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Funko Reports 2023 Fourth Quarter, Full Year Financial Results; Provides Full-Year Outlook for 2024 image

Funko Reports 2023 Fourth Quarter, Full Year Financial Results; Provides Full-Year Outlook for 2024

Q4 Net Sales, Gross Margin and Adjusted EBITDA at Upper End of Expectations, Driven by Strong DTC Growth and Continued Operational Improvement–

Funko reported its consolidated financial results for the fourth quarter and full year ended December 31, 2023. The company also provided financial guidance for the 2024 first quarter and full year.

Fourth-Quarter Financial Results Summary: 2023 vs 2022

  • Net sales were $291.2 million versus $333.0 million
  • Gross profit was $109.4 million, equal to gross margin of 37.6%, compared with $94.3 million, equal to gross margin of 28.3%
  • SG&A expenses were $97.4 million, which included $8.0 million of non-recurring charges primarily related to fair market value adjustments for assets held for sale. This compares with $139.2 million, which included $32.5 million of non-recurring charges related to the write down of an enterprise resource planning system, for the fourth quarter of 2022
  • Net loss was $10.8 million, or $0.21 per share, versus $42.2 million, or $0.89 per diluted share
  • Adjusted net income* was $0.5 million, or $0.01 per diluted share, versus adjusted net loss of $17.9 million, or $0.35 per share
  • Adjusted EBITDA* was $23.5 million versus negative adjusted EBITDA* of $6.3 million

Full-Year Financial Results Summary: 2023 vs 2022

  • Net sales were $1.1 billion versus $1.3 billion
  • Gross profit was $333.0 million, equal to gross margin of 30.4%, which included $39.0 million of non-recurring charges related to the disposal of excess inventory and finished and unfinished goods held at offshore factories. This compares with $434.0 million, equal to gross margin of 32.8%
  • SG&A expenses were $377.1 million, which included $20.7 million of non-recurring charges primarily related to the termination of a lease agreement, fair market value adjustments for assets held for sale and severance and related charges. This compares with $398.3 million for the 2022 full year, which included $32.5 million of non-recurring charges related to the write-down of an enterprise resource planning system
  • Net loss was $154.1 million, or $3.19 per share, compared with $8.0 million, or $0.18 per share
  • Adjusted net loss* was $45.4 million, or $0.87 per share, versus adjusted net income* of $29.6 million, or $0.57 per diluted share
  • Adjusted EBITDA* was $27.2 million compared with $97.4 million

“In 2023, we implemented a comprehensive plan to significantly reduce costs, improve operational efficiencies and focus on our core product offerings,” said Michael Lunsford, Funko’s Interim Chief Executive Officer. “The major elements of that plan, which addressed the company’s inventory issues, unprofitable product lines and SKUs, workforce size, and several other factors, were successfully completed, and we believe our company is now on a significantly more solid foundation upon which we intend to build and grow.

“For the 2023 fourth quarter, net sales and adjusted EBITDA were at the upper end of our guidance range, fueled in part by growth in our direct-to-consumer (DTC) business, which accounted for 26 percent of our revenue and increased nearly 30 percent compared with the same quarter of the prior year. Gross margin of 38 percent was the highest of any quarter in 2023.

“Turning to our balance sheet, we substantially lowered our inventory levels to $119 million at December 31, 2023 from $246 million at the end of last year and $162 million at September 30, 2023. We also paid down our debt by $26 million in the fourth quarter and used the proceeds from a transaction related to our Games business to further reduce our debt in the first quarter of 2024.

“Looking ahead, we face a softer content schedule following the recent Hollywood strikes and uncertainty around shipping costs caused by the Red Sea situation. Despite these headwinds, we expect our bottom line to significantly improve in 2024 compared with 2023. Our belief is based on the actions we are taking to, among other things, further expand our DTC business and increase sales of Pop! Yourself and limited-edition products – areas we control and can grow profitably.”

Leadership Update

The company also announced today that Steve Nave, Funko’s Chief Financial Officer (CFO) and Chief Operating Officer, is resigning effective March 15, 2024. Yves LePendeven, the company’s Deputy CFO, will serve as Acting CFO as of the same date.

“Steve joined us a year ago to help with our cost reduction and operational improvement plan,” said Lunsford. “We have made significant progress against that plan and thank Steve for his contributions. We wish Steve success in his future endeavors.

“I have worked with Yves for several years now, as both a board member and as the interim CEO. I have complete faith in Yves to lead our Finance and Accounting functions. We believe we now have in place a strong, lean, aligned senior leadership team to support the arrival of a new CEO and the growth of Funko.”

