10-Q: Funko Faces Going Concern Doubt Amid Sales Decline

Funko, Inc. reported a significant net loss and sales decline for Q2 2025, raising substantial doubt about its ability to continue as a going concern due to financial covenant pressures and liquidity challenges.

Summary

• Net sales for the three months ended June 30, 2025, decreased by 21.9% to $193.5 million, down from $247.7 million in the prior year period.
• The company reported a net loss of $41.0 million for the three months ended June 30, 2025, a significant deterioration from a net income of $5.4 million in the same period last year.
• For the six months ended June 30, 2025, net sales decreased by 17.1% to $384.2 million, and the net loss widened to $69.1 million from $18.2 million in the prior year period.
• Gross margin (exclusive of depreciation and amortization) decreased to 32.1% for the three months ended June 30, 2025, from 42.0% in the prior year, primarily due to increased inventory reserves and higher shipping, freight, and duty costs.
• The company's management has expressed substantial doubt about its ability to continue as a going concern due to forecasted non-compliance with debt covenants and potentially insufficient working capital within the next twelve months.
• A Fourth Amendment to the Credit Agreement was entered into on July 16, 2025, waiving compliance with the maximum Net Leverage Ratio and minimum Fixed Charge Coverage Ratio for the quarters ended June 30, 2025, and September 30, 2025.
• The Revolving Credit Facility commitments were permanently reduced from $150.0 million to $135.0 million (effective July 16, 2025) and further to $125.0 million (effective December 31, 2025).
• The company's Credit Agreement matures in September 2026, and it is not forecasted to have sufficient cash reserves to fully repay outstanding loans, necessitating refinancing.
• Inventory increased to $101.3 million as of June 30, 2025, from $92.6 million as of December 31, 2024, with reserves for excess and obsolete inventories increasing to $13.4 million from $11.8 million.
• Net cash used in operating activities was $44.4 million for the six months ended June 30, 2025, compared to net cash provided of $60.4 million in the prior year period, primarily due to changes in working capital and increased net loss.
• The company's Board has initiated a formal review process to evaluate strategic alternatives, including a potential sale of the company, to maximize stockholder value and comply with debt covenants.

Sentiment

Score: 1

Explanation: The filing indicates severe financial distress, including substantial doubt about the company's ability to continue as a going concern, significant losses, declining sales, deteriorating margins, and a need for immediate capital raise or debt refinancing. This is a highly negative outlook.

Positives

• Successfully settled the 'In re Funko, Inc. Securities Litigation' class action for $14.75 million, paid directly by insurance policies, with final court approval and dismissal on June 6, 2025.
• Successfully settled a former employee wage and hour class action for an immaterial monetary amount, with final court approval and payment expected in early 2026.
• Secured a Fourth Amendment to its Credit Agreement on July 16, 2025, providing waivers for key financial covenants (Net Leverage Ratio and Fixed Charge Coverage Ratio) for the quarters ended June 30, 2025, and September 30, 2025.
• Cash and cash equivalents increased to $49.2 million as of June 30, 2025, from $34.7 million at December 31, 2024, primarily due to increased borrowings on the revolving line of credit.
• Interest expense, net, decreased by 11.0% for the three months and 26.5% for the six months ended June 30, 2025, compared to the prior year periods, mainly due to lower average debt outstanding.

