-- Results Exceed Expectations --
Funko, Inc. (Nasdaq: FNKO), a leading pop culture lifestyle
brand, today reported consolidated financial results for its third
quarter ended September 30, 2023.
Third Quarter Financial Results Summary: 2023 vs 2022
- Net sales were $312.9 million for the 2023 third quarter versus
$365.6 million for the 2022 third quarter
- Gross profit was $104.0 million, equal to gross margin of
33.2%, for the 2023 third quarter, which included $6.4 million of
charges related to factory purchase order cancellations, versus
35.0% for the 2022 third quarter
- SG&A expenses were $94.0 million for the 2023 third
quarter, which included $9.9 million of one-time expenses comprised
of $6.2 million primarily related to the termination of a lease
agreement and $3.7 million for severance and related charges. This
compares with $97.9 million for the 2022 third quarter, which
included $1.1 million of one-time relocation costs in connection
with the opening of a new warehouse and distribution facility in
Buckeye, Arizona
- Net loss was $15.0 million, or $0.31 per share, for the 2023
third quarter, versus net income of $9.6 million, or $0.19 per
diluted share, for the 2022 third quarter
- Adjusted net income* was $1.7 million, or $0.03 per diluted
share, for the 2023 third quarter compared with $15.1 million, or
$0.28 per diluted share, for the 2022 third quarter
- Adjusted EBITDA* was $25.4 million for the 2023 third quarter
compared with $35.7 million for the 2022 third quarter
“For the 2023 third quarter, net sales, adjusted net income and
adjusted EBITDA exceeded our expectations,” said Michael Lunsford,
Interim Chief Executive Officer of Funko. “Our solid overall
performance was driven by strong direct-to-consumer sales, which
were bolstered by the successful online launch of Pop! Yourself;
improved sales to several of our larger US and European wholesale
customers, due in part to growing sales of Bitty Pop!; and ongoing
efforts to significantly reduce costs and enhance efficiencies.
“We also made progress on our plan to focus on Funko’s core
products and reduce the number of product lines and complexity in
our business. In addition, we re-aligned our senior management team
to streamline decision making, to better collaborate and to improve
cross-functional communication throughout the organization.”
Operations
“During the third quarter, we continued to make progress on
improving operations and reducing costs,” said Steve Nave, Chief
Financial Officer and Chief Operating Officer. “As expected, our
gross margin increased and selling, general and administrative
expenses as a percentage of net sales decreased compared with the
second quarter of 2023. Both measures would have shown even more
improvement if not for certain non-recurring charges in the
quarter.
“We saw a partial cost savings benefit in the third quarter from
the previously announced workforce reduction of approximately 180
positions; we expect to see the full benefit beginning in our
current fourth quarter.”
Third Quarter 2023 Net Sales by Category and
Geography
The tables below show the breakdown of net sales on a brand
category and geographical basis (in thousands):
Three Months Ended September
30,
Period Over Period
Change
2023
2022
Dollar
Percentage
Core Collectible Brands
$
233,269
$
282,412
$
(49,143
)
(17.4
)%
Loungefly Brand
57,439
59,562
(2,123
)
(3.6
)%
Other Brands
22,236
23,633
(1,397
)
(5.9
)%
Total net sales
$
312,944
$
365,607
$
(52,663
)
(14.4
)%
Three Months Ended September
30,
Period Over Period
Change
2023
2022
Dollar
Percentage
Net sales by geography:
United States
$
208,895
$
262,316
$
(53,421
)
(20.4
)%
Europe
83,398
78,239
5,159
6.6
%
Other International
20,651
25,052
(4,401
)
(17.6
)%
Total net sales
$
312,944
$
365,607
$
(52,663
)
(14.4
)%
Balance Sheet Highlights - At September 30, 2023 vs December
31, 2022
- Total cash and cash equivalents were $31.9 million at September
30, 2023 versus $19.2 million at December 31, 2022
- Inventories were $162.1 million at September 30, 2023 versus
$246.4 million at December 31, 2022
- Total debt was $299.5 million at September 30, 2023 versus
$245.8 million at December 31, 2022. Total debt includes the amount
outstanding under the company's term loan facility, net of
unamortized discounts, revolving line of credit and the company's
equipment finance loan
Outlook for Fiscal 2023
Based on its current outlook, the company narrowed the net sales
