Funko(FNKO) - 2023 Q1 - Quarterly Report

Part I – FINANCIAL INFORMATION This section provides Funko, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the three months ended March 31, 2023 and 2022, along with disclosures on market risk and internal controls Item 1. Financial Statements This section presents Funko, Inc.'s unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022, including statements of operations, comprehensive (loss) income, balance sheets, and cash flows, with detailed notes on accounting policies and other financial aspects Condensed Consolidated Statements of Operations (unaudited) This table presents the unaudited condensed consolidated statements of operations for Funko, Inc., detailing net sales, cost of sales, operating expenses, and net (loss) income for the three months ended March 31, 2023 and 2022 | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $251,878 | $308,343 | | Cost of sales | $202,303 | $199,649 | | Operating expenses | $316,340 | $288,540 | | (Loss) income from operations | $(64,462) | $19,803 | | Net (loss) income | $(61,144) | $14,518 | | Net (loss) income attributable to Funko, Inc. | $(55,311) | $9,882 | | Basic (Loss) Earnings per share of Class A common stock | $(1.17) | $0.25 | | Diluted (Loss) Earnings per share of Class A common stock | $(1.17) | $0.23 | Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited) This table outlines Funko, Inc.'s unaudited condensed consolidated statements of comprehensive (loss) income, including net (loss) income and foreign currency translation adjustments for the three months ended March 31, 2023 and 2022 | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income | $(61,144) | $14,518 | | Foreign currency translation (loss) gain, net of tax effect | $1,054 | $(1,282) | | Comprehensive (loss) income | $(60,090) | $13,236 | | Comprehensive (loss) income attributable to Funko, Inc. | $(54,373) | $8,946 | Condensed Consolidated Balance Sheets (unaudited) This table provides Funko, Inc.'s unaudited condensed consolidated balance sheets, detailing assets, liabilities, and stockholders' equity as of March 31, 2023, and December 31, 2022 | Metric (in thousands of dollars) | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $34,797 | $19,200 | | Inventory | $191,558 | $246,429 | | Total current assets | $436,158 | $473,172 | | Total assets | $1,058,594 | $1,091,145 | | Line of credit | $141,000 | $70,000 | | Total current liabilities | $394,580 | $361,397 | | Total liabilities and stockholders' equity | $1,058,594 | $1,091,145 | Condensed Consolidated Statements of Cash Flows (unaudited) This table presents Funko, Inc.'s unaudited condensed consolidated statements of cash flows, summarizing cash activities from operations, investing, and financing for the three months ended March 31, 2023 and 2022 | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(30,270) | $(22,955) | | Net cash used in investing activities | $(17,787) | $(19,474) | | Net cash provided by (used in) financing activities | $63,509 | $(7,830) | | Net change in cash and cash equivalents | $15,597 | $(50,426) | | Cash and cash equivalents at end of period | $34,797 | $33,131 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed notes explaining Funko, Inc.'s organization, significant accounting policies, fair value measurements, debt, tax receivable agreement liabilities, commitments, contingencies, segments, income taxes, stockholders' equity, non-controlling interests, and earnings per share 1. Organization and Operations This note describes Funko, Inc.'s formation as a Delaware corporation for an IPO and its consolidation of FAH, LLC's financial results, reporting non-controlling interests - Funko, Inc. was formed as a Delaware corporation on April 21, 2017, to complete an IPO and related transactions, carrying on the business of Funko Acquisition Holdings, L.L.C. (FAH, LLC) and its subsidiaries[23] - The Company consolidates the financial results of FAH, LLC and reports a non-controlling interest representing the common units of FAH, LLC held by other owners[24] 2. Significant Accounting Policies This note details significant accounting policies, including a one-time inventory write-down recorded in Q1 2023 to improve warehouse efficiency - During the three months ended March 31, 2023, the Company recorded a one-time inventory write-down of $30.1 million, included in cost of sales, as part of an inventory reduction plan to improve U.S. warehouse operational efficiency[28] 3. Fair Value Measurements This note provides fair value measurements for crypto asset safeguarding liability, corresponding assets, and debt instruments as of March 31, 2023, and December 31, 2022 | Metric (in thousands of dollars) | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Crypto asset safeguarding liability and corresponding asset (Fair Value) | $16,600 | $11,300 | | Debt instruments (Fair Value) | $171,900 | $177,500 | | Debt instruments (Carrying Value) | $169,400 | $175,800 | 4. Debt This note details the Company's debt structure, including revolving credit, term loan, and equipment finance facilities, and outlines modifications to financial covenants and interest margins | Debt Type (in thousands of dollars) | March 31, 2023 | December 31, 2022 | | :----------------------- | :------------- | :---------------- | | Revolving Credit Facility | $141,000 | $70,000 | | Term