FUNKO, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC") onMarch 5, 2020 . This discussion and analysis contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth under "Risk Factors" included in this Quarterly Report on Form 10-Q. As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to: •"we," "us," "our," the "Company," "Funko" and similar references refer: (1) following the consummation of the Transactions, toFunko, Inc. , and, unless otherwise stated, all of its direct and indirect subsidiaries, includingFAH, LLC and (2) prior to the completion of the Transactions, toFAH, LLC and, unless otherwise stated, all of its subsidiaries. •"ACON" refers toACON Funko Investors, L.L.C. , aDelaware limited liability company, and certain funds affiliated withACON Funko Investors, L.L.C. (including any such fund or entity formed to hold shares of Class A common stock for the Former Equity Owners). •"Continuing Equity Owners" refers collectively to ACON, Fundamental, the Former Profits Interests Holders, the Warrant Holders and certain current and former executive officers, employees and directors and each of their permitted transferees that own common units inFAH, LLC after the Transactions and who may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their common units for, at our election, cash or newly-issued shares ofFunko, Inc.'s Class A common stock. •"FAH, LLC " refers toFunko Acquisition Holdings, L.L.C. •"FAH LLC Agreement" refers toFAH, LLC's second amended and restated limited liability company agreement, as amended from time to time. •"Former Equity Owners" refers to those Original Equity Owners affiliated with ACON who transferred their indirect ownership interests in common units ofFAH, LLC for shares ofFunko, Inc.'s Class A common stock (to be held by them either directly or indirectly) in connection with the consummation of the Transactions. •"Former Profits Interests Holders" refers collectively to certain of our directors and certain current executive officers and employees, in each case, who, prior to the consummation of the Transactions, held existing vested and unvested profits interests inFAH, LLC pursuant toFAH, LLC's prior equity incentive plan and received common units ofFAH, LLC in exchange for their profits interests (subject to any common units received in exchange for unvested profits interests remaining subject to their existing time-based vesting requirements) in connection with the Transactions. •"Fundamental" refers collectively toFundamental Capital, LLC andFunko International, LLC . 17 -------------------------------------------------------------------------------- •"Credit Facilities" refers to the Company's credit agreement, datedOctober 22, 2018 (as amended, the "Credit Agreement"), providing for a term loan facility in the amount of$235.0 million (the "Term Loan Facility") and a revolving credit facility of$50.0 million (which was increased to$75.0 million onFebruary 11, 2019 ) (the "Revolving Credit Facility"). •"Original Equity Owners" refers to the owners of ownership interests inFAH, LLC , collectively, prior to the Transactions, which include ACON, Fundamental, the Former Profits Interests Holders and certain current and former executive officers, employees and directors. •"Tax Receivable Agreement" refers to a tax receivable agreement entered into betweenFunko, Inc. ,FAH, LLC and each of the Continuing Equity Owners as part of the Transactions, defined below. •"Transactions" refers to certain organizational transactions that we effected in connection with our initial public offering ("IPO") inNovember 2017 . •"Warrant Holders" refers to lenders under our former senior secured credit facilities, which were terminated onOctober 22, 2018 , that previously held warrants to purchase ownership interests inFAH, LLC , which were converted into common units ofFAH, LLC in connection with the consummation of the Transactions. Overview We are a leading pop culture consumer products company. Our business is built on the principle that almost everyone is a fan of something and the evolution of pop culture is leading to increasing opportunities for fan loyalty. We create whimsical, fun and unique products that enable fans to express their affinity for their favorite "something"-whether it is a movie, TV show, video game, musician or sports team. We infuse our distinct designs and aesthetic sensibility into one of the industry's largest portfolios of licensed content over a wide variety of product categories, including figures, plush, accessories, apparel and homewares. We were founded in 1998 as a consumer products company focused on designing and selling nostalgic bobble head figures. In 2005, we were acquired by a small group of investors led byBrian Mariotti , who took over day-to-day operations and has served as our chief executive officer since that time. Under Brian's leadership, we have significantly broadened and deepened our relationships with content providers. Content providers trust us to create unique extensions of their intellectual property that extend the relevance of their content with consumers through ongoing engagement, helping to maximize the lifetime value of their content. We strive to license every pop culture property that we believe is relevant to consumers. Domestically, we primarily sell our products to specialty retailers, mass-market retailers, and e-commerce sites. Internationally, we sell our products directly to similar retailers, primarily inEurope , through our subsidiaryFunko UK, Ltd. We also sell our products to distributors for sale to small retailers inthe United States and in certain countries internationally, typically where we do not have a direct presence. We also sell certain of our products directly to consumers through our e-commerce business and, to a lesser extent, at specialty licensing and comic book shows, conventions and exhibitions in cities throughoutthe United States , including at Comic-Con events. OnNovember 6, 2017 , we completed our IPO of 10,416,666 shares of Class A common stock at an initial public offering price of$12.00 per share and received approximately$117.3 million in net proceeds after deducting underwriting discounts and commissions. We used the net proceeds to purchase 10,416,666 newly issued common units directly fromFAH, LLC at a price per unit equal to the price per share of Class A common stock in the IPO less underwriting discounts and commissions. AtMarch 31, 2020 , we held 35.0 million common units, representing an approximately 68.7% interest inFAH, LLC . 18 --------------------------------------------------------------------------------
