Quarterly Report (10-q)

Date : 05/03/2019 @ 5:57PM
Source : Edgar (US Regulatory)
Stock : Funko, Inc. (FNKO)
Quote : 24.01  -0.07 (-0.29%) @ 11:29PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-38274

 

FUNKO, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

35-2593276

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

2802 Wetmore Avenue

Everett, Washington

 

98201

(Address of principal executive offices)

 

(Zip Code)

 

(425) 783-3616

(Registrant’s telephone number, including area code)

N/A

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

 

 

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

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

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

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock,

$0.0001 par value per share

FNKO

The Nasdaq Stock Market LLC

As of May 1, 2019, the registrant had 29,837,309 shares of Class A common stock, $0.0001 par value per share, and 18,993,573 shares of Class B common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

INDEX

 

 

 

Page

Part I

FINANCIAL INFORMATION 

 

Item 1.

Financial Statements

2

 

Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2019 and 2018

2

 

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2019 and 2018

3

 

Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2019 and December 31, 2018

4

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2019 and 2018

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

Part II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 5.

Other Information

58

Item 6.

Exhibits

59

SIGNATURES

 

60

 

 

 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, potential acquisitions, market growth and trends, demand for our products, the effectiveness of our preliminary prospectus on Form S-3, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including the important factors described in this Quarterly Report on Form 10-Q under Part II. Item 1A. “Risk Factors,” and in our other filings with the Securities and Exchange Commission, that may cause our actual results, performance or achievements to differ materially and adversely from those expressed or implied by the forward-looking statements.

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

 

1


Part I – FINA NCIAL INFORMATION

Ite m 1.

Financial Statements

 

FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands, except per share data)

 

Net sales

 

$

166,800

 

 

$

137,211

 

Cost of sales (exclusive of depreciation and

   amortization shown separately below)

 

 

103,268

 

 

 

85,921

 

Selling, general, and administrative expenses

 

 

40,818

 

 

 

34,810

 

Acquisition transaction costs

 

 

-

 

 

 

28

 

Depreciation and amortization

 

 

10,093

 

 

 

9,301

 

Total operating expenses

 

 

154,179

 

 

 

130,060

 

Income from operations

 

 

12,621

 

 

 

7,151

 

Interest expense, net

 

 

4,072

 

 

 

5,896

 

Other (income) expense, net

 

 

65

 

 

 

(1,442

)

Income before income taxes

 

 

8,484

 

 

 

2,697

 

Income tax expense

 

 

1,414

 

 

 

460

 

Net income

 

 

7,070

 

 

 

2,237

 

Less: net income attributable to non-controlling

   interests

 

 

4,910

 

 

 

1,338

 

Net income attributable to Funko, Inc.

 

$

2,160

 

 

$

899

 

 

 

 

 

 

 

 

 

 

Earnings per share of Class A common stock:

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

 

$

0.04

 

Diluted

 

$

0.08

 

 

$

0.04

 

Weighted average shares of Class A common

   stock outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

26,640

 

 

 

23,338

 

Diluted

 

 

28,458

 

 

 

50,633

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

2


FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U naudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Net income

 

$

7,070

 

 

$

2,237

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation gain, net of tax effect of $(80) and $(105) for the three months ended March 31, 2019 and 2018, respectively

 

 

653

 

 

 

1,083

 

Comprehensive income

 

 

7,723

 

 

 

3,320

 

Less: Comprehensive income attributable to

   non-controlling interests

 

 

5,292

 

 

 

1,919

 

Comprehensive income attributable to

   Funko, Inc.

 

$

2,431

 

 

$

1,401

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

 

3


FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands, except per share amounts)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,546

 

 

$

13,486

 

Accounts receivable, net

 

 

117,618

 

 

 

148,627

 

Inventory

 

 

75,396

 

 

 

86,622

 

Prepaid expenses and other current assets

 

 

16,935

 

 

 

11,904

 

Total current assets

 

 

232,495

 

 

 

260,639

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

42,863

 

 

 

44,296

 

Operating lease right-of-use assets

 

 

33,102

 

 

 

 

Goodwill

 

 

121,892

 

 

 

112,818

 

Intangible assets, net

 

 

233,155

 

 

 

233,645

 

Deferred tax asset

 

 

21,081

 

 

 

7,346

 

Other assets

 

 

4,475

 

 

 

4,275

 

Total assets

 

$

689,063

 

 

$

663,019

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Line of credit

 

$

22,456

 

 

$

20,000

 

Current portion long-term debt, net of unamortized discount

 

 

10,605

 

 

 

10,593

 

Current portion of operating lease liabilities

 

 

7,839

 

 

 

 

Accounts payable

 

 

25,753

 

 

 

36,130

 

Income taxes payable

 

 

5,441

 

 

 

4,492

 

Accrued royalties

 

 

28,359

 

 

 

39,020

 

Accrued expenses and other current liabilities

 

 

19,647

 

 

 

27,621

 

Total current liabilities

 

 

120,100

 

 

 

137,856

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of unamortized discount

 

 

214,045

 

 

 

216,704

 

Operating lease liabilities, net of current portion

 

 

29,663

 

 

 

 

Deferred tax liability

 

 

23

 

 

 

5

 

Liabilities under tax receivable agreement, net of current portion

 

 

23,293

 

 

 

6,504

 

