WWW.SPINMASTER.COM
SPIN MASTER CORP.
2017 ANNUAL REPORT
GROWTH STRATEGIES
INNOVATE ACROSS THE PORTFOLIO OF
BRANDS AND BUSINESS SEGMENTS
DEVELOP EVERGREEN GLOBAL
ENTERTAINMENT PROPERTIES
• Leverage competitive strengths
to build a robust pipeline in all
business segments
• 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
• Capitalize on success of current
entertainment properties
• Develop at least one
new show per year
• Strategically relaunch
properties to capitalize
on value of owned
content library
b
INCREASE SALES IN INTERNATIONAL
DEVELOPING AND EMERGING MARKETS
LEVERAGE GLOBAL PLATFORM
THROUGH STRATEGIC ACQUISITIONS
• Fragmented industry with opportunities for consolidation
• Strong balance sheet with financial flexibility
• Optimize international distribution
network
• Strategically tailor product offering to
local international markets
• Increase proportion of sales outside
of North America to 40% in the
medium term
FINANCIAL INFORMATION
(US$ millions)
+30.2%
+30.2%
GROSS PRODUCT SALES1
GROSS PRODUCT SALES1
CAGR 2013–2017
CAGR 2013–2017
$1,657
$1,657
$1,255
$1,255
+53.2%
+53.2%
ADJUSTED EBITDA1
ADJUSTED EBITDA1
CAGR 2013–2017
CAGR 2013–2017
+66.0%
+66.0%
ADJUSTED NET INCOME1
ADJUSTED NET INCOME1
CAGR 2013–2017
CAGR 2013–2017
$292
$292
$983
$983
$812
$812
$577
$577
$206
$206
$160
$160
$112
$112
$53
$53
$173
$173
$120
$120
$99
$99
$66
$66
$23
$23
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
1. Non-IFRS financial measures. 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 within Spin Master’s public filings 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).
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
8 Adelaide Street West, Suite 200
Toronto, ON M5H 0A9
Annual Meeting of Shareholders
May 9, 2018
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
John Cassaday, Lead Director 2017
Jeffrey I. Cohen
Ben Gadbois
Ronnen Harary
Dina Howell
Anton Rabie
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 and Chief Operating
Officer
Ben Varadi
Executive Vice President and Chief
Creative Officer
Bill Hess
Executive Vice President of Operations
and 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 evergreen global entertainment properties; international sales expansion; acquisitions; partnering with others; new products and entertainment properties to be introduced in 2018 and beyond. The words “believe”, “focus”, “expectations”, “plan”, “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”, “achieve”, or “execute” 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 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, 2017: 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; 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.
LETTER TO SHAREHOLDERS
2017 was another year of significant growth for Spin Master, highlighted by strong revenue
and EBITDA growth and the expansion of both our core and emerging brands. We executed well
against our four growth strategies which include: innovating our core portfolio of products;
creating successful global entertainment properties; increasing international sales; and making
strategic, accretive acquisitions. These strategies continue to be drivers of our growth and are
the primary focus of Spin Master’s management team.
When we combine our strengths with
those of our partners — including
inventors, retailers, licensors,
broadcasters, and animation studios —
we create SIGNIFICANT value
Grounded in our dedicated vision for growth, we maintained and extended our
position as the fourth largest toy manufacturer in the US1 while navigating through a
challenging year for the toy industry. The announcement of the Toys “R” Us bankruptcy
had a dampening effect on the industry; however we maintained a conservative financial
profile and led with innovative products that topped retailer and consumer wish lists.
We report Gross Product Sales2 in five business segments: (1) Remote Control &
Interactive Characters, emphasizing innovative, adrenalin-charged experiences as
well as leading-edge robotics; (2) Boys Action and High-Tech Construction, delivering
high-quality products, including popular entertainment franchises, with engineering
and robotics play; (3) Activities, Games & Puzzles and Fun Furniture, a wide range of
products with global appeal, including innovative owned intellectual property as well
as licensed brands; (4) Pre-School and Girls, products based on our internally created
entertainment content as well as focused on specific girls’ play patterns and trends;
and (5) Outdoor, a diverse portfolio of innovative toys, floats and sporting goods for
the backyard, pool and beach.
3
We reported Gross Product Sales2 of $1,657 million, up 32% from 2016. Over the past
10 years, our Gross Product Sales2 have increased at a compound annual growth rate of
13%. In 2017, we also reported year-over-year increases in Revenue (up 34%), Gross Profit
(up 34%), Adjusted EBITDA2 (up 42%), Adjusted Net Income2 (up 44%), and Adjusted EPS
(up 43%). Free Cash Flow2 increased from $118.7 million in 2016 to $193.4 million in 2017.
All of these metrics were at record high levels in 2017.
We maintain a capital-light business model that emphasizes variable costs over
fixed costs. We do not own any material manufacturing assets, nor do we own any
warehousing facilities or animation studios. Our asset light structure enhances our free
cash flow generation potential, allowing us to focus on the areas that add the most value
and also gives us flexibility in securing the best specialized partners, thereby prioritizing
the quality of the content and products we produce. From a manufacturing perspective,
we have increasingly diversified our supply base to qualified low cost producers where it
is most advantageous.
As our sales grew in 2017, we stayed focused on our efforts to expand gross margins
through several initiatives, including: a product mix that favours our internally created
intellectual property, which also allows us to generate alternate high-margin revenue
streams; a goal of lowering sales allowances; a disciplined approach to operating leverage;
and productivity programs for strategic sourcing, volume rebates and reengineering.
Looking ahead, we still see opportunities for gross margin expansion.
1. The NPD Group/Retail Tracking Services 2. Non-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 (continued)
4
Our strong profitability and free cash flow allows us to reinvest cash in our four growth strategies
as well as investing in our people and processes to exploit future opportunities. What follows
is a review of the factors in 2017 that allowed us to advance each of our growth strategies and
deliver strong financial results.
INNOVATION
Success in the toy industry demands constant innovation. Our ability to innovate has, over the
years, become one of our core competencies and a key competitive advantage. Our global
internal R&D, engineering and design teams, complemented by our global 3rd party inventor
network, consistently create meaningful innovation for our consumers. The sustainability
of our innovation is achieved, in part, from our rolling 36-month brand innovation pipeline.
We regularly review our 36-month product pipeline to identify opportunities for innovation,
capitalize on growing trends, fill gaps in the marketplace and maintain diversification.
In 2017, PAW Patrol and Hatchimals continued to grow globally, Luvabella was a strong new
entry in the doll category and the launch of Soggy Doggy brought new interactivity to board
games. We also expanded the Cool Maker line, and for the first time in over 50 years, introduced
two innovative new Etch A Sketch products following our acquisition of the line in 2016.
Hatchimals was a global phenomenon and category leader in 2017. Following its breakout
in 2016, we seized the opportunity to grow Hatchimals from one product into a brand,
supported by products at multiple price points and play patterns, as well as a full licensing and
merchandising program. We extended the brand into lower price points and tapped into the
high demand collectible trend with Hatchimals Colleggtibles. We introduced further innovation
with Hatchimals Surprise, the hatching of twins that we launched on our second annual global
Hatchimals Day on October 6, 2017.
In any highly competitive toy category, it is a challenge to be set apart from the competition, let
alone breakout as an award-winning, “must-have” toy. Luvabella did just that in the doll super
category in 2017. With advanced animatronic technology providing over 500 lifelike expressions
and interactive responses, Luvabella is revolutionizing the traditional baby doll. Luvabella
exemplifies our quest for opportunities in the market to introduce disruptive innovation to
classic play patterns.
Moonlite was launched in late 2017 and is quickly being recognized for its transformative
innovation by merging traditional storybooks with modern technology. Inspired by shadow
play, this children’s story book projector attaches to a mobile phone and brings story time to life,
projecting popular children’s books onto the ceiling or wall.
Our commitment to innovation is also evident in the dynamic approach we took to digital and
experiential marketing campaigns for 2017. Recognizing that media behaviours are changing
and kids are spending more time on social media, using apps and accessing content online, we
raised brand awareness and engaged consumers in new and inspired ways. The following are
some highlights of our innovative marketing campaigns:
• Our second annual Hatchimals Day set social media ablaze with Hatchimals being
mentioned, on average, every 4 minutes across all social media in the US;
• PAW Patrol engaged fans through high-impact experiences, including: the PAW Patrol
Road Tour, with hundreds of thousands lining up for the chance to board the PAW Patroller
and interact with their favourite characters; the live stage show; and giant PAW characters
featured in the Macy’s Thanksgiving Day parade; and
• We launched a national Etch A Sketch day in conjunction with the release of a creative App
bringing the Etch A Sketch experience to mobile devices.
We will continue to innovate in our product development and marketing initiatives as this drives
our product pipeline and builds our brands.
DEVELOP EVERGREEN GLOBAL ENTERTAINMENT
PROPERTIES
We are focusing on developing our own entertainment content as we see opportunities
for increased consumer engagement, extended product life, better margins and the ability
to participate in incremental royalty streams. We partner with world-class content creators,
animation studios and talent to develop entertainment content that is complemented by
and developed in conjunction with the physical toy lines. Children’s programming, especially
animation, travels across geographies, cultures and ethnicities very easily. Many children’s
properties are based on animals or fictitious characters, increasing their appeal to all viewers.
5
We had success in 2017 with our two pre-school properties: PAW Patrol and Rusty Rivets. In 2017,
PAW Patrol was the number one property in the infant/toddler/pre-school toy super category
in the US as reported by NPD. The property is now in its fifth season in the US & Canada, and in
earlier seasons internationally. The combination of original and themed content, an integrated
toy line, high television ratings and a strong distribution and licensing partner in Nickelodeon,
is fuelling growth in global demand for PAW Patrol. We are also pleased with the success of
Rusty Rivets, our newest pre-school entertainment property, currently in its second season on
Nickelodeon. Rusty Rivets follows ten-year old inventor Rusty and his sidekick Ruby, as they
improvise and build their way through obstacles and challenges. Rusty Rivets is consistently
rating in the top three for pre-school boys’ properties and the full toy line will be rolled out
globally in 2018.
Telling stories and creating engaging and aspirational characters that resonate with kids around
the world is the focus of our entertainment division for 2018 and beyond with a number of
exciting properties under development in the boys’ action and girls’ category, including the
launch of Abby Hatcher in late 2018 followed by the global relaunch of Bakugan in 2019.
For further information about our 2018 product lines and entertainment content, please see
the Business Segment Report available at www.spinmaster.com/investor-relations.php.
INTERNATIONAL EXPANSION
In 2017, we actively pursued our objective of growing sales in international markets, resulting
in Gross Product Sales2 outside North America increasing to $574 million in 2017 from $407
million in 2016. We are making solid progress toward our medium-term goal of increasing
our international Gross Product Sales2 to 40% of our Gross Product Sales2. We remain under-
represented compared to the industry as a whole and that represents an opportunity for growth.
International sales in 2017 grew to 34.7% of Gross Product Sales2 compared to 32.5% in 2016,
as a result of expanding our distribution networks, increasing our internal sales capabilities
in existing offices, widening our product offering, and executing effective global marketing
campaigns. Our global content as well as our innovative product offerings are opening new
retail opportunities and strengthening our existing customer relationships.
LETTER TO SHAREHOLDERS (continued)
6
2017 was the first full year of direct sales in Australia and Central Eastern Europe (Poland,
Romania, Czech Republic, Hungary and Slovakia) following the conversion of these markets
from 3rd party distribution to direct sales in late 2016. The return on investment in converting a
market is strong and we performed well above our internal expectations in these geographies.
We plan to selectively convert 3rd party distributor markets to direct sales where it makes sense
strategically for us to do so.
We also began selling our products in China in July 2017. Our go-to-market strategy was two
pronged: selling directly to consumers via e-commerce through Alibaba/T-Mall, and through
a distributor for sales into the bricks and mortar channel. We were selective about the product
lines we introduced into China, focusing on a few brands with global appeal led by PAW Patrol.
Our results, while still immaterial, far exceeded our internal expectations and we believe we have
built a solid long-term foundation for future growth in China.
ACQUISITIONS
We acquired several businesses in 2017, further diversifying our product line and leveraging our
global footprint.
• Marbles consists primarily of high-quality games and logic puzzles that promote brain
development and will add to the recurring revenue that underlies our Activities,
Games & Puzzles and Fun Furniture business segment. We are increasing Marbles
sales across speciality and mass channels, including international where there was little
penetration before.
• The outdoor flying disks and sports toys line from Aerobie was a natural fit in the Outdoor
category we established through our 2016 acquisition of Swimways. We see opportunities
to grow the business through increased global sales and distribution and to increase
margins by leveraging our strategic productivity programs.
• Perplexus, a 3-D ball-in-a-maze puzzle, is a brand we have successfully distributed for several
years and in December 2017 we acquired the global intellectual property and distribution
rights. Securing permanent control of this core brand was important strategically. Beyond
the immediate profit margin we gain by cutting our distributor costing, we are now able
to leverage our productivity programs for strategic sourcing to further increase our gross
margin and profitability. Owning Perplexus gives us the freedom to do what we do best:
infuse the line with new innovation. We plan to expand the brand to include additional
single play puzzles.
GIVING BACK
At Spin Master, we are passionate about delivering inspiration, imagination and joy to children
around the world. We created The Toy Movement in 2013 as a way to ensure that children are
provided with the opportunity to play, learn and grow regardless of their circumstances. Since
its inception, The Toy Movement has distributed more than 250,000 toys to children living
in troubled parts of the world. In 2017, we completed missions to Mexico, South Africa and
Nicaragua. In 2018, we are launching a mission in Iraq and we are committing to making a
difference in the lives of 500,000 children around the world that have been hit hard by poverty
and war.
LOOKING AHEAD
In 2018, we will continue execute against our core growth strategies. We will focus on gaining
competitive advantage and driving shareholder value creation by innovating throughout our
business segments, building entertainment franchises, leveraging our global platform to expand
sales internationally, and strategically assessing quality accretive acquisition opportunities as
they may arise. As we grow, we will also continue to build an appropriate internal platform to
support growth, with meaningful investments in technology and our people.
We are very excited about our recent acquisition of Gund. Gund is a heritage brand with 120-year-
old roots in the plush business. Gund products are highly emotional, trusted purchases and
many kids keep their Gund toys for decades. With the acquisition, we will now bring together
Gund’s deep expertise in plush and our ability to innovate and scale internationally; it will also
allow us to build a stable platform for expansion into the infant toy and specialty gift categories.
As part of our corporate governance program, the chairmanship of Spin Master is transferring
from Anton Rabie, who served as Chair from 2015 through the end of 2017, to Ronnen Harary.