COVID-19
COVID-19 has caused and continues to cause significant loss of life and disruption to the global economy, including the curtailment of activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease, and through business and transportation shutdowns and restrictions on people's movement and congregation. As a result of the pandemic, we have experienced, and continue to experience, weakened demand for our products, which has had a negative impact on our net sales in the three months endedMarch 31, 2020 and into the second quarter of 2020. Many of our customers have been unable to sell our products in their stores due to government-mandated closures and have deferred or significantly reduced orders for our products. We expect these trends to continue until such closures are significantly curtailed or lifted. In addition, the pandemic has reduced foot traffic in the stores where our products are sold that remain open, and the global economic impact of the pandemic has temporarily reduced consumer demand for our products as they focus on purchasing essential goods. InEurope , many of our key accounts remain closed or are operating at significantly reduced volumes. As a result, we have made the strategic decision inEurope to shift any new products that were initially planned to arrive on retailer shelves in the second quarter of 2020 into the third quarter of 2020 to preserve demand for these new items. Therefore, we expect shipments in the region during the second quarter of 2020 will be minimal. Given these factors, the Company anticipates that the greatest impact from the COVID-19 pandemic in fiscal 2020 will occur in the second quarter of 2020 and will result in a significant net sales decline as compared to the second quarter of 2019. In addition, in the three months endedMarch 31, 2020 , certain of our suppliers and the manufacturers of certain of our products were adversely impacted by COVID-19. As a result, we faced delays or difficulty sourcing products, which negatively affected our business and financial results. In response, we shifted a greater amount of our production fromChina toVietnam . Even if we are able to find alternate sources for such products, they may cost more and cause delays in our supply chain, which could adversely impact our profitability and financial condition. We have taken actions to protect our employees in response to the pandemic, including closing our corporate offices and requiring our office employees to work from home. At our distribution centers, certain practices are in effect to safeguard workers, including a staggered work schedule, and we are continuing to monitor direction from local and national governments carefully. Additionally, our two retail locations have been closed until further notice. As a result of the impact of COVID-19 on our financial results for the three months endedMarch 31, 2020 , and the anticipated future impact of the pandemic, we have implemented cost control measures and cash management actions, including: •Furloughing a significant portion of our employees; •Implementing 20% salary reductions across our executive team and other members of upper level management; •Executing reductions in operating expenses, planned inventory levels and non-product development capital expenditures; and •Proactively managing working capital, including reducing incoming inventory to align with anticipated sales. 19 -------------------------------------------------------------------------------- As ofMarch 31, 2020 , we had$46.3 million available under the Revolving Credit Facility. Key Performance Indicators We consider the following metrics to be key performance indicators to evaluate our business, develop financial forecasts, and make strategic decisions. Three Months Ended March 31, 2020 2019 (amounts in thousands) Net sales$ 136,700 $ 167,065 Net (loss) income$ (5,732) $ 7,145 EBITDA (1)$ 7,056 $ 22,876 Adjusted EBITDA (1)$ 10,596 $ 25,339 (1)Earnings before interest, taxes, depreciation and amortization ("EBITDA") and Adjusted EBITDA are financial measures not calculated in accordance withU.S. GAAP, or non-GAAP financial measures. For a reconciliation of EBITDA and Adjusted EBITDA to net (loss) income, the most closely comparableU.S. GAAP financial measure, see "Non-GAAP Financial Measures" below. 20 -------------------------------------------------------------------------------- Results of Operations Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 The following table sets forth information comparing the components of net (loss) income for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, Period over Period Change 2020 2019 Dollar Percentage (amounts in thousands, except percentages) Net sales$ 136,700 $ 167,065 $ (30,365) (18.2) % Cost of sales (exclusive of depreciation and amortization shown separately below) 81,417 103,656 (22,239) (21.5) % Selling, general, and administrative expenses 47,313 40,468 6,845 16.9 % Depreciation and amortization 10,989 10,230 759 7.4 % Total operating expenses 139,719 154,354 (14,635) (9.5) % (Loss) income from operations (3,019) 12,711 (15,730) (123.8) % Interest expense, net 2,655 4,072 (1,417) (34.8) % Other expense, net 914 65 849 1,306.2 % Income before income taxes (6,588) 8,574 (15,162) (176.8) % Income tax (benefit) expense (856) 1,429 (2,285) (159.9) % Net (loss) income (5,732) 7,145 (12,877) (180.2) % Less: net (loss) income attributable to non-controlling interests (1,606) 4,950 (6,556) (132.4) %
Net (loss) income attributable to
(288.0) %
Net Sales
Net sales were $136.7 million for the three months ended March 31, 2020 , a
decrease of 18.2%, compared to $167.1 million for the three months ended
March 31, 2019 . The decrease in net sales was due primarily to a weaker content
lineup for the three months ended March 31, 2020 compared to the three months
ended March 31, 2019 as well as impacts from the COVID-19 pandemic. During the
three months ended March 31, 2020 , we experienced supply chain disruptions
related to the COVID-19 pandemic as well as reduced shipments to our customers
as non-essential business closures and social distancing guidelines took effect
in the final weeks of the three months ended March 31, 2020 .
