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Further, achieving these objectives will require investments that may result in short-term costs without generating any current sales or countervailing cost savings and, therefore, may be dilutive to our earnings, at least in the short term.
−Removed: In addition, we may decide to divest or discontinue certain brands or products or streamline operations and incur other costs or special charges in doing so.
+Added: In addition, we have in the past decided and may in the future decide to divest or discontinue certain brands or products or streamline operations and incur other costs or special charges in doing so.
We may also decide to discontinue certain programs or sales to certain retailers based on anticipated strategic benefits.
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In addition, we may face difficulties processing inventory through our distribution centers, which could cause us to hold inventory for an extended period of time.
−Removed: For example, inventories at December 31, 2022 increased 48% over the prior year period, primarily from the timing of receipt of inventory and challenges of processing through our new consolidated U.S.
−Removed: distribution center.
−Removed: We also continue to see elevated levels of inventory in transit and elevated freight costs through drayage and container storage costs as a result of recent processing challenges in our warehouse operations.
If market conditions, demand for our products or consumer preferences shift or we face distribution challenges prior to the sales of the inventory, we may have excess inventory that we may need to hold for a long period of time, write down, and/or sell at prices lower than expected or discard.
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We have recently experienced canceled orders and if demand or future sales do not reach forecasted levels, we could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard.
−Removed: For example, in the fourth quarter of 2019, we wrote-down $16.8 million of inventory due to our decision to dispose of slower moving inventory to increase operational capacity which contributed to the Company’s net loss for the period.
−Removed: Also, in the first half of 2023, we expect to incur a $30.0 million to $36.0 million write-down of our inventory to increase operational efficiency and reduce storage costs.
+Added: For example, during the year ended December 31, 2023, we incurred an inventory write-down of $30.3 million due to our decision to increase operational efficiency and reduce storage costs and we also wrote down $8.7 million in unfinished and finished goods held at offshore factories, which contributed to the Company's net loss for the period.
If we are not successful in managing our inventory, our business, financial condition and results of operations could be adversely affected.
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See “Our success is critically dependent on the efforts and dedication of our officers and other employees, and the loss of one or more key employees, or our inability to attract and retain qualified personnel and maintain our corporate culture, could adversely affect our business.” To manage domestic and international growth of our operations and personnel, we have invested and continue to invest in the development of warehouse management systems, additional platforms to support our direct-to-consumer experience, and capital build out of new leased warehouse and office spaces.
−Removed: In August 2022, we announced that we were delaying the remaining steps for implementation of our enterprise resource planning software to 2023, which has caused us to incur increased costs and adversely impacted our financial results.
At December 31, 2022, we determined the enterprise resource planning project was not feasible for its intended use and abandoned the cloud computing arrangement and incurred a write down of $32.5 million.
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Our business is dependent upon our license agreements, which involve certain risks.
−Removed: Products from which we generate substantially all of our net sales are produced under license agreements which grant us the right to use certain intellectual property in such products.
+Added: We generate substantially all of our net sales from products produced under license agreements which grant us the right to use third party intellectual property in such products.
These license agreements typically have short terms (between two and three years), are not automatically renewable, and, in some cases, give the licensor the right to terminate the license agreement at will.
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We believe our ability to retain our license agreements depends, in large part, on the strength of our relationships with our licensors.
−Removed: Any events or developments adversely affecting those relationships, or the loss of one or more members of our management team, particularly our Chief Executive Officer and President, could adversely affect our ability to maintain and renew our license agreements on similar terms or at all.
−Removed: Our top ten licensors collectively accounted for approximately 74% of our sales for the years ended December 31, 2022, 2021 and 2020, respectively.
+Added: Any events or developments adversely affecting those relationships, or changes in our management team, could adversely affect our ability to maintain and renew our license agreements on similar terms or at all.
+Added: In July 2023, we announced that Brian Mariotti, our then-Chief Executive Officer, would take a six-month sabbatical and that he would be replaced by a member of our board of directors, Michael Lunsford, as our Interim Chief Executive Officer.
+Added: In September 2023, we announced that Mr.
+Added: Mariotti resigned from the board of directors and as an employee of the company and entered into an Advisor Agreement with the Company.
+Added: No assurance can be made that this change in our leadership will not have a material adverse impact on our relationships with licensors, and if we fail to manage our licensor relationships successfully, our business, financial condition or results of operations could be adversely affected.
+Added: Our top ten licensors collectively accounted for approximately 68%, 74% and 74% of our sales for the years ended December 31, 2023, 2022 and 2021, respectively.
Moreover, while we have separate licensing arrangements with Disney, LucasFilm and Marvel, these parties are all under common ownership by Disney and collectively these licensors accounted for approximately 38%, 44% and 43% of our sales for the years ended December 31, 2023, 2022 and 2021, respectively.
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Such cost increases and weakened economic conditions may result from any number of factors, including pandemics, terrorist attacks, wars and other conflicts, natural disasters, increases in critical commodity prices or labor costs, sovereign debt defaults or the prospect of such events.
−Removed: General inflation in the United States, Europe and other geographies has risen to levels not experienced in recent decades.
+Added: General inflation in the United States, Europe and other geographies has recently risen to levels not experienced in decades.
Such a weakened economic and business climate, as well as consumer uncertainty created by such a climate, has adversely impacted and could in the future materially harm our sales and profitability.
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Those steps may lower our net sales or increase our costs, thereby decreasing our operating margins and lowering our profitability.
−Removed: As a result of increased inflation or supply constraints, like we are currently facing, we have increased prices of certain products, and may in the future need to increase our prices further in order to cover increased costs of goods sold, which may reduce demand for our products and may not fully offset our increased costs.
+Added: As a result of increased inflation or supply constraints, like we have previously faced, we have increased prices of certain products, and may in the future need to increase our prices further in order to cover increased costs of goods sold, which may reduce demand for our products and may not fully offset our increased costs.
+Added: The Company maintains the majority of its cash and cash equivalents in accounts with major U.S.
+Added: and multi-national financial institutions, and our deposits at certain of these institutions exceed insured limits.
+Added: Market conditions can impact the viability of these institutions.
+Added: In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all.
Changes in the retail industry and markets for consumer products affecting our retail customers or retailing practices could negatively impact our business, financial condition and results of operations.
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As such, trends and changes in the retail industry can negatively impact our business, financial condition and results of operations.
−Removed: For example, in 2022, the retail industry faced reductions in sales due to macroeconomic uncertainty and we currently expect the retail industry will continue to face sales challenges in early 2023, which may adversely impact our sales.
+Added: For example, in 2022 and 2023, the retail industry faced reductions in sales due to macroeconomic uncertainty which adversely impacted our sales.
Due to the challenging environment for traditional “brick-and-mortar” retail locations caused by declining in-store traffic, many retailers have closed physical stores, and some traditional retailers have engaged in significant reorganizations, filed for bankruptcy and gone out of business.
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If we were to lose the services of a distributor, we might need to find another distributor in that area, and there can be no assurance of our ability to do so in a timely manner or on favorable terms.
−Removed: In addition, our business could be adversely affected if any of our retail customers or distributors were to reduce purchases of our products.
+Added: In addition, our business could be adversely affected if any of our retail customers or distributors were to reduce purchases of our products, as has occurred in recent periods.
Our retail customers and distributors generally build inventories in anticipation of future sales and will decrease the size of their future product orders if sales do not occur as rapidly as they anticipate.
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Furthermore, consumer preferences have shifted, and may continue to shift in the future, to sales channels other than traditional retail, including e-commerce, in which we have more limited experience, presence and development.
−Removed: In addition, our entry into new product categories and geographies has exposed, and may continue to expose, us to new sales channels in which we have less expertise.
+Added: In addition, our emphasis on building out our e-commerce offerings and our entry into new product categories and geographies has exposed, and may continue to expose, us to new sales channels in which we have less expertise.
If we are not successful in developing our e-commerce channel and other new sales channels, our net sales and profitability may be adversely affected.
−Removed: The COVID-19 pandemic adversely impacted our business.
−Removed: Ongoing impacts of the COVID-19 pandemic or its variants could materially adversely impact our business, financial condition and results of operations going forward.
−Removed: During 2020, 2021 and into 2022, we and certain of our suppliers and the manufacturers of certain of our products were adversely impacted by COVID-19.
+Added: Our business, financial condition and results of operations have been, and may in the future be adversely affected by epidemics, pandemics or other public health crises, such as the COVID-19 pandemic.
+Added: We may face risks related to health epidemics and pandemics or other public health crises.
+Added: For example, we and certain of our suppliers and the manufacturers of certain of our products have in the past been adversely impacted by COVID-19.
We faced delays and difficulty sourcing products, and significant increases in shipping costs, which have negatively affected our business and financial results.
−Removed: If such supplier and manufacturer challenges continue or recur, the impact on our supply chain and manufacturing could negatively affect our financial results for future reporting periods.
−Removed: Even if we are able to find alternate sources for such products, they may cost more, which could adversely impact our profitability and financial condition.
−Removed: By the end of the year ended December 31, 2022, our business, was no longer experiencing a material effect from COVID-19, however, any renewed surge that leads to the curtailment of activities by businesses and consumers in much of the world, including as a result of restrictions imposed by governments and others to limit the spread of the disease and its variants such as through business and transportation shutdowns and restrictions on people’s movement and congregation, would adversely affect our business, financial position and results of operations going forward.
−Removed: Additionally, concerns over the economic impact of the COVID-19 pandemic have previously caused extreme volatility in financial and capital markets and may continue to do so in the future, which may materially adversely impact our stock price and our ability to access capital markets.
+Added: The extent to which an epidemic, pandemic or other public health crisis impacts our business going forward will depend on factors such as the duration and scope;
+Added: governmental, business, and individuals' actions in response to such crisis;
+Added: and the impact on economic activity, including the possibility of recession or financial market instability.
+Added: Measures to contain a public health crisis may intensify other risks described in these Risk Factors.
+Added: Additionally, concerns over the economic impact of an epidemic, pandemic or other public health crisis have previously caused and may in the future cause extreme volatility in financial and capital markets, which may materially adversely impact our stock price and our ability to access capital markets.
Our industry is highly competitive and the barriers to entry are low.
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Our gross margin may not be sustainable and may fluctuate over time.
−Removed: Our gross margin has historically fluctuated, primarily as a result of changes in product mix, changes in our costs, price competition and acquisitions.
+Added: Our gross margin has historically fluctuated, primarily as a result of changes in product mix, changes in our costs, including inventory management, price competition and acquisitions.
For the years ended December 31, 2023, 2022 and 2021, our gross margins (exclusive of depreciation and amortization) were 30.4%, 32.8% and 37.0%, respectively.
−Removed: Our current gross margin may not be sustainable, and our gross margin may decrease over time.
+Added: Our current or historical gross margins may not be sustainable or predictive of future gross margins, and our gross margin may decrease over time.