7
On behalf of the board and management team, we thank you for your continued support of
Spin Master as we strive to build one of the world’s great children’s entertainment companies.
Anton Rabie
Chair 2017 and Co-CEO
Ronnen Harary
Director and Co-CEO
John Cassaday
Lead Director 2017
2017 Annual Report
Management’s Discussion and Analysis of Financial Results 1
Independent Auditor’s Report 40
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 and twelve months ended December 31, 2017
The following Management’s Discussion and Analysis (“MD&A”) for Spin Master Corp. (“Spin Master” or the
“Company”) is dated March 7, 2018 and provides information concerning the Company’s financial condition and
financial performance for the year ended December 31, 2017, and the three months ended December 31, 2017,
(“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 for the year ended
December 31, 2017 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 forward looking statements that involve risks and
uncertainties. See the “Forward Looking Statements”, “Financial Risk Management” and “Risks Relating to Spin
Master’s Business” sections of this MD&A for a discussion of the uncertainties, risks and assumptions associated
with those statements. Actual results may differ materially from those discussed in the forward looking statements
as a result of various factors, including those described in the “Risks Relating to Spin Master’s Business” section
and elsewhere in this MD&A.
BASIS OF PRESENTATION
The 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 in the “Non-IFRS Financial Measures” section of this MD&A.
All financial information is presented in United States dollars ("$", "dollars" and "USD") and has been rounded to
the nearest thousand, except per share amounts and where 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 $879,406 in 2015 to $1,551,324 in 2017. Over the same
period, Gross Product Sales (a non-IFRS measure) have increased from $982,693 to $1,657,028, a 29.9%
compound annual growth rate. The Company’s Gross Product Sales have grown at a 13.0% 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 $800,456 in 2017 (representing 51.6% of revenue) and
Adjusted EBITDA (a non-IFRS measure) of $292,193, or 18.8% of revenue, in 2017.
Spin Master’s principal strategies to drive 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 three geographic segments: North America, comprised of the U.S. and
Canada; Europe, comprised of the UK, France, Italy, the Netherlands, Germany, Austria, Switzerland, Belgium,
Luxembourg, Slovakia and Poland; and the Rest of World, comprised of Mexico and all other areas of the world
serviced by Spin Master’s third 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 High Tech Construction; (4) Pre School and Girls and (5) Outdoor.
Selected Financial Information
The following table provides selected historical information and other data of the Company which should be read
in conjunction with the financial statements of the Company.
(all amounts in USD 000's, except percentages)
Earnings Results
Gross Product Sales (1) By Segment
Activities, Games and 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 expenses
Other expenses (income)
Foreign exchange (gain) loss
Finance costs
Income before income tax expense
Income tax expense
Net income
Net income attributable to:
Owners of the Company
Non-Controlling interests
Net income
Note:
1) See "Non-IFRS Financial Measures"
Year ended December 31
2017
2016
2015
365,378
593,355
112,102
493,069
93,124
337,768
282,777
154,454
460,484
19,075
1,657,028
1,254,558
85,792
47,940
231,433
233,294
192,304
325,662
—
982,693
19,217
1,742,820
1,302,498
1,001,910
191,496
148,044
1,551,324
1,154,454
750,868
800,456
557,712
596,742
122,504
879,406
420,486
458,920
51.6%
51.7%
52.2%
312,186
262,066
6,700
(11,370)
10,445
220,429
59,363
161,066
161,066
—
161,066
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
2 Net Earnings from operations
(all amounts in USD 000's, except for EPS and percentages)
Year ended December 31
2017
2016
2015
Net income attributable to Owners of the Company
161,066
99,515
43,213
Earnings per share attributable to common shareholders (3)
Basic and diluted EPS
$
1.58
$
0.99
$
0.48
Other Financial Data
EBITDA (1)
Adjusted EBITDA (1)
Adjusted EBITDA Margin
Adjusted Net Income (1)
275,782
292,192
176,970
109,049
205,511
160,449
18.8%
17.8%
18.2%
172,997
120,115
98,609
Adjusted Net Income attributable to Owners of the Company (1)
172,997
120,115
94,748
Adjusted Earnings Per Share (1) (3)
Adjusted basic and diluted EPS (1)
Balance Sheet and Cash Flow Data
Cash
Total assets
$
1.70
$
1.19
$
1.04
117,262
938,385
99,416
45,713
775,596
388,283
Total non - current liabilities
13,810
18,584
56,749
Loans and borrowings
Loans from related parties
Total debt
Net Debt (2)
531
158,145
50,310
—
—
531
158,145
(116,731)
58,729
40
50,350
4,637
Total shareholders' equity
500,082
325,679
156,319
Cash provided by operating activities
Cash used in investing activities
Cash (used in) provided by financing activities
267,405
73,038
55,639
(81,598)
(172,273)
(93,573)
(161,485)
155,467
(11,541)
Notes:
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, 2017, compared to the same period in 2016:
(all amounts in USD 000's, except per share)
• Revenue increased by 30.3% from $338,377 to $440,863 in 2017. In Constant Currency terms (a
non-IFRS measure), revenue increased by 27.6%.
• Gross profit as a percentage of revenue was 51.9%, an increase of 1.1% from 50.8%.
• Net income was $20,040 or $0.21 per share compared to a net income of $2,727 or $0.03 per share.
• Adjusted EBITDA (a non-IFRS measure) was $47,343 or 10.7% of revenue, compared to $22,888
or 6.8% of revenue.
• On November 30, 2017, the Company acquired certain assets related to the Perplexus brand, from
Michael McGinnis, Klitsner Industrial Design Group and Busy Life LLC., for approximately
$9,000. Spin Master has distributed Perplexus since 2013 and with this recent transaction, Spin
Master will now own the global intellectual property rights to the Perplexus brand. Perplexus is included
in the Activities, Games and Puzzles and Fun Furniture business segment.
Highlights for the twelve month period ended December 31, 2017, compared to the same period in 2016:
(all amounts in USD 000's, except per share)
• Revenue increased by 34.4% to $1,551,324 from $1,154,454. In Constant Currency terms (a non-
IFRS measure), revenue increased by 33.7%.
• Gross profit as a percentage of revenue was 51.6%, a decrease of 0.1% from 51.7%.
• Net income was $161,066 or $1.58 per share compared to $99,515 or $0.99 per share.
• Adjusted EBITDA was $292,192 or 18.8% of revenue, compared to $205,511 or 17.8% of revenue.
• On April 28, 2017, Spin Master acquired certain assets of Marbles, a manufacturer of brain-building
and high-quality games for approximately $4,700. The purchase consideration was funded from
internal cash resources. The Marbles portfolio is included in the Activities, Games and Puzzles and
Fun Furniture business segment.
• On May 24, 2017, the three founders of the Company completed a public offering of 3,681,000
subordinate voting shares of the Company at a price of Canadian Dollars ("CDN") CDN$40.75 (USD
$30.21) per share, for aggregate gross proceeds to the selling shareholders of CDN$150,000 (USD
$111,193). To satisfy the sale, the selling shareholders converted in aggregate 3,861,000 multiple
voting shares into subordinate voting shares on a one-for-one basis. The Company did not receive
any proceeds from the sale of subordinate voting shares associated with this offering.
• On July 28, 2017, the Company acquired certain assets of Aerobie Inc., a leading manufacturer of
outdoor flying disks and sports toys, for $10,700. The purchase consideration was financed from
internal cash resources. The Aerobie portfolio is managed by Swimways as part of the Coop family
of outdoor leisure products and is reported in the Outdoor business segment. Aerobie was founded
in Palo Alto, CA in 1984 and focuses on creating high performance flying toys, resulting in the ground-
breaking flying ring format. The Aerobie portfolio of flying discs includes the Pro Ring, Superdisc and
Sprint Ring and the Orbiter Boomerang.
• On September 18, 2017, Toys "R" Us Inc. ("TRU") announced that certain of its U.S. subsidiaries
have voluntarily filed for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court
for the Eastern District of Virginia in Richmond, VA. In addition, TRU's Canadian subsidiary filed to
seek protection in parallel proceedings under the CCAA in the Ontario Superior Court of Justice.
TRU's operations outside of the U.S. and Canada, including its approximately 255 licensed stores
and joint venture partnership in Asia, which are separate entities, were not part of the Chapter 11
filing and CCAA proceedings. TRU has subsequently received a commitment for debtor-in-possession
(“DIP”) financing. TRU's Chapter 11 and CCAA filings have resulted in a non-recurring bad debt
expense of $5,400 for the year ended December 31, 2017. This amount represents the co-insurance
portion of the claim under various credit insurance policies in place for the pre-petition receivables.
4 Subsequent event
On February 28, 2018, the Company signed an agreement to acquire certain assets relating to the Gund line of
business from Enesco LLC for $79,100. Gund is a manufacturer and distributor of plush toys and is best known
for its’ line of teddy bears. Established in 1898, Gund has a 120-year history as a market leader and toy industry
pioneer widely known for its high quality and innovative design. Headquartered in Edison, New Jersey, Gund
distributes product throughout the United States, Canada, Europe, Japan, Australia and South America. The
acquisition will allow Spin Master to build a stable platform for expansion into the infant toy and specialty gift
categories and further grow the business internationally. Gund will be included in the Activities, Games and Puzzles
and Fun Furniture business segment. The purchase consideration will be funded from internally generated cash
resources and the Company’s existing Credit Facility. The acquisition is expected to close on April 1, 2018.
FINANCIAL PERFORMANCE
For the three and twelve months period ended December 31, 2017 compared to the three and twelve months
period ended December 31, 2016:
Consolidated Results
The following tables provide a summary of Spin Master’s consolidated results for the three and twelve months
period ended December 31, 2017 and 2016.
(All amounts in USD 000's)
2017
2016
$ Change
% Change
Three Months Ended December 31
Revenue
Cost of sales
Gross profit
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
440,863
212,000
228,863
132,495
67,364
(1,329)
2,866
2,584
24,883
4,843
20,040
338,377
166,373
172,004
104,551
55,417
(223)
6,634
2,414
3,211
484
2,727
102,486
45,627
56,859
27,944
11,947
(1,106)
(3,768)
170
21,672
4,359
17,313
Year ended December 31
30.3 %
27.4 %
33.1 %
26.7 %
21.6 %
496.0 %
(56.8)%
7.0 %
674.9 %
900.6 %
634.9 %
(All amounts in USD 000's)
2017
2016
$ Change
% Change
Revenue
Cost of sales
Gross profit
Selling, marketing, distribution and product
development
Administrative expenses
Other expenses
Foreign exchange (gain) loss
Finance costs
Income before income tax expense
Income tax expense
Net income
1,551,324
1,154,454
750,868
800,456
312,186
262,066
6,700
(11,370)
10,445
220,429
59,363
161,066
557,712
596,742
243,689
201,008
35
5,530
8,601
137,879
38,364
99,515
396,870
193,156
203,714
68,497
61,058
6,665
(16,900)
1,844
82,550
20,999
61,551
34.4 %
34.6 %
34.1 %
28.1 %
30.4 %
19,042.9 %
(305.6)%
21.4 %
59.9 %
54.7 %
61.9 %
5 Revenue
For the Three Months ended December 31, 2017
The following table provides a summary of Spin Master’s revenue and segmented breakdown for the three months
ended December 31, 2017 and 2016:
(All amounts in USD 000's)
2017
2016
$ Change
% Change
Three Months Ended December 31
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)
131,443
198,706
36,714
102,414
14,588
483,865
109,512
92,566
34,765
125,133
14,202
376,178
21,931
106,140
1,949
(22,719)
386
107,687
20.0 %
114.7 %
5.6 %
(18.2)%
2.7 %
28.6 %
Other revenue
30,034
12,281
17,753
144.6 %
Total Gross Sales (1)
513,899
388,459
125,440
32.3 %
Sales allowances (1)
73,036
50,082
22,954
45.8 %
Revenue
440,863
338,377
102,486
30.3 %
(1) Non-IFRS measure. See “Non-IFRS Financial measures”.
Gross Product Sales increased by $107,687, or 28.6%, to $483,865 with a favourable impact from changes in
foreign exchange rates of $10,294.
Gross Product Sales in the Activities, Games & Puzzles and Fun Furniture increased by $21,931, or 20.0% to
$131,443, driven by sales of Cool branded products, Doctor Dreadful, Etch A Sketch, Kinetic Rock and Spin
Master’s games portfolio, which includes Cardinal and Marbles, offset in part by decreases in Marshmallow
Furniture.
Gross Product Sales in the Remote Control and Interactive Characters segment increased by $106,140 or 114.7%
to $198,706, driven by sales of Hatchimals and Luvabella offset by decreases in Zoomer and Air Hogs.
Gross Product Sales in the Boys Action and High Tech Construction segment increased by $1,949 or 5.6% to
$36,714 due to higher sales of Star Wars licensed merchandise such as BB8 and Tech Deck, partially offset by
decreased sales of Secret Life of Pets products. Sales of Meccano were consistent with the prior year.
Gross Product Sales in the Pre School and Girls segment decreased by $22,719 or 18.2% to $102,414, driven
by decreased sales of, Brightlings, Power Puff Girls and Chubby Puppies.
Gross Product Sales in the Outdoor segment comprised the sales of Swimways products under the Swimways,
Kelysius and Coop brands, which the Company acquired on August 2, 2016. Gross Product Sales in the Outdoor
segment increased by $386 or 2.7% to $14,588.
Other Revenue increased by $17,753 or 144.6% to $30,034, driven by increased royalty income from products
marketed by third parties using Spin Master's owned intellectual property, increased television distribution income
and app revenue from Toca Boca and Sago Mini.
Sales allowances increased by $22,954 or 45.8% to $73,036, primarily driven by increased Gross Product Sales
as well as product and market mix. As a percentage of Gross Product Sales, Sales allowances increased 1.8%
to 15.1% from 13.3% in 2016.
6 The following table provides a summary of Spin Master’s Gross Product Sales by geographic segment for the
three month periods ended December 31, 2017 and 2016:
(All amounts in USD 000's)
2017
2016
$ Change
% Change
Three Months Ended December 31
North America
Europe
Rest of World
Gross Product Sales (1)
286,603
125,898
71,364
483,865
245,363
93,949
36,866
376,178
41,240
31,949
34,498
107,687
16.8%
34.0%
93.6%
28.6%
(1) Non-IFRS measure. See “Non-IFRS Financial measures”.
Gross Product Sales in North America increased by $41,240 or 16.8% to $286,603 with a favourable impact from
changes in foreign exchange rates of $887. Growth was driven by sales of Hatchimals, Cardinal Games and Star
Wars licensed merchandise such as BB8, more than offsetting declines in Air Hogs and Zoomer.
