Good afternoon, and welcome to Funko’s Conference Call to discuss Financial Results for the Second Quarter 2018. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this conference is being recorded. On the call today from management are Brian Mariotti, Chief Executive Officer; and Russell Nickel, Chief Financial Officer. I will turn the call over to Mr. Nickel to get started. Please go ahead, sir.

Thank you, and good afternoon. A press release covering the company’s second quarter 2018 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section on the company’s website. Management’s remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements regarding our business goals, plans, abilities and opportunities, industry and customer trends, growth, momentum and investment initiatives, collaboration and license relationships, consumer engagement and brand awareness, acquisitions and related expenses and anticipated financial performance. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our Form 10-K for the fiscal year 2017 and our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligations to update them. Please also note, that we will be referring to certain non-GAAP financial measures on today’s call, such as EBITDA, adjusted EBITDA, adjusted pro forma net income, adjusted pro forma earnings per diluted share and net debt, which we believe may be important to investors to assess our operating performance. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and in the Investor Relations section on our website at funko.com. I will now turn the call over to Brian.

Thanks, and good afternoon, everyone. Funko had another terrific quarter as we once again delivered strong top and bottom-line results with continued positive momentum across the business. Year-over-year sales in the quarter increased 32% to $138.7 million. Gross margin increased 120 basis points to 38.2%. Income from operations was up 125% to $9.1 million and adjusted EBITDA increased 12% to $19.9 million in the quarter. We believe our financial results are a reflection of our unique business model and differentiated products which we believe are increasingly resonating with consumers around the globe. We have established Funko as a pop culture platform with our Pop! brand being seen as a unique form factor that pop culture fans instantly recognize and which is a medium for the expression of a wide range of properties. We think of it as the [Funkoars], a world in which properties as diverse as the Golden Girls, Marvel, Harry Potter and Fortnite can coexist in a world of pop culture merchandise. Our broad offering of licensed consumer products and collectibles continue to appeal to a wide array of fans across age, gender and income groups. We're constantly leveraging our portfolio of more than 1,000 licensed properties to develop a steady stream of new products that we sell to a variety of retailers and channels and directly to consumers. Our platform allows us to continually put out new products based on the steady stream of content. Think of it as an indexed fund of popular culture and entertainment. We don't have to be the one coming up with the hit ideas and although we don't bet heavily on just one or two, we believe that based on our expertise we can better predict what hot properties will be. And when something does get hot, we’re usually the first…

Thanks, Brian. And good afternoon, everyone. Our strong second quarter results were broad-based with continued positive underlying trends. Net sales in the quarter increased 32% to $138.7 million and were driven primarily by the continued expansion of products and properties within our portfolio. In the quarter, the number of active properties increased 26% to 510 and net sales for active properties increased 5% to 272,000. On a geographical basis, net sales in the United States increased 33% to $97.1 million and net sales to all foreign countries increased 32% to $41.6 million. As expected, with the implementation of a new ERP system in the UK and the rollout of the 3PL operation in mainland Europe, sales and operations were impacted, which is why we proactively pulled forward the approximately 5 million in shipments into Q1. On a product category basis, net sales of figures increased 31% to a $114.5 million and net sales of other products such as bags, accessories, apparel and homeowners increased 42% to $24.2 million. We saw continued strength with our Pop! brand with sales of Pop! Vinyl figures increasing 33% on a global basis. We believe it is noteworthy that in its eighth year our largest brand Pop! Vinyl figures was up 34% in the US which is our most mature market, indicating just how much the brand is able to be refreshed and kept relevant by infusing it with new content. Our sales growth through e-commerce channels, which includes online-only retailers as well as some of our e-commerce divisions of our brick-and-mortar retailers, continued to outpace our total sales growth. We saw third party e-commerce sales on a global basis grow 63% year-over-year during the second quarter, and these sales accounted for 16% of our total sales in Q2 of this year compared to 13%…

[Operator Instructions]. Our first question is coming from the line of Steph Wissink with Jefferies. Please proceed with your question.

