brand contract and a continuing relationship. We enter into an arms‑length negotiation primarily to finalize a purchase price, our percentage of the contract partys brand income (“acquired brand income or ABI”), and the scope of brand income, including whether or not there would be any specific exclusions. We do, however, have limited experience in evaluating and entering into similar contracts with athletes, entertainers and other high‑profile individuals because we are pioneering a new business model and to date we have only entered into a small number of brand contracts.

 

We believe that developing a diverse portfolio of global brands will enable us to increase brand reach across our portfolio and allow us to provide unique insights that contract parties may employ to increase consumer awareness of their brands and our brands more generally. We believe that our combined efforts could lead to increased consumer engagement with the brands by optimizing message delivery, including driving engagement through the use of content developed by us or third parties. We seek to aid our brands in fostering positive brand associations in order to create a unique position in the marketplace that is independent of their primary occupation as a professional athlete. We believe this will drive greater engagement with a connected audience and lead to greater longevity of the brands. We also believe that investors in a tracking stock linked to one or more brands are more likely to be consumer advocates for those brands. Investors in a tracking stock would have an economic interest in the growth of the associated brand, and therefore we believe they may be more likely to follow and share brand information and be more active promoters of the associated brand than other fans or social network followers of the brand. However, we have no history to demonstrate, and we can make no assurances, that any of our investors will in fact actively promote the associated brand.

In addition to our services intended to help optimize the reach of the brand, we intend to provide advice to contract parties based on our experience that would aid them in obtaining more attractive terms in their negotiations with future sponsors. We believe that our proprietary internal data and our marketing insights will assist our contract parties to more accurately evaluate their brand value in the marketplace and potentially increase future endorsement amounts and brand longevity post career.

We note, however, that we have no contractual obligation to the contract party to engage in any of these activities that may enhance the value of our brands, and the contract party has no contractual obligation to act on any advice that we may provide. Brand development is a long‑term strategy, and any investment we may make to promote our acquired brands will be for long‑ or medium‑term results and would not be expected to increase brand income in the near‑term, if at all. Moreover, as with other forms of marketing and brand enhancement strategies, the impact of our efforts on brand value may be difficult to determine objectively. Even if our promotion activities increase the endorsement income to a contract party, they may nonetheless have a negative impact on the market value of shares of the associated tracking stock because we will only receive a portion of any increased brand income. For example, because the ABI under our typical brand contract is 10% of brand income, our promotion efforts must produce brand income equal to at least ten times our costs for such promotion efforts in order to return our investment.

If our brand enhancement strategy is unsuccessful, or if a contract party chooses not to accept any brand enhancement assistance from us, then the success of any brands we acquire will be entirely dependent upon the efforts of the contract party. In addition, our contract parties are neither affiliate, directors, officers or employees of our company and consequently our contract parties owe no fiduciary duties to us or any of our stockholders, and have no obligation to take any action whatsoever to enhance the value of their brand.

4


 

Our Tracking Stocks

We currently have brand contracts with each of the following contract parties:

 

 

 

 

 

 

Contract Party

 

Effective Date of Brand Contract

 

Tracking Stock Related to the Brand Contract

 

Vernon Davis

 

October 30, 2013

 

Fantex Series Vernon Davis

 

EJ Manuel

 

February 14, 2014

 

Fantex Series EJ Manuel

 

Mohamed Sanu

 

May 14, 2014

 

Fantex Series Mohamed Sanu

 

Alshon Jeffery

 

September 18, 2014

 

Fantex Series Alshon Jeffery

 

Michael Brockers

 

January 9, 2015

 

Fantex Series Michael Brockers

 

Jack Mewhort

 

March 26, 2015

 

Fantex Series Jack Mewhort

 

Kendall Wright

 

March 26, 2015

 

Fantex Series Professional Sports

 

Andrew Heaney

 

September 10, 2015

 

Fantex Series Professional Sports

 

Terrance Williams

 

September 17, 2015

 

Fantex Series Professional Sports

 

Ryan Shazier

 

September 23, 2015

 

Fantex Series Professional Sports

 

 

Conversion into Platform Common Stock

Our platform common stock is intended to track and reflect the economic performance of all of our tracking stocks by having a small percentage of ABI from these tracking stocks attributed to it. In addition, to the extent not attributed to a particular tracking stock, our platform common stock will have attributed to it any of the direct liabilities, costs and expenses related to any of our offerings of our tracking stocks (other than underwriting discounts and commissions as applicable for any offering) or incurred by us or our parent in connection with any brand development activities prior to the consummation of the offering of any tracking stock.

Our board of directors may at any time following the two‑year anniversary of the filing of a certificate of designations creating a new tracking stock and convert such tracking stock into fully paid and non‑assessable shares of our platform common stock at a conversion ratio to be determined by dividing the fair value of a share of such tracking stock by the fair value of a share of our platform common stock.

The Units

We are offering 1,984,000 Units in this offering. Each Unit has an assumed purchase price of $13.50 (the midpoint of the estimated offering price range set forth on the front cover of the prospectus) and consists of 0.047 shares of Fantex Series Vernon Davis, 0.127  shares of Fantex Series EJ Manuel, 0.040 shares of Fantex Series Mohamed Sanu, 0.277 shares of Fantex Series Alshon Jeffery, 0.117 shares of Fantex Series Michael Brockers, 0.089 shares of Fantex Series Jack Mewhort and 0.683 shares of Fantex Series Professional Sports. Holders of the Units will be entitled to all of the rights, preferences and privileges of holders of shares of the tracking stocks that comprise the Units, to the extent of their fractional interest in a whole share of such tracking stocks.  

5


 

We determined the aggregate offering price of the Units based on the following values attributed to each of the tracking stocks included in the Unit: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Included

 

 

 

September 30, 2015

 

 

 

 

in Unit if the

 

Shares Included

 

 

 

 

Fair Value Included

 

 

 

 

Underwriters' Option

 

in Unit Without the

 

 

 

 

in Unit Without the

 

 

 

 

to Purchase

 

Underwriters' Option

 

 

 

 

Underwriters' Option

 

 

 

 

Additional Units

 

to Purchase

 

 

 

to Purchase

 

 

Total Shares

 

is Exercised in Full

 

Additional Units

 

Fair Value(1)

 

Additional Units

 

Fantex Series Vernon Davis

421,100

 

102,454

 

93,140

 

$

2,955,698

 

$

653,843

 

Fantex Series EJ Manuel

523,700

 

277,934

 

252,667

 

 

2,365,365

 

 

1,142,055

 

Fantex Series Mohamed Sanu

164,300

 

88,365

 

80,331

 

 

2,161,261

 

 

1,056,352

 

Fantex Series Alshon Jeffery

835,800

 

603,994

 

549,085

 

 

7,411,567

 

 

4,870,384

 

Fantex Series Michael Brockers

362,200

 

255,893

 

232,630

 

 

3,996,634

 

 

2,565,909

 

Fantex Series Jack Mewhort

268,100

 

193,534

 

175,940

 

 

2,653,126

 

 

1,741,806

 

Total

 

 

 

 

 

 

$

21,543,651

 

$

12,030,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Proceeds

 

Kendall Wright Brand Contract

 

 

 

 

 

 

 

 

 

$

3,324,468

 

Andrew Heaney Brand Contract

 

 

 

 

 

 

 

 

 

 

3,591,398

 

Terrance Williams Brand Contract

 

 

 

 

 

 

 

 

 

 

3,290,323

 

Ryan Shazier Brand Contract

 

 

 

 

 

 

 

 

 

 

3,344,086

 

Total Fantex Series Professional Sports

 

 

 

 

 

 

 

 

 

$

13,550,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds for General Corporate Purposes

 

 

 

 

 

 

 

 

 

 

1,203,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Aggregate Offering Price of the Units

 

 

 

 

 

 

 

 

 

$

26,784,000

 


(1)

For a discussion of how we determine the fair value of our tracking stocks, please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The components of attributed net equity as of September 30, 2015 for each of the convertible tracking stocks included in the Unit are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets / (Liabilities) Prior to Attribution

 

Attributed Net Equity

 

 

 

Cash

 

Amounts Due from Athlete

 

Other Investments

 

Brand Contract

 

Liabilities

 

Net Equity

 

Platform Common

 

Tracking Stock

 

Fantex Series Vernon Davis

 

$

205,207

 

$

85,835

 

$

110,800

 

$

2,715,678

 

$

(6,259)

 

$

3,111,261

 

$

155,563

 

$

2,955,698

 

Fantex Series EJ Manuel

 

 

94,418

 

 

22,972

 

 

 —

 

 

2,372,783

 

 

(315)

 

 

2,489,858

 

 

124,493

 

 

2,365,365

 

Fantex Series Mohamed Sanu

 

 

40,668

 

 

28,710

 

 

 —

 

 

2,206,684

 

 

(1,050)

 

 

2,275,012

 

 

113,751

 

 

2,161,261

 

Fantex Series Alshon Jeffery

 

 

131,425

 

 

29,354

 

 

 —

 

 

7,642,065

 

 

(1,195)

 

 

7,801,649

 

 

390,082

 

 

7,411,567

 

Fantex Series Michael Brockers

 

 

79,798

 

 

21,199

 

 

 —

 

 

4,110,231

 

 

(4,245)

 

 

4,206,983

 

 

210,349

 

 

3,996,634

 

Fantex Series Jack Mewhort

 

 

 —

 

 

10,278

 

 

 —

 

 

2,782,486

 

 

 —

 

 

2,792,764

 

 

139,638

 

 

2,653,126

 

Total

 

$

551,516

 

$

198,347

 

$

110,800

 

$

21,829,927

 

$

(13,063)

 

$

22,677,527

 

$

1,133,876

 

$

21,543,651

 

 

The following table sets forth the fair value of the net assets included in the Unit as of September 30, 2015 and on a projected basis to estimate the increase in net present value of the brand contracts as of March 31, 2016 assuming:

· all projected cash and receivables as of September 30, 2015 are collected in full and at the time anticipated;

· there are no adjustments to the value of the underlying brand contracts due to changes in performance, comparable contract projections or career length; 

6


 

· there are no changes in the discount rates used from those used as of September 30, 2015;

· cash flows continue to be discounted using a  full-year convention; and

· the aggregate payment of the purchase price to Kendall Wright, Andrew Heaney, Terrance Williams and Ryan Shazier for the acquisition of ABI under our brand contract with each party.

 

 

 

 

 

 

 

 

 

 

Fair Value Included in Unit

 

 

 

Actual as of

 

Projected as of

 

 

 

September 30, 2015

 

March 31, 2016

 

Fantex Series Vernon Davis

 

$

653,843

 

$

679,922

 

Fantex Series EJ Manuel

 

 

1,142,055

 

 

1,205,222

 

Fantex Series Mohamed Sanu

 

 

1,056,352

 

 

1,132,667

 

Fantex Series Alshon Jeffery

 

 

4,870,384

 

 

5,216,308

 

Fantex Series Michael Brockers

 

 

2,565,909

 

 

2,719,445

 

Fantex Series Jack Mewhort

 

 

1,741,806

 

 

1,866,723

 

Total

 

$

12,030,349

 

$

12,820,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kendall Wright Brand Contract

 

$

3,324,468

 

$

3,588,741

 

Andrew Heaney Brand Contract

 

 

3,591,398

 

 

3,902,890

 

Terrance Williams Brand Contract

 

 

3,290,323

 

 

3,556,646

 

Ryan Shazier Brand Contract

 

 

3,344,086

 

 

3,555,569

 

Total Fantex Series Professional Sports

 

 

13,550,275

 

 

14,603,846

 

 

 

 

 

 

 

 

 

Proceeds for General Corporate Purposes

 

 

1,203,376

 

 

 —

 

 

 

 

 

 

 

 

 

Total

 

$

26,784,000

 

$

27,424,133

 

 

For further discussion of the Units, please see the section entitled “Description of Capital Stock beginning on page 177.

Our Brands

Vernon Davis Brand

Our brand contract with Vernon Davis entitles us to receive 10% of brand income for Vernon Davis from and after October 30, 2013. As consideration for the ABI under the brand contract, we paid Vernon Davis a one-time cash amount of $4.0 million upon the completion of the offering of Fantex Series Vernon Davis. We have no further financial obligation to Vernon Davis under the brand contract, other than certain indemnity obligations. The brand contract is intended to remain in effect indefinitely and, except as set forth in the brand contract, may be terminated only upon mutual agreement of Vernon Davis and us. If Vernon Davis resigns from the NFL within two years of the date of the completion of the offering of shares of Fantex Series Vernon Davis for any reason other than injury, illness or a medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $4.21 million (net of any amounts previously paid to us by him pursuant to the brand contract), which includes a pro rata share of underwriting expenses from the initial public offering of Fantex Series Vernon Davis. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with Vernon Davis, please see Business—Vernon Davis Brand—Vernon Davis Brand Contract.

EJ Manuel Brand

Our brand contract with EJ Manuel entitles us to receive 10% of brand income for EJ Manuel from and after February 14, 2014. As consideration for the ABI under the brand contract, we paid EJ Manuel a one-time cash amount of $4.98 million upon the completion of the offering of Fantex Series EJ Manuel. We have no further financial obligation to EJ Manuel under the brand contract, other than certain indemnity obligations. The brand contract is intended to remain

7


 

in effect indefinitely and, except as set forth in the brand contract, may be terminated only upon mutual agreement of EJ Manuel and us. If EJ Manuel resigns from the NFL within two years of the date of the completion of the offering of shares of Fantex Series EJ Manuel for any reason other than injury, illness or a medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $5.24 million (net of any amounts previously paid to us by him pursuant to the brand contract), which includes a pro rata share of underwriting expenses from the initial public offering of Fantex Series EJ Manuel. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with EJ Manuel, please see Business—EJ Manuel Brand—EJ Manuel Brand Contract.”

Mohamed Sanu Brand

Our brand contract with Mohamed Sanu entitles us to receive 10% of brand income for Mohamed Sanu from and after May 14, 2014. As consideration for the ABI under the brand contract, we paid Mohamed Sanu a one-time cash amount of $1.56 million upon the completion of the offering of Fantex Series Mohamed Sanu. We have no further financial obligation to Mohamed Sanu under the brand contract, other than certain indemnity obligations. The brand contract is intended to remain in effect indefinitely and, except as set forth in the brand contract, may be terminated only upon mutual agreement of Mohamed Sanu and us. If Mohamed Sanu resigns from the NFL within two years of the date of the completion of the offering of shares of Fantex Series Mohamed Sanu for any reason other than injury, illness or a medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $1.64 million (net of any amounts previously paid to us by him pursuant to the brand contract), which includes a pro rata share of underwriting expenses from the initial public offering of Fantex Series Mohamed Sanu. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with Mohamed Sanu, please see Business—Mohamed Sanu Brand—Mohamed Sanu Brand Contract.

Alshon Jeffery Brand

Our brand contract with Alshon Jeffery entitles us to receive 13% of brand income for Alshon Jeffery from and after September 7, 2014 with respect to brand income payable under Alshon Jefferys NFL player contracts, and from and after September 18, 2014 with respect to all other brand income. As consideration for the ABI under the brand contract, we paid Alshon Jeffery a one-time cash amount of $7.94 million upon the completion of the offering of Fantex Series Alshon Jeffery. We have no further financial obligation to Alshon Jeffery under the brand contract, other than certain indemnity obligations. The brand contract is intended to remain in effect indefinitely and, except as set forth in the brand contract, may be terminated only upon mutual agreement of Alshon Jeffery and us. If Alshon Jeffery resigns from the NFL within two years of the date of the completion of the offering of shares of Fantex Series Alshon Jeffery for any reason other than injury, illness or a medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $8.36 million (net of any amounts previously paid to us by him pursuant to the brand contract), which includes a pro rata share of underwriting expenses from the initial public offering of Fantex Series Alshon Jeffery. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with Alshon Jeffery, please see Business—Alshon Jeffery Brand—Alshon Jeffery Brand Contract.”

