Funko Reports 2023 Second Quarter Financial Results, Revises Full-Year Outlook
Company Provides Update on Operational Improvement Initiatives, Implements Substantial Additional Cost Savings Measures —
Everett, WA — Funko reported consolidated financial results for its second quarter ended June 30, 2023.
Second Quarter Financial Results Summary: 2023 vs 2022
- Net sales were $240.0 million for the 2023 second quarter versus $315.7 million for the 2022 second quarter
- Gross margin was 29.2% for the 2023 second quarter versus 32.7% for the 2022 second quarter
- SG&A expenses were $85.6 million for the 2023 second quarter versus $82.7 million for the 2022 second quarter
- Net loss was $75.9 million, or $1.54 per share, for the 2023 second quarter, which includes a company established full valuation allowance against its deferred tax asset of $138.1 million, offset by an adjustment to the tax receivable agreement liability of $99.6 million, the net effect of which was a non-cash charge of $38.5 million. This compares to net income of $15.8 million, or $0.28 per diluted share, for the 2022 second quarter
- Adjusted net loss* was $22.3 million, or $0.43 per share, for the 2023 second quarter versus adjusted net income* of $14.0 million, or $0.26 per diluted share per share
- Negative adjusted EBITDA* was $7.6 million for the 2023 second quarter versus adjusted EBITDA* of $31.8 million for the 2022 second quarter
“For the 2023 second quarter, net sales and adjusted EBITDA* loss were within our guidance, and SG&A expenses were better than expected and an improvement over the preceding quarter,” said Michael Lunsford, recently appointed Interim Chief Executive Officer of Funko. “Ongoing inventory de-stocking by some of our larger U.S. wholesale customers impacted our topline and profitability. We anticipate that this softness will continue in the second half of this year and, as a result, we have lowered our full-year guidance.
“We have also begun re-shaping the company to focus our energies and resources on Funko’s core products. To that end, we are implementing a strategic plan to reduce the number of product lines and complexity in our business. Putting our fans and brand first, running the business like a lean startup and investing in areas where we can grow profitably, will guide and inform every decision we make.
“Over the remaining two quarters of the current year, we expect sales and gross margin to meaningfully ramp up compared with the recently completed second quarter. We also expect SG&A as a percentage of sales to decrease, primarily due to continuing cost reductions and operational improvements. Looking out a bit further, we see our financial performance rebounding in 2024, based in part on a full year of benefit to our gross margin and cost structure from our improvement efforts, the launch of Pop! Yourself, currently planned for later this month, and a return to more normalized sales to our wholesale customers.”
Restructuring, Cost Reduction Initiatives
Earlier this year, the company implemented an operational improvement and cost reduction plan that, once completed, is expected to generate annualized cost savings of between $155 million to $185 million.
“We are ahead of schedule on the key elements of our cost reduction plan,” said Steve Nave, Chief Financial Officer and Chief Operating Officer. “To date, we’ve made excellent progress on the disposal of inventory that was in excess of our warehouse capacity, which has enabled us to process customer orders more quickly and eliminate certain related storage costs and container rental charges.
“Despite this progress, last week we implemented a plan that includes, among other things, another round of cost-lowering initiatives and further reductions to our workforce of approximately 12%, or 180 positions. These actions are estimated to generate approximately $38 million of incremental annualized savings, of which approximately $20 million is related to the workforce reduction.”
Leadership Changes
As previously announced, Brian Mariotti took a leave of absence and ceased serving as the company’s CEO, and Michael Lunsford, a member of Funko’s board of directors since 2018, was appointed interim CEO. The company’s board of directors plans to shortly commence a search for a permanent CEO; the search will include both internal and external candidates.
