Everett, WA — Funko, Inc. (“Funko,” or the “Company”) (Nasdaq: FNKO), a leading pop culture consumer products company, today reported its consolidated financial results for the fourth quarter and fiscal year ended December 31, 2019.

Full Year 2019 Financial Highlights

• Net sales increased 16% to $795.1 million
• Gross profit1 increased 11% to $282.5 million, and gross profit excluding a one-time charge of $16.8 million related to the write-down of inventory2 increased 17% to $299.3 million
• Gross margin1 of 35.5% and gross margin excluding the inventory write-down referenced above2 of 37.6%
• Net income of $27.8 million
• Adjusted EBITDA3 of $123.0 million and Adjusted EBITDA Margin3 of 15.5%
• Cash flow from operations of $90.8 million

Full Year 2019 Operating Highlights

• Completed the strategic acquisition of world-class game design studio Forrest-Pruzan, creating Funko Games, and successfully entered the board game category
• Grew sales in the European region approximately 32% on a year-over-year basis
• Successfully grew sales of Loungefly products more than 60% on a year-over-year basis
• Unveiled an enhanced mobile app with robust new features and rolled out a fan loyalty program
• Opened Funko’s second flagship store in Hollywood, CA
• Reinforced Funko’s bench with new hires across the Company in operations, planning, supply chain and finance
• Strengthened the Company’s balance sheet through the successful refinancing of Funko’s credit facilities

Brian Mariotti, Chief Executive Officer, stated, “Full year top line growth of 16% was driven by the underlying strength of Pop! Vinyl, growth in key geographic markets and the introduction of new products and categories. Although we closed the year with a difficult fourth quarter, we remain confident in the underlying strength of our business model and have a number of initiatives underway to drive growth in 2020. We have an exceptional line-up of games, toys and figures coming to market in the second half, unique evergreen retail programs and new products and partnerships in underpenetrated genres, including anime, sports and music.”

“Funko’s deep roots and expertise in all things pop culture provide us with a strong foundation for growth and expansion. As the proliferation of content continues to occur across pop culture, we believe Funko will be at the forefront. We are focused on building for scale – ensuring we have the tools and talent in place to drive a high level of execution, support our growth and deliver long-term shareholder value.”

Full Year 2019 Financial Results

Net sales grew 16% to $795.1 million in 2019 compared to $686.1 million in 2018. The year-over-year improvement was primarily driven by an increase in the number of active properties and strength in the U.S. and international markets.

In 2019, the number of active properties increased 20% to 804 from 672 in 2018 and net sales per active property decreased 3%. On a geographical basis, net sales in the United States increased 12% to $523.9 million and net sales internationally increased 23% to $271.2 million driven by strong growth in Europe. On a product category basis, net sales of figures increased 15% to $642.5 million. Net sales of other products increased 21% to $152.6 million, which reflects strong growth in our Loungefly products.

The tables below show the breakdown of net sales on a geographical and product category basis (in thousands):

Gross margin1 in 2019 decreased 170 basis points to 35.5% compared to 37.2% in 2018, primarily due to a one-time charge of $16.8 million related to the write-down of inventory in the fourth quarter of 2019. Gross margin excluding the one-time inventory write down2 was 37.6%, an increase of 40 basis points compared to 2018. The year-over-year increase is primarily attributable to lower product costs as a percentage of net sales due to a mix shift toward higher margin products as well as a decrease in shipping and freight costs as a percentage of net sales, which was partially offset by higher duties as a percentage of net sales related to our Loungefly products.

SG&A expenses increased 25% to $193.8 million in 2019 compared to $155.3 million in 2018, primarily reflecting increased headcount, warehouse costs and marketing to support new product launches as well as new office, retail and warehouse facilities.