Michael Brockers Brand

Our brand contract with Michael Brockers entitles us to receive 10% of brand income for Michael Brockers from and after October 15, 2014. As consideration for the ABI under the brand contract, we paid Michael Brockers a one-time cash amount of $3.44 million upon the completion of the offering of Fantex Series Michael Brockers. We have no further financial obligation to Michael Brockers under the brand contract, other than certain indemnity obligations. The brand contract is intended to remain in effect indefinitely and, except as set forth in the brand contract, may be terminated only upon mutual agreement of Michael Brockers and us. If Michael Brockers resigns from the NFL within two years of the date of the completion of the offering of shares of Fantex Series Michael Brockers for any reason other than injury, illness or a medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $3.62 million (net of any amounts previously paid to us by him pursuant to the brand contract), which includes a pro rata share of underwriting expenses from the initial public offering of Fantex

8


 

Series Michael Brockers. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with Michael Brockers, please see Business—Michael Brockers Brand—Michael Brockers Brand Contract.

Jack Mewhort Brand

Our brand contract with Jack Mewhort entitles us to receive 10% of brand income for Jack Mewhort after February 15, 2015. As consideration for the ABI under the brand contract, we paid Jack Mewhort a one-time cash amount of $2.52 million upon the completion of the offering of Fantex Series Jack Mewhort.  We have no further financial obligation to Jack Mewhort under the brand contract, other than certain indemnity obligations. The brand contract is intended to remain in effect indefinitely and, except as set forth under the brand contract, may be terminated only upon mutual agreement of Jack Mewhort and us. If Jack Mewhort resigns from the NFL within two years of the date of the completion of the offering of shares of Fantex Series Jack Mewhort for any reason other than injury, illness or medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $2.68 million (net of any amounts previously paid to us by him pursuant to the brand contract),  which includes a pro rata share of underwriting expenses from the initial public offering of Fantex Series Jack Mewhort. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with Jack Mewhort, please see Business—Jack Mewhort Brand—Jack Mewhort Brand Contract.

Kendall Wright Brand

Our brand contract with Kendall Wright entitles us to receive 10% of brand income for Kendall Wright after December 1, 2014. As consideration for the ABI under the brand contract, we will pay Kendall Wright a one-time cash amount of $3.125 million contingent upon our ability to obtain financing, which we intend to do through this offering. We will have no further financial obligation to Kendall Wright under the brand contract once this payment has been made, other than certain indemnity obligations. The brand contract is intended to remain in effect indefinitely and, except as set forth in the brand contract, may be terminated only upon mutual agreement of Kendall Wright and us. If Kendall Wright resigns from the NFL within two years of the date of this offering for any reason other than injury, illness or medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $3.32 million (net of any amounts previously paid to us by him pursuant to the brand contract),  which includes a pro rata share of underwriting expenses. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with Kendall Wright, please see “Business—Kendall Wright Brand—Kendall Wright Brand Contract.”

Andrew Heaney Brand

Our brand contract with Andrew Heaney entitles us to receive 10% of brand income for Andrew Heaney from and after January 1, 2015. As consideration for the ABI under the brand contract, we will pay Andrew Heaney a one-time cash amount of $3.34 million contingent upon our ability to obtain financing, which we intend to do through this offering. We will have no further financial obligation to Andrew Heaney under the brand contract once this payment has been made, other than certain indemnity obligations. The brand contract is intended to remain in effect indefinitely and, except as set forth in the brand contract, may be terminated only upon mutual agreement of Andrew Heaney and us. If Andrew Heaney resigns from MLB within two years of the date of this offering for any reason other than injury, illness or a medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $3.59 million (net of any amounts previously paid to us by him pursuant to the brand contract), which includes a pro rata share of underwriting expenses. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with Andrew Heaney, please see Business—Andrew Heaney Brand—Andrew Heaney Brand Contract.”

Terrance Williams Brand

Our brand contract with Terrance Williams entitles us to receive 10% of brand income for Terrance Williams from and after February 1, 2015. As consideration for the ABI under the brand contract, we will pay Terrance Williams a one-time cash amount of $3.06 million contingent upon our ability to obtain financing, which we intend to do through

9


 

this offering. We will have no further financial obligation to Terrance Williams under the brand contract once this payment has been made, other than certain indemnity obligations. The brand contract is intended to remain in effect indefinitely and, except as set forth in the brand contract, may be terminated only upon mutual agreement of Terrance Williams and us. If Terrance Williams resigns from the NFL within two years of the date of this offering for any reason other than injury, illness or a medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $3.29 million (net of any amounts previously paid to us by him pursuant to the brand contract), which includes a pro rata share of underwriting expenses. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with Terrance Williams, please see Business—Terrance Williams Brand—Terrance Williams Brand Contract.”

Ryan Shazier Brand

Our brand contract with Ryan Shazier entitles us to receive 10% of brand income for Ryan Shazier from and after September 1, 2015. As consideration for the ABI under the brand contract, we will pay Ryan Shazier a one-time cash amount of $3.11 million contingent upon our ability to obtain financing, which we intend to do through this offering. We will have no further financial obligation to Ryan Shazier under the brand contract once this payment has been made, other than certain indemnity obligations. The brand contract is intended to remain in effect indefinitely and, except as set forth in the brand contract, may be terminated only upon mutual agreement of Ryan Shazier and us. If Ryan Shazier resigns from the NFL within two years of the date of this offering for any reason other than injury, illness or a medical condition, we may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $3.34 million (net of any amounts previously paid to us by him pursuant to the brand contract), which includes a pro rata share of underwriting expenses. We are also entitled to certain other ongoing information and audit rights. For a further description of our brand contract with Ryan Shazier, please see Business— Ryan Shazier Brand— Ryan Shazier Brand Contract.”

Management Agreement

We have entered into a management agreement with our parent, pursuant to which our parent has agreed to provide us with management and administrative services, including providing and compensating our executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We have agreed to pay 5% of the amount of the gross cash received by us, if any, pursuant to our brand contracts during any quarterly period as remuneration for the services provided. The amount of gross cash received used to calculate this 5% fee will include any portion allocated to reduction in carrying value on our financial statements but will not take into account the changes in fair value of the brand contracts. As such, the service fee under the management agreement will be determined based on the total amount of actual cash received under the brand contracts in a given quarterly period prior to any adjustments for fair value and without regard to the expected cash receipts in such quarter as reflected in the financial statements for that quarter. To the extent we receive no cash for any period then we would not owe any fee for any services provided during that period. We may evaluate the service fee from time to time to assess the continued appropriateness of the percentage of our cash receipts upon which the service fee is calculated, in light of the services being provided by our parent at the time and cost of those services.

The agreement had an initial term through December 31, 2014 and was automatically renewed for a one-year term through December 31, 2015. It will continue to automatically renew for successive one‑year terms each December 31 unless either party provides written notice of its intent not to renew at least three months prior to such renewal. We may also terminate any specific service and/or the agreement, without penalty, with 30 days prior written notice to Fantex Holdings. Fantex Holdings may terminate any specific service and/or the agreement with 180 days prior written notice to us, but if we, using our commercially reasonable efforts, are unable to either perform the services ourselves or enter into a reasonable arrangement with a third party to perform the services that we are unable perform ourselves, then Fantex Holdings will continue to perform such services for an additional period of 180 days.

10


 

Risks Associated with Our Business

Our ability to implement our business strategy is subject to numerous risks and uncertainties. You should carefully consider all of the information set forth in this prospectus, including information incorporated by reference in this prospectus.

Conflicts of Interest

The offering is being conducted in accordance with the applicable provisions of Rule 5121 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc. (“FINRA”). One of the underwriters, FBS, is deemed to have a “conflict of interest” under Rule 5121 because we are under common control with FBS, and we will receive a portion of the net proceeds of this offering. Accordingly, this offering will be made in compliance with the applicable provisions of Rule 5121, which requires, among other things, that a “qualified independent underwriter” participate in the preparation of, and exercise the usual standards of due diligence with respect to, the registration statement and this prospectus. UBS Securities LLC has agreed to act as the “qualified independent underwriter” (as defined by FINRA) for the offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act, specifically including performing due diligence investigations and reviewing and participating in the preparation of the registration statement of which this prospectus forms a part. UBS Securities LLC will not receive any additional fees for acting as “qualified independent underwriter.” Pursuant to FINRA Rule 5121, FBS will not confirm sales to accounts in which it exercises discretionary authority, if any, without the specific prior written approval of the account holder. See “Underwriting (Conflicts of Interest)—Conflicts of Interest.”

 Restrictions on the Purchase or Beneficial Ownership of Tracking Stocks 

We have entered into an agreement with MLB that requires us to, among other things, take steps designed to prohibit certain investors from purchasing or owning Fantex Series Professional Sports, including the incorporation of such ownership restrictions into the certificate of designations for the Fantex Series Professional Sports. These prohibited investors (“Prohibited Investors”) include persons who are (i) owners, officers, directors or employees of any MLB club or MLB related entity, or any family member or agent of the foregoing, and (ii) individuals who have been arrested in connection with, charged with, indicted for, or convicted or participating in (whether directly or indirectly) any illegal gambling activity or any illegal activity in connection with certain gaming enterprises (including any governmental body that exercises certain types of control over such individuals, and other affiliated persons and entities). Pursuant to the restrictions set forth in the certificate of designations for Fantex Series Professional Sports, any person who is a Prohibited Investor will be prohibited from purchasing or beneficially owning (whether directly or indirectly) Fantex Series Professional Sports. Because the Units include shares of Fantex Series Professional Sports, Prohibited Investors will likewise be prohibited from purchasing or beneficially owning Units. In addition, any person who opens or maintains a customer account with FBS (an “FBS Accountholder”) other than our affiliates or institutional investors, even if not a Prohibited Investor, is prohibited from beneficially owning more than 10% of the outstanding shares of Fantex Series Professional Sports (whether directly or through Units). If any Prohibited Investor purchases or otherwise comes to beneficially own Units or shares of Fantex Series Professional Sports, or any FBS Accountholder comes to beneficially own more than 10% of the outstanding shares of Fantex Series Professional Sports (whether directly or through ownership of the Units), we will have the right, under certain circumstances, to restrict the transfer of ownership of such securities, and to redeem in cash all of the shares of tracking stocks that comprise the Units at the par value of such tracking stocks, or $0.0001 per share. In addition, if we reasonably believe that the ownership of Units by any securityholder or proposed securityholder would violate the ownership restrictions on the Units, we will have the right to request information from such securityholder or proposed securityholder in order to determine whether such ownership does or would constitute a violation of these restrictions. See “Description of Capital Stock” and “Risk Factors.”

Corporate History

We were incorporated in Delaware on September 14, 2012 as a wholly‑owned subsidiary of Fantex Holdings. Fantex Holdings was incorporated in Delaware on April 9, 2012. Our principal executive offices are located at 330 Townsend Street, Suite 234 San Francisco, California 94107, and our telephone number is (415) 592‑5950. Our website

11


 

address is www.fantexbrands.com. The information on, or that can be accessed through, our website is not part of this prospectus. We have included our website address as an inactive textual reference only.

We have little operational history and limited assets and resources and to date we have relied on our parent to conduct our operations through its employees. From and after April 28, 2014, we have been operating under a management agreement with our parent, which we describe in more detail elsewhere in this prospectus (including documents incorporated by reference in this prospectus), but pursuant to which our parent provides us with certain management and administrative services, including providing and compensating our executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We will begin to assume management and administrative tasks at such time in the future as the actual cost of these services is less than our service fee to Fantex Holdings, which we do not anticipate would occur until we begin to receive significant cash flows from multiple brand contracts. However, if our parent is unable to perform any of the services that they are required to perform under the management agreement, due to financial difficulty or otherwise, then we may be forced to assume management and administrative tasks, and incur additional expenses, sooner than we anticipate. Until such time we will continue to rely on our parent to conduct our operations in accordance with the management agreement.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

(1)

a requirement to have only two years of audited financial statements and only two years of related MD&A;

(2)

an exemption from the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

(3)

an extended transition period for complying with new or revised accounting standards;

(4)

reduced disclosure about the companys executive compensation arrangements; and 

(5)

no non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of these provisions for up December 31, 2019, or such earlier time when we are no longer an emerging growth company. We would cease to be an emerging growth company on the earlier of (1) the last day of the fiscal year (a) in which we have more than $1.0 billion in annual revenues or (b) in which we have more than $700 million in market value of our capital stock held by non-affiliates, or (2) the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. We have irrevocably taken advantage of other reduced reporting requirements in this prospectus, and we may choose to do so in future filings. To the extent we do, the information that we provide stockholders may be different than you might get from other public companies in which you hold equity interests.

12


 

THE OFFERING

Securities offered

    

1,984,000 Fantex Sports Portfolio 1 Units (the “Units”), each Unit consisting of:

●  0.047 shares of Fantex Series Vernon Davis Convertible Tracking Stock (“Fantex Series Vernon Davis”);

●  0.127 shares of Fantex Series EJ Manuel Convertible Tracking Stock (“Fantex Series EJ Manuel”);

●  0.040 shares of Fantex Series Mohamed Sanu Convertible Tracking Stock (“Fantex Series Mohamed Sanu”);

●  0.277 shares of Fantex Series Alshon Jeffery Convertible Tracking Stock (“Fantex Series Alshon Jeffery”);

●  0.117 shares of Fantex Series Michael Brockers Convertible Tracking Stock (“Fantex Series Michael Brockers”);

●  0.089 shares of Fantex Series Jack Mewhort Convertible Tracking Stock (“Fantex Series Jack Mewhort”); and

●  0.683 shares of Fantex Series Professional Sports Convertible Tracking Stock (“Fantex Series Professional Sports”). 

The selling stockholders are offering all of the shares of Fantex Series Vernon Davis, Fantex Series EJ Manuel, Fantex Series Mohamed Sanu, Fantex Series Alshon Jeffery, Fantex Series Michael Brockers and Fantex Series Jack Mewhort included in the Units. We are offering all of the shares of Fantex Series Professional Sports included in the Units. A Unit cannot be separated into its component parts at any time.

Underwriters’ option to purchase additional Units

 

In the event that the underwriters locate qualified purchasers for at least 1,984,000 Units, we and the selling stockholders have granted the underwriters an option for a period of 30 days from the date of the prospectus to purchase up to 198,400 additional Units at the initial public offering price, less the underwriting discounts and commissions.

Units to be outstanding after this offering

 

1,984,000 (2,182,400 if the underwriters’ conditional option to purchase additional Units is exercised in full)

Common stock to be outstanding after this offering

 

100,000,000 shares of platform common stock, 421,100 shares of Fantex Series Vernon Davis, 523,700 shares of Fantex Series EJ Manuel, 164,300 shares of Fantex Series Mohamed Sanu, 835,800 shares of Fantex Series Alshon Jeffery, 362,200 shares of Fantex Series Michael Brockers, 268,100 shares of Fantex Series Jack Mewhort and 1,355,028 shares of Fantex Series Professional Sports.

Offering Type

 

The offering is being conducted on a best efforts, “minimum/maximum” basis. We and the selling stockholders are offering a minimum of 1,948,000 Units and a maximum of 2,182,400 Units. Until the underwriters sell at least 1,984,000 Units, funds received from the offering will be deposited into an interest bearing escrow account pending the closing of the offering in accordance with Rule 15c2‑4 of the Securities Exchange Act of 1934, as amended. If the underwriters do not sell at least 1,984,000 Units within 30 days after the date this registration statement becomes effective with the SEC, all funds will be promptly returned to investors with interest and without deduction.

