S-1 1 d369769ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on October 6, 2017

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

FUNKO, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

3944

(Primary Standard Industrial

Classification Code Number)

 

35-2593276

(I.R.S. Employer

Identification No.)

2802 Wetmore Avenue

Everett, Washington 98201

Telephone: (425) 783-3616

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

 

 

Tracy D. Daw

Senior Vice President, General Counsel and Secretary

2802 Wetmore Avenue

Everett, Washington 98201

Telephone: (425) 783-3616

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

 

 

Copies to:

 

Marc D. Jaffe, Esq.

Ian D. Schuman, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022

Telephone: (212) 906-1200

Fax: (212) 751-4864

 

John Duke, Esq.

Adam Brown, Esq.

Hogan Lovells US LLP

1735 Market Street, 23rd Floor

Philadelphia, PA 19103

Telephone: (267) 675-4600

Fax: (267) 675-4601

 

Patrick J. Schultheis

Michael Nordtvedt

Jeana S. Kim

Wilson Sonsini Goodrich & Rosati

Professional Corporation

701 Fifth Avenue, Suite 5100

Seattle, WA 98104

Telephone: (206) 883-2500

Fax: (206) 883-2699

 

 

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 to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     Accelerated filer  
Non-accelerated filer    (Do not check if a smaller reporting company)   Smaller reporting company  
Emerging growth company    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered  

Proposed maximum

aggregate
offering price(1)(2)

  Amount of registration fee

Class A common Stock, $0.0001 par value per share

  $100,000,000   $12,450

 

 

(1)  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)  Includes the offering price of shares of Class A common stock that may be sold if the option to purchase additional shares of Class A common stock granted by the Registrant to the underwriters is exercised.

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 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 in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated October 6, 2017.

 

 

LOGO

             Shares

Funko, Inc.

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of Funko, Inc. We are selling              shares of Class A common stock. The selling stockholders identified in this prospectus are offering an additional              shares of our Class A common stock.

Prior to this offering, there has been no public market for the Class A common stock. It is currently estimated that the initial public offering price per share of Class A common stock will be between $             and $            . We have applied to list our Class A common stock on the Nasdaq Global Select Market under the symbol “FNKO.”

We will have two classes of common stock outstanding after this offering: Class A common stock and Class B common stock. Each share of our Class A common stock and Class B common stock entitles its holders to one vote per share on all matters presented to our stockholders generally. All shares of our Class B common stock will be held by the Continuing Equity Owners (as defined below).

We will be a holding company, and upon consummation of this offering and the application of proceeds therefrom, our principal asset will consist of the common units of Funko Acquisition Holdings, L.L.C., or FAH, LLC, that we purchase directly from FAH, LLC and certain of the Continuing Equity Owners (as defined below) with the proceeds from this offering and the common units of FAH, LLC that we acquire from the Former Equity Owners (as defined below) in connection with the consummation of the Transactions (as defined below), collectively representing an aggregate     % economic interest in FAH, LLC. The remaining     % economic interest in FAH, LLC will be owned by the Continuing Equity Owners through their ownership of common units of FAH, LLC.

We will be the sole managing member of FAH, LLC. We will operate and control all of the business and affairs of FAH, LLC and, through FAH, LLC and its subsidiaries, conduct our business.

Following this offering, we will be a “controlled company” within the meaning of the Nasdaq rules (as defined below). See “Our Organizational Structure” and “Management—Controlled Company Exception.”

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, and will be subject to reduced public reporting requirements. This prospectus complies with the requirements that apply to an issuer that is an emerging growth company.

 

 

See “Risk Factors” beginning on page 28 to read about factors you should consider before buying shares of our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                   $                   

Underwriting discounts and commissions(1)

   $      $  

Proceeds, before expenses, to Funko, Inc.

   $      $  

Proceeds, before expenses, to the selling stockholders

   $      $  

 

(1)  We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting.”

To the extent that the underwriters sell more than              shares of Class A common stock, the underwriters have the option to purchase up to an additional              shares from us and the selling stockholders at the initial price to public less the underwriting discount.

 

 

The underwriters expect to deliver the shares of Class A Common stock against payment in New York, New York on                     , 2017.

 

Goldman Sachs & Co. LLC    J.P. Morgan        BofA Merrill Lynch

 

Piper Jaffray    Jefferies

 

Stifel        BMO Capital Markets    SunTrust Robinson Humphrey

 

 

Prospectus dated                 , 2017.


Table of Contents

TABLE OF CONTENTS

 

     Page  

BASIS OF PRESENTATION

     ii  

TRADEMARKS

     v  

MARKET AND INDUSTRY DATA

     v  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     28  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     66  

OUR ORGANIZATIONAL STRUCTURE

     69  

USE OF PROCEEDS

     74  

CAPITALIZATION

     76  

DIVIDEND POLICY

     78  

DILUTION

     79  

SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA

     83  

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     88  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     100  

BUSINESS

     125  

MANAGEMENT

     146  

EXECUTIVE COMPENSATION

     153  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     167  

PRINCIPAL AND SELLING STOCKHOLDERS

     183  

DESCRIPTION OF CAPITAL STOCK

     186  

DESCRIPTION OF CERTAIN INDEBTEDNESS

     193  

SHARES ELIGIBLE FOR FUTURE SALE

     198  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK

     201  

UNDERWRITING

     205  

LEGAL MATTERS

     212  

EXPERTS

     212  

WHERE YOU CAN FIND MORE INFORMATION

     212  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

We, the selling stockholders and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any related free writing prospectuses. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered by this prospectus, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, financial condition, results of operations and prospectus may have changed since that date.

For investors outside the United States: We and the selling stockholders have not, and the underwriters have not, done anything that would permit this offering or the possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside the United States. See “Underwriting.”

 

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BASIS OF PRESENTATION

Organizational Structure

In connection with the closing of this offering, we will effect certain organizational transactions. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions and this offering, which we refer to collectively as the Transactions. See “Our Organizational Structure” for a description of the Transactions and a diagram depicting our organizational structure after giving effect to the Transactions, including this offering.

As used in this prospectus, unless the context otherwise requires, references to:

 

    “we,” “us,” “our,” the “Company,” “Funko” and similar references refer: (1) following the consummation of the Transactions, including this offering, to Funko, Inc., and, unless otherwise stated, all of its subsidiaries, including FAH, LLC and, unless otherwise stated, all of its subsidiaries, and (2) prior to the completion of the Transactions, including this offering, to FAH, LLC and, unless otherwise stated, all of its subsidiaries.

 

    “ACON” refers to ACON Funko Investors, L.L.C., a Delaware limited liability company, and certain funds affiliated with ACON Funko Investors, L.L.C. (including any such fund or entity formed to hold shares of Class A common stock for the Former Equity Owners).

 

    “Continuing Equity Owners” refers collectively to ACON, Fundamental, the Former Profits Interests Holders, the Warrant Holders and certain current and former executive officers, employees and directors and each of their permitted transferees that will own common units in FAH, LLC after the Transactions and who may, following the consummation of this offering, redeem at each of their options (subject in certain circumstances to time-based vesting requirements and limitations on the common units that will be converted from the Home Run Units previously granted pursuant to the existing limited liability company agreement of FAH, LLC (the “HR Units”)) their common units for, at our election, cash or newly-issued shares of our Class A common stock as described in “Certain Relationships and Related Party Transactions—FAH LLC Agreement—Agreement in Effect Upon Consummation of this Offering.”

 

    “FAH LLC Agreement” refers to FAH, LLC’s second amended and restated limited liability company agreement, which will become effective on or prior to the consummation of this offering.

 

    FHL” refers to Funko Holdings LLC, a Delaware limited liability company.

 

    “Former Equity Owners” refers to those Original Equity Owners affiliated with ACON who will transfer their indirect ownership interests in common units of FAH, LLC for shares of our Class A common stock (to be held by them either directly or indirectly) in connection with the consummation of the Transactions.

 

    “Former Profits Interests Holders” refers collectively to certain of our directors and certain current executive officers and employees, in each case, who hold existing vested and unvested profits interests in FAH, LLC pursuant to FAH, LLC’s existing equity incentive plan and who will receive common units of FAH, LLC in exchange for their profits interests (subject to any common units received in exchange for unvested profits interests remaining subject to their existing time-based vesting requirements) in connection with the Transactions.

 

    Fundamental” refers collectively to Fundamental Capital, LLC and Funko International, LLC.

 

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    “Original Equity Owners” refers to the owners of ownership interests in FAH, LLC, collectively, prior to the Transactions, which include ACON, Fundamental, the Former Profits Interests Holders and certain current and former executive officers, employees and directors.

 

    “Warrant Holders” refers to lenders under our Senior Secured Credit Facilities that currently hold warrants to purchase ownership interests in FAH, LLC, which will be converted into common units of FAH, LLC in connection with the consummation of the Transactions.

We will be a holding company and the sole managing member of FAH, LLC, and upon consummation of this offering and the application of proceeds therefrom, our principal asset will consist of common units of FAH, LLC.

Presentation of Financial Information

FAH, LLC is the predecessor of the issuer, Funko, Inc., for financial reporting purposes. Funko, Inc. will be the audited financial reporting entity following this offering. Accordingly, this prospectus contains the following historical financial statements:

 

    Funko, Inc. Other than the inception balance sheet, dated as of April 21, 2017, and the unaudited balance sheet, dated as of June 30, 2017, the historical financial information of Funko, Inc. has not been included in this prospectus as it is a newly incorporated entity, has no business transactions or activities to date and had no assets or liabilities during the periods presented in this prospectus.

 

    FAH, LLC. As we will have no interest in any operations other than those of FAH, LLC and its subsidiaries, the historical consolidated financial information included in this prospectus is that of FAH, LLC and its subsidiaries.

On October 30, 2015, ACON, through FAH, LLC, an entity formed in contemplation of the transaction, acquired a controlling interest in FHL and its subsidiary, Funko, LLC. We refer to this transaction as the “ACON Acquisition.” As a result of the ACON Acquisition, information throughout this prospectus presents operations and cash flows for two periods, Predecessor and Successor, which relate to the period preceding the ACON Acquisition on October 30, 2015 and the period succeeding the ACON Acquisition, respectively. References to the “Successor 2015 Period” refer to the period from October 31, 2015 through December 31, 2015 and references to the “Predecessor 2015 Period” refer to the period from January 1, 2015 through October 30, 2015. Financial information in the Predecessor 2015 Period principally relates to FHL and its subsidiary Funko, LLC. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

Our presentation of certain financial information for the combined year ended December 31, 2015, specifically net sales and Adjusted EBITDA, represents the mathematical addition of the Predecessor 2015 Period and the Successor 2015 Period. The change in basis resulting from the ACON Acquisition did not materially impact such financial information and, although this presentation of financial information on a combined basis does not comply with U.S. generally accepted accounting principles, or GAAP, or with the pro forma requirements of Article 11 of Regulation S-X, we believe it provides a meaningful method of comparison to the other periods presented in this prospectus. The data is being presented for analytical purposes only. Combined operating results (1) may not reflect the actual results we would have achieved absent the ACON Acquisition, (2) may not be predictive of future results of operations and (3) should not be viewed as a substitute for the results of the Predecessor and the Successor presented in accordance with GAAP.

The unaudited pro forma financial information of Funko, Inc. presented in this prospectus has been derived by the application of pro forma adjustments to the historical consolidated financial

 

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statements of FAH, LLC and its subsidiaries included elsewhere in this prospectus. These pro forma adjustments give effect to the Transactions as described in “Our Organizational Structure,” including the consummation of this offering, as if all such transactions had occurred on January 1, 2016, in the case of the unaudited pro forma consolidated statements of operations data, and as of June 30, 2017 in the case of the unaudited pro forma consolidated balance sheets. See “Unaudited Pro Forma Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this prospectus. Certain other amounts that appear in this prospectus may not sum due to rounding.

 

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TRADEMARKS

This prospectus includes our trademarks and trade names, including Pop! ®, Mystery Minis®, Dorbz®, Pint Size Heroes™, Rock Candy®, Galactic Plushies, Hero Plushies, SuperCute and MyMoji®, which are protected under applicable intellectual property laws and are our property. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry, competitive position and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and other third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data, and our experience in, and knowledge of, such industry and markets, which we believe to be reasonable. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our Class A common stock. You should read the entire prospectus carefully, including the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Some of the statements in this prospectus constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

Funko: At the Nexus of Pop Culture

We are a leading pop culture consumer products company. Our business is built on the principle that almost everyone is a fan of something and the evolution of pop culture is leading to increasing opportunities for fan loyalty. We create whimsical, fun and unique products that enable fans to express their affinity for their favorite “something”—whether it is a movie, TV show, video game, musician or sports team. We infuse our distinct designs and aesthetic sensibility into one of the industry’s largest portfolios of licensed content over a wide variety of product categories, including figures, plush, accessories, apparel and homewares. With our unique style, expertise in pop culture, broad product distribution and highly accessible price points, we have developed a passionate following for our products that has underpinned our growth. We believe we sit at the nexus of pop culture—content providers value us for our broad network of retail customers, retailers value us for our broad portfolio of licensed pop culture products and pop culture insights, and consumers value us for our distinct, stylized products and the content they represent. We believe our innovative product design and market positioning have disrupted the licensed product markets and helped to define today’s pop culture products category.

Pop culture pervades modern life and almost everyone is a fan of something. In the past, pop culture fandom was often associated with stereotypical images of fans from narrow demographics, such as Star Trek fans attending conventions to speak Klingon to each other or friends getting together to play Dungeons & Dragons. Today, more quality content is available and technology innovation has made content accessible anytime, anywhere. As a result, the breadth and depth of pop culture fandom resembles, and in many cases exceeds, the type of fandom previously associated only with sports. Everyday interactions at home, work or with friends are increasingly influenced by pop culture.

You may have experienced pop culture through:

 

    gathering with friends at the office to talk about the latest episode of Game of Thrones…or hiding from them because you haven’t watched it yet;

 

    waiting in line for the midnight showing of the latest Star Wars movie release;

 

    binge watching an entire season of Stranger Things on Netflix with your family;

 

    experiencing Coachella via social media;

 

    watching Bugs Bunny with your children on Saturday morning;

 

    debating with your friends whether the Hunger Games books or movies are better;

 

    attending a Frozen-themed birthday party; or

 

    wearing your favorite quarterback’s jersey.

 



 

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We have invested strategically in our relationships with key constituents in pop culture. Content providers value us for our broad network of retail customers and retailers value us for our broad portfolio of licensed pop culture products, pop culture insights and ability to drive consumer traffic. Consumers, who value us for our distinct, stylized products, remain at the center of everything we do.

 

LOGO

 

    Content Providers:    We have strong licensing relationships with many established content providers, such as Disney, HBO, LucasFilm, Marvel, the National Football League and Warner Brothers. We strive to license every pop culture property that we believe is relevant to consumers. We currently have licensed over 1,000 properties, which we believe represents one of the largest portfolios in our industry, and from which we can create multiple products based on each character within those properties. Content providers trust us to create unique, stylized extensions of their intellectual property that extend the relevance of their content with consumers through ongoing engagement, helping to maximize the lifetime value of their content. We believe we have benefited from a trend of content providers consolidating their relationships to do more business with fewer licensees. Our track record of obtaining licenses from content providers, together with our proven ability to renew and extend the scope of our licenses, demonstrates the trust content providers place in us.

 

   

Retail Channels:    We sell our products through a diverse network of retail customers across multiple retail channels, including specialty retailers, mass-market retailers and e-commerce sites. We can provide our retail customers a customized product mix designed to appeal to their particular customer bases. Our current retail customers include Amazon, Barnes & Noble, Entertainment Earth, GameStop, Hot Topic, Target and Walmart in the United States, and Smyths Toys and Tesco internationally. In 2016, we sold our products through over 2,000 U.S. retailers, who collectively have over 25,000 total doors, and through distributors internationally, which represented 18.8% of 2016 net sales. Retailers recognize the opportunity presented by the demand for pop culture products and are continuing to dedicate additional shelf space to our products and the pop culture category. For example, based on public filings, GameStop, a specialty video game retailer, generated $494 million in 2016 net sales from its collectibles business, an increase of 60% compared to 2015. Additionally, some of our retail customers, such as Target and Walmart, view us as pop culture experts, and we help them manage their pop culture category. We believe we drive meaningful traffic to our retail customers’ stores because our products have their own built-in fan base, are refreshed regularly creating a

 



 

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“treasure hunt” shopping experience for consumers, and are often supplemented with exclusive, limited-time products that are highlighted on social media. We believe these merchandising strategies create a sense of urgency with consumers that encourages repeat visits to our retail customers.

 

    Consumers:    Fans are increasingly looking for ways to express their affinity for and engage with their favorite pop culture content. Over time, many of our consumers evolve from occasional buyers to more frequent purchasers, whom we categorize as enthusiasts or collectors. We estimate that enthusiasts, who are more engaged in pop culture, and collectors, who regularly purchase our products and self-identify as collectors, each make up approximately one-third of our customers. We create products to appeal to a broad array of fans across consumer demographic groups—men, women, boys and girls—not a single, narrow demographic. We currently offer over 5,000 products across our product categories. Our products are generally priced under $10, which allows our diverse consumer base to express their fandom frequently and impulsively. We continue to introduce innovative products designed to facilitate fan engagement at different price points and styles. In addition, our fans routinely express their passion for our products and brands through social media and live pop culture events, such as Comic-Con or Star Wars Celebration.

We have developed a nimble and low-fixed cost production model. The strength of our in-house creative team and relationships with content providers, retailers and third-party manufacturers allows us to move from product concept to pre-selling a new product in as few as 24 hours. We typically have a new figure on the store shelf between 110 and 200 days and can have it on the shelf in as few as 70 days. As a result, we can dynamically manage our business to balance current content releases and pop culture trends with content based on classic evergreen properties, such as Mickey Mouse or classic Batman. This has allowed us to deliver significant growth while lessening our dependence on individual content releases.

Our financial performance reflects the strong growth of our business. From 2014 to 2016, we expanded our net sales, net income and Adjusted EBITDA at a 100%, a 17% and an 86% compound annual growth rate, or CAGR, respectively. We achieved this growth without reliance on a singular “hit” property as no single property accounted for more than 15% of annual net sales during that period. We believe our strong growth and profitability reflect our pop culture consumer products leadership.

 

 

LOGO

 



 

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The following table sets forth net income (loss) and Adjusted EBITDA as a percentage of net sales.

 

     Years Ended December 31,  
         2014          Predecessor
    2015    
     Successor
    2015    
         2016      

Net income (loss)

     18%        13%        (28)%        6%  

Adjusted EBITDA

     26%        29%        23%        23%  

Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial performance measure, see “—Summary Historical and Pro Forma Consolidated Financial and Other Data.”

The Pop Culture Industry: The Forces at Work

Pop culture encompasses virtually everything that someone can be a fan of—movies, TV shows, video games, music and sports. The global licensed pop culture product industry in which we compete sits within the global licensed entertainment and character products market, which had $113 billion in total sales in 2016. We believe that many retailers have seen traffic decline across traditional consumer categories. In contrast, demand for pop culture content, consumer products and experiences has grown rapidly. We believe the increasing influence of pop culture and the strength of the pop culture industry is evidenced by:

 

    60 movie franchises each grossing more than $1 billion worldwide, and the average number of franchise films included in the top ten annual grossing movies from 2000 through 2015 was 6.6 films, up from 2.5 franchise films in the 1990s;

 

    3.2 million total interactions across both Facebook and Twitter about each new episode of The Walking Dead in 2016;

 

    47% increase in live concert ticket sales in North America from 1996 to 2015; and

 

    43 million viewers watching the League of Legends championship in 2016, a number that is 1.4 times that of the viewership of the NBA Finals that year, and an increase of 19% from 2015.

 



 

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The pop culture industry is being driven by several major forces. Technology advances have made it easier to access, consume and engage with content. Content providers have produced more quality content to drive fan engagement, often with a focus on franchise properties. Dedicated, active and enduring fan bases have emerged across the pop culture landscape. These fans seek out opportunities to interact with their favorite content and with like-minded fans through social media and content-centric experiences. At the same time, social norms have shifted, making fandom culturally accepted and mainstream. These trends reinforce one another leading to a substantial increase in pop culture fandom and to significant growth in the industry.

The Forces At Work In The Pop Culture Industry

 

 

LOGO

Technology Innovation

The proliferation of powerful mobile technology, such as tablets and smartphones, and the emergence of new content distribution services, such as Amazon Prime, Hulu and Netflix, have enabled fans to connect and engage with content anywhere, at any time, in larger “binge” quantities. More content and greater access have led to more fans spending more time per day consuming content. In addition, fans are able to develop a deeper affinity for content due to the increased prevalence of platforms and events where they can share their passion with other fans (such as through social media, blogs, YouTube, podcasts and online games). The accelerated pace of content discovery and sharing has created an environment where niche content can quickly become mainstream, resulting in more content becoming part of pop culture.

Evolution of Content

Content providers have increasingly focused on creating original scripted and franchise content that has broad global appeal and potential for sequels and brand extensions. During the 1990s, the top ten annual grossing movies included an average of 2.5 franchise films and from 2000 through 2015, the top ten annual grossing movies included an average of 6.6 franchise films. The growth of a healthy franchise ecosystem across content types has fostered fan loyalty and stimulated licensed product purchases. In addition, there has been a virtuous content-led cycle, which has driven an increase in the production of scripted high-budget, high-quality original TV shows, such as The Sopranos and Game of

 



 

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Thrones. The number of scripted original series more than doubled from 216 in 2010 to 455 in 2016, with newer entrants such as Amazon Prime, Hulu and Netflix spending or announcing the intention to spend substantial capital on new original content. For example, based on public filings, Netflix plans to invest approximately $6 billion in content creation in 2017.

Dedicated and Active Fan Base

We believe pop culture fans possess distinguishing characteristics that make them highly valuable consumers. Like sports fans, fans of other forms of pop culture identify strongly with their favored properties, and have a natural tendency to form social communities around them. For context, in 2016, retail sales of licensed entertainment and character products totaled $113 billion, compared to $25 billion for retail sales of licensed sports products. Furthermore, as it becomes increasingly easy to access a large quantity of quality content, fans seek more ways to expand and express connectivity to their favored characters or properties as they share their passion with others. As a result, consumers are participating in the story of these properties via social media platforms and conventions, such as Comic-Con, AnimeExpo and Star Wars Celebration, rather than being solely consumers of content. By being a part of the conversation regarding their favored content, fans reinforce their love for it, thereby creating a cycle of fandom.

Growing Cultural Relevance and Acceptance

As pop culture engagement has increased, we believe it has become more culturally acceptable to be openly passionate about all forms of pop culture, not just sports. Social media is driving the importance of pop culture as fans increasingly want to engage with the content and their social communities to show affinity for pop culture content. The top five U.S. media conventions, including Comic-Con International: San Diego and New York Comic Con, drew over a half million attendees in 2015, representing a sharp increase of over 40% from 2010. This growth was driven in part by an increase in female attendees, who accounted for 45% of all convention attendees in 2014. This represents a long-term cultural shift supporting the acceptability of fan affinity for pop culture content across multiple demographic categories of fans, and the growth beyond the traditional narrow, male-dominated demographic.

Our Strategic Differentiation

Leading Design and Creative Capabilities

Our in-house creative team layers our own whimsical, fun and distinct stylization onto content providers’ characters, creating unique products for which there is substantial consumer demand. Our creative team is passionate about pop culture. We enjoy a strong pipeline of talent for our creative team given our culture and the opportunity we provide to work with the most relevant pop culture content. We believe content providers trust us with their properties, and consumers passionately engage with our products and brands because of our creativity. In addition, we reinvigorate classic evergreen or back catalog content by infusing a fresh, unique aesthetic and design into characters that enjoy enduring passion and nostalgia from fans. As a result of our creative capabilities and broad portfolio of licenses, we create a substantial number of new products each year, including approximately 2,300 new products in 2016.

Diversity of Products and Accessible Price Points Create Broad Appeal

We create products to appeal to a broad array of fans across consumer demographic groups. We do not limit ourselves by targeting discrete demographics such as the stereotypical collector or the

 



 

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child seeking the latest (and often short-lived) toy craze. We estimate based on market and internal data that occasional buyers, which we define as those consumers who are mainstream movie and TV fans, but do not self-identify as enthusiasts, and enthusiasts, who are more engaged in pop culture than occasional buyers but who do not self-identify as collectors, each make up approximately one-third of our customers. Our products’ price points are generally under $10, which allows our diverse consumer base to express their fandom frequently and impulsively. We have broadened our products beyond our historical focus on figures (down to approximately 82% of 2016 net sales from 91% of 2015 net sales), having successfully launched new and growing categories such as plush (approximately 6% of 2016 net sales) and accessories (approximately 5% of 2016 net sales). We believe we have one of the largest and most engaged fan bases in our industry, driven by their passion and love of our unique products and the properties we represent.

Trusted Steward of the Most Important Pop Culture Content

We strive to license every pop culture property that we believe is relevant to our consumers. Over the last decade, we have built strong relationships with content providers and currently have a catalog of content licenses covering over 1,000 properties that we believe is one of the industry’s largest. We believe there is a trend of content providers consolidating their relationships to do more business with fewer licensees. As a trusted steward with a strong retail distribution network, we believe we have benefited from this trend. We often work collaboratively with content providers in advance of new content releases to create unique, stylized products to maximize the value of their properties. In some cases, the input we have provided has influenced the content provider’s creative choices for its original content. We have licenses for all of the 15 highest grossing movie franchises in history. We believe we are well positioned to continue to obtain licenses for new important movie franchises and other properties. Further, we have historically been able to renew productive licenses on commercially reasonable terms, which positions us to benefit from the ongoing desire of consumers to engage with and show affinity for their favorite pop culture content.

Deep, Mutually Beneficial Relationships with a Broad Network of Retail Customers

We partner with a diverse group of retail customers through which we sell our products. Many of our retail customers view us as experts in pop culture and in some cases we help manage their growing pop culture category within their stores and can provide a curated experience by catering to their particular customer bases. We believe this enables us to enhance the productivity of the pop culture category for our retail customers, resulting in increased sales and expanded shelf space for our products—a major driver of our growth historically. Additionally, we believe our pop culture expertise and omnichannel sales model position us well to capture the industry shift from traditional brick and mortar to channel-agnostic content consumerism. In addition, we often release exclusive new products with a specific retail customer, driving significant traffic and sales for them.

Nimble Speed to Market Reflects “Fast Fashion” Product Development Process

Speed to market has become increasingly important as technological innovation has accelerated the pace of content discovery and sharing and the speed at which niche content can become mainstream. Our flexible and low-fixed cost production model enables us to go from product design of a figure to the store shelf between 110 and 200 days and can have it on the shelf in as few as 70 days, with a minimal upfront investment for most figures of $5,000 to $7,500 in tooling, molds and internal design costs. Because of the strength of our in-house creative team, we are able to move from product design to pre-selling a new product in as few as 24 hours. This ability, coupled with the valuable data insights we have developed over the past decade, and the increasing use of repeated franchise properties by content providers, reduces potential product risk to us while better positioning us to

 



 

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benefit from trends in content creation and consumption. As an example of our “fast fashion” product development process, we announced and were able to pre-sell a dancing Baby Groot figure, which was a surprise character in Marvel’s 2014 Guardians of the Galaxy movie release, within a week of the movie release.

Dynamic Business Model Drives Revenue Visibility and Growth

Our business is diversified across content providers and properties, product categories, and sales channels. As a result, we can dynamically manage our business to capitalize on pop culture trends, which has allowed us to deliver significant growth while lessening our dependence on individual content releases. Our content provider relationships are highly diversified. We generated only approximately 8% and 15% of net sales from our top property for the six months ended June 30, 2017 and the year ended December 31, 2016, respectively, and the portion of our net sales for the six months ended June 30, 2017 and the year ended December 31, 2016 attributable to our top five properties was 27% and 36%, respectively. Our products are balanced across our licensed property categories. In 2016, we generated approximately 43% of net sales from classic evergreen properties, approximately 24% from movie release properties, approximately 20% from current video game properties and approximately 12% from current TV properties. We have visibility into the new release schedule of our content providers and our expansive license portfolio allows us to dynamically manage new product creation. This allows us to adjust the mix of products based on classic evergreen properties and new releases, depending on the media release cycle. In addition, we sell our products worldwide through a diverse group of sales channels, including specialty retailers, distributors, mass-market retailers, e-commerce sites and direct-to-consumer.

