Funko, Inc. Q3 2024 10-Q Summary
Business Context and Reporting Period
This summary covers Funko, Inc.'s (FNKO) unaudited financial results for the quarter and nine months ended September 30, 2024. Funko is a leading pop culture lifestyle brand selling licensed collectibles, plush, accessories, and digital products globally. The company operates as a single segment and relies heavily on third-party licensors and manufacturers.
Key Financial Metrics
| Metric | Q3 2024 | Q3 2023 | 9M 2024 | 9M 2023 |
|---|---|---|---|---|
| Net Sales | $292.8M | $312.9M | $756.1M | $804.9M |
| Gross Margin | 40.9% | 33.2% | 41.0% | 27.8% |
| Operating Income (Loss) | $11.7M | ($5.4M) | $7.6M | ($100.4M) |
| Net Income (Loss) | $4.6M | ($16.2M) | ($13.7M) | ($153.2M) |
| EPS (Diluted) | $0.08 | ($0.31) | ($0.26) | ($3.01) |
| Adjusted EBITDA | $31.0M | $25.4M | $68.5M | $3.7M |
| Cash & Equivalents | $28.5M | $36.5M (Dec '23) | $28.5M | $31.9M (Sep '23) |
| Total Debt | $223.4M | $273.6M (Dec '23) | $223.4M | $273.6M (Dec '23) |
Note: Total Debt includes $95.0M Revolving Credit Facility, $117.7M Term Loan, and $11.8M Equipment Finance Loan as of Sept 30, 2024.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 6.4% in Q3 and 6.1% for the nine months ended Sept 30, 2024, compared to the prior year. This was driven by reduced sales to specialty retailers and e-commerce, attributed to the available content slate and performance of exclusive products.
- Margin Expansion: Gross margin improved significantly to 40.9% in Q3 (from 33.2% in Q3 2023) and 41.0% for the nine months (from 27.8% in 2023). This improvement was primarily due to a $2.1M recapture of inventory write-downs in Q3 and a $10.8M recapture for the nine months, contrasted against a $30.1M one-time inventory write-down in the prior year period.
- Profitability Turnaround: The company returned to net income in Q3 ($4.6M) compared to a net loss in Q3 2023. The nine-month net loss narrowed significantly to $13.7M from $153.2M in the prior year, aided by lower costs and the absence of the prior year's large inventory write-down and tax valuation allowance adjustments.
- Debt Reduction: Total debt outstanding decreased from $273.6M at year-end 2023 to $223.4M at Sept 30, 2024, due to repayments on the Revolving Credit Facility and Term Loan.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects seasonality to continue, with over 50% of annual sales typically occurring in Q3 and Q4. No specific forward-looking financial guidance was provided in this filing.
- Internal Controls: The company disclosed that disclosure controls and procedures were not effective as of September 30, 2024, due to material weaknesses in internal control over financial reporting. Remediation efforts are ongoing, including system redesigns and enhanced monitoring.
- Liquidity: As of Sept 30, 2024, the company had $55.0M available under its Revolving Credit Facility. Management expects to maintain compliance with financial covenants (Net Leverage Ratio of 2.50:1.00) for at least one year.
- Legal Contingencies:
- Securities Litigation: A settlement in principle was reached on Oct 21, 2024, regarding the In re Funko, Inc. Securities Litigation. The company has accrued $14.75M, expected to be covered by insurance.
- Derivative Actions: Settlements in principle were reached for multiple derivative lawsuits, with final approval hearings scheduled for November 2024.
- Wage and Hour: A putative class action regarding California wage and hour violations is pending, with mediation expected in May 2025.
- Unusual Items: The prior year (2023) results were significantly impacted by a $30.1M inventory write-down and a $99.6M gain on the Tax Receivable Agreement (TRA) liability adjustment due to a full valuation allowance on deferred tax assets. The TRA liability balance was reduced to zero in Q3 2024 following payment of the remaining balance.
Investor Verification Checklist
- Inventory Management: Verify the sustainability of gross margins given the significant impact of inventory write-down recaptures in 2024 versus write-downs in 2023.
- Internal Control Remediation: Monitor progress on remediation of material weaknesses in internal controls, as ineffective controls pose a risk to financial reporting accuracy.
- Licensor Concentration: Review the top 10 licensors, which accounted for 66% of sales in the first nine months of 2024, and the impact of Disney/LucasFilm/Marvel (33% of sales).
- Debt Covenants: Confirm ongoing compliance with the Net Leverage Ratio and Fixed Charge Coverage Ratio covenants under the Credit Agreement.
- Legal Settlements: Track the final court approval of the securities litigation settlement and the potential for additional legal costs or insurance coverage limitations.