A decrease in gross margin can be the result of numerous factors, including, but not limited to:
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Additionally, unforeseen factors in the media and entertainment industry, including labor strikes and unforeseen developments with talent such as accusations of a star’s wrongdoing, may also delay or cancel the release of such projects.
+Added: For example, in the summer of 2023, both the Writers’ Guild of America and Screen Actors Guild – American Federation of Television and Radio Artists (“SAG-AFTRA”) voted to authorize strikes by their respective members.
+Added: Although subsequently resolved, these strikes have resulted in projects that were originally scheduled for 2023 release dates to be delayed into 2024 and beyond, and may delay further development and production of new and ongoing productions.
Any such delay or cancellation may decrease the number of products we sell and harm our business.
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To the extent we are unable to do so, our sales and profitability will be adversely affected.
−Removed: This is particularly true given the concentration of our sales under certain of our brand categories, particularly Core Collectible.
−Removed: Sales of our Core Collectible branded category products accounted for approximately 76%, 80% and 81% of our sales for the years ended December 31, 2022, 2021 and 2020,
−Removed: respectively.
+Added: This is particularly true given the concentration of our sales under certain of our brand categories, particularly Core Collectibles.
+Added: Sales of our Core Collectible branded category products accounted for approximately 73%, 76% and 80% of our sales for the years ended December 31, 2023, 2022 and 2021, respectively.
If consumer demand for our Core Collectible branded category products were to decrease, our business, financial condition and results of operations could be adversely affected unless we were able to develop and market additional products that generated an equivalent amount of net sales at a comparable gross margin, which there is no guarantee we would be able to do.
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It is their skill, creativity and hard work that drive our success.
−Removed: In particular, our success depends to a significant extent on the continued service and performance of our senior management team, including our Chief Executive Officer, Brian Mariotti, and President, Andrew Perlmutter.
+Added: In particular, our success depends to a significant extent on the continued service and performance of our senior management team.
We are dependent on their talents and continuing employment, and believe they are integral to our relationships with our licensors, certain of our key retail customers and to our overall selling and creative design processes.
−Removed: The loss of any member of our senior management team, or of any other key employees, or the inability to successfully complete planned management transitions, could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, financial condition and results of operations.
+Added: In July 2023, we announced that Brian Mariotti, our then-Chief Executive Officer, would take a six-month sabbatical and that he would be replaced by a member of our board of directors, Michael Lunsford, as our Interim Chief Executive Officer.
+Added: In September 2023, we announced that Mr.
+Added: Mariotti resigned from the board of directors and as an employee of the company and entered into an Advisor Agreement with the Company.
+Added: These changes in our leadership could have a material adverse impact on our business, financial condition and results of operations.
+Added: The loss or temporary absence of any member of our senior management team, or of any other key employees, or the inability to successfully complete planned management transitions, could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, financial condition and results of operations.
We do not currently maintain key man life insurance policies on any member of our senior management team or on our other key employees.
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Our headquarters is located near Seattle and competition in the Seattle area for qualified personnel, particularly those with technology-related skills and experience, is intense due to the increasing number of technology and e-commerce companies with a large or growing presence in Seattle, some of whom have greater resources than us and may be located closer to the city of Seattle than we are.
−Removed: In 2022 and 2021, we also faced higher than normal recruitment and personnel costs in efforts to seek and retain qualified personnel.
Furthermore, as we continue to grow our business and hire new employees, it may become increasingly challenging to hire people who will maintain our corporate culture.
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As we continue to grow, we may be unable to identify, hire or retain enough people who will maintain our corporate culture, including those in management and other key positions.
−Removed: Conversely, when we furlough or lay off employees, as we did in connection with the transition of the U.S.
−Removed: warehouse locations, there have been and may in the future be adverse consequences for our corporate culture and employee morale.
+Added: Conversely, when we furlough or lay off employees, as we did in connection with our cost-cutting reduction-in-force measures during the year ended December 31, 2023, there have been and may in the future be adverse consequences for our corporate culture and employee morale.
+Added: No assurance can be made that our cost cutting measures, including our recent reduction in force, will not harm our corporate culture, employee morale, or have a material adverse impact on our business, financial condition and results of operations.
Our corporate culture could also be adversely affected by the increasingly global distribution of our employees, as well as their increasingly diverse skill sets.
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There are inherent climate-related risks wherever business is conducted.
−Removed: Various meteorological phenomena and extreme weather events (including, but not limited to, storms, flooding, drought, wildfire, and extreme temperatures) may disrupt our operations or those of our suppliers, requiring us to incur additional operating or capital expenditures, or otherwise adversely impact our business, financial condition, or results of operations.
−Removed: Climate change may impact the frequency and/or intensity of such events.
+Added: Various meteorological phenomena and extreme weather events (including, but not limited to, storms, flooding, drought, wildfire, and extreme temperatures) may disrupt our operations or those of our suppliers, requiring us or our suppliers to incur additional operating or capital expenditures, or otherwise adversely impact our business, financial condition, or results of operations, either directly or indirectly through impacting our suppliers.
+Added: Climate change may impact the frequency and/or intensity of such events as well as contribute to certain chronic changes, such as changes to meteorological or hydrological patterns, which may have various adverse impacts.
While we may take various actions to mitigate our business risks associated with climate change, this may require us to incur substantial costs and may not be successful, due to, among other things, the uncertainty associated with the longer-term projections associated with managing climate risks.
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Reporting expectations are also increasing, with a variety of stakeholders seeking increased information on climate related risks.
−Removed: For example, the SEC has published proposed rules that would require companies to provide significantly expanded climate-related disclosures in their periodic reporting, which may require us to incur significant additional costs to comply, including the implementation of significant additional internal controls processes and procedures regarding matters that have not been subject to such controls in the past, and impose increased oversight obligations on our management and board of directors.
+Added: For example, several regulators, such as the SEC and the State of California, have adopted, or are considering adopting, rules that would require companies to provide significantly expanded climate-related disclosures in their periodic reporting and other disclosures, which may require us to incur significant additional costs to comply, including the implementation of significant additional internal controls processes and procedures regarding matters that have not been subject to such controls in the past, and impose increased oversight obligations on our management and board of directors.
All of these risks may also impact our suppliers or business partners, which may indirectly impact our business, financial condition, or results of operations.
Increased attention to, and evolving expectations for, sustainability and environmental, social, and governance (“ESG”) initiatives could increase our costs, harm our reputation, or otherwise adversely impact our business.
+Added: Expectations surrounding ESG matters continue to evolve rapidly.
+Added: For example, we have previously been subject to media scrutiny for our management of product inventory.
+Added: Unfavorable perceptions of our ESG performance may have a negative impact on our business, whether from a reputational perspective, a reduction in interest in our stock or products, issues in attracting/retaining customers, employees, or business partners, or otherwise.
+Added: Simultaneously, there are efforts by some parties to reduce companies’ efforts on certain ESG-related matters.
+Added: Both advocates and opponents to certain ESG matters increasingly resort to a range of activism forms, including media campaigns and litigation, to advance their perspectives.
+Added: Addressing these varying demands and expectations may be costly, and our efforts may not be successful or have the desired effect.
+Added: Certain of our suppliers and business partners may be subject to similar expectations, which may augment or create additional risks, including risks that may not be known to us.
Companies across industries are facing increasing scrutiny from a variety of stakeholders related to their ESG and sustainability practices.
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Any disruption to or failures in these delivery services, at our headquarters or at our warehouse facilities, whether as a result of extreme or severe weather conditions, natural disasters, labor unrest or otherwise, affecting western Washington or Arizona in particular, or the West Coast in general, or in other areas in which we operate, could significantly disrupt our operations, damage or destroy our equipment and inventory and cause us to incur additional expenses, any of which could have a material adverse effect on our business, financial condition and results of operations.
−Removed: For example, in 2020, 2021 and early 2022, certain of our suppliers and the manufacturers of certain of our products were adversely impacted by COVID-19.
−Removed: As a result, we faced delays or difficulty sourcing products, which negatively affected our business and financial results.
−Removed: In response, we shifted a greater amount of our production from China to Vietnam.
Although we possess insurance for damage to our property and the disruption of our business, this insurance, and in particular earthquake insurance, which is subject to various limitations and requires large deductibles or co-payments, may not be sufficient to cover all of our potential losses, and may be cancelled by us in the future or otherwise cease to be available to us on reasonable terms or at all.
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• potential challenges to our transfer pricing determinations and other aspects of our cross-border transactions, which can materially increase our taxes and other costs of doing business;
−Removed: • political instability, civil unrest, war and economic instability, such as the current situation with Ukraine and Russia and any impacts on surrounding regions;
+Added: • political instability, civil unrest, war and economic instability, such as the current situation with Ukraine and Russia or Israel and Hamas and any impacts on surrounding regions;
• greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;
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• proper payment of customs duties and/or excise taxes;
−Removed: • natural disasters and pandemics, including related to the COVID-19 pandemic, the greater difficulty and cost in recovering therefrom;
+Added: • natural disasters and pandemics, including related to COVID-19, the greater difficulty and cost in recovering therefrom;
• transportation delays and interruptions;
−Removed: • difficulties in moving materials and products from one country to another, including port congestion, strikes or other labor disruptions and other transportation delays and interruptions;
+Added: • difficulties in moving materials and products from one country to another, including port congestion, strikes or other labor disruptions, trade route disruptions due to geopolitical tensions and other transportation delays and interruptions;
• increased investment and operational complexity to make our products compatible with systems in various countries and compliant with local laws.
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trade policies, tariffs, taxes, export restrictions or other trade barriers, or restrictions on raw materials or components may limit our ability to produce products, increase our manufacturing costs, decrease our profit margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase raw materials or components, which would have a material adverse effect on our business, results of operations and financial condition.
−Removed: The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
−Removed: Following a national referendum and subsequent legislation, the United Kingdom formally withdrew from the European Union, commonly referred to as “Brexit,” and ratified a trade and cooperation agreement governing its future relationship with the European Union.
−Removed: Among other things, the agreement, which became effective in 2021, addresses trade, economic arrangements, law enforcement, judicial cooperation and governance.
−Removed: Because the agreement merely sets forth a framework in many respects that requires complex additional bilateral negotiations between the United Kingdom and the European Union, significant uncertainty remains about how the precise terms of the relationship between the parties will differ from the terms before withdrawal.
−Removed: These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets.
−Removed: Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
−Removed: Our operations in the United Kingdom subject us to revenue risk with respect to our customers in the United Kingdom and adverse movements in foreign currency exchange rates, in addition to risks related to the general economic and legal uncertainty related to Brexit described above.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.
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• changes in tax laws, regulations or interpretations thereof.
−Removed: In addition, we may be subject to audits of our income, sales and other transaction taxes by the U.K., U.S.
+Added: We may be subject to audits of our income, sales and other transaction taxes by the U.K., U.S.
federal and state authorities.
Outcomes from these audits could have an adverse effect on our operating results and financial condition.
