-- Company Provides Update on Operational
Improvement Initiatives, Implements Substantial Additional Cost
Savings Measures --
Funko, Inc. (Nasdaq: FNKO), a leading pop culture lifestyle
brand, today 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.
Conference Call and Webcast
The Company will host a conference call at 4:30 p.m. Eastern
Time (1:30 p.m. Pacific Time) today, August 3, 2023, to further
discuss its second 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; 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
June 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 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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