Spin Master
Annual Report 2016

Plain-text annual report

SPIN MASTER CORP. 2016 ANNUAL REPORT GROWTH STRATEGIES INNOVAT INNOVATE ACROSS THE PORTFOLIO OF BRAN BRANDS AND BUSINESS SEGMENTS Leverage competitive strengths to build a robust pipeline in all business segments DEVELOP EVERGREEN GLOBAL ENTERTAINMENT PROPERTIES Capitalize on success of current entertainment properties Continue to focus on strategic brand building Continue to invest in advanced technology and entertainment licenses Expand capability and product offering in digital mobile gaming Develop at least one new show per year Strategically relaunch properties to capitalize on value of owned content library INCREASE SALES IN INTERNATIONAL INCREA DEVELOPING AND EMERGING MARKETS Optimize international distribution network Strategically tailor product offering to local international markets Increase proportion of sales outside of North America to 35-40% in the medium term LEVERAGE GLOBAL PLATFORM THROUGH STRATEGIC ACQUISITIONS Fragmented industry with opportunities for consolidation Strong balance sheet with financial flexibility FINANCIAL INFORMATION +27.1% 1 GROSS PRODUCT SALES CAGR 2012-2016 $1254.6 +57.0% ADJUSTED EBITDA CAGR 2O13-2016 1 $982.7 $811.9 $576.9 $480.6 $205.5 $160.4 $111.7 $53.1 +73.8% ADJUSTED NET INCOME 1 CAGR 2O13-2016 $120.1 $98.6 $66.3 2012 2013 2014 2015 2016 $22.9 2012 $22.9 $34.4 2013 2014 2015 2016 2013 2014 2015 2016 2012 1Non-IFRS term. Non-IFRS measures do not have any standardized meaning prescribed by International Financial Reporting Standards (“IFRS” ) and are therefore unlikely to be comparable to similar measures presented by other issuers. Please refer to the section entitled “Non-IFRS Financial Measures” in the Management Discussion and Analysis for a discussion of the definition, components and uses of such non-IFRS measures, as well as a reconciliation of such non-IFRS measures to IFRS measures (where a comparable IFRS measure exists). LETTER TO SHAREHOLDERS 2016 was an outstanding year for Spin Master. In our first full year as a public company, we delivered strong shareholder returns and operating performance, achieved major milestones under each of our four key growth strategies, and was one of the most successful product launches in the history of our company. When we combine our strengths with those of our partners – including inventors, retailers, licensors, broadcasters, and animation studios —we create SIGNIFICANT value In 2015, we became a publicly-traded company because we believed that access to capital markets would be the best way to accelerate our growth and further establish Spin Master as one of the world’s leading children’s entertainment companies. In 2016, we completed four strategic acquisitions that, in combination with our internal growth strategies, significantly advanced the realization of that vision. We are confident that there will be more exciting developments in 2017 and beyond. We are very pleased with our financial results in 2016. We reported Gross Product Sales1 of $1,254.7 million, up 27.7% from 2015. Over the past 10 years, our Gross Product Sales1 have increased at a compound annual growth rate of 14.0%. In 2016, we also reported significant year-over-year increases in Revenue (up 31.3%), Gross Profit (up 30.0%), Adjusted EBITDA1 (up 28.1%) and Adjusted Net Income1 (up 21.8%). Free Cash Flow1 increased from $67.2 million in 2015 to $118.7 million in 2016. Our growth is grounded in four clearly-defined strategies: to innovate our core portfolio of products, create successful global entertainment properties, increase our penetration in international markets, and make strategic, accretive acquisitions. We’re sticking to them and they are working. Here’s what we did in 2016 to advance each of our growth strategies and deliver these outstanding financial results: INNOVATION Innovation is at the core of who we are. The children’s entertainment industry is dynamic, and continuous product development remains crucial to our long-term success. Our internal 36-month brand innovation process facilitates the identification of market opportunities that we capitalize on through product development and acquisitions. We never stop trying to infuse innovation into our brands, entertainment and products. Our biggest innovation-led success of 2016 was unquestionably the launch of Hatchimals, which was the direct result of Spin Master’s focus on both innovation and marketing. Hatchimals, which utilizes patented state-of-the-art interactive robotics technology, was developed internally through our global R&D team and was enhanced by our inventor network. Consumer demand for Hatchimals exploded globally following our innovative “Hatchimals Day” launch on October 7, far exceeding our expectations. Despite the best efforts of our entire team, we were not able to meet the extraordinary demand. Given our initial success, we are continuing to build the Hatchimals line for 2017 and beyond. leveraging our global sales and marketing We also continued to build more established brands including PAW Patrol, Air Hogs and Zoomer in 2016 by infrastructure and delivering state-of-the-art new products. These included Air Hogs Thunder Trax (a ground and water based RC vehicle) and innovative Zoomer products such as Meowzies, Hedgies, Chimp and Kitty. There were new product launches in 2016 for Bunchems, which has been very successful particularly in Canada and Europe and Secret Life of Pets. Our innovation pipeline remains very strong across all of our business segments as we grow existing brands and plan our new product offerings. LETTER TO SHAREHOLDERS (Continued) DEVELOP EVERGREEN GLOBAL ENTERTAINMENT PROPERTIES We believe we can maximize the value of our brands by developing television franchises that are fully integrated with our toy business. The global success of PAW Patrol highlights this strategy and has established Spin Master as a major player in the Pre-School segment. PAW Patrol is on air in over 160 countries and territories and is on many of the most popular channels in our key markets. Three seasons of PAW Patrol have aired to date, and three more are either about to air or are in development. We are continuing to invest in keeping PAW Patrol content fresh with new characters and themes in order to increase the longevity of the franchise. PAW Patrol keeps generating high ratings, crosses many cultural boundaries, and has strong support from Nickelodeon and our other partners globally, which is allowing us to build deep awareness with consumers. Our goal is to repeat the success of PAW Patrol by launching at least one new entertainment property each year. In 2016, we launched Season 1 of Rusty Rivets which began airing on Nickelodeon in November and has been well received. Inspired by the DIY culture of the “maker” movement, Rusty Rivets fuels pre-schoolers’ confidence and creativity with a strong focus on inventing, creating and problem solving. We are now focused on the Rusty Rivets toy launch in North America in 2017, with a rollout in Europe and other markets in 2018. The global success of PAW Patrol and Rusty Rivets has strengthened our relationship with Nickelodeon and paved the way for future television franchises. Looking ahead, we have a number of other exciting entertainment properties under development, including the relaunch of Bakugan, a global success from 2007 to early 2012. INTERNATIONAL EXPANSION We are beginning to achieve our objective of significantly increasing Spin Master’s scale outside North America. We generated international Gross Product Sales1 of $407.3 million in 2016, which represented 32.5% of our overall sales. By comparison, Gross Product Sales1 outside North America were $290.5 million in 2015, or 30% of the total. We are making solid progress toward our medium-term goal of increasing our international sales to 35-40% of our total sales. Europe was a particular source of strength for Spin Master in 2016, with Gross Product Sales1 rising 47.5% over 2015. We entered new markets across the continent, expanded our sales and distribution capabilities, and boosted our product offerings through the Cardinal and Editrice Giochi (EG Games) acquisitions. More distribution channels are opening up for us across Europe on a regular basis, and our products are well supported by retailers. Our success in Europe and elsewhere internationally can be attributed to a number of factors: • • • Reaching Critical Mass: The size of our business in each market is such that we can now build meaningful brand campaigns and support for our new product launches. Economies of Scale: As we grow, our media investments become more efficient driving a stronger return on investment. Culture: Spin Master is seen as a progressive, fun and forward looking company. We have built a reputation on strong local partnerships, product innovation and creative marketing. Our customers are responding well and this is creating more opportunities. In 2016 we opened offices in Central Eastern Europe covering Poland, Romania, Czech Republic, Hungary and Slovakia as well as an office in Australia. LETTER TO SHAREHOLDERS (Continued) ACQUISITIONS Each of our four acquisitions in 2016 provided clear strategic benefits for Spin Master: • • • • EG Games brought us some of Italy’s best-known board games including Risiko and Scarabeo and positioned us for further growth in our games business across Europe. Etch A Sketch is an iconic toy brand that has sold more than 150 million units, but has received minimal investment for some time. Etch A Sketch continues to be a focus of innovation in the Activities business segment, and we will see new products evolving from this acquisition in the next few years, much as we did with Meccano. The acquisition of the Toca Boca and Sago Mini companies established us in the mobile digital app business – a space that we believe will be increasingly important in the years ahead. Toca Boca and Sago Mini are mobile digital app developers that emphasize children's natural sense of curiosity, experimentation, and self-expression. Toca Boca focuses on kids aged 3-9, while Sago Mini focuses on the Pre-School age group of 2-5 years. Combined, they have over 150 million downloads and more than 15 million monthly active users globally. Kids are consuming more content on mobile devices today than ever before, and we want to be where kids are. Our vision is to take our proven capability in toys and entertainment and combine it with Toca Boca and Sago Mini’s content and mobile digital capabilities to provide an end-to-end experience for kids. The Swimways acquisition gives us an immediate leadership position in the large and growing Outdoor category. The acquisition is a beachhead for our new Outdoor business segment and we see the Outdoor category as primed for innovation and other potential acquisitions. Swimways also gives us an experienced and proven senior management team and consistent financial performance to build on. As with our acquisition of Cardinal in 2015, we are very pleased that the previous owners and management of Swimways have chosen to stay on with Spin Master and build the business further. We believe our entrepreneurial style and willingness to work with successful entrepreneurs is a competitive advantage for us. Buying these businesses and brands is only the start. We expect these transactions to drive significant earnings growth in the years ahead - not just from innovation, but also from leveraging our international platform. One example of how this process works is Cardinal, which was primarily a North American business when we acquired it. We have used Spin Master’s global distribution network, along with the distribution network brought to us through the EG Games acquisition, to significantly expand global sales of Cardinal games in 2016. It is also important to note that we recently entered into an agreement with lenders that increased the size of our credit facility from US$280 million to US$510 million. This increase provides Spin Master with stronger liquidity to pursue both organic growth and further strategic acquisitions. LETTER TO SHAREHOLDERS (Continued) LOOKING AHEAD We expect 2017 to be another exciting year for Spin Master. Fundamentals in the global toy industry remain positive and we will continue to execute on our core growth strategies. We have many innovative brands and entertainment properties coming to market in 2017 – as is further detailed in our online 2016 Annual Report and earnings releases, available at www.spinmaster.com/investor-relations.php. We plan to leverage our global platform to expand sales in Europe and internationally, enhanced by our new offices in Australia and Central Eastern Europe. Spin Master’s size, scale and strong balance sheet positions us to make more quality acquisitions and add value under the Spin Master umbrella. We’ll always remain disciplined and focused on transactions that drive strong returns for shareholders. On behalf of the board and management team, we thank you for your support of Spin Master as we continue our efforts to build one of the world’s great children’s entertainment companies. ee Anton Rabie Anton Rabie CCEOEO Chair & Co-CEO Chair & Co-C Ronnen Harary araryy Director & Co-CEO CCo-o-CECEOO John Cassaday daday Lead Director oorr 2016 Annual Report Management’s Discussion and Analysis of Financial Results 1 Independent Auditor’s Report 39 Consolidated Statements of Financial Position 41 Consolidated Statements of Operations and Comprehensive Income 42 Consolidated Statements of Changes in Equity 43 Consolidated Statements of Cash Flows 44 Notes to the Consolidated Financial Statements 45 SPIN MASTER CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS For the three months and twelve months ended December 31, 2016 The following Management’s Discussion and Analysis (“MD&A”) for Spin Master Corp. (“Spin Master” or the “Company”) is dated March 22, 2017 and provides information concerning the Company’s financial condition and financial performance for the year ended December 31, 2016, and the three months ended December 31,2016 (“fourth quarter”, “the quarter”, “Q4”). This MD&A should be read in conjunction with the Company’s audited Consolidated Financial Statements (“financial statements”) and accompanying notes as at December 31, 2016 and its Annual Information Form. Additional information relating to the Company can be found under the company's profile on SEDAR at www.sedar.com. Some of the information contained in this MD&A contains statements that involve risks and uncertainties. Statements” and “Financial Risk Management” and “Risks Relating to Spin Master’s Business” for See a discussion of the uncertainties, risks and assumptions associated with those statements. Actual results may differ materially from those discussed in the statements as a result of various factors, including those described in “Risks Relating to Spin Master’s Business” and elsewhere in this MD&A. BASIS OF PRESENTATION The audited consolidated financial statements and accompanying notes of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”). However, certain financial measures contained in this MD&A are non-IFRS measures and are discussed further at “Non-IFRS Financial Measures”. All references to “$” and “dollars” refer to U.S. dollars, unless otherwise indicated. Certain totals, subtotals and percentages throughout this MD&A may not reconcile due to rounding. OVERVIEW Spin Master is a leading global children’s entertainment company that creates, designs, manufactures and markets a diversified portfolio of innovative toys, games, products and entertainment properties. The Company is driven by a desire to challenge and expand traditional play patterns through the creation of innovative products, entertainment and digital content. Spin Master has successfully increased its revenue from $715,650 in 2014 to $1,154,454 in 2016. Over the same period, Gross Product Sales (a non-IFRS measure) have increased from $811,895 to $1,254,558, a 24.3% compound annual growth rate. The Company’s Gross Product Sales have grown at a 14.0% compound annual growth rate over the past 10 years. Additionally, the Company has demonstrated the ability to effectively manage costs and increase margins, generating gross profit of $596,742 in 2016 (representing 51.7% of revenue) and Adjusted EBITDA (a non-IFRS measure) of $205,510, or 17.8% of revenue, in 2016. Spin Master’s principal strategies to drive the Company’s continued growth, both organically and through acquisitions include: • Innovation across the portfolio and expanding current business segments; • Developing evergreen global entertainment properties; • Increasing international sales in developed and emerging markets; and • Leveraging its global platform through strategic acquisitions. Spin Master’s business is separated into 3 geographic segments: North America, comprised of the U.S. and Canada; Europe, comprised of Spin Master’s subsidiaries in the UK, France, Italy, the Netherlands, Germany, Austria and Switzerland; and the Rest of World, comprised of Spin Master’s subsidiaries in Mexico and all other areas of the world serviced by Spin Master’s 3rd party distribution network. 1Spin Master’s diversified portfolio of children’s products, brands and entertainment properties is reported under five business segments: (1) Activities, Games & Puzzles and Fun Furniture; (2) Remote Control and Interactive Characters; (3) Boys Action and and Girls and (5) Outdoor. ech Construction; Selected Financial Information The following table provides selected historical information and other data of the Company which should be read in conjunction with the audited consolidated financial statements of the Company. (in $ thousands USD, except percentages) Fiscal Years Ended, December 31, 2014 2015 2016 Earnings Results Gross Product Sales (1) By Segment Activities, Games & Puzzles And Fun Furniture Remote Control And Interactive Characters Boys Action And High Tech Construction Pre School and Girls Outdoor Gross Product Sales (1) Other revenue Total Gross Sales (1) Sales Allowances (1) Revenue Cost of goods sold Gross profit Gross Margin Selling, marketing, distribution and product development Administrative Other expenses (income) Foreign exchange loss (gain) Finance costs Net income (loss) before income tax expense Income tax expense (recovery) Net income (loss) Net Income Attributable to: Owners of the Company Non-Controlling Interests 1) See "Non-IFRS Financial Measures" 337,768 282,777 154,454 460,484 19,075 1,254,558 47,940 1,302,498 148,044 1,154,454 557,712 596,742 231,433 233,294 192,304 325,662 — 982,693 19,217 1,001,910 122,504 879,406 420,486 458,920 190,542 268,612 191,821 160,920 — 811,895 8,778 820,673 105,023 715,650 357,528 358,122 51.7% 52.2% 50.0% 243,689 201,008 35 5,530 8,601 137,879 38,364 99,515 99,515 — 99,515 183,791 195,909 (13,429) 6,477 6,539 79,633 32,559 47,074 43,213 3,861 47,074 139,544 124,443 911 4,905 2,829 85,490 23,276 62,214 51,896 10,318 62,214 2Selected Financial Information (Continued) (In thousands of United States dollars, except for EPS) Net Earnings from operations Fiscal Years Ended, December 2015 2014 2016 Net Earnings from operations attributable of Owners of the Company 99,515 43,213 51,896 Earnings per share from operations attributable to common shareholders (3) Basic EPS Diluted EPS Other Financial Data EBITDA (1) Adjusted EBITDA(1) Adjusted EBITDA Margin Adjusted Net Income (1) $ $ 0.99 0.99 $ $ 0.48 0.48 $ $ 0.61 0.61 176,969 205,510 109,049 160,449 106,062 111,775 17.8% 18.2% 15.6% 120,115 98,609 66,372 Adjusted Net Income attributable to Owners of the Company 120,115 94,748 56,054 Adjusted Earnings Per Share (3) Adjusted Basic EPS Adjusted Diluted EPS Balance Sheet & Cash Flow Data Cash and cash equivalents Total assets Total non- current liabilities Borrowings Preferred shares Loans from related parties Total debt Net Debt (2) Total shareholders' equity Cash from (used in) operations Cash from (used in) investing Cash from (used in) financing $ $ 1.19 1.19 $ $ 1.04 1.04 $ $ 0.78 0.78 99,416 753,432 45,713 388,283 101,292 350,785 18,584 56,749 2,205 158,145 — — 158,145 58,729 50,310 839 — 257,776 25 40 258,640 50,350 4,637 157,348 325,679 156,319 (66,225) 73,038 (172,273) 155,467 55,639 (93,573) (11,541) 123,966 (26,221) (23,141) 1) See "Non-IFRS Financial Measures" 2) Net debt is total debt less cash and cash equivalents 3) Amounts per share give effect on a retrospective basis following the reorganization that occurred prior to the offering of July 30, 2015 3Highlights for the three month period ended December 31, 2016: (In $ thousands, except per share) • Revenue increased by 30.9% from $258,408 for the same period in 2015 to $338,377 in 2016. • Gross profit as a percentage of revenue for the three months ended December 31, 2016 was 50.8%, a decrease of 0.1% from 50.9% for the same period in 2015. • Net Income was $2,727 or $0.03 per share compared to a loss of $13,260 or $0.13 per share for the same period in 2015. • Adjusted EBITDA (a non-IFRS measure) was $22,888 or 6.8% of revenue, compared to $13,646 or 5.3% of revenue for the same period in 2015. • On December 21, 2016 entered into an agreement with a syndicate of lenders to increase, amend and extend its credit agreement. Under the agreement, the Company's revolving credit facility and term credit facility were restructured into committed single five-year revolving facility (the "Credit Facility"), and the total capital available was increased from $280 million to $510 million. The new maturity date of the Credit Facility is December 2021. Highlights for the twelve month period ended December 31, 2016: (In $ thousands, except per share) • Revenue increased by 31.3% to $1,154,454 from $879,406 for the same period in 2015. • Gross profit as a percentage of revenue was 51.7%, a decrease of 0.5% from 52.2% for the same period in 2015. • Net Income was $99,515 or $0.99 per share compared to $47,074 or $0.48 per share for the same period in 2015. • Adjusted EBITDA was $205,510 or 17.8% of revenue, compared to $160,449 or 18.2% of revenue during the same period in 2015. • On January 27, 2016, the Company announced that it had purchased the library of board games owned by Editrice Giochi SRL. The purchase includes the Editrice Giochi brand, which has been in the Italian market for more than 70 years. The acquisition enables Spin Master to expand its selection of games and licensed products in the Italian market with such games as Risiko, and Scarabeo. . The acquisition closed on March 11, 2016. • On February 11, 2016, the Company announced that it had acquired the Etch A Sketch and Doodle Sketch brands from The Ohio Art Company. The acquisition included all brand-related patents, trademarks, tooling and inventory for the brands. • On May 2, 2016, the Company acquired the Toca Boca and Sago Mini companies from the Bonnier Group of Sweden. With offices in Stockholm, San Francisco and New York , Toca Boca is a play studio that makes digital toys for kids aged 3-9. Toca Boca apps focus on stimulating kids' imagination so that they can play and have fun in a safe digital environment with no in-app purchases or external advertising. Located in Toronto, Sago Mini creates mobile apps for kids aged 2-5 that focus on the pre-school segment. Toca Boca and Sago Mini both emphasize children's natural sense of curiosity, experimentation and self-curiosity, experimentation and self-expression. • On June 6, 2016, the Company closed the public offering of 4,900,000 Subordinate Voting Shares of the Company, at a price of 26.60 Canadian Dollars (“C$”) per Subordinate Voting Share (the "Offering"). The Offering included a treasury offering of 2,450,000 Subordinate Voting Shares by the Company for gross proceeds of approximately C$65 million (the "Treasury Offering") and a secondary offering of 2,450,000 Subordinate Voting Shares, indirectly, beneficially owned by the founders of the Company for gross proceeds of approximately C$65 million. The Company used the net proceeds of the Treasury Offering to reduce indebtedness under its Credit Facility. 4• On August 2, 2016, the Company acquired Swimways Corporation ("Swimways"), for US$85 million in cash on closing, less an escrow for possible adjustments, plus up to US$8.5 million payable over four years based on Swimways' sales growth, if any. The transaction was financed through Spin Master's Credit Facility. Swimways, headquartered in Virginia Beach, VA, with an office in Guangzhou, China, a manufacturing and distribution facility in Tarboro, NC, has a portfolio of toys, games and sporting goods for the pool, beach and backyard. FINANCIAL PERFORMANCE For the three and twelve months ended December 31, 2016: Consolidated Results The following tables provide a summary of Spin Master’s consolidated results for the three and twelve month ended December 31, 2016 and 2015. (All amounts in US$ 000's) Revenue Cost of sales Gross profit Selling, marketing, distribution and product Administrative Other income Foreign exchange gains/(losses) Finance costs Net income before tax Income tax (expense) Net income Net Income Attributable to: Owners of the Company Non-Controlling Interests (All amounts in US$ 000's) Revenue Cost of sales Gross profit Selling, marketing, distribution and product development Administrative Other income Foreign exchange gains/(losses) Finance costs Net income before tax Income tax (expense) Net income Net Income Attributable to: Owners of the Company Non-Controlling Interests Three Months Ended December 31 2016 2015 $ Change % Change 338,377 (166,373) 172,004 (104,551) (55,417) 223 (6,634) (2,414) 3,211 (484) 2,727 2,727 — 2,727 258,408 (126,781) 131,627 (88,232) (48,476) 118 (529) (4,925) (10,417) (2,843) (13,260) (13,260) — (13,260) 79,969 (39,592) 40,377 (16,319) (6,941) 105 (6,105) 2,511 13,628 2,359 15,987 15,987 — 15,987 30.9 % 31.2 % 30.7 % 18.5 % 14.3 % 89.0 % 1,154.1 % (51.0)% (130.8)% (83.0)% Twelve Months Ended December 31 2016 2015 $ Change % Change 1,154,454 (557,712) 596,742 (243,689) (201,008) (35) (5,530) (8,601) 137,879 (38,364) 99,515 99,515 — 99,515 879,406 (420,486) 458,920 (183,791) (195,909) 13,429 (6,477) (6,539) 79,633 (32,559) 47,074 44,064 3,861 63,207 275,048 (137,226) 137,822 (59,898) (5,099) (13,464) 947 (2,062) 58,246 (5,805) 52,441 55,451 (3,861) 52,441 31.3 % 32.6 % 30.0 % 32.6 % 2.6 % 100.3 % (14.6)% 31.5 % 73.1 % (17.8)% 111.4 % 125.8 % 111.4 % 5Revenue For the Three Months ended December 31, 2016 The following table provides a summary of Spin Master’s consolidated sales and segmented breakdown for the three months ended December 31, 2016 and 2015: Three Months Ended December 31 (All amounts in US$ 000's) 2016 2015 $ Change % Change Activities, Games & Puzzles and Fun Furniture Remote Control and Interactive Characters Boys Action and High-Tech Construction Pre-School and Girls Outdoor Total Gross Product Sales (1) 109,512 92,566 34,765 125,133 14,202 376,178 100,252 50,037 48,068 89,138 — 287,495 9,260 42,529 (13,303) 35,995 14,202 88,683 Other Revenue 12,281 8,048 4,233 Total Gross Sales (1) Sales Allowances (1) Revenue 388,459 295,543 50,082 37,135 338,377 258,408 92,916 12,947 79,969 9.2 % 85.0 % (27.7)% 40.4 % 30.8 % 52.6 % 31.4 % 34.9 % 30.9 % Total Gross Product Sales increased by $88,683, or 30.8%, to $376,178 with an unfavorable impact from changes in currency exchange rates of $8,800. Gross Product Sales in the Activities, Games & Puzzles and Fun Furniture increased by $9,260, or 9.2% to $109,512, driven by Spin Master’s games portfolio, Pottery Cool and Bunchems. Gross Product Sales in the Remote Control and Interactive Characters segment increased by $42,529 or 85.0% to $92,566, driven by sales of Hatchimals. Gross Product Sales in the Boys Action and ech Construction segment decreased by $13,303 or 27.7% to $34,765, due lower sales of How to Train Your Dragon, Teenage Mutant Ninja Turtles and Star Wars related toys and Spy Gear and Meccano, partially offset by sales of Secret Life of Pets and Angry Birds licensed toys and Tech Deck. Gross Product Sales in the of Paw Patrol. and Girls segment increased by $35,995 or 40.4% to $125,133 , driven by sales Gross Product Sales in the Outdoor segment were related to the sales of Swimways products, which the company acquired on August 2, 2016. Other Revenue increased by $4,233 or 52.6% to $12,281, primarily driven by increased licensing and merchandising royalties’ income from products marketed by third parties using Spin Master’s owned intellectual property and inclusion of app revenues related to the acquisition of Toca Boca and Sago Mini. Sales Allowances increased by $12,947 or 34.9% to $50,082, primarily due to increases in Gross Product Sales and product and market mix. The following table provides a summary of Spin Master’s consolidated Gross Product Sales by key geographic segment for the three month ended December 31, 2016 and 2015: 6Three Months Ended December 31 (All amounts in US$ 000's) 2016 2015 $ Change % Change North America Europe Rest of World Total Gross Product Sales (1) 245,363 93,949 36,866 376,178 201,200 58,952 27,343 287,495 44,163 34,997 9,523 88,683 21.9% 59.4% 34.8% 30.8% (1) Non-IFRS measure. See “Non-IFRS Financial measures”. Gross Product Sales in North America increased by $44,163 or 21.9% to $245,363, driven by sales of Paw Patrol, Hatchimals and Swimways products more than offsetting declines in Meccano, Kinetic Sand and Star Wars products. Gross Product Sales in Europe increased by $34,997 or 59.4% to $93,949, with an unfavourable impact from changes in currency exchange rates of $6,085. Growth was primarily driven by sales of Paw Patrol and Hatchimals in Italy, France and the UK. Gross Product Sales in the Rest of World region increased by $9,523 or 34.8% to $36,866, with an unfavourable impact from changes in currency exchange rates of $2,725. Growth was primarily driven by increases in Paw Patrol and Hatchimals in both Mexico and the International 3rd party business. For the Twelve Months ended December 31, 2016 The following table provides a summary of Spin Master’s consolidated sales and segmented breakdown for the twelve months ended December 31, 2016 and 2015: Twelve Months Ended December 31 (All amounts in US$ 000's) 2016 2015 $ Change % Change Activities, Games & Puzzles and Fun Furniture Remote Control and Interactive Characters Boys Action and High-Tech Construction Pre-School and Girls Outdoor Total Gross Product Sales (1) 337,768 282,777 154,454 460,484 19,075 1,254,558 231,433 233,294 192,304 325,662 — 982,693 106,335 49,483 (37,850) 134,822 19,075 271,865 45.9 % 21.2 % (19.7)% 41.4 % 27.7 % Other Revenue Total Gross Sales (1) Sales Allowances (1) Revenue 47,940 19,217 28,723 149.5 % 1,302,498 1,001,910 300,588 148,044 122,504 25,540 1,154,454 879,406 275,048 30.0 % 20.8 % 31.3 % (1) Non-IFRS measure. See “Non-IFRS Financial measures”. Gross Product Sales in the Activities, Games & Puzzles and Fun Furniture segment increased by $106,335 or 45.9% to $337,768, primarily driven Cardinal and Bunchems products. Gross Product Sales in the Remote Control and Interactive Characters segment increased by $49,483 or 21.2% to $282,777 primarily due to sales of Hatchimals which offset declines in Zoomer, Digi Birds and Air Hogs. Gross Product Sales in the Boys Action and ech Construction segment decreased by $37,850 or 19.7% to $154,454 driven by declines in Meccano, Star Wars and How to Train your Dragon licensed products, partially offset by sales of Secret Life of Pets and Angry Birds licensed toys. Gross Product Sales in the of Paw Patrol products, and the launch of Brightlings, offset by declines in Flutterbye Flying Fairy. and Girls segment increased by $134,822 or 41.4% to $460,484 driven by sales 7Gross Product Sales in the Outdoor segment were related to the sales of Swimways, which the company acquired on August 2, 2016. Other Revenue increased by $28,723 or 149.5%, to $47,940 million, driven by increased television distribution income, higher royalty income from products marketed by third parties using Spin Master’s owned intellectual property and app revenue from Toca Boca and Sago Mini. Sales Allowances increased by $25,540 or 20.8% to $148,044, driven primarily by higher Gross Product Sales. The following table provides a summary of Spin Master’s consolidated Gross Product Sales by key geographic segment for the twelve months ended December 31, 2016: Twelve Months Ended December 31 (All amounts in US$ 000's) 2016 2015 $ Change % Change North America Europe Rest of World Total Gross Product Sales (1) 847,278 271,130 136,150 1,254,558 692,242 183,786 106,665 982,693 155,036 87,344 29,485 271,865 22.4% 47.5% 27.6% 27.7% (1) Non-IFRS measure. See “Non-IFRS Financial measures”. Gross Product Sales increased by $271,865, or 27.7%, to $1,254,558 with an unfavourable impact from changes in currency exchange rates of $16,099. Gross Product Sales in North America increased by $155,036 or 22.4% to $847,278 with an unfavorable impact from changes in currency exchange rates of $484. Growth was driven primarily by increases in product sales of Cardinal, Hatchimals, Paw Patrol, Swimways and Secret Life of Pets products which more than offset declines in Star Wars, Kinetic Sand and Meccano. Gross Product Sales in Europe increased by $87,344 or 47.5% to $271,130 with an unfavourable impact from changes in currency exchange rates of $10,004. Growth was primarily driven by sales of Paw Patrol , Hatchimals and Bunchems in France, Italy and the UK, which more than offset declines in Zoomer and How to Train Your Dragon products. Gross Product Sales in the Rest of World region increased by $29,485 or 27.6% to $136,150 with an unfavourable impact from changes in currency exchange rates of $5,611. The increases were primarily driven by increases in Paw Patrol, Hatchimals, Cardinal, Bunchems and Secret Life of Pets products, which offset declines in Meccano, Flutterbye Flying Fairies, Air Hogs, Zoomer and How to train your Dragon products sales. Gross Profit Gross Profit Gross Profit as % of Revenue 2016 2015 $ Change % Change 172,004 50.8% 131,627 50.9% 40,377 30.7% Three Months Ended December 31 For the three months ended December 31, 2016, gross profit increased by $40,377 or 30.7% to $172,004. As a percentage of revenue, gross profit decreased from 50.9% to 50.8%. Gross Profit Gross Profit as % of Revenue 2016 2015 $ Change % Change 596,742 51.7% 458,920 52.2% 137,822 30.0% Twelve Months Ended December 31 8For the twelve months ended December 31, 2016, gross profit increased by $137,822 or 30.0% to $596,742. As a percentage of revenue, gross profit decreased from 52.2 % to 51.7% primarily due to the inclusion of lower gross margin Cardinal products and foreign exchange partially offset by increased licensing and merchandising revenue and product mix. Selling, Marketing, Distribution and Product Development Expenses Marketing Expenses Marketing Expenses as a % of Revenue Product Development Expenses Product Development Expenses as a % of Selling Expenses Selling Expenses as a % of Revenue Distribution Expenses Distribution Expenses as a % of Revenue Three Months Ended December 31 2016 2015 $ Change % Change 61,879 18.3% 7,147 2.1% 22,807 6.7% 12,718 3.8% 57,383 22.2% 4,628 1.8% 17,750 6.9% 8,471 3.3% 4,496 2,519 5,057 4,247 7.8% 54.4% 28.5% 50.1% Marketing expenses increased by $4,496 or 7.8%, to $61,879, primarily as a result of increased media and promotion spend behind Hatchimals, Paw Patrol, Air Hogs and Zoomer in Europe and North America. Product development expenses increased by $2,519 or 54.4%, to $7,147, related to the timing of projects primarily in the Remote Control and Interactive Characters, Activities, Games & Puzzles and Fun Furniture and Outdoor segment. Selling expenses increased by $5,057, or 28.5%, to $22,807, driven by sales of Hatchimals and Paw Patrol . Selling expenses as a percentage of revenue was consistent with 2015. Distribution expenses increased by $4,247 or 50.1% to $12,718, driven by increased volume, inventory storage costs due to increased inventory levels associated with growth in Europe and acquisition of Swimways, which was acquired in August 2016. Marketing Expenses Marketing Expenses as a % of Revenue Product Development Expenses Product Development Expenses as a % of Selling Expenses Selling Expenses as a % of Revenue Distribution Expenses Distribution Expenses as a % of Revenue Twelve Months Ended December 31 2016 112,339 9.7% 22,017 1.9% 77,102 6.7% 32,231 2.8% 2015 $ Change % Change 91,152 10.4% 15,389 1.7% 55,604 6.3% 21,646 2.5% 21,187 6,628 21,498 10,585 23.2% 43.1% 38.7% 48.9% Marketing expenses increased by $21,187, or 23.2%, to $112,339, primarily as a result of increased media spending to support Paw Patrol, Hatchimals, Air Hogs and Secret Life of Pets products, increased research and strategic marketing spend and marketing expenses from Toca Boca and Sago Mini, which was acquired in May 2016. Product development expenses increased by $6,628, or 43.1%, to $22,017, primarily due to investments in the Remote Control and Interactive Characters, Girls and Pre School and Activities, Games & Puzzles and Fun Furniture segments. Selling expenses increased by $21,498, or 38.7%, to $77,102, driven primarily by sales of Cardinal licensed products, Paw Patrol, Angry Birds, Secret Life of Pets and Power Puff Girls related products. Distribution expenses increased by $10,585, or 48.9%, to $32,231, driven primarily by higher sales volumes, increased distribution expenses to support European growth and costs associated with acquisitions . 