CORRECTING and REPLACING Funko Reports Record Third Quarter 2022 Sales of $365.6 million, Up 36.6%

Sustained Growth Driven by Broad-Based Strength Across Reported Brand Categories, Channels, and Geographies

EVERETT, Wash.–(BUSINESS WIRE)–The Outlook paragraph of the release dated November 3, 2022 has been updated to read: “… Adjusted Net Income² of $39 million to $41 million, based on a blended tax rate of 25%; and Adjusted Earnings per Diluted Share² of $0.70 to $0.80, based on estimated adjusted average diluted shares outstanding of 55.2 million for the full year.” This replaces the following language from the original release: “… Adjusted Net Income² of $47 million to $49 million, based on a blended tax rate of 25%; and Adjusted Earnings per Diluted Share² of $0.85 to $0.95, based on estimated adjusted average diluted shares outstanding of 55.2 million for the full year.”. This change is consistent with the prepared remarks we shared on our earnings call on November 3, 2022.

The updated release reads:

FUNKO REPORTS RECORD THIRD QUARTER 2022 SALES OF $365.6 MILLION, UP 36.6%

Sustained Growth Driven by Broad-Based Strength Across Reported Brand Categories, Channels, and Geographies

Funko, Inc. («Funko,” or the “Company”) (Nasdaq: FNKO), a leading pop culture lifestyle brand, today reported its consolidated financial results for the third quarter ended September 30, 2022.

«We delivered another quarter of record net sales growth, with robust demand across our brand portfolio. Our sustained success is a testament to our employees, our partners, and our loyal and highly engaged fan base,» said Andrew Perlmutter, Chief Executive Officer. «As we continue to support our rapid growth, we are making needed short-term investments to upgrade our infrastructure to help provide the capability and capacity to support our future growth.»

Third Quarter 2022 Financial Summary Versus Prior Year

• Net sales increased 36.6% to $365.6 million
• Gross profit increased 32.6% to $127.9 million
• Gross margin¹ contracted 100 basis points to 35.0%
• Net income decreased 39.3% to $11.1 million
• Net income margin¹ contracted 390 basis points to 3.0%
• Adjusted EBITDA² decreased 11.2% to $35.7 million
• Adjusted EBITDA margin² contracted 520 basis points to 9.8%
• Cash flow used in operations of $64.7 million for the nine months ended September 30, 2022
• Total liquidity³ of $150.1 million compared to $193.2 million

Third Quarter 2022 Operating Highlights

• Double-digit net sales growth across all brand categories
• Strong international growth as Europe net sales grew 32.9% y/y while Other International grew 42.6%
• Direct-to-consumer (DTC) net sales increased 36.5% y/y, driven by strong growth in average order value and e-commerce site traffic
• More than doubled Digital Pop! NFT net sales, with multiple top-tier drops, increasing drop frequency and average revenue per drop
• Began integration of high-end collectibles company Mondo under Core Collectible Brands
• Introduced «countdown to anything» with expanded countdown calendars to include multiple holidays, driving more than 8x net sales growth in only 4 years

Third Quarter 2022 Financial Results

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

	Three Months Ended September 30,		Period Over Period Change
	2022	2021	Dollar	Percentage
Net sales by geography:
United States	$ 262,316	$ 191,289	$ 71,027	37.1 %
Europe	78,239	58,873	19,366	32.9 %
Other International	25,052	17,571	7,481	42.6 %
Total net sales	$ 365,607	$ 267,733	$ 97,874	36.6 %
	Three Months Ended September 30,		Period Over Period Change
	2022	2021	Dollar	Percentage
Core Collectible Brands	$ 281,536	$ 210,645	$ 70,891	33.7 %
Loungefly Brand	62,246	39,575	22,671	57.3 %
Other Brands	21,825	17,513	4,312	24.6 %
Total net sales	$ 365,607	$ 267,733	$ 97,874	36.6 %

Gross margin¹ in the third quarter of 2022 decreased 100 basis points to 35.0% compared to 36.0% in the third quarter of 2021, reflecting a change in product costs outpacing previous price increases on certain products.

SG&A expenses increased 63.5% to $97.9 million or 26.8% of net sales in the third quarter of 2022 compared to $59.9 million or 22.4% of net sales in the third quarter of 2021. SG&A expenses for the third quarter of 2022 were higher than expected due to increased infrastructure investment to accommodate recent rapid growth and provide capacity for sustained future growth.

Net income in the third quarter of 2022 was $11.1 million and net income margin¹ was 3.0%, compared to net income of $18.4 million and net income margin¹ of 6.9% in the third quarter of 2021. Adjusted Net Income² (non-GAAP) was $15.1 million in the third quarter of 2022 versus Adjusted Net Income² of $21.1 million in the third quarter of 2021. Adjusted EBITDA² in the third quarter of 2022 was $35.7 million and Adjusted EBITDA margin² was 9.8%, compared to $40.2 million and 15.0%, respectively, in the third quarter of 2021. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP measures is provided below.