Visionary Management Team and Employees with Genuine Passion for Pop Culture

Our highly experienced management team is led by Brian Mariotti, an industry pioneer. A long-time pop culture fan, Brian recognized early on the impact that trends in media and entertainment would have on the pop culture industry and the value of having a diverse portfolio of licenses. Passion for pop culture pervades our company and our openness to new ideas from anywhere in the organization has resulted in some of our most innovative and differentiated products.

How We Plan To Grow

We are pursuing the following strategies that we believe will drive substantial future growth.

Increase Sales with Existing Retail Customers

We intend to continue to increase our sales by expanding our shelf space and deepening our relationships with our retail customers. Our products have driven traffic to our retail customers’ previously less productive square footage, which has resulted in increased shelf space for our products. In addition to designing unique, stylized products that resonate with pop culture fans and drive traffic, we intend to increase the number of retail customers for whom we curate pop culture selections. We believe doing so deepens our relationships with our retail customers and encourages them to allocate more shelf space to our products and pop culture products generally and, in some cases, create pop culture departments where none existed before, which we believe will drive additional brand awareness and sales growth. We are also in the process of creating a self-service online portal for our retail customers to reduce ordering time and increase the efficiency of our ordering process, which we believe will increase our sales with our existing retail customers.

Add New Retail Customers and Expand Into New Channels

We regularly evaluate and add new retail customers as we believe consumers demand Funko products regardless of the retail channel through which they purchase them. While we believe we have

 



 

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opportunities to add new specialty and mass-market retailers, we also plan to selectively target new or underdeveloped sales channels, such as dollar, drug, grocery and convenience stores. By adding new retail customers, we will increase the awareness and availability of our products to consumers, which we believe will increase sales. We also intend to increase our direct-to-consumer efforts, which represented approximately 6% of 2016 net sales.

Broaden Our Product Offerings

In addition to designing products to address new content that licensors continually produce, we plan to add new product categories, lines and brands to leverage our existing sales channels to continue to drive sales. For example, we are expanding our blind box offerings, which have historically included figures, to plush products. We also continually evaluate product innovations and potential acquisition targets to complement our existing product categories, lines and brands. In June 2017, we completed the acquisition of Loungefly, LLC, a designer of a variety of licensed pop culture fashion handbags, small leather goods and accessories, to expand and diversify our product offerings in our accessories category. Adding new product categories, lines and brands will enable us to leverage our existing retail distribution network to quickly increase sales while offering a more fulsome pop culture product offering to our retail customers and consumers.

Expand Internationally

We believe that the forces at work first observed in the U.S. pop culture industry are global. We believe we are currently underpenetrated internationally, as approximately 28.6% and 18.8% of net sales for the six months ended June 30, 2017 and the year ended December 31, 2016, respectively, were generated outside of the United States, and we believe that international sales represent a significant growth opportunity. In contrast to our international sales, approximately 75% of global box office receipts in 2016 were generated outside of the United States, suggesting significant potential for international growth. We are investing in the growth of our international business both organically and through third party distributors. In January 2017, we acquired certain assets of Underground Toys Limited and now sell directly to certain of our customers in Europe, the Middle East and Africa through our newly formed subsidiary, Funko UK, Ltd. In the future we may pursue similar acquisitions, or expand our direct sales force or distributor relationships to further penetrate Asia Pacific, Latin America or other regions.

Leverage the Funko Brand Across Multiple Channels

We believe there is a significant opportunity to leverage our distinctive style and designs across numerous underserved channels such as digital content, as well as potentially movies and television. For example, we are in the process of creating an online portal for Funko that will serve as an online destination for our consumers. This online community will allow consumers to create personal avatars, purchase digital products and interact with other consumers. We believe this opportunity will drive brand awareness with new audience segments, deepen consumer engagement to drive customer lifetime value, strengthen our direct connection with our consumers and grow our direct-to-consumer business, as well as support our retail customers.

 



 

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Summary Risk Factors

Participating in this offering involves substantial risk. Our ability to execute our strategy is also subject to certain risks. The risks described under the heading “Risk Factors” included elsewhere in this prospectus may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the most significant challenges and risks include the following:

 

    our success depends on our ability to execute our business strategy;

 

    our business is dependent upon our license agreements, which involve certain risks;

 

    we may not be able to design and develop products that will be popular with consumers or maintain the popularity of successful products;

 

    changes or downturns in the retail industry and markets for consumer products could negatively impact our business, financial condition and results of operations;

 

    our business depends on our ability to maintain and develop relationships with retail customers and distributors;

 

    our industry is highly competitive and barriers to entry are low;

 

    our financial performance may suffer if we fail to manage our growth effectively;

 

    our gross margin may not be sustainable and may fluctuate over time;

 

    our business depends on content development and creation by third parties;

 

    our success depends on our ability to successfully manage our inventories;

 

    we or our licensors may be unable to obtain, maintain and protect our respective intellectual property rights, which could negatively impact our competitive position;

 

    our success is critically dependent on the efforts and dedication of our officers and other employees;

 

    our use of third-party manufacturers to produce our products presents risks to our business;

 

    we are subject to various government regulations, violation of which could subject us to sanctions or otherwise harm our business;

 

    our indebtedness could adversely affect our financial health and competitive position;

 

    ACON will have significant influence over us, including over decisions that require the approval of stockholders, and its interests, along with the interests of our other Continuing Equity Owners, may conflict with yours;

 

    we are a “controlled company” within the meaning of the listing rules of The Nasdaq Stock Market LLC, or the Nasdaq rules, and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements;

 

    we may not be able to realize any tax benefits that may arise from our organizational structure and any redemptions or exchanges of common units of FAH, LLC for cash or stock, including in connection with this offering; and

 

    we will incur increased costs and obligations as a result of being a public company.

Before you invest in our Class A common stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors.”

 



 

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Summary of the Transactions

Funko, Inc., a Delaware corporation, was formed on April 21, 2017 to serve as the issuer of the Class A common stock offered hereby. Prior to this offering, all of our business operations have been conducted through FAH, LLC and its subsidiaries. We will consummate the following organizational transactions in connection with this offering:

 

    we will amend and restate the existing limited liability company agreement of FAH, LLC to, among other things, (1) convert all existing ownership interests (including vested profits interests and all unvested profits interests (subject to          common units received in exchange for unvested profits interests remaining subject to their existing time-based vesting requirements)) in FAH, LLC into          common units of FAH, LLC, and (2) appoint Funko, Inc. as the sole managing member of FAH, LLC upon its acquisition of common units in connection with this offering;

 

    we will amend and restate Funko, Inc.’s certificate of incorporation to, among other things, provide (1) for Class A common stock, with each share of our Class A common stock entitling its holders to one vote per share on all matters presented to our stockholders generally and (2) for Class B common stock, with each share of our Class B common stock entitling its holders to one vote per share on all matters presented to our stockholders generally, and that shares of our Class B common stock may only be held by the Continuing Equity Owners and their permitted transferees as described in “Description of Capital Stock—Common Stock—Class B Common Stock;”

 

    we will issue              shares of our Class A common stock to the purchasers in this offering (or              shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock) in exchange for net proceeds of approximately $         million (or approximately $          million if the underwriters exercise in full their option to purchase additional shares of Class A common stock) based upon an assumed initial public offering price of $         per share (which is the midpoint of the price range set forth on the cover page of this prospectus);

 

    we will use all of the net proceeds from this offering to purchase (1)              newly issued common units (or          common units if the underwriters exercise in full their option to purchase additional shares of Class A common stock) directly from FAH, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions, and (2)         common units directly from certain of the Continuing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions, which combined represents     % of FAH, LLC’s outstanding common units following this offering (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

    FAH, LLC intends to use the net proceeds from the sale of common units to Funko, Inc. to repay the Subordinated Promissory Notes, repay a portion of the outstanding borrowings under our Senior Secured Credit Facilities (as defined herein) and, if any remain, for general corporate purposes as described under “Use of Proceeds;”

 

    existing options to purchase certain ownership interests in FAH, LLC will be converted into          options to purchase common units in FAH, LLC;

 

    existing warrants to purchase ownership interests in FAH, LLC held by the Warrant Holders will be converted into              common units of FAH, LLC;

 



 

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    the Former Equity Owners will exchange their indirect ownership interests in FAH, LLC for              shares of Class A common stock on a one-to-one basis;

 

    the Former Equity Owners will sell              shares of our Class A common stock in this offering as selling stockholders; and

 

    Funko, Inc. will enter into (1) a stockholders agreement, which we refer to as the Stockholders Agreement, with ACON, Fundamental and Brian Mariotti, our Chief Executive Officer, (2) a registration rights agreement, which we refer to as the Registration Rights Agreement, with certain of the Original Equity Owners (including each of our executive officers) and (3) a tax receivable agreement, which we refer to as the Tax Receivable Agreement, with FAH, LLC and each of the Continuing Equity Owners. For a description of the terms of the Stockholders Agreement, the Registration Rights Agreement and the Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions.”

We collectively refer to the foregoing organizational transactions as the Transactions.

Immediately following the consummation of the Transactions (including this offering):

 

    Funko, Inc. will be a holding company and its principal asset will consist of common units it purchases from FAH, LLC and certain of the Continuing Equity Owners and common units it acquires from the Former Equity Owners;

 

    Funko, Inc. will be the sole managing member of FAH, LLC and will control the business and affairs of FAH, LLC and its subsidiaries;

 

    Funko, Inc. will own, directly or indirectly,          common units of FAH, LLC, representing approximately     % of the economic interest in FAH, LLC (or          common units, representing approximately     % of the economic interest in FAH, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

    the Continuing Equity Owners (1) will own          common units of FAH, LLC (excluding          common units subject to time-based vesting requirements), representing approximately     % of the economic interest in FAH, LLC (or          common units, representing approximately     % of the economic interest in FAH, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) will own              shares of Class B common stock of Funko, Inc., representing approximately     % of the combined voting power of all of Funko, Inc.’s common stock (or approximately     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

    the purchasers in this offering (1) will own              shares of Class A common stock of Funko, Inc. (or              shares of Class A common stock of Funko, Inc. if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately     % of the combined voting power of all of Funko, Inc.’s common stock and approximately     % of the economic interest in Funko, Inc. (or approximately     % of the combined voting power and approximately     % of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) through Funko, Inc.’s ownership of FAH, LLC’s common units, indirectly will hold approximately     % of the economic interest in FAH, LLC (or approximately     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

 

   

ACON (1) will own              shares of Class A common stock of Funko, Inc. (or              shares of Class A common stock of Funko, Inc. if the underwriters exercise in full their option to purchase

 



 

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additional shares of Class A common stock), representing approximately     % of the economic interest in Funko, Inc. (or approximately     % of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), (2) will own              shares of Class B common stock of Funko, Inc., which combined with the Class A common stock described in clause (1) will represent approximately     % of the combined voting power of all of Funko, Inc.’s common stock (or approximately     % of the combined voting power if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (3) through Funko, Inc.’s ownership of common units of FAH, LLC and ACON’s ownership of common units of FAH, LLC, directly or indirectly will hold approximately     % of the economic interest in FAH, LLC (or approximately     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

As the sole managing member of FAH, LLC, we will operate and control all of the business and affairs of FAH, LLC and, through FAH, LLC and its subsidiaries, conduct the business. Following the Transactions, including this offering, we will record a significant non-controlling interest in our consolidated subsidiary, FAH, LLC, relating to the ownership interest of the Continuing Equity Owners. Accordingly, although Funko, Inc. will have a minority economic interest in FAH, LLC, it will control the management of FAH, LLC as the sole managing member. As a result, Funko, Inc. will consolidate FAH, LLC and record a non-controlling interest in consolidated entity for the economic interest in FAH, LLC held by the Continuing Equity Owners.

Unless otherwise indicated, this prospectus assumes the shares of Class A common stock are offered at $        per share (the midpoint of the price range listed on the cover page of this prospectus). Although the number of shares of Class A common stock being offered hereby to the public and the total number of FAH, LLC common units outstanding after the offering will remain fixed regardless of the initial public offering price in this offering, certain share information and FAH, LLC common unit information presented in this prospectus will vary depending on the initial public offering price in this offering. Specifically, the relative allocation of the common units issued in the Transactions as among the Original Equity Owners will vary, depending on the initial public offering price in this offering, which will also impact the shares of Class A common stock and Class B common stock issued to the Original Equity Owners in the Transactions. An increase in the assumed initial public offering price would result in a decrease in the amount of common units of FAH, LLC and, in turn, shares of Class B common stock issued to ACON, Fundamental, the Warrant Holders and certain other Original Equity Owners and an increase in the amount of common units issued to the Former Profits Interests Holders on an aggregate basis. A decrease in the assumed initial public offering price would result in an increase in the amount of common units and, in turn, shares of Class B common stock issued to ACON, Fundamental, the Warrant Holders and certain other Original Equity Owners and a decrease in the amount of common units issued to the Former Profits Interests Holders on an aggregate basis.

For more information regarding our structure, see “Our Organizational Structure.”

 



 

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Ownership Structure

The diagram below depicts our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

 

LOGO

 

(1)  Includes Fundamental, the Former Profits Interests Holders, the Warrant Holders, certain of our current executive officers, other employees and directors and each of their permitted transferees. The common units held by the Continuing Equity Owners exclude                      common units that will be subject to time-based vesting.
(2)  FAH, LLC, its direct wholly owned subsidiary FHL and its indirect wholly owned subsidiary Funko, LLC are the borrowers under our Senior Secured Credit Facilities.
(3) A portion of these common units will be held through wholly owned subsidiaries of Funko, Inc. as a result of the Former Equity Owners exchanging their indirect ownership interests in common units of FAH, LLC for shares of Class A common stock on a one-to-one basis as part of the Transactions.

 



 

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Our Corporate Information

Funko, Inc., the issuer of the Class A common stock in this offering, was incorporated as a Delaware corporation on April 21, 2017. Our corporate headquarters are located at 2802 Wetmore Avenue, Everett, WA 98201. Our telephone number is (425) 783-3616. Our principal website address is www.funko.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.

After giving effect to the Transactions, including this offering, Funko, Inc. will be a holding company whose principal asset will consist of     % of the outstanding common units of FAH, LLC, a Delaware limited liability company (or     % if the underwriters exercise in full their option to purchase additional shares of our Class A common stock).

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally applicable to public companies. As a result:

 

    we are required to have only two years of audited financial statements and only two years of related selected financial data and Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

    we are not required to engage an auditor to report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

    we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or the PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

    we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes;” and

 

    we are not required to comply with certain disclosure requirements related to executive compensation, such as the requirement to disclose the correlation between executive compensation and performance and the requirement to present a comparison of our Chief Executive Officer’s compensation to our median employee compensation.

We may take advantage of these reduced reporting and other requirements until the last day of our fiscal year following the fifth anniversary of the completion of this offering, or such earlier time that we are no longer an emerging growth company. However, if certain events occur prior to the end of such five-year period, including if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our Class A common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. We may choose to take advantage of some but not all of these reduced burdens. We have elected to adopt the reduced requirements with respect to our financial statements and the related selected financial data and Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure. As a result, the information that we provide to stockholders may be different than the information you may receive from other public companies in which you hold equity.

 



 

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As mentioned above, the JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have chosen to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.

ACON Investments

ACON Investments, L.L.C. is a Washington, D.C.-based international private equity investment firm that manages capital through varied investment funds and special purpose partnerships. From its inception in 1996 through June 30, 2017, ACON Investments, L.L.C. and its affiliates have managed approximately $5.5 billion of capital. ACON Investments, L.L.C and its affiliates have professionals in Washington, D.C., Los Angeles, Mexico City, Sao Paulo and Bogota. For additional information regarding ACON’s ownership in us after this offering, see “—Summary of the Transactions” and “Principal and Selling Stockholders.”

 



 

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The Offering

 

Issuer

   Funko, Inc.

Shares of Class A common stock offered by us

                shares.

Shares of Class A common stock offered by the selling stockholders

  


             shares.

Underwriters’ option to purchase additional shares of Class A common stock from us and the selling stockholders

  



             shares.

Shares of Class A common stock to be issued to the Former Equity Owners

  


             shares.

Shares of Class A common stock to be outstanding immediately after this offering

  


             shares, representing approximately     % of the combined voting power of all of Funko, Inc.’s common stock and 100% of the economic interest in Funko, Inc.

Shares of Class B common stock to be outstanding immediately after this offering

  


             shares, representing approximately     % of the combined voting power of all of Funko, Inc.’s common stock and no economic interest in Funko, Inc.

Common units of FAH, LLC to be held by us immediately after this offering

  


             common units, representing approximately     % of the economic interest in FAH, LLC (or          common units, representing approximately     % of the economic interest in FAH, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

Common units of FAH, LLC to be held by the Continuing Equity Owners immediately after this offering

  



             common units, representing approximately     % of the economic interest in FAH, LLC (or          common units, representing approximately     % of the economic interest in FAH, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

Ratio of shares of Class A common stock to common units

  


Our amended and restated certificate of incorporation and the FAH LLC Agreement will require that we and FAH, LLC at all times maintain a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of common units of FAH, LLC owned by us.

Ratio of shares of Class B common stock to common units

  


Our amended and restated certificate of incorporation and the FAH LLC Agreement will require that we and FAH, LLC at all times maintain a one-to-one ratio between the number

 



 

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   of shares of Class B common stock owned by the Continuing Equity Owners and the number of common units of FAH, LLC owned by the Continuing Equity Owners. Immediately after this offering, the Continuing Equity Owners will own 100% of the outstanding shares of our Class B common stock.

Permitted holders of shares of Class B common stock

  


Only the Continuing Equity Owners and the permitted transferees of Class B common stock as described in this prospectus will be permitted to hold shares of our Class B common stock. Shares of Class B common stock are transferable only together with an equal number of common units of FAH, LLC. See “Certain Relationships and Related Party Transactions—FAH LLC Agreement—Agreement in Effect Upon Consummation of this Offering.”

Voting rights

   Holders of shares of our Class A common stock and our Class B common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law or our amended and restated certificate of incorporation. Each share of Class A common stock and Class B common stock entitles its holders to one vote per share on all matters presented to our stockholders generally. See “Description of Capital Stock.”

Redemption rights of holders of common units

   The Continuing Equity Owners may from time to time at each of their options (subject in certain circumstances to time-based vesting requirements and limitations on the common units that will be converted from HR units in connection with the Transactions) require FAH, LLC to redeem all or a portion of their common units (             common units outstanding immediately after this offering) in exchange for, at our election, newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of our Class A common stock for each common unit redeemed, in each case, in accordance with the terms of the FAH LLC Agreement; provided that, at our election, we may effect a direct exchange by Funko, Inc. of such Class A common stock or such cash, as applicable, for such common units. The Continuing Equity Owners may exercise such redemption right for as long as their common units remain outstanding. See “Certain Relationships and Related Party Transactions— FAH LLC Agreement.” Simultaneously with the payment of cash or shares of Class A common

 



 

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   stock, as applicable, in connection with a redemption or exchange of common units pursuant to the terms of the FAH LLC Agreement, a number of shares of our Class B common stock registered in the name of the redeeming or exchanging Continuing Equity Owner will be cancelled for no consideration on a one-for-one basis with the number of common units so redeemed or exchanged.

Use of proceeds

   We estimate, based upon an assumed initial public offering price of $             per share (which is the midpoint of the price range set forth on the cover page of this prospectus), that we will receive net proceeds from this offering of approximately $             million (or $             million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering to purchase (1)              common units (or              common units if the underwriters exercise in full their option to purchase additional shares of Class A common stock) directly from FAH, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in this offering, less the underwriting discounts and commissions, and (2)              common units directly from certain of the Continuing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering, less the underwriting discounts and commissions. FAH, LLC intends to use $             of the net proceeds from the sale of common units to Funko, Inc. to repay the Subordinated Promissory Notes (as defined below), repay a portion of the outstanding borrowings under our Senior Secured Credit Facilities and the remainder for general corporate purposes. FAH, LLC will not receive any proceeds that Funko, Inc. uses to purchase common units from certain of the Continuing Equity Owners, and we will not receive any of the proceeds from the sale of shares of our Class A common stock by the selling stockholders. FAH, LLC will bear or reimburse Funko, Inc. and the selling stockholders for all of the expenses of this offering. See “Use of Proceeds.”

Dividend policy

   We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay

 



 

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   indebtedness, and therefore we do not anticipate declaring or paying any cash dividends on our Class A common stock in the foreseeable future. Holders of our Class B common stock are not entitled to participate in any dividends declared by our board of directors. Additionally, our ability to pay any cash dividends on our Class A common stock is limited by restrictions on the ability of FAH, LLC and our other subsidiaries to pay dividends or make distributions under the terms of our Senior Secured Credit Facilities. Additionally, because we are a holding company, our ability to pay cash dividends on our Class A common stock depends on our receipt of cash distributions from FAH, LLC and, through FAH, LLC, cash distributions and dividends from our other direct and indirect wholly owned subsidiaries. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to compliance with contractual restrictions and covenants in the agreements governing our current and future indebtedness. Any such determination will also depend upon our business prospects, results of operations, financial condition, cash requirements and availability, industry trends and other factors that our board of directors may deem relevant. See “Dividend Policy.”

Controlled company exception

   After the consummation of this offering, we will be considered a “controlled company” for the purposes of the Nasdaq rules as ACON, Fundamental and Brian Mariotti, our Chief Executive Officer, will, in the aggregate, have more than 50% of the voting power for the election of directors. See “Principal and Selling Stockholders.” As a “controlled company,” we will not be subject to certain corporate governance requirements, including that: (1) a majority of our board of directors consists of “independent directors,” as defined under the Nasdaq rules; (2) we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; (3) we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and (4) we perform annual performance evaluations of the nominating and corporate governance and compensation committees. As a result, we may not have a

 



 

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   majority of independent directors on our board of directors, an entirely independent nominating and corporate governance committee, an entirely independent compensation committee or perform annual performance evaluations of the nominating and corporate governance and compensation committees unless and until such time as we are required to do so.

Tax receivable agreement

   We will enter into a Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that will provide for the payment by Funko, Inc. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Funko, Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (1) increases in tax basis resulting from Funko, Inc.’s purchase of common units of FAH, LLC directly from certain of the Continuing Equity Owners in connection with this offering, as described under “Use of Proceeds,” and future redemptions funded by Funko, Inc. or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock described above under “—Redemption rights of holders of common units,” and (2) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a discussion of the Tax Receivable Agreement.

Registration rights agreement

   Pursuant to the Registration Rights Agreement, we will, subject to the terms and conditions thereof, agree to register the resale of the shares of our Class A common stock that are issuable to certain of the Continuing Equity Owners (including each of our executive officers) upon redemption or exchange of their common units of FAH, LLC and the shares of our Class A common stock that are issued to the Former Equity Owners in connection with the Transactions. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

Risk factors

   See “Risk Factors” beginning on page 28 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our Class A common stock.

Trading symbol

   We have applied to list our Class A common stock on the Nasdaq Global Select Market under the symbol “FNKO.”

 



 

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Unless we indicate otherwise or the context otherwise requires, all information in this prospectus:

 

    gives effect to the amendment and restatement of the FAH LLC Agreement that converts all existing ownership interests in FAH, LLC into              common units, as well as the filing of our amended and restated certificate of incorporation;

 

    gives effect to the other Transactions, including the consummation of this offering;

 

    excludes              shares of Class A common stock reserved for issuance under our 2017 Equity Plan, or 2017 Plan, including shares of Class A common stock issuable pursuant to              stock options and              restricted stock units granted to certain of our directors and certain of our employees in connection with this offering as described under the captions “Executive Compensation—Executive Compensation Arrangements—Director Compensation” and “Executive Compensation—Equity Compensation Plans—2017 Incentive Award Plan;”

 

    excludes              options to purchase common units in FAH, LLC at a price of $             per unit, all of which are expected to be vested as of the consummation of this offering;

 

    excludes              common units to be held by certain Former Profits Interests Holders that are subject to time-based vesting requirements;

 

    excludes shares of Class A common stock that may be issuable upon exercise of redemption rights of the Continuing Equity Owners (or at our election, a direct exchange);

 

    assumes an initial public offering price of $             per share of Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus; and

 

    assumes no exercise by the underwriters of their option to purchase              additional shares of Class A common stock from us.

Unless otherwise indicated, this prospectus assumes the shares of Class A common stock are offered at $             per share (the midpoint of the price range listed on the cover page of this prospectus). Although the number of shares of Class A common stock being offered hereby to the public and the total number of FAH, LLC common units outstanding after the offering will remain fixed regardless of the initial public offering price in this offering, certain share information and FAH, LLC common unit information presented in this prospectus will vary depending on the initial public offering price in this offering. Specifically, the relative allocation of the common units issued in the Transactions as among the Original Equity Owners will vary, depending on the initial public offering price in this offering, which will also impact the shares of Class A common stock and Class B common stock issued to the Original Equity Owners in the Transactions. An increase in the assumed initial public offering price would result in a decrease in the amount of common units of FAH, LLC and, in turn, shares of Class B common stock issued to ACON, Fundamental, the Warrant Holders and certain other Original Equity Owners and an increase in the amount of common units issued to the Former Profits Interests Holders on an aggregate basis. A decrease in the assumed initial public offering price would result in an increase in the amount of common units and, in turn, shares of Class B common stock issued to ACON, Fundamental, the Warrant Holders and certain other Original Equity Owners and a decrease in the amount of common units issued to the Former Profits Interests Holders on an aggregate basis.

 



 

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Summary Historical and Pro Forma Consolidated Financial and Other Data

The following tables present the summary historical consolidated financial and other data for FAH, LLC and its subsidiaries and the summary pro forma consolidated financial and other data for Funko, Inc. FAH, LLC is the predecessor of the issuer, Funko, Inc., for financial reporting purposes. The summary consolidated statements of operations data and statements of cash flows data for the year ended December 31, 2016 (Successor), the period from October 31, 2015 through December 31, 2015 (Successor) and the period from January 1, 2015 through October 30, 2016 (Predecessor), and the summary consolidated balance sheet data as of December 31, 2016 are derived from the audited consolidated financial statements of FAH, LLC included elsewhere in this prospectus. The summary consolidated statements of operations data and statements of cash flows data for the six months ended June 30, 2017 and 2016, and the summary consolidated balance sheet data as of June 30, 2017 are derived from the unaudited consolidated financial statements of FAH, LLC included elsewhere in this prospectus. We have prepared the unaudited consolidated financial information set forth below on the same basis as our audited consolidated financial statements and have included all adjustments, consisting of only normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and results of operations for such periods.

The results for any interim period are not necessarily indicative of the results that may be expected for a full year. Additionally, the results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period. The information set forth below should be read together with the “Selected Historical and Unaudited Pro Forma Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

The summary unaudited pro forma consolidated financial data of Funko, Inc. presented below have been derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The summary unaudited pro forma consolidated financial data for the year ended December 31, 2016 and as of and for the six months ended June 30, 2017 give effect to the Transactions, including the consummation of this offering and the use of proceeds therefrom, as described in “Our Organizational Structure” and “Use of Proceeds,” as if all such transactions had occurred on January 1, 2016, in the case of the summary unaudited pro forma consolidated statements of operations data, and as of June 30, 2017, in the case of the summary unaudited pro forma consolidated balance sheet data. The unaudited pro forma consolidated financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had this offering and related transactions taken place on the dates indicated, or that may be expected to occur in the future. See “Unaudited Pro Forma Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma consolidated financial data.

