Funko, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited, consolidated results. Comparisons are with Q1 2020 unless noted. Funko designs and sells licensed pop-culture consumer products, including figures, accessories and apparel.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net sales | $189.2 million | $136.7 million; up 38.4% |
| Gross margin, excluding depreciation and amortization | 41.4% | 40.4% |
| Operating income (loss) | $16.8 million | $(3.0) million |
| Net income (loss) | $11.1 million | $(5.7) million |
| Net income (loss) attributable to Funko, Inc. | $6.5 million | $(4.1) million |
| Class A diluted EPS | $0.17 | $(0.12) |
| Adjusted EBITDA (non-GAAP) | $29.8 million | $10.6 million |
| Cash provided by operating activities | $37.5 million | $37.0 million |
| Cash and cash equivalents, March 31 | $74.7 million | $52.3 million at December 31, 2020 |
Cost of sales was $110.9 million, up 36.2%; SG&A was $51.3 million, up 8.4% and down to 27.1% of sales from 34.6%. Management attributed improved gross margin primarily to product margins, partly offset by higher freight costs from global supply-chain capacity constraints. Operating cash flow was nearly flat year over year; investing cash use was $3.7 million, mainly for tooling and molds, and financing cash use was $10.4 million.
At March 31, working capital was $128.4 million. Debt under the term loan was $185.9 million before unamortized discount and $183.0 million net; no revolving borrowings were outstanding, with $75.0 million available. The term loan matures September 23, 2024. Funko reported compliance with its debt covenants. The Tax Receivable Agreement liability was $68.3 million, including accrued interest.
Material changes and business drivers
- Sales growth was attributed primarily to specialty retailer and direct-to-consumer customers. Active properties rose 11.9% to 762, while average sales per active property increased 23.7%.
- U.S. sales increased 38.6% and Europe sales 55.5%; other international sales increased 2.2%. International customers represented approximately 28% of sales.
- Pop! products generated 79.5% of sales; Loungefly products generated 13.0%. Loungefly sales rose 82.0% year over year.
- Funko acquired a majority interest in TokenWave LLC, developer of the TokenHead NFT tracking app, on March 26, 2021. Purchase consideration and acquired balances were not material; the acquisition’s Q1 operating contribution was also not material.
Outlook, risks and contingencies
- Outlook: The filing provides no numerical earnings or sales guidance. Management said available liquidity was expected to fund operations, growth plans and planned capital expenditures for at least 12 months, while cautioning that longer-term liquidity could be affected by COVID-19 and consumer demand. Management was evaluating possible debt, equity or equity-linked financing; timing and whether any issuance would occur were uncertain.
- COVID-19 and supply chain: Store restrictions, reduced foot traffic, customer order changes and supplier disruptions remained risks. Further closures or sourcing problems could affect sales, liquidity and costs. Management cited higher freight costs from capacity constraints.
- Licenses and concentration: The top ten licensors accounted for approximately 71% of sales; Disney, Lucasfilm and Marvel collectively accounted for approximately 42%. Pop! dependence, short-term and renewable license agreements, royalties and changing consumer preferences create exposure.
- Seasonality: Funko historically generates over half its annual sales in Q3 and Q4; Q1 is typically its lowest-volume and least-profitable quarter. Results may also fluctuate with product and content release timing.
- Legal and other contingencies: A securities class action was dismissed in February 2021 with leave to amend; plaintiffs filed an amended complaint in March, with dismissal briefing expected to conclude in July 2021. Other securities and derivative matters remained pending or stayed. The filing states that possible losses in certain proceedings could not be estimated clearly.
- Customs matter: Funko previously paid $7.8 million to U.S. Customs for identified historical duty underpayments and recorded a $0.5 million contingent liability for potential penalties; additional penalties could exceed the recorded amount.
- Other obligations: The balance sheet included a $9.1 million reserve related to ongoing and future royalty audits. The Tax Receivable Agreement generally requires payment to continuing equity owners of 85% of specified realized or deemed tax benefits.
Key facts for investors to verify
- Whether sales growth and improved profitability persist beyond the pandemic recovery and across seasonal quarters.
- Whether freight, sourcing and other supply-chain cost pressures affect gross margin, and whether Funko can maintain inventory discipline.
- Debt repayment, covenant headroom and future liquidity needs, including any additional financing and its potential dilution or restrictions.
- Developments in the securities litigation, customs-duty matter and royalty audits, including any changes in estimated exposure.
- Performance and commercial prospects of the TokenWave/NFT initiative, a new and uncertain market opportunity.