For the three months ended March 31, 2020 , the number of active properties
increased 11% to 681 as compared to 611 for the three months ended March 31,
2019 , and the average net sales per active property decreased 27% for the three
months ended March 31, 2020 as compared to the three months ended March 31,
2019 . An active property is a licensed property from which we generate sales of
products during a given period. While we expect to see growth in the number of
active properties and average sales per active property over time, we expect
that the number of active properties and the average sales per active property
will fluctuate from year to year or quarter to quarter based on what is relevant
in pop culture at that time and the types of properties we are producing
against.
On a geographical basis, net sales in the United States decreased 9.5% to $98.5
million in the three months ended March 31, 2020 as compared to the three months
ended March 31, 2019 , and net sales internationally decreased 34.4% to $38.2
million in the three months ended March 31, 2020 as compared to the three months
ended March 31, 2019 , driven primarily by decreased sales in Europe , reflecting
21
--------------------------------------------------------------------------------
more significant impacts from the COVID-19 pandemic as non-essential business
closures impacted overseas markets earlier in the quarter, especially within
Europe . On a product category basis, net sales of figures decreased 18.3% to
$111.3 million in the three months ended March 31, 2020 as compared to the three
months ended March 31, 2019 , and net sales of other products decreased 17.7% to
$25.4 million in the three months ended March 31, 2020 as compared to the three
months ended March 31, 2019 , which reflects decreased sales in accessories,
plush and other items, partially offset by growth in our Loungefly and apparel
products.
Cost of Sales and Gross Margin (exclusive of depreciation and amortization)
Cost of sales (exclusive of depreciation and amortization) was $81.4 million for
the three months ended March 31, 2020 , a decrease of 21.5%, compared to $103.7
million for the three months ended March 31, 2019 . Cost of sales (exclusive of
depreciation and amortization) decreased primarily as a result of lower sales
stemming from a weaker content lineup and the COVID-19 pandemic, as discussed
above.
Gross margin (exclusive of depreciation and amortization), calculated as net
sales less cost of sales as a percentage of net sales, was 40.4% for the three
months ended March 31, 2020 , compared to 38.0% for the three months ended
March 31, 2019 . The increase in gross margin (exclusive of depreciation and
amortization) for the three months ended March 31, 2020 compared to the three
months ended March 31, 2019 was driven primarily by improved product margins and
enhanced inventory management processes implemented in the second half of 2019.
The increase in product margins for the three months ended March 31, 2020
compared to the three months ended March 31, 2019 was primarily attributable to
higher average selling prices driven by a mix shift toward direct-to-consumer
sales as well as higher margins on our Loungefly products and sales to our
European customers.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $47.3 million for the three
months ended March 31, 2020 , an increase of 16.9%, compared to $40.5 million for
the three months ended March 31, 2019 . The increase was driven primarily by a
$3.6 million increase in personnel and related costs (including salary and
related taxes/benefits, commissions and stock compensation expense), a $1.5
million increase in rent and related facilities costs and a $1.4 million
increase in professional fees. Selling, general and administrative expenses were
34.6% and 24.2% of net sales for the three months ended March 31, 2020 and 2019,
respectively.
Depreciation and Amortization
Depreciation and amortization expense was $11.0 million for the three months
ended March 31, 2020 , an increase of 7.4%, compared to $10.2 million for the
three months ended March 31, 2019 , primarily driven by amortization of
intangible assets acquired from the Forrest-Pruzan acquisition in February 2019
and an increase in depreciation on our office and warehouse facilities,
including the addition of our Hollywood retail store.
Interest Expense, Net
Interest expense, net was $2.7 million for the three months ended March 31,
2020 , a decrease of 34.8%, compared to $4.1 million for the three months ended
March 31, 2019 . The decrease in interest expense, net was due to lower interest
rates on debt outstanding during the three months ended March 31, 2020 as
compared to the interest rates on debt outstanding during the three months ended
March 31, 2019 as a result of the second amendment to the Credit Facilities
entered into on September 23, 2019 that reduced the interest margin applicable
to all loans under the Credit Agreement by 0.75%.
22
--------------------------------------------------------------------------------
Other expense, net
Other expense, net was $0.9 million for the three months ended March 31, 2020 ,
compared to $0.1 million for the three months ended March 31, 2019 . Other
expense, net for the three months ended March 31, 2020 and 2019 was primarily
related to foreign currency gains and losses relating to transactions
denominated in currencies other than the US dollar.
Net (loss) income
Net loss was $5.7 million for the three months ended March 31, 2020 , compared to
net income of $7.1 million for the three months ended March 31, 2019 , primarily
due to the decrease in net sales and increase in selling, general and
administrative expenses for the three months ended March 31, 2020 as compared to
the three months ended March 31, 2019 , as discussed above.