 



 

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The summary historical consolidated financial and other data of Funko, Inc. has not been presented because Funko, Inc. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

 

    Pro Forma
Funko, Inc.
    Historical FAH, LLC  
      Successor          Predecessor  
    Six Months
Ended
June 30, 2017
    Year Ended
December 31,
2016
   

 

Six Months Ended

June 30,

    Year Ended
December 31,
2016
    Period from
October 31,
2015

through
December 31,
2015
         Period from
January 1,

2015
through
October 30,
2015
 
        2017     2016             
    (unaudited)     (unaudited)                         
    (in thousands, except per share data and margins)  

Consolidated Statements of Operations Data:

           

Net sales

  $                 $                 $ 203,798     $ 176,261     $ 426,717     $ 56,565         $ 217,491  

Cost of sales (exclusive of depreciation and amortization shown separately below)

        130,066       125,799       280,396       44,485           131,621  

Selling, general and administrative expenses

        50,901       37,087       77,525       13,894           37,145  

Acquisition transaction costs

        3,086       349       1,140       7,559           13,301  

Depreciation and amortization

        14,322       11,174       23,509       3,370           5,723  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) from operations

        5,423       1,852       44,147       (12,743         29,701  

Interest expense, net

        14,677       7,879       17,267       2,818           2,202  

Other income, net

        (113     —         —         —             —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) before income taxes

        (9,141     (6,027     —         —             —    

Income tax expense

        1,024       —         —         —             —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net income (loss)

  $   $   $ (10,165   $ (6,027   $ 26,880     $ (15,561       $ 27,499  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Pro Forma Net Income Per Share Data(1):

                 

Pro forma weighted average shares of Class A common stock outstanding:

                 

Basic

                 

Diluted

                 

Consolidated Statements of Cash Flows Data:

                 

Net cash provided by operating activities

      $ 15,750     $ 16,389     $ 49,468     $ 14,110         $ 8,538  

Net cash used in investing activities

        (46,764     (8,014     (22,105     (244,421         (10,043

Net cash (used in) provided by financing activities

        37,627       3,339       (45,613     244,456           11,390  

Selected Other Data:

                 

EBITDA(2)

  $                   $                   $ 19,858     $ 13,026     $ 67,656     $ (9,373       $ 35,424  

Adjusted EBITDA(2)

  $     $     $ 31,284     $ 35,644     $ 96,960     $ 13,170         $ 61,996  

Net income (loss) margin

    %       %       (5.0 )%      (3.4 )%      6.3     (27.5 )%          12.6

Adjusted EBITDA margin(2)

    %       %       15.4     20.2     22.7     23.3         28.5

 



 

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    Pro Forma
Funko, Inc.(3)
   Historical FAH, LLC  
    June 30, 2017    June 30, 2017      December 31, 2016  
    (unaudited)    (unaudited)         
    (in thousands)  

Consolidated Balance Sheets Data (at period end):

       

Cash and cash equivalents

  $                $ 12,752      $ 6,161  

Total assets

       588,380        522,237  

Total debt(4)

       339,064        217,753  

Total members’/stockholders’ equity

       154,990        217,377  

 

(1)  See Note (f) to the unaudited pro forma consolidated statements of operations for the year ended December 31, 2016 in “Unaudited Pro Forma Consolidated Financial Information” for the calculation of pro forma basic net income per share and pro forma diluted net income per share.
(2)  EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not measurements of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity.

We define “EBITDA” as net income before interest expense, net, income tax expense and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA further adjusted for monitoring fees, non-cash charges related to equity-based compensation programs, earnout fair market value adjustments, inventory step-ups, acquisition transaction costs, foreign currency transaction (gains) losses and other unusual or one-time items. We define Adjusted EBITDA margin as the ratio of Adjusted EBITDA to net sales. We caution investors that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA margin in the same manner. We present EBITDA, Adjusted EBITDA and Adjusted EBITDA margin because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.

Management uses EBITDA, Adjusted EBITDA and Adjusted EBITDA margin:

 

    as a measurement of operating performance because they assist us in comparing the operating performance of our business on a consistent basis, as they remove the impact of items not directly resulting from our core operations;

 

    for planning purposes, including the preparation of our internal annual operating budget and financial projections;

 

    as a consideration to assess incentive compensation for our employees;

 

    to evaluate the performance and effectiveness of our operational strategies; and

 

    to evaluate our capacity to expand our business.

By providing these non-GAAP financial measures, together with reconciliations, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. In addition, our Senior Secured Credit Facilities use Adjusted EBITDA to measure our compliance with covenants such as senior leverage ratio. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income, net income (loss) margin or other financial statement data presented in our consolidated financial statements included elsewhere in this prospectus as indicators of financial performance. Some of the limitations are:

 

    such measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

    such measures do not reflect changes in, or cash requirements for, our working capital needs;

 

    such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

    such measures do not reflect our tax expense or the cash requirements to pay our taxes;

 

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and

 



 

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    other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.

Due to these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for monitoring fees, non-cash charges related to equity-based compensation programs, earnout fair market value adjustments, inventory step-ups, acquisition transaction costs and other unusual or one-time items. It is reasonable to expect that these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other companies over time. In addition, Adjusted EBITDA includes adjustments for other items that we do not expect to regularly record following this offering. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.

The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net income:

 

    Pro Forma
Funko, Inc.
    Historical FAH, LLC  
      Successor           Predecessor  
    Six Months
Ended
June 30, 2017
    Year Ended
December 31,
2016
   

 

Six Months Ended

June 30,

    Year Ended
December 31,
2016
    Period from
October 31,
2015

through
December 31,
2015
          Period from
January 1,
2015

through
October 30,
2015 
    Year Ended
December 31,
2014 
 
        2017     2016                
    (unaudited)     (unaudited)                                
    (in thousands)  

Net income (loss)

  $                 $                 $ (10,165   $ (6,027   $ 26,880     $ (15,561       $ 27,499     $ 19,615  

Interest expense, net

        14,677       7,879       17,267       2,818           2,202       2,693  

Income tax expense

        1,024                                    

Depreciation and amortization

        14,322       11,174       23,509       3,370           5,723       4,003  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

EBITDA

  $   $     $ 19,858     $ 13,026     $ 67,656     $ (9,373       $ 35,424     $ 26,311  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjustments:

                   

Monitoring fees(a)

        981       749       1,498       272           3,346       1,416  

Equity-based compensation(b)

        3,745       1,166       2,369       4,484           9,925        

Earnout fair market value adjustment(c)

        8       6,630       8,561       1,540                  

Inventory step-up(d)

        2,630       13,435       13,434       8,688                  

Acquisition transaction costs and other expenses(e)

        4,175       638       3,442       7,559           13,301       385  

Foreign currency transaction (gain)
loss(f)

        (113                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted EBITDA

  $   $   $ 31,284     $ 35,644     $   96,960     $   13,170         $   61,996     $   28,112  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

  (a) 

Represents monitoring fees paid pursuant to a management services agreement with Fundamental Capital, LLC, which was terminated in 2015 in connection with the ACON Acquisition, and a management services agreement

 



 

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  with ACON that was entered into in connection with the ACON Acquisition, which will terminate upon the consummation of this offering.
  (b)  Represents non-cash charges related to equity-based compensation programs, which vary from period to period depending on timing of awards.
  (c)  Reflects the increase in the fair value of contingent liabilities incurred in connection with the ACON Acquisition and the Underground Toys Acquisition.
  (d)  Represents a non-cash adjustment to cost of sales resulting from the ACON Acquisition and the Underground Toys Acquisition.
  (e)  Represents legal, accounting, and other related costs incurred in connection with this offering, the ACON Acquisition, the Underground Toys Acquisition, the Loungefly Acquisition and other potential acquisitions.
  (f)  Represents both unrealized and realized foreign currency (gains) losses on transactions other than in U.S. dollars.

 

(3)  Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease each of cash, total assets and total stockholders’ equity on a pro forma basis by approximately $             million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(4)  Total debt as of June 30, 2017 consists of the Subordinated Promissory Notes and borrowings under our Senior Secured Credit Facilities, net of unamortized discount of $12.1 million. Total debt as of December 31, 2016 consists of borrowings under our Senior Secured Credit Facilities, net of unamortized discount of $6.4 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Subordinated Promissory Notes” and “—Description of Senior Secured Credit Facilities” and “Description of Certain Indebtedness.” Also see our audited consolidated financial statements included elsewhere in this prospectus, which include all liabilities.

 



 

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RISK FACTORS

You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

Our success depends on our ability to execute our business strategy.

Our net sales and profitability have grown rapidly in recent periods; however, this should not be considered indicative of our future performance. Our future growth, profitability and cash flows depend upon our ability to successfully execute our business strategy, which is dependent upon a number of factors, including our ability to:

 

    expand our market presence in existing sales channels and enter additional sales channels;

 

    anticipate, gauge and respond to rapidly changing consumer preferences and pop culture trends;

 

    acquire or enter into new licenses in existing product categories or in new product categories;

 

    expand our geographic presence to take advantage of opportunities outside of the United States;

 

    enhance and maintain favorable brand recognition for our company and product offerings;

 

    maintain and expand margins through sales growth and efficiency initiatives;

 

    effectively manage our relationships with third-party manufacturers;

 

    effectively manage our debt, working capital and capital investments to maintain and improve the generation of cash flow; and

 

    execute any acquisitions quickly and efficiently and integrate businesses successfully.

There can be no assurance that we can successfully execute our business strategy in the manner or time period that we expect. Further, achieving these objectives will require investments which may result in short-term costs without generating any current sales or countervailing cost savings and, therefore, may be dilutive to our earnings, at least in the short term. In addition, we may decide to divest or discontinue certain brands or products or streamline operations and incur other costs or special charges in doing so. We may also decide to discontinue certain programs or sales to certain retailers based on anticipated strategic benefits. The failure to realize the anticipated benefits from our business strategy could have a material adverse effect on our prospects, business, financial condition and results of operations.

Our business is dependent upon our license agreements, which involve certain risks.

Products from which we generate substantially all of our net sales are produced under license agreements which grant us the right to use certain intellectual property in such products. These license agreements typically have short terms (between two and three years), are not automatically renewable, and, in some cases, give the licensor the right to terminate the license agreement at will. Our license agreements typically provide that our licensors own the intellectual property rights in the products we design and sell under the license, and as a result, upon termination of the license, we would no longer have the right to sell these products, while our licensors could engage a competitor to do so. We

 

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believe our ability to retain our license agreements depends, in large part, on the strength of our relationships with our licensors. Any events or developments adversely affecting those relationships, or the loss of one or more members of our management team, particularly our Chief Executive Officer, could adversely affect our ability to maintain and renew our license agreements on similar terms or at all. Our top ten licensors collectively accounted for approximately 70% and 80% of our net sales for the six months ended June 30, 2017 and 2016, respectively, and approximately 77% and 81% of our 2016 and 2015 net sales, respectively. Our largest licensor, Warner Brothers, accounted for approximately 17% and 21% of our net sales for the six months ended June 30, 2017 and 2016, respectively, and 21% and 15% of our 2016 and 2015 net sales, respectively. Moreover, while we have separate licensing arrangements with Disney, LucasFilm and Marvel, these parties are all under common ownership and collectively these licensors accounted for approximately 30% and 37% of our net sales for the six months ended June 30, 2017 and 2016, respectively, and approximately 31% and 45% of our 2016 and 2015 net sales, respectively. The termination or lack of renewal of one or more of our license agreements, or the renewal of a license agreement on less favorable terms, could have a material adverse effect on our business, financial condition and results of operations. While we may enter into additional license agreements in the future, the terms of such license agreements may be less favorable than the terms of our existing license agreements.

Our license agreements are complex, and typically grant our licensors the right to audit our compliance with the terms and conditions of such agreements. Any such audit could result in a dispute over whether we have paid the proper royalties, which could require us to pay additional royalties, and the amounts involved could be material. For example, as of June 30, 2017, we had a reserve of $4.0 million on our balance sheet related to ongoing and future royalty audits. In addition to royalty payments, these agreements as a whole impose numerous other obligations on us, including obligations to, among other things:

 

    maintain the integrity of the applicable intellectual property;

 

    obtain the licensor’s approval of the products we develop under the license prior to making any sales;

 

    permit the licensor’s involvement in, or obtain the licensor’s approval of, advertising, packaging and marketing plans;

 

    maintain minimum sales levels or make minimum guaranteed royalty payments;

 

    actively promote the sale of the licensed product and maintain the availability of the licensed product throughout the license term;

 

    spend a certain percentage of our sales of the licensed product on marketing and advertising for the licensed product;

 

    sell the products we develop under the license only within a specified territory or within specified sales channels;

 

    indemnify the licensor in the event of product liability or other claims related to the licensed product and advertising or other materials used to promote the licensed product;

 

    obtain the licensor’s approval of the retail price of the licensed products;

 

    sell the licensed products to the licensor at a discounted price or at the lowest price charged to our customers;

 

    obtain the licensor’s consent prior to assigning or sub-licensing to third parties; and

 

    provide notice to the licensor or obtain its approval of certain changes in control.

If we breach any of these obligations or any other obligations set forth in any of our license agreements, we could be subject to monetary penalties and our rights under such license agreements

 

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could be terminated, either of which could have a material adverse effect on our business, financial condition and results of operations.

Our success is also partially dependent on the reputation of our licensors and the goodwill associated with their intellectual property, and the ability of our licensors to protect and maintain the intellectual property rights that we use in connection with our products, all of which may be harmed by factors outside our control. See also “—If we are unable to obtain, maintain and protect our intellectual property rights, in particular trademarks and copyrights, or if our licensors are unable to maintain and protect their intellectual property rights that we use in connection with our products, our ability to compete could be negatively impacted.”

As a purveyor of licensed pop culture consumer products, we cannot assure you that we will be able to design and develop products that will be popular with consumers, or that we will be able to maintain the popularity of successful products.

The interests of consumers evolve extremely quickly and can change dramatically from year to year. To be successful we must correctly anticipate both the products and the movies, TV shows, video games, music, sports and other content releases (including the related characters), that will appeal to consumers and quickly develop and introduce products that can compete successfully for consumers’ limited time, attention and spending. Evolving consumer tastes and shifting interests, coupled with an ever changing and expanding pipeline of consumer products and content that compete for consumers’ interest and acceptance, create an environment in which some products and content can fail to achieve consumer acceptance, while others can be popular during a certain period of time but then be rapidly replaced. As a result, consumer products, particularly those based on pop culture such as ours, can have short life cycles. In addition, given the growing market for digital products and the increasingly digital nature of pop culture, there is also a risk that consumer demand for physical products may decrease over time. If we devote time and resources to developing and marketing products that consumers do not find appealing enough to buy in sufficient quantities of our products to be profitable to us, our sales and profits may decline and our business performance may be damaged. Similarly, if our product offerings fail to correctly anticipate consumer interests, our sales and earnings will be adversely affected.

Additionally, our business is increasingly global and depends on interest in and acceptance of our products and our licensors’ brands by consumers in diverse markets around the world with different tastes and preferences. As such, our success depends on our ability to successfully predict and adapt to changing consumer tastes and preferences in multiple markets and geographies and to design products that can achieve popularity globally over a broad and diverse consumer audience. There is no guarantee that we will be able to successfully develop and market products with global appeal.

Consumer demand for pop culture products can and does shift rapidly and without warning. As a result, even if our product offerings are initially successful, there can be no guarantee that we will be able to maintain their popularity with consumers. Accordingly, our success will depend, in part, on our ability to continually design and introduce new products that consumers find appealing. To the extent we are unable to do so, our sales and profitability will be adversely affected. This is particularly true given the concentration of our sales under certain of our brands, particularly Pop!. Sales of our Pop! branded products accounted for approximately 68% and 69% of our net sales for the six months ended June 30, 2017 and 2016, respectively, and approximately 64% and 75% of our 2016 and 2015 net sales, respectively. If consumer demand for our Pop! branded products were to decrease, our business, financial condition and results of operations could be adversely affected unless we were able to develop and market additional products that were successful in achieving a similar level of consumer acceptance and that generated an equivalent amount of net sales at a comparable gross margin, which there is no guarantee we would be able to do.

 

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Changes in the retail industry and markets for consumer products affecting our retail customers or retailing practices could negatively impact our business, financial condition and results of operations.

Our products are primarily sold to consumers through retailers that are our direct customers or customers of our distributors. As such, changes in the retail industry can negatively impact our business, financial condition and results of operations.

Due to the challenging environment for traditional “brick-and-mortar” retail locations caused by declining in-store traffic, many retailers are closing physical stores, and some traditional retailers are engaging in significant reorganizations, filing for bankruptcy and going out of business. For example, in September 2017, Toys “R” Us, Inc. and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code. Such entities accounted for approximately 3.8% of our net sales for the six months ended June 30, 2017 and 3.4% of our net sales for the year ended December 31, 2016. In addition to furthering consolidation in the retail industry, such a trend could have a negative effect on the financial health of our retail customers and distributors, potentially causing them to experience difficulties in fulfilling their payment obligations to us or our distributors, reduce the amount of their purchases, seek extended credit terms or otherwise change their purchasing patterns, alter the manner in which they promote our products or the resources they devote to promoting and selling our products or cease doing business with us or our distributors. If any of our retail customers were to file for bankruptcy, we could be unable to collect amounts owed to us, and could even be required to repay certain amounts paid to us prior to the bankruptcy filing. The occurrence of any of these events would have an adverse effect on our business, cash flows, financial condition and results of operations.

If we do not effectively maintain and further develop our relationships with retail customers and distributors, our growth prospects, business and results of operations could be harmed.

Historically, substantially all of our net sales has been derived from our retail customers and distributors, upon which we rely to reach the consumers who are the ultimate purchasers of our products. In the United States, we primarily sell our products directly to specialty retailers, mass-market retailers and e-commerce sites. In international markets, we sell our products directly to similar retailers, primarily in Europe, through our subsidiary Funko UK, Ltd. We also sell our products to distributors for sale to retailers in the United States and in certain countries internationally, typically in those countries in which we do not currently have a direct presence. Our top ten customers represented approximately 45% and 61% of our net sales for the six months ended June 30, 2017 and 2016, respectively, and approximately 63% and 60% of our 2016 and 2015 net sales, respectively. Additionally, our largest customer, GameStop, represented approximately 12%, 12% and 11% of our 2016, Successor 2015 Period and Predecessor 2015 Period net sales, respectively. Additionally, Underground Toys Limited represented approximately 8%, 18% and 10% of our 2016, Successor 2015 Period and Predecessor 2015 Period net sales, respectively, and Hot Topic represented approximately 9%, 8% and 11% of our 2016, Successor 2015 Period and Predecessor 2015 Period net sales, respectively.

We depend on retailers to provide adequate and attractive space for our products and point of purchase displays in their stores. We further depend on our retail customers to employ, educate and motivate their sales personnel to effectively sell our products. If our retail customers do not adequately display our products or choose to promote competitors’ products over ours, our sales could decrease and our business could be harmed. Similarly, we depend on our distributors to reach retailers in certain market segments in the United States and to reach international retailers in countries where we do not have a direct presence. Our distributors generally offer products from several different companies, including our competitors. Accordingly, we are at risk that these distributors may give higher priority to selling other companies’ products. If we were to lose the services of a distributor, we might need to find another distributor in that area, and there can be no assurance of our ability to do so in a timely manner or on favorable terms.

 

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In addition, our business could be adversely affected if any of our retail customers or distributors were to reduce purchases of our products. Our retail customers and distributors generally build inventories in anticipation of future sales, and will decrease the size of their future product orders if sales do not occur as rapidly as they anticipate. Our customers make no long-term commitments to us regarding purchase volumes and can therefore freely reduce their purchases of our products. Any reduction in purchases of our products by our retail customers and distributors, or the loss of any key retailer or distributor, could adversely affect our net sales, operating results and financial condition.

Furthermore, as discussed in this prospectus, consumer preferences have shifted, and may continue to shift in the future, to sales channels other than traditional retail, including e-commerce, in which we have more limited experience, presence and development. Consumer demand for our products may be less in these channels than in traditional retail channels. In addition, our entry into new product categories and geographies has exposed, and may continue to expose, us to new sales channels in which we have less expertise. If we are not successful in developing our e-commerce channel and other new sales channels, our net sales and profitability may be adversely affected.

Our industry is highly competitive and the barriers to entry are low. If we are unable to compete effectively with existing or new competitors, our sales, market share and profitability could decline.

Our industry is, and will continue to be, highly competitive. We compete with toy companies in many of our product categories, some of which have substantially more resources than us, stronger name recognition, longer operating histories and greater economies of scale. We also compete with numerous smaller domestic and foreign collectible product designers and manufacturers. Across our business, we face competitors who are constantly monitoring and attempting to anticipate consumer tastes and trends, seeking ideas which will appeal to consumers and introducing new products that compete with our products for consumer acceptance and purchase.

In addition to existing competitors, the barriers to entry for new participants in our industry are low, and the increasing use of digital technology, social media and the internet to spark consumer interest has further increased the ability for new participants to enter our markets, and has broadened the array of companies we compete with. New participants can gain access to retail customers and consumers and become a significant source of competition for our products in a very short period of time. Additionally, since we do not have exclusive rights to any of the properties we license or the related entertainment brands, our competitors, including those with more resources and greater economies of scale, can obtain licenses to design and sell products based on the same properties that we license, potentially on more favorable terms. Any of these competitors may be able to bring new products to market more quickly, respond more rapidly than us to changes in consumer preferences and produce products of higher quality or that can be sold at more accessible price points. To the extent our competitors’ products achieve greater market acceptance than our products, our business, financial condition and results of operations will be adversely affected.

In addition, certain of our licensors have reserved the rights to manufacture, distribute and sell identical or similar products to those we design and sell under our license agreements. These products could directly compete with our products and could be sold at lower prices than those at which our products are sold, resulting in higher margins for our customers compared to our products, potentially lessening our customers’ demand for our products and adversely affecting our sales and profitability.

Furthermore, competition for access to the properties we license is intense, and we must vigorously compete to obtain licenses to the intellectual property we need to produce our products. This competition could lessen our ability to secure, maintain, and renew our existing licenses, or require us to pay licensors higher royalties and higher minimum guaranteed payments in order to

 

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obtain new licenses or retain our existing licenses. To the extent we are unable to license properties on commercially reasonable terms, or on terms at least as favorable as our competitors, our competitive position and demand for our products will suffer. Because our ability to compete for licensed properties is based largely on our ability to increase fan engagement and generate royalty revenues for our licensors, any reduction in the demand for and sales of our products will further inhibit our ability to obtain licenses on commercially reasonable terms or at all. As a result, any such reduction in the demand for and sales of our products could have a material adverse effect on our business, financial condition and results of operations.

We also increasingly compete with toy companies and other product designers for shelf space at specialty, mass-market and other retailers. Our retail customers will allocate shelf space and promotional resources based on the margins of our products for our customers, as well as their sales volumes. If toy companies or other competitors produce higher margin or more popular merchandise than our products, our retail customers may reduce purchases of our products and, in turn, devote less shelf space and resources to the sale of our products, which could have a material adverse effect on our sales and profitability.

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, our financial performance may suffer.

We have experienced rapid growth over the last several years, which has placed a strain on our managerial, operational, product design and development, sales and marketing, administrative and financial infrastructure. For example, we increased our total number of full-time employees from 66 as of December 31, 2013 to 465 as of June 30, 2017. As a result of our acquisition of certain of the assets of Underground Toys in January 2017, which we refer to as the Underground Toys Acquisition, we now have distribution operations in the United Kingdom, our first distribution center outside of our headquarters in Everett, Washington. Our success will depend in part upon our ability to manage our growth effectively. To do so, we must continue to increase the productivity of our existing employees and to hire, train and manage new employees as needed, which we may not be able to do successfully or without compromising our corporate culture. See “—Our success is critically dependent on the efforts and dedication of our officers and other employees, and the loss of any one or more key employees, or our inability to attract and retain qualified personnel and maintain our corporate culture, could adversely affect our business.” To manage domestic and international growth of our operations and personnel, we will need to continue to improve our product development, supply chain, financial and management controls and our reporting processes and procedures, and implement more extensive and integrated financial and business information systems. These additional investments will increase our operating costs, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. Moreover, if we fail to scale our operations or manage our growth successfully, our business, financial condition and operating results could be adversely affected.

Our gross margin may not be sustainable and may fluctuate over time.

Our gross margin has historically fluctuated, primarily as a result of changes in product mix, changes in our costs, price competition and acquisitions. For the six months ended June 30, 2017 and 2016, our gross margins (exclusive of depreciation and amortization) were 36.2% and 28.6%, respectively, and for the year ended December 31, 2016, the Successor 2015 Period and the Predecessor 2015 Period, our gross margins (exclusive of depreciation and amortization) were 34.3%, 21.4% and 39.5%, respectively. Our current gross margin may not be sustainable and our gross margin may decrease over time. A decrease in gross margin can be the result of numerous factors, including, but not limited to:

 

    changes in customer, geographic, or product mix;

 

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    introduction of new products, including our expansion into additional product categories;

 

    increases in the royalty rates under our license agreements;

 

    inability to meet minimum guaranteed royalties;

 

    increases in, or our inability to reduce, our costs;

 

    entry into new markets or growth in lower margin markets;

 

    increases in raw materials, labor or other manufacturing- and inventory-related costs;

 

    increases in transportation costs, including the cost of fuel;

 

    increased price competition;

 

    changes in the dynamics of our sales channels, including those affecting the retail industry and the financial health of our customers;

 

    increases in sales discounts and allowances provided to our customers;

 

    acquisitions of companies with a lower gross margin than ours; and

 

    overall execution of our business strategy and operating plan.

If any of these factors, or other factors unknown to us at this time, occur, then our gross margin could be adversely affected, which could have a material adverse effect on our business, financial condition and results of operations.

Our business is largely dependent on content development and creation by third parties.

We spend considerable resources in designing and developing products in conjunction with planned movie, TV show, video game, music and other content releases by various third-party content providers. The timing of the development and release, and the ultimate consumer interest in and success of, such content depends on the efforts of these third parties, as well as conditions in the media and entertainment industry generally. We do not control when or if any particular project will be greenlit, developed or released, and the creators of such projects may change their plans with respect to release dates or cancel development altogether. This can make it difficult for us to successfully develop and market products in conjunction with a given content release, given the lead times involved in product development and successful marketing efforts. Additionally, unforeseen factors in the media and entertainment industry, including labor strikes and unforeseen developments with talent, including accusations of a star’s wrongdoing, may also delay or cancel the release of such projects. Any such delay or cancellation may decrease the number of products we sell and harm our business.

We may not realize the full benefit of our licenses if the properties we license have less market appeal than expected or if sales from the products that use those properties are not sufficient to satisfy the minimum guaranteed royalties.

We seek to fulfill consumer preferences and interests by designing and selling products based on properties owned by third parties and licensed to us. The popularity of the properties we license can significantly affect our sales and profitability. If we produce products based on a particular content release, the success of the movie, TV show or video game has a critical impact on the level of consumer interest in the associated products we are offering. Although we license a wide variety of properties, sales of products tied to major movie franchises have been significant contributors to our business. In addition, the theatrical duration of movie releases has decreased over time and we expect this trend to continue. This may make it increasingly difficult for us to sell products based on such properties or lead our customers to reduce demand for our products to minimize inventory risk. If the

 

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performance of one or more of such movie franchises failed to meet expectations or if there was a shift in consumer tastes away from such franchises generally, our results of operations could be adversely affected. In addition, competition in our industry for access to licensed properties can lessen our ability to secure, maintain, and renew our existing licenses on commercially reasonable terms, if at all, and to attract and retain the talented employees necessary to design, develop and market successful products based on these properties.

Our license agreements usually also require us to pay minimum royalty guarantees, which may in some cases be greater than what we are ultimately able to recoup from actual sales. When our licensing agreements require minimum royalty guarantees, we accrue a royalty liability based on the contractually required percentage, as revenues are earned. In the case that a minimum royalty guarantee is not expected to be met through sales, we will accrue up to the minimum amount required to be paid. For the six months ended June 30, 2017 and 2016 and the years ended December 31, 2016 and 2015, we recorded reserves of $0.2 million, $0.2 million, $0.3 million and $0.1 million, respectively, related to prepaid royalties we estimated would not be met through sales. Acquiring or renewing licenses may require the payment of minimum guaranteed royalties that we consider to be too high to be profitable, which may result in losing licenses that we currently hold when they become available for renewal, or missing business opportunities for new licenses. Additionally, we have no guarantee that any particular property we license will translate into a successful product. Products tied to a particular content release may be developed and released before demand for the underlying content is known. The underperformance of any such product may result in reduced sales and operating profit for us.

Our success depends, in part, on our ability to successfully manage our inventories.

We must maintain sufficient inventory levels to operate our business successfully, but we must also avoid accumulating excess inventory, which increases working capital needs and lowers gross margin. We obtain substantially all of our inventory from third-party manufacturers located outside the United States and must typically order products well in advance of the time these products will be offered for sale to our customers. As a result, it may be difficult to respond to changes in consumer preferences and market conditions, which for pop culture products can change rapidly. If we do not accurately anticipate the popularity of certain products, then we may not have sufficient inventory to meet demand. Alternatively, if demand or future sales do not reach forecasted levels, we could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard. If we are not successful in managing our inventory, our business, financial condition and results of operations could be adversely affected.

We may also be negatively affected by changes in retailers’ inventory policies and practices. As a result of the desire of retailers to more closely manage inventory levels, there is a growing trend to make purchases on a “just-in-time” basis. This requires us to more closely anticipate demand, and could require us to carry additional inventory. Policies and practices of individual retailers may adversely affect us as well, including those relating to access to and time on shelf space, price demands, payment terms and favoring the products of our competitors. Our retail customers make no binding long-term commitments to us regarding purchase volumes and make all purchases by delivering purchase orders. Any retailer can therefore freely reduce its overall purchase of our products, and reduce the number and variety of our products that it carries and the shelf space allotted for our products. If demand or future sales do not reach forecasted levels, we could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard. If we are not successful in managing our inventory, our business, financial condition and results of operations could be adversely affected.

