fnko-10q_20180930.htm

 

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 September 30, 2018

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 Section13(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  

As of November 8, 2018, the registrant had 24,733,240 shares of Class A common stock, $0.0001 par value per share, and 23,633,692 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 for the Three and Nine Months Ended September 30, 2018 and 2017

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017

3

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2018

5

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

Part II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

Item 5.

Other Information

61

Item 6.

Exhibits

62

SIGNATURES

 

63

 

 

 


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, 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 – FINANCIAL INFORMATION

Item 1.

Financial Statements

 

FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(In thousands, except per share data)

 

Net sales

 

$

176,915

 

 

$

142,812

 

 

$

452,849

 

 

$

346,610

 

Cost of sales (exclusive of depreciation and

   amortization shown separately below)

 

 

108,898

 

 

 

84,387

 

 

 

280,536

 

 

 

214,453

 

Selling, general, and administrative expenses

 

 

41,267

 

 

 

32,511

 

 

 

110,306

 

 

 

83,412

 

Acquisition transaction costs

 

 

-

 

 

 

136

 

 

 

28

 

 

 

3,222

 

Depreciation and amortization

 

 

9,961

 

 

 

8,433

 

 

 

28,912

 

 

 

22,755

 

Total operating expenses

 

 

160,126

 

 

 

125,467

 

 

 

419,782

 

 

 

323,842

 

Income from operations

 

 

16,789

 

 

 

17,345

 

 

 

33,067

 

 

 

22,768

 

Interest expense, net

 

 

5,750

 

 

 

9,091

 

 

 

17,230

 

 

 

23,768

 

Other (income) expense, net

 

 

1,434

 

 

 

(32

)

 

 

2,594

 

 

 

(145

)

Income (loss) before income taxes

 

 

9,605

 

 

 

8,286

 

 

 

13,243

 

 

 

(855

)

Income tax expense

 

 

1,519

 

 

 

22

 

 

 

2,049

 

 

 

1,046

 

Net income (loss)

 

 

8,086

 

 

 

8,264

 

 

 

11,194

 

 

 

(1,901

)

Less: net income attributable to non-controlling

   interests

 

 

6,056

 

 

 

-

 

 

 

7,848

 

 

 

-

 

Net income (loss) attributable to Funko, Inc.

 

$

2,030

 

 

$

8,264

 

 

$

3,346

 

 

$

(1,901

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of Class A common stock (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

 

 

 

 

 

$

0.14

 

 

 

 

 

Diluted

 

$

0.08

 

 

 

 

 

 

$

0.13

 

 

 

 

 

Weighted average shares of Class A common

   stock outstanding (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,765

 

 

 

 

 

 

 

23,484

 

 

 

 

 

Diluted

 

 

26,286

 

 

 

 

 

 

 

25,124

 

 

 

 

 

 

(1)

Basic and diluted earnings per Class A common stock is applicable only for the period after the Company’s initial public offering. See Note 11, Earnings per Share.

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

2


FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Net income (loss)

 

$

8,086

 

 

$

8,264

 

 

$

11,194

 

 

$

(1,901

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss), net of tax effect of $92 and $0 for the three months ended September 30, 2018 and 2017, and $31 and $0 for the nine months ended September 30, 2018 and 2017, respectively

 

 

(149

)

 

 

590

 

 

 

(1,338

)

 

 

1,361

 

Comprehensive income (loss)

 

 

7,937

 

 

 

8,854

 

 

 

9,856

 

 

 

(540

)

Less: Comprehensive income attributable to

   non-controlling interests

 

 

5,951

 

 

 

 

 

 

7,149

 

 

 

 

Comprehensive income (loss) attributable to

   Funko, Inc.

 

$

1,986

 

 

$

8,854

 

 

$

2,707

 

 

$

(540

)

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

 

3


FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands, except per share amounts)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,576

 

 

$

7,728

 

Accounts receivable, net

 

 

127,026

 

 

 

115,478

 

Inventory

 

 

81,206

 

 

 

79,082

 

Prepaid expenses and other current assets

 

 

25,302

 

 

 

21,727

 

Total current assets

 

 

244,110

 

 

 

224,015

 

Property and equipment, net

 

 

44,469

 

 

 

40,438

 

Goodwill

 

 

112,977

 

 

 

110,902

 

Intangible assets, net

 

 

237,518

 

 

 

250,649

 

Deferred tax asset

 

 

5,795

 

 

 

51

 

Other assets

 

 

3,896

 

 

 

4,258

 

Total assets

 

$

648,765

 

 

$

630,313

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Line of credit

 

$

54,899

 

 

$

10,801

 

