10-Q: Funko Faces Going Concern Doubt Amid Deepening Losses

Funko, Inc. reports significant net losses and declining sales, raising substantial doubt about its ability to continue as a going concern, driven by macroeconomic pressures and debt covenant non-compliance.

Summary

• Net sales for the three months ended September 30, 2025, decreased by 14.3% to $250.9 million, down from $292.8 million in the prior year period.
• Net sales for the nine months ended September 30, 2025, decreased by 16.0% to $635.1 million, down from $756.1 million in the prior year period.
• The company reported a net income attributable to Funko, Inc. of $0.9 million for the three months ended September 30, 2025, a 79.2% decrease from $4.3 million in the prior year.
• A net loss attributable to Funko, Inc. of $67.2 million was recorded for the nine months ended September 30, 2025, significantly wider than the $13.2 million loss in the prior year period.
• Basic and diluted earnings per share for the three months were $0.02, down from $0.08, and for the nine months were $(1.24), down from $(0.26).
• Gross margin (exclusive of depreciation and amortization) decreased to 40.2% for the three months and 37.7% for the nine months ended September 30, 2025, compared to 40.9% and 41.0% respectively in the prior year periods.
• Operating activities used $33.2 million in cash for the nine months ended September 30, 2025, a significant shift from $63.7 million provided in the prior year period.
• Working capital deteriorated significantly to $(157.5) million as of September 30, 2025, from $(18.7) million as of December 31, 2024.
• Outstanding borrowings under the Revolving Credit Facility increased to $135.0 million as of September 30, 2025, from $60.0 million as of December 31, 2024.
• The current portion of long-term debt increased substantially to $104.6 million as of September 30, 2025, from $22.5 million as of December 31, 2024.
• The company has identified material weaknesses in its internal control over financial reporting, with remediation efforts ongoing throughout fiscal 2025.

Sentiment

Score: 2

Explanation: The filing presents a highly negative outlook, with significant financial deterioration, explicit 'going concern' doubt, anticipated debt covenant breaches, and the need for urgent refinancing or a potential sale of the company. While management outlines a plan, the uncertainties are substantial, indicating severe financial distress.

Positives

• Cash and cash equivalents increased to $39.2 million as of September 30, 2025, from $34.7 million as of December 31, 2024.
• Net cash provided by financing activities was $57.8 million for the nine months ended September 30, 2025, primarily due to net borrowings on the Revolving Line of Credit Facility.
• The company successfully sold Funko Games inventory and certain intellectual property in January 2024, generating $6.8 million in proceeds used to pay down debt.
• A class action lawsuit regarding wage and hour violations reached an immaterial monetary settlement in May 2025, with final court approval expected in early 2026.

Negatives

• Substantial doubt exists about the company's ability to continue as a going concern for the next twelve months due to anticipated non-compliance with debt covenants and potentially insufficient working capital.
• Net sales decreased across all distribution channels and branded categories for both the three and nine months ended September 30, 2025, primarily due to tariff disruption and macroeconomic uncertainty.
• The company anticipates non-compliance with the maximum Net Leverage Ratio and minimum Fixed Charge Coverage Ratio covenants as of December 31, 2025, and in future quarters.
• Outstanding Milestone Covenants related to a Refinancing Transaction or Sale Transaction have not been satisfied as of the filing date, with compliance dates extended to November 25, 2025, and February 16, 2026.
• Increased shipping, freight, and duty costs, along with increased inventory reserves, negatively impacted gross margin.
• Selling, general, and administrative expenses, while decreasing in absolute terms, increased as a percentage of net sales for the nine months ended September 30, 2025 (38.9% vs. 33.9%).
• The company is not forecasted to have sufficient cash reserves to fully repay outstanding loans under the Credit Agreement at its September 2026 maturity date, necessitating refinancing.
• The securities class action lawsuit, *Studen v. Funko, Inc., et al.*, which was dismissed with prejudice, has been appealed to the Ninth Circuit, with oral argument held in May 2025 and a decision pending.