 

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An inability to develop and introduce products in a timely and cost-effective manner may damage our business.

Our sales and profitability depend on our ability to bring products to market to meet customer demands and before consumers begin to lose interest in a given property. There is no guarantee that we will be able to manufacture, source and ship new or continuing products in a timely manner and on a cost-effective basis to meet constantly changing consumer demands. This risk is heightened by our customers’ increasingly compressed shipping schedules and the seasonality of our business. Furthermore, our license agreements typically require us to obtain the licensor’s approval of the products we develop under a particular license prior to making any sales, which can have the effect of delaying our product releases. Additionally, for products based on properties in our movie, TV show and video game categories, this risk may also be exacerbated by our need to introduce new products on a timeframe that corresponds with a particular content release. These time constraints may lead our customers to reduce their demand for these products in order to minimize their inventory risk. Moreover, unforeseen delays or difficulties in the development process, significant increases in the planned cost of development, manufacturing delays or changes in anticipated consumer demand for our products and new brands may cause the introduction date for products to be later than anticipated, may reduce or eliminate the profitability of such products or, in some situations, may cause a product or new brand introduction to be discontinued.

If we are unable to obtain, maintain and protect our intellectual property rights, in particular trademarks and copyrights, or if our licensors are unable to maintain and protect their intellectual property rights that we use in connection with our products, our ability to compete could be negatively impacted.

Our intellectual property is a valuable asset of our business. The market for our products depends to a significant extent upon the value associated with our product design, our proprietary brands and the properties we license. Although certain of our intellectual property is registered in the United States and in several of the foreign countries in which we operate, there can be no assurances with respect to the rights associated with such intellectual property in those countries, including our ability to register, use, maintain or defend key trademarks and copyrights. We rely on a combination of trademark, trade dress, copyright and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our intellectual property or other proprietary rights. However, these laws, procedures and restrictions provide only limited and uncertain protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated, including by counterfeiters and parallel importers. In addition, our intellectual property portfolio in many foreign countries is less extensive than our portfolio in the United States, and the laws of foreign countries, including many emerging markets in which our products are produced or sold, may not protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our trademarks and copyrights may be substantial.

In addition, we may fail to apply for, or be unable to obtain, protection for certain aspects of the intellectual property used in or beneficial to our business. Further, we cannot provide assurance that our applications for trademarks, copyrights and other intellectual property rights will be granted, or, if granted, will provide meaningful protection. In addition, third parties have in the past and could in the future bring infringement, invalidity or similar claims with respect to any of our current trademarks and copyrights, or any trademarks or copyrights that we may seek to obtain in the future. Any such claims, whether or not successful, could be extremely costly to defend, divert management’s attention and resources, damage our reputation and brands, and substantially harm our business and results of operations.

In order to protect or enforce our intellectual property and other proprietary rights, or to determine the enforceability, scope or validity of the intellectual or proprietary rights of others, we may initiate

 

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litigation or other proceedings against third parties. Any lawsuits or proceedings that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation and other proceedings also put our intellectual property at risk of being invalidated, or if not invalidated, may result in the scope of our intellectual property rights being narrowed. In addition, our efforts to try to protect and defend our trademarks and copyrights may be ineffective. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits or other proceedings that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.

In addition, most of our products bear the trademarks and other intellectual property rights of our licensors, and the value of our products is affected by the value of those rights. Our licensors’ ability to maintain and protect their trademarks and other intellectual property rights is subject to risks similar to those described above with respect to our intellectual property. We do not control the protection of the trademarks and other intellectual property rights of our licensors and cannot ensure that our licensors will be able to secure or protect their trademarks and other intellectual property rights. The loss of any of our significant owned or licensed trademarks, copyrights or other intellectual property could have a material adverse effect on our business, financial condition and results of operations. In addition, our licensors may engage in activities or otherwise be subject to negative publicity that could harm their reputation and impair the value of the intellectual property rights we license from them, which could reduce consumer demand for our products and adversely affect our business financial condition and results of operations.

Our success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the trademarks, copyrights and proprietary rights of other parties.

Our commercial success depends at least in part on our ability to operate without infringing, misappropriating or otherwise violating the trademarks, copyrights and other proprietary rights of others. However, we cannot be certain that the conduct of our business does not and will not infringe, misappropriate or otherwise violate such rights. Many companies have employed intellectual property litigation as a way to gain a competitive advantage, and to the extent we gain greater visibility and market exposure as a public company, we may also face a greater risk of being the subject of such litigation. For these and other reasons, third parties may allege that our products or activities, including products we make under license, infringe, misappropriate or otherwise violate their trademark, copyright or other proprietary rights. While we typically receive intellectual property infringement indemnities from our licensors, the indemnities are often limited to third-party copyright infringement claims to the extent arising from our use of the licensed material. Defending against allegations and litigation could be expensive, take significant time, divert management’s attention from other business concerns, and delay getting our products to market. In addition, if we are found to be infringing, misappropriating or otherwise violating third-party trademark, copyright or other proprietary rights, we may need to obtain a license, which may not be available on commercially reasonable terms or at all, or may need to redesign or rebrand our products, which may not be possible. We may also be required to pay substantial damages or be subject to a court order prohibiting us and our customers from selling certain products or engaging in certain activities. Any claims of violating others’ intellectual property, even those without merit, could therefore have a material adverse effect on our business, financial condition and results of operations.

 

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Our success is critically dependent on the efforts and dedication of our officers and other employees, and the loss of one or more key employees, or our inability to attract and retain qualified personnel and maintain our corporate culture, could adversely affect our business.

Our officers and employees are at the heart of all of our efforts. It is their skill, creativity and hard work that drive our success. In particular, our success depends to a significant extent on the continued service and performance of our senior management team, including our Chief Executive Officer, Brian Mariotti. We are dependent on his talents and believe he is integral to our relationships with our licensors and certain of our key retail customers. The loss of any member of our senior management team, or of any other key employees, could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, financial condition and results of operations. We do not currently maintain key man life insurance policies on any member of our senior management team or on our other key employees.

In addition, competition for qualified personnel is intense. We compete with many other potential employers in recruiting, hiring and retaining our senior management team and our many other skilled officers and other employees around the world. Our headquarters is located near Seattle and competition in the Seattle area for qualified personnel, particularly those with technology-related skills and experience, is intense due to the increasing number of technology and e-commerce companies with a large or growing presence in Seattle, some of whom have greater resources than us and may be located closer to the city than we are.

Furthermore, as we continue to grow our business and hire new employees, it may become increasingly challenging to hire people who will maintain our corporate culture. We believe our corporate culture, which fosters speed, teamwork and creativity, is one of our key competitive strengths. As we continue to grow, we may be unable to identify, hire or retain enough people who will maintain our corporate culture, including those in management and other key positions. Our corporate culture could also be adversely affected by the increasingly global distribution of our employees, as well as their increasingly diverse skill sets. If we are unable to maintain the strength of our corporate culture, our competitive ability and our business may be adversely affected.

Our operating results may fluctuate from quarter to quarter and year to year due to the seasonality of our business, as well as due to the timing of new product releases.

The businesses of our retail customers is highly seasonal, with a majority of retail sales occurring during the period from October through December in anticipation of the holiday season. As a consequence, we have experienced moderate seasonality in our business. Approximately 58.7% and 64.6%, of our 2016 and 2015 net sales, respectively, were made in the third and fourth quarters, primarily in the period from August through November, as our customers build up their inventories in anticipation of the holiday season.

This seasonal pattern requires significant use of working capital, mainly to manufacture inventory during the portion of the year prior to the holiday season, and requires accurate forecasting of demand for products during the holiday season in order to avoid losing potential sales of popular products or producing excess inventory of products that are less popular with consumers. In addition, as a result of the seasonal nature of our business, we would be significantly and adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events such as a terrorist attack or economic shock that harm the retail environment or consumer buying patterns during our key selling season, or by events such as strikes or port delays that interfere with the shipment of goods during the critical months leading up to the holiday shopping season.

In addition, our results of operations may fluctuate significantly from quarter to quarter or year to year depending on the timing of new product releases and related content releases. Sales of a certain

 

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product or group of products tied to a particular content release can dramatically increase our net sales in any given quarter or year. For example, in 2016, we introduced products based on the video game property “Five Nights at Freddy’s,” sales of which accounted for approximately 15% of 2016 net sales. The timing and mix of products we sell in any given year will depend on various factors, including the timing and popularity of new releases by third-party content providers and our ability to license properties based on these releases.

Our results of operations may also fluctuate as a result of factors such as the delivery schedules set by our customers and holiday shut down schedules set by our third-party manufacturers. Additionally, the rapid growth we have experienced in recent years may have masked the full effects of seasonal factors on our business to date, and as such, these factors may have a greater effect on our results of operations in future periods.

Our use of third-party manufacturers to produce our products presents risks to our business.

We use third-party manufacturers to manufacture all of our products, and have historically concentrated production with a small number of manufacturers and factories. As a result, the loss or unavailability of one of our manufacturers or one of the factories in which our products are produced, even on a temporary basis, could have a negative impact on our business, financial condition and results of operations. This risk is exacerbated by the fact that we do not have long-term contracts with our manufacturers. While we believe our external sources of manufacturing could be shifted, if necessary, to alternative sources of supply, we would require a significant period of time to make such a shift. Because we believe our products represent a significant percentage of the total capacity of each factory in which they are produced, such a shift may require us to establish relationships with new manufacturers, which we may not be able to do on a timely basis, on similar terms, or at all. We may also be required to seek out additional manufacturers in response to increased demand for our products, as our current manufacturers may not have the capacity to increase production. If we were prevented from or delayed in obtaining a material portion of the products produced by our manufacturers, or if we were required to shift manufacturers (assuming we would be able to do so), our sales and profitability could be significantly reduced.

In addition, while we require that our products supplied by third-party manufacturers be produced in compliance with all applicable laws and regulations, and we have the right to monitor compliance by our third-party manufacturers with our manufacturing requirements and to oversee the quality control process at our manufacturers’ factories, there is always a risk that one or more of our third-party manufacturers will not comply with our requirements, and that we will not immediately discover such non-compliance. For example, the Consumer Product Safety Improvement Act of 2008, or the CPSIA, limits the amounts of lead and phthalates that are permissible in certain products and requires that our products be tested to ensure that they do not contain these substances in amounts that exceed permissible levels. In the past, products manufactured by certain of our third-party manufacturers have tested positive for phthalates. Though the amount was not in excess of the amount permissible under the CPSIA, we cannot guarantee that products made by our third-party manufacturers will not in the future contain phthalates in excess of permissible amounts, or will not otherwise violate the CPSIA, other consumer or product safety requirements, or labor or other applicable requirements. Any failure of our third-party manufacturers to comply with such requirements in manufacturing products for us could result in damage to our reputation, harm our brand image and sales of our products and potentially create liability for us.

Monitoring compliance by independent manufacturers is complicated by the fact that expectations of ethical business practices continually evolve, may be substantially more demanding than applicable legal requirements and are driven in part by legal developments and by diverse groups active in publicizing and organizing public responses to perceived ethical shortcomings. Accordingly, we cannot

 

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predict how such expectations might develop in the future and cannot be certain that our manufacturing requirements, even if complied with, would satisfy all parties who are active in monitoring and publicizing perceived shortcomings in labor and other business practices worldwide.

Additionally, the third-party manufacturers that produce most of our products are located in China, Vietnam and Mexico. As a result, we are subject to various risks resulting from our international operations. See “—Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations.”

Our operations, including our corporate headquarters, primary distribution facilities and third-party manufacturers, are concentrated in certain geographic regions, which makes us susceptible to adverse conditions in those regions.

Our corporate headquarters and primary distribution facilities are located in Everett, Washington. We also have an additional warehouse facility and offices located in Essex, England. In addition, the factories that produce most of our products are located in China, Vietnam and Mexico. As a result, our business may be more susceptible to adverse conditions in these regions than the operations of more geographically diverse competitors. Such conditions could include, among others, adverse economic and labor conditions, as well as demographic trends. Furthermore, Everett is the location from which most of the products we sell are received, stored and shipped to our customers. We depend heavily on ocean container delivery to receive products from our third-party manufacturers located in Asia and contracted third-party delivery service providers to deliver our products to our Everett distribution facilities. Any disruption to or failures in these delivery services, whether as a result of extreme or severe weather conditions, natural disasters, labor unrest or otherwise, affecting western Washington in particular or the West Coast in general, could significantly disrupt our operations, damage or destroy our equipment and inventory and cause us to incur additional expenses, any of which could have a material adverse effect on our business, financial condition and results of operations. For example, in the fall of 2014, longshoreman work stoppages created a significant backlog of cargo containers at ports. We experienced delays in the shipment of our products as a result of this backlog and were unable to meet our planned inventory allocations for a limited period of time. Although we possess insurance for damage to our property and the disruption of our business, this insurance, and in particular earthquake insurance, which is subject to various limitations and requires large deductibles or co-payments, may not be sufficient to cover all of our potential losses, and may be cancelled by us in the future or otherwise cease to be available to us on reasonable terms or at all. Similarly, natural disasters and other adverse events or conditions affecting east or southeast Asia, where most of our products are produced, could halt or disrupt the production of our products, impair the movement of finished products out of those regions, damage or destroy the molds and tooling necessary to make our products and otherwise cause us to incur additional costs and expenses, any of which could also have a material adverse effect on our business, financial condition and results of operations.

Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations.

We operate facilities and sell products in numerous countries outside the United States. Sales to our international customers comprised approximately 28.6% and 19.3% of our net sales for the six months ended June 30, 2017 and 2016, respectively, and approximately 18.8% and 23.8% of our 2016 and 2015 net sales, respectively. We expect sales to our international customers to account for an increasing portion of our net sales in future fiscal years, including as a result of the Underground Toys Acquisition and the formation of our subsidiary Funko UK, Ltd., through which we now sell directly to certain of our customers in Europe, the Middle East and Africa. In fact, over time, we expect our international sales and operations to continue to grow both in dollars and as a percentage of our overall business as a result of a key business strategy to expand our presence in emerging and

 

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underserved international markets. Additionally, as discussed above, we use third-party manufacturers located in China, Vietnam and Mexico to produce most of our products. These international sales and manufacturing operations, including operations in emerging markets, are subject to risks that may significantly harm our sales, increase our costs or otherwise damage our business, including:

 

    currency conversion risks and currency fluctuations;

 

    limitations on the repatriation of earnings;

 

    potential challenges to our transfer pricing determinations and other aspects of our cross border transactions, which can materially increase our taxes and other costs of doing business;

 

    political instability, civil unrest and economic instability;

 

    greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;

 

    complications in complying with different laws and regulations in varying jurisdictions, including the U.S. Foreign Corrupt Practices Act, or the FCPA, the U.K. Bribery Act of 2010, similar anti-bribery and anti-corruption laws and local and international environmental, health and safety laws, and in dealing with changes in governmental policies and the evolution of laws and regulations and related enforcement;

 

    difficulties understanding the retail climate, consumer trends, local customs and competitive conditions in foreign markets which may be quite different from the United States;

 

    natural disasters and the greater difficulty and cost in recovering therefrom;

 

    transportation delays and interruptions;

 

    difficulties in moving materials and products from one country to another, including port congestion, strikes and other transportation delays and interruptions;

 

    increased investment and operational complexity to make our products compatible with systems in various countries and compliant with local laws;

 

    changes in international labor costs and other costs of doing business internationally; and

 

    the imposition of and changes in tariffs, quotas, border adjustment taxes (such as are currently being discussed in the United States) or other protectionist measures by any major country or market in which we operate, which could make it significantly more expensive and difficult to import products into that country or market, raise the cost of such products, decrease our sales of such products or decrease our profitability.

Because of the importance of international sales, sourcing and manufacturing to our business, our financial condition and results of operations could be significantly harmed if any of the risks described above were to occur or if we are otherwise unsuccessful in managing our increasingly global business.

The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

We make sales to our European customers primarily through our subsidiary Funko UK, Ltd. In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum and, in March 2017, the government of the United Kingdom formally initiated the withdrawal process. The terms of any withdrawal are subject to a negotiation period that could last at least two years after the withdrawal process was initiated. These events have created significant uncertainty about the future relationship between the United Kingdom and the European Union, and have given rise to calls for certain regions within the United Kingdom to preserve their place in the European Union by separating from the United Kingdom, as well as for the governments of other European Union member states to consider withdrawal.

 

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These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility. Lack of clarity about future United Kingdom laws and regulations as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal, including financial laws and regulations, tax and free trade agreements, intellectual property rights, privacy and data protection, environmental, health and safety laws and regulations and employment laws, could increase costs and depress economic activity. If the United Kingdom and the European Union are unable to negotiate acceptable withdrawal terms or if other European Union member states pursue withdrawal, barrier-free access between the United Kingdom and other European Union member states or among the European economic area overall could be diminished or eliminated. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.

Changes in U.S. tax law may have an adverse effect on our business, financial condition and results of operations.

The Trump administration and members of the U.S. Congress have announced their intention to pursue reform of the U.S. tax system. Proposals under discussion include changes to the U.S. corporate tax system that would reduce U.S. corporate tax rates, change how U.S. multinational corporations are taxed on international earnings and eliminate in whole or in part the deduction for net interest expense. Many aspects of the proposals being discussed are unclear or undeveloped. We are unable to predict which, if any, tax reform proposals will be enacted into law, and what effects any enacted legislation might have on our liability for U.S. corporate tax. However, these potential changes could have an adverse effect on our business, financial condition, and results of operations.

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.

We are subject to income taxes in the United States, and our tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

    changes in the valuation of our deferred tax assets and liabilities;

 

    expected timing and amount of the release of any tax valuation allowances;

 

    expiration of, or detrimental changes in, research and development tax credit laws;

 

    tax effects of stock-based compensation;

 

    costs related to intercompany restructurings; or

 

    changes in tax laws, regulations or interpretations thereof.

In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal and state authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

Changes in foreign currency exchange rates can significantly impact our reported financial performance.

Our increasingly global operations mean we produce and buy products, and sell products, in many different markets with many different currencies. As a result, if the exchange rate between the

 

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U.S. dollar and a local currency for an international market in which we have significant sales or operations changes, our financial results as reported in U.S. dollars may be meaningfully impacted even if our business in the local currency is not significantly affected. Similarly, our expenses can be significantly impacted, in U.S. dollar terms, by exchange rates, meaning the profitability of our business in U.S. dollar terms can be negatively impacted by exchange rate movements which we do not control. In recent years, certain key currencies, such as the euro and the British pound sterling, depreciated significantly compared to the U.S. dollar. Depreciation in key currencies during 2017 and beyond may have a significant negative impact on our net sales and earnings as they are reported in U.S. dollars.

Global and regional economic downturns that negatively impact the retail and credit markets, or that otherwise damage the financial health of our retail customers and consumers, can harm our business and financial performance.

We design, manufacture and market a wide variety of consumer products worldwide through sales to our retail customers and directly to consumers. Our financial performance is impacted by the level of discretionary consumer spending in the markets in which we operate. Recessions, credit crises and other economic downturns, or disruptions in credit markets, in the United States and in other markets in which our products are sold can result in lower levels of economic activity, lower employment levels, less consumer disposable income, and lower consumer confidence. The retail industry is subject to volatility, especially during uncertain economic conditions. A downturn in the retail industry in particular may disproportionately affect us because a substantial majority of our net sales are to retail customers. Significant increases in the costs of other products which are required by consumers, such as gasoline, home heating fuels, or groceries, may reduce household spending on our products. Such cost increases and weakened economic conditions may result from any number of factors, including terrorist attacks, wars and other conflicts, natural disasters, increases in critical commodity prices or labor costs, or the prospect of such events. Such a weakened economic and business climate, as well as consumer uncertainty created by such a climate, could harm our sales and profitability. Similarly, reductions in the value of key assets held by consumers, such as their homes or stock market investments, can lower consumer confidence and consumer spending power. Any of these factors can reduce the amount which consumers spend on the purchase of our products. This in turn can reduce our sales and harm our financial performance and profitability.

In addition to experiencing potentially lower sales of our products during times of economic difficulty, in an effort to maintain sales during such times, we may need to reduce the price of our products, increase our promotional spending or sales allowances, or take other steps to encourage retailer and consumer purchases of our products. Those steps may lower our net sales or increase our costs, thereby decreasing our operating margins and lowering our profitability.

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

We rely significantly on vendor and outsourcing relationships with third parties for services and systems including manufacturing, transportation, logistics and information technology. Any shortcoming of one of our vendors or outsourcers, particularly one affecting the quality of these services or systems, may be attributed by customers to us, thus damaging our reputation and brand value, and potentially affecting our results of operations. In addition, problems with transitioning these services and systems to, or operating failures with, these vendors and outsourcers could cause delays in product sales, reduce the efficiency of our operations and require significant capital investments to remediate.

 

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We are subject to various government regulations and may be subject to additional regulations in the future, violation of which could subject us to sanctions or otherwise harm our business.

As a company that designs and sells consumer products, we are subject to significant government regulation, including, in the United States, under the Consumer Product Safety Act, the Federal Hazardous Substances Act, the CPSIA and the Flammable Fabrics Act, as well as under product safety and consumer protection statutes in our international markets. There can be no assurance that we will be in compliance, and failure to comply with these acts could result in sanctions which could have a negative impact on our business, financial condition and results of operations. This risk is exacerbated by our reliance on third parties to manufacture our products. See “—Our use of third-party manufacturers to produce our products presents risks to our business.”

Governments and regulatory agencies in the markets in which we manufacture and sell products may enact additional regulations relating to product safety and consumer protection in the future and may also increase the penalties for failing to comply with such regulations. In addition, one or more of our customers might require changes in our products, such as the non-use of certain materials, in the future. Complying with any such additional regulations or requirements could impose increased costs on our business. Similarly, increased penalties for non-compliance could subject us to greater expense in the event any of our products were found to not comply with such regulations. Such increased costs or penalties could harm our business.

As discussed above, our international operations subject us to a host of other governmental regulations throughout the world, including antitrust, customs and tax requirements, anti-boycott regulations, environmental regulations and the FCPA. Complying with these regulations imposes costs on us which can reduce our profitability, and our failure to successfully comply with any such legal requirements could subject us to monetary liabilities and other sanctions that could further harm our business and financial condition. See “—Our substantial sales and manufacturing operations outside the United States subject us to risks associated with international operations.”

We could be subject to future product liability suits or product recalls which could have a significant adverse effect on our financial condition and results of operations.

As a company that designs and sells consumer products, we may be subject to product liability suits or involuntary product recalls, or may choose to voluntarily conduct a product recall. While costs associated with product liability claims and product recalls have generally not been material to our business, the costs associated with future product liability claims or product recalls in any given fiscal year, individually or in the aggregate, could be significant. In addition, any product recall, regardless of the direct costs of the recall, could harm consumer perceptions of our products, subject us to additional government scrutiny, divert development and management resources, adversely affect our business operations and otherwise put us at a competitive disadvantage compared to other companies in our industry, any of which could have a significant adverse effect on our financial condition and results of operations.

Failure to comply with anti-corruption and anti-bribery laws could result in fines, criminal penalties and materially adversely affect our business, financial condition and results of operations.

A significant risk resulting from our global operations is compliance with a wide variety of U.S. federal and state and non-U.S. laws, regulations and policies, including laws related to anti-corruption, anti-bribery and laundering. The FCPA, the U.K. Bribery Act of 2010 and similar anti-corruption and anti-bribery laws in other jurisdictions generally prohibit companies, their officers, directors, employees and third-party intermediaries, business partners, and agents from making improper payments or other

 

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improper things of value to government officials or other persons. There has been an increase in anti-bribery and anti-corruption law enforcement activity in recent years, with more frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. We operate in parts of the world that are considered high-risk from an anti-bribery and anti-corruption perspective, and strict compliance with anti-bribery and anti-corruption laws may conflict with local customs and practices. We cannot assure you that our internal controls, policies and procedures will protect us from improper conduct by our officers, directors, employees, third-party intermediaries, business partners or agents. To the extent that we learn that any of these parties do not adhere to our internal control policies, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that any such party has or may have violated such laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, and detecting, investigating and resolving actual or alleged violations can be expensive and require a significant diversion of time, resources and attention from senior management. Any violation of U.S. federal and state and non-U.S. anti-bribery and anti-corruption laws, regulations and policies could result in substantial fines, sanctions, civil or criminal penalties, and curtailment of operations in the U.S. or other applicable jurisdictions. In addition, actual or alleged violations could damage our reputation and ability to do business. Any of the foregoing could materially adversely affect our business, financial condition and results of operations.

We are subject to governmental economic sanctions requirements and export and import controls that could impair our ability to compete in international markets or subject us to liability if we are not in compliance with applicable laws.

As a U.S. company, we are subject to U.S. export control and economic sanctions laws and regulations, and we are required to export our products in compliance with those laws and regulations, including the U.S. Export Administration Regulations and economic and trade sanctions programs administered by the Treasury Department’s Office of Foreign Assets Control. U.S. economic sanctions and export control laws and regulations prohibit the shipment of specified products and services to countries, governments and persons that are the subject of U.S. sanctions. While we take precautions against doing any business, directly or indirectly, in or with countries, governments and persons subject to U.S. sanctions, such measures may be circumvented. There can be no assurance that we will be in compliance with U.S. export control or economic sanctions laws and regulations in the future. Any such violation could result in criminal or civil fines, penalties or other sanctions and repercussions, including reputational harm that could materially adversely affect our business

We may not realize the anticipated benefits of acquisitions or investments in joint ventures, or those benefits may be delayed or reduced in their realization.

Acquisitions have been a component of our growth and the development of our business, and are likely to continue in the future. Acquisitions can broaden and diversify our brand holdings and product offerings, expand our distribution capabilities and allow us to build additional capabilities and competencies. For example, in the case of the Underground Toys Acquisition, we looked to strengthen our ability to sell our products directly to international retailers, primarily those located in Europe, and reduce our reliance on third-party distributors in Europe and certain other international jurisdictions. However, we cannot be certain that the products and offerings of companies we may acquire, or acquire an interest in, will achieve or maintain popularity with consumers in the future or that any such acquired companies or investments will allow us to more effectively distribute our products, market our products, develop our competencies or to grow our business.

In some cases, we expect that the integration of the companies that we may acquire into our operations will create production, distribution, marketing and other operating synergies which will

 

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produce greater sales growth and profitability and, where applicable, cost savings, operating efficiencies and other advantages. However, we cannot be certain that these synergies, efficiencies and cost savings will be realized. Even if achieved, these benefits may be delayed or reduced in their realization. In other cases, we may acquire or invest in companies that we believe have strong and creative management, in which case we may plan to operate them more autonomously rather than fully integrating them into our operations. We cannot be certain that the key talented individuals at these companies would continue to work for us after the acquisition or that they would develop popular and profitable products, in the future. There is no guarantee that any acquisition or investment we may make will be successful or beneficial or that we will be able to manage the integration process successfully, and acquisitions can consume significant amounts of management attention and other resources, which may negatively impact other aspects of our business.

Our e-commerce business is subject to numerous risks that could have an adverse effect on our business and results of operations.

Although sales through our websites have constituted a small portion of our net sales historically, we expect to continue to grow our e-commerce business in the future. Though sales through our websites generally have higher profit margins and provide us useful insight on the sales impact of certain of our marketing campaigns, further development of our e-commerce business also subjects us to a number of risks. Our online sales may negatively impact our relationships with our retail customers and distributors if they perceive that we are competing with them. In addition, online commerce is subject to increasing regulation by states, the federal government and various foreign jurisdictions. Compliance with these laws will increase our costs of doing business, and our failure to comply with these laws could also subject us to potential fines, claims for damages and other remedies, any of which would have an adverse effect on our business, financial condition and results of operations.

Additionally, some jurisdictions have implemented, or may implement, laws that require remote sellers of goods and services to collect and remit taxes on sales to customers located within the jurisdiction. In particular, the Streamlined Sales Tax Project (an ongoing, multi-year effort by U.S. state and local governments to pursue federal legislation that would require collection and remittance of sales tax by out-of-state sellers) could allow states that meet certain simplification and other criteria to require out-of-state sellers to collect and remit sales taxes on goods purchased by in-state residents. This collection responsibility and the complexity associated with use tax collection, remittance and audit requirements would also increase the costs associated with our e-commerce business.