Loan Facility | $153,000 | $157,500 | | Equipment Finance Loan | $18,879 | $20,000 | | Total term debt | $169,364 | $175,819 | - On February 28, 2023, Amendment No. 3 to the New Credit Agreement modified financial covenants, reduced the Revolving Credit Facility size from $215.0 million to $180.0 million (and $150.0 million by December 31, 2023), restricted draws, and increased interest margins during the Waiver Period (through December 31, 2023)[36] - As of March 31, 2023, the Company had $141.0 million outstanding under the New Revolving Credit Facility with no availability remaining, compared to $70.0 million outstanding and $145.0 million available as of December 31, 2022[40] 5. Liabilities under Tax Receivable Agreement This note details the liabilities under the Tax Receivable Agreement, including the beginning and ending balances and payments made | Metric (in thousands of dollars) | 2023 | 2022 | | :-------------------- | :-------- | :------- | | Beginning Balance | $109,187 | $82,884 | | Additional liabilities for exchanges | — | $2,672 | | Payments under tax receivable agreement | $(5) | — | | Ending balance | $109,182 | $85,556 | - As of March 31, 2023, the total obligation under the Tax Receivable Agreement was $109.2 million, with $9.6 million included in current liabilities[46] 6. Commitments and Contingencies This note discusses the Company's involvement in various legal proceedings, including securities class action and derivative lawsuits, and a contingent liability for potential customs duty underpayments - The Company is involved in various legal proceedings, including ongoing securities class action and derivative lawsuits, which could have an adverse effect on its financial position, results of operations, or cash flows[52][53][55][58][59][61] - A non-monetary settlement in principle has been reached for the consolidated derivative actions (In re Funko, Inc. Derivative Litigation, Smith v. Mariotti, and Fletcher, et al. v. Mariotti)[55] - The Company has recorded a contingent liability of $1.0 million related to potential penalties from U.S. Customs for historical underpayments of customs duties by its subsidiary, Loungefly[57][222] 7. Segments This note clarifies that the Company operates as a single segment and provides a breakdown of net sales by product category and geographical region - The Company operates as a single segment, with financial performance reviewed at a consolidated level[63] Product Category (% of sales) | Product Category | Three Months Ended March 31, 2023 (% of sales) | Three Months Ended March 31, 2022 (% of sales) | | :--------------- | :--------------------------------------------- | :--------------------------------------------- | | Core Collectible | 72.9 % | 77.8 % | | Loungefly | 20.7 % | 16.2 % | | Other | 6.4 % | 6.0 % | Geographical Net Sales (in thousands of dollars) | Geographical Net Sales (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | United States | $177,785 | $232,165 | | Europe | $59,336 | $57,057 | | Other International | $14,757 | $19,121 | | Total net sales | $251,878 | $308,343 | 8. Income Taxes This note presents the income tax (benefit) expense and effective tax rate for the three months ended March 31, 2023 and 2022, explaining the factors influencing the effective tax rate | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Income tax (benefit) expense | $(10,320) | $3,678 | | Effective tax rate | 14.4% | N/A | - The effective tax rate for Q1 2023 was 14.4%, lower than the statutory rate of 21% primarily due to foreign income taxes and the portion of FAH, LLC's earnings attributable to non-controlling interests[66] 9. Stockholders' Equity This note provides key metrics related to stockholders' equity, including total equity, retained earnings, and net (loss) income attributable to Funko, Inc. | Metric (in thousands of dollars) | March 31, 2023 | March 31, 2022 | | :-------------------- | :------------- | :------------- | | Total stockholders' equity | $333,329 | $409,748 | | Retained earnings (Ending balance) | $4,704 | $77,932 | | Net (loss) income attributable to Funko, Inc. | $(55,311) | $9,882 | 10. Non-controlling interests This note details Funko, Inc.'s economic interest in FAH, LLC as of March 31, 2023, and December 31, 2022 - As of March 31, 2023, Funko, Inc. owned 91.4% economic interest in FAH, LLC, down from 91.6% at December 31, 2022[72] 11. Earnings per Share This note presents basic and diluted earnings per share for Funko, Inc., along with the weighted-average shares outstanding and details on excluded anti-dilutive securities | Metric (in thousands, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income attributable to Funko, Inc. | $(55,311) | $9,882 | | Weighted-average shares of Class A common stock outstanding — basic | 47,247,676 | 40,323,886 | | Weighted-average shares of Class A common stock outstanding — diluted | 47,247,676 | 42,528,956 | | (Loss) earnings per share of Class A common stock — basic | $(1.17) | $0.25 | | (Loss) earnings per share of Class A common stock — diluted | $(1.17) | $0.23 | - For Q1 2023, 10.5 million potentially dilutive securities were excluded from diluted EPS computation as their effect would have been anti-dilutive, including 4.4 million common units of FAH, LLC[76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Funko's financial condition and results of operations for