Deferred rent and other long-term liabilities

 

 

4,519

 

 

 

5,584

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Class A common stock, par value $0.0001 per share, 200,000 shares

   authorized; 28,522 and 24,960 shares issued and outstanding as of March 31, 2019

   and December 31, 2018, respectively

 

 

3

 

 

 

2

 

Class B common stock, par value $0.0001 per share, 50,000 shares

   authorized; 20,281 and 23,584 shares issued and outstanding as of March 31, 2019

   and December 31, 2018, respectively

 

 

2

 

 

 

2

 

Additional paid-in-capital

 

 

166,208

 

 

 

146,408

 

Accumulated other comprehensive income

 

 

100

 

 

 

(171

)

Retained earnings

 

 

12,557

 

 

 

10,397

 

Total stockholders' equity attributable to Funko, Inc.

 

 

178,870

 

 

 

156,638

 

Non-controlling interests

 

 

118,550

 

 

 

139,728

 

Total stockholders' equity

 

 

297,420

 

 

 

296,366

 

Total liabilities and stockholders' equity

 

$

689,063

 

 

$

663,019

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

4


FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

7,070

 

 

$

2,237

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and other

 

 

10,050

 

 

 

9,301

 

Equity-based compensation

 

 

2,748

 

 

 

972

 

Accretion of discount on long-term debt

 

 

291

 

 

 

366

 

Amortization of debt issuance costs

 

 

63

 

 

 

150

 

Foreign currency gain

 

 

(466

)

 

 

(1,464

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

31,718

 

 

 

28,245

 

Inventory

 

 

12,155

 

 

 

6,548

 

Prepaid expenses and other assets

 

 

(3,838

)

 

 

(2,895

)

Accounts payable

 

 

(12,885

)

 

 

(29,055

)

Income taxes payable

 

 

933

 

 

 

423

 

Accrued royalties

 

 

(10,667

)

 

 

(7,147

)

Accrued expenses and other liabilities

 

 

(9,870

)

 

 

1,774

 

Net cash provided by operating activities

 

 

27,302

 

 

 

9,455

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(3,613

)

 

 

(5,866

)

Acquisitions, net of cash

 

 

(6,369

)

 

 

(635

)

Net cash used in investing activities

 

 

(9,982

)

 

 

(6,501

)

Financing Activities

 

 

 

 

 

 

 

 

Borrowings on line of credit

 

 

22,543

 

 

 

94,452

 

Payments on line of credit

 

 

(20,000

)

 

 

(71,713

)

Payment of long-term debt

 

 

(2,938

)

 

 

(15,350

)

Debt issuance costs

 

 

(272

)

 

 

 

Proceeds from exercise of equity-based options

 

 

1,149

 

 

 

 

Distribution to continuing equity owners

 

 

(8,052

)

 

 

(10,857

)

Net cash used in financing activities

 

 

(7,570

)

 

 

(3,468

)

Effect of exchange rates on cash and cash equivalents

 

 

(690

)

 

 

(764

)

Net increase (decrease) in cash and cash equivalents

 

 

9,060

 

 

 

(1,278

)

Cash and cash equivalents at beginning of period

 

 

13,486

 

 

 

7,728

 

Cash and cash equivalents at end of period

 

$

22,546

 

 

$

6,450

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5


FUNKO, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Operations

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

The Company was formed as a Delaware corporation on April 21, 2017. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and related transactions in order to carry on the business of Funko Acquisition Holdings, L.L.C. (“FAH, LLC”) and its subsidiaries. FAH, LLC, a holding company with no operating assets or operations, was formed on September 24, 2015. On October 30, 2015, ACON Funko Investors, L.L.C. (together with related entities, “ACON”), through FAH, LLC, acquired a controlling interest in Funko Holdings LLC (“FHL”) (the “ACON Acquisition”), a Delaware limited liability company formed on May 28, 2013, which is also a holding company with no operating assets or operations. FAH, LLC owns 100% of FHL and FHL owns 100% of Funko, LLC, a limited liability company formed in the state of Washington, which is its operating entity. Funko, LLC is headquartered in Everett, Washington and is a leading pop culture consumer products company. Funko, LLC designs, sources, and distributes licensed pop culture products.

On November 6, 2017, the Company completed an IPO of 10,416,666 shares of its Class A common stock at a public offering price of $12.00 per share, receiving approximately $117.3 million in net proceeds, after deducting underwriting discounts and commissions, which were used to purchase 10,416,666 of FAH, LLC’s newly-issued common units at a price per unit equal to the price per share of Class A common stock sold in the IPO, less underwriting discounts and commissions. The IPO and related reorganization transactions (the “Transactions”) resulted in the Company being the sole managing member of FAH, LLC. As the sole managing member of FAH, LLC, Funko, Inc. operates and controls all of FAH, LLC’s operations and, through FAH, LLC and its subsidiaries, conducts FAH, LLC’s business. Accordingly, the Company consolidates the financial results of FAH, LLC and reports a non-controlling interest in its unaudited condensed consolidated financial statements representing the FAH, LLC interests held by ACON Funko Investors, L.L.C., a Delaware limited liability company (“ACON Funko Investors”) and certain of its affiliates, Fundamental Capital, LLC and Funko International, LLC (collectively, “Fundamental”), and certain current and former executive officers, employees and directors, in each case, who held profits interests in FAH, LLC and who received common units of FAH, LLC in exchange for their profits interests in connection with the Transactions (as defined herein) (collectively, the “Original Equity Owners”) and the former holders of warrants to purchase ownership interests in FAH, LLC, which were converted into common units of FAH, LLC in connection with the Transactions, and, in each case, each of their permitted transferees that own common units in FAH, LLC and who may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their common units for, at the Company’s election, cash or newly-issued shares of the Company’s Class A common stock (collectively, the “Continuing Equity Owners”).