Furthermore, our e-commerce operations subject us to risks related to the computer systems that operate our websites and related support systems, such as system failures, viruses, computer hackers and similar disruptions. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of our systems, system interruptions or delays could occur that adversely affect our operating results and harm our brand. While we depend on our technology vendors to manage “up-time” of the front-end e-commerce store, manage the intake of our orders, and export orders for fulfillment, we could begin to run all or a greater portion of these components ourselves in the future. Any failure on the part of our third-party e-commerce vendors or in our ability to transition third-party services effectively could result in lost sales and harm our brand.

There is a risk that consumer demand for our products online may not generate sufficient sales to make our e-commerce business profitable, as consumer demand for physical products online may be less than in traditional retail sales channels. To the extent our e-commerce business does not generate more net sales than costs, our business, financial condition and results of operations will be adversely affected.

 

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Use of social media may materially and adversely affect our reputation or subject us to fines or other penalties.

We rely to a large extent on our online presence to reach consumers and use third-party social media platforms as marketing tools. For example, we maintain Facebook, Twitter, Instagram and YouTube accounts. As e-commerce and social media platforms continue to rapidly evolve, we must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools, our ability to acquire new consumers and our financial condition may suffer. Furthermore, as laws and regulations rapidly evolve to govern the use of these platforms, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and result of operations.

Failure to successfully operate our information systems and implement new technology effectively could disrupt our business or reduce our sales or profitability.

We rely extensively on various information technology systems and software applications to manage many aspects of our business, including product development, management of our supply chain, sale and delivery of our products, financial reporting and various other processes and transactions. We are critically dependent on the integrity, security and consistent operations of these systems and related back-up systems. These systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, malware and other security breaches, catastrophic events such as hurricanes, fires, floods, earthquakes, tornadoes, acts of war or terrorism and usage errors by our employees. The efficient operation and successful growth of our business depends on these information systems, including our ability to operate them effectively and to select and implement adequate disaster recovery systems successfully. The failure of these information systems to perform as designed, our failure to operate them effectively, or a security breach or disruption in operation of our information systems could disrupt our business, require significant capital investments to remediate a problem or subject us to liability.

In addition, we have recently implemented, and expect to continue to invest in and implement, modifications and upgrades to our information technology systems and procedures to support our growth and the development of our e-commerce business. These modifications and upgrades could require substantial investment, and may not improve our profitability at a level that outweighs their costs, or at all. In addition, the process of implementing any new technology systems involves inherent costs and risks, including potential delays and system failures, the potential disruption of our internal control structure, the diversion of management’s time and attention, and the need to re-train or hire new employees, any of which could disrupt our business operations and have a material adverse effect on our business, financial condition and results of operations.

If our electronic data is compromised our business could be significantly harmed.

We maintain significant amounts of data electronically. This data relates to all aspects of our business, including current and future products and entertainment under development, and also contains certain customer, consumer, supplier, partner and employee data. We maintain systems and processes designed to protect the data within our control, but notwithstanding such protective measures, there is a risk of intrusion or tampering that could compromise the integrity and privacy of this data. In addition, we provide confidential and proprietary information to our third-party business partners in certain cases where doing so is necessary or appropriate to conduct our business. While we obtain assurances from those parties that they have systems and processes in place to protect

 

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such data, and where applicable, that they will take steps to assure the protections of such data by third parties, nonetheless those partners may also be subject to data intrusion or otherwise compromise the protection of such data. Any compromise of the confidential data of our customers, consumers, suppliers, partners, employees or ourselves, or failure to prevent or mitigate the loss of or damage to this data through breach of our information technology systems or other means could substantially disrupt our operations, harm our customers, consumers and other business partners, damage our reputation, violate applicable laws and regulations and subject us to additional costs and liabilities and loss of business that could be material.

A failure to comply with laws and regulations relating to privacy and the protection of data relating to individuals may result in negative publicity, claims, investigations and litigation, and adversely affect our financial performance.

We are subject to laws, rules, and regulations in the United States and other countries relating to the collection, use, and security of personal information and data. Such data privacy laws, regulations, and other obligations may require us to change our business practices, and may negatively impact our ability to expand our business and pursue business opportunities. We may incur significant expenses to comply with the laws, regulations and other obligations that apply to us. Additionally, the privacy- and data protection-related laws, rules, and regulations applicable to us are subject to significant change. Several jurisdictions have passed new laws and regulations in this area, and other jurisdictions are considering imposing additional restrictions. These laws and regulations also may be interpreted and enforced inconsistently over time and from jurisdiction to jurisdiction. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. One example of such self-regulatory standards to which we may be contractually bound is the Payment Card Industry Data Security Standard, or PCI DSS. Though we currently use third-party vendors to process and store credit card data in connection with our e-commerce business, to the extent we process or store such data ourselves in the future, we may be subject to various aspects of the PCI DSS, and fines, penalties, and a loss of the ability to process credit card payments could result from any failure to comply with the PCI DSS. Any actual or perceived inability to comply with applicable privacy or data protection laws, regulations, or other obligations could result in significant cost and liability, litigation or governmental investigations, damage our reputation, and adversely affect our business.

Our indebtedness could adversely affect our financial health and competitive position.

As of June 30, 2017, we had $319.1 million of indebtedness outstanding under our Senior Secured Credit Facilities, consisting of $227.0 million outstanding under our Term Loan A Facility (net of unamortized discount of $6.1 million), $41.0 million outstanding under our Term Loan B Facility (net of unamortized discount of $6.0 million) and $51.1 million outstanding under our Revolving Credit Facility. As of June 30, 2017, we also had $20.0 million in aggregate principal amount of promissory notes payable to certain members of FAH, LLC.

In order to service this indebtedness and any additional indebtedness we may incur in the future, we need to generate cash. Our ability to generate cash is subject, to a certain extent, to our ability to successfully execute our business strategy, as well as general economic, financial, competitive, regulatory and other factors beyond our control. We cannot assure you that our business will be able to generate sufficient cash flow from operations or that future borrowings or other financing will be available to us in an amount sufficient to enable us to service our indebtedness and fund our other liquidity needs. To the extent we are required to use our cash flow from operations or the proceeds of any future financing to service our indebtedness instead of funding working capital, capital expenditures or other general corporate purposes, we will be less able to plan for, or react to, changes in our business, industry and in the economy generally. This will place us at a competitive disadvantage compared to our competitors that have less indebtedness.

 

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In addition, the credit agreement governing our Senior Secured Credit Facilities contains, and any agreements evidencing or governing other future indebtedness may contain, certain restrictive covenants that limit our ability, among other things, to engage in certain activities that are in our long-term best interests, including our ability to:

 

    incur additional indebtedness;

 

    incur certain liens;

 

    consolidate, merge or sell or otherwise dispose of our assets;

 

    alter the business conducted by us and our subsidiaries;

 

    make investments, loans, advances, guarantees and acquisitions;

 

    enter into sale and leaseback transactions;

 

    pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests;

 

    enter into transactions with our affiliates;

 

    enter into agreements restricting our subsidiaries’ ability to pay dividends;

 

    issue or sell equity interests or securities convertible into or exchangeable for equity interests;

 

    redeem, repurchase or refinance our other indebtedness; and

 

    amend or modify our governing documents.

The restrictive covenants in the credit agreement governing our Senior Secured Credit Facilities also require us to maintain specified financial ratios. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Senior Secured Credit Facilities.” While we have not previously breached and are not in breach of any of these covenants, there can be no guarantee that we will not breach these covenants in the future. Our ability to comply with these covenants and restrictions may be affected by events and factors beyond our control. Our failure to comply with any of these covenants or restrictions could result in an event of default under our Senior Secured Credit Facilities. This would permit the lending banks under such facilities to take certain actions, including terminating all outstanding commitments and declaring all amounts due under our credit agreement to be immediately due and payable, including all outstanding borrowings, accrued and unpaid interest thereon, and prepayment premiums with respect to such borrowings and any terminated commitments. In addition, the lenders would have the right to proceed against the collateral we granted to them, which includes substantially all of our assets. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances, and may determine to engage in equity or debt financings or enter into credit facilities or refinance existing indebtedness for other reasons. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. As discussed above, the credit agreement governing our Senior Secured Credit Facilities contains restrictive covenants that limit our ability to incur additional indebtedness and engage in other capital-raising activities. Any debt financing obtained by us in the future could involve covenants that further restrict our capital raising activities and other financial and operational matters, which may make it more difficult for us to operate our business, obtain additional capital and pursue business opportunities, including potential

 

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acquisitions. Furthermore, if we raise additional funds through the issuance of equity or convertible debt or other equity-linked securities, our existing stockholders could suffer significant dilution. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

Any impairment in the value of our goodwill or other assets would adversely affect our financial condition and results of operations.

We are required, at least annually, or as facts and circumstances warrant, to test goodwill and other assets to determine if impairment has occurred. Impairment may result from any number of factors, including adverse changes in assumptions used for valuation purposes, such as actual or projected net sales growth rates, profitability or discount rates, or other variables. If the testing indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other assets and the implied fair value of the goodwill or the fair value of other assets in the period the determination is made. We cannot always predict the amount and timing of any impairment of assets. Should the value of goodwill or other assets become impaired, it would have an adverse effect on our financial condition and results of operations.

Risks Relating to Our Organizational Structure

ACON will have significant influence over us after the consummation of this offering, including over decisions that require the approval of stockholders, and its interests, along with the interests of our other Continuing Equity Owners, in our business may conflict with yours.

Each share of our Class A common stock and Class B common stock will entitle its holders to one vote per share on all matters presented to our stockholders generally. See “Description of Capital Stock.” As a result, immediately after the consummation of this offering, ACON will hold approximately     % of the combined voting power of our common stock through its ownership of                  shares of our Class A common stock and                  shares of our Class B common stock. Accordingly, ACON will have significant influence over substantially all transactions and other matters submitted to a vote of our stockholders, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, the issuance or redemption of certain additional equity interests, and the election of directors. This influence may increase the likelihood that we will consummate transactions that are not in the best interests of holders of our Class A common stock or, conversely, prevent the consummation of transactions that are in the best interests of holders of our Class A common stock.

Additionally, the Continuing Equity Owners, who collectively will hold approximately     % of the combined voting power of our common stock immediately after the consummation of this offering, may receive payments from us under the Tax Receivable Agreement in connection with Funko, Inc.’s purchase of common units of FAH, LLC directly from certain of the Continuing Equity Owners in connection with this offering as described under “Use of Proceeds,” and upon a redemption or exchange of their common units in FAH, LLC, including the issuance of shares of our Class A common stock upon any such redemption or exchange. As a result, the interests of the Continuing Equity Owners may conflict with the interests of holders of our Class A common stock. For example, the Continuing Equity Owners may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, and whether and when we should terminate the Tax Receivable Agreement and accelerate our obligations thereunder. In addition, the structuring of future transactions may take into consideration tax or other considerations of the Continuing Equity Owners even in situations where no similar considerations are relevant to us. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a discussion of the Tax Receivable Agreement and the related likely benefits to be realized by the Continuing Equity Owners.

 

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In addition, pursuant to the Stockholders Agreement, ACON will have the right to designate certain of our directors, which we refer to as the ACON Directors, which will be three ACON Directors for as long as ACON directly or indirectly, beneficially owns, in the aggregate, 35% or more of our Class A common stock, two ACON Directors for so long as ACON, directly or indirectly, beneficially owns, in the aggregate, less than 35% but at least 25% or more of our Class A common stock and one ACON Director for as long as ACON, directly or indirectly, beneficially owns, in the aggregate, less than 25% but at least 15% or more of our Class A common stock (assuming in each such case that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one for one basis). In addition, Fundamental will also have the right to designate one of our directors, which we refer to as the Fundamental Director, for as long as Fundamental, directly or indirectly, beneficially owns, in the aggregate, 15% or more of our Class A common stock (assuming that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one for one basis). Each of ACON, Fundamental and Brian Mariotti, our Chief Executive Officer, will also agree to vote, or cause to vote, all of their outstanding shares of our Class A common stock and Class B common stock at any annual or special meeting of stockholders in which directors are elected, so as to cause the election of the ACON Directors, the Fundamental Director and Mr. Mariotti for as long as he is our Chief Executive Officer. Additionally, pursuant to the Stockholders Agreement, we shall take all commercially reasonable action to cause (1) the board of directors to be comprised of at least seven directors or such other number of directors as our board of directors may determine; (2) the individuals designated in accordance with the terms of the Stockholders Agreement to be included in the slate of nominees to be elected to the board of directors at the next annual or special meeting of our stockholders at which directors are to be elected and at each annual meeting of our stockholders thereafter at which a director’s term expires; (3) the individuals designated in accordance with the terms of the Stockholders Agreement to fill the applicable vacancies on the board of directors; and (4) an ACON Director to be the chairperson of the board of directors (as defined in the amended and restated bylaws).

In addition, the Stockholders Agreement provides that for as long as the ACON Related Parties beneficially own, directly or indirectly, in the aggregate, 30% or more of all issued and outstanding shares of our Class A common stock (assuming that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one for one basis), we will not take, and will cause our subsidiaries not to take, certain actions or enter into certain transactions (whether by merger, consolidation or otherwise) without the prior written approval of ACON and each of its affiliated funds that will hold common units of FAH, LLC or our Class A common stock after the consummation of this offering, including:

 

    entering into any transaction or series of related transactions in which any person or group (other than the ACON Related Parties and any group that includes the ACON Related Parties, Fundamental (or certain of its affiliates or permitted transferees) or Mr. Mariotti) acquires, directly or indirectly, in excess of 50% of the then outstanding shares of any class of our or our subsidiaries’ capital stock, or following which any such person or group has the direct or indirect power to elect a majority of the members of our board of directors or to replace Funko, Inc. as the sole manager of FAH, LLC (or to add another person as co-manager of FAH, LLC);

 

    the reorganization, recapitalization, voluntary bankruptcy, liquidation, dissolution or winding up of us or any of our subsidiaries;

 

    the sale, lease or exchange of all or substantially all of our and our subsidiaries’ property and assets;

 

    the resignation, replacement or removal of Funko, Inc. as the sole manager of FAH, LLC, or the appointment of any additional person as a manager of FAH, LLC;

 

   

any acquisition or disposition of our or any of our subsidiaries’ assets for aggregate consideration in excess of $       in a single transaction or series of related transactions (other

 

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than transactions solely between or among us and our direct or indirect wholly owned subsidiaries);

 

    the creation of a new class or series of capital stock or other equity securities of us or any of our subsidiaries;

 

    the issuance of additional shares of Class A common stock, Class B common stock, preferred stock or other equity securities of us or any of our subsidiaries other than (i) under any stock option or other equity compensation plan approved by our board of directors or the compensation committee thereof, (ii) pursuant to the exercise or conversion of any options, warrants or other securities existing as of the date of the Stockholders Agreement and (iii) in connection with any redemption of common units of FAH, LLC pursuant to the FAH LLC Agreement;

 

    any amendment or modification of our or any of our subsidiaries’ organizational documents, other than the FAH LLC Agreement, which shall be subject to amendment or modification solely in accordance with the terms set forth herein; and

 

    any increase or decrease of the size of our board of directors.

We are a “controlled company” within the meaning of the Nasdaq rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such corporate governance requirements.

Pursuant to the terms of the Stockholders Agreement, ACON, Fundamental and Brian Mariotti, our Chief Executive Officer, after the consummation of this offering will, in the aggregate, have more than 50% of the voting power for the election of directors, and, as a result, we will be considered a “controlled company” for the purposes of the Nasdaq rules. As such, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements, including the requirements to have a majority of independent directors on our board of directors, an entirely independent nominating and corporate governance committee, an entirely independent compensation committee or to perform annual performance evaluation of the nominating and corporate governance and compensation committees.

The corporate governance requirements and specifically the independence standards are intended to ensure that directors who are considered independent are free of any conflicting interest that could influence their actions as directors. Following this offering, we intend to use certain exemptions afforded to a “controlled company.” As a result, we will not be subject to certain corporate governance requirements, including that a majority of our board of directors consists of “independent directors,” as defined under the Nasdaq rules. In addition, we will not be required to have a nominating and corporate governance committee or compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities or to conduct annual performance evaluations of the nominating and corporate governance and compensation committees. See “Management.” Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq rules.

Our amended and restated certificate of incorporation provides that the doctrine of “corporate opportunity” will not apply with respect to any director or stockholder who is not employed by us or our subsidiaries.

The doctrine of corporate opportunity generally provides that a corporate fiduciary may not develop an opportunity using corporate resources, acquire an interest adverse to that of the corporation or acquire property that is reasonably incident to the present or prospective business of the

 

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corporation or in which the corporation has a present or expectancy interest, unless that opportunity is first presented to the corporation and the corporation chooses not to pursue that opportunity. The doctrine of corporate opportunity is intended to preclude officers or directors or other fiduciaries from personally benefiting from opportunities that belong to the corporation. Our amended and restated certificate of incorporation, which will be in effect upon the consummation of this offering, will provide that the doctrine of “corporate opportunity” will not apply with respect to any director or stockholder who is not employed by us or our subsidiaries. Any director or stockholder who is not employed by us or our subsidiaries will therefore have no duty to communicate or present corporate opportunities to us, and will have the right to either hold any corporate opportunity for their (and their affiliates’) own account and benefit or to recommend, assign or otherwise transfer such corporate opportunity to persons other than us, including to any director or stockholder who is not employed by us or our subsidiaries.

As a result, certain of our stockholders, directors and their respective affiliates will not be prohibited from operating or investing in competing businesses. We therefore may find ourselves in competition with certain of our stockholders, directors or their respective affiliates, and we may not have knowledge of, or be able to pursue, transactions that could potentially be beneficial to us. Accordingly, we may lose a corporate opportunity or suffer competitive harm, which could negatively impact our business or prospects.

Our principal asset after the consummation of this offering will consist of our interest in FAH, LLC, and accordingly, we will depend on distributions from FAH, LLC to pay taxes and expenses, including payments under the Tax Receivable Agreement. FAH, LLC’s ability to make such distributions may be subject to various limitations and restrictions.

Upon consummation of this offering, we will be a holding company and will have no material assets other than our ownership of              common units of FAH, LLC, representing approximately     % of the economic interest in FAH, LLC (or              common units of FAH, LLC, representing approximately     % of the economic interest in FAH, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock). We will have no independent means of generating revenue or cash flow, and our ability to pay dividends in the future, if any, will be dependent upon the financial results and cash flows of FAH, LLC and its subsidiaries and distributions we receive from FAH, LLC. There can be no assurance that our subsidiaries will generate sufficient cash flow to dividend or distribute funds to us or that applicable local law and contractual restrictions, including negative covenants in our debt instruments, will permit such dividends or distributions.

FAH, LLC will be treated as a partnership for U.S. federal income tax purposes and, as such, generally will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to holders of its common units, including us. As a result, we will incur income taxes on our allocable share of any net taxable income of FAH, LLC. Under the terms of the FAH LLC Agreement, FAH, LLC will be obligated to make tax distributions to its members, including us, except to the extent such distributions would render FAH, LLC insolvent or are otherwise prohibited by law or any limitations or restrictions in our debt agreements. The amount of such tax distribution will be calculated based on the highest combined federal, state and local tax rate that may potentially apply to any one of FAH, LLC’s members, regardless of the actual final tax liability of any such member. As a result of the foregoing, FAH, LLC may be obligated to make tax distributions in excess of some or all of its members’ actual tax liability, which could reduce its cash available for its business operations. In addition to tax expenses, we will also incur expenses related to our operations, our interests in FAH, LLC and related party agreements, including payment obligations under the Tax Receivable Agreement and expenses and costs of being a public company, all of which could be significant. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” We intend, as its managing member, to cause FAH, LLC to make distributions in an amount sufficient to allow us to pay our taxes and operating expenses, including any ordinary course payments due under the Tax

 

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Receivable Agreement. However, FAH, LLC’s ability to make such distributions may be subject to various limitations and restrictions including, but not limited to, restrictions on distributions that would either violate any contract or agreement to which FAH, LLC is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering FAH, LLC insolvent. If FAH, LLC does not have sufficient funds to pay tax distributions or other liabilities to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore may accelerate payments due under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” If FAH, LLC does not have sufficient funds to make distributions, our ability to declare and pay cash dividends may also be restricted or impaired. See “—Risks Relating to This Offering and Ownership of Our Class A Common Stock.”

Our Tax Receivable Agreement with the Continuing Equity Owners requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, the amounts that we may be required to pay could be significant, and we may not realize such tax benefits.

In connection with the consummation of this offering, we will enter into a Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners. Pursuant to the Tax Receivable Agreement, we will be required to make cash payments to the Continuing Equity Owners equal to 85% of the tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize as a result of (1) increases in tax basis resulting from Funko, Inc.’s purchase of common units of FAH, LLC directly from certain of the Continuing Equity Owners in connection with this offering, as described under “Use of Proceeds,” and any future redemptions funded by Funko, Inc. or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock described under “Certain Relationships and Related Party Transactions—FAH LLC Agreement—Agreement in Effect Upon Consummation of this Offering—Common Unit Redemption Right,” and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement. The amount of the cash payments that we may be required to make under the Tax Receivable Agreement could be significant. Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, which tax reporting positions are subject to challenge by taxing authorities. Payments made under the Tax Receivable Agreement will not be returned upon a successful challenge by a taxing authority to our reporting positions. Any payments made by us to the Continuing Equity Owners under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are unable to make timely payments under the Tax Receivable Agreement for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us. Nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore may accelerate payments due under the Tax Receivable Agreement. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that may be deemed realized under the Tax Receivable Agreement upon a change of control. The payments under the Tax Receivable Agreement are also not conditioned upon the Continuing Equity Owners maintaining a continued ownership interest in FAH, LLC. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a discussion of the Tax Receivable Agreement and the related likely benefits to be realized by the Continuing Equity Owners.

 

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The amounts that we may be required to pay to the Continuing Equity Owners under the Tax Receivable Agreement may be accelerated in certain circumstances and may also significantly exceed the actual tax benefits that we ultimately realize.

The Tax Receivable Agreement provides that if certain mergers, asset sales, other forms of business combination, or other changes of control were to occur, if we materially breach any of our material obligations under the Tax Receivable Agreement or if, at any time, we elect an early termination of the Tax Receivable Agreement, then the Tax Receivable Agreement will terminate and our obligations, or our successor’s obligations, to make future payments under the Tax Receivable Agreement would accelerate and become immediately due and payable. In those circumstances members of FAH, LLC would be deemed to exchange any remaining outstanding common units of FAH, LLC for Class A common stock and would generally be entitled to payments under the Tax Receivable Agreement resulting from such deemed exchange. The amount due and payable in those circumstances is determined based on certain assumptions, including an assumption that we would have sufficient taxable income to fully use all potential future tax benefits that are subject to the Tax Receivable Agreement. We may need to incur debt to finance payments under the Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing discrepancies or otherwise.

As a result of the foregoing, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. We also could be required to make cash payments to the Continuing Equity Owners that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement. Our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of control. There can be no assurance that we will be able to finance our obligations under the Tax Receivable Agreement.

We will not be reimbursed for any payments made to the Continuing Equity Owners under the Tax Receivable Agreement in the event that any tax benefits are disallowed.

We will not be reimbursed for any cash payments previously made to the Continuing Equity Owners pursuant to the Tax Receivable Agreement if any tax benefits initially claimed by us are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to a Continuing Equity Owner will be netted against any future cash payments that we might otherwise be required to make under the terms of the Tax Receivable Agreement. However, a challenge to any tax benefits initially claimed by us may not arise for a number of years following the initial time of such payment or, even if challenged early, such excess cash payment may be greater than the amount of future cash payments that we might otherwise be required to make under the terms of the Tax Receivable Agreement and, as a result, there might not be future cash payments from which to net against. The applicable U.S. federal income tax rules are complex and factual in nature, and there can be no assurance that the IRS or a court will not disagree with our tax reporting positions. As a result, it is possible that we could make cash payments under the Tax Receivable Agreement that are substantially greater than our actual cash tax savings. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a discussion of the Tax Receivable Agreement and the related likely benefits to be realized by the Continuing Equity Owners.

 

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If we were deemed to be an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act, as a result of our ownership of FAH, LLC, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, financial condition and results of operations.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (1) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

As the sole managing member of FAH, LLC, we will control and operate FAH, LLC. On that basis, we believe that our interest in FAH, LLC is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of FAH, LLC, our interest in FAH, LLC could be deemed an “investment security” for purposes of the 1940 Act.

We and FAH, LLC intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, financial condition and results of operations.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Equity Owners that will not benefit Class A common stockholders to the same extent as it will benefit the Continuing Equity Owners.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Equity Owners that will not benefit the holders of our Class A common stock to the same extent as it will benefit such Continuing Equity Owners. We will enter into the Tax Receivable Agreement with FAH, LLC and such Continuing Equity Owners and it will provide for the payment by Funko, Inc. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Funko, Inc. actually realizes, or in some circumstances is deemed to realize, as a result of (1) increases in tax basis resulting from Funko, Inc.’s purchase of common units of FAH, LLC directly from certain of the Continuing Equity Owners in connection with this offering, as described under “Use of Proceeds,” and any future redemptions funded by Funko, Inc. or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock described under “Certain Relationships and Related Party Transactions—FAH LLC Agreement—Agreement in Effect Upon Consummation of this Offering—Common Unit Redemption Right,” and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement. This and other aspects of our organizational structure may adversely impact the future trading market for the Class A common stock.

Risks Relating to This Offering and Ownership of Our Class A Common Stock

Immediately following the consummation of this offering, the Continuing Equity Owners will own common units in FAH, LLC, and the Continuing Equity Owners will have the right to redeem their common units in FAH, LLC pursuant to the terms of the FAH LLC Agreement for shares of Class A common stock or cash.

After this offering, we will have an aggregate of              shares of Class A common stock authorized but unissued (or                  if the underwriters exercise in full their option to purchase

 

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additional shares of Class A common stock), including approximately              shares of Class A common stock issuable, at our election, upon redemption of FAH, LLC common units that will be held by the Continuing Equity Owners. FAH, LLC will enter into the FAH LLC Agreement, and subject to certain restrictions set forth in such agreement and as described elsewhere in this prospectus, the Continuing Equity Owners will be entitled to have their common units redeemed from time to time at each of their options (subject in certain circumstances to time-based vesting requirements and limitations on the common units that will be converted from HR units in connection with the Transactions) for, at our election, newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each common unit redeemed, in each case, in accordance with the terms of the FAH LLC Agreement; provided that, at our election, we may effect a direct exchange by Funko, Inc. of such Class A common stock or such cash, as applicable, for such common units. The Continuing Equity Owners may exercise such redemption right for as long as their common units remain outstanding. See “Certain Relationships and Related Party Transactions—FAH LLC Agreement.” We also intend to enter into a Registration Rights Agreement pursuant to which the shares of Class A common stock issued to certain of the Continuing Equity Owners (including each of our executive officers) upon such redemption and the shares of Class A common stock issued to the Former Equity Owners in connection with the Transactions will be eligible for resale, subject to certain limitations set forth in the Registration Rights Agreement. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.

You may be diluted by future issuances of additional Class A common stock or common units in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock price.

Our amended and restated certificate of incorporation authorizes us to issue shares of our Class A common stock and options, rights, warrants and appreciation rights relating to our Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. In addition, we, FAH, LLC and the Continuing Equity Owners will be party to the FAH LLC Agreement under which the Continuing Equity Owners (or certain permitted transferees thereof) will have the right (subject to the terms of the FAH LLC Agreement) to have their common units redeemed from time to time at each of their options (subject in certain circumstances to time-based vesting requirements and limitations on the common units that will be converted from HR units in connection with the Transactions) by FAH, LLC in exchange for, at our election, newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume-weighted average market price of one share of Class A common stock for each common unit redeemed, in each case, in accordance with the terms of the FAH LLC Agreement; provided that, at our election, we may effect a direct exchange by Funko, Inc. of such Class A common stock or such cash, as applicable, for such common units. The Continuing Equity Owners may exercise such redemption right for as long as their common units remain outstanding. See “Certain Relationships and Related Party Transactions—FAH LLC Agreement.” The market price of shares of our Class A common stock could decline as a result of these redemptions or exchanges or the perception that a redemption or exchange could occur. These redemptions or exchanges, or the possibility that these redemptions or exchanges may occur, also might make it more difficult for holders of our Class A common stock to sell such stock in the future at a time and at a price that they deem appropriate.

 

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We have reserved for issuance under our 2017 Plan              shares of Class A common stock, including              shares of Class A common stock issuable pursuant to              stock options and              restricted stock units granted to certain of our directors and certain of our employees in connection with this offering as described under the captions “Executive Compensation—Executive Compensation Arrangements—Director Compensation” and “Executive Compensation—Equity Compensation Plans—2017 Incentive Award Plan.” Any shares of Class A common stock that we issue, including under our 2017 Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.

