FNKO.NASDAQFunko, INC
10-Q: Funko Inc. Reports Q3 2024 Results: Net Sales Decline, but Profitability Improves
Sentiment:
Quarterly Report
Funko Inc. experienced a decrease in net sales but improved profitability in the third quarter of 2024, compared to the same period last year.
Capital raiseThe company has a shelf registration statement on Form S-3 that allows it to offer and sell up to $100.0 million of Class A common stock, preferred stock, debt securities, warrants, purchase contracts, or units.The company may need to secure additional financing on favorable terms to meet future capital needs.
Better than expectedThe company's net income improved significantly in Q3 2024 compared to the same period last year.Gross margin saw a substantial increase in both the third quarter and the nine-month period.The company's net loss for the nine-month period improved significantly compared to the previous year.
Summary
- Funko's net sales for the third quarter of 2024 were $292.8 million, a 6.4% decrease compared to $312.9 million in the same quarter of 2023.
- The company reported a net income of $4.6 million for the quarter, a significant improvement from a net loss of $16.2 million in the third quarter of 2023.
- Gross margin increased to 40.9% in Q3 2024 from 33.2% in Q3 2023, primarily due to a recapture of inventory write-downs and lower disposal costs.
- Selling, general, and administrative expenses decreased slightly by 1.4% to $92.7 million.
- For the nine months ended September 30, 2024, net sales were $756.1 million, a 6.1% decrease compared to $804.9 million in the same period of 2023.
- The net loss for the nine-month period was $13.7 million, a significant improvement from a net loss of $153.2 million in the same period of 2023.
- The company's gross margin for the nine months ended September 30, 2024 was 41.0%, compared to 27.8% for the same period in 2023.
- Funko's cash and cash equivalents were $28.5 million as of September 30, 2024, compared to $36.5 million at the end of 2023.
Sentiment
Score: 6
Explanation: The document presents a mixed picture. While profitability has improved significantly, the decline in net sales is a concern. The company is also facing various risks and challenges, including legal proceedings and the need to remediate material weaknesses in internal control. The sentiment is cautiously optimistic due to the improved profitability, but the risks and sales decline temper the overall outlook.
Positives
- The company's net income improved significantly in Q3 2024 compared to the same period last year.
- Gross margin saw a substantial increase in both the third quarter and the nine-month period.
- Interest expenses decreased due to lower average debt balances.
- The company's net loss for the nine-month period improved significantly compared to the previous year.
- Selling, general, and administrative expenses decreased by 1.4% in Q3 2024.
Negatives
- Net sales decreased by 6.4% in Q3 2024 compared to Q3 2023.
- Net sales decreased by 6.1% for the nine months ended September 30, 2024 compared to the same period in 2023.
- Cash and cash equivalents decreased from $36.5 million at the end of 2023 to $28.5 million as of September 30, 2024.
Risks
- The company is subject to risks related to the operation of its business, including its ability to execute its business strategy, manage growth and inventories, and attract and retain qualified personnel.
- Funko is dependent on content creation by third parties and is subject to risks related to the market appeal of licensed properties.
- The company is subject to risks related to the retail industry, including economic downturns and changes in retail practices.
- There are risks related to intellectual property, including the ability to obtain, protect, and enforce intellectual property rights.
- The company's success depends on its ability to manage fluctuations in its business, including seasonal impacts and new product releases.
- International operations expose the company to risks associated with global trade markets, currency fluctuations, and tax rates.
- The company relies on third-party vendors and manufacturers, and its reputation may be harmed by their actions.
- Funko is subject to potential legal risks, including ongoing securities class action litigation.
- The company is subject to risks related to information technology, including e-commerce operations and data protection.
- Indebtedness could adversely affect the company's financial health and competitive position.
- TCG has significant influence over the company, and its interests may conflict with other stockholders.
- There are risks related to the Tax Receivable Agreement, which confers benefits upon the Continuing Equity Owners.
- There are risks associated with the ownership of Class A common stock, including potential dilution and price volatility.
Future Outlook
The company believes that its sources of liquidity and capital will be sufficient to finance its continued operations, growth strategy, and planned capital expenditures for at least the next 12 months. However, there is no assurance that cash provided by operating activities, cash and cash equivalents, or cash available under the Revolving Credit Facility will be sufficient to meet future needs.
Management Comments
- Management is committed to implementing measures designed to ensure that the control deficiencies contributing to the material weaknesses are remediated.
- Management is devoting substantial resources to the ongoing remediation efforts.
Industry Context
The company operates in the pop culture consumer products industry, which is highly competitive and subject to rapidly changing consumer preferences. The company's performance is influenced by the success of licensed properties and the overall retail environment. The company is also navigating a challenging retail environment where retailers have slowed their restocking, prioritized lower inventory levels and, in some cases, have canceled their orders.
Comparison to Industry Standards
- The company's gross margin improvement in Q3 2024 is a positive sign, as it indicates better cost management and pricing strategies compared to the previous year. However, the decrease in net sales suggests that the company is still facing challenges in generating revenue.