Gross Product Sales in Europe increased by $31,949 or 34.0% to $125,898, with a favourable impact from changes
in foreign exchange rates of $8,149. Growth was primarily driven by sales of Hatchimals and increased sales of
PAW Patrol in Germany, Austria and Switzerland.
Gross Product Sales in the Rest of World region increased by $34,498 or 93.6% to $71,364, with a favourable
impact from changes in foreign exchange rates of $1,258. Growth was primarily driven by increases in Hatchimals
partially offset by decreases in sales to third party distributors.
For the year ended December 31, 2017
The following table provides a summary of Spin Master’s revenue and segmented breakdown for the twelve
months ended December 31, 2017 and 2016:
(All amounts in USD 000's)
2017
2016
$ Change
% Change
Year ended December 31
Activities, Games and Puzzles and Fun Furniture
Remote Control and Interactive Characters
Boys Action and High-Tech Construction
Pre-School and Girls
Outdoor
Gross Product Sales (1)
365,378
593,355
112,102
493,069
93,124
337,768
282,777
154,454
460,484
19,075
1,657,028
1,254,558
27,610
310,578
(42,352)
32,585
74,049
402,470
8.2 %
109.8 %
(27.4)%
7.1 %
388.2 %
32.1 %
Other revenue
85,792
47,940
37,852
79.0 %
Total Gross Sales (1)
1,742,820
1,302,498
440,322
33.8 %
Sales allowances (1)
191,496
148,044
43,452
29.4 %
Revenue
1,551,324
1,154,454
396,870
34.4 %
(1) Non-IFRS measure. See “Non-IFRS Financial measures”.
Gross Product Sales increased by $402,470, or 32.1%, to $1,657,028 with a favourable impact from changes in
foreign exchange rates of $9,500.
Gross Product Sales in the Activities, Games and Puzzles and Fun Furniture segment increased by $27,610 or
8.2% to $365,378, primarily driven by increases in Kinetic Rock, Cool branded products, Etch A Sketch and Spin
Master’s games portfolio, which includes Cardinal and Marbles, offset by decreases in Bunchems, Kinetic Sand,
Kinetic Foam and Marshmallow Furniture.
7 Gross Product Sales in the Remote Control and Interactive Characters segment increased by $310,578 or 109.8%
to $593,355, primarily due to higher sales of Hatchimals and Luvabella, which offset declines in Air Hogs and
Zoomer.
Gross Product Sales in the Boys Action and High Tech Construction segment decreased by $42,352 or 27.4%
to $112,102 primarily as a result of declines in Secret Life of Pets, Spy Gear and Angry Birds licensed toys,
Minecraft and Meccano, partially offset by increased sales of Pirates of the Caribbean and Star Wars licensed
merchandise such as BB8, as well as Tech Deck.
Gross Product Sales in the Pre School and Girls segment increased by $32,585 or 7.1% to $493,069, driven by
increased sales of PAW Patrol and Rusty Rivets, and offset by declines in Brightlings, Chubby Puppies and Power
Puff Girls licensed products.
Gross Product Sales in the Outdoor segment were comprised of the sales of Swimways products under the
Swimways, Kelysius and Coop brands, which the Company acquired on August 2, 2016. As the Outdoor segment
was formed on August 2, 2016 following the acquisition of Swimways, there was a full year of contribution to Gross
Product Sales from the Outdoor segment in 2017, compared to five months in 2016.
Other revenue increased by $37,852 or 79.0%, to $85,792, driven by increased television distribution income,
increased 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 $43,452 or 29.4% to $191,496, driven primarily by higher Gross Product Sales.
Sales allowances as a percentage of Gross Product Sales decreased slightly by 0.2% to 11.6% from 11.8% in
2016.
The following table provides a summary of Spin Master’s Gross Product Sales by geographic segment for the
twelve months ended December 31, 2017 and 2016:
(All amounts in USD 000's)
2017
2016
$ Change
% Change
Year ended December 31
North America
Europe
Rest of World
1,082,709
368,009
206,310
847,278
271,130
136,150
Total Gross Product Sales (1)
1,657,028
1,254,558
(1) Non-IFRS measure. See “Non-IFRS Financial measures”.
235,431
96,879
70,160
402,470
27.8%
35.7%
51.5%
32.1%
Gross Product Sales in North America increased by $235,431 or 27.8% to $1,082,709 with a favourable impact
from changes in foreign exchange rates of $1,183. Growth was driven primarily by increases in product sales of
Hatchimals, PAW Patrol, Luvabella and Star Wars licensed merchandise such as BB8, which more than offset
declines in Secret Life of Pets, Air Hogs, Zoomer and Chubby Puppies.
Gross Product Sales in Europe increased by $96,879 or 35.7% to $368,009 with a favourable impact from changes
in foreign exchange rates of $6,451. Growth was primarily driven by higher sales of PAW Patrol, Hatchimals and
increased sales of LuvaBella in the UK as well as increased sales of Bunchems in France and the Benelux region.
Gross Product Sales in the Rest of World region increased by $70,160 or 51.5% to $206,310 with a favourable
impact from changes in foreign exchange rates of $1,866. The increases were primarily driven by increases in
Hatchimals, which offset declines in Zoomer, Kinetic Sand and Bunchems as well as licensed products such as
Secret Life of Pets, Angry Birds and Teenage Mutant Ninja Turtles.
8 Gross Profit
(All amounts in USD 000's)
Gross profit
Gross profit as % of revenue
Three Months Ended December 31
2017
2016
$ Change
% Change
228,863
172,004
56,859
51.9%
50.8%
33.1%
—
For the three months ended December 31, 2017, gross profit increased by $56,859 or 33.1% to $228,863. As a
percentage of revenue, gross profit increased to 51.9% from 50.8%.
(All amounts in USD 000's)
Gross profit
Gross profit as % of revenue
Year ended December 31
2017
2016
800,456
596,742
51.6%
51.7%
$ Change
203,714
% Change
34.1%
For the twelve months ended December 31, 2017, gross profit increased by $203,714 or 34.1% to $800,456. As
a percentage of revenue, gross margin decreased slightly from 51.7% to 51.6%, primarily due to product mix
related to acquisitions and foreign exchange, offset by increases in gross margin from owned intellectual property
products and increased licensing and merchandising revenues.
Selling, Marketing, Distribution and Product Development Expenses
Three Months Ended December 31
2016
$ Change
% Change
(All amounts in USD 000's)
Marketing expenses
Marketing expenses as a % of revenue
Product development expenses
Product development expenses as a % of
revenue
Selling expenses
Selling expenses as a % of revenue
Distribution expenses
Distribution expenses as a % of revenue
2017
70,205
15.9%
7,539
1.7%
36,765
8.3%
17,986
4.1%
61,879
18.3%
7,147
2.1%
22,807
6.7%
12,718
3.8%
8,326
392
13,958
5,268
Total
132,495
104,551
27,944
13.5%
5.5%
61.2%
41.4%
26.7%
Marketing expenses increased by $8,326 or 13.5%, to $70,205, primarily as a result of increased media spending
to drive higher sales as well as increased spending on promotions, research and merchandising. Marketing
expenses as a percentage of revenue decreased to 15.9% from 18.3% in 2016.
Product development expenses increased by $392 or 5.5%, to $7,539, related to the timing of projects primarily
in the Remote Control and Interactive Characters and Boys Action and High-Tech Construction business segments.
Selling expenses increased by $13,958, or 61.2%, to $36,765. Selling expenses as a percentage of revenue
increased to 8.3% from 6.7% in 2016.
Distribution expenses increased by $5,268 or 41.4% to $17,986, driven by increased domestic sales volume
primarily in Europe as well as on-going efforts to rationalize the Company's supply chain as the Company continues
to position itself for growth.
9 (All amounts in USD 000's)
Marketing expenses
Marketing expenses as a % of revenue
Product development expenses
Product development expenses as a % of
revenue
Selling expenses
Selling expenses as a % of revenue
Distribution expenses
Distribution expenses as a % of revenue
Year ended December 31
2017
2016
$ Change
% Change
128,713
112,339
16,374
8.3%
23,365
1.5%
106,471
6.9%
53,637
3.5%
9.7%
22,017
1.9%
77,102
6.7%
32,231
2.8%
1,348
29,369
21,406
14.6%
6.1%
38.1%
66.4%
28.1%
Total
312,186
243,689
68,497
Marketing expenses increased by $16,374 or 14.6%, to $128,713, primarily as a result of increased media spending
to drive higher sales as well as increased spending on promotion, research and strategic marketing spend. As a
percentage of revenue, marketing expenses decreased to 8.3% from 9.7%.
Product development expenses increased by $1,348, or 6.1%, to $23,365, primarily due to investments in the
Remote Control and Interactive Characters and Boys Action and High-Tech Construction business segments.
Selling expenses increased by $29,369 or 38.1%, to $106,471. As a percentage of revenue, selling expenses
marginally increased to 6.9% from 6.7%.
Distribution expenses increased by $21,406, or 66.4%, to $53,637, driven by higher sales volumes, increased
distribution expenses to support European growth and costs associated with integrating the logistics and supply
chains of acquired companies.
Administrative Expenses
For the three months ended December 31, 2017 compared to the same period in 2016, administrative expenses
increased by $11,947, or 21.6%, to $67,364. Administrative expenses as a percentage of revenue decreased to
15.3% from 16.4% in the same period in 2016. Share-based compensation expenses associated with equity
participation agreements remained consistent with the prior year. Excluding the impact of share-based
compensation, administrative expenses as a percentage of revenue decreased to 14.8% from 15.7% in 2016.
For the twelve months ended December 31, 2017 compared to the same period in 2016, administrative expenses
increased by $61,058, or 30.4%, to $262,066, primarily due to increased expenses associated with acquired
companies and the non-recurring bad debt expense related to TRU, partially offset by lower share-based
compensation expense associated with the equity participation agreement at the time of the Company's initial
public offering (the "IPO") and grants of restricted share units. Administrative expenses as a percentage of revenue
decreased to 16.9% from 17.4% in the same period in 2016. Excluding the impact of share-based compensation,
administrative expenses as a percentage of revenue increased to 16.2% from 15.6% in 2016. Excluding the impact
of share-based compensation and the non-recurring bad debt expense related to TRU, administrative expenses
as a percentage of revenue was 15.9% compared to 15.6%.
Finance Costs
For the three months ended December 31, 2017, finance costs increased by $170 to $2,584 compared to the
same period in 2016. For the twelve months ended December 31, 2017 , finance costs increased by $1,844 to
$10,445 compared to the same period in 2016. The increase was primarily driven by an increase in sales volume
related bank charges and higher interest costs associated with the borrowings on the Company’s Credit Facility.
Net income
Net income for the three months ended December 31, 2017 increased by $17,313 to $20,040 from $2,727 for the
same period in 2016, primarily as a result of higher revenues and a positive impact of foreign exchange offset by
higher administrative expenses, increased marketing and selling expenses and an increase in distribution expense.
10 Excluding share-based compensation expense, foreign exchange losses and other non-recurring items, Adjusted
Net Income (a non-IFRS measure, see “Non-IFRS financial measures”) for the three months ended December 31,
2017 increased by $16,165 to $25,512 from $9,347 for the same period in 2016.
Net income for the year ended December 31, 2017 increased by $61,551 to $161,066 from $99,515 for the same
period in 2016. Excluding share-based compensation expense, restructuring and foreign exchange gains, Adjusted
Net Income for the year ended December 31, 2017 increased by $52,882 to $172,997 from $120,115 for the same
period in 2016.
OUTLOOK
For 2018, Spin Master expects its organic Gross Product Sales growth rate to be in the mid to high single digits
range compared to 2017. From a seasonality perspective, Spin Master expects Gross Product Sales in the first
half of 2018 to be in the range of 32-35% of full year Gross Product Sales compared to approximately 30% in
the past. Adjusted EBITDA Margin for 2018 is expected to be consistent with 2017.
SELECTED QUARTERLY FINANCIAL INFORMATION
Seasonality factors cause Spin Master’s operating results to fluctuate significantly from quarter to quarter. A majority
of the Company’s annual sales occur during the third and fourth quarters of the Company’s fiscal year with a
significant portion of its net income earned during the same period.
The following table provides selected historical information and other data, which should be read in conjunction
with the financial statements of the Company.
(All amounts in USD 000's except
EPS)
Dec 31,
2017
Sep 30,
2017
Jun 30,
2017
Mar 31,
2017
Dec 31,
2016
Sep 30,
2016
Jun 30,
2016
Mar 31,
2016
Three Months Ended
Revenue
440,863 606,098 276,652 227,711 338,377 475,015
179,360
161,702
Adjusted EBITDA (1)
47,343
170,308
43,724
30,818
22,888
133,261
25,389
23,973
Adjusted EBITDA margin (1)
10.7%
28.1%
15.8%
13.5%
6.8%
28.1%
14.2%
14.8%
Net income
20,040
108,825
22,114
10,087
Basic and diluted EPS
$0.21
$1.07
$0.22
$0.10
2,727
$0.03
83,253
$0.82
3,598
$0.04
9,937
$0.10
Adjusted Net Income (1)
25,512
111,711
22,217
13,557
Basic and diluted adjusted EPS (1)
$0.25
$1.10
$0.22
$0.13
9,347
$0.09
87,482
11,698
11,588
$0.86
$0.12
$0.12
Free cash flow (1)
18,439
145,169
24,835
4,998
(3,881)
117,238 (11,026)
16,359
1) See “Non-IFRS Financial Measures"
11 The following table provides reconciliations of net income to EBITDA, Adjusted EBITDA and Adjusted Net
Income.