Second 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 June 30, | Period Over Period Change | ||||||||||||
| Net sales by brand category: | 2023 | 2022 | Dollar | Percentage | |||||||||
| Core Collectible Brands | $ | 173,665 | $ | 233,045 | $ | (59,380 | ) | (25.5 | )% | ||||
| Loungefly Brand | 50,002 | 69,966 | (19,964 | ) | (28.5 | )% | |||||||
| Other Brands | 16,361 | 12,705 | 3,656 | 28.8 | % | ||||||||
| Total net sales | $ | 240,028 | $ | 315,716 | $ | (75,688 | ) | (24.0 | )% | ||||
| Three Months Ended June 30, | Period Over Period Change | ||||||||||||
| 2023 | 2022 | Dollar | Percentage | ||||||||||
| Net sales by geography: | |||||||||||||
| United States | $ | 171,219 | $ | 231,196 | $ | (59,977 | ) | (25.9 | )% | ||||
| Europe | 50,495 | 63,392 | (12,897 | ) | (20.3 | )% | |||||||
| Other International | 18,314 | 21,128 | (2,814 | ) | (13.3 | )% | |||||||
| Total net sales | $ | 240,028 | $ | 315,716 | $ | (75,688 | ) | (24.0 | )% | ||||
Balance Sheet Highlights – At June 30, 2023 vs December 31, 2022
- Total cash and cash equivalents were $36.8 million at June 30, 2023 versus $19.2 million at December 31, 2022
- Inventories were $187.3 million at June 30, 2023 versus $246.4 million at December 31, 2022
- Total debt was $305.0 million at June 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 revised its 2023 full-year outlook and provided guidance for its 2023 third quarter, as follows:
| Current Outlook | Previous Outlook | ||
| 2023 Full Year | |||
| Net Sales | $1.05 billion to $1.12 billion | $1.19 billion to $1.26 billion | |
| Adjusted EBITDA* | $20 million to $30 million | $65 million to $75 million | |
| 2023 Third Quarter | |||
| Net sales | $280 million to $310 million | ||
| Gross margin % | Increasing sequentially from Q2 | ||
| SG&A expense | Improving sequentially from Q2 | ||
| Adjusted net loss* | $5 million to $1 million | ||
| Adjusted net loss per share* | $0.10 to $0.03 | ||
| Adjusted EBITDA* | $14 million to $19 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 third quarter of 2023 the Company expects equity-based compensation of approximately $4 million, depreciation and amortization of approximately $15 million, interest expense of approximately $7 million and severance and restructuring expenses of approximately $3 million. For the full year 2023 the Company expects equity-based compensation of approximately $16 million, depreciation and amortization of approximately $59 million, interest expense of approximately $27 million, and severance and restructuring expenses of approximately $5 million, each of which is a reconciling item to net loss. See “Use of Non-GAAP Financial Measures” and the attached reconciliations for more information.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| (In thousands, except per share data) | |||||||||||||||
| Net sales | $ | 240,028 | $ | 315,716 | $ | 491,906 | $ | 624,059 | |||||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 170,019 | 212,597 | 372,322 | 412,246 | |||||||||||
| Selling, general, and administrative expenses | 85,632 | 82,693 | 185,693 | 161,113 | |||||||||||
| Depreciation and amortization | 14,893 | 11,483 | 28,869 | 21,954 | |||||||||||
| Total operating expenses | 270,544 | 306,773 | 586,884 | 595,313 | |||||||||||
| (Loss) income from operations | (30,516 | ) | 8,943 | (94,978 | ) | 28,746 | |||||||||
| Interest expense, net | 7,264 | 1,667 | 12,950 | 2,877 | |||||||||||
| Loss on debt extinguishment | — | — | 494 | — | |||||||||||
| Gain on tax receivable agreement liability adjustment | (99,620 | ) | — | (99,620 | ) | — | |||||||||
| Other (income) expense, net | (401 | ) | 435 | 421 | 832 | ||||||||||