 

13


 

Voting rights

 

The holders of shares of our tracking stocks, including through the purchase of Units, and of our platform common stock are each entitled to one vote for each whole share held and fractional votes for fractional shares held (whether directly or through the Unit). The holders of Units are entitled to the votes provided with respect to shares or fractional shares, as the case may be, of tracking stock or platform common stock that comprise the Units. The holders of Units will be entitled to the following number of fractional votes with respect to our Unit Tracking Stocks per one Unit held, assuming no conversion of any of the Unit Tracking Stocks into platform common stock:

 

●  0.047 votes of Fantex Series Vernon Davis;

●  0.127 votes of Fantex Series EJ Manuel;

●  0.040 votes of Fantex Series Mohamed Sanu;

●  0.277 votes of Fantex Series Alshon Jeffery;

●  0.117 votes of Fantex Series Michael Brockers;

●  0.089 votes of Fantex Series Jack Mewhort; and

●  0.683 votes of Fantex Series Professional Sports.

Following the consummation of this offering, Fantex Holdings, our parent company, will continue to hold substantially all of the voting power of our outstanding common stock. See “Description of Capital Stock.”

Conversion

 

Our board of directors may, at any time following the two‑year anniversary of the filing of a certificate of designations creating any of our tracking stocks, convert shares of such tracking stocks (including shares, or fractions thereof, of our Unit Tracking Stocks) into fully paid and non‑assessable shares of our platform common stock at a conversion ratio to be determined by dividing the fair value of a share of such tracking stock by the fair value of a share of our platform common stock. If any of the Unit Tracking Stocks that are included in the Units are converted into shares of platform common stock, the Units will thereafter include platform common stock in lieu of the converted Unit Tracking Stock, along with the remaining Unit Tracking Stocks that have not been converted to platform common stock. For a further description, including how we would determine the fair value of shares of our platform common stock and our tracking stocks, please see “Description of Capital Stock.”

 

14


 

 

Liquidation

 

In the event of a liquidation, dissolution or winding up of Fantex, including a change of control of Fantex, after payment or provision for payment of our debts and liabilities, each share of our common stock (including each of our tracking stocks and the platform common stock, whether held directly or as a component part of the Units) will be entitled to receive a proportionate interest in the net assets of Fantex remaining for distribution to holders of common stock equal to the fair value of such share, provided that if the assets legally available for distribution to the holders of common stock are insufficient to permit the payment in full to each share of common stock the amount to which they would otherwise be entitled, then such assets available for distribution to the holders of common stock will be distributed to all holders of common stock ratably in proportion to the full amounts which they would be entitled to receive on shares (including fractional shares) of common stock held by them. If all distributions required above are made and there remain any assets available for distribution to holders of common stock such assets shall be divided among the holders of common stock in proportion to the amounts that were payable as required above in respect of the shares (including fractional shares) held by them. Upon any distribution to holders of common stock, the holders of Units will be entitled to receive payment based on their proportionate interest in shares (or fractions thereof) of the Unit Tracking Stocks that comprise each of the Units. For a further description, including how we would determine the fair value of shares of our platform common stock and our tracking stocks, please see “Description of Capital Stock.”

Dividends

 

We have paid cash dividends in the past. We intend to pay a majority of available cash for each tracking stock as a cash dividend at least once every 12 months to the extent permitted by the General Corporation Law of the State of Delaware, provided that such dividend is not expected to have a material impact on our liquidity or capital resources. The available dividend amount for any tracking stock is, as of any particular date, an amount equal to the lesser of (a) total assets of our company legally available for the payment of dividends under Delaware law and (b) an amount equal to (i) the excess of the total assets attributed to the applicable tracking stock over the total liabilities attributed to such tracking stock, less the par value of the outstanding shares of such tracking stock; or (ii) if there is no such excess, the attributable income of the tracking stock for the fiscal year in which the dividend is being declared and/or the preceding fiscal year. Upon payment of dividends with respect to any of our Unit Tracking Stocks, holders of Units will receive an amount equal to their proportionate interest in the Unit Tracking Stock with respect to which the dividend is paid. Please see “Dividend Policy.”

Use of proceeds

 

We estimate that the net proceeds to us from this offering will be approximately $13.72 million, based on the sale of 1,984,000 Units at an assumed public offering price of $13.50 per Unit (the midpoint of the estimated offering price range set forth on the front cover of the prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We estimate that the net proceeds to the selling stockholders from this offering will be approximately $11.19 million, based on the sale of 1,984,000 Units at an assumed public offering price of $13.50 per Unit (the midpoint of the estimated offering price range set forth on the front cover of the prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by them. We will not receive any proceeds from the sale of any shares of tracking stocks sold by the selling stockholders and included in the Units.

15


 

 

 

As consideration for the ABI under our brand contracts with each of Kendall Wright, Andrew Heaney, Terrance Williams and Ryan Shazier, we have agreed to pay them one-time cash amounts of $3.13 million, $3.34 million, $3.06 million and $3.11 million, respectively. These amounts total, in the aggregate, $12.64 million and are contingent upon our ability to obtain financing. We will use substantially all of our net proceeds from this offering, together with existing cash and cash equivalents if necessary, to fund the payment of this purchase price to these contract parties pursuant to our brand contracts with them. See “Use of Proceeds.”

 

U.S. federal income tax considerations

 

For material U.S. federal income tax consequences of the acquisition, ownership, and disposition of Units, please see “Material U.S. Federal Income Tax Considerations” herein.

 

Risk factors

 

You should read “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in the Units.

 

Proposed NASDAQ symbol

 

“FXSP”

 

The number of Units to be outstanding after this offering is based on no outstanding units as of September 30, 2015. The number of shares of our common stock to be outstanding after this offering is based on the following outstanding shares of our company as of September 30, 2015:

·

100,000,000 shares of our platform common stock;

·

421,100 shares of our Fantex Series Vernon Davis;

·

523,700 shares of our Fantex Series EJ Manuel;

·

164,300 shares of our Fantex Series Mohamed Sanu;

·

835,800 shares of our Fantex Series Alshon Jeffery;

·

362,200 shares of Fantex Series Michael Brockers;

·

268,100 shares of Fantex Series Jack Mewhort; and

·

no other outstanding tracking stocks;

and excludes 7,500,000 shares of our platform common stock reserved for future issuance under our 2013 Equity Incentive Award Plan.

Except as otherwise indicated, all information in this prospectus assumes:

·

that our certificate of designations for Fantex Series Professional Sports, which we will file in connection with the consummation of this offering, is in effect; and  

·

no exercise of the underwriters’ conditional option to purchase additional Units in this offering. 

 

16


 

 

SUMMARY FINANCIAL AND OTHER DATA 

We have derived the following summary financial data from our audited financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2014 and from the unaudited information appearing in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, both of which are incorporated by reference in this prospectus. Historical results are not necessarily indicative of the results that may be expected in the future. The summary financial data set forth below should be read together with the financial statements and the related notes to those statements and the statement captioned “Managements Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q.

Statements of Operations and Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

Year Ended December 31,

 

 

 

2015

 

2014

 

2014

 

2013

 

Income (Loss) from Brand Contracts

 

$

1,301,985

 

$

463,110

 

$

(2,203,500)

 

$

 

Income from Other Investments

 

 

10,400

 

 

 

 

 

 

 

Total Income

 

 

1,312,385

 

 

463,110

 

 

(2,203,500)

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel Costs

 

 

1,088,529

 

 

916,245

 

 

1,308,698

 

 

875,718

 

Professional Services

 

 

1,625,993

 

 

1,745,112

 

 

2,136,554

 

 

2,305,020

 

General and Administrative, Exclusive of Personnel Costs

 

 

515,885

 

 

435,563

 

 

605,969

 

 

381,557

 

Total Operating Expenses

 

 

3,230,407

 

 

3,096,920

 

 

4,051,221

 

 

3,562,295

 

Net Loss (1)

 

$

(1,918,022)

 

$

(2,633,810)

 

$

(6,254,721)

 

$

(3,562,295)

 

 


(1)

For a more detailed description of the Net Income (Loss) attributable to our platform common stock and each of our Tracking Stocks as of September 30, 2015 and December 31, 2014 please see “Calculation of Net Income (Loss) for Our Platform Common Stock and the Outstanding Tracking Stocks” below.

 

The table below presents our balance sheet as of September 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

    

September 30, 2015

    

December 31, 2014

 

Assets

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

950,829

 

$

929,440

 

Receivable from Contract Parties

 

 

198,347

 

 

60,487

 

Prepaid Assets

 

 

 —

 

 

44,278

 

Investment in Brand Contracts, at Fair Value

 

 

21,829,927

 

 

7,221,182

 

Other Investments, at Cost

 

 

110,800

 

 

 —

 

Total Assets

 

$

23,089,903

 

$

8,255,387

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Total Liabilities

 

$

13,063

 

$

76,172

 

Contributed Capital(1)

 

 

36,539,384

 

 

19,480,354

 

Accumulated Deficit

 

 

(13,462,571)

 

 

(11,301,139)

 

Total stockholders' equity

 

 

23,076,840

 

 

8,179,215

 

Total liabilities and stockholders' equity

 

$

23,089,903

 

$

8,255,387

 


(1)

Includes par value of issued and outstanding shares and additional paid in capital. Please see “Capitalization” in this Registration Statement, our audited Financial Statements included in our Annual Report on Form 10-K and our unaudited Financial Statements included in our Quarterly Report on Form 10-Q.

 

17


 

Calculation of Net Income (Loss) for Our Platform Common Stock and the Outstanding Tracking Stocks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2015

 

 

 

 

 

 

Attributed Operating Expenses

 

 

 

 

 

 

 

Attributed Income (Loss) from Brand Contracts(1)(3)

 

 

Direct Expenses

 

 

Management Fees(2)

 

 

Total Attributed Operating Expenses

 

 

Attributed Net Income (Loss)

 

Platform Common Stock

 

$

65,619

 

$

3,203,865

 

$

(22,124)

 

$

3,181,741

 

$

(3,116,122)

 

Fantex Series Vernon Davis Convertible Tracking Stock

 

 

301,123

 

 

9,800

 

 

8,167

 

 

17,967

 

 

283,156

 

Fantex Series EJ Manuel Convertible Tracking Stock

 

 

(168,827)

 

 

1,052

 

 

876

 

 

1,928

 

 

(170,755)

 

Fantex Series Mohamed Sanu Convertible Tracking Stock

 

 

233,981

 

 

2,510

 

 

2,099

 

 

4,609

 

 

229,372

 

Fantex Series Alshon Jeffery Convertible Tracking Stock

 

 

(116,142)

 

 

8,341

 

 

6,950

 

 

15,291

 

 

(131,433)

 

Fantex Series Michael Brockers Convertible Tracking Stock

 

 

737,505

 

 

4,839

 

 

4,032

 

 

8,871

 

 

728,634

 

Fantex Series Jack Mewhort Convertible Tracking Stock

 

 

259,126

 

 

 —

 

 

 —

 

 

 —

 

 

259,126

 

Total

 

$

1,312,385

 

$

3,230,407

 

$

 —

 

$

3,230,407

 

$

(1,918,022)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2014

 

 

 

 

 

 

Attributed Operating Expenses

 

 

 

 

 

 

 

Attributed Income from Brand Contracts(1)

 

 

Direct Expenses

 

 

Management Fees(2)

 

 

Total Attributed Operating Expenses

 

 

Attributed Net Income (Loss)

 

Platform Common Stock

 

$

23,154

 

$

3,064,774

 

$

(25,449)

 

$

3,039,325

 

$

(3,016,171)

 

Fantex Series Vernon Davis Convertible Tracking Stock

 

 

257,171

 

 

31,011

 

 

24,551

 

 

55,562

 

 

201,609

 

Fantex Series EJ Manuel Convertible Tracking Stock

 

 

182,785

 

 

1,135

 

 

898

 

 

2,033

 

 

180,752

 

Total

 

$

463,110

 

$

3,096,920

 

$

 —

 

$

3,096,920

 

$

(2,633,810)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2014

 

 

 

 

 

 

Attributed Operating Expenses

 

 

 

 

 

 

 

Attributed Income (Loss) from Brand Contracts(1)

 

 

Direct Expenses

 

 

Management Fees(2)

 

 

Total Attributed Operating Expenses

 

 

Attributed Net Income (Loss)

 

Platform Common Stock

 

$

(110,175)

 

$

3,989,774

 

$

(49,866)

 

$

3,939,908

 

$

(4,050,083)

 

Fantex Series Vernon Davis Convertible Tracking Stock

 

 

(398,100)

 

 

54,245

 

 

43,912

 

 

98,157

 

 

(496,257)

 

Fantex Series EJ Manuel Convertible Tracking Stock

 

 

(2,181,112)

 

 

5,026

 

 

4,141

 

 

9,167

 

 

(2,190,279)

 

Fantex Series Mohamed Sanu Convertible Tracking Stock

 

 

485,887

 

 

2,176

 

 

1,813

 

 

3,989

 

 

481,898

 

Total

 

$

(2,203,500)

 

$

4,051,221

 

$

 —

 

$

4,051,221

 

$

(6,254,721)

 


(1)

In accordance with the Company's management and attribution policies, 5% of the income from a brand contract is attributed to the platform common stock with the remaining 95% attributed to the associated tracking stock.

(2)

Pursuant to the management agreement with our Parent, the management fee is calculated as 5% of the cash receipts from the brand contracts, during the relevant period. The total management fee is included in the direct expenses of the platform common stock.

(3)

Attributed income also includes income from other investments.

 

18


 

Results of Operations

Nine months ended September 30, 2015 and 2014

 

We first began to generate income in the quarter ended June 30, 2014. The income generated from our brand contracts is based primarily on the change in fair market value of these contracts subsequent to their purchase. During the nine months ended September 30, 2015 and 2014, the change in fair value of our brand contract portfolio resulted in income of $287,930 and $463,110, respectively. The year-over-year change was primarily the result of acquiring additional contracts, the change in fair value of our brand contract portfolio resulting from the increase in present value of the brand contracts as the cash flows are brought closer to the present, and to a lesser extent from net gains resulting from the receipt of cash payments due to us under those contracts. In addition,  during the second quarter of 2015, we changed the estimates of certain cash flows under our brand contract with Alshon Jeffery, as described below.  Also, during the third quarters of 2015 and 2014, we changed the estimates of certain cash flows under our brand contract with EJ Manuel, as described below.

 

All of our contracts performed generally as anticipated in the nine months ended September 30, 2015 and 2014 except for our contracts with EJ Manuel and Alshon Jeffery.  

 

During the nine months ended September 30, 2015, we performed a revaluation of EJ Manuel’s brand contract based on lower estimated future endorsement income as a result of the impact of EJ Manuel not obtaining the starting quarterback position of the Buffalo Bills as previously projected in his endorsement income estimates. We also reviewed the fair value assumptions of his current and future NFL contracts including career length and the composition of the comparable contracts. We have concluded that as of September 30, 2015, these assumptions remain reasonable as his current comparable contracts include a representative mix of starting, journeymen and back-up quarterback comparable players. The changes in our estimates for the timing and amounts of these new cash of flows resulted in a reduction in estimated ABI of approximately $0.4 million during the nine months ended September 30, 2015. During the nine months ended September 30, 2014, we performed a revaluation of EJ Manuel’s brand contract based on lower estimated near term endorsement income as a result of the impact of EJ Manuel losing his starting quarterback position with the Buffalo Bills.  This revaluation resulted in a reduction in estimated ABI of approximately $0.3 million during the nine months ended September 30, 2014.