(All amounts in USD 000's)
Dec 31,
2017
Sep 30,
2017
Jun 30,
2017
Mar 31,
2017
Dec 31,
2016
Sep 30,
2016
Jun 30,
2016
Mar 31,
2016
Three Months Ended
Net income
20,040 108,825
22,114
10,087
2,727
83,253
3,598
9,937
275
—
4,065
7,017
—
—
—
—
—
—
656
—
(5,040)
6,785
—
—
—
—
—
—
Finance costs
Depreciation and amortization
Income tax
EBITDA (1)
Normalization adjustments
Restructuring (2)
Recovery of contingent liability (3)
Foreign exchange loss (gain) (4)
Share based compensation (5)
Impairment of intangible asset (6)
Fair market value adjustments (7)
2,584
12,422
4,843
2,558
12,670
42,233
39,889 166,286
2,439
10,602
8,431
43,586
2,864
9,214
3,856
26,021
2,414
8,173
484
2,575
9,420
32,319
13,798 127,567
1,852
7,526
1,056
14,032
1,760
5,371
4,505
21,573
327
—
2,866
2,076
2,531
450
167
—
(5,831)
2,425
3,800
—
434
—
(6,706)
2,857
2,316
—
752
—
(1,699)
2,724
385
2,355
65
(222)
6,634
2,146
—
—
828
—
(129)
4,996
—
—
Executive compensation - acquisition
(8)
Non-recurring transaction costs (9)
Non-recurring bad debt expense (10)
(840)
44
—
279
—
5,382
Non-recurring royalty recovery (11)
— (2,200)
281
956
—
—
280
467
—
—
—
—
—
—
—
—
—
—
Adjusted EBITDA (1)
Finance costs
Depreciation and amortization
Income tax
Tax effect of normalization adjustments
(12)
Adjusted Net Income (1)
Footnotes:
47,343 170,308
2,558
12,670
42,233
2,584
12,422
4,843
43,724
2,439
10,602
8,431
30,818
2,864
9,214
3,856
22,888 133,262
2,575
9,420
32,319
2,414
8,173
484
25,389
1,852
7,526
1,056
23,973
1,760
5,371
4,505
1,982
1,136
35
1,327
25,512 111,711
22,217
13,557
2,470
9,347
1,465
3,257
750
87,483
11,698
11,589
1) See "Non-IFRS Financial Measures".
2) Restructuring primarily relates to organizational changes.
3) A reversal of a portion of a contingent consideration liability 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 payout.
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 in which they occur.
5) Share 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.
6) Non-cash Impairment charges of intangible assets relating to Licenses, Content Development, Brands and Trademarks.
7) Amortization of Fair Market Value adjustments to inventory relating to the acquisition of Marbles and Aerobie in the
second and third quarters of 2017 respectively, Swimways in the third quarter of 2016 and Cardinal in the fourth quarter of
2015.
8) Remuneration expense associated with contingent consideration for the Swimways acquisition.
9) Non-recurring transaction costs relating to Marbles acquisition in the second quarter of 2017.
10) Non-recurring bad debt expense related to the bankruptcy declaration of TRU in Canada and the United States during
the third quarter of 2017.
11) Non-recurring royalty income recovery related to prior year.
12) Tax effect of normalization adjustments (Footnotes 2-11). Normalization adjustments are 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, 2017,
the Company had $510 million available under its Credit Facility, which matures in December 2021. Advances
12 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 fund 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 built up 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 $531 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.
On April 28, 2017, the Company filed a final short-form base shelf prospectus, allowing the Company to offer and
issue the following securities: (i) subordinate voting shares; (ii) preferred shares; (iii) senior or subordinated
unsecured debt securities; (iv) subscription receipts; (v) warrants; and (vi) securities comprised of more than one
of the subordinate voting shares, preferred shares, debt securities, subscription receipts and / or warrants offered
together as a unit. These securities may be offered separately or together, in separate series, in amounts, at prices
and on terms to be set forth in one or more shelf prospectus supplements. The aggregate initial offering price of
securities that could be sold by the Company (or certain of the Company’s shareholders, including the principal
shareholders) pursuant to this base shelf prospectus during the 25-month period that the base shelf prospectus,
including any amendments thereto, remains valid was limited to CDN$600 million.
TRU Chapter 11 and CCAA filing
On September 19, 2017, TRU announced that certain of its U.S. subsidiaries have voluntarily filed for relief under
Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Virginia in Richmond,
VA. In addition, TRU's Canadian subsidiary filed to seek protection in parallel proceedings under the CCAA in the
Ontario Superior Court of Justice. TRU intends to use these court-supervised proceedings to restructure its
outstanding debt and establish a sustainable capital structure.
TRU's operations outside of the U.S. and Canada, including its approximately 255 licensed stores and joint venture
partnership in Asia, which are separate entities, are not part of the Chapter 11 filing and CCAA proceedings.
TRU has received a commitment for over $3.0 billion in DIP financing from various lenders, including a JP Morgan-
led bank syndicate and certain of TRU's existing lenders, which is expected to immediately improve TRU's financial
health and support its ongoing operations during the court-supervised process.
In conjunction with the Chapter 11 process in the U.S., TRU has filed a number of customary motions with the
bankruptcy court seeking authorization to support its operations during the restructuring process and ensure a
smooth transition into Chapter 11 without disruption, including authority to continue payment of employee wages
and benefits, honour customer programs and pay vendors and suppliers in the ordinary course for all goods
provided on or after the filing date.
TRU's Chapter 11 and CCAA filings have resulted in a one-time bad debt expense of $5.4 million for the year
ended December 31, 2017.
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 television show production.
CASH FLOW
The following table provides a summary of Spin Master’s consolidated cash flows for three and twelve months
ended December 31, 2017 and 2016.
(All amounts in USD 000's)
Net cash flows provided by operating activities
Net cash flows used in investing activities
Net cash flows used in financing activities
Net increase in cash
Effect of foreign currency exchange rate changes on cash
Cash at beginning of period
Cash at end of year
(All amounts in USD 000's)
Net cash flows provided by operating activities
Net cash flows used in investing activities
Net cash flows (used in) provided by financing activities
Net increase in cash
Effect of foreign currency exchange rate changes on cash
Cash at beginning of year
Cash at end of year
Cash from Operating Activities
Three months ended December 31
2017
109,525
(9,618)
(30,131)
69,776
(2,425)
49,911
117,262
2016
62,310
(4,554)
(5,260)
52,496
(2,607)
49,527
99,416
Year ended December 31
2017
267,405
(81,598)
(161,485)
24,322
(6,476)
99,416
117,262
2016
73,038
(172,273)
155,467
56,232
(2,529)
45,713
99,416
$ Change
47,215
(5,064)
(24,871)
17,280
182
384
17,846
$ Change
194,367
90,675
(316,952)
(31,910)
(3,947)
53,703
17,846
Cash flows from operating activities were $109,525 for the three months ended December 31, 2017 compared to
cash flows from operating activities of $62,310 for the same period in 2016. For the twelve months ended December
31, 2017, cash flows from operating activities were $267,405 compared to $73,038 for the same period in 2016.
The increase in cash from operating activities was driven by higher net income, favourable changes in net working
capital and a decrease in cash interest paid. The increase in cash was partially offset by an increase in cash
income taxes paid.
14 Investing Activities
The following table provides a summary of Spin Master’s consolidated cash flows used in investing activities for
the three and twelve months ended December 31, 2017 and 2016:
Three months ended December 31
(All amounts in USD 000's)
Capital expenditure in property, plant and equipment
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)
Cash used in investing activities
(All amounts in USD 000's)
Capital expenditure in property, plant and equipment
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)
Cash used in investing activities
2017
1,685
3,416
5,101
—
(4,570)
41
(4,529)
572
—
9,046
9,618
2016
$ Change
5,500
2,890
8,390
(1)
(4,547)
722
(3,826)
4,564
(10)
—
4,554
(3,815)
526
(3,289)
1
(23)
(681)
(703)
(3,992)
10
9,046
5,064
Year ended December 31
2017
19,505
6,413
25,918
—
30,109
1,155
31,264
57,182
—
24,416
81,598
2016
$ Change
19,574
4,462
24,036
62
15,390
2,090
17,542
41,578
(10)
130,705
172,273
(69)
1,951
1,882
(62)
14,719
(935)
13,722
15,604
10
(106,289)
(90,675)
Cash used in investing activities were $9,618 for the three months ended December 31, 2017 compared to $4,554
for the same period in 2016. The increase in cash flows used in investing activities was driven primarily by higher
cash flows used for business acquisitions, offset in part by decreased investment in capital expenditures in property,
plant and equipment and the Company receiving tax credits associated with the production of television
programming for the three months ended December 31, 2017. For the twelve months ended December 31, 2017
cash flows used in investing activities were $81,598 compared to $172,273 for the same period in 2016. The
decrease in cash flows used in investing activities was primarily due to higher cash flows used for business
acquisitions in the prior year, partially offset by higher investments in content development in the current year.
Financing Activities
Cash flows used in financing activities were $30,131 for the three months ended December 31, 2017 compared
to f $5,260 for the for the same period in 2016. For the twelve months ended December 31, 2017, cash flows used
in financing activities were $161,485 compared to cash flows provided by financing activities of $155,467 for the
comparable period in 2016. Cash flows used in financing activities consist of reductions in bank indebtedness. In
15 addition, cash flows in the prior year were driven by the issuance of subordinate voting shares pursuant to a
treasury offering in the second 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 the three and twelve months ended December 31, 2017 and 2016:
(All amounts in USD 000's)
Cash flows provided by operating activities
Plus:
Changes in net working capital
Net cash flows provided by operating activities before
working capital changes
Less:
Three months ended December 31
2017
109,525
2016
62,310
$ Change
47,215
(90,514)
(61,637)
(28,877)
19,011
673
18,338
Cash flows used in investing activities
(9,618)
(4,554)
(5,064)
Plus:
Cash used for License, Brand and Business Acquisitions
Free Cash Flow
9,046
18,439
—
(3,881)
9,046
22,320
(All amounts in USD 000's)
Cash flows provided by operating activities
Plus:
Changes in net working capital
Net cash flows provided by operating activities before
working capital changes
Less:
Year ended December 31
2017
267,405
2016
73,038
$ Change
194,367
(16,782)
87,220
(104,002)
250,623
160,258
90,365
Cash flows used in investing activities
(81,598)
(172,273)
90,675
Plus:
Cash used for License, Brand and Business Acquisitions
Free Cash Flow
24,416
193,441
130,705
118,690
(106,289)
74,751
Free Cash Flow was $18,439 for the three months ended December 31, 2017 compared to negative $3,881 for
the same period in 2016. For the twelve months ended December 31, 2017, Free Cash Flow was $193,441 an
increase of $74,751 compared to the same period in 2016. The increase in Free Cash Flow was driven by an
increase in cash generated by operating activities before working capital changes, a decrease in cash flows used
in investing activities and a decrease in cash used for license, brand and business acquisitions.
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 non cancellable lease agreements for premises and equipment, which contain minimum rental
payments.
The following table summarizes Spin Master's contractual commitments and obligations as at December 31, 2017,
which are primarily for 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.
16 Lease obligations
Minimum guarantees due to licensors
Borrowings
Total commitments
OFF BALANCE SHEET ARRANGEMENTS
Less than 1 year to greater than 5 years
<1 Year
1-5 Years
> 5 Years
Total
6,832
47,331
531
54,694
40,859
16,231
—
—
—
—
40,859
16,231
63,922
47,331
531
111,784
Spin Master has no off balance 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 7, 2018, there were 73,549,812 Multiple Voting Shares outstanding and 28,126,094 Subordinate
Voting Shares outstanding.
As of March 7, 2018 pursuant to grants under the Company's Long-Term Incentive Plan, 325,415 Subordinate
Voting Shares were issuable under outstanding Restricted Stock Units, up to 1,065,536 Subordinate Voting Shares
were issuable under outstanding Performance Share Units (assuming vesting at 200%) and 552,699 Subordinate
Voting shares were issuable under outstanding Share Option grants.
On May 24, 2017, the three founders of the Company completed a public offering of 3,681,000 subordinate voting
shares of the Company at a price of CDN$40.75 (US$30.21) per share, for aggregate gross proceeds to the selling
shareholders of CDN$150,000 (US$111,193). To satisfy the sale, the selling shareholders converted in aggregate
3,681,000 multiple voting shares into subordinate voting shares on a one-for-one basis. The Company did not
receive any proceeds from the sale of subordinate voting shares associated with this offering.
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 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
17 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 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.
18 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 found to be infringing on the IP rights of any third party, Spin Master or its licensors
19 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
20 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 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:
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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.
21 Spin Master’s significant use of third-party manufacturers outside of North America also exposes the Company
to risks, including:
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currency fluctuations;
limitations on the repatriation of capital;
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 2017, the top three customers
collectively accounted for approximately 48.8% 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
22 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
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
23 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 programs could have a material and adverse effect on the Company’s
business, financial condition and performance.
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
24 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.
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.
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
25 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.
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.
26 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.
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 or employees 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
27 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.
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.
28 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.
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
29 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.
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.
30 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 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 foreign 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 foreign
exchange rates (“transaction exposures”) and because the non-US dollar denominated financial statements of
the Company’s subsidiaries may vary on translation 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.
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 48% and 52% of consolidated gross product sales for the twelve month
periods ended December 31, 2017 and 2016 respectively.
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, when available.
RELATED PARTY TRANSACTIONS
There were no related party transactions included in the consolidated financial statements of the Company as
at December 31, 2017.
31 CRITICAL ACCOUNTING ESTIMATES
The Company’s significant accounting policies are described in Note 3 of the Company's fiscal 2017 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
Determination of cash generating units
A cash generating unit ("CGU") 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 CGUs of
the Company.
Functional currency
Transactions in foreign currencies are translated to the respective functional currencies of Company entities at
foreign 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 country specific 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 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.
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 CGU 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
32 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 operating results, the timing of reversal of temporary differences and possible audits of
income tax filings by 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”, which replaces IAS 11 -
Construction Contracts, IAS 18 - Revenue and International Financial Reporting Interpretations Committee 13 -
Customer Loyalty Programs ("IFRIC 13"), as well as various other interpretations regarding revenue. IFRS 15
outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers; except for contracts that are within the scope of the standards on leases, insurance contracts, and
financial instruments. IFRS 15 also contains enhanced disclosure requirements. The standard is effective for
annual periods beginning on or after January 1, 2018.
In April 2016, the IASB published clarifications to IFRS 15 which addressed three topics (identifying performance
obligations, principal versus agent considerations, and licensing) and provides some transition relief for modified
contracts and completed contracts. The amendments are effective for annual periods beginning on or after January
1, 2018.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full
retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized
at the date of initial application (modified retrospective method). The Company will adopt the standard using the
full retrospective method to restate each prior reporting period presented.
In preparation for adoption of the standard, the Company has completed the review of relevant contracts and has
concluded there will be no material transitional adjustment upon adoption and no material changes in the timing
of revenue recognition is expected once adopted.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments”. The new standard includes
revised guidance on the classification and measurement of financial assets, including impairment, as well as new
hedge accounting principles.
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, fair value
through other comprehensive income ("FVOCI") 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
33 at fair value or FVOCI. A debt instrument that has cash flows which represent solely payments of principal and
interest is measured at amortized cost only if it is held to collect the contractual cash flows or FVOCI if it is held
to collect and sale contractual cash flows. 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.
IFRS 9 introduces a new expected credit loss ("ECL") model for all financial assets in scope of the impairment
requirements. The new ECL will result in an allowance for credit losses being recorded on financial assets
regardless of whether there has been an actual loss event.
In preparation for adoption of the standard, the Company has completed its assessment of the implications of
implementing the new standard and has concluded there will be no material transitional adjustment upon adoption
and no material changes are expected once adopted.