We, our officers and directors, the Original Equity Owners and the selling stockholders, subject to certain exceptions, will agree that, without the prior written consent of Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus: (1) offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, any shares of Class A common stock or any securities convertible into, exchangeable for or that represent the right to receive shares of Class A common stock; (2) file any registration statement with the SEC relating to the offering of any shares of Class A common stock or any securities convertible into or exercisable or exchangeable for Class A common stock; or (3) enter into any swap or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of Class A common stock, subject to certain exceptions. Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, in their sole discretion, may release the Class A common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice. See “Underwriting.”

The market price of our Class A common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline in the market price of our Class A common stock might impede our ability to raise capital through the issuance of additional shares of Class A common stock or other equity securities.

In connection with the completion of this offering, we intend to enter into a Registration Rights Agreement with certain of the Original Equity Owners (including each of our executive officers). Any sales in connection with the Registration Rights Agreement, or the prospect of any such sales, could materially impact the market price of our Class A common stock and could impair our ability to raise capital through future sales of equity securities. For a further description of our Registration Rights Agreement, see “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our Class A common stock after this offering.

In the future, we may also issue additional securities if we need to raise capital, including, but not limited to, in connection with acquisitions, which could constitute a material portion of our then-outstanding shares of Class A common stock.

Our Class A common stock price may be volatile or may decline regardless of our operating performance and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has not been a public trading market for shares of our Class A common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained, which could make it difficult for you to sell your shares of Class A common stock at an attractive price or at all. The initial public offering price of our

 

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Class A common stock will be determined by negotiations among us, the selling stockholders and the representatives of the underwriters based upon a number of factors and may not be indicative of prices that will prevail in the open market following the consummation of this offering. See “Underwriting.” Consequently, you may not be able to sell our shares of Class A common stock at prices equal to or greater than the price you paid in this offering.

Volatility in the market price of our Class A common stock may prevent you from being able to sell your shares at or above the price you paid for them. Many factors, which are outside our control, may cause the market price of our Class A common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section and this prospectus, as well as the following:

 

    our operating and financial performance and prospects;

 

    our quarterly or annual earnings or those of other companies in our industry compared to market expectations;

 

    conditions that impact demand for our products;

 

    future announcements concerning our business, our customers’ businesses or our competitors’ businesses;

 

    the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

    the market’s reaction to our reduced disclosure and other requirements as a result of being an “emerging growth company” under the JOBS Act;

 

    the size of our public float;

 

    coverage by or changes in financial estimates by securities analysts or failure to meet their expectations;

 

    market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

    strategic actions by us or our competitors, such as acquisitions or restructurings;

 

    changes in laws or regulations which adversely affect our industry, our licensors or us;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    changes in senior management or key personnel;

 

    issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock;

 

    changes in our dividend policy;

 

    adverse resolution of new or pending litigation against us; and

 

    changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events.

As a result, volatility in the market price of our Class A common stock may prevent investors from being able to sell their Class A common stock at or above the initial public offering price or at all. These broad market and industry factors may materially reduce the market price of our Class A common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our Class A common stock is low. As a result, you may suffer a loss on your investment.

We do not intend to pay dividends on our Class A common stock for the foreseeable future.

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness. As a result, we do not anticipate declaring or

 

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paying any cash dividends on our Class A common stock in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our business prospects, results of operations, financial condition, cash requirements and availability, industry trends and other factors that our board of directors may deem relevant. Any such decision will also be subject to compliance with contractual restrictions and covenants in the agreements governing our current and future indebtedness. Our Senior Secured Credit Facilities contain certain covenants that restrict the ability of FAH, LLC and its subsidiaries to pay dividends or make distributions. See “Description of Certain Indebtedness.” Because we are a holding company, our ability to pay dividends on our Class A common stock depends on our receipt of cash distributions from FAH, LLC and, through FAH, LLC, cash distributions and dividends from our other direct and indirect wholly owned subsidiaries. In addition, we may incur additional indebtedness, the terms of which may further restrict or prevent us from paying dividends on our Class A common stock. As a result, you may have to sell some or all of your Class A common stock after price appreciation in order to generate cash flow from your investment, which you may not be able to do. Our inability or decision not to pay dividends, particularly when others in our industry have elected to do so, could also adversely affect the market price of our Class A common stock.

Delaware law and certain provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may prevent efforts by our stockholders to change the direction or management of our company.

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including, but not limited to, the following:

 

    our board of directors is classified into three classes, each of which serves for a staggered three-year term;

 

    only the chairperson of our board of directors or a majority of our board of directors may call special meetings of our stockholders, except that at such time as ACON, certain of its affiliates and their permitted transferees, which we collectively refer to as the ACON Related Parties, directly or indirectly, beneficially own in the aggregate, 35% or more of all shares of Class A common stock (including for this purpose all shares of Class A common stock issuable upon redemption of common units, assuming all such common units are redeemed for Class A common stock on a one-for-one basis) issued and outstanding, the holders of a majority in voting power of the outstanding shares of our capital stock may also call special meetings of our stockholders;

 

    we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

   

any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a written consent is signed by the holders of our outstanding shares of common stock representing not less than the minimum number of votes that would be necessary to authorize such action at a meeting at which all outstanding shares of common stock entitled to vote thereon were present and voted, provided that at such time as the ACON Related Parties, directly or indirectly, beneficially own in the aggregate, less than 35% of all shares of Class A common stock (including for this purpose all shares of Class A common stock issuable upon redemption of common units, assuming all such common units are redeemed for Class A common stock on a one-for-one basis) issued and outstanding, any

 

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action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may not be taken by written consent in lieu of a meeting;

 

    our amended and restated certificate of incorporation may be amended or repealed by the affirmative vote of a majority of the votes which all our stockholders would be eligible to cast in an election of directors and our amended and restated bylaws may be amended or repealed by a majority vote of our board of directors or by the affirmative vote of a majority of the votes which all our stockholders would be eligible to cast in an election of directors, provided that at such time as the ACON Related Parties, directly or indirectly, beneficially own in the aggregate, less than 35% of all shares of Class A common stock (including for this purpose all shares of Class A common stock issuable upon redemption of common units, assuming all such common units are redeemed for Class A common stock on a one-for-one basis) issued and outstanding, our amended and restated certificate of incorporation and our amended and restated bylaws may be amended or repealed by the affirmative vote of the holders of at least 662/3% of the votes which all our stockholders would be entitled to cast in any annual election of directors and our amended and restated bylaws may also be amended or repealed by a majority vote of our board of directors;

 

    we require advance notice and duration of ownership requirements for stockholder proposals; and

 

    we have opted out of Section 203 of the Delaware General Corporation Law of the State of Delaware, or the DGCL, however, our amended and restated certificate of incorporation will contain provisions that are similar to Section 203 of the DGCL (except with respect to ACON and Fundamental and any of their respective affiliates and any of their respective direct or indirect transferees of Class B common stock). See “Description of Capital Stock—Anti-Takeover Provisions—Section 203 of the DGCL.”

These provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire, including actions that you may deem advantageous, or negatively affect the trading price of our Class A common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.

Please see “—Risks Relating to Our Organizational Structure—ACON will have significant influence over us after the consummation of this offering, including over decisions that require the approval of stockholders, and its interests, along with the interests of our other Continuing Equity Owners, in our business may conflict with yours.”

Our amended and restated certificate of incorporation will provide, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our amended and restated certificate of incorporation will provide, subject to limited exceptions, that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders; (3) any action asserting a claim against us, any director or our officers and employees arising pursuant to any provision of the DGCL, our amended and restated

 

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certificate of incorporation or our amended and restated bylaws, or as to which the DGCL confers exclusive jurisdiction on the Court of Chancery; or (4) any action asserting a claim against us, any director or our officers or employees that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision that will be contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.

Our amended and restated certificate of incorporation will authorize us to issue one or more series of preferred stock. Our board of directors will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our Class A common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.

Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our Class A common stock less attractive to investors.

The JOBS Act provides that, for so long as a company qualifies as an “emerging growth company,” it will, among other things:

 

    be required to initially have only two years of audited financial statements and only two years of related selected financial data and Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

    be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

 

    be exempt from the “say on pay” and “say on golden parachute” advisory vote requirements of the Dodd-Frank Wall Street Reform and Customer Protection Act, or the Dodd-Frank Act;

 

    be exempt from certain disclosure requirements of the Dodd-Frank Act relating to compensation of its executive officers and be permitted to omit the detailed compensation discussion and analysis from the proxy statements and reports it files under the Securities Exchange Act of 1934, as amended, or the Exchange Act; and

 

    be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on our financial statements.

 

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We currently intend to take advantage of each of the exemptions described above. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act. We could be an emerging growth company for up to five years after this offering. We cannot predict if investors will find our Class A common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our Class A common stock.

The obligations associated with being a public company will require significant resources and management attention, which may divert from our business operations.

As a result of this offering, we will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal control over financial reporting. As a result, we will incur significant legal, accounting and other expenses that we did not previously incur. Additionally, most of our management team, including our Chief Executive Officer and Chief Financial Officer, have never managed a publicly traded company, and as a result, do not have experience in complying with the increasingly complex and changing legal and regulatory landscape in which public companies operate. Furthermore, while certain members of our board of directors have been officers and other employees of public companies, only one of our directors has served on the board of directors of a public company. Our entire management team and many of our other employees will need to devote substantial time to compliance, and may not effectively or efficiently manage our transition into a public company.

In addition, the need to establish the corporate infrastructure demanded of a public company may also divert management’s attention from implementing our business strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal control over financial reporting, including information technology controls, and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain our culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition and results of operations. In addition, we cannot predict or estimate the amount of additional costs we may incur to comply with these requirements. We anticipate that these costs will materially increase our general and administrative expenses.

Furthermore, as a public company, we will incur additional legal, accounting and other expenses that have not been reflected in our predecessor’s historical financial statements or our pro forma financial statements included elsewhere in this prospectus. In addition, rules implemented by the SEC and the have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. These rules and regulations result in our incurring legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

 

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As a public reporting company, we will be subject to rules and regulations established from time to time by the SEC regarding our internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner.

Upon consummation of this offering, we will become a public reporting company subject to the rules and regulations established from time to time by the SEC and The Nasdaq Stock Market LLC, or the Nasdaq Stock Market. These rules and regulations will require, among other things, that we establish and periodically evaluate procedures with respect to our internal control over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel.

In addition, as a public company, we will be required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting. Though we will be required to disclose changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. Furthermore, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC and the date we are no longer an emerging growth company.

If our senior management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if our independent registered public accounting firm cannot render an unqualified opinion on management’s assessment and the effectiveness of our internal control over financial reporting at such time as it is required to do so, or if material weaknesses in our internal control over financial reporting are identified, we could be subject to regulatory scrutiny, a loss of public and investor confidence, and to litigation from investors and stockholders, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our financial performance on a timely basis, which could cause a decline in our common stock price and adversely affect our results of operations and financial condition. Failure to comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC, the Nasdaq Stock Market or other regulatory authorities, which would require additional financial and management resources.

An active trading market for our Class A common stock may never develop or be sustained.

Although we expect the shares of our Class A common stock will be authorized for trading on the Nasdaq Global Select Market, an active trading market for our Class A common stock may not develop on that exchange or elsewhere or, if developed, that market may not be sustained. Accordingly, if an active trading market for our Class A common stock does not develop or is not maintained, the liquidity of our Class A common stock, your ability to sell your shares of our Class A common stock when desired and the prices that you may obtain for your shares of Class A common stock will be adversely affected.

 

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If securities analysts do not publish research or reports about our company, or if they issue unfavorable commentary about us or our industry or downgrade our Class A common stock, the price of our Class A common stock could decline.

The trading market for our Class A common stock will depend in part on the research and reports that third-party securities analysts publish about our company and our industry. We may be unable or slow to attract research coverage and if one or more analysts cease coverage of our company, we could lose visibility in the market. In addition, one or more of these analysts could downgrade our Class A common stock or issue other negative commentary about our company or our industry. As a result of one or more of these factors, the trading price of our Class A common stock could decline.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding the Transactions, including the consummation of this offering, expected growth, future capital expenditures and debt service obligations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to statements about:

 

    our ability to execute our business strategy;

 

    our dependence upon our license agreements, our ability to renew and extend expiring license agreements and enter into license agreements for newer pop culture properties and our relationship with content providers;

 

    the trend of content providers consolidating their license relationships to do more business with fewer licensees;

 

    our ability to design and develop products that will be popular with consumers and to maintain the popularity of successful products;

 

    the effect on our business of changes in the retail industry and the market for consumer products;

 

    the continued growth of the market for pop culture consumer products;

 

    our ability to maintain and develop relationships with retail customers and distributors, including increasing sales and shelf space with existing retail customers and the number of retailers for whom we curate pop culture selections, and our intent to expand into new sales channels;

 

    competition in our industry and our ability to compete effectively with new or existing competitors;

 

    our ability to manage our growth effectively;

 

    the sustainability of, and fluctuations in, our gross margins over time;

 

    our dependence on third-party content providers;

 

    the ability of our licensed properties to generate market appeal and sales of our products;

 

    our ability to successfully manage our inventories;

 

    our ability to develop and introduce products in a timely and cost-effective manner;

 

    our ability to obtain, maintain and protect our intellectual property rights;

 

    our plan to expand our intellectual property across multiple channels, including movies, TV and digital content;

 

    our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights of others;

 

    attracting and retaining qualified personnel and maintaining our corporate culture;

 

    the seasonality of our business and the popularity and timing of new product releases and related content releases;

 

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    our susceptibility to risks created by our use of third-party manufacturers and our ability to find alternative sources of supply in a timely and cost-effective manner;

 

    the effects of adverse conditions in the certain geographic regions in which our manufacturing and sales are concentrated;

 

    the risks associated with our substantial sales and manufacturing operations outside the United States and plans to expand internationally;

 

    the effect of the United Kingdom’s referendum on withdrawal from the European Union on global economic conditions, financial markets and our business;

 

    changes in U.S. tax law, the stability of effective tax rates and adverse outcomes resulting from examination of our income or other tax returns;

 

    the impact on our business of changes in foreign currency exchange rates;

 

    the effect of global and regional economic downturns on the retail and credit markets and the financial health of our retail customers and consumers;

 

    our ability to comply with current or future government regulations that we are subject to;

 

    future product liability suits or product recalls;

 

    our ability to comply with anti-corruption and anti-bribery laws, governmental economic sanctions requirements and export and import controls;

 

    our ability to realize the anticipated benefits of acquisitions or investments in joint ventures;

 

    risks related to our e-commerce business and our intent to grow this business;

 

    our plans to continue to expand our marketing through social media outlets, our websites and internet-based advertising and the potential consequences of our use of social media;

 

    our ability to successfully operate our information systems and implement new technology effectively;

 

    the impact on our business if our electronic data is compromised;

 

    the effects of our indebtedness on our financial health and competitive position and our ability to secure additional financing and to meet our future capital needs;

 

    impairment in the value of our goodwill our other assets;

 

    the effects of ACON’s significant influence over us;

 

    the reduced corporate governance requirements to which we are subject as a result of being a controlled company;

 

    our ability to realize any tax benefits that may arise from our organizational structure and any redemptions or exchanges of common units of FAH, LLC for cash or stock, including in connection with this offering; and

 

    the other factors set forth under “Risk Factors.”

The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We believe that these factors include, but are not limited to the factors set forth under

 

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“Risk Factors.” Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

These forward-looking statements speak only as of the date of this prospectus. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this prospectus after we distribute this prospectus, whether as a result of any new information, future events or otherwise.

 

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OUR ORGANIZATIONAL STRUCTURE

Funko, Inc., a Delaware corporation, was formed on April 21, 2017 to serve as the issuer of the Class A common stock offered by this prospectus. Prior to this offering, all of our business operations have been conducted through FAH, LLC and its subsidiaries. We will consummate the Transactions (excluding this offering) on or prior to the consummation of this offering.

Existing Organization

FAH, LLC is treated as a partnership for U.S. federal income tax purposes and, as such is not subject to any U.S. federal entity-level income taxes. Taxable income or loss of FAH, LLC is included in the U.S. federal income tax returns of FAH, LLC’s members. Prior to the consummation of this offering, the Original Equity Owners were the only members of FAH, LLC, and included ACON, Fundamental, and certain of our current and former executive officers, employees and directors.

Transactions

We will consummate the following organizational transactions in connection with this offering:

 

    we will amend and restate the existing limited liability company agreement of FAH, LLC to, among other things, (1) convert all existing ownership interests (including vested profits interests and all unvested profits interests (subject to              common units received in exchange for unvested profits interests remaining subject to their existing time-based vesting requirements)) in FAH, LLC into              common units of FAH, LLC, and (2) appoint Funko, Inc. as the sole managing member of FAH, LLC upon its acquisition of common units in connection with this offering;

 

    we will amend and restate Funko, Inc.’s certificate of incorporation to, among other things, provide (1) for Class A common stock, with each share of our Class A common stock entitling its holders to one vote per share on all matters presented to our stockholders generally and (2) for Class B common stock, with each share of our Class B common stock entitling its holders to one vote per share on all matters presented to our stockholders generally, and that shares of our Class B common stock may only be held by the Continuing Equity Owners and their permitted transferees as described in “Description of Capital Stock—Common Stock—Class B Common Stock;”

 

    we will issue                  shares of our Class A common stock to the purchasers in this offering (or                  shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock) in exchange for net proceeds of approximately $              million (or approximately $              million if the underwriters exercise in full their option to purchase additional shares of Class A common stock) based upon an assumed initial public offering price of $              per share (which is the midpoint of the price range set forth on the cover page of this prospectus);

 

    we will use all of the net proceeds from this offering to purchase (1)              newly issued common units (or              common units if the underwriters exercise in full their option to purchase additional shares of Class A common stock) directly from FAH, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions and (2)              common units directly from certain of the Continuing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions, which combined represents     % of FAH, LLC’s outstanding common units following this offering (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

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    FAH, LLC intends to use the net proceeds from the sale of common units to Funko, Inc. to repay the Subordinated Promissory Notes, repay a portion of the outstanding borrowings under our Senior Secured Credit Facilities (as defined herein) and, if any remain, for general corporate purposes as described under “Use of Proceeds”;

 

    existing options to purchase certain ownership interests in FAH, LLC will be converted into              options to purchase common units in FAH, LLC;

 

    existing warrants to purchase ownership interests in FAH, LLC held by the Warrant Holders will be converted into              common units of FAH, LLC;

 

    the Former Equity Owners will exchange their indirect ownership interests in common units of FAH, LLC for                  shares of Class A common stock on a one-to-one basis;

 

    the Former Equity Owners will sell              shares of our Class A common stock in this offering as selling stockholders; and

 

    Funko, Inc. will enter into (1) the Stockholders Agreement with ACON, Fundamental and Brian Mariotti, our Chief Executive Officer, (2) the Registration Rights Agreement with certain of the Original Equity Owners (including each of our executive officers) and (3) the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners. For a description of the terms of the Stockholders Agreement, the Registration Rights Agreement and the Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions.”

We collectively refer to the foregoing organizational transactions as the Transactions.

Organizational Structure Following this Offering

 

    Funko, Inc. will be a holding company and its principal asset will consist of common units it purchases from FAH, LLC and certain of the Continuing Equity Owners and common units it acquires from the Former Equity Owners;

 

    Funko, Inc. will be the sole managing member of FAH, LLC and will control the business and affairs of FAH, LLC and its subsidiaries;

 

    Funko, Inc. will own, directly or indirectly,              common units of FAH, LLC, representing approximately     % of the economic interest in FAH, LLC (or              common units, representing approximately     % of the economic interest in FAH, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

    the Continuing Equity Owners (1) will own              common units of FAH, LLC (excluding              common units subject to certain time-based vesting requirements), representing approximately     % of the economic interest in FAH, LLC (or              common units, representing approximately     % of the economic interest in FAH, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) will own              shares of Class B common stock of Funko, Inc., representing approximately     % of the combined voting power of all of Funko, Inc.’s common stock (or approximately     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

the purchasers in this offering (1) will own              shares of Class A common stock of Funko, Inc. (or              shares of Class A common stock of Funko, Inc. if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately     % of the combined voting power of all of Funko, Inc.’s common stock and approximately     % of the economic interest in Funko, Inc. (or approximately     % of the

 

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combined voting power and approximately     % of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) through Funko, Inc.’s ownership of FAH, LLC’s common units, indirectly will hold approximately     % of the economic interest in FAH, LLC (or approximately     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

 

    ACON (1) will own              shares of Class A common stock of Funko, Inc. (or              shares of Class A common stock of Funko, Inc. if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately     % of the economic interest in Funko, Inc. (or approximately     % of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) will own              shares of Class B common stock of Funko, Inc., which combined with the Class A common stock described in clause (1) will represent approximately     % of the combined voting power of all of Funko, Inc.’s common stock (or approximately     % of the combined voting power if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (3) through Funko, Inc.’s ownership of common units of FAH, LLC and ACON’s ownership interest in common units of FAH, LLC, directly or indirectly will hold approximately     % of the economic interest in FAH, LLC (or approximately     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

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The diagram below depicts our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

 

LOGO

 

(1) Includes Fundamental, the Former Profits Interests Holders, the Warrant Holders, certain of our current executive officers, other employees and directors and each of their permitted transferees. The common units held by the Continuing Equity Owners exclude                      common units that will be subject to time-based vesting.
(2) FAH, LLC, its wholly owned subsidiary FHL and its indirect wholly owned subsidiary Funko, LLC are the borrowers under our Senior Secured Credit Facilities.
(3) A portion of these common units will be held through wholly owned subsidiaries of Funko, Inc. as a result of the Former Equity Owners exchanging their indirect ownership interests in common units of FAH, LLC for shares of Class A common stock on a one-to-one basis as part of the Transactions.

 

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As the sole managing member of FAH, LLC, we will operate and control all of the business and affairs of FAH, LLC and, through FAH, LLC and its subsidiaries, conduct the business. Following the Transactions, including this offering, we will record a significant non-controlling interest in our consolidated subsidiary, FAH, LLC, relating to the ownership interest of the Continuing Equity Owners. Accordingly, although Funko, Inc. will have a minority economic interest in FAH, LLC, it will control the management of FAH, LLC as the sole managing member. As a result, Funko, Inc. will consolidate FAH, LLC and record a non-controlling interest in consolidated entity for the economic interest in FAH, LLC held by the Continuing Equity Owners.

Unless otherwise indicated, this prospectus assumes the shares of Class A common stock are offered at $        per share (the midpoint of the price range listed on the cover page of this prospectus). Although the number of shares of Class A common stock being offered hereby to the public and the total number of FAH, LLC common units outstanding after the offering will remain fixed regardless of the initial public offering price in this offering, certain share information and FAH, LLC common unit information presented in this prospectus will vary depending on the initial public offering price in this offering. Specifically, the relative allocation of the common units issued in the Transactions as among the Original Equity Owners will vary, depending on the initial public offering price in this offering, which will also impact the shares of Class A common stock and Class B common stock issued to the Original Equity Owners in the Transactions. An increase in the assumed initial public offering price would result in a decrease in the amount of common units of FAH, LLC and, in turn, shares of Class B common stock issued to ACON, Fundamental, the Warrant Holders and certain other Original Equity Owners and an increase in the amount of common units issued to the Former Profits Interests Holders on an aggregate basis. A decrease in the assumed initial public offering price would result in an increase in the amount of common units and, in turn, shares of Class B common stock issued to ACON, Fundamental, the Warrant Holders and certain other Original Equity Owners and a decrease in the amount of common units issued to the Former Profits Interests Holders on an aggregate basis.

Incorporation of Funko, Inc.

Funko, Inc., the issuer of the Class A common stock offered hereby, was incorporated as a Delaware corporation on April 21, 2017. Funko, Inc. has not engaged in any material business or other activities except in connection with its formation. The amended and restated certificate of incorporation of Funko, Inc. that will become effective immediately prior to the consummation of this offering will authorize two classes of common stock, Class A common stock and Class B common stock, each having the terms described in “Description of Capital Stock.”

Reclassification and Amendment and Restatement of the FAH LLC Agreement

Prior to or substantially concurrently with the consummation of this offering, the limited liability company agreement of FAH, LLC will be amended and restated to, among other things, modify its capital structure by creating a single new class of units that we refer to as “common units” and providing for a right of redemption of common units (subject in certain circumstances to time-based vesting requirements and limitations on the common units that will be converted from HR units in connection with the Transactions) in exchange for, at our election, shares of our Class A common stock or cash. See “Certain Relationships and Related Party Transactions—FAH LLC Agreement.”

 

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USE OF PROCEEDS

We estimate, based upon an assumed initial public offering price of $        per share (which is the midpoint of the price range set forth on the cover page of this prospectus), that we will receive net proceeds from this offering of approximately $              million (or $              million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering (including any net proceeds from any exercise of the underwriters’ option to purchase additional shares of Class A common stock) to purchase (1)              common units (or              common units if the underwriters exercise in full their option to purchase additional shares of Class A common stock) directly from FAH, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions, and (2)              common units directly from certain of the Continuing Equity Owners at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions.

FAH, LLC intends to use the $          million in net proceeds it receives from the sale of common units to Funko, Inc. (together with any additional proceeds it may receive if the underwriters exercise their option to purchase additional shares of Class A common stock) as follows:

 

    to repay the Subordinated Promissory Notes in full;

 

    to repay approximately $          million of the outstanding borrowings under our Senior Secured Credit Facilities, including $         million of outstanding borrowings under our Term Loan A Facility, $        million of outstanding borrowings under our Term Loan B Facility and $        million of outstanding borrowings under our Revolving Credit Facility; and

 

    the remainder for general corporate purposes.

The Subordinated Promissory Notes are scheduled to mature on the earlier of (1) 180 days after the payment in full of the obligations under our Senior Secured Credit Facilities, and (2) the consummation of this offering, and accrued interest at a rate of 11.0% per year as of June 30, 2017. Proceeds from the Subordinated Promissory Notes were used to fund a portion of the 2016 Earnout Payment (as described under the caption “Certain Relationships and Related Party Transactions—Related Party Agreements in Effect Prior to this Offering—ACON Acquisition”).

The Term Loan A Facility, the Term Loan B Facility and the Revolving Credit Facility are each scheduled to mature on October 30, 2021 and had interest rates of 8.25%, 11.05% and 3.74%, respectively, as of June 30, 2017. In September 2016, we used $50.0 million of borrowings under the Term Loan A Facility to pay a $49.0 million special cash distribution to the holders of Class A units of FAH, LLC, $0.8 million in cash bonus payments to certain of our executive officers and other employees and a $0.2 million reduction in interest and principal under loans to certain members of management. In June 2017, we used $20.0 million of the borrowings under the Term Loan A Facility to fund a portion of the purchase price for the Loungefly Acquisition, and to pay related fees and expenses. In January 2017, we used $50.0 million of borrowings under the Term Loan B Facility to pay a $49.0 million special cash distribution to the holders of Class A units of FAH, LLC, $0.8 million in cash bonus payments to certain of our executive officers and other employees and a $0.2 million reduction in interest and principal under loans to certain of our executive officers and other employees. Outstanding borrowings under the Revolving Credit Facility were used to fund working capital and capital expenditures, as well as the Underground Toys Acquisition in January 2017 and the formation of our subsidiary Funko UK, Ltd.

 

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Pending use of the net proceeds from this offering described above, we may invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government.

Assuming no exercise of the underwriters’ option to purchase additional shares of Class A common stock, each $1.00 increase (decrease) in the assumed initial public offering price of $        per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by approximately $          million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 share increase (decrease) in the number of shares offered in this offering would increase (decrease) the net proceeds to us from this offering by approximately $          million, assuming that the price per share for the offering remains at $          (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The Former Equity Owners, who will exchange their indirect ownership interests in common units of FAH, LLC for shares of Class A common stock as part of the Transactions, will sell              of those shares of Class A common stock in this offering as selling stockholders. We will not receive any proceeds from the sale of shares by the selling stockholders. After deducting estimated underwriting discounts and commissions, the selling stockholders will receive approximately $          million of net proceeds from this offering.

FAH, LLC will bear or reimburse Funko, Inc. and the selling stockholders for all of the expenses incurred in connection with this offering.