Consolidation and Interim Financial Information

In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date of and for the interim periods presented have been included; such adjustments consist of normal recurring adjustments. The unaudited condensed consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2019, due to seasonality and other factors. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 6, 2019.

2. Significant Accounting Policies

Use of Estimates

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

6


Significant Accounting Policies

A description of the Company’s significant accounting policies is included in the audited financial statements within its Annual Report on Form 10–K for the year ended December 31, 2018. 

Recently Adopted Accounting Standards

Lease Accounting. In February 2016, the FASB issued guidance related to lease accounting that requires the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements for leases with a term of more than 12 months. The Company adopted the standard on January 1, 2019 by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application.  Comparative information has not been restated and continues to be reported under the standards in effect for those periods.

The Company has elected the “package of practical expedients” and as a result is not required to reassess under the new standard its prior accounting conclusions about lease identification, lease classification and initial direct costs for lease contracts that exist as of the transition date.  However, the Company has not elected the use of hindsight for determining the reasonably certain lease term.

The new lease standard also provides practical expedients and policy elections for an entity’s ongoing accounting. The Company has elected the practical expedient to not separate lease and non-lease components for all of its leases. The Company has also elected the short-term lease recognition exemption, which results in no recognition of right-of-use assets and lease liabilities for existing short-term leases at transition.

Upon adoption on January 1, 2019, the Company recognized operating lease right-of-use assets and lease liabilities that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments. The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as deferred and prepaid rent. Deferred and prepaid rent will not be presented separately for periods subsequent to the adoption of the new lease standard.

The cumulative effect of initially applying the new lease accounting standard as of January 1, 2019 is as follows:

 

 

January 1, 2019

 

 

 

Beginning balance

 

 

Cumulative Effect Adjustment

 

 

Beginning Balance, As Adjusted

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

 

 

$

33,014

 

 

 

33,014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of operating lease liabilities

 

$

 

 

$

7,380

 

 

$

7,380

 

Accrued expenses and other current liabilities

 

$

27,621

 

 

$

(429

)

 

$

27,192

 

Operating lease liabilities, net of current portion

 

 

 

 

 

$

30,076

 

 

$

30,076

 

Deferred rent and other long-term liabilities

 

$

5,584

 

 

$

(4,013

)

 

$

1,571

 

The adoption of the standard did not result in any material changes to the recognition of operating lease expenses in the Company’s consolidated statements of operations.  

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued new guidance that allows an entity to elect to reclassify “stranded” tax effects in accumulated other comprehensive income to retained earnings to address concerns related to accounting for certain provisions of the Tax Cuts and Jobs Act (“the Tax Act”) enacted in December 2017. The adoption of this standard in the first quarter of 2019 had no impact on the Company’s unaudited condensed consolidated financial statements.

3. Acquisitions

During the three months ended March 31, 2019, the Company completed one acquisition that was accounted for as a business combination by applying the acquisition method of accounting, where identifiable tangible and intangible assets

7


acquired and liabilities assumed are recognized and measured as of the acquisition date at fair value and goodwill is calculated as the excess of the purchase price paid over the net assets acquired.

Forrest-Pruzan Creative LLC. On February 11, 2019, the Company acquired 100% of the membership interests of Forrest-Pruzan Creative LLC (the “Forrest-Pruzan Acquisition”), a board game development studio in Seattle, WA, which now operates as Funko Games LLC. This transaction represents an opportunity to expand the Company’s product offerings into the board game category. The preliminary purchase consideration consists of $6.5 million in cash and 126,757 shares of the Company’s Class A common stock with a fair value of $2.2 million paid at closing, $1.5 million cash holdback due to the sellers in 18 months, subject to certain conditions as per the agreement, and $2 million in cash due after a 24-month deferral period. The Company is still in the process of completing its analysis of the opening balance sheet balances and finalizing its analysis and assumptions over the fair value of assets and liabilities acquired and purchase consideration transferred, and the difference between the estimated and final values could be material.   

 

Goodwill of $8.9 million is calculated as the excess of the purchase price paid over the net assets acquired. The goodwill recognized in connection with the Forrest-Pruzan Acquisition primarily reflects relevant skills and industry knowledge of the retained workforce, as well as intangible assets that do not qualify for separate recognition.

 

The activity of Funko Games LLC included in the Company’s consolidated statements of operations from the acquisition date to March 31, 2019 was not material.