Net income in 2019 was $27.8 million compared to net income of $25.1 million in 2018 and Adjusted Net Income3 (non-GAAP) was $49.9 million in 2019 versus $39.5 million in 2018. Adjusted EBITDA3 in 2019 was $123.0 million and Adjusted EBITDA margin3 was 15.5%, compared to $113.5 million and 16.5%, respectively, in 2018. A reconciliation of these non-GAAP measures to GAAP is provided below.

Fourth Quarter 2019 Financial Results

Net sales decreased 8% to $213.6 million in the fourth quarter of 2019 compared to $233.2 million in the fourth quarter of 2018. The year-over-year decline was primarily driven by underperformance in more mature markets, including the U.S., Australia and Canada, and reflects three primary factors: softness at retail during the holiday season which led to a decrease in orders, underperformance in key tentpole properties, and difficult comparisons from the year ago period due to the strength of Fortnite which generated 12% of sales in the fourth quarter of 2018.

In the fourth quarter of 2019, the number of active properties increased 14% to 667 from 583 in the fourth quarter of 2018 and net sales per active property decreased 20%. On a geographical basis, net sales in the United States decreased 9% to $144.9 million and net sales internationally decreased 8% to $68.6 million due to declines in Australia and Canada, partially offset by strong growth in Europe. On a product category basis, net sales of figures decreased 10% to $170.2 million reflecting the overall softness at retail in the quarter. Net sales of other products decreased 3% to $43.3 million versus the fourth quarter of 2018, which reflects decreased sales in plush and accessories, partially offset by double digit growth in our Loungefly brand.

The tables below show the breakdown of net sales on a geographical and product category basis (in thousands):

Gross margin1 in the fourth quarter of 2019 decreased 680 basis points to 29.2% compared to 36.0% in the fourth quarter of 2018, primarily due to a one-time charge of $16.8 million related to the write-down of inventory in the 2019 quarter. Gross margin excluding the one-time inventory write down2 was 37.1%, an increase of 110 basis points compared to the fourth quarter of 2018. The year-over-year increase is primarily attributable to lower product costs as a percentage of net sales due to a mix shift toward higher margin products, which was partially offset by higher duties as a percentage of net sales related to our Loungefly products.

SG&A expenses increased 27% to $57.3 million in the fourth quarter of 2019 compared to $45.0 million in the fourth quarter of 2018, primarily reflecting increased headcount, marketing spend to support new product launches, and the addition of new office, retail and warehouse facilities.

Net loss in the fourth quarter of 2019 was $6.3 million compared to net income of $15.5 million in the fourth quarter of 2018 and Adjusted Net Income3 (non-GAAP) was $8.9 million in the fourth quarter of 2019 versus $21.3 million in the fourth quarter of 2018. Adjusted EBITDA3 in the fourth quarter of 2019 was $25.7 million and Adjusted EBITDA margin3 was 12.0%, compared to $43.1 million and 18.5%, respectively, in the fourth quarter of 2018. A reconciliation of these non-GAAP measures to GAAP is provided below.

Balance Sheet Highlights

As of December 31, 2019, the Company had cash and cash equivalents of $25 million and total debt of $242 million. Inventories at year-end totaled $62 million, a decrease of 28% compared to a year ago, primarily reflecting an inventory write-down in the fourth quarter of 2019.

Jennifer Fall Jung, Chief Financial Officer, stated, “In 2019, we generated strong operating cash flow and strengthened our balance sheet, providing us with the financial flexibility to invest in our infrastructure and strategic growth opportunities. Looking at 2020, we expect to achieve top line growth in the range of 6% to 9%, and adjusted EBITDA margins of approximately 14%, which includes our current assumptions regarding the impact of the coronavirus crisis. Our adjusted EBITDA outlook reflects strong gross margin performance, offset by the investments we’re making to enhance our operations, drive efficiency and build scale in our model.”