23
--------------------------------------------------------------------------------
Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income and Adjusted (Loss) Earnings
per Diluted Share (collectively the "Non-GAAP Financial Measures") are
supplemental measures of our performance that are not required by, or presented
in accordance with, U.S. GAAP. The Non-GAAP Financial Measures are not
measurements of our financial performance under U.S. GAAP and should not be
considered as an alternative to net (loss) income, (loss) earnings per share or
any other performance measure derived in accordance with U.S. GAAP. We define
EBITDA as net (loss) income before interest expense, net, income tax (benefit)
expense, depreciation and amortization. We define Adjusted EBITDA as EBITDA
further adjusted for non-cash charges related to equity-based compensation
programs, acquisition transaction costs and other expenses, certain severance,
relocation and related costs, foreign currency transaction gains and losses and
other unusual or one-time items. We define Adjusted Net (Loss) Income as net
(loss) income attributable to Funko, Inc. adjusted for the reallocation of
income attributable to non-controlling interests from the assumed exchange of
all outstanding common units and options in FAH, LLC for newly issued-shares of
Class A common stock of Funko, Inc. and further adjusted for the impact of
certain non-cash charges and other items that we do not consider in our
evaluation of ongoing operating performance. These items include, among other
things, reallocation of net (loss) income attributable to non-controlling
interests, non-cash charges related to equity-based compensation programs,
acquisition transaction costs and other expenses, certain severance, relocation
and related costs, foreign currency transaction gains and losses and other
unusual or one-time items, and the income tax (benefit) expense effect of these
adjustments. We define Adjusted (Loss) Earnings per Diluted Share as Adjusted
Net (Loss) Income divided by the weighted-average shares of Class A common stock
outstanding, assuming (1) the full exchange of all outstanding common units and
options in FAH, LLC for newly issued-shares of Class A common stock of Funko,
Inc. and (2) the dilutive effect of stock options and unvested common units, if
any. We caution investors that amounts presented in accordance with our
definitions of the Non-GAAP Financial Measures may not be comparable to similar
measures disclosed by our competitors, because not all companies and analysts
calculate the Non-GAAP Financial Measures in the same manner. We present the
Non-GAAP Financial Measures because we consider them to be important
supplemental measures of our performance and believe they are frequently used by
securities analysts, investors, and other interested parties in the evaluation
of companies in our industry. Management believes that investors' understanding
of our performance is enhanced by including these Non-GAAP Financial Measures as
a reasonable basis for comparing our ongoing results of operations.
Management uses the Non-GAAP Financial Measures:
•as a measurement of operating performance because they assist us in comparing
the operating performance of our business on a consistent basis, as they remove
the impact of items not directly resulting from our core operations;
•for planning purposes, including the preparation of our internal annual
operating budget and financial projections;
•as a consideration to assess incentive compensation for our employees;
•to evaluate the performance and effectiveness of our operational strategies;
and
•to evaluate our capacity to expand our business.
By providing these Non-GAAP Financial Measures, together with reconciliations,
we believe we are enhancing investors' understanding of our business and our
results of operations, as well as assisting investors in evaluating how well we
are executing our strategic initiatives. In addition, our Credit Facilities use
Adjusted EBITDA to measure our compliance with covenants such as a senior
leverage ratio. The Non-GAAP Financial Measures have limitations as analytical
tools, and should not be considered in isolation, or as an alternative to, or a
substitute for net (loss) income or other financial statement data
24
--------------------------------------------------------------------------------
presented in our unaudited condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q as indicators of financial
performance. Some of the limitations are:
•such measures do not reflect our cash expenditures, or future requirements for
capital expenditures or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working
capital needs;
•such measures do not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments on our debt;
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future and such
measures do not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate such measures differently than we
do, limiting their usefulness as comparative measures.
Due to these limitations, Non-GAAP Financial Measures should not be considered
as measures of discretionary cash available to us to invest in the growth of our
business. We compensate for these limitations by relying primarily on our U.S.
GAAP results and using these non-GAAP measures only supplementally. As noted in
the table below, the Non-GAAP Financial Measures include adjustments for
non-cash charges related to equity-based compensation programs, acquisition
transaction costs and other expenses, certain severance, relocation and related
costs, foreign currency transaction gains and losses and other unusual or
one-time items. It is reasonable to expect that these items will occur in future
periods. However, we believe these adjustments are appropriate because the
amounts recognized can vary significantly from period to period, do not directly
relate to the ongoing operations of our business and complicate comparisons of
our internal operating results and operating results of other companies over
time. Each of the normal recurring adjustments and other adjustments described
herein and in the reconciliation table below help management with a measure of
our core operating performance over time by removing items that are not related
to day-to-day operations.