The purchase consideration for the acquisition was as follows:

 

 

Purchase Consideration at Fair Value

 

 

 

(in thousands)

 

Cash paid

 

$

6,500

 

Fair value of class A common stock issued

 

 

2,221

 

Cash holdback

 

 

1,400

 

Fair value of cash consideration due February 11, 2021

 

 

1,815

 

Purchase consideration

 

$

11,936

 

The following table shows the amounts recognized for each major class of assets acquired and liabilities assumed and the resultant purchase price allocation for the Forrest-Pruzan Acquisition as of February 11, 2019:

 

 

 

Assets (Liabilities) Acquired (Assumed)

at Fair Value

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

131

 

Property and equipment

 

 

14

 

Operating lease right-of-use assets

 

 

1,027

 

Goodwill

 

 

8,922

 

Intangible assets

 

 

3,133

 

Other assets

 

 

17

 

Current liabilities

 

 

(281

)

Operating lease liabilities

 

 

(1,027

)

Consideration transferred

 

$

11,936

 

 

8


The following table summarizes the identifiable intangible assets acquired in connection with the transactions described above and their estimated useful lives as of February 11, 2019 :

 

 

 

Estimated Fair Value of

Assets Acquired

 

 

Estimated

Useful Life

 

 

 

(in thousands)

 

 

(Years)

 

Intangible asset type:

 

 

 

 

 

 

 

 

Noncompetition agreements

 

$

861

 

 

 

3

 

Intellectual property

 

 

580

 

 

 

3

 

Customer relationships

 

 

1,692

 

 

 

3

 

Intangible assets

 

$

3,133

 

 

 

 

 

 

4. Fair Value Measurements

The Company’s financial instruments, other than those discussed below, include cash, accounts receivable, accounts payable, and accrued liabilities. The carrying amount of these financial instruments approximate fair value due to the short-term nature of these instruments. For financial instruments measured at fair value on a recurring basis, the Company prioritizes the inputs used in measuring fair value according to a three-tier fair value hierarchy defined by U.S. GAAP. For a description of the methods and assumptions that the Company uses to estimate the fair value and determine the classification according to the fair value hierarchy for each financial instrument, see the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2018.

Debt. The estimated fair value of the Company’s debt instruments, which are classified as Level 3 financial instruments, at March 31, 2019 and December 31, 2018, was approximately $251.6 million and $252.1 million, respectively. The carrying values of the Company’s debt instruments at March 31, 2019 and December 31, 2018, were $247.1 million and $247.3 million, respectively.  The estimated fair value of the Company’s debt instruments primarily reflects assumptions regarding credit spreads for similar floating-rate instruments with similar terms and maturities and the Company’s standalone credit risk.

5. Debt

Debt consists of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

New Revolving Credit Facility

 

$

22,456

 

 

$

20,000

 

New Term Loan Facility

 

 

229,125

 

 

 

232,063

 

Debt issuance costs

 

 

(4,475

)

 

 

(4,766

)

Total term debt

 

 

224,650

 

 

 

227,297

 

Less: current portion

 

 

10,605

 

 

 

10,593

 

Long-term debt, net

 

$

214,045

 

 

$

216,704

 

New Credit Facilities 

On October 22, 2018 (the “Closing Date”), the Company entered into a new credit agreement providing for the New Term Loan Facility in the amount of $235.0 million and the New Revolving Credit Facility of $50.0 million (as amended, the “New Credit Facilities”).  On February 11, 2019, the Company amended the New Credit Facilities to increase the New Revolving Credit Facility to $75.0 million.

Upon closing, proceeds from the New Credit Facilities were primarily used to repay all of the outstanding aggregate principal balance and accrued interest of $209.6 million on the previous Term Loan A Facility and $65.3 million on the previous Revolving Credit Facility.  Upon repayment, both the previous Term Loan A Facility and the previous Revolving Credit Facility were terminated.

The New Term Loan Facility matures on October 22, 2023 (the “Maturity Date”).  The New Term Loan Facility amortizes in quarterly installments in aggregate amounts equal to 5.00% of the original principal amount of the New Term Loan Facility in the first and second years of the New Term Loan Facility, 10.00% of the original principal amount of the New

9


Term Loan Facility in the third and fourth years of the New Term Loan Facility and 12.50% of the original principal amount of the New Term Loan Facility in the fifth year of the New Term Loan Facility, with any ou tstanding balance due and payable on the Maturity Date.  The first amortization payment was on December 31, 2018.  The New Revolving Credit Facility terminates on the Maturity Date and loans thereunder may be borrowed, repaid, and reborrowed up to such dat e .

Loans under the New Credit Facilities bear interest, at the Company’s option, at either the Euro-Rate (as defined in the Credit Agreement) plus 3.25% or the Base Rate (as defined in the Credit Agreement) plus 2.25%, with two 0.25% step-downs based on the achievement of certain leverage ratios following the Closing Date. The Euro-Rate is subject to a 0.00% floor. For loans based on the Euro-Rate, interest payments are due at the end of each applicable interest period. For loans based on the Base Rate, interest payments are due quarterly.

The New Credit Facilities are secured by substantially all of the assets of the Company and any of its existing or future material domestic subsidiaries, subject to customary exceptions.  As of March 31, 2019 and December 31, 2018, the Company was in compliance with all of the covenants in its New Credit Facilities.

At March 31, 2019, the Company had $229.1 million and $22.5 million of borrowings outstanding under the New Term Loan Facility and New Revolving Credit Facility, respectively.   At December 31, 2018, the Company had $232.1 million and $20.0 million of borrowings outstanding under the New Term Loan Facility and New Revolving Credit Facility, respectively.  

There were no outstanding letters of credit as of March 31, 2019 and December 31, 2018 .   