 

During the second quarter of 2015, we performed a revaluation of Alshon Jeffery’s brand contract based on the timing and terms of the anticipated renegotiation of his contract. The changes in our estimates for the timing and amounts of these new cash of flows as a result of this revaluation, resulted in an unrealized loss of approximately $1.8 million for the Alshon Jeffery Brand Contract recorded during the nine months ended September 30, 2015. This unrealized loss was partially offset by an increase in the net present value of expected cash flows from this brand contract of approximately $1.7 million during the nine months ended September 30, 2015.

 

For further information on the revaluation of the EJ Manuel and Alshon Jeffery Brand Contracts, see Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Quarterly Report on Form 10-Q for the three months ended September 30, 2015.

 

Operating expenses for the nine months ended September 30, 2015 and 2014 were $3.2 million and $3.1 million, respectively. These reflect costs incurred to develop and operate our business. All such costs to date except those under our management agreement with our Parent, have been allocated to us from our Parent. Expenses such as personnel and facility costs were primarily allocated based on the estimated number of full time equivalent (FTE) employees working on activities associated with us. All personnel costs were allocated based on an estimated percentage of time spent on our activities. Facility costs were allocated based on the FTE employees associated with us as a percentage of all employees of our Parent. All other costs were specifically identified and charged to us as determined by management. All estimates are deemed to be reasonable and reflect, in the best judgment of our management, the costs associated with our activities.

 

19


 

Years Ended December 31, 2014 and 2013

 

We first began to generate income in the quarter ended June 30, 2014. As such, our net loss from operations for the year ended December 31, 2013 was the result of the operating expenses associated with starting our business. For the year ended December 31, 2014, our net loss from operations increased by approximately $2.7 million compared to the prior year. This increase was primarily due to our updating the fair value of our brand contracts, following the 2014 NFL season in accordance with our valuation process, to account for the on-field performance of our contract parties. 

 

Due to EJ Manuel losing his starting quarterback job with the Buffalo Bills at the end of September 2014 and the corresponding impact on his on-field statistical performance in the 2014 NFL season, our estimate of the fair value of the brand contract with EJ Manuel declined by approximately $2.3 million. For further information on the revaluation of the EJ Manuel Brand Contract, the Vernon Davis Brand Contract and the Mohamed Sanu Brand Contract, see Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K.

 

In addition, total operating expenses increased to approximately $4.1 million in 2014 from approximately $3.6 million in 2014 primarily due to increases in personnel costs caused by an increase in the number of personnel and increases in marketing costs.

 

20


 

 

RISK FACTORS

Investing in our Fantex Sports Portfolio 1 Units involves a high degree of risk. Before making any decision to invest in Units, you should carefully consider the risks described below, together with the other information contained or incorporated by reference in this prospectus. The risks and uncertainties described or incorporated by reference in this prospectus are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we believe are not material at this time could also materially adversely affect our business, financial condition or results of operations. You should also refer to our financial statements and the notes to those statements, which are incorporated by reference in this prospectus. See also the information contained under the heading “Special Note Regarding Forward-Looking Statements and Industry Data” immediately following these risk factors. If any of the events discussed in the risk factors below or incorporated by reference in this prospectus occur, it could have a material and adverse impact on our business, results of operations, financial condition and cash flows. If that were to happen, the trading price of the Units could decline, and you could lose all or part of your investment.

Throughout these Risk Factors, references to our tracking stocks, the holders of our tracking stocks and related terms shall be deemed to refer to and include the Units and holders of the Units to the extent appropriate based on the tracking stocks’ inclusion in the Units, except where a clearly contrary intention appears.

Risks Relating to Our Limited Operating History, Financial Position and Capital Needs

We have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future.

We incorporated in Delaware in September 2012 as a wholly‑owned subsidiary of Fantex Holdings. We are currently in a start‑up phase and to date have relied on our parent to conduct our operations. We therefore have a very limited operating history. Investment in our company is highly speculative because it entails substantial upfront cost and significant risk that we may never become commercially viable. Our parent has incurred significant expenses on our behalf. Our parent is not obligated to continue to incur expenses on our behalf except as required under our management agreement with them, and we expect that we will incur significant expenses related to our ongoing operations. For the years ended December 31, 2014 and 2013, we reported a net loss of approximately $6.3 million and $3.6 million, respectively. For the nine months ended September 30, 2015, we reported a net loss of approximately $1.9 million and had accumulated losses since inception of approximately $13.5 million.

We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase as we continue evaluating, targeting and accessing brands, negotiating the acquisition of minority interests in those brands that meet our criteria, and developing the infrastructure necessary to support our ongoing operations. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses, the rate at which we are able to acquire brands that meet our criteria and the ability of our acquired brands to generate income and cash flow. Even if our brands generate cash flows they may not produce payments quickly enough to cover our expenses. If any individuals with whom we have or may contract in the future, fail to make payments in amounts we expect, or at all, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our expected future losses will have an adverse effect on our stockholders’ equity and working capital.

We have a very limited operating history, which may make it difficult for investors to evaluate the success of our business to date and to assess our future viability. Our business model also requires us to make substantial upfront payments to our contract parties in exchange for rights to future payments.

Our operations to date have been limited to organizing and staffing our company, evaluating, targeting and accessing brands that meet our criteria, negotiating the acquisition of minority interests in those brands, engaging in the registration process for the offering of shares of tracking stocks relating to our existing brand contracts and managing our brand contracts.

We have entered into 10 brand contracts. We intend to enter into additional brand contracts in the future with other contract parties and are actively pursuing these brand contracts, but we have no current commitments to enter into

21


 

another brand contract. Each of our brand contracts requires us to make an upfront cash payment, and we expect that any other brand contracts that we enter into in the future with other contract parties will also require us to make upfront payments, in return for the right to future payments based on our ABI.

Therefore, our business model requires us to make substantial upfront payments to our contract parties in exchange for rights to future payments. We will be at risk if for any reason we do not receive those future payments, or if they are less than we would need to be profitable or to offset our expenses. We have no history to demonstrate, and we can make no assurances, that our business model will be successful, or whether any of our brand contracts will be profitable. Consequently, it will be difficult for anyone to predict our future success, performance or viability, and more difficult than it would be if we had a longer operating history and/or successful brand contracts to judge the viability of our business model. Any such predictions may not be accurate or reliable.

We may not receive the cash amounts that we expect, or any at all, from our brand contracts with our contract parties or from any future brand contracts and we may never generate sufficient income to become profitable.

Our ability to generate income from the brand contracts and become profitable will depend, among other things, upon our ability to successfully evaluate, target and access brands that have the potential to generate significant brand income, acquire a minority interest in the brand income from these brands for an appropriate purchase price, aid our acquired brands in enhancing their value in amounts sufficient to provide a return on our investment, and enforce the brand contracts and collect our ABI with respect to these brands. Even if we are able to successfully do these and other things that are within our control there are numerous other factors, some of which are not within our control, that might impact our ability to generate income or cash flows or be profitable, including those discussed in these risk factors.

In addition, there are numerous risks and uncertainties associated with the brands in which we invest, including that the success of our brand contracts will depend upon the contributions, success and longevity of an individual in their primary occupation, such as an athlete in the NFL. Therefore, we are unable to predict the timing or amount of future cash receipts, or when or if we will be able to achieve or maintain profitability. Even if we are able to acquire, manage and develop brands as described above, we anticipate incurring significant costs associated with our efforts to achieve or maintain profitability. Further, we may not receive the cash amounts that we expect, or any at all, from any of our brand contracts.

Our business strategy depends in large part on our ability to build a robust platform of brands by entering into additional brand contracts. We may not be able to enter into additional brand contracts in the future, or enter into the number of additional brand contracts that we anticipate would be necessary to support our business model.

Our strategy of enhancing brand reach and brand value for our acquired brands depends in large part on our ability to build a robust platform of brands and benefit from economies of scale and an ability to cross‑pollinate and share best practices across our acquired brands. For example, any direct investment of resources that we make in any promotional activities relative to one brand contract must exceed a return that is at least approximately eight to ten times our investment in order to increase the value of such tracking stock. Thus, unless we achieve significant economies of scale in our ability to deliver brand enhancing value at a low cost across all our tracking stocks (by, for example, utilizing fixed, in‑house personnel rather than incurring out‑of‑pocket third party costs), then we will not likely be able to make investments at a cost that would allow for a positive return on our investment. Accordingly, we are actively pursuing additional brand contracts that we intend to enter into in the future. However, we have no current commitments to enter into another brand contract.

We do not know if future potential contract parties will agree to enter into additional brand contracts and we may not be able to attract sufficient additional brand contracts. For example, future potential contract parties may not view the brand contract as an attractive value proposition to them due to any number of factors, including differing expectations of an appropriate purchase price that reflects the agreed upon ABI, which may be based on any number of factors, such as:

·

we and future potential contract parties may not agree on the assumptions and estimates used to determine the estimated future earnings of potential contract parties;

22


 

·

potential contract parties may not want to incur legal, tax and other burdens associated with entering into a brand contract, including, for example, ongoing information and disclosure requirements, as well as the potential risk, due to the lack of any currently binding or authoritative guidance from the IRS, that the ABI we are purchasing from the contract party could be reportable income for the contract party, and, as a result, that it may not be fully deductible for U.S. federal income tax purposes;

·

the potential impact of possible disclosure of the terms of material included contracts, and the impact that these disclosure obligations may have on the ability of a contract party to enter into additional endorsement deals or to participate in other brand‑income generating activities;

·

any negative perception by the media, fans, leagues, clubs or others of our business model;

·

any negative perception by the media, fans, leagues, clubs or others of any of our current contract parties or other future contract parties, as a result of their decision to enter into a brand contract with us, or otherwise; and

·

the performance of our brand contracts or other brand contracts that we may enter into in the future, and/or the performance of the related tracking stock, which may be worse than anticipated.

As a result, we may be forced to revise our business model to attract additional brand contracts. For example, we are not currently contractually obligated to expend capital on enhancing the brand value of our contract parties. Contract parties may require us to contractually agree to provide certain minimum levels of marketing services in order to enter into brand contracts, which we may not be able to provide or which may not give us sufficient return on capital to make the brand contract profitable. Moreover, we or our parent may be asked to provide an indemnity to the contract party against any tax risk to them as a result of the uncertainty discussed above. For example, our parent has agreed to provide an indemnity to each of our current contract parties if their respective ABI is reportable and not deductible, and either we or our parent may have to agree to similar tax indemnities for future contract parties until there is additional guidance in this area or sufficient history with our contract parties. Even if potential contract parties are willing to agree to enter into additional brand contracts with us, the leagues, team owners, players associations, endorsement partners, elected officials or others may take actions that could restrict our ability or make it more costly for us to enter into future brand contracts. And even if we are successful in entering into additional brand contracts with additional contract parties, we may not be successful in conducting offerings to finance the purchase price under these brand contracts.

We will need to obtain additional funding to continue operations and brand contract acquisition at current levels. If we fail to obtain the necessary financing, or fail to become profitable or are unable to sustain profitability on a continuing basis, then we will need to significantly delay, scale back or discontinue the current levels of our brand contract acquisition and operations.

 

We will require additional capital to fund our operations, and if we fail to obtain necessary financing, our business plan may not be successful.

Any brand contracts that we enter into in the future with other contract parties will require us to make substantial upfront payments to acquire the ABI under such brand contracts. We do not, and we do not expect to have, the necessary funds that we would need to make any of these upfront payments under future brand contracts. Therefore, we expect that our future brand contracts for the foreseeable future will be contingent upon obtaining financing to fund the acquisition of the ABI in the respective brands, and we intend to finance these acquisitions through the issuance of additional tracking stocks linked to the value of such brands. Such financing may be expensive and time consuming to obtain, and we may not have investor interest that would enable us to obtain such financing. Our parent has purchased approximately $11.2 million in the company’s tracking series as a stand-by purchaser in the public offerings we have consummated to date so that the offerings could be completed and we do not expect our parent will continue to purchase similar amounts in the future.

In addition, our operations (excluding upfront payments under future brand contracts) have consumed substantial amounts of cash since inception, and we expect they will continue to consume substantial amounts of cash as we aggressively build our platform of brands and our internal marketing, compliance and other administrative functions. To date, these operations have been financed primarily by equity contributions from our parent. We are dependent on the

23


 

continued support of our parent; at this time our parent intends to continue to fund operations for at least the next 12 months. Our parent has no obligation to continue to finance our operations except as required under our management agreement with them. Although we believe future funding from our parent together with existing cash and cash equivalents, and interest thereon will be sufficient to fund our projected operating expenses for the next 12 months, as noted above, we will require additional capital to finance the acquisition of future brands, and we may also need to raise additional funds sooner if our operating and other expenses are higher than we expect or our cash received from brand contracts is lower than we expect.

Until we can generate a sufficient amount of cash from our brand contracts, if ever, we expect to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may not be able to continue to acquire additional ABI in other brands and we may have to significantly delay, scale back or discontinue our operations. Our board of directors has adopted resolutions limiting our ability to incur indebtedness for borrowed money or issue debt securities without the prior approval of our independent directors or a committee comprised of independent directors. If we raise additional funds through the issuance of additional debt or equity securities it could result in dilution to our existing stockholders, and/or fixed payment obligations that could reduce our ability to pay dividends or otherwise fund our other operations. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license brands without consent and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

Our forecast of the period of time through which our financial resources will be adequate to support our operations (excluding upfront payments under future brand contracts) is a forward‑looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both near and long‑term, will depend on many factors, including, but not limited to:

·

the rate at which we begin to realize income under our existing brand contracts, as well as under any additional brand contracts that we may enter into in the future;

·

the cost of our efforts to evaluate, target and access the brands that meet our criteria, as well as the cost and expense of negotiating any new brand contracts;

·

our ability to enter into additional brand contracts, and if so the amount of the upfront purchase price that we would have to pay to acquire rights under any such brand contracts;

·

the level of participation required by our parent as a standby purchaser to conclude any future initial public offerings;

·

the number and characteristics of any new brand contracts that we may enter into;

·

the cost and expenses of any equity or debt financings that would be necessary to pay the purchase price under any additional brand contracts, and any regulatory or other delays in any of these offering processes;

·

the effect of competing technological and market developments;

·

the cost of establishing and building our sales, marketing and compliance capabilities; and

·

the rate at which we invest in marketing and other costs to assist our acquired brands in building and enhancing the value of their brands.

If a lack of available capital means that we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected.

24


 

Risks Relating to Our Brand Contracts and Our Business

Our principal source of cash flows for the foreseeable future will be derived from our brand contracts.

Our principal source of cash flows for the foreseeable future will be derived from our brand contracts. There are a number of risks relating to brand contracts. If any of these risks occur it could have a material and adverse impact on our business, financial condition and results of operations.

We have very limited experience managing brand contracts and we have very limited historical performance data about our brand contracts.

We entered into our first brand contract in February 2013. Due to our limited experience with brand contracts, we have limited historical performance data regarding our ability to generate cash receipts from the management of brand contracts and the likelihood of long‑term performance of the contract party, or our ability to aid our brands in enhancing their brand reach and brand value. As a result, the brand contracts that we enter into may generate lower ABI than we anticipate, or none at all. We may therefore pay a purchase price for ABI that is too high. As we gain more experience with our brand contracts, we may change how we estimate the brand value of future brand contracts, and investors who invest early may not benefit from the experience that we gain from our early brand contracts.

Our cash received under our brand contracts will depend upon the continued satisfactory performance of the related contract party, and we do not have any rights to require the contract party to take any actions to attract or maintain or otherwise generate brand income.