I have two questions. The first one, Rusell for you is just on the third-party fulfillment partner, the company you are using to help with retail level restocks. Can you just help us know where that goes through the P&L? Is that a cost of good expense or does that hit you in the SG&A line? And how should we think about the determinal value of that over time? Is it a contract over the course of years or is it based on performance stipulation, how should we think about that agreement?

It hits in the SG&A, it’s part of our sales and general and administrative expense -- sales expense. And then it is a contract over a three month period of time that will then turn into a month-to-month.

And then the second question just with respect to leverage in the business, I think you mentioned in your closing remarks kind of operating expense leverage in the back half of '18 and into '19. Are you seeing any areas within the business today where you’re -- I think signs of some of that early leverage and maybe if you could just help us on pointing those out, where we should start to see the leverage first as we get to the back half of '18 and then how you see it progressing into '19?

Yes, I mean I think ultimately if I’m understanding your question it’s going to come from the sales and general, administrative expense first and foremost with the headcount really since we are required in 2018 we've been making substantial investments in personnel on a worldwide global basis, including the acquisitions that we made throughout the course of last year. So I think you are going to see leverage really coming from headcount going forward.

Then the last one for us is, just with respect to Brian your comments on the amount of velocity in the portfolio of foreign properties. Maybe if you could just talk a little bit about some of those that tend to be evergreen? How we should think about the evergreen contribution over the course of the next maybe six to 12 months? Do you expect it to come and stay in that 45% to 50% ratio?

Yes. It has been amazing how consistent it has been over the last seven years, that 40% to 45% always seems to hit. I think we were able to end at 45% in Q2. And if you look at our top 10 partner was 1 and Disney Classic was 5. So just two great examples of how we can take something to Disney Classic one is a great example. We built a huge program around Hercules which just there was no anniversary there is no rhyme or reason why we built a program around that specific movie but it resonated, it took off and the numbers were fantastic. So we believe this track over the last seven years speaks really loudly in terms of evergreen content. We feel that based off the partner strength for last three years. last two big Star Wars movies, Episode 7 and Episode 8 we have outsold with Star Wars Classic in both those years. So I don’t think we see anything changing. The continued dedication to making sure that we take everything that’s topical and hot and trendy and leverage against it and then fill in all the cracks with the evergreen content. So yes, we see no change in that model going forward.

The next question is coming from the line of Mike Swartz with SunTrust Robinson Humphrey. Please proceed with your question.

Brian, just a question for you around proprietary properties non-royalty bearing. I think you said longer term this is one of your strategies to grow the business. Can you just give us a sense of maybe how big those proprietary properties are now? And maybe do you have a target in mind longer term?

No, Mike, great question. It’s certainly something that’s a focus for us. Wetmore Forest is our first true series of characters where there is some storytelling elements behind, there’s natural process on how to bring these things to market. It’s still relatively small. We have had over the years some of Funko’s own creations in our Pop! line and our Spastik Plastik line, both of those have done very, very well. But this is still very small and less than a 1% of our business right now. So I think it’s something important when you have 85 to 90 world class artists sitting at our headquarters, they all have voices, they all have ideas, they often times take their work home with them and come up with great characters that we would be foolish not to leverage those ideas and those concepts. So I think you’re just going to see a greater amount of time dedicated to looking at opportunities and developing our own IP. We still view our lines like Pop!, and Dorbz and Rock Candy and [BNYL] and 5 Star is kind of our own IP layered over our licensors’ IP. But certainly when it comes to new proprietary designs, it’s definitely a way for us to incubate new lines and bring them into specialty and grow them accordingly.

And then just second question with regards to the new Fortnite and Pokémon partnerships that you announced during the quarter. Could you help us understand maybe was that predicated in your prior guidance and maybe how much of that went into the guidance raise that you’re announcing tonight?