+Added: Further, under tax rules applicable to partnerships like FAH, LLC, audit adjustments to the tax items of FAH, LLC that are generally “passed through” to its equity holders may result in income tax assessments that are paid at the FAH, LLC-level, notwithstanding that FAH, LLC generally is not an entity-level taxpayer with respect to the income taxes that are the subject of the adjustment.
+Added: This could result in the then-current owners of FAH, LLC equity interests (including us) bearing the burden of income tax audit adjustments in accordance with their then-current ownership of FAH, LLC, even if their ownership percentage of FAH, LLC during the taxable period that gave rise to the audit adjustment was different.
+Added: In addition, changes in law and policy relating to taxes could adversely affect us.
+Added: Taxing authorities and other officials regularly propose significant changes to tax laws, some of which may affect our business.
+Added: The Organization for Economic Co-operation and Development (the “OECD”) has announced an accord commonly referred to as “Pillar Two” to set a minimum global corporate tax rate of 15%, which is being or may be implemented in many jurisdictions, including the United States.
+Added: The OECD is also issuing guidelines that are different, in some respects, than current international tax principles, and adoption of these guidelines may increase tax uncertainty and increase taxes applicable to us.
+Added: We cannot predict whether the U.S.
+Added: Congress or any other governmental body may enact new tax legislation or tax regulations, or offer any assurance that new legislation or regulations, including changes to existing laws and regulations, will not have an adverse effect on our business, results of operations, financial condition or prospects.
Our business depends in large part on our vendors and outsourcers, and our reputation and ability to effectively operate our business may be harmed by actions taken by these third parties outside of our control.
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We are subject to various government regulations and may be subject to additional regulations in the future, violation of which could subject us to sanctions or otherwise harm our business.
−Removed: As a company that designs and sells consumer products, we are subject to significant government regulation, including, in the United States, under the CPSA, the FHSA, the CPSIA and the FFA, as well as under product safety and consumer protection statutes in our international markets.
+Added: As a company that designs and sells consumer products, we are subject to significant government regulation, including, in the United States, under the Child Status Protection Act (the “CPSA”), the Federal Hazardous Substances Act (the “FHSA”), the Consumer Product Safety Improvement Act (the “CPSIA”) and the Flammable Fabrics Act (the “FFA”), as well as under product safety and consumer protection statutes in our international markets.
There can be no assurance that we will be in compliance, and failure to comply with these acts could result in sanctions which could have a negative impact on our business, financial condition and results of operations.
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Customs along with a report explaining the nature of the underpayments.
−Removed: The fact that such underpayments occurred could lead to government investigation or litigation, which could result in additional payments and potential penalties.
Pursuant to the applicable statute, for an importer that meets all of the requirements for self-reporting underpayments, the maximum civil potential penalty is 100% of the lawful duties, taxes, and fees due to U.S.
Customs and the civil penalty for an importer who fails to meet the self-reporting requirements is up to the value of the merchandise associated with underpayment.
−Removed: We have recorded a contingent liability of $0.8 million related to potential penalties that may be assessed by U.S.
−Removed: Customs in this matter.
−Removed: This amount is recorded under the caption “Accrued expenses and other current liabilities” in our consolidated balance sheet, as of December 31, 2022.
−Removed: As of the date of this Annual Report on Form 10-K, we are not aware of any investigation that has been initiated by U.S.
−Removed: Customs or any other governmental body.
−Removed: Customs or any other governmental body elects to investigate us and decides to impose penalties, the imposition of penalties could be in excess of the contingent liability that we have recorded in our consolidated balance sheet.
−Removed: The imposition of any penalties or other remedial measures could have a material adverse effect on our business, results of operations, and financial condition.
+Added: Following a review by U.S.
+Added: Customs, it was determined that we owed $1.0 million in penalties and interest related to the underpayment.
+Added: This payment was made during the year ended December 31, 2023.
As digital assets are a relatively new and emerging asset class, the regulatory, commercial, and legal framework governing digital assets and associated products and services is likely to evolve both in the U.S.
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Our e-commerce business is subject to numerous risks that could have an adverse effect on our business and results of operations.
−Removed: Although sales through our websites have constituted a small portion of our net sales historically, we expect to continue to grow our e-commerce business in the future.
+Added: Sales through our websites have continued to grow as a percentage of our net sales and we expect them to continue to grow in the future.
Though sales through our websites generally have higher profit margins and provide us useful insight on the sales impact of certain of our marketing campaigns, further development of our e-commerce business also subjects us to a number of risks.
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state may require an online retailer with no in-state property or personnel to collect and remit sales taxes on sales made to the state’s residents, which may permit wider enforcement of sales tax collection requirements.
−Removed: These collection responsibilities and the complexity associated with tax collection, remittance and audit requirements would also increase the costs associated with our e-commerce business.
+Added: These collection responsibilities and the complexity associated with tax collection, remittance and audit requirements increase the costs associated with our e-commerce business.
Furthermore, our e-commerce operations subject us to risks related to the computer systems that operate our websites and related support systems, such as system failures, viruses, computer hackers, cyberattacks and similar disruptions, or the perception thereof.
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We are, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business.
−Removed: For example, on March 10, 2020, a purported stockholder of the Company filed a putative class action lawsuit in the United States District Court for the Central District of California against us and certain of our officers, entitled Ferreira v.
−Removed: The original complaint alleged that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as Rule 10b-5 promulgated thereunder.
−Removed: The lawsuit sought, among other things, compensatory damages and attorneys’ fees and costs.
−Removed: Two additional complaints making substantially similar allegations were filed April 3, 2020 in the United States District Court for the Central District of California and April 9, 2020 in the United States District Court for the Western District of Washington, respectively.
−Removed: On June 11, 2020, the Central District of California actions were consolidated for all purposes into one action under the Ferreira caption, and lead plaintiffs and lead counsel were appointed pursuant to the Private Securities Litigation Reform Act;
−Removed: shortly thereafter, the Western District of Washington action was voluntarily dismissed.
−Removed: Lead plaintiffs filed a consolidated complaint on July 31, 2020, against us and certain of our officers and directors, as well as entities affiliated with ACON.
−Removed: The consolidated complaint added Section 10(b) and 20(a) claims based on our earnings announcement and Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, as well as claims under Section 20A of the Exchange Act.
−Removed: All defendants moved to dismiss the consolidated action and the Court granted all defendants’ motions to dismiss the Ferreira action on February 25, 2021, allowing the lead plaintiffs leave to amend the complaint.
−Removed: Lead plaintiffs filed an amended complaint on March 29, 2021 and all defendants moved to dismiss.
−Removed: On October 25, 2021, the Court issued an order granting defendants’ motion in part and denying the motion in part.
−Removed: On May 3, 2022, the parties agreed in principle to settle the litigation.
−Removed: The Court granted preliminary approval of the settlement on July 17, 2022 and granted final approval on November 7, 2022.
−Removed: The cost of settlement was paid through our director and officer liability insurance.
−Removed: Several stockholder derivative actions based on the earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 have been brought on behalf of the Company against certain of our directors and officers.
+Added: For example, several stockholder derivative actions based on the Company’s earnings announcement and Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 have been brought on behalf of the Company against certain of our directors and officers.
Specifically, on April 23, June 5, and June 10, 2020, the actions captioned Cassella v.
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On July 6, 2020, these three actions were consolidated for all purposes into one action under the title In re Funko, Inc.
−Removed: Derivative Litigation , and on August 13, 2020, the consolidated action was stayed pending final resolution of the motion to dismiss in the Ferreira action.
+Added: Derivative Litigation , and on August 13, 2020, the consolidated action was stayed.
On May 9, 2022, another complaint, asserting substantially similar claims, was filed in the U.S.
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Mariotti, et al.
−Removed: Our responses to the complaints in both the consolidated action and Smith v.
−Removed: Mariotti are scheduled to be submitted on March 10, 2023.
+Added: On July 5, 2022, two purported stockholders filed an additional derivative action in the Court of Chancery of the State of Delaware, captioned Fletcher, et al.
+Added: In March 2023, the Company reached a non-monetary settlement in principle in In re Funko, Inc.
+Added: Derivative Litigation , Smith v.
+Added: Mariotti , and Fletcher, et al.
+Added: Mariotti and the actions were stayed pending finalization of the settlement.
+Added: On March 4, 2024, plaintiffs filed a motion for preliminary approval of the settlement with the Court.
+Added: As part of the settlement, the plaintiffs agreed to dismiss their claims on behalf of the corporation in exchange for a set of corporate governance reforms and attorney’s fees and expenses.
+Added: The attorney’s fees and expenses will be paid out of Funko’s directors and officers insurance.
+Added: The motion for preliminary approval of the settlement remains pending.
On June 11, 2021, a purported stockholder filed an additional derivative action, captioned Silverberg v.
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, in the Court of Chancery of the State of Delaware.
−Removed: On July 5, 2022, two purported stockholders filed an additional derivative action in the Court of Chancery, captioned Fletcher, et al.
−Removed: That complaint also asserts claims arising out of same issues and events as the Silverberg litigation and the derivative actions pending in the Central District of California.
+Added: The Company moved to dismiss the Silverberg complaint on April 3, 2023.
+Added: Plaintiff responded on May 3, 2023, and briefing was completed on May 25, 2023.
+Added: The motion remains pending before the Court of Chancery.
Additionally, between November 16, 2017 and June 12, 2018, seven purported stockholders of the Company filed putative class action lawsuits in the Superior Court of Washington in and for King County against us, certain of our officers and directors, ACON, Fundamental, the underwriters of our IPO, and certain other defendants.
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On August 1, 2018, plaintiffs filed a consolidated complaint against us, certain of our officers and directors, ACON, Fundamental, and certain other defendants.
−Removed: We moved to dismiss twice, and the Court twice granted our motions to dismiss, the second time with prejudice.
+Added: The Company moved to dismiss twice, and the Court twice granted our motions to dismiss, the second time with prejudice.
Plaintiffs appealed and on November 1, 2021, the Court of Appeals reversed the trial court’s dismissal decision in most respects.
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We filed our answer on September 19, 2022, and discovery is currently ongoing.
+Added: Plaintiffs filed a motion for class certification on July 7, 2023, and briefing was completed on the class certification motion on October 25, 2023.
+Added: On November 6, 2023, the Washington Superior Court granted Plaintiffs' motion for class certification.
On June 4, 2018, a putative class action lawsuit entitled Kanugonda v.
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On April 30, 2019, the lead plaintiff filed an amended complaint against the previously named defendants.
−Removed: Funko must respond to the Complaint in the federal action, now captioned Berkelhammer v.
−Removed: , by March 13, 2023.
−Removed: The cases in Washington state court and Berkelhammer v.
−Removed: allege that we violated Sections 11, 12, and 15 of the Securities Act of 1933, as amended (“Securities Act”), by making allegedly materially misleading statements in documents filed with the SEC in connection with our IPO and by omitting material facts necessary to make the statements made therein not misleading.
−Removed: 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 the plaintiffs and members of the putative class, as well as attorneys’ fees and costs.
+Added: Funko moved to dismiss the Complaint in the federal action, now captioned Berkelhammer v.
