Funko(FNKO) - 2021 Q1 - Quarterly Report

Part I Item 1. Financial Statements Funko's unaudited condensed consolidated financial statements for Q1 2021 and 2020 are presented, including statements of operations, balance sheets, and cash flows with detailed notes Condensed Consolidated Statements of Operations Net income for Q1 2021 reached $11.1 million, a significant improvement from a $5.7 million net loss in Q1 2020, driven by a 38.4% increase in net sales Q1 2021 vs Q1 2020 Performance | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Net sales | $189,177 | $136,700 | | Income (loss) from operations | $16,795 | $(3,019) | | Net income (loss) | $11,086 | $(5,732) | | Diluted Earnings (loss) per share | $0.17 | $(0.12) | Condensed Consolidated Balance Sheets Total assets increased slightly to $769.2 million as of March 31, 2021, with notable changes including increased cash and decreased long-term debt Balance Sheet Summary | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $266,944 | $259,351 | | Total Assets | $769,198 | $763,590 | | Long-term debt, net | $168,371 | $180,012 | | Total Stockholders' Equity | $333,099 | $322,445 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities was $37.5 million for Q1 2021, with a net increase in cash of $22.4 million after financing activities Cash Flow Summary (Three Months Ended March 31) | Activity | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $37,465 | $36,952 | | Net cash used in investing activities | $(3,685) | $(4,961) | | Net cash used in financing activities | $(10,400) | $(2,752) | | Net increase in cash and cash equivalents | $22,442 | $30,184 | Notes to Unaudited Condensed Consolidated Financial Statements Detailed notes to the financial statements cover a recent acquisition, debt facilities, legal contingencies, segment information, and income taxes - On March 26, 2021, the company acquired a majority interest in TokenWave LLC, developer of the TokenHead app, to expand its product offerings into digital Non-Fungible Tokens (NFTs)[28] - As of March 31, 2021, the company had $185.9 million outstanding under its Term Loan Facility and no outstanding borrowings under its $75.0 million Revolving Credit Facility[39] - The company is involved in several legal proceedings, including a putative class action lawsuit (Ferreira v. Funko, Inc. et al.) alleging misleading statements in 2019 financial reports and shareholder derivative actions[47][48] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 financial performance, highlighting a 38.4% net sales increase and return to profitability, covering operations, non-GAAP measures, and liquidity Results of Operations Net sales for Q1 2021 increased 38.4% to $189.2 million, driven by strong geographic growth and improved gross margin, leading to operating income Q1 2021 vs Q1 2020 Results of Operations | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Net sales | $189,177 | $136,700 | 38.4% | | Gross Profit | $78,324 | $55,283 | 41.7% | | Gross Margin | 41.4% | 40.4% | +1.0 ppt | | Income (loss) from operations | $16,795 | $(3,019) | nm | - The number of active properties increased by 11.9% to 762, and the average net sales per active property grew by 23.7% compared to the prior-year period[84] Net Sales Growth by Brand | Brand | Q1 2021 Sales (in millions) | YoY Growth | | :--- | :--- | :--- | | Pop! Branded Products | $150.3 | 33.0% | | Loungefly Branded Products | $24.5 | 82.0% | | Other Branded Products | $14.3 | 40.8% | Non-GAAP Financial Measures Non-GAAP measures show Adjusted EBITDA significantly increased to $29.8 million in Q1 2021, with Adjusted Net Income of $13.0 million Reconciliation of Net Income (Loss) to Adjusted EBITDA | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net income (loss) | $11,086 | $(5,732) | | EBITDA | $25,878 | $7,056 | | Adjusted EBITDA | $29,772 | $10,596 | Adjusted Net Income (Loss) and EPS | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Adjusted net income (loss) | $12,955 | $(2,286) | | Adjusted earnings (loss) per diluted share | $0.24 | $(0.04) | Liquidity and Financial Condition As of March 31, 2021, the company had $74.7 million in cash and $75.0 million available under its Revolving Credit Facility, with sufficient liquidity for the next 12 months - As of March 31, 2021, the company had $74.7 million of cash and cash equivalents and $128.4 million of working capital[130] - The company was in compliance with all covenants in its Credit Agreement as of March 31, 2021, and had $183.0 million of indebtedness outstanding under its Term Loan Facility with no borrowings on its Revolving Credit Facility[125][127] - The company has an effective Form S-3 shelf registration statement, allowing it to offer and sell up to $100.0 million of various securities to provide financial flexibility[128][129] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposures primarily stem from interest rate and foreign currency fluctuations, with additional hedging contracts initiated in Q1 2021 - The company is primarily exposed to market risk from interest rate and foreign currency fluctuations[140] - In Q1 2021, the company entered into additional short-term foreign currency forward exchange contracts to economically hedge foreign currency risk[140] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting - Management concluded that as of March 31, 2021, the company's disclosure controls and procedures were effective at the reasonable assurance level[143] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[144] Part II Item 1. Legal Proceedings Material legal proceedings, including ongoing securities class action and shareholder derivative lawsuits, are discussed in Note 7 of the financial statements - For details on material legal proceedings, the report directs readers to Note 7, "Commitments and Contingencies - Legal Contingencies"[146] Item 1A. Risk Factors Significant risks include the ongoing COVID-19 impact, high dependence on third-party licenses, intense competition, retail volatility, supply chain disruptions, and debt-related concerns - The COVID-19 pandemic continues to pose a significant risk, potentially impacting demand, supply chains, and overall financial condition[148][152] - The business is highly dependent on license agreements, with the top ten licensors accounting for 71% of sales in Q1 2021, and Disney-owned properties alone represented approximately 42% of sales[158] - ACON has significant influence over the company, holding approximately 39.6% of the combined voting power and rights to designate directors, which may create conflicts of interest with other stockholders[255][258] - The company's debt of $183.0 million as of March 31, 2021, and the associated covenants in the Credit Agreement could adversely affect financial health and restrict operations[249][251] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - There were no unregistered sales of equity securities or use of proceeds to report for the quarter[313] Item 5. Other Information No other information required for disclosure was reported for the period - There was no other information to report for the period[314] Item 6. Exhibits The exhibits filed with Form 10-Q include CEO and CFO certifications and Inline XBRL documents - The exhibits filed include certifications from the CEO and CFO pursuant to the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002, as well as XBRL data files[317]