Funko, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless noted. Funko sells licensed pop-culture products, principally Core Collectibles and Loungefly.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net sales | $251.9 million | $308.3 million | Down 18.3% |
| Gross margin, excluding depreciation and amortization | 19.7% | 35.3% | Down 15.6 percentage points; includes a $30.1 million inventory write-down |
| SG&A | $100.1 million | $78.4 million | Up 27.6%; 39.7% of sales versus 25.4% |
| Operating income (loss) | $(64.5) million | $19.8 million | Declined $84.3 million |
| Net income (loss) | $(61.1) million | $14.5 million | Net loss attributable to Funko, Inc. was $55.3 million, or $1.17 per Class A share |
| Adjusted EBITDA (non-GAAP) | $(14.0) million | $36.3 million | Includes a $30.1 million add-back for the inventory write-down |
| Cash from operating activities | $(30.3) million | $(23.0) million | Higher cash use year over year |
Sales fell primarily because specialty retailers, e-commerce sites and distributors bought less. Active properties declined 3.5% to 736, and average sales per active property fell 15.3%. U.S. sales decreased 23.4% to $177.8 million; Europe sales increased 4.0% to $59.3 million, including a $6.3 million unfavorable foreign-exchange impact; other international sales decreased 22.8% to $14.8 million. Core Collectibles sales fell 23.4% to $183.5 million, while Loungefly sales rose 4.1% to $52.2 million.
Liquidity and debt
- Cash and cash equivalents were $34.8 million at March 31, 2023, versus $19.2 million at December 31, 2022. Working capital was $41.6 million, down from $111.8 million.
- Balance-sheet debt, including the revolving line, term loan and equipment finance loan, was approximately $310.4 million. The revolving credit balance rose to $141.0 million from $70.0 million at year-end; the filing reports no availability under the revolver at quarter-end.
- Investing activities used $17.8 million, including $12.7 million of property and equipment purchases and $5.3 million paid for HipDot. Financing activities provided $63.5 million, principally from $71.0 million of revolver borrowings.
- Net interest expense increased to $5.7 million from $1.2 million, primarily due to higher average borrowings and the revolver balance.
Material changes, outlook and risks
- Funko recorded a one-time $30.1 million inventory write-down under a plan to reduce inventory and improve U.S. warehouse efficiency; physical destruction was expected to continue through the first half of 2023. Management expected lower inbound shipping and freight costs as the plan progressed.
- Retailers had slowed post-holiday restocking and were prioritizing lower inventory levels. Management expected this trend to continue at least through Q2. The filing provides no numerical earnings or revenue guidance.
- A February 2023 credit amendment modified financial covenants through December 31, 2023, increased borrowing margins during that period, restricted additional revolver draws and certain transactions, and reduced the revolver commitment to $180 million, then $150 million on December 31, 2023. Funko reported covenant compliance at March 31 and stated it expected to remain compliant for at least one year based on current forecasts, but warned that weaker results could require further amendments or financing.
- Management said available liquidity was expected to fund operations and planned capital needs for at least 12 months, while cautioning that operating cash generation or credit availability might prove insufficient. The company also cited significant future Tax Receivable Agreement obligations; the total obligation was $109.2 million, including $9.6 million current.
- Disclosure controls were not effective as of March 31 because of previously reported material weaknesses in internal control over financial reporting. Remediation was ongoing, with no completion date assured.
- Legal matters include ongoing securities and derivative litigation. A prior securities class-action settlement was paid by D&O insurance; other proceedings remain pending, and some possible losses could not be estimated. Funko also recorded a $1.0 million contingent liability for potential customs penalties related to previously disclosed duty underpayments.
- Key business risks include discretionary consumer demand and retailer order reductions, licensed-property concentration, inventory and product-popularity forecasting, international sourcing and currency exposure, debt and covenant constraints, and reliance on third-party manufacturers. The top ten licensors accounted for about 71% of sales; Disney-related licensors collectively accounted for about 41%.
Investor verification points
- Track whether sales, retailer restocking and average sales per active property stabilize after the Q1 decline, particularly in Core Collectibles and the U.S.
- Assess the inventory-reduction plan’s remaining costs, execution and impact on gross margin, freight expense and cash flow.
- Verify covenant compliance, revolver restrictions and availability, cash generation, debt service costs, and the scheduled reduction in credit commitment.
- Monitor progress in remediating internal-control material weaknesses and the status and potential exposure of pending litigation and customs matters.
- Review future cash needs, including capital spending, debt repayments and Tax Receivable Agreement payments; the filing provides no numerical forward earnings guidance.