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