25
--------------------------------------------------------------------------------
The following tables reconcile the Non-GAAP Financial Measures to the most
directly comparable
Three Months Ended March 31,
2020 2019
(In thousands, except per share data)
Net (loss) income attributable to Funko, Inc. $
(4,126)
(1,606) 4,950
Equity-based compensation (2) 2,413 2,748
Acquisition transaction costs and other expenses (3) - (350)
Certain severance, relocation and related costs (4) 213 -
Foreign currency transaction loss (5) 914 65
Income tax expense (6) (94) (1,330)
Adjusted net (loss) income $ (2,286) $ 8,278
Weighted-average shares of Class A common stock outstanding-basic 34,944 26,640
Equity-based compensation awards and common units of
15,927 24,994
Adjusted weighted-average shares of Class A stock outstanding - diluted
50,871 51,634
Adjusted (loss) earnings per diluted share $ (0.04) $ 0.16
Three Months Ended March 31,
2020 2019
(amounts in thousands)
Net (loss) income $ (5,732) $ 7,145
Interest expense, net 2,655 4,072
Income tax (benefit) expense (856) 1,429
Depreciation and amortization 10,989 10,230
EBITDA $ 7,056 $ 22,876
Adjustments:
Equity-based compensation (2) 2,413 2,748
Acquisition transaction costs and other expenses (3) - (350)
Certain severance, relocation and related costs (4) 213 -
Foreign currency transaction loss (5) 914 65
Adjusted EBITDA $ 10,596 $ 25,339
(1)Represents the reallocation of net (loss) income 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 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.
26
--------------------------------------------------------------------------------
(3)Represents legal, accounting, and other related costs incurred in connection
with acquisitions and other potential transactions. For the three months ended
March 31, 2019 , includes a $0.4 million reversal of a pre-acquisition contingent
loss related to our Loungefly acquisition.
(4)For the three months ended March 31, 2020 , represents severance, relocation
and related costs associated with the consolidation of our warehouse facilities
in the United Kingdom .
(5)Represents both unrealized and realized foreign currency gains and losses on
transactions other than in U.S. dollars, including derivative gains and losses
on foreign currency forward exchange contracts.
(6)Represents the income tax expense effect of the above adjustments. This
adjustment uses an effective tax rate of 25% for all periods presented.
Liquidity and Financial Condition
Introduction
Our primary requirements for liquidity and capital are working capital,
inventory management, capital expenditures, debt service and general corporate
needs.
Notwithstanding our obligations under the Tax Receivable Agreement between
Funko, Inc. , FAH, LLC and each of the Continuing Equity Owners, we believe that
our sources of liquidity and capital will be sufficient to finance our continued
operations, growth strategy, our planned capital expenditures and the additional
expenses we expect to incur as a public company for at least the next 12 months.
However, we cannot assure you that our cash provided by operating activities,
cash and cash equivalents or cash available under our Revolving Credit Facility
will be sufficient to meet our long-term future needs beyond the next 12 months,
particularly in light of the ongoing nature of the COVID-19 pandemic and its
continuing impact on the global economy and consumer demand. In addition to the
flexibility provided by the Third Amendment (as described below), we are
currently evaluating additional options to improve our liquidity, such as the
issuance of additional unsecured and secured debt, equity securities and
equity-linked securities. There can be no assurance as to the timing of any such
issuance, which may be in the near term, and any such financing may be material
in nature and could result in significant additional borrowings or issuances of
equity or equity-linked securities. If we obtain additional capital by issuing
equity, the interests of our existing stockholders will be diluted, which may be
significant. If we incur additional indebtedness, that indebtedness may contain
significant financial and other covenants that may significantly restrict our
operations. We cannot assure you that we could obtain refinancing or additional
financing on favorable terms or at all.
Liquidity and Capital Resources
The following table shows summary cash flow information for the three months
ended March 31, 2020 and 2019 (in thousands):
Three
Months Ended
2020 2019
Net cash provided by operating activities $ 36,952 $ 27,302
Net cash used in investing activities (4,961) (9,982)
Net cash used in by financing activities (2,752) (7,570)
Effect of exchange rates on cash and cash equivalents 945 (690)
Net increase in cash and cash equivalents $ 30,184
27
--------------------------------------------------------------------------------
Operating Activities. Net cash provided by operating activities was $37.0
million for the three months ended March 31, 2020 , compared to $27.3 million for
the three months ended March 31, 2019 . Changes in net cash provided by operating
activities result primarily from cash received from net sales and cash payments
for product costs and royalty expenses paid to our licensors. Other drivers of
the changes in net cash provided by operating activities include shipping and
freight costs, selling, general and administrative expenses (including personnel
expenses and commissions and rent and facilities costs) and interest payments
made for our short-term borrowings and long-term debt. Our accounts receivable
typically are short term and settle in approximately 30 to 90 days.
The increase for the three months ended March 31, 2020 compared to the three
months ended March 31, 2019 was primarily due to an increase related to changes
in working capital. Changes in working capital increased net cash provided by
operating activities by $19.8 million and were primarily due to decreases in
accounts receivable, net of $12.3 million and prepaid expenses and other assets
of $10.3 million and an increase in accrued expenses and other liabilities of
$6.6 million , partially offset by an increase in inventory of $4.4 million , and
decreases to accrued royalties and income taxes payable of $3.5 million and $1.4
million , respectively. Partially offsetting the increase from changes in working
capital was a decrease in net income, excluding non-cash adjustments, of $10.2
million , driven primarily by a decrease in net sales due to a weaker content
lineup and the impact of the COVID-19 pandemic as well as an increase in
selling, general and administrative expenses, partially offset by a decrease in
interest expense, net and a decrease in cost of sales (exclusive of depreciation
and amortization).