Fourth 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 December 31,

Period Over Period Change

2023

2022

Dollar

Percentage

Net sales by product brand:

Core Collectibles

$

212,776

$

243,340

$

(30,564

)

(12.6

)%

Loungefly Branded Products

54,908

73,346

(18,438

)

(25.1

)%

Other

23,552

16,354

7,198

44.0

%

Total net sales

$

291,236

$

333,040

$

(41,804

)

(12.6

)%

Three Months Ended December 31,

Period Over Period Change

2023

2022

Dollar

Percentage

Net sales by geography:

United States

$

197,368

$

240,647

$

(43,279

)

(18.0

)%

Europe

78,138

61,869

16,269

26.3

%

Other International

15,730

30,524

(14,794

)

(48.5

)%

Total net sales

$

291,236

$

333,040

$

(41,804

)

(12.6

)%

Balance Sheet Highlights – At December 31, 2023 vs December 31, 2022

  • Total cash and cash equivalents were $36.5 million at December 31, 2023 versus $19.2 million at December 31, 2022
  • Inventories were $119.5 million at December 31, 2023 versus $246.4 million at December 31, 2022
  • Total debt was $273.6 million at December 31, 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 2024

Based on its current outlook, the company provided its 2024 full-year outlook and 2024 first-quarter guidance, as follows:

Current Outlook

2024 Full Year

Net Sales

$1.047 billion to $1.103 billion

Adjusted EBITDA*

$65 million to $85 million

2024 First Quarter

Net sales

$214 million to $227 million

Gross margin %

~37%

SG&A expense, in dollars

$87 million to $88 million

Adjusted net loss*

$17 million to $13 million

Adjusted net loss per share*

$0.32 to $0.24

Adjusted EBITDA*

$0 million to $5 million

*

Funko, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2023

2022

2023

2022

(in thousands, except per share data)

Net sales

$

291,236

$

333,040

$

1,096,086

$

1,322,706

Cost of sales (exclusive of depreciation and amortization shown separately below)

181,827

238,711

763,085

888,685

Selling, general, and administrative expenses

97,380

139,229

377,065

398,272

Depreciation and amortization

15,429

13,160

59,763

47,669

Total operating expenses

294,636

391,100

1,199,913

1,334,626

(Loss) income from operations

(3,400

)

(58,060

)

(103,827

)

(11,920

)

Interest expense, net

7,419

4,480

27,970

10,334

Loss on extinguishment of debt

494

Gain on tax receivable agreement liability adjustment

(603

)

(100,223

)

Other (income) expense, net

(646

)

(971

)

(127

)

787

(Loss) income before income taxes

(9,570

)

(61,569

)

(31,941

)

(23,041

)

Income tax expense (benefit)

1,638

(14,869

)

132,497

(17,801

)

Net (loss) income

(11,208

)

(46,700

)

(164,438

)

(5,240

)

Less: net (loss) income attributable to non-controlling interests

(447

)

(4,481

)

(10,359

)

2,795

Net (loss) income attributable to Funko, Inc.

$

(10,761

)

$

(42,219

)

$

(154,079

)

$

(8,035

)

(Loss) earnings per share of Class A common stock:

Basic

$

(0.21

)

$

(0.89

)

$

(3.19

)

$

(0.18

)

Diluted

$

(0.21

)

$

(0.89

)

$

(3.19

)

$

(0.18

)

Weighted average shares of Class A common stock outstanding:

Basic

50,384

47,179

48,332

44,555

Diluted

50,384

47,179

48,332

44,555

Funko, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

December 31,

2023

2022

(in thousands, except per share data)

Assets

Current assets:

Cash and cash equivalents

$

36,453

$

19,200

Accounts receivable, net

130,831

167,895

Inventory, net

119,458

246,429

Prepaid expenses and other current assets

56,134

39,648

Total current assets

342,876

473,172

Property and equipment, net

91,335

102,232

Operating lease right-of-use assets

61,499

71,072

Goodwill

133,795

131,380

Intangible assets, net

167,388

181,284

Deferred tax asset, net of valuation allowance

123,893

Other assets

7,752

8,112

Total assets

$

804,645

$

1,091,145

Liabilities and Stockholders’ Equity

Current liabilities:

Line of credit

$

120,500

$

70,000

Current portion long-term debt, net of unamortized discount

22,072

22,041

Current portion of operating lease liabilities

17,486

18,904

Accounts payable

52,919

67,651

Income taxes payable

986

871

Accrued royalties

54,375

69,098

Accrued expenses and other current liabilities

90,494

112,832

Total current liabilities

358,832

361,397

Long-term debt, net of unamortized discount

130,986

153,778

Operating lease liabilities, net of current portion

71,309

82,356

Deferred tax liability

402

382

Liabilities under tax receivable agreement, net of current portion

99,620

Other long-term liabilities

5,076

3,923

Commitments and contingencies

Stockholders’ equity:

Class A common stock, par value $0.0001 per share, 200,000 shares authorized; 50,549 shares and 47,192 shares issued and outstanding as of December 31, 2023 and 2022, respectively

5

5

Class B common stock, par value $0.0001 per share, 50,000 shares authorized; 2,277 shares and 3,293 shares issued and outstanding as of December 31, 2023 and 2022, respectively

Additional paid-in-capital

326,180

310,807

Accumulated other comprehensive loss

(180

)

(2,603

)

(Accumulated deficit) retained earnings

(94,064

)

60,015

Total stockholders’ equity attributable to Funko, Inc.