Risks

• Global and regional economic downturns, changes in retail practices, and the ability to maintain and develop relationships with retail customers and distributors.
• Risks associated with international operations, including changes in global trade markets, fluctuations in foreign currency or tax rates, political instability, and difficulties enforcing intellectual property rights.
• Indebtedness could adversely affect financial health and competitive position, and the company may not secure additional financing on favorable terms or at all.
• Substantial doubt about the company's ability to continue as a going concern due to pressure on financial covenants, potentially insufficient working capital, and potential non-compliance with other covenants.
• No assurance that the review of strategic alternatives will be successful in identifying or completing any transaction, result in additional value for stockholders, or avoid adverse impacts on the business.
• Inability to execute business strategy, manage growth and inventories effectively, and attract and retain qualified personnel.
• Dependence on third-party content development and creation, including the market appeal of licensed properties and the creation of compelling content by licensors.
• Inability to obtain, protect, and enforce intellectual property rights, or operate without violating the intellectual property rights of others.
• Fluctuations in gross margin, seasonal impacts, and fluctuations due to the timing and popularity of new product releases.
• Harm to reputation and ability to operate effectively due to actions taken by third-party vendors and outsourcers.
• Ongoing securities class action litigation, future product liability suits or recalls, or risks associated with failure to comply with various laws and regulations.
• Risks related to information technology, including e-commerce operations, information systems, and compliance with privacy and data protection laws.
• TCG's significant influence over the company, with interests that may conflict with other stockholders.
• Risks related to the organizational structure, including the Tax Receivable Agreement, which confers certain benefits upon TRA Parties that may not benefit other Class A common stockholders to the same extent.
• Risks associated with the ownership of Class A common stock, including potential dilution by future issuances and volatility in the stock price.
• Risks related to climate change, including meteorological phenomena, extreme weather events, and regulatory changes.
• Increased attention to, and evolving expectations for, sustainability and environmental, social, and governance (ESG) initiatives could increase costs or adversely impact business and reputation.
• Concentration of operations in certain geographic regions makes the company susceptible to adverse conditions in those regions.
• Unanticipated changes in effective tax rates or adverse outcomes from tax return examinations.
• Production and sale of counterfeit versions of products.
• Inability to develop and introduce products in a timely and cost-effective manner.
• Inability to realize the full benefit of licenses if properties have less market appeal or sales do not satisfy minimum guaranteed royalties.
• Failure to successfully operate information systems and implement new technology effectively.
• Failure to protect confidential information and/or experience data security incidents.
• Impairment in the value of goodwill or other assets.
• Incorrect estimates or judgments relating to critical accounting estimates.
• Limitations on the ability to use certain tax attributes.
• Failure to comply with anti-corruption and anti-bribery laws.
• Actual or perceived failure to comply with new or existing laws, regulations, and other requirements relating to privacy and the protection of personal information.

Future Outlook

The company anticipates continued supply chain challenges, cost volatility, and consumer and economic uncertainty due to rapid changes in global trade policies, which are expected to adversely affect future net sales, margins, and profitability. Management forecasts non-compliance with maximum Net Leverage Ratio and minimum Fixed Charge Coverage Ratio covenants for the fiscal quarter ending December 31, 2025, and future quarters, and potentially with the minimum Qualified Cash covenant. The Credit Agreement matures in September 2026 and will require refinancing. The company's plan to address these challenges includes monitoring commercial pricing, working with sourcing partners to mitigate costs (including shifting manufacturing out of China), continuous overhead cost reductions, increasing sales of higher-margin products, working capital management, growing international markets, and potentially raising additional cash through equity or debt, assessing amendments/refinancing of existing debt, or a potential sale of the company. Remediation efforts for identified material weaknesses in internal control over financial reporting are expected to continue throughout fiscal 2025.

Management Comments

• Management evaluated the company's future liquidity, forecasts of the expected effects of announced tariffs and other facts and conditions, and ability to comply with the covenants under the Credit Agreement, and determined that there is substantial doubt about the company's ability to continue as a going concern for the next twelve months from the date of issuance of these financial statements.
• The company anticipates it will not be in compliance with the maximum Net Leverage Ratio and minimum Fixed Charge Coverage Ratio covenants as of the end of the quarter ending December 31, 2025 and future quarters.
• The company has not yet satisfied the actions under the Outstanding Milestone Covenants with upcoming compliance dates of November 25, 2025 and February 16, 2026.
• Management has developed a plan that, if executed successfully, it believes will provide sufficient liquidity to meet the company's obligations as they become due for a reasonable period of time, including to meet the company's obligations under the Credit Agreement.
• The company will need to raise additional cash or refinance its Credit Agreement in the near term.
• The Board of Directors has initiated a formal review process to evaluate strategic alternatives for the Company, including a potential sale of the Company.

Industry Context

The company operates in the highly competitive pop culture consumer products industry, which is significantly impacted by global macroeconomic factors, including tariffs, inflation, and consumer discretionary spending. The retail environment is challenging, with retailers slowing restocking and prioritizing lower inventory levels, leading to order cancellations. The industry is also characterized by rapid shifts in consumer preferences and dependence on third-party content development, which can have short product life cycles. The growing market for digital products and NFTs presents both opportunities and risks, with an evolving regulatory and commercial framework. The company's reliance on international manufacturing and sales exposes it to global trade tensions and currency fluctuations, which are currently adverse.

Comparison to Industry Standards

• The company's significant decline in net sales and widening net loss, coupled with substantial doubt about its going concern ability, indicates performance significantly below industry standards for healthy, growing consumer product companies.
• The deterioration in gross margin (from 41.0% to 37.7% for nine months) suggests a struggle to maintain profitability amidst rising costs and tariff pressures, which is a common challenge but more pronounced for companies with high international sourcing exposure.
• The inability to comply with debt covenants and the need for refinancing or a potential sale of the company are critical indicators of financial distress, contrasting sharply with financially stable industry peers who typically maintain healthy leverage and coverage ratios.
• The dependence on third-party licenses and the volatility of pop culture trends are inherent to the industry (e.g., Hasbro, Mattel, or smaller collectibles companies), but Funko's current financial state suggests a particular vulnerability to these factors, especially if it cannot secure or renew licenses on favorable terms.
• The ongoing material weaknesses in internal control over financial reporting are a significant governance concern, placing the company behind best practices for public companies in any industry.

