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Funko Reports 2023 Third Quarter Financial Results image

Funko Reports 2023 Third Quarter Financial Results

Everett, WA— Funko, 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.

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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