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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Funko, Inc.    FNKO

FUNKO, INC.

(FNKO)
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Funko : Form8-K

03/05/2020 | 06:58pm EST

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

March 5, 2020

Date of Report (Date of earliest event reported)

FUNKO, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

001-38274

35-2593276

(State or Other Jurisdiction

(Commission File Number)

(IRS Employer

of Incorporation)

Identification No.)

2802 Wetmore Avenue

Everett, Washington 98201

(Address of Principal Executive Offices) (Zip Code)

(425) 783-3616

(Registrant's telephone number, including area code)

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

  • Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
  • Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
  • Pre-commencementcommunications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
  • Pre-commencementcommunications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock,

FNKO

The Nasdaq Stock Market LLC

$0.0001 par value per share

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Item 2.02. Results of Operations and Financial Condition.

On March 5, 2020, Funko, Inc. (the "Company") announced its financial results for the quarter and fiscal year ended December 31, 2019. The full text of the press release (the "Press Release") issued in connection with the announcement is furnished as Exhibit 99.1 to this report and is incorporated herein by reference. The information contained in the website cited in the Press Release is not incorporated herein.

Item 7.01. Regulation FD Disclosure.

The slides for the Company's earnings presentation on March 5, 2020 for the quarter and fiscal year ended December 31, 2019, are furnished as Exhibit 99.2 to this report.

The information in this report (including Exhibits 99.1 and 99.2) shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits:

Exhibit No.

Description

Exhibit 99.1

Press release of Funko, Inc. issued March 5, 2020.

Exhibit 99.2

Earnings presentation of Funko, Inc. dated March 5, 2020.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: March 5, 2020 FUNKO, INC.

By:

/s/ Jennifer Fall Jung

Jennifer Fall Jung

Chief Financial Officer (Principal Financial Officer)

Funko Reports Fourth Quarter and Fiscal 2019 Financial Results

Full Year Net Sales Increased 16% to $795 Million

Provides 2020 Outlook

EVERETT, Wash. March 5, 2020-- 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

_______________________

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

2Gross profit excluding the one-time inventory write-down and gross margin excluding the one-time inventory write-down are non-GAAP financial measures. Please see the "Non-GAAP Financial Measures" section for a reconciliation to the most directly comparable U.S. GAAP measure.

3Adjusted Net Income, Adjusted Earnings per Diluted Share, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a reconciliation of 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.

  • 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):

Twelve Months Ended December 31,

Period Over Period Change

2019

2018

Dollar

Percentage

Net sales by geography:

United States

$

523,897

$

466,044

$

57,853

12.4

%

International

271,225

220,029

51,196

23.3

%

Total net sales

$

795,122

$

686,073

$

109,049

15.9

%

Twelve Months Ended December 31,

Period Over Period Change

2019

2018

Dollar

Percentage

Net sales by product:

Figures

$

642,531

$

560,100

$

82,431

14.7

%

Other

152,591

125,973

26,618

21.1

%

Total net sales

$

795,122

$

686,073

$

109,049

15.9

%

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):

Three Months Ended December 31,

Period Over Period Change

2019

2018

Dollar

Percentage

Net sales by geography:

United States

$

144,932

$

158,770

$

(13,838)

(8.7)

%

International

68,619

74,454

(5,835)

(7.8)

%

Total net sales

$

213,551

$

233,224

$

(19,673)

(8.4)

%

Three Months Ended December 31,

Period Over Period Change

2019

2018

Dollar

Percentage

Net sales by product:

Figures

$

170,204

$

188,261

$

(18,057)

(9.6)

%

Other

43,347

44,963

(1,616)

(3.6)

%

Total net sales

$

213,551

$

233,224

$

(19,673)

(8.4)

%

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 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.

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

Media:

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

Funko, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

(In thousands, except per share data)

Net sales

$

213,551

$

233,224

$

795,122

$

686,073

Cost of sales (exclusive of depreciation

and amortization shown separately

below)

151,125

149,172

512,580

430,746

Selling, general, and administrative

expenses

57,264

45,015

193,803

155,321

Acquisition transaction costs

-

-

-

28

Depreciation and amortization

10,999

10,204

42,126

39,116

Total operating expenses

219,388

204,391

748,509

625,211

Income (loss) from operations

(5,837)

28,833

46,613

60,862

Interest expense, net

2,887

4,509

14,342

21,739

Loss on extinguishment of debt

-

4,547

-

4,547

Other (income) expense, net

(448)

1,488

(25)

4,082

Income (loss) before income taxes

(8,276)

18,289

32,296

30,494

Income tax (benefit) expense

(1,988)

2,770

4,476

5,432

Net (loss) income

(6,288)

15,519

27,820

25,062

Less: net income (loss) attributable to

non-controlling interests

(2,047)

10,292

16,095

17,599

Net income (loss) attributable to Funko, Inc.