No, it wasn’t. I mean it’s just Funko being Funko. Our -- obviously we identified Fortnite quite a while ago and worked very, very hard. We probably favor the first ones who approach them on a license. These things take a little bit of time, but no they did not factor into our guidance previous to this call.

They did.

May be we were anticipating having those licenses in the guidance that we had given.

Yes, yes, going forward. Yes. Right. Yes, going forward. So, look I think it’s one of the things that the idea how Funko operates is absolutely going to be finger on the pulse of everything that moves pop culture and when we put out our guidance even at the beginning of last year or tail end of last year we were always anticipating that we’re going to pick up whatever is next that’s new and it is hot and that's just part of our strategy always going forward.

Thank you. Our next question is coming from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.

I guess first I would love a little bit more detail behind North America, a very strong dollar growth and I recognize you had a bit of an easier comparison year-over-year but if you could just maybe update us on how the progress with Walmart’s repositioning in terms of where you’re showcasing products in the store. I know you talked a bit on Target but then are there other new accounts that you’re starting to work with in a little bit more of a forward fashion in the quarter?

Good question, Erinn. First and foremost those are fantastic numbers considering the Walmart migration from one area to another that’s going to happen in -- tail end of Q3, so we’re obviously very excited about our North America growth. Obviously we’re seeing a significant amount of increase in our third party e-commerce business and obviously there’s a couple major retailers that are e-retailers that have done phenomenally well over the last couple of years and they’re growing exponentially for us. Again it’s the same model just coming out with additional shelf space to create programs whether it’d be at Hot Topic or BoxLunch or FYE or GameStop or Walmart or Target, just trying to find interesting ways to put out pop culture statements, but I definitely think that considering where we’re at for the first two quarters and knowing the transition from Walmart into what we think a much bigger space comes Q3. We’re excited about what North America looks like going forward.

And then on Europe you talked a bit about the ERP implementation during the quarter. It sounds like you had some hiccups, a lot of those were anticipated though. As we look into the back half, how should we think about the international growth from here, does it start to stabilize in kind of here in most recent quarter, or is it going to a pick-up a little bit, just any help on where you are at with working through some of the system implementation?

I mean with any ERP system that anybody is going through there are going to hiccups, they were anticipated, there is process as well as technology, just it was a lot of process change for the organization. So as we work through this we’re seeing tremendous demand throughout Europe, and really the rest of the world. Over the rest of the year -- for the year I should say we are still are anticipating that 45% to 50% growth rate for Europe and then 18% or 20% for the rest of the world. So you're going to start see because -- you're going to start to see in Europe in particular, growth really normalize around where we were at the -- where we were in Q2. As a reminder, we acquired Underground Toys in January of 2017. We began to ramp-up those sales. And now in Q3 and Q4 we’re going to be -- are comping, that ramped up, channel fill and growth. And so that's why you're seeing the overall growth rate in the second half of the year normalized around the 38%.

And then just my last question is for Brian again. You talked about in your prepared remarks just really strong engagement you are seeing with the video shorts. How do you think about like monetizing and the fact you are getting 90 million views on a year-to-date period. How do you monetize that over time and what are the opportunities that you guys are working on?

It’s a great question. I think the one thing we've done is obviously for our strategy for the second half of this year and all of 2019 it's going to be really simple. We're going to look at all of the big programs the big beats, whether it's television or movies, for example our vendors Infinity War, Frozen 2, Star Wars Episode 9 that content is going to basic co-exist around with these big retail programs. What we see in that is an ability to take that content and have our retail partners share it on their websites in stores like a lot of the stores are doing in Europe. They add on a final slide to the animation where they are showing their exclusive content. The way they monetize this is just purely simple, the videos are so engaging and get so many viral views that we’re exposing people to these really cute whimsical product, you may have not them before. We also see that social media increases sometimes fivefold, when we put the video content in versus just pictures and sometime up to a threefold increase in preorder. So we obviously acquired Funko Animation Studio for reason. We love the ability to kind of grow that business and now give them an ability to align with our big opportunities for retail, I mean also they continue to incubate the Wetmore Forest and some of our lines like [BNYL] and 5 Star where we can use that medium as well to basically gotten more attention to some of our newer product lines.

