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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