Investing Activities. Our net cash used in investing activities primarily
consists of acquisitions, net of cash, and purchase of property and equipment.
For the three months ended March 31, 2020 , net cash used in investing activities
was $5.0 million and was primarily related to purchases of tooling and molds
used in production our product lines.
For the three months ended March 31, 2019 , net cash used in investing activities
was $10.0 million and was comprised of initial cash consideration, net of cash
acquired of $6.4 million for the Forrest-Pruzan acquisition and $3.6 million for
purchases of property and equipment primarily relating to tooling and molds.
Financing Activities. Our financing activities primarily consist of proceeds
from the issuance of long-term debt, net of debt issuance costs, the repayment
of long-term debt, payments and borrowings under our line of credit facility,
distributions to the Continuing Equity Owners and proceeds from the exercise of
equity-based options. We do not anticipate any future financing activity related
to contributions from the Continuing Equity Owners.
For the three months ended March 31, 2020 , net cash used in financing activities
was $2.8 million , primarily related to payments on the Term Loan Facility of
$2.9 million and distributions to the Continuing Equity Owners of $2.7 million ,
partially offset by net borrowings on the Revolving Credit Facility of $3.0
million .
For the three months ended March 31, 2019 , net cash used in financing activities
was $7.6 million , primarily related to distributions to the Continuing Equity
Owners of $8.1 million and payments on the Term Loan Facility of $2.9 million ,
partially offset by net borrowings on the Revolving Credit Facility of $2.5
million and proceeds from the exercise of equity based options of $1.1 million .
Credit Facilities
On October 22, 2018 (the "Closing Date"), Funko Acquisition Holdings, L.L.C.,
Funko Holdings LLC, Funko, LLC and Loungefly, LLC (each, a "Borrower" and
collectively, the "Borrowers"), entered into a new Credit Agreement by and among
each Borrower, certain financial institutions party thereto and PNC Bank ,
28
--------------------------------------------------------------------------------
National Association, as administrative agent and collateral agent, providing
for a Term Loan Facility in the amount of $235.0 million and a Revolving Credit
Facility of $50.0 million . Proceeds from the Credit Facilities were primarily
used to repay our prior senior secured credit facilities.
On February 11, 2019 , the Company amended its Credit Facilities to increase the
Revolving Credit Facility to $75.0 million , reflecting the incremental capacity
of $25.0 million contemplated under the Credit Facilities prior to such
amendment.
On September 23, 2019 , the Company entered into a second amendment to the Credit
Facilities (the "Second Amendment"). The Second Amendment extended the maturity
date of the term loans and revolving credit facility under the Credit Agreement
to September 23, 2024 , reduced the interest margin applicable to all loans under
the Credit Agreement by 0.75% and reduced certain fees incurred under the Credit
Agreement. The Second Amendment also allows the Company to request that the Term
Loan Facility be increased by an additional $25.0 million .
On May 5, 2020 , the Company entered into an amendment to the Credit Agreement
(the "Third Amendment"), which amended and modified the Credit Agreement, to,
among other things, (i) waive the financial covenants under the Credit Agreement
for the fiscal quarters ending June 30, 2020 and September 30, 2020 (the "Waiver
Period"), (ii) add a requirement to maintain a minimum liquidity of at least $30
million until the Leverage Ratio (as defined in the Credit Agreement) for the
most recently ended four consecutive fiscal quarter period is less than 2.50 to
1.00, (iii) hold the incurrence ratios for certain restricted payments,
investments and dispositions at the levels applicable prior to the effectiveness
of the Third Amendment, (iv) increase the interest and fees payable under the
Credit Agreement from the date of Third Amendment through (but excluding) the
first date on which the Company receives cumulative net cash proceeds of at
least $50 million from certain issuances of permitted equity or convertible
subordinated debt and (v) allow that any calculation of Consolidated EBITDA (as
defined in the Credit Agreement) that includes the fiscal quarter ended December
31, 2019 may include non-cash expenses for inventory write-downs incurred by the
Company during such quarter.
Following the Waiver Period, the Third Amendment adjusts the required leverage
levels for the Leverage Ratio to provide the Company with additional flexibility
when it is re-imposed at the end of the Waiver Period.
The Credit Facilities are secured by substantially all assets of the Borrowers
and any of their existing or future material domestic subsidiaries, subject to
customary exceptions. We are a holding company with no material assets and we do
not conduct any business operations of our own. We have no independent means of
generating revenue or cash flow, and our ability to pay dividends in the future,
if any, is dependent upon the financial results and cash flows of FAH, LLC and
its subsidiaries and distributions we receive from FAH, LLC . Under the terms of
the Credit Facilities, our operating subsidiaries are currently limited in their
ability to pay cash dividends to the Company, subject to certain customary
exceptions, including:
•the ability to pay, so long as there is no current or ongoing event of default,
amounts required to be paid under the Tax Receivable Agreement, certain expenses
associated with being a public company and reimbursement of expenses required by
the LLC Agreement or the Registration Rights Agreement; and
•the ability to make other distributions of up to $25.0 million during any
period of four fiscal quarters in order to pay dividends to the common unit
holders of FAH, LLC (including the Company) as long as the funds received by the
Company are used to pay dividends to the Company's stockholders, the Leverage
Ratio (as defined in the Credit Agreement) is not greater than a ratio that is
0.50:1.00 less than the Leverage Ratio for the applicable fiscal quarter and
there is remaining Availability (as defined in the Credit Agreement) under the
Credit Facilities of at least $25.0 million .
