Funko, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods. Funko sells licensed pop-culture products, including Core Collectibles and Loungefly. Approximately 29% of first-half sales came from outside the United States.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $240.0 million | $315.7 million | $491.9 million | $624.1 million |
| Gross margin, excluding depreciation and amortization | 29.2% | 32.7% | 24.3% | 33.9% |
| Operating income (loss) | $(30.5) million | $8.9 million | $(95.0) million | $28.7 million |
| Net income (loss) | $(75.9) million | $15.8 million | $(137.0) million | $30.3 million |
| Adjusted EBITDA, non-GAAP | $(7.6) million | $31.8 million | $(21.6) million | $68.0 million |
| Net interest expense | $7.3 million | $1.7 million | $13.0 million | $2.9 million |
Q2 diluted loss per Class A share was $1.54, versus diluted earnings of $0.28 a year earlier. First-half diluted loss per share was $2.71, versus earnings of $0.53.
Revenue fell 24.0% in Q2 and 21.2% in the first half, primarily as retailers and e-commerce customers reduced inventories, slowed restocking, or canceled orders. In Q2, U.S. sales declined 25.9%; Core Collectible sales fell 25.5% and Loungefly sales fell 28.5%. Gross margin pressure reflected inventory reserves and adjustments, higher freight costs on certain inventory, and, for the first half, a $30.1 million one-time inventory write-down.
The reported results include a $99.6 million gain from reducing the Tax Receivable Agreement (TRA) liability and a $123.2 million deferred-tax valuation allowance that substantially increased tax expense. These non-operating tax-related items materially affect GAAP net income: Q2 reported pretax income of $62.2 million but a net loss of $75.9 million after $138.1 million of income tax expense. Adjusted EBITDA was negative in both Q2 and the first half; it is a non-GAAP measure and should be considered alongside GAAP results.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $36.8 million, compared with $19.2 million at December 31, 2022. Working capital was negative $3.8 million, versus positive $111.8 million at year-end.
- For the first half, operating cash flow was negative $12.0 million, investing cash flow was negative $27.6 million, and financing cash flow was positive $57.0 million. Financing included $71.0 million of revolving-credit borrowings.
- Total borrowings were approximately $305.0 million: $141.0 million drawn on the revolver, $148.5 million under the term loan, and $17.7 million under the equipment finance loan. The revolver had no availability at June 30; its outstanding draws were due within 30 days of the applicable draw.
- A February 2023 credit amendment modified covenants through December 31, 2023, raised borrowing margins during that period, restricted certain actions, and required at least $10 million of qualified cash. Funko reported compliance with the amended covenants at June 30. It cautioned that future covenant compliance and financing access depend on results and cash generation.
Outlook, risks, and unusual items
- Management expected the retailer de-stocking and challenging retail environment to continue at least into Q3 2023. The filing provides no quantified revenue or earnings guidance.
- Management said available liquidity was expected to support operations and planned needs for at least 12 months, while cautioning that cash flow and credit availability might prove insufficient and additional financing might not be available on favorable terms.
- The inventory reduction plan included a $30.1 million write-down; physical destruction of identified inventory was expected to continue during Q3.
- In July 2023, Funko announced that CEO Brian Mariotti would take a six-month sabbatical, with Michael Lunsford serving as interim CEO, and a further workforce reduction of approximately 12–13% (180–200 positions). The filing also describes cost reductions already underway.
- Disclosure controls were deemed ineffective at June 30 because of previously reported material weaknesses in internal control over financial reporting. Remediation was ongoing, with no assurance given as to completion timing.
- Risks include customer and licensor concentration, licensed-product demand and renewal, inventory and seasonal demand, international sourcing and currency exposure, debt and covenant constraints, and pending securities and derivative litigation. The filing also reports a $1.0 million accrued liability for customs penalties and interest, expected to be paid in Q3 2023.
Important facts for investors to verify
- Whether sales, customer orders, gross margin, and inventory levels stabilize after the expected Q3 de-stocking period.
- How much of reported earnings reflects operating performance versus the TRA gain, deferred-tax valuation allowance, and inventory write-down; review the non-GAAP reconciliations and their adjustments.
- Cash generation, near-term revolver repayment requirements, refinancing needs, and compliance with amended and post-waiver financial covenants.
- Progress on internal-control remediation, and developments in the securities and derivative cases and the customs payment.
- Execution of leadership changes and workforce reductions, and any effects on licensed-property relationships, operations, and product launches.