Funko Reports Third Quarter 2024 Financial Results; Updates 2024 Full-Year Outlook

November 07, 2024 at 16:05 PM EST

--Q3 Net Sales, Gross Margin and Adjusted EBITDA at High End or Above Expectations--

Funko, Inc. (Nasdaq: FNKO), a leading pop culture lifestyle brand, today reported its consolidated financial results for the third quarter ended September 30, 2024.

Third Quarter Financial Results Summary: 2024 vs 2023

Net sales were $292.8 million compared with $312.9 million
Gross profit was $119.8 million, equal to gross margin of 40.9%. This compares with $104.0 million, equal to gross margin of 33.2%, which included $6.4 million of non-recurring charges
SG&A expenses were $92.7 million, which included $0.4 million of non-recurring charges. This compares with $94.0 million, which included $9.9 million of non-recurring charges. Details related to the non-recurring charges can be found in footnotes 4, 5 and 10 of the attached reconciliations
Net income was $4.6 million, or $0.08 per diluted share, compared with net loss of $16.2 million, or $0.31 per share
Adjusted net income* was $8.0 million, or $0.14 per diluted share*, compared to $1.7 million, or $0.03 per share
Adjusted EBITDA* was $31.0 million versus $25.4 million

"We reported solid financial results for the 2024 third quarter,” said Cynthia Williams, Chief Executive Officer of Funko. “As expected, net sales were down compared with the prior-year quarter, though in the top end of our guidance range. On the other hand, we delivered better than expected profitability on improved gross margins, as we did in the first two quarters of this year.

"We've updated our full-year 2024 outlook for net sales to reflect a more cautious consumer environment, which we began to see in the third quarter. We now expect net sales to be at the low end to slightly below our previous range. Adjusted EBITDA is a different matter, we have raised our full-year outlook to above the high end of the range.

"We are deep in the process of developing our strategic plan for 2025 and beyond, and pleased that we have already begun executing several elements of that plan. Recently, we enabled direct-to-consumer shipping capability to Canada, and we expanded our collaboration with the National Football League (NFL), and its fanbase of more than 200 million, to include the option to customize Pop! Yourself with any NFL team logo. Additionally, and just in time for the holidays, we are announcing that Harry Potter accessories will be available to customize Pop! Yourself beginning tomorrow."

Third Quarter 2024 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
	2024		2023		Dollar			Percentage
Net sales by brand category:
Core Collectible	$	227,845	$	233,269	$	(5,424	)	(2.3	)%
Loungefly		47,310		57,439		(10,129	)	(17.6	)%
Other		17,610		22,236		(4,626	)	(20.8	)%
Total net sales	$	292,765	$	312,944	$	(20,179	)	(6.4	)%


	Three Months Ended September 30,				Period Over Period Change
		2024		2023	Dollar			Percentage
Net sales by geography (shipped to):
United States	$	194,416	$	209,966	$	(15,550	)	(7.4	)%
Europe		74,473		81,938		(7,465	)	(9.1	)%
Other International		23,876		21,040		2,836		13.5	%
Total net sales	$	292,765	$	312,944	$	(20,179	)	(6.4	)%

Balance Sheet Highlights - At September 30, 2024 vs December 31, 2023

Total cash and cash equivalents were $28.5 million at September 30, 2024 compared with $36.5 million at December 31, 2023
Inventory was $118.6 million at September 30, 2024 down from $119.5 million at December 31, 2023
Total debt was $223.4 million at September 30, 2024 versus $273.6 million at December 31, 2023. Total debt includes the amount outstanding under the company's term loan facility, net of unamortized discounts, revolving line of credit and equipment finance loan

Outlook for 2024

Regarding its 2024 full-year outlook, the company lowered the range for net sales and raised the range for adjusted EBITDA, and provided guidance for its 2024 fourth quarter, as follows:

		Current Outlook
2024 Full Year
Net Sales		$1.037 billion to $1.050 billion
Adjusted EBITDA*		$85 million to $90 million

2024 Fourth Quarter
Net sales		$280 million to $294 million
Gross margin %		38% to 40%
SG&A expense, in dollars		$93 million to $99 million
Adjusted net income (loss)*		($3) million to $1 million
Adjusted net income (loss) per diluted share*		($0.05) to $0.02
Adjusted EBITDA*		$17 million to $22 million