29
--------------------------------------------------------------------------------
We expect these limitations to continue in the future under the terms of the
Credit Facilities and that they may continue under the terms of any future
credit agreement or any future debt or preferred equity securities of ours or of
our subsidiaries.
The Borrowers and any of their existing or future material domestic
subsidiaries, subject to customary exceptions, guarantee repayment of the Credit
Facilities. The Term Loan Facility matures on September 23, 2024 (the "Maturity
Date"). The Term Loan Facility amortizes in quarterly installments in aggregate
amounts equal to 5.00% of the original principal amount of the Term Loan
Facility in the first and second years of the Term Loan Facility, 10.00% of the
original principal amount of the Term Loan Facility in the third and fourth
years of the Term Loan Facility and 12.50% of the original principal amount of
the Term Loan Facility in the fifth and sixth year of the Term Loan Facility,
with any outstanding balance due and payable on the Maturity Date. The Revolving
Credit Facility terminates on the Maturity Date and loans thereunder may be
borrowed, repaid, and reborrowed up to such date. $28.7 million was outstanding
under the Revolving Credit Facility as of March 31, 2020 .
Loans under the Credit Facilities, at the Borrowers' option, bear interest at
either the Euro-Rate (as defined in the Credit Agreement) or, in the case of
swing loans, the Swing Rate (as defined in the Credit Agreement), plus 2.50% or
the Base Rate (as defined in the Credit Agreement) plus 1.50%, with two 0.25%
step-downs based on the achievement of certain leverage ratios following the
Closing Date. The Euro-Rate is subject to a 0.00% floor. For loans based on the
Euro-Rate, interest payments are due at the end of each applicable interest
period. For loans based on the Base Rate, interest payments are due quarterly.
The Credit Agreement governing the Credit Facilities contains a number of
covenants that, among other things and subject to certain exceptions, restrict
our ability to:
•incur additional indebtedness;
•incur certain liens;
•consolidate, merge or sell or otherwise dispose of our assets;
•alter the business conducted by us and our subsidiaries;
•make investments, loans, advances, guarantees and acquisitions;
•pay dividends or make other distributions on equity interests, or redeem,
repurchase or retire equity interests;
•enter into transactions with affiliates;
•enter into agreements restricting our subsidiaries' ability to pay dividends;
•issue or sell equity interests or securities convertible into or exchangeable
for equity interests;
•redeem, repurchase or refinance other indebtedness; and
•amend or modify our governing documents.
In addition, the Credit Agreement requires FAH, LLC and its subsidiaries to
comply on a quarterly basis with a maximum senior leverage ratio and a minimum
fixed charge coverage ratio (in each case, measured on a trailing four-quarter
basis). The maximum senior leverage ratio is currently 2.75:1.00. As of
March 31, 2020 and December 31, 2019 , we were in compliance with all covenants
in our Credit Facilities.
30
--------------------------------------------------------------------------------
The Credit Agreement also contains certain customary representations and
warranties and affirmative covenants, and certain reporting obligations. In
addition, the lenders under the Credit Facilities will be permitted to
accelerate all outstanding borrowings and other obligations, terminate
outstanding commitments and exercise other specified remedies upon the
occurrence of certain events of default (subject to certain grace periods and
exceptions), which include, among other things, payment defaults, breaches of
representations and warranties, covenant defaults, certain cross-defaults and
cross-accelerations to other indebtedness, certain events of bankruptcy and
insolvency, certain judgments and changes of control. The Credit Agreement
defines "change of control" to include, among other things, any person or group
other than ACON and its affiliates becoming the beneficial owner of more than
35% of the voting power of the equity interests of Funko, Inc.
As of March 31, 2020 , we had $242.5 million of indebtedness outstanding under
our Credit Facilities, consisting of $213.8 million outstanding under our Term
Loan Facility (net of unamortized discount of $3.5 million and $28.7 million
outstanding under our Revolving Credit Facility, leaving $46.3 million available
under our Revolving Credit Facility.
31
--------------------------------------------------------------------------------
Form S-3 Registration Statement
On April 20, 2019 , we filed a preliminary shelf registration statement on Form
S-3 (as amended on May 13, 2019 and August 30, 2019 , the "Form S-3") with the
SEC . The Form S-3 was declared effective by the SEC on September 16, 2019 . The
Form S-3 allows us to offer and sell from time-to-time up to $100.0 million of
Class A common stock, preferred stock, debt securities, warrants, purchase
contracts or units comprised of any combination of these securities for our own
account and allows certain selling stockholders to offer and sell 27,884,185
shares of Class A common stock in one or more offerings. On September 19, 2019 ,
certain selling stockholders completed a secondary underwritten public offering
of 4,000,000 shares of Class A common stock under our Form S-3.