IFRS 2 Share Based Payments
The IASB issued amendments to IFRS 2 “Share Based Payments”. The amendment is intended to clarify 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.
IFRIC 22 Foreign Currency Transactions and Advance Consideration
IFRIC 22 clarifies the accounting for transactions that include the receipt or payment of advance consideration in
a foreign currency. The interpretation addresses how to determine the date of the transaction for the purpose of
determining the foreign exchange rate to use on initial recognition of the related asset, expense or income (or part
of it) on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt
of advance consideration in a foreign currency. The IASB has reached the consensus that the date of the
transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary
prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, a date of
transaction is established for each payment or receipt. IFRIC 22 is effective for annual reporting periods beginning
on or after January 1, 2018. The Company is evaluating the impact on its financial statements.
IFRIC 23 Uncertainty over income tax treatments
In June 2017, the IASB issued IFRIC 23 to clarify how the requirements of IAS 12 Income Taxes should be applied
when there is uncertainty over income tax treatments. The interpretation specifically addresses:
• Whether an entity considers uncertain tax treatments separately;
•
The assumptions an entity makes about the examination of tax treatments by taxation authorities;
• How and entity determine taxable profit (or loss), tax bases, unused tax losses, unused tax credits and
tax rates; and
• How an entity considers changes in facts and circumstances.
The interpretation is effective for annual periods beginning on or after January 1, 2019, with modified retrospective
or retrospective application. The Company is currently evaluating the impact of IFRIC 23 on its 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 and 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.
FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments such as foreign exchange forward contracts to manage foreign
currency risk.
As at December 31, 2017, the Company is committed under outstanding foreign exchange contracts to purchase
USD, representing total purchase commitments of approximately $48,060 (2016 - $162,777).
34 DISCLOSURE CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and the Chief Financial Officer (the “Certifying Officers”) 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, 2017 and have concluded that the Company's DC&P was effective as at
December 31, 2017.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Certifying Officers 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, 2017 and have concluded that the Company's ICFR was effective as at December 31,
2017.
There have been no changes in the Company’s ICFR during the three-month period ended December 31, 2017
which have materially affected, or are reasonably likely to materially affect, the Company’s ICFR.
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 non IFRS financial measures. Non IFRS 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.
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.
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 non recurring items that do not
necessarily reflect the Company’s underlying financial performance including foreign exchange gains or losses,
restructuring 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 finance costs, income tax expense and depreciation and amortization.
Management uses EBITDA internally as a measure of the Company’s profitability and to benchmark the Company
against key competitors.
35 Free Cash Flow is calculated as cash from operations before changes in net 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 tooling expenditures) and the production of television
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 product category and geographical segment 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 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
co operative 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.
Constant Currency represents Revenue and Gross Product Sales results that are presented excluding the impact
from changes in foreign 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 exchange rates.
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.
The Company believes that lenders, securities analysts, investors and other interested parties frequently use
these non-IFRS financial measures in the evaluation of issuers.
36 Reconciliation Tables
The following table presents a reconciliation of Net Income to EBITDA, Adjusted EBITDA and Adjusted Net Income,
and Cash from Operations to Free Cash Flow for the fiscal years ended December 31, 2017, 2016 and 2015:
(All amounts in USD 000's)
Reconciliation of Non-IFRS Financial Measures
Net income
Income tax expense
Finance costs
Depreciation and amortization
EBITDA (1)
Normalization Adjustments:
Restructuring (2)
Recovery of contingent liability (3)
Foreign exchange (gain) loss (4)
Offering costs (5)
Share based compensation (6)
One-time income form transfer of non business related assets (7)
One-time service fee income (8)
Impairment of intangible asset (9)
One-time legal expense (10)
Amortization of fair market value adjustments (11)
Acquisition related incentive compensation (12)
One-time transaction costs (13)
One-time bad debt expense (14)
One-time royalty recovery (15)
Adjusted EBITDA (1)
Income tax expense (16)
Finance costs (16)
Depreciation and amortization
Tax effect of normalization adjustments (17)
Adjusted Net Income (1)
Cash provided by operating activities
Plus:
Changes in net working capital
Year ended December 31
2017
2016
2015
161,066
59,363
10,445
44,908
99,515
38,364
8,601
30,490
47,074
32,559
6,539
22,877
275,782
176,970
109,049
1,680
—
(11,370)
—
1,823
(222)
5,530
—
3,528
(457)
6,477
925
10,082
20,943
50,658
—
—
9,032
—
2,805
—
1,000
5,382
(2,200)
—
—
—
—
—
467
—
—
—
(9,690)
(5,000)
659
3,325
975
—
—
—
—
292,193
205,511
160,449
59,363
10,445
44,908
4,480
38,364
8,601
30,490
7,941
172,997
120,115
21,843
3,547
22,877
13,583
98,608
267,405
73,038
55,640
(16,782)
87,220
50,044
Cash provided by operating activities before net working capital changes
250,623
160,258
105,684
Less:
Cash used in investing investing activities
(81,598)
(172,273)
(93,573)
Plus:
Cash used for license, brand and business acquisitions
Free Cash Flow (1)
1) See "Non-IFRS Financial Measures".
24,416
130,705
193,441
118,690
55,038
67,149
2) 2017 and 2016 restructuring primarily related to organizational changes. 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.
37 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 in 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) Share 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 assets related to content development, licenses, brands and trademarks.
10) One-time legal expense related to an outstanding litigation matter in Q4 2015.
11) Amortization of fair market value adjustments to inventory relating to the acquisition of Marbles and Aerobie in the
second and third quarters of 2017 respectively, Swimways in the third quarter of 2016 and Cardinal in the fourth quarter of
2015.
12) Remuneration expense associated with contingent consideration for the Swimways acquisition.
13) One-time transaction costs relating to Marbles acquisition in the second quarter of 2017.
14) One-time bad debt expense related to the bankruptcy declaration of TRU in Canada and the United States during the
third quarter of 2017.
15) One-time royalty income recovery related to the prior year.
16) Income tax expense and finance costs have been adjusted for 2015 to exclude impacts related to the settlement of
certain tax matters as they are not reflective of on on-going costs of the business.
17) Tax effect of normalization adjustments (Footnotes 2-15). Normalization adjustments are tax effected at the effective
tax rate of the given period.
FORWARD LOOKING STATEMENTS
Certain statements, other than statements of historical fact, contained in this MD&A 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 MD&A. 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 MD&A 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; the
expected receipt of eligible tax credits; the impact of TRU's Chapter 11 and CCAA proceedings on the Company;
impact of acquisitions on future financial performance, and the successful execution of its strategies for growth;
and 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 MD&A, 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 MD&A, 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 sales from acquired brands; 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
38 employees, suppliers and retailers; 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 products and
entertainment properties will be launched as scheduled and that the risk factors noted in this MD&A, 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 MD&A. Such risks and
uncertainties include, without limitation, the factors discussed in the Company's disclosure materials, including
this MD&A and the Company's most recent Annual Information Form, filed with the securities regulatory authorities
in Canada and 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.
39 (cid:3)
Deloitte LLP
Bay Adelaide East
8 Adelaide Street West
Suite 200
Toronto ON M5H 0A9
Canada
Tel: 416-601-6150
Fax: 416-601-6151
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, 2017 and December 31,
2016, 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.
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, 2017 and December 31, 2016, 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 7, 2018
Member of Deloitte Touche Tohmatsu Limited
40 Spin Master Corp.
Consolidated statements of financial position as at December 31, 2017 and December 31, 2016
(In thousands of United States dollars)
Notes
2017
2016
Assets
Current assets
Cash
Trade and other receivables
Inventories
Prepaid expenses
Non-current assets
Advances 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
Share capital
Accumulated deficit
Contributed surplus
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
9
10
11
12
13
8
14
15
16
8
15
16
8
17
117,262
369,719
120,329
20,500
627,810
5,000
32,978
145,165
105,487
21,945
310,575
938,385
350,757
531
10,472
25,398
45
37,290
424,493
—
5,735
—
8,075
13,810
438,303
99,416
295,068
79,924
21,398
495,806
11,695
26,996
130,390
91,707
19,002
279,790
775,596
228,935
158,107
5,500
26,454
6
12,331
431,333
38
12,025
110
6,411
18,584
449,917
681,310
(247,340)
20,323
45,789
500,082
938,385
670,115
(408,406)
21,436
42,534
325,679
775,596
Approved by the Board of Directors on March 7, 2018.
The accompanying notes on pages 5 to 45 are an integral part of these consolidated financial statements.
41
Spin Master Corp.
Consolidated statements of operations and comprehensive income
For the year ended December 31
(In thousands of United States dollars, except share data)
Notes
2017
2016
Revenue
Cost of sales
Gross profit
Expenses
Selling, marketing, distribution and product development
Administrative expenses
Other expenses
Foreign exchange (gain) loss
Finance costs
Income before income tax expense
Income tax expense
Net income
Items that may be subsequently reclassified to net income or loss
Currency translation adjustment
Other comprehensive income (loss)
Total comprehensive income
Earnings per share
Basic and diluted
Weighted average number of common shares outstanding
Basic
Diluted
4
7
7
5
6
8
18
18
18
1,551,324
1,154,454
750,868
800,456
557,712
596,742
312,186
262,066
6,700
(11,370)
10,445
220,429
59,363
161,066
243,689
201,008
35
5,530
8,601
137,879
38,364
99,515
3,255
3,255
(863)
(863)
164,321
98,652
1.58
0.99
101,675,906
100,647,133
101,846,680
100,702,757
The accompanying notes on pages 5 to 45 are an integral part of these consolidated financial statements.
42 Spin Master Corp.
Consolidated statements of changes in equity
(In thousands of United States dollars)
Note
Balance at January 1, 2016
Net income
Currency translation adjustment
Share-based compensation
Issuance of subordinate shares, net of transaction costs
Shares released from equity participation
Balance at December 31, 2016
Balance at January 1, 2017
Net income
Currency translation adjustment
Share-based compensation
Shares released from equity participation
Balance at December 31, 2017
17
17
17
17
17
Share
capital
Accumulated
deficit
Contributed
surplus
589,263
(507,921)
31,580
—
—
—
48,394
32,458
99,515
—
—
—
—
670,115
(408,406)
—
—
20,943
—
(31,087)
21,436
670,115
(408,406)
21,436
—
—
—
11,195
681,310
161,066
—
—
—
(247,340)
—
—
10,082
(11,195)
20,323
Accumulated
other
comprehensive
income
43,397
—
(863)
—
—
—
Total
156,319
99,515
(863)
20,943
48,394
1,371
42,534
325,679
42,534
—
3,255
—
—
325,679
161,066
3,255
10,082
—
45,789
500,082
The accompanying notes on pages 5 to 45 are an integral part of these consolidated financial statements.
43 Spin Master Corp.
Consolidated statements of cash flows
For the year ended December 31
(In thousands of United States dollars)
Operating activities
Net income
Notes
2017
2016
161,066
99,515
Adjustments to reconcile net income to net cash provided by operating activities
Income tax expense
Interest expense
Depreciation and amortization
Amortization of fair value increments to inventories acquired in business
combinations
8
6
7, 11, 12
Accretion expense
Amortization of financing costs
Impairment of non-current assets
Share-based compensation expense
Changes in net working capital
Changes in contingent consideration liabilities
Income taxes paid
Interest paid
Cash provided by operating activities
Investing activities
Capital expenditures - property, plant and equipment
Capital expenditures - intangible assets
Disposal of property, plant and equipment
Business acquisitions, net of cash acquired
Cash used in investing activities
Financing activities
Proceeds from borrowings
Repayment of borrowings
Issuance of subordinate voting shares, net of transaction costs
Cash (used in) provided by financing activities
6
6
5
17
19
11
12
23
15
15
17
59,363
3,357
44,908
2,805
2,559
879
9,693
10,082
16,782
(6,290)
(34,878)
(2,921)
267,405
(25,918)
(31,264)
—
(24,416)
(81,598)
25,791
(187,276)
—
(161,485)
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
Effect of foreign currency exchange rate changes on cash
(6,476)
(2,529)
Net increase in cash during the year
Cash, beginning of year
Cash, end of year
17,846
99,416
117,262
53,703
45,713
99,416
The accompanying notes on pages 5 to 45 are an integral part of these consolidated financial statements.
44 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
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 25).
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, Switzerland and Poland. The Rest of World
segment is primarily comprised of Hong Kong, China, Australia and Mexico, as well as all other areas of the world
serviced by the Company’s distribution network.
2.
Summary of 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 ("USD"), except as
otherwise indicated.
These consolidated financial statements were approved and authorized for issuance by the Board of Directors on
March 7, 2018.
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
Amendments to International Accounting Standard ("IAS") 7 - Statement of Cash Flows
The amendments to IAS 7 Statement of Cash Flows are part of the International Accounting Standards Board’s ("IASB")
Disclosure Initiative and help users of financial statements better understand changes in an entity’s debt. The
amendments require entities to provide disclosures about changes in their liabilities arising from financing activities,
including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses).
On initial application of the amendment, entities are not required to provide comparative information for preceding
periods.
The amendment was adopted on January 1, 2017. The amendment does not have a significant impact on the Company’s
consolidated financial statements for the year ended December 31, 2017.
Amendments to IAS 12 - Recognition of deferred tax assets for unrealized losses
The IASB issued the amendments to IAS 12 Income Taxes to clarify the accounting for deferred tax assets for unrealized
losses on debt instruments measured at fair value. The amendments clarify that an entity needs to consider whether
tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible
temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable
profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than
their carrying amount.
Entities are required to apply the amendments retrospectively. However, on initial application of the amendments, the
change in the opening equity of the earliest comparative period may be recognized in opening retained earnings (or
in another component of equity, as appropriate), without allocating the change between opening retained earnings
and other components of equity. Entities applying this relief must disclose that fact.
The amendment was adopted on January 1, 2017, 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 (the “Group”). Control is achieved when the Company:
•
has power over the investee;
45 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2. Significant accounting policies (continued)
(C) Basis of preparation (continued)
•
•
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.
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.
The Company has reclassified certain sales tax receivable and sales tax payable balances for the comparative period
in the statement of financial position, in order to reflect the appropriate netting of sales tax receivable and payable
accounts, in accordance with IAS 12 "Income Taxes". The impact of the reclassification was an increase of $22,164
in trade and other receivables and a corresponding increase in trade payables and other liabilities as at December
31, 2016.
(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.
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 CGUs) that are expected to benefit from the combination.
46 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2.
Significant accounting policies (continued)
(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; and
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 allow 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 deferred 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.
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.
47
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2.