231,941

368,224

Non-controlling interests

6,099

21,465

Total stockholders’ equity

238,040

389,689

Total liabilities and stockholders’ equity

$

804,645

$

1,091,145

Funko, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Year Ended December 31,

2023

2022

2021

(in thousands)

Operating Activities

Net (loss) income

$

(164,438

)

$

(5,240

)

$

67,854

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation, amortization and other

57,389

47,919

40,056

Equity-based compensation

10,534

16,591

12,994

Amortization of debt issuance costs and debt discounts

1,274

902

1,118

Loss on debt extinguishment

494

675

Gain on tax receivable agreement liability adjustment

(100,223

)

Deferred tax expense (benefit)

123,124

(17,414

)

(361

)

Other

4,090

5,244

1,403

Changes in operating assets and liabilities, net of amounts acquired:

Accounts receivable, net

40,513

19,075

(56,648

)

Inventory

122,479

(82,214

)

(107,166

)

Prepaid expenses and other assets

3,242

(7,263

)

3,700

Accounts payable

(17,968

)

11,043

26,933

Income taxes payable

75

(15,018

)

15,585

Accrued royalties

(14,723

)

9,082

17,633

Accrued expenses and other liabilities

(34,927

)

(22,841

)

63,586

Net cash provided by (used in) operating activities

30,935

(40,134

)

87,362

Investing Activities

Purchase of property and equipment

$

(35,131

)

$

(59,148

)

$

(27,759

)

Acquisitions of business and intangible assets, net of cash acquired

(5,364

)

(19,479

)

199

Other

699

562

179

Net cash used in investing activities

(39,796

)

(78,065

)

(27,381

)

Financing Activities

Borrowings on line of credit

$

71,000

$

120,000

$

Payments on line of credit

(20,500

)

(50,000

)

Debt issuance costs

(1,957

)

(405

)

(1,055

)

Proceeds from long-term debt, net

20,000

180,000

Payment of long-term debt

(22,581

)

(18,000

)

(198,375

)

Contingent consideration

(2,000

)

Distributions to continuing equity owners

(1,118

)

(10,710

)

(9,277

)

Payments under tax receivable agreement

(4

)

(7,718

)

(1,715

)

Proceeds from exercise of equity-based options

756

1,472

3,794

Net cash provided by (used in) financing activities

25,596

54,639

(28,628

)

Effect of exchange rates on cash and cash equivalents

518

(797

)

(51

)

Net change in cash and cash equivalents

17,253

(64,357

)

31,302

Cash and cash equivalents at beginning of period

19,200

83,557

52,255

Cash and cash equivalents at end of period

$

36,453

$

19,200

$

83,557

Supplemental Cash Flow Information

Cash paid for interest

$

24,635

$

8,856

$

5,679

Income tax payments

1,059

22,363

1,462

Establishment of liabilities under tax receivable agreement

30,034

20,691

Issuance of equity instruments for acquisitions

1,487

Tenant allowance

17,236

The following tables reconcile the Non-GAAP Financial Measures to the most directly comparable U.S. GAAP financial performance measure, which is net income (loss), for the periods presented:

Three Months Ended December 31,

Twelve Months Ended December 31,

2023

2022

2023

2022

(in thousands, except per share data)

Net (loss) income attributable to Funko, Inc.

$

(10,761

)

$

(42,219

)

$

(154,079

)

$

(8,035

)

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)

(447

)

(4,481

)

(10,359

)

2,795

Equity-based compensation (2)

3,013

4,592

10,534

16,591

Acquisition transaction costs and other expenses (3)

7,320

14,241

2,850

Certain severance, relocation and related costs (4)

702

1,572

6,486

9,775

Loss on extinguishment of debt (5)

494

Foreign currency transaction (gain) loss (6)

(641

)

(4,990

)

854

(3,232

)

Tax receivable agreement liability adjustments (7)

(603

)

3,987

(100,223

)

3,987

One-time cloud based computing arrangement abandonment (8)

32,492

32,492

One-time disposal costs for finished inventory held at offshore factories (9)

135

6,283

One-time disposal costs for unfinished inventory held at offshore factories (10)

2,404

Inventory write-down (11)

254

30,338

Income tax expense (9)

1,486

(8,890

)

147,630

(27,657

)