9Administrative Expenses For the three months ended December 31, 2016 compared to the same period in 2015, administrative expenses increased by $6,941, or 14.3%, to $55,417, primarily due to administrative expenses of acquired companies partially offset by lower share-based compensation expenses associated with equity participation agreements and the grants of restricted share units to employees upon the closing of the Company’s initial public offering (“IPO”) of subordinate voting shares in July 2015. Administrative expenses as a percentage of revenue decreased to 16.4% from 18.8% in the same period in 2015. Excluding the impact of share-based compensation, administrative expenses as a percentage of revenue decreased to 15.7% from 16.0% in 2015. For the twelve months ended December 31, 2016 compared to the same period in 2015, administrative expenses increased by $5,099, or 2.6%, to $201,008, primarily due to increased expense in property and operations and professional fees incurred due to the Company's business combinations. Administrative expenses as a percentage of revenue decreased to 17.4% from 22.3% in the same period in 2015. Excluding the impact of share-based compensation, administrative expenses as a percentage of revenue decreased to 15.6% from 16.5% in 2015. Finance Costs For the three months ended December 31, 2016, finance costs decreased by $2,511 to $2,414 compared to the same period in 2015. The decrease was driven by $2,992 of interest associated with the Company’s settlement agreement with the CRA in relation to the previously disclosed transfer pricing matter in the fourth quarter of 2015, offset by higher interest as a result of increased borrowings on the Company’s Credit Facility and accretion expense related to provisions for contingent consideration arrangements as part of the Toca Boca and Swimways acquisitions. For the twelve months ended December 31, 2016 compared to the same period in 2015, Finance costs increased by $2,062 to $8,601 compared to the same period in 2015 for the reasons noted above in addition to the Cardinal acquisition. Net Income Net Income for the three months ended December 31, 2016 increased by $15,987 to $2,727 from a loss of $13,260 for the same period in 2015 as a result of higher revenue, lower finance costs, lower interest and tax associated with the Company’s settlement agreement with the CRA in relation to the previously disclosed transfer pricing matter in the fourth quarter of 2015, and lower income tax expense offset by higher administrative expenses and foreign exchange losses. Excluding share-based compensation expense,foreign exchange losses and other one time items, Adjusted Net Income (a non-IFRS measure, see “Non-IFRS financial measures”) for the three months ended December 31, 2016 increased by $2,656 to $9,347 from $6,691 for the same period in 2015. Net Income for the twelve months ended December 31, 2016 increased by $52,441 to $99,515 from $47,074 for the same period in 2015. Excluding share-based compensation expense, restructuring and foreign exchange gains, Adjusted Net Income for the twelve month ended December 31, 2016 increased by $21,506 to $120,115 from $98,609 for the same period in 2015. OUTLOOK For 2017, excluding Swimways, Spin Master expects organic Gross Product Sales1 growth to be at the upper end of the Company’s mid to high single digit long term organic Gross Product Sales1 growth target range. Including Swimways, Spin Master expects Gross Product Sales1 growth in the low teens compared to 2016. From a seasonality perspective, excluding Swimways, Spin Master expects Gross Product Sales1 in the first half of 2017, to be in line with the Company’s historical seasonality of approximately 30% in the first half of the year and 70% in the second half of the year. Including Swimways, Gross Product Sales1 is expected to be in the 31%-33% range in the first half of 2017 due to the seasonality of Swimways’ Gross Product Sales profile. Adjusted EBITDA Margins1 for 2017, excluding Swimways and Toca Boca, are expected to be slightly higher than 2016. Including Swimways and Toca Boca, Adjusted EBITDA Margins1 are expected to be consistent with 2016. (1) Non-IFRS measure. See “Non-IFRS Financial measures”. 10SELECTED QUARTERLY FINANCIAL INFORMATION The following table provides selected historical information and other data, which should be read in conjunction with the audited consolidated financial statements of the Company. December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015 September 30, 2015 June 30, 2015 March 31, 2015 (All amounts in US$ 000's , except per share) Revenue Net Income / (loss) 338,377 475,015 179,360 161,702 258,408 386,829 127,702 106,467 2,727 83,253 3,598 9,937 (13,260) 51,091 7,574 1,669 Three Months Ended Net Income / (loss) attributable to - owners of the company Earnings per share attributable to common shareholders of the company (2) 2,727 83,253 3,298 9,937 (13,260) 48,781 6,310 1,382 Basic and Diluted EPS $ 0.03 $ 0.82 $ 0.04 $ 0.10 $ (0.13) $ 0.52 $ 0.07 $ 0.02 Adjusted EBITDA (1) 22,888 133,261 25,389 23,973 13,647 118,667 17,943 10,193 Adjusted EBITDA Margin (1) 6.8% 28.1% 14.2% 14.8% 5.3% 30.7% 14.1% 9.6% Adjusted Net Income / (loss) (1) 9,347 87,482 11,698 11,588 6,691 80,410 8,134 3,374 Adjusted Net Income / (loss) attributable to - owners of the company (1) Adjusted Earnings per share attributable to common shareholders of the company (2) 9,347 87,482 11,698 11,588 6,691 78,100 6,870 3,087 Adjusted Basic and Diluted EPS $ 0.09 $ 0.86 $ 0.12 $ 0.12 $ 0.07 $ 0.83 $ 0.08 $ 0.04 Free Cash Flow (1) (3,881) 117,238 (11,026) 16,359 (6,260) 75,830 5,788 (8,210) 1) See “Non-IFRS Financial Measures" and 2) Amounts per share give effect on a retrospective basis following the Reorganization that occurred prior to the Offering (see Seasonality risk in "Risks Relating to Spin Master's Business") 11The following table provides reconciliations of Net Income to EBITDA, Adjusted EBITDA and Adjusted Net Income. Three Months Ended December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015 September 30, 2015 June 30, 2015 March 31, 2015 (All amounts in US$ 000's , except per share) Net Income 2,727 83,253 3,598 9,937 (13,260) 51,092 7,574 1,669 Finance Costs Depreciation and Amortization Income Tax EBITDA (1) Restructuring (2) Recovery of contingent liability (3) Foreign exchange loss (gain) (4) Offering Costs (5) 2,414 8,173 2,575 9,419 484 32,319 1,852 7,526 1,056 1,760 5,371 4,505 13,798 127,566 14,032 21,573 65 (222) 6,634 — 827 — 275 — 656 — (129) 4,065 (5,040) — — — 4,925 5,887 2,843 395 891 (457) 529 257 922 5,173 26,407 423 6,700 2,600 269 5,116 709 83,594 17,297 7,763 1,716 — 4,396 560 — 361 — (75) 1,627 65 161 442 Share Based Compensation (6) 2,146 4,996 7,017 6,784 7,145 43,513 One time income from Transfer of Non Business Related Assets (7) One time Service Fee income (8) Impairment of Intangible Asset (9) One time Legal Expense (10) Fair Market Value adjustments (11) Executive Compensation related to Acquisition (12) — — — — — 467 — — — — — — — — — — — — — — — — — — (73) — 659 3,325 975 — (9,617) (5,000) — — — — — — — — — — — — — — — — — — Adjusted EBITDA (1) 22,888 133,260 25,389 23,973 13,646 118,667 17,943 10,193 Finance Costs Depreciation and Amortization Income Tax (13) Tax Effect of Normalization Adjustments (14) Adjusted Net Income (1) Footnotes: 1) See "Non-IFRS Financial Measures". 2,414 8,173 2,575 9,419 484 32,319 1,852 7,526 1,056 1,760 5,371 4,505 4,925 5,887 922 5,173 (6,643) 22,176 423 6,700 2,600 2,470 9,347 1,465 3,257 749 87,482 11,698 11,588 2,786 6,691 9,986 86 80,410 8,134 3,374 269 5,116 709 725 2) 2016 restructuring related to changes in the Company's US operations. 2015 restructuring primarily related to changes to the Company's executive team. 3) A write off of contingent consideration related to a future earn-out provision associated with the acquisition of Spy Gear occurred as sales targets were not met to achieve the additional pay out. 4) Transaction gains and losses generated by the effect of foreign exchange recorded on assets and liabilities denominated in a currency that differs from the functional currency of the applicable entity are recorded as foreign exchange gain or loss in the period which they occur. 5) Offering Costs from the IPO are considered a one time expense and are not reflective of on going costs of the business. 6) Stock based compensation is related to expenses associated with subordinate voting shares granted to equity participants and restricted stock units granted to employees at the time of the IPO and share option expense. 7) One of the predecessor corporations to the Company owned assets which was non income producing and did not relate to the business of the Company. Accordingly, the assets were transferred to the principal shareholders prior to the closing of the IPO through dividends in kind at their current fair market value. 8) One time service fee income in connection with the acquisition of Cardinal and services provided to Cardinal prior to the closing of the transaction on October 2, 2015. 9) Impairment of Intangible asset related to Content Development. 10) One time legal expense related to an outstanding litigation matter in Q4 2015. 11) Amortization of Fair Market Value adjustments relating to acquisition of Cardinal in the fourth quarter of 2015. 1212) Remuneration expense associated with contingent consideration for the Swimways acquisition. 13) Income tax expense /(recovery) and Finance Costs have been adjusted for 2015 to exclude Financial Impacts related to the settlement of certain tax matters as they are not reflective of ongoing costs of the business. 14) Tax effect of normalization adjustments (Footnotes 3-12). Normalization adjustments tax effected at the effective tax rate of the given period. LIQUIDITY AND CAPITAL RESOURCES The Company’s primary source of liquidity is cash flow from operations. In addition, as at December 31, 2016, the Company had $352 million available under its Credit Facility, which was amended and restated on December 20,2016. Total capital available under the Credit Facility has increased from $280 million to $510 million and the maturity was extended to December 2021. Advances under the Credit Facility may be used for general corporate purposes including refinancing existing Indebtedness, funding working capital requirements, permitted acquisitions and permitted distributions. Management believes that cash flows from its ongoing operations, plus cash on hand and availability under the Credit Facility provide sufficient liquidity to support ongoing operations over the next 12 months. Cash flows from operations could be negatively impacted by decreased demand for the Company’s products, which may result from factors such as adverse economic conditions and changes in public and consumer preferences, the loss of confidence by the Company’s principal customers in the Company and its product lines, or by increased costs associated with manufacturing and distribution of products. The Company’s primary capital needs are related to inventory financing, accounts payable funding, debt servicing and capital expenditures for tooling, film production, and to funding strategic acquisitions. As a result of the seasonal nature of the toy and children’s entertainment industries, working capital requirements are variable throughout the year. Working capital needs typically grow through the first three quarters as inventories are for the peak sales periods for retailers in the fourth quarter. The Company’s cash flows from operating activities are typically at their highest levels of the year in the fourth quarter. The Company has separately financed $1.7 million of the Little Charmers production costs. The financing of the production costs of Little Charmers is directly related to the expected receipt of eligible government tax credits. The Company intends to continue to use this type of borrowing to fund the costs of future television productions. The following table provides a summary of Spin Master’s consolidated cash flows for three and twelve months ended December 31, 2016 and 2015. (All amounts in US$ 000's) Net cash flows generated by (used in) operating activities Net cash flows used in investing activities Net cash flows generated by (used in) financing activities Net increase (decrease) in cash Effect of exchange rate changes on cash Cash at beginning of period Cash at end of period (All amounts in US$ 000's) Net cash flows generated by (used in) operating activities Net cash flows used in investing activities Net cash flows generated by (used in) financing activities Net increase (decrease) in cash Effect of exchange rate changes on cash Cash at beginning of period Cash at end of period Three months ended December 31 2015 $ Change 2016 62,310 $ (4,554) $ (5,260) $ 52,496 $ (2,607) $ 49,527 $ 99,416 $ 65,124 $ (60,834) $ (10,084) $ (5,794) $ (4,075) $ 55,582 $ 45,713 $ (2,814) 56,280 4,824 58,290 1,468 (6,055) 53,703 Twelve months ended December 31 2015 $ Change 2016 73,038 $ (172,273) $ 155,467 $ 56,232 $ (2,529) $ 45,713 $ 99,416 $ 55,640 $ (93,573) $ (11,541) $ (49,474) $ (6,105) $ 101,292 $ 45,713 $ 17,398 (78,700) 167,008 105,706 3,576 (55,579) 53,703 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 13Capital and Investment Framework Over the long term, the Company plans to use its free cash flows to fund seasonal working capital requirements related to product sales, TV show and mobile digital development and strategic acquisitions. Spin Master primarily uses third parties to manufacture, warehouse and distribute its products. As a result, the Company does not have to incur material investments in property, plant and equipment on an annual basis. The Company’s annual capital expenses are mostly comprised of the purchase of tooling used in the manufacturing process and TV show production. CASH FLOW Cash from Operating Activities Cash flows from operating activities were $62,310 for the three months ended December 31, 2016 compared to $65,124 for the same period in 2015. For the twelve months ended December 31, 2016 cash flows from operating activities were $73,038 compared to $55,640 from operating activities for the same period in 2015. The increase in cash from operating activities was driven by higher net income offset by changes in working capital driven by higher accounts receivables as a result of increased sales. Investing Activities The following table provides a summary of Spin Master’s consolidated cash flows used for investing activities for the three and twelve months ended December 31, 2016 and 2015: (All amounts in US$ 000's) Capital Expenditure in Property Plant and Tooling Other Total Capital Expenditures in Property Plant and Equipment Intangible Assets Brands, Licenses and trademark acquisitions Content development Computer software Total Capital Expenditures in Intangible Assets Total Capital Expenditures Disposals Business Acquisition (net of cash received) Net cash flows used in investing activities $ $ $ $ $ $ $ $ $ Three months ended December 31 2015 $ Change 2016 5,500 $ 2,890 $ 8,390 $ (1) $ (4,547) $ 722 $ (3,826) $ 4,564 (10) — $ 4,554 $ 3,876 $ 931 $ 4,807 $ 5,801 $ 3,221 $ 825 $ 9,847 $ 14,654 — 46,180 $ 60,834 $ 1,624 1,959 3,583 (5,802) (7,768) (103) (13,673) (10,090) (10) (46,180) (56,280) (All amounts in US$ 000's) Capital Expenditure in Property Plant and Tooling Other Total Capital Expenditures in Property Plant and Equipment Brands, Licenses and trademark acquisitions Content development Computer software Total Capital Expenditures in Intangible Assets Total Capital Expenditures Disposals Business Acquisition (net of cash received) Net cash flows used in investing activities Twelve months ended December 31 2015 2016 $ Change 19,574 4,462 24,036 62 15,390 2,090 17,542 41,578 (10) 130,705 172,273 13,754 1,486 15,240 5,801 21,791 1,461 29,053 44,293 — 49,280 93,573 5,820 2,976 8,796 (5,739) (6,401) 629 (11,511) (2,715) (10) 81,425 78,700 14Cash flows used in investing activities were $4,554 for the three months ended December 31, 2016 compared to $60,834 for the same period in 2015. The decrease in cash flows used in investing activities was driven primarily by the acquisition of Cardinal in the fourth quarter of 2015 and lower content development due to higher recognition of tax credits associated with the production of television programming. For the twelve months ended December 31, 2016 cash flows used in investing activities were $172,273 compared to $93,573 for the same period in 2015. The increase in cash flows used in investing activities was driven by cash used in business acquisitions in 2016 related to Swimways and Toca Boca. Financing Activities Cash flows used in financing activities were $5,260 for the three months ended December 31, 2016 compared to $10,084 for the three months ended December 31, 2015. Cash flows used in investing activities consist of change in bank indebtedness. Cash flows generated by financing activities were $155,467 for the twelve months ended December 31, 2016 compared to cash flows used in financing activities of $11,541 for the comparable period in 2015. Cash flows generated by financing activities consisted of the increase in bank indebtedness for acquisitions and the proceeds from the Treasury Offering in the 2nd quarter of 2016. Free Cash Flow The following table provides a reconciliation of Spin Master’s consolidated Free Cash Flow (a non-IFRS measure) to cash from operations for three and twelve months ended December 31, 2016 and 2015: Three Months Ended December 31 2015 2016 $ Change Net cash flows generated by (used in) operating activities Plus: Changes in Working Capital Net cash flows generated by (used in) operating activities before working capital changes Less: Net cash flows used in investing activities Plus: Cash used for License, Brand and Business Acquisitions Free Cash Flow Free Cash Flow Net cash flows generated by (used in) operating activities Plus: Changes in Working Capital Net cash flows generated by (used in) operating activities before working capital changes Less: Net cash flows used in investing activities Plus: Cash used for License, Brand and Business Acquisitions Free Cash Flow $ $ $ $ $ $ $ $ $ $ $ $ 62,310 $ 65,124 $ (2,814) (61,637) $ (62,487) $ 850 673 $ 2,637 $ (1,964) (4,554) $ (60,834) $ 56,280 — $ (3,881) $ 51,938 $ (6,259) $ (51,938) 2,378 Twelve Months Ended December 31 2015 2016 $ Change 73,038 $ 55,640 $ 17,398 87,220 $ 50,044 $ 160,258 $ 105,684 $ 37,176 54,574 (172,273) $ (93,573) $ (78,700) 130,705 $ 118,690 $ 55,038 $ 67,149 $ 75,667 51,541 Free Cash Flow was negative $3,881 for the three months ended December 31, 2016 compared to negative $6,259 for the same period in 2015. The increase in Free Cash Flow was driven by a decrease in cash flows used in investing activities before cash used for business acquisitions. For the twelve months ended December 31, 2016 Free Cash Flow was $118,690 an increase of $51,541 compared to the same period in 2015. The increase in Free Cash Flow was due to higher net cash flows generated by operating activities before working capital changes and offset by increased investing activities. 15COMMITMENTS In the normal course of business, Spin Master enters into contractual arrangements to obtain and protect Spin Master’s right to create and market certain products and to ensure availability and timely delivery of future purchases of goods and services. These arrangements include commitments for future services, purchases and royalty payments pursuant to licensing agreements. Certain of these commitments routinely contain provisions for guarantees or minimum expenditures during the terms of the contracts. Additionally, Spin Master routinely enters into lease agreements for premises and equipment, which contain minimum rental payments. The following table summarizes (in US$ thousands) Spin Masters contractual commitments and obligations as at December 31, 2016, which relate primarily to the leasing of offices and related office equipment and minimum guarantees due to licensor's. The leases have been entered into with terms of between two and ten years in length and minimum guarantees to licensor's are primarily due within 24 months, but can extend beyond 24 months. Lease obligations Minimum Guarantees Due to Licensors Borrowings Total Commitments SHEET ARRANGEMENTS Less than 1 year to greater than 5 years <1 Year 1-5 Years > 5 Years Total 6,784 32,092 158,107 196,983 16,097 — 38 16,135 — — — — 22,881 32,092 158,145 213,118 Spin Master has no of sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. OUTSTANDING SHARE CAPITAL As at March 22, 2017, there were 77,230,812 Multiple Voting Shares outstanding and 24,445,309 Subordinate Voting Shares outstanding. As of March 22, 2017 pursuant to grants under the Company's Long-Term Incentive Plan, 943,114 Subordinate Voting Shares were issuable under outstanding Restricted Stock Units, up to 713,050 Subordinate Voting Shares were issuable under outstanding Performance Share Units (assuming vesting at 200%) and 346,148 Subordinate Voting shares were issuable under outstanding Share Option grants. RISKS RELATING TO SPIN MASTER’S BUSINESS If Spin Master does not create original products, brands and entertainment properties, or enhance existing products, brands and entertainment properties, that satisfy consumer preferences, and anticipate, initiate and capitalize on developments in its industry, the Company’s business will suffer. Spin Master depends on its ability to innovate products, brands and entertainment properties and to identify changing consumer sentiments and sell original products, brands and entertainment properties that respond to such changes on a timely basis. Spin Master also relies on its ability to identify third-party entertainment media that is likely to be popular with consumers and license rights to such media to incorporate into the Company’s products. Spin Master’s ability to maintain current sales, and increase sales or establish sales with new, innovative toys, will depend on its ability to satisfy play preferences, enhance existing products, engineer, develop, introduce and achieve market acceptance of its original products, brands and entertainment properties. If the Company is unable to anticipate consumer preferences, its products, brands and entertainment properties may not be accepted by children, parents, or families, demand for the Company’s products, brands and entertainment properties could decrease and Spin Master’s business, financial condition and performance could be materially and adversely affected. Spin Master’s business and financial performance depend largely upon the appeal of its products, brands and entertainment properties. Failure to anticipate, identify and react to changes in children’s interests and consumer preferences could 16significantly lower sales of its products, brands and entertainment properties and harm its revenues and profitability. This challenge is more difficult with the ever increasing utilization of technology and digital media in entertainment offerings, and the increasing breadth of entertainment available to consumers. Evolving consumer tastes and shifting interests, coupled with changing and expanding sources of entertainment and consumer products and properties which compete for children’s and families’ interest and acceptance, create an environment in which some products and properties can fail to achieve consumer acceptance, and other products and properties can be popular during a certain period of time but then be rapidly replaced. The preferences and interests of children and families evolve quickly, can change drastically from year to year and season to season and are difficult to anticipate. Significant, sudden shifts in demand are caused by “hit” toys, technologies and trends, which are often unpredictable. Even the Company’s successful brands and products typically have a relatively short period of high demand followed by a decrease in demand as the product matures or is superseded by newer technologies and / or brands and products. A decline in the popularity of the Company’s existing products, brands and entertainment properties, or the failure of Spin Master’s original products, brands and entertainment properties to achieve and sustain market acceptance with retailers and consumers, could significantly lower the Company’s revenues and operating margins, which would harm Spin Master’s business, financial condition and performance. The industries in which Spin Master operates are highly competitive and the Company’s inability to compete effectively may materially and adversely impact its business, financial condition and performance. Spin Master operates in industries characterized by intense competition. The Company competes domestically and internationally with numerous large and small toy and game companies, as well as other children’s entertainment companies. Low barriers to entry enable new competitors to quickly establish themselves with only a single popular product. New participants with a popular product idea or property can gain access to consumers and become a significant source of competition for the Company. Spin Master’s competitors’ products may achieve greater market acceptance than the Company’s products and, in doing so, may potentially reduce the demand for the Company’s products, brands or properties. Spin Master’s competitors have obtained and are likely to continue to obtain licenses that overlap with the Company’s licenses with respect to products, geographic areas and markets. Spin Master may not be able to obtain adequate shelf space in retail stores to support or expand its brands or products, and the Company may not be able to continue to compete effectively against current and future competitors. In addition, Spin Master’s toys and other products compete with the offerings of consumer electronics, digital media and social media companies. The level of this competition has increased due to increased use by children of tablet devices and mobile phones, and accelerated age compression whereby children are outgrowing categories of toys and other children’s products at younger ages. The growing importance of digital media, and the heightened connection between digital media and consumer interest, has further increased the ability for new participants to enter Spin Master’s markets, and has broadened the array of companies Spin Master competes with which can become a significant source of competition for the Company in a very short period of time. These existing and new competitors may be able to respond more rapidly than Spin Master to changes in consumer preferences. Spin Master’s competitors’ products may achieve greater market acceptance than the Company’s products and potentially reduce demand for the Company’s products, lower its revenues and lower its profitability. Competition has also increased as a result of Spin Master’s production of products in the entertainment market such as television and film platforms. Some of the Company’s competitors in this market have interests in multiple media businesses which are often vertically integrated. Spin Master’s ability to compete in the entertainment market depends on a number of factors, including its ability to provide high quality and popular entertainment content, adapt to new technologies and distribution platforms and achieve widespread distribution. Some of Spin Master’s competitors have longer operating histories, significantly greater financial, marketing and other resources, greater economies of scale, more long standing brands and products and greater name recognition. The Company may be unable to compete with them in the future. If Spin Master fails to compete, its business, financial condition and performance could be materially and adversely affected. Spin Master licenses IP rights from third-party owners. Failure of such owners to properly maintain or enforce the IP underlying such licenses could have a material adverse effect on the Company’s business, financial condition and performance. The Company’s licensors may also seek to terminate Spin Master’s license. Spin Master is a party to a number of licenses that give the Company rights to third-party IP that is necessary or useful to the Company’s business. Spin Master’s success will depend in part on the ability of its licensors to obtain, maintain and enforce its licensed IP, in particular, those IP rights to which the Company has secured exclusive rights. Without protection for the IP Spin Master licenses, other companies might be able to offer substantially identical products for sale, which could have a material adverse effect on the Company’s business, financial condition and performance. One or more of the Company’s licensors may allege that Spin Master has breached its license agreement with them, and accordingly seek to terminate Spin Master’s license. If successful, this could result in the Company’s loss of the right to 17use the licensed IP, which could adversely affect the Company’s ability to commercialize its technologies, products or services, as well as have a material adverse effect on its business, financial condition and performance. Spin Master’s failure to market or advertise products could have a material adverse effect on the Company’s business, financial condition and performance. Spin Master’s products are marketed worldwide through a diverse spectrum of advertising and promotional programs. The Company’s ability to sell products is largely dependent upon the success of these programs. If Spin Master does not market its products, sales could decline or if media or other advertising or promotional costs increase, Spin Master’s costs could increase, which could have a material adverse effect on the Company’s business, financial condition and performance. Additionally, loss of television or media support related to any of the Company’s products may decrease the number of products it sells and harm its business, financial condition and performance. Spin Master’s success depends on its founders and other key personnel and without them the Company may be unable to maintain and expand its business. Spin Master’s future success depends on the continued contribution of the Company’s founders, and other key personnel, including, designers, technical, sales, marketing and administrative personnel. The loss of services of any of the Company’s key personnel could harm its business. Recruiting and retaining skilled personnel is costly and highly competitive. If the Company fails to retain, hire, train and integrate qualified employees and contractors, it may not be able to maintain and expand its business. Spin Master may not be able to sustain or manage its product line growth, which may prevent the Company from increasing its net revenues. Historically, Spin Master has experienced growth in its product lines which at times has been rapid. The Company’s growth strategy calls for it to continuously develop and diversify its business by introducing original products, innovating and refining its existing product lines and expanding into international markets, entering into additional license agreements, and acquiring other companies, which will place additional demands upon the Company’s management, operational capacity and financial resources and systems. The increased demand upon management may necessitate Spin Master’s recruitment and retention of qualified personnel. This can be particularly difficult when unexpected, significant, sudden shifts in demand are caused by “hit” toys and trends. There can be no assurance that the Company will be able to recruit and retain qualified personnel or expand and manage its operations effectively and profitably. Implementation of Spin Master’s growth strategy is subject to risks beyond its control, including competition, market acceptance of original products, changes in economic conditions, its ability to obtain or renew licenses on commercially reasonable terms and its ability to finance increased levels of accounts receivable and inventory necessary to support its sales growth, if any. Accordingly, there can be no assurance that the Company’s growth strategy will be successful or that it will be able to achieve its targeted future sales growth. The lack of success in the Company’s growth strategy may have a material and adverse effect on its business, financial condition and performance. Failure to protect or enforce Spin Master’s IP rights and claims by third parties that the Company is infringing their intellectual product rights could materially and adversely affect Spin Master’s business, financial condition and performance. Spin Master relies on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect its IP and proprietary rights. Contractual arrangements and other steps the Company has taken to protect its IP may not prevent misappropriation of its IP or deter independent third-party development of similar products. The steps Spin Master has taken may not prevent unauthorized use of its IP, particularly in foreign countries where the Company does not hold patents or trademarks or where the laws may not protect its IP as fully as in North America. Some of Spin Master’s products and product features have limited IP protection, and, as a consequence, the Company may not have the legal right to prevent others from reverse engineering or otherwise copying and using these features in competitive products. Monitoring the unauthorized use of the Company’s IP is costly, and any dispute or other litigation, regardless of the outcome, may be costly and time consuming and may divert the Company’s attention. Additionally, Spin Master has registered various domain names relating to some of its brands and products. If the Company fails to maintain these registrations, or if a third party acquires domain names similar to the Company’s and engages in a business that may be confusing to the Company’s users and customers, Spin Master’s revenues may decline and it may incur additional expenses in maintaining its brands. Spin Master periodically receives claims of infringement or otherwise becomes aware of potentially relevant patents, copyrights, trademarks or other IP rights held by other parties. Responding to any infringement claim, regardless of its validity, may be costly and time- consuming and may divert the Company’s attention. If Spin Master or its licensors are 18found to be infringing on the IP rights of any third party, Spin Master or its licensors may be required to obtain a license to use those rights, which may not be obtainable on reasonable terms, if at all. The Company also may be subject to significant damages or injunctions against the development and sale of some of its products or against the use of a trademark or copyright in the sale of some of its products. Spin Master’s insurance does not cover all types of IP claims and insurance levels for covered claims may not be adequate to indemnify the Company against all liability, which could materially and adversely harm its business, financial condition and performance. Spin Master may not realize the full benefit of its licenses if the licensed material has less market appeal than expected and licenses may not be profitable to the Company if sales revenue from the licensed products are not sufficient to support the minimum guaranteed royalties. An integral part of Spin Master’s business involves obtaining licenses to produce products utilizing various entertainment brands and images. As a licensee of entertainment-based properties, the Company has no guarantee that a particular brand or property will translate into a successful toy, entertainment brand or other product. Additionally, a successful brand may not continue to be successful or maintain a high level of sales. As well, popularity of licensed properties may not result in popular toys or the success of the properties with the public. The license agreements into which the Company enters usually require it to pay minimum royalty guarantees that may be substantial, and in some cases may be greater than the amount it earns from sales of the licensed items. This could result in write-offs of significant amounts, which in turn could materially and adversely impact the Company’s financial condition and performance. Acquiring or renewing licenses may require the payment of minimum guaranteed royalties that Spin Master considers to be too high to be profitable, which may result in losing licenses it currently holds when they become renewable under their terms, or missing business opportunities for new licenses. If the Company is unable to acquire or maintain successful licenses on advantageous terms, its business, financial condition and performance may be materially and adversely impacted. Failure to maintain existing relationships with inventors and entertainment content collaborators or develop relationships with new inventors and entertainment content collaborators could have a material adverse effect on Spin Master’s business, financial condition and performance. Spin Master’s relationships with inventors are a critical aspect of the Company’s product development. A significant portion of Spin Master’s product ideas have been sourced from inventors and developed by the Company. If Spin Master fails to maintain existing relationships or to build new relationships within the inventor community or if the Company experiences an adverse change in the perception of the Company by inventors, Spin Master may receive fewer product concepts from inventors. This would adversely impact Spin Master’s ability to introduce new, innovative brands and products, which in turn would materially and adversely harm its business, financial condition and performance. Spin Master’s relationships with entertainment collaborators, including writers, content developers, broadcasters and directors, are a critical aspect of the Company’s development of its entertainment properties, brands and images. A portion of Spin Master’s entertainment properties, brands and images have been sourced from external collaborators. If Spin Master fails to maintain existing relationships or to build new relationships with entertainment collaborators or if the Company experiences an adverse change in the perception of the Company by these entertainment collaborators, Spin Master may receive fewer concepts. This would adversely impact Spin Master’s ability to introduce new entertainment properties, brands and images, which in turn would materially and adversely harm its business, financial condition and performance. Spin Master may engage in acquisitions, mergers, or dispositions, which may affect the profit, revenues, profit margins or other aspects of its business. Spin Master may not realize the anticipated benefits of future acquisitions, mergers or dispositions to the degree anticipated, or such transactions could have a material adverse impact on the Company’s business, financial condition and performance. Acquisitions have been a part of Spin Master’s growth and have enabled it to further broaden and diversify its product offerings. The Company expects that in the future it will further expand its operations, brands, and product offerings through the acquisition of additional businesses, products or technologies. However, the Company may not be able to identify suitable acquisition targets or merger partners and the Company’s ability to efficiently integrate large acquisitions may be limited by its lack of experience with them. If Spin Master is able to identify suitable targets or merger partners, it may not be able to acquire these targets on acceptable terms or agree to terms with merger partners. Also, Spin Master may not be able to integrate or profitably manage acquired businesses and may experience substantial expenses, delays or other operational or financial problems associated with the integration of acquired businesses. The Company may also face substantial expenses, delays or other operational or financial problems if it is unable to sustain the distribution channels and other relationships currently in place at an acquired business. The businesses, products, brands or properties the Company acquires may not achieve or maintain popularity with consumers, and other anticipated benefits may not be realized immediately or at all. Further, integration of an acquired business may divert the attention of the Company’s management from its core business. In cases where Spin Master acquires businesses that have key talented individuals, Spin Master cannot be certain that those persons will continue to work for it after the acquisition or that they will continue 19to develop popular and profitable products. Loss of such individuals could materially and adversely affect the value of businesses that the Company acquires. Acquisitions also entail numerous other risks, including but not limited to: • • • • • unanticipated costs and legal liabilities; adverse effects on the Company’s existing business relationships with its suppliers and customers; risk of entering markets in which the Company has limited or no prior experience; amortizing any acquired intangible assets; and difficulties in maintaining uniform standards, procedures, controls and policies. Some or all of the foregoing risks could have a material adverse effect on Spin Master’s business, financial condition and performance. In addition, any businesses, products or technologies the Company may acquire may not achieve anticipated revenues or income and the Company may not be able to achieve cost savings and other benefits that it would hope to achieve with an acquisition. Acquisitions could also consume a substantial portion of Spin Master’s available cash, could result in incurring substantial debt which may not be available on favourable terms, and could result in the Company assuming contingent liabilities. In addition, if the business, product or technologies the Company acquires are unsuccessful it would likely result in the incurrence of a write-down of such acquired assets, that could adversely affect Spin Master’s financial performance. The Company’s failure to manage its acquisition strategy could have a material adverse effect on its business, financial condition and performance. Consistent with Spin Master’s past practice and in the normal course, the Company may have outstanding non-binding letters of intent and / or conditional agreements or may otherwise be engaged in discussions with respect to possible acquisitions which may or may not be material. However, there can be no assurance that any of these letters, agreements and / or discussions will result in an acquisition and, if they do, what the final terms or timing of any acquisition would be. Spin Master’s dependence on third-party manufacturers and distributors to manufacture and distribute Spin Master’s products presents risks to the Company’s business and exposes it to risks associated with international operations. Spin Master’s products are manufactured by third-party manufacturers, most of which are located in Asia and primarily in China, and stored and distributed by third parties on its behalf. The Company’s operations could be adversely affected if the Company lost its relationship with any of its third-party manufacturers or distributors, or if Spin Master were to be prevented from obtaining products from a substantial number of its current suppliers due to political, labour or other factors beyond the Company’s control. Although Spin Master’s external sources of manufacturing and its distribution centers can be shifted over a period of time to alternative sources, should such changes be necessary, the Company’s operations could be disrupted, potentially for a significant period of time, while alternative sources were secured. As a result of Spin Master’s dependence on third-party manufacturers, any difficulties encountered by one of the Company’s third-party manufacturers that results in production delays, cost overruns or the inability to fulfill its orders on a timely basis, including political disruptions, labour difficulties and other factors beyond the Company’s control, could adversely affect the Company’s ability to deliver its products to its customers, which in turn could harm the Company’s reputation and adversely affect its business, financial condition and performance. Similarly, Spin Master relies on third-party distributors to transport its products to the markets in which they are sold and to distribute those products within those markets. Any disruption affecting the ability of the Company’s third-party distributors to timely deliver or distribute its products to its customers could cause the Company to miss important seasons or opportunities, harm its reputation or cause its customers to cancel orders. Spin Master’s significant use of third-party manufacturers outside of North America also exposes the Company to risks, including: • • currency fluctuations; limitations on the repatriation of capital; 20• • • • • • • • • potential challenges to the Company’s transfer pricing determinations and other aspects of its cross border transactions which may impact income tax expense; political instability, civil unrest and economic instability; greater difficulty enforcing IP rights and weaker laws protecting such rights; requirements to comply with different laws in varying jurisdictions, which laws may dictate that certain practices that are acceptable in some jurisdictions are not acceptable in others, and changes in governmental policies; natural disasters and greater difficulty and expense in recovering from them; difficulties in moving materials and products from one country to another, including port congestion, strikes and other transportation delays and interruptions; difficulties in controlling the quality of raw materials and components used to manufacture the Company’s products, which may lead to public health and other concerns regarding its products; changes in international labour costs, labour strikes, disruptions or lock-outs; and the imposition of tariffs or other protectionist measures, or the breakdown of trade relations. Due to Spin Master’s reliance on international sourcing of manufacturing, its business, financial condition and performance could be significantly and materially harmed if any of the risks described above were to occur. Spin Master requires its third-party manufacturers and distributors to comply with Spin Master’s Code of Conduct, which is designed to prevent products manufactured by or for the Company from being produced under inhumane or exploitive conditions. Spin Master’s Code of Conduct addresses a number of issues, including work hours and compensation, health and safety, and abuse and discrimination. In addition, the Company requires that its products supplied by third-party manufacturers or distributors be produced or distributed in compliance with all applicable laws and regulations, including consumer and product safety laws in the markets where those products are sold. The Company has the right, both directly and through the use of outside monitors, to monitor compliance by its third-party manufacturers and distributors with Spin Master’s Code of Conduct and other manufacturing requirements. In addition, the Company conducts quality assurance testing on its products, including products manufactured or distributed for the Company by third parties. Notwithstanding these requirements and Spin Master’s monitoring and testing of compliance with them, there remains the risk that one or more of the Company’s third-party manufacturers or distributors will not comply with Spin Master’s requirements and that Spin Master will not immediately discover such non-compliance. Any failure of the Company’s third-party manufacturers or distributors to comply with labour, consumer, product safety or other applicable requirements in manufacturing or distributing products for the Company could result in damage to Spin Master’s reputation, harm sales of its products and potentially create liability for Spin Master and its business, financial condition and performance could be materially and adversely impacted. Spin Master’s sales are concentrated with a small number of retailers that do not make long-term purchase commitments. Consequently economic difficulties or changes in the purchasing policies of those retailers could have a material adverse effect on the Company’s business, financial condition and performance. A small number of retailers account for a large share of Spin Master’s total sales. For 2016, Wal-Mart Stores, Inc., Target Corporation and Toys “R” Us, Inc. collectively accounted for 51.9% of the Company’s Gross Product Sales. This concentration means that if one or more of Spin Master’s major customers were to experience difficulties in fulfilling their obligations to the Company, cease doing business with the Company, significantly reduce the amount of their purchases from the Company, favour competitors or new entrants, return substantial amounts of Spin Master’s products, favour its competitors or increase their competition with Spin Master by expanding their private label product lines or seek material financial contributions from the Company towards price reductions at the retail level, the Company’s business, financial condition and performance could suffer. In addition, increased concentration among Spin Master’s customers could also negatively impact its ability to negotiate higher sales prices for its products, could result in lower gross margins and could reduce the number of products the Company would otherwise be able to bring to market. Retailers do not make any long- term commitments to the Company regarding purchase volumes and make all purchases by delivering one-time purchase orders. Any customer could reduce its overall purchases of the Company’s products, reduce the number and variety of the Company’s products that it carries and the shelf space allotted for Spin Master’s products, or otherwise seek to materially change the terms of their business relationship with Spin Master at any time. Any such change could significantly harm the Company’s business, financial condition and performance. Similarly, liquidity problems at one or more of the Company’s key customers could expose the Company to losses from bad debts and negatively impact its business, financial condition and performance. Spin Master’s sales to retailers are typically made on credit without collateral. There is a risk that 21customers will not pay, or that payment will be delayed, because of bankruptcy or other factors beyond Spin Master’s control, which could increase its exposure to losses from bad debts and increase its cost of sales. In addition, if these or other retailers were to cease doing business as a result of bankruptcy, or significantly reduce the number of stores they operate, it could have a material adverse effect on the Company’s business, financial condition and performance. Spin Master’s credit insurance may not cover all types of claims against customers and insurance levels for covered claims may not be adequate to indemnify the Company against all liability, which could materially and adversely harm the Company’s business, financial condition and performance. Uncertainty and adverse changes in general economic conditions may negatively affect consumer spending, which could have a material adverse effect on Spin Master’s revenue and profitability. Current and future conditions in the economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the level of growth or contraction for the economy as a whole. It is even more challenging to estimate growth or contraction in various parts, sectors and regions of the economy, including the many different markets in which Spin Master participates. The Company’s budgeting and forecasting are dependent upon estimates of demand for its products and growth or contraction in the markets it serves. Economic uncertainty complicates reliable estimation of future income and expenditures. Adverse changes may occur as a result of weakening global economic conditions, tightening of consumer credit, falling consumer confidence, increasing unemployment, declining stock markets or other factors affecting economic conditions generally. These changes may negatively affect demand for Spin Master’s products, increase exposure to retailers with whom it does business, increase the cost and decrease the availability of financing to fund Spin Master’s working capital needs, or increase costs associated with manufacturing and distributing products, any of which could have a material and adverse effect on the Company’s revenue and profitability. In addition, consumer spending habits, including spending on Spin Master products, are affected by, among other things, prevailing economic conditions, levels of employment, fuel prices, salaries and wages, the availability of consumer credit, consumer confidence and consumer perception of economic conditions. A general economic slowdown in Canada, the U.S. and other parts of the world could decrease demand for the Company’s products which would adversely affect its revenue; an uncertain economic outlook may adversely affect consumer spending habits and customer traffic, which may result in lower revenue. A prolonged global economic downturn could have a material negative impact on the Company’s business, financial condition and performance. Failure to leverage Spin Master’s portfolio of brands and products effectively across entertainment and media platforms, maintain relationships with key television and motion picture studios, and entertainment and media companies could have a material adverse effect on the Company’s business, financial condition and performance. Complementing Spin Master’s product offerings with entertainment and media initiatives is an integral part of the Company’s growth strategy. Spin Master invests in interactive media and other entertainment initiatives, extending the Company’s brands across multiple platforms. Establishing and maintaining relationships with key broadcasters and motion picture studios, and entertainment and media companies are critical to the successful execution of these initiatives. The Company’s failure to execute effectively on these initiatives could result in its inability to recoup its investment and harm the related toy brands employed in these initiatives. Such failures could have a material adverse effect on the Company’s prospects, business, financial condition and performance. Risks Related to the Broadcast Entertainment Industry. The broadcast entertainment industry involves a substantial degree of risk. Acceptance of children’s entertainment programming represents a response not only to the production’s artistic components, but also the quality and acceptance of other competing programs released into the marketplace at or near the same time, the availability of alternative forms of children’s entertainment and leisure time activities, general economic conditions, public tastes generally and other intangible factors, all of which could change rapidly or without notice and cannot be predicted with certainty. There is a risk that some or all of Spin Master’s programming will not be purchased or accepted by the public generally, resulting in a portion of costs not being recouped or anticipated direct and indirect profits not being realized, which could have a material and adverse effect on the Company’s business, financial condition and performance. There can be no assurance that revenue from existing or future programming will replace loss of revenue associated with the cancellation or unsuccessful commercialization of any particular production or that Spin Master’s entertainment programming will generate product sales. Distributors’ decisions regarding the timing of release and promotional support of Spin Master’s television programs are important in determining the success of these programs. The Company does not control the timing and manner in which its distributors distribute the Company’s television programs. Any decision by those distributors not to distribute or promote one of Spin Master’s television programs or to promote competitors’ programs to a greater extent than they promote Spin Master’s could have a material and adverse effect on the Company’s business, financial condition and performance. 22The business of producing and distributing television programs is highly competitive. Spin Master faces intense competition with other producers and distributors, many of whom are substantially larger and have greater financial, technical and marketing resources than Spin Master. The Company competes with other television production companies for ideas and storylines created by third parties as well as for actors, directors and other personnel required for a production. Spin Master may not be successful in any of these efforts which could have a material and adverse effect on its business, financial condition and performance. A production’s costs may exceed its budget. Unforeseen events such as labour disputes, death or disability of a star performer, changes related to technology, special effects or other aspects of production, shortage of necessary equipment, damage to film negatives, master tapes and recordings, or adverse weather conditions, or other unforeseen events may cause cost overruns and delay or frustrate completion of a production. Although Spin Master has historically completed its productions within budget, there can be no assurance that it will continue to do so. The Company currently maintains insurance policies and when necessary, completion bonds, covering certain of these risks. There can be no assurance that any overrun resulting from any occurrence will be adequately covered or that such insurance and completion bonds will continue to be available or, if available on terms acceptable to Spin Master. In the event of substantial budget overruns, there can be no assurance that such costs will be recouped, which could have a material and adverse effect on the Company’s business, financial condition and performance. There can be no assurance that the local cultural incentive programs, film equity investment programs, federal tax credits and provincial tax credits which Spin Master may access in Canada and internationally from time to time, including those sponsored by various European, Australian and Canadian governmental agencies, will not be reduced, amended or eliminated. Any change in the policies of those countries in connection with their incentive programs could have a material and adverse effect on the Company’s business, financial condition and performance. Spin Master’s business is seasonal and therefore its annual financial performance depends, in large part, on its sales relating to the holiday shopping season. As retailers become more efficient in their control of inventory levels and give shorter lead times for production, failures to predict demand and possible transportation, production or other disruptions during peak demand times may affect the Company’s ability to deliver products in time to meet retailer demands. Seasonality factors cause Spin Master’s operating results to fluctuate significantly from quarter to quarter. A majority of the Company’s sales occur during the period from September through December. This seasonality has increased over time, as retailers become more efficient in their control of inventory levels through inventory management techniques. Spin Master’s failure to predict levels of consumer demand surrounding the holiday season may result in under-producing popular products and overproducing underperforming items, which, in either case, would adversely affect the Company’s business, financial condition and performance. Spin Master’s results of operations may also fluctuate as a result of factors such as the timing of new products or new products that its competitors introduce in the marketplace, the advertising activities of its competitors and the emergence of new market entrants. In addition, due to the seasonal nature of Spin Master’s business, the Company would be materially and adversely impacted, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events, such as public health crises, terrorist attacks, adverse weather conditions or economic shocks that harm the retail environment or consumer buying patterns during the Company’s key selling season, or by events such as strikes, port delays or supply chain interruptions, in the second half of the year. If Spin Master fails to meet transportation schedules, it could damage the Company’s relationships with retailers, increase the Company’s shipping costs or cause sales opportunities to be delayed or lost. In order to be able to deliver its merchandise on a timely basis, Spin Master needs to maintain adequate inventory levels of the desired products. If the Company’s inventory forecasting and production planning processes result in Spin Master manufacturing inventory in excess of the levels demanded by its customers, the Company could be required to record inventory write-downs for excess and obsolete inventory, which could materially and adversely affect the Company’s financial performance. If the inventory of Spin Master products held by its retailers is too high, they may not place or may reduce orders for additional products, which could unfavourably impact the Company’s future sales and materially and adversely affect its financial performance. International sales are subject to various risks and failure to implement the international growth strategy could have a material adverse effect on the Company’s business, financial condition and performance. Spin Master currently relies on international sales of its products and expects to do so to a greater extent in the future as it continues to expand its business. The Company believes that its revenue and financial performance will depend in part upon its ability to increase sales in international markets. Implementation of Spin Master’s growth strategy is subject to risks beyond its control, and accordingly, there can be no assurance that the Company’s growth strategy will be successful. The lack of success in the Company’s growth strategy may have a material and adverse effect on its business, financial condition and performance. 23International sales are subject to various risks, including: exposure to currency fluctuations; political and economic instability; increased difficulty of administering business; and the need to comply with a wide variety of international and domestic laws and regulatory requirements. There are a number of risks inherent in the Company’s international activities, including: unexpected changes in Canadian, U.S. or other governmental policies concerning the import and export of goods; services and technology and other regulatory requirements; tariffs and other trade barriers; costs and risks of localizing products for foreign languages; longer accounts receivable payment cycles; limits on repatriation of earnings; the burdens of complying with a wide variety of non-Canadian or U.S. laws; and difficulties supervising and managing local personnel. The financial stability of non-Canadian or U.S. markets could also affect Spin Master’s international sales. Such factors may have a material adverse effect on the Company’s revenues and expenses related to international sales and, consequently, business, financial condition and performance. In addition, international income may be subject to taxation by more than one jurisdiction, which could also have a material adverse effect on the Company’s financial performance. Significant developments stemming from the recent U.S. presidential election could have a material adverse effect on our business, results of operations and financial condition. The outcome of the recent U.S. presidential election, as well as the Republican Party maintaining control of both the House of Representatives and Senate of the United States, has created uncertainty with respect to, among other things, existing and proposed trade agreements, free trade generally, and potential significant increases on tariffs on goods imported into the United States, particularly from Mexico, Canada and China. It is unknown at this time to what extent new laws will be passed or pending or new regulatory proposals will be adopted, if any, or the effect that such passage or adoption may have on the economy and / or our business. However, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade in the jurisdictions in which we and / or our customers or suppliers operate, may have a material adverse effect on the Company’s revenues and expenses related to international sales and, consequently, business, financial condition and performance. The production and sale of private-label toys by the retailers with which Spin Master does business may result in lower purchases of the Spin Master’s branded products by those customers. In recent years, retailers have been increasing the development of their own private-label products that directly compete with the products of their other suppliers, including children’s entertainment companies. Some of the retailers with whom Spin Master does business sell private-label toys designed, manufactured and branded by the retailers themselves. The Company’s customers may sell their private-label toys at prices lower than comparable toys sold by the Company, and, particularly in the event of strong sales of private-label toys, may elect to reduce their purchases of its branded products. In some cases, retailers who sell these private-label toys are larger than Spin Master and have substantially more resources. An increase in the sale of private-label product by retailers could have a material adverse effect on the Company’s business, financial condition and performance. Product recalls, post-manufacture repairs of Spin Master’s products, product liability claims, absence or cost of insurance, and associated costs could harm the Company’s reputation and this could cause Spin Master’s licensors to terminate or not renew its licenses. This could have a material adverse effect on the Company’s business, financial condition and performance. Spin Master is subject to regulation by Health Canada, the U.S. Consumer Product Safety Commission and regulatory authorities and by similar consumer protection regulatory authorities in other countries in which Spin Master sells its products. These regulatory bodies have the authority to remove from the market, products that are found to be defective and present a substantial hazard or risk of serious injury or death. The Company has experienced, and may in the future experience, issues in relation to products that result in recalls, delays, withdrawals, or post-manufacture repairs or replacements of products. Individuals have asserted claims, and may in the future assert claims, that they have sustained injuries from the Company’s products, and Spin Master may be subject to lawsuits relating to these claims. There is a risk that these claims or liabilities may exceed, or fall outside of the scope of, Spin Master’s insurance coverage as Spin Master does not maintain separate product recall insurance. The Company has recorded, and in the future may record, charges and incremental costs relating to recalls, withdrawals or replacements of its products, based on the Company’s most recent estimates of retailer inventory returns, consumer product replacement costs, associated legal and other professional fees, and costs associated with advertising and administration of product recalls. As these current and expected future charges are based on estimates, they may increase as a result of numerous factors, many of which are beyond Spin Master’s control, including the amount of products that may be returned by consumers and retailers, the number and type of legal, regulatory, or legislative proceedings relating to product recalls, withdrawals or replacements or product safety proceedings in Canada, the U.S. and elsewhere that may involve the Company, as well as regulatory or judicial orders or decrees in Canada, the U.S. and elsewhere that may require the Company to take certain actions in connection with product recalls. 