| Income (loss) before income taxes | 62,241 | 6,841 | (9,223 | ) | 25,037 | ||||||||||
| Income tax expense (benefit) | 138,103 | (8,952 | ) | 127,783 | (5,274 | ) | |||||||||
| Net (loss) income | (75,862 | ) | 15,793 | (137,006 | ) | 30,311 | |||||||||
| Less: net (loss) income attributable to non-controlling interests | (2,864 | ) | 1,121 | (8,697 | ) | 5,757 | |||||||||
| Net (loss) income attributable to Funko, Inc. | $ | (72,998 | ) | $ | 14,672 | $ | (128,309 | ) | $ | 24,554 | |||||
| (Loss) earnings per share of Class A common stock: | |||||||||||||||
| Basic | $ | (1.54 | ) | $ | 0.34 | $ | (2.71 | ) | $ | 0.58 | |||||
| Diluted | $ | (1.54 | ) | $ | 0.28 | $ | (2.71 | ) | $ | 0.53 | |||||
| Weighted average shares of Class A common stock outstanding: | |||||||||||||||
| Basic | 47,428 | 43,741 | 47,338 | 42,042 | |||||||||||
| Diluted | 47,428 | 53,824 | 47,338 | 53,976 | |||||||||||
| Funko, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets |
|||||||
| June 30, 2023 (unaudited) |
December 31, 2022 |
||||||
| (In thousands, except per share amounts) | |||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 36,827 | $ | 19,200 | |||
| Accounts receivable, net | 137,441 | 167,895 | |||||
| Inventory | 187,311 | 246,429 | |||||
| Prepaid expenses and other current assets | 44,651 | 39,648 | |||||
| Total current assets | 406,230 | 473,172 | |||||
| Property and equipment, net | 104,157 | 102,232 | |||||
| Operating lease right-of-use assets | 66,060 | 71,072 | |||||
| Goodwill | 135,865 | 131,380 | |||||
| Intangible assets, net | 175,314 | 181,284 | |||||
| Deferred tax asset, net of valuation allowance | — | 123,893 | |||||
| Other assets | 9,935 | 8,112 | |||||
| Total assets | $ | 897,561 | $ | 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 | 21,883 | 22,041 | |||||
| Current portion of operating lease liabilities | 18,330 | 18,904 | |||||
| Accounts payable | 81,389 | 67,651 | |||||
| Income taxes payable | 1,341 | 871 | |||||
| Accrued royalties | 53,291 | 69,098 | |||||
| Accrued expenses and other current liabilities | 92,790 | 112,832 | |||||
| Total current liabilities | 410,024 | 361,397 | |||||
| Long-term debt, net of unamortized discount | 142,067 | 153,778 | |||||
| Operating lease liabilities, net of current portion | 76,897 | 82,356 | |||||
| Deferred tax liability | 401 | 382 | |||||
| Liabilities under tax receivable agreement, net of current portion | — | 99,620 | |||||
| Other long-term liabilities | 5,420 | 3,923 | |||||
| Commitments and Contingencies | |||||||
| Stockholders’ equity: | |||||||
| Class A common stock, par value $0.0001 per share, 200,000 shares authorized; 47,497 and 47,192 shares issued and outstanding as of June 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 and 3,293 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | — | — | |||||
| Additional paid-in-capital | 319,531 | 310,807 | |||||
| Accumulated other comprehensive loss | (426 | ) | (2,603 | ) | |||
| (Accumulated deficit) retained earnings | (68,294 | ) | 60,015 | ||||
| Total stockholders’ equity attributable to Funko, Inc. | 250,816 | 368,224 | |||||
| Non-controlling interests | 11,936 | 21,465 | |||||
| Total stockholders’ equity | 262,752 | 389,689 | |||||
| Total liabilities and stockholders’ equity | $ | 897,561 | $ | 1,091,145 | |||
| Funko, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited) |
|||||||
| Six Months Ended June 30, | |||||||
| 2023 | 2022 | ||||||
| (In thousands) | |||||||
| Operating Activities | |||||||
| Net (loss) income | $ | (137,006 | ) | $ | 30,311 | ||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||