Adjusted net income (loss)

$

458

$

(17,937

)

$

(45,397

)

$

29,566

Adjusted net income (loss) margin (13)

0.2

%

(5.4

)%

(4.1

)%

2.2

%

Weighted-average shares of Class A common stock outstanding-basic

50,384

47,179

48,332

44,555

Equity-based compensation awards and common units of FAH, LLC that are convertible into Class A common stock

2,808

4,335

4,021

6,967

Adjusted weighted-average shares of Class A stock outstanding – diluted

53,192

51,514

52,353

51,522

Adjusted earnings (loss) per diluted share

$

0.01

$

(0.35

)

$

(0.87

)

$

0.57

Three Months Ended December 31,

Twelve Months Ended December 31,

2023

2022

2023

2022

(in thousands)

Net (loss) income

$

(11,208

)

$

(46,700

)

$

(164,438

)

$

(5,240

)

Interest expense, net

7,419

4,480

27,970

10,334

Income tax expense

1,638

(14,869

)

132,497

(17,801

)

Depreciation and amortization

15,429

13,160

59,763

47,669

EBITDA

$

13,278

$

(43,929

)

$

55,792

$

34,962

Adjustments:

Equity-based compensation (2)

3,013

4,592

10,534

16,591

Acquisition transaction costs and other expenses (3)

7,320

14,241

2,850

Certain severance, relocation and related costs (4)

702

1,572

6,486

9,775

Loss on extinguishment of debt (5)

494

Foreign currency transaction (gain) loss (6)

(641

)

(4,990

)

854

(3,232

)

Tax receivable agreement liability adjustments (7)

(603

)

3,987

(100,223

)

3,987

One-time cloud based computing arrangement abandonment (8)

32,492

32,492

One-time disposal costs for finished inventory held at offshore factories (9)

135

6,283

One-time disposal costs for unfinished inventory held at offshore factories (10)

2,404

Inventory write-down (11)

254

30,338

Adjusted EBITDA

$

23,458

$

(6,276

)

$

27,203

$

97,425

Adjusted EBITDA margin (14)

8.1

%

(1.9

)%

2.5

%

7.4

%

(1)

Represents the reallocation of net income attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC 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 timing of awards.

(3)

For the three months ended December 31, 2023, includes fair market value adjustments for assets held for sale. For the year ended December 31, 2023, includes costs related to the termination of a lease agreement and related expenses, fair market value adjustments for assets held for sale, partially offset by acquisition-related benefits. For the year ended December 31, 2022, includes acquisition-related costs related to investment banking and due diligence fees.

(4)

Represents certain severance, relocation and related costs. For the three months ended December 31, 2023, includes residual charges for severance and benefit costs for reductions-in-force. For the year ended December 31, 2023, includes charges to remove leasehold improvements and return multiple Washington-based warehouses, and charges related to severance and benefit costs for reductions-in-force. For the three months ended December 31, 2022, includes charges related to severance for the transition of management personnel. For the year ended December 31, 2022, includes charges related to residual one-time relocation and severance costs for U.S. warehouse personnel in connection with the opening of a warehouse and distribution facility in Buckeye, Arizona.

(5)

Represents write-off of unamortized debt financing fees for the year ended December 31, 2023.

(6)

Represents both unrealized and realized foreign currency losses (gains) on transactions other than in U.S. dollars.

(7)

Represents recognized adjustments to the tax receivable agreement liability. For the year ended December 31, 2023, 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.

(8)

Represents abandoned cloud computing arrangement charge related to the enterprise resource planning project for the three months and year ended December 31, 2022.

(9)

Represents one-time disposal costs related to unfinished goods held at offshore factories for the year ended December 31, 2023.

(10)

Represents one-time disposal costs related to finished goods held at offshore factories primarily due to customer order cancellations for the year ended December 31, 2023. Incremental charge during the three months ended December 31, 2023 were related to a true-up of original estimate of third-party destruction costs.

(11)

Represents an inventory write-down, outside of normal business operations, to improve U.S. warehouse operational efficiency for the year ended December 31, 2023. Incremental charge during the three months ended December 31, 2023 were related to a true-up of original estimate of third-party destruction costs.

(12)

Represents the income tax expense effect of the above adjustments. This adjustment uses an effective tax rate of 25% for the years ended December 31, 2023 and 2022. For the year ended December 31, 2023, this also includes $123.2 million recognized valuation allowance on the Company’s deferred tax assets. For the year ended December 31, 2022, this also includes the $11.0 million discrete benefit from the release of a valuation allowance on the outside basis deferred tax asset.

(13)

Adjusted net income (loss) margin is calculated as Adjusted net income (loss) as a percentage of net sales.

(14)

Adjusted EBITDA margin is calculated as Adjusted EBITDA as a percentage of net sales.

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