Business context and reporting period
Funko, Inc. filed this Form 10-K for the fiscal year ended December 31, 2022—not a standalone fourth-quarter report. Funko designs and sells licensed pop-culture products through retailers, distributors and direct-to-consumer channels. It reported one operating segment.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net sales | $1,322.7 million | $1,029.3 million |
| Gross margin, excluding depreciation and amortization | 32.8% | 37.0% |
| Operating income (loss) | $(11.9) million | $95.5 million |
| Net income (loss), consolidated | $(5.2) million | $67.9 million |
| Net income (loss) attributable to Funko, Inc. | $(8.0) million | $43.9 million |
| Operating cash flow | $(40.1) million | $87.4 million |
| Adjusted EBITDA (non-GAAP) | $97.4 million | $149.9 million |
Sales rose 28.5%, led by growth in mass-market retail, distributor and e-commerce customers. U.S. sales increased 30.0%; Europe increased 22.3%. Loungefly sales grew 67.7%, while Core Collectible sales grew 21.6%. Core Collectibles represented about 75.5% of sales.
Cost of sales increased 37.1%, faster than revenue, as product, royalty and freight costs rose. Gross margin fell 420 basis points, primarily due to warehouse challenges, freight and inventory-storage costs. SG&A rose 63.0% to $398.3 million (30.1% of sales), including a $32.5 million write-off of an abandoned enterprise resource planning project. Reported EBITDA was $35.0 million; adjusted EBITDA excludes this and other specified items.
Cash and cash equivalents were $19.2 million at year-end, down from $83.6 million; working capital was $111.8 million, down from $167.6 million. Inventory increased 48% to $246.4 million. At year-end, debt principal comprised $157.5 million of term loans, $70.0 million drawn on the revolver and a $20.0 million equipment loan, or $247.5 million in total; cash was $19.2 million. The filing’s debt balance-sheet presentation reflects unamortized debt discounts and separately presents the revolver.
Material changes, outlook and risks
- Cash generation and costs: Operating cash flow shifted from $87.4 million provided in 2021 to $40.1 million used in 2022, largely reflecting working-capital movements and lower earnings. The company said elevated warehouse, freight and inventory costs were expected to continue at least through the first half of 2023.
- Inventory action: Funko expected a further $30–$36 million inventory write-down in the first half of 2023 as part of a plan to improve U.S. warehouse efficiency and reduce storage costs.
- Credit amendment after year-end: Funko said its projections indicated it would not meet financial covenants at March 31, 2023. On February 28, 2023, it amended its credit agreement through December 31, 2023, modifying covenants, increasing borrowing margins, restricting additional revolver draws and certain transactions, requiring at least $10 million in cash, and requiring specified excess cash to prepay the revolver. The revolver commitment was reduced from $215 million to $180 million, then scheduled to decline to $150 million. The company stated it expected covenant compliance for at least one year based on its forecasts, but noted uncertainty if conditions or results deteriorated.
- Other notable items: A $11.0 million discrete tax benefit resulted from releasing part of a valuation allowance. Funko acquired Mondo for approximately $14 million and bought the remaining TokenWave interests, expanding into high-end collectibles and digital products. No specific earnings or revenue guidance is provided in the supplied filing text.
- Controls and contingencies: Management and the auditor identified material weaknesses in internal control over financial reporting; the auditor issued an adverse opinion on controls, while giving an unqualified opinion on the financial statements. Remediation was planned through 2023. Securities and derivative cases remained pending; the settlement of one securities class action was paid by insurance. A $19.4 million reserve related to royalty audits was disclosed, as was a $0.8 million contingent liability for potential customs penalties.
- Business risks: Key exposures include dependence on licensed properties and third-party manufacturers, rapidly changing consumer tastes, retailer order volatility, inventory management, foreign exchange and inflation, debt covenant and liquidity constraints, and the influence of TCG. Funko reported that Disney-related licensors collectively represented approximately 44% of sales in 2022.
Important facts for investors to verify
- Review the 2023 inventory write-down and whether warehouse throughput, storage costs and freight costs improved as expected.
- Check compliance with the amended credit agreement, available borrowing capacity, cash levels, interest expense and any further lender amendments.
- Assess the remediation and independent testing of the reported material weaknesses in financial reporting controls.
- Track operating cash flow, inventory, gross margin and SG&A against revenue growth; compare GAAP results with the company’s adjusted EBITDA reconciliations.
- Monitor outcomes and potential exposure from pending litigation, royalty audits and the customs-duty matter.