2020 Outlook

In 2020, the Company expects the following:

• Net sales of $840.0 million to $865.0 million, representing 6% to 9% growth compared to 2019, including approximately 2 points of anticipated impact from the coronavirus;
• Adjusted EBITDA3 of $115.0 million to $125.0 million, representing Adjusted EBITDA margin of 13.7% to 14.5%;
• Adjusted Net Income3 of $43.3 million to $50.8 million, based on a blended tax rate of 25%; and
• Adjusted Earnings per Diluted Share3 of $0.85 per share to $1.00 per share, based on estimated adjusted average diluted shares outstanding of 51.0 million for the full year.

The Company’s 2020 outlook reflects its current assumptions regarding any potential effect of the novel coronavirus due to manufacturing disruptions and delayed shipments resulting from the crisis. Compared to 2019, the Company anticipates that net sales in the first quarter of 2020 will decline in the mid-teens and the first half of the year will decline mid-single digits, which includes the anticipated impact of manufacturing disruptions and delayed shipments.

Adjusted EBITDA and Adjusted EPS are non-GAAP measures. A table at the end of this release reconciles Funko’s outlook for the full year 2020 Adjusted EBITDA and Adjusted Earnings per Diluted Share guidance to the most directly comparable U.S. GAAP financial measures. Please refer to the “Non-GAAP Financial Measures” section of this press release.

Conference Call and Webcast

The Company will host a conference call at 4:30 p.m. Eastern Time (1:30 p.m. Pacific Time) today, March 5, 2020, to further discuss its fourth quarter results. Investors and analysts can participate on the conference call by dialing (833) 227-5847 or (647) 689-4074 and referencing passcode 6565388. Interested parties can also listen to a live webcast or replay of the conference call by logging on to the Investor Relations section on the Company’s website at https://investor.funko.com/. The replay of the webcast will be available for one year.

About Funko

Headquartered in Everett, Washington, Funko is a leading pop culture consumer products company. Funko designs, sources and distributes licensed pop culture products across multiple categories, including vinyl figures, action toys, plush, apparel, housewares and accessories for consumers who seek tangible ways to connect with their favorite pop culture brands and characters. Learn more at https://funko.com/, and follow us on Twitter (@OriginalFunko) and Instagram (@OriginalFunko).

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding our anticipated financial results, the underlying trends in our business, the anticipated impact of the novel coronavirus outbreak on our business, growing demand for our products, our potential for growth, plans for investments in our business and expected enhancements to operations. These forward-looking statements are based on management’s current expectations. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the following: our ability to execute our business strategy; our ability to maintain and realize the full value of our license agreements; the ongoing level of popularity of our products with consumers; changes in the retail industry and markets for our consumer products; our ability to maintain our relationships with retail customers and distributors; our ability to compete effectively; fluctuations in our gross margin; our dependence on content development and creation by third parties; our ability to manage our inventories; our ability to develop and introduce products in a timely and cost-effective manner; our ability to obtain, maintain and protect our intellectual property rights or those of our licensors; potential violations of the intellectual property rights of others; risks associated with counterfeit versions of our products; our ability to attract and retain qualified employees and maintain our corporate culture; our use of third-party manufacturing; risks associated with our international operations; changes in effective tax rates or tax law; foreign currency exchange rate exposure; the possibility or existence of global and regional economic downturns; our dependence on vendors and outsourcers; risks relating to government regulation; risks relating to litigation, including products liability claims and securities class action litigation; any failure to successfully integrate or realize the anticipated benefits of acquisitions or investments; reputational risk resulting from our e-commerce business and social media presence; risks relating to our indebtedness and our ability to secure additional financing; the potential for our electronic data or the electronic data of our customers to be compromised; the influence of our significant stockholder, ACON, and the possibility that ACON’s interests may conflict with the interests of our other stockholders; risks relating to our organizational structure; volatility in the price of our Class A common stock; and risks associated with our internal control over financial reporting. These and other important factors discussed under the caption “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2019 and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made in this press release. Any such forward-looking statements represent management’s estimates as of the date of this press release. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this press release.