Balance Sheet Highlights

Total liquidity³ as of September 30, 2022 totaled $150.1 million, a decrease of 22.4% compared to September 30, 2021. Total liquidity was comprised of cash and cash equivalents of $25.1 million and total revolver availability of $125.0 million.

As of September 30, 2022, total debt was $250.2 million, an increase of 40.9% compared to a year ago, as we accessed our revolver to maintain appropriate liquidity as working capital needs have increased in recent quarters. Total debt includes the amount outstanding under the Company’s term loan facility, net of unamortized discounts.

Inventories at the end of the third quarter of 2022 totaled $265.8 million, up 88.7% compared to a year ago. We expect to make sequential progress in inventory levels in the fourth quarter of 2022.

Outlook

In 2022, the Company expects the following full-year results:

• Net sales of $1.29 billion to $1.33 billion;
• Sequential decline in gross margin due to margin seasonality and ongoing inventory management;
• Adjusted EBITDA margin² of high single digits;
• Adjusted Net Income² of $39 million to $41 million, based on a blended tax rate of 25%; and
• Adjusted Earnings per Diluted Share² of $0.70 to $0.80, based on estimated adjusted average diluted shares outstanding of 55.2 million for the full year.

¹Gross margin is calculated as net sales less cost of sales (exclusive of depreciation and amortization) as a percentage of net sales. Net Income margin is calculated as net income as a percentage of net sales.

²Adjusted Net Income, Adjusted Earnings per Diluted Share, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a reconciliation of historical Adjusted Net Income, Adjusted Earnings per Diluted Share and Adjusted EBITDA to the most directly comparable U.S. GAAP financial measures, please refer to the “Non-GAAP Financial Measures” section of this press release. A reconciliation of Adjusted Net Income, Adjusted Earnings per Diluted Share and Adjusted EBITDA margin outlook to the corresponding GAAP measure on a forward-looking basis cannot be provided without unreasonable efforts, as we are unable to provide reconciling information with respect to certain items. However, in 2022 the Company expects equity-based compensation of approximately $15.7 million, depreciation and amortization of approximately $46.5 million, interest expense of approximately $8.9 million, severance and restructuring expenses of approximately $10.1 million and foreign currency transaction loss of $1.8 million, each of which is a reconciling item to Net Income. See «Non-GAAP Financial Measures» for more information.

³Total liquidity is calculated as cash and cash equivalents plus availability under the Company’s $215 million revolving credit facility as of September 30, 2022.

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, November 3, 2022, to further discuss its third quarter results and business outlook. A live webcast and replay of the event will be available on the Investor Relations section on the Company’s website at 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 www.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 and financial position, the underlying trends in our business, including supply chain constraints, inflation, and other macroeconomic trends, our potential for growth, expectations regarding infrastructure investments, expectations regarding inventory levels and our strategic growth priorities. 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: risks related to the impact of COVID-19 on our business, financial results and financial condition; our ability to execute our business strategy; our ability to maintain and realize the full value of our license agreements; 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; the ongoing level of popularity of our products with consumers; 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, including the impact of freight rates; 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, TCG, and the possibility that TCG’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 quarterly report on Form 10-Q for the quarter ended September 30, 2022 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 Condensed Consolidated Statements of Operations (Unaudited)
	Three Months Ended September 30,					Nine Months Ended September 30,
		2022		2021			2022			2021
	(In thousands, except per share data)
Net sales	$	365,607	$	267,733		$	989,666		$	693,020
Cost of sales (exclusive of depreciation and amortization shown separately below)		237,728		171,320			649,974			425,929
Selling, general, and administrative expenses		97,930		59,890			259,043			166,032
Depreciation and amortization		12,555		10,328			34,509			30,778
Total operating expenses		348,213		241,538			943,526			622,739
Income from operations		17,394		26,195			46,140			70,281
Interest expense, net		2,977		1,711			5,854			5,921
Loss on debt extinguishment		—		675			—			675
Other expense (income), net		926		(505	)		1,758			466
Income before income taxes		13,491		24,314			38,528			63,219
Income tax expense (benefit)		2,342		5,939			(2,932	)		12,814
Net income		11,149		18,375			41,460			50,405
Less: net income attributable to non-controlling interests		1,519		6,474			7,276			18,177
Net income attributable to Funko, Inc.	$	9,630	$	11,901		$	34,184		$	32,228
Earnings per share of Class A common stock:
Basic	$	0.21	$	0.30		$	0.78		$	0.85
Diluted	$	0.19	$	0.28		$	0.73		$	0.80
Weighted average shares of Class A common stock outstanding:
Basic		46,874		39,448			43,670			37,856
Diluted		49,686		41,796			53,991			40,079