Current portion long-term debt, net of unamortized discount

 

 

7,973

 

 

 

7,928

 

Accounts payable

 

 

34,978

 

 

 

53,428

 

Income taxes payable

 

 

2,371

 

 

 

2,268

 

Accrued royalties

 

 

31,494

 

 

 

25,969

 

Accrued expenses and other current liabilities

 

 

31,066

 

 

 

27,032

 

Current portion of contingent consideration

 

 

2,500

 

 

 

2,500

 

Total current liabilities

 

 

165,281

 

 

 

129,926

 

Long-term debt, net of unamortized discount

 

 

196,181

 

 

 

215,170

 

Deferred tax liability

 

 

65

 

 

 

588

 

Deferred rent and other long-term liabilities

 

 

10,820

 

 

 

3,474

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   authorized; 24,701 and 23,338 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

2

 

 

 

2

 

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

   authorized; 23,665 and 24,976 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

2

 

 

 

2

 

Additional paid-in-capital

 

 

142,426

 

 

 

129,320

 

Accumulated other comprehensive income

 

 

163

 

 

 

802

 

Retained earnings

 

 

4,387

 

 

 

1,041

 

Total stockholders' equity attributable to Funko, Inc.

 

 

146,980

 

 

 

131,167

 

Non-controlling interests

 

 

129,438

 

 

 

149,988

 

Total stockholders' equity

 

 

276,418

 

 

 

281,155

 

Total liabilities and stockholders' equity

 

$

648,765

 

 

$

630,313

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

4


FUNKO, inc. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTs OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common

Stock

 

 

Class B Common

Stock

 

 

Additional

Paid-In

 

 

Other

Comprehensive

 

 

Retained

 

 

Non-

Controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Interests

 

 

Total

 

Period ended December 31, 2017

 

 

23,338

 

 

$

2

 

 

 

24,976

 

 

$

2

 

 

$

129,320

 

 

$

802

 

 

$

1,041

 

 

$

149,988

 

 

$

281,155

 

Distribution to continuing equity owners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,441

)

 

 

(20,441

)

Equity-based compensation and option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,755

 

 

 

 

 

 

 

 

 

 

 

 

5,755

 

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(639

)

 

 

 

 

 

(699

)

 

 

(1,338

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

93

 

 

 

 

 

 

 

 

 

 

 

 

93

 

Redemption of common units of FAH, LLC

 

 

1,363

 

 

 

 

 

 

(1,311

)

 

 

 

 

 

7,258

 

 

 

 

 

 

 

 

 

 

(7,258

)

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,346

 

 

 

7,848

 

 

 

11,194

 

Period ended September 30, 2018

 

 

24,701

 

 

 

2

 

 

 

23,665

 

 

 

2

 

 

 

142,426

 

 

 

163

 

 

 

4,387

 

 

 

129,438

 

 

 

276,418

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

5


FUNKO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Operating Activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

11,194

 

 

$

(1,901

)

Adjustments to reconcile net income (loss) to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28,912

 

 

 

22,755

 

Equity-based compensation

 

 

5,750

 

 

 

4,328

 

Contingent consideration

 

-

 

 

 

30

 

Accretion of discount on long-term debt

 

 

431

 

 

 

3,281

 

Amortization of debt issuance costs

 

 

1,107

 

 

 

378

 

Foreign currency gain

 

 

2,683

 

 

 

 

Deferred tax benefit

 

 

408

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(13,764

)

 

 

(12,358

)

Inventory

 

 

(3,705

)

 

 

(17,158

)

Prepaid expenses and other assets

 

 

(3,609

)

 

 

(10,932

)

Accounts payable

 

 

(20,234

)

 

 

14,711

 

Income taxes payable

 

 

84

 

 

 

 

Accrued royalties

 

 

5,568

 

 

 

2,483

 

Accrued expenses and other liabilities

 

 

6,583

 

 

 

4,823

 

Net cash provided by operating activities

 

 

21,408

 

 

 

10,440

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(20,870

)

 

 

(26,278

)

Acquisitions, net of cash

 

 

(635

)

 

 

(28,443

)

Net cash used in investing activities

 

 

(21,505

)

 

 

(54,721

)

Financing Activities

 

 

 

 

 

 

 

 

Borrowings on line of credit

 

 

251,853

 

 

 

110,177

 

Payments on line of credit

 

 

(207,755

)

 

 

(55,256

)

Proceeds from long-term debt, net

 

 

 

 

 

66,336

 

Payment of long-term debt

 

 

(20,050

)

 

 

(9,650

)

Proceeds from subordinated debt, net

 

 

 

 

 

20,000

 