| Depreciation, amortization and other | 27,851 | 21,586 | |||||
| Equity-based compensation | 8,437 | 7,322 | |||||
| Amortization of debt issuance costs and debt discounts | 607 | 433 | |||||
| Loss on debt extinguishment | 494 | — | |||||
| Gain on tax receivable agreement liability adjustment | (99,620 | ) | — | ||||
| Deferred tax expense | 123,206 | — | |||||
| Other | (3,124 | ) | 2,588 | ||||
| Changes in operating assets and liabilities, net of amounts acquired: | |||||||
| Accounts receivable, net | 33,405 | (9,667 | ) | ||||
| Inventory | 61,640 | (68,921 | ) | ||||
| Prepaid expenses and other assets | 237 | (27,985 | ) | ||||
| Accounts payable | 13,400 | 57,661 | |||||
| Income taxes payable | 559 | (15,542 | ) | ||||
| Accrued royalties | (15,807 | ) | (9,776 | ) | |||
| Accrued expenses and other liabilities | (26,315 | ) | (18,149 | ) | |||
| Net cash used in operating activities | (12,036 | ) | (30,139 | ) | |||
| Investing Activities | |||||||
| Purchases of property and equipment | (22,712 | ) | (33,713 | ) | |||
| Acquisitions of businesses and related intangible assets, net of cash acquired | (5,274 | ) | (13,968 | ) | |||
| Other | 420 | 61 | |||||
| Net cash used in investing activities | (27,566 | ) | (47,620 | ) | |||
| Financing Activities | |||||||
| Borrowings on line of credit | 71,000 | 70,000 | |||||
| Debt issuance costs | (1,957 | ) | — | ||||
| Payments of long-term debt | (11,258 | ) | (9,000 | ) | |||
| Distributions to TRA Parties | (1,103 | ) | (10,224 | ) | |||
| Payments under tax receivable agreement | — | — | |||||
| Proceeds from exercise of equity-based options | 287 | 559 | |||||
| Net cash provided by financing activities | 56,969 | 51,335 | |||||
| Effect of exchange rates on cash and cash equivalents | 260 | (942 | ) | ||||
| Net change in cash and cash equivalents | 17,627 | (27,366 | ) | ||||
| Cash and cash equivalents at beginning of period | 19,200 | 83,557 | |||||
| Cash and cash equivalents at end of period | $ | 36,827 | $ | 56,191 | |||
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 June 30, | Six Months Ended June 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| (In thousands, except per share data) | |||||||||||||||
| Net (loss) income attributable to Funko, Inc. | $ | (72,998 | ) | $ | 14,672 | $ | (128,309 | ) | $ | 24,554 | |||||
| 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) | (2,864 | ) | 1,121 | (8,697 | ) | 5,757 | |||||||||
| Equity-based compensation (2) | 4,795 | 3,953 | 8,437 | 7,322 | |||||||||||
| Loss on extinguishment of debt (3) | — | — | 494 | — | |||||||||||
| Acquisition transaction costs and other expenses (4) | 444 | 1,920 | 1,454 | 2,850 | |||||||||||
| Certain severance, relocation and related costs (5) | 346 | 5,453 | 2,081 | 7,133 | |||||||||||
| Foreign currency transaction loss (6) | (401 | ) | 434 | 421 | 831 | ||||||||||
| One-time inventory write-down (7) | — | — | 30,084 | — | |||||||||||
| Tax receivable agreement liability adjustments (8) | (99,620 | ) | — | (99,620 | ) | — | |||||||||
| One-time disposal costs for unfinished inventory held at offshore factories (9) | 2,404 | — | 2,404 | — | |||||||||||
| Income tax expense (10) | 145,551 | (13,602 | ) | 143,650 | (16,067 | ) | |||||||||
| Adjusted net (loss) income | $ | (22,343 | ) | $ | 13,951 | $ | (47,601 | ) | $ | 32,380 | |||||
| Adjusted net income margin (11) | (9.3 | )% | 4.4 | % | (9.7 | )% | 5.2 | % | |||||||
| Weighted-average shares of Class A common stock outstanding-basic | 47,428 | 43,741 | 47,338 | 42,042 | |||||||||||
| Equity-based compensation awards and common units of FAH, LLC that are convertible into Class A common stock | 4,481 | 10,083 | 4,423 | 11,935 | |||||||||||
