10-K: Funko's 2024 10-K Filing: Revenue Declines Amidst Ongoing Remediation Efforts

Funko's 2024 annual report reveals a decrease in net sales and ongoing efforts to remediate material weaknesses in internal control over financial reporting.

Summary

• Funko's net sales decreased by 4.2% to $1.05 billion in 2024, compared to $1.10 billion in 2023.
• The company reported a net loss of $15.1 million for 2024, a significant improvement from the $164.4 million net loss in 2023.
• Sales in the United States decreased by 9.7%, while sales in Europe increased by 5.7% and other international locations increased by 16.8%.
• Core Collectible branded products saw a slight increase in sales, while Loungefly branded products experienced a decrease.
• Gross margin increased to 41.4% in 2024 from 30.4% in 2023, primarily due to non-recurring costs in 2023.
• The company is actively working to remediate material weaknesses in its internal control over financial reporting, with efforts expected to continue throughout fiscal year 2025.
• As of December 31, 2024, Funko had $172.2 million of indebtedness outstanding under its Credit Facilities.
• The company does not anticipate paying any cash dividends on its Class A common stock in the foreseeable future.

Sentiment

Score: 6

Explanation: The document presents a mixed sentiment. While the company experienced a decrease in net sales, it also significantly reduced its net loss and improved its gross margin. Ongoing efforts to remediate internal control weaknesses are a positive sign, but the presence of these weaknesses remains a concern.

Positives

• Net loss significantly decreased from $164.4 million in 2023 to $15.1 million in 2024.
• Gross margin increased from 30.4% in 2023 to 41.4% in 2024.
• Sales in Europe and other international locations increased.
• The company is actively working to remediate material weaknesses in its internal control over financial reporting.

Negatives

• Net sales decreased by 4.2% to $1.05 billion in 2024.
• Sales in the United States decreased by 9.7%.
• Loungefly branded products experienced a decrease in sales.
• The company identified material weaknesses in its internal control over financial reporting.

Risks

• The company's ability to execute its business strategy is subject to various factors, including changing consumer preferences and macroeconomic pressures.
• Failure to manage inventory effectively could lead to insufficient stock or excess inventory.
• The company's business is dependent on license agreements, which are typically short-term and not automatically renewable.
• Global and regional economic downturns could negatively impact consumer spending and the financial health of retail customers.
• The industry is highly competitive, with low barriers to entry and increasing competition for shelf space.
• The company's gross margin may fluctuate over time due to changes in product mix, costs, and price competition.
• The company's success is dependent on content development and creation by third parties.
• The company's operating results may fluctuate due to the seasonality of its business and the timing and popularity of new product releases.
• The company's use of third-party manufacturers presents risks to its business, including potential disruptions and non-compliance with regulations.
• The company is subject to various government regulations, and violation of these regulations could subject the company to sanctions.
• The company's e-commerce business is subject to numerous risks, including increasing regulation and potential negative impacts on relationships with retail customers.
• The company could be subject to future product liability suits or product recalls.
• The company is currently subject to securities class action and derivative litigation and may be subject to similar or other litigation in the future.
• The company may not realize the anticipated benefits of acquisitions or investments.
• Use of social media may materially and adversely affect the company's reputation or subject the company to fines or other penalties.
• Failure to successfully operate the company's information systems and implement new technology effectively could disrupt the company's business or reduce its sales or profitability.
• The company's indebtedness could adversely affect its financial health and competitive position.
• The company may not be able to secure additional financing on favorable terms, or at all, to meet its future capital needs.
• TCG has significant influence over the company, and its interests may conflict with the interests of the company's other stockholders.
• The company's organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the TRA Parties that will not benefit Class A common stockholders to the same extent as it will benefit the TRA Parties.
• There are risks associated with the ownership of the company's Class A common stock including, but not limited to, potential dilution by future issuances and volatility in the price of the company's Class A common stock.

Future Outlook

The company expects to continue to invest in the development of a domestic enterprise resource planning system, warehouse management systems, additional platforms to support its direct-to-consumer experience, and capital build out of new leased warehouse and office spaces.

Management Comments

• We are building out our sports, music and video game fandoms and diversifying our offering with personalized products, such as Pop! Yourself, micro collectibles and blind boxes containing mystery figures.
• We also intend to continue licensing content that will allow us to capitalize on the popularity of current releases across movies, TV shows, video games, and other content types, and to leverage those licenses across a broader array of products and expanded distribution to reach new consumers.
• We have the ability to leverage evergreen or back catalog content by creating fun, whimsical and nostalgic programs to be sold at retail that resonate with fans.

Industry Context

The document highlights the competitive nature of the pop culture consumer products industry, with low barriers to entry and increasing competition for shelf space. The company competes with toy companies and smaller domestic and foreign collectible product designers and manufacturers.

Comparison to Industry Standards

• The document does not provide a direct comparison to industry standards.
• However, it mentions that the company competes with toy companies, some of which have substantially more resources, stronger name recognition, longer operating histories, and greater economies of scale.
• The document also notes that certain licensors have reserved the rights to manufacture, distribute and sell similar or identical products to those Funko designs and sells, potentially at lower prices.

Management Changes

Legal Proceedings

• The company is currently subject to securities class action and derivative litigation and may be subject to similar or other litigation in the future.
• The company reached a non-monetary settlement in principle in In re Funko, Inc. Derivative Litigation, Smith v. Mariotti, and Fletcher v. Mariotti et al. and the actions were stayed pending finalization of the settlement.
• The claims in the Silverberg v. Mariotti, et al. , litigation were released as a result of the settlement described above.
• On October 21, 2024, the parties agreed to a settlement in principle, and on October 29, 2024 notified the Court of a proposed class settlement.
• On April 12, 2024, a former employee of the Company filed a putative class action in San Diego Superior Court, seeking to represent all non-exempt workers of the Company in the State of California.

Related Party Transactions

• The company sells products to Forbidden Planet, a U.K. retailer through its wholly owned subsidiary Funko UK, Ltd. One of the investors in Forbidden Planet is an employee of Funko UK, Ltd. and an executive officer.

Stakeholder Impact

• Shareholders may be impacted by the company's financial performance, including the decrease in net sales and the ongoing remediation efforts for internal control weaknesses.
• Employees may be impacted by changes in management and potential cost-cutting measures.
• Customers may be impacted by changes in product offerings and pricing.
• Suppliers may be impacted by changes in the company's sourcing and manufacturing operations.

Next Steps

• The company plans to continue its remediation efforts for material weaknesses in internal control over financial reporting throughout fiscal year 2025.
• The company intends to continue licensing content to capitalize on current releases and leverage licenses across a broader array of products and expanded distribution.
• The company expects to continue to invest in the development of a domestic enterprise resource planning system, warehouse management systems, additional platforms to support its direct-to-consumer experience, and capital build out of new leased warehouse and office spaces.

Key Dates