Contingent consideration

 

 

 

 

 

(17,958

)

Contributions from members

 

 

 

 

 

5,000

 

Distribution to continuing equity owners

 

 

(20,441

)

 

 

(72,777

)

Net cash provided by financing activities

 

 

3,607

 

 

 

45,872

 

Effect of exchange rates on cash and cash equivalents

 

 

(662

)

 

 

(90

)

Net increase in cash and cash equivalents

 

 

2,848

 

 

 

1,501

 

Cash and cash equivalents at beginning of period

 

 

7,728

 

 

 

6,161

 

Cash and cash equivalents at end of period

 

$

10,576

 

 

$

7,662

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6


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”), 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 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, 2018, 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, 2017 filed with the Securities and Exchange Commission (“SEC”) on March 19, 2018.

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.

7


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, 2017. 

Recently Adopted Accounting Standards

Revenue Recognition. In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard. The new standard allows for a full retrospective approach to transition or a modified retrospective approach. Effective January 1, 2018, the Company adopted ASU 2014-09 and its related amendments (collectively, the “new revenue standards”) using the modified retrospective transition method, which was applied to all contracts not completed as of that date. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standards, while prior periods were not adjusted. There was no impact related to the cumulative effect of the adoption of the new revenue standards on January 1. The adoption of the new revenue standard did not have any impact on the Company’s unaudited condensed consolidated financial statements as of or for the three and nine months ended September 30, 2018. The Company has applied the practical expedient prescribed in the new revenue standards and does not evaluate contracts of one year or less for the existence of a significant financing component.

Substantially all of the Company’s revenues continue to be recognized when control of the goods are transferred to the customer, which is upon shipment or upon receipt of finished goods by the customer, depending on the contract terms. Based on the Company’s analysis of the new revenue standards, revenue recognition from the sale of finished goods to customers, which represents substantially all of the Company’s revenues, was not impacted by the adoption of the new revenue standards. Additionally, the Company routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. These sales adjustments require management to make estimates. In making these estimates, management considers all available information including the overall business environment, historical trends and information from customers, such as agreed upon customer contract terms as well as historical experience from the customer. The costs of these programs are considered variable consideration and are recorded as sales adjustments that reduce gross sales in the period the related sale is recognized. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimate process change; historically adjustments to estimated variable consideration have not been material.  

 

Amounts received prior to when control of the goods is transferred to the customer are recorded as deferred revenue on the unaudited condensed consolidated balance sheet. Sales terms do not allow for a right of return exception in relation to a manufacturing defect. The Company defers revenue on these advance payments until its performance obligation is satisfied. Deferred revenue is classified as a current liability when recognition is expected within 12 months following the balance sheet date. Deferred revenue was not material to the Company’s unaudited condensed consolidated balance sheet as of September 30, 2018 and December 31, 2017, and the changes in deferred revenue were not material to the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017.  

 

We have elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.  Accordingly, shipping and handling activities that are performed by the Company, whether before or after a customer has obtained control of the products, are considered fulfillment costs to satisfy our performance obligation to transfer the products, and are recorded as incurred within cost of goods sold.

 

We have made an accounting policy election to exclude from revenue all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (for example, sales, use, value added, and some excise taxes).

For a presentation of the Company’s revenues disaggregated by segment and geography, see Note 7, Segments.

Statement of Cash Flows. In August 2016, the FASB issued a standard which clarifies how entities should classify certain cash receipts and cash payments in the statement of cash flows. The standard is effective for the Company beginning January 1, 2018, and did not have an impact on the Company’s unaudited condensed consolidated statement of cash flows.

8


Definition of a Business. In January 2017, the FASB issued a standard which provides a new framework for determining whether transactions should be accounted for as acquisitions (or dispositions) of assets or a business. The standard is effective for the Company beginning January 1, 2018, and it did not have an impact on the Company’s unaudited condensed consolidated financial statements.

Stock Compensation Modifications. In May 2017, the FASB issued a standard that clarifies the accounting for a stock-based compensation award that has been modified. The standard is effective for awards modified by the Company on or after January 1, 2018 and did not have an impact on the Company’s unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

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 standard is effective for reporting periods beginning after December 15, 2018, with early adoption permitted.  We will adopt the lease standard and its related amendments on January 1, 2019 with a cumulative adjustment to retained earnings rather than retrospectively adjusting prior periods.  This will result in a balance sheet presentation that is not comparable to prior periods in the year of adoption. The Company is in the process of its implementation which includes evaluating its leasing activities and developing its estimate of the right-of-use asset and lease liability, which is based on the present value of lease payments. Final financial statement impacts will depend on the lease portfolio at the time of adoption, but the impact on the balance sheet is expected to be material. The Company does not expect material changes to the recognition of operating lease expenses in its 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 guidance is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements.