| Adjusted weighted-average shares of Class A stock outstanding – diluted | 51,909 | 53,824 | 51,761 | 53,977 | |||||||||||
| Adjusted (loss) earnings per diluted share | $ | (0.43 | ) | $ | 0.26 | $ | (0.92 | ) | $ | 0.60 | |||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| (amounts in thousands) | |||||||||||||||
| Net (loss) income | $ | (75,862 | ) | $ | 15,793 | $ | (137,006 | ) | $ | 30,311 | |||||
| Interest expense, net | 7,264 | 1,667 | 12,950 | 2,877 | |||||||||||
| Income tax expense (benefit) | 138,103 | (8,952 | ) | 127,783 | (5,274 | ) | |||||||||
| Depreciation and amortization | 14,893 | 11,483 | 28,869 | 21,954 | |||||||||||
| EBITDA | $ | 84,398 | $ | 19,991 | $ | 32,596 | $ | 49,868 | |||||||
| Adjustments: | |||||||||||||||
| Equity-based compensation (2) | 4,795 | 3,953 | 8,437 | 7,322 | |||||||||||
| Loss on extinguishment of debt (3) | — | — | 494 | — | |||||||||||
| Acquisition transaction costs and other expenses (4) | 444 | 1,920 | 1,454 | 2,850 | |||||||||||
| Certain severance, relocation and related costs (5) | 346 | 5,453 | 2,081 | 7,133 | |||||||||||
| Foreign currency transaction loss (6) | (401 | ) | 434 | 421 | 831 | ||||||||||
| One-time inventory write-down (7) | — | — | 30,084 | — | |||||||||||
| Tax receivable agreement liability adjustments (8) | (99,620 | ) | — | (99,620 | ) | — | |||||||||
| One-time disposal costs for unfinished inventory held at offshore factories (9) | 2,404 | — | 2,404 | — | |||||||||||
| Adjusted EBITDA | $ | (7,634 | ) | $ | 31,751 | $ | (21,649 | ) | $ | 68,004 | |||||
| Adjusted EBITDA margin (12) | (3.2 | )% | 10.1 | % | (4.4 | )% | 10.9 | % | |||||||
| (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 related to equity-based compensation programs, which vary from period to period depending on the timing of awards. | |
| (3) | Represents write-off of unamortized debt financing fees for the six months ended June 30, 2023. | |
| (4) | For the three months ended June 30, 2023 includes one-time bank monitoring fees. For the six months ended June 30, 2023 includes acquisition-related costs related to due diligence fees. For the three and six months ended June 30, 2022 includes acquisition-related costs related to investment banking and due diligence fees. | |
| (5) | For the three months ended June 30, 2023, includes charges to remove leasehold improvements and return multiple Washington-based warehouses. For the six months ended June 30, 2023, includes charges related to severance and benefit costs for a reduction-in-force. For the three and six months ended June 30, 2022, includes charges related to one-time relocation costs for U.S. warehouse personnel and inventory in connection with the new opening of a 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 six months ended June 30, 2023, represents 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 three and six months ended June 30, 2023, represents a one-time disposal costs related to unfinished inventory held at offshore factories. | |
| (10) | 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 three and six months ended June 30, 2023, this also includes $123.2 million recognized valuation allowance on the Company’s deferred tax assets. For the three and six months ended June 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. | |
| (11) | Adjusted net (loss) income margin is calculated as Adjusted net (loss) income as a percentage of net sales. | |
| (12) | Adjusted EBITDA margin is calculated as Adjusted EBITDA as a percentage of net sales. |
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