range of its 2023 full-year outlook and provided guidance for its
2023 fourth quarter, as follows:
Current Outlook
Previous Outlook
2023 Full Year
Net Sales
$1.065 billion to $1.105 billion
$1.05 billion to $1.12 billion
Adjusted EBITDA*
$20 million to $30 million
$20 million to $30 million
2023 Fourth Quarter
Net sales
$260 million to $300 million
Gross margin %
Increasing sequentially from Q3
SG&A expense, in dollars
Decreasing sequentially from Q3
Adjusted net income (loss)*
($4.2) million to $2.8 million
Adjusted net income (loss) per share*
($0.08) to $0.05
Adjusted EBITDA*
$16 million to $26 million
*Adjusted net loss, adjusted net loss per diluted share and
adjusted EBITDA are non-GAAP financial measures. For a
reconciliation of historical adjusted net loss, adjusted loss per
diluted share, and adjusted EBITDA, to the most directly comparable
U.S. GAAP financial measures, please refer to the “Non-GAAP
Financial Measures” section of this press release. A reconciliation
of adjusted net loss, adjusted net loss per diluted share and
adjusted EBITDA outlook to the corresponding GAAP measure on a
forward-looking basis cannot be provided without unreasonable
efforts, as we are unable to provide reconciling information with
respect to certain items. However, for the fourth quarter of 2023
the Company expects equity-based compensation of approximately $4
million, depreciation and amortization of approximately $15 million
and interest expense of approximately $6 million. For the full year
2023 the Company expects equity-based compensation of approximately
$11 million, depreciation and amortization of approximately $60
million, interest expense of approximately $27 million, and
severance and restructuring expenses of approximately $12 million,
which includes the non-recurring lease exit and related costs taken
in Q3-2023, each of which is a reconciling item to net loss. See
"Use of Non-GAAP Financial Measures" and the attached
reconciliations for more information.
Conference Call and Webcast
The Company will host a conference call at 4:30 p.m. ET (1:30
p.m. PT) today, November 2, 2023, to further discuss its third
quarter results and business outlook. A live webcast and replay of
the event will be available on the Investor Relations section on
the Company’s website at investor.funko.com. The replay of the
webcast will be available for one year.
Use of Non-GAAP Financial Measures
This release contains references to non-GAAP financial measures,
including adjusted net income (loss), including per share amounts,
adjusted EBITDA, and adjusted EBITDA margin, which are financial
measures that are not prepared in conformity with United States
generally accepted accounting principles (U.S. GAAP). Management
uses these measures internally for evaluating its operating
performance, for planning purposes, including the preparation of
our annual operating budget and financials projections, and to
assess incentive compensation for our employees, and to evaluate
our capacity to expand our business. In addition, our senior
secured credit facilities use adjusted EBITDA to measure our
compliance with covenants such as senior leverage ratio. The
company's management believes that the presentation of non-GAAP
financial measures provides useful supplementary information
regarding operational performance, because it enhances an
investor's overall understanding of the financial results for the
company's core business. Additionally, it provides a basis for the
comparison of the financial results for the company's core business
between current, past and future periods as they remove the impact
of items not directly resulting from our core operations. The
company also believes that including Adjusted EBITDA and the other
non-GAAP financial measures presented in this release is
appropriate to provide additional information to investors and help
to compare against other companies in our industry. Non-GAAP
financial measures have limitations as analytical tools and should
be considered only as a supplement to, and not as a substitute for
or as a superior measure to, financial measures prepared in
accordance with U.S. GAAP. We caution investors that amounts
presented in accordance with our definitions of adjusted net income
(loss), including per share amounts, adjusted EBITDA and adjusted
EBITDA margin may not be comparable to similar measures disclosed
by our competitors, because not all companies and analysts
calculate these measures in the same manner.
