Funko, Inc. — Q1 2024 Form 10-Q Summary
Reporting period: Three months ended March 31, 2024; unaudited consolidated results, compared with the three months ended March 31, 2023. Funko is a licensed pop-culture products company. It reports one operating segment; Core Collectibles represented 72.9% of sales and Loungefly 18.9%.
Financial performance and condition
| Metric | Q1 2024 | Q1 2023 or prior date | Change / context |
|---|---|---|---|
| Net sales | $215.7 million | $251.9 million | Down 14.4%; company cited lower sales to specialty and other retailers and e-commerce sites. |
| Gross margin, excluding depreciation and amortization | 40.0% | 19.7% | Improvement was primarily attributable to the prior-year $30.1 million inventory write-down, not solely underlying operating improvement. |
| Operating loss | $14.9 million | $64.5 million | Improved by $49.6 million. |
| Net loss | $23.7 million | $61.1 million | Improved by $37.5 million; prior-year loss included the inventory write-down. |
| Net loss attributable to Funko, Inc. / diluted loss per Class A share | $22.7 million / $0.45 | $55.3 million / $1.17 | Loss per share improved; diluted shares equaled basic shares because potential shares were anti-dilutive. |
| Adjusted EBITDA (non-GAAP) | $9.6 million | $(14.0) million | Improved; includes adjustments for specified costs and other items. See filing reconciliation. |
| Operating cash flow | $14.5 million provided | $30.3 million used | Improvement reflected lower loss excluding non-cash items and working-capital changes. |
| Investing cash flow | $2.8 million provided | $17.8 million used | Included $6.8 million proceeds from the Funko Games asset sale. |
| Financing cash flow | $27.4 million used | $63.5 million provided | Q1 2024 included debt repayments and a $13.5 million reduction in revolver borrowings. |
| Cash and cash equivalents | $26.1 million at March 31, 2024 | $36.5 million at December 31, 2023 | Decreased $10.3 million during the quarter. |
| Working capital | $(40.1) million at March 31, 2024 | $(16.0) million at December 31, 2023 | Deficit widened; affected by seasonality, current debt and revolver borrowings. |
| Debt | $246.4 million carrying amount | $274.1 million at December 31, 2023 | Includes $107.0 million revolver, $126.7 million term loan and $14.2 million equipment financing, net of debt issuance costs. |
| Interest expense, net | $6.3 million | $5.7 million | Higher, primarily due to higher interest rates. |
Material changes and unusual items
- Sales declined across the United States, Europe and other international markets. U.S. sales fell 17.4%; Europe fell 7.2%; other international sales fell 6.9%. Core Collectibles sales declined 14.6% and Loungefly sales declined 20.6%, while Other category sales increased 7.6%.
- Q1 2023 cost of sales included a $30.1 million inventory write-down related to a warehouse-efficiency and inventory-reduction plan. This materially affects year-over-year gross margin and loss comparisons.
- In January 2024, Funko sold Funko Games inventory and certain related intellectual property and entered a multi-year exclusive worldwide license and distribution agreement. Sale proceeds were used to repay term-loan borrowings; the company expects minimum guaranteed royalties under the agreement.
- SG&A decreased 14.5%, mainly due to lower personnel-related and facilities costs, partly offset by higher professional fees. Depreciation and amortization increased 11.5%.
- Management changes included the appointment of an Interim CEO and an Acting CFO. The filing reports that Cynthia Williams was announced as CEO on May 9, 2024, effective May 20, 2024.
Liquidity, outlook and risks
- Management stated that available liquidity is expected to fund operations and planned capital expenditures for at least the next 12 months, but cautioned that future cash flows and revolver availability may not be sufficient. No specific revenue or earnings guidance was provided in the supplied filing text.
- At March 31, 2024, $107.0 million was drawn on the $150.0 million revolving facility, leaving $43.0 million available. Revolver borrowings were due within 30 days of the applicable draw. Credit facilities mature September 17, 2026.
- Funko reported compliance with its debt covenants at quarter-end. The applicable maximum net leverage ratio was 2.50:1.00 and minimum fixed-charge coverage ratio was 1.25:1.00. Management expects compliance for at least one year based on current forecasts, while warning that weaker results or cash flows could affect compliance and require further amendments or financing.
- The company reported ineffective disclosure controls as of March 31, 2024 because of previously identified material weaknesses in internal control over financial reporting. Remediation is ongoing and expected to continue through 2024; management gave no assurance on completion timing.
- Principal operating risks include retailer restocking restraint and order cancellations, inventory forecasting and markdown/write-down exposure, reliance on licensed third-party content, concentrated licensors and customers, consumer and retail conditions, international sourcing and currency exposure, and seasonality. More than 50% of annual sales historically occur in Q3 and Q4.
- Debt, negative working capital, floating-rate interest exposure, and covenant restrictions constrain financial flexibility. Funko stated that substantially all borrower assets secure the credit facilities.
- Legal matters include securities and derivative litigation, a Delaware fiduciary-duty action and, subsequent to quarter-end, a California wage-and-hour class action. A derivative-litigation settlement received oral preliminary approval in April 2024; written approval and final approval remained pending. The filing says some potential losses cannot be estimated and no accrual was established for certain matters.
- Other notable exposures include a $19.6 million reserve for ongoing and future royalty audits, a $1.5 million reserve for prepaid royalties estimated to be unrecoverable, and contingent Tax Receivable Agreement obligations. The company reduced its recorded TRA liability to $9.0 million at December 31, 2023 based on its assessment of tax-benefit realizability.
Important facts for investors to verify
- Whether sales stabilize and retailer orders recover, particularly in the U.S., and whether the trend differs by brand and channel.
- How much of the reported gross-margin improvement reflects the absence of the prior-year inventory write-down versus sustainable pricing, product mix and cost performance.
- Cash conversion and working-capital needs, including inventory levels, accounts receivable, royalty payments and the negative working-capital position.
- Debt repayment capacity, revolver availability and covenant headroom as the company returns to the stated covenant thresholds.
- Progress and testing of internal-control remediation, and any further disclosure about material weaknesses or potential reporting impacts.
- Developments in material litigation, royalty audits and the California wage-and-hour matter, including any change in estimated exposure or insurance coverage.
- Leadership transition, license renewals and concentration: the top ten licensors accounted for approximately 68% of Q1 sales, and the top ten customers approximately 43%.