Negatives

• Reported a significant net loss of $41.0 million for the three months ended June 30, 2025, a substantial decline from a net income of $5.4 million in the prior year period.
• Net sales decreased by 21.9% for the three months and 17.1% for the six months ended June 30, 2025, across all distribution channels and branded categories, primarily due to tariff disruption and macroeconomic uncertainty.
• Gross margin significantly declined to 32.1% for the three months and 36.2% for the six months ended June 30, 2025, driven by increased inventory reserves and higher shipping, freight, and duty costs.
• Selling, general, and administrative expenses increased by 5.6% for the three months and 2.2% for the six months ended June 30, 2025, despite declining sales, indicating a lack of cost leverage.
• Net cash used in operating activities was $44.4 million for the six months ended June 30, 2025, a significant negative shift from $60.4 million provided in the prior year period.
• Working capital deteriorated significantly to a deficit of $161.7 million as of June 30, 2025, from a deficit of $18.7 million at December 31, 2024.
• The company forecasts non-compliance with maximum Net Leverage Ratio and minimum Fixed Charge Coverage Ratio covenants as of December 31, 2025, and future quarters, raising substantial doubt about its going concern ability.
• The company anticipates cash flows may be insufficient to support working capital needs within the next twelve months and may not comply with its minimum Qualified Cash covenant in future periods.
• The Revolving Credit Facility commitments were permanently reduced, limiting future borrowing capacity.
• Material weaknesses in internal control over financial reporting persist, and remediation efforts are ongoing throughout fiscal 2025 with no assurance of completion or effectiveness.

Risks

• Substantial doubt about the ability to continue as a going concern due to pressure on financial covenants and potentially insufficient working capital.
• Inability to secure additional financing or refinancing on favorable terms, or at all, to meet future capital needs, especially for the Credit Agreement maturing in September 2026.
• Failure to successfully identify or complete any strategic alternative, including a potential sale of the company, or that such a process will not adversely impact the business.
• Adverse impacts from global and regional economic downturns, changes in retail practices, and ability to maintain relationships with retail customers and distributors.
• Risks associated with international operations, including changes in global trade markets, fluctuations in foreign currency or tax rates, and increased tariffs on products sourced from Vietnam, China, and Mexico.
• Dependence on content development and creation by third parties, with risks related to compelling content creation, market appeal of licensed properties, and short product life cycles.
• Inability to obtain, protect, and enforce intellectual property rights, or if licensors are unable to maintain and protect their intellectual property rights.
• Fluctuations in gross margin due to changes in product mix, costs, price competition, and acquisitions, which may not be sustainable.
• Dependence on vendors and outsourcers, with potential harm to reputation and operations from actions taken by these third parties outside of control.
• Potential future product liability suits or product recalls, which could have a significant adverse effect on financial condition and results of operations.
• Ongoing securities class action litigation and other legal proceedings requiring significant management time and attention, resulting in legal expenses and potentially unfavorable outcomes.
• Risks related to information technology, including the operation of e-commerce business, ability to operate information systems, and compliance with laws related to privacy and data protection.
• 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 benefits upon TRA Parties that may not benefit other Class A common stockholders to the same extent.
• Potential dilution by future issuances of Class A common stock or common units and volatility in the price of Class A common stock.
• Inability to successfully manage inventories, leading to excess inventory, write-downs, or sales at lower prices.
• Failure to manage growth effectively, straining managerial, operational, and financial infrastructure.
• Inability to develop and introduce products in a timely and cost-effective manner.
• Operating results may fluctuate due to seasonality and the timing/popularity of new product releases.
• Highly competitive industry with low barriers to entry, including competition from former CEO Brian Mariotti's new company.
• Risks related to climate change, including extreme weather events, regulatory changes, and increased ESG scrutiny.
• Concentration of operations in certain geographic regions (Everett, WA; Buckeye, AZ; Vietnam, China, Mexico) making the company susceptible to adverse conditions.
• Unanticipated changes in effective tax rates or adverse outcomes from tax return examinations.
• 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 forecasts non-compliance with its maximum Net Leverage Ratio and minimum Fixed Charge Coverage Ratio covenants as of December 31, 2025, and future quarters. It anticipates cash flows may be insufficient to support working capital needs within the next twelve months and may not comply with its minimum Qualified Cash covenant. The Credit Agreement matures in September 2026 and will need to be refinanced. Management plans to continue monitoring commercial pricing, working with sourcing partners to mitigate cost increases (including shifting manufacturing out of China), reducing activity levels and capital expenditures, and gaining positive cash inflow from operating activities through overhead cost reductions, increased sales of higher margin products, and working capital management. The company will also pursue strategies to grow international markets not impacted by tariffs. It intends to raise additional cash through equity or debt issuance, assess potential amendments or refinancing of existing debt, and opportunistically consider other business opportunities or strategic transactions, including a potential sale of the company. The company expects to obtain additional financing and cannot assure it will be on favorable terms or at all. The 'One Big Beautiful Bill Act of 2025' was enacted, and the company is evaluating its impact on financial statements, including deferred tax balances and effective tax rate, with certain provisions effective fiscal 2026.