Our next question is coming from the line of Mike Ng with Goldman Sachs.

Thanks for the time. I just have a few. First, could you just talk about what your expected revenue contribution is from Pokémon and Fortnite in 2019 and can you help us understand the thought process behind having a limited release in 2018 with only one retailer? And also do you consider pursuing a Master Toy license for Fortnite?

Mike, all good questions. As Russell was saying, it’s a lit over $10 on the Fortnite business. So above 10 bucks. So let’s start with the bunch of the questions. One, we explored a lot of different opportunities with Fortnite but I think where we ended up is where we thought we'd be have the best chance to succeed which is really what is truly in our core which is fun whimsical pop culture products that aim for all four quadrants adults and boys and girls. So I think we are really happy with where we landed with that. And obviously we think that there is going to be a great business to be have with those guys over the years to come. Pokémon has been long time in coming. We have been working with them for a very long time trying to obtain a license. We have finally got it and it's a slow burn, it’s going to be just with one retailer this year. But we obviously feel like there’s been dialogue to increase what we will be making in 2019. So I think that both of those licenses are obviously we're very excited but we are also tempering expectations for 2018, based on the limited amount of Pokémon products and then obviously Fortnite setting in fourth quarter alone but really glad that both of those are part of our new staple.

Yes, I would just add a couple of things. One, again as we look at 2019 as we expect as we look we are not a hit driven organization, typically no individual property accounts for more than 10%. Again the Fortnite, the Pokémon, Harry Potter, these are licenses, these are things that we do, this is in the very core DNA of what Funko is. And so it’s just an opportunity to continue to put out products around properties that people are fan of. And just to clarify, we have been in long conversations with both Pokémon and Fortnite going out through the course of really most of 2018. And so, when we provided that earlier guidance for the year as overall, we were anticipating these licenses -- or licenses similar to these.

And you mentioned Target has already expanded some shelf space for Funko and Walmart is in the process of doing that as well. I was just wondering, could you just elaborate on that a little bit, when is that happening and what is Walmart actually doing?

Yes. So Walmart is migrating primarily from the toy department over to DVD entertainment department. That’s going to be a shift that closely mirrors the good success we've had over the last couple of years with Target. So we are excited about that, that’s going to afford us more shelf space with them certainly than what we had in toy department. And I think that is -- it's basically a way to continue to grow the business. Some of our properties are going to still stay aligned like Five Nights at Freddy's with a much more toyetic with Walmart and also with Target. Target is just continuing that -- we are just continuing to burn our shelf space in a lot of different areas and continuing to grow the business with a lot of different adjacent categories as well with apparel and accessories and the Loungefly categories. And we continue to control a little bit more shelf space with Target because our products are working with such velocity. So obviously with both those retail partners, we’re very excited about the second half of the year and going forward. But I think it’s a really big win for us with Walmart to see the migration of the more collectible products moving to DVD and entertainment section.

And my last question is just on taxes. You mentioned there is a 25% corporate tax rate. If I remember correctly I think the cash tax rate, if you include the tax distribution to members, is a bit higher. Can you just give us your latest thoughts on what that cash tax rate would be including those tax distributions? And what was the free cash flow in the quarter post tax distributions in members?

Yes, as it relates to the tax distribution or LLC agreement has the -- the cash tax distributions only had 42.9% of the allocated taxable income, the -- that is a reduction obviously with the changes in the tax law. As far as the free cash flow in the quarter, I don't have that in front of me and I’d have to get back to you on that.

Thank you. Our next question is coming from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

So, a couple of follow-up questions there, I am trying to put some guardrails around Fortnite and Pokémon. If you look back I think Five Nights at Freddy's was $16 million in 2016 and I know you’ve had historically not more than 10% of sales as one platform but that exceeded 10% and clearly those two brands are much more recognizable globally as you mentioned. So why wouldn’t each one of those brands as we think about on a full run rate exceeds that $16 million from that you sold off Five Nights at Freddy's in 2016?