Some or all of the brand income that a contract party is expected to generate is contingent on continued satisfactory performance and is not guaranteed. Although we structure our brand contracts so that the contract party maintains the substantial majority of future brand income to help ensure that the contract party will maintain incentives to continue to generate brand income, we can provide no assurances that the contract party will do so. The contract party may retire from such contract party’s primary occupation, such as an athlete in the NFL, at any time and for any reason, subject only to a requirement to repay us the amount of the purchase price we paid such contract party, plus certain expenses and net of any amounts already paid to us, if the contract party retires within two years. In addition, if the contract party voluntarily retires during such period, such contract party may have other obligations under other contracts to pay back upfront payments, such as a signing bonus, and the contract party may not have the funds to meet all of its obligations at that time. The contract party has no obligation to take any actions to generate brand income, and may choose not to do anything to generate brand income. In addition, even if the contract party chooses to engage in additional brand income generating activities, their ability to do so may be restricted under their existing or future contracts. Moreover, brand income under our brand contracts generally only includes income that the contract party may receive in the future in such contract party’s primary occupation at the time, such as an athlete in the NFL, and related fields, such as broadcasting and coaching. Our brand contract contains no restriction on the ability of the contract party to change professions or earn money in unrelated fields, and such income may not be brand income. In any of these events, we may lose some or all of the brand income in the future under a brand contract, in which case our cash receipts would decline.

The contract party is neither our affiliate, nor a director, officer or employee of our company and owes no fiduciary duties to us or any of our stockholders. The contract party has no obligation to enhance the value of their brand or disclose information to our stockholders.

Events in the contract party’s personal life, including relationships with spouse, family, friends, etc. could have a significant impact on the contract party’s performance on the field. The contract party’s obligations to disclose such personal events is limited to the obligations under the brand contract and the contract party is under no obligation to disclose any personal matters to the holders of shares of our tracking stocks. Furthermore, although the contract party is contractually obligated to disclose all material facts to us, we cannot guarantee that the contract party will comply with such disclosure requirements or that we can independently verify or uncover material events in the contract party’s personal life. In addition, the contract party has no obligation to enhance the value of their brand. For example, Vernon Davis chose not to participate in the San Francisco 49ers’ offseason conditioning program in 2014 and therefore did not

25


 

earn a $200,000 workout bonus for which he was eligible. Vernon Davis also was fined $70,000 for failing to attend a mandatory 2014 preseason minicamp. In addition, a contract party in the NFL may agree to a salary reduction to assist their team in staying within the league salary cap, to be on a more competitive team, or to stay with a specific team, all of which may have the effect of reducing potential brand income and conflict with stockholders’ interests in maximizing brand income. Since the contract party’s obligations under the brand contract are solely limited to obligations owed to us, the holders of shares of our tracking stocks have no contractual right to enforce such obligations against the contract party. Furthermore, since the contract party is neither a director nor an officer of our company, such contract party owes no fiduciary obligations to the holders of shares of our tracking stocks. As a result, our stockholders will have no recourse directly against the contract party, either under the brand contract or under the securities laws.

Profitability of our brand contracts may also depend upon the contract party’s ability to attract and maintain endorsements and attract and maintain other brand income generating activities.

The purchase price that we expect to pay for future ABI under our brand contracts is based on our assumption that the contract party will generate brand income in excess of that which may be predictable under the included contracts. Therefore, we expect that the contract party will need to be able to maintain existing included contracts as well as attract and maintain additional endorsements and other brand income generating activities. As noted above, the contract party has no obligation to take any actions to generate brand income, or to take any actions to increase the amount of brand income that the contract party currently generates. However, even if the contract party desires to and attempts to attract and maintain additional endorsements and other brand income generating activities there can be no assurances that such contract party will be able to do so.

Competition for endorsements and other brand income opportunities is intense. These opportunities may depend on a variety of factors, including the primary occupation, such as an athlete in the NFL, and perceived value of such profession to marketing executives, and on‑field factors in the primary occupation, such as quality of the contract party’s performance, whether or not the contract party plays for a winning team, plays in post‑season games or wins individual awards or is named to the Pro Bowl or All‑Pro Team, the market in which the contract party performs, skill of the contract party at such contract party’s position, the style of play and potential to perform in the future, as well as intangible traits off the field such as personality, personal drive and ambition, “likability,” authenticity and consistency. Thus, future endorsements and other brand income opportunities may be difficult to attract and maintain, and they may not generate as much brand income as we expect or that they have historically. A downturn in the performance of the contract party or even the team on which the contract party plays, whether the current team or a different team, could adversely affect such contract party’s ability to attract and maintain endorsements. Even if the contract party enters into multi‑year agreements that are capable of generating significant brand income, such agreements may have termination clauses relating to performance, character or other reasons, or such agreements may become the subject of disputes. We will have no rights under our brand contracts to require the contract party to pursue any remedies or engage in any disputes with any third parties.

Brand income may decrease due to factors outside the control of the contract party, such as an injury, illness, medical condition or death of the contract party, or due to other factors such as public scandal or other reputational harm to the contract party. In any such event, we do not maintain any insurance against such an event, and it is likely that the brand income with respect to such brand contract will not return to its prior levels or may cease completely.

Our focus for the foreseeable future is to enter into brand contracts with high‑profile athletes who play professional sports. There is a high risk of injury in many professional sports, and in particular in the NFL. Nevertheless, we do not maintain any insurance against the loss of any brand income as a result of injury, illness, medical condition or death of the contract party. Therefore, if a contract party becomes injured or sustains a serious illness or other adverse medical condition in the course of their professional career or otherwise, or dies, the brand income, and thus our ABI, would likely be dramatically less than we anticipate, and it is likely that such brand income would not return to its prior levels or may cease completely.

In some cases, we may also expect to receive material amounts of brand income from existing and future endorsement agreements entered into by the contract party, as well as other public activities related to the primary occupation of the contract party, such as television broadcasting. We believe that the contract party’s ability to attract

26


 

and maintain any such endorsement agreements as well as other sources of brand income could depend on the contract party’s reputation and ability to be viewed favorably by the public. Prior to entering into a brand contract, we assess the character and reputation of the contract party and the brand through our independent assessments, industry references and background checks conducted by third parties. However, there can be no assurance that our review process uncovers all facts and characteristics that could adversely affect the reputation of a contract party or the value of the brand contract, or that our assessment of reputational risk based on our due diligence is accurate. Even if our review process provides us with an accurate assessment of the character and integrity of a contract party as of the date of our review, there can be no assurance that circumstances in the future will not change, or that a contract party may not suffer reputational damage in the future, whether as a result of future behavior or otherwise.

Any harm to the public reputation of a contract party, or association of the contract party’s name with a public scandal, may reduce the contract party’s ability to enter into and maintain future endorsements and other sources of brand income and as a result, brand income would likely decrease or may cease completely.

The contract party or other third parties may refuse or fail to make payments to us under the brand contracts.

Our cash flows depend on contract parties and other third parties making payments of ABI to us. A contract party or other third party may dispute amounts to which we believe we are entitled, or may be unwilling or unable to make payments to which we are entitled, including for reasons discussed elsewhere in these risk factors.

In either event, we may become involved in a dispute with the contract party or other third party regarding the payment of such amounts, including possible litigation. Disputes of this nature could harm the relationship between us and the contract party or other third party, and could be costly and time‑consuming for us to pursue.

Failure of the contract party or other third party to make payments of our ABI to us for any reason would adversely affect our business and in particular the value of a tracking stock if the failure to pay relates to the brand contract associated with any tracking stocks.

In addition, if the contract party or other third party who may be obligated to make payments to us were to become the subject of a proceeding under the United States Bankruptcy Code or a similar proceeding or arrangement under another state, federal or foreign law, our rights and interests under the brand contract or otherwise may be prejudiced or impaired, perhaps significantly so. In such circumstances, we may be precluded, stayed or otherwise limited in enforcing some or all of our rights under the brand contract or otherwise and realizing the economic and other benefits contemplated therein. To the extent we do not receive payments under a brand contract to which we would otherwise be entitled as a result of any such debtor relief laws, then the amount of such payments we do not receive will nonetheless be attributable to the respective tracking stock. In such an event, such shortfall in income will be treated as a general expense of Fantex and be shared pro rata (calculated based on attributable income) among all of our then outstanding tracking stocks. As a result, the market value of a tracking stock could decline if another brand contract that is not related to a tracking stock is unenforceable as a result of debtor relief laws.

Our brand contracts are not secured by any collateral or guaranteed or insured by any third party other than the contract party, and an investor must rely on Fantex to pursue remedies against the contract party in the event of any default.

The payments under a brand contract will be unsecured obligations of the contract party and will not be secured by any collateral, nor guaranteed or insured by any third party or governmental authority. Therefore, we will be limited in our ability to collect any payments that may be owed to us under a brand contract if those amounts are not paid. Generally, we would have to pursue remedies against the contract party or other third parties to whom our ABI was assigned by the contract party.

If the contract party defaults under the brand contract, there can be no assurances that the contract party will have adequate resources, if any, to satisfy any obligations to us under the brand contract. In addition, our brand contracts will require that our ABI be directly assigned to us by the contract party where commercially practicable. It may be necessary, therefore, for us to also pursue remedies against counterparties to included contracts. These counterparties

27


 

may assert that the assignment of brand income by the contract party did not create an obligation on their part to pay any brand income to us.

If a contract party does not comply with the terms of an included contract, our management, at its discretion, could decide not to pursue damages for the contract party’s breach, which could adversely affect the amount of brand income that we receive under a contract.

Moreover, payment of the ABI is an obligation of the contract party to us, not obligations to our stockholders. Our stockholders will have no recourse directly against the contract party.

The brand contract does not restrict the contract party from incurring unsecured or secured debt, nor does it impose any other financial restrictions on the contract party.

If the contract party incurs additional secured or unsecured debt after entering into a brand contract with us, or if the contract party incurs excessive expenses, the contract party may be impaired in its ability to make payments to us under the brand contract. In addition, additional debt or expenses may adversely affect the contract party’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the contract party. To the extent that the contract party has or incurs other indebtedness and expenses and cannot pay all of its indebtedness or expenses, the contract party may choose to make payments to other creditors rather than us.

To the extent a contract party incurs other indebtedness that is secured, such as mortgage, home equity, or auto loans, the ability of secured creditors to exercise remedies against the assets of the contract party may impair the contract party’s ability to make payments to us under the brand contract. The contract party may also choose to repay obligations under secured indebtedness before making required payments on the brand contract because the contract party has no collateral at risk in the case of the brand contract.

The financial and other information that we obtain from the contract party or other third parties may be inaccurate and may not accurately reflect the true financial position of the contract party, and the risk of default on the brand contract may be significant and may be higher than we anticipate.

Prior to entering into a brand contract, we conduct a review of the contract party that includes collecting financial and other information from the contract party to evaluate financial suitability of the contract party, including a review of assets, liabilities, existing commitments, tax returns and credit scores. We also conduct background checks and obtain credit reports from the major credit rating agencies to help us assess the ability of the contract party to meet their financial obligations. However, we do not verify this information and it may be inaccurate or incomplete. For example, the credit score assigned to a contract party may not accurately reflect the actual likelihood that the contract party will perform under the brand contract because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we do not verify the information obtained from the contract party’s credit report. If information that is supplied to us by the contract party or other third parties is inaccurate or incomplete, the risk of default on the brand contract may be significant and may be higher than we anticipate.

Our due diligence procedures may not reveal all relevant information regarding a targeted brand acquisition and may result in an inaccurate assessment of the projected value of an acquired brand.

Prior to entering into a brand contract with an athlete, entertainer or other high profile individual, we conduct due diligence and review the included contracts of such contract party and other documents to support our estimate of such contract party’s projected brand income. As part of this due diligence process and assessment, we will rely in part on the contract party to fully address our questions by disclosing all relevant information and, in some cases, on information provided by third parties. However, our due diligence processes may not uncover all relevant facts, and our brand acquisitions may not be profitable. Although our brand contracts with our contract parties obligates them to, and we intend to require future contract parties, if any, to contractually agree to, disclose all material facts to us, we cannot guarantee that our current contract parties or any future contract party will comply with such disclosure requirements or that we can independently verify or uncover material events about our current contract parties or any such future contract parties.

28


 

The valuation of our brand contracts and expected ABI requires us to make material assumptions that may ultimately prove to be incorrect. In such an event, we could suffer significant losses that could materially and adversely affect our results of operations.

Our principal assets are expected to be derived from our brand contracts with athletes, entertainers and other high‑profile individuals. Those assets are considered “Level 3” assets under ASC 820, Fair Value Measurements and Disclosures, as there is currently no active market where we are able to observe quoted prices for identical assets. As a result, our valuation of those assets incorporates significant inputs that are not observable. Fair value of future expected brand income is determined by measuring expected returns on player contracts, anticipated lengths of player careers and related contracts, anticipated future endorsements and anticipated renewals of existing contracts based on comparable individuals in the same industry. However, valuation of the expected brand income is highly speculative due to the heavily subjective nature of identifying comparable athletes or entertainers and is inherently difficult due to the uniqueness of each professional athlete or entertainer and the limited number of available comparable athletes and entertainers.

The fair value measurement of Level 3 assets is inherently uncertain and creates additional volatility in our financial statements that are not necessarily related to the performance of the underlying assets. To determine the amount of our purchase price and the fair values of our brand contracts with our contract parties, we applied discount rates subjectively determined in our analysis based on assumptions that have not been reviewed by any independent financial advisor. If we determine in the future that the discount rates we used were too low, then our estimate of the fair value of any of our brand contracts may be too high. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a further discussion of fair value measurements. 

Failure of a contract party to adequately protect their intellectual property could injure the value of the contract party’s brand.

We invest in high‑profile brands through our brand contracts. Therefore, the success of our brand contracts is dependent on the contract party protecting their brand from intellectual property infringement (such as counterfeiting and other unauthorized uses of their intellectual property rights). Although contract parties may seek to protect the intellectual property rights associated with their brand by ensuring that they own and control certain intellectual property rights in and to those assets and, where appropriate, by enforcing those intellectual property rights, it may not be possible to detect all instances of brand infringement. Additionally, where instances of brand infringement are detected, we cannot guarantee that such instances will be prevented as there may be legal or factual circumstances that give rise to uncertainty as to the validity, scope and enforceability of a contract party’s intellectual property rights. We will have no rights under the brand contract to enforce any intellectual property rights of the contract party or the brand. Infringement of their trademark, copyright and other intellectual property rights by others could have an adverse effect on the brand income, and thus the ABI that we receive under the brand contract. If any contract party were to fail or be unable to secure, protect, maintain and/or enforce the intellectual property rights that vest in their brand, then we could lose a portion of our cash stream that would have been received from such brand assets.

Our cash received under brand contracts may fluctuate due to seasonality.

The cash receipts under our brand contracts may be subject to seasonal variation, limiting the overall comparability of interim financial periods. For example, the salary under NFL player contracts is usually paid out in even installments during the course of the NFL season, or as a signing bonus according to varying schedules. The NFL season occurs primarily in the third and fourth quarters of each calendar year. As a result, our interim results and any quarterly financial information may not be indicative of the financial performance for the whole year.

An economic downturn and adverse economic conditions may harm a contract party’s earning potential.

Economic downturns and adverse conditions in the global markets may negatively affect the earnings of a contract party. For example, the NFL market salary cap is dependent upon the revenues the NFL receives. In addition, endorsements may depend in part on the actual or perceived personal disposable income of consumers and marketing budgets of endorsement partners. These commercial contract payments are contingent upon the expenditures of

29


 

businesses across a wide range of industries, which industries may cut costs in response to any economic downturn.