3. Acquisitions

In 2017, the Company completed three acquisitions that were accounted for as business combinations by applying the acquisition method of accounting, where identifiable tangible and intangible assets 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.

A Large Evil Corporation Limited. On November 28, 2017, the Company acquired all of the outstanding equity of A Large Evil Corporation Limited (“A Large Evil Corporation Acquisition”), an animation studio based in the United Kingdom. The preliminary purchase consideration included $3.9 million paid in cash and additional $1.0 million due to the sellers based on certain working capital adjustments and other conditions as per the agreement. The purchase price allocation was finalized during the third quarter of 2018 and the estimated fair value of the assets acquired and liabilities assumed has been finalized.  The finalization of the purchase price allocation resulted in no change from the preliminary estimate.

Loungefly. On June 28, 2017, the Company acquired all of the outstanding equity interests of Loungefly, LLC (“Loungefly”), a designer of licensed pop culture fashion handbags, small leather goods and accessories (the “Loungefly Acquisition”). The purchase consideration included $17.9 million paid in cash, which included $1.8 million in transaction fees paid on behalf of the seller, and the issuance of $2.1 million of FAH, LLC’s Class A units. The purchase price allocation was finalized during the first quarter of 2018 and the estimated fair value of the assets acquired and liabilities assumed has been finalized. The finalization of purchase price allocation resulted primarily in a reduction of $1.7 million to intangible assets and an increase in goodwill of $1.8 million.

Underground Toys Limited. On January 27, 2017, the Company acquired certain assets of Underground Toys Limited, a manufacturer and distributor of licensed products based in the United Kingdom (the “Underground Toys Acquisition”). The acquired assets primarily consisted of inventory and identifiable intangible assets, which are now used by the Company’s newly formed subsidiary Funko UK, Ltd. The purchase consideration included $12.6 million in cash, the issuance of $3.2 million of FAH, LLC’s Class A units, an additional payment in cash of up to $2.5 million contingent upon the assignment of certain license agreements and certain working capital adjustments of $1.8 million.

9


The following table shows the amounts recognized for each major class of assets acquired and liabilities assumed and the resultant purchase price allocation for each transaction described above as of the respective acquisition date:

 

 

 

Assets (Liabilities) Acquired (Assumed)

at Fair Value

 

 

 

Loungefly

 

 

Underground

Toys Limited

 

 

A Large Evil

Corporation

Limited

 

 

 

(in thousands)

 

Cash

 

$

1,501

 

 

$

 

 

$

645

 

Accounts receivable

 

 

3,315

 

 

 

 

 

 

30

 

Inventory

 

 

2,351

 

 

 

15,263

 

 

 

 

Other current assets

 

 

132

 

 

 

1,122

 

 

 

321

 

Property and equipment

 

 

214

 

 

 

289

 

 

 

76

 

Intangible assets

 

 

12,605

 

 

 

6,500

 

 

 

 

Goodwill

 

 

8,428

 

 

 

2,999

 

 

 

4,000

 

Current liabilities

 

 

(7,890

)

 

 

(6,183

)

 

 

(207

)

Consideration transferred

 

$

20,656

 

 

$

19,990

 

 

$

4,865

 

 

The following table summarizes the identifiable intangible assets acquired in connection with the transactions described above and their estimated useful lives as of the respective acquisition date:

 

 

 

Estimated Fair Value of

Assets Acquired

 

 

 

 

 

 

 

Loungefly

 

 

Underground

Toys Limited

 

 

Estimated

Useful Life

 

 

 

(in thousands)

 

 

(Years)

 

Intangible asset type:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

2,015

 

 

$

3,700

 

 

 

10

 

Licensor relationships

 

 

8,590

 

 

 

2,500

 

 

 

10

 

Trade name

 

 

2,000

 

 

 

 

 

 

10

 

Supplier relationships

 

 

 

 

 

300

 

 

 

2

 

Intangible assets

 

$

12,605

 

 

$

6,500

 

 

 

 

 

 

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, 2017.

Contingent Consideration. The Company measures contingent consideration obligations at the acquisition date of a business combination, and at each balance sheet date, at fair value, with changes in fair value recognized in its unaudited condensed consolidated statements of operations. Fair value is measured using the discounted cash flow method and based on assumptions the Company believes would be made by a market participant. Significant market inputs used to determine fair value as of September 30, 2018 and December 31, 2017 included probabilities of the likelihood of assignment of license agreements that would trigger contingent purchase consideration, the timing of when the payments will be made, and the discount rate. Significant changes to these assumptions would result in a significantly lower or higher fair value measurement. The valuation represents a Level 3 measurement within the fair value hierarchy.