Funko, Inc. and Subsidiaries
Non-GAAP Financial Measures

Adjusted Net Income, Adjusted Earnings per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of our performance that are not required by, or presented in accordance with, U.S. GAAP. Adjusted Net Income, Adjusted Earnings per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to net income (loss), earnings per share or any other performance measure derived in accordance with U.S. GAAP. We define Adjusted Net Income as net 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, non-cash charges related to equity-based compensation programs, loss on extinguishment of debt, acquisition transaction costs and other expenses, foreign currency transaction gains and losses, the Loungefly customs investigation and related costs, certain severance, relocation and related costs, tax receivable agreement liability adjustments, and other unusual or one-time items, and the income tax expense (benefit) effect of these adjustments. We define Adjusted Earnings per Diluted Share as Adjusted Net 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 define EBITDA as net income (loss) before interest expense, net, income tax expense (benefit), depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted for non-cash charges related to equity-based compensation programs, loss on extinguishment of debt, acquisition transaction costs and other expenses, the Loungefly customs investigation and related costs, certain severance, relocation and related costs, foreign currency transaction gains and losses, tax receivable agreement liability adjustments and other unusual or one-time items. Adjusted EBITDA margin is calculated as Adjusted EBITDA as a percentage of net sales We caution investors that amounts presented in accordance with our definitions of Adjusted Net Income, Adjusted Earnings per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate these measures in the same manner. We present Adjusted Net Income, Adjusted Earnings per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin 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 Adjusted Net Income, Adjusted Earnings per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin 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 senior secured credit facilities use Adjusted EBITDA to measure our compliance with covenants such as senior leverage ratio. Adjusted Net Income, Adjusted Earnings per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income (loss) or other financial statement data presented in this press release 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, Adjusted Net Income, Adjusted Earnings per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin 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 GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted Net Income, Adjusted Earnings per Diluted Share, Adjusted EBITDA and Adjusted EBITDA margin include adjustments for non-cash charges related to equity-based compensation programs, loss on extinguishment of debt, acquisition transaction costs and other expenses, the Loungefly customs investigation and related costs, certain severance, relocation and related costs, foreign currency transaction gains and losses, tax receivable agreement liability adjustments 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.

In addition, this press release refers to the non-GAAP financial measures gross profit excluding the one-time inventory write-down and gross margin excluding the one-time inventory write-down. Gross profit excluding the one-time inventory write-down is calculated as net sales less cost of goods sold (exclusive of depreciation and amortization) less the $16.8 million charge related to the one-time inventory write-down in the fourth quarter of 2019. Gross margin excluding the one-time inventory write-down is calculated as net sales less cost of goods sold (exclusive of depreciation and amortization) less the $16.8 million charge related to the one-time inventory write-down as a percentage of net sales. Management believes that gross profit excluding the one-time inventory write-down and gross margin excluding the one-time inventory write-down provides useful information to investors because it assists investors in comparing our ongoing operating performance between periods.

The following table reconciles gross profit excluding the one-time inventory write-down and gross margin excluding the one-time inventory write-down to the most directly comparable U.S. GAAP financial performance measure:

The following tables reconcile Adjusted Net Income, Adjusted Earnings per Diluted Share, EBITDA and Adjusted EBITDA to the most directly comparable U.S. GAAP financial performance measure:

Note: The Company is not able to provide the expected impact of unrealized and realized foreign currency gains and losses for the year ending December 31, 2020 on transactions without unreasonable efforts because the calculation for that change is primarily driven by changes in foreign currency exchange rates, principally British pounds and euros. Additionally, the impacts are also driven by fluctuations in product sales and operating expenses in each of those local currencies, which can fluctuate month to month. Therefore, the Company’s Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per Diluted Share for the year ending December 31, 2020, including the above adjustments, may differ materially from that forecasted in the table above.

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Investor Relations:
Andrew Harless
Funko Investor Relations
investorrelations@funko.com

Media:
Jessica Piha-Grafstein
Funko Public Relations
jessicap@funko.com