+Added: , on June 14, 2023.
+Added: Plaintiff filed an opposition on July 27, 2023, cross moving for an order voluntarily dismissing the action without prejudice so that he can pursue status as a class representative in In re Funko, Inc.
+Added: Securities Litigation , or in the alternative, a court order denying defendants’ motion to dismiss.
+Added: Briefing completed on August 18, 2023.
+Added: On October 13, 2023, the District Court granted plaintiff’s motion for voluntary dismissal without prejudice, denied defendants’ motion to dismiss, and dismissed the action.
+Added: The case in Washington state court alleges that we violated Sections 11, 12, and 15 of the Securities Act of 1933, as amended (“Securities Act”), by making allegedly materially misleading statements in documents filed with the SEC in connection with our IPO and by omitting material facts necessary to make the statements made therein not misleading.
+Added: The lawsuit seeks, among other things, compensatory statutory damages and rescissory damages in account of the consideration paid for our Class A common stock by the plaintiffs and members of the putative class, as well as attorneys’ fees and costs.
On January 18, 2022, a purported stockholder filed a putative class action lawsuit in the Court of Chancery of the State of Delaware, captioned Shumacher v.
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Briefing on the motion to dismiss was completed on February 8, 2023;
−Removed: briefing on Plaintiff’s fee application is expected to be completed on March 10, 2023.
+Added: briefing on Plaintiff’s fee application was completed on April 10, 2023.
+Added: The Court heard oral argument on both motions on July 24, 2023.
+Added: On December 18, 2023, the Court denied Defendants’ motion to dismiss and denied Plaintiffs’ application for an interim fee.
+Added: We filed our answer on January 26, 2024, and discovery is currently ongoing.
+Added: On June 2, 2023, a purported stockholder filed a putative class action lawsuit in the United States District Court for the Western District of Washington, captioned Studen v.
+Added: The Complaint alleges that the Company and certain individual defendants violated Sections 10(b) and 20(a) of the Exchange Act, as amended, as well as Rule 10b-5 promulgated thereunder by making allegedly materially misleading statements in documents filed with the SEC, as well as in earnings calls and presentations to investors, regarding a planned upgrade to its enterprise resource planning system and the relocation of a distribution center, as well as by omitting material facts about the same subjects necessary to make the statements made therein not misleading.
+Added: The lawsuits seek, among other things, compensatory damages and attorneys’ fees and costs.
+Added: On August 17, 2023, the Court appointed lead plaintiff, and on August 29, 2023, the parties submitted a joint stipulated scheduling order.
+Added: Plaintiff’s amended complaint was filed October 19, 2023.
+Added: The amendment adds additional allegations by including accounts from purported former employees and contractors.
+Added: Plaintiff seeks to represent a putative class of investors who purchased or acquired Funko common stock between March 3, 2022 and March 1, 2023.
+Added: Funko moved to dismiss the complaint on December 15, 2023, and the motion will be fully briefed by March 22, 2024.
The results of the securities class action lawsuits, derivative lawsuits, and any future legal proceedings cannot be predicted with certainty.
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The market and consumer demand, as well as the legal and regulatory framework, for NFTs and other digital collectible products is new, rapidly developing and highly uncertain.
−Removed: No assurance can be given that our investment in TokenWave LLC, or our development or future launch of NFT or digital collectible products, will be successful.
−Removed: Similarly, in the year ended December 31, 2022, we acquired Mondo Collectibles, LLC (f/k/a Mondo Tees Buyer, LLC) (“Mondo”), a high-end pop culture collectibles company that creates vinyl records, posters, soundtracks, toys, apparel, books, games and other collectibles for preliminary purchase consideration of $14.0 million in cash.
+Added: No assurance can be given that our investment in TokenWave LLC, or our future launches of NFT or digital collectible products, will be successful.
+Added: Similarly, in the year ended December 31, 2022, we acquired Mondo Collectibles, LLC (f/k/a Mondo Tees Buyer, LLC) (“Mondo”), a high-end pop culture collectibles company that creates vinyl records, posters, soundtracks, toys, apparel, books, games and other collectibles for $14.0 million in cash.
This transaction represents an opportunity to expand the Company’s product offerings into vinyl records, posters and other high-end collectibles however the Company has limited experience selling these product categories and there can be no assurance that we will be able to successfully or profitably enter these product categories at scale.
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The characteristics of particular digital assets within this broad asset class may differ significantly.
−Removed: We receive payments in digital assets in connection with our secondary sales on our NFT and digital collectibles business.
+Added: We receive payments in digital assets in connection with our secondary sales in our NFT and digital collectibles business.
We also purchase digital assets for use as a currency for certain expenses related to our NFT and digital collectibles business.
−Removed: There is no guarantee that these investments and payments will maintain their value as measured against fiat currencies.
+Added: There is no guarantee that these investments and payments will maintain their value as measured against fiat currencies or that such digital assets can be converted into or sold for fiat currencies.
Digital assets continue to be an emerging asset class based on emerging technologies, and our use of digital assets is subject to a number of factors relating to the capabilities and development of blockchain technologies, such as the infancy of their development, their dependence on the internet and other technologies, their dependence on the role played by miners, validators and developers and the potential for malicious activity, among other factors.
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We rely to a large extent on our online presence to reach consumers and use third-party social media platforms as marketing tools.
−Removed: For example, we maintain Facebook, Twitter, Instagram, TikTok and YouTube accounts.
+Added: For example, we maintain Facebook, X (formerly Twitter), Instagram, TikTok and YouTube accounts.
As e-commerce and social media platforms continue to rapidly evolve, we must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms.
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Failure to successfully operate our information systems and implement new technology effectively could disrupt our business or reduce our sales or profitability.
−Removed: We rely extensively on various information technology systems and software applications, including our enterprise resource planning software, to manage many aspects of our business, including product development, management of our supply chain, sale and delivery of our products, financial reporting and various other processes and transactions.
−Removed: We are critically dependent on the integrity, security and consistent operations of these systems and related back-up systems.
−Removed: These systems are subject to damage or interruption from power outages, computer and telecommunications failures, usage errors by our employees, software bugs or misconfigurations, cybersecurity attacks, computer viruses, malware and other security breaches, as well as catastrophic events such as hurricanes, fires, floods, earthquakes, tornadoes, acts of war or terrorism and global pandemics.
+Added: We rely extensively on various information technology systems and software applications, including our enterprise resource planning software (collectively, "IT Systems"), to manage many aspects of our business, including product development, management of our supply chain, sale and delivery of our products, financial reporting and various other processes and transactions.
+Added: We are critically dependent on the integrity, security and consistent operations of these IT Systems and related back-up systems.
+Added: These IT Systems are subject to damage or interruption from power outages, computer and telecommunications failures, usage errors by our employees, software bugs or misconfigurations, cybersecurity attacks, computer viruses, malware and other security breaches, as well as catastrophic events such as hurricanes, fires, floods, earthquakes, tornadoes, acts of war or terrorism and global pandemics.
For example, the widely publicized vulnerability in Apache's Log4j software library disclosed in December 2021 was reported to have affected many organizations globally, requiring updates to patched versions of the software.
While we were not impacted by this vulnerability, this incident demonstrates that similar third-party software vulnerabilities may impact us in the future.
−Removed: The efficient operation and successful growth of our business depends on these information systems, including our ability to operate and upgrade them effectively and to select and implement adequate disaster recovery systems successfully.
−Removed: The failure of these information systems to perform as designed, our failure to operate them effectively, or a security breach or disruption, or the perception thereof, in operation of our information systems could disrupt our business, require significant capital investments to remediate a problem or subject us to liability.
−Removed: At December 31, 2022, we determined the enterprise resource planning software was not feasible for its intended purpose and abandoned the cloud computing arrangement, incurring a $32.5 million write-down.
−Removed: In addition, we have recently implemented, and expect to continue to invest in and implement, modifications and upgrades to our information technology systems and procedures to support our growth and the development of our e-commerce business.
+Added: The efficient operation and successful growth of our business depends on these IT Systems, including our ability to operate and upgrade them effectively and to select and implement adequate disaster recovery systems successfully.
+Added: The failure of these IT Systems to perform as designed, our failure to operate them effectively or address known vulnerabilities in a timely and comprehensive manner, or a security breach or disruption, or the perception thereof, in operation of our IT Systems could disrupt our business, require significant capital investments to remediate a problem or subject us to liability.
+Added: During the year ended December 31, 2022, we determined the enterprise resource planning software was not feasible for its intended purpose and abandoned the cloud computing arrangement, incurring a $32.5 million write-down.
+Added: In addition, we have recently implemented, and expect to continue to invest in and implement, modifications and upgrades to our IT Systems and procedures to support our growth and the development of our e-commerce business.
These modifications and upgrades could require substantial investment and may not improve our profitability at a level that outweighs their costs, or at all.
+Added: Moreover, any integration of artificial intelligence in our or any third party’s operations, products or services is expected to pose new or unknown cybersecurity risks and challenges.
In addition, the process of implementing any new technology systems involves inherent costs and risks, including potential delays and system failures, the potential disruption of our internal control structure, the diversion of management’s time and attention, and the need to re-train or hire new employees, any of which could disrupt our business operations and have a material adverse effect on our business, financial condition and results of operations.
Our indebtedness could adversely affect our financial health and competitive position.
−Removed: On September 17, 2021, we entered into a new credit agreement (the "New Credit Agreement"), providing for a term loan facility in the amount of $180.0 million (the "New Term Loan Facility") and a revolving credit facility of $100.0 million (the "New Revolving Credit Facility" and together with the New Term Loan Facility, the " New Credit Facilities").
−Removed: Proceeds from the New Term Loan Facility were primarily used to repay the Company’s former term loan facility.
−Removed: On July 29, 2022, the New Credit Agreement was further amended by the Second Amendment, which, among other things, increased the New Revolving Credit Facility to $215.0 million.
−Removed: As of December 31, 2022, we had $225.8 million of indebtedness outstanding under our New Credit Facilities, consisting of $155.8 million outstanding under our New Term Loan Facility (net of unamortized discount of $1.7 million) and $70.0 million outstanding borrowings under our New Revolving Credit Facility.