Our ability to increase the value of any of our brands may be limited and our investments in the promotion of any of our brands may cause the market value of our stock to decline.

Our management and board of directors will have complete discretion in determining the scope and execution of our brand promotion efforts, if any, with respect to our brands. Any investment we may make to promote our acquired brands will be for long‑ or medium‑term results and would not be expected to increase brand income in the near‑term, if at all. Any expenditures that we may make on promotional activities that are attributable to a single brand will be an attributable expense to the associated tracking stock. To the extent that our promotional activities increase the attributable income of a tracking stock by an amount less than the attributable expenses for the promotion, the attributed retained earnings of that tracking stock would decline. There can be no assurances that our management will promote any of our brands in a manner that creates value for the associated tracking stock or any of our other stockholders.

Confidentiality agreements with employees and others may not adequately prevent disclosures of our proprietary information and confidential information of the contract party.

We have taken measures to protect our proprietary information and confidential information of the contract parties, but these measures may not be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us, including for example, information we acquire about the contract parties, be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, employees, collaborators or consultants may still disclose or misuse our confidential information, and we may not be able to meaningfully protect our proprietary information and confidential information of the contract parties. In addition, others may independently develop substantially equivalent information or techniques or otherwise lawfully gain access to our proprietary information and confidential information of the contract parties, and thereafter communicate this information to others without maintaining its confidentiality. If this occurs, it may negatively impact our business and relationships with our current or future contract parties, and may damage our reputation and limit our ability to enter into new brand contracts. In addition, costly and time‑consuming litigation could be necessary to enforce our proprietary rights or limit the prohibited disclosure of confidential information, and failure to obtain or maintain protection of our proprietary information or the confidential information of the contract parties could adversely affect our competitive business position.

Changes in government policy, legislation or regulatory or judicial interpretations could hinder or prevent our ability to conduct our business operations, including by hindering or preventing our ability to enforce our brand contracts or conduct offerings of tracking stocks.

Changes in government policy, legislation or regulatory or judicial interpretations could hinder or prevent our ability to conduct our business operations, including by hindering or preventing our ability to enforce our brand contracts or conduct offerings of tracking stocks. For example, we could be deemed to be subject to insurance and other regulations, which in some circumstances may be applied retrospectively. In addition, our brand contracts are intended to be effective in perpetuity and may be terminated only upon mutual agreement of the contract party and us. In some jurisdictions, perpetual contracts have been found to be against public policy and therefore terminable in some circumstances. Our brand contracts are governed by California law, and California legal decisions do not disfavor express contractual terms for indefinite duration. However, we can provide no assurances that a California court may not rule differently in the future, or that a court of another jurisdiction might attempt to apply a different choice of law to our brand contracts. If this occurs then we may become involved in expensive and time consuming litigation, or may be unable in certain cases to enforce our brand contracts. Any other changes in or interpretations of current laws and regulations could also require us to increase our compliance expenditures, inhibit our ability to enter into new brand contracts or cause us to significantly alter or to discontinue offerings of additional tracking stocks. Altering the terms of our brand contracts or tracking stocks to comply with changes in or interpretations of applicable laws and regulations could require significant legal expenditures, increase the cost of managing or acquiring our brand contracts or make

30


 

offerings of our tracking stocks less attractive to investors. In addition, our failure to comply with applicable laws and regulations could lead to significant penalties, fines or other sanctions. If we are unable to effectively respond to any such changes or comply with existing and future laws and regulations, our competitive position, results of operations, financial condition and cash flows could be materially adversely impacted.

The leagues, team owners, players associations, endorsement partners, elected officials or others may take actions that could restrict our ability or make it more costly for us to enter into future brand contracts.

Our business model depends on the cooperation of various third parties. Because the brand contracts and offerings of tracking stocks linked to the income of professional athletes and entertainers is a novel business model, there may be influential parties with interests that are adverse or perceived to be adverse to our business, such as sports leagues, sports teams, fantasy sports networks or gambling institutions. These parties may seek to change the rules, policies, laws, regulations or legal interpretations in ways to prohibit, or limit the success of, our business. For example, in 2010 the Cantor Futures Exchange received approval from the Commodities Futures Trading Commission to launch the Hollywood Stock Exchange as a contract market for the trading of box office futures; however, the Motion Picture Association of America successfully lobbied members of the U.S. congress to pass legislation making trading in box office futures illegal. In a similar manner, influential parties that perceive our business model to be a threat to their business or detrimental to professional sports may attempt to lobby leagues, team owners, players associations, endorsement partners and elected officials to adopt rules, policies, laws, regulations or legal interpretations that inhibit us from conducting our business. Any such changes may adversely affect the ability of our contract parties to perform their obligations under brand contracts, or inhibit our ability to enter into new brand contracts with other contract parties. These changes could cover various requirements of the brand contract, such as prohibiting the sale or assignment of a portion of personal income, limiting the ability to enter into contracts with an indefinite term or limiting the ability of the contract party to disclose information about included contracts to us. Any such changes prohibiting, or limiting the enforceability of, any terms in the brand contract could prevent or inhibit our collection of the ABI to which we are entitled under the brand contract. Any limitations on the ability of the contract party to disclose information about included contracts to us, or the SEC if we deemed it necessary, could limit the ability of a contract party to enter into such agreements subsequent to entering into a brand contract with us. Any increase in the expenses associated with our management of the brand contract or decrease in the expected ABI that we will collect could materially and adversely affect the value of shares of our tracking stocks.

We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner, or at all.

Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Cornell “Buck” French, our Chief Executive Officer, David Mullin, our Chief Financial Officer, and David Beirne, Chairman of our board of directors. Neither we nor Fantex Holdings have employment agreements with any of our executive officers or key employees, other than Messrs. French and Mullin. The material terms of the agreements with Messrs. French and Mullin are described under “Executive Compensation—Executive Compensation Arrangements.” Our executive officers or key employees could terminate their employment with Fantex Holdings or us at any time without penalty. In addition, we do not maintain key person life insurance policies on any of our employees or any of our contract parties. The loss of one or more of these executive officers or key employees could seriously harm our business and may prevent us from implementing our business plan in a timely manner, or at all.

Risks Relating to Our Contract Parties in the NFL and MLB

The profitability of our brand contract with a contract party in the NFL or MLB is substantially dependent upon the contract party’s ability to play out his existing player contract in professional sports and enter into additional high-value player contracts. If a contract party in the NFL or MLB does enter into additional high-value player contracts, there is no guarantee that any portion of such contracts will consist of guaranteed money.

We anticipate that we will receive the majority of payments due under our brand contract with a contract party in the NFL and MLB during the period of his professional sports playing career. These contract parties’ current player

31


 

contracts represent the source of substantially all of the brand income under our brand contracts with them, and we expect that these contract parties’ annual incomes will continue to be more heavily weighted toward their player contracts than on other brand income-generating activities. More than 90% of these contract parties’ estimated total lifetime brand income is based on projected player contracts, endorsements and post-career earnings, which we have discounted at weighted-average discount rates ranging from approximately 12% to 16%. 

The length of the professional sports playing career of a contract party in the NFL or MLB is uncertain. These contract parties may not continue to perform well as players and therefore, their future earnings may be substantially less than those under their current player contracts. In addition, if such a contract party is unable to sign a new player contract or the terms of a new player contract are materially worse than his current player contract, the cash receipts from the related brand contract will decline, which in turn may cause the market value of the Units to decline.

In addition, in valuing the potential lifetime brand income of our contract parties in the NFL or MLB, we generally estimated that the brand income these contract parties may earn as a result of endorsements will be in excess of their historical earnings from endorsements. However, we do not know if these contract parties’ endorsement income will grow in the future, and we do not know if their reputations and brands will be enhanced as a result of their being one of our contract parties. In fact, a contract party’s reputation and brand may be negatively affected by his willingness to enter into a brand contract and trade potential future earnings for present income.

If future endorsement partners or professional sports teams suspect that a contract party has hidden motives behind accepting an upfront cash payment in exchange for a portion of his future earnings, future endorsement partners may be less willing to enter into contracts with a contract party and may not find his promises of future performance under such contracts reliable. In addition, the endorsement contracts that a contract party in the NFL or MLB may enter into during his playing career in professional sports may be terminated if he does not play for a professional sports team. Furthermore, a contract party’s ability to successfully attract and retain endorsements is dependent on such party’s complying with the contractual requirements of those endorsements and there is no guarantee that a contract party will do so. Moreover, future endorsement partners may be less willing to enter into contracts with one of our contract parties as a result of his entering into the brand contract with us in order to avoid public disclosure of their arrangements with such contract party. For the aforementioned reasons, our contract parties may not be able to enter into new endorsement deals. In addition, the ability of each of our contract parties to generate other brand income after his playing career, such as through coaching or broadcasting, is unproven. A contract party’s failure to attract and maintain key endorsements or generate other brand income after his playing career could have a negative impact on our cash received under the brand contract.

The opportunity to receive a return of capital or any profit from an investment in Units will depend in large part upon the ability of our contract parties to generate significant future brand income from professional sports and in some cases enter into and maintain endorsement contracts that are significantly in excess of those they have had historically. If a contract party does enter into additional high-value player contracts, there is no guarantee that any portion of such contracts will consist of guaranteed money. For a more detailed description of the valuation of the each of our brand contracts, please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 73.

Most of our contract parties have been in professional sports for fewer than five years and therefore we have limited historical data upon which to base our valuation and projections of their future earnings potential.

Most of our contract parties have been in professional sports for fewer than five years. As a result, we have less information on our contract parties’ ability to be successful in professional sports and have little historical data upon which to build our analysis and valuation of the future brand income. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed description of how we estimated each contract party’s career length and future contracts.

32


 

Risks Related to Each of Our Contract Parties 

Our ability to increase the value of our brands may be limited and our investments in the promotion of such brands may cause the market value of our stock to decline.

Based on publicly reported and widely available information, endorsement deals with professional football players historically appear to have been significantly smaller than endorsement deals with athletes from other professional sports such as golf and basketball. As a result, the endorsement potential of each of our contract parties may be limited and we may be unable to increase the value of the associated brand despite our efforts. To the extent that our promotional activities are unsuccessful, the market value of shares of our tracking stocks may decline. Furthermore, even if our promotion activities increase the endorsement income to our contract parties, the promotional activities may nonetheless have a negative impact on the market value of shares of our tracking stock because we will only receive a portion of any increased brand income. For example, because the ABI under our typical brand contract is 10% of brand income, our promotion efforts must produce brand income equal to at least ten times our costs for such promotion efforts in order to return our investment. There can be no assurances that our management will promote any of our brands in a manner that creates value for holders of shares of our tracking stocks.

The value of our brands is dependent upon the performance of, and to a lesser extent, the popularity of our contract parties.

Our cash receipts under each of our brand contracts are driven by the performance of, and to a lesser extent, the popularity of our contract parties. The contract party’s performance in their primary career directly affects, and a deterioration of their performance could adversely affect, the ABI under our brand contract. Poor or mediocre performance could cause the contract party’s playing contract to be terminated and may result in sponsors cancelling their endorsements, or result in the contract party failing to qualify for additional incentive payments under existing or future endorsement contracts. We cannot ensure that any of our contract parties will continue to be successful in their playing careers.

Contract parties in the NFL or MLB could be negatively affected by an NFL or MLB work stoppage.

If the NFL or MLB experiences a work stoppage, then the earnings of a contract party in the NFL or MLB, including each of our current contract parties, will be adversely affected. For example, in 1974 and 1982 the NFL experienced player strikes and in 2011 the NFL owners staged a “lockout” of the players. If either a strike or a lockout occurs during an NFL or MLB season, player pay may be suspended. Each of our contract party’s earnings are heavily dependent on their professional football salary and would be negatively affected by any such work stoppage. This would have a negative impact on the payments we receive under the brand contract. We can give no assurances that such work stoppages will not occur.

Contract parties in the NFL or MLB could be negatively affected by current and future rules of the NFL or MLB, including rules and standards of personal conduct which, if violated, could lead to fines and/or suspension or a permanent ban from the NFL or MLB.

Current NFL or MLB rules that permit the termination of NFL or MLB player contracts for certain violations of NFL or MLB rules may adversely affect the earnings of each our contract parties in the NFL or MLB. The NFL or MLB has promulgated a number of rules and standards of personal conduct which, if violated, could lead to fines and/or the contract party’s suspension or permanent ban from the NFL or MLB. While we are not aware of, or privy to, all of the circumstances which might lead to a contract party’s suspension or permanent ban from the NFL or MLB, personal conduct that could result in the termination of the player contract includes, but is not limited to: criminal offenses (including domestic violence); the use or provision of steroids or other prohibited substances; certain violent, threatening or inherently dangerous conduct; gambling, bribery, game‑fixing or the failure to report bribery or game‑fixing in connection with NFL or MLB games; and any other conduct that undermines or puts at risk the integrity and reputation of the NFL or MLB, NFL or MLB clubs, or NFL or MLB players. For example, on September 8, 2014, the Baltimore Ravens terminated the contract of, and the NFL indefinitely suspended, Baltimore Ravens player Ray Rice for domestic violence. The termination of a contract party’s NFL or MLB player contract could have a negative impact on such

33


 

contract party’s brand income and therefore would impact the ABI we receive under the respective brand contract.

Future changes to the NFL or MLB rules or other regulations may also adversely affect the earnings of each of our contract parties in the NFL or MLB. These regulations could cover various aspects of their participation, such as changes to the rules of the game resulting in a devaluation of their respective skill sets, changes governing player eligibility and fines, and changes to the league’s CBA. Changes in the format of the game and league in which the contract party plays could have a negative impact on their brand income and therefore, will impact the ABI we receive under the respective brand contract.

There could be a decline in the popularity of the NFL or MLB and/or the team on which the contract party plays in the NFL or MLB, or a decline in the contract party’s popularity.

There can be no assurance that the NFL or MLB will retain its popularity as a sport, together with the associated levels of media coverage. In addition, either the team for which the contract party plays or the contract party could suffer a decline in popularity, including as a result of poor performance or behavior by the contract party or any of their teammates or the team in general, particularly if such performance or behavior tarnishes the contract party’s brand image. A contract party may be traded to another club in the NFL or MLB that has a smaller media market and/or is less popular than the current team, or other teams or players in the NFL or MLB may gain popularity relative to the contract party by performing at a higher level, exhibiting more appealing behavior, or otherwise. Any decline in popularity of the NFL or MLB, the team on which the contract party plays in the NFL or MLB, or the contract party, or relative decline as compared to other teams or players, could result in lower offers for future endorsements and NFL or MLB player contracts, a reduction in the value of the contract party or their brand, and a resulting decline in the value of shares of our tracking stock linked to the value and performance of the contract party’s brand. Even if the contract party and the team on which he plays in the NFL or MLB is successful, a substantial decline in the popularity of the NFL or MLB, whether as a result of increase in the popularity of other professional sports or the emergence of new spectator sports, could have a material adverse effect on shares of our tracking stocks. Any one of these events or a combination of such events could have a material adverse effect on the trading volume of our tracking stock and on the cash received under the brand contract associated with such contract party.

A contract party’s NFL or MLB player contract is a significant portion of the current cash we would receive under their brand contract.

We expect that each contract party’s NFL or MLB player contract will generate a significant portion of the current cash we expect to receive under their brand contract. In many cases, the amount of ABI under a playing contract is not guaranteed. We cannot guarantee that a contract party will be able to enter into a new NFL or MLB player contract when the existing contract expires.

A contract party could cease playing in the NFL or MLB at any time due to illness, injury or death, if they are dropped from the team and unable to secure a new contract, if they incur negative publicity or if they are suspended or banned from the NFL or MLB.