Management Changes

Corporate Governance

Legal Proceedings

• A putative class action lawsuit, *Lynch vs. Mariotti, et al.*, in Delaware Chancery Court, alleging breach of fiduciary duties related to the company's Up-C structure, is ongoing. The court denied a motion to dismiss, and the company filed its Answer on December 10, 2024.
• A securities class action lawsuit, *Construction Laborers Pension Trust of Greater St. Louis v. Funko, Inc., et al.*, in the Ninth Circuit Court of Appeals, alleges misleading statements regarding an ERP system upgrade and distribution center relocation. Oral argument was held on May 23, 2025, and a decision is pending.
• A former employee class action lawsuit in San Diego Superior Court, alleging wage and hour violations, reached an immaterial monetary settlement in May 2025, with final court approval expected in early 2026.

Related Party Transactions

• The company is party to a Tax Receivable Agreement (TRA) with TRA Parties (Continuing Equity Owners and certain transferees), requiring payments of 85% of realized tax benefits. The estimated gross outstanding balance of the TRA liability was $102.8 million as of September 30, 2025.
• TCG (TCG 3.0 Fuji, LP) has significant influence over the company, including the right to designate directors and require prior written approval for certain transactions, as long as TCG Related Parties beneficially own 22% or more of Class A common stock. This creates potential conflicts of interest with other stockholders.

Stakeholder Impact

• **Shareholders:** Face significant risk of dilution from potential future equity raises and substantial doubt about the company's ability to continue as a going concern, which could lead to further stock price decline. TCG's significant influence may also impact decisions in ways that do not align with all shareholders' interests.
• **Employees:** Management changes, ongoing cost reduction efforts, and potential operational scaling back could impact job security and morale. The former employee class action settlement addresses past wage and hour claims.
• **Customers:** Retail customers are already reducing orders and managing inventory tightly, impacting the company's sales. Continued macroeconomic uncertainty and potential price increases due to tariffs could further affect consumer demand for products.
• **Suppliers/Licensors:** The company's financial distress and potential non-compliance with debt covenants could affect its ability to make timely payments or renew license agreements on favorable terms. Shifting manufacturing out of China could impact existing supplier relationships.
• **Creditors:** The company's lenders face substantial risk due to anticipated covenant non-compliance and the need for refinancing. The Fourth Amendment to the Credit Agreement and the Outstanding Milestone Covenants indicate heightened scrutiny and potential for accelerated debt repayment if conditions are not met.

Next Steps

• Continue to monitor commercial pricing strategy and work with sourcing partners to mitigate increasing costs, including shifting manufacturing out of China.
• Implement continuous overhead cost reductions, increase sales of higher margin products, and manage working capital.
• Pursue strategies to grow international markets, which are not impacted by tariffs.
• Raise additional cash through equity or debt issuance, or assess potential amendments and/or refinancing of existing debt arrangements.
• Opportunistically consider other potential business opportunities or strategic transactions, including a potential sale of the company.
• Continue remediation efforts for material weaknesses in internal control over financial reporting throughout fiscal 2025.
• Deliver a compliance certificate by February 16, 2026, for the quarter ending December 31, 2025, related to Outstanding Milestone Covenants.
• Await a decision from the United States Court of Appeals for the Ninth Circuit regarding the appeal of the *Studen v. Funko, Inc., et al.* securities class action lawsuit.
• Await final court approval and payment of the immaterial monetary settlement for the former employee class action lawsuit, expected in early 2026.

Key Dates

Recommendation

The filing explicitly states 'substantial doubt about our ability to continue as a going concern,' which is the most severe warning a company can issue. This, combined with significant year-over-year declines in net sales and net income, a widening net loss, deteriorating working capital, and anticipated breaches of debt covenants, paints a dire financial picture. While management is exploring strategic alternatives, including a potential sale or capital raise, there is no assurance of a successful outcome. The high level of uncertainty, coupled with ongoing legal proceedings and material weaknesses in internal controls, makes the stock an extremely high-risk investment. A seasoned investor would likely view this as a strong sell, anticipating further downside risk and potential for significant capital loss.

Keywords

Pop Culture Collectibles, Licensed Products, Action Figures, Vinyl Figures, Loungefly, Mondo, SEC Filing, 10-Q, Financial Results, Going Concern, Debt Covenants, Refinancing, Strategic Alternatives, Retail Industry, Tariffs, Macroeconomic Uncertainty, Supply Chain, Intellectual Property, Corporate Governance, Legal Proceedings, Internal Controls, EBITDA, Net Sales, Net Loss, Working Capital