Funko, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited)
	September 30, 2022			December 31, 2021
	(In thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents	$	25,050		$	83,557
Accounts receivable, net		189,917			187,688
Inventory		265,799			166,428
Prepaid expenses and other current assets		38,480			14,925
Total current assets		519,246			452,598
Property and equipment, net		98,574			58,828
Operating lease right-of-use assets		68,236			53,466
Goodwill		131,297			126,651
Intangible assets, net		180,186			189,619
Deferred tax asset		117,602			74,412
Other assets		21,743			11,929
Total assets	$	1,136,884		$	967,503
Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit	$	90,000		$	—
Current portion of long-term debt, net of unamortized discount		17,443			17,395
Current portion of operating lease liabilities		17,807			14,959
Accounts payable		88,101			57,238
Income taxes payable		2,537			15,994
Accrued royalties		70,715			58,158
Accrued expenses and other current liabilities		90,875			121,267
Total current liabilities		377,478			285,011
Long-term debt, net of unamortized discount		142,729			155,818
Operating lease liabilities, net of current portion		79,871			50,459
Deferred tax liability		533			648
Liabilities under tax receivable agreement, net of current portion		100,886			75,523
Other long-term liabilities		2,902			3,486
Commitments and Contingencies
Stockholders’ equity:
Class A common stock, par value $0.0001 per share, 200,000 shares authorized; 47,095 and 40,088 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		5			4
Class B common stock, par value $0.0001 per share, 50,000 shares authorized; 3,293 and 10,691 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		—			1
Additional paid-in-capital		309,609			252,505
Accumulated other comprehensive (loss) income		(5,851	)		1,078
Retained earnings		102,234			68,050
Total stockholders’ equity attributable to Funko, Inc.		405,997			321,638
Non-controlling interests		26,488			74,920
Total stockholders’ equity		432,485			396,558
Total liabilities and stockholders’ equity	$	1,136,884		$	967,503

Funko, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
	Nine Months Ended September 30,
		2022			2021
	(In thousands)
Operating Activities
Net income	$	41,460		$	50,405
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation, amortization and other		34,390			30,356
Equity-based compensation		11,999			9,869
Amortization of debt issuance costs and debt discounts		670			893
Loss on debt extinguishment		0			675
Deferred tax expense		0			994
Other		7,539			(93	)
Changes in operating assets and liabilities:
Accounts receivable, net		(10,198	)		(22,223	)
Inventory		(106,061	)		(81,770	)
Prepaid expenses and other assets		(32,310	)		(1,582	)
Accounts payable		32,349			33,933
Income taxes payable		(13,303	)		10,135
Accrued royalties		10,942			7,086
Accrued expenses and other liabilities		(42,159	)		40,114
Net cash (used in) provided by operating activities		(64,682	)		78,792
Investing Activities
Purchases of property and equipment		(46,908	)		(17,434	)
Acquisitions of businesses and related intangible assets, net of cash		(13,967	)		199
Other		778			84
Net cash used in investing activities		(60,097	)		(17,151	)
Financing Activities
Borrowings on line of credit		90,000			—
Payments on line of credit		—			—
Debt issuance costs		(405	)		(1,055	)
Issuance of long-term debt		—			180,000
Payments of long-term debt		(13,500	)		(193,875	)
Contributions from continuing equity owners					—
Distributions to continuing equity owners		(10,507	)		(9,284	)
Payments under tax receivable agreement		—			(6	)
Proceeds from exercise of equity-based options		1,209			3,726
Net cash provided by (used in) financing activities		66,797			(20,494	)
Effect of exchange rates on cash and cash equivalents		(525	)		(157	)
Net change in cash and cash equivalents		(58,507	)		40,990
Cash and cash equivalents at beginning of period		83,557			52,255
Cash and cash equivalents at end of period	$	25,050		$	93,245

Funko, Inc. and Subsidiaries

Non-GAAP Financial Measures

(Unaudited)

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted 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 income, earnings per share or any other performance measure derived in accordance with U.S. GAAP. We define EBITDA as net income 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, acquisition transaction costs and other expenses, certain severance, relocation and related costs, loss on debt extinguishment, foreign currency transaction gains and losses and other unusual or one-time items. Adjusted EBITDA Margin is calculated as Adjusted EBITDA as a percentage of net sales. 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, acquisition transaction costs and other expenses, certain severance, relocation and related costs, loss on debt extinguishment, foreign currency transaction gains and losses 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 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. 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 income 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, Non-GAAP Financial Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business.

Contacts

Investor Relations:
[email protected]

Media:
[email protected]

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