Detailed reconciliations of non-GAAP financial measures to the
most directly comparable GAAP financial measures are included in
the financial tables following this release.
About Funko
Headquartered in Everett, Washington, Funko is a leading pop
culture lifestyle brand. Funko designs, sources and distributes
licensed pop culture products across multiple categories, including
vinyl figures, action toys, plush, apparel, housewares and
accessories for consumers who seek tangible ways to connect with
their favorite pop culture brands and characters. Learn more at
www.funko.com, and follow us on Twitter (@OriginalFunko) and
Instagram (@OriginalFunko).
Forward Looking Statements
This press release contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. All statements contained in this press release that do not
relate to matters of historical fact should be considered
forward-looking statements, including statements regarding our
anticipated financial results and financial position, the
underlying trends in our business, including retailer de-stocking,
inflation and macroeconomic trends, our potential for growth,
expectations regarding annualized cost savings and restructuring
initiatives; benefits from changes to our management team; and our
strategic growth priorities. These forward-looking statements are
based on management’s current expectations. These statements are
neither promises nor guarantees, but involve known and unknown
risks, uncertainties and other important factors that may cause our
actual results, performance or achievements to be materially
different from any future results, performance or achievements
expressed or implied by the forward-looking statements, including,
but not limited to, the following: our ability to execute our
business strategy; our ability to manage our inventories; our
ability maintain and realize the full value of our license
agreements; impacts from economic downturns; changes in the retail
industry and markets for our consumer products; our ability to
maintain our relationships with retail customers and distributors;
risks related to the impact of COVID-19 on our business, financial
results and financial condition; our ability to compete
effectively; fluctuations in our gross margin; our dependence on
content development and creation by third parties; the ongoing
level of popularity of our products with consumers; our ability to
develop and introduce products in a timely and cost-effective
manner; our ability to obtain, maintain and protect our
intellectual property rights or those of our licensors; potential
violations of the intellectual property rights of others; risks
associated with counterfeit versions of our products; our ability
to attract and retain qualified employees and maintain our
corporate culture; our use of third-party manufacturing; risks
associated with climate change; increased attention to
sustainability and environmental, social and governance
initiatives; geographic concentration of our operations; risks
associated with our international operations; changes in effective
tax rates or tax law; foreign currency exchange rate exposure; our
dependence on vendors and outsourcers; risks relating to government
regulation; risks relating to litigation, including products
liability claims and securities class action litigation; any
failure to successfully integrate or realize the anticipated
benefits of acquisitions or investments; future development and
acceptance of blockchain networks; risks associated with receiving
payments in digital assets; reputational risk resulting from our
e-commerce business and social media presence; risks relating to
our indebtedness, including our ability to comply with financial
and negative covenants under our Credit Agreement, as amended; our
ability to secure additional financing on favorable terms or at
all; the potential for our or our third party providers’ electronic
data or the electronic data of our customers to be compromised; the
influence of our significant stockholder, TCG, and the possibility
that TCG’s interests may conflict with the interests of our other
stockholders; risks relating to our organizational structure;
volatility in the price of our Class A common stock; and risks
associated with our internal control over financial reporting.
These and other important factors discussed under the caption “Risk
Factors” in our quarterly report on Form 10-Q for the quarter ended
September 30, 2023 and our other filings with the Securities and
Exchange Commission could cause actual results to differ materially
from those indicated by the forward-looking statements made in this
press release. Any such forward-looking statements represent
management’s estimates as of the date of this press release. While
we may elect to update such forward-looking statements at some
point in the future, we disclaim any obligation to do so, even if
subsequent events cause our views to change. These forward-looking
statements should not be relied upon as representing our views as
of any date subsequent to the date of this press release.
