Funko, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed March 7, 2024. Funko designs and sells licensed pop-culture products, principally collectibles and Loungefly accessories. It reports one operating segment.
Financial performance and liquidity
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Net sales | $1,096.1 million | $1,322.7 million |
| Gross margin, excluding depreciation and amortization | 30.4% | 32.8% |
| Operating loss | $103.8 million | $11.9 million |
| Net loss | $164.4 million | $5.2 million |
| Net loss attributable to Funko, Inc.; diluted EPS | $154.1 million; $(3.19) | $8.0 million; $(0.18) |
| Adjusted EBITDA (non-GAAP) | $27.2 million | $97.4 million |
| Cash from operating activities | $30.9 million | Cash used: $40.1 million |
| Cash and cash equivalents at year-end | $36.5 million | $19.2 million |
| Working capital at year-end | $(16.0) million | $111.8 million |
Sales fell 17.1%, primarily reflecting lower orders from mass-market retailers, e-commerce customers and distributors amid slower restocking and a difficult retail environment. U.S. sales declined 21.8%; Europe sales increased 3.0%. Core Collectibles sales decreased 19.6%, Loungefly sales decreased 15.2%, and Other product sales increased 10.0%.
Cost of sales was $763.1 million, down 14.1%; gross margin contracted 240 basis points. SG&A declined 5.3% to $377.1 million but rose to 34.4% of sales from 30.1%. Interest expense increased to $28.0 million from $10.3 million, reflecting higher debt balances and rates.
The $164.4 million GAAP net loss included $132.5 million of income tax expense, including a $123.2 million valuation allowance against deferred tax assets. A $100.2 million gain from reducing the Tax Receivable Agreement (TRA) liability partly offset the loss; the adjustment was non-cash. The company reported EBITDA of $55.8 million and Adjusted EBITDA of $27.2 million; these non-GAAP measures include adjustments for items such as inventory write-downs and the TRA liability adjustment.
Operating cash flow improved to $30.9 million, while investing activities used $39.8 million, including $35.1 million for property and equipment. Financing activities provided $25.6 million, principally from net revolving-credit borrowings. Inventory was $119.5 million, down from $246.4 million; the year included a $30.3 million inventory write-down and $8.7 million of offshore finished- and unfinished-goods disposal costs.
At year-end, debt included $120.5 million drawn on the revolver, $139.5 million under the term loan and $15.4 million under an equipment-finance loan. The company reported $20.5 million of remaining availability under its $150 million revolving facility. Its Credit Agreement is secured by substantially all borrower assets. Funko was compliant with its amended covenants at year-end, but the stricter maximum net leverage ratio of 2.50:1.00 and minimum fixed-charge coverage ratio of 1.25:1.00 resumed beginning with the quarter ending March 31, 2024. Management said available liquidity was expected to support operations and planned capital spending for at least 12 months, while cautioning that future cash generation and covenant compliance are not assured.
Material changes and management commentary
- Direct-to-consumer sales grew to approximately 21% of sales from 13%; international sales rose to approximately 31% from 27%.
- Evergreen properties accounted for approximately 67% of sales. The top five properties accounted for 17%; no single property exceeded 6%.
- Management cited retailer inventory restraint, order cancellations, macroeconomic uncertainty, inflation and geopolitical disruptions. It adjusted inventory purchases to emphasize core products.
- Brian Mariotti left the CEO role and the company in 2023; Michael Lunsford became interim CEO. The filing provides no formal forward revenue or earnings guidance.
- Funko acquired HipDot for $6.0 million in cash in January 2023. The company also terminated a lease that had not commenced, recording an approximately $4.2 million charge.
Risks, contingencies and unusual items
- Internal controls: Management found disclosure controls and internal control over financial reporting ineffective at year-end due to material weaknesses in control activities, IT controls and monitoring. The auditor issued an adverse opinion on internal control, but an unqualified opinion on the financial statements. Remediation continues through 2024; completion timing is uncertain.
- Litigation: A Washington securities class action relating to the IPO received class certification in November 2023. A separate investor suit concerning ERP and distribution-center statements remained pending on a motion to dismiss. A Delaware fiduciary-duty case concerning the Up-C structure continued after dismissal was denied. A proposed settlement of certain derivative suits remained subject to court approval.
- Licensing exposure: Top ten licensors represented approximately 68% of sales; Disney-related licensors collectively represented approximately 38%. The balance sheet included an $18.1 million reserve for ongoing and future royalty audits. Minimum guaranteed royalty commitments totaled $80.4 million, including $31.1 million due in 2024.
- Other exposures: Dependence on licensed properties and third-party manufacturers, demand and inventory forecasting, variable-rate debt, covenant restrictions, foreign exchange and shipping costs, and digital-asset regulation. A $1.0 million customs penalty and interest related to historical duty underpayments was paid in 2023.
Investor verification priorities
- Verify the drivers and sustainability of sales, gross-margin and Adjusted EBITDA declines, including the impact of retailer restocking and inventory actions.
- Assess liquidity and covenant headroom against the $20.5 million revolver availability, negative working capital and debt service needs.
- Review the assumptions behind the $123.2 million deferred-tax valuation allowance and the reduced TRA liability; the TRA liability was $9.0 million at year-end, with $9.0 million expected in 2024.
- Track remediation and independent testing of internal controls, particularly U.S. ERP, digital-collectibles systems and control activities.
- Monitor litigation developments, royalty-audit outcomes and the ability to renew significant licenses on acceptable terms.