Funko, Inc. ("Funko,” or the “Company”) (Nasdaq: FNKO), a leading pop culture lifestyle brand, today reported its consolidated financial results for the fourth quarter and fiscal year ended December 31, 2022. The Company also introduced financial guidance for the first quarter and fiscal year 2023.

"During the fourth quarter and in early 2023, we have made progress in addressing operational issues that impacted our results in the second half of 2022. We have strengthened our executive and operational management team and have taken significant steps to improve our operating efficiency. We are gratified that the Funko brands continue to see strong consumer demand from our incredibly loyal and resilient global fanbase, as demonstrated by 37% direct-to-consumer growth and strong sell-through in the fourth quarter," said Brian Mariotti, Chief Executive Officer.

"As we move forward, we remain laser focused with a high sense of urgency to build an operating foundation to support the long-term growth opportunities we envision for Funko, our partners and stakeholders."

Fourth Quarter 2022 Financial Summary (Compared to Fourth Quarter 2021)

• Net sales decreased 1% to $333.0 million
• Net income decreased 368% to $(46.7) million
• Adjusted EBITDA¹ decreased 116% to $(6.3) million
• GAAP loss per diluted share of $(0.89)
• Adjusted loss per diluted share of $(0.35)

Fiscal Year 2022 Financial Summary (Compared to Full Fiscal Year 2021)

• Net sales increased 29% to $1.3 billion
• Net income decreased 108% to $(5.2) million
• Adjusted EBITDA¹ decreased 35% to $97.4 million
• Net income margin contracted -699 basis points to (0.4)%
• Adjusted EBITDA margin¹ decreased 720 basis points to 7.4%
• GAAP loss per diluted share of $(0.18)
• Adjusted earnings per diluted share of $0.57
• Company announced $150 million to $180 million in anticipated annualized cost saving initiatives

Steve Nave Appointed As Chief Financial Officer and Chief Operating Officer

In a separate release today, Funko announced that Steve Nave has been appointed Chief Financial Officer and Chief Operating Officer, effective immediately.

Fourth Quarter 2022 Financial Results

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

Gross margin² in the fourth quarter of 2022 decreased 560 basis points to 28.3% compared to 33.9% in the fourth quarter of 2021, driven primarily by storage and container rental charges associated with inventory in excess of warehouse capacity.

SG&A expenses increased 78% to $139.2 million in the fourth quarter of 2022 compared to $78.3 million in the fourth quarter of 2021, which includes a $32.5 million write down of capitalized costs associated with the decision not to implement a previously disclosed enterprise resource planning system, hiring for positions left vacant since pandemic cost-reduction initiatives, and additional fulfillment costs, including warehouse labor and third-party warehouse charges.

Net loss in the fourth quarter of 2022 was $(46.7) million and net loss margin was (14.0)%, compared to net income of $17.4 million and net income margin of 5.2% in the fourth quarter of 2021. Net loss attributable to Funko, Inc. was $(42.2) million in the fourth quarter of 2022 versus net income attributable to Funko, Inc. of $11.7 million in the fourth quarter of 2021. Adjusted EBITDA¹ in the fourth quarter of 2022 was $(6.3) million compared to $38.9 million in the prior year, and Adjusted EBITDA margin¹ was (1.9)%, compared to 11.6% in the fourth quarter of 2021.

Balance Sheet Highlights

Total cash and cash equivalents as of December 31, 2022 totaled $19.2 million.

As of December 31, 2022, total debt was $245.8 million, an increase of 42% compared to year ago levels. Total debt includes the amount outstanding under the Company's term loan facility, net of unamortized discounts, line of credit and equipment finance loan. On February 28, 2023, the Company entered into an amendment to its credit agreement, pursuant to which the lenders waived compliance with certain financial covenants. Among other things, the amendment restricts our ability to draw additional amounts under our revolver in excess of the amount outstanding on February 28, 2023, for the duration of 2023. Additional details will be provided in our annual report on Form 10-K for the year ended December 31, 2022.

Inventory at year-end totaled $246.4 million, an increase of 48% compared to a year ago. This includes inventory that the Company intends to eliminate in the first half of 2023 to reduce fulfillment costs by managing inventory levels to align with the operating capacity of our distribution center. This is expected to result in a write down in the first half of 2023 of approximately $30 to $36 million.

Outlook

Funko is highly focused on identifying and addressing opportunities for improvement. Our areas of focus, gross margin opportunities, fulfillment costs, and other SG&A, will position the Company to drive sustained long-term shareholder value. However, these initiatives will take several quarters in some cases, and as a result, we expect sequential improvement throughout the year as our initiatives take hold.