$

(4,241)

$

5,227

$

11,725

$

7,463

Earnings (loss) per share of Class A common

stock:

Basic

$

(0.12)

$

0.21

$

0.38

$

0.31

Diluted

$

(0.12)

$

0.20

$

0.36

$

0.29

Weighted average shares of Class A

common stock outstanding:

Basic

34,883

24,821

30,898

23,821

Diluted

34,883

26,607

32,926

25,560

Funko, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

December 31,

2019

2018

(In thousands)

Assets

Current assets:

Cash and cash equivalents

$

25,229

$

13,486

Accounts receivable, net

151,564

148,627

Inventory

62,124

86,622

Prepaid expenses and other current assets

20,280

11,904

Total current assets

259,197

260,639

Property and equipment, net

65,712

44,296

Operating lease right-of-use assets

62,901

-

Goodwill

124,835

116,078

Intangible assets, net

221,492

233,645

Deferred tax asset

57,547

7,407

Other assets

4,783

4,275

Total assets

$

796,467

$

666,340

Liabilities and Stockholders' Equity

Current liabilities:

Line of credit

$

25,822

$

20,000

Current portion long-term debt, net of unamortized discount

13,685

10,593

Current portion of operating lease liabilities

11,314

-

Accounts payable

42,531

36,130

Income taxes payable

637

4,492

Accrued royalties

34,625

39,020

Accrued expenses and other current liabilities

28,955

33,015

Total current liabilities

157,569

143,250

Operating lease liabilities, net of current portion

61,622

-

Deferred tax liability

341

5

Liabilities under tax receivable agreement, net of current portion

61,554

6,504

Deferred rent and other long-term liabilities

7,421

6,623

Commitments and contingencies

Stockholders' equity:

Class A common stock, par value $0.0001 per share, 200,000 shares authorized; 34,918 shares and 24,960 shares issued and outstanding as of December 31, 2019 and 2018, respectively

3

2

Class B common stock, par value $0.0001 per share, 50,000 shares authorized; 14,515 shares and 23,584 shares issued and outstanding as of December 31, 2019 and 2018, respectively

1

2

Additional paid-in-capital

204,174

146,154

Accumulated other comprehensive income

791

(167)

Retained earnings

20,442

8,717

Total stockholders' equity attributable to Funko, Inc.

225,411

154,708

Non-controlling interests

79,733

138,546

Total stockholders' equity

305,144

293,254

Total liabilities and stockholders' equity

$

796,467

$

666,340

Funko, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Year Ended December 31,

2019

2018

(In thousands)

Operating Activities

Net income

$

27,820

$

25,062

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation, amortization and other

44,518

39,116

Equity-based compensation

13,044

9,140

Accretion of discount on long-term debt

952

1,414

Amortization of debt issuance costs

258

709

Loss on debt extinguishment

-

4,547

Deferred tax benefit

(2,293)

(964)

Other

635

4,288

Changes in operating assets and liabilities:

Accounts receivable, net

(3,969)

(36,139)

Inventory

25,372

(8,886)

Prepaid expenses and other assets

(5,824)

8,736

Accounts payable

4,629

(16,375)

Income taxes payable

(3,618)

2,177

Accrued royalties

(4,403)

13,495

Accrued expenses and other liabilities

(6,356)

3,671

Net cash provided by operating activities

90,765

49,991

Investing Activities

Purchase of property and equipment

(42,264)

(26,866)

Acquisitions, net of cash

(6,369)

(635)

Net cash used in investing activities

(48,633)

(27,501)

Financing Activities

Borrowings on line of credit

42,083

316,390

Payments on line of credit

(36,383)

(307,191)

Debt issuance costs

(411)

-

Proceeds from long-term debt, net

-

230,011

Payment of long-term debt

(11,750)

