Is the Party Over After Funko is Accused of Fun House Accounting?

If you have had a chance to research Funko’s prospectus before their IPO, you might of thought the earnings were too good to be true.  If you did, you weren’t the only one.  Today, the law firm of Kirby McInerney LLP announced that it was opening an investigation of Funko, Inc. (NASDAQ: FNKO) concerning the Company and its officers’ possible violations of federal securities laws.  If you are not aware, Funko commenced its IPO of 10,416,666 shares at a price of $12.00 per share on November 2, 2017.  On November 3, 2017, the day after the IPO, Funko shares closed at $7.00, more than 40% below the IPO price.  It was the worst opening day for an IPO in 17 years.  It’s kind of crazy to think that the underwriters initially wanted to open at $14-$16.  An article from Stephen Gandel over at BloombergGadfly gives you a great explanation of Funko’s “fun house accounting”.   

The article alleged that Funko’s reported annual earnings growth rate excluded costs and depreciation and grossly exaggerated the value of intellectual property holdings. It concluded that “just $7 million, or 10 percent, of Funko’s $69 million increase in adjusted… [earnings before interest, taxes, depreciation, and amortization] was from actual earnings growth. The other 90 percent came from higher costs that the company says investors should just ignore.”

You can read the whole article here.

Funko closed at $7.80 today, down another 1.89%

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