Top toy and collectible brand faces Chapter 11 bankruptcy

It’s hard to know when a popular collectible has staying power or it’s a fad.

There were many people, for example, who thought that Beanie Babies were a good long/term investment. It turned out that, like Cabbage Patch Kids in the 1980s, that the collectible stuffed animals had a short run and then people lost interest.

There are other collectibles like card games Pokémon and Magic: The Gathering that have retained popularity for decades.

Because those cards are tied to actual games with loyal player bases, many cards see their value increase. There’s no guarantee, of course, but some collectibles have a much better history than others.

For a few years, Funko seemed like its collective figures would be a long-term play. They appealed to collectors of all ages and could be adapted to everything from cartoon characters to athletes and actors.

Over the past two years, however, the company has faced diminishing demand and a decline in its number of hit products.

Funko faces a financial crisis

Funko's 10-Q filing with the SEC made it clear that breaching the terms of its credit agreement could push it to file a Chapter 11, or even a Chapter 7 bankruptcy.

"If an event of default occurs and is not cured or waived, the Required Lenders (as defined in the Credit Agreement) could elect to declare all amounts outstanding under the Credit Agreement immediately due and payable and exercise other remedies as set forth in the Credit Agreement. In addition, the Required Lenders would have the right to proceed against the collateral pledged to them, which includes substantially all of the Company’s assets," it shared.

Investigative reporter Gregory Zuckerman shared what this means for the company in simple terms.

“'Substantial doubt' wording is rare, and serious. It means that auditors and management cannot currently prove that liquidity will be adequate in the next 12 months without further steps. In plain English, Funko needs to perform a fix — pronto — by trimming costs further, reducing its debt load, or boosting sales enough to generate the cash it requires and satisfy lenders," he wrote.

Comics Beat explained the business conditions that have led to this situation.

"Funko Pops run hot and cold with consumers, with some adoring the simple design and others hating them. But with a relatively low price tag and infinite customizability, the figurines became one of the most ubiquitous products in all of retail, showing up in most major retail stores throughout the 2010s and 2020s," the website shared.

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That situation has gotten worse as demand has shrunk.

"Over the last few years, though, it seems like more and more dead stock and fewer and fewer big hits. This year, for instance, Funko is seeing big demand for KPop Demon Hunters Pops, but that’s about the only bright spot in their current situation," it added.

Funko going concern key details

• Funko stated in its Q3 filing that there is “substantial doubt” about its ability to continue as a going concern for the next 12 months.
• The company expects to breach debt-covenants by December 31 given current business conditions.
• Funko’s total current liabilities jumped 50 % year-over-year to about $457.4 million.
• Net sales in Q3 were down more than 14 % vs prior year ($251 million) and net income plunged almost 80 % to S$948,000.
• The company is not forecast to have sufficient cash reserves to fully repay its credit agreement loans maturing in September 2026; it has engaged Moelis & Company as financial advisor for refinancing.
• Funko’s management links the liquidity concerns to announced tariffs, weakening sales, and “other facts and conditions” that may impair working-capital support.
• Despite being in compliance earlier (when it first issued a going-concern warning in May), conditions have since deteriorated.
  Source: Funko SEC 10-Q