Chris it’s a good analogy you’re using and I think that Fortnite is an interesting property. The game is based on skins and they’re not necessarily based on characters like an Overwatch, they have defined characters with defined personalities and those are the actual attachment to those characters. So I think everybody is going in with a ton of hope that Fortnite is the next great property we believe in it, we love it, we love the character skin. But one other things is that it’s going to have to prove itself out, obviously we think there’s going to be good business there, but going to be a phenomenal business. I don't think we're ready yet to make that jump or leap yet because we certainly didn’t see that with Five Nights at Freddy's either. It is one of things that just took off. Pokémon is still going to be a -- it’s going to have a cadence to how we release products. I mean while we see just a few products in ‘18, there’s going to be -- we’re going to grow off of that ‘19 and we’re just going to have see but I can tell you right now you can definitely count on if not -- releasing 10, 20, 30, 40 SKUs of Pokémon in 2019. I think it is going to be more of a definite jump from ‘18 to ‘19 but we’re not going to be releasing the pre-rolled supply of Pokémon. We’re just -- we’re going to that relationship gradually. We’re excited about that relationship. So I think both of those you could think that these could be epic numbers. And I think certainly with Fortnite that there is definitely a possibility there in ‘19 but we’re just going to kind of play it by year, put out great products, monitor it. And if we see something that looks like it’s really starting to resonate, I mean obviously we’ll keep you guys in the loop.

One of the other big differences Chris is you often have to recognize that Five Nights at Freddy's was really a Master Toy license and really our first foray into a Master Toy license. So we had a much broader array of product categories that we could produce I guess that we don’t have with either Fortnite or Pokémon.

And the follow-up Brian. So it sounds like you’re -- if you’ve to say just the magnitude, how much bigger do you think the Fortnite potential is versus say a Pokémon and like a full Pokémon run rate understanding that you’re going to lead this out over time?

I don’t know. I wish I did, I wish I could tell you. I think Pokémon is going to be a very, very strong license as we continue to grow the breadth of SKUs there. Fortnite, look there’s going to be some competition in the space, so I think Russell’s point is really well spoken. As a Master Toy license you’re afforded more things like with Five Nights at Freddy's then we will be with just being one of their partners right. So I can tell you right now the good news about us and as we continue to grow as the company get smarter about doing business is we get to monitor through those sell throughs. And when you get them -- when you monitor that sell through on a week-to-week basis with our top 15, 20 customers we're going to get a really good read on how Fortnite is resonating. And we believe we might be the first guys out with products in three dimensional form for fourth quarter. So we're definitely being able to take that -- those lessons learned, those sell throughs and begin to formulate what 2019 will look like with Fortnite.

And just a couple of follow-ups. So can you talk about -- Russell can you talk about how large Underground Toys and Loungefly were in the back half of last year, what dollars wise?

Dollar wise, I'd have to get back to you on specific numbers. Overall, Loungefly, when we acquired them, they were doing about $20 million a year in business for the year. So as we are ramping that up that would probably be in the $10 million range. And then Underground Toys we saw strong ramp -- there was strong growth really in the second half of the year so we were looking at probably about $50 million or $60 million in revenue coming from Underground Toys or really I should say Funko UK in the second half of the year the last year.

Okay. And then last one. You talked about -- I think in the last call you talked about 39% gross margin as sort of the long-term stable target. You were below that. Is there -- was there something unique to this quarter or when do you think we've built to that gross margin rate?

I think really as I've said we're going to get to that gross margin rate probably beginning on a steady basis in 2019, early part of 2019. Part of what drove the lower gross margin this year was just really the property mix of what we sold. When you look at our top 10 there was a number of properties that have a higher royalty rate. And so, we're trended above that.

Thank you. Our next question is from the line of Gerrick Johnson with BMO Capital Markets.