6. Leases

The Company has entered into non-cancellable operating leases for office, warehouse, and distribution facilities, with original lease periods expiring through 2028. Some operating leases also contain the option to renew for five-year periods at prevailing market rates at the time of renewal. In addition to minimum rent, certain of the leases require payment of real estate taxes, insurance, common area maintenance charges, and other executory costs. Differences between rent expense and rent paid are recognized as adjustments to operating lease right-of-use assets on the unaudited consolidated balance sheets. For certain leases the Company receives lease incentives, such as tenant improvement allowances, and records those as adjustments to operating lease right-of-use assets and operating leases liabilities on the unaudited condensed consolidated balance sheets and amortize the lease incentives on a straight-line basis over the lease term as an adjustment to rent expense. Rent expense was $3.1 million and $2.1 million for the three months ended March 31, 2019 and 2018, respectively .

As of March 31, 2019, the Company had recorded operating lease liabilities of $37.5 million and operating lease right-of-use assets of $33.1 million.  During the three months ended March 31, 2019, operating cash outflows relating to operating lease liabilities was $1.8 million and operating lease right-of-use assets obtained in exchange for new operating lease obligations was $1.0 million.  As of March 31, 2019, the Company’s operating leases had a weighted-average remaining term of 6.4 years and weighted-average discount rate of 7.4%.  Excluded from the measurement of operating lease liabilities and operating lease right-of-use assets were certain warehouse and distribution contracts that either qualify for the short-term lease recognition exception and/or do not give the Company the right to control the warehouse and/or distribution facilities underlying the contract.

 

The future payments on the Company’s operating lease liabilities were as follows:

 

 

As of March 31, 2019

 

Remaining 2019

 

$

6,058

 

2020

 

 

8,232

 

2021

 

 

7,155

 

2022

 

 

6,028

 

2023

 

 

6,285

 

Thereafter

 

 

14,032

 

Total lease payments

 

 

47,790

 

Less:  imputed interest

 

 

(10,288

)

Total

 

 

37,502

 

10


In addition, in the first quarter of 2019, the Company entered into a ten-year lease of a retail location that commenced on April 1, 2019.  The lease includes total base rent of approximately $21.1 million to be paid over the lease term, subject to certain abatement provisions, as well as certain variable costs.  

7. Liabilities under Tax Receivable Agreement

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

During the three months ended March 31, 2019, the Company recognized an additional liability related to the Tax Receivable Agreement in the amount of $18.6 million for the payments due to the redeeming members under the Tax Receivable Agreement, representing 85% of the aggregate tax benefits the Company expects to realize from the tax basis increases related to the redemption of FAH, LLC common units, after concluding it was probable that such Tax Receivable Agreement payments would be paid in the future based on the Company’s estimate of future taxable income. The Company did not record any liabilities for the Tax Receivable Agreement during the three months ended March 31, 2018.

There were no payments made pursuant to the Tax Receivable Agreement during the three months ended March 31, 2019 and 2018.

As of March 31, 2019, the Company’s total obligation under the Tax Receivable Agreement, including accrued interest, was $25.4 million, of which $2.1 million was included in Accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheets. There were no transactions subject to the Tax Receivable Agreement for which the Company did not recognize the related liability, as the Company concluded that it was probable that the Company would have sufficient future taxable income to utilize all of the related tax benefits.  At December 31, 2018, the Company’s total obligation under the Tax Receivable Agreement, including accrued interest, was $6.8 million, of which $0.3 million was included in Accrued expenses and other current liabilities on the condensed consolidated balance sheets.

8. Commitments and Contingencies

License Agreements

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

In January 2019, the Company renewed its licensing agreements with Disney and its controlled affiliates, LucasFilm and Marvel. As of December 31, 2018 , the Company recorded a $2.0 million consent fee under its existing licensing agreements with Disney, which was subsequently paid during the three months ended March 31, 2019.  

Employment Agreements

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

11


Debt

The Company has entered into a credit agreement which includes a term loan facility and a revolving credit facility. See Note 5, Debt.

Tax Receivable Agreement

The Company is party to the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners under certain circumstances.  See Note 7, Liabilities under Tax Receivable Agreement.

Legal Contingencies

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

The Company is, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business. For example, on November 16, 2017, a purported stockholder of the Company filed a putative class action lawsuit in the Superior Court of Washington in and for King County against the Company, certain of its officers and directors, and the underwriters of its IPO, entitled Robert Lowinger v. Funko, Inc., et. al . In January and March 2018, five additional putative class action lawsuits were filed in Washington state court, four in the Superior Court of Washington in and for King County and one in the Superior Court of Washington in and for Snohomish County. Two of the King County lawsuits, Surratt v. Funko, Inc. et. al. (filed on January 16, 2018) and Baskin v. Funko, Inc. et. al. (filed on January 30, 2018), were filed against the Company and certain of its officers and directors. The other two King County lawsuits, The Ronald and Maxine Linde Foundation v. Funko, Inc. et. al. (filed on January 18, 2018) and Lovewell v. Funko, Inc. et. al (filed on March 27, 2018), were filed against the Company, certain of its officers and directors, ACON, Fundamental and certain other defendants. The Snohomish County lawsuit, Berkelhammer v. Funko, Inc. et. al. (filed on March 13, 2018), was filed against us, certain of the Company’s officers and directors, and ACON. On May 8, 2018, the Berkelhammer action was voluntarily dismissed, and on May 15, 2018 a substantially similar action was filed by the same plaintiff in the Superior Court of Washington in and for King County.  On April 2, 2018, a putative class action lawsuit Jacobs v. Funko, Inc. et. al was filed in the United States District Court for the Western District of Washington against the Company, certain of its officers and directors, and certain other defendants. On May 21, 2018, the Jacobs action was voluntarily dismissed, and on June 12, 2018 a substantially similar action was filed by the same plaintiff in the Superior Court of Washington in and for King County.