−Removed: Subsequent to December 31, 2022, our projections indicated that we would be unable to maintain compliance with the financial covenants under the New Credit Agreement as of March 31, 2023 and, on February 28, 2023, we entered into a further amendment (the "Third Amendment") to the New Credit Agreement to, among other things, (i) modify the financial covenants under the New Credit Agreement for the period beginning on the date of the Third Amendment through the fiscal quarter ending December 31, 2023 (the “Waiver Period”), (ii) reduce the size of the New Revolving Credit Facility from $215 million to $180.0 million as of the date of the Third Amendment and thereafter to $150.0 million on December 31, 2023, which reduction shall be permanent after the Waiver Period, (iii) restrict the ability to draw on the New Revolving Credit Facility during the Waiver Period in excess of the amount outstanding on the date of the Third Amendment, (iv) increase the margin payable under the Credit Facilities during the Waiver Period to (a) 4.00% per annum with respect to any Term Benchmark Loan or RFR Loan (each as defined in the New Credit Agreement), and (b) 3.00% per annum with respect to any Canadian Prime Loan or ABR Loan (each as defined in the New Credit Agreement), (iv) allow that any calculation of Consolidated EBITDA (as defined in the New Credit Agreement) that includes the fiscal quarters during the Waiver Period may include certain agreed upon amounts for certain addbacks, (v) further limit our ability to make certain restricted payments, including the ability to pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests, incur additional indebtedness, incur additional liens, enter into sale and leaseback transactions or issue additional equity interests or securities convertible into or exchange for equity interests (other than the issuance of common stock) during the Waiver Period, (vi) require a minimum cash requirement of at least $10.0 million and (vii) require a mandatory prepayment of the New Revolving Credit Facility during the Waiver Period with any cash proceeds in excess of $25.0 million.
−Removed: Following the Waiver Period, beginning in the fiscal quarter ended March 31, 2024, the Third Amendment resets the maximum Net Leverage Ratio and the minimum Fixed Charge Coverage Ratio (each as defined in the New Credit Agreement) that must be maintained by the Credit Agreement Parties to 2.50:1.00 and 1.25:1.00, respectively, which were the ratios in effect under the New Credit Agreement prior to the Third Amendment.
+Added: On September 17, 2021, we entered into a new credit agreement (the "Credit Agreement"), providing for a term loan facility in the amount of $180.0 million (the "Term Loan Facility") and a revolving credit facility of $100.0 million (the "Revolving Credit Facility" and together with the Term Loan Facility, the "Credit Facilities").
+Added: Proceeds from the Term Loan Facility were primarily used to repay the Company’s former term loan facility.
+Added: On July 29, 2022, the Credit Agreement was further amended by the Second Amendment, which, among other things, increased the Revolving Credit Facility to $215.0 million.
+Added: On February 28, 2023, we entered into a further amendment (the "Third Amendment") to the Credit Agreement to, among other things, (i) modify the financial covenants under the Credit Agreement for the period beginning on the date of the Third Amendment through the fiscal quarter ended December 31, 2023 (the “Waiver Period”), (ii) reduce the size of the Revolving Credit Facility from $215 million to $180.0 million as of the date of the Third Amendment and thereafter to $150.0 million on December 31, 2023, which reduction is permanent after the Waiver Period, (iii) restrict the ability to draw on the Revolving Credit Facility during the Waiver Period in excess of the amount outstanding on the date of the Third Amendment, (iv) increase the margin payable under the Credit Facilities during the Waiver Period to (a) 4.00% per annum with respect to any Term Benchmark Loan or RFR Loan (each as defined in the Credit Agreement), and (b) 3.00% per annum with respect to any Canadian Prime Loan or ABR Loan (each as defined in the Credit Agreement), (v) allow that any calculation of Consolidated EBITDA (as defined in the Credit Agreement) that includes the fiscal quarters during the Waiver Period may include certain agreed upon amounts for certain addbacks, (vi) further limit our ability to make certain restricted payments, including the ability to pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests, incur additional indebtedness, incur additional liens, enter into sale and leaseback transactions or issue additional equity interests or securities convertible into or exchange for equity interests (other than the issuance of common stock) during the Waiver Period, (vii) require a minimum qualified cash requirement of at least $10.0 million and (viii) require a mandatory prepayment of the Revolving Credit Facility during the Waiver Period with any qualified cash proceeds in excess of $25.0 million.
+Added: Following the Waiver Period, beginning in the fiscal quarter ending March 31, 2024, the Third Amendment will reset the maximum Net Leverage Ratio and the minimum Fixed Charge Coverage Ratio (each as defined in the Credit Agreement) that must be maintained by the Credit Agreement Parties to 2.50:1.00 and 1.25:1.00, respectively, which were the ratios in effect under the Credit Agreement prior to the Third Amendment.
+Added: As of December 31, 2023, we had $258.1 million of indebtedness outstanding under our Credit Facilities, consisting of $137.6 million outstanding under our Term Loan Facility (net of unamortized discount of $1.9 million) and $120.5 million outstanding borrowings under our Revolving Credit Facility.
On November 25, 2022, Funko, LLC, Funko Games, LLC, Funko Acquisition Holdings, L.L.C., Funko Holdings LLC and Loungefly, LLC, (collectively, "Equipment Finance Credit Parties"), entered into a $20.0 million equipment finance agreement ("Equipment Finance Loan") with Wells Fargo Equipment Finance, Inc.
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This will place us at a competitive disadvantage compared to our competitors that have less indebtedness.
−Removed: In addition, the New Credit Agreement contains, and any agreements evidencing or governing other future indebtedness may contain, certain restrictive covenants that limit our ability, among other things, to engage in certain activities that are in our long-term best interests, including our ability to:
+Added: In addition, the Credit Agreement contains, and any agreements evidencing or governing other future indebtedness may contain, certain restrictive covenants that limit our ability, among other things, to engage in certain activities that are in our long-term best interests, including our ability to:
• incur additional indebtedness;
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• amend or modify our governing documents.
−Removed: Additionally, as noted above, during the Waiver Period these restrictive covenants contain incremental requirements that limit our ability to engage in certain of these activities and, as such, our operations may be even more limited during this period, which could limit our ability to engage in transactions that may be in our long-term best interests.
−Removed: The restrictive covenants in the New Credit Agreement also include certain financial covenants that require us to comply on a quarterly basis with a maximum net leverage ratio and a minimum fixed charge coverage ratio (in each case, measured on a trailing four-quarter basis) other than during the Waiver Period.
−Removed: Although we are currently in the Waiver Period where we do not need to comply with these covenants, there can be no guarantee that we will not breach these covenants in the future after the Waiver Period.
+Added: The restrictive covenants in the Credit Agreement also include certain financial covenants that require us to comply on a quarterly basis with a maximum net leverage ratio and a minimum fixed charge coverage ratio (in each case, measured on a trailing four-quarter basis).
+Added: There can be no guarantee that we will not breach these covenants in the future.
Our ability to comply with our financial covenants and the other covenants and restrictions under our credit facilities may be affected by events and factors beyond our control, and there can be no guarantee that we will be able to further amend our credit facilities in order to avoid or mitigate the risk of any potential breach that may occur in the future.
Our failure to comply with our financial covenants as described above, or with any of the other covenants or restrictions under our credit facilities, could result in an event of default under our credit facilities.
−Removed: This would permit the lending banks under such facilities to take certain actions, including halting future borrowings under the New Revolving Credit Facility, terminating all outstanding commitments and declaring all amounts due under our New Credit Agreement to be immediately due and payable, including all outstanding borrowings, accrued and unpaid interest thereon, and prepayment premiums with respect to such borrowings and any terminated commitments.
+Added: This would permit the lending banks under such facilities to take certain actions, including halting future borrowings under the Revolving Credit Facility, terminating all outstanding commitments and declaring all amounts due under our Credit Agreement to be immediately due and payable, including all outstanding borrowings, accrued and unpaid interest thereon, and prepayment premiums with respect to such borrowings and any terminated commitments.
In addition, the Lenders would have the right to proceed against the collateral we granted to them, which includes substantially all of our assets.
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We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
−Removed: In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances, including in the event we are unable to maintain compliance with the financial or other covenants contained in the New Credit Agreement, and may determine to engage in equity or debt financings or enter into credit facilities or refinance existing indebtedness for other reasons.
−Removed: As discussed above, under the terms of the Third Amendment to the New Credit Agreement we are unable to draw amounts in excess of the amount outstanding on the effective date of the Third Amendment under our New Revolver Credit Facility until the end of the Waiver Period.
−Removed: We may not be able to timely secure additional debt or equity financing on favorable terms, or at all, including due to market volatility and uncertainty resulting from the COVID-19 pandemic, the war in Ukraine or the potential for U.S.
−Removed: sovereign debt default.
−Removed: As discussed above, the New Credit Agreement contains restrictive covenants that limit our ability to incur additional indebtedness and engage in other capital-raising activities, which restrictive covenants contain additional limitations on our ability to raise debt and issue new equity (other than common equity) during the Waiver Period.
+Added: In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances, including in the event we are unable to maintain compliance with the financial or other covenants contained in the Credit Agreement, and may determine to engage in equity or debt financings or enter into credit facilities or refinance existing indebtedness for other reasons.
+Added: As discussed above, under the terms of the Third Amendment to the Credit Agreement we are unable to draw amounts in excess of the amount outstanding on the effective date of the Third Amendment under our Revolver Credit Facility until the end of the Waiver Period.
+Added: We may not be able to timely secure additional debt or equity financing on favorable terms, or at all, including due to market volatility and uncertainty resulting from international conflicts or geopolitical tensions, among other factors.
+Added: As discussed above, the Credit Agreement contains restrictive covenants that limit our ability to incur additional indebtedness and engage in other capital-raising activities.
Any debt financing obtained by us in the future could involve covenants that further restrict our capital raising activities and other financial and operational matters, which may make it more difficult for us to operate our business, obtain additional capital and pursue business opportunities, including potential acquisitions.
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ORGANIZATIONAL STRUCTURE RISKS
−Removed: TCG has significant influence over us, including over decisions that require the approval of stockholders, and its interests, along with the interests of our Continuing Equity Owners, in our business may conflict with the interests of our other stockholders.
+Added: TCG has significant influence over us, including over decisions that require the approval of stockholders, and its interests, along with the interests of our Continuing Equity Owners and certain other parties, in our business may conflict with the interests of our other stockholders.
Each share of our Class A common stock and Class B common stock entitles its holders to one vote per share on all matters presented to our stockholders.
−Removed: On May 19, 2022, ACON completed, pursuant to the Stock Purchase Agreement with TCG, the sale of 12,520,559 shares of our Class A common stock (including shares of Class A common stock issued upon the transfer of common units of FAH, LLC and the cancellation of shares of our Class B common stock) to TCG (the "ACON Sale").
−Removed: Accordingly, TCG currently has significant influence over substantially all transactions and other matters submitted to a vote of our stockholders, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, the issuance or redemption of certain additional equity interests, and the election of directors.
+Added: TCG currently has significant influence over substantially all transactions and other matters submitted to a vote of our stockholders, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, the issuance or redemption of certain additional equity interests, and the election of directors.
This influence may increase the likelihood that we will consummate transactions that are not in the best interests of holders of our Class A common stock or, conversely, prevent the consummation of transactions that are in the best interests of holders of our Class A common stock.
−Removed: We entered into a new Stockholders Agreement with TCG (the “New Stockholders Agreement”), as well as a Joinder and Amendment to our Registration Rights Agreement, both became effective at the closing of the ACON Sale.
