Funko Reports Second Quarter 2021 Sales of $236.1 Million, Up 141%

Funko, Inc. ("Funko,” or the “Company”) (Nasdaq: FNKO), a leading pop culture consumer products company, today reported its consolidated financial results for the second quarter ended June 30, 2021.

Second Quarter 2021 Financial Highlights

• Net sales increased 141% y/y to $236.1 million
• Gross margin1 expanded 250 basis points y/y to 39%
• SG&A expenses increased 40% y/y to $54.9 million; as a percent of net sales, SG&A declined to 23%
• Net income increased $36.0 million y/y to $20.9 million
• Net income margin1 expanded 2,420 basis points y/y to 9%
• Adjusted EBITDA2 increased $40.8 million y/y to $41.1 million
• Adjusted EBITDA margin2 expanded 1,720 basis points y/y to 17%
• Cash flow from operations of $71.4 million for the six months ended June 30, 2021
• Total liquidity3 increased 96% to $170.5 million

Second Quarter 2021 and Recent Operating Highlights

• Broad-based strength in all geographies - U.S. and Europe surpassed 2019 results, and U.S. net sales increased 110% to $163.2 million, Europe net sales increased 393% to $52.0 million, and Other International net sales rose 117% to $20.9 million over Q2 2020 results.
• Pop! branded products grew 137% on strong evergreen product sales (evergreen properties comprised 65% of total net sales) and a robust calendar of new content.
• Net sales of Other (non-figure) products increased 136%, led by Loungefly branded products which grew 132%, including bags, wallets and accessories, as well as strength in other categories, including games and plush.
• Direct-to-consumer sales increased more than 190% and now comprise 11% of net sales, driven by increased website efficiency coupled with sustained traffic growth.
• Launched first series of Digital Pop! NFTs (August 3, 2021) with Teenage Mutant Ninja Turtles.

“Our teams delivered the largest top line quarter in Company history,” said Brian Mariotti, Chief Executive Officer. “Second quarter net sales more than doubled versus a year ago and also eclipsed 2019 levels, reflecting broad-based strength across our products, channels and regions.”

“We are pleased with our strong year-to-date performance in 2021 and our ability to deliver against our core operating and growth strategies despite the challenges of the pandemic. As we approach the second half of the year, we are continuing to navigate the uncertain macro environment, while remaining focused on delighting and engaging our fans around the world.”

Second Quarter 2021 Financial Results

Net sales increased 141% to $236.1 million in the second quarter of 2021 compared to $98.1 million in the second quarter of 2020. The year-over-year increase reflects the impact of the COVID-19 pandemic in the comparable 2020 period as well as broad-based strength across geographies, products and channels.

In the second quarter of 2021, the number of active properties increased 23% to 795 from 644 in the second quarter of 2020 and net sales per active property increased 95%.

On a geographical basis, net sales in the United States increased 110% to $163.2 million and net sales in Europe increased 393% to $52.0 million. Net sales in other international regions increased 117% to $20.9 million, with all geographies reporting growth.

On a product category basis, net sales of Figures grew 142% to $187.2 million, reflecting strength in the U.S. and Europe, as well as the Company’s e-commerce sites. Net sales of Other (non-figure) products increased 136% to $48.9 million, reflecting strength in Loungefly branded products as well as games and plush.

On a brand basis, Pop! branded products grew 137% to $185.4 million, reflecting strong growth in the U.S. and Europe. Loungefly branded products grew 132% to $29.6 million. Both brands generated strong demand in the U.S. and Europe, as well as strength across our direct-to-consumer channels. Net sales of other branded products increased 193% to $21.1 million driven by board games, plush and action figures.

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

Gross margin1 in the second quarter of 2021 increased 250 basis points to 39% compared to 37% in the second quarter of 2020, reflecting a healthy inventory position and fewer clearance events in the quarter.

SG&A expenses increased 40% to $54.9 million or 23% of net sales in the second quarter of 2021 compared to $39.1 million or 40% of net sales in the second quarter of 2020.

Net income in the second quarter of 2021 was $20.9 million and net income margin1 was 9%, compared to a net loss of $15.0 million and net loss margin1 of 15% in the second quarter of 2020. Adjusted Net Income2 (non-GAAP) was $21.7 million in the second quarter of 2021 versus an Adjusted Net Loss of $10.2 million in the second quarter of 2020. Adjusted EBITDA2 in the second quarter of 2021 was $41.1 million and Adjusted EBITDA margin2 was 17.4%, compared to $0.2 million and 0.2%, respectively, in the second quarter of 2020. A reconciliation of these non-GAAP measures to GAAP is provided below.

Balance Sheet Highlights

Total liquidity3 as of June 30, 2021 totaled $170.5 million, an increase of 96% compared to June 30, 2020. Total liquidity was comprised of cash and cash equivalents of $95.5 million and total revolver availability of $75.0 million.

As of June 30, 2021, total debt was $177.4 million, a decrease of 26% compared to a year ago. Total debt includes the amount outstanding under the Company's term loan facility, net of unamortized discounts.

Inventories at the end of the second quarter of 2021 totaled $86.4 million, up 43% compared to a year ago.

Outlook

In 2021, the Company expects the following full year results:

• Net sales of $900 million to $930 million;
• Adjusted EBITDA margin2 of 14.0% to 14.5%;
• Adjusted Net Income2 of $57.4 million to $64.2 million, based on a blended tax rate of 25%; and
• Adjusted Earnings per Diluted Share2 of $1.06 to $1.19, based on estimated adjusted average diluted shares outstanding of 54 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 (Loss) margin is calculated as net income as a percentage of net sales.

2Adjusted Net Income (Loss), Adjusted Earnings (Loss) per Diluted Share, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a reconciliation of historical Adjusted Net Income (Loss), Adjusted Earnings (Loss) 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 (Loss), Adjusted Earnings (Loss) 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 2021 the Company expects equity-based compensation of approximately $14 million, depreciation and amortization of approximately $42 million and interest expense of approximately $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 $75 million revolving credit facility.

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, August 5, 2021, to further discuss its second 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, the underlying trends in our business, including macroeconomic trends, our potential for growth, 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; 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 quarterly report on Form 10-Q for the quarter ended June 30, 2021 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
(Unaudited)

EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss) and Adjusted Earnings (Loss) 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 (loss), earnings (loss) per share or any other performance measure derived in accordance with U.S. GAAP. 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, certain severance, relocation and related costs, foreign currency transaction gains and other unusual or one-time items. We define Adjusted Net Income (Loss) as net income (loss) attributable to Funko, Inc. adjusted for the reallocation of income (loss) 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, certain severance, relocation and related costs, foreign currency transaction gains and other unusual or one-time items, and the income tax (expense) benefit effect of these adjustments. We define Adjusted Earnings (Loss) per Diluted Share as Adjusted Net Income (Loss) 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 (loss) or other financial statement data presented in our unaudited condensed consolidated financial statements included elsewhere 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. 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, certain severance, relocation and related costs, foreign currency transaction gains 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.

The following tables reconcile the Non-GAAP Financial Measures to the most directly comparable U.S. GAAP financial performance measure, which is net income (loss), for the periods presented:

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