*Adjusted net income (loss), adjusted net income (loss) per diluted share and adjusted EBITDA are non-GAAP financial measures. For a reconciliation of historical adjusted net income (loss), adjusted net income (loss) per share, and adjusted EBITDA, to the most directly comparable U.S. GAAP financial measures, please refer to the “Use of Non-GAAP Financial Measures” section of this press release. A reconciliation of adjusted net income (loss), adjusted net income (loss) per 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 2024 the company expects equity-based compensation of approximately $4 million, depreciation and amortization of approximately $15 million and interest expense of approximately $5 million. For the full year 2024, the company expects equity-based compensation of approximately $14 million, depreciation and amortization of approximately $62 million and interest expense of approximately $21 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, November 7, 2024, to further discuss its third quarter results and business update. A live webcast and a 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, adjusted EBITDA margin and adjusted net income (loss) 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 X (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 product offerings and strategic plan, anticipated financial results, including without limitation, equity-based compensation and financial position. 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 and growth; our ability to 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; 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; 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; risk resulting from our e-commerce business and social media presence; our ability to successfully operate our information systems and implement new technology; 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 September 30, 2024 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.
Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
		2024		2023			2024			2023
	(In thousands, except per share data)
Net sales	$	292,765	$	312,944		$	756,121		$	804,850
Cost of sales (exclusive of depreciation and amortization)		172,956		208,936			445,992			581,258
Selling, general, and administrative expenses		92,662		93,992			256,154			279,685
Depreciation and amortization		15,411		15,465			46,409			44,334
Total operating expenses		281,029		318,393			748,555			905,277
Income (loss) from operations		11,736		(5,449	)		7,566			(100,427	)
Interest expense, net		4,971		7,601			16,363			20,551
Loss on debt extinguishment		—		—			—			494
Gain on tax receivable agreement liability adjustment		—		—			—			(99,620	)
Other expense, net		998		98			1,994			519
Income (loss) before income taxes		5,767		(13,148	)		(10,791	)		(22,371	)
Income tax expense		1,170		3,076			2,859			130,859
Net income (loss)		4,597		(16,224	)		(13,650	)		(153,230	)
Less: net income (loss) attributable to non-controlling interests		267		(1,215	)		(432	)		(9,912	)
Net income (loss) attributable to Funko, Inc.	$	4,330	$	(15,009	)	$	(13,218	)	$	(143,318	)
Earnings (loss) per share of Class A common stock:
Basic	$	0.08	$	(0.31	)	$	(0.26	)	$	(3.01	)
Diluted	$	0.08	$	(0.31	)	$	(0.26	)	$	(3.01	)
Weighted average shares of Class A common stock outstanding:
Basic		52,523		48,237			51,781			47,641
Diluted		53,428		48,237			51,781			47,641

Funko, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

	September 30, 2024			December 31, 2023
	(In thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents	$	28,546		$	36,453
Accounts receivable, net		172,653			130,831
Inventories		118,563			119,458
Prepaid expenses and other current assets		35,471			56,134
Total current assets		355,233			342,876
Property and equipment, net		78,805			91,335
Operating lease right-of-use assets, net		55,158			61,499
Goodwill		133,887			133,795
Intangible assets, net		155,587			167,388
Other assets		4,904			7,752
Total assets	$	783,574		$	804,645
Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit	$	95,000		$	120,500
Current portion of long-term debt		22,413			22,072
Current portion of operating lease liabilities		17,365			17,486
Accounts payable		78,295			52,919
Accrued royalties		61,213			54,375
Accrued expenses and other current liabilities		93,910			91,480
Total current liabilities		368,196			358,832
Long-term debt		105,967			130,986
Operating lease liabilities		63,345			71,309
Other long-term liabilities		5,634			5,478

Commitments and Contingencies

Stockholders’ equity:
Class A common stock, par value $0.0001 per share, 200,000 shares authorized; 52,692 and 50,549 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively		5			5
Class B common stock, par value $0.0001 per share, 50,000 shares authorized; 1,433 and 2,277 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively		—			—
Additional paid-in-capital		339,834			326,180
Accumulated other comprehensive income (loss)		3,951			(180	)
Accumulated deficit		(107,282	)		(94,064	)
Total stockholders’ equity attributable to Funko, Inc.		236,508			231,941
Non-controlling interests		3,924			6,099
Total stockholders’ equity		240,432			238,040
Total liabilities and stockholders’ equity	$	783,574		$	804,645

Funko, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months Ended September 30,
		2024			2023
	(In thousands)
Operating Activities
Net loss	$	(13,650	)	$	(153,230	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		46,409			42,592
Equity-based compensation		10,530			7,521
Loss on debt extinguishment		—			494
Gain on tax receivable agreement liability adjustment		—			(99,620	)
Deferred tax expense		—			123,206
Other, net		(271	)		1,143
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable, net		(38,547	)		1,314
Inventories		3,306			84,797
Prepaid expenses and other assets		25,253			8,244
Accounts payable		23,851			2,536
Accrued royalties		6,838			(7,240	)
Accrued expenses and other liabilities		23			(14,624	)
Net cash provided by (used in) operating activities		63,742			(2,867	)