Management Comments

• Management evaluated the company's future liquidity, forecasted operating results, and ability to comply with Credit Agreement covenants for the twelve months from the date of issuance of these financial statements and determined that, principally based on the forecast of the expected effects of announced tariffs and other facts and conditions, the company is forecasting that 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.
• Based on the forecast of the expected effects of the announced tariffs and other facts and conditions, the company anticipates that its cash flows may be insufficient to support working capital needs within the next twelve months and, relatedly, the company may not be able to comply with its minimum Qualified Cash covenant in future periods.
• 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.
• While management believes that the measures described in the above plan will be adequate to satisfy its liquidity requirements, there can be no assurance that management's liquidity plan will be successfully implemented, the company's lenders will agree to waive, modify and/or amend the maximum Net Leverage Ratio and minimum Fixed Charge Coverage Ratio covenants for the periods of forecasted covenant noncompliance, or that the Credit Agreement can be refinanced before its maturity date, which all raise 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.

Industry Context

The company operates in a highly competitive pop culture consumer products industry characterized by low barriers to entry and rapid shifts in consumer preferences. The broader retail environment is challenging, with macroeconomic uncertainty, increased tariffs, and inflationary pressures impacting consumer discretionary spending and retailer inventory management. The shift towards digital products and streaming content also poses a risk to demand for physical collectibles. The emergence of new competitors, including one founded by the company's former CEO, intensifies the competitive landscape. The digital assets market, including NFTs, remains nascent and highly uncertain, with evolving regulatory frameworks and extreme price volatility.

Comparison to Industry Standards

• The filing does not provide specific comparable company or project data to assess results against global benchmarks. However, the significant decline in net sales and gross margin, coupled with a shift to substantial net loss, indicates performance well below healthy industry standards for consumer product companies.
• The expressed 'substantial doubt about our ability to continue as a going concern' and forecasted non-compliance with debt covenants are critical indicators of severe financial distress, which is a significant deviation from the financial health typically expected of publicly traded companies in the consumer goods sector.
• The increase in inventory reserves and the negative shift in cash flow from operations suggest challenges in inventory management and operational efficiency compared to industry best practices, especially in a volatile retail environment.

Management Changes

Corporate Governance

Legal Proceedings

• The 'In re Funko, Inc. Securities Litigation' class action, alleging materially misleading statements in IPO documents, was preliminarily settled for $14.75 million on February 12, 2025. The settlement was paid by the company's insurance policies on February 25, 2025, and the litigation was dismissed with final approval on June 6, 2025.
• The 'Shumacher v. Mariotti, et al.' putative class action, alleging breach of fiduciary duties related to the company's Up-C structure, had a motion to dismiss denied on December 18, 2023. Discovery is currently ongoing.
• The 'Studen v. Funko, Inc., et al.' putative class action, alleging misleading statements regarding an ERP system upgrade and distribution center relocation, was dismissed with prejudice by the District Court on July 8, 2024, after plaintiffs chose not to amend their complaint. Plaintiffs filed a Notice of Appeal to the Ninth Circuit on August 6, 2024, and oral argument was held on May 23, 2025, with a decision pending.
• A former employee filed a putative class action in San Diego Superior Court on April 12, 2024, alleging various wage and hour violations. An immaterial monetary settlement was reached on May 20, 2025, with final court approval and payment 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 from certain redemptions/exchanges of FAH, LLC common units. The estimated gross outstanding balance of the TRA liability was $102.8 million as of June 30, 2025.
• TCG (TCG 3.0 Fuji, LP) has significant influence over the company, including director designation rights and approval rights over certain transactions, as long as it maintains specific ownership thresholds of Class A common stock.
• The company's amended and restated certificate of incorporation provides that the doctrine of corporate opportunity does not apply to any director or stockholder not employed by the company or its subsidiaries, allowing them to pursue competing businesses.