The Company recorded an estimated $2.5 million in contingent consideration at the time the Company acquired Underground Toys Limited. The fair value of contingent consideration related to the acquisition of Underground Toys Limited was $2.5 million at September 30, 2018 and December 31, 2017.

 

Changes in fair value reflect changes to the Company’s assumptions regarding probabilities of the likelihood of assignment of license agreements, the timing of when the payment will be made, and the discount rate used to estimate

10


the fair value of the obligation, and are recorded within selling, general and administrative expense in the unaudited condensed consolidated statements of operations.

Debt. The estimated fair values of the Company’s debt instruments, which are classified as Level 3 financial instruments, at September 30, 2018 and December 31, 2017, were approximately $263.2 million and $239.2 million, respectively. The carrying values of the Company’s debt instruments at September 30, 2018 and December 31, 2017, were $259.1 million and $233.9 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 our standalone credit risk.

5. Debt

Debt consists of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Line of credit

 

$

54,899

 

 

$

10,801

 

Term Loan A Facility

 

 

208,350

 

 

 

228,400

 

Debt issuance costs

 

 

(4,196

)

 

 

(5,302

)

Total term debt

 

 

204,154

 

 

 

223,098

 

Less: current portion

 

 

7,973

 

 

 

7,928

 

Long-term debt, net

 

$

196,181

 

 

$

215,170

 

Subordinated Promissory Notes

On June 26, 2017, FAH, LLC issued promissory notes payable to certain of its members, including several members of management and its majority owner, in the aggregate principal amount of $20.0 million (the “Subordinated Promissory Notes”). Borrowings under the Subordinated Promissory Notes accrued interest at a rate equal to 11.0% per year for the first 90 days after their effective date, increasing to 13.0% per year 91 days after such effective date and 15.0% per year 181 days after such effective date. Proceeds from the Subordinated Promissory Notes were used to finance a portion of the contingent consideration related to the ACON Acquisition that was paid out during 2017. The Subordinated Promissory Notes matured on the earlier of (i) 180 days after payment of all obligations under the Senior Secured Credit Facilities (discussed further below) or (ii) the consummation of a qualified initial public offering. In November 2017, all of the outstanding aggregate principal balance and accrued interest on the Subordinated Promissory Notes of $20.9 million was repaid in connection with the Company’s IPO.

Senior Secured Credit Facilities

In October 2015, the Company entered into a credit agreement which provided for a $175.0 million term loan facility (the “Term Loan A Facility”) and revolving credit facility, including a $3.0 million subfacility for the issuance of letters of credit (the “Revolving Credit Facility”). On September 8, 2016, the Company entered into an amendment to the credit agreement which, among other things, increased borrowings under the Term Loan A Facility by $50.0 million and changed the interest rate applicable to the Revolving Credit Facility. On January 17, 2017, the Company entered into an amendment to its credit agreement which provided for, among other things, an additional $50.0 million term loan facility (the “Term Loan B Facility” and, together with the Term Loan A Facility and Revolving Credit Facility, the “Senior Secured Credit Facilities”), providing for interest rate options that can be chosen by the Company and an increase in commitments under the Revolving Credit Facility to $80.0 million.

In June 2017, the Company entered into additional amendments to its credit agreement to, among other things, (1) permit the Company to enter into certain subordinated loan documents, and (2) increase borrowings under the Term Loan A Facility by $20.0 million, increase commitments under the Revolving Credit Facility to $100.0 million and make certain changes to certain covenants and definitions. Proceeds from the additional Term Loan A Facility borrowings were used to fund a portion of the purchase price for the Loungefly Acquisition and to pay related fees and expenses.

In November 2017, all of the outstanding aggregate principal balance and accrued interest of $46.1 million on the Company’s Term Loan B Facility was repaid in connection with the IPO, and the Company recorded a $5.1 million loss on debt extinguishment as a result of the write-off of unamortized discount.

On March 7, 2018, the Company entered into an amendment to its credit agreement which provides for, among other things, (i) a $13.0 million prepayment of the amounts owing under the Term Loan A Facility on the effective date of the

11


amendment, with no changes in the amount of future amortization payments, (ii) a reduction in the interest rate margins (a) for the Term Loan A Facility, from 6.25% to 5.50% for base rate loans and 7.25% to 6.50% for LIBOR rate loans and (b) for the Revolving Credit Facility, from 2.50% to 1.75% for LIBOR rate loans, (iii) a 1% prepayment premium on prepayments under both the Term Loan A Facility and the Revolving Credit Facility for 180 days after the effective date of the amendment, and (iv) a $20.0 million increase to the borrowing base under the Revolving Credit Facility, so long as no loan party formed under the laws of England and Wales or Funko UK, Ltd. incurs secured indebtedness for borrowed money.