Significant accounting policies (continued)
(H) Foreign currencies
The Company reports its financial results in USD; 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 USD 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, 2017 and 2016, 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 net income by the weighted average number of shares
outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average
number of 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 “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.
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 net income before taxes. 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.
48 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2.
Significant accounting policies (continued)
(J) Income taxes (continued)
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
Leasehold
improvements
Computer hardware
Machinery and
equipment
Not depreciated
30 years
2 years
3 years
Lesser of lease term or 5
years
3 years
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:
Brands
Character trademarks
Customer lists
Intellectual property
Indefinite
5 years
5 years
10 years
Non-competition agreements
1 year
Content development
Computer software
1-5 years
1 year
49
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2.
Significant accounting policies (continued)
(M) Intangible Assets (continued)
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 if applicable 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 incurred. An internally-generated intangible asset arising from
development (or from the development phase of an internal project) is recognized 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.
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 CGU to which the asset belongs. When a reasonable and consistent basis
50 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2.
Significant accounting policies (continued)
(M) Intangible assets (continued)
of allocation can be identified, corporate assets are also allocated to individual CGUs, or otherwise they are allocated
to the smallest group of CGUs for which a reasonable and consistent allocation 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 CGU) is estimated to be less than its carrying amount, the carrying amount
of the asset (or CGU) 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 CGU) 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 CGU) 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 initially recorded as an asset and subsequently expensed to net income or loss 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.
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 is recorded as a
reduction to revenue in the consolidated statements of operations and comprehensive income.
51 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2.
Significant accounting policies (continued)
(P) Provisions (continued)
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 obligation 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 was 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 that 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
Loans from related parties
Other long-term liabilities
Foreign exchange forward contracts
(R) Financial assets
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
FVTPL
The classification of financial assets depends on the nature and purpose of the financial assets and is determined at
the time of initial recognition.
52
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2.
Significant accounting policies (continued)
(R) Financial Assets (continued)
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 measured 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 classified as 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 offset 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 the Company are recognized as 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.
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.
53
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2.
Significant accounting policies (continued)
(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 hierarchy and liquidity risk disclosure
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).
The fair value of short-term financial instruments approximates their carrying amounts due to the relatively short period
to maturity. These include cash, trade and other receivables, as well as trade payables and accrued liabilities and
provisions. Fair value amounts represent point-in-time estimates and may not reflect fair value in the future.
(V) Accounting standards issued but not yet adopted
IFRS 15 Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”, which replaces IAS 11 - Construction
Contracts, IAS 18 - Revenue and International Financial Reporting Interpretations Committee 13 - Customer Loyalty
Programs ("IFRIC 13"), as well as various other interpretations regarding revenue. IFRS 15 outlines a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers; except for
contracts that are within the scope of the standards on leases, non-monetary transactions, insurance contracts, and
financial instruments. IFRS 15 also contains enhanced disclosure requirements. The standard is effective for annual
periods beginning on or after January 1, 2018.
In April 2016, the IASB published clarifications to IFRS 15 which addressed three topics (identifying performance
obligations, principal versus agent considerations, and licensing) and provides some transition relief for modified
contracts and completed contracts. The amendments are effective for annual periods beginning on or after January
1, 2018.
The guidance permits two methods of adoption: retrospectively to each prior reporting period restated (full retrospective
method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial
application (modified retrospective method). The Company will adopt the standard using the full retrospective method
to restate each prior reporting period presented.
In preparation for adoption of the standard, the Company has completed the review of relevant contracts and has
concluded there will be no material transitional adjustment upon adoption and no material changes in the timing of
revenue recognition is expected once adopted.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments”. The new standard includes revised
guidance on the classification and measurement of financial assets, including impairment, as well as new hedge
accounting principles.
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, fair value through other
comprehensive income ("FVOCI") 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 or
FVOCI. A debt instrument that has cash flows which represent solely payments of principal and interest is measured
at amortized cost only if it is held to collect the contractual cash flows or FVOCI if it is held to collect and sale contractual
cash flows. Otherwise it is measured at FVTPL. For financial liabilities designated as at FVTPL, the change in the fair
value attributable to
54
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
2.
Summary of Significant accounting policies (continued)
(W) Accounting standards issued but not yet applied (continued)
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.
IFRS 9 introduces a new expected credit loss ("ECL") model for all financial assets in scope of the impairment
requirements. The new ECL will result in an allowance for credit losses being recorded on financial assets regardless
of whether there has been an actual loss event.
In preparation for adoption of the standard, the Company has completed its assessment of the implications of
implementing the new standard and has concluded there will be no material transitional adjustment upon adoption
and no material changes are expected once adopted.
IFRS 2 Share Based Payments
The IASB issued amendments to IFRS 2 “Share Based Payments”. The amendment is intended to clarify 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.
IFRIC 22 Foreign Currency Transactions and Advance Consideration
IFRIC 22 clarifies the accounting for transactions that include the receipt or payment of advance consideration in a
foreign currency. The interpretation addresses how to determine the date of the transaction for the purpose of
determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on
the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance
consideration in a foreign currency. The IASB has reached the consensus that the date of the transaction, for the
purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or
deferred income liability. If there are multiple payments or receipts in advance, a date of transaction is established for
each payment or receipt. IFRIC 22 is effective for annual reporting periods beginning on or after January 1, 2018. The
Company is evaluating the impact on its financial statements.
IFRIC 23 Uncertainty Over Income Tax Treatments
In June 2017, the IASB issued IFRIC 23 to clarify how the requirements of IAS 12 Income Taxes should be applied
when there is uncertainty over income tax treatments. The interpretation specifically addresses:
• Whether an entity considers uncertain tax treatments separately;
• The assumptions an entity makes about the examination of tax treatments by taxation authorities;
• How and entity determine taxable profit (or loss), tax bases, unused tax losses, unused tax credits and tax rates;
and
• How an entity considers changes in facts and circumstances.
The interpretation is effective for annual periods beginning on or after January 1, 2019, with modified retrospective or
retrospective application. The Company is currently evaluating the impact of IFRIC 23 on its 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 and 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.
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. The estimates and underlying assumptions are reviewed on an ongoing
55
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
3.
Significant accounting judgments and estimates (continued)
basis, and adjustments 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 are CGUs of the Company.
(B) Functional currency
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange
rates as of the dates the transactions occur. 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.
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 CGU 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 required to sell. 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 contractual discounts, negotiated
discounts, customer audits, defective products and costs incurred by customers to sell the Company’s products. The
56 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
3.
Significant accounting judgments and estimates (continued)
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.
4.
Revenue
The Company earns revenue from the following primary sources:
• Sales of toys and related products; and
• Royalties and licensing fees earned for the use of intellectual property, application revenues and the distribution
of television programs (“Other revenue”)
Year ended December 31
Revenue from sale of goods
Other revenue
Total revenue
5.
Other (income) expenses
Year ended December 31
Impairment of non-current assets (see Notes 11,12)
Revaluation of provisions
Other
Total other expenses
6. Finance costs
Year ended December 31
Interest on bank loans
Bank fees
Accretion expense
Amortization of financing costs
Other
Total finance costs
7. Costs included within expenses
2017
2016
1,465,532
1,106,514
85,792
47,940
1,551,324
1,154,454
2017
9,693
—
(2,993)
6,700
2017
3,357
3,650
2,559
879
—
10,445
2016
265
(222)
(8)
35
2016
2,833
2,228
2,868
602
70
8,601
Included within expenses are the following: research and development costs, depreciation expense and employee
benefit expenses.
57 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
7. Costs included within expenses (continued)
Research and development costs
Year ended December 31
Research and development costs
Total research and development costs
Depreciation and amortization expense
Year ended December 31
Depreciation and amortization included in cost of sales
Depreciation and amortization included in administrative expenses
Total depreciation and amortization expense
Employee benefits expenses
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 compensation
Termination benefits
Other employee benefits
Total employee benefits expenses in administrative expenses
Total employee benefits expenses
Selling, marketing, distribution and product development
Year ended December 31
Selling
Marketing
Distribution
Product development
2017
23,365
23,365
2017
34,679
10,229
44,908
2017
2,671
955
3,626
129,684
10,082
1,680
28,509
169,955
173,581
2017
106,471
128,713
53,637
23,365
2016
22,017
22,017
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
Total selling, marketing, distribution and product development
312,186
243,689
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
2017
2016
169,955
136,474
8,382
23,696
31,246
10,229
18,558
5,131
19,482
22,496
6,896
10,529
262,066
201,008
58
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
8.
Income taxes
Income tax recognized in profit or loss
Year ended December 31
Current tax expense
Deferred tax expense
Total income tax expense
2017
59,838
(475)
59,363
2016
28,354
10,010
38,364
Reconciliations of the income tax expense for the year at the statutory tax rate with the amounts presented in the
consolidated statements of operations are 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 income
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 rate changes
Effect of tax settlement with the Canada Revenue Agency on transfer pricing matter
Other
Total income tax expense
2017
2016
220,429
137,879
58,414
36,538
1,112
480
(510)
(6,782)
2,528
—
4,121
59,363
1,471
277
(187)
(3,976)
—
(153)
4,394
38,364
The tax rates used for the reconciliations above is the Canadian statutory tax rate of the parent 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
Year ended December 31
Income tax payable
Total income tax payable
Deferred tax balances
2017
37,290
37,290
2016
12,331
12,331
The following is the analysis of deferred tax assets and liabilities presented in the consolidated statements of financial
position:
Year ended December 31
Deferred tax assets
Deferred tax liabilities
Net deferred tax asset
2017
21,945
(8,075)
13,870
2016
19,002
(6,411)
12,591
59 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
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
2016
Recognized in
profit or loss
Recognized in
equity
1,104
(3,990)
5,021
260
2,395
9,538
658
12,591
(560)
(276)
2,834
79
2,077
(2,786)
1,184
475
Unrecognized deductible temporary differences and unused tax losses
Year ended December 31
Tax losses
Other
Total deductible temporary difference and unused tax losses
2017
614
(4,508)
8,172
355
4,633
7,354
1,883
13,870
2016
1,919
2,139
4,058
70
(242)
317
16
161
602
41
804
2017
2,604
—
2,604
Unused tax losses of $1,077 will expire beyond 2027 and $1,527 may be carried forward indefinitely.
Unrecognized taxable temporary differences associated with investments
The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax
liabilities were not recognized as at December 31, 2017, is $228,749 (2016 - $182,708).
9. Trade and other receivables
As at
Trade receivables
Provisions for sales allowances
Allowance for doubtful accounts
Other receivables
Total net trade and other receivables
December 31, December 31,
2017
393,617
(120,547)
(2,789)
270,281
99,438
369,719
2016
307,051
(79,261)
(2,684)
225,106
69,962
295,068
Trade receivables disclosed above include amounts that are past due as 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
60-90 days
91-120 days
> 120 days
Total trade receivables past due but not impaired
December 31, December 31,
2017
9,697
7,229
35,771
52,697
2016
7,077
3,031
34,244
44,352
60 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
9. Trade and other receivables (continued)
Movement in the allowance for doubtful accounts
As at
Balance at the beginning of the year
Impairment losses recognized on receivables
Amounts written off during the year as uncollectible
Impairment losses reversed
Foreign currency translation
Balance as at December 31, 2017
December 31, December 31,
2017
2,684
8,060
(7,636)
(424)
105
2,789
2016
1,245
2,058
(409)
(237)
27
2,684
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
Raw materials
Finished goods
Total inventories
December 31, December 31,
2017
10,931
109,398
120,329
2016
9,114
70,810
79,924
The cost of inventories recognized as an expense in cost of sales during the year was $670,621 (2016 - $501,551).
During 2017, $6,114 of inventories were written down to net realizable value (2016 - $4,048). 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, 2017 and December 31, 2016
11. Property, plant and equipment
Cost
Balance at December 31, 2015
Additions
Asset retirements
Asset impairments
Assets recognized upon acquisition
Foreign currency translation
Total at December 31, 2016
Additions
Asset retirements
Asset impairments
Foreign currency translation
Total at December 31, 2017
Accumulated depreciation
Balance at December 31, 2015
Depreciation
Asset retirements
Asset impairments
Assets recognized upon acquisition
Foreign currency translation
Total at December 31, 2016
Depreciation
Asset retirements
Foreign currency translation
Total at December 31, 2017
Net carrying amount
Total at December 31, 2016
Total at December 31, 2017
Moulds, dies
and tools
Equipment
Property, land
and building
Computer
hardware
Total
80,161
19,574
(1,317)
(854)
1,205
(2,885)
95,884
19,505
(6,341)
(660)
3,916
6,789
2,470
(2)
(343)
6,548
(61)
15,401
2,134
(127)
—
706
6,420
1,517
(27)
(230)
1,930
(157)
9,453
2,954
(127)
—
590
112,304
18,114
12,870
7,893
475
(19)
(150)
244
(28)
101,263
24,036
(1,365)
(1,577)
9,927
(3,131)
8,415
129,153
1,325
(447)
—
470
9,763
25,918
(7,042)
(660)
5,682
153,051
Moulds, dies
and tools
Equipment
Property, land
and building
Computer
hardware
Total
(67,771)
(11,417)
1,312
616
(80)
321
(77,019)
(17,445)
6,341
(2,631)
(90,754)
(5,718)
(1,644)
2
338
(4,124)
(82)
(11,228)
(1,555)
82
(564)
(13,265)
18,865
21,550
4,173
4,849
(4,938)
(299)
22
209
(1,359)
(45)
(6,410)
(1,080)
52
(355)
(7,793)
3,043
5,077
(6,740)
(446)
19
149
(52)
(430)
(85,167)
(13,806)
1,355
1,312
(5,615)
(236)
(7,500)
(102,157)
(655)
400
(506)
(20,735)
6,875
(4,056)
(8,261)
(120,073)
915
1,502
26,996
32,978
For the year ended December 31, 2017, the Company recorded $660 (2016 - $265) of impairment losses in respect
of 4 CGUs (2016 - 8). 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, 2017 and December 31, 2016
12.