We expect that a significant portion of the brand income we expect to receive from a contract party will come from current and future NFL or MLB playing contracts.  However, a contract party could cease playing football in the NFL or MLB at any time due to illness, injury or death, if they are dropped from the team and unable to secure a new contract, if they incurs negative publicity or if they are suspended or banned from the NFL or MLB. If any of these were to occur, a contract party would not receive amounts under their existing player contract and may not be able to secure future playing contracts.

34


 

The profitability of a contract party’s brand contract is substantially dependent upon the contract party to enter into additional high‑value NFL or MLB player contracts, and on their ability to successfully attract and retain endorsements during their playing career and thereafter significantly in excess of the amounts they have attracted historically and/or generate other brand income after their playing career. If a contract party does enter into additional high‑value NFL or MLB player contracts, there is no guarantee that any portion of such contracts will consist of guaranteed money.

We anticipate that we will receive the majority of payments due under our brand contract with a contract party during the period of their NFL or MLB playing career. A contract party’s current NFL or MLB player contract represents the source of a significant portion of all brand income, and we expect that a contract party’s annual income will continue to be more heavily weighted toward their NFL or MLB player contract than on other brand income generating activities.

The length of a contract party’s NFL or MLB playing career is uncertain. Following the expiration of a contract party’s current playing contract, NFL or MLB teams may be unwilling to enter into an NFL or MLB player contract with a contract party. In addition, a contract party may not continue to perform well as an NFL or MLB player and therefore, future earnings may be substantially less than those under their current NFL or MLB player contract. If a contract party is unable to sign a new NFL or MLB player contract or the terms of such new contract are materially worse than their current NFL or MLB player contract, the cash receipts from the contract party will decline, which in turn may cause the market value of shares of the tracking stock linked to the brand agreement with a contract party to decline.

In addition, in valuing a contract party’s potential lifetime brand income, we estimated the brand income a contract party may earn as a result of their endorsements to be significantly in excess of their historical earnings from endorsements. However, we do not know if their endorsement income will grow in the future, and we do not know if their reputation and brand will be enhanced as a result of their being one of our contract parties. In fact, their reputation and brand may be negatively affected by their willingness to enter into a brand contract and trade potential future earnings for present income.

If future endorsement partners or NFL or MLB teams do not like that a contract party accepted an upfront cash payment in exchange for a portion of their future earnings, future endorsement partners may be less willing to enter into contracts with a contract party. In addition, a contract party’s endorsement contracts that they may enter into during their NFL or MLB playing career may be terminated if a contract party does not play for an NFL or MLB team. Furthermore, a contract party’s ability to successfully attract and retain endorsements is dependent on a contract party complying with the contractual requirements of those endorsements and there is no guarantee that a contract party will do so. Moreover, future endorsement partners may be less willing to enter into contracts with a contract party as a result of their entering into the brand contract with us in order to avoid public disclosure of their arrangements with a contract party. For the aforementioned reasons, a contract party may not be able to enter into new endorsement deals. In addition, their ability to generate other brand income after their playing career, such as through coaching or broadcasting, is unproven. Failure to attract and maintain key endorsements or generate other brand income after their playing career could have a negative impact on our cash received under the brand contract.

The opportunity to receive a return of capital or any profit from an investment in our tracking stocks will depend in large part upon a contract party’s ability to enter into additional high‑value, multi‑year NFL or MLB player contracts and on their ability over the same period and beyond to enter into and maintain endorsement contracts that are significantly in excess of those they have had historically. If a contract party does enter into additional high‑value, multi‑year NFL or MLB player contracts, there is no guarantee that any portion of such contracts will consist of guaranteed money.

In general we have limited historical data upon which to base our valuation and projections of a contract party’s future earnings potential.

Most of our contract parties have played less than four seasons in the NFL or MLB. As a result, we have limited historical data upon which to build our analysis and valuation of the future NFL or MLB player contracts, future endorsements and other post‑career contracts for a contract party.

35


 

A contract party may suffer from an injury, illness or medical condition; any injuries, illnesses or medical conditions of a contract party may affect the cash received by us under the brand contract.

Any injury, illness or medical condition of a contract party could cause you to lose a substantial portion or all of your investment in a tracking stock linked to that contract party’s brand agreement. Even if not career-ending, an injury, illness or medical condition could have a negative effect upon a contract party’s performance and may result in a loss of brand income that would otherwise have resulted from current and future NFL or MLB player contracts. A reduction in brand income will reduce our ABI and our ability to make dividend payments, if any, and will have a negative impact on the value of shares of the associated tracking stock. Any of these outcomes could also affect our ability to enter into additional brand contracts or to finance the acquisition of additional brands, which would have an adverse impact on our ability to execute on our business strategy.

All of our contract parties have experienced injuries which, in certain cases, have caused that contract party to miss games. In addition each contract party has experienced other instances of normal wear and tear as an athlete in Division I college football and the NFL or MLB and we expect that each contract party will continue to experience such wear and tear. Any worsening of these conditions, or re‑injury or new injury, could materially and adversely affect a contract party’s playing performance and the value of the contract party’s brand.

A substantial portion of our anticipated income under the brand contract is attributable to a contract party’s current and future NFL or MLB player contracts. To the extent that the value of your investment is dependent on the competitive success of a contract party, the likelihood of achieving such success is substantially reduced by serious or untimely injuries to a contract party. If a contract party is unable to play as a result of any injury, illness or medical condition they may be unable to enter into any future NFL or MLB player contracts. Additionally, certain endorsement contracts are made subject to an athlete’s continued employment with the NFL or MLB and if they cease to be an NFL or MLB player for any reason, including injury, illness or medical condition, their ability to maintain sponsors and their ability to attract new sponsors may be severely diminished.

It is difficult to estimate with precision the projected future earnings of a contract party in football, football related activities, and other brand income because such estimation is necessarily based on future events that may or may not occur and that could change based on a number of factors that are hard to control. As a result, it is difficult to predict an accurate return on investment or rate of return for an investment in our tracking stocks.

Because the length of a contract party’s NFL or MLB playing career is uncertain, we made certain estimates to predict a contract party’s career length. When estimating a contract party’s potential future contracts, we did not account for comparable players who cease playing NFL or MLB football due to illness or injury, are dropped from the team or are suspended or banned. The results on which our projections are based are not typical. Due to the inherent uncertainty in predicting the future, it is difficult to estimate with precision the projected future earnings of a contract party in football, football related activities and other brand income. These estimations are based on future events that may or may not occur. Additionally, future events change based on a number of factors that are difficult or impossible to control. As a result, it is difficult to predict an accurate return on investment or rate of return of an investment in our tracking stocks.

Each of our contract parties may suffer from an injury, illness or medical condition; any injuries, illnesses or medical conditions of any contract party may affect the cash received by us under the related brand contract.

Any injury, illness or medical condition of a contract party could cause you to lose a substantial portion of your investment in Units. Even if not career ending, an injury, illness or medical condition could have a negative effect upon a contract party’s performance and may result in a loss of brand income that would otherwise have resulted from current and future player contracts. A reduction in brand income will reduce our ABI, our ability to make dividend payments, if any, and have a negative impact on the value of the Units. Any of these outcomes could also affect our ability to enter into additional brand contracts or to finance the acquisition of additional brands, which would have an adverse impact on our ability to execute on our business strategy.

Our contract parties have experienced certain injuries as well as instances of normal wear and tear as athletes in college and professional sports and we expect that our contract parties will continue to experience such wear and tear. Any worsening of these conditions, or re-injury or new injury, could materially and adversely affect such contract

36


 

party’s playing performance and the value of such party’s brand.

For example, in May of 2013, Andrew Heaney missed two months of the minor league baseball season due to a strained muscle in his back. During the 2015 NFL season, Ryan Shazier has missed four games due to a shoulder injury. In November 2014, Ryan Shazier suffered an ankle injury and missed three games. During the 2015 NFL season, Kendall Wright has missed three games due to a knee injury, and on December 3, 2014, Kendall Wright broke a bone in his right hand and missed two NFL games as a result. On July 2, 2014, Jack Mewhort underwent arthroscopic knee surgery on his right knee, after the Indianapolis Colts’ rookie minicamp, but started the first four games of the 2014 NFL regular season for the Indianapolis Colts. Jack Mewhort missed two NFL games on October 5, 2014 and October 9, 2014, due to an ankle injury. During an NFL preseason game on August 31, 2012, Michael Brockers suffered a high ankle sprain and was forced to miss the first three regular season games of the 2012 NFL season. In February 2013, Michael Brockers underwent clean-up surgery to remove bone chips in his left ankle. On October 7, 2012, Alshon Jeffery suffered a fracture of the third metacarpal bone in his right hand during a regular season game against the Jacksonville Jaguars which resulted in him missing four games in the 2012 NFL season. On November 19, 2012, Alshon Jeffery suffered a knee injury during a regular season game against the San Francisco 49ers. He did not return to the game, and this injury required arthroscopic knee surgery, which was performed on November 21, 2012 and caused him to miss two additional games during 2012 NFL season. On September 24, 2006, Vernon Davis left a regular season NFL game in the third quarter after sustaining a fracture to his left fibula. This injury caused him to miss six games during the 2006 NFL regular season. After suffering a concussion, Vernon Davis was forced to temporarily leave a regular season game on December 31, 2006. On September 23, 2007, Vernon Davis left a regular season NFL game early after suffering a sprain to his right knee. This injury caused him to miss the following two regular season games. Vernon Davis also missed portions of two regular season NFL games in the 2010 season following a reported ankle injury. On December 23, 2012, Vernon Davis was reported to leave an NFL game early after suffering a concussion. On September 15, 2013, Vernon Davis left a regular season NFL game early in the fourth quarter with a hamstring strain, which injury also caused him to miss a game the subsequent week. Most recently, on November 10, 2013, Vernon Davis was reported to leave a regular season game early as a result of suffering a concussion. During the 2014 NFL season, Vernon Davis missed two games due to an ankle injury. In December 2010, Mohamed Sanu underwent surgery to repair his left shoulder. On November 29, 2012, Mohamed Sanu suffered a stress fracture to the fifth metatarsal of his left foot during a team practice. This injury required surgery, which was performed on December 2, 2012 and resulted in him missing the rest of the 2012 NFL playing season. On October 27, 2013, Mohamed Sanu left a regular season game against the New York Jets after suffering an injury to his left shoulder. He did not return to the game, but was not forced to miss any additional playing time. In August 2013, EJ Manuel had minor surgery on his left knee and missed two pre-season games. On October 3, 2013, during the third quarter in a game against the Cleveland Browns, EJ Manuel sprained the lateral collateral ligament in his right knee. This injury caused him to miss four games of the 2013 season. In December 2013, EJ Manuel sprained the lateral collateral ligament in his left knee and missed the last two games of the 2013 NFL season. In January 2014, EJ Manuel had an arthroscopic procedure performed on each of his knees.

A substantial portion of our anticipated income under our brand contracts is attributable to our contract parties’ earnings in professional sports. To the extent that the value of your investment is dependent on the competitive success of a contract party, the likelihood of achieving such success is substantially reduced by serious or untimely injuries to such contract party. If a contract party is unable to play as a result of any injury, illness or medical condition he may be unable to generate significant brand income from professional sports. Additionally, certain endorsement contracts are made subject to an athlete’s continued employment with the professional sports league and if he ceases to be a professional player for any reason, including injury, illness or medical condition, his ability to maintain sponsors and his ability to attract new sponsors may be severely diminished.

Future negative publicity could harm a contract party’s reputation and impair the value of his brand.

The return on your investment in Units depends on the value and strength of the brand and reputation of our contract parties as well as the financial success of Fantex as a whole. Each of our contract parties has in the past received, and we expect will continue to receive in the future, media coverage. Unfavorable publicity regarding a contract party’s professional performance or his behavior off the field could negatively affect his brand and reputation. Any negative publicity regarding a contract party’s on-field performance or off-the-field behavior or otherwise could damage his reputation and impair the value of his brand. Moreover, future endorsement agreements may contain

37


 

“morality” clauses which would permit counterparties to endorsement agreements to terminate those agreements with the contract party in certain circumstances (such as if he were charged with a felony or other crime involving fraud, dishonesty, violence, physical harm to another person, possession or use of illegal drugs or moral turpitude), further reducing our potential ABI.

Risks Relating to Vernon Davis

Vernon Davis’s NFL player contract is a significant portion of the current cash we would receive under his brand contract.

In 2010, Vernon Davis signed a six year contract with the 49ers worth up to $42.5 million, and his professional football compensation in the year ended December 31, 2014 made up over 91%  of his annual income. This 2010 NFL player contract included a $10.0 million signing bonus with the remaining $32.5 million to be paid out over the term of the contract. The available brand income remaining as of the beginning of the 2015 NFL season under his existing NFL player contract was $4.4 million, none of which is guaranteed. Therefore, much of the cash expected to be received under our brand contract with Vernon Davis is tied to his professional football career and is not guaranteed. We cannot guarantee that Vernon Davis will continue to be paid according to the terms of his current NFL player contract, or that he will be able to enter into a new NFL player contract when the existing contract expires.

We have estimated that Vernon Davis will have a 13 year NFL career and sign a three year contract for $23.6 million prior to his eleventh season (2016).  We based our estimate on the contract value of comparable tight ends who signed contracts in their tenth to twelfth season and did not account for tight ends who cease playing NFL football due to illness, injury, are dropped from the team or who are suspended or banned. The results on which our projections are based are not typical. It is difficult to estimate with precision the projected future earnings of Vernon Davis in football, football related activities, and other brand income because such estimation is necessarily based on future events that may or may not occur and that could change based on a number of factors that are hard to control. As a result, it is difficult to predict an accurate return on investment or rate of return in an investment in the Units.

Because the length of Vernon Davis’s NFL playing career is uncertain, we made certain estimates to predict his career length and future contract. See the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations—Estimated Fair Value of Consummated Brand Contracts as of September 30, 2015Vernon Davis Brand Contract, at Estimated Fair Value —Vernon Davis Career Length” beginning on page 74 for a more detailed description of how we estimated Vernon Davis’s career length. We estimated that Vernon Davis would complete his current NFL player contract. After expiration of his current NFL player contract, we estimated that Vernon Davis would sign a three year contract prior to the 2016 NFL season, for an estimated $23.6 million. In total, we estimated that Vernon Davis would have a career as a player in the NFL for 13 years.

In estimating the value of Vernon Davis’s  final NFL player contract, we used a data set of tight ends who entered into multi-year NFL player contracts in their tenth to twelfth NFL seasons in 1994 thru 2014. Based on a mathematical model taking into account draft round, games played, statistical production and All-Pro and Pro Bowl selection, we assigned to each of these tight ends a relative weighting with the most comparable wide receivers to Vernon Davis receiving a higher weighting. Using a methodology we believe to be statistically valid based on published research, we arrived at a sample size of the four most comparable players who signed four contracts. 

When estimating Vernon Davis’s potential future contract, we did not account for tight ends who cease playing NFL football due to illness, injury, are dropped from the team or are suspended or banned. The results on which our projections are based are not typical. Due to the inherent uncertainty in predicting the future, it is difficult to estimate with precision the projected future earnings of Vernon Davis in football, football related activities and other brand income. These estimations are based on future events that may or may not occur. Additionally, future events change based on a number of factors that are difficult or impossible to control. As a result, it is difficult to predict an accurate return on investment or rate of return of an investment in the Units.

38


 

Risks Relating to EJ Manuel

EJ Manuel’s NFL player contract is a significant portion of the current cash we would receive under his brand contract.