the three months ended March 31, 2023, compared to the same period in 2022, covering key performance indicators, revenue, expenses, non-GAAP measures, liquidity, capital resources, and seasonality Overview This overview describes Funko as a leading pop culture lifestyle brand operating in a challenging retail environment with slowed restocking and prioritized lower inventory levels - Funko is a leading pop culture lifestyle brand, creating licensed consumer products across various categories, with approximately 29% of net sales generated outside the United States[81][82] - The Company is operating in a challenging retail environment with slowed post-holiday restocking and prioritized lower inventory levels, impacting net sales, gross margin, and net income, a trend expected to continue into Q2[83] Key Performance Indicators This table presents key performance indicators for Funko, Inc., including net sales, net (loss) income, EBITDA, and Adjusted EBITDA for the three months ended March 31, 2023 and 2022 | Metric (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $251,878 | $308,343 | | Net (loss) income | $(61,144) | $14,518 | | EBITDA | $(51,801) | $29,877 | | Adjusted EBITDA | $(14,014) | $36,253 | Results of Operations This section provides a detailed analysis of Funko, Inc.'s financial performance, examining net sales, cost of sales, gross margin, operating expenses, interest expense, and net (loss) income for the three months ended March 31, 2023 and 2022 Net Sales This section analyzes the decrease in net sales, attributing it primarily to reduced sales to specialty retailers, e-commerce sites, and distributors, and provides a breakdown by geography and product category Net Sales Performance | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Period over Period Change (Dollar) | Period over Period Change (Percentage) | | :----- | :-------------------------------- | :-------------------------------- | :--------------------------------- | :------------------------------------- | | Net sales | $251,878 | $308,343 | $(56,465) | (18.3)% | - The decrease in net sales was primarily due to decreased sales to specialty retailers, e-commerce sites, and distributors[88] - Active properties decreased by 3.5% to 736, and average net sales per active property decreased by 15.3% year-over-year[89] Geographical Net Sales (in millions of dollars) | Geographical Net Sales (in millions of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | United States | $177.8 | $232.2 | (23.4)% | | Europe | $59.3 | $57.1 | 4.0% | | Other International | $14.8 | $19.1 | (22.8)% | Branded Category Net Sales (in millions of dollars) | Branded Category Net Sales (in millions of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Core Collectible | $183.5 | $239.6 | (23.4)% | | Loungefly | $52.2 | $50.1 | 4.1% | | Other | $16.2 | $18.6 | (12.7)% | Cost of Sales and Gross Margin (exclusive of depreciation and amortization) This section details the cost of sales and gross margin, highlighting a significant decrease in gross margin primarily due to a one-time inventory write-down | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | | Cost of sales (exclusive of depreciation and amortization) | $202.3 million | $199.6 million | 1.3% | | Gross margin (exclusive of depreciation and amortization) | 19.7% | 35.3% | (15.6) pp | - The decrease in gross margin was primarily driven by a one-time inventory write-down of $30.1 million[93] Selling, General, and Administrative Expenses This section analyzes the increase in selling, general, and administrative expenses, attributing it to higher personnel costs, facilities and rent, and advertising and marketing | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | | SG&A expenses | $100.1 million | $78.4 million | 27.6% | | SG&A as % of net sales | 39.7% | 25.4% | 14.3 pp | - The increase in SG&A was driven by a $12.8 million increase in personnel costs, a $3.6 million increase in facilities and rent, and a $2.5 million increase in advertising and marketing costs[94] Depreciation and Amortization This section presents the depreciation and amortization expenses for the three months ended March 31, 2023 and 2022 | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | | Depreciation and amortization | $14.0 million | $10.5 million | 33.5% | Interest Expense, Net This section details the increase in net interest expense, primarily due to a higher average balance on outstanding debt, including the New Revolving Credit Facility | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | | Interest expense, net | $5.7 million | $1.2 million | 370.0% | - The increase in interest expense was primarily due to a higher average balance on debt outstanding, including $141.0 million on the New Revolving Credit Facility in Q1 2023 compared to no outstanding balance in Q1 2022[96] Loss on debt extinguishment This section explains the $0.5 million loss on debt extinguishment recorded in Q1 2023 due to the write-off of unamortized debt financing fees from a February 2023 refinancing - A $0.5 million loss on debt extinguishment was recorded for Q1 2023 due to the write-off of unamortized debt financing fees from the February 2023 debt refinancing[97] Other expense, net This section presents the net other expense, primarily related to foreign currency gains and losses | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----- | :-------------------------------- | :-------------------------------- | | Other expense, net | $0.8 million | $0.4 million | - Other expense, net was primarily related to foreign currency gains and losses[98] Income tax (benefit) expense This section details the income tax (benefit) expense, noting the shift from expense to benefit due to a decrease in income before income taxes | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----- | :-------------------------------- | :-------------------------------- | | Income tax (benefit) expense | $(10.3) million | $3.7 million | - The shift from income tax expense to benefit was related to a decrease in income before income taxes[99] Net (loss) income This section presents the net (loss) income, attributing the decrease primarily to reduced net sales and a significant one-time inventory write-down | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----- | :-------------------------------- | :-------------------------------- | | Net (loss) income | $(61.1) million | $14.5 million | - The decrease in net income was primarily due to decreased net sales and a $30.1 million one-time inventory write-down[100] Non-GAAP Financial Measures This section explains the Company's use of non-GAAP financial measures (EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, and Adjusted (Loss) Earnings per Diluted Share) to evaluate performance and make strategic decisions - The Company uses non-GAAP financial measures (EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, and Adjusted (Loss) Earnings per Diluted Share) to evaluate performance, develop forecasts, and make strategic decisions, as they remove the impact of items not directly resulting from core operations[102][103][105] Non-GAAP Financial Metrics | Metric (in thousands of dollars, except per share data) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------- | :-------------------------------- | :-------------------------------- | | Adjusted net (loss) income | $(25,258) | $18,429 | | Adjusted weighted-average shares of Class A stock outstanding - diluted | 51,612 | 54,132 | | Adjusted (loss) earnings per diluted share | $(0.49) | $0.34 | | EBITDA | $(51,801) | $29,877 | | Adjusted EBITDA | $(14,014) | $36,253 | Liquidity and Financial Condition This section discusses Funko's liquidity and capital requirements, including working capital, inventory management, capital expenditures, and debt service, and assesses the sufficiency of its liquidity sources Introduction This introduction outlines Funko's primary liquidity and capital requirements, including working capital, inventory management, capital expenditures, and debt service, and assesses the sufficiency of its liquidity sources - Primary liquidity and capital requirements include working capital, inventory management, capital expenditures, debt service, and general corporate needs[109] - The Company believes its liquidity sources will be sufficient for continued operations and growth for at least the next 12 months, but cannot assure sufficient cash flows or additional financing on favorable terms[110][111] Liquidity and Capital Resources This section details the Company's cash flow activities, highlighting changes in operating, investing, and financing cash flows, and the impact of working capital and debt borrowings Cash Flow Activity (in thousands of dollars) | Cash Flow Activity (in thousands of dollars) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(30,270) | $(22,955) | | Net cash used in investing activities | $(17,787) | $(19,474) | | Net cash provided by (used in) financing activities | $63,509 | $(7,830) | | Net change in cash and cash equivalents | $15,597 | $(50,426) | - The increase in net cash used in operating activities for Q1 2023 was primarily due to a decrease in net income, partially offset by favorable changes in working capital, including a $51.9 million decrease in inventory[113] - Net cash provided by financing activities in Q1 2023 was $63.5 million, mainly from $71.0 million in borrowings on the New Revolving Line of Credit, offset by debt payments[116] Credit Facilities This section describes the modifications to the New Credit Agreement, including changes to financial covenants, revolving credit facility size, draw restrictions, and interest margins, and details the Company's outstanding indebtedness and restrictive covenants - On February 28, 2023, Amendment No. 3 to the New Credit Agreement modified financial covenants, reduced the New Revolving Credit Facility size, restricted draws, and increased interest margins during the Waiver Period (through December 31, 2023)[118] - As of March 31, 2023, the Company had $291.5 million of indebtedness outstanding under its New Credit Facilities, with no availability remaining under the New Revolving Credit Facility[125] - The New Credit Agreement contains restrictive covenants that limit the Company's ability to incur additional debt, make investments, pay dividends, and other activities, with further restrictions during the Waiver Period[122][123][258][259] Form S-3 Registration Statement This section notes the effective Form S-3 shelf registration statement, allowing the Company to offer and sell up to $100.0 million of various securities and certain selling stockholders to sell 17,318,008 shares of Class A common stock - A Form S-3 shelf registration statement, effective