Funko, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter report. Funko designs and sells licensed pop-culture products, principally figures and accessories, through retail, distributor and direct-to-consumer channels. The company reports one operating segment.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $652.5 million | $795.1 million |
| Gross margin, excluding depreciation and amortization | 38.2% | 35.5% |
| Income from operations | $23.5 million | $46.6 million |
| Net income | $9.8 million | $27.8 million |
| Net income attributable to Funko, Inc. | $4.0 million | $11.7 million |
| Diluted Class A EPS | $0.11 | $0.36 |
| Adjusted EBITDA | $80.2 million | $123.0 million |
| Cash from operating activities | $107.2 million | $90.8 million |
- Cash and cash equivalents were $52.3 million at year-end, versus $25.2 million in 2019; working capital was $120.7 million, versus $101.6 million.
- Debt under the term loan was $190.8 million net of unamortized discount; the $75 million revolving facility had no year-end borrowings. The term loan matures in September 2024 and is secured by substantially all borrower assets.
- Operating cash flow increased despite lower earnings, supported in part by working-capital changes. Investing cash outflow was $18.5 million, primarily for property and equipment; financing cash outflow was $61.8 million.
Material changes versus FY2019
- Sales declined 17.9%, primarily from COVID-19-related store closures, reduced retailer and distributor orders, and weaker demand. E-commerce and direct-to-consumer sales partly offset the decline.
- Operating income fell 49.5% and net income fell 64.9%. SG&A declined 6.5%, but rose to 27.8% of sales from 24.4% as revenue contracted.
- Gross margin improved 270 basis points, principally because FY2019 included a $16.8 million inventory write-down; the improvement should not be read as solely reflecting recurring operating gains.
- U.S. sales fell 6.7%, Europe sales fell 43.5%, and other international sales fell 29.2%. International sales were approximately 25% of total sales, compared with 34% in 2019.
- Pop! sales declined 20.4%; Loungefly sales increased 17.0%. Direct-to-consumer sales rose to approximately 8% of sales from 4%.
- Evergreen properties contributed approximately 66% of sales, compared with 51% in 2019, amid fewer new content releases during the pandemic.
Outlook, risks and unusual items
- Funko withdrew its 2020 financial guidance in March 2020. The filing provides no replacement quantitative guidance. Management said it expected available liquidity to support operations, growth plans and planned capital expenditures for at least 12 months, while cautioning that pandemic-related uncertainty could require additional financing.
- Management cited ongoing risks from COVID-19, retail demand and store closures, supply-chain disruption, consumer and content trends, inventory forecasting, competition, foreign exchange and international trade. Production delays or costlier alternative sourcing could affect results.
- The May 2020 credit amendment waived certain financial covenants for the quarters ended June and September 2020 and imposed a temporary minimum-liquidity requirement. Funko reported compliance with its credit covenants at year-end; future compliance could be affected if recovery or cash flows weaken.
- Contractual commitments totaled $384.7 million, including estimated debt and interest, operating leases, Tax Receivable Agreement liabilities and minimum royalties. The Tax Receivable Agreement generally requires payment to continuing equity owners of 85% of specified realized or deemed tax benefits.
- Funko disclosed $7.8 million of historical Loungefly customs-duty underpayments, paid to U.S. Customs in 2019, and a $0.5 million contingent liability for potential penalties. The filing said it was not aware of a government investigation as of the report date; penalties could exceed the recorded amount.
- Several securities and derivative actions remained pending. A federal securities action was dismissed on February 26, 2021, with leave to amend; a separate Washington state securities action was dismissed with prejudice and was on appeal. The company said loss estimates for certain matters were not clear or could not be made.
- A material weakness in controls over customs-duty calculations, identified in 2019, was reported as remediated in 2020. Management concluded internal control over financial reporting was effective at year-end; the auditor did not provide an internal-control attestation because of the company’s emerging-growth-company exemption.
Important facts for investors to verify
- Whether sales and margins recover as retail operations normalize, and whether FY2020’s higher gross margin persists without the prior-year inventory charge.
- Current liquidity, debt balances, covenant headroom and cash needs, including the effects of working capital, debt service and contractual commitments.
- Progress in restoring international sales and the performance of direct-to-consumer and Loungefly businesses.
- Potential customs penalties and developments in the disclosed securities, derivative and other legal matters.
- License renewal terms and concentration: the top ten licensors represented approximately 74% of FY2020 sales; Disney-related licensors Disney, LucasFilm and Marvel together represented approximately 41%.
- Customer and product concentration: the top ten customers represented approximately 48% of FY2020 sales; Pop! products represented approximately 76%. No individual customer exceeded 10% of revenue.