−Removed: Pursuant to the New Stockholders Agreement, TCG has the right to designate certain of our directors, which we refer to as the TCG Directors, which will be two TCG Directors for as long as the TCG Related Parties (as defined in the New Stockholders Agreement) beneficially own directly or indirectly, in the aggregate at least 20% of our Class A common stock, and one TCG Director for as long as the TCG Related Parties beneficially own directly or indirectly, in the aggregate, less than 20% but at least 10% or more of our Class A common stock (assuming in each such case that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis).
+Added: We entered into a Stockholders Agreement with TCG (the “Stockholders Agreement”) in connection with TCG’s acquisition of our stock from another stockholder, as well as a Joinder and Amendment to our Registration Rights Agreement, both of which became effective at the closing of the ACON Sale.
+Added: Pursuant to the Stockholders Agreement, TCG has the right to designate certain of our directors, which we refer to as the TCG Directors, which will be two TCG Directors for as long as the TCG Related Parties (as defined in the Stockholders Agreement) beneficially own directly or indirectly, in the aggregate at least 20% of our Class A common stock, and one TCG Director for as long as the TCG Related Parties beneficially own directly or indirectly, in the aggregate, less than 20% but at least 10% or more of our Class A common stock (assuming in each such case that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis).
+Added: The TCG Related Parties are not entitled to designate any TCG director designee if at any time, the TCG Related Parties beneficially own, directly or indirectly, in the aggregate less than 10% of all issued and outstanding shares of Class A common stock (assuming in each such case that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis).
Additionally, we are required to take all commercially reasonable action to cause (1) the board of directors to be comprised of at least seven directors or such other number of directors as our board of directors may determine;
−Removed: (2) the individuals designated in accordance with the terms of the New Stockholders Agreement to be included in the slate of nominees to be elected to the board of directors at each annual meeting of our stockholders at which a director’s term expires;
−Removed: and (3) the individuals designated in accordance with the terms of the New Stockholders Agreement to fill the applicable vacancies on the board of directors.
−Removed: In addition, the New Stockholders Agreement provides that for as long as the TCG Related Parties, beneficially own, directly or indirectly, in the aggregate, 22% or more of all issued and outstanding shares of our Class A common stock (assuming that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis), we will not take, and will cause our subsidiaries not to take, certain actions or enter into certain transactions (whether by merger, consolidation, or otherwise) without the prior written approval of TCG, including:
+Added: (2) the individuals designated in accordance with the terms of the Stockholders Agreement to be included in the slate of nominees to be elected to the board of directors at each annual meeting of our stockholders at which a director’s term expires;
+Added: and (3) the individuals designated in accordance with the terms of the Stockholders Agreement to fill any applicable vacancies on the board of directors.
+Added: In addition, the Stockholders Agreement provides that for as long as the TCG Related Parties beneficially own, directly or indirectly, in the aggregate, 22% or more of all issued and outstanding shares of our Class A common stock (assuming that all outstanding common units in FAH, LLC are redeemed for newly issued shares of our Class A common stock on a one-for-one basis), we will not take, and will cause our subsidiaries not to take, certain actions or enter into certain transactions (whether by merger, consolidation, or otherwise) without the prior written approval of TCG, including:
• entering into any transaction or series of related transactions in which any person or group (other than the TCG Related Parties and any group that includes the TCG Related Parties), acquires, directly or indirectly, in excess of 50% of the then outstanding shares of any class of our or our subsidiaries’ capital stock, or following which any such person or group has the direct or indirect power to elect a majority of the members of our board of directors or to replace us as the sole manager of FAH, LLC (or to add another person as co-manager of FAH, LLC);
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• the creation of a new class or series of capital stock or other equity securities of us or, in the event such creation would materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, any of our subsidiaries;
−Removed: • the issuance of additional shares of Class A common stock, Class B common stock, preferred stock or other equity securities of us other than (x) under any stock option or other equity compensation plan approved by our board of directors or the compensation committee, or (y) pursuant to the exercise or conversion of any options, warrants or other securities existing as of the date of the New Stockholders Agreement or, in the event such creation would materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, equity securities of any of our subsidiaries;
+Added: • the issuance of additional shares of Class A common stock, Class B common stock, preferred stock or other equity securities of us other than (x) under any stock option or other equity compensation plan approved by our board of directors or the compensation committee, or (y) pursuant to the exercise or conversion of any options, warrants or other securities existing as of the date of the Stockholders Agreement or, in the event such creation would materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, equity securities of any of our subsidiaries;
• any amendment or modification of our certificate of incorporation or bylaws or any similar organizational documents of any of our subsidiaries that would, in either case, materially and adversely impair the rights of the TCG Related Parties as holders of our Class A common stock, and
−Removed: • except to the extent of the express restrictions applicable to TCG and its controlled affiliates in the New Stockholders Agreement, any action to adopt, approve or implement any plan, agreement or provision that would, among other things, impair certain rights of TCG under the terms of the New Stockholders Agreement.
−Removed: Additionally, the Continuing Equity Owners who, as of February 27, 2023, collectively hold approximately 6.7% of the combined voting power of our common stock, and certain transferees of former Continuing Equity Owners may receive payments from us under the Tax Receivable Agreement in connection with our purchase of common units of FAH, LLC directly from certain of the Continuing Equity Owners upon a redemption or exchange of their common units in FAH, LLC, including the issuance of shares of our Class A common stock upon any such redemption or exchange.
+Added: • except to the extent of the express restrictions applicable to TCG and its controlled affiliates in the Stockholders Agreement, any action to adopt, approve or implement any plan, agreement or provision that would, among other things, negatively affect TCG’s or its controlled affiliates’ ability to continue to hold or acquire additional shares of our capital stock or other securities.
+Added: Additionally, the Continuing Equity Owners who, as of March 5, 2024, collectively hold approximately 4.3% of the combined voting power of our common stock, and certain transferees of former Continuing Equity Owners that have been joined to our Tax Receivable Agreement (the “TRA Parties”) may receive payments from us under the Tax Receivable Agreement in connection with our purchase of common units of FAH, LLC directly from certain of the Continuing Equity Owners upon a redemption or exchange of their common units in FAH, LLC, including the issuance of shares of our Class A common stock upon any such redemption or exchange.
Moreover, Continuing Equity Owners own interests in our business by holding interests in FAH, LLC directly (rather than through ownership of our Class A common stock).
−Removed: As a result of these considerations, the interests of the Continuing Equity Owners and such transferees may conflict with the interests of holders of our Class A common stock.
−Removed: For example, the Continuing Equity Owners and such transferees may have different interests in the tax positions or other actions that we take which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, and whether and when we should terminate the Tax Receivable Agreement and accelerate our obligations thereunder.
−Removed: In addition, the structuring of future transactions may take into consideration tax or other considerations of the Continuing Equity Owners even in situations where no similar considerations are relevant to us.
+Added: As a result of these considerations, the interests of the Continuing Equity Owners and such transferees as well as the TRA Parties may conflict with the interests of holders of our Class A common stock.
+Added: For example, the TRA Parties may have different interests in the tax positions or other actions that we take which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, and whether and when we should terminate the Tax Receivable Agreement and accelerate our obligations thereunder.
+Added: In addition, the structuring of future transactions may take into consideration tax or other considerations of the TRA Parties even in situations where no similar considerations are relevant to us.
Our amended and restated certificate of incorporation provides that the doctrine of “corporate opportunity” does not apply with respect to any director or stockholder who is not employed by us or our subsidiaries.
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As discussed above, under the terms of the FAH LLC Agreement, FAH, LLC is obligated to make tax distributions to us and the Continuing Equity Owners and certain of their transferees based on the highest combined federal, state and local tax rates that may potentially apply to any one member of FAH, LLC and such distributions will generally be made to such holders pro rata based on their interests in FAH, LLC.
−Removed: As a result of potential differences in the amount of net taxable income allocable to us and to the Continuing Equity Owners and certain of their transferees, as well as the use of an assumed tax rate in calculating FAH, LLC’s distribution obligations, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement.
−Removed: Funds we receive from FAH, LLC to satisfy its tax distribution obligations will not be available for reinvestment in our business.
+Added: As a result of potential differences in the amount of net taxable income allocable to us and to the Continuing Equity Owners and certain of their transferees, as well as the use of an assumed tax rate in calculating FAH, LLC’s distribution obligations (and certain other considerations), we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement.
+Added: Funds we receive from FAH, LLC to satisfy its tax distribution obligations generally will not be available for reinvestment in our business.
Our board of directors will determine the appropriate uses for any excess cash so accumulated, which may include, among other uses, the payment of a cash dividend on our Class A common stock, the payment of obligations under the Tax Receivable Agreement, the declaration of a stock dividend on our Class A common stock, along with the purchase of a corresponding number of common units in FAH, LLC, or the purchase of additional common units in FAH, LLC, along with a recapitalization of all of the outstanding common units in FAH, LLC.
For example, on May 3, 2022, we entered into a common unit subscription agreement with FAH, LLC pursuant to which we purchased 4,251,701 newly issued common units in exchange for a capital contribution of approximately $74.0 million (the “Capital Contribution”).
−Removed: Following the Capital Contribution, (i) the common units of FAH, LLC were recapitalized through a reverse unit split in order to maintain a one-to-one ratio between the number of common units owned by us and the number of outstanding shares of our Class A common stock in accordance with the FAH LLC Agreement, and (ii) approximately 0.9 million outstanding shares of our Class B common stock were cancelled in order to maintain a one-to-one ratio between the number of shares of Class B common stock and the number of common units (other than common units issuable upon the exercise of options), in each case, held by the Continuing Equity Owners, in accordance with our amended and restated certificate of incorporation (clauses (i) and (ii) together, the “Recapitalization”).
+Added: Following the Capital Contribution, (i) the common units of FAH, LLC were recapitalized through a reverse unit split in order to maintain a one-to-one ratio between the number of common units owned by us and the number of outstanding shares of our Class A common stock in accordance with the FAH LLC Agreement, and (ii) approximately 0.9 million outstanding shares of our Class B common stock were cancelled in order to maintain a one-to-one ratio between the number of shares of Class B common stock and the number of common units, in each case, held by the Continuing Equity Owners, in accordance with our amended and restated certificate of incorporation (clauses (i) and (ii) together, the “Recapitalization”).
To the extent we do not take such actions in the future and instead, for example, hold such cash balances or lend them to FAH, LLC, the Continuing Equity Owners and certain of their transferees that hold interests in FAH, LLC would benefit from any value attributable to such accumulated cash balances as a result of their ownership of Class A common stock following an exchange of their common units for Class A common stock.
+Added: No adjustments are or will be made as a result of such cash balances to the consideration that the Continuing Equity Owners receive in connection with an election to have their common units redeemed in exchange for, at our election, a newly-issued share of our Class A common stock or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each common unit redeemed.
Our Tax Receivable Agreement requires us to make cash payments in respect of certain tax benefits to which we may become entitled, the amounts that we may be required to pay could be significant, and we may not realize such tax benefits.
−Removed: In connection with the consummation of the IPO, we entered into the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners, and certain transferees of the Continuing Equity Owners have been joined as parties to the Tax Receivable Agreement (the parties entitled to payments under the Tax Receivable Agreement are referred to herein as the "TRA Parties").