July 26, 2022, allows the Company to offer and sell up to $100.0 million of various securities and certain selling stockholders to sell 17,318,008 shares of Class A common stock[126][281] Future Sources and Uses of Liquidity This section outlines the Company's cash and working capital positions, identifying primary cash flow sources and future liquidity needs, including tax distributions, TRA payments, and capital expenditures Liquidity Metrics (in millions of dollars) | Metric (in millions of dollars) | March 31, 2023 | December 31, 2022 | | :------------------- | :------------- | :---------------- | | Cash and cash equivalents | $34.8 | $19.2 | | Working capital | $41.6 | $111.8 | - Primary sources of cash flows are operating activities and credit facilities; future liquidity needs include tax distributions, TRA payments, and capital expenditures for WMS and direct-to-consumer platforms[129][131] Seasonality This section discusses the historical seasonality of Funko's net sales, with over 50% occurring in the third and fourth quarters due to the holiday season, and notes that rapid growth may have masked its full effects - Historically, over 50% of net sales occur in the third and fourth quarters (August through November) due to the holiday season, making the first quarter the least profitable[132][195] - Rapid growth in recent years may have masked the full effects of seasonality, which could have a greater impact on future results[132][197] Critical Accounting Policies and Estimates This section identifies key accounting policies and estimates, including revenue recognition, sales allowances, royalties, inventory, goodwill, intangible assets, and income taxes, noting no significant changes since the 2022 Annual Report - Key accounting policies and estimates include revenue recognition, sales allowances, royalties, inventory, goodwill and intangible assets, and income taxes[134] - There have been no significant changes to critical accounting policies and estimates since the Annual Report on Form 10-K for 2022[135] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risks from changes in interest rates, foreign currency, and inflation, arising from normal business operations, with no material changes since the previous annual report - The Company is exposed to market risk from changes in interest rates, foreign currency, and inflation, with no material changes from the prior year's disclosure[136] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2023, due to previously identified material weaknesses in internal control over financial reporting, with ongoing remediation efforts - As of March 31, 2023, disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting[139] - Remediation efforts include rigorous risk assessment, enhancing control design, improving user access management, reviewing changes to IT systems, and investing in training and hiring personnel[140] - Remediation is expected to continue throughout 2023, and material weaknesses will not be considered remediated until controls operate effectively for a sufficient period[140] Part II – OTHER INFORMATION This section provides additional information beyond the financial statements, including legal proceedings, risk factors, unregistered sales of equity securities, other information, and a list of exhibits Item 1. Legal Proceedings This section refers to Note 6, "Commitments and Contingencies - Legal Contingencies," for a detailed discussion of the Company's material legal proceedings - Material legal proceedings are discussed in Note 6 'Commitments and Contingencies - Legal Contingencies' of the unaudited condensed consolidated financial statements[142] Item 1A. Risk Factors This section outlines significant risks and uncertainties that could materially affect Funko's business, financial condition, and results of operations, categorized into business, economic, market, operating, organizational structure, and ownership risks BUSINESS, ECONOMIC, MARKET AND OPERATING RISKS This section details risks related to Funko's business strategy, inventory management, growth, macroeconomic pressures, consumer preferences, reliance on licenses, competition, gross margin fluctuations, supply chain, international operations, and indebtedness - The Company's success depends on its ability to execute its business strategy, manage inventories effectively, and manage growth, which is challenged by macroeconomic pressures and rapid changes in consumer preferences[144][146][150] - Reliance on short-term license agreements (2-3 years) and concentration with top licensors (Disney, LucasFilm, Marvel collectively 41% of sales in Q1 2023) poses risks if agreements are terminated or renewed on less favorable terms[151][152] - Global and regional economic downturns, inflation, and changes in the retail industry (e.g., store closures, shifts to e-commerce) can negatively impact sales, gross margin, and profitability[157][160][164][165] - The industry is highly competitive with low barriers to entry, and the Company faces risks from competitors, potential loss of shelf space, and intense competition for licensed properties[169][170][172][173] - Gross margin is not sustainable and can fluctuate due to product mix, costs, price competition, and the $30.1 million inventory write-down in Q1 2023[174][175][180] - Dependence on third-party content development and rapidly shifting consumer