On July 2, 2018, all of the above-referenced suits were ordered consolidated for all purposes into one action under the title In re Funko, Inc. Securities Litigation in the Superior Court of Washington in and for King County. On August 1, 2018, plaintiffs filed a consolidated complaint against the Company, certain of its officers and directors, ACON, Fundamental, and certain other defendants. On October 1, 2018, the Company moved to dismiss that action. Plaintiffs filed their opposition to the Company’s motion to dismiss on October 31, 2018, and the Company filed its reply to plaintiffs’ opposition on November 30, 2018.  Oral arguments on the motions to dismiss are scheduled to be held on May 3, 2019.

Additionally, on June 4, 2018, a putative class action lawsuit Kanugonda v. Funko, et al. was filed in the United States District Court for the Western District of Washington against the Company, certain of its officers and directors, and certain other defendants. On January 4, 2019, a lead plaintiff was appointed in that case.  On April 30, 2019, the lead plaintiff filed an amended complaint against the previously named defendants.

The complaints in both state and federal court allege that the Company violated Sections 11, 12, and 15 of the Securities Act of 1933, as amended, by making allegedly materially misleading statements and by omitting material facts necessary to make the statements made therein not misleading. The lawsuits seek, among other things, compensatory statutory damages and rescissory damages in account of the consideration paid for the Company’s Class A common stock by plaintiff and members of the putative class, as well as attorneys’ fees and costs. The Company believes it has meritorious defenses to the claims of the plaintiff and members of the class and any liability for the alleged claims is not currently probable or reasonably estimable.

12


9. Segments

The Company identifies its reportable segments according to how the business activities are managed and evaluated and for which discrete financial information is available and regularly reviewed by its Chief Operating Decision Maker (the “CODM”) to allocate resources and assess performance. Because its CODM reviews financial performance and allocates resources at a consolidated level on a regular basis, it has one reportable segment. The following table is a summary of the Company’s main product categories as a percent of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Figures

 

 

81.5

%

 

 

84.2

%

Other

 

 

18.5

%

 

 

15.8

%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Net sales:

 

 

 

 

 

 

 

 

United States

 

$

108,698

 

 

$

88,850

 

International

 

 

58,102

 

 

 

48,361

 

Total net sales

 

$

166,800

 

 

$

137,211

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Long-lived assets:

 

 

 

 

 

 

 

 

United States

 

$

51,300

 

 

$

23,781

 

China and Vietnam

 

 

19,825

 

 

 

20,662

 

United Kingdom

 

 

9,315

 

 

 

4,128

 

Total long-lived assets

 

$

80,440

 

 

$

48,571

 

 

 

10. Related Party Transactions

In June 2017, in connection with the acquisition of Loungefly, LLC (“Loungefly”), the Company assumed a lease for the Loungefly headquarters and warehouse operations with 20310 Plummer Street LLC and entered into a global sourcing agreement with Sure Star Development Ltd. Both entities are owned by certain former employees of the Company, who were also the former owners of Loungefly. For the three months ended March 31, 2018, the Company recorded $0.1 million in rental expense related to the lease, which was recorded in selling, general and administrative expenses in the Company’s unaudited condensed consolidated statements of operations.  The entities ceased to be related parties after July 12, 2018.

The Company sells products to Forbidden Planet, a U.K. retailer through its wholly owned subsidiary Funko UK, Ltd. One of the investors in Forbidden Planet is an employee of Funko UK. For the three months ended March 31, 2019 and 2018, the Company recorded approximately $0.7 million and $1.2 million, respectively, in net sales to Forbidden Planet. At March 31, 2019 and December 31, 2018, accounts receivable from Forbidden Planet was $0.4 million and $0.8 million on the unaudited condensed consolidated balance sheets.

In February 2019, in connection with the Forrest-Pruzan Acquisition, the Company assumed two leases of office space with Roll and Move, LLC and Roll and Move II LLC, both of which are owned by certain former owners of Forrest-Pruzan Creative LLC, one of whom remains an employee of the Company. For the three months ended March 31, 2019, the Company recorded a nominal amount of rental expense related to the leases, which was recorded in selling, general and administrative expenses in the Company’s unaudited condensed consolidated statements of operations.  At March 31, 2019, the Company had recorded operating lease right-of-use assets and operating lease liabilities of $1.0 million related to the leases.  

13


11 . Income Taxes

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

The Company recorded   $1.4 million and $0.5 million of income tax expense for the three months ended March 31, 2019 and 2018, respectively.  The Company’s estimated annual effective tax rate for the three months ended March 31, 2019 was 16.7%. The Company’s estimated annual effective tax rate is less than the statutory rate of 21% primarily because the Company is not liable for income taxes on the portion of FAH, LLC’s earnings that are attributable to non-controlling interests.   