24Moreover, Spin Master may be unable to obtain adequate liability insurance in the future. Any of these issues could result in damage to the Company’s reputation, diversion of development and management resources, reduced sales, and increased costs and could cause the Company’s licensors to terminate or not renew its licenses, any of which could materially and adversely harm its business, financial condition and performance. Product recalls, withdrawals, or replacements may also increase the competition that Spin Master faces. Some competitors may attempt to differentiate themselves by claiming that their products are produced in a manner or geographic area that is insulated from the issues that preceded recalls, withdrawals or replacements of Spin Master’s products. In addition, to the extent that the Company’s competitors choose not to implement enhanced safety and testing protocols comparable to those that the Company and its third-party manufacturers have adopted, such competitors could enjoy a cost advantage that could enable them to offer products at lower prices than Spin Master. Additionally, product recalls relating to Spin Master’s competitors’ products, post-manufacture repairs of their products and product liability claims against the Company’s competitors may indirectly impact the Company’s product sales even if its products are not subject to the same recalls, repairs or claims. Spin Master’s ability to enter into licensing agreements for products on competitive terms may be adversely affected if licensors believe that products sold by the Company will be less favourably received in the market. Inventors and entertainment content collaborators may be less willing to work with the Spin Master and the Company may receive fewer product concepts. Spin Master’s retailer customers may be less willing to purchase the Company’s products or to provide marketing support for those products, shelf space, promotions and advertising. Reduced acceptance of the Company’s products would adversely affect its business, financial condition and performance. Unfavourable resolution of litigation matters and disputes, including those arising from recalls, withdrawals or replacements of Spin Master’s products, could have a material adverse effect on the Company’s business, financial condition and performance. Spin Master is involved from time to time in litigation and disputes, including those arising from recalls, withdrawals or replacements of its products. Since outcomes of regulatory investigations, litigation and arbitration disputes are inherently difficult to predict, there is the risk that an unfavourable outcome in any of these matters could negatively affect the Company’s business, financial condition and performance. Regardless of the outcome, litigation may result in substantial costs and expenses to Spin Master and significantly divert the attention of its management. The Company may not be able to prevail in, or achieve a favourable settlement of, pending litigation. In addition to pending litigation, future litigation, government proceedings, labour disputes or environmental matters could lead to increased costs or interruption of the Company’s normal business operations. Failure to implement new initiatives or the delay in the anticipated timing of launching new products or entertainment properties could have a material adverse effect on Spin Master’s business, financial condition and performance. Spin Master has undertaken, and in the future may undertake, initiatives to improve the execution of its core business, globalize and extend its brands, develop or extend entertainment properties, leverage new trends, create new brands, offer new innovative products and technologies, enhance product safety, develop its employees, improve productivity, simplify processes, maintain customer service levels, drive sales growth, manage costs, capitalize on its scale advantage and improve its supply chain. These initiatives involve investment of capital and complex decision-making, as well as extensive and intensive execution, and these initiatives may not succeed or there may be a delay in the anticipated timing of the launch of new initiative or products. Failure to implement any of these initiatives, or the delay of the anticipated launch, could have a material adverse effect on the Company’s business, financial condition and performance. A reduction or interruption in the delivery of raw materials, parts and components from Spin Master’s suppliers or a significant increase in the price of supplies could negatively impact the Company’s profit margins or result in lower sales. Spin Master’s ability to meet customer demand depends in part on its ability to obtain timely and adequate delivery of materials, parts and components from Spin Master’s suppliers. The Company has experienced shortages in the past, including shortages of raw materials and components, and may encounter these problems in the future. A reduction or interruption in supplies or a significant increase in the price of one or more supplies, such as fuel and resin (which is a petroleum-based product), could have a material adverse effect on the Company’s business, financial condition and performance. Cost increases, whether resulting from shortages of materials or rising costs of materials, transportation, services or labour, could impact the profit margins on the sale of Spin Master’s products. Due to market conditions, timing of pricing decisions and other factors, the Company may not be able to offset any of these increased costs by adjusting the prices of its products. Increases in prices of the Company’s products could result in lower sales and have a material adverse effect on its financial condition and performance. 25Spin Master’s safety procedures are regularly monitored and are subject to change, which may materially and adversely affect its relationship with vendors and make it more difficult for it to purchase and deliver products on a timely basis to meet market demands. Future conditions may require the Company to adopt changes to its safety procedures that may increase its costs and adversely affect the Company’s relationship with vendors. Spin Master’s operating procedures and requirements for vendors, which are regularly monitored and which are subject to change, including by implementing enhanced testing requirements and standards, impose additional costs on both Spin Master and the vendors from whom it purchases products. These changes may also delay delivery of the Company’s products. Additionally, changes in industry wide product safety guidelines may affect the Company’s ability to sell its inventory and may negatively impact its business. Spin Master’s relationship with existing vendors may be adversely affected as a result of these changes, making it more dependent on a smaller number of vendors. Some vendors may choose not to continue to do business with the Company or not to accommodate the Company’s needs to the extent that they have done so in the past. Due to the seasonal nature of Spin Master’s business and the demands of its customers for deliveries with short lead times, Spin Master depends upon the cooperation of its vendors to meet market demand for its products in a timely manner. Existing and future events may require the Company to impose additional requirements on its vendors that may adversely affect the Company’s relationships with those vendors and its ability to meet market demand in a timely manner which may in turn have a material and adverse effect on the Company’s business, financial condition and performance. Negative publicity and product reviews may negatively impact Spin Master’s business, financial condition and performance. There has been a marked increase in the use of social media platforms and similar channels, including weblogs (blogs), social media websites and other forms of Internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability and impact of information on social media platforms is virtually immediate and the accuracy of such information is not independently verified. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning Spin Master or one or more of its products may be posted on such platforms at any time. Information posted may be adverse to Spin Master’s interests or may be inaccurate, each of which may harm the Company’s reputation and business. The harm may be immediate without affording Spin Master an opportunity for redress or correction. Ultimately, the risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially and adversely impact its business, financial condition and performance. Increases in interest rates, the lack of availability of credit and Spin Master’s inability to meet the debt covenant coverage requirements in its credit facility could negatively impact the Company’s ability to conduct its business operations. Increases in interest rates, both domestically and internationally, could negatively affect Spin Master’s cost of financing its operations and investments. Adverse credit market conditions could limit the Company’s ability to refinance its existing credit facility and raise additional debt that may be needed to fund the Company’s operations. Additionally, Spin Master’s ability to issue or borrow long-term debt and obtain seasonal financing or pay dividends could be adversely affected by factors such as an inability to meet certain debt covenant requirements and ratios. In the past, the Company’s business has required and will continue to require capital expenditures and available resources to finance acquisitions. Accordingly, Spin Master’s ability to maintain its current credit facility and its ability to issue or borrow long-term debt and raise seasonal financing are critical for the success of Spin Master’s business. The Company’s ability to conduct operations could be materially and adversely impacted should these or other adverse conditions affect the Company’s sources of liquidity. If Spin Master fails to maintain an effective system of internal controls, Spin Master may not be able to report its financial results or prevent fraud, which could harm the Company’s financial performance and may cause investors to lose confidence in it. Spin Master must maintain effective internal financial controls for it to provide reliable and accurate financial reports. The Company’s compliance with the internal control reporting requirements will depend on the effectiveness of its financial reporting and data systems and controls. Spin Master expects these systems and controls to become increasingly complex to the extent that its business grows, including through acquisitions. To effectively manage such growth, the Company will need to continue to improve its operational, financial and management controls and its reporting systems and procedures. These measures may not ensure that Spin Master designs, implements and maintains adequate controls over its financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation or operation, could harm the Company’s financial performance or cause it to fail to meet its financial reporting obligations. Inferior internal controls could also cause investors to lose confidence in the Company’s reported financial information, which could have a material and adverse effect on the trading price of its stock and its access to capital. 26Spin Master is subject to tax and regulatory compliance in all the jurisdictions in which it operates and may be subject to audits from time to time that could result in the assessment of additional taxes, interest and penalties. Spin Master conducts business globally and is subject to tax and regulatory compliance in the jurisdictions in which it operates. These include those related to collection and payment of value added taxes at appropriate rates and the appropriate application of value added taxes to each of the Company’s products, those designed to ensure that appropriate levels of customs duties are assessed on the importation of its products, as well as transfer pricing and other tax regulations designed to ensure that its intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned and that it is taxed appropriately on such transactions. International transfer pricing is a subjective area of taxation and generally involves a significant degree of judgment. Spin Master may be subject to audits that are at various levels of review, assessment or appeal in a number of jurisdictions involving various aspects of value added taxes, customs duties, transfer pricing, income taxes, withholding taxes, sales and use and other taxes and related interest and penalties in material amounts. The taxation authorities in the jurisdictions where the Company carries on business could challenge the Company’s transfer pricing policies. In some circumstances, additional taxes, interest and penalties may be assessed and deposits required to be paid in order to challenge the assessments. When applicable, the Company reserves in the consolidated financial statements an amount that it believes represents the most likely outcome of the resolution of disputes, but if it is incorrect in its assessment, it may have to pay a different amount which could potentially be material. Ultimate resolution of these matters can take several years, and the outcome is uncertain. If the taxing authorities in any of the jurisdictions in which the Company operates were to successfully challenge its transfer pricing practices or its positions regarding the payment of income taxes, customs duties, value added taxes, withholding taxes, sales and use, and other taxes, it could become subject to higher taxes and its revenue and earnings could be adversely affected. Spin Master may be assessed penalties, interest in the event it is unable to fulfill its withholding obligations with respect to the Company’s pre-IPO equity participation arrangements with certain current and former employees and may be required to pay the tax owed by participants who are not resident in Canada. Spin Master is required to withhold tax and other source deductions from the entitlements participants receive under the Company’s pre-IPO equity participation arrangements, including on the value of the Subordinate Voting Shares received by participants. Under the pre-IPO equity participation arrangements, the participants are required to provide the Company with the amount the Company is required to withhold. It is anticipated that Subordinate Voting Shares will be sold to fund this withholding obligation. The Subordinate Voting Shares shall be held by an escrow agent until the participants sell the shares. The participants shall not receive any proceeds from a sale of Subordinate Voting Shares until the Company has confirmed that it has received the required remittance amount. In addition, the participants granted the Company a power of attorney to allow the Company to sell Subordinate Voting Shares on their behalf. In the event that the value of the Subordinate Voting Shares decreases significantly, the sale of Subordinate Voting Shares may not be sufficient to cover the Company’s withholding obligations with respect to participants, the participants may not have other cash remuneration from which the Company could withhold and the Company may not be able to obtain funds from the participant to satisfy its withholding obligation. In such case, the Company could be assessed penalties and interest by CRA in respect of the amounts that were not remitted. In addition, the Company could be required to pay the tax owing by participants who are not resident in Canada. Spin Master is subject to various laws and government regulations, which, if violated, could subject Spin Master to sanctions or third-party litigation or, if changed, could lead to increased costs, changes in the Company’s effective tax rate or the interruption of normal business operations that would negatively impact the Company’s business, financial condition and performance. Spin Master is subject to a number of laws and regulations in Canada, the U.S. and internationally, both as a supplier of consumer products and services and indirectly through its third-party manufacturers and distributors. The Company is subject to the U.S. Children’s Online Privacy Protection Act, which, as implemented, requires Spin Master to obtain verifiable, informed parental consent before it collects, uses or discloses personal information from children under the age of 13. The Company also is subject to various other laws, including Canadian, U.S. and international employment, environmental, trade, tax, and other laws. The Company believes that it takes all necessary steps to comply with these laws and regulations, but Spin Master cannot be certain that it is in full compliance or will be in the future. Failure to comply could result in sanctions or delays that could have a negative impact on the Company’s business, financial condition and performance. In addition, changes in laws or regulations may lead to increased costs, changes in the Company’s effective tax rate, or the interruption of normal business operations that would materially and adversely impact its business, financial condition and performance. 27Significant changes in currency exchange rates could have a material adverse effect on Spin Master’s business, financial condition and performance. Spin Master’s financial performance and cash flows are subject to changes in currency exchange rates and regulations. As the Company’s financial results are reported in U.S. dollars, changes in the exchange rate between the U.S. dollar, Canadian dollar, Pound Sterling and the Euro may have an adverse effect / beneficial impact on the Company’s U.S. dollar results. Furthermore, potential significant revaluation of the Chinese yuan, which may result in an increase in the cost of producing products in China, could negatively affect Spin Master’s business. Government action may restrict the Company’s ability to transfer capital across borders and may also impact the fluctuation of currencies in the countries where the Company conducts business or has invested capital. Significant changes in currency exchange rates and reductions in Spin Master’s ability to transfer capital across borders could have a material adverse effect on its business, financial condition and performance. Currency fluctuations may also adversely affect the Company’s financial performance when it repatriates the funds it receives from these sales or other sources. System failures related to the websites that support Spin Master’s internet-related products, applications, services and associated websites could harm the Company’s business. The websites, applications and services associated with Spin Master’s internet-related products depend upon the reliable performance of their technological infrastructure. Customers could be inconvenienced and the Company’s business may suffer if demand for access to those websites, applications or services exceeds their capacity. Any significant disruption to, or malfunction by, those websites or services, particularly malfunctions related to transaction processing, on those associated websites could result in a loss of potential or existing customers and sales. Although Spin Master’s systems have been designed to function in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, and other events. Some of the Company’s systems are not fully redundant, and its disaster recovery planning is not sufficient for all eventualities. Spin Master’s systems are also subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions the Company may take, the occurrence of a natural disaster or other unanticipated problems at the Company’s hosting facilities could result in lengthy interruptions in its services. Spin Master does not carry business interruption insurance sufficient to compensate it for losses that may result from interruptions in its service as a result of system failures. Any unplanned disruption of the Company’s systems could result in material and adverse financial impact on its business, financial condition and performance. Spin Master’s business could be significantly harmed if its electronic data is compromised. Spin Master maintains significant amounts of data electronically in locations around the world. This data relates to all aspects of the Company’s business and also contains certain customer and consumer data. The Company maintains systems and processes designed to protect this data, but notwithstanding such protective measures, there is a risk of intrusion or tampering that could compromise the integrity and privacy of this data. In addition, Spin Master provides confidential and proprietary information to its third-party business partners in certain cases where doing so is necessary to conduct the Company’s business. While Spin Master obtains assurances from those parties that they have systems and processes in place to protect such data, and where applicable, that they will take steps to assure the protections of such data by third parties, nonetheless those partners may also be subject to data intrusion or otherwise compromise the protection of such data. While Spin Master and its third-party business partners maintain systems for preventing and detecting a breach of their respective information technology systems, Spin Master and those third parties may be unaware that a breach has occurred and may be unable to detect an ongoing breach. Spin Master has exposure to similar security risks faced by other large companies that have data stored on their information technology systems. To its knowledge, Spin Master has not experienced any material breach of its cybersecurity systems. If Spin Master’s or any third-party service providers’ systems fail to operate effectively or are damaged, destroyed, or shut down, or there are problems with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of the aforementioned could occur as a result of natural disasters, software or equipment failures, telecommunications failures, loss or theft of equipment, acts of terrorism, circumvention of security systems, or other cyber-attacks, Spin Master could experience delays or decreases in product sales, and reduced efficiency of its operations. Any compromise of the confidential data of Spin Master’s customers, its consumers or itself, or failure to prevent or mitigate the loss of this data could disrupt Spin Master’s operations, damage its reputation, violate applicable laws and regulations and subject the Company to additional costs and liabilities and have a material and adverse impact on its business, financial condition and performance. 28The challenge of continuously developing and offering products that are sought after by children is compounded by the sophistication of today’s children and the increasing array of technology and entertainment offerings available to them. Children are increasingly utilizing electronic offerings such as tablet devices and mobile phones and they are expanding their interests to a wider array of innovative, technology-driven entertainment products and digital and social media offerings at younger and younger ages. Spin Master’s products compete with the offerings of consumer electronics companies, digital media and social media companies. To meet this challenge, the Company is designing and marketing products which incorporate increasing technology, seek to combine digital and analog play, and capitalize on evolving play patterns and increased consumption of digital and social media. With the increasing array of competitive entertainment offerings, there is no guarantee that: • • • • any of Spin Master’s products, brands or entertainment properties will achieve popularity or continue to be popular; any property for which Spin Master has a significant license will achieve or sustain popularity; any new products or product lines Spin Master introduces, or entertainment content that it creates, will be considered interesting to consumers and achieve an adequate market acceptance; or any product’s life cycle or sales quantities will be sufficient to permit Spin Master to profitably recover the development, manufacturing, marketing, royalties (including royalty advances and guarantees) and other costs of producing, marketing and selling the product. An increasing portion of Spin Master’s business may come from technologically advanced or sophisticated digital and smart technology products, which present additional challenges compared to more traditional toys and games. Spin Master expects that children will continue to be interested in product offerings incorporating sophisticated technology, such as video games, consumer electronics and social and digital media, at younger and younger ages. Spin Master also expects that parents will seek to enhance child development and learning through digital technologies and analog and technology-based play. In addition to the risks associated with Spin Master’s more traditional products, sophisticated digital and smart technology products face certain additional risks. Costs associated with designing, developing and producing technologically advanced or sophisticated products tend to be higher than for many of Spin Master’s more traditional products. Heavy competition in consumer electronics and entertainment products and difficult economic conditions may increase the risk of Spin Master not achieving sales sufficient to recover the increased costs associated with these products. Designing, developing and producing sophisticated digital and smart technology products requires different competencies and may follow longer timelines than traditional toys and games, and any delays in the design, development or production of these products could have a significant impact on Spin Master’s ability to successfully offer such products. In addition, the pace of change in product offerings and consumer tastes in the video games, consumer electronics and social and digital media areas is potentially even greater than for Spin Master’s more traditional products. This pace of change means that the window in which a technologically advanced or sophisticated product can achieve and maintain consumer interest may be shorter than traditional toys and games. These products may also present data security and data privacy risks and be subject to certain laws, government policies or regulations not applicable to more traditional products, such as the U.S. Children’s Online Privacy Protection Act of 1998 and the EU Data Protection Directive (Directive 95/46/EC) and related national regulations. Failure to adapt to the evolution of gaming could materially and adversely affect Spin Master’s business, financial condition and performance. Gaming requires increased innovation and a different strategy to market gaming products in order to remain successful in the gaming business in the future. Spin Master recognizes the need to provide immersive game play that is easy for consumers to learn and play in shorter periods of time, as well as offer innovative face to face, off the board and digital gaming opportunities. People are gaming in greater numbers than ever before, but the nature of gaming has and continues to evolve quickly. To be successful Spin Master’s gaming offerings must evolve to anticipate and meet these changes in consumer gaming. Failure to implement a gaming strategy and to keep up with the evolution of gaming could have a material adverse effect on the Company’s business, financial condition and performance. FINANCIAL RISK MANAGEMENT The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth. The main objectives of the Company’s risk management process are to ensure that risks are properly 29identified and that the capital base is adequate in relation to these risks. The principal financial risks to which the Company is exposed are described below. Foreign currency risk Due to the nature of the Company’s international operations, it is exposed to foreign currency risk driven by fluctuations in exchange rates. Risk arises because the value of monetary assets, liabilities, revenues and expenditures arising from transactions denominated in foreign currencies may vary due to changes in exchange rates (“transaction exposures”) and because the dollar denominated financial statements of the Company’s subsidiaries may vary on revaluation into the US dollar presentation currency (“translation exposures”). These exposures could impact the Company’s earnings and cash flows. As part of the Company’s risk management strategy, the Company uses derivative financial instruments such as foreign exchange forward contracts to manage foreign currency risk. The Company does not use derivative instruments for speculative purposes. Interest rate risk Interest rate risk is the risk that the Company’s financial assets and liabilities will increase or decrease in value due to a change in interest rates. The Company is exposed to interest rate risk as its loan facility bears interest at a variable rate. Credit risk and Customer Concentration The Company is dependent on three main retailers with respect to product sales for the majority of its products. These three customers accounted for 52% and 57% of consolidated gross sales for the twelve month periods ended December 31, 2016 and 2015 respectively, as follows As the Company usually grants credit to customers on an unsecured basis, credit risk arises from the possibility that customers may experience financial difficulty and may be unable to fulfill their financial obligations. This risk is managed through the establishment of credit limits and payment terms based on an evaluation of the customer’s financial performance, ability to generate cash, financing availability, and liquidity status. These factors are reviewed at least annually, with more frequent reviews performed as necessary. In addition, the Company uses a variety of financial arrangements to ensure collectability of trade receivables, including requiring letters of credit, cash in advance of shipment and through the purchase of insurance on material customer receivables. RELATED PARTY TRANSACTIONS There were no related party transactions included in consolidated financial statements of the Company as at December 31, 2016. CRITICAL ACCOUNTING ESTIMATES The Company’s significant accounting policies are described in Note 2 to the fiscal 2016 audited consolidated financial statements and accompanying notes, which have been prepared in accordance with IFRS. The preparation of financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and related disclosures and the reported amounts of revenues and expenses during the periods covered by the financial statements. The Company has identified the following accounting policies under which significant judgments, estimates and assumptions are made, where actual results may differ from these estimates under different assumptions and conditions, and which may materially affect financial results or the financial position in future periods 30Determination of units A unit is defined as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Determining the impact of impairment requires significant judgment in identifying which assets or groups of assets constitute units of the Company. Functional currency Transactions in foreign currencies are translated to the respective functional currencies of Company entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Determining the appropriate functional currencies for entities in the Company requires analysis of various factors, including the currencies and factors that mainly influence sales prices, and the currencies that mainly influence labour, materials, and other costs of providing goods or services. Useful life of property, plant and equipment and intangible assets with finite useful lives The Company employs significant estimates to determine the estimated useful lives of property, plant and equipment and intangible assets with finite useful lives, considering industry trends such as technological advancements, past experience, expected use and review of asset lives. Components of an item of property, plant and equipment may have different useful lives. The Company makes estimates when determining depreciation methods, depreciation rates and asset useful lives, which requires taking into account industry trends and factors. The Company reviews these decisions at least once each year or when circumstances change. The Company will change depreciation methods, depreciation rates or asset useful lives if they are different from previous estimates. Impairment testing of goodwill and indefinite life intangible assets Goodwill and indefinite life intangible assets are assessed for impairment at least annually, and whenever there is an indication that the asset may be impaired. The Company determines the fair value of its unit groupings and indefinite life intangible assets using discounted cash flow models corroborated by other valuation techniques. The process of determining these fair values requires the Company to make estimates and assumptions of a long term nature regarding discount rates, projected revenues, royalty rates and margins, as applicable, derived from past experience, actual operating results and budgets. These estimates and assumptions may change in the future due to uncertain competitive and economic market conditions or changes in business strategies. Provision for inventory Inventories are stated at the lower of cost and estimated net realizable value. The Company estimates net realizable value as the amount at which inventories are expected to be sold, taking into consideration fluctuations in retail prices due to seasonality less estimated costs necessary to make the sale. Inventories are written down to net realizable value when the cost of inventories is estimated to be unrecoverable due to obsolescence, damage or declining selling prices. Sales allowances A sales allowance is established to reflect credits requested by customers relating to factors such as contractual discounts, negotiated discounts, customer audits, defective products, and costs incurred by customers to sell the Company’s products. The allowance is based on specific reserves based upon the Company’s evaluation of the likelihood of the outcome of sale allowance claims. Income and other taxes The calculation of current and deferred income taxes requires the Company to make estimates and assumptions and to exercise judgment regarding the carrying values of assets and liabilities which are subject to accounting estimates inherent in those balances, the interpretation of income tax legislation across various jurisdictions, expectations about future 31operating results, the timing of reversal of temporary differences and possible audits of income tax filings by the tax authorities. Changes or differences in underlying estimates or assumptions may result in changes to the current or deferred income tax balances on the consolidated statements of financial position, a charge or credit to income tax expense in the consolidated statement of earnings and may result in cash payments or receipts. All income, capital and commodity tax filings are subject to audits and reassessments. Changes in interpretations or judgments may result in a change in the Company’s income, capital or commodity tax provisions in the future. The amount of such a change cannot be reasonably estimated. FUTURE CHANGES IN ACCOUNTING POLICIES IFRS 15 Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”. These narrow scope amendments simplify accounting for revenue from contracts with customers. The standard is effective for annual periods beginning on or after January 1, 2018. The Company is currently evaluating the impact of this standard on its consolidated financial statements. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments”. IFRS 9 applies to classification and measurement of financial assets and replaces the multi category and measurement models of IAS 39 for debt instruments with a new mixed measurement model having only two categories of amortized cost and Fair Value Through Profit and Loss ("FVTPL"). IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. Under IFRS 9, all recognized financial assets that are currently within the scope of IAS 39 will be measured at either amortized cost or fair value. The basis of classification will depend on the business model and the contractual cash flow characteristics of the financial asset. All equity instruments will be measured at fair value. A debt instrument is measured at amortized cost only if it is held to collect the contractual cash flows and the cash flows represent principal and interest, otherwise it is measured at FVTPL. For financial liabilities designated as at FVTPL, the change in the fair value attributable to changes in the liability’s credit risk is recognized in Other Comprehensive Income ("OCI") unless it gives rise to an accounting mismatch in profit or loss. The IASB has issued new hedge accounting requirements, aligning these more closely with an entity’s risk management activities. In addition, in July 2014 the IASB published the complete revision of IFRS 9, which supersedes the 2010 revision of IFRS 9. This complete revision is effective for annual periods beginning on or after January 1, 2018, with retrospective application. The Company is currently evaluating the impact of IFRS 9 on its consolidated financial statements. IFRS 16 Leases In January 2016, the IASB issued a new Lease Standard, IFRS 16. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from January 1, 2019. A company can choose to apply IFRS 16 before that date but only if it also applies IFRS 15 Revenue from Contracts with Customers. IFRS 16 completes the IASB’s project to improve the financial reporting of leases. IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations. The standard is effective for annual periods beginning on or after January 1, 2019. The Company is evaluating the impact on its financial statements. IFRS 2 Share Based Payments The IASB issued amendments to IFRS 2 “Share Based Payments”. The amendment is intended to clarify IFRS 2 on the estimation of the fair value of cash settled share based payments. The amendments are effective for annual reporting periods beginning on or after January 1, 2018. The Company is evaluating the impact on its financial statements. IAS 7 Statement of Cash Flows In 2016, the IASB issued an amendment to IAS 7 “Statement of Cash Flows”. The amendment is intended to clarify IAS 7 to improve information provided to users of financial statements about an entity’s financing activities. The amendment is effective for annual periods beginning on or after January 1, 2017 with earlier application permitted. The amendment is not expected to have a material impact of on the Company’s consolidated financial statements. 32Financial Instruments Due to the nature of the Company’s international operations, it is exposed to foreign currency risk driven by fluctuations in exchange rates. Risk arises because the value of monetary assets, liabilities, revenues and expenditures arising from transactions denominated in foreign currencies may vary due to changes in exchange rates (“transaction exposures”) and because the non-US dollar denominated financial statements of the Company’s subsidiaries may vary on revaluation into the US dollar presentation currency (“translation exposures”). These exposures could impact the Company’s earnings and cash flows. The Company uses derivative financial instruments such as foreign exchange forward contracts to manage foreign currency risk. As at December 31, 2016, the Company is committed under outstanding foreign exchange contracts to purchase Canadian dollars in exchange for US dollars, representing total purchase commitments of approximately $161,287 (2015 - $41,692). DISCLOSURE CONTROLS AND PROCEDURES The Co-Chief Executive Officers and the Chief Financial Officer (the “Certifying Officers”), along with other members of management, have designed, or caused to be designed under their supervision, Disclosure Controls and Procedures (“DC&P”) to provide reasonable assurance that (i) material information relating to the Company is made known to them by others, particularly during the period in which the annual filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. The Certifying Officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s DC&P as at December 31, 2016 and have concluded that the Company's DC&P was effective as at December 31, 2016 subject to the scope limitation described below. INTERNAL CONTROL OVER FINANCIAL REPORTING The Certifying Officers, along with other members of management, have also designed, or caused to be designed under their supervision, Internal Control over Financial Reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes prepared in accordance with IFRS. The Certifying Officers have used the Internal Control – Integrated Framework (2013 COSO Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to design the Company’s ICFR. The Certifying Officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s ICFR as at December 31, 2016 and have concluded that the Company'sICFR was effective as at December 31, 2016, subject to the scope limitation described below. There have been no changes in the Company’s ICFR during the three-month period ended December 31, 2016 which have materially affected, or are reasonably likely to materially affect, the Company’s ICFR. SPIN MASTER’S SCOPE LIMITATION ON DISCLOSURE CONTROLS AND PROCEDURES & INTERNAL CONTROL OVER FINANCIAL REPORTING The Company’s management, as permitted by securities legislation, for the period ended December 31, 2016, has limited the scope of its design of DC&P and ICFR to exclude controls, policies and procedures of Swimways Industries, Inc. (US Operations), which Spin Master acquired through a wholly-owned subsidiary on August 2, 2016. Included in Spin Master’s consolidated financial statements for the twelve month period ended December 31, 2016 are the following amounts related to Swimways Industries Inc. Consolidated Statement of Operations: Revenue $5,678 Net Income /(loss) ($3,854) Consolidated Balance Sheet 33Current Assets $25,709 Other Assets $3,307 Current Liabilities: $5,884 Other Liabilities : $ 0 LIMITATIONS OF AN INTERNAL CONTROL SYSTEM The Certifying Officers believe that any DC&P or ICFR, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met and that all control issues, including instances of fraud, if any, within the Company have been prevented or detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The design of any system of control is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential (future) conditions. NON-IFRS FINANCIAL MEASURES In addition to using financial measures prescribed under IFRS, references are made in this MD&A to “Adjusted EBITDA”, “Adjusted Net Income”, “EBITDA”, “Free Cash Flow”, “Gross Product Sales”, “Sales Allowances” and “Total Gross Sales”, which are financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. financial measures. Adjusted EBITDA is calculated as EBITDA excluding one time or other non-recurring items that do not necessarily reflect the Company’s underlying financial performance, including foreign exchange gains or losses, restructuring costs, IPO costs and write downs, among other items. Adjusted EBITDA is used internally as the key benchmark for incentive compensation and by management as a measure of the Company’s profitability and its ability to fund working capital requirements, investment in property, plant and equipment, and make debt repayments. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by revenue. Management uses Adjusted EBITDA Margin to evaluate the Company’s performance compared to internal targets and to benchmark its performance against key competitors. Adjusted Net Income is calculated as net income excluding one time or other items that do not necessarily reflect the Company’s underlying financial performance including foreign exchange gains or losses, restructuring costs, IPO costs and write downs, among other items and the corresponding impact these items have on income tax expense. Management uses Adjusted Net Income to understand the underlying financial performance of the business on a consistent basis over time. EBITDA is calculated as net earnings before borrowing costs, taxes and depreciation and amortization. Management uses EBITDA internally as a measure of the Company’s profitability and to benchmark the Company against key competitors. Free Cash Flow is calculated as cash from operations before changes in working capital less capital expenditures plus any cash used in brand or business acquisitions. Capital expenditures include expenditures on assets such as property, plant, equipment (primarily expenditures of tooling) and the production of TV properties. Management uses the Free Cash Flow metric to analyze the cash flow being generated by the Company’s business. Gross Product Sales represent sales of the Company’s products to customers, excluding the impact of marketing, incentive and allowance sales adjustments. Changes in Gross Product Sales are discussed because, while Spin Master records the details of such Sales Allowances in its financial accounting systems at the time of sale in order to calculate revenue, such Sales Allowances are generally not associated with individual products, making revenue less meaningful when comparing its segments and geographical results to highlight trends in Spin Master’s business. Total Gross Sales represents Gross Product Sales plus other revenue comprised of royalties and licensing fees from third parties for the use of the Company’s intellectual property on the third parties’ products and revenue generated through the distribution of the Company’s television programs as well as income from the sale of apps. Management uses Total Gross 34Sales to evaluate the Company’s total revenue generating capacity compared to internal targets and past performance and as a measure to understand the performance of the Company, on a monthly, quarterly and annual basis. Sales Allowances represent marketing and sales credits requested by customers relating to factors such as advertising, contractual discounts, negotiated discounts, customer audits, volume rebates, defective products, and costs incurred by customers to sell the Company’s products and are booked as a reduction to Gross Product Sales. Management uses Sales Allowances to identify and compare the cost of doing business with individual retailers, different geographic markets and amongst various distribution channels. Management believes that Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, EBITDA, Free Cash Flow, Gross Product Sales and Total Gross Sales are important supplemental measures of operating performance and highlight trends in the core business that may not otherwise be apparent when relying solely on IFRS financial measures. Management believes that Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, EBITDA, Free Cash Flow, Gross Product Sales and Total Gross Sales allow for assessment of the Company’s operating performance and financial condition on a basis that is more consistent and comparable between reporting periods. Constant Currency represents Revenue and Gross Product Sales results that are presented excluding the impact from changes in foreign currency exchange rates. The current period and prior period results for entities reporting in currencies other than the US dollar are translated using consistent exchange rates, rather than using the actual exchange rate in effect during the respective periods. The difference between the current period and prior period results using the consistent exchange rates reflects the changes in the underlying performance results, excluding the impact from fluctuations in foreign currency exchange rates. 35Reconciliation Tables The following table presents a reconciliation of Net Income to EBITDA, Adjusted EBITDA and Adjusted Net Income, and Cash from (used in) Operations to Free Cash Flow for the fiscal years ended December 31, 2016, 2015 and 2014: (in $ thousands, except percentages) Reconciliation of Non-IFRS Financial Measures Net income (loss) Income tax expense (recovery) Finance costs Depreciation and amortization EBITDA (1) Normalization Adjustments: Restructuring (2) Recovery of contingent liability (3) Foreign exchange loss (gain) (4) Offering Costs (5) Stock Based Compensation (6) One time income from Transfer of Non Business Related Assets (7) One time Service Fee income (8) Impairment of Intangible Asset (9) One time Legal Expense (10) Fair Market Value adjustments (11) Acquisition Related Incentive Compensation (12) Fiscal Years Ended, December 31, 2016 2015 2014 99,515 38,364 8,601 30,489 47,074 32,559 6,539 22,877 62,214 23,276 2,829 17,743 176,969 109,049 106,062 1,823 (222) 5,530 — 3,528 (457) 6,477 925 595 (687) 4,905 900 20,943 50,658 — — — — — 467 (9,690) (5,000) 659 3,325 975 — — — — — — — — Adjusted EBITDA (1) 205,510 160,449 111,775 Income tax expense (recovery) (13) Finance costs (13) Depreciation and amortization Tax effect of normalization adjustments (14) Adjusted Net Income (1) Cash from (used in) operations Plus: Changes in working capital 38,364 8,601 30,489 7,941 120,115 21,834 3,547 22,877 13,583 98,608 23,276 2,829 17,743 1,555 66,372 73,038 55,640 123,966 87,220 50,044 (34,221) Cash from (used in) operations before working capital changes 160,258 105,684 89,745 Less: Cash from (used in) investing Plus: (172,273) (93,573) (26,221) Cash used for license, brand and business acquisitions Free Cash Flow (1) 130,705 118,690 55,038 67,149 1,292 64,816 1) See "Non-IFRS Financial Measures". 2) 2016 restructuring primarily related to organizational changes in the normal course of business. 2015 restructuring primarily related to changes to the Company's executive team. 2014 restructuring related to organizational changes in Europe only. 363) 2016 contingent consideration related to organizational changes in the normal course of business. in 2015 a write off of contingent consideration related to a future earn-out provision associated with the acquisition of Spy Gear occurred as sales targets were not met to achieve the additional pay out. 4) Transaction gains and losses generated by the effect of foreign exchange recorded on assets and liabilities denominated in a currency that differs front the functional currency of the applicable entity are recorded as foreign exchange gain or loss in the period which they occur. 5) Offering Costs from the IPO are considered a one time expense and are not reflective of on going costs of the business. 6) Stock based compensation is related to expenses associated with subordinate voting shares granted to equity participants and restricted stock units granted to employees at the time of the IPO and share option expense. 7) One of the predecessor corporations to the Company owned assets which are non income producing and do not relate to the business of the Company. Accordingly, the assets were transferred to the principal shareholders prior to the closing of the IPO through dividends in kind at their current fair market value. 8) One time service fee income is in connection with the acquisition of Cardinal and services provided to Cardinal prior to the closing of the transaction on October 2, 2015. 9) Impairment of Intangible asset related to Content Development. 10) One time legal expense related to an outstanding litigation matter in Q4 2015 11) Amortization of Fair Market Value adjustments relating to acquisition of Cardinal Industries Inc. in the fourth quarter of 2015 12) Remuneration expense associated with contingent consideration for the Swimways acquisition. 13) Income tax expense /(recovery) and Finance Costs have been adjusted for 2015 to exclude Financial Impacts related to the settlement of certain tax matters as they are not reflective of on ongoing costs of the business. 14) Tax effect of normalization adjustments (Footnotes 3-12). Normalization adjustments tax effected at the effective tax rate of the given period. (see "Free Cash Flow" and "Selected Quarterly Financial Information" sections of the MD&A for further information) FORW STATEMENTS Certain statements, other than statements of historical fact, contained in this press release constitute “forward-looking information” within the meaning of certain securities laws, including the Securities Act (Ontario), and are based on expectations, estimates and projections as of the date on which the statements are made in this press release. The words “plans”, “expects”, “projected”, “estimated”, “forecasts”, “anticipates”, “indicative”, “intend”, “guidance”, “outlook”, “potential”, “prospects”, “seek”, “strategy”, “targets” or “believes”, or variations of such words and phrases or statements that certain future conditions, actions, events or results “will”, “may”, “could”, “would”, “should”, “might” or “can”, or negative versions thereof, “be taken”, “occur”, “continue” or “be achieved”, and other similar expressions, identify statements containing forward-looking information. Statements of forward-looking information in this press release include, without limitation, statements with respect to: the Company’s outlook for 2017 (see “Outlook”); future growth expectations; financial position, cash flows and financial performance; , drivers for such growth; impact of acquisitions on future financial performance, and the successful execution of its strategies for growth; the seasonality of financial results and performance. Forward-looking statements are necessarily based upon management’s perceptions of historical trends, current conditions and expected future developments, as well as a number of specific factors and assumptions that, while considered reasonable by management as of the date on which the statements are made in this press release, are inherently subject to significant business, economic and competitive uncertainties and contingencies which could result in the forward-looking statements ultimately being incorrect. In addition to any factors and assumptions set forth above in this press release, the material factors and assumptions used to develop the forward-looking information include, but are not limited to: the expanded use of advanced technology, robotics and innovation the Company applies to its products will have a level of success consistent with its past experiences; the Company will continue to successfully secure broader licenses from third parties for major entertainment properties consistent with past practices; the expansion of sales and marketing offices in new markets will increase the sales of products in that territory; the Company will be able to successfully identify and integrate strategic acquisition opportunities; the Company will be able to maintain its distribution capabilities; the Company will be able to leverage its global platform to grow Cardinal’s and Swimways’ sales; the Company will be able to recognize and capitalize on opportunities earlier than its competitors; the Company will be able to continue to build and maintain strong, collaborative relationships; the Company will maintain its status as a preferred collaborator; the culture and business structure of the Company will support its growth; the current business strategies of the Company will continue to be desirable on an international platform; the Company will be able to expand its portfolio of owned branded intellectual property and successfully license it to third parties; use of advanced technology and robotics in the Company’s products will expand; access of entertainment content on mobile platforms will expand; fragmentation of the market will continue to create acquisition opportunities; the Company will be able to maintain its relationships with its employees, suppliers and retailers; 37the Company will continue to attract qualified personnel to support its development requirements; and the Company founders will continue to be involved in the Company and that the risk factors noted below, collectively, do not have a material impact on the Company. By its nature, forward-looking information is subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. Known and unknown risk factors, many of which are beyond the control of the Company, could cause actual results to differ materially from the forward-looking information in this press release. Such risks and uncertainties include, without limitation, the factors discussed under “Risk Relating to Spin Master's Business” and the Company’s Annual Information Form for the year ended December 31, 2016, each of which are available under the Company’s profile on SEDAR (www.sedar.com). These risk factors are not intended to represent a complete list of the factors that could affect the Company and investors are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Forward-looking statements are provided for the purpose of providing information about management’s expectations and plans relating to the future. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, or to explain any material difference between subsequent actual events and such forward-looking statements, except to the extent required by applicable law. 38Deloitte LLP One London Place 255 Queens Avenue Suite 700 London ON N6A 5R8 Canada Tel: 519-679-1880 Fax: 519-640-4625 www.deloitte.ca (cid:3) Independent Auditor’s Report To the Shareholders of Spin Master Corp. We have audited the accompanying consolidated financial statements of Spin Master Corp., which comprise the consolidated statements of financial position as at December 31, 2016 and 2015, and the consolidated statements of operations and comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. 39Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Spin Master Corp. as at December 31, 2016 and December 31, 2015, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants Licensed Public Accountants March 22, 2017 40Spin Master Corp. Consolidated statements of financial position as at December 31, 2016 and December 31, 2015 (In thousands of United States dollars) Notes 2016 2015 Assets Current assets Cash Trade and other receivables Inventories Prepaid expenses Non-current assets Advance on royalties Property, plant and equipment Intangible assets Goodwill Deferred tax assets Total assets Liabilities Current liabilities Trade payables and other liabilities Loans and borrowings Deferred revenues Provisions Interest payable Income tax payable Non-current liabilities Loans and borrowings Provisions Other long-term liabilities Deferred tax liabilities Total liabilities Shareholders’ equity Issued capital Accumulated deficit Contributed surplus Cumulative translation account Total shareholders’ equity Total liabilities and shareholders’ equity 9 10 11 12 13 8 14 15 16 8 15 16 8 17 99,416 272,904 79,924 21,398 473,642 11,695 26,996 130,390 91,707 19,002 279,790 753,432 206,771 158,107 5,500 26,454 6 12,331 409,169 38 12,025 110 6,411 18,584 427,753 45,713 134,618 49,140 16,330 245,801 1,523 16,096 62,370 36,130 26,363 142,482 388,283 134,717 3,436 6,765 10,115 3,026 17,156 175,215 46,874 8,458 225 1,192 56,749 231,964 670,115 (408,406) 21,436 42,534 325,679 753,432 589,263 (507,921) 31,580 43,397 156,319 388,283 Approved by the Board of Directors on March 22, 2017. The accompanying notes on pages 45 to 85 are an integral part of these consolidated financial statements. 41 Spin Master Corp. Consolidated statements of operations and comprehensive income For the years ended December 31, 2016 and December 31, 2015 (In thousands of United States dollars, except share data) Notes 2016 2015 Revenue Cost of sales Gross profit Expenses Selling, marketing, distribution and product development Administrative expenses Other (income) Foreign exchange loss Finance costs Income before income tax expense Income tax expense Net income Items that may be subsequently reclassified to net income or loss Foreign currency translation of subsidiary accounts Other comprehensive income Total comprehensive income Comprehensive income attributable to: Owners of the Company Non-controlling interests Net income attributable to: Owners of the Company Non-controlling interests Earnings per share attributable to owners of the Company Basic Diluted Weighted average of common shares outstanding Basic Diluted 4 7 7 5 6 8 18 18 18 18 1,154,454 557,712 596,742 243,689 201,008 35 5,530 8,601 137,879 38,364 99,515 (863) (863) 98,652 98,652 — 98,652 99,515 — 99,515 0.99 0.99 879,406 420,486 458,920 183,791 195,909 (13,429) 6,477 6,539 79,633 32,559 47,074 16,133 16,133 63,207 60,197 3,010 63,207 43,213 3,861 47,074 0.48 0.48 100,647,133 100,702,757 90,939,485 90,939,485 The accompanying notes on pages 45 to 85 are an integral part of these consolidated financial statements. 42Spin Master Corp. Consolidated statements of changes in equity For the years ended December 31, 2016 and December 31, 2015 (In thousands of United States dollars) Note Issued capital Accumulated deficit Contributed surplus Cumulative translation account Equity attributable to shareholders Non- Controlling Interest Total Balance at January 1, 2015 Net income Foreign currency translation Dividends declared Issuance of common stock Corporate reorganization Stock-based compensation Total comprehensive income Balance at December 31, 2015 Balance at January 1, 2016 Net income Foreign currency translation Recognition of share-based payments Issuance of subordinate shares* Shares released from equity participation Total comprehensive income Balance at December 31, 2016 * Net of transaction costs of $2,587. 1 — — — 182,668 406,594 — 589,262 589,263 589,263 — — — 48,394 32,458 80,852 670,115 17 17 17 17 (118,782) 43,212 — (235,052) — (197,299) — (389,139) (507,921) (507,921) 99,515 — — — — 99,515 (408,406) 1,647 — — — — — 29,933 29,933 31,580 31,580 — — 20,943 — (31,087) (10,144) 21,436 26,413 — 16,984 — — — — 16,984 43,397 43,397 — (863) — — — (863) 42,534 (90,721) 43,212 16,984 (235,052) 182,668 209,295 29,933 247,040 156,319 156,319 99,515 (863) 20,943 48,394 1,371 169,360 325,679 24,496 3,861 (851) (66,225) 47,073 16,133 — (235,052) — 182,668 (27,506) 181,789 — 29,933 (24,496) 222,544 — 156,319 — 156,319 — 99,515 (863) — — 20,943 — 48,394 — 1,371 — 169,360 — 325,679 The accompanying notes on pages 45 to 85 are an integral part of these consolidated financial statements. 43Spin Master Corp. Consolidated statements of cash flows For the years ended December 31, 2016 and December 31, 2015 (In thousands of United States dollars) Notes 2016 2015 Operating activities Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities 99,515 47,074 Income tax expense Interest expense Depreciation and amortization of non-current assets Amortization of fair value from acquisition Accretion expense Amortization of financing costs Property, plant and equipment impairment Gain on transfer of business related assets Stock-based compensation expense Changes in non-cash working capital, net Changes in contingent consideration liabilities Income taxes paid Interest paid Share-based compensation payments Cash provided by operating activities Investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Disposal of property, plant and equipment Business acquisitions, net of cash acquired Cash provided by (used in) investing activities Financing activities Proceeds from borrowings Repayment of borrowings Advances on loans from related parties Issuance of subordinate voting shares, net of transaction costs Issuance of shares over allotment, net of transaction costs Dividends paid Settlement of preferred shares Payment of financing costs Cash provided by (used in) financing activities Effect of foreign currency exchange rate changes on cash Net increase (decrease) in cash during the year Cash, beginning of year Cash, end of year 8 6 11,12 6, 16 6 5 5 17 19 17 11 12 24 15 15 21 17 17 38,364 2,833 30,490 — 2,868 602 265 — 20,943 (87,220) 3,567 (33,233) (5,956) — 73,038 (24,036) (17,542) 10 (130,705) (172,273) 204,000 (96,242) — 47,709 — — — — 155,467 32,559 4,597 22,877 975 — 466 1,718 (9,566) 50,658 (50,044) 7,785 (31,163) (1,571) (20,725) 55,640 (15,240) (29,053) — (49,280) (93,573) 152,937 (101,555) 405 155,227 23,558 (235,053) (4,683) (2,377) (11,541) (2,529) (6,105) 53,703 45,713 99,416 (55,579) 101,292 45,713 The accompanying notes on pages 45 to 85 are an integral part of these consolidated financial statements. 44Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 1. Description of business Spin Master Corp., (the “Company”), formerly SML Investments Inc., was incorporated on June 9, 2004, under the laws of the Province of Ontario, Canada. Spin Master Ltd., which was incorporated on May 9, 1994, under the laws of the Province of Ontario, Canada, is a subsidiary of the Company. The Company, through Spin Master Ltd. and its subsidiaries, is a children’s entertainment company engaged in the design, marketing and sale of entertainment products for children. The Company’s principal place of business is 121 Bloor Street East, Toronto, Canada, M4W 1A9. The Company has three reportable operating segments: North America, Europe and Rest of World (see Note 26). The North American segment is comprised of the United States and Canada. The European segment is comprised of the United Kingdom, France, Italy, the Benelux, Germany, Austria, and Switzerland. The Rest of World segment is primarily comprised of Hong Kong, China, and Mexico, as well as all other areas of the world serviced by the Company’s distribution network. 2. Significant accounting policies (A) Statement of compliance and basis of preparation and measurement The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). All financial information is presented in thousands of United States dollars, except as otherwise indicated. These consolidated financial statements were approved and authorized for issuance by the Board of Directors on March 22, 2017. The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments that are measured at fair value, as explained in the accounting policies below. Historical cost is measured on the fair value of the consideration provided in exchange for goods and services. (B) Application of new and revised IFRS In May 2014, the IASB issued amendments to IAS 16 “Property, Plant and Equipment” and IAS 38 “Intangible Assets”. The amendments clarify when a method of depreciation or amortization based on revenue may be appropriate. IAS 16 clarifies that the depreciation of an item of property, plant and equipment based on revenue generated by using the asset is not appropriate. IAS 38 establishes a rebuttable presumption that amortization of an intangible asset based on revenue generated by using the asset is inappropriate. The presumption may only be rebutted in certain limited circumstances which are: • Where the intangible asset is expressed as a measure of revenue; or • Where it can be demonstrated that revenue and the consumption of the economic benefits of the intangible asset are highly correlated. The amendment is effective for annual periods beginning on or after January 1, 2016, and there is no impact to the Company’s consolidated financial statements. In December 2014, the IASB issued amendments to IAS 1, “Presentation of Financial Statements” (“IAS 1 amendments”) The amendments address additional subtotals in the statement of financial position or statement of profit and loss and other comprehensive income. The amendments give guidance on what additional subtotals are acceptable and how they are presented. The revised guidance captures common subtotals that are not specifically required by IFRS, such as operating profit or profit before interest and tax. Additional subtotals should: • Be made up of items recognized and measured in accordance with IFRS; • Be presented and labeled in a manner that makes the components of the subtotal understandable; • Be consistent from period to period; and • Not be displayed with more prominence than the subtotals and totals specified in IAS 1. The amendment is effective for annual periods beginning on or after January 1, 2016, and there is no impact to the Company’s consolidated financial statements. 45Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (B) Application of new and revised IFRS (continued) In January 2016, the IASB issued an amendment to IAS 12 “Income Taxes”. The IASB has concluded that the diversity in practice around the recognition of a deferred tax asset that is related to a debt instrument measured at fair value is mainly attributable to uncertainty about the application of some of the principals in IAS12. Therefore the amendments consist of some clarifying paragraphs and an illustrating example. There is no impact to the Company’s consolidated financial statements. The amendment is effective for annual periods beginning on or after January 1, 2016, and there is no impact to the Company’s consolidated financial statements. (C) Basis of preparation The consolidated financial statements incorporate the financial statement accounts of the Company and entities controlled by the Company and its subsidiaries (Note 20) (the “Group”). Control is achieved when the Company: • • • has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of operations and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. (D) Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Company, liabilities incurred by the Company to the former owners of the acquiree and the equity interests issued by the Company in exchange for control of the acquiree. Acquisition-related costs are recognized in profit or loss as incurred. When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustment against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the “measurement period” (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with the relevant policy. Changes in the fair value of contingent consideration classified as equity are not recognized. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known would have affected the amounts recognized at that time. 46Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (D) Business combinations (continued) At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value. Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. Goodwill is measured as the excess of the sum of the consideration transferred, over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash- generating units (CGUs) (or groups of cash-generating units) that are expected to benefit from the combination. (E) Goodwill A CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss, and an impairment loss recognized for goodwill is not reversed in subsequent periods. On disposal of the relevant CGU, the attributed amount of goodwill is included in the determination of the profit or loss on disposal. (F) Revenue recognition Sale of goods The majority of the Company’s revenue is derived from the sales of toys and related products to retail customers and distributors in select international markets. Revenue represents the fair value of the sale of goods excluding value added tax and after deduction of estimates for defective products and sales allowances relating to the sale. Estimates for defective products and allowances to customers are made as a reduction against revenue in the period in which the related sales are recorded. Estimates are made based on contractual terms and conditions and historical data. Revenues from the sale of goods are recognized when all the following conditions have been met and control over the goods has been transferred to the buyer. • Significant risks and rewards of ownership of the goods have been transferred to the buyer. • • • Costs incurred or to be incurred in respect of the transaction can be measured reliably. The revenues can be measured reliably. It is probable that the economic benefits associated with the transaction will flow to the company. These conditions are typically met at the time the risks and rewards of ownership of the product pass to the customer. Television Distribution, Royalty & License Sales Television distribution sales as well as royalty and licensing revenues which allows others to use the Company’s brands are recognized on an accrual basis in accordance with the substance of the relevant agreements. Revenue is measured at the fair value of the consideration received or receivable when it is probable the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be measured reliably. These conditions are typically met in the period in which the royalty or licensing period has commenced unless there are future performance obligations that must be met or upon the delivery of the programs to the broadcaster for television distribution sales. Customer advances on contracts, licensing and/or television distribution, are recorded in unearned revenue until all of the foregoing revenue recognition conditions have been met. (G) Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. 47Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (G) Leases (continued) In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. (H) Foreign currencies The Company reports its financial results in United States Dollars; however, the functional currency of the Company is the Canadian dollar. The assets and liabilities of foreign operations that have a functional currency different from that of the Company, including goodwill and fair value adjustments arising on acquisition, are translated into the Company’s functional currency of Canadian dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in the foreign currency translation adjustment as part of other comprehensive income. In preparing the financial statements of each individual Group entity, transactions in currencies other than the Group entity’s functional currency are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. The resulting foreign currency exchange gains or losses are recognized in net income or loss. For the purposes of presenting these consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into United States dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated in the same manner as above with exchange differences impacting other comprehensive income and accumulated in equity. At December 31, 2016 and 2015, the functional currencies of the Groups subsidiaries included the Canadian Dollar, the Euro, the Great Britain Pound, the Hong Kong Dollar, the Mexican Peso, the Chinese Yuan, the Swedish Krona and the Australian Dollar. (I) Earnings per share Basic earnings per share (“EPS”) is calculated by dividing the net income attributable to owners of the Company by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing the net income attributable to the owners of the Company by the weighted average number common shares outstanding, if all the convertible securities were exercised during the period. Convertible securities refer to all outstanding stock options. (J) Income taxes Income tax expense represents the sum of the taxes currently payable and deferred taxes. Current tax For each entity in the Group, the tax currently payable is based on taxable income for the year. Taxable income differs from “net income before income tax expense” as reported on the consolidated statement of operations and comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax is recognized on temporary differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of taxable income. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are recognized for deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. 48Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (J) Income taxes (continued) Deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than a business combination) of assets and liabilities in a transaction that does not affect either taxable income or accounting income. In addition, deferred tax liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the asset to be recovered. Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is expected to be settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted at the end of the reporting period, reflecting the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax for the period Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognized in other comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. (K) Cash Cash includes cash on hand and in banks, net of outstanding bank overdrafts. (L) Property, plant and equipment Property, plant and equipment are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Repair and maintenance costs are recognized in profit or loss as incurred. Depreciation is recognized so as to write off the cost or valuation of assets less their residual values over their useful lives, using the straight-line method or declining balance method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. The following are the estimated useful lives for the major classes of property, plant and equipment: Land Buildings Moulds, dies and tools Office equipment Not depreciated 30 years 2 years 3 years Leasehold improvements Lesser of lease term or 5 years Computer hardware 3 years Machinery and equipment 30% declining balance An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amounts of the asset and is recognized in profit or loss. (M) Intangible assets The following are the estimated useful lives for the major classes of intangible assets: Brand Character trademarks Customer relationships Indefinite 5 years 5 years 49 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (M) Intangible assets (continued) Intellectual property 10 years Non-competition agreements 1 year Content development Computer software 1-5 years 1 year Intangible assets acquired separately Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses, if any. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives, such as brands and trademarks that are acquired separately are carried at cost less accumulated impairment losses. Intangible assets acquired in a business combination Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their initial cost). Subsequent to initial recognition, intangible assets acquired in business combinations are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Internally-generated intangible assets - research and development expenditures Expenditures on research activities are recognized as an expense as incurred. An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognized if, and only if, all of the following have been demonstrated: • • • • • • the technical feasibility of completing the intangible asset so that it will be available for use or sale; the intention to complete the intangible asset for use or sale; the ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits; the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and the ability to measure reliably the expenditure attributable to the intangible asset during its development. The amount initially recognized for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognized, development expenditures are recognized in profit or loss in the period in which they are incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Television production assets Television production assets are a component of intangible assets, and are recorded at cost under Content Development. Capitalized costs net of anticipated federal and provincial tax credits are charged to amortization expense as completed episodes are delivered on a pro-rata basis over the total number of episodes for the season. The federal and provincial tax credits are not recognized until there is reasonable assurance that the Company will comply with the conditions attaching to them and that the tax credits will be received. Deferred revenue related to television production assets arises as a result of consideration received in advance of the Company fulfilling its obligation. 50 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (M) Intangible assets (continued) Impairment of tangible and intangible assets other than goodwill At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise units for which a reasonable and consistent allocation they are allocated to the smallest group of basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually as part of year-end procedures, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss equal to the difference between the carrying and recorded amounts is recognized immediately in profit or loss. When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, provided that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. (N) Advances on royalties The Company enters into license agreements with inventors and licensors for the use of their intellectual properties in its products. These agreements may call for payment in advance or future payment of minimum guaranteed amounts. Amounts paid in advance are recorded as an asset and charged to the results of operations as revenue from the related products is recognized. If all, or a portion of an advance, does not appear to be recoverable through future use of the rights obtained under license, the non-recoverable portion is written-off and recognized immediately in profit or loss. (O) Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined on a standard cost basis, and includes the purchase price and other costs, such as import duties, taxes and transportation costs. Trade discounts and rebates are deducted from the purchase price. Net realizable value represents the estimated selling price for inventories in the ordinary course of business, less all estimated costs of completion and costs necessary to make the sale. Reserves for excess and obsolete inventory are based upon quantities on hand, projected volumes from demand forecast and net realizable value. The impact of changes in inventory reserves is reflected in cost of sales. (P) Provisions A provision is a liability of uncertain timing or amount. Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of the amount expected to be required to settle the obligation, and are re-measured each reporting date. Future royalty obligations Where the Company is committed to pay royalties on sales of acquired brands, the future royalty obligation is measured based on the Company’s estimate of the related brands future sales, discounted based on the timing of the expected payments and recorded as a provision. 51Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (P) Provisions (continued) Provision for defectives Defectives refer to when the end consumer returns defective goods to the Company’s customers. Customers without a fixed allowance for defectives are eligible for a credit for the cost of the product if returned as defective by the end consumer. The estimate of defectives is made based on the class and nature of the product and reduces the net sales figure on the consolidated statements of operations and comprehensive income. Supplier obligations Supplier obligations represent the estimated compensation to be paid to suppliers for lower than expected volumes purchased, resulting in the supplier having excess raw material and finished goods inventory. While payments are not contractually required, the Company regularly compensates suppliers to maintain supplier relationships, which represents a constructive obligations due to past practices. The supplier obligation is based on an estimate of the cost of the supplier’s excess raw material and finished goods inventory. Share-based payments As part of the Company’s Initial Public Offering (the “Initial Offering”), employees were granted subordinate voting shares under two arrangements; the settlement of equity participation agreements and the issuance of restricted stock units (“RSUs”). The initial Offering price multiplied by the number of shares that an employee is entitled to receive is recognized as an expense in administrative expenses, with a corresponding increase in contributed surplus over the period, at the end of which, the employees become unconditionally entitled to shares. The amount expensed is adjusted for forfeitures as required. The Company has one share option plan for key employees, which forms part of their long-term incentive compensation plan. Under the plan, the exercise price of each option equals the market price of the Company’s share on the date of grant and the options have a maximum term of ten years. Options vest between zero and four years. (Q) Financial instruments Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the respective instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are included in the initial carrying value of the related instrument and are amortized using the effective interest method. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. Fair value estimates are made at the consolidated statement of financial position date based on relevant market information and information about the financial instrument. All financial instruments are classified into one of the following categories: fair value through profit or loss (“FVTPL”), held-to-maturity, loans and receivables, available-for- sale financial assets or other liabilities. The Company has made the following classifications: Cash Trade and other receivables Loans to related parties Other long-term assets Trade payables and other liabilities Borrowings Interest payable Preferred shares Loans from related parties Other long-term liabilities Foreign exchange forward contracts Loans and receivables Loans and receivables Loans and receivables Loans and receivables Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities FVTPL 52Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (R) Financial assets The classification of financial assets depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets at FVTPL Financial assets are classified as FVTPL when the financial asset is either held for trading or it is designated as FVTPL. A financial asset is classified as held for trading if: • • • it has been acquired principally for the purpose of selling it in the near term; or on initial recognition it is part of a portfolio of identified financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially measures at fair value plus any attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. (S) Financial liabilities and equity instruments Classification as debt or equity Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by a Company entity are recognized at the proceeds received, net of direct issue costs. Other financial liabilities Other financial liabilities (including borrowings and trade and other payables) are initially measured at fair value, net of transaction costs. Subsequently, other financial liabilities are measured at amortized cost using the effective interest method. 53Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (S) Financial liabilities and equity instruments The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. (T) Derivative financial instruments The Company enters into foreign exchange forward contracts to manage its exposure to foreign exchange rate risks. Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently re-measured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss. (U) Fair value Fair value measurements are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: • • • Level 1 - valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 - valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 - valuation techniques using inputs for the asset or liability that are not based on observable market data (unobservable inputs). (V) Fair value hierarchy and liquidity risk disclosure The fair value of short-term financial instruments approximates their carrying amounts due to the relatively short period to maturity. These include trade and other receivables, as well as trade payables and accrued liabilities. Fair value amounts represent point-in-time estimates and may not reflect fair value in the future. (W) Accounting standards issued but not yet applied IFRS 15 Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”. These narrow scope amendments simplify accounting for revenue from contracts with customers. The standard is effective for annual periods beginning on or after January 1, 2018. The Company is currently evaluating the impact of this standard on its consolidated financial statements. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments”. IFRS 9 applies to classification and measurement of financial assets and replaces the multi category and measurement models of IAS 39 for debt instruments with a new mixed measurement model having only two categories of amortized cost and FVTPL. IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. Under IFRS 9, all recognized financial assets that are currently within the scope of IAS 39 will be measured at either amortized cost or fair value. The basis of classification will depend on the business model and the contractual cash flow characteristics of the financial asset. All equity instruments will be measured at fair value. A debt instrument is measured at amortized cost only if it is held to collect the contractual cash flows and the cash flows represent principal and interest, otherwise it is measured at FVTPL. For financial liabilities designated as at FVTPL, the change in the fair value attributable to changes in the liability’s credit risk is recognized in OCI unless it gives rise to an accounting mismatch in profit or loss. The IASB has issued new hedge accounting requirements, aligning these more closely with an entity’s risk management activities. In addition, in July 2014 the IASB published the complete revision of IFRS 9, which supersedes the 2010 revision of IFRS 9. This complete revision is effective for annual periods beginning on or after January 1, 2018, with retrospective application. The Company is currently evaluating the impact of IFRS 9 on its consolidated financial statements. 54Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 2. Significant accounting policies (continued) (W) Accounting standard issued but not yet applied (continued) IFRS 16 Leases In January 2016, the IASB issued a new Lease Standard, IFRS 16. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (the customer (‘lessee’) and the supplier (‘lessor’)). IFRS 16 is effective from January 1, 2019. A company can choose to apply IFRS 16 before that date but only if it also applies IFRS 15 Revenue from Contracts with Customers. IFRS 16 completes the IASB’s project to improve the financial reporting of leases. IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations. The standard is effective for annual periods beginning on or after January 1, 2019. The Company is evaluating the impact on its financial statements. IFRS 2 Share Based Payments The IASB issued amendments to IFRS 2 “Share Based Payments”. The amendment is intended to clarify IFRS 2 on the estimation of the fair value of cash settled share based payments. The amendments are effective for annual reporting periods beginning on or after January 1, 2018. The Company is evaluating the impact on its financial statements. IAS 7 Statement of Cash Flows In 2016, the IASB issued an amendment to IAS 7 “Statement of Cash Flows”. The amendment is intended to clarify IAS 7 to improve information provided to users of financial statements about an entity’s financing activities. The amendment is effective for annual periods beginning on or after January 1, 2017 with earlier application permitted. The amendment is not expected to have a material impact of on the Company’s consolidated financial statements. 3. Significant accounting judgments and estimates In the application of the Company’s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. These estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant, and actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis, and revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgments in applying accounting policies The Company has identified the following judgments, apart from estimates, which management has made in the process of applying the Company’s accounting policies, and which have the most significant effect on the amounts recognized in the consolidated financial statements. (A) Determination of CGUs A CGU is defined as is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Determining the impact of impairment requires significant judgment in identifying which assets or groups of assets CGUs of the Company. (B) Functional currency Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Determining the appropriate functional currencies for entities in the Group requires analysis of various factors, including the currencies and country-specific factors that mainly influence sales prices, and the currencies that mainly influence labour, materials, and other costs of providing goods or services. 55Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 3. Significant accounting judgments and estimates (continued) Significant estimates and assumptions The Company has identified the following accounting policies under which significant judgments, estimates and assumptions are made, where actual results may differ from these estimates under different assumptions and conditions, and which may materially affect financial results or the financial position in future periods. (A) Useful life of property, plant and equipment and intangible assets with finite useful lives The Company employs significant estimates to determine the estimated useful lives of property, plant and equipment and intangible assets with finite useful lives, considering industry trends such as technological advancements, past experience, expected use and review of asset lives. Components of an item of property, plant and equipment may have different useful lives. The Company makes estimates when determining depreciation methods, depreciation rates and asset useful lives, which requires taking into account industry trends and company-specific factors. The Company reviews depreciation methods, useful lives and residual values annually or when circumstances change and adjusts its depreciation methods and assumptions prospectively. (B) Impairment testing of goodwill and indefinite life intangible assets Goodwill and indefinite life intangible assets are assessed for impairment at least annually, and whenever there is an indication that the asset may be impaired. The Company determines the fair value of its cash-generating unit groupings and indefinite life intangible assets using discounted cash flow models corroborated by other valuation techniques. The process of determining these fair values requires the Company to make estimates and assumptions of a long term nature regarding discount rates, projected revenues, royalty rates and margins, as applicable, derived from past experience, actual operating results and budgets. These estimates and assumptions may change in the future due to uncertain competitive and economic market conditions or changes in business strategies. (C) Provision for inventory Inventories are stated at the lower of cost and estimated net realizable value. The Company estimates net realizable value as the amount at which inventories are expected to be sold, taking into consideration fluctuations in retail prices due to seasonality less estimated costs necessary to make the sale. Inventories are written down to net realizable value when the cost of inventories is estimated to be unrecoverable due to obsolescence, damage or declining selling prices. (D) Sales allowances A sales allowance is established to reflect credits requested by customers relating to factors such as contractual discounts, negotiated discounts, customer audits, defective products, and costs incurred by customers to sell the Company’s products. The allowance is based on specific reserves based upon the Company’s evaluation of the likelihood of the outcome of sales allowance claims. (E) Income and other taxes The calculation of current and deferred income taxes requires the Company to make estimates and assumptions and to exercise judgment regarding the carrying values of assets and liabilities which are subject to accounting estimates inherent in those balances, the interpretation of income tax legislation across various jurisdictions, expectations about future operating results, the timing of reversal of temporary differences and possible audits of income tax filings by the tax authorities. Changes or differences in underlying estimates or assumptions may result in changes to the current or deferred income tax balances on the consolidated statements of financial position, a charge or credit to income tax expense in the consolidated statement of earnings and may result in cash payments or receipts. All income, capital and commodity tax filings are subject to audits and reassessments. Changes in interpretations or judgments may result in a change in the Company’s income, capital or commodity tax provisions in the future. The amount of such a change cannot be reasonably estimated. 56Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 4. Revenue The Company earns revenue from the following primary sources: • Sales of toys and related products; and • Royalties and licensing fees received for the use of intellectual property and the distribution of television programs (“Other revenue”) Year ended December 31 Revenue from the sale of goods Other revenue Total revenue 5. Other (income) expense Year ended December 31 Impairment of non-current assets (see notes 11,12) Revaluation of provisions Service fees Gain on transfer of non-business related assets Other Total other (income) expense Service fees 2016 1,106,514 47,940 1,154,454 2015 860,189 19,217 879,406 2016 265 (222) — — (8) 35 2015 1,718 (457) (5,051) (9,566) (73) (13,429) Associated with the acquisition of Cardinal Industries, Inc. (“Cardinal”) in 2015 as described in Note 24, the Company received approximately $5,051 in service fees in connection with services provided to Cardinal prior to the acquisition date. Gain on transfer of non-business related assets Prior to the closing of the initial public offering ("Initial Offering") in 2015, one of the predecessor corporations to the Company owned non-business related assets which were transferred at their fair value to the principal shareholders. The non-business assets previously had no carrying value for financial reporting purposes. The aggregate amount of the dividend-in-kind and related gain on transfer totaled $9,566. 6. Finance costs Year ended December 31 Interest on bank loans Interest related to income tax assessments Bank fees Accretion expense Amortization of financing costs Other Total finance costs 7. Costs included within expenses 2016 2,833 — 2,228 2,868 602 70 8,601 2015 915 2,992 1,476 673 466 17 6,539 Included within operating expenses are the following research and development costs, depreciation expense and employee benefit expenses. Research and development costs Year ended December 31 Research and development costs Total research and development costs 2016 22,017 22,017 2015 15,486 15,486 57 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 7. Costs included within expenses (continued) Depreciation expense Year ended December 31 Depreciation and amortization included in cost of sales Depreciation and amortization included in administrative expenses Total depreciation expenses Employee benefits expense Year ended December 31 Salaries, wages, and bonuses Other employee benefits Total employee benefits expenses in cost of sales Salaries, wages, and bonuses Share-based payments Termination benefits Other employee benefits Total employee benefits expenses in administrative costs Total employee benefits expenses Selling, marketing, distribution and product development Year ended December 31 Selling Marketing expenses Distribution Product development Other 2016 23,680 6,810 30,490 2016 3,856 683 4,539 99,473 20,943 1,823 14,236 136,475 141,014 2016 77,102 112,339 32,231 22,017 — 2015 20,926 1,951 22,877 2015 1,823 284 2,107 80,894 50,658 3,528 9,816 144,896 147,003 2015 55,604 91,152 21,646 15,486 (97) Total selling, marketing, distribution and product development 243,689 183,791 Administrative expenses Year ended December 31 Staff costs Technology Professional services Property and operations Depreciation of property, plant and equipment (excluding Tooling) Other Total administrative expenses 2016 2015 136,474 144,896 5,131 19,482 22,496 6,896 10,529 3,743 15,190 17,519 7,109 7,452 201,008 195,909 58 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 8. Income taxes Income tax recognized in profit or loss Year ended December 31 Current tax expense Deferred tax expense Total income tax expense The income tax expense for the year can be reconciled to the accounting profit as follows: Year ended December 31 Net income before income taxes Statutory tax rate (26.5%) Adjustments Effect of expenses that are not deductible in determining taxable profit Effect of unused tax losses and tax offsets not recognized as deferred tax assets Effect of previously unrecognized unused tax losses and deductible temporary differences now recognized as deferred tax assets Effect of different tax rates of subsidiaries operating in other jurisdictions Effect of tax settlement with the Canada Revenue Agency on transfer pricing matter Other Total income tax expense 2016 28,354 10,010 38,364 2015 32,862 (303) 32,559 2016 2015 137,879 79,633 36,538 21,103 1,471 277 (187) (3,976) (153) 4,394 38,364 2,236 1,015 (113) (1,873) 10,508 (317) 32,559 The tax rates used for the reconciliations above are the domestic corporate tax rates payable by corporate entities in the Group, on taxable profits under tax law in the respective jurisdictions in which the Company operates. Current tax assets and liabilities As at December 31 Income tax payable Total income tax payable Deferred tax balances 2016 12,331 12,331 2015 17,156 17,156 The following is the analysis of deferred tax assets and liabilities presented in the consolidated statement of financial position: As at December 31 Deferred tax assets Deferred tax liabilities Net deferred tax asset 2016 19,002 (6,411) 12,591 2015 26,363 (1,192) 25,171 59 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 8. Income taxes (continued) Recognized deferred tax assets and liabilities As at December 31 Deferred tax assets (liabilities) in relation to Property, plant and equipment Intangible assets Provisions Allowance for doubtful accounts Tax losses Other Total deferred tax Recognized in Profit or loss Recognized in equity Recognized in Acquisitions/ Disposals 40 (517) (135) 110 (502) (9,566) 58 (10,010) — 685 (2) — 683 (6) — 677 (108) (4,650) — — (4,758) — 1,511 (3,247) 2015 1,172 492 5,158 150 6,972 19,110 (911) 25,171 Unrecognized deductible temporary differences and unused tax losses As at December 31 Tax losses Others Total deductible temporary difference and unused tax losses The unused tax losses will expire commencing in 2023. Unrecognized taxable temporary differences associated with investments 2016 1,919 2,139 4,058 2016 1,104 (3,990) 5,021 260 2,395 9,538 658 12,591 2015 1,694 1,426 3,120 The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities were not recognized as at December 31, 2016, is $182,708 (2015 - $120,142). 9. Trade and other receivables As at December 31 Trade receivables Provisions for sales allowances Allowance for doubtful accounts Other receivables Total net trade and other receivables 2016 307,051 (79,261) (2,684) 225,106 47,798 272,904 2015 190,271 (66,123) (1,245) 122,903 11,715 134,618 Trade receivables disclosed above include amounts that are past due at the end of the reporting period for which the Company has not recognized an allowance because there has not been a significant change in credit quality and the amounts are still considered recoverable. Trade receivables past due but not impaired As at December 31 60-90 days 91-120 days > 120 days Total trade receivables past due but not impaired 2016 7,077 3,031 34,244 44,352 2015 6,391 2,335 19,575 28,301 60 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 9. Trade and other receivables (continued) Movement in the allowance for doubtful accounts As at December 31 Balance at the beginning of the year Impairment losses recognized on receivables Amounts written off during the year as uncollectible Impairment losses reversed Foreign exchange translation Total as at December 31,2016 2016 1,245 2,058 (409) (237) 27 2,684 2015 914 946 (548) — (67) 1,245 In determining the recoverability of a trade receivable, the Company considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the end of the reporting period. 10. Inventories As at December 31 Raw materials Finished goods Total inventories 2016 2,408 77,516 79,924 2015 1,774 47,366 49,140 The cost of inventories recognized as an expense in cost of sales during the year was $501,551 (2015 - $368,418). During 2016, $9,423 of inventories was written down to net realizable value (2015 - $2,780).This charge is included within cost of sales in the consolidated statements of operations and comprehensive income. 61Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 11. Property, plant and equipment Cost Balance, December 31, 2014 Additions Asset retirements Foreign currency translation Other Total at December 31, 2015 Balance at December 31, 2015 Additions Asset retirements Asset Impairments Assets recognized upon acquisition Foreign currency translation Total at December 31, 2016 Moulds, dies and tools Equipment * Property ** Computer hardware Total 71,208 13,754 (2,249) (2,552) — 80,161 80,161 19,574 (1,317) (854) 1,205 (2,885) 95,884 7,202 341 (21) (743) 10 6,789 6,789 2,470 (2) (343) 6,548 (61) 15,401 6,817 197 — (607) 13 6,420 6,420 1,517 (27) (230) 1,930 (157) 9,453 7,920 948 (186) (791) 2 93,147 15,240 (2,456) (4,693) 25 7,893 101,263 7,893 475 (19) (150) 244 (28) 101,263 24,036 (1,365) (1,577) 9,927 (3,131) 8,415 129,153 * Equipment includes office equipment, machinery, and equipment ** Property includes land, building and leasehold improvements Accumulated depreciation Balance, December 31, 2014 Depreciation Asset retirements Asset Impairments Foreign currency translation Other Moulds, dies and tools Equipment * Property ** Computer hardware Total (63,669) (6,592) 2,249 (1,059) 1,300 — (6,242) (324) 21 — 827 — (5,277) (120) — — 467 (8) (6,715) (526) 186 — 321 (6) (81,903) (7,562) 2,456 (1,059) 2,915 (14) Total at December 31, 2015 (67,771) (5,718) (4,938) (6,740) (85,167) Balance at December 31, 2015 Depreciation Asset retirements Asset Impairments Assets recognized upon acquisition Foreign currency translation Total at December 31, 2016 (67,771) (11,417) 1,312 616 (80) 321 (77,019) (5,718) (1,644) 2 338 (4,124) (82) (11,228) (4,938) (299) 22 209 (1,359) (45) (6,410) (6,740) (446) 19 149 (52) (430) (85,167) (13,806) 1,355 1,312 (5,615) (236) (7,500) (102,157) * Equipment includes office equipment, machinery, and equipment ** Property includes land, building and leasehold improvements Net carrying amount Balance at December 31, 2015 Balance at December 31, 2016 12,390 18,865 1,071 4,173 1,482 3,043 1,153 915 16,096 26,996 For the year ended December 31, 2016, the Company recorded $265 (2015 - $1,059) of impairment losses in respect of 8 CGUs (2015 - 13). Impairment losses are recorded where the carrying amount of the CGU exceeds its recoverable amount. The recoverable amount was based the CGU’s value in use. 62 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 12. Intangible assets Cost Balance, December 31, 2014 Additions Asset Acquisitions via business combinations Foreign currency translation Total at December 31, 2015 Trademarks, licenses & customer lists Definite Brands Indefinite 27,258 2,658 8,100 (4,065) 33,951 — 3,100 10,400 — 13,500 Balance, December 31, 2015 33,951 13,500 Additions Disposals Asset acquisitions via business combinations Foreign currency translation Total at December 31, 2016 Accumulated amortization Balance, December 31, 2014 Impairment losses Amortization Foreign currency translation Total at December 31, 2015 Balance, December 31, 2015 Amortization Disposal Foreign currency translation Total at December 31, 2016 Net carrying amount Balance at December 31, 2015 Balance at December 31, 2016 — — 44,480 1,542 79,973 — — — — — — — — (302) (302) 62 — 20,747 195 34,504 — — (402) — (402) (402) (2,713) — 25 Content development Computer software 26,342 21,791 — (5,411) 42,722 42,722 15,390 — 852 1,979 60,943 20,569 1,461 — (3,546) 18,484 18,484 2,090 (288) — 477 20,763 (18,071) (18,848) (659) (14,334) 3,376 — (579) 3,230 (29,688) (16,197) (29,688) (16,197) (12,263) (1,708) — (1,935) 288 (898) (3,090) (43,886) (18,515) 33,951 79,671 13,098 31,414 13,034 17,057 2,287 2,248 Total 74,169 29,010 18,500 (13,022) 108,657 108,657 17,542 (288) 66,079 4,193 196,183 (36,919) (659) (15,315) 6,606 (46,287) (46,287) (16,684) 288 (3,110) (65,793) 62,370 130,390 units Indefinite life intangibles have been allocated for impairment testing purposes to the following determined by brands: • • • • • • The ‘Wild Planet’ brand has been allocated to the ‘Spy Gear’ cash-generating unit; The ‘Meccano’ brand has been allocated to the ‘Meccano Brand’ cash-generating unit; The ‘Imagination Games’, ‘Head Bandz’, ‘Boom Boom Balloon’ ‘Catch a Bubble’, 'Bellz', 'EG Games' and 'Cardinal' brands have been allocated to the ‘Games and Puzzles’ cash-generating unit; The 'Swimways' brand has been allocated to the 'Swimways' cash-generating unit; The ‘Toca Boca’ and 'Sago Mini' brands have been allocated to the ‘Toca Boca’ cash-generating unit; and The ‘Etch A Sketch’ brand has been allocated to the ‘Etch A Sketch’ cash-generating unit. 63 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 12. Intangible assets (continued) Impairment losses For the year ended December 31, 2016, the Company recorded $nil (2015 - $659) of impairment losses in respect of nil CGUs (2015 - 13) . Impairment losses are recorded where the carrying amount of the CGU exceeds its recoverable amount. The recoverable amount was based on the CGUs value in use. The recoverable amount of the CGUs is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a five-year period and a pre tax discount rate of 11.1% per annum (2015: 15.0.0% per annum). Cash flow projections during the budget period are based on the same expected gross margins and raw materials price inflation throughout the budget period. The cash flows beyond the five-year period have been extrapolated using a steady 1.0% (2015: 0%) per annum growth rate which is the projected long-term average growth rate. Management believes that any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the CGUs. The carrying amount of indefinite life intangible assets, comprised of brands and trademarks, was allocated to these cash-generating units as follows: As at December 31 Spy Gear Meccano Brand Games and Puzzles Swimways Toca Boca Etch A Sketch Total 13. Goodwill As at December 31 Balance, beginning of year Additions during the period Foreign currency translation Total goodwill 2016 7,577 2,221 25,393 24,690 13,000 6,790 79,671 2016 36,130 55,806 (229) 91,707 2015 7,577 2,221 24,153 — — — 33,951 2015 3,847 32,564 (281) 36,130 Goodwill has been allocated for impairment testing purposes to the following cash-generating units: • The ‘Feva’ business has been allocated to the ‘Spin Master UK’ cash-generating unit; • The ‘Meccano’ business has been allocated to the ‘Meccano Brand’ cash-generating unit; • The ‘X Concepts (Tech Deck)’ business has been allocated to the ‘Tech Deck’ cash-generating unit; • The ‘Cardinal’ and 'EG Games' businesses have been allocated to the ‘Games and Puzzles’ cash-generating unit; • The ‘Swimways’ business has been allocated to the ‘Swimways’ cash-generating unit; • The ‘Toca Boca’ business has been allocated to the ‘Toca Boca’ cash-generating unit; and • The ‘Etch A Sketch’ business has been allocated to the ‘Etch A Sketch’ cash-generating unit. 64Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 13. Goodwill (continued) The carrying amount of goodwill was allocated to these CGUs as follows: As at December 31 Spin Master UK Meccano Brand Tech Deck Games and Puzzles Etch A Sketch Toca Boca Swimways Total goodwill 2016 215 2,145 1,206 35,264 3,933 11,492 37,452 91,707 2015 215 2,145 1,206 32,564 - - - 36,130 There have been no impairment losses recognized with respect to goodwill during 2016 (2015 - $nil). 14. Trade payables and other liabilities As at December 31 Trade payables Accrued liabilities Total trade payables and other liabilities 15. Loans and borrowings As at December 31 Unsecured debt (at amortized cost) Loans from other entities (i) Secured debt (at amortized cost) Bank facilities (ii) and (iii) and (iv) Less: Financing costs Total loans and borrowings Current Non-current Total loans and borrowings 2016 92,171 114,600 206,771 2015 55,656 79,061 134,717 2016 2015 215 215 160,831 161,046 2,901 158,145 158,107 38 158,145 489 489 51,797 52,286 1,976 50,310 3,436 46,874 50,310 (i) Fixed rate loans with Région Nord-Pas de Calais, Cap Calais and OSEO related to Meccano operations in France, with remaining maturity periods not exceeding 3 years (2015 - 3 years). The weighted average effective interest rate on the loans is 1.06% per annum (2015 - 1.08% per annum). (ii) Variable rate secured facility with maximum borrowings of $4,281 to finance television production costs through one of the Company’s production entities. The interest rate on amounts drawn under the facility bear interest at a variable rate referenced to the lending institution’s Canadian dollar prime rate. Amounts outstanding are due prior to July, 2017. The obligation under the facility is secured through a general security agreement over the production company’s assets and by a guarantee by the parent company of the Production Company. As at December 31, 2016, the Company had $1,640 outstanding (December 31, 2015 - $2,797) on the obligation. 65 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 15. Loans and borrowings (continued) On December 21, 2016, the Company’s Revolving Credit Facility and Term Credit Facility were restructured into a single five-year secured revolving facility (the “Facility”), and the total capital available was increased from $280 million to $510 million. The new maturity date of the Facility is December 2021. Advances under the Revolving Credit Facility may be used for general corporate purposes including refinancing existing Indebtedness, funding working capital requirements, permitted acquisitions and permitted distributions. (iv) Available borrowing options under the Facility include: • Prime Rate Loans; • Base Rate Loans; • Bankers’ Acceptances from BA Lenders with a maturity of thirty (30), sixty (60), ninety (90) or one hundred and eighty (180) days, subject to availability; • BA Equivalent Loans from the Non-BA Lenders with a maturity of thirty (30) ), sixty (60), ninety (90) or one hundred and eighty (180) days, subject to availability; LIBOR Loans with an Interest Period of one (1), two (2), three (3) or six (6) months, subject to availability; • Swing Loans; or Letters of Credit • The obligation under the Facility is secured by a general security and pledge agreement in respect of all present and future personal property, assets and undertaking of the credit parties. This facility is subject to the maintenance of the following financial covenants: • Total Leverage Ratio, defined as the ratio of (a) Total Debt at such time, to (b) EBITDA for the applicable twelve-month period, is calculated on a quarterly basis, of 3.00 to1.00 or less, provided that, in the event the Borrower used proceeds of a Borrowing to complete a single Permitted Acquisition with aggregate consideration greater than $100,000, during any two consecutive fiscal quarters falling within the twelve- month reporting period immediately following such Permitted Acquisition, the Borrower must only maintain the Total Leverage Ratio 3.50 to 1.00 or less; and • Interest Coverage Ratio, calculated on a consolidated, rolling four quarter basis, at 3.00:1.00 or greater. Company was in compliance with the Total Leverage and Fixed Charge Coverage Ratio covenants as at December 31, 2016 and 2015. As at December 31, 2016, the Company had utilized $160,912 (2015 - $49,000) of its Facility: $159,190 drawn in LIBOR Loans and $1,722 (2015 - $1,136) drawn in letters of credit. 16. Provisions and contingent liabilities As at December 31 Defectives (i) Royalties (ii) Supplier liabilities (iii) Contingent consideration, acquisitions (iv) Total provisions Current Non-current Total Provisions 2016 10,943 29 5,202 22,305 38,479 26,454 12,025 38,479 2015 6,038 584 3,493 8,458 18,573 10,115 8,458 18,573 66Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 16. Provisions and contingent liabilities (continued) Defectives Royalties Supplier liabilities Contingent consideration, acquisitions 8,205 6,038 — (8,205) — 6,038 6,038 10,943 — (6,038) — 10,943 1,298 — — (257) (457) 584 584 — — (334) (221) 29 1,692 4,193 — (2,392) — 3,493 3,493 1,709 — — — — 7,785 673 — — 8,458 8,458 11,892 2,868 (861) (52) 5,202 22,305 Total 11,195 18,016 673 (10,854) (457) 18,573 18,573 24,544 2,868 (7,233) (273) 38,479 As at December 31, 2014 Provisions recognized Accretion recognized Reductions arising from payments Revaluation of provisions As at December 31, 2015 As at December 31, 2015 Provisions recognized Accretion Reductions arising from payments Revaluation of provisions As at December 31, 2016 Provisions (i) Defectives refer to when the end consumer returns faulty goods to the Company’s customers. Customers without a fixed allowance for defectives are eligible for a credit for the cost of the product if returned as defective by the end consumer. The estimate of defectives is made based on the class and nature or the product and reduces the net sales figure on the statements of operations and comprehensive income. (ii) During 2012, the Company acquired a number of brands in an asset acquisition. As part of the purchase price, the Company committed to pay royalties on sales of those brands until November 21, 2016. The future royalty obligation was estimated based on the Company’s estimate of the related brands’ future sales. (iii) Supplier obligations represent the estimated compensation to be paid to suppliers for lower than expected volumes purchased, resulting in the supplier having excess raw material and finished goods inventory. While payments are not legally required, the Company will regularly compensate suppliers to maintain supplier relationships. The supplier obligation is based on the Company’s estimate of the cost of the supplier’s excess raw material and finished goods inventory. The provision for supplier obligations is recorded in Cost of Sales on the consolidated statements of operations and comprehensive income. (iv) The Company took part in several business combinations as described in Note 24 which includes an earn- out payable over the next five calendar years. The fair value of the total contingent consideration on December 31, 2016 was $22,305 (2015 - $8,458) and is based on the achievement of certain financial performance criteria. The accretion of the earn-out is recorded in other (income) expense on the consolidated statements of operations and comprehensive income. The Company is involved in various routine legal proceedings incidental to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s business, financial condition and/or its results of operations. However, in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period. 17. Issued capital (a) Authorized as at December 31, 2016 and 2015 Unlimited number of Multiple voting shares; Unlimited number of Subordinate voting shares; and Unlimited number of Preferred shares issuable in series. 67 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 17. Issued capital (continued) As at December 31 Multiple voting shares Subordinate voting shares Total capital issued and outstanding As at December 31 Multiple voting shares Subordinate voting shares Total capital issued and outstanding Issued and outstanding 2016 406,595 263,520 670,115 2015 406,595 182,668 589,263 Number of shares Number of shares 77,230,812 79,680,812 24,445,309 19,612,423 101,676,121 99,293,235 On June 6, 2016, the Company closed the public offering of 4,900,000 subordinate voting shares at a price of $20.69 per subordinate voting share (the "Secondary Offering"). The Secondary Offering included a treasury offering of 2,450,000 subordinate voting shares by the Company for gross proceeds of $50,691 and a secondary offering of 2,450,000 subordinate voting shares, satisfied by the exchange of multiple voting shares by the founders of the Company. The Company incurred $2,587 of issuance costs, which is deducted from share capital in accordance with IAS 32, Financial instruments: Presentation. During 2015, the Company completed the Initial Offering. As part of that Initial Offering, 12,225,000 Subordinate voting shares were issued at a price of $12.98 for gross proceeds, before expenses of $159 million. As part of the Initial Offering, the underwriters were granted an over-allotment option exercisable at their sole discretion at any time, in whole or in part, for a period of 30 days after the closing of the Initial Offering, to purchase from the Company, at the Initial Offering price, up to an additional 1,833,750 Subordinate voting shares. On August 26, 2015, the over-allotment option granted to the underwriters was exercised in full, generating additional gross proceeds to Spin Master of $24 million. Immediately prior to the Company’s Initial Offering, a reorganization of the Company and its subsidiaries was completed, resulting in the exchange of Class A1, Class A2 and Class Y preference shares held by the principal shareholders for Multiple voting shares. The completion of this reorganization also resulted in the elimination of the previously recognized non-controlling interest. Class X1 and X2 preference shares were redeemed by the Company and settled in cash. (b) Share-based plans Participation arrangements The Company had equity participation arrangements (“Participation Arrangements”) with nine senior employees and one former employee pursuant to which they were entitled to receive a cash payment and shares on the initial public offering of the Company. The Participation Arrangements served to reward the past service, and to encourage retention. The terms of the Participation Arrangements differ between participants with vesting participants being entitled to some or all of their shares between six months and six years following the Initial Offering. The Company satisfied the participants’ entitlements by making a one-time cash payment to participants and by issuing an aggregate 4,790,178 Subordinate voting shares immediately prior to the closing of the Initial Offering. The compensation expense for the Participation Arrangements is calculated based on the fair value of each Participation Arrangement, as determined by the value of the Company at the closing of the Initial Offering, less the value of the cash settlement. The Company recognizes compensation expense over the vesting period of the Participation Arrangements, which is between six months and six years. As of December 31, 2016, 2,473,228 Subordinate voting shares have vested with a fair value of $59,229 (December 31, 2015 - $nil). Restricted Share Units (“RSUs”) In connection with the Initial Offering, the Company issued RSUs at a value of $10,500 to all of its current employees (other than the participants under the Participation Arrangements and employees in China). 68 Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 17. Issued capital (continued) The RSUs served to reward past service of the employees and align the interests of the employees with those of the Company. The RSUs were settled with Subordinate voting shares that fully vested on the first anniversary of the closing of the Initial Offering. Upon vesting of the RSUs, the Company issued approximately 693,057 Subordinate voting shares. Only employees that were employed on the settlement date received Subordinate voting shares. The Company classified the RSUs as equity instruments as the Company had the ability and intent to settle the awards with Subordinate voting shares. The compensation expense for RSUs is calculated based on the fair value of each RSU as determined by the closing value of the Company’s Subordinate voting shares on the business day of the grant date. The Company recognized compensation expense over the vesting period of the RSU. (c) Compensation expense The expense recognized for employees services received during the year is shown in the following table: Expense arising from equity-settled “Participation Agreement” transactions Expense arising from cash-settled “Participation Agreement” transactions Expense arising from equity-settled “RSU” transactions Expense arising from share options Total stock based compensation expense 2016 14,270 — 5,949 724 20,943 2015 25,558 20,725 4,375 — 50,658 Compensation expense of $20,943 (2015 - $50,658) is recorded in administrative expenses within the consolidated statement of operations. A corresponding entry is booked to contributed surplus for the equity settled awards of $20,456 (2015 - $29,933) with the remainder being settled through cash during the year. Upon completion of the Initial Offering, the Company immediately incurred compensation expense of $38,670 in respect of the Participation Arrangements. This amount was included in the Company’s financial results for the year ended December 31, 2015. In addition, the Company expected to incur additional expenses of $42,836 in its financial statements over the six-year period following the closing of the offering on a graded basis of which $7,613 was included in the Company’s results for the year ended December 31, 2015. In total, the Company recognized $46,283 of compensation expense in its financial results for 2015 related to the Participation Arrangements. In 2016 the company incurred $14,507 in respect Participation arrangements. In 2016, the company incurred compensation expense of $5,949 its financial results for RSU equity awards granted.The Company also incurred $4,375 of compensation expense in its financial results for 2015 for the RSU equity awards granted. A summary of the Participation Arrangements and RSU activity since December 31, 2015 is shown below: Granted during the year Balance at December 31, 2015 Forfeited Balance at December 31, 2016 Participation Agreement RSUs Number 4,790,178 4,790,178 (51,140) 4,739,038 Weighted average grant date fair value 65,877 65,877 (703) 65,174 Number 763,495 763,495 (15,974) 747,521 Weighted average grant date fair value 10,500 10,500 (220) 10,280 The weighted average remaining contractual life for Participation Arrangements outstanding as at December 31, 2016 is 24 months and for the RSUs outstanding as at December 31, 2016 is 7 months. (d) Share Purchase Options (“Options”) The Company has one share option plan for key employees, which forms part of their long-term incentive compensation plan. Under the plan, the exercise price of each option equals the market price of the Company’s share on the date of grant and the options have a maximum term of ten years. Options vest between zero and four years. 69Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 17. Issued capital (continued) The following is a summary of the activity of the outstanding share purchase options: Balance as at December 31, 2015 Granted during the year Balance as at December 31, 2016 18. Earnings per share Details of the calculations of earnings per share are set out below: Number of options Weighted average exercise price (CAD) — 346,148 346,148 — 22.94 22.94 Basic Diluted 2016 2015 Weighted average number of shares 100,647,133 101,702,757 Per common share amount ($) 0.99 0.99 Weighted average number of shares 90,939,485 90,939,485 Per common share amount ($) 0.48 0.48 The Participation Arrangements and RSUs issued to employees as Subordinate voting shares resulted in the issuance of fewer multiple voting shares to the principal shareholders. These shares issuances are anti-dilutive and are, therefore, not included in the computation of diluted earnings per share. 19. Change in working capital, net (Increase) decrease in: Trade and other receivables Inventories Prepaid expenses Advances on royalties Increase (decrease) in: Trade payables and other liabilities Advances from related parties Deferred revenues Provisions Other Total net change in working capital 2016 2015 (128,448) (39,205) (6,731) (10,140) (184,524) 68,320 — (1,265) 30,249 — 97,304 (87,220) (37,614) (1,005) (11,856) (1,695) (52,170) (402) 15 3,593 (1,080) — 2,126 (50,044) 20. Investments in subsidiaries The table below provides a summary of the Company’s subsidiaries as at December 31, 2016. Unless otherwise stated, the subsidiaries as listed below have share capital consisting solely of ordinary shares, which are held directly or indirectly by the Company, and the proportion of ownership interests held is equal to the voting rights held by the shareholders of the Company. The country of incorporation corresponds to the below noted principal place of operations. 70Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 20. Investment in subsidiaries (continued) Entity Spin Master Ltd. Spin Master Film Productions Inc. Spin Master Paw Productions Inc. Spin Master Paw 2 Production Inc. Spin Master Paw 3 Production Inc. Spin Master Paw 4 Production Inc. Spin Master Film Distribution Inc. Spin Master Charming Production Inc. Spin Master Charming 2 Production Inc. Spin Master Dig It Productions Inc. Spin Master Riveting Productions Inc. Spin Master Hatching Productions Inc. Spin Master Acquisition Inc. Sago Sago Toys Inc. Spin Master Mexico S.S de C.V Spin Master Mexico Services S.A de C.V Spin Master US Holdings Inc. Spin Master Inc. Spin Master Studios Inc. Bluesquare Innovation Inc. Cardinal Industries Inc. Swimways Corp Toca Boca Inc. Spin Master US Finance Co. Spin Master US 7 LLC. Spin Master Acquisition Co. Spin Master Far East Services Ltd. Spin Master Toys Far East Limited Swimways Hong Kong Company Ltd. Red Bird HK Ltd. Guangzhou Swimways Trading Co. Ltd. Spin Master Dongguan Technical Consultancy Servicing Co.Ltd Spin Master Japan Ltd. Spin Master Europe Holdings SARL Spin Master International SARL Spin Master Toys UK Limited Spin Master France SAS Meccano SA Toba Boca AB Spin Master Australia Ltd. Country Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Mexico Mexico United States United States United States United States United States United States United States United States United States United States Hong Kong Hong Kong Hong Kong Hong Kong China China Japan Luxembourg Luxembourg United Kingdom France France Sweden Australia 2016 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 2015 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 — 100.0 100.0 100.0 100.0 100.0 100.0 100.0 — — — — — — 100.0 — 100.0 — 100.0 100.0 100.0 100.0 100.0 100.0 100.0 — — 71Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 21. Related party transactions Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Immediately before the closing of the Company’s Initial Offering on July 30, 2015 a series of transactions were undertaken to distribute non-business assets and funds to Ronnen Harary, Anton Rabie and Ben Varadi (collectively, the “Principal Shareholders”) and to create the Company’s post-Offering share capital structure (the “Reorganization.”) There were no related party transactions included in consolidated financial statements of the Company as at December 31, 2016. The following related party transactions are included in the consolidated financial statements of the Company as at December 31, 2015: (a) Transfer of non-business related assets In 2015 prior to the closing of the Initial Offering, one of the predecessor corporations to the Company owned non-business related assets, which were transferred at their fair value to the principal shareholders. The non- business assets previously had no carrying value for the financial reporting purposes. The aggregate amount of the dividend-in-kind and related gain on transfer totaled $9,566. (b) Preferred shares redemption In 2015, the company redeemed the outstanding Class X1 Preferred Shares and the Class X2 Preferred shares in exchange for $4,683 in cash. (c) Amalgamation In 2015, the Company amalgamated the SML Investments 2008 Inc. and Varadi Bee Corp. The predecessor corporations were all non-active corporations indirectly owned the Principal Shareholders. (d) Dividends to principal shareholders In 2015, following the amalgamation, the Company paid dividends to the Principal Shareholders in the aggregate of $235,053. The dividends were paid from cash, after accounting for set off against existing indebtedness owing by Principal Shareholders for the Company, from proceeds of the Offering and by drawing down on the credit facilities immediately following the closing of the Initial Offering. No guarantees were given or received. No expense was recognized in the current or prior years for bad or doubtful debts in respect of the amounts owed by related parties. These entities were related parties by virtue of being owned by Principal Shareholders of the company, or members of key management personnel. Compensation of key management personnel The remuneration of directors and other key management personnel during the year was as follows: Year ended December 31 Salary and short-term benefits Other long-term benefits Share based compensation Total compensation of key management personnel 2016 2015 5,293 1,548 9,155 15,996 15,321 641 5,040 21,002 72Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 22. Operating leases Operating leases relate primarily to the leasing of offices and related office equipment, and have been entered into with lease terms of between two and ten years in length. Payments recognized as an expense Year ended December 31 Minimum lease payments Total minimum lease payments 23. Commitments for expenditures 2016 7,099 7,099 2015 5,390 5,390 As at December 31, 2016, the Company had minimum guarantees to licensors of approximately $32,092 (2015 - $34,586). Non-cancellable operating lease commitments As at December 31 No later than 1 year Later than 1 year and no later than 5 years Later than 5 years Total lease commitments 24. Business combinations Acquisition of Swimways Corporation (“Swimways”) 2016 2015 6,784 16,097 — 22,881 6,475 12,779 4,277 23,531 On August 2, 2016, the Company acquired Swimways, a privately held Company headquartered in Virginia Beach, Virginia with offices in Guangzhou, China and a manufacturing and distribution facility in Tarboro, North Carolina. Swimways has a diverse portfolio of toys, games, and sporting goods for the pool, beach and backyard which will complement the Company’s existing products and drive sales throughout the year, outside of the seasonality traditionally associated with toys and games. Pursuant to the terms set forth in the agreement, the Company acquired control of Swimways through the acquisition of 100% of the shares of Swimways for total cash consideration of $85 million on closing, less an escrow for possible adjustments. In addition, the Company agreed to pay an earn-out of up to $8.5 million based on Swimways sales growth over four years. The potential payments for the first two years of the earn-out are included in the total purchase consideration, whereas the payments related to the latter two years of the earn-out are recognized separately from the business combination transaction because they are contingent upon the continued employment with the acquired entity. Where the deferred consideration is contingent upon continued employment, it is recognized separately from the business combination transaction and treated as remuneration within administrative expenses in the period of performance. At each balance sheet date, the contingent deferred consideration balance comprises of the accrual for unsettled remuneration which has been expensed as at that date. For the period ended December 31, 2016, the Company recorded $466 in administrative expenses and a corresponding liability related to deferred consideration for post-acquisition services. Included in the total purchase consideration of $91,376 is $5,220 related to the estimated fair value of the deferred payments included in the earn-out which are not contingent upon continuing employment. The total purchase consideration has been allocated to identifiable intangible assets based on their estimated fair values of $33,800 (related to brands and intellectual property), $37,452 of goodwill acquired and $20,124 of net tangible assets acquired. The Company is in the process of finalizing the valuation of the assets acquired and liabilities assumed which may result in adjustments to the values presented and a corresponding adjustment to goodwill. The Company incurred $800 in transaction related costs which have all been included in administrative expenses in the consolidated statement of operations and comprehensive income for the year ended December 31, 2016. 73Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 24. Business combinations (continued) Acquisition of Swimways Corporation (“Swimways”) (continued) Assets acquired and liabilities recognized at the date of acquisition Assets acquired Cash Trade and other receivables Inventories Prepaid expenses Property, plant and equipment Intangible assets Other assets Liabilities assumed Trade payables and accrued liabilities Fair value of identifiable net assets acquired Fair value as at August 2, 2016 760 13,205 6,345 687 3,059 33,800 273 58,129 4,205 4,205 53,924 The trade and other receivables acquired (which principally comprised trade receivables) in this transaction with a fair value of $13,205 had gross contractual amounts of $13,205. Goodwill arising on acquisition Consideration transferred, including deferred payments Fair value of identifiable net assets acquired Goodwill arising from transaction Total 91,376 (53,924) 37,452 Goodwill arose on the acquisition of Swimways because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth and future market development. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. As at the date of acquisition, $37,452 of goodwill is expected to be deductible for income tax purposes and is amortized over 15 years. The consideration transferred includes $5,220 in deferred payments. The deferred payment is payable to the vendor upon the achievement of key performance indicators over a two year period. The potential undiscounted amount of all future payments that the Company could be required to make under the contingent consideration arrangement is between $0 and $5,500. Net cash outflow on acquisition Consideration paid in cash Less: receivable relating to closing net debt and working capital Less: cash balance acquired Net cash outflow Impact of acquisition on the results of the Company Total 89,332 (3,176) (760) 85,396 Included in the Company’s financial results for the year ended December 31, 2016 is $16,870 in revenues and $2,450 in net losses, attributable to the Swimways acquisition. On a proforma basis (unaudited), had this acquisition been completed on January 1, 2016, the Company’s total revenue and net loss for the year would have amounted to $1,239,244 and $100,658, respectively. Management considers these ‘pro-forma’ estimates to represent an approximate measure of the performance of the combined Company on an annualized basis. 74Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 24. Business combinations (continued) Acquisition of Toca Boca and Sago Mini companies (“Toca Boca”) On May 2, 2016, the Company acquired Toca Boca, a privately held Company with offices in Stockholm, San Francisco, New York and Toronto, from Bonnier Group of Sweden, pursuant to a share purchase agreement. Toca Boca, is a play studio that makes digital toys and creates mobile applications for kids aged 2-9, focusing on the pre-school segment. The acquisition will allow the Company to develop a leadership position in the mobile application space for kids. Pursuant to the terms set forth in the agreement, the Company obtained control of Toca Boca through the acquisition of 100% of the shares of Toca Boca for total cash consideration of $30,839. Included in the total purchase consideration of $32,098 is $833 of deferred payments and $426 of working capital adjustments. The total purchase consideration of $32,098 has been allocated to identifiable intangible assets based on their estimated fair values of $23,202 (related to brands and trademarks), $7,184 of goodwill acquired and $453 of net tangible assets acquired. The determination of the final values of the assets acquired and liabilities assumed may result in adjustments to the values presented and a corresponding adjustment to goodwill. The pro forma and actual results of operations for this acquisition have not been presented and are immaterial. The Company incurred $500 in transaction related costs which have all been Included in administrative expense in the consolidated statement of operations and comprehensive income for the year ended December 31, 2016. Assets acquired and liabilities recognized at the date of acquisition Fair value as at May 2, 2016 Assets acquired Trade and other receivables Inventories Prepaid expenses Property, plant and equipment Intangible assets Deferred tax assets Other assets Liabilities assumed Trade payables and accrued liabilities Other liabilities Fair value of identifiable net assets acquired 1,072 251 283 467 23,202 1,193 163 26,631 733 984 1,717 24,914 The trade and other receivables acquired (which principally comprised trade receivables) in this transaction with a fair value of $1,072 had gross contractual amounts of $1,072. Goodwill arising on acquisition Consideration transferred, including deferred payments Fair value of identifiable net assets acquired Goodwill arising from transaction Total 32,098 (24,914) 7,184 Goodwill arose on the acquisition of Toca Boca because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth and future market development. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. As at the date of acquisition, $7,184 of the goodwill is expected to be deductible for income tax purposes and is amortized over 15 years. 75Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 24. Business combinations (continued) Acquisition of Toca Boca and Sago Mini companies (“Toca Boca”) (continued) The consideration transferred includes $833 related to the estimated fair value of the deferred payments as at the acquisition date. The deferred payment is payable to the vendor upon the achievement of key performance indicators over a five year period. The potential undiscounted amount of all future payments the Company could be required to make under the contingent consideration arrangement is between $0 and $4,000. Net cash outflow on acquisition Consideration paid in cash Net cash outflow Total 30,839 30,839 Acquisition of assets of Editrice Giochi SRL (“EG Games”) On March 11, 2016, the Company acquired EG Games, a privately held company headquartered in Italy, pursuant to a share purchase agreement. EG Games specializes in producing and selling board games. The acquisition builds upon the Company’s substantial presence and will strengthen its position as a leader in the Games market in Europe. Pursuant to the terms set forth in the agreement, the Company obtained control of EG Games through the acquisition of 100% of the net assets of EG Games for total cash consideration of $5,000, of which $2,900 was due on closing, including an indemnity escrow amount of $435 held for 3 years after closing and $2,100 in Deferred Payments. Deferred Payments are to be paid into escrow quarterly over the next 7 years based on 6.5% of Gross Sales up to a maximum payment of $2,100 and is to be paid to the vendor on the 7th anniversary of the Closing date subject to set-off rights. In addition, the Company agreed to pay additional cash consideration of $500 if the aggregate gross sales during the five year period commencing from the acquisition date reaches a specified target. Included in the total purchase consideration of $5,111 is $1,671 relating to the estimated fair value of the deferred payments and $310 related to the estimated fair value of the additional cash consideration as at the acquisition date. The total purchase consideration has been initially allocated to identifiable intangible assets based on their estimated fair values of $1,983 (related to brands and trademarks), and $2,700 of goodwill acquired. Additionally, $428 of net tangible assets were acquired. These assets are included in the Activities, Games & Puzzles, and Fun Furniture product category, belonging to the Europe segment effective March 11, 2016. The pro forma and actual results of operations for this acquisition have not been presented and are immaterial. The Company incurred $199 in transaction related costs which have all be included in administrative expenses in the consolidated statement of operations and comprehensive income for the year-ended December 31, 2016. Assets acquired and liabilities recognized at the date of acquisition Fair value as at March 11, 2016 Assets acquired Cash Trade and other receivables Inventories Intangible assets Liabilities assumed Trade payables and accrued liabilities Fair value of identifiable net assets acquired 105 138 671 1,983 2,897 486 486 2,411 The trade and other receivables acquired (which principally comprised trade receivables) in this transaction with a fair value of $138 had gross contractual amounts of $138. 76Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 24. Business combinations (continued) Acquisition of assets of Editrice Giochi SRL (“EG Games”) (continued) Goodwill arising on acquisition Consideration transferred, including deferred payments Fair value of identifiable net assets acquired Goodwill arising from transaction Total 5,111 (2,411) 2,700 Goodwill arose on the acquisition of EG Games because the cost of the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth and future market development. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. Goodwill recognized is not expected to be deductible for income tax purposes. Net cash outflow on acquisition Consideration paid in cash Cash balances acquired Net cash outflow Total 3,144 (105) 3,039 Acquisition of assets of Etch A Sketch On February 11, 2016, the Company acquired the rights to the brands of Etch A Sketch and Doodle Sketch (“Etch A Sketch”), pursuant to an asset purchase agreement with the Ohio Art Company. The acquisition will complement the Company’s existing products and builds on its reputation for acquiring legacy brands and infusing them with unexpected innovation. The Company obtained control of Etch A Sketch through the acquisition of all brand-related patents, trademarks, and inventory for the brands for total cash consideration of $8,950, including an indemnity escrow amount of $850. In addition, the Company agreed to pay a royalty between 2-4% based on future revenues for 8 years from the date of closing up with a minimum royalty payment of $3,150 up to a maximum of $8,150. Included in the total purchase consideration of $11,074 is $2,124 related to the estimated fair value of the future royalty payments as at the acquisition date. The total purchase consideration has been initially allocated to identifiable intangible assets based on their estimated fair values of $6,790 (related to brands and trademarks), and $3,712 of goodwill acquired. Additionally, $572 of net tangible assets were acquired. These assets are included in the Activities, Games & Puzzles, and Fun Furniture product category effective February 11, 2016. The pro forma and actual results of operations for this acquisition have not been presented because they are not material. The Company incurred $57 in transaction related costs which have all been included in administrative expenses in the consolidated statement of operations and comprehensive income for the year ended December 31, 2016. Assets acquired at the date of acquisition Assets acquired Inventories Intangible assets Fair value of identifiable net assets acquired Fair value as at February 11, 2016 572 6,790 7,362 77Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 24. Business combinations (continued) Acquisition of assets of Etch A Sketch (continued) Goodwill arising on acquisition Consideration transferred, including present value of royalty payments Fair value of identifiable net assets acquired Post-closing purchase price adjustment Goodwill arising from transaction Total 11,074 (7,362) 275 3,987 Goodwill arose on the acquisition of the Etch A Sketch brand because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth and future market development. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. As at the date of acquisition, $3,987 of the goodwill is expected to be deductible for income tax purposes and is amortized at 7% declining balance. Net cash outflow on acquisition Consideration paid in cash Net cash outflow Prior year acquisitions Acquisition of Cardinal Industries Inc. Total 8,950 8,950 On October 2, 2015, the Company acquired Cardinal, a privately-held U.S. company headquartered in Long Island City, New York, pursuant to a share purchase agreement. Cardinal is a toy company specializing in producing and selling games and puzzles which complements the Company’s existing product, builds upon the Company’s substantial presence and will strengthen its position as a leader in the Games market. Pursuant to the terms set forth in the agreement, the Company obtained control of Cardinal through the acquisition of 100% of the issued and outstanding common shares of Cardinal for total cash consideration of $50,000, less an indemnity escrow of $1,250 held for one- year after closing. In addition, the Company agreed to pay an earn-out of up to an aggregate amount of $19,500 in cash over the five calendar years following the acquisition based on the achievement of certain EBITDA targets. The Cardinal acquisition was financed through the Company’s existing Credit Facility. Including the estimated fair value of future earn out payments, the total purchase consideration of $58,100 million was allocated to net tangible assets acquired based on their estimated fair value of $7,000, identifiable intangible assets (primarily related to the trademarks and customer lists) of $18,500, and $32,600 of goodwill. The fair values of the identifiable intangible assets related to trade names were based on the relief from royalty method, using Level 3 inputs within the fair value hierarchy, which included forecasted future cash flows, long-term revenue growth rates, royalty rates, and discount rates. 78Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 24. Business combinations (continued) Acquisition of Cardinal Industries Inc. (continued) Assets acquired and liabilities recognized at the date of acquisition Assets acquired Cash Trade and other receivables Inventories Prepaid expenses Intangible assets Liabilities assumed Trade payables and accrued liabilities Fair value of identifiable net assets acquired Fair value as at October 2, 2016 720 14,928 9,415 446 18,500 44,009 18,485 18,485 25,524 The trade and other receivables acquired (which principally comprised trade receivables) in this transaction with a fair value of $14,928 had gross contractual amounts of $17,551. The best estimate at the acquisition date of the contractual cash flows not expected to be collected amounted to $2,623. Goodwill arising on acquisition Consideration transferred, including estimated earn out payments Fair value of identifiable net assets acquired Goodwill arising from transaction Total 58,089 (25,524) 32,565 Goodwill arose on the acquisition of Cardinal Industries Inc. because the cost of the combination included a control premium. In addition, the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce of Cardinal. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. As at the date of acquisition, $32,565 of the goodwill was expected to be deductible for income tax purposes and was amortized over 15 years. Net cash outflow on acquisition Consideration paid in cash Less:cash balances acquired Net cash outflow Total 50,000 (720) 49,280 Impact of acquisition on the results of the Company Included in the Company’s revenue and net income for the year ended December 31, 2015 is $31,002 and $3,909, respectively, attributable to the acquisition. On a pro forma basis (unaudited), had this acquisition been completed on January 1, 2015, the Company’s total revenue and income for the year would have amounted to $969,739 and $59,069, respectively. Management considers these ‘pro-forma’ numbers to represent an approximate measure of the performance of the combined Company on an annualized basis. 79Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 25. Financial instruments and risk management Capital management Management includes the following items in its definition of capital: Capital components Short-term borrowings Non-current borrowings Total debt Issued Capital Contributed Surplus Accumulated Deficit Total capital 2016 2015 158,107 38 158,145 670,115 21,436 (408,406) 441,290 3,436 46,874 50,310 589,263 31,580 (507,921) 163,232 The Company makes adjustments to it capital based on the funds available to the Company, in order to support the operations of the business and in order to ensure that the entities in the Company will be able to continue as going concerns, while maximizing the return to stakeholders through the optimization of the debt and equity balances. The Company manages its capital structure, and makes adjustments to it in light of changes in economic conditions. In order to maintain or modify the capital structure, the Company may arrange new debt with existing or new lenders, or obtain additional financing through other means. Management reviews its capital management approach on an ongoing basis and believes that this approach is reasonable. There were no changes in the Company’s approach to capital management during the years ended December 31, 2016. The Company is subject to capital requirements under the credit facility agreement, as described in Note 15. As at December 31, 2016, the Company was in compliance with all financial covenants. Financial risk management objectives Management’s objective is to protect the Company and its subsidiaries on a consolidated basis against material economic exposures, and the variability of results from various financial risks that include foreign currency risk, interest rate risk, credit risk, and liquidity risk. Market risk Foreign currency risk Due to the nature of the Company’s international operations, it is exposed to foreign currency risk driven by fluctuations in exchange rates. Risk arises because the value of monetary assets, liabilities, revenues and expenditures arising from transactions denominated in foreign currencies may vary due to changes in exchange rates (“transaction exposures”) and because the non-US dollar denominated financial statements of the Company’s subsidiaries may vary on revaluation into the US dollar presentation currency (“translation exposures”). These exposures could impact the Company’s earnings and cash flows. The Company uses derivative financial instruments such as foreign exchange forward contracts to manage foreign currency risk. As at December 31, 2016, the Company is committed under outstanding foreign exchange contracts to purchase Canadian dollars in exchange for US dollars, representing total purchase commitments of approximately $162,777 (2015 - $41,692). 80Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 25. Financial instruments and risk management (continued) The consolidated statements of financial position include the following amounts (by denomination) presented in United States dollars: Financial Assets United States Dollars Canadian Dollars Euros Pound Peso Total Assets Financial Liabilities United States dollars Canadian dollars Euros Pound Peso Total Liabilities 2016 2015 161,090 121,579 10,027 91,696 39,598 21,266 8,306 31,026 5,154 14,266 323,677 180,331 293,838 58,687 8,183 7,366 2,537 164,795 6,945 12,260 1,524 2,715 370,611 188,239 Foreign currency risk - sensitivity analysis The Company is mainly exposed to the Canadian dollar and the Euro. A sensitivity rate of 5% is used when reporting foreign currency risk internally to key management personnel, and represents management’s assessment of the reasonably possible change in foreign exchange rates to which the Company is exposed. For the year ended December 31, 2016, a 5% strengthening of the above currencies against the United States dollar would have resulted in a decrease to net assets of $4,086 (2015 - an decrease to net assets of $1,681). The sensitivity analysis includes only outstanding foreign currency denominated monetary assets and liabilities, and adjusts their translation at the reporting period for a 5% change in foreign currency rates. Interest rate risk - management Interest rate risk is the risk that the Company’s financial assets and liabilities will increase or decrease in value due to a change in interest rates. The Company is exposed to interest rate risk as its loan facility bears interest at a variable rate. Interest rate risk - sensitivity analysis The Company is exposed to interest rate risk on financial instruments. A sensitivity rate of 50 basis points is used when reporting interest rate risk internally to key management personnel, and represents management’s assessment of the reasonably possible change in interest rates to which the Company is exposed. For floating rate liabilities, the analysis below assumes the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. For the year ended December 31, 2016, with all other variables held constant, a 50 basis point increase in interest rates would have resulted in a decrease to net income for the year of $600 (2015 - a decrease to net income of $178). This is mainly attributable to the Company’s exposure to interest rate on its variable rate borrowings. 81Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 25. Financial instruments and risk management (continued) Credit risk As the Company usually grants credit to customers on an unsecured basis, credit risk arises from the possibility that customers may experience financial difficulty and may be unable to fulfill their financial obligations. This risk is managed through the establishment of credit limits and payment terms based on an evaluation of the customer’s financial performance, ability to generate cash, financing availability, and liquidity status. These factors are reviewed at least annually, with more frequent reviews performed as necessary. In addition, the Company uses a variety of financial arrangements to ensure collectability of trade receivables, including requiring letters of credit, cash in advance of shipment and through the purchase of insurance on material customer receivables. As at December 31, 2016, approximately 43% (2015 - 39%) of the Company’s trade receivable are from three major retail customers, and these three major customers represent approximately 52% of gross product sales for the year ended December 31, 2016 (2015 - 57%). Substantially all of these customers were covered by credit insurance. The Company mitigates credit risk on its cash balance by ensuring all deposits are with financial institutions with high credit-ratings assigned by international credit-rating agencies. Liquidity risk The following details the Company’s remaining contractual maturities for its financial liabilities with contractual repayment periods. The tables reflect the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay, including both interest and principal cash flows. To the extent that interest rates are floating rate, the undiscounted amount is derived from interest rate curves at the end of the reporting period. The contractual maturity is based on the earliest date on which the Company may be required to pay. Trade payables and other liabilities Other long-term liabilities Loans and borrowings Provisions Total as at December 31 Trade payables and other liabilities Other long-term liabilities Loan and borrowings Provisions Total as at December 31 Financing facilities Secured bank loan facilities Amount used Amount unused Total as at December 31 Less than 1 year 1 year to Greater than 5 years Greater than 5 years 2016 Total 206,771 — 158,107 26,454 391,332 — 110 38 12,025 12,173 — — — — — 206,771 110 158,145 38,479 403,505 Less than 1 year 1 year to Greater than 5 years Greater than 5 years 2015 Total 134,717 — 3,436 10,115 148,268 — 225 46,874 8,458 55,557 — — — — — 134,717 225 50,310 18,573 203,825 2016 2015 160,831 343,450 504,281 50,136 227,764 277,900 82Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 25. Financial instruments and risk management (continued) Fair value measurements With the exception of foreign exchange forward contracts, the Company does not currently record any financial assets or liabilities at fair value in the financial statements. The carrying amounts of those financial assets and liabilities approximate their fair values. The fair value of foreign exchange forward contracts represented a liability as at December 31, 2016 of $78 (2015 - $755) recorded in other liabilities. These fair values are categorized within Level 2 of the fair value hierarchy. The fair value of foreign exchange contracts is estimated based on forward exchange rates observable at the end of the reporting period and contract forward rates, discounted at a rate that reflects the credit risk of various counterparties. 26. Segment information Spin Master’s portfolio includes children’s products, brands and entertainment properties which are grouped into five major product categories as follows: (i) Activities, games & puzzles and fun furniture (ii) Remote control and interactive characters (iii) Boys action and high-tech construction (iv) Pre-school and girls (v) Outdoor Information reported to the Chief Operating Decision Maker (“CODM”) for the purposes of resource allocation and assessment of segment performance focuses on geographical areas rather than by product category. The directors of the Company have chosen to organize the Company around the following operating segments: (i) North America, (ii) Europe, and (iii) Rest of World. Factors considered in determining the operating segments include the nature of the Company’s business activities, the management structure directly accountable to the CODM, availability of discrete financial information, and strategic priorities within the organizational structure. Segment revenue and results The following table shows of the Company’s revenue and results from continuing operations by reportable segment. Revenue by segment North America Europe Rest of world Gross product sales Other revenue and sales allowances Total consolidated revenue Segment income North America Europe Rest of world Total segment income Corporate and other Net income before taxes 2016 2015 847,278 271,130 136,150 1,254,558 (100,104) 1,154,454 65,022 65,455 44,314 174,791 (36,912) 137,879 692,242 183,786 106,665 982,693 (103,287) 879,406 22,454 37,408 33,442 93,304 (13,671) 79,633 Revenues for North America include revenues attributable to Canada of $31,001 and $54,154, for 2016 and 2015, respectively. Segment revenue reported above represents revenue generated from external customers. There were no inter- segment sales in the current year (2015 - $nil). The Company does not include sales adjustments such as trade discounts and other allowances in the calculation of segment revenues (“referred to as gross product sales”). 83Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 26. Segment information (continued) The accounting policies of the reportable segments are the same as the Company’s accounting policies described in Note 2. Segment income represents income before tax earned by each segment without allocation of other income and expenses, foreign exchange loss (gain), and finance costs. This is the measure reported to the CODM for the purposes of resource allocation and assessment of segment performance. Segment assets As at December 31 Assets North America Europe Rest of world Total segment assets Corporate and other Total consolidated assets A breakdown of non-current assets by location of assets are detailed as follows: As at December 31 Non-current assets North America Europe Rest of world Total segment non-current assets Corporate and other Total consolidated non-current assets 2016 2015 571,267 105,561 37,596 714,424 39,008 753,432 228,999 60,304 20,537 309,840 78,443 388,283 2016 2015 140,880 10,519 6,042 157,441 122,349 279,790 54,939 4,490 4,529 63,958 78,524 142,482 Non-current assets for North America include non-current assets attributable to Canada of $68,902 and $50,744 for the years ending December 31, 2016 and December 31, 2015 respectively. Segment liabilities As at December 31 Liabilities North America Europe Rest of world Total segment liabilities Corporate and other Total consolidated liabilities 2016 2015 220,317 25,116 15,518 260,951 166,802 427,753 192,236 17,977 8,391 218,604 13,360 231,964 For the purposes of monitoring segment performance and allocating resources between segments: • • all assets are allocated to reportable segments other than deferred tax assets, other long-term assets and computer software. Goodwill is allocated to cash generating units as described in Note 13. Assets used jointly by reportable segments are allocated on the basis of the revenues earned by individual reportable segments; and all liabilities are allocated to reportable segments other than royalties payable included within trade payables and accrued liabilities, deferred tax liabilities and preferred shares. Liabilities for which reportable segments are jointly liable are allocated in proportion to segment assets. 84Spin Master Corp. Consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 26. Segment information (continued) Depreciation and amortization by segment Year ended December 31 Depreciation and amortization by segment North America Europe Rest of world Total segment depreciation Corporate and other Total consolidated depreciation 2016 2015 24,193 3,100 1,808 29,101 1,389 30,490 20,229 1,539 862 22,630 247 22,877 In addition to the depreciation and amortization reported above, impairment losses of $265 were recognized in respect of property, plant and equipment and intangible assets. These impairment losses were attributable to the following reportable segments: Year ended December 31 Impairment losses recognized for the year North America Europe Rest of world Total impairment losses Revenue from major product categories 2016 — — 265 265 2015 1,406 205 107 1,718 The following is an analysis of the Company’s worldwide revenues from continuing operations based on its major product categories: Year ended December 31 Revenue from product categories Activities, games & puzzles, & fun furniture Remote control & interactive characters Boys action & high-tech construction Pre-school & girls Outdoor Gross product sales Other revenues and sales allowances Total revenues Major customers 2016 2015 337,768 282,777 154,454 460,484 19,075 1,254,558 (100,104) 1,154,454 231,433 233,294 192,304 325,662 — 982,693 (103,287) 879,406 Sales to the Company’s largest customers accounted for 52% and 57% of consolidated gross product sales for 2016 and 2015 respectively, as follows: Year ended December 31 Revenue Wal-Mart Toys “R” Us Target Total 2016 2015 303,952 193,343 154,119 651,414 241,532 164,585 157,684 563,801 85Shareholder Information Head Office 121 Bloor Street East Toronto, ON M4W 3M5 Toronto Stock Exchange Listing Trading symbol: TOY Securities listed: Subordinate Voting Shares Registrar and Transfer Agent Computershare Investor Services Inc. 100 University Avenue, 8th Floor Toronto, ON M5J 2Y1 Auditors Deloitte LLP 181 Bay Street, Suite 1400 Toronto, ON M5J 2V1 Annual Meeting of Shareholders May 12, 2017 Blake, Cassels & Graydon LLP 199 Bay Street, Suite 4000 Toronto, ON M5L 1A9 Investor Contact Information Email: investor.relations@spinmaster.com Board of Directors Executive Officers Anton Rabie, Chairman John Cassaday, Lead Director Jeffrey I. Cohen Ben Gadbois Ronnen Harary Dina Howell Todd Tappin Ben Varadi Charles Winograd (From Left to Right) Ronnen Harary, Co-Chief Executive Officer Anton Rabie, Co-Chief Executive Officer Adam Beder, Executive Vice President of Global Licensing and Business Affairs Mark Segal, Executive Vice President and Chief Financial Officer Christopher Beardall, Executive Vice President of Global Sales Ben Gadbois, Global President & Chief Operating Officer Ben Varadi, Executive Vice President and Chief Creative Officer Bill Hess, Executive Vice President of Operations & Chief Information Officer Christopher Harrs, Executive Vice President and General Counsel, Corporate Secretary Nancy Zwiers, Executive Vice President and Chief Marketing Officer Forward-Looking Statements Certain statements, other than statements of historical fact, contained in this document constitute “forward-looking information” within the meaning of certain securities laws, including the Securities Act (Ontario). Forward-looking statements include, without limitation, statements with respect to: our growth strategies and objectives; innovation; development of new properties; international sales expansion; acquisitions; partnering with others; new products and entertainment properties to be introduced in 2017 and beyond. The words “believe”, “expects”, “focus”, “plans”, “potential”, “strategy” or “vision”, or variations of such words and phrases or statements that certain future conditions, actions, events or results “can”, “will” or “would”, or negative versions thereof, “continue” or “achieve”, and other similar expressions, frequently identify forward-looking statements. Forward-looking statements are necessarily based upon our perception of historical trends, current conditions and expected future developments, as well as a number of specific factors and assumptions that, while considered reasonable by us as of the date on which the statements are made in this document, are inherently subject to significant uncertainties and contingencies which could result in them being incorrect. The material factors and assumptions used to develop the forward-looking information include, but are not limited to: the expanded use of advanced technology, robotics and innovation the Company applies to its products will have a level of success consistent with its past experiences; the Company will continue to successfully secure broader licenses from third parties for major entertainment properties consistent with past practices; the expansion of sales and marketing offices in new markets will increase the sales of products in that territory; the Company will be able to successfully identify and integrate strategic acquisition opportunities; our ability of to maintain our distribution capabilities; our ability to recognize and capitalize on opportunities earlier than our competitors; our ability to continue to build and maintain strong, collaborative relationships; our status as a preferred collaborator; our culture and business structure will support our growth; our current business strategies will continue to be desirable on an international platform; the ability to expand our portfolio of owned branded intellectual property and successfully license it to third parties; the expanded use of advanced technology and robotics in our products; the increased access of entertainment content on mobile platforms; fragmentation of the market creates acquisition opportunities; our ability to maintain our relationships with employees, suppliers and retailers; our ability to continue to attract qualified personnel to support our development requirements; the continued involvement of the founders; and that the risk factors noted below, collectively, do not have a material impact on us. By its nature, forward-looking information is subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, and that objectives, strategic goals and priorities will not be achieved. Known and unknown risk factors, many of which are beyond our control, could cause actual results to differ materially from the forward-looking information in this document. Such factors include, without limitation, the following, which are discussed in greater detail in the “Risk Factors” section of our Annual Information Form for the year ended December 31, 2016: creation of original products, brands and entertainment properties; industry competition; failure of third-party owners to maintain or enforce IP licenses; failure to market or advertise products; dependence on the Company’s founders and other key personnel; product line growth; failure to protect or enforce the Company’s IP rights; failure to realize the full benefit of the Company’s licenses; relationships with inventors and entertainment content collaborators; future acquisitions, mergers or dispositions; dependence on third-party manufacturers and distributors; sales concentration with retailers; general economic conditions; failure to leverage the Company’s portfolio of brands and products across entertainment and media platforms; broadcast entertainment industry conditions; seasonality; international sales growth strategy; uncertainty as a result of the recent U.S. presidential election; production and sale of private-label toys; product recalls, repairs, product liability claims and the absence or cost of insurance; litigation; implementation and timing of launches; delivery of raw materials, parts and components from suppliers or increase in the price of supplies; safety procedures; negative publicity and product reviews; interest rates and the availability of credit; system of internal controls; tax and regulatory compliance; withholding obligations with respect to equity participation arrangements; laws and government regulations; currency exchange rates; website system failures; electronic data compromises; failure to stay competitive amongst an increasing array of technology and entertainment offerings; the increase in technologically advanced or sophisticated digital and smart technology products; and failure to stay competitive given the evolution of gaming. These risk factors are not intended to represent a complete list of the factors that could affect us and investors are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Forward-looking statements are provided for the purpose of providing information about our expectations and plans relating to the future. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, or to explain any material difference between subsequent actual events and such forward-looking statements, except to the extent required by applicable law. All forward-looking statements in this document are qualified by these cautionary statements. WWW.SPINMASTER.COM 121 Bloor Street East, Toronto, ON M4W 3M5 Canada • Tel. (416) 364-6002 Fax (416) 364-5097 

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