- Compared to other companies in the consumer products industry, Funko's performance is mixed. While the company has shown improvement in profitability, it still needs to address the decline in sales.
- The company's reliance on licensed properties and third-party manufacturers is a common practice in the industry, but it also exposes the company to risks related to content creation and supply chain management.
- The company's efforts to expand its e-commerce business and enter new product categories are in line with industry trends, but it needs to effectively manage these initiatives to achieve success.
Management Changes
| Role | Previous Person | New Person | Effective Date | Reason |
|---|---|---|---|---|
| Chief Executive Officer | Michael Lunsford | Cynthia Williams | 2024-05 | Succession |
| Chief Financial Officer | NA | Yves Le Pendeven | 2024-08-08 | New hire |
Corporate Governance
| Change Type | Description | Effective Date | Impact Assessment |
|---|---|---|---|
| Trading Plan | Tracy Daw, Chief Legal Officer and Secretary, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 176,902 shares of the Companys Class A common stock between December 13, 2024 and February 28, 2025, subject to certain conditions. | 2024-09-13 | NA |
| Trading Plan | Andrew Oddie, Chief Commercial Officer, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 48,389 shares of the Companys Class A common stock between December 16, 2024 and May 30, 2025, subject to certain conditions. | 2024-09-16 | NA |
| Trading Plan | Michael Lunsford, Board of Directors, terminated a trading plan intended to satisfy Rule 10b5-1(c) that was originally adopted on March 12, 2024 for the sale of up to 20,000 shares of the Companys Class A common stock until July 12, 2024. | 2024-08-15 | NA |
Legal Proceedings
- The company is involved in several legal proceedings, including stockholder derivative actions and securities class action lawsuits.
- The company has reached a non-monetary settlement in principle in In re Funko, Inc. Derivative Litigation, Smith v. Mariotti, and Fletcher v. Mariotti et al.
- The company has agreed to a settlement in principle in In re Funko, Inc. Securities Litigation.
- The company is also involved in a putative class action lawsuit in the United States District Court for the Western District of Washington, captioned Studen v. Funko, Inc., et al.
- A former employee of the Company filed a putative class action in San Diego Superior Court, seeking to represent all non-exempt workers of the Company in the State of California.
Stakeholder Impact
- Shareholders may be impacted by the volatility of the stock price and the potential for dilution.
- Employees may be impacted by changes in management and ongoing remediation efforts.
- Customers may be impacted by changes in product availability and pricing.
- Suppliers may be impacted by changes in the company's sourcing and manufacturing strategies.
- Creditors may be impacted by the company's debt levels and ability to meet its financial obligations.
Next Steps
- The company will continue to implement measures to remediate material weaknesses in internal control over financial reporting.
- The company will continue to monitor the pending implementation of Pillar Two by individual countries and the potential effects of Pillar Two on the business.
- The company will continue to evaluate and work to improve its internal control over financial reporting.
Key Dates
| Date | Description |
|---|---|
| 2017-04-21 | Funko, Inc. was formed as a Delaware corporation. |
| 2017-11-16 | Start of class action lawsuits in the Superior Court of Washington in and for King County against the Company. |
| 2018-06-12 | End of class action lawsuits in the Superior Court of Washington in and for King County against the Company. |
| 2018-07-02 | Suits were ordered consolidated for all purposes into one action under the title In re Funko, Inc. Securities Litigation. |
| 2020-04-23 | Cassella v. Mariotti et al. was filed in the United States District Court for the Central District of California. |
| 2020-06-05 | Evans v. Mariotti et al. was filed in the United States District Court for the Central District of California. |
| 2020-06-10 | Igelido v. Mariotti et al. was filed in the United States District Court for the Central District of California. |
| 2020-07-06 | These three actions were consolidated for all purposes into one action under the title In re Funko, Inc. Derivative Litigation. |
| 2021-06-11 | Silverberg v. Mariotti, et al. was filed in the Court of Chancery of the State of Delaware. |
| 2021-09-17 | FAH, LLC entered into a new credit agreement. |
| 2022-01-18 | Shumacher v. Mariotti, et al. was filed in the Court of Chancery of the State of Delaware. |
| 2022-04-26 | The Credit Agreement Parties entered into Amendment No. 1 to the Credit Agreement. |
| 2022-05-03 | Plaintiff responded to the motion to dismiss the Silverberg complaint. |
| 2022-05-04 | The Washington State Supreme Court denied the Companys petition. |
| 2022-05-09 | Smith v. Mariotti, et al. was filed in the U.S. District Court for the Central District of California. |