The Senior Secured Credit Facilities also provide for an excess cash flow payment following the end of each fiscal year that requires the Company to prepay the outstanding principal amount of all loans under the Senior Secured Credit Facilities in an aggregate amount equal to 60% of excess cash flow for such fiscal year, subject to certain step-downs and other reductions based on the Company’s senior leverage ratio and the amount of certain voluntary prepayments. The Company did not make any excess cash flow prepayments for the nine months ended September 30, 2018 or 2017.

Borrowings under the Term Loan A Facility accrue interest at an annual rate equal to, at the Company’s option, either (1) the Reference Rate plus a margin of 6.25%, or (2) the LIBOR Rate plus a margin of 7.25%. The “Reference Rate” is defined as the greatest of (1) a commercial lending rate publicly announced by the reference bank, (2) the federal funds open rate plus 0.50% per year, and (3) the one-month LIBOR published in the Wall Street Journal plus 1.00% per year, subject to a 3.00% floor. The “LIBOR Rate” is defined as the applicable London Interbank Offered Rate for U.S. dollar deposits, subject to a 1.00% floor, divided by 1.00 minus the maximum effective reserve percentage for Eurocurrency funding. Borrowings under the Term Loan B Facility accrue interest at an annual rate equal to, at the Company’s option, either (1) the Reference Rate plus a margin of 9.00% per year, or (2) the LIBOR Rate plus a margin of 10.00% per year.

The Senior Secured Credit Facilities are collateralized by substantially all of the assets of, and the equity interests held by, the borrowers and any subsidiary guarantor that may become party to the credit agreement in the future, subject to certain exceptions. The Senior Secured Credit Facilities also contain certain financial and restrictive covenants. As of September 30, 2018 and December 31, 2017, the Company was in compliance with all covenants under the Senior Secured Credit Facilities.

The Company had $54.9 million and $10.8 million of borrowings outstanding under the Revolving Credit Facility as of September 30, 2018 and December 31, 2017, respectively. There were no outstanding letters of credit as of September 30, 2018 and December 31, 2017.

On October 22, 2018, we refinanced the Senior Secured Credit Facilities. See Note 12, Subsequent Event, for further information.

6. 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.

The Company is currently in the process of negotiating a renewal of our licensing agreements with Disney and its controlled affiliates, LucasFilm and Marvel. As of September 30, 2018, we had accrued a $2.0 million consent fee under our existing licensing agreements with Disney, which we expect to pay in connection with the renewal of such licensing agreements. However, there is no certainty regarding the amount and timing of such consent fee, and the terms of any final agreement reached with Disney may be less favorable to us than the terms of our existing licensing agreements.  

Leases

The Company has entered into non-cancellable operating leases for office, warehouse, and distribution facilities, with original lease periods expiring through 2027. 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 is recorded as deferred rent on the consolidated balance sheets. For certain leases we receive tenant improvement allowances and record those as deferred rent on the unaudited condensed consolidated balance sheets and amortize the tenant improvement allowances on a straight-line basis over the lease term as a reduction of rent expense. Rent expense, net of sublease income, was $3.1 million and $1.6 million for the three months ended

12


September 30, 2018 and 2017, respectively, and $7.7 million and $4.2 million for the nine months ended September 30, 2018 and 2017, respectively.

Liabilities under Tax Receivable Agreement

As discussed in Note 11, Income Taxes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, 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 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 Company is not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transaction that gave rise to the payment are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) the generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If the Company does not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then it would not be required to make the related Tax Receivable Agreement payments.

During the three and nine months ended September 30, 2018, the Company recognized an additional liability in the amount of $6.5 million and $6.6 million, respectively, for the payments due to the redeeming members under the Tax Receivable Agreement, representing 85% of the aggregate tax benefits we expect 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 our estimate of future taxable income. The Company did not record any liabilities for the Tax Receivable Agreement during the three and nine months ended September 30, 2017.

There were no payments made pursuant to the Tax Receivable Agreement during the three and nine months ended September 30, 2018 and 2017.

As of September 30, 2018, the Company’s total obligation under the Tax Receivable Agreement, including accrued interest, was $6.6 million, of which $0.6 million was included in Accrued expenses and other current liabilities, and $6.0 million was included in Deferred rent and other long-term liabilities on the 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 we 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, 2017, the Company did not have any obligations recorded under the 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.