 

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CAPITALIZATION

The following table sets forth the cash and cash equivalents and capitalization as of June 30, 2017, as follows:

 

    of FAH, LLC and its subsidiaries on an actual basis;

 

    of Funko, Inc. and its subsidiaries on a pro forma basis to give effect to the Transactions, excluding this offering; and

 

    of Funko, Inc. and its subsidiaries on a pro forma as adjusted basis to give effect to the Transactions, including our sale of              shares of Class A common stock in this offering at an assumed initial public offering price of $        per share (which is the midpoint of the range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds therefrom as described under “Use of Proceeds,” and the sale of              shares of our Class A common stock in this offering by the selling stockholders.

For more information, please see “Our Organizational Structure,” “Use of Proceeds” and “Unaudited Pro Forma Consolidated Financial Information” elsewhere in this prospectus. You should read this information in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of June 30, 2017  
     Historical
FAH, LLC
    Pro Forma
Funko, Inc.
     Pro Forma
As Adjusted
Funko, Inc.(5)
 
    

(in thousands, except share

and per share data)

 

Cash and cash equivalents

   $ 12,752     $                   $               
  

 

 

   

 

 

    

 

 

 

Indebtedness:

       

Term Loan A Facility(1)(2)

   $ 227,040     $      $  

Term Loan B Facility(1)(3)

     40,970       

Revolving Credit Facility(1)

     51,054       

Subordinated Promissory Notes

     20,000       
  

 

 

   

 

 

    

 

 

 

Total indebtedness

     339,064       

Total equity:

       

Members’ equity

     225,871               

Class A common stock, par value $0.0001 per share; no shares authorized, issued and outstanding, actual;              shares authorized,              issued and outstanding, pro forma

           

Class B common stock, par value $0.0001 per share; no shares authorized, issued and outstanding, actual;              shares authorized,              issued and              outstanding, pro forma

           

Additional paid-in capital

     65,588       

Accumulated other comprehensive income

     771       

Accumulated deficit

     (137,240     
  

 

 

   

 

 

    

 

 

 

Total members’/stockholders’ equity

     154,990       
  

 

 

   

 

 

    

 

 

 

Non-controlling interest(4)

           
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 494,054     $                       $                   
  

 

 

   

 

 

    

 

 

 

 

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(1)  For a discussion of the Term Loan A Facility, the Term Loan B Facility, the Revolving Credit Facility and the Subordinated Promissory Notes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Senior Secured Credit Facilities” and “—Description of Subordinated Promissory Notes.” See also our audited consolidated financial statements included elsewhere in this prospectus, which include all liabilities.
(2)  Net of $6.1 million of unamortized discount.
(3) Net of $6.0 million of unamortized discount.
(4)  On a pro forma basis and a pro forma as adjusted basis, includes the ownership interests not owned by Funko, Inc., which represents     % and     % of the outstanding common units of FAH, LLC, respectively. The Continuing Equity Owners will hold the     % and     % non-controlling interest in FAH, LLC on a pro forma and pro forma as adjusted basis, respectively.
(5)  Each $1.00 increase or decrease in the assumed initial public offering price of $        per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease each of cash, additional paid-in capital, total members’ / stockholders’ equity and total capitalization on a pro forma as adjusted basis by approximately $          million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 share increase or decrease in the number of shares offered in this offering would increase or decrease each of cash, additional paid-in capital, total members’ / stockholders’ equity and total capitalization on a pro forma as adjusted basis by approximately $          million, assuming that the price per share for the offering remains at $          (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and therefore we do not anticipate declaring or paying any cash dividends on our Class A common stock in the foreseeable future. Holders of our Class B common stock are not entitled to participate in any dividends declared by our board of directors. Additionally, our ability to pay any cash dividends on our Class A common stock is limited by restrictions on the ability of FAH, LLC and our other subsidiaries to pay dividends or make distributions under the terms of our Senior Secured Credit Facilities. See “Description of Capital Stock” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Senior Secured Credit Facilities.” Furthermore, because we are a holding company, our ability to pay cash dividends on our Class A common stock depends on our receipt of cash distributions from FAH, LLC and, through FAH, LLC, cash distributions and dividends from our other direct and indirect wholly owned subsidiaries. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to compliance with contractual restrictions and covenants in the agreements governing our current and future indebtedness. Any such determination will also depend upon our business prospects, results of operations, financial condition, cash requirements and availability and other factors that our board of directors may deem relevant.

Accordingly, you may need to sell your shares of our Class A common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Relating to This Offering and Ownership of Our Class A Common Stock—We do not intend to pay dividends on our Class A common stock for the foreseeable future.”

FAH, LLC paid cash tax distributions to its members during the six months ended June 30, 2017 and 2016 aggregating $23.7 million and $13.7 million, respectively, and during the year ended December 31, 2016 and the Predecessor 2015 Period aggregating $21.3 million and $12.2 million, respectively. FAH, LLC did not pay any cash tax distributions to its members during the three months ended September 30, 2017 and the Successor 2015 Period. Additionally, FAH, LLC paid a special distribution to its members during the six months ended June 30, 2017 of $49.2 million (of which $49.0 million consisted of cash and $0.2 million consisted of a reduction in interest and principal under loans to certain members of management) and during the year ended December 31, 2016 paid a special distribution to its members of $49.2 million (of which $49.0 million consisted of cash and $0.2 million consisted of a reduction in interest and principal under loans to certain members of management).

 

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DILUTION

The Continuing Equity Owners will own common units in FAH, LLC after the Transactions. Because the Continuing Equity Owners do not own any Class A common stock or have any right to receive distributions from Funko, Inc., we have presented dilution in pro forma net tangible book value per share both before and after this offering assuming that all of the holders of common units (other than Funko, Inc.) had their common units redeemed or exchanged for newly-issued shares of Class A common stock on a one-for-one basis (rather than for cash) and the cancellation for no consideration of all of their shares of Class B common stock (which are not entitled to receive distributions or dividends, whether cash or stock from Funko, Inc.) in order to more meaningfully present the dilutive impact on the investors in this offering. We refer to the assumed redemption or exchange of all common units for shares of Class A common stock as described in the previous sentence as the Assumed Redemption.

Dilution is the amount by which the offering price paid by the purchasers of the Class A common stock in this offering exceeds the pro forma net tangible book value per share of Class A common stock after the offering. FAH, LLC’s pro forma net tangible book value as of June 30, 2017 prior to this offering and after the Assumed Redemption was $        . Pro forma net tangible book value per share prior to this offering is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock deemed to be outstanding after giving effect to the Assumed Redemption.

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our Class A common stock after this offering.

Pro forma net tangible book value per share after this offering is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock deemed to be outstanding, after giving effect to the Transactions, including this offering and the application of the proceeds from this offering as described in “Use of Proceeds,” and the Assumed Redemption. Our pro forma net tangible book value as of June 30, 2017 after this offering would have been approximately $          million, or $        per share of Class A common stock. This amount represents an immediate increase in pro forma net tangible book value of $        per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $        per share to new investors purchasing shares of Class A common stock in this offering. We determine dilution by subtracting the pro forma net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution:

 

Assumed initial public offering price per share

   $               

Pro forma net tangible book value per share as of June 30, 2017 before this offering(1)

  

Increase per share attributable to investors in this offering

  

Pro forma net tangible book value per share after this offering(2)

   $               
  

 

 

 

Dilution per share to new Class A common stock investors

   $               
  

 

 

 

 

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(1)  The computation of pro forma net tangible book value per share as of June 30, 2017 before this offering is set forth below (in thousands except for share data):

 

Numerator

  

Book value of tangible assets

   $               

Less: total liabilities

   $  
  

 

 

 

Pro forma net tangible book value(a)

   $               
  

 

 

 

Denominator

  

Shares of Class A common stock to be outstanding immediately prior to this offering, the Assumed Redemption and vested restricted stock units(b)

  
  

 

 

 

Total

  
  

 

 

 

Pro forma net tangible book value per share

   $  
  

 

 

 

 

  (a)  Gives pro forma effect to the Transactions (excluding this offering) and the Assumed Redemption.
  (b)  Reflects              outstanding shares of Class A common stock, consisting of (i)              outstanding shares of Class A common stock issued in exchange for certain of the Former Equity Owners’ indirect ownership interests in common units of FAH, LLC on a one-to-one basis and (ii)              outstanding shares of Class A common stock issuable upon the exchange of common units to be held by the Continuing Equity Owners prior to this offering.

 

(2)  The computation of pro forma net tangible book value per share as of June 30, 2017 after giving effect to this offering is set forth below:

 

Numerator

  

Book value of tangible assets

   $               

Less: total liabilities

  
  

 

 

 

Pro forma net tangible book value (deficit)(a)

   $               
  

 

 

 

Denominator

  

Shares of Class A common stock to be outstanding immediately after this offering and the Assumed Redemption(b)

  
  

 

 

 

Total

  
  

 

 

 

Pro forma net tangible book value (deficit) per share

   $               
  

 

 

 

 

  (a)  Gives pro forma effect to the Transactions (including this offering) and the Assumed Redemption. Pro forma net tangible book value reflects a net increase from stockholders’ equity of $        million, comprised of an increase of $        million as a result of the issuance of our Class A common stock, offset by a reduction of $        million related to our purchase of common units directly from certain of the Continuing Equity Owners with a portion of the net proceeds from this offering, as described under “Use of Proceeds.”
  (b)  Reflects              outstanding shares of Class A common stock, consisting of (i)              shares of Class A common stock to be issued in this offering, and (ii) the              shares described in note (1)(b) above, including              shares of Class A common stock sold by the Former Equity Owners in this offering, less the shares of Class A common stock issuable upon the exchange of common units to be purchased directly from certain of the Continuing Equity Owners with a portion of the net proceeds from this offering, as described under “Use of Proceeds.” Does not reflect stock options and restricted stock units covering a total of              shares of our Class A common stock to be granted to certain of our directors and certain of our employees in connection with this offering as described under the captions “Executive Compensation—Executive Compensation Arrangements—Director Compensation” and “Executive Compensation—Equity Compensation Plans—2017 Incentive Award Plan.”

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share, which is the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) the pro forma net tangible book value per share after this offering by approximately $        , and dilution in pro forma net tangible book value per share to new investors by approximately $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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If the underwriters exercise in full their option to purchase additional shares of Class A common stock, the pro forma net tangible book value after the offering would be $        per share, the increase in pro forma net tangible book value per share to existing stockholders would be $        per share and the dilution in pro forma net tangible book value to new investors would be $        per share, in each case assuming an initial public offering price of $        per share, which is the midpoint of the price range listed on the cover page of this prospectus.

The following table summarizes, as of June 30, 2017 after giving effect to the Transactions (including this offering) and the Assumed Redemption, the number of shares of Class A common stock purchased from us, the total consideration paid, or to be paid, to us and the average price per share paid, or to be paid, by existing owners and by the new investors. The calculation below is based on an assumed initial public offering price of $        per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares
Purchased
    Total Consideration        
     Number      Percent     Amount      Percent     Average price
per Share
 

Original Equity Owners

                       $                                            $                       

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $        100   $                       
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share would increase (decrease) the total consideration paid by new investors and the total consideration paid by all stockholders by $          million, assuming the number of shares offered by us remains the same and after deducting estimated underwriting discounts and commissions but before estimated offering expenses.

Except as otherwise indicated, the discussion and the tables above assume no exercise of the underwriters’ option to purchase additional shares of Class A common stock. In addition, the discussion and tables above exclude shares of Class B common stock, because holders of the Class B common stock are not entitled to distributions or dividends, whether cash or stock, from Funko, Inc. The number of shares of our Class A common stock outstanding after this offering as shown in the tables above is based on the number of shares outstanding as of June 30, 2017, after giving effect to the Transactions and the Assumed Redemption, and excludes              shares of Class A common stock reserved for issuance under our 2017 Plan (as described in “Executive Compensation—Equity Compensation Plans—2017 Incentive Award Plan”), including shares of Class A common stock issuable pursuant to             stock options and             restricted stock units granted on the date of this prospectus to our directors and certain employees, including the named executive officers, in connection with this offering as described in “Executive Compensation—Executive Compensation Arrangements—Director Compensation” and “Executive Compensation—Equity Compensation Plans—2017 Incentive Award Plan.”

To the extent any of these outstanding options are exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of June 30, 2017 the pro forma net tangible book value per share after this offering would be $        , and total dilution per share to new investors would be $        .

 

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If the underwriters exercise in full their option to purchase additional shares of Class A common stock:

 

    the percentage of shares of Class A common stock held by the Original Equity Owners will decrease to approximately     % of the total number of shares of our Class A common stock outstanding after this offering; and

 

    the number of shares held by new investors will increase to             , or approximately     % of the total number of shares of our Class A common stock outstanding after this offering.

 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents the selected historical consolidated financial and other data for FAH, LLC and its subsidiaries. FAH, LLC is the predecessor of the issuer, Funko, Inc., for financial reporting purposes. The selected consolidated statements of operations and statements of cash flows data for the year ended December 31, 2016 (Successor), the period from October 31, 2015 through December 31, 2015 (Successor) and the period from January 1, 2015 through October 30, 2015 (Predecessor), and the summary consolidated balance sheet data as of December 31, 2016 and 2015 are derived from the audited consolidated financial statements of FAH, LLC included elsewhere in this prospectus. The selected consolidated statements of operations and statements of cash flows data for the six months ended June 30, 2017 and 2016, and the summary consolidated balance sheet data as of June 30, 2017 are derived from the unaudited consolidated financial statements of FAH, LLC included elsewhere in this prospectus. We have prepared the unaudited consolidated financial information set forth below on the same basis as our audited consolidated financial statements and have included all adjustments, consisting of only normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and results of operations for such periods.

The results for any interim period are not necessarily indicative of the results that may be expected for a full year. Additionally, the results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period. The information set forth below should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and the consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

The selected unaudited pro forma consolidated financial data of Funko, Inc. presented below have been derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The selected unaudited pro forma financial data for the year ended December 31, 2016 and as of and for the six months ended June 30, 2017 give effect to the Transactions, as described in “Our Organizational Structure,” and the consummation of this offering, the use of proceeds therefrom and related transactions, as described in “Use of Proceeds,” as if all such transactions had occurred on January 1, 2016, in the case of the selected unaudited pro forma consolidated statements of operations data, and as of June 30, 2017, in the case of the selected unaudited pro forma consolidated balance sheet data. The unaudited pro forma consolidated financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had this offering and the related transactions taken place on the dates indicated, or that may be expected to occur in the future. See “Unaudited Pro Forma Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the unaudited pro forma consolidated financial data.

 

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The selected historical financial data of Funko, Inc. has not been presented because Funko, Inc. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

 

    Pro Forma
Funko, Inc.
    Historical FAH, LLC  
      Successor           Predecessor  
    Six Months
Ended

June 30,
2017
    Year Ended
December 31,

2016
   

 

Six Months Ended

June 30,

    Year Ended
December 31,

2016
    Period from
October 31,
2015

through
December 31,
2015
          Period from
January 1,
2015

through
October 30,
2015
 
        2017     2016              
   

(unaudited)

    (unaudited)        
    (in thousands, except margins)  

Consolidated Statements of Operations Data:

                 

Net sales

  $                   $                   $ 203,798     $ 176,261     $ 426,717     $   56,565         $ 217,491  

Cost of sales (exclusive of depreciation and amortization shown separately below)

        130,066       125,799       280,396       44,485           131,621  

Selling, general and administrative expenses

        50,901       37,087       77,525       13,894           37,145  

Acquisition transaction costs

        3,086       349       1,140       7,559           13,301  

Depreciation and amortization

        14,322       11,174       23,509       3,370           5,723  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) from operations

        5,423       1,852       44,147       (12,743         29,701  

Interest expense, net

        14,677       7,879       17,267       2,818           2,202  

Other income, net

        (113     —         —         —             —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) before income taxes

        (9,141     (6,027     —         —             —    

Income tax expense

        1,024       —         —         —             —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net income (loss)

  $     $                  $ (10,165   $ (6,027   $ 26,880     $ (15,561       $ 27,499  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Consolidated Statements of Cash Flows Data:

                 

Net cash provided by operating activities

      $ 15,750     $ 16,389     $ 49,468     $ 14,110         $ 8,538  

Net cash used in investing activities

        (46,764     (8,014     (22,105     (244,421         (10,043

Net cash (used in) provided by financing activities

        37,627       3,339       (45,613     244,456           11,390  

Selected Other Data:

                 

EBITDA(1)

  $     $                  $ 19,858     $ 13,026     $ 67,656     $ (9,373       $ 35,424  

Adjusted EBITDA(1)

  $     $                  $ 31,284     $ 35,644     $ 96,960     $ 13,170         $ 61,996  

Net income (loss) margin

    %              %      (5.0 )%      (3.4 )%      6.3     (27.5 )%          12.6

Adjusted EBITDA margin(1)

    %              %      15.4     20.2     22.7     23.3         28.5

 

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     Pro Forma
Funko, Inc.(2)
     Historical FAH, LLC  
     June 30,
2017
     June 30,
2017
     December 31,
2016
     December 31,
2015
 
     (unaudited)      (unaudited)         
    

(in thousands)

 

Consolidated Balance Sheets Data:

           

Cash and cash equivalents

   $                   $ 12,752      $           6,161      $       24,411  

Total assets

        588,380        522,237        505,330  

Total debt(3)

        339,064        217,753        169,846  

Total members’/stockholders’ equity

        154,990        217,377        243,556  

 

(1)  EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not measurements of our financial performance under GAAP and should not be considered as an alternative to net income (loss), net income (loss) margin or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity.

 

   We define “EBITDA” as net income before interest expense, net, income tax expense and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA further adjusted for monitoring fees, non-cash charges related to equity-based compensation programs, earnout fair market value adjustments, inventory step-ups, acquisition transaction costs, foreign currency transaction (gains) losses and other unusual or one-time items. We define Adjusted EBITDA margin as the ratio of Adjusted EBITDA to net sales. We caution investors that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA margin in the same manner. We present EBITDA, Adjusted EBITDA and Adjusted EBITDA margin because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.

Management uses EBITDA, Adjusted EBITDA and Adjusted EBITDA margin:

 

    as a measurement of operating performance because they assist us in comparing the operating performance of our business on a consistent basis, as they remove the impact of items not directly resulting from our core operations;

 

    for planning purposes, including the preparation of our internal annual operating budget and financial projections;

 

    as a consideration to assess incentive compensation for our employees;

 

    to evaluate the performance and effectiveness of our operational strategies; and

 

    to evaluate our capacity to expand our business.

By providing these non-GAAP financial measures, together with reconciliations, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. In addition, our Senior Secured Credit Facilities use Adjusted EBITDA to measure our compliance with covenants such as senior leverage ratio. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income, net income (loss) margin or other financial statement data presented in our consolidated financial statements included elsewhere in this prospectus as indicators of financial performance. Some of the limitations are:

 

    such measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

    such measures do not reflect changes in, or cash requirements for, our working capital needs;

 

    such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

    such measures do not reflect our tax expense or the cash requirements to pay our taxes;

 

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and

 

    other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.

 

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Due to these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for monitoring fees, non-cash charges related to equity-based compensation programs, earnout fair market value adjustments, inventory step-ups, acquisition transaction costs and other unusual or one-time items. It is reasonable to expect that these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other companies over time. In addition, Adjusted EBITDA includes adjustments for other items that we do not expect to regularly record following this offering. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.

The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net income:

 

    Pro Forma Funko, Inc.     Historical FAH, LLC  
      Successor           Predecessor  
    Six
Months
Ended
June 30,

2017
    Year Ended
December 31,
2016
   

Six Months Ended

June 30,

    Year Ended
December 31,
2016
    Period from
October 31,
2015 through
December 31,
      2015      
          Period from
January 1,
2015

through
October 30,
      2015      
    Year Ended
December 31,
      2014      
 
        2017     2016                
    (unaudited)     (unaudited)                                
    (in thousands)  

Net income (loss)

  $                   $                   $   (10,165   $ (6,027   $ 26,880     $ (15,561       $ 27,499     $ 19,615  

Interest expense, net

        14,677       7,879       17,267       2,818           2,202       2,693  

Income tax expense

        1,024                                    

Depreciation and amortization

        14,322       11,174       23,509       3,370           5,723       4,003  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

EBITDA

  $     $     $   19,858     $   13,026     $ 67,656     $ (9,373       $ 35,424     $ 26,311  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjustments:

                   

Monitoring fees(a)

        981       749       1,498       272           3,346       1,416  

Equity-based compensation(b)

        3,745       1,166       2,369       4,484           9,925        

Earnout fair market value adjustment(c)

        8       6,630       8,561       1,540                  

Inventory step-up(d)

        2,630       13,435       13,434       8,688                  

Acquisition transaction costs and other expenses(e)

        4,175       638       3,442       7,559           13,301       385  

Foreign currency transaction (gain) loss(f)

        (113                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted EBITDA

  $                   $     $   31,284     $   35,644     $   96,960     $   13,170         $   61,996     $   28,112  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

  (a)  Represents monitoring fees paid pursuant to a management services agreement with Fundamental Capital, LLC, which was terminated in 2015 in connection with the ACON Acquisition, and a management services agreement with ACON that was entered into in connection with the ACON Acquisition, which will terminate upon the consummation of this offering.
  (b)  Represents non-cash charges related to equity-based compensation programs, which vary from period to period depending on timing of awards.
  (c)  Reflects the increase in the fair value of contingent liabilities incurred in connection with the ACON Acquisition and the Underground Toys Acquisition.
  (d)  Represents a non-cash adjustment to cost of sales resulting from the ACON Acquisition and the Underground Toys Acquisition.
  (e)  Represents legal, accounting, and other related costs incurred in connection with this offering, the ACON Acquisition, the Underground Toys Acquisition, the Loungefly Acquisition and other potential acquisitions.
  (f)  Represents both unrealized and realized foreign currency (gains) losses on transactions other than in U.S. dollars.

 

(2) 

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease each of cash and total stockholders’ equity on a

 

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  pro forma basis by approximately $          million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(3)  Total debt as of June 30, 2017 consists of the Subordinated Promissory Notes and borrowings under our Senior Secured Credit Facilities, net of unamortized discount of $12.1 million. Total debt consists of borrowings under our Senior Secured Credit Facilities net of unamortized discount of $6.4 million and $5.2 million as of December 31, 2016 and 2015, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Subordinated Promissory Notes” and “—Description of Senior Secured Credit Facilities and “Description of Certain Indebtedness.” Also see our audited consolidated financial statements included elsewhere in this prospectus, which include all liabilities.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

We have derived the unaudited pro forma consolidated statement of operations for the year ended December 31, 2016 set forth below by the application of pro forma adjustments to the audited consolidated financial statements of FAH LLC and subsidiaries included elsewhere in this prospectus. We have derived the unaudited pro forma consolidated statement of operations for the six months ended June 30, 2017 and the unaudited pro forma consolidated balance sheet as of June 30, 2017 set forth below by the application of pro forma adjustments to the unaudited consolidated financial statements of FAH, LLC and subsidiaries included elsewhere in this prospectus.

The unaudited pro forma consolidated statements of operations for the year ended December 31, 2016 and the six months ended June 30, 2017, and the unaudited pro forma consolidated balance sheet as of June 30, 2017, present our consolidated results of operations and financial position to give pro forma effect to all of the Transactions (excluding this offering) described in “Our Organizational Structure,” the sale of shares of Class A common stock in this offering (excluding shares issuable upon exercise of the underwriters’ option to purchase additional shares), and the application of the net proceeds by us and FAH, LLC from this offering and the other transactions described elsewhere in this section, as if all such transactions had been completed as of January 1, 2016 with respect to the unaudited pro forma consolidated statements of operations, and as of June 30, 2017, with respect to the unaudited pro forma consolidated balance sheet. The unaudited pro forma consolidated financial statements reflect pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change. We have made, in our opinion, all adjustments that are necessary to present fairly the pro forma financial information.

The pro forma adjustments principally give effect to the following items:

 

    the Transactions (excluding this offering) described in “Our Organizational Structure;”

 

    this offering and the payment by us of fees and expenses related to this offering and the use of a portion of the proceeds by FAH, LLC (from the sale of common units to us using the proceeds of this offering) to repay the Subordinated Promissory Notes in full and to repay a portion of the outstanding borrowings under the Senior Secured Credit Facilities as described in “Use of Proceeds;” and

 

    a provision for federal, state and local income taxes of Funko, Inc. as a taxable corporation at an effective rate of     % and     % for the year ended December 31, 2016 and the six months ended June 30, 2017, respectively, which includes a provision for U.S. federal income taxes and assumes the highest statutory rates applied to income apportioned to each state and local jurisdiction.

The unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of the option to purchase up to an additional              shares of Class A common stock from us.

As described in greater detail under “Certain Relationships and Related Party Transactions—Tax Receivable Agreement,” in connection with the closing of this offering, we will enter into the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that will provide for the payment by Funko, Inc. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Funko, Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (1) increases in tax basis resulting from Funko, Inc.’s purchase of common units of FAH, LLC directly from certain of the Continuing Equity Owners in connection with this offering, as described under “Use of Proceeds” and any future redemptions funded by Funko, Inc. or exchanges of common units for

 

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Class A common stock described under “Certain Relationships and Related Party Transactions—FAH LLC Agreement—Agreement in Effect Upon Consummation of this Offering—Common Unit Redemption Right,” and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement. Due to the uncertainty in the amount and timing of future redemptions or exchanges of common units by the Continuing Equity Owners, the unaudited pro forma consolidated financial information assumes that no future redemptions or exchanges of common units have occurred.

As described in “Our Organizational Structure,” the unaudited pro forma consolidated financial statements reflect the acquisition of the equity interests in FAH, LLC and does not result in a change in the book basis of FAH, LLC as such transactions are between entities under common control.

As a public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. We expect to incur additional annual expenses related to these steps and, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses. We have not included any pro forma adjustments relating to these costs. Funko, Inc. was formed on April 21, 2017 and will have no material assets or results of operations until the completion of this offering and therefore its historical financial position is not shown in a separate column in the unaudited pro forma statement of operations.

The unaudited pro forma consolidated financial information is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Transactions, including this offering, been consummated on the dates indicated, and do not purport to be indicative of statements of financial condition data or results of operations as of any future date or for any future period. You should read our unaudited pro forma consolidated financial information and the accompanying notes in conjunction with all of the historical financial statements and related notes included elsewhere in this prospectus and the financial and other information appearing elsewhere in this prospectus, including information contained in “Risk Factors,” “Use of Proceeds,” “Capitalization,” “Selected Historical and Unaudited Pro Forma Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Funko, Inc. and Subsidiaries

Unaudited Pro Forma Consolidated Balance Sheet

as of June 30, 2017

 

    Historical
FAH, LLC (a)
    Recapitalization
Adjustments (b)
    Pro Forma
FAH, LLC
    Transaction
Adjustments
    Offering
Adjustments
    Pro Forma
Funko, Inc.
 

Assets

      (in thousands)          

Current assets:

           

Cash and cash equivalents

  $ 12,752     $                              $              $           (e)    $          (c)(g)(h)    $               

Accounts receivable, net

    81,629            

Inventory

    57,982            

Prepaid expenses and other current assets

    31,573                      (g)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    183,936            

Property and equipment, net

    35,639            

Goodwill

    106,521            

Intangible assets, net

    257,991            

Deferred tax asset

                       (i)     

Other assets

    4,293            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 588,380     $     $     $     $     $  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Members’/Stockholders’ Equity

           

Current liabilities:

           

Line of credit

  $ 51,054     $     $     $     $          (h)    $  

Current portion long-term debt, net of unamortized discount

    16,451                      (h)   

Accounts payable

    45,043            

Accrued royalties

    16,297            

Accrued expenses and other current liabilities

    27,044            

Current portion of Tax Receivable Agreement liability

               

Current portion of contingent consideration

    2,478            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    158,367            

Long-term debt, net of unamortized discount

    271,559                      (h)   

Deferred rent

    3,464            

Tax Receivable Agreement liability, net of current portion

                       (i)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    433,390            

Commitments and contingencies

           

Members’/stockholders’ equity:

           

Class A units, $1,000 par value; unlimited units authorized; 225,871 units issued and outstanding at June 30, 2017

    225,871                (b)                 (d)(f)     

Common units, no par value; 12,500 units authorized; 11,724 units issued and outstanding at June 30, 2017

               

Senior Preferred units, $1,000 par value; no units authorized, issued, and outstanding at June 30, 2017

               

Home Run units, no par value; 11,724 units authorized; 11,724 units issued and outstanding at June 30, 2017

               

Stockholders’ equity

           

Class A common stock, par value $0.0001 per share

                       (d)               (c)   

Class B common stock, par value $0.0001 per share

                       (e)     

Additional paid-in-capital

    65,588                    (i)               (c)(g)   

Accumulated other comprehensive income

    771            

Accumulated deficit

    (137,240                  (d)(f)               (f)(h)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Members’/stockholders’ equity attributable to Funko, Inc.