During the three months ended March 31, 2019, the Company acquired an aggregate of 3.3 million common units of FAH, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of the Company’s investment in FAH, LLC subject to the provisions of the Tax Receivable Agreement.  As a result of these exchanges, during the three months ended March 31, 2019 the Company recognized an increase to its net deferred tax assets in the amount of $13.9 million, and corresponding Tax Receivable Agreement liabilities of $18.6 million, representing 85% of the tax benefits due to the Continuing Equity Owners.  There were no redemptions of FAH, LLC common units during the three months ended March 31, 2018.

14


12. Stockholders’ Equity

The following is a reconciliation of changes in stockholders’ equity for the three months ended March 31, 2019 and 2018:

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

 

 

 

 

 

 

 

Balance at January 1,

 

$

2

 

 

$

2

 

Shares issued

 

 

1

 

 

 

-

 

Balance at March 31,

 

$

3

 

 

$

2

 

 

 

 

 

 

 

 

 

 

Class B common stock

 

 

 

 

 

 

 

 

Balance at January 1, and March 31,

 

$

2

 

 

$

2

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

 

 

Balance at January 1,

 

$

146,408

 

 

$

129,320

 

Equity-based compensation

 

 

2,748

 

 

 

972

 

Shares issued for equity-based compensation awards

 

 

1,148

 

 

 

-

 

Shares issued for purchase consideration

 

 

2,221

 

 

 

-

 

Redemption of common units of FAH, LLC

 

 

18,418

 

 

 

-

 

Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets

 

 

(4,735

)

 

 

-

 

Balance at March 31,

 

$

166,208

 

 

$

130,292

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

 

 

 

 

Balance at January 1,

 

$

(171

)

 

$

802

 

Foreign currency translation gain, net of tax

 

 

271

 

 

 

502

 

Balance at March 31,

 

$

100

 

 

$

1,304

 

 

 

 

 

 

 

 

 

 

Retained earnings (1)

 

 

 

 

 

 

 

 

Balance at January 1,

 

$

10,397

 

 

$

1,041

 

Net income attributable to Funko, Inc.

 

 

2,160

 

 

 

899

 

Balance at March 31,

 

$

12,557

 

 

$

1,940

 

 

 

 

 

 

 

 

 

 

Non-controlling interests (1)

 

 

 

 

 

 

 

 

Balance at January 1,

 

$

139,728

 

 

$

149,988

 

Distributions to continuing equity owners (1)

 

 

(8,052

)

 

 

(10,857

)

Redemption of common units of FAH, LLC

 

 

(18,418

)

 

 

-

 

Foreign currency translation gain, net of tax

 

 

382

 

 

 

581

 

Net income attributable to non-controlling interests

 

 

4,910

 

 

 

1,338

 

Balance at March 31,

 

$

118,550

 

 

$

141,050

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity

 

$

297,420

 

 

$

274,590

 

(1)

Effective with reporting for the second quarter of 2018, the Company began to classify distributions to continuing equity holders as a reduction of non-controlling interests rather than retained earnings.  Prior periods have been reclassified to conform to the current presentation.

15


The following is a reconciliation of changes in Class A and Class B common shares outstanding for the three months ended March 31, 2019 and 2018:

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

Class A common shares outstanding

 

 

 

 

 

 

 

 

Balance at January 1,

 

 

24,960

 

 

 

23,338

 

Shares issued for equity-based compensation awards

 

 

109

 

 

 

-

 

Shares issued for purchase consideration

 

 

127

 

 

 

-

 

Redemption of common units of FAH, LLC

 

 

3,326

 

 

 

-

 

Balance at March 31,

 

 

28,522

 

 

 

23,338

 

 

 

 

 

 

 

 

 

 

Class B common shares outstanding

 

 

 

 

 

 

 

 

Balance at January 1,

 

 

23,584

 

 

 

24,976

 

Redemption of common units of FAH, LLC

 

 

(3,303

)

 

 

-

 

Balance at March 31,

 

 

20,281

 

 

 

24,976

 

 

 

 

 

 

 

 

 

 

Total Class A and Class B common shares outstanding

 

 

48,803

 

 

 

48,314

 

 

13. Non-controlling interests

Funko, Inc. is the sole managing member of FAH, LLC and as a result consolidates the financial results of FAH, LLC and reports a non-controlling interest representing the common units of FAH, LLC held by the Continuing Equity Owners. Changes in Funko, Inc.’s ownership interest in FAH, LLC while Funko, Inc. retains its controlling interest in FAH, LLC will be accounted for as equity transactions. As such, future redemptions or direct exchanges of common units of FAH, LLC by the Continuing Equity Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when FAH, LLC has positive or negative net assets, respectively.

Net income and comprehensive income are attributed between Funko, Inc. and noncontrolling interest holders based on each party’s relative economic ownership interest in FAH, LLC. As of March 31, 2019 and December 31, 2018, Funko, Inc. owned 28.5 million and 25.0 million of FAH, LLC common units, respectively, representing a 57.1% and 50.2% economic ownership interest in FAH, LLC, respectively.

Net income and comprehensive income of FAH, LLC excludes certain activity attributable to Funko, Inc., including $2.2 million and $0.2 million of equity-based compensation expense for share-based compensation awards issued by Funko, Inc. for the three months ended March 31, 2019 and 2018, respectively, and $0.9 million and $0.1 million of income tax expense for corporate, federal, state and local taxes attributable to Funko, Inc. for the three months ended March 31, 2019 and 2018, respectively.