Funko, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Operations
(Unaudited)
Three Months Ended September
30,
Nine Months Ended September
30,
2023
2022
2023
2022
(In thousands, except per
share data)
Net sales
$
312,944
$
365,607
$
804,850
$
989,666
Cost of sales (exclusive of depreciation
and amortization shown separately below)
208,936
237,728
581,258
649,974
Selling, general, and administrative
expenses
93,992
97,930
279,685
259,043
Depreciation and amortization
15,465
12,555
44,334
34,509
Total operating expenses
318,393
348,213
905,277
943,526
(Loss) income from operations
(5,449
)
17,394
(100,427
)
46,140
Interest expense, net
7,601
2,977
20,551
5,854
Loss on debt extinguishment
—
—
494
—
Gain on tax receivable agreement
liability
—
—
(99,620
)
—
Other expense, net
98
926
519
1,758
(Loss) income before income taxes
(13,148
)
13,491
(22,371
)
38,528
Income tax expense (benefit)
3,076
2,342
130,859
(2,932
)
Net (loss) income
(16,224
)
11,149
(153,230
)
41,460
Less: net (loss) income attributable to
non-controlling interests
(1,215
)
1,519
(9,912
)
7,276
Net (loss) income attributable to Funko,
Inc.
$
(15,009
)
$
9,630
$
(143,318
)
$
34,184
(Loss) earnings per share of Class A
common stock:
Basic
$
(0.31
)
$
0.21
$
(3.01
)
$
0.78
Diluted
$
(0.31
)
$
0.19
$
(3.01
)
$
0.73
Weighted average shares of Class A common
stock outstanding:
Basic
48,237
46,874
47,641
43,670
Diluted
48,237
49,686
47,641
53,991
Funko, Inc. and
Subsidiaries
Condensed Consolidated Balance
Sheets
September 30, 2023
(Unaudited)
December 31,
2022
(In thousands, except per
share amounts)
Assets
Current assets:
Cash and cash equivalents
$
31,885
$
19,200
Accounts receivable, net
166,934
167,895
Inventory
162,062
246,429
Prepaid expenses and other current
assets
44,048
39,648
Total current assets
404,929
473,172
Property and equipment, net
95,389
102,232
Operating lease right-of-use assets
63,533
71,072
Goodwill
135,722
131,380
Intangible assets, net
171,261
181,284
Deferred tax asset, net of valuation
allowance
—
123,893
Other assets
9,209
8,112
Total assets
$
880,043
$
1,091,145
Liabilities and Stockholders’
Equity
Current liabilities:
Line of credit
$
141,000
$
70,000
Current portion of long-term debt, net of
unamortized discount
21,977
22,041
Current portion of operating lease
liabilities
17,866
18,904
Accounts payable
70,178
67,651
Income taxes payable
1,136
871
Accrued royalties
61,857
69,098
Accrued expenses and other current
liabilities
107,720
112,832
Total current liabilities
421,734
361,397
Long-term debt, net of unamortized
discount
136,539
153,778
Operating lease liabilities, net of
current portion
73,961
82,356
Deferred tax liability
385
382
Liabilities under tax receivable
agreement, net of current portion
—
99,620
Other long-term liabilities
4,658
3,923
Commitments and Contingencies
Stockholders’ equity:
Class A common stock, par value $0.0001
per share, 200,000 shares authorized; 48,727 and 47,192 shares
issued and outstanding as of September 30, 2023 and December 31,
2022, respectively
5
5
Class B common stock, par value $0.0001
per share, 50,000 shares authorized; 3,293 shares issued and
outstanding as of September 30, 2023 and December 31, 2022,
respectively
—
—
Additional paid-in-capital
318,782
310,807
Accumulated other comprehensive loss
(3,030
)
(2,603
)
(Accumulated deficit) retained
earnings
(83,303
)
60,015
Total stockholders’ equity attributable to
Funko, Inc.