The Form S-3 is intended to provide us flexibility to conduct registered sales
of our securities, subject to market conditions and our future capital needs.
The terms of any future offering under the shelf registration statement will be
established at the time of such offering and will be described in a prospectus
supplement filed with the SEC prior to the completion of any such offering.
As of March 31, 2020 , we had $55.4 million of cash and cash equivalents and
$93.2 million of working capital, compared with $25.2 million of cash and cash
equivalents and $101.6 million of working capital as of December 31, 2019 .
Working capital is impacted by the seasonal trends of our business and the
timing of new product releases, as well as our current portion of long-term debt
and draw downs on our line of credit.
Future Sources and Uses of Liquidity
Sources
As noted above, historically, our primary sources of cash flows have been cash
flows from operating activities and borrowings under our Credit Facilities. We
expect these sources of liquidity to continue to be our primary sources of
liquidity. For a discussion of our Credit Facilities, see "Financial Condition"
above and Note 4, Debt.
In addition, as described above, on April 20, 2019 , we filed a preliminary shelf
registration statement on Form S-3 with the SEC , which was declared effective by
the SEC on September 16, 2019 . The terms of any offering under the shelf
registration statement will be established at the time of such offering and will
be described in a prospectus supplement filed with the SEC prior to the
completion of any such offering.
We cannot assure you that our cash provided by operating activities or cash
available under our Credit Facilities will be sufficient to meet our long-term
future needs beyond the next 12 months, particularly in light of the ongoing
nature of the COVID-19 pandemic and its continuing impact on the global economy
and consumer demand. We are currently evaluating additional options to improve
our liquidity, such as the issuance of additional unsecured and secured debt,
equity securities and equity-linked securities. However, the disruption and
volatility in the global capital markets caused by COVID-19 could impact our
ability to access the capital markets, and could therefore have a material
adverse effect on our future liquidity.
Uses
Additional future liquidity needs may include public company costs, tax
distributions, the redemption right held by the Continuing Equity Owners that
they may exercise from time to time (should we elect to exchange their common
units for a cash payment), payments under the Tax Receivable Agreement and
general cash requirements for operations and capital expenditures. The
Continuing Equity Owners may exercise their redemption right for as long as
their common units remain outstanding. Although the actual timing and amount of
any payments that may be made under the Tax Receivable Agreement will vary, we
expect that the payments we will be required to make to the Continuing Equity
Owners will be significant.
32
--------------------------------------------------------------------------------
Any payments made by us to the Continuing Equity Owners under the Tax Receivable
Agreement will generally reduce the amount of overall cash flow that might have
otherwise have been available to us or to FAH, LLC and, to the extent that we
are unable to make payments under the Tax Receivable Agreement for any reason,
the unpaid amounts generally will be deferred and will accrue interest until
paid by us; provided however, that nonpayment for a specified period may
constitute a material breach under the Tax Receivable Agreement and therefore
may accelerate payments due under the Tax Receivable Agreement.
Seasonality
While our customers in the retail industry typically operate in highly seasonal
businesses, we have historically experienced only moderate seasonality in our
business. Historically, over 50% of our net sales are made in the third and
fourth quarters, primarily in the period from August through November, as our
customers build up their inventories in anticipation of the holiday season.
Historically, the first quarter of the year has represented the lowest volume of
shipment and sales in our business and in the retail and toy industries
generally and it is also the least profitable quarter due to the various fixed
costs of the business. However, the rapid growth we have experienced in recent
years may have masked the full effects of seasonal factors on our business to
date, and as such, seasonality may have a greater effect on our results of
operations in future periods.
Contractual Obligations
There were no material changes in our commitments during the three months ended
March 31, 2020 under contractual obligations from those disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2019 outside the course of
normal business.
Off-Balance Sheet Arrangements
As of March 31, 2020 , we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Discussion and analysis of our financial condition and results of operations are
based on our unaudited condensed consolidated financial statements which have
been prepared in accordance with U.S. GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and related disclosures of contingent assets
and liabilities, revenue and expenses at the date of the unaudited condensed
consolidated financial statements. We base our estimates on historical
experience and on various other assumptions in accordance with U.S. GAAP that we
believe to be reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
Critical accounting policies and estimates are those that we consider the most
important to the portrayal of our financial condition and operating results and
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. Our critical accounting policies and estimates include
those related to revenue recognition and sales allowances, royalties, inventory,
goodwill and intangible assets, equity-based compensation and income taxes.
Changes to these policies and estimates could have a material adverse effect on
our results of operations and financial condition.
There have been no significant changes to our critical accounting policies to
our disclosure reported in "Critical Accounting Policies and Estimates" in our
Annual Report on Form 10-K for the year ended December 31, 2019 except as
disclosed in Note 2, Significant Accounting Policies.
33--------------------------------------------------------------------------------
© Edgar Online, source
