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Funko Inflated “Adjusted EBITDA” Figure for IPO, Says Securities Class Action

Funko Dolls Sulley and Boo

It’s not a good sign when Bloomberg Gadfly publishes an article on a company entitled, “Funko Extends Playtime to Its Accounting.” The complaint for this class action quotes from that article to support its allegation that Funko, Inc.’s Registration Statement, including a Prospectus, for its initial public offering (IPO) was misleading, in violation of the Securities Act of 1933.

The class for this action is all persons or entities who acquired Funko, Inc. common stock pursuant to its initial public offering (IPO) or traceable to its Registration Statement and its November 3, 2017 Prospectus, filed on Form 424B4 with the Securities and Exchange Commission (SEC) in connection with the IPO.

Funko sells a range of pop culture consumer products that feature characters from media and entertainment, such as movies, TV shows, video games, music, and sports. It combines its own brands and designs with properties it licenses from others.

The Prospectus claims, “From 2014 to 2016, we expanded our net sales, net income and Adjusted EBITDA at a 100%, a 17% and an 86% compound annual growth rate, or CEGR, respectively.” The complaint also reproduces figures from its net income and profitability and intangible asset pages.

According to the complaint, these statements were misleading, making it look like Funko’s growth trends were stronger than they were, and that the EBITDA growth trend reflected the company’s prospects, neither of which statements, it says, is true.

The IPO was not a success, the complaint claims, with the company hoping to sell over 13 million shares for possibly $245 million but only selling 10.4 million shares at $12. The Seattle Times called it the “worst first-day return for an IPO in 17 years.”

But the Bloomberg article did more than comment, according to the complaint; it explained that the company’s 86% figure was not possible: “The actual bottom line … was up an average of just 16 percent in 2015 and 2016 and has turned negative lately.” The article examines the increase in Adjusted EBITDA and finds elements such as the fact that the company was acquired by a private equity firm, as well as write-offs of intellectual property, depreciation, increases in debt, and higher interest expenses: “You get the picture; the higher cost is reflected back as better earnings once it’s excluded.”

The article concluded, “The result, just $7 million, or 10 percent, of Funko’s $69 million increase in adjusted Ebitda—which led to that 86 percent increase in growth from 2014 to 2016—was from actual earnings growth. The other 90 percent came from higher costs that the company says investors should just ignore.”

At the news, the company’s stock dropped 41% from its initial $12 price to close at just over $7.

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