(231,338)

Payment of subordinated debt, net

-

-

Proceeds from subordinated debt, net

-

-

Contingent consideration

-

(2,500)

Contributions from members

-

-

Proceeds from initial public offering, net of underwriters

discount and commissions

-

-

Proceeds from issuance of Class B common stock

-

-

Distributions to continuing equity owners

(23,923)

(20,441)

Payments under tax receivable agreement

(173)

-

Proceeds from exercise of equity-based options

2,217

23

Net cash provided by (used in) financing activities

(28,340)

(15,046)

Effect of exchange rates on cash and cash equivalents

(2,049)

(1,686)

Net increase in cash and cash equivalents

11,743

5,758

Cash and cash equivalents at beginning of period

13,486

7,728

Cash and cash equivalents at end of period

$

25,229

$

13,486

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:

Net sales

$

Cost of sales (exclusive of

depreciation and amortization)

Gross profit(1)

$

Gross margin(1)

Adjustments:

One-time inventory write-down(2)

Gross profit excluding the one-time

$

inventory write-down

Gross margin excluding the one-time inventory write-down

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

(amounts in thousands)

213,551

$

233,224

$

795,122

$

686,073

151,125

149,172

512,580

430,746

62,426

$

84,052

$

282,542

$

255,327

29.2

%

36.0

%

35.5

%

37.2

%

16,775

-

16,775

-

79,201

$

84,052

$

299,317

$

255,327

37.1

%

36.0

%

37.6

%

37.2

%

  1. Gross profit is calculated as net sales less cost of sales (exclusive of depreciation and amortization). Gross margin is calculated as net sales less cost of sales (exclusive of depreciation and amortization) as a percentage of net sales.
  2. Represents a one-time $16.8 million charge for the three and twelve months ended December 31, 2019 to cost of goods sold for additional inventory reserves to dispose of certain inventory items. This charge is incremental to normal course inventory reserves and was recorded as a result of the Company's decision to dispose of slower moving inventory to increase operational capacity.

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:

Net income (loss) attributable

to Funko, Inc.

$

Reallocation of net income (loss)

attributable to non-controlling

interests from the assumed

exchange of common units of

FAH, LLC for Class A common

stock (1)

Equity-based compensation (2)

Loss on extinguishment of debt

Acquisition transaction costs and other

expenses (3)

Customs investigation and related

costs (4)

Certain severance, relocation and related

costs (5)

Foreign currency transaction loss (6)

Tax receivable agreement liability

adjustments

One-time inventory write-down(7)

Income tax expense (benefit) (8)

Adjusted net income

Adjusted net income margin (9)

Weighted-average shares of Class A

common stock outstanding - basic

Equity-based compensation awards and

common units of FAH, LLC that are

convertible into Class A common

stock

Adjusted weighted-average shares of

Class A stock outstanding - diluted

Adjusted earnings per diluted share

$

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

(In thousands, except per share data)

(4,241)

$

5,227

$

11,725

$

7,463

(2,047)

10,292

16,095

17,599

3,214

3,390

13,044

9,140

-

4,547

-

4,547

-

700

383

3,391

-

-

3,357

-

559

-

739

1,031

(600)

1,488

(177)

4,082

152

-

152

-

16,775

-

16,775

-

(4,944)

(4,334)

(12,166)

(7,739)

8,868

21,310

49,927

39,514

4.2

%

9.1

%

6.3

%

5.8

%

34,883

24,821

30,898

23,821

15,403

26,054

21,167

26,858

50,286

50,875

52,065

50,679

0.18

$

0.42

$

0.96

$

0.78

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

(amounts in thousands)

Net income

$

(6,288)

$

15,519

$

27,820

$

25,062

Interest expense, net

2,887

4,509

14,342

21,739

Income tax (benefit) expense

(1,988)

2,770

4,476

5,432

Depreciation and amortization

10,999

10,204

42,126

39,116

EBITDA

$

5,610

$

33,002

$

88,764

$

91,349

Adjustments:

Equity-based compensation (2)

3,214

3,390

13,044

9,140

Loss on extinguishment of debt

-

4,547

-

4,547

Acquisition transaction costs and other

-

700

383

3,391

expenses (3)

Customs investigation and related

-

-

3,357

-

costs (4)