14. Earnings per Share

Basic earnings per share of Class A common stock is computed by dividing net income available to Funko, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available to Funko, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.

16


The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock:

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

7,070

 

 

$

2,237

 

Less: net income attributable to non-controlling

   interests

 

 

4,910

 

 

 

1,338

 

Net income attributable to Funko, Inc. basic

 

$

2,160

 

 

$

899

 

Add : Reallocation of net income attributable to non-

   controlling interests from the assumed exchange of

   common units of FAH, LLC for Class A common

   stock

 

 

 

 

 

984

 

Net income attributable to Funko, Inc. — diluted

 

$

2,160

 

 

$

1,883

 

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares of Class A common stock

   outstanding — basic

 

 

26,639,572

 

 

 

23,337,705

 

Add: Effect of dilutive equity-based compensation awards

   and common units of FAH, LLC that are

   convertible into Class A common stock

 

 

1,818,249

 

 

 

27,295,123

 

Weighted-average shares of Class A common stock

   outstanding — diluted

 

 

28,457,821

 

 

 

50,632,828

 

Earnings per share of Class A common stock — basic

 

$

0.08

 

 

$

0.04

 

Earnings per share of Class A common stock —

   diluted

 

$

0.08

 

 

$

0.04

 

For the three months ended March 31, 2019, an aggregate of 23.7 million of potentially dilutive securities were excluded from the weighted-average in the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive. For the three months ended March 31, 2019, anti-dilutive securities included 23.2 million of common units of FAH, LLC that are convertible into Class A common stock, but were excluded from the computations of diluted earnings per share because the effect would have been anti-dilutive under the if-converted method.  

For the three months ended March 31, 2018, 1.0 million stock options were excluded from the weighted-average in the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive.

Shares of the Company’s Class B common stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.

 

17


Item 2.

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 our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2019. This discussion and analysis 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 important factors, including those set forth under “Risk Factors” included in this Quarterly Report on Form 10-Q.

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:

 

we, ” “ us, ” “ our, the Company, Funko and similar references refer: (1) following the consummation of the Transactions, to Funko, Inc., and, unless otherwise stated, all of its direct and indirect subsidiaries, including FAH, LLC and (2) prior to the completion of the Transactions, 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 own common units in FAH, LLC after the Transactions and who may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their common units for, at our election, cash or newly-issued shares of Funko, Inc.’s Class A common stock.

 

FAH, LLC” refers to Funko Acquisition Holdings, L.L.C.

 

FAH LLC Agreement refers to FAH, LLC’s second amended and restated limited liability company agreement, as amended from time to time.

 

Former Equity Owners refers to those Original Equity Owners affiliated with ACON who transferred their indirect ownership interests in common units of FAH, LLC for shares of Funko, Inc.’s 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, prior to the consummation of the Transactions, held existing vested and unvested profits interests in FAH, LLC pursuant to FAH, LLC’s prior equity incentive plan and received 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.

 

Former Senior Secured Credit Facilities ” refers to the Company’s credit agreement, dated October 30, 2015, which provided for a $175.0 million term loan facility (the “Term Loan A Facility”) and a revolving credit facility, including a $3.0 million sub-facility for the issuance of letters of credit (the “Revolving Credit Facility”). Among other amendments to the credit agreement, on January 17, 2017, the Company entered into an amendment which provided for, among other things, an additional $50.0 million term loan facility (the “Term Loan B Facility”), which was repaid in November 2017 in connection with our initial public offering (“IPO”). The Former Senior Secured Credit Facilities were terminated on October 22, 2018.

 

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

 

“New Credit Facilities” refers to the Company’s credit agreement, dated October 22, 2018 (the “Credit Agreement”), providing for a term loan facility in the amount of $235.0 million (the “New Term Loan Facility”) and a revolving credit facility of $50.0 million (which was increased to $75.0 million on February 11, 2019) (the “New Revolving Credit Facility”).

 

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.

 

Revolving Credit Facility ” refers to our former revolving credit facility, including a $3.0 million subfacility for the issuance of letters of credit.

 

Transactions ” refers to certain organizational transactions that we effected in connection with our initial public offering (“IPO”) in November 2017.

 

Warrant Holders refers to lenders under our Former Senior Secured Credit Facilities (as defined herein) that previously held warrants to purchase ownership interests in FAH, LLC, which were converted into common units of FAH, LLC in connection with the consummation of the Transactions.

18


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. Content providers trust us to create unique 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 strive to license every pop culture property that we believe is relevant to consumers.

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. 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.

On November 6, 2017, we completed our IPO of 10,416,666 shares of Class A common stock at an initial public offering price of $12.00 per share and received approximately $117.3 million in net proceeds after deducting underwriting discounts and commissions. We used the net proceeds to purchase 10,416,666 newly issued common units directly from FAH, LLC at a price per unit equal to the price per share of Class A common stock in the IPO less underwriting discounts and commissions. At March 31, 2019, we held 28.5 million common units, representing an approximately 57.1% interest in FAH, LLC.

Key Performance Indicators

We consider the following metrics to be key performance indicators to evaluate our business, develop financial forecasts, and make strategic decisions.

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(amounts in thousands)

 

Net sales

 

$

166,800