−Removed: Pursuant to the Tax Receivable Agreement, we will be required to make cash payments to the TRA Parties equal to 85% of the tax benefits, if any, that we realize, or in some circumstances are deemed to realize as a result of (1) any future redemptions funded by us or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock or cash, and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement.
−Removed: The amount of the cash payments that we may be required to make under the Tax Receivable Agreement could be significant.
+Added: In connection with the consummation of the IPO, we entered into the Tax Receivable Agreement.
+Added: Pursuant to the Tax Receivable Agreement, we are required to make cash payments to the TRA Parties equal to 85% of the tax benefits, if any, that we realize, or in some circumstances are deemed to realize as a result of (1) any future redemptions funded by us or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock or cash, and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement.
+Added: The tax benefits that we realize in connection with the matters covered by the Tax Receivable Agreement will vary depending on a number of factors (some of which are likely to change over time), including the timing of redemptions or exchanges by the TRA Parties, the amount and timing of the taxable income we generate in the future and the tax rate to which we are subject.
+Added: At June 30, 2023, as a result of the recognition of a full valuation allowance on the deferred tax assets, and projected inability to fully utilize all or part of the related tax benefits, the Company determined that payments to the TRA Parties related to unrealized tax benefits under the Tax Receivable Agreement are no longer probable and estimable and we have reduced the Tax Receivable Agreement liability accordingly.
+Added: However, the amount of the cash payments that we may be required to make under the Tax Receivable Agreement could be significant.
Payments under the Tax Receivable Agreement will generally be based on the tax reporting positions that we determine, which are subject to challenge by taxing authorities.
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We may need to incur debt to finance payments under the Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement.
−Removed: As a result of the foregoing, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits.
+Added: As a result of the foregoing, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement (calculated utilizing the assumptions described above), which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits.
We could also be required to make cash payments to the TRA Parties that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement.
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Significant management judgment is required in connection with interpreting applicable tax laws and in taking valuation positions relevant to our tax compliance obligations.
−Removed: We are constantly evaluating our tax return positions, and changes in our return positions could affect our liabilities and risks that we face in connection with determining our the taxes we owe and the amounts that we are required to pay in connection with the Tax Receivable Agreement.
+Added: We are constantly evaluating our tax return positions, and changes in our return positions could affect our liabilities and risks that we face in connection with determining the taxes we owe and the amounts that we are required to pay in connection with the Tax Receivable Agreement.
There can be no assurance that the IRS or a court will not disagree with our tax reporting positions.
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Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the TRA Parties that will not benefit Class A common stockholders to the same extent as it will benefit the Continuing Equity Owners and transferees.
−Removed: Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Equity Owners and certain of their transferees that will not benefit the holders of our Class A common stock to the same extent as it will benefit such Continuing Equity Owners and transferees.
+Added: Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the TRA Parties and the Continuing Equity Owners and certain of their transferees that will not benefit the holders of our Class A common stock to the same extent.
We have entered into the Tax Receivable Agreement with FAH, LLC and the TRA Parties, and it provides for the payment by us to the TRA Parties of 85% of the amount of tax benefits, if any, that we realize, or in some circumstances are deemed to realize, as a result of (1) any future redemptions funded by us or exchanges (or deemed exchanges in certain circumstances) of common units for Class A common stock or cash and (2) certain additional tax benefits attributable to payments under the Tax Receivable Agreement.
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The Continuing Equity Owners own common units in FAH, LLC, and the Continuing Equity Owners have the right to redeem their common units in FAH, LLC pursuant to the terms of the FAH LLC Agreement for shares of Class A common stock or cash.
−Removed: As of February 27, 2023, we had an aggregate of 152,773,165 shares of Class A common stock authorized but unissued, as well as approximately 4,334,801 shares of Class A common stock issuable, at our election, upon redemption of FAH, LLC common units held by the Continuing Equity Owners.
+Added: As of March 5, 2024, we had an aggregate of 149,207,103 shares of Class A common stock authorized but unissued, as well as approximately 2,725,151 shares of Class A common stock issuable, at our election, upon redemption of FAH, LLC common units held by the Continuing Equity Owners.
FAH, LLC has entered into the FAH LLC Agreement, and subject to certain restrictions set forth in such agreement, the Continuing Equity Owners are entitled to have their common units redeemed from time to time at each of their options (subject in certain circumstances to time-based vesting requirements) for, at our election, newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each common unit redeemed, in each case, in accordance with the terms of the FAH LLC Agreement;
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These redemptions or exchanges, or the possibility that these redemptions or exchanges may occur, also might make it more difficult for holders of our Class A common stock to sell such stock in the future at a time and at a price that they deem appropriate.
−Removed: We have reserved for issuance 5,518,518 shares of Class A common stock under our 2017 Incentive Award Plan (the “2017 Plan”), including, as of December 31, 2022, 2,701,626 shares of Class A common stock underlying stock options we granted to certain of our directors, executive officers and other employees and 2,711,908 shares of Class A common stock underlying restricted stock units we granted to certain of our executive officers, consultants and other employees.
+Added: We originally reserved for issuance 5,518,518 shares of Class A common stock under our 2017 Incentive Award Plan (the “2017 Plan”), including, as of December 31, 2023, 1,928,998 shares of Class A common stock underlying stock options we granted to certain of our directors, executive officers and other employees and 2,382,960 shares of Class A common stock underlying restricted stock units we granted to certain of our executive officers, consultants and other employees.
We have also reserved for issuance an aggregate number of shares under the Company’s 2019 Incentive Award Plan (the “2019 Plan”) equal to the sum of (i) 3,000,000 shares of our Class A common stock and (ii) an annual increase on the first day of each calendar year beginning on January 1, 2020 and ending on and including January 1, 2029, equal to the lesser of (A) 2% of the shares of Class A common stock outstanding as of the last day of the immediately preceding fiscal year on a fully-diluted basis and (B) such lesser number of shares of Class A common stock as determined by our board of directors.
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In the future, we may also issue additional securities if we need to raise capital, including, but not limited to, in connection with acquisitions, which could constitute a material portion of our then-outstanding shares of Class A common stock.
−Removed: Further, in connection with the completion of the IPO, we entered into a Registration Rights Agreement with certain of the Original Equity Owners (including each of our then-current executive officers).
+Added: Further, in connection with the completion of the IPO, we entered into a Registration Rights Agreement with certain of the Original Equity Owners (including each of our then-current executive officers), pursuant to which TCG has been joined as a party.
On July 15, 2022, we filed a preliminary shelf registration statement on Form S-3 with the SEC.
The Form S-3 was declared effective by the SEC on July 26, 2022.
−Removed: The Form S-3 allows us to sell from time to time up to $100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts or units comprised of any combination of these securities for our own account and, following the secondary underwritten public offering, allows certain Original Equity Owners to sell 17,318,008 shares of Class A common stock in one or more offerings.
+Added: The Form S-3 allows us to sell from time to time up to $100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts or units comprised of any combination of these securities for our own account and, allows parties to the Registration Rights Agreement to sell 17,318,008 shares of Class A common stock in one or more offerings.
If we offer and sell Class A common stock under the Form S-3, it would dilute the percentage ownership held by the existing holders of our Class A common stock.
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• we require advance notice and duration of ownership requirements for stockholder proposals;
−Removed: • we have opted out of Section 203 of the Delaware General Corporation Law of the State of Delaware, or the DGCL, however, our amended and restated certificate of incorporation contains provisions that are similar to Section 203 of the DGCL (except with respect to ACON and Fundamental and any of their respective affiliates and any of their respective direct or indirect transferees of Class B common stock).
−Removed: In connection with the ACON Sale, we have agreed to amend our amended and restated certificate of incorporation at a future date to carve out TCG and any of their respective affiliates and any of their respective direct transferees of Class A common stock from the provisions in our charter that are similar to Section 203 of the DGCL.
+Added: • we have opted out of Section 203 of the Delaware General Corporation Law of the State of Delaware, or the DGCL, however, our amended and restated certificate of incorporation contains provisions that are similar to Section 203 of the DGCL (except with respect to TCG and certain other parties, including certain affiliates, associates and transferees of TCG).
These provisions could discourage, delay or prevent a transaction involving a change in control of our company.
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In addition, because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
−Removed: Please see “Organizational Structure Risks—TCG has significant influence over us, including over decisions that require the approval of stockholders, and its interests, along with the interests of our other Continuing Equity Owners, in our business may conflict with the interests of our other stockholders.”
−Removed: Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
+Added: Please see “Organizational Structure Risks—TCG has significant influence over us, including over decisions that require the approval of stockholders, and its interests, along with the interests of our other Continuing Equity Owners and certain other parties, in our business may conflict with the interests of our other stockholders.”
+Added: Our amended and restated certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters and our amended and restated bylaws designate the federal district courts of the United States as the exclusive forum for actions arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf;
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or (4) any action asserting a claim against us, any director or our officers or employees that is governed by the internal affairs doctrine.
−Removed: This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act, Securities Act, or, in each case, the rules and regulations thereunder, or any other claim for which the U.S.
−Removed: federal courts have exclusive jurisdiction.
−Removed: Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above.
−Removed: This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims.
−Removed: Alternatively, if a court were to find the choice of forum provision that will be contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations.
+Added: In addition, our bylaws provide that the federal district courts of the United States are the exclusive forum for any complaint raising a cause of action arising under the Securities Act.
+Added: These provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act.
+Added: These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims.
+Added: Alternatively, if a court were to find either of the choice of forum provisions to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.
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In recent years, certain key currencies, such as the euro and the British pound sterling, depreciated significantly compared to the U.S.
−Removed: Depreciation in key currencies during 2022 has had a negative impact on our sales and earnings and future depreciation in key currencies may have a significant negative impact on our sales and earnings as they are reported in U.S.
+Added: Depreciation in key currencies may have a significant negative impact on our sales and earnings as they are reported in U.S.
If our or our third-party providers' electronic data is compromised our business could be significantly harmed.
−Removed: We rely extensively on various information technology systems and software applications (collectively “IT Systems”) for internal and external operations and while we operate certain of these IT Systems, we also rely on third-party providers for a host of technologies, products and services.
+Added: We rely extensively on IT Systems for internal and external operations and while we operate certain of these IT Systems, we also rely on third-party providers for a host of technologies, products and services.
In addition, in the ordinary course of business, both we and our third-party providers collect, process and maintain significant amounts of data electronically, including proprietary and confidential business information as well as personal information.
This data relates to all aspects of our business, including but not limited to current and future products and entertainment under development, and also contains certain customer, consumer, supplier, partner and employee data.
−Removed: We maintain systems and processes designed to protect the data within our control, but notwithstanding such protective measures, there is a risk of intrusion or tampering that could compromise the integrity and privacy of this data.
+Added: We maintain systems and processes designed to protect the data within our control, but notwithstanding such protective measures, we face numerous and evolving cybersecurity risks that threaten the confidentiality, integrity, availability and privacy of this data.