Certain severance, relocation and related

559

-

739

1,031

costs (5)

Foreign currency transaction (gain)

(600)

1,488

(177)

4,082

loss (6)

One-time inventory write-down(7)

16,775

-

16,775

-

Tax receivable agreement liability

adjustments

152

-

152

-

Adjusted EBITDA

$

25,710

$

43,127

$

123,037

$

113,540

Adjusted EBITDA margin (10)

12.0

%

18.5

%

15.5

%

16.5

%

  1. Represents the reallocation of net 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 timing of awards.
  3. Represents legal, accounting, and other related costs incurred in connection with acquisitions and other potential transactions. Included for the twelve months ended December 31, 2018 is a one-time $2.0 million consent fee related to certain existing license agreements and $0.7 million for the recognition of a pre-acquisition contingency related to our Loungefly acquisition.
  4. Represents legal, accounting and other related costs incurred in connection with the Company's investigation of the underpayment of customs duties at Loungefly. For the twelve months ended December 31, 2019, includes the accrual of a contingent liability of $0.5 million related to potential penalties that may be assessed by U.S. Customs in connection with the underpayment of customs duties at Loungefly.
  5. Represents certain severance, relocation and related costs. For the three months and twelve months ended December 31, 2019, includes $0.4 million of severance costs incurred in connection with the departure of our former Chief Financial Officer as well as severance, relocation and related costs associated with the consolidation of our warehouse facilities in the United Kingdom. For the twelve months ended December 31, 2018, includes severance costs incurred in connection with the departure of certain members of senior management, including the founders of Loungefly.
  6. Represents both unrealized and realized foreign currency losses on transactions other than in U.S. dollars.
  7. Represents a one-time $16.8 million charge for the three and twelve months ended December 31, 2019 to cost of goods sold for additional inventory reserves to dispose of certain inventory items. This charge is incremental to normal course inventory reserves and was recorded as a result of the Company's decision to dispose of slower moving inventory to increase operational capacity.
  8. Represents the income tax expense effect of the above adjustments. This adjustment uses an effective tax rate of 25% for all periods presented.
  9. Adjusted net income margin is calculated as Adjusted net income as a percentage of net sales.
  10. Adjusted EBITDA margin is calculated as Adjusted EBITDA as a percentage of net sales.

Guidance Reconciliation of Net Income to EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Earnings per Diluted Share

Estimated Range for the Year Ending December 31, 2020

(In millions, except per share amounts)

Net Sales

$

840.0

$

865.0

Net income

34.1

41.9

Interest expense, net

11.5

11.5

Income tax expense

9.6

11.8

Depreciation and amortization

45.8

45.8

EBITDA

$

101.0

$

111.0

Adjustments:

Equity-based compensation (1)

13.3

13.3

Certain severance, relocation and related costs (2)

0.7

0.7

Adjusted EBITDA

$

115.0

$

125.0

Adjusted EBITDA Margin (3)

13.7

%

14.5

%

Net income

$

34.1

$

41.9

Equity-based compensation (1)

13.3

13.3

Certain severance, relocation and related costs (2)

0.7

0.7

Income tax expense (4)

(4.8)

(5.1)

Adjusted net income

$

43.3

$

50.8

Weighted-average shares of Class A common stock

outstanding

35.6

35.6

Equity-based compensation awards and common units of

FAH, LLC that are convertible into Class A common stock

15.4

15.4

Adjusted weighted-average shares of Class A stock

outstanding - diluted

51.0

51.0

Adjusted earnings per diluted share

$

0.85

$

1.00

  1. Represents non-cash charges related to equity-based compensation programs, which vary from period to period depending on timing of awards.
  2. Represents severance, relocation and related costs associated with the consolidation of our new warehouse facilities in the United Kingdom.
  3. Adjusted EBITDA Margin is calculated as Adjusted EBITDA as a percentage of net sales.
  4. Represents the income tax expense effect of the above adjustments. This adjustment uses an effective tax rate of 25% for the year ending December 31, 2020.

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.

Disclaimer

Funko Inc. published this content on 05 March 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 05 March 2020 23:57:01 UTC


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NameTitle
Brian Mariotti Chief Executive Officer & Director
Andrew Perlmutter President
Kenneth R. Brotman Chairman
Joe Sansone Chief Global Operations Officer
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