Two questions. First, can you talk about the POS to retail sell through in the second quarter? And second, maybe a little discussion on the economics of Gears Pop!?

Yes, Gerrick, it’s Brian. Thanks for the questions. I can tell you that if you take the anomaly of the business moving from WalMart toys to transitioning over, we are in the high teens with sell through continuing to really be excited about not only the sell through rate but the inventory levels of all of our key retail partners. So what -- we’re again seeing a lot of really, really good trends when it comes to the appetite for the product, the in-stock for the product and the sell through for the product. The second question?

Yes, as it relates for the Gears Pop!, we’re not really anticipating substantial monetization as it relates to that. The way Microsoft is developing this they have licensed the Pop! IP the Pop! brand which really I think just highlights how much that IP, that brand, that platform resonates on a global but it's not really -- we're not anticipating that a lot, but there is a royalty base coming from Microsoft.

The next question is coming from the line of Drew Crum with Stifel. Please proceed with your question.

So, Brian I wonder if you could talk about or characterize the pipeline in terms of new licenses or adding licenses as you look out over the next several quarters, obviously added the two big ones or announced two big ones back in July. But how would you characterize the pipeline of new licenses over the next couple of quarters?

Drew, thank you for not asking that Fortnite question. We are obviously very excited about. Look, I tend to go with my geekiness and finger on pop culture, I tend to go by looking at licensing years and I’d tell you 2017 in my mind was an A minus really, really strong licensing year where '18 wasn’t as strong. I think it's more of a BB plus. 2016 was more like a BB minus. So I will tell you that I'm personally excited about what 2019 looks like if you look at, Frozen 2, Star Wars Episode 9, The Avengers Infinity Wars sequel, Captain Marvel. There is just some -- The Wonder Women sequel, and we added Stranger Things and Finale Season of Game of Thrones, I think you're just looking at a ton of fantastic content going in. New content, it’s again like anything else -- we are -- our fingers on the pulse, our ears on the ground. We are always looking for new ways to monetize. There is a ton of animated licenses. They are continuing to do very, very good business. We continue to back catalog as much stuff as we possibly can, when it comes to music like K-pop bands, video games. We are looking at that catalog stuff for more evergreen content. We are building programs around. So I think that everything we are interested in, there is some sort of state of negotiation for new licenses. But also you couple that with the theatrical, the videogame, and then yes, I mean I think we are very, very excited about what 2018 and 2019 looks like.

And then you mentioned videogames, it looks like a very strong slate for the second half of this year, we think it’s a very least -- the increased traffic to GameStop helps your business. But can you remind us what exposure you have to some of the big titles that are launching on console this fall?

I wouldn’t say exposure. I think that we are obviously leveraging some of the most popular ones on the planet right now. Obviously, Overwatch is continuing to be a strong license for us for the last couple of years and we will continue to grow that relationship. Obviously, Fortnite, Fallout 76 is a new title that we are very, very excited about. So those are three big ones I think we are the most excited, we are going to put the most of products to. But like anything else we are looking at sell through indications of interest on our orders. We never get ourselves in over inventory position when it comes to those videogames. We are really watching the level of interest and the indications of interest to make sure we get those decisions made right. But those are three great ones that we are obviously going to build a lot of business around.

And then just a housekeeping item Russell, the -- I know it’s small but D&A picked up sequentially just below 10 million. Is that kind of a good quarterly run rate to think about going forward?

Yes, I think so -- I think the pick up is just -- as we continue to grow and we continue to put out more products, we are continuing to invest, and more than doing and that's what you are seeing. That’s what's really driving that number.

Thank you. We have reached the end of our question-and-answer session. So I’d like to pass the floor back over to Mr. Mariotti for any additional or concluding comments.

Yes. Thank you for your interest and support of Funko and we look forward to speaking to you guys again in the third quarter earnings if not sooner. I hope everyday has a great day. Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation, and you may disconnect your lines at this time.