    154,990            

Non-controlling interest

                       (f)               (f)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and members’/stockholders’ equity

  $ 588,380     $     $     $     $     $  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.

 

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Funko, Inc. and Subsidiaries

Notes to Unaudited Pro Forma Consolidated Balance Sheet

 

(a) Funko, Inc. was formed on April 21, 2017 and will have no material assets or results of operations until the completion of this offering and therefore its historical financial position is not shown in a separate column in this unaudited pro forma consolidated balance sheet.

 

(b) In connection with the Transactions, all existing ownership interests (including vested profits interests and all unvested profits interests (subject to common units received in exchange for unvested profits interests remaining subject to their existing time-based vesting requirements)) in FAH, LLC will be converted into common units of FAH, LLC. Existing options to purchase certain ownership interests in FAH, LLC will be converted into options to purchase common units in FAH, LLC.

 

(c) We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions but before estimated offering expenses, of $        million, will be approximately $        million. This amount has been determined based on the assumption that the underwriters’ option to purchase additional shares of our Class A common stock is not exercised. A reconciliation of the gross proceeds from this offering to the net cash proceeds is set forth below:

 

Assumed initial public offering price per share

   $  

Shares of Class A common stock issued in this offering

  
  

 

 

 

Gross proceeds

  

Less: underwriting discounts and commissions and offering expenses (including amounts previously deferred of $        million)

  
  

 

 

 

Net cash proceeds

   $  
  

 

 

 

 

(d) In connection with this offering, the Former Equity Owners will exchange            of their indirect ownership interest in common units of FAH, LLC for              shares of Class A common stock in Funko, Inc. on a one-to-one basis.

 

(e) In connection with this offering, we will issue              shares of Class B common stock to the Continuing Equity Owners (other than the Former Profits Interests Holders), on a one-to-one basis with the number of common units of FAH, LLC they own. Holders of our Class B common stock along with the holders of our Class A common stock, will have certain voting rights as described under “Description of Capital Stock,” but holders of our Class B common stock will not be entitled to receive any distributions from or participate in any dividends declared by our board of directors.

 

(f) Upon completion of the Transactions, we will become the sole managing member of FAH, LLC. Although we will have a minority economic interest in FAH, LLC, we will have the sole voting interest in, and control the management of, FAH, LLC. As a result, we will consolidate the financial results of FAH, LLC and will report a non-controlling interest related to the common units of FAH, LLC held by the Continuing Equity Owners on our consolidated balance sheet. The computation of the non-controlling interest following the consummation of this offering is as follows:

 

     Units      Percentage  

Interest in FAH, LLC by Funko, Inc.

     

Non-controlling interest in FAH, LLC by Continuing Equity Owners

     
  

 

 

    

 

 

 
     
  

 

 

    

 

 

 

If the underwriters were to exercise their option to purchase additional shares of our Class A common stock in full, Funko, Inc. would own     % of the common units of the FAH, LLC and the Continuing Equity Owners would own the remaining     % of the common units of FAH, LLC.

 

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Following the consummation of this offering, the common units of FAH, LLC held by the Continuing Equity Owners, representing the non-controlling interest, will be redeemable at each of their options (subject in certain circumstances to time-based vesting requirements and limitations on the common units that will be converted from HR units in connection with the Transactions) for, at our election, newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each common unit redeemed, in each case in accordance with the terms of the FAH LLC Agreement; provided that, at our election, we may effect a direct exchange of such Class A common stock or such cash, as applicable, for such common units. The Continuing Equity Owners may exercise such redemption right for as long as their common units remain outstanding. See “Certain Relationships and Related Party Transactions—FAH LLC Agreement.”

The Transaction adjustments include adjustments to transfer pro forma FAH, LLC members’ deficit to accumulated deficit and report a non-controlling interest equal to the Continuing Equity Owners’ economic interest in FAH, LLC of     % after giving effect to the Former Equity Owners’ exchange of                common units for                shares of Class A common stock. The following table describes such Transaction adjustments ($ in thousands):

 

Non-controlling interest

  

Members deficit—FAH, LLC

   $  

Former Equity Owners’ Class A common stock economic interest in FAH, LLC

  

Members’ deficit attributable to Former Equity Owners’ Class A common stock

  
  

 

 

 

Members’ deficit attributable to Continuing Equity Owners’ Class A common stock

   $  
  

 

 

 

The Offering adjustments include adjustments to report a non-controlling interest equal to the Continuing Equity Owners’ economic interest in FAH, LLC of     %, after giving effect to the issuance of                  shares of Class A common stock in this offering and the Former Equity Owners’ exchange of                common units for                  shares of Class A common stock, based on the pro forma FAH, LLC members’ deficit adjusted for the net proceeds received from the sale of common units to Funko, Inc., less offering expenses paid by FAH, LLC which are included in additional paid-in capital, and the loss on debt repayment.

The following table describes such Offering adjustments ($ in thousands):

 

Non-controlling interest

  

Members deficit—FAH, LLC

   $  

Purchase of FAH, LLC common units with net proceeds of the offering

  

Offering expenses paid by FAH, LLC

  

Profit unit recognition—additional paid-in capital

  

Profit unit recognition—accumulated deficit

  

Accumulated deficit—write off of prorated portion of original issue discount and capitalized finance costs

  
  

 

 

 

FAH, LLC members’ equity after the offering

  

Continuing Equity Owners’ interest in FAH, LLC

  

Members’ deficit attributable to Continuing Equity Owners’ -non-controlling interest

  

Less: Non-controlling interest included in the “Transaction Adjustments” column

  
  

 

 

 

Non-controlling interest—“Offering Adjustments” column

   $  
  

 

 

 

 

(g) We are deferring certain costs associated with this offering, including certain legal, accounting and other related expenses, which have been recorded in prepaid expenses and other assets on our consolidated balance sheet. Upon completion of this offering, these deferred costs will be charged against the proceeds from this offering with a corresponding reduction to additional paid-in capital.

 

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(h) FAH, LLC intends to use the $        million in net proceeds it receives from the sale of common units to Funko, Inc. to repay $        million of outstanding borrowings under our Subordinated Promissory Notes, $        million of outstanding borrowings under our Term Loan A Facility, $        million of outstanding borrowings under our Term Loan B Facility, $        million of outstanding borrowings under our Revolving Credit Facility and the remainder for general corporate purposes. The repayment of a portion of our borrowings under our Term Loan A Facility and Term Loan B Facility resulted in a $        million loss on debt repayment as the result of the write-off of a portion of the unamortized original issue discount and capitalized finance costs.

 

(i) We expect to obtain an increase in the tax basis of our share of the assets of FAH, LLC when common units are redeemed or exchanged by the Continuing Equity Owners and other qualifying transactions. This increase in tax basis may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. In connection with the consummation of this offering, we will enter into the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that will provide for the payment by us to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in the tax basis of the assets of FAH, LLC resulting from the purchase of common units in exchange for Class A common stock in connection with the consummation of this offering and any future redemptions or exchanges of common units or any prior sales of interests in FAH, LLC and (ii) certain other tax benefits related to payments made by us under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

The net impact of the adjustments to net deferred taxes and the Tax Receivable Agreement liability of $         has been recorded as an increase to additional paid-in capital, as these adjustments arise from equity transactions of the Company.

The amounts to be recorded for both the net deferred tax assets and the liability for our obligations under the Tax Receivable Agreement have been estimated. All of the effects of changes to both the net deferred tax assets and our obligations under the Tax Receivable Agreement after the date of the purchase will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.

 

(j) The reconciliation of FAH, LLC members’ deficit to Funko, Inc. accumulated deficit as of June 30, 2017 is as follows ($ in thousands):

 

Accumulated deficit—“Transaction Adjustments” column

  

Transfer of members’ deficit to accumulated deficit

   $  

Non-controlling interest

  

Compensation expense recognized upon exercise of the outstanding Profit Units

  

Transfer of the par value of the Class A common stock from accumulated deficit to Class A common stock as a result of the exchange of common units by the Former Equity Owners

  
  

 

 

 

Accumulated deficit

  
  

 

 

 

Accumulated deficit—“Offering Adjustments” column

  

Loss on repayment of debt as a result of the write off of the pro rata portion of unamortized original issue discount and capitalized finance costs

  

Offset to the non-controlling interest

  
  

 

 

 

Accumulated deficit—“Offering Adjustments” column

  
  

 

 

 

Total pro forma Funko, Inc. accumulated deficit

   $  
  

 

 

 

 

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Funko, Inc. and Subsidiaries

Unaudited Pro Forma Consolidated Statement of Operations

for the Six Months Ended June 30, 2017

 

     Historical
FAH, LLC (a)
    Transaction
Adjustments
           Offering
Adjustments
           Pro Forma
Funko, Inc.
 
     (in thousands, except per share data)  

Net sales

   $ 203,798     $                         $                         $                   

Cost of sales (exclusive of depreciation and amortization shown separately below)

     130,066              

Selling, general, and administrative expenses

     50,901              (b)     

Acquisition transaction costs

     3,086              

Depreciation and amortization

     14,322              
  

 

 

   

 

 

      

 

 

      

 

 

 

Total operating expenses

     198,375              
  

 

 

   

 

 

      

 

 

      

 

 

 

Income from operations

     5,423              

Interest expense, net

     14,677              (e)     

Other income, net

     (113            (e)     
  

 

 

   

 

 

      

 

 

      

 

 

 

Income (loss) before income taxes

     (9,141            

Income tax expense

     1,024              (c)     
  

 

 

   

 

 

      

 

 

      

 

 

 

Net income (loss)

   $ (10,165   $        $        $  
  

 

 

   

 

 

      

 

 

      

 

 

 

Net income (loss) attributable to non-controlling interests

             (d)          (d)     
  

 

 

   

 

 

      

 

 

      

 

 

 

Net income (loss) attributable to Funko, Inc.

   $ (10,165   $        $        $  
  

 

 

   

 

 

      

 

 

      

 

 

 

Pro forma net income per share data (f):

              

Weighted average shares of Class A common stock outstanding:

              

Basic

              

Diluted

              

Net income available to Class A common stock per share:

              

Basic

              

Diluted

              

See accompanying Notes to Unaudited Pro Forma Consolidated Statement of Operations.

 

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Funko, Inc. and Subsidiaries

Unaudited Pro Forma Consolidated Statement of Operations

for the Year Ended December 31, 2016

 

     Historical
FAH, LLC(a)
     Transaction
Adjustments
           Offering
Adjustments
          Pro Forma
Funko, Inc.
 
     (in thousands, except per share data)  

Net sales

   $ 426,717      $                         $                        $                   

Cost of sales (exclusive of depreciation and amortization shown separately below)

     280,396              

Selling, general, and administrative expenses

     77,525               (b  

Acquisition transaction costs

     1,140              

Depreciation and amortization

     23,509              
  

 

 

    

 

 

      

 

 

     

 

 

 

Total operating expenses

     382,570              
  

 

 

    

 

 

      

 

 

     

 

 

 

Income from operations

     44,147              

Interest expense, net

     17,267               (e  

Other income, net

                   (e  
  

 

 

    

 

 

      

 

 

     

 

 

 

Income (loss) before income taxes

     26,880              

Income tax expense

                   (c  
  

 

 

    

 

 

      

 

 

     

 

 

 

Net income (loss)

   $ 26,880      $        $       $  
  

 

 

    

 

 

      

 

 

     

 

 

 

Net income (loss) attributable to non-controlling interests

              (d)          (d  
  

 

 

    

 

 

      

 

 

     

 

 

 

Net income (loss) attributable to Funko, Inc.

   $ 26,880      $        $       $  
  

 

 

    

 

 

      

 

 

     

 

 

 

Pro forma net income (loss) per share data (f):

              

Weighted average shares of Class A common stock outstanding:

              

Basic

              

Diluted

              

Net income (loss) available to Class A common stock per share:

              

Basic

              

Diluted

              

See accompanying Notes to Unaudited Pro Forma Consolidated Statement of Operations.

 

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Funko, Inc. and Subsidiaries

Notes to Unaudited Pro Forma Consolidated Statements of Operations

 

(a) Funko, Inc. was formed on April 21, 2017 and will have no material assets or results of operations until the completion of this offering and therefore its historical financial position is not shown in a separate column in this unaudited pro forma consolidated statements of operations.

 

(b) Represents the increase in compensation expense we expect to incur following the completion of this offering. We expect to grant            stock options and             restricted stock units to our directors and certain employees in connection with this offering. This amount was calculated assuming the stock options and restricted stock units were granted on January 1, 2016 with the stock options having an exercise price equal to $        per share, the assumed initial public offering price based on the midpoint of the price range set forth on the cover page of this prospectus. The grant date fair values of the stock options were determined using the Black-Scholes valuation model using the following assumptions:

Expected volatility

Expected dividend yield

Expected term (in years)

Risk-free interest rate

 

(c) FAH, LLC has been, and will continue to be, treated as a partnership for U.S. federal and state income tax purposes. As such, income generated by FAH, LLC will flow through to its partners, including us, and is generally not subject to tax at the FAH, LLC level. Following the Transactions, we will be subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income of FAH, LLC. As a result, the unaudited pro forma consolidated statements of income reflect adjustments to our income tax expense to reflect an effective income tax rate of     % and     % for the year ended December 31, 2016 and the six months ended June 30, 2017, respectively, which were calculated assuming the U.S. federal rates currently in effect and the highest statutory rates apportioned to each applicable state, local and foreign jurisdiction.

The income tax expense for the Offering adjustments is determined using the Continuing Equity Owners’ economic interest in FAH, LLC of     % after giving effect to the issuance of              shares of Class A common stock in this offering and the Former Equity Owners’ exchange of            common units for              shares of Class A common stock, based on the pro forma FAH, LLC income before income taxes adjusted for stock option expense, the loss on repayment of debt and the reduction in interest expense as a result of the repayment of our Subordinated Promissory Notes and a portion of the outstanding borrowings under our Term Loan A Facility, Term Loan B Facility and Revolving Credit Facility. The effective tax rate derived from the face of the unaudited pro forma consolidated statement of income will be lower than the stated effective tax rate as the effective tax rate is only applied to the     % of the income before taxes based on Funko, Inc.‘s economic interest in FAH, LLC. Our pro forma allocable share of taxable income from FAH, LLC was $        million and $        million, and our income tax was $            million and $        million, respectively, for the year ended December 31, 2016 and the six months ended June 30, 2017.

 

(d)

Upon completion of the Transactions, Funko, Inc. will become the sole managing member of FAH, LLC. Although we will have a minority economic interest in FAH, LLC, we will have the sole voting interest in, and control the management of, FAH, LLC. As a result, we will consolidate the financial results of FAH, LLC and will report a non-controlling interest related to the common units of FAH, LLC held by the Continuing Equity Owners on our consolidated statements of income. Following this offering, assuming the underwriters do not exercise their option to purchase additional shares of Class A common stock, Funko, Inc. will own     % of the common units of FAH, LLC and the Continuing Equity Owners will own the remaining     % of the common units of

 

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  FAH, LLC. Net income attributable to non-controlling interest will represent     % of the income before income taxes of Funko, Inc. These amounts have been determined based on the assumption that the underwriters option to purchase              additional shares of Class A common stock is not exercised. If the underwriters exercise their option to purchase additional shares of Class A common stock in full, Funko Inc. will own     % of the common units of FAH, LLC and the Continuing Equity Owners will own the remaining     % of the common units of FAH, LLC and net income attributable to non-controlling interest will represent     % of the income before income taxes of Funko, Inc.

The Transaction adjustments include adjustments to report pro forma FAH, LLC net income attributable to non-controlling interests equal to the Continuing Equity Owners’ economic interest in FAH, LLC of     % after giving effect to the Former Equity Owners’ exchange of            common units for              shares of Class A common stock.

The Offering adjustments include adjustments to report a non-controlling interest equal to the Continuing Equity Owners’ economic interest in FAH, LLC of     %, after giving effect to the issuance of              shares of Class A common stock in this offering and the Former Equity Owners exchange of            common units for              shares of Class A common stock based on the pro forma FAH, LLC net income adjusted for equity-based compensation expense and the loss on repayment of debt and the reduction in interest expense as a result of the repayment of $        million of outstanding borrowings under our Subordinated Promissory Notes, $        million of outstanding borrowings under our Revolving Credit Facility, $        million of outstanding borrowings under our Term Loan A Facility and $        million of outstanding borrowings under our Term Loan B Facility.

 

(e) As described in “Use of Proceeds,” we intend to use the net proceeds from this offering (assuming that the underwriters’ option to purchase              additional shares of our Class A common stock is not exercised) to purchase            common units directly from FAH, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions. FAH, LLC intends to use the $        million in net proceeds it receives from the sale of common units to Funko, Inc. to repay $        million of outstanding borrowings under our Subordinated Promissory Notes, $        million of outstanding borrowings under our Revolving Credit Facility, $        million of outstanding borrowings under our Term Loan A Facility and $        million of outstanding borrowings under our Term Loan B Facility. Accordingly, pro forma adjustments have been made to reflect a reduction in interest expense of $        million and $        million for the year ended December 31, 2016 and the six months ended June 30, 2017, respectively, computed at weighted-average interest rates of     % and     % respectively, in each case, as if the outstanding borrowings had been repaid on January 1, 2016, and a $        million loss on debt repayment for the year ended December 31, 2016, comprised of the write off of unamortized original issue discount and capitalized finance costs.

 

(f)

Pro forma basic net loss per share is computed by dividing the net income available to Class A common stockholders by the weighted-average shares of Class A common stock outstanding during the period. Pro forma diluted net loss per share is computed by adjusting the net loss available to Class A common stockholders and the weighted-average shares of Class A common stock outstanding to give effect to potentially dilutive securities. Shares of our Class B common stock are not entitled to receive any distributions or dividends and have no rights to convert into Class A common stock. When a common unit is exchanged for, at our election, cash or Class A common stock by a Continuing Equity Owner who holds shares of our Class B common stock, such Continuing Equity Owner will be required to surrender a share of Class B common stock, which we will cancel for no consideration. Therefore, we did not include shares of our Class B common stock in the computation of pro forma basic or diluted net loss per share. The following

 

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  table sets forth a reconciliation of the numerators and denominators used to compute pro forma basic and diluted net loss per share (in thousands, except per share data):

 

    Pro Forma  
    Year ended
December 31, 2016
    Six Months ended
June 30, 2017
 

Basic net income (loss) per share:

   

Numerator

   

Net income (loss)

   

Less: Net income (loss) attributable to non-controlling interests

   
 

 

 

   

 

 

 

Net income (loss) attributable to Class A common stockholders—basic

   
 

 

 

   

 

 

 

Denominator

   

Shares of Class A common stock held by Former Equity Owners

   

Shares of Class A common stock sold in this offering(1)

   

Vested portion of Class A options(2)

   
 

 

 

   

 

 

 

Weighted average shares of Class A common stock outstanding—basic

   
 

 

 

   

 

 

 

Basic net income (loss) per share

   
 

 

 

   

 

 

 

Diluted net income (loss) per share:

   

Numerator

   

Net income (loss) attributable to Class A common stockholders—basic

   

Reallocation of net income (loss) assuming conversion of common units(3)

   
 

 

 

   

 

 

 

Net income (loss) attributable to Class A common stockholders—diluted

   
 

 

 

   

 

 

 

Denominator

   

Weighted average shares of Class A common stock outstanding—basic

   

Weighted average effect of dilutive securities(4)

   
 

 

 

   

 

 

 

Weighted average shares of Class A common stock outstanding—diluted

   
 

 

 

   

 

 

 

Diluted net income (loss) per share

   
 

 

 

   

 

 

 

 

  (1) We plan to use a portion of the net proceeds from this offering (assuming that the underwriters’ option to purchase              additional shares of our Class A common stock is not exercised) to purchase            common units directly from FAH, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwritings discounts and commissions and, in turn, Class A common stock in this offering less the underwriting discounts and commissions and, in turn, FAH, LLC intends to use the $        million in net proceeds it receives from the sale of common units to Funko, Inc. to repay $        million of outstanding borrowings under our Subordinated Promissory Notes, $        million of outstanding borrowings under our Revolving Credit Facility, $        million of outstanding borrowings under our Term Loan A Facility and $        million of outstanding borrowings under our Term Loan B Facility.
  (2)

In calculating pro forma basic net income per share for the year ended December 31, 2016 and the six months ended June 30, 2017,                  shares of common units that we expect to grant to our directors and certain employees in connection with this offering that would have vested as of December 31, 2016 have been included. Unvested shares of stock options of            that we expect to grant to our directors and certain employees in

 

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  connection with this offering that would have vested as of December 31, 2016 have not been included as their exercise price is equal to the initial public offering price per share of Class A common stock in this offering and therefore they have no effect on pro forma dilutive net income per share.
  (3) The reallocation of net income (loss) assuming conversion of common units represents the tax effected net income (loss) attributable to non-controlling interest using the effective income tax rates described in footnote (c) and assuming all common units of FAH, LLC were exchanged for Class A common stock at the beginning of the period. The common units of FAH, LLC held by the Continuing Equity Owners are potentially dilutive securities and the computations of pro forma diluted net income (loss) per share assume that all common units of FAH, LLC were exchanged for shares of Class A common stock at the beginning of the period. This adjustment was made for purposes of calculating pro forma diluted net income per share only and does not necessarily reflect the amount of exchanges that may occur subsequent to this offering.
  (4) Includes (i)             outstanding shares of Class A common stock issuable upon the exchange of common units to be held by the Continuing Equity Owners prior to this offering and (ii)             unvested shares of common units/Class A options that we expect to grant to our directors and certain employees in connection with this offering.

 

(g) As described in “Use of Proceeds,” we intend to use the net proceeds from this offering (assuming that the underwriters’ option to purchase              additional shares of our Class A common stock is not exercised) to purchase            common units directly from FAH, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions. FAH, LLC intends to use the $        million in net proceeds it receives from the sale of common units to Funko, Inc. to repay $        million of outstanding borrowings under our Subordinated Promissory Notes, $        million of outstanding borrowings under our Revolving Credit Facility, $        million of outstanding borrowings under our Term Loan A Facility, and $        million of outstanding borrowings under our Term Loan B Facility. Accordingly, pro forma adjustments have been made to reflect a reduction in interest expense of $        million and $        million for the year ended December 31, 2016 and the six months ended June 30, 2017, respectively, computed at weighted-average interest rates of     % and     %, respectively, in each case, as if the outstanding borrowings had been repaid on January 1, 2016, and a $        million loss on debt repayment for the year ended December 31, 2016, comprised of the write off of unamortized original issue discount and capitalized finance costs.

 

(h) We expect to obtain an increase in the tax basis of our share of the assets of FAH, LLC when common units are redeemed or exchanged by the Continuing Equity Owners and other qualifying transactions. This increase in tax basis may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. In connection with the consummation of this offering, we will enter into the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that will provide for the payment by us to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in the tax basis of the assets of FAH, LLC resulting from the purchase of common units in exchange for Class A common stock in connection with the consummation of this offering and any future redemptions or exchanges of common units or any prior sales of interests in FAH, LLC and (ii) certain other tax benefits related to payments made by us under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Historical and Unaudited Pro Forma Consolidated Financial and Other Data,” “Unaudited Pro Forma Consolidated Financial Information,” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis reflects our historical results of operations and financial position, and, except as otherwise indicated below, does not give effect to the Transactions or to the completion of this offering. See “Our Organizational Structure.” This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this prospectus.

The following discussion and analysis presents operations and cash flows for two periods, Predecessor and Successor, which relate to the period preceding the ACON Acquisition and the period succeeding the ACON Acquisition, respectively. References to the Successor 2015 Period refer to the period from October 31, 2015 through December 31, 2015 and references to the Predecessor 2015 Period refer to the period from January 1, 2015 through October 30, 2015.

Overview

We are a leading pop culture consumer products company. Our business is built on the principle that almost everyone is a fan of something and the evolution of pop culture is leading to increasing opportunities for fan loyalty. We create whimsical, fun and unique products that enable fans to express their affinity for their favorite “something”—whether it is a movie, TV show, video game, musician or sports team. We infuse our distinct designs and aesthetic sensibility into one of the industry’s largest portfolios of licensed content over a wide variety of product categories, including figures, plush, accessories, apparel and homewares.

We were founded in 1998 as a consumer products company focused on designing and selling nostalgic bobble head figures. In 2005, we were acquired by a small group of investors led by Brian Mariotti, who took over day-to-day operations and has served as our Chief Executive Officer since that time. Under Brian’s leadership, we have significantly broadened and deepened our relationships with content providers. During the first half of 2017, we had active license agreements with approximately 112 different licensors covering over 1,000 properties. Over the same period, we have also diversified our products and brands. Today, we offer over 5,000 products across our product categories.

Domestically, we primarily sell our products to specialty retailers, mass-market retailers, and e-commerce sites. Internationally, we sell our products directly to similar retailers, primarily in Europe, through our subsidiary Funko UK, Ltd., which we formed in December 2016 in connection with the Underground Toys Acquisition. We also sell our products to distributors for sale to small retailers in the United States and in certain countries internationally, typically where we do not currently have a direct presence. We also sell certain of our products directly to consumers through our e-commerce business and, to a lesser extent, at specialty licensing and comic book shows, conventions and exhibitions in cities throughout the United States, including at Comic-Con events.

We have a multi-part strategy to continue to increase net sales. First, we intend to drive growth in net sales at our existing retail customers by expanding shelf space dedicated to our products, continuing to design products that resonate with pop culture fans and increasing the number of retail customers for whom we curate pop culture selections. Second, we intend to expand the number of

 

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retail doors at which our products are sold. While we believe we have opportunities to add new specialty and mass-market retailers, we also plan to selectively target new or underdeveloped sales channels, such as dollar, drug, grocery and convenience stores. Third, given our minimal upfront product development costs, we will continue to increase our product offerings to drive traffic to our retail customers. We continually evaluate product innovations and potential acquisition targets to complement our existing products. For example, both the Underground Toys Acquisition and the Loungefly Acquisition increased our product offerings and product categories, which we believe will provide additional sales opportunities with our existing and new customers.

We generate the majority of our net sales in the United States; however, we are also focused on growing our international business. Net sales generated from customers outside of the United States accounted for approximately 18.8% and 23.8% of our net sales for the years ended December 31, 2016 and 2015, respectively. The Underground Toys Acquisition in January 2017, and sales in Europe through our newly-formed subsidiary, Funko UK, Ltd., is part of this strategy. For additional information regarding net sales generated from each geography, please see Note 16 of the notes to our audited consolidated financial statements included elsewhere in this prospectus.

Our flexible and low-fixed cost production model enables us to go from product design of a figure to the store shelf in as few as 70 days and typically between 110 and 200 days, with a minimal upfront investment for most figures of $5,000 to $7,500 in tooling, molds and internal design costs. Because of the strength of our in-house creative team, we are able to move from product design to pre-selling a new product in as few as 24 hours. This ability, coupled with the valuable data insights we have developed over the past decade and the increasing use of repeated franchise properties by content providers, reduces potential product risk to us.

Our rate of growth during the first half of 2017 was lower than prior periods, largely driven by the slow rate of growth in the second quarter. Our results in the second quarter were primarily impacted by a retail inventory overhang from prior periods which resulted in a slower pace of retail reorders during the second quarter, and the impact of the anniversary of results from our master toy license for Five Nights at Freddy’s. For the six months ended June 30, 2017, we had net sales of $203.8 million, net loss of $10.2 million and Adjusted EBITDA of $31.3 million. For the six months ended June 30, 2016, we had net sales of $176.3 million, net loss of $6.0 million and Adjusted EBITDA of $35.6 million. For the year ended December 31, 2016, we had net sales of $426.7 million, net income of $26.9 million and Adjusted EBITDA of $97.0 million. For the Successor 2015 Period and the Predecessor 2015 Period, we had net sales of $56.6 million and $217.5 million, respectively, net loss of $15.6 million and net income of $27.5 million, respectively, and Adjusted EBITDA of $13.2 million and $62.0 million, respectively. Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Adjusted EBITDA to net income (loss), the most closely comparable GAAP financial measure, see “Selected Historical and Unaudited Pro Forma Consolidated Financial and Other Data.”

Factors Affecting our Business

Growth in the Market for Pop Culture Consumer Products

Our operating results and prospects will be impacted by developments in the market for pop culture consumer products. Our business has benefitted from pop culture trends including (1) technological innovation that has facilitated content consumption and engagement, (2) creation of more quality content, (3) greater cultural prevalence and acceptance of pop culture fandom and (