In addition, we provide confidential and proprietary information to our third-party business partners in certain cases where doing so is necessary or appropriate to conduct our business.
−Removed: While we obtain assurances from those parties that they have systems and processes in place to protect such data, and where applicable, that they will take steps to assure the protections of such data by third parties, nonetheless those partners may also be subject to data intrusion or otherwise compromise the protection of such data.
+Added: While we seek to obtain assurances from those parties that they have systems and processes in place designed to protect such data, and where applicable, that they will take steps to assure the protections of such data by third parties, nonetheless those partners may also be subject to cybersecurity risks or otherwise compromise the protection of such data.
+Added: Successful cyberattacks that disrupt or result in unauthorized access to the systems of such business partners can materially impact our operations and financial results.
We and many third parties have experienced and expect to continue to experience cyberattacks and other security incidents.
−Removed: Threat actors are becoming more sophisticated and increasingly using techniques designed to circumvent security controls, to evade detection and to obfuscate or remove forensic evidence, which means we may be unable to timely or effectively detect, identify, contain, or remediate future attacks or incidents.
−Removed: Disruptive attacks, such as through ransomware and other extortion-based tactics, that can temporarily or permanently disable operations are becoming increasingly prevalent.
−Removed: Such attacks may involve internal or external actors, and may result from the exploitation of bugs, misconfigurations or vulnerabilities in our IT Systems, human error, social engineering, supply chain attacks, or malware deployment (for example, ransomware), and may disrupt our operations and/or compromise data.
−Removed: Also, remote working arrangements that started during the COVID-19 pandemic may continue in the future, which increases the risk that threat actors will engage in social engineering and exploit vulnerabilities inherent in many non-corporate home networks.
−Removed: Any compromise of the confidential data of our customers, consumers, suppliers, partners, employees or ourselves, or failure to prevent or mitigate the loss of or damage to this data through breach of our information technology systems or other means could substantially disrupt our operations, harm our customers, consumers and other business partners, damage our reputation, violate applicable laws and regulations and subject us to litigation or regulatory actions, to additional costs for remediation and compliance, as well to liabilities and loss of business that could be material.
−Removed: Global consumer protection, data privacy and cybersecurity legal requirements, such as under the European Union’s General Data Protection Regulation (the “GDPR”) and California Consumer Privacy Act (the “CCPA”), are evolving rapidly and increasingly exposing companies to significant fines and penalties for violations.
−Removed: While we carry insurance, our policies may not cover, or may not fully cover or reimburse us for, any or all costs and losses associated with cybersecurity related events.
+Added: Threat actors are becoming more sophisticated and increasingly using techniques and tools, including artificial intelligence, designed to circumvent security controls, to evade detection and to obfuscate or remove forensic evidence, which means we may be unable to timely or effectively detect, identify, contain, or remediate future attacks or incidents.
+Added: Disruptive attacks, such as through ransomware and other extortion-based tactics, that can temporarily or permanently disable operations or otherwise disrupt our business are becoming increasingly prevalent.
+Added: Such attacks may involve internal or external actors, including state-sponsored organizations, opportunistic hackers and hacktivists, and may result from the exploitation of bugs, misconfigurations or vulnerabilities in our IT Systems (or open-source or commercial software that is integrated into our IT Systems), human error, social engineering/phishing, supply chain attacks, or malware deployment (for example, ransomware), and may disrupt our operations and/or compromise data.
+Added: Also, remote working arrangements that started during the COVID-19 pandemic have continued, which increases the risk that threat actors will exploit vulnerabilities inherent in many non-corporate home networks.
+Added: Any compromise of the confidential data of our customers, consumers, suppliers, partners, employees or ourselves, or failure to prevent or mitigate the loss of or damage to this data through breach of our IT Systems or other means could substantially disrupt our operations, harm our customers, consumers and other business partners, damage our reputation, violate applicable laws and regulations and subject us to litigation (including class action lawsuits) or regulatory actions, to additional costs for remediation and compliance, as well as to liabilities and loss of business that could be material.
+Added: Global consumer protection, data privacy and cybersecurity legal requirements, such as under the GDPR and the CCPA, are evolving rapidly and increasingly exposing companies to significant fines and penalties for violations.
+Added: While we carry insurance, our policies may not cover, or may not fully cover or reimburse us for, any or all costs and losses associated with cybersecurity related events, or applicable insurance may not be available to us in the future on economically reasonable terms or at all.
+Added: In addition, there can be no assurance that our cybersecurity risk management program and processes, including our policies, controls or procedures, will be fully implemented, complied with or effective in protecting our systems and information.
Any impairment in the value of our goodwill or other assets could adversely affect our financial condition and results of operations.
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If the testing indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other assets and the implied fair value of the goodwill or the fair value of other assets in the period the determination is made.
−Removed: We cannot always predict the amount and timing of any impairment of assets.
+Added: We cannot always predict the amount and timing of any impairment of assets and we have incurred impairment charges in the past.
Should the value of goodwill or other assets become impaired, it would have an adverse effect on our financial condition and results of operations.
19 unchanged sentences
• the imposition of fines or other remedial measures as a result of regulatory violations or civil liability such as due to the underpayment of customs duties at Loungefly;
−Removed: • changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war, pandemics such as COVID-19, and responses to such events.
+Added: • changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war, pandemics and responses to such events.
As a result, volatility in the market price of our Class A common stock may prevent investors from being able to sell their Class A common stock at or above the price they paid for them or at all.
9 unchanged sentences
As a result of one or more of these factors, the trading price of our Class A common stock could decline.
−Removed: A new 1% U.S.
federal excise tax could be imposed on us if we were to undertake redemptions or certain other transactions.
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into federal law.
−Removed: The IRA provides for, among other things, a new U.S.
+Added: The IRA provides for, among other things, a U.S.
federal 1% excise tax on certain repurchases (including redemptions) of stock by publicly traded U.S.
6 unchanged sentences
Department of Treasury has been given authority to provide regulations and other guidance to carry out, and prevent the abuse or avoidance of the excise tax.
−Removed: The IRA applies only to repurchases that occur after December 31, 2022.
If we were to conduct repurchases of our stock or other transactions covered by the excise tax described above, we could potentially be subject to this excise tax, which could increase our costs and adversely affect our operating results.
+Added: Our ability to use certain tax attributes may be limited.
+Added: Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change," the corporation’s ability to use certain of its tax attributes (including any net operating loss carryforwards) to offset its post-change income and taxes may be limited.
+Added: In general, an "ownership change" occurs if there is a cumulative change in ownership of the relevant corporation by "5% shareholders" (as defined under U.S.
+Added: income tax laws) that exceeds 50 percentage points over a rolling three-year period.
+Added: Similar rules apply under state tax laws.
+Added: If we were to experience one or more ownership changes, then we may be limited in our ability to use certain tax attributes.
+Added: Any such limitations on the ability to use tax attributes could adversely impact our business, financial condition, and operating results.
Failure to comply with anti-corruption and anti-bribery laws could result in fines, criminal penalties and materially adversely affect our business, financial condition and results of operations.
17 unchanged sentences
Any of the foregoing could materially adversely affect our business, financial condition and results of operations.
−Removed: A failure to comply with laws and regulations relating to privacy and the protection of data relating to individuals may result in negative publicity, claims, investigations and litigation, and adversely affect our financial performance.
−Removed: We are subject to laws, rules, and regulations in the United States, the European Union, and other jurisdictions relating to the collection, use, and security of personal information and data.
+Added: A failure to comply with laws and regulations relating to privacy and the protection of personal information may result in negative publicity, claims, investigations and litigation, and adversely affect our financial performance.
+Added: We are subject to laws, rules, and regulations in the United States, the European Union, and other jurisdictions relating to the collection, use, and security of personal information.
Such data privacy laws, regulations, and other obligations may require us to change our business practices and may negatively impact our ability to expand our business and pursue business opportunities.
5 unchanged sentences
demonstrating an appropriate legal basis;
−Removed: granted new rights for data subjects in regard to their personal data;
+Added: granting new rights for data subjects in regard to their personal data;
and imposing limitations on retention of personal data;
1 unchanged sentence
Each of the GDPR and the UK data protection regime can result in fines up to the greater of EUR 20 million or £17 million, as applicable, or 4% of total global annual turnover.
−Removed: We are also subject to European Union rules with respect to cross-border transfers of personal data out of the EEA and the United Kingdom.
+Added: We are also subject to European Union rules with respect to cross-border transfers of personal data out of the European Economic Area ("EEA") and the United Kingdom.
Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal information from the EEA and the United Kingdom to the United States.
These recent developments may require us to review and amend the legal mechanisms by which we make and/or receive personal data transfers to/in the U.S.
−Removed: The CCPA, which went into effect on January 1, 2020, imposes similar requirements on companies handling data of California residents and creates a new and potentially severe statutory damages framework for (i) violations of the CCPA and (ii) businesses that fail to implement reasonable security procedures and practices to prevent data breaches.
−Removed: Additionally, a new law, the California Privacy Rights Act (the “CPRA”), imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data.
−Removed: It will also create a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement.
−Removed: The majority of the provisions went into effect on January 1, 2023, and additional compliance investment and potential business process changes may be required.
+Added: In the U.S., the CCPA, imposes similar requirements on companies handling data of California residents and creates a new and potentially severe statutory damages framework for violations of the CCPA.
+Added: Additionally, the California Privacy Rights Act (the “CPRA”), imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data processing, and opt outs for certain disclosures of data and uses of sensitive data.
+Added: It also created a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement.
+Added: The enactment of the CCPA is prompting a wave of similar legislative developments in other states in the United States, which creates a patchwork of overlapping but different state laws.
+Added: We are also subject to general consumer protection laws, rules and regulations, such as the authority of the Federal Trade Commission and state attorneys general to enforce “unfair” or “deceptive” trade practices, including statements made in our public-facing website, privacy policy, and other statements.
Privacy and data protection-related laws and regulations also may be interpreted and enforced inconsistently over time and from jurisdiction to jurisdiction.
1 unchanged sentence
One example of such self-regulatory standards to which we may be contractually bound is the Payment Card Industry Data Security Standard, or PCI DSS.
−Removed: Though we currently use third-party vendors to process and store credit card data in connection with our e-commerce business, to the extent we process or store such data ourselves in the future, we may be subject to various aspects of the PCI DSS, and fines, penalties, and a loss of the ability to process credit card payments could result from any failure to comply with the PCI DSS.
+Added: Though we currently use third-party vendors to process and store credit card data in connection with our e-commerce business, we are subject to various aspects of the PCI DSS, and fines, penalties, and a loss of the ability to process credit card payments could result from any failure to comply with the PCI DSS.
Any actual or perceived inability to comply with applicable privacy or data protection laws, regulations, or other obligations could result in significant cost and liability, litigation or governmental investigations, damage our reputation, and adversely affect our business.
−Removed: UNRESOLVED STAFF COMMENTS
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.