232,454
368,224
Non-controlling interests
10,312
21,465
Total stockholders’ equity
242,766
389,689
Total liabilities and stockholders’
equity
$
880,043
$
1,091,145
Funko, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Cash Flows
(Unaudited)
Nine Months Ended September
30,
2023
2022
(In thousands)
Operating Activities
Net (loss) income
$
(153,230
)
$
41,460
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation, amortization and other
42,592
34,390
Equity-based compensation
7,521
11,999
Amortization of debt issuance costs and
debt discounts
944
670
Loss on debt extinguishment
494
—
Gain on tax receivable agreement liability
adjustment
(99,620
)
—
Deferred tax expense
123,206
—
Other
(69
)
7,539
Changes in operating assets and
liabilities:
Accounts receivable, net
1,314
(10,198
)
Inventory
84,797
(106,061
)
Prepaid expenses and other assets
8,244
(32,310
)
Accounts payable
2,536
32,349
Income taxes payable
268
(13,303
)
Accrued royalties
(7,240
)
10,942
Accrued expenses and other liabilities
(14,624
)
(42,159
)
Net cash used in operating activities
(2,867
)
(64,682
)
Investing Activities
Purchases of property and equipment
(30,861
)
(46,908
)
Acquisitions of businesses and related
intangible assets, net of cash acquired
(5,274
)
(13,967
)
Other
551
778
Net cash used in investing activities
(35,584
)
(60,097
)
Financing Activities
Borrowings on line of credit
71,000
90,000
Debt issuance costs
(1,957
)
(405
)
Payments of long-term debt
(16,911
)
(13,500
)
Distributions to Tax Receivable Agreement
Parties
(1,110
)
(10,507
)
Proceeds from exercise of equity-based
options
287
1,209
Net cash provided by financing
activities
51,309
66,797
Effect of exchange rates on cash and cash
equivalents
(173
)
(525
)
Net change in cash and cash
equivalents
12,685
(58,507
)
Cash and cash equivalents at beginning of
period
19,200
83,557
Cash and cash equivalents at end of
period
$
31,885
$
25,050
The following tables reconcile the Non-GAAP Financial Measures
to the most directly comparable U.S. GAAP financial performance
measure, which is net income, for the periods presented:
Three Months Ended September
30,
Nine Months Ended September
30,
2023
2022
2023
2022
(In thousands, except per
share data)
Net (loss) income attributable to Funko,
Inc.
$
(15,009
)
$
9,630
$
(143,318
)
$
34,184
Reallocation of net (loss) income
attributable to non-controlling interests from the assumed exchange
of common units of FAH, LLC for Class A common stock (1)
(1,215
)
1,519
(9,912
)
7,276
Equity-based compensation (2)
(916
)
4,677
7,521
11,999
Loss on extinguishment of debt (3)
—
—
494
—
Acquisition transaction costs and other
expenses (4)
5,467
—
6,921
2,850
Certain severance, relocation and related
costs (5)
3,703
1,070
5,784
8,203
Foreign currency transaction loss (6)
1,074
927
1,495
1,758
One-time inventory write-down (7)
—
—
30,084
—
Tax receivable agreement liability
adjustments (8)
—
—
(99,620
)
—
One-time disposal costs for unfinished
goods held at offshore factories (9)
—
—
2,404
—
One-time disposal costs for finished goods
held at offshore factories (10)
6,148
—
6,148
Income tax expense (benefit) (11)
2,494
(2,699
)
146,144
(18,767
)
Adjusted net income (loss)
$
1,746
$
15,124
$
(45,855
)
$
47,503
Adjusted net income (loss) margin (12)
0.6
%
4.1
%
(5.7
)%
4.8
%
Weighted-average shares of Class A common
stock outstanding-basic
48,237
46,874
47,641
43,670
Equity-based compensation awards and
common units of FAH, LLC that are convertible into Class A common
stock
4,443
7,150
4,430
10,321
Adjusted weighted-average shares of Class
A stock outstanding - diluted
52,680
54,024
52,071
53,991
Adjusted earnings (loss) per diluted
share
$
0.03
$
0.28
$
(0.88
)
$
0.88
Three Months Ended September
30,
Nine Months Ended September
30,
2023
2022
2023
2022
(amounts in thousands)
Net (loss) income
$
(16,224
)
$
11,149
$
(153,230
)
$
41,460
Interest expense, net
7,601
2,977
20,551
5,854