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 us, certain of our officers and directors, and the underwriters of our 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 us and certain of our 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 us, certain of our 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 our 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,

13


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, we moved to dismiss that action.

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.

The complaints in both state and federal court allege that we 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 our 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.

7. 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 product categories as a percent of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Figures

 

 

80.1

%

 

 

80.4

%

 

 

82.1

%

 

 

82.4

%

Other

 

 

19.9

%

 

 

19.6

%

 

 

17.9

%

 

 

17.6

%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

121,316

 

 

$

104,234

 

 

$

307,274

 

 

$

253,782

 

International

 

 

55,599

 

 

 

38,578

 

 

 

145,575

 

 

 

92,828

 

Total net sales

 

$

176,915

 

 

$

142,812

 

 

$

452,849

 

 

$

346,610

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 

 

 

2018

 

 

2017

 

Long-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

$

24,370

 

 

$

24,637

 

China and Vietnam

 

 

 

 

 

 

21,202

 

 

 

18,865

 

United Kingdom

 

 

 

 

 

 

2,793

 

 

 

1,194

 

Total long-lived assets

 

 

 

 

 

$

48,365

 

 

$

44,696

 

 

 

14


8. Related Party Transactions

ACON Equity Management Agreement

On October 31, 2015, the Company entered into a management services agreement with ACON Equity Management, L.L.C. (“ACON Equity Management”), which required payment of a monitoring fee equal to the greater of (1) $500,000 and (2) 2% prior year Adjusted EBITDA, up to a maximum fee of $2.0 million. Pursuant to the management services agreement, Funko, LLC also agreed to pay ACON Equity Management a one-time advisory fee of $2.0 million and agreed to reimburse ACON Equity Management for certain costs and expenses in connection with ACON Equity Management’s performance under the agreement. In connection with the IPO, on November 6, 2017, the management fee agreement terminated. ACON Equity Management waived the $5.8 million termination fee.

The Company had no management fees for the three and nine months ended September 30, 2018.  The Company recognized $0.5 million and $1.5 million in management fees for the three and nine months ended September 30, 2017, respectively. These fees are recorded within selling, general and administrative expenses. As of September 30, 2018 and December 31, 2017, there were no amounts due to ACON Equity Management.

Promissory Notes

In October 2015, the Company entered into subscription agreements with several members of management (the “Purchasers”) to purchase FAH, LLC Class A units having an aggregate purchase price of $0.9 million. Funko, LLC entered into a secured promissory note with each Purchaser in an amount equal to the purchase price of the Class A units purchased by such individual. Amounts outstanding under the promissory notes were collateralized by all direct or indirect ownership interests of the Purchasers in FAH, LLC. The promissory notes had an 8% interest rate compounded on an annual basis and were recorded as a non-cash transaction within members’ equity. The Company recognized interest on a cash basis when principal payments were made and recorded a nominal amount of interest income for the three and nine months ended September 30, 2017. On October 5, 2017, outstanding aggregate principal and accrued interest of $0.2 million was forgiven for certain of FAH, LLC’s officers and executives. In November 2017, the remaining promissory notes were repaid in full with proceeds from the IPO.

Other Agreements

In June 2017, in connection with the Loungefly Acquisition, 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 employees of the Company, who were the former owners of Loungefly. For the three and nine months ended September 30, 2018, the Company recorded $0.1 million and $0.3 million, respectively, 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. At September 30, 2018, amounts owed to those entities were $3.1 million and were recorded in accounts payable on the unaudited condensed consolidated balance sheet.

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 and nine months ended September 30, 2018, the Company recorded approximately $2.5 million and $4.4 million, respectively, in net sales to Forbidden Planet. At each of September 30, 2018 and December 31, 2017, accounts receivable from Forbidden Planet was $0.5 million on the unaudited condensed consolidated balance sheets.

9. 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 $1.5 million and $2.0 million of income tax expense for the three and nine months ended September 30, 2018, respectively.  The Company’s estimated annual effective tax rate for the nine months ended September 30, 2018 was 15.5%. 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. The results from the three and nine months ended September 30, 2017 reflect the U.K.

15


Corporation Tax attributable to Funko UK, Ltd., but does not reflect the U.S. tax expense of FAH, LLC, which as a pass-through entity, was not subject to U.S. income tax.

In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was passed. The Tax Act changed existing U.S. tax law, including changes to U.S. corporate tax rates, business-related exclusions, and deductions and credits.