| 2022-05-25 | Plaintiff filed an Amended Complaint in Shumacher v. Mariotti, et al. |
| 2022-05-25 | Briefing was completed on the motion to dismiss the Silverberg complaint. |
| 2022-07-05 | Fletcher v. Mariotti et al. was filed in the Court of Chancery of the State of Delaware. |
| 2022-07-15 | Funko filed a preliminary shelf registration statement on Form S-3 with the SEC. |
| 2022-07-26 | The Form S-3 was declared effective by the SEC. |
| 2022-07-29 | The Credit Agreement Parties entered into Amendment No. 2 to the Credit Agreement. |
| 2022-08-12 | Defendants again moved to dismiss in Shumacher v. Mariotti, et al. |
| 2022-09-19 | The Company filed its answer in In re Funko, Inc. Securities Litigation. |
| 2022-11-25 | Funko entered into a $20.0 million equipment finance agreement. |
| 2022-12-15 | Plaintiff opposed the Defendants motion to dismiss in Shumacher v. Mariotti, et al. |
| 2022-12-18 | The Court denied Defendants motion to dismiss and denied Plaintiffs application for an interim fee in Shumacher v. Mariotti, et al. |
| 2023-02-08 | Briefing on the motion to dismiss was completed in Shumacher v. Mariotti, et al. |
| 2023-02-28 | The Credit Agreement Parties entered into Amendment No. 3 to the Credit Agreement. |
| 2023-03-04 | Plaintiffs filed a motion for preliminary approval of the settlement with the Court in the Smith v. Mariotti litigation. |
| 2023-03-31 | The Company moved to dismiss the action in Shumacher v. Mariotti, et al. |
| 2023-04-03 | The Company moved to dismiss the Silverberg complaint. |
| 2023-04-10 | Briefing on Plaintiffs fee application was completed in Shumacher v. Mariotti, et al. |
| 2023-05-03 | Plaintiff responded to the motion to dismiss the Silverberg complaint. |
| 2023-05-25 | Briefing was completed on the motion to dismiss the Silverberg complaint. |
| 2023-06-02 | Studen v. Funko, Inc., et al. was filed in the United States District Court for the Western District of Washington. |
| 2023-07-24 | The Court heard oral argument on both motions in Shumacher v. Mariotti, et al. |
| 2023-08-17 | The Court appointed lead plaintiff in Studen v. Funko, Inc., et al. |
| 2023-08-29 | The parties submitted a joint stipulated scheduling order in Studen v. Funko, Inc., et al. |
| 2023-10-19 | Plaintiffs amended complaint was filed in Studen v. Funko, Inc., et al. |
| 2023-11-06 | The Court certified the case as a class action in In re Funko, Inc. Securities Litigation. |
| 2023-12-18 | The Court denied Defendants motion to dismiss and denied Plaintiffs application for an interim fee in Shumacher v. Mariotti, et al. |
| 2024-01-26 | We filed our answer in Shumacher v. Mariotti, et al. |
| 2024-03-04 | Plaintiffs filed a motion for preliminary approval of the settlement with the Court in the Smith v. Mariotti litigation. |
| 2024-03-05 | The Company informed the Court that Plaintiffs in the Smith v. Mariotti matter had moved for preliminary approval of settlement. |
| 2024-03-13 | The representative plaintiff moved to withdraw as a plaintiff in Shumacher v. Mariotti, et al. |
| 2024-04-12 | A former employee of the Company filed a putative class action in San Diego Superior Court. |
| 2024-05-16 | The Court granted the Companys motion to dismiss with leave for Plaintiffs to file a second amended complaint in Studen v. Funko, Inc., et al. |
| 2024-06-11 | The Credit Agreement Parties entered into that certain Limited Waiver and Limited Consent. |
| 2024-07-01 | Plaintiffs notified the Court of their decision to not amend their complaint in Studen v. Funko, Inc., et al. |
| 2024-07-08 | The Court dismissed the complaint with prejudice in Studen v. Funko, Inc., et al. |
| 2024-07-26 | The Court granted the motion for preliminary approval in the Smith v. Mariotti litigation. |
| 2024-08-06 | Plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit in Studen v. Funko, Inc., et al. |
| 2024-08-15 | Michael Lunsford terminated a trading plan. |
| 2024-09-13 | Tracy Daw adopted a trading plan. |
| 2024-09-16 | Andrew Oddie adopted a trading plan. |
| 2024-09-30 | End of the reporting period for the quarterly report. |
| 2024-10-11 | Plaintiffs counsel filed a declaration in support of the Motion for Settlement Approval of Final Approval of Derivative Settlement in the Smith v. Mariotti matter. |
| 2024-10-21 | The parties agreed to a settlement in principle in In re Funko, Inc. Securities Litigation. |
| 2024-10-21 | Plaintiffs opening brief was filed in Studen v. Funko, Inc., et al. |
| 2024-11-05 | Share count as of this date. |
| 2024-11-07 | Date of the quarterly report. |
| 2024-11-15 | Scheduled hearing date for final approval of the settlement in the Smith v. Mariotti litigation. |
| 2025-01 | Briefing is scheduled to be completed in or around this month in Studen v. Funko, Inc., et al. |
| 2025-05 | The parties have agreed to a mediation session related to the wage and hour case. |
Keywords
Funko, Collectibles, Pop Culture, Licensed Products, Net Sales, Gross Margin, EBITDA, Financial Results, Inventory, Retail, Licensing, Debt, Tax Receivable Agreement
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