tastes for pop culture products creates risks for product popularity and sales, especially for Core Collectibles (73% of Q1 2023 sales)[177][178][181] - Reliance on third-party manufacturers (Vietnam, China, Mexico) and concentration in certain geographic regions (Everett, WA; Buckeye, AZ) exposes the Company to supply chain disruptions, compliance risks, and adverse local conditions[198][200][205][207] - International operations are subject to currency fluctuations, political instability, trade restrictions (e.g., tariffs, Uyghur Forced Labor Prevention Act), and compliance with diverse laws[208][209][211][212] - The Company's indebtedness ($291.5 million as of March 31, 2023) and restrictive covenants in credit facilities could adversely affect financial health and competitive position, limiting operational flexibility and future financing options[254][257][258][259][260] ORGANIZATIONAL STRUCTURE RISKS This section addresses risks related to the Company's organizational structure, including TCG's significant influence, potential conflicts of interest, dependence on FAH, LLC distributions, and obligations under the Tax Receivable Agreement - TCG has significant influence over stockholder decisions and director appointments, with its interests potentially conflicting with other stockholders[262][263] - The Company's certificate of incorporation allows directors or stockholders not employed by the Company to pursue corporate opportunities for their own benefit, potentially leading to lost opportunities[266][267] - The Company's primary asset is its interest in FAH, LLC, and its ability to pay taxes and expenses (including TRA payments) depends on distributions from FAH, LLC, which may be subject to limitations[268][269] - The Tax Receivable Agreement (TRA) requires significant cash payments to TRA Parties for tax benefits, which may be accelerated in certain circumstances and could exceed actual tax benefits realized, without reimbursement for disallowed benefits[272][273][274][275] OWNERSHIP OF OUR CLASS A COMMON STOCK RISKS This section discusses risks associated with the ownership of Class A common stock, including potential dilution from common unit redemptions, the Company's dividend policy, and provisions in its charter and bylaws that may limit stockholder influence - Continuing Equity Owners have the right to redeem common units for Class A common stock or cash, potentially leading to future dilution and affecting stock price[277][279] - The Company does not intend to pay dividends on Class A common stock for the foreseeable future, retaining earnings for growth and debt repayment, which may limit investor returns[282] - Delaware law and certain provisions in the Company's charter and bylaws may prevent efforts by stockholders to change the direction or management of the company[283][285] - The Company has identified material weaknesses in internal control over financial reporting, which could lead to inaccurate financial reporting, investor confidence loss, and regulatory sanctions[291][292][293] GENERAL RISKS This section covers general risks, including foreign currency exchange rate fluctuations, cybersecurity incidents, asset impairment, stock price volatility, non-compliance with anti-corruption laws, and evolving privacy and data protection regulations - Changes in foreign currency exchange rates, particularly the depreciation of the euro and British pound sterling against the U.S. dollar, can significantly impact reported financial performance[295] - Compromise of electronic data, including proprietary and personal information, due to cyberattacks or security incidents, could disrupt operations, harm reputation, and lead to litigation or regulatory actions[296][299] - Impairment in the value of goodwill or other assets, resulting from adverse changes in valuation assumptions, could adversely affect financial condition and results of operations[300] - The Class A common stock price may be volatile due to various factors, including operating performance, market expectations, industry conditions, and general economic and political events[301][302][303][305] - Failure to comply with anti-corruption and anti-bribery laws (e.g., FCPA, U.K. Bribery Act) could result in substantial fines, penalties, and reputational damage, especially given operations in high-risk regions[307] - Non-compliance with evolving privacy and data protection laws (e.g., GDPR, CCPA, CPRA) could lead to significant costs, liabilities, litigation, and damage to reputation[309][310][311] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds were reported[312] Item 5. Other Information This section indicates that there is no other information to report for the period - No other information was reported[312] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including organizational documents, employment agreements, credit agreement amendments, certifications, and XBRL-related documents - Exhibits include Amended and Restated Certificate of Incorporation and Bylaws, Employment Agreements, Amendment No. 3 to Credit Agreement, CEO/CFO Certifications, and Inline XBRL documents[315][316][317] SIGNATURES This section confirms the report was signed on May 4, 2023, by Steve Nave, Chief Financial Officer and Chief Operating Officer - The report was signed on May 4, 2023, by Steve Nave, Chief Financial Officer and Chief Operating Officer[319]