In 2013, EJ Manuel signed a four year contract with the Buffalo Bills worth up to $8.9 million, and his professional football compensation in the year ended December 31, 2014 made up over 68%  of his annual income. This 2013 NFL player contract included a $4.8 million signing bonus with the remaining $4.1 million to be paid out over the term of the contract. The available brand income remaining as of the beginning of the 2015 NFL season under his NFL player contract was $2.8 million, all of which is guaranteed. We cannot guarantee that EJ Manuel will be able to enter into a new NFL player contract when the existing contract expires.

We have estimated that EJ Manuel will have a nine year NFL career and sign a three year contract in his fifth season (2017) for $24.3 million and a two year contract in his eighth season (2020) for $8.5 million. We based our estimate on the contract value of comparable quarterbacks who signed contracts in their fourth to sixth season and seventh to ninth season and did not account for quarterbacks who cease playing NFL football due to illness, injury, are dropped from the team or who are suspended or banned. The results on which our projections are based are not typical. It is difficult to estimate with precision the projected future earnings of EJ Manuel in football, football related activities, and other brand income because such estimation is necessarily based on future events that may or may not occur and that could change based on a number of factors that are hard to control. As a result, it is difficult to predict an accurate return on investment or rate of return in an investment in the Units.

Because the length of EJ Manuel’s NFL playing career is uncertain, we made certain estimates to predict his career length. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Estimated Fair Value of Consummated Brand Contracts as of September 30, 2015—EJ Manuel Brand Contract, at Estimated Fair Value—EJ Manuel Career Length” beginning on page 78 for a more detailed description of how we estimated EJ Manuel’s career length. We estimated that EJ Manuel would perform under his current NFL player contract of four years. After expiration of his current NFL player contract, we estimated that EJ Manuel would sign a three year contract in his fifth season in the NFL, which would be the 2017 NFL season, for an estimated $24.3 million. We then estimated that EJ Manuel would enter into his final NFL player contract, a two year contract in his eighth season for an estimated $8.5 million. In total, we estimated that EJ Manuel would have a career as a player in the NFL for nine years.

In estimating the value of EJ Manuel’s potential second NFL player contract, we used a data set of quarterbacks who entered into NFL player contracts between their fourth and sixth NFL seasons in 1994 thru 2014. Based on a mathematical model taking into account statistical production, we assigned to each of these quarterbacks a relative weighting with the most comparable quarterbacks to EJ Manuel receiving a higher weighting. Using a methodology we believe to be statistically valid based on published research, we arrived at a sample size of the six most comparable player contracts. In estimating EJ Manuel’s potential third NFL player contract, we used a data set of quarterbacks who entered into NFL player contracts between their seventh and ninth NFL seasons in 1994 thru 2014. We then used the same mathematical model to assign each of these quarterbacks a relative weighting with the most comparable quarterbacks to EJ Manuel receiving a higher weighting. We then used the same methodology to arrive at a sample size of the six most comparable player contracts.

When estimating EJ Manuel’s potential future contracts, we did not account for quarterbacks who cease playing NFL football due to illness, injury, are dropped from the team or who are suspended or banned. The results on which our projections are based are not typical. Due to the inherent uncertainty in predicting the future, it is difficult to estimate with precision the projected future earnings of EJ Manuel in football, football related activities and other brand income. These estimations are based on future events that may or may not occur. Additionally, future events change based on a number of factors that are difficult or impossible to control. As a result, it is difficult to predict an accurate return on investment or rate of return of an investment in the Units.

39


 

Risks Relating to Mohamed Sanu

Mohamed Sanu’s NFL player contract is a significant portion of the current cash we would receive under his brand contract.

In 2012, Mohamed Sanu signed a four year contract with the Cincinnati Bengals worth up to $2.7 million, and his professional football compensation in the year ended December 31, 2014 made up over 95%  of his annual income. This 2012 NFL player contract included a $0.6 million signing bonus. The available brand income remaining as of beginning of the 2015 NFL season under his existing NFL player contract was $0.7 million, none of which is guaranteed. We cannot guarantee that Mohamed Sanu will be able to enter into a new NFL player contract when the existing contract expires.

We have estimated that Mohamed Sanu will have a nine year NFL career and sign a four year contract in his fifth season (2016) for $26.0 million and a one year contract in his ninth season (2020) for $4.0 million. We based our estimate on the contract value of comparable wide receivers who signed contracts in their fourth to sixth season and ninth season and did not account for wide receivers who cease playing NFL football due to illness, injury, are dropped from the team or who are suspended or banned. The results on which our projections are based are not typical. It is difficult to estimate with precision the projected future earnings of Mohamed Sanu in football, football related activities, and other brand income because such estimation is necessarily based on future events that may or may not occur and that could change based on a number of factors that are hard to control. As a result, it is difficult to predict an accurate return on investment or rate of return in an investment in the Units.

Because the length of Mohamed Sanu’s NFL playing career is uncertain, we made certain estimates to predict his career length. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of OperationsEstimated Fair Value of Consummated Brand Contracts as of September 30, 2015—Mohamed Sanu Brand Contract, at Estimated Fair Value—Mohamed Sanu Career Length” beginning on page 83 for a more detailed description of how we estimated Mohamed Sanu’s career length. We estimated that Mohamed Sanu would perform under his current NFL player contract of four years. After expiration of his current NFL player contract, we estimated that Mohamed Sanu would sign a four year contract in his fifth season in the NFL, which would be the 2016 NFL season, for an estimated $26.0 million. We then estimated that Mohamed Sanu would enter into his final NFL player contract in his ninth season for $4.0 million. In total, we estimated that Mohamed Sanu would have a career as a player in the NFL for nine years.

In estimating the value of Mohamed Sanu’s potential second NFL player contract, we used a data set of wide receivers who entered into NFL player contracts between their fourth and sixth NFL seasons in 1999 thru 2014. Based on a mathematical model taking into account statistical production, we assigned to each of these wide receivers a relative weighting with the most comparable wide receivers to Mohamed Sanu receiving a higher weighting. Using a methodology we believe to be statistically valid based on published research, we arrived at a sample size of the 11 most comparable player contracts. In estimating Mohamed Sanu’s potential third NFL player contract, we used a data set of wide receivers who entered into NFL player contracts between their eighth and ninth NFL seasons in 1999 thru 2014. We then used the same mathematical model to assign each of these wide receivers a relative weighting with the most comparable wide receivers to Mohamed Sanu receiving a higher weighting. We then used the same methodology to arrive at a sample size of the seven most comparable player contracts.

When estimating Mohamed Sanu’s potential future contracts, we did not account for wide receivers who cease playing NFL football due to illness, injury, are dropped from the team or who are suspended or banned. The results on which our projections are based are not typical. Due to the inherent uncertainty in predicting the future, it is difficult to estimate with precision the projected future earnings of Mohamed Sanu in football, football related activities and other brand income. These estimations are based on future events that may or may not occur. Additionally, future events change based on a number of factors that are difficult or impossible to control. As a result, it is difficult to predict an accurate return on investment or rate of return of an investment in the Units.

40


 

Risks Related to Alshon Jeffery

Alshon Jeffery’s NFL player contract is a significant portion of the current cash we would receive under his brand contract.

In 2012, Alshon Jeffery signed a four year contract with the Chicago Bears worth up to $4.5 million, and his professional football compensation in the year ended December 31, 2014 made up over 82%  of his annual income. This 2012 NFL player contract included a $1.7 million signing bonus and base pay of $2.7 million. The available brand income remaining as of the beginning of the 2015 NFL season under his existing player contract was $1.0 million, none of which is guaranteed. We cannot guarantee that Alshon Jeffery will be able to enter into a new NFL player contract when the existing contract expires.

We have estimated that Alshon Jeffery will have an eleven year NFL career. We have also estimated that Alshon Jeffery will receive a six year contract in 2016 with a total value of $76.8 million and a one year contract in 2022 with a total value of $7.5 million. We based our estimate on the contract value of comparable wide receivers who signed contracts in their fourth to sixth seasons and tenth to twelfth seasons and did not account for wide receivers who cease playing NFL football due to illness or injury, are dropped from the team or are suspended or banned. The results on which our projections are based are not typical. It is difficult to estimate with precision the projected future earnings of Alshon Jeffery in football, football related activities, and other brand income because such estimation is necessarily based on future events that may or may not occur and that could change based on a number of factors that are hard to control. As a result, it is difficult to predict an accurate return on investment or rate of return in an investment in the Units.

Because the length of Alshon Jeffery’s NFL playing career is uncertain, we made certain estimates to predict his career length. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of OperationsEstimated Fair Value of Consummated Brand Contracts as of September 30,2015—Alshon Jeffery Brand Contract, at Estimated Fair Value—Alshon Jeffery Career Length” beginning on page 88 for a more detailed description of how we estimated Alshon Jeffery’s career length. We estimated that Alshon Jeffery will play out his existing NFL contract and receive a six year contract in 2016 with a total value of $76.8 million. We then estimated that Alshon Jeffery will receive a one year contract in 2022 with a total value of $7.5 million. In total, we estimated that Alshon Jeffery would have a career as a player in the NFL for eleven years.

In estimating the value of Alshon Jeffery’s potential second NFL player contract, we began with a data set consisting of all 385 wide receivers who caught 1.875 passes per team game over the regular season in their rookie, second, or third NFL seasons between 1980 and 2012. We then limited this data set to wide receivers who have entered into NFL player contracts between their fourth and sixth NFL seasons in 1994 thru 2014, resulting in a set of 109 players who have entered into a total of 114 contracts. Based on a mathematical model taking into account statistical production, Pro-Bowl selection and draft position, we assigned to each of these wide receivers a relative weighting with the most comparable wide receivers to Alshon Jeffery (based on the above criteria) receiving a higher weighting. Using a methodology we believe to be statistically valid based on published research, we arrived at a sample size of the 11 most comparable player contracts. In estimating the value of Alshon Jeffery’s potential third NFL player contract, we began with a data set consisting of all 385 wide receivers who caught 1.875 passes per team game over the regular season in their rookie, second, or third NFL seasons between 1980 and 2012. We then limited this data set to wide receivers who have entered into NFL player contracts between their tenth and twelfth NFL seasons in 1999 thru 2014, resulting in a set of 42 players who have entered into a total of 51 contracts. We then used the same mathematical model to assign each of these wide receivers a relative weighting with the most comparable wide receivers to Alshon Jeffery receiving a higher weighting. We then used the same methodology to arrive at a sample size of the eight most comparable player contracts.

When estimating Alshon Jeffery’s potential future contracts, we did not account for wide receivers who cease playing NFL football due to illness or injury, are dropped from the team or are suspended or banned. The results on which our projections are based are not typical. Due to the inherent uncertainty in predicting the future, it is difficult to estimate with precision the projected future earnings of Alshon Jeffery in football, football related activities and other brand income. These estimations are based on future events that may or may not occur. Additionally, future events

41


 

change based on a number of factors that are difficult or impossible to control. As a result, it is difficult to predict an accurate return on investment or rate of return of an investment in the Units.

Risks Relating to Michael Brockers

Michael Brockers’s NFL player contract is a significant portion of the current cash we would receive under his brand contract.

In 2012, Michael Brockers signed a four year contract with the St. Louis Rams worth up to $9.5 million, and his professional football compensation for the year ended December 31, 2014 made up over 99% of his annual income. The available brand income remaining as of the start of the 2015 NFL season under his existing NFL player contract was $1.7 million, all of which is guaranteed. We cannot guarantee that Michael Brockers will be able to enter into a new NFL player contract when the existing contract expires.

We have estimated that Michael Brockers will have a twelve year NFL career and sign a five year contract in his fifth season (2016) for $45.1 million and a three year contract for $24.0 million prior to his tenth season (2021). We based our estimate on the contract value of comparable defensive tackles who signed contracts in their fourth to sixth season and ninth to eleventh season and did not account for defensive tackles who cease playing football in the NFL due to illness or injury, are dropped from the team or are suspended or banned. The results on which our projections are based are not typical. It is difficult to estimate with precision the projected future earnings of Michael Brockers in football, football related activities, and other brand income because such estimation is necessarily based on future events that may or may not occur and that could change based on a number of factors that are hard to control. As a result, it is difficult to predict an accurate return on investment or rate of return for an investment in the Units.

Because the length of Michael Brockers’s NFL playing career is uncertain, we made certain estimates to predict his career length. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of OperationsEstimated Fair Value of Consummated Brand Contracts as of September 30, 2015—Michael Brockers Brand Contract, at Estimated Fair Value—Michael Brockers Career Length” beginning on page 94 for a more detailed description of how we estimated Michael Brockers’s career length. We estimated that Michael Brockers would perform under his current NFL player contract of four years. After expiration of his current NFL player contract, we estimated that Michael Brockers would sign a five year contract in his fifth season in the NFL, which would be the 2016 NFL season, for an estimated $45.1 million and a three year contract in his tenth season in the NFL, which would be the 2021 NFL, for an estimated $24.0 million. In total, we estimated that Michael Brockers would have a career as a player in the NFL for twelve years.

In estimating the value of Michael Brockers’s potential second NFL player contract, we used a data set of defensive tackles who entered into multi-year NFL player contracts in their fourth to sixth NFL seasons. Based on a mathematical model taking into account statistical production, we assigned to each of these defensive tackles a relative weighting with the most comparable defensive tackles to Michael Brockers receiving a higher weighting. Using a methodology we believe to be statistically valid based on published research, we arrived at a sample size of the nine most comparable player contracts. In estimating the value of Michael Brockers’s potential third NFL player contract, we used a data set of defensive tackles who entered into multi-year NFL player contracts in their ninth to eleventh NFL seasons. Based on a mathematical model taking into account statistical production, we assigned to each of these defensive tackles a relative weighting with the most comparable defensive tackles to Michael Brockers receiving a higher weighting. Using a methodology we believe to be statistically valid based on published research, we arrived at a sample size of the nine most comparable player contracts.

When estimating Michael Brockers’s potential future contracts, we did not account for defensive tackles who cease playing NFL football due to illness, injury, are dropped from the team or who are suspended or banned. The results on which our projections are based are not typical. Due to the inherent uncertainty in predicting the future, it is difficult to estimate with precision the projected future earnings of Michael Brockers in football, football related activities and other brand income. These estimations are based on future events that may or may not occur. Additionally, future events

42


 

change based on a number of factors that are difficult or impossible to control. As a result, it is difficult to predict an accurate return on investment or rate of return of an investment in the Units.

Risks Relating to Jack Mewhort

Jack Mewhort’s NFL player contract is a significant portion of the current cash we would receive under his brand contract.

In 2014, Jack Mewhort signed a four-year contract with the Indianapolis Colts worth up to $3.6 million, and his professional football compensation for the year ended December 31, 2014 made up approximately 100% of his annual brand income. The available brand income remaining as of September 30, 2015 under his existing NFL player contract was $2.2 million, of which $417,000 of his 2015 NFL player salary is guaranteed. We cannot guarantee that Jack Mewhort will be able to enter into a new NFL player contract when the existing contract expires.

We have estimated that Jack Mewhort will have a ten-year NFL career and sign a six-year contract in his fifth season (2018) for $55.9 million. We based our estimate on the contract value of comparable offensive lineman who signed contracts in their fourth to sixth season and did not account for offensive lineman who cease playing football in the NFL due to illness or injury, are dropped from the team or are suspended or banned. The results on which our projections are based are not typical. It is difficult to estimate with precision the projected future earnings of Jack Mewhort in football, football related activities, and other brand income because such estimation is necessarily based on future events that may or may not occur and that could change based on a number of factors that are hard to control. As a result, it is difficult to predict an accurate return on investment or rate of return for an investment in the Units.