Stakeholder Impact

• **Shareholders**: Face significant dilution risk from potential future equity issuances for capital raises. The 'substantial doubt about going concern' and declining financial performance pose a severe risk to stock price and investment value. The strategic alternatives review process introduces uncertainty regarding future ownership and value realization.
• **Employees**: The company's cost-cutting measures, including potential furloughs or layoffs, could negatively impact employee morale and corporate culture. The ongoing material weaknesses in internal controls may also affect employee processes and responsibilities.
• **Customers (Retailers & Consumers)**: Retailers are reducing purchases and canceling orders due to macroeconomic uncertainty and tariffs, impacting the company's sales. Consumers face increased prices for Funko products due to tariffs, potentially reducing demand. The company's ability to consistently deliver popular products is crucial for maintaining customer interest.
• **Suppliers/Manufacturers**: The company's reliance on third-party manufacturers, particularly in Vietnam, China, and Mexico, exposes them to risks from tariff changes and supply chain disruptions. The company's financial difficulties could impact its ability to fulfill commitments to suppliers.
• **Creditors**: The company's forecasted non-compliance with debt covenants and the need for refinancing or additional capital raise indicate increased risk for creditors. The Fourth Amendment provides temporary waivers but underscores the underlying financial fragility.

Next Steps

• Continue to monitor commercial pricing strategy.
• Work with current and potential sourcing partners to mitigate increasing costs, including shifting certain manufacturing out of China.
• Decrease activity level and capital expenditures further if necessary and consistent with existing contractual commitments.
• Gain positive cash-inflow from operating activities through continuous overhead cost reductions, increased sales of higher margin products, and working capital management (including timing of accounts receivable collections).
• Pursue strategies to grow international markets not impacted by tariffs.
• Raise additional cash through the issuance of equity or debt.
• Assess potential amendments, including additional covenant relief, 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.
• Await decision on the appeal in the 'Studen v. Funko, Inc., et al.' lawsuit from the United States Court of Appeals for the Ninth Circuit.
• Await final court approval and payment of the former employee wage and hour class action settlement in early 2026.
• Evaluate the impact of the 'One Big Beautiful Bill Act of 2025' on financial statements, including deferred tax balances and the effective tax rate.

Key Dates

Recommendation

The filing reveals a company in severe financial distress, explicitly stating 'substantial doubt about our ability to continue as a going concern.' This is the most critical red flag for investors. The company has experienced a dramatic shift from profitability to significant losses, coupled with a sharp decline in sales and gross margin. Cash flow from operations has turned negative, and working capital has deteriorated substantially. While the company secured temporary waivers for debt covenants, it forecasts future non-compliance and acknowledges the need for immediate capital infusion or debt refinancing, with no guarantee of favorable terms or success. The initiation of a strategic alternatives review, including a potential sale, further underscores the precarious situation. Given these compounding negative factors and the high uncertainty surrounding its future viability, a seasoned investor would likely recommend a strong sell.

Keywords

Pop Culture, Collectibles, Funko, Loungefly, SEC Filing, 10-Q, Financial Results, Net Loss, Sales Decline, Going Concern, Debt Covenants, Refinancing, Strategic Alternatives, Tariffs, Inventory, Gross Margin, Liquidity, Retail Industry, Intellectual Property, Supply Chain, Corporate Governance, Legal Proceedings, FNKO