Income tax expense (benefit)
3,076
2,342
130,859
(2,932
)
Depreciation and amortization
15,465
12,555
44,334
34,509
EBITDA
$
9,918
$
29,023
$
42,514
$
78,891
Adjustments:
Equity-based compensation (2)
(916
)
4,677
7,521
11,999
Loss on extinguishment of debt (3)
—
—
494
—
Acquisition transaction costs and other
expenses (4)
5,467
—
6,921
2,850
Certain severance, relocation and related
costs (5)
3,703
1,070
5,784
8,203
Foreign currency transaction loss (6)
1,074
927
1,495
1,758
One-time inventory write-down (7)
—
—
30,084
—
Tax receivable agreement liability
adjustments (8)
—
—
(99,620
)
—
One-time disposal costs for unfinished
goods held at offshore factories (9)
—
—
2,404
—
One-time disposal costs for finished goods
held at offshore factories (10)
6,148
—
6,148
Adjusted EBITDA
$
25,394
$
35,697
$
3,745
$
103,701
Adjusted EBITDA margin (13)
8.1
%
9.8
%
0.5
%
10.5
%
(1)
Represents the reallocation of net (loss)
income attributable to non-controlling interests from the assumed
exchange of common units of FAH, LLC for Class A common stock in
periods in which income was attributable to non-controlling
interests.
(2)
Represents non-cash charges (recapture of
charges) related to equity-based compensation programs, which vary
from period to period depending on the timing of awards and
forfeitures
(3)
Represents write-off of unamortized debt
financing fees for the nine months ended September 30, 2023.
(4)
For the three and nine months ended
September 30, 2023, includes costs related to the termination of a
lease agreement and related expenses, partially offset by
acquisition-related benefits. For the nine months ended September
30, 2022, includes acquisition-related costs related to investment
banking and due diligence fees.
(5)
For the three and nine months ended
September 30, 2023, includes charges to remove leasehold
improvements and return multiple Washington-based warehouses, and
charges related to severance and benefit costs for a
reduction-in-force. For the three and nine months ended September
30, 2022, includes charges related to one-time relocation costs for
U.S. warehouse personnel and inventory in connection with the
opening of a new warehouse and distribution facility in Buckeye,
Arizona.
(6)
Represents both unrealized and realized
foreign currency gains and losses on transactions denominated other
than in U.S. dollars, including derivative gains and losses on
foreign currency forward exchange contracts.
(7)
For the nine months ended September 30,
2023, represents a one-time inventory write-down to improve U.S.
warehouse operational efficiency.
(8)
Represents reduction of the tax receivable
agreement liability as a result of recognizing a full valuation
allowance of the Company’s deferred tax assets and anticipated
inability to realize future tax benefits.
(9)
For the nine months ended September 30,
2023, represents one-time disposal costs related to unfinished
goods held at offshore factories.
(10)
For the three and nine months ended
September 30, 2023, represents one-time disposal costs related to
finished goods held at offshore factories, primarily due to
customer order cancellations.
(11)
Represents the income tax expense effect
of the above adjustments, except for the tax liability receivable
adjustment. This adjustment uses an effective tax rate of 25% for
all periods presented. For the nine months ended September 30,
2023, this also includes $123.2 million recognized valuation
allowance on the Company’s deferred tax assets. For the nine months
ended September 30, 2022, this also includes the $11.0 million
discrete benefit from the release of a valuation allowance on the
outside basis deferred tax asset.
(12)
Adjusted net (loss) income margin is
calculated as Adjusted net (loss) income as a percentage of net
sales.
(13)
Adjusted EBITDA margin is calculated as
Adjusted EBITDA as a percentage of net sales.
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