Investing Activities
Purchases of property and equipment		(20,796	)		(30,861	)
Acquisitions of businesses and related intangible assets, net of cash acquired		—			(5,274	)
Sale of Funko Games inventory and certain intellectual property		6,754			—
Other		655			551
Net cash used in investing activities		(13,387	)		(35,584	)

Financing Activities
Borrowings on line of credit		25,000			71,000
Payments on line of credit		(50,500	)		—
Payments of long-term debt		(25,365	)		(16,911	)
Payments under tax receivable agreement		(8,960	)		—
Other, net		1,250			(2,780	)
Net cash (used in) provided by financing activities		(58,575	)		51,309

Effect of exchange rates on cash and cash equivalents		313			(173	)

Net change in cash and cash equivalents		(7,907	)		12,685
Cash and cash equivalents at beginning of period		36,453			19,200
Cash and cash equivalents at end of period	$	28,546		$	31,885

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 September 30,						Nine Months Ended September 30,
		2024			2023			2024			2023
	(In thousands, except per share data)
Net income (loss) attributable to Funko, Inc.	$	4,330		$	(15,009	)	$	(13,218	)	$	(143,318	)
Reallocation of net income (loss) attributable to non-controlling interests from the assumed exchange of common units of FAH, LLC for Class A common stock ⁽¹⁾		267			(1,215	)		(432	)		(9,912	)
Equity-based compensation ⁽²⁾		3,430			(916	)		10,530			7,521
Loss on extinguishment of debt ⁽³⁾		—			—			—			494
Acquisition transaction costs and other expenses ⁽⁴⁾		287			5,467			1,866			6,921
Certain severance, relocation and related costs ⁽⁵⁾		114			3,703			2,081			5,784
Foreign currency transaction loss ⁽⁶⁾		1,005			1,074			2,018			1,495
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 ⁽¹¹⁾		(1,481	)		2,494			1,433			146,144
Adjusted net income (loss)	$	7,952		$	1,746		$	4,278		$	(45,855	)
Adjusted net income (loss) margin ⁽¹²⁾		2.7	%		0.6	%		0.6	%		(5.7	)%
Weighted-average shares of Class A common stock outstanding-basic		52,523			48,237			51,781			47,641
Equity-based compensation awards and common units of FAH, LLC that are convertible into Class A common stock		2,755			4,443			2,182			4,430
Adjusted weighted-average shares of Class A stock outstanding - diluted		55,278			52,680			53,963			52,071
Adjusted earnings (loss) per diluted share	$	0.14		$	0.03		$	0.08		$	(0.88	)

	Three Months Ended September 30,						Nine Months Ended September 30,
		2024			2023			2024			2023
	(amounts in thousands)
Net income (loss)	$	4,597		$	(16,224	)	$	(13,650	)	$	(153,230	)
Interest expense, net		4,971			7,601			16,363			20,551
Income tax expense		1,170			3,076			2,859			130,859
Depreciation and amortization		15,411			15,465			46,409			44,334
EBITDA	$	26,149		$	9,918		$	51,981		$	42,514
Adjustments:
Equity-based compensation ⁽²⁾		3,430			(916	)		10,530			7,521
Loss on extinguishment of debt ⁽³⁾		—			—			—			494
Acquisition transaction costs and other expenses ⁽⁴⁾		287			5,467			1,866			6,921
Certain severance, relocation and related costs ⁽⁵⁾		114			3,703			2,081			5,784
Foreign currency transaction loss ⁽⁶⁾		1,005			1,074			2,018			1,495
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	$	30,985		$	25,394		$	68,476		$	3,745
Adjusted EBITDA margin ⁽¹³⁾		10.6	%		8.1	%		9.1	%		0.5	%

(1)		Represents the reallocation of net income (loss) 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 (loss) 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 nine months ended September 30, 2023.
(4)		For the three months ended September 30, 2024, includes charges related to contract settlement agreements for warehouse leased space. For the nine months ended September 30, 2024, includes one-time legal settlement gain and contract settlement agreements and related services to and the fair market value adjustments of certain assets held for sale. 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.
(5)		For the three and nine months ended September 30, 2024, includes severance and benefit costs related to certain management departures. 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.
(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.
(12)		Adjusted net income (loss) margin is calculated as adjusted net loss as a percentage of net sales.
(13)		Adjusted EBITDA margin is calculated as adjusted EBITDA as a percentage of net sales.