For the first quarter of 2023 the Company expects:

• Revenue of between $225 million and $255 million.
• Excluding an anticipated inventory write down, gross margin is expected to be in line to slightly below the fourth quarter of 2022, and improve sequentially throughout the year.
• SG&A to be sequentially lower from the fourth quarter of 2022 by approximately $25 million at the midpoint of the revenue range.
• Adjusted EBITDA of between $(50) million and $(45) million, returning to positive territory in the second half of 2023.
• Adjusted Net Loss of $(53) to $(48) million based on a blended tax rate of 25%, and adjusted loss per diluted share of $(1.00) to $(0.90) based on a weighted average diluted share count of 52.3 million shares.

For the full year 2023 the Company expects:

• Revenue growth year-over-year between 0% and 5%.
• Adjusted EBITDA for the year to be between $50 million and $75 million.

¹Adjusted 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, Adjusted EBITDA 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, the first quarter of 2023 the Company expects equity-based compensation of approximately $3.8 million, depreciation and amortization of approximately $14.3 million, interest expense of approximately $5.2 million and severance and restructuring expenses of approximately $0.2 million. For the full year 2023 the Company expects equity-based compensation of approximately $15.0 million, depreciation and amortization of approximately $59.0 million, interest expense of approximately $23.4 million and severance and restructuring expenses of approximately $0.8 million, each of which is a reconciling item to Net Income. See "Non-GAAP Financial Measures" for more information.

²Gross 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.

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 1, 2023, to further discuss its fourth quarter and fiscal year results and provide a business update. 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 lifestyle brand. 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, including capital resources, the underlying trends in our business, including operational constraints, inflation, interest rates, and other macroeconomic trends, compliance with financial and negative covenants under our Credit Agreement, as amended, and related impacts to our business, demand for our products and our potential for growth, expectations regarding infrastructure investments, expectations regarding inventory levels including future write-downs of inventory, cost savings initiatives and anticipated annualized cost savings, 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: our ability to execute our business strategy and manage growth; our ability to manage our inventories; our ability to maintain and realize the full value of our license agreements; impacts from economic downturns; changes in the retail industry and markets for our consumer products; our ability to maintain our relationships with retail customers and distributors; risks related to the impact of COVID-19 on our business, financial results and financial condition; 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 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 climate change; increased attention to sustainability and environmental, social and governance initiatives; geographic concentration of our operations; risks associated with our international operations; changes in effective tax rates or tax law; foreign currency exchange rate exposure; 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; future development and acceptance of blockchain networks; risks associated with receiving payments in digital assets; reputational risk resulting from our e-commerce business and social media presence; risks relating to our indebtedness, including our ability to comply with financial and negative covenants under our Credit Agreement, as amended; our ability to secure additional financing on favorable terms or at all; the potential for our or third-party providers’ 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 annual report on Form 10-K for the fiscal year ended December 31, 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

Non-GAAP Financial Measures

Adjusted Net (Loss) Income, Adjusted (Loss) 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 (Loss) Income, Adjusted (Loss) 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, earnings per share or any other performance measure derived in accordance with U.S. GAAP. We define Adjusted Net (Loss) Income as net income 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, acquisition transaction costs and other expenses, certain severance, relocation and related costs, loss on extinguishment of debt, foreign currency transaction gains and losses, tax receivable agreement liability adjustments, one-time cloud based computing arrangement abandonment, and other unusual or one-time items, and the income tax expense (benefit) 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 define EBITDA as net income before interest expense, net, income tax 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, loss of extinguishment of debt, foreign currency transaction gains and losses, tax receivable agreement liability adjustments, one-time cloud based computing arrangement abandonment, 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 (Loss) Income, Adjusted (Loss) 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 (Loss) 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 (Loss) Income, Adjusted (Loss) 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 (Loss) Income, Adjusted (Loss) 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 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 (Loss) Income, Adjusted (Loss) 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 (Loss) Income, Adjusted (Loss) Earnings per Diluted Share, Adjusted EBITDA and Adjusted EBITDA margin include adjustments for non-cash charges related to equity-based compensation programs, acquisition transaction costs and other expenses, certain severance, relocation and related costs, loss of extinguishment of debt, foreign currency transaction gains and losses, tax receivable agreement liability adjustments, one-time cloud based computing arrangement abandonment, 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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