Intangible assets
Trademarks,
licenses &
customer
lists - definite
Brands -
indefinite
Content
development
Computer
software
Cost
Balance, December 31, 2015
33,951
13,500
—
—
44,480
1,542
79,973
—
(5,734)
6,300
2,463
83,002
—
—
—
—
—
—
—
—
—
30,109
62
—
20,747
195
34,504
(3,045)
4,400
124
35,983
(402)
(2,713)
—
(277)
(3,392)
(3,180)
1,074
(320)
(5,818)
42,722
15,390
—
852
1,979
60,943
(859)
—
4,487
94,680
(29,688)
(12,263)
—
(1,935)
(43,886)
(19,173)
129
(978)
18,484
2,090
(288)
—
477
20,763
1,155
(5,288)
—
1,517
18,147
(16,197)
(1,708)
288
(898)
(18,515)
(1,820)
4,690
(1,276)
(63,908)
(16,921)
Total
108,657
17,542
(288)
66,079
4,193
196,183
31,264
(14,926)
10,700
8,591
231,812
(46,287)
(16,684)
288
(3,110)
(65,793)
(24,173)
5,893
(2,574)
(86,647)
Additions
Disposals
Asset acquisitions via business combinations
Foreign currency translation
Total at December 31, 2016
Additions
Asset impairments
Asset acquisitions via business combinations
Foreign currency translation
Total at December 31, 2017
Balance, December 31, 2015
Amortization
Disposals
Foreign currency translation
Total at December 31, 2016
Amortization
Asset impairment
Foreign currency translation
Total at December 31, 2017
Net carrying amount
Balance at December 31, 2016
Balance at December 31, 2017
79,973
83,002
31,112
30,165
17,057
30,772
2,248
1,226
130,390
145,165
Indefinite life intangibles have been allocated for impairment testing purposes to the following CGUs determined by
brands:
•
•
•
•
•
•
The ‘Wild Planet’ brand has been allocated to the ‘Spy Gear’ CGU;
The ‘Meccano’ brand has been allocated to the ‘Meccano Brand’ CGU;
The ‘Imagination Games’, ‘Head Bandz’, ‘Boom Boom Balloon’ ‘Catch a Bubble’, 'Bellz', 'EG Games', 'Cardinal',
'Marbles' and 'Perplexus' brands have been allocated to the ‘Games and Puzzles’ CGU;
The 'Swimways' and 'Aerobie' brands have been allocated to the 'Swimways' CGU;
The ‘Toca Boca’ and 'Sago Mini' brands have been allocated to the ‘Toca Boca’ CGU; and
The ‘Etch A Sketch’ brand has been allocated to the ‘Etch A Sketch’ CGU.
Impairment losses
For the year ended December 31, 2017, the Company recorded $9,033 (2016 - $nil) of impairment losses in respect
of 3 CGUs (2016 - nil) . Impairment losses are recorded where the carrying amount of the CGU exceeds its recoverable
amount. The recoverable amount was based on the CGU's 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 11.5%
per annum (2016: 11.1% per annum).
63
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
12.
Intangible assets (continued)
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% (2016: 1.0%) 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 CGUs
as follows:
As at
Spy Gear
Meccano Brand
Games and Puzzles
Swimways
Toca Boca
Etch A Sketch
Total
13. Goodwill
As at
Balance, beginning of year
Additions during the year
Foreign currency translation
Total goodwill
December 31, December 31,
2017
5,047
2,221
27,313
27,790
13,000
7,631
83,002
2016
7,577
2,221
25,695
24,690
13,000
6,790
79,973
December 31, December 31,
2017
91,707
13,123
657
105,487
2016
36,130
55,806
(229)
91,707
Goodwill has been allocated for impairment testing purposes to the following CGUs:
• The ‘Feva’ business has been allocated to the ‘Spin Master UK’ CGU;
• The ‘Meccano’ business has been allocated to the ‘Meccano Brand’ CGU;
• The ‘X Concepts (Tech Deck)’ business has been allocated to the ‘Tech Deck’ CGU;
• The ‘Cardinal’, 'EG Games', 'Marbles' and 'Perplexus' businesses have been allocated to the ‘Games and Puzzles’
CGU;
• The ‘Etch A Sketch’ business has been allocated to the ‘Etch A Sketch’ CGU;
• The ‘Toca Boca’ business has been allocated to the ‘Toca Boca’ CGU; and
• The ‘Swimways’ and 'Aerobie' businesses have been allocated to the ‘Swimways’ CGU.
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
2017
215
2,145
1,206
44,223
4,148
11,492
42,058
105,487
2016
215
2,145
1,206
35,264
3,933
11,492
37,452
91,707
There have been no impairment losses recognized with respect to goodwill during 2017 (2016 - $nil).
64 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
14. Trade payables and other liabilities
As at
Trade payables
Accrued liabilities
Total trade payables and other liabilities
15. Loans and borrowings
As at
Unsecured debt (at amortized cost)
Loans from third parties (i)
Secured debt (at amortized cost)
Bank facilities (ii) and (iii)
Less:
Financing costs
Total loans and borrowings
Current
Non-current
Total loans and borrowings
December 31, December 31,
2017
155,519
195,238
350,757
2016
92,171
136,764
228,935
December 31, December 31,
2017
2016
44
44
532
576
45
531
531
—
531
215
215
160,831
161,046
2,901
158,145
158,107
38
158,145
(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 1 year (2016 - 3 years). The weighted average effective interest
rate on the loans is 1.27% per annum (2016 - 1.06% per annum).
(ii) Variable rate secured facility with maximum borrowings of $905 to finance television production. 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.
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, 2017, the Company had $532 outstanding (December 31, 2016 - $1,640) on the obligation.
On March 6, 2017 the Company entered into a Revolving Credit Facility (the "Production Facility") with a limit of
$31,867 to finance television and film production. The interest rate on amounts drawn under the Production Facility
bear interest at a variable rate referenced to the lending institution’s Canadian dollar prime rate. As at December 31,
2017, nil was drawn on the Production Facility.
(iii) 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 $280,000
to $510,000. The new maturity date of the Facility is December 2021. Advances under the Facility may be used
for general corporate purposes including refinancing existing Indebtedness, funding working capital requirements,
permitted acquisitions and permitted distributions.
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;
65
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
15.
Loans and borrowings (continued)
• 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 to 1.00 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 million 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.
The Company was in compliance with the total leverage and interest coverage ratio covenants as at December 31,
2017 and December 31, 2016.
As at December 31, 2017, the Company had utilized $545 (December 31, 2016 - $160,912) of its Facility: nil
(December 31, 2016 - $159,190) drawn in LIBOR Loans, nil drawn in Swing Line loans and $545 (December 31,
2016 - $1,722) 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
2017
8,956
—
5,826
16,351
31,133
25,398
5,735
31,133
As at December 31, 2015
Provisions recognized
Accretion recognized
Reductions arising from payments
Revaluation of provisions
As at December 31, 2016
As at December 31, 2016
Provisions recognized
Accretion recognized
Reductions arising from payments
Revaluation of provisions
As at December 31, 2017
Defectives
Royalties
6,038
10,943
—
(6,038)
—
10,943
10,943
14,936
—
(16,923)
—
8,956
584
—
—
(334)
(221)
29
29
—
—
—
(29)
—
Supplier
liabilities
Contingent
consideration,
acquisitions
3,493
1,709
—
—
—
8,458
11,892
2,868
(861)
(52)
5,202
22,305
5,202
1,616
—
(992)
—
5,826
22,305
1,539
2,559
(6,773)
(3,279)
16,351
2016
10,943
29
5,202
22,305
38,479
26,454
12,025
38,479
Total
18,573
24,544
2,868
(7,233)
(273)
38,479
38,479
18,091
2,559
(24,688)
(3,308)
31,133
66 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
16. Provisions and contingent liabilities (continued)
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 23 which includes an earn-
out payable over the next five calendar years. The fair value of the total contingent consideration on
December 31, 2017 was $16,351 (2016 - $22,305) and is based on the achievement of certain financial
performance criteria. The accretion of the earn-out is recorded in other (income) expense in 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.
Share capital
(a) Authorized as at December 31, 2017 and December 31, 2016
Unlimited number of Multiple voting shares;
Unlimited number of Subordinate voting shares; and
Unlimited number of Preferred shares issuable in series.
As at
Multiple voting shares
Subordinate voting shares
Total share capital issued and outstanding
Multiple voting shares
Subordinate voting shares
Total share capital issued and outstanding
December 31, December 31,
2017
375,115
306,195
681,310
2016
406,595
263,520
670,115
Number of
shares
Number of
shares
73,549,812
77,230,812
28,126,094
24,445,309
101,675,906
101,676,121
67
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
17.
Share capital (continued)
Issued and outstanding
On May 24, 2017 the three founders of the Company closed an offering of 3,681,000 subordinate voting shares of the
Company at a price of $30.21 per share, for aggregate gross proceeds to the selling shareholders of $111,203. To
satisfy the sale, the selling shareholders converted in aggregate 3,681,000 multiple voting shares into subordinate
voting shares on a one-for-one basis. The Company did not receive any proceeds from the sale of subordinate voting
shares associated with this offering.
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.
(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 ( the "Initial Offering") of the Company. The Participation Arrangements served to reward past service and
encourage retention. The terms of the Participation Arrangements differ between participants with vested 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 of 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 at December 31, 2017, 2,473,228 Subordinate voting shares have vested with a fair value of $106,439 (December
31, 2016 - $59,229).
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).
The RSUs served to reward past service of the employees and align their interests 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 RSUs were accounted for as equity instruments as the Company had the ability and intent to settle the awards
with Subordinate voting shares. The compensation expense for RSUs was 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.
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.
68
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
17.
Share capital (continued)
The expense recognized for employee services received during the year is shown in the following table:
Expense arising from equity-settled “Participation Agreement” transactions
Expense arising from equity-settled “RSU” transactions
Expense arising from share options
Total share-based compensation expense
Year ended December 31,
2017
8,689
—
1,393
10,082
2016
14,270
5,949
724
20,943
Compensation expense of $10,082 (2016 - $20,943) is recorded in administrative expenses in the consolidated
statement of operations and comprehensive income. A corresponding amount was recorded in contributed surplus.
In 2017, the Company incurred compensation expense of nil its financial results for RSU equity awards granted (2016
- $5,949).
There was no activity for Participation Arrangements and RSUs since December 31, 2016 as shown below:
Participation Agreement
RSUs
Balance as at December 31, 2016
Number
4,739,038
Weighted average
grant date fair value
65,174
Number
747,521
Balance as at December 31, 2017
4,739,038
65,174
747,521
Weighted average
grant date fair value
10,280
10,280
The weighted average remaining contractual life for Participation Arrangements outstanding as at December 31, 2017
is 24 months.
The following is a summary of the activity of the outstanding share purchase options:
Balance as at December 31, 2016
Granted during the period
Balance as at December 31, 2017
18. Earnings per share
Number of
options
Weighted average exercise
price (CAD)
346,148
206,551
552,699
$22.94
$37.64
$28.43
Details of the calculations of earnings per share are set out below:
2017
2016
Weighted average
number of shares
Per common share
amount ($)
Weighted average
number of shares
Per common share
amount ($)
Basic
Diluted
101,675,906
101,846,680
1.58
1.58
100,647,133
100,702,757
0.99
0.99
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. As these share issuances are anti-dilutive, they are not
included in the computation of diluted earnings per share.
69 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
19. Changes in net working capital
(Increase) decrease in:
Trade and other receivables
Inventories
Prepaid expenses
Advances on royalties
Increase (decrease) in:
Trade payables and other liabilities
Deferred revenues
Provisions
Other
Total changes in net working capital
Year ended December 31,
2017
2016
(136,594)
(42,384)
1,005
5,160
(150,612)
(39,205)
(6,731)
(10,140)
(172,813)
(206,688)
186,668
4,972
(2,596)
550
189,594
16,782
90,484
(1,265)
30,249
—
119,468
(87,220)
20. 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.
There were no related party transactions included in consolidated financial statements of the Company as at December
31, 2017 and December 31, 2016.
Compensation of key management personnel
The remuneration of directors and other key management personnel during the year was as follows:
Year ended December 31
Salaries, wages and bonuses
Other employee benefits
Share-based compensation
Total compensation of key management personnel
2017
5,230
340
1,037
6,607
2016
5,293
1,548
9,155
15,996
21. 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
22. Commitments for expenditures
2017
10,539
10,539
2016
7,099
7,099
As at December 31, 2017, the Company had minimum guarantees to licensors of approximately $47,331 (2016 -
$32,092).
70 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
22. Commitments for expenditures (continued)
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
23. Business combinations
Acquisition of Perplexus
2017
2016
6,832
40,859
16,231
63,922
6,784
16,097
—
22,881
On November 30, 2017 the Company acquired certain assets related to the Perplexus product, co-invented in 2001
by Michael McGinnis and Klitsner Industrial Design Group of San Francisco and manufactured by Busy Life LLC.
Pursuant to the terms set forth in the agreement, the Company acquired control of Perplexus through the acquisition
of certain assets, for a total purchase consideration of $9,861 less an escrow for possible adjustments. In addition,
the Company has agreed to pay an earn-out of up to $2,000 per year based on Perplexus sales over a five year
term, commencing January 1, 2018.
Included in the total purchase consideration of $9,861 is $815 related to the estimated fair value of the future earn-
out payments as at the acquisition date. The total purchase consideration has been initially allocated to the identifiable
intangible assets based on its estimated fair values of $2,000 (related to the trade name), and $7,861 of goodwill
acquired. The assets are included in the games and puzzles product category, belonging to the North America segment
effective November 30, 2017. The pro forma and actual results of operations for this acquisition have not been presented
and are immaterial. The Company incurred $90 in transactions related costs which have all been included in
administrative expenses in the consolidated statements of operations and comprehensive income for the year ended
December 31, 2017.
Assets acquired at the date of acquisition
Assets acquired
Intangible assets
Fair value of identifiable assets acquired
Goodwill arising on acquisition
Consideration transferred
Fair value of identifiable assets acquired
Goodwill arising from transaction
Fair Value as at November 30, 2017
2,000
2,000
Total
9,861
2,000
7,861
Goodwill relates to the benefit of expected synergies, revenue growth and future market development. These benefits
are not recognized separately from goodwill as they do not meet the recognition criteria for identifiable intangible
assets. As at the date of acquisition, $7,861 of goodwill is expected to be deductible for income tax purposes and is
being amortized for tax purposes over 15 years.
Net cash outflow on acquisition
Consideration paid in cash
Net cash outflow
Total
9,046
9,046
71
Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
23. Business combinations (continued)
Acquisition of Aerobie Inc. ("Aerobie")
On July 28, 2017 the Company acquired certain assets of Aerobie, a privately held Company headquartered in Palo
Alto, California. Aerobie is a manufacturer of outdoor flying disks and sports toys, which will complement the Company's
existing products in the outdoor segment. Pursuant to the terms set forth in the agreement, the Company acquired
control of Aerobie through the acquisition of certain assets, for total purchase consideration of $11,418, less an escrow
for possible adjustments. Additionally, the Company has agreed to pay additional consideration in the form of a royalty,
calculated in each quarterly period of a three year royalty term, commencing January 1, 2018.
Included in the total purchase consideration of $11,418 is $724 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 $6,100 (related to brands and customer relationships), $4,606
of goodwill acquired and $712 of inventory acquired. The assets are included in the Outdoor product category, belonging
to the North America segment effective July 28, 2017. The pro forma and actual results of operations for this acquisition
have not been presented and are immaterial. The Company incurred $200 in transaction related costs which have
been included in administrative expenses in the consolidated statement of operations and comprehensive income for
the year ended December 31, 2017.
Assets acquired at the date of acquisition
Assets acquired
Inventories
Intangible assets
Fair value of identifiable assets acquired
Goodwill arising on acquisition
Consideration transferred
Fair value of identifiable assets acquired
Goodwill arising from transaction
Fair Value as at July 28, 2017
712
6,100
6,812
Total
11,418
(6,812)
4,606
Goodwill relates to the benefit of expected synergies, revenue growth and future market development. These benefits
are not recognized separately from goodwill as they do not meet the recognition criteria for identifiable intangible
assets. As at the date of acquisition, $4,606 of goodwill is expected to be deductible for income tax purposes and is
being amortized for tax purposes over 15 years.
Net cash outflow on acquisition
Consideration paid in cash
Net cash outflow
Acquisition of Marbles Corporation
Total
10,694
10,694
On April 28, 2017, the Company acquired Marbles Holdings, LLC ("Marbles"), a privately held Company headquartered
in Chicago, Illinois, pursuant to an asset purchase agreement. Marbles is a leader in brain-building and high-quality
games, gifts and gadgets for all ages. The acquisition will complement the Company’s existing products and builds
upon the Company’s substantial presence and will strengthen its position as a leader in the Games market. The
Company obtained control of the Marbles business through the acquisition of brand-related patents, trademarks and
inventory for the brands for total cash consideration of $4,675.
72 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
23. Business combinations (continued)
Acquisition of Marbles Corporation (continued)
The acquired assets were sold through a bankruptcy court approved sale process and include all of Marbles’ proprietary
and licensed games, warehoused inventory and the Marbles name and website. Spin Master submitted a bid for the
assets and subsequently emerged as the successful bidder at the conclusion of the open auction sale process on
April 24, 2017. The court overseeing the Marbles bankruptcy case issued an order approving the sale to Spin Master
on April 26, 2017. The Company closed the acquisition of Marbles on April 28, 2017.
The total purchase consideration has been allocated to identifiable intangible assets based on their estimated fair
values of $2,600 (related to brands, trademarks and customer relationships). Additionally $1,419 of net tangible assets
were acquired. The assets are included in the Games & Puzzles product category, belonging to the North America
segment effective April 28, 2017. The pro forma and actual results of operations for this acquisition have not been
presented and are immaterial. The Company incurred $1,218 in transaction related costs, $262 of which have been
included in administrative expenses and $956 of which have been included in other expenses in the consolidated
statement of operations and comprehensive income for the year ended December 31, 2017.
Assets acquired and liabilities recognized at the date of acquisition
Fair Value as at April 28, 2017
Assets acquired
Inventories
Prepaid expenses
Intangible assets
Liabilities assumed
Royalties payable
Fair value of identifiable net assets acquired
Goodwill arising on acquisition
Consideration transferred
Fair value of identifiable net assets acquired
Goodwill arising from transaction
983
450
2,600
4,033
14
14
4,019
Total
4,675
(4,019)
656
Goodwill relates to the benefit of expected synergies, revenue growth and future market development. These benefits
are not recognized separately from goodwill as they do not meet the recognition criteria for identifiable intangible
assets. As at the date of acquisition, $656 of goodwill is expected to be deductible for income tax purposes and is
being amortized for tax purposes at 5% declining balance.
Net cash outflow on acquisition
Consideration paid in cash
Net cash outflow
Prior year acquisitions
Total
4,675
4,675
Acquisition of Swimways Corporation (“Swimways”)
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
73 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
23. Business combinations (continued)
Acquisition of Swimways Corporation (“Swimways”) (continued)
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 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.
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
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
74 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
23. Business combinations (continued)
Acquisition of Swimways Corporation (“Swimways”) (continued)
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.
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.
75 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
23. Business combinations (continued)
Acquisition of Toca Boca and Sago Mini companies (“Toca Boca”) (continued)
Assets acquired and liabilities recognized at the date of acquisition
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
Fair value as at May 2, 2016
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.
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.
76 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
23. Business combinations (continued)
Acquisition of assets of Editrice Giochi SRL (“EG Games”) (continued)
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.
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.
77 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
23. Business combinations (continued)
Acquisition of assets of Editrice Giochi SRL (“EG Games”) (continued)
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
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
Fair value as at February 11, 2016
572
6,790
7,362
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.
78 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
23. Business combinations (continued)
Acquisition of assets of Etch A Sketch (continued)
Net cash outflow on acquisition
Consideration paid in cash
Net cash outflow
24.
Financial instruments and risk management
Capital management
Management includes the following items in its definition of capital:
As at
Capital components
Short-term borrowings
Non-current borrowings
Total debt
Share capital
Contributed surplus
Accumulated deficit
Total capital
Total
8,950
8,950
2017
2016
531
—
531
681,310
20,323
(247,340)
454,824
158,107
38
158,145
670,115
21,436
(408,406)
441,290
The Company makes adjustments to its' 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 year ended
December 31, 2017.
The Company is subject to capital requirements under the credit facility agreement, as described in Note 15. As at
December 31, 2017, 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 translation 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.
79 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
24.
Financial instruments and risk management (continued)
As at December 31, 2017, the Company is committed under outstanding foreign exchange contracts to purchase
USD, representing total purchase commitments of approximately $48,060 (2016 - $162,777).
The consolidated statements of financial position include the following amounts (by denomination) presented in
USD:
As at December 31
Financial Assets
USD
CAD
Euros
Pound
Peso
Yen
Australian dollar
Total Assets
Financial Liabilities
USD
CAD
Euros
Pound
Peso
Yen
Australian dollar
Total Liabilities
2017
2016
335,123
161,090
19,248
56,173
25,881
40,392
19
9,634
10,027
91,696
39,598
21,266
—
—
486,470
323,677
85,569
145,330
38,863
9,402
14,750
99
3,365
293,838
58,687
8,183
7,366
2,537
—
—
297,378
370,611
Foreign currency risk - sensitivity analysis
The Company is consistently exposed to the Canadian dollar, the Peso, the British Pound 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, 2017, a 5% strengthening of the above currencies against the USD would have
resulted in a decrease to net assets of $3,508 (2016 - an increase to net assets of $4,517).
The sensitivity analysis includes only outstanding foreign currency denominated monetary assets and liabilities, and
adjusts their translation as at the end of 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 the year ended December 31, 2017, with all other variables held constant, a 50 basis point increase in interest
rates would have resulted in no impact to net income for the year (2016 - a decrease to net income of $600).
80 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
24.
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, 2017, approximately 33% (2016 - 43%) of the Company’s trade receivables are from three major
retail customers which represent approximately 48% of gross product sales for the year ended December 31, 2017
(2016 - 52%). The Company's credit insurance provides coverage for all of these customers.
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.
To the extent that interest rates are floating, 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.
The Company's contractual maturities are as follows:
Trade payables and other 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
As at December 31,
Secured bank loan facilities
Amount used
Amount unused
Total as at December 31
Less than
1 year
1 year to
5 years
Greater than
5 years
2017 Total
350,757
531
25,398
376,686
—
—
5,735
5,735
—
—
—
—
350,757
531
31,133
382,421
Less than
1 year
1 year to
5 years
Greater than
5 years
2016 Total
228,935
—
158,107
26,454
413,496
—
110
38
12,025
12,173
—
—
—
—
—
228,935
110
158,145
38,479
425,669
2017
2016
531
510,373
510,904
160,831
343,450
504,281
81 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
24. 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 and their carrying amounts approximate their fair values.
The fair value of foreign exchange forward contracts represented an asset as at December 31, 2017 of $971 and is
recorded in other assets (2016 - liability $78 and is 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.
25. 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 and 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 product category. The directors of
the Company have chosen to organize the Company around the 3 operating segments as follows: (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 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
Income before income tax expense
Year ended December 31
2017
2016
1,082,709
368,009
206,310
1,657,028
(105,704)
1,551,324
189,973
19,647
19,806
229,426
(8,997)
220,429
847,278
271,130
136,150
1,254,558
(100,104)
1,154,454
65,023
65,455
44,314
174,792
(36,913)
137,879
Revenues for North America include revenues attributable to Canada of $142,707 (2016 - $122,350) for the period
ended December 31, 2017.
Revenue reported by segment above represents revenue generated from external customers. There were no inter-
segment sales in the current year (2016 - $nil). The Company does not include sales adjustments such as trade
discounts and other allowances in reporting revenue by segment (“referred to as gross product sales”).
82 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
25. 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 income tax expense earned by each segment without allocation
of other expenses, foreign exchange (gain) loss 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
2017
2016
489,390
99,819
138,087
727,296
211,089
938,385
571,267
105,561
37,596
714,424
61,172
775,596
2017
2016
204,136
12,741
9,665
226,542
84,033
310,575
140,880
10,519
6,042
157,441
122,349
279,790
Non-current assets for North America include non-current assets attributable to Canada of $82,862 (2016 - $68,902)
for the periods ending December 31, 2017.
Segment liabilities
As at December 31
Liabilities
North America
Europe
Rest of world
Total segment liabilities
Corporate and other
Total consolidated liabilities
2017
2016
295,313
60,619
55,335
411,267
27,036
438,303
220,317
25,116
15,518
260,951
188,966
449,917
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 CGUs. 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
other liabilities) and deferred tax liabilities. Liabilities for which reportable segments are jointly liable are allocated
in proportion to segment assets.
83 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
25. 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 and amortization
Corporate and other
Total consolidated depreciation and amortization
2017
2016
33,681
5,207
3,216
42,104
2,804
44,908
24,193
3,100
1,808
29,101
1,389
30,490
In addition to the depreciation and amortization reported above, impairment losses of $9,693 (2016 - $265) were
recognized in respect of property, plant and equipment and intangible assets, for the year ended December 31, 2017.
These impairment losses were attributable to the following reportable segments:
Year ended December 31
Impairment losses
North America
Rest of world
Total impairment losses
2017
9,033
660
9,693
2016
—
265
265
Revenue from major product categories
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 and puzzles, and fun furniture
Remote control and interactive characters
Boys action and high-tech construction
Pre-school and girls
Outdoor
Gross product sales
Other revenues and sales allowances
Total revenues
Major customers
2017
2016
365,378
593,355
112,102
493,069
93,124
1,657,028
(105,704)
1,551,324
337,768
282,777
154,454
460,484
19,075
1,254,558
(100,104)
1,154,454
Sales to the Company’s largest customers accounted for 48.1% and 52.0% of consolidated gross product sales for
2017 and 2016 respectively. Sales to single customers of the company that contributed 10% or more to gross product
sales include three customers. The largest customer contributed $363,674 (2016 - $303,952 ) while the second and
third largest customers each contributed $230,696 (2016 - $193,343 ) and $203,425 (2016 - $154,119), respectively.
No other single customer contributed 10% or more to gross product sales of the company for 2017 and 2016.
84 Spin Master Corp.
Consolidated financial statements for the years ended December 31, 2017 and December 31, 2016
26. Events after the reporting period
On February 28, 2018, the Company signed an agreement to acquire certain assets relating to the Gund line of business
from Enesco LLC for $79.1 million. Gund is a manufacturer and distributor of plush toys and is best known for its’ line
of teddy bears. Established in 1898, Gund has a 120-year history as a market leader and toy industry pioneer widely
known for its high quality and innovative design. Headquartered in Edison, New Jersey, Gund distributes product
throughout the United States, Canada, Europe, Japan, Australia and South America. The acquisition will allow Spin
Master to build a stable platform for expansion into the infant toy and specialty gift categories and further grow the
business internationally. Gund will be included in the Activities, Games and Puzzles and Fun Furniture business
segment. The purchase consideration will be funded from internally generated cash resources and the Company’s
existing Credit Facility. The acquisition is expected to close on April 1, 2018.
85
GROWTH STRATEGIES
INNOVATE ACROSS THE PORTFOLIO OF
BRANDS AND BUSINESS SEGMENTS
DEVELOP EVERGREEN GLOBAL
ENTERTAINMENT PROPERTIES
• Leverage competitive strengths
to build a robust pipeline in all
business segments
• Continue to focus on strategic
brand building
• Continue to invest in advanced
technology and entertainment licenses
• Expand capability and product offering
in digital mobile gaming
• Capitalize on success of current
entertainment properties
• Develop at least one
new show per year
• Strategically relaunch
properties to capitalize
on value of owned
content library
b
INCREASE SALES IN INTERNATIONAL
DEVELOPING AND EMERGING MARKETS
LEVERAGE GLOBAL PLATFORM
THROUGH STRATEGIC ACQUISITIONS
• Fragmented industry with opportunities for consolidation
• Strong balance sheet with financial flexibility
• Optimize international distribution
network
• Strategically tailor product offering to
local international markets
• Increase proportion of sales outside
of North America to 40% in the
medium term
FINANCIAL INFORMATION
(US$ millions)
+30.2%
+30.2%
GROSS PRODUCT SALES1
GROSS PRODUCT SALES1
CAGR 2013–2017
CAGR 2013–2017
$1,657
$1,657
$1,255
$1,255
+53.2%
+53.2%
ADJUSTED EBITDA1
ADJUSTED EBITDA1
CAGR 2013–2017
CAGR 2013–2017
+66.0%
+66.0%
ADJUSTED NET INCOME1
ADJUSTED NET INCOME1
CAGR 2013–2017
CAGR 2013–2017
$292
$292
$983
$983
$812
$812
$577
$577
$206
$206
$160
$160
$112
$112
$53
$53
$173
$173
$120
$120
$99
$99
$66
$66
$23
$23
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
2013
2014 2015
2016 2017
1. Non-IFRS financial measures. 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 within Spin Master’s public filings 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).
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
8 Adelaide Street West, Suite 200
Toronto, ON M5H 0A9
Annual Meeting of Shareholders
May 9, 2018
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
John Cassaday, Lead Director 2017
Jeffrey I. Cohen
Ben Gadbois
Ronnen Harary
Dina Howell
Anton Rabie
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 and Chief Operating
Officer
Ben Varadi
Executive Vice President and Chief
Creative Officer
Bill Hess
Executive Vice President of Operations
and 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 evergreen global entertainment properties; international sales expansion; acquisitions; partnering with others; new products and entertainment properties to be introduced in 2018 and beyond. The words “believe”, “focus”, “expectations”, “plan”, “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”, “achieve”, or “execute” 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 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, 2017: 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; 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
SPIN MASTER CORP.
2017 ANNUAL REPORT