Analysis and interpretation of the Tax Act is provisional. The Company continues to assess and analyze the potential impacts of the Tax Act that could potentially impact the measurement of our tax balances. During the three and nine months ended September 30, 2018, the Company did not make any additional adjustments related to the Tax Act provisional amounts recorded at December 31, 2017. We expect to complete our analysis within the measurement period in accordance with SAB 118.

As a result of the IPO and certain reorganization transactions, the Company recorded a net deferred tax asset resulting from the outside basis difference of its interest in FAH, LLC. The Company determined that the deferred tax asset related to acquiring its interest in FAH, LLC through the newly issued FAH, LLC units is not expected to be realized unless the Company disposes of its investment in FAH, LLC. Accordingly, the Company established a valuation allowance of $8.9 million against this portion of its deferred tax asset. The Company did not recognize any change to the valuation allowance through the provision for income tax or other comprehensive income for the three and nine months ended September 30, 2018.

Pursuant to our election under Section 754 of the Internal Revenue Code, we expect the Company will receive additional increases in its share of the tax basis of FAH, LLC assets when the Continuing Equity Owners exchange common units of FAH, LLC (together with the corresponding shares of Class B common stock) for Class A common stock. If the Company acquires common units of FAH, LLC from the Continuing Equity Owners, we expect both the original basis adjustments and the anticipated basis adjustments will increase, resulting in additional future tax deductions and therefore reducing the amount of future income tax the Company would otherwise be required to pay. These potential future increases in tax basis will result in additional deferred tax assets and additional liabilities under the Tax Receivable Agreement, representing approximately 85% of the projected tax savings for the expected use of these tax attributes. Such amounts will be recorded at the time of these future exchanges based on our projections of taxable income and other factors that may exist at the time of such exchanges.  

During the nine months ended September 30, 2018, the Company acquired an aggregate of 1.4 million common units of FAH, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in FAH, LLC subject to the provisions of the Tax Receivable Agreement.  As a result of these exchanges, during the nine months ended September 30, 2018 the Company recognized an increase to its net deferred tax assets in the amount of $6.7 million, and corresponding Tax Receivable Agreement liabilities of $6.6 million, representing 85% of the tax benefits due to the Continuing Equity Owners.  

10. 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 (loss) and comprehensive income (loss) are attributed between Funko, Inc. and noncontrolling interest holders based on each party’s relative economic ownership interest in FAH, LLC. As of September 30, 2018 and December 31, 2017, Funko, Inc. owned 24.7 million and 23.3 million of FAH, LLC common units, respectively, representing a 50.5% and 48.3% economic ownership interest in FAH, LLC, respectively.

11. 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.

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Prior to the IPO, the FAH, LLC membership structure included Class A Units, Profits Units and HR Units. The Company analyzed the calculation of earnings per unit for periods prior to the IPO using the two-class method and determined that it resulted in values that would not be meaningful to the users of these unaudited condensed consolidated financial statements. Therefore, earnings per share information has not been presented for the three and nine months ended September 30, 2017.

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

Net income attributable to Funko, Inc.

 

$

8,086

 

 

$

11,194

 

Less: net income attributable to non-controlling

   interests

 

 

6,056

 

 

 

7,848

 

Net income attributable to Funko, Inc. basic

 

$

2,030

 

 

$

3,346

 

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

 

 

 

 

 

 

Net income attributable to Funko, Inc. — diluted

 

$

2,030

 

 

$

3,346

 

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares of Class A common stock

   outstanding — basic

 

 

23,765,291

 

 

 

23,484,041

 

Add: Effect of dilutive equity-based compensation awards

 

 

2,520,242

 

 

 

1,640,327

 

Weighted-average shares of Class A common stock

   outstanding — diluted

 

 

26,285,533

 

 

 

25,124,368

 

Earnings per share of Class A common stock — basic

 

$

0.09

 

 

$

0.14

 

Earnings per share of Class A common stock —

   diluted

 

$

0.08

 

 

$

0.13

 

For the three and nine months ended September 30, 2018, an aggregate of 25.4 million and 26.2 million of potentially dilutive securities, respectively, 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 and nine months ended September 30, 2018, anti-dilutive securities included 25.2 million and 25.4 million, respectively, 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.  

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.

12. Subsequent Event

On October 22, 2018 (the “Closing Date”), the Company entered into a new 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 (the “New Revolving Credit Facility” and together with the New Term Loan Facility, the “New Credit Facilities”).

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 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 outstanding balance due and payable on the Maturity Date.  The first amortization payment is 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 date.

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Loans under the New Credit Facilities will, at the Company’s option, bear interest 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.

Under certain circumstances described in the Credit Agreement, the Company may increase the New Credit Facilities in an aggregate amount not to exceed $25.0 million.

          

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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 19, 2018. 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: