Spin Master
Annual Report 2022

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2 0 2 2 A N N U A L R E P O R T S P I N M A S T E R C O R P . REIMAGINE EVERYDAY PLAY 2022 ANNUAL REPORT SPIN MASTER CORP. ABOUT SPIN MASTER It started with a few grass seeds and an idea, providing the launchpad to become an internationally renowned toy innovator. From disrupting the sandbox with innovative toys, Spin Master expanded to the small screen with its first TV show. Then, we levelled up to the mobile screen, acquiring two digital game studios to create a trifecta of Toys, Entertainment and Digital Games. Today, Spin Master is a leading children’s entertainment company. With three thriving creative centres and a roster of amazing brands, we inspire magical play experiences for kids and their families around the world, every day. We continue to pursue our long-term strategy of leveraging our intellectual property across all three creative centres, growing our global footprint, making meaningful acquisitions and delivering magical experiences for children and their families. Max Rangel, Global President & CEO Financial Highlights 1 | Company Overview 2 | Corporate Strategy 3 Letter to Shareholders 4 | Corporate Social Responsibility 8 | 2022 Financial Review 10 This Annual Report is intended to provide shareholders and other interested persons with information concerning Spin Master Corp. (the “Company”). For further information concerning the Company, shareholders and other interested persons should consult the Company’s disclosure documents, such as its most recent Annual Information Form and Management’s Discussion and Analysis. Copies of the Company’s continuous disclosure documents can be obtained from its website at www.spinmaster.com or from www.sedar.com. Readers should also review the note further in this report, in the section entitled Forward-Looking Statements, concerning the use of Forward-Looking Statements, which applies to the entirety of this Annual Report. For the convenience of readers, portions of this Annual Report may be extracted and made available separately as standalone documents. However, in all cases, such extracts should be considered to be part of this Annual Report as a whole. All figures mentioned in this report are in U.S. dollars, in millions, and as of December 31, 2022, unless otherwise noted. Financial Highlights Revenue 2018 2019 2020 2021 2022 Toy Gross Product Sales1 $1,632 $1,582 $1,571 $2,042 $2,020 2018 2019 2020 2021 2022 Net Income2 Adjusted Net Income1,2 2018 2019 2020 2021 2022 $155 $64 $46 2018 2019 2020 2021 2022 $199 $261 $164 $93 $53 $1,708 $1,691 $1,624 $1,962 $1,979 $221 $244 Adjusted EBITDA1,2 Adjusted EBITDA Margin1,2 2018 2019 2020 2021 2022 $304 $219 $181 $414 $389 2018 2019 2020 2021 2022 13.8% 11.5% 18.6% 20.3% 19.3% Cash Provided by Operating Activities Free Cash Flow1 2018 2019 2020 2021 2022 $193 $98 $311 $419 $249 2018 2019 $5 2020 2021 2022 $110 $150 $232 $340 $2,020M Revenue $261M Net Income2 $389M Adjusted EBITDA1,2 $1,979M Toy Gross Product Sales1 $244M Adjusted Net Income1,2 $19.3% Adjusted EBITDA Margin1,2 $249M Cash Provided by Operating Activities $150M Free Cash Flow1 1. Non-GAAP financial measure. Non-GAAP financial measures do not have any standardized meaning prescribed by International Financial Reporting Standards (“IFRS”) and therefore may not be comparable to similar measures presented by other issuers. Please refer to the section entitled “Non-GAAP Financial Measures and Ratios” in the Management’s Discussion and Analysis dated March 8, 2023 for the three months and year ended December 31, 2022 within Spin Master’s public filings for a discussion of the definition, components and uses of such Non-GAAP measures, as well as a reconciliation of such Non-GAAP measures to IFRS measures which is incorporated by reference herein. The 2022, 2021 and 2020 reconciliations of Adjusted Net Income and Adjusted EBITDA are included on page 71, Free Cash Flow on page 73 and Toy Gross Product Sales on page 75. The MD&A is available at www.sedar.com. 2. Spin Master adopted International Financial Reporting Standard 16 Leases (“IFRS 16”), effective January 1, 2019. The Company implemented the standard using the modified retrospective approach. As a result, the Company’s 2019 results reflect lease accounting under IFRS 16. Prior year results have not been restated. See “Application of new and revised IFRS” in Note 2 of the Company’s annual consolidated financial statements for the year ended December 31, 2019 for more information on the implementation of IFRS 16. Spin Master Corp. 2022 Annual Report Spin Master Corp. 2022 Annual Report | 1 | 1 Company Overview REIMAGINING EVERYDAY PLAY At Spin Master, we find ideas and develop new concepts, compelling stories and innovative experiences to surprise and delight kids and their families globally. We are wherever children play and understand these moments in kids’ lives better than anyone. Our understanding of play allows us to anticipate how kids’ activity patterns are evolving, and we leverage our rich insights to deliver memorable experiences across physical and digital worlds. CREATIVE CENTRES Toys With distribution in over 100 countries, Spin Master is best known for award-winning brands PAW Patrol®, Bakugan®, Kinetic Sand®, Air Hogs®, Hatchimals®, Rubik’s Cube® and GUND®, and is the global toy licensee for other popular properties. Preschool, Dolls & Interactive Wheels & Action Activities, Games & Puzzles and Plush Outdoor Entertainment Spin Master Entertainment creates and produces compelling multiplatform content, through its in-house studio and partnerships with outside creators, including the preschool franchise PAW Patrol and numerous other original shows, short-form series and feature films. Digital Games Spin Master has an established presence in digital games, anchored by the Toca Boca® and Sago Mini® brands, offering open-ended and creative game and educational play in digital environments. 2 | Spin Master Corp. 2022 Annual Report CORPORATE STRATEGY TOYS ENTERTAINMENT DIGITAL GAMES Be a global leader in Toys by creating play experiences that spark creativity and imagination in kids and families globally. Be a leading global creator of children’s entertainment, igniting imaginations and deep character connections. Create exceptional digital play experiences for kids of all ages around the world. I N O S V I • Build and expand core portfolio • Build new franchises • Drive Spin Master franchises • Expand PAW Patrol universe S E I G E T A R T S • Build licensed partner portfolio • Expand existing partnerships • Expand geographic & retail footprint • Pursue strategic Mergers & Acquisitions (“M&A”) and Ventures • Accelerate new content for direct to audience platforms • Expand Licensing & Merchandising • Pursue strategic M&A and Ventures • Leverage Spin Master IP and rapidly prototype new digital games • Deepen consumer insights to create robust player ecosystems • Expand digital games portfolio to capture kids of all ages • Pursue strategic M&A and Ventures Enterprise Shared Capabilities Franchise & Brand Development Develop brands’ DNA anchored in target audience, understanding and insights, creating aspirational and distinctive brand promises that enable evergreen, timeless franchises Consumer and Parent Data & Insights Put the customer at the heart of everything we do – centralizing our insights to build next-generation know-how Licensing & Merchandising Broaden scope of IP extension efforts beyond toy properties to all creative centres, creating must-have consumer products Omni-Channel Digital Engagement & Commerce Accelerate global digital innovation, creating seamless, personalized and targeted omni-channel experiences Mergers & Acquisitions Acquire new brands and companies with greater speed, collaboration and coordination Spin Master Corp. 2022 Annual Report | 3 Letter to Shareholders Fellow Shareholders, Innovation, creativity and imagination are at the heart of our vision across our three creative centres – Toys, Entertainment and Digital Games – as we reimagine everyday play. We remain focused on this vision to drive future growth and profitability. In 2022, despite being faced with external market pressures, we grew our Revenue and Constant Currency Toy Gross Product Sales1, a positive result in difficult economic circumstances. From a creative centre perspective, Toys had an exceptionally strong first half, building on the positive momentum from 2021 and driven by retailers bringing in toys earlier in the year to minimize anticipated supply chain disruptions in the fall. Toy revenue in the second half was pressured by changes in the macroeconomic environment, including inflationary pressure and higher interest rates. These factors resulted in reduced discretionary spending and lowered demand, having an adverse effect on the launch of new products. This was further compounded by foreign exchange volatility. While historically more resilient during recessionary environments, the toy industry was impacted, ultimately resulting in a carry-over of inventory at retail at the end of 2022. Nevertheless, we grew Constant Currency Toy Gross Product Sales1 by 3.5%, driven by the growth of core brands Rubik’s Cube and Tech Deck™, and our strong license portfolio, including Gabby’s Dollhouse™ and Monster Jam®. Over the past few years, we have significantly expanded our licensed toy portfolio, bringing in popular entertainment franchises with built-in fan bases. Our licensed business has grown 86%2 since 2019 and now comprises 31%2 of our point-of-sale (POS) compared to 19%2 in 2019, reflecting how we’ve become a partner of choice for some of the biggest licensors. In Entertainment, we grew our content development and licensing and merchandising programs. In addition to continuing to create PAW Patrol content, we launched two new properties: Sago Mini Friends™ on Apple TV+, marking the first cross-creative centre collaboration with our Digital Games creative centre; and we started delivery of Rubble & Crew™, our first PAW Patrol spinoff series, airing on Nick Jr. We also have two entirely new series launching in 2023, Vida the Vet™ and Unicorn Academy™, as well as a second feature film for our PAW Patrol franchise, Paw Patrol: The Mighty Movie™, which will debut in theatres September 2023 in association with Nickelodeon Movies and distributed by Paramount Pictures. Our Digital Games creative centre, lapping unprecedented growth during the pandemic, experienced a slight revenue decline in 2022. Despite this decline, we retained player engagement with 58 million monthly active users (MAU) in Toca Life World™ and just under 300,000 subscribers in Sago Mini.3 We acquired Nørdlight Games AB during the year to expand our digital games ecosystem, levelling up for exciting future digital experiences. In 2023, we are launching new digital games, including one for Rubik’s Cube, our first entry into the casual gaming genre, and PAW Patrol Academy™, timed to launch with the second PAW Patrol movie. 1. Non-GAAP financial measure. Non-GAAP financial measures do not have any standardized meaning prescribed by International Financial Reporting Standards (“IFRS”) and therefore may not be comparable to similar measures presented by other issuers. Please refer to the section entitled “Non-GAAP Financial Measures and Ratios” in the Management’s Discussion and Analysis dated March 8, 2023 for the three months and year ended December 31, 2022 within Spin Master’s public filings for a discussion of the definition, components and uses of such Non-GAAP measures, as well as a reconciliation of such Non-GAAP measures to IFRS measures which is incorporated by reference herein. The reconciliation of Toy Gross Product Sales is included on page 75 and Constant Currency Toy Gross Product Sales is included on page 76. The MD&A is available at www.sedar.com. 2. Sourcing: Circana Group/Retail Tracking Service/G11/Excl. Brazil, Russia/Projected USD/2022. 3. As at December 31, 2022. 4 | Spin Master Corp. 2022 Annual Report Toys, Entertainment and Digital Games each have a distinct and interrelated role to play in driving us forward. We continue to pursue our long-term strategy of leveraging our intellectual property across all three creative centres, growing our global footprint, making meaningful acquisitions and delivering magical experiences for children and their families. Toys: Building Everlasting Brands With innovation at the core, our Toys creative centre is focused on delivering play experiences that spark creativity and imagination. In 2022, we continued to enhance our portfolio, growing recently launched brands such as Purse Pets™ and expanding our core properties with new play experiences within Kinetic Sand, Hatchimals and Bakugan. Our preschool franchise PAW Patrol, which remains the top1 preschool property globally in the Infant/Toddler/ Preschool (ITPS) Category, introduced new toy themes as excitement mounted for what’s to come in 2023: the franchise’s 10-year anniversary. We also demonstrated Spin Master’s innovation capability with the iconic Rubik’s brand through the development of the Rubik’s Phantom™, a Rubik’s Cube that features thermochromic technology, which quickly sold out. All of our efforts resulted in Spin Master ending the year as the #41 toy manufacturer globally, up from #51 in 2021. Spin Master toys held seven top-selling items in their respective classes, among them Rubik’s Cube 3x3 (Brainteasers), Purse Pets (Fashion Roleplay & Dress up), Tech Deck 96mm Fingerboard Assortment (Finger/Extreme Vehicle/Accessories) and Kinetic Sand 2lb Color Assortment (Reusable Compounds), and most notably Gabby’s Dollhouse Purrfect Playset™, which was the #1 selling toy in the U.S. for the ITPS Super Category.1 Our deep licensing partnerships with Universal Brand Development and Feld Entertainment exemplify Spin Master’s expertise in applying innovation to beloved licensed brands. Our licensed portfolio POS was up 36%1 for 2022 over the prior year in the U.S., primarily driven by Gabby’s Dollhouse, Wizarding World® and Monster Jam. Our trusted stewardship and ability to innovate earned us two additional licenses for 2023: global master toy licensee for Disney’s new animated series Firebuds™ and Sony Interactive Media’s PlayStation® brand and titles, entrusting us to deliver innovation to their fanbases. As part of our long-term growth strategy, we’re focused on finding companies with strong IP to acquire that will further expand our presence in key categories of play, as well as broaden our reach and connection with consumers globally. We announced three acquisitions of IP in 2022: 4D Brands, an innovative disruptor in puzzle model construction; the independent game studio SolidRoots; and HEXBUG®, a line of creatures and playsets featuring robotic technology. International expansion is a core growth strategy for Spin Master, and we expanded our global footprint with the establishment of direct operations in Spain, where we began to sell directly to leading Spanish retailers in early 2022. As a result of increasing global geo-political tensions due to the Russia/ Ukraine conflict, we ceased all business operations in Russia and closed our office in the country in mid-2022. Entertainment: A Catalyst for Franchises With proven success and expertise in children’s programming, our Entertainment creative centre is focused on igniting imaginations and developing deep character connections to serve as a catalyst for growth and innovation in Toys and Digital Games – ultimately creating evergreen franchises. In 2022, the Entertainment creative centre announced an impressive content pipeline, planting the seed for new franchises including our first major collaboration between the Digital Games and Entertainment creative centres. Leveraging the award-winning Sago Mini app, our entertainment team further brought the characters to life, delving into their stories and reaching kids in an all-new format and platform for Apple TV+. 1. Sourcing: Circana Group/Retail Tracking Service/G11/Excl. Brazil, Russia/Projected USD/2022. PAW Patrol continues to reign as one of the top-ranked preschool properties. The 2021 debut of the pups’ first feature film delivered more than $150 million in global box office, and momentum continued throughout 2022, with fresh new content and themes engaging preschoolers globally. 2023 marks the franchise’s 10th anniversary, a huge feat that will be celebrated with a second feature film and spinoff series, Rubble & Crew. The new series features fan-favourite pup Rubble and his family of builders with new characters and exciting adventures that lean into construction play patterns – opening the PAW Patrol world to a whole new way to play starting in February 2023. Capitalizing on our proven success in the preschool space, we announced a new animated series, Vida the Vet, launching in fall 2023. With beautiful 2D artwork and engaging stories infused with a sense of play, the property will extend across all aspects of children’s lives with a global franchise rollout starting in 2024 with toys and continuing with consumer products, cross-category licensing and other partnerships. We also announced the launch of a new fantasy-adventure franchise: Unicorn Academy. Beginning with a new series on Netflix in fall 2023, Unicorn Academy will see us deliver fully branded experiences across Toys, Entertainment and Digital Games as part of our strategic vision to build new franchises. Kids will be enchanted by the immersive entertainment experience of this magical series that will incite a robust consumer product offering including new licensing and merchandising opportunities. By creating entertainment franchises that ignite and inspire new fans, we are activating a growing consumer products enterprise. With fresh new properties, our licensing and merchandising opportunities will bring the characters that kids love to multiple touchpoints in their lives through worldwide strategic partnerships and promotions. Spin Master Corp. 2022 Annual Report | 5 Digital Games: Expanding Ecosystems Over the past two years our Digital Games creative centre experienced explosive growth, sparked by a combination of our award-winning content converging with pandemic- related circumstances that saw major increases in screen time. In the second half of 2022, the environment started to normalize as kids went back to school and began to spend more time outdoors. Our approach remains consistent as we focus on creating exceptional play experiences for our existing digital games led by Toca Life World and Sago Mini, while expanding our mobile digital games ecosystem to leverage our portfolio of IP. The establishment of our in-house game studio Noid in Sweden in 2021, and our recent acquisitions of game studios Originator Inc. in 2021 and Nørdlight Games AB in 2022, strengthen our capabilities to develop and build new digital games. Our Nørdlight team, based in Stockholm, is developing the world- famous Rubik’s brand into the casual gaming space with a mobile game set to launch in 2023. We are also developing a new PAW Patrol mobile game that will launch in conjunction with the second movie in September 2023. With San Francisco-based Originator studio at the helm, the PAW Patrol Academy game will invite preschoolers to join missions and games with content designed to blend story and interactivity with educational and emotional learning. These new digital experiences for beloved brands will allow us to expand our digital games ecosystem, engaging with existing fans in new ways and welcoming new audiences. Capital Allocation Strategy We have the capital to pursue opportunities and to continue to drive growth. As a company we have a strong focus on cash flow generation and we continue to assess how to allocate cash in the most effective manner, balancing capital allocation between internal investments across creative centres, towards M&A and to shareholders. 6 | Spin Master Corp. 2022 Annual Report Spin Master creates magical play experiences for children and their families. We foster an inclusive culture, empower children to grow and learn through play while acting as responsible custodians of the world these children will one day inherit. We were pleased to announce two significant developments for shareholders with the establishment of a quarterly dividend, the first of which was declared in Q3 2022, and we announced a Normal Course Issuer Bid (NCIB) as we continue to focus on a total return mindset to drive long-term shareholder value. Acquisitions Between 2022 and early 2023, we announced four strategic acquisitions that include strong brands that we can innovate and grow globally and bolster our studio capabilities in the digital games space. Following an initial investment from Spin Master Ventures, in August 2022, we acquired Nørdlight Games AB, a digital games studio in Stockholm, Sweden. This acquisition supports our plan to grow digital games revenue and acquire key talent, as well as our strategy to leverage our proprietary IP across all three creative centres. We further diversified our Games & Puzzles offering in 2022 with two acquisitions. In August, we purchased IP from Oklahoma-based SolidRoots, LLC, a creator of family board games including the popular game Mind the Gap™. And, early in 2023, we acquired 4D puzzles from Toronto-based 4D Brands, opening up new opportunities to inject innovation into our puzzle portfolio, with new form factors and licenses. Finally, within the Toys creative centre we announced the purchase of the HEXBUG brand from Texas-based Innovation First International, Inc, which will strengthen our robotic toy offering. This acquisition marked our 28th since Spin Master was founded in 1994 and the 18th since our public offering in 2015. We continue to look for accretive acquisition targets to further diversify our overall portfolio, stay on the leading edge of children’s entertainment and drive growth. Spin Master Ventures We continue to build on our capital deployment options with our Ventures strategic initiative, which we use to accelerate growth within our three creative centres. Against the backdrop of a rapidly changing children’s entertainment space, we made several strategic minority investments in start- ups and early-stage companies with promising ideas through an infusion of seed or growth capital. These investments are expected to give us access to new ideas, products and services that complement our own R&D efforts. We aim to become the ultimate partnership generator, widening our relationships, networks and knowledge, while bolstering our product development pipeline and ultimately our leadership position in the children’s entertainment space. Corporate Social Responsibility We began our corporate social responsibility (CSR) journey in 2019 and are incredibly proud of the progress we’ve made since. In addition to expanding our efforts, we’ve increased transparency, added new targets and enhanced governance. As we’ve advanced our work, we’ve taken the opportunity to refine our CSR vision to: Reimagine Play for Future Generations. This new vision ladders into our corporate strategy and reflects the maturity of our commitments within our four key areas of focus: our products, our people, our communities and our environment. Grounded in the belief that all children deserve the opportunity to grow, learn and explore through play, we partnered with leading children’s charities to deliver programming to help kids tap into their own creativity and develop new skills. From teaching students to solve the Rubik’s Cube to challenging kids to develop their own inventions, we are inspiring and enabling kids to become the next generation of inventors, artists, animators and developers. In 2022, we extended our reach, donating more than 450,000 toys to children on a global scale through initiatives like The Toy Movement and our signature Caring & Sharing events. Collectively, our philanthropy programs positively impacted 610,000 children, made possible through the generosity of our employees, who recorded more than 5,000 volunteer hours this past year. Intertwined with our commitment to the well-being of children is a sense of responsibility to ensure that we protect the world that they will one day inherit. We have developed our first- ever climate action plan designed to reduce our carbon footprint and overall impact on the environment. We have set targets to reduce our Scope 1 and 2 carbon emissions by 70% by 2030 and to achieve net zero by 2050. Our product development and packaging teams have also been hard at work reducing our use of virgin plastic and incorporating sustainable design into our toy portfolio, and in 2022, we launched seven new toys, including a 100% recycled Baby GUND line. More information regarding our progress can be found in our 2022 CSR Report. Looking Forward We expect the macroeconomic environment to be challenging in 2023 and are taking actions to ensure we position Spin Master to continue to thrive. We remain very excited about our growth prospects for 2023 and beyond. This entails expanding our core toy portfolio with innovation, driving our global franchises and building our licensed partner portfolio. We continue to invest in our diversified entertainment slate with exciting premieres in 2023, which is planned to be our biggest year ever for content releases and which will establish multiple franchise platforms for 2024 and beyond. Building on our existing digital games, and with the introduction of new digital games experiences, we expect to attract new fans to join our established and highly engaged user base. We continue to seek accretive acquisition and venture opportunities and balance investments designed to deliver on our long-term business strategy, while also effectively managing our costs and navigating retailer and consumer dynamics to deliver profitable growth and long-term shareholder value. On behalf of the Board of Directors and management, we thank our talented team members globally for their contributions in 2022. As we begin 2023, we see even greater potential to create and engage with kids and families as we reimagine everyday play across Toys, Entertainment and Digital Games. We look forward to creating a long-lasting legacy for Spin Master as the global leader in the children’s entertainment industry. Ronnen Harary Chair & Co-Founder Anton Rabie Director & Co-Founder Max Rangel Global President & CEO Ronnen Harary Chair & Co-Founder Anton Rabie Director & Co-Founder Max Rangel Global President & CEO Spin Master Corp. 2022 Annual Report | 7 CSR at Spin Master CSR VISION Spin Master creates magical play experiences for children and their families. We foster an inclusive culture, empower children to grow and learn through play while acting as responsible custodians of the world these children will one day inherit. CSR STRATEGIC FOCUS AREAS OUR PRODUCTS As a leading children’s entertainment company, we are committed to producing safe, high-quality and responsibly sourced products. We are striving to incorporate responsible product materials and packaging to provide consumers with more sustainable options. OUR PEOPLE Our talented team is the driving force behind our purpose of creating magical experiences for children and their families. We are committed to investing in our employees’ well-being and development and to fostering an inclusive workplace where everyone can thrive, grow and ultimately have fun. OUR COMMUNITIES We give children in communities around the world the opportunity to grow, explore and learn through the power of play. Through our in-kind donations, investments in educational programming, local community engagement and employee volunteerism, we are helping children harness their creativity and develop skills to achieve things they thought unimaginable. OUR ENVIRONMENT We are committed to minimizing the impact of our operations on the planet to ensure we protect the world for children and families today and for generations to come. 8 | Spin Master Corp. 2022 Annual Report 2022 Performance PRODUCTS COMMUNITY 214M toys and games produced 7 sustainably designed toys released Zero recalls in over 15 years 99.2% of manufacturing facilities underwent an IETP/Ethical Toy Program audit, or equivalent $3.01M in cash donations1 610,000 children positively impacted through our philanthropy efforts 450,000 toys donated 5,000+ employee volunteer hours PEOPLE ENVIRONMENT 87% of employees indicated they are proud to work at Spin Master 98% gender pay equity achieved 60% reduction in Scope 1 and 2 emissions (from 20192) 63% reduction in waste from owned and leased facilities (from 20202) 50/50 female/male employee ratio 1. Cash donations include monetary contributions to registered charities, cost of goods of donated products and direct operational costs associated with donations. 2. Subject to external verification. Spin Master Corp. 2022 Annual Report | 9 2022 Financial Review Management’s Discussion and Analysis of Financial Results Independent Auditor’s Report Consolidated Statements of Financial Position Consolidated Statements of Earnings and Comprehensive Income Consolidated Statements of Changes in Shareholders’ Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements 10 | Spin Master Corp. 2022 Annual Report Spin Master Corp. Management's Discussion and Analysis of Financial Results For the three months and year ended December 31, 2022 TABLE OF CONTENTS INTRODUCTION ......................................................................................................................................................... BASIS OF PRESENTATION .................................................................................................................................... BUSINESS OVERVIEW ............................................................................................................................................. FINANCIAL PERFORMANCE .................................................................................................................................. CONSOLIDATED RESULTS ........................................................................................................................................... SEGMENTED RESULTS .................................................................................................................................................. INVESTMENTS AND ACQUISITIONS ................................................................................................................... SELECTED QUARTERLY FINANCIAL INFORMATION .................................................................................... LIQUIDITY AND CAPITAL RESOURCES ............................................................................................................. CASH FLOW ............................................................................................................................................................... OUTLOOK .................................................................................................................................................................... CONTRACTUAL OBLIGATIONS & COMMITMENTS ......................................................................................... OFF-BALANCE SHEET ARRANGEMENTS ......................................................................................................... CAPITALIZATION ...................................................................................................................................................... RISKS RELATING TO SPIN MASTER'S BUSINESS ......................................................................................... FINANCIAL RISK MANAGEMENT ......................................................................................................................... RELATED PARTY TRANSACTIONS ..................................................................................................................... CRITICAL ACCOUNTING ESTIMATES ................................................................................................................. FINANCIAL INSTRUMENTS .................................................................................................................................... DISCLOSURE CONTROLS AND PROCEDURES ............................................................................................... INTERNAL CONTROL OVER FINANCIAL REPORTING .................................................................................. LIMITATIONS OF AN INTERNAL CONTROL SYSTEM ..................................................................................... NON-GAAP FINANCIAL MEASURES AND RATIOS ......................................................................................... ADDENDUM ................................................................................................................................................................ FORWARD-LOOKING STATEMENTS .................................................................................................................. 1 1 1 7 7 16 29 32 33 35 39 39 39 39 40 62 62 62 64 66 66 66 67 77 79 March 8, 2023 INTRODUCTION The following Management’s Discussion and Analysis (“MD&A”) for Spin Master Corp. and its subsidiaries (“Spin Master” or the “Company”) is dated March 8, 2023 and provides information concerning the Company’s financial condition, financial performance and cash flows for the year ended December 31, 2022 and the three months ended December 31, 2022, (“fourth quarter”, “the quarter”, “Q4”). This MD&A should be read in conjunction with the Company’s audited Consolidated financial statements and accompanying notes (“annual financial statements”) for the year ended December 31, 2022, as well as its Annual Information Form ("AIF") dated March 25, 2022. These and additional information relating to the Company can be found under the Company's profile on SEDAR at www.sedar.com. Some of the statements in this MD&A contain forward-looking information that are based on assumptions and 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 annual financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”). However, certain financial measures and ratios contained in this MD&A do not have any standardized meaning under IFRS ("Non-GAAP") and are discussed further in the “Non-GAAP Financial Measures and Ratios” section of this MD&A. Management believes the Non-GAAP financial measures and Non-GAAP financial ratios defined in the section noted above are important supplemental measures of operating performance and highlight trends in the business. Management believes that these measures allow for assessment of the Company’s operating performance and financial condition on a basis that is consistent and comparable between reporting periods. The Company believes that investors, lenders, securities analysts and other interested parties frequently use these Non-GAAP financial measures and Non- GAAP financial ratios in the evaluation of issuers. All financial information is presented in United States dollars ("$", "dollars" and "US$") and has been rounded to the nearest hundred thousand, except per share amounts and where otherwise indicated. BUSINESS OVERVIEW Spin Master Corp. is a leading global children's entertainment company, creating exceptional play experiences through its three creative centres: Toys, Entertainment and Digital Games. With distribution in over 100 countries, Spin Master is best known for award-winning brands PAW Patrol®, Bakugan®, Kinetic Sand®, Air Hogs®, Hatchimals®, Rubik’s Cube® and GUND®, and is the global toy licensee for other popular properties. Spin Master Entertainment creates and produces compelling multiplatform content, through its in-house studio and partnerships with outside creators, including the preschool franchise PAW Patrol and numerous other original shows, short-form series and feature films. The Company has an established presence in Digital Games, anchored by the Toca Boca® and Sago Mini® brands, offering open-ended and creative game and educational play in digital environments. Through Spin Master Ventures, the Company makes minority investments globally in emerging companies and start-ups. With over 30 offices in close to 20 countries, Spin Master employs more than 2,000 team members globally. 1 Segment information Effective January 1, 2022, the Company revised its reportable operating segments to align with its current business structure and how the Company’s new Chief Operating Decision Maker (“CODM”) reviews operations and makes decisions. The Company has three reportable operating segments: Toys, Entertainment and Digital Games. Toys The Toys segment engages in the creation, design, manufacturing, licensing, and marketing of consumer products. Spin Master’s Toys segment is organized into four product categories: (1) Activities, Games & Puzzles and Plush; (2) Wheels & Action; (3) Outdoor; and (4) Preschool and Dolls & Interactive and are sold in three geographic regions: (1) North America, (2) Europe and (3) Rest of World. Entertainment The Entertainment segment engages in the creation, development, production and distribution of multi-platform content for children and families around the world. The Entertainment segment also licenses Spin Master’s brands for use in non-toy consumer products, including apparel and other consumer goods, publishing, and live entertainment. Digital Games The Digital Games segment engages in the creation of digital play experiences for players globally. Digital Games develops, markets and delivers digital games, which are distributed via third-party platform providers and monetized through subscriptions or in-app purchases. Corporate & Other Corporate & Other includes certain corporate costs, foreign exchange and merger and acquisition-related costs, as well as fair value gains and losses and distribution income on minority investments. 2 Strategy Spin Master’s principal strategies to drive the Company’s continued growth include: 1 Toys Entertainment Digital Games Vision Be a global leader in Toys by creating play experiences that spark creativity and imagination in kids and families globally Be a leading global creator of children’s entertainment, igniting imaginations and deep character connections Create exceptional digital play experiences for kids of all ages around the world Primary Role Provide a stable base of Revenue/Adjusted EBITDA1/Free Cash Flow1 to build brands & innovate Create content and build evergreen franchises that kids love, across physical and digital platforms Create digital games and play-to-learn platforms using both new and existing IP Key Strategic Focus Enterprise Shared Capabilities • • • • • • • • • • • • • • • • Build and expand core portfolio Drive Spin Master franchises Build licensed partner portfolio Expand existing partnerships Expand geographic & retail footprint Pursue strategic Mergers & Acquisitions and Ventures Build new franchises Expand PAW Patrol Universe Accelerate new content for direct to audience platforms Expand Licensing & Merchandising Pursue strategic Mergers & Acquisitions and Ventures • • • • Leverage Spin Master IP and rapidly prototype new digital games Deepen consumer insights to create robust player ecosystems Expand digital games portfolio to capture kids of all ages Pursue strategic Mergers & Acquisitions ("M&A") and Ventures Grow Franchise and Brand Developments Build Consumer and Parent Data and Insights Expand Licensing and Merchandising Accelerate Omni-Channel Engagement and Commerce Pursue M&A opportunities 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 3 Selected Financial Information The following provides selected key performance metrics of the Company for the year ended December 31, 2022 and 2021, which should be read in conjunction with the annual financial statements. Consolidated Results (US$ millions, except per share information) Year Ended Dec 31 2022 2021 2020 Revenue Operating Income Operating Margin1 Adjusted Operating Income2 Adjusted Operating Margin2 Net Income Adjusted Net Income2 Adjusted EBITDA2 Adjusted EBITDA Margin2 Earnings Per Share ("EPS") Basic EPS Diluted EPS Adjusted Basic EPS2 Adjusted Diluted EPS2 Cash dividends declared per share (CAD) Selected Cash Flow Data Cash provided by operating activities Cash used in investing activities Free Cash Flow2 Selected Balance Sheet Data Cash and cash equivalents Total assets Total liabilities 1 Operating Margin is calculated as Operating Income divided by Revenue. 2 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 2,020.3 343.3 2,042.4 272.2 17.0 % 321.2 15.9 % 261.3 244.3 389.4 13.3 % 302.2 14.8 % 198.6 221.3 414.1 1,570.6 21.5 1.4 % 77.6 4.9 % 45.5 53.4 180.6 19.3 % 20.3 % 11.5 % 2.54 2.45 2.37 2.30 0.12 249.3 (109.2) 149.9 Dec 31, 2022 644.3 1,792.5 550.0 1.94 1.89 2.16 2.10 — 419.1 (153.2) 339.6 Dec 31, 2021 562.7 1,736.7 684.3 0.45 0.44 0.52 0.51 — 310.8 (84.9) 232.1 Dec 31 2020 320.6 1,342.1 499.2 4 Executive Summary for the year ended December 31, 2022 as compared to December 31, 2021 • • Revenue was $2,020.3 million, down 1.1% from $2,042.4 million. Constant Currency Revenue1 increased by 1.4% to $2,071.1 million from $2,042.4 million. Constant Currency Revenue excluding PAW Patrol: The Movie Distribution Revenue1 increased by 2.7%. The decline in Revenue was driven by decreases in Entertainment revenue of 12.5% and Digital Games revenue of 6.2%, offset by a slight increase in Toy revenue of 0.3%. • • • • • • Operating Income was $343.3 million compared to $272.2 million, an increase of $71.1 million or 26.1%. Operating Margin was 17.0% compared to 13.3%. The increase in Operating Income was primarily driven by a favourable foreign exchange gain of $61.4 million, as compared to $2.9 million. Adjusted Operating Income1 was $321.2 million compared to $302.2 million, an increase of $19.0 million or 6.3%. Adjusted Operating Margin1 was 15.9% compared to 14.8%. Adjusted EBITDA1 was $389.4 million compared to $414.1 million, a decrease of $24.7 million or 6.0%. Adjusted EBITDA, excluding PAW Patrol: The Movie1 recognized in 2021 was up by $1.3 million. Adjusted EBITDA Margin1 was 19.3% compared to 20.3%. Adjusted EBITDA Margin, excluding PAW Patrol: The Movie Distribution Revenue1 was up by 0.1% compared to 19.2%. During the year ended December 31, 2022, the Company acquired certain assets from SolidRoots LLC, a creator of family board games and the Company also acquired all of the remaining shares of Nørdlight Games AB, a digital game studio in which the Company had previously acquired a minority interest. Subsequent to the year end, the Company acquired certain assets of 4D Brands International Inc. on January 17, for total purchase consideration of $20.2 million and the HEXBUG brand of toys from Innovation First International, Inc., on February 1, for total purchase consideration of $16.0 million. These acquisitions will be reported in the Activities, Games & Puzzles and Plush and Wheels & Action product categories within the Toy operating segment, respectively. During the fourth quarter of 2022, the Company, through Spin Master Ventures, acquired a minority interest in two privately-held entities for a total of $3.5 million. Subsequent to year end, the Company declared a quarterly dividend of 0.06 CAD per outstanding subordinate voting share and multiple voting share in respect of the first quarter of 2023, payable April 14, 2023. In connection with efforts to effectively manage the Company’s cost structure, in the first quarter of 2023, the Company committed to a planned reduction to its global workforce and also announced the intention to close its manufacturing facility in Calais, France inherited through the acquisition of Meccano in 2013. As a result, in 2023 the Company expects to incur a restructuring charge of approximately $9.0M related to severance, employee-related costs, professional fees and closure costs. • • • 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios" 5 Segmented Results (US$ millions) Toys Toy Gross Product Sales2 Toy revenue Operating Income Operating Margin1 Adjusted EBITDA2 Adjusted EBITDA Margin2 Cash Flow Toys capital expenditures Balance Sheet Moulds, dies and tools, net carrying amount Entertainment Entertainment revenue Operating Income Operating Margin1 Adjusted Operating Income2 Adjusted Operating Margin2 Cash Flow Entertainment capital expenditures Balance Sheet Entertainment content development, net carrying amount Digital Games Digital Games revenue Operating Income Operating Margin1 Adjusted Operating Income2 Adjusted Operating Margin2 Cash Flow Digital Games capital expenditures Balance Sheet Digital Games development, net carrying amount 1 Operating Margin is calculated as segment Operating Income divided by segment Revenue. 2 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". Year Ended Dec 31 2022 2021 1,978.8 1,737.6 170.1 9.8 % 244.6 14.1 % 1,962.4 1,731.8 159.0 9.2 % 239.7 13.8 % 32.4 26.8 Dec 31 2022 Dec 31 2021 19.2 21.2 Year Ended Dec 31 2022 2021 118.8 76.7 64.6 % 79.1 66.6 % 135.8 53.4 39.3 % 55.9 41.2 % 54.9 44.0 Dec 31 2022 Dec 31 2021 64.5 27.4 Year Ended Dec 31 2022 2021 163.9 46.5 28.4 % 53.9 32.9 % 174.8 67.5 38.6 % 72.2 41.3 % 12.1 8.7 Dec 31 2022 Dec 31 2021 17.1 12.8 6 FINANCIAL PERFORMANCE Consolidated Results The following tables provide a summary of Spin Master’s consolidated results for the three months ended December 31, 2022 compared to the same period in 2021: (US$ millions) Revenue Cost of sales Gross Profit Selling, general and administrative expenses Depreciation and amortization Other expense, net Foreign exchange loss (gain) Operating (Loss) Income Interest income Interest expense (Loss) Income before income tax (recovery) expense Income tax (recovery) expense Net (Loss) Income Q4 2022 Q4 2021 $ Change % Change 465.8 233.4 232.4 237.8 7.1 6.7 4.8 (24.0) (5.5) 3.8 (22.3) (8.5) (13.8) 620.5 297.2 323.3 267.4 7.9 9.6 (0.7) 39.1 (0.4) 3.5 36.0 9.5 26.5 (154.7) (63.8) (90.9) (29.6) (0.8) (2.9) 5.5 (63.1) (5.1) 0.3 (58.3) (18.0) (40.3) (24.9) % (21.5) % (28.1) % (11.1) % (10.1) % (30.2) % (785.7) % (161.4) % 1,275.0 % 8.6 % (161.9) % (189.5) % (152.1) % The following tables provide a summary of Spin Master’s consolidated results for the year ended December 31, 2022 compared to the same period in 2021: (US$ millions) Revenue Cost of sales Gross Profit Selling, general and administrative expenses Depreciation and amortization Other expense, net Foreign exchange gain Operating Income Interest income Interest expense Income before income tax expense Income tax expense Net Income 2022 2,020.3 916.5 1,103.8 782.1 28.9 10.9 (61.4) 343.3 (10.7) 13.6 340.4 79.1 261.3 Year Ended Dec 31 2021 $ Change % Change 2,042.4 985.8 1,056.6 742.5 33.5 11.3 (2.9) 272.2 (1.1) 11.3 262.0 63.4 198.6 (22.1) (69.3) 47.2 39.6 (4.6) (0.4) (58.5) 71.1 (9.6) 2.3 78.4 15.7 62.7 (1.1) % (7.0) % 4.5 % 5.3 % (13.7) % (3.5) % 2,017.2 % 26.1 % 872.7 % 20.4 % 29.9 % 24.8 % 31.6 % 7 Revenue as compared to the same period in 2021: The following table provides a summary of Spin Master’s revenue by segment, for the three months ended December 31, 2022 and 2021: (US$ millions) Toy revenue Entertainment revenue Digital Games revenue Revenue Q4 2022 Q4 2021 $ Change % Change 396.7 31.2 37.9 465.8 542.0 28.5 50.0 620.5 (145.3) 2.7 (12.1) (154.7) (26.8) % 9.5 % (24.2) % (24.9) % Revenue was $465.8 million, a decrease of 24.9% from $620.5 million primarily due to a decrease in Toy revenue of 26.8% and Digital Games revenue of 24.2%, offset by an increase in Entertainment revenue of 9.5%. Constant Currency Revenue1 was $484.2 million, a decrease of 22.0%, from $620.5 million. Toy revenue decreased by $145.3 million or 26.8% to $396.7 million driven by a decrease in Toy Gross Product Sales1 and an increase in Sales Allowances as a percentage of Toy Gross Product Sales1. Toy Gross Product Sales1 decreased by $148.3 million or 23.6%, to $479.2 million from $627.5 million. Constant Currency Toy Gross Product Sales1 decreased by $129.2 million or 20.6% to $498.3 million. Entertainment revenue increased by $2.7 million or 9.5% to $31.2 million driven by higher distribution revenue and licensing and merchandising revenue. Digital Games revenue decreased by $12.1 million or 24.2% to $37.9 million. Constant Currency Digital Games Revenue1 decreased by $9.9 million or 19.8% to $40.1 million, down from $50.0 million. The decrease was primarily due to lower in-app revenue in Toca Life World. The following table provides a summary of Spin Master’s revenue by segment, for the year ended December 31, 2022 and 2021: (US$ millions) Toy revenue Entertainment revenue Digital Games revenue Revenue Year Ended Dec 31 2022 2021 $ Change % Change 1,737.6 118.8 163.9 2,020.3 1,731.8 135.8 174.8 2,042.4 5.8 (17.0) (10.9) (22.1) 0.3 % (12.5) % (6.2) % (1.1) % Revenue was $2,020.3 million, a decline of 1.1% from $2,042.4 million driven by decreases in Entertainment revenue and Digital Games revenue, offset by a slight increase in Toy revenue. Constant Currency Revenue1 increased by 1.4% to $2,071.1 million from $2,042.4 million. Constant Currency Revenue excluding PAW Patrol: The Movie Distribution Revenue1 in 2021 increased by 2.7%. Toy revenue increased by $5.8 million or 0.3% to $1,737.6 million driven by an increase in Toy Gross Product Sales1 offset by an increase in Sales Allowances as a percentage of Toy Gross Product Sales1. Toy Gross Product Sales1 increased by $16.4 million or 0.8%, to $1,978.8 million from $1,962.4 million. Constant Currency Toy Gross Product Sales1 increased by $68.2 million or 3.5% to $2,030.6 million, up from $1,962.4 million. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios" 8 Entertainment revenue decreased by $17.0 million or 12.5% to $118.8 million. The decline was due to lower distribution revenue related to PAW Patrol: The Movie released in 2021, partially offset by higher licensing & merchandising revenue. Digital Games revenue decreased by $10.9 million or 6.2% to $163.9 million. Constant Currency Digital Games Revenue1 decreased by $2.9 million or 1.7% to $171.9 million, down from $174.8 million. The decrease was due to lower in-game app revenue in Toca Life World. Gross Profit as compared to the same period in 2021: (US$ millions) Revenue Gross Profit Gross Margin Q4 2022 Q4 2021 $ Change % Change 465.8 232.4 49.9 % 620.5 323.3 52.1 % (154.7) (90.9) (24.9) % (28.1) % (2.2) % For the three months ended December 31, 2022, Gross Profit decreased by $90.9 million or 28.1% to $232.4 million, primarily driven by a 26.8% decrease in Toy Revenue and 24.2% decrease in Digital Games Revenue, offset by a 9.5% increase in Entertainment Revenue. Gross Margin decreased to 49.9% from 52.1% as compared to the same period in 2021, as a result of higher Sales Allowances as a percentage of Toy Gross Product Sales1 due to markdowns, as consumers in the fourth quarter were more price sensitive given global inflationary pressure, an increase in closeout sales and unfavourable impact of foreign exchange. These factors were partially offset by price increases in the Toys segment implemented to offset inflation on product costs and lower ocean freight costs. In the fourth quarter, supply chain pressure eased compared to the prior year with greater availability of ocean containers. The Company continues to focus on optimizing productivity and efficiency. Gross Margin was also positively impacted by fewer Entertainment content deliveries resulting in lower amortization. (US$ millions) Revenue Gross Profit Gross Margin 2022 2,020.3 1,103.8 Year Ended Dec 31 2021 $ Change % Change 2,042.4 1,056.6 (22.1) 47.2 (1.1) % 4.5 % 2.9 % 54.6 % 51.7 % For the year ended December 31, 2022, Gross Profit increased by $47.2 million or 4.5% to $1,103.8 million, primarily driven by price increases in Toy Revenue implemented to mitigate inflation on product costs partially offset by lower Digital Games revenue. Gross Margin increased to 54.6% from 51.7%, as a result of changes in Toy product mix, price increases implemented to mitigate inflation on product costs, fewer Entertainment content deliveries resulting in lower amortization and a higher proportion of licensing and merchandising revenue. In addition, Gross Margin was lower in the prior year due to the dilutive effect of PAW Patrol: The Movie (distribution revenue less amortization of production costs). Gross Margin, excluding PAW Patrol: The Movie1 in 2021 was 52.3%. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios" 9 Selling, General and Administrative Expenses ("SG&A") as compared to the same period in 2021: (US$ millions) Administrative Selling Marketing Distribution Product development SG&A Q4 2022 Q4 2021 $ Change % Change 91.2 33.8 83.3 20.1 9.4 103.8 (12.6) 41.3 92.0 22.9 7.4 (7.5) (8.7) (2.8) 2.0 237.8 267.4 (29.6) (12.1) % (18.2) % (9.5) % (12.2) % 27.0 % (11.1) % Administrative expenses decreased by $12.6 million or 12.1% to $91.2 million. The decrease was primarily due to lower incentive compensation and favourable foreign exchange, partially offset by higher personnel related, technology and travel costs. Administrative expenses as a percentage of consolidated revenue increased to 19.6% from 16.7%. Selling expenses decreased by $7.5 million or 18.2% to $33.8 million primarily due to a decrease in sales of partner licensed brands, as a result of an overall decline in sales in the fourth quarter. Selling expenses as a percentage of Toy revenue increased to 8.5% from 7.6% due to the higher proportion of Toy revenue from partner licensed brands and a shift in mix. Marketing expenses decreased by $8.7 million or 9.5% to $83.3 million, due to lower media and commercial production spend in response to the anticipated lower volume in the fourth quarter. Marketing expenses as a percentage of consolidated revenue increased to 17.9% from 14.8%. Distribution expenses decreased by $2.8 million or 12.2% to $20.1 million, primarily due to lower warehousing and outbound transportation costs from lower domestic sales volume. Distribution expenses as a percentage of Toy revenue increased to 5.1% from 4.2%, primarily due to fixed warehousing costs. Product development expenses increased by $2.0 million or 27.0% to $9.4 million, due to higher development and design spend on Toy products. (US$ millions) Administrative Selling Marketing Distribution Product development SG&A Year Ended Dec 31 2022 2021 $ Change % Change 353.8 144.2 185.1 67.9 31.1 782.1 330.3 133.8 179.7 71.3 27.4 742.5 23.5 10.4 5.4 (3.4) 3.7 39.6 7.1 % 7.8 % 3.0 % (4.8) % 13.5 % 5.3 % Administrative expenses increased by $23.5 million or 7.1% to $353.8 million. The increase was primarily due to higher personnel related, travel, technology and property costs, partially offset by favourable foreign exchange and lower incentive compensation. Administrative expenses as a percentage of consolidated revenue increased to 17.5% from 16.2%. Selling expenses increased by $10.4 million or 7.8% to $144.2 million and selling expenses as a percentage of Toy revenue increased to 8.3% from 7.7%. Both Selling expenses and Selling expenses as a percentage of Toy revenue increased due to the higher proportion of Toy revenue from partner licensed brands and a shift in mix. Marketing expenses increased by $5.4 million or 3.0% to $185.1 million, due to higher media spend and trade show expenses. Marketing expenses as a percentage of consolidated revenue increased to 9.2% from 8.8%. 10 Distribution expenses decreased by $3.4 million or 4.8% to $67.9 million, due to lower warehousing and outbound transportation costs driven by lower domestic sales volume. Distribution expenses as a percentage of Toy revenue declined to 3.9% from 4.1% driven by lower domestic sales volume. Product development expenses increased by $3.7 million or 13.5% to $31.1 million, due to higher development and design spend on Toy products. Adjusted SG&A1 as compared to the same period in 2021: (US$ millions) Q4 2022 Q4 2021 $ Change % Change 0.2 267.4 237.8 (29.6) SG&A Adjustments1: Restructuring and other related costs2 Share based compensation3 Transaction costs4 Adjusted SG&A5 1 These adjustments relate to items recorded within Administrative expenses. 2 Restructuring and other related costs primarily relates to changes in personnel. 3 Related to non-cash expenses associated with subordinate voting shares granted to equity participants at the time of the Company's initial public offering, share option expense and long-term incentive plan. 4 Professional fees incurred relating to acquisitions and other transactions. 5 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". (114.3) % (11.1) % (90.5) % (10.3) % 17.5 % (26.8) 233.1 259.9 (4.7) (1.4) (0.2) (4.0) (0.7) (2.1) 1.6 1.9 Adjusted SG&A1 decreased by $26.8 million or 10.3% to $233.1 million primarily as a result of lower administrative, selling and marketing costs. Adjusted SG&A1 as a percentage of consolidated revenue increased to 50.0% from 41.9%, due to lower revenue in the fourth quarter compared to the prior period. (US$ millions) 2022 2021 $ Change % Change Year Ended Dec 31 39.6 (4.9) 742.5 782.1 SG&A Adjustments1: Restructuring and other related costs2 Share based compensation3 Transaction costs4 Adjusted SG&A5 1 These adjustments relate to items recorded within Administrative expenses. 2 Restructuring and other related costs primarily relates to changes in personnel. 3 Related to non-cash expenses associated with subordinate voting shares granted to equity participants at the time of the Company's initial public offering, share option expense and long-term incentive plan. See Note 22 of the Consolidated financial statements. 4 Professional fees incurred relating to acquisitions and other transactions. 5 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". (64.3) % 96.0 % 15.0 % (15.3) (17.6) 721.9 758.6 5.1 % 5.3 % (2.5) (1.0) (2.8) (2.3) (2.4) 36.7 1.8 Adjusted SG&A1 increased by $36.7 million or 5.1% to $758.6 million primarily as a result of higher administrative and selling costs. Adjusted SG&A1 as a percentage of consolidated revenue increased to 37.5% from 35.3%. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 11 Depreciation and Amortization as compared to the same period in 2021: (US$ millions) Property, plant and equipment Moulds, dies and tools, included in cost of sales Equipment, included in cost of sales Equipment Building and leasehold improvements Computer hardware Intangible assets Entertainment content development, included in cost of sales Trademarks, licenses, IP & customer lists - definite Digital Games development, included in cost of sales Computer software Q4 2022 Q4 2021 $ Change % Change 5.0 — 0.4 1.5 0.2 7.1 4.7 1.1 1.1 0.9 7.8 7.2 0.1 0.6 1.5 0.2 9.6 6.2 1.5 1.6 1.1 10.4 (2.2) (0.1) (0.2) — — (30.6) % (100.0) % (33.3) % — % — % (2.5) (26.0) % (1.5) (0.4) (0.5) (0.2) (2.6) (24.2) % (26.7) % (31.3) % (18.2) % (25.0) % Right-of-use assets 3.0 3.0 — — % Depreciation and amortization 17.9 23.0 (5.1) (22.2) % (US$ millions) Included in cost of sales Included in expenses Depreciation and amortization Q4 2022 Q4 2021 $ Change % Change 10.7 7.2 17.9 15.1 7.9 23.0 (4.4) (0.7) (5.1) (29.1) % (8.9) % (22.2) % For the three months ended December 31, 2022, depreciation and amortization expense decreased by $5.1 million to $17.9 million due to a decline in property, plant and equipment and intangibles assets. Depreciation and amortization related to property, plant and equipment decreased by $2.5 million or 26.0%, primarily due to lower depreciation for equipment and moulds, dies and tools. Depreciation and amortization related to intangible assets decreased by $2.6 million or 25.0%, as a result of fewer content deliveries in the current quarter. 12 (US$ millions) Property, plant and equipment Year Ended Dec 31 2022 2021 $ Change % Change Moulds, dies and tools, included in cost of sales 20.5 24.5 Equipment, included in cost of sales Equipment Building and leasehold improvements Computer hardware 0.1 1.7 5.6 0.8 0.4 2.9 6.2 1.2 28.7 35.2 (4.0) (0.3) (1.2) (0.6) (0.4) (6.5) Intangible assets Entertainment content development, included in cost of sales1 Trademarks, licenses, IP & customer lists - definite Digital Games development, included in cost of sales Computer software 14.4 5.1 4.3 3.5 27.3 47.7 (33.3) 6.1 5.8 3.9 (1.0) (1.5) (0.4) 63.5 (36.2) (16.3) % (75.0) % (41.4) % (9.7) % (33.3) % (18.5) % (69.8) % (16.4) % (25.9) % (10.3) % (57.0) % Right-of-use assets 12.2 13.2 (1.0) (7.6) % Depreciation and amortization 68.2 111.9 (43.7) (39.1) % (US$ millions) Included in cost of sales1 Included in expenses Year Ended Dec 31 2022 39.2 29.0 2021 $ Change % Change 78.4 33.5 (39.2) (4.5) (50.0) % (13.4) % Depreciation and amortization (39.1) % 1Prior year comparative includes the entertainment content development amortization related to the delivery of PAW Patrol: The Movie. 111.9 68.2 (43.7) For the year ended December 31, 2022, depreciation and amortization decreased by $43.7 million to $68.2 million primarily due to lower depreciation and amortization related to intangibles. Depreciation and amortization related to property, plant and equipment decreased by $6.5 million or 18.5%, primarily due to lower depreciation for moulds, dies and tools and equipment. Depreciation and amortization related to intangible assets decreased by $36.2 million or 57.0%, due to lower entertainment content development amortization primarily related to the PAW Patrol: The Movie in 2021 and fewer content deliveries in the current year. 13 Foreign Exchange Loss (Gain) as compared to the same period in 2021: For the three months ended December 31, 2022, the Company recognized a net foreign exchange loss of $4.8 million (comprised of an unrealized loss of $17.4 million and realized gain of $12.6 million) due to fluctuations in foreign currency denominated monetary assets and liabilities, primarily in the Canadian dollar, as well as the Swedish krona, Great Britain pound sterling and Russian ruble, as compared to a foreign exchange gain of $0.7 million (comprised of an unrealized gain of $0.7 million and realized gain of $nil). For the year ended December 31, 2022, the Company recognized a foreign exchange gain of $61.4 million (comprised of an unrealized gain of $40.3 million and realized gain of $21.1 million), due to fluctuations in foreign currency denominated monetary assets and liabilities, primarily in the Canadian dollar, as well as the Swedish krona, Euro and Great Britain pound sterling, compared to a foreign exchange gain of $2.9 million (comprised of a realized gain of $2.5 million and an unrealized gain of $0.4 million). Unrealized foreign exchange gains and losses are generated by the translation of monetary assets and liabilities denominated in a currency other than the functional currency and also includes gains and losses related to the Company's hedging programs. Realized foreign exchange gains and losses are recognized when monetary assets and liabilities denominated in a currency other than the functional currency of the applicable entity are settled. The Company periodically enters into derivative financial instruments such as foreign exchange forward contracts to manage its foreign currency risk on cash flows denominated in currencies other than US dollar. Operating (Loss) Income and Adjusted Operating (Loss) Income1 as compared to the same period in 2021: Operating Loss for the three months ended December 31, 2022, was $24.0 million compared to Operating Income of $39.1 million, representing a variance of $63.1 million. Adjusted Operating Loss1 for the three months ended December 31, 2022 was $5.5 million, a variance of $60.8 million from an Adjusted Operating Income1 of $55.3 million. The decrease in Operating Income was primarily driven by decreases in Toys Operating Income of $57.9 million, Digital Games Operating Income of $7.2 million, and Corporate & Other Operating Income of $5.0 million, offset partially by an increase in Entertainment Operating Income of $7.0 million. Operating Income for the year ended December 31, 2022 was $343.3 million, an increase of $71.1 million from $272.2 million. Adjusted Operating Income1 for the year ended December 31, 2022 was $321.2 million, an increase of $19.0 million from $302.2 million. The increase in Operating Income was primarily driven by an increase in Entertainment Operating Income of $23.3 million and Toys Operating Income of $11.1 million. Adjusted EBITDA1 as compared to the same period in 2021: Adjusted EBITDA1 for the three months ended December 31, 2022 decreased to $12.4 million with Adjusted EBITDA Margin1 of 2.7%, compared to $78.3 million and 12.6% respectively. The decrease in Adjusted EBITDA1 was primarily driven by lower Gross Profit partially offset by lower administrative, marketing and selling expenses. Adjusted EBITDA Margin1 declined due to higher marketing and administrative expenses as a percentage of revenue and lower Toys gross margin. Adjusted EBITDA1 for the year ended December 31, 2022 was $389.4 million compared to $414.1 million. Adjusted EBITDA Margin1 was 19.3% compared to 20.3%. The decrease in Adjusted EBITDA1 was primarily driven by higher administrative, selling and marketing expenses partially offset by higher Gross Profit. Adjusted EBITDA Margin1 decreased due to higher administrative, selling and marketing expenses as a percentage of revenue, partially offset by higher Toys gross margin. Adjusted EBITDA Margin excluding PAW Patrol: The Movie Distribution Revenue1 increased slightly to 19.3% compared to 19.2%. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 14 Interest Income and Interest Expense as compared to the same period in 2021: Interest expense includes bank fees and financing charges, accretion expense and the amortization of Facility fee cost. For the three months ended December 31, 2022, interest expense was $3.8 million, an increase of $0.3 million from $3.5 million due to higher bank fees and financing charges. For the three months ended December 31, 2022, interest income was $5.5 million, an increase of $5.1 million from $0.4 million as a result of higher interest earned on cash and cash equivalents. For the year ended December 31, 2022, interest expense was $13.6 million, an increase of $2.3 million from $11.3 million due to higher bank fees and financing charges. For the year ended December 31, 2022, interest income was $10.7 million, an increase of $9.6 million from $1.1 million as a result of higher interest earned on cash and cash equivalents. Income Tax (Recovery) Expense as compared to the same period in 2021: For the three months ended December 31, 2022, income tax recovery was $8.5 million compared to an income tax expense of $9.5 million. The effective tax rate was 38.1% compared to 26.4%. For the year ended December 31, 2022, income tax expense was $79.1 million compared to $63.4 million. The effective tax rate was 23.2% compared to 24.2%. Net (Loss) Income and Adjusted Net Income1 as compared to the same period in 2021: Net loss for the three months ended December 31, 2022 was $13.8 million, a decrease of $40.3 million from Net Income of $26.5 million. Adjusted Net Income1 for the three months ended December 31, 2022 was $nil, a decrease of $38.7 million. Net Income for the year ended December 31, 2022 was $261.3 million, an increase of $62.7 million from $198.6 million. Adjusted Net Income1 for the year ended December 31, 2022 was $244.3 million, an increase of $23.0 million from $221.3 million. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 15 Segmented Results The Company revised its reportable segments effective January 1, 2022. The Company’s reportable segments are: Toys, Entertainment and Digital Games. The Company’s results from operations by reportable segment for the three months ended December 31, 2022 and 2021 are as follows: (US$ millions) Q4 2022 Q4 2021 Revenue Toys 396.7 Entertainment 31.2 Digital Games 37.9 Corporate & Other — Total 465.8 Toys 542.0 Entertainment 28.5 Digital Games 50.0 Corporate & Other — Total 620.5 19.1 10.1 (9.9) (24.0) 14.6 12.1 17.3 (4.9) Operating (Loss) Income Restructuring and other related costs (43.3) (0.2) Foreign exchange loss (gain) — 3.3 Share based compensation — Impairment of goodwill Impairment of property, plant and equipment Impairment of intangible assets Legal settlement Acquisition related deferred incentive compensation Net unrealized loss on investment Acquisition related contingent consideration Transaction costs 0.9 — — 0.7 — 3.1 — — — 0.3 — — 1.1 — — — — — — — 0.7 — — — — 1.5 — — — — 4.8 0.4 — — — 1.6 — 0.1 — 0.2 (0.2) 4.8 4.7 — 0.9 1.1 1.6 2.2 0.1 3.1 0.2 20.5 (35.5) Adjusted Operating (Loss) Income1 Depreciation and amortization Adjusted EBITDA1 Adjusted EBITDA Margin1 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 14.2 (2.7) 37.5% n.m. (24.4) (6.2)% 25.3 81.1% (2.8) (5.5) 17.9 12.3 11.1 1.9 4.8 0.1 12.4 40.8 2.7% 7.5% 1.2 — 3.5 1.9 — — — 1.5 — 3.4 — 26.1 14.7 — — 0.1 — — 1.2 — — — — — 0.2 — 0.4 — — — — 1.1 — — — 39.1 1.4 — (0.7) (0.7) — — — — — — 0.3 — 2.1 4.0 1.9 — 1.2 — 2.6 0.3 3.4 2.1 13.4 19.0 (3.2) 55.3 6.3 2.0 — 23.0 19.7 69.1% 21.0 (3.2) 42.0% n.m. 78.3 12.6% 16 The Company’s results from operations by reportable segment for the year ended December 31, 2022 and 2021: (US$ millions) Revenue Toys 1,737.6 Entertainment 118.8 2022 Digital Games 163.9 Corporate & Other — 2021 Total Toys 2,020.3 1,731.8 Entertainment 135.8 Digital Games 174.8 Corporate & Other — Total 2,042.4 Year Ended Dec 31 Operating Income 170.1 76.7 46.5 50.0 343.3 159.0 53.4 67.5 (7.7) 272.2 Restructuring and other related costs Foreign exchange gain Share based compensation 4.6 — 12.4 Impairment of goodwill Impairment of property, plant and equipment Impairment of intangible assets Legal settlement Acquisition related deferred incentive compensation Net unrealized gain on investment Investment distribution income Loss on Minority interest and other investments Acquisition related deferred consideration Transaction costs Gain on disposal of asset — 1.9 — — 5.4 — — — 3.5 — — 0.1 — 1.2 — — 1.1 — — — — — — — — 0.2 — 2.3 — — — — 4.9 — — — — — — — 4.9 2.3 (61.4) 1.7 (61.4) — 13.4 17.6 — — — (0.5) — — — 1.9 1.1 (0.5) 10.3 — (0.1) (0.1) 0.5 (0.9) 1.0 — 0.5 2.6 1.0 — 1.9 — — — 4.3 — — — 2.7 — (0.2) — — 0.4 — — 2.1 — — — — — — — — 0.2 — 1.5 — — 0.5 — 2.5 — — — — — — — (2.9) — — — — — — 2.5 (2.9) 15.3 1.9 — 2.6 — 6.8 (0.9) (0.9) (0.6) (0.6) — — 2.8 — 79.1 53.9 197.9 Adjusted Operating Income1 Depreciation and amortization2 Adjusted EBITDA1 Adjusted EBITDA Margin1 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 2 Prior year comparative includes the entertainment content development amortization related to the delivery of PAW Patrol: The Movie. 19.3% 13.8% 36.9% 79.0% 14.1% 76.7% 183.4 321.2 244.6 239.7 389.4 104.1 (9.7) (9.6) n.m. 14.8 46.7 55.9 68.2 72.2 79.6 93.9 60.5 48.2 56.3 45.5% n.m. (9.3) (9.3) 6.6 0.1 7.4 — — 2.7 2.8 (0.2) 302.2 111.9 414.1 20.3% 17 Toys Segment Results The following table provides a summary of Toys segment operating results for the three months ended December 31, 2022 and 2021: (US$ millions) Toy Gross Product Sales1, 2 Toy revenue Operating (Loss) Income Operating Margin Adjusted EBITDA1 Adjusted EBITDA Margin1 Selected Cash Flow Data Toys capital expenditures Q4 2022 Q4 2021 $ Change % Change 479.2 396.7 (43.3) (10.9) % (24.4) (6.2) % 627.5 542.0 14.6 2.7 % 40.8 7.5 % (148.3) (145.3) (57.9) (23.6) % (26.8) % (396.6) % (13.6) % (65.2) (159.8) % (13.7) % 7.5 3.8 3.7 97.4 % 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 2 Toy Gross Product Sales represents Toy revenue excluding Sales Allowances. Toy revenue decreased by $145.3 million or 26.8% to $396.7 million primarily driven by a decrease in Toy Gross Product Sales1 and an increase in Sales Allowances as a percentage of Toy Gross Product Sales1. Toy Gross Product Sales1 decreased by $148.3 million or 23.6%, to $479.2 million from $627.5 million as a result of lower customer orders as consumer demand was negatively impacted by the pressure of higher inflation, which in turn reduced consumer discretionary spending, as well as the unfavorable impact of foreign exchange. Toy Gross Product Sales1 were positively impacted by price increases implemented to mitigate inflation on product costs and ocean freight. In addition, Toy Gross Product Sales1 in the fourth quarter of 2021 were supported by shipments due to the theatrical releases of Paw Patrol: The Movie and DC Comics The Batman. Sales allowances increased primarily due to higher markdowns, as consumers were more price sensitive given global inflationary pressure. Constant Currency Toy Gross Product Sales1 decreased by $129.2 million or 20.6% to $498.3 million, down from $627.5 million. Operating Loss was $43.3 million compared to Operating Income of $14.6 million representing a variance of $57.9 million. Operating Margin was (10.9)% compared to 2.7%. Adjusted EBITDA1 decreased by $65.2 million to $(24.4) million. Adjusted EBITDA Margin1 was (6.2)% compared to 7.5%. The decrease in Operating Margin is due to higher administrative and marketing expenses as a percentage of revenue driven by lower Toy revenue. This was partially offset by improved gross margin from changes in product mix and price increases implemented to offset inflation on product costs and ocean freight. Adjusted EBITDA Margin1 declined as a result of lower Operating Margin. Toys capital expenditures increased by $3.7 million to $7.5 million, primarily as a result of higher investments in moulds, dies and tools. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 18 Toys Segment Results The following table provides a summary of the Toys segment's operating results for the year ended December 31, 2022 and 2021: (US$ millions) Toy Gross Product Sales1, 2 Toy revenue Operating Income Operating Margin Adjusted EBITDA1 Adjusted EBITDA Margin1 Selected Cash Flow and Balance Sheet Data Year Ended Dec 31 2022 1,978.8 1,737.6 170.1 9.8 % 244.6 14.1 % 2021 1,962.4 1,731.8 159.0 9.2 % 239.7 13.8 % $ Change % Change 16.4 5.8 11.1 4.9 0.8 % 0.3 % 7.0 % 0.6 % 2.0 % 0.3 % Toys capital expenditures 32.4 26.8 5.6 20.9 % Moulds, dies and tools, net carrying amount 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 2 Toy Gross Product Sales represents Toy revenue excluding Sales Allowances. 19.2 Dec 31, 2022 Dec 31, 2021 21.2 $ Change % Change (2.0) (9.4) % Toy revenue increased by $5.8 million or 0.3% to $1,737.6 million driven by an increase in Toy Gross Product Sales1, offset by an increase in Sales Allowances as a percentage of Toy Gross Product Sales1. Toy Gross Product Sales1 increased by $16.4 million or 0.8%, to $1,978.8 million from $1,962.4 million as a result of changes in sales mix and price increases implemented to mitigate inflation on product and ocean freight costs, offset by unfavorable foreign exchange. Sales allowances increased primarily due to higher markdowns, as consumers were more price sensitive given global inflationary pressure. Constant Currency Toy Gross Product Sales1 increased by $68.2 million or 3.5% to $2,030.6 million, up from $1,962.4 million. Toy Revenue increased in first half of 2022 due to strong customer demand and the positive momentum carried forward from 2021. The higher Toy Revenue in the first half of 2022 was also positively impacted by the Company's successful management of the global supply chain volatility, as retailers ordered earlier in the year to minimize anticipated supply chain disruptions. While historically more resilient during recessionary environments, Toy Revenue in the second half was pressured by changes in the macroeconomic environment, including inflationary pressure and higher interest rates. These factors resulted in reduced discretionary spending and demand. Operating Income increased by $11.1 million or 7.0% to $170.1 million. Operating Margin was 9.8% compared to 9.2%. The improvement in Operating Margin was driven primarily by higher revenues and improved gross margin from changes in product mix, price increases to partially offset inflation on product costs and ocean freight and lower administrative and distribution expenses as a percentage of revenue, offset in part by higher selling and marketing expenses as a percentage of revenue. Adjusted EBITDA1 increased by $4.9 million to $244.6 million. Adjusted EBITDA Margin1 was 14.1% compared to 13.8%. Adjusted EBITDA Margin1 improved as a result of higher Operating Margin. We are taking a balanced approach to pricing and promotions, investing in innovative marketing to remain competitive and maintain our profitability. Toys capital expenditures increased by $5.6 million to $32.4 million, primarily as a result of higher investments in moulds, dies and tools. Moulds, dies and tools, net carrying amount was $19.2 million compared to $21.2 million. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 19 Toy Revenue For the three months ended December 31, 2022 as compared to the same period in 2021: The following table provides a summary of Spin Master’s Toy revenue, including Toy Gross Product Sales1 by product category, for the three months ended December 31, 2022 and 2021: (US$ millions) Preschool and Dolls & Interactive Activities, Games & Puzzles and Plush Wheels & Action Q4 2022 Q4 2021 $ Change % Change 201.7 160.6 90.0 251.8 206.5 146.1 (50.1) (45.9) (56.1) (19.9) % (22.2) % (38.4) % Outdoor Toy Gross Product Sales 1 Sales Allowances2 Sales Allowances % of GPS Toy revenue 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 2 The Company enters into arrangements to provide sales allowances requested by customers relating to cooperative advertising, contractual and negotiated discounts, volume rebates, and costs incurred by customers to sell the Company’s products. (148.3) (145.3) 17.2 % 13.6 % (85.5) (82.5) 542.0 479.2 627.5 396.7 (3.0) 26.9 23.1 3.8 16.5 % (23.6) % (3.5) % (26.8) % Preschool and Dolls & Interactive decreased by $50.1 million or 19.9% to $201.7 million, primarily from a decrease in sales of PAW Patrol, Hatchimals, Peek-A-Roo and Present Pets, offset by an increase in Gabby's Dollhouse. Activities, Games & Puzzles and Plush decreased by $45.9 million or 22.2% to $160.6 million, mainly due to a decrease in the Games & Puzzles portfolio and Kinetic Sand, offset by an increase in Rubik's. Wheels & Action decreased by $56.1 million or 38.4% to $90.0 million, due to decreases in DC, Monster Jam and Bakugan. Outdoor increased by $3.8 million or 16.5% to $26.9 million. Sales Allowances decreased by $3.0 million to $82.5 million. As a percentage of Toy Gross Product Sales1, Sales Allowances increased to 17.2% from 13.6%, primarily driven by higher markdowns, as consumers were more price sensitive given global inflationary pressure. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 20 Revenue by Geographic Area Toy Gross Product Sales1 by geographical area are based on the location of the customers. The following table provides a summary of Spin Master’s Toy Gross Product Sales1 by geographic area for the three months ended December 31, 2022 and 2021: (US$ millions) North America Europe Rest of World International Toy Gross Product Sales1 Sales Allowances Toy revenue Q4 2022 % of GPS Q4 2021 % of GPS $ Change 260.7 144.5 74.0 218.5 479.2 (82.5) 396.7 54.4 % 30.2 % 15.4 % 45.6 % 100.0 % (17.2) % 361.8 187.5 78.2 265.7 627.5 (85.5) 542.0 57.6 % 29.9 % 12.5 % 42.4 % 100.0 % (13.6) % (101.1) (43.0) (4.2) (47.2) (148.3) 3.0 (145.3) Change in % of GPS (3.2) % 0.3 % 2.9 % 3.2 % (3.6) % 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". As a percentage of Toy Gross Product Sales1, the North America segment decreased 3.2% to 54.4% compared to 57.6%. International sales, comprised of the Europe and Rest of World segments, increased 3.2% to 45.6% compared to 42.4%. North America decreased by $101.1 million or 27.9% to $260.7 million. The decrease was driven by DC, Kinetic Sand, the Games & Puzzles portfolio, Monster Jam RC, and PAW Patrol, partially offset by an increase from Rubik's and Gabby's Dollhouse. Europe decreased by $43.0 million or 22.9% to $144.5 million, which includes an unfavourable foreign exchange impact of $18.8 million. The decrease was mainly driven by PAW Patrol, Bakugan, Peek-A-Roo and Air Hogs, partially offset by an increase from Gabby's Dollhouse. Rest of World decreased by $4.2 million or 5.4% to $74.0 million, which includes an unfavourable foreign exchange impact of $0.2 million. The decrease arose from PAW Patrol, DC and Peek-A-Roo, partially offset by an increase from Gabby's Dollhouse. 21 For the year ended December 31, 2022, as compared to the same period in 2021: The following table provides a summary of Spin Master’s Toy revenue, including Toy Gross Product Sales1 by product category, for the year ended December 31, 2022 and 2021: (US$ millions) Preschool and Dolls & Interactive Activities, Games & Puzzles and Plush Year Ended Dec 31 2022 867.0 561.7 2021 $ Change % Change 809.6 587.8 57.4 (26.1) 7.1 % (4.4) % 99.3 450.8 445.6 Wheels & Action Outdoor1 Toy Gross Product Sales2 Sales Allowances3 Sales Allowances % of GPS Toy revenue 1,737.6 1 Outdoor includes $20.8 million in 2021 Gross Product Sales related to certain brands associated with divestiture of manufacturing assets in Q1 2022. 2 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 3 The Company enters into arrangements to provide sales allowances requested by customers relating to cooperative advertising, contractual and negotiated discounts, volume rebates, and costs incurred by customers to sell the Company’s products. 12.2 % 11.8 % 1,978.8 1,962.4 1,731.8 (241.2) (230.6) (20.1) 119.4 16.4 10.6 5.2 5.8 1.2 % (16.8) % 0.8 % 4.6 % 0.3 % Preschool and Dolls & Interactive increased by $57.4 million or 7.1% to $867.0 million, from sales of Gabby's Dollhouse, Purse Pets and Wizarding World, offset by a decline in PAW Patrol and Present Pets. Activities, Games & Puzzles and Plush decreased by $26.1 million or 4.4% to $561.7 million, mainly due to lower sales of the Games & Puzzles portfolio, Kinetic Sand and Cool Maker, offset in part by Rubik's and Pixobitz. Wheels & Action increased by $5.2 million or 1.2% to $450.8 million, led by increases in Tech Deck, DC and Monster Jam, offset in part by Air Hogs. Outdoor declined by $20.1 million or 16.8% to $99.3 million, primarily driven by SwimWays. Outdoor includes $1.1 million for 2022 and $20.8 million from 2021 related to certain brands associated with the divestiture of manufacturing assets in Q1 2022. Excluding the divestiture, Outdoor remained flat year-over-year. Sales Allowances increased by $10.6 million to $241.2 million. As a percentage of Toy Gross Product Sales1, Sales Allowances increased to 12.2% from 11.8%, primarily driven by higher markdowns in the fourth quarter of 2022, as consumers were more price sensitive given global inflationary pressure. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 22 Revenue by Geographic Area The following table provides a summary of Spin Master’s Toy Gross Product Sales1 by geographic area for the year ended December 31, 2022 and 2021: (US$ millions) North America Europe Rest of World International Toy Gross Product Sales1 Sales Allowances Toy revenue Year Ended Dec 31 2022 % of GPS 2021 % of GPS $ Change Change in % of GPS 1,189.8 525.0 264.0 789.0 60.1 % 26.5 % 13.3 % 39.9 % 1,197.3 530.7 234.4 765.1 1,978.8 100.0 % 1,962.4 (241.2) 1,737.6 12.2 % (230.6) 1,731.8 61.0 % 27.0 % 11.9 % 39.0 % 100.0 % 11.8 % (7.5) (5.7) 29.6 23.9 16.4 (10.6) 5.8 (0.9) % (0.5) % 1.4 % 0.9 % 0.4 % 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". As a percentage of total Toy Gross Product Sales1, the North America segment decreased 0.9% to 60.1% compared to 61.0%. International sales, comprised of the Europe and Rest of World segments, increased 0.9% to 39.9% compared to 39.0%. North America declined by $7.5 million or 0.6% to $1,189.8 million. The decrease was driven by PAW Patrol, the Games & Puzzles portfolio, Monster Jam RC and SwimWays partially offset by Gabby's Dollhouse. Europe declined by $5.7 million or 1.1% to $525.0 million, with an unfavourable foreign exchange impact of $49.3 million. The decrease was driven by PAW Patrol partially offset by Purse Pets and Gabby's Dollhouse. Rest of World increased by $29.6 million or 12.6% to $264.0 million, with an unfavourable foreign exchange impact of $1.7 million. The increase was driven by Gabby's Dollhouse, Monster Jam, Rubik's, Wizarding World, offset in part by Hatchimals, Present Pets and Cool Maker. Toys Segment Trend Analysis (US$ millions) Toy Gross Product Sales1 Toy revenue Operating (Loss) Income Operating Margin Adjusted EBITDA1 Adjusted EBITDA Margin1 Selected Cash Flow and Balance Sheet Data Q4 2022 479.2 396.7 (43.3) Q3 2022 617.7 552.4 109.4 Q2 2022 484.4 437.6 62.6 Q1 2022 397.5 350.9 41.4 (10.9)% 19.8% 14.3% 11.8% (24.4) 126.9 83.2 58.9 (6.2)% 23.0% 19.0% 16.8% Q4 2021 627.5 542.0 14.6 2.7% 40.8 7.5% Q3 2021 681.2 607.8 128.0 21.1% 146.5 Q2 2021 359.0 326.4 28.5 8.7% 47.3 Q1 2021 294.7 255.6 (12.1) (4.7)% 5.1 24.1% 14.5% 2.0% Toys capital expenditures Moulds, dies and tools, net carrying amount2 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 19.2 19.5 7.5 7.9 2 Net carrying amount represents balance as at end of the period. 9.8 23.5 7.2 21.9 3.8 21.2 9.1 23.6 8.7 23.6 5.2 20.6 23 Entertainment Segment Results The following table provides a summary of the Entertainment segment's operating results for the three months ended December 31, 2022 and 2021: (US$ millions) Entertainment revenue Operating Income Operating Margin Adjusted Operating Income1 Adjusted Operating Margin1 Selected Cash Flow Data Entertainment capital expenditures Q4 2022 Q4 2021 $ Change % Change 31.2 19.1 61.2 % 20.5 65.7 % 28.5 12.1 42.5 % 13.4 47.0 % 2.7 7.0 7.1 9.5 % 57.9 % 18.7 % 53.0 % 18.7 % 11.9 12.1 (0.2) (1.7) % 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". Entertainment revenue increased by $2.7 million or 9.5% to $31.2 million, driven by higher distribution revenue and licensing and merchandising revenue. Operating Income increased by $7.0 million or 57.9% to $19.1 million. Operating Margin was 61.2% compared to 42.5%. Adjusted Operating Income1 was $20.5 million compared to $13.4 million. Adjusted Operating Margin1 was 65.7% compared to 47.0%. The increase in Operating Income, Adjusted Operating Income1, and Adjusted Operating Margin1 was primarily a result of higher licensing and merchandising revenue as well as lower costs due to fewer content deliveries compared to prior year. Entertainment capital expenditures decreased by $0.2 million to $11.9 million. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 24 The following table provides a summary of the Entertainment segment's operating results for the year ended December 31, 2022 and 2021: (US$ millions) Entertainment revenue Operating Income Operating Margin Adjusted Operating Income2 Adjusted Operating Margin2 Selected Cash Flow and Balance Sheet Data Year Ended Dec 31 2022 2021 $ Change % Change 118.8 76.7 64.6 % 79.1 66.6 % 135.8 53.4 39.3 % 55.9 41.2 % (17.0) 23.3 23.2 (12.5) % 43.6 % 25.3 % 41.5 % 25.4 % Entertainment capital expenditures 54.9 44.0 10.9 24.8 % Dec 31 2022 Dec 31 2021 $ Change % Change Entertainment content development, net carrying amount 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 64.5 27.4 37.1 135.4 % Entertainment revenue decreased by $17.0 million or 12.5% to $118.8 million, due to lower distribution revenue related to PAW Patrol: The Movie released in 2021, partially offset by higher licensing & merchandising revenue. Operating Income increased by $23.3 million or 43.6% to $76.7 million. Adjusted Operating Income1 was $79.1 million compared to $55.9 million. Operating Income and Adjusted Operating Income1 increased due to lower Entertainment amortization expenses due to fewer content deliveries in the current year as well as higher licensing and merchandising revenue. Operating Margin was 64.6% compared to 39.3%. Operating Margin, excluding PAW Patrol: The Movie1 in the prior period was 45.9%. Adjusted Operating Margin1 was 66.6% compared to 41.2%. Adjusted Operating Margin excluding PAW Patrol: The Movie1 in the prior period,1 was 48.2%. The increase in both Operating Margin and Adjusted Operating Margin1 was driven primarily by the dilutive effect of PAW Patrol: The Movie (distribution revenue less amortization of content development costs) in the prior year and fewer Entertainment content deliveries in the current period, which resulted in lower amortization expense. Entertainment capital expenditures increased by $10.9 million to $54.9 million, primarily as a result of higher content development costs driven by production of PAW Patrol: The Mighty Movie, Rubble and Crew, and Vida the Vet. Entertainment content development, net carrying amount increased by $37.1 million to $64.5 million, primarily as a result of content production costs on series and films, including PAW Patrol series, PAW Patrol: The Mighty Movie and other projects in production. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 25 Entertainment Segment Trend Analysis (US$ millions) Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Entertainment revenue 31.2 37.0 28.4 22.2 28.5 52.9 27.5 26.9 Operating Income Operating Margin Adjusted Operating Income1 Adjusted Operating Margin1 Selected Cash Flow and Balance Sheet Data 19.1 17.5 28.9 11.2 12.5 61.2 % 78.1 % 61.6 % 50.5 % 42.5 % 34.4% 45.5% 11.4 12.6 65.7 % 78.9% 63.4% 51.4% 11.6 47.0 % 34.6% 45.8% 43.1% 10.6 0.4 12.1 13.4 18.3 18.0 18.2 29.2 20.5 Entertainment capital expenditures Entertainment content development, net carrying amount2 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 2 Net carrying amount represents balance as at end of the period. 3 Includes Entertainment content development costs associated with PAW Patrol: The Movie. 11.9 64.5 21.3 57.4 14.9 41.3 6.8 30.2 12.1 27.4 8.5 20.1³ 14.9 39.1 8.5 35.2 Digital Games Segment Results The following table provides a summary of the Digital Games segment's operating results for the three months ended December 31, 2022 and 2021: (US$ millions) Digital Games revenue Operating Income Operating Margin Adjusted Operating Income1 Adjusted Operating Margin1 Selected Cash Flow Data Q4 2022 Q4 2021 $ Change % Change 37.9 10.1 26.6 % 12.3 32.5 % 50.0 17.3 34.6 % 19.0 38.0 % (12.1) (7.2) (6.7) (24.2) % (41.6) % (8.0) % (35.3) % (5.5) % Digital Games capital expenditures 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 3.9 2.9 1.0 34.5 % Digital Games revenue decreased by $12.1 million or 24.2% to $37.9 million. Constant Currency Digital Games Revenue1 decreased by $9.9 million or 19.8% to $40.1 million, down from $50.0 million. The decrease in Digital Games revenue and Constant Currency Digital Games Revenue1 were due to lower in-app revenue in Toca Life World. Operating Income decreased by $7.2 million or 41.6% to $10.1 million. Adjusted Operating Income1 decreased by $6.7 million or 35.3% to $12.3 million from $19.0 million. The decline in Operating Income and Adjusted Operating Income1 was from lower revenue from in-app purchases in Toca Life World and higher product development and personnel costs related to the investment in future products. Operating Margin was 26.6% compared to 34.6%. Adjusted Operating Margin1 was 32.5% compared to 38.0%. Operating Margin decreased due to higher product development and personnel costs related to the investment in future products. Adjusted Operating Margin1 decreased due to a decrease in Operating Margin partially offset by an increase in adjustments related to acquisition related deferred incentive compensation. Digital Games capital expenditures were $3.9 million compared to $2.9 million, an increase of $1.0 million or 34.5%, primarily as a result of higher Digital Games development costs related to both current and future digital games. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 26 The following table provides a summary of the Digital Games segment's operating results for the year ended December 31, 2022 and 2021: (US$ millions) Digital Games revenue Operating Income Operating Margin Adjusted Operating Income1 Adjusted Operating Margin1 Year Ended Dec 31 2022 2021 $ Change % Change 163.9 46.5 28.4 % 53.9 32.9 % 174.8 67.5 38.6 % 72.2 41.3 % (10.9) (21.0) (18.3) (6.2) % (31.1) % (10.2) % (25.3) % (8.4) % Selected Cash Flow and Balance Sheet Data Digital Games capital expenditures 12.1 8.7 3.4 39.1 % Digital Games development, net carrying amount 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 17.1 Dec 31 2022 Dec 31 2021 12.8 $ Change % Change 4.3 33.6 % Digital Games revenue decreased by $10.9 million or 6.2% to $163.9 million. Constant Currency Digital Games Revenue1 decreased by $2.9 million or 1.7% to $171.9 million, down from $174.8 million. The decrease in Digital Games revenue and Constant Currency Digital Games Revenue1 were due to lower in-game app revenue in Toca Life World. Operating Income decreased by $21.0 million or 31.1% to $46.5 million. Adjusted Operating Income1 decreased by $18.3 million or 25.3% to $53.9 million from $72.2 million. The declines in Operating Income and Adjusted Operating Income1 are attributable to higher product development investments in future digital games and personnel costs, as well as higher marketing costs to acquire users, and lower in-app purchases in Toca Life World. Operating Margin was 28.4% compared to 38.6%. Adjusted Operating Margin1 was 32.9% compared to 41.3%. Digital Games capital expenditures were $12.1 million compared to $8.7 million, an increase of $3.4 million or 39.1%, primarily as a result of higher Digital Games development costs related to both current and future digital games. Digital Games development, net carrying balance was $17.1 million compared to $12.8 million. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 27 Digital Games Segment Trend Analysis (US$ millions) Digital Games revenue Operating Income Operating Margin Adjusted Operating Income1 Adjusted Operating Margin1 Selected Cash Flow and Balance Sheet Data Digital Games capital expenditures Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 37.9 34.6 40.3 51.1 50.0 53.8 36.9 34.1 10.1 8.2 8.4 19.8 13.2 26.6 % 23.7 % 20.8 % 38.7 % 34.6 % 45.0% 34.7% 38.7% 13.5 38.0 % 48.3% 37.1% 39.6% 21.6 32.5 % 28.9% 24.8% 42.3% 17.3 19.0 13.7 12.8 26.0 10.0 10.0 24.2 12.3 3.9 17.1 2.9 14.6 2.8 14.2 2.5 13.6 2.9 12.8 2.4 11.9³ 1.6 9.2 1.8 3.3 Digital Games development, net carrying amount2 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 2 Net carrying amount represents balance as at end of the period. 3 Includes Digital Games development related to Originator Inc. acquired in Q2 2021. Corporate & Other for the three months and year ended December 31, 2022 as compared to the same period in 2021: For the three months ended December 31, 2022, Operating Loss for Corporate & Other increased by $5.0 million to $9.9 million as a result of foreign exchange losses due to fluctuations in foreign currency denominated monetary assets and liabilities, primarily in the Canadian dollar, as well as the Swedish krona, Great Britain pound sterling and Russian ruble. Adjusted Operating Loss1 was $2.8 million compared to $3.2 million. For the year ended December 31, 2022, Operating Income was $50.0 million compared to an Operating Loss of $7.7 million a change of $57.7 million as a result of higher foreign exchange gains due to fluctuations in foreign currency denominated monetary assets and liabilities, primarily in the Canadian dollar, as well as the Swedish krona, Euro and Great Britain pound sterling. Adjusted Operating Loss1 increased to $9.7 million compared to $9.3 million. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 28 INVESTMENTS AND ACQUISITIONS Acquisition of certain assets from SolidRoots, LLC On August 2, 2022, the Company acquired certain assets from SolidRoots, LLC (“SolidRoots”), a creator of family board games. Management performed an analysis under IFRS 3, Business Combinations ("IFRS 3") and has determined that the assets and processes acquired comprised a business and therefore, accounted for the transaction as a business combination using the acquisition method of accounting. This acquisition is expected to complement the Company's existing board games offering and has been reported in the Toys segment within the Activities, Games & Puzzles and Plush product category and included in the Games and Puzzles cash generating unit ("CGU") beginning from the date of acquisition. The purchase consideration of $10.7 million is comprised of $8.5 million of cash consideration and $2.2 million of contingent consideration related to the estimated fair value of future royalties. The purchase agreement also included total deferred incentive compensation of $1.0 million, which is contingent on the continued employment of key principals as well as certain performance metrics, over a five-year period. These payments are considered a remuneration expense and are accrued over the related service period. Deferred incentive compensation of less than $0.1 million is included in Other expense, net in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. The contingent consideration and deferred incentive compensation are recorded in provisions in the Consolidated statements of financial position. Purchase consideration of $10.7 million has been allocated as follows: $4.4 million to intangible assets (related to the brand), $2.0 million to inventories and $0.1 million to prepaid expenses and other assets, with the remainder of $4.2 million allocated to goodwill. The Company incurred $0.2 million in transaction related costs which were included in administrative expenses in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. Acquisition of the remaining shares of Nørdlight Games AB On August 24, 2021, the Company acquired 18.53% of the shares in Nørdlight Games AB (“Nørdlight”), a company that creates and develops digital games, based in Sweden. On August 8, 2022, the Company acquired the remaining 81.47% of the shares of Nørdlight, resulting in ownership and control of 100% of the voting shares in Nørdlight. This investment was classified in 2021 as an equity instrument measured at FVTOCI. Management performed an analysis under IFRS 3 and determined that the assets and processes acquired comprised a business and therefore, accounted for the transaction as a business combination using the acquisition method of accounting. The acquisition has been reported under the Digital Games segment and CGU beginning from the date of acquisition. The Company paid cash consideration of $2.5 million. The total purchase consideration has been allocated to the identifiable assets of $0.5 million, and liabilities of $0.2 million, with the remainder $2.9 million allocated to goodwill. The purchase agreement includes total deferred incentive compensation of $7.8 million, which is contingent on the continued employment of key principals as well as certain performance metrics, over a five-year period. These payments are considered an incentive-related remuneration expense and are accrued over the related service period. Deferred incentive compensation of $1.4 million is included in Other expense, net in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. The deferred incentive compensation is recorded in provisions in the Consolidated statements of financial position. The purchase agreement also includes contingent consideration of $4.9 million which is payable on achieving certain performance metrics and has been allocated a fair value of $nil in the total purchase consideration. The Company incurred $0.1 million in transaction related costs which were included in administrative expenses in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. 29 Prior year acquisitions Acquisition of Rubik's Brand Limited On January 4, 2021, the Company completed the acquisition of Rubik's Brand Limited by acquiring 100% of the shares of its holding company, Rubiks Malta Holding Company Limited (“Rubik’s”). Rubik’s is a licensor and distributor of various editions of the Rubik’s product lines and qualifies as a business under IFRS 3. The Company secured the global intellectual property for the Rubik’s portfolio and the ability to sell, market and license for further penetration directly to wholesale customers or continue to sell indirectly through distributors into markets as well as expansion into new territories. The brand has been reported in the Toys segment within the Activities, Games & Puzzles and Plush product category and included in the Rubik's CGU beginning from the date of acquisition. Total purchase consideration of $55.2 million was comprised of $51.4 million of cash consideration plus $3.8 million related to the estimated fair value of future royalties. The total purchase consideration has been allocated to the identifiable intangible assets based on their estimated fair values of $38.1 million (related to brands and customer relationships), tangible assets of $6.5 million and assumed liabilities of $12.0 million with the remainder allocated to goodwill. Acquisition of certain assets from a product invention and development company On April 16, 2021, the Company acquired assets and assumed liabilities of a product invention and development company which constitutes a business under IFRS 3. Included in the acquisition is an assembled workforce to complement the Company's toy innovation and development capabilities. The acquisition has been reported in the Toys segment and CGU from the date of acquisition. Total purchase consideration was comprised of $7.5 million of cash consideration and has been allocated as $0.7 million of tangible assets and $0.7 million of assumed liabilities with the remainder allocated to goodwill. The purchase agreement also included deferred incentive compensation of $14.5 million, which is contingent on continued employment of key principals over a five-year period. These payments are considered an incentive-remuneration expense and are accrued over the five-year period. Acquisition of Originator Inc. On June 14, 2021, the Company acquired 100% of the shares of Originator Inc., which qualifies as a business under IFRS 3. Originator Inc. is a developer and publisher of education focused mobile digital games for kids and families and was acquired to complement Sago Mini's edutainment digital games offering. The acquisition has been reported in the Digital Games segment and CGU and its revenue is included within Digital Games revenue from the date of acquisition. Total purchase consideration was comprised of $15.0 million of cash consideration. The total purchase consideration has been allocated to identifiable intangible assets based on their estimated fair values of $9.1 million (related to brands, customer relationships and Digital Games development), tangible assets of $0.6 million and assumed liabilities of $2.9 million with the remainder allocated to goodwill. The purchase agreement also included total deferred incentive compensation of $10.0 million, which is contingent on the continued employment of key principals as well as certain performance metrics, over a five- year period. These payments are considered an incentive-related remuneration expense and are accrued over the five-year period. 30 Spin Master Ventures On October 19, 2021, the Company announced the creation of Spin Master Ventures ("SMV"). SMV’s focus is to accelerate growth by making minority investments in companies operating in each of the Company’s three creative centres comprising Toys, Entertainment and Digital Games. Spin Master has initially allocated $100 million of capital to SMV, to be funded from existing internal resources. As at December 31, 2022, the Company has invested $9.9 million. In 2022, the Company acquired minority interests in privately-held entities for a total of $7.5 million. In the third quarter of 2022, the Company acquired the remaining ownership interest of Nørdlight, a Minority interest investment classified as FVTOCI. As part of the step acquisition to 100% ownership of the entity, the prior investment was deemed to be disposed of and reacquired at fair value of $0.7 million. The Company accounted for this transaction as a business combination. The SMV portfolio currently consists of the following investments: Creative Centre Location Acquisition date Initial investment Dec 31, 2022 Dec 31, 2021 Classified as FVTPL Education technology company Virtual reality gaming company Content streaming platform1 Baby consumer product brand Digital Games Canada Q3 2021 Digital Games Entertainment Toys U.K. U.S.A U.S.A U.S.A Q1 2022 Q1 2022 Q2 2022 Q4 2022 Q3 2021 Q4 2022 Animation technology company Entertainment Classified as FVTOCI Mobile game development company2 Digital Games Sweden U.S.A Global publishing company Entertainment 1.8 0.5 0.5 3.0 0.5 0.6 3.0 9.9 1.8 0.5 — 3.0 0.5 — 3.0 8.8 1.8 — — — — 0.6 — 2.4 1 Fair value loss of $0.5 million recorded in Q2 2022 through the statement of earnings 2 Fair value gain of $0.1 million recorded in Q2 2022 through other comprehensive income, and disposed of in Q3 2022 at a value of $0.7 million. 31 SELECTED QUARTERLY FINANCIAL INFORMATION The following table provides selected historical information and other data, which should be read in conjunction with the annual financial statements and current and past interim financial statements. (in US$ millions, except EPS) Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Revenue 465.8 624.0 506.3 424.2 620.5 714.5 390.8 316.6 Operating (Loss) Income (24.0) 187.4 118.2 61.7 Operating Margin Adjusted Operating (Loss) Income1 Adjusted Operating Margin1 (5.2)% 30.0% 23.3% 14.5% (5.5) 151.8 97.6 77.3 (1.2)% 24.3% 19.3% 18.2% 39.1 6.3% 55.3 8.9% 26.5 $0.26 $0.25 179.5 46.9 25.1% 12.0% 175.6 57.7 24.6% 14.8% 135.4 $1.32 $1.29 33.5 $0.33 $0.32 6.7 2.1% 13.6 4.3% 3.2 $0.03 $0.03 (13.8) $(0.13) $(0.13) 141.4 $1.37 $1.33 88.1 $0.86 $0.83 45.6 $0.45 $0.43 12.4 2.7% — $— $— 167.6 113.7 95.7 78.3 217.3 81.8 36.7 26.9% 22.5% 22.6% 12.6% 30.4% 20.9% 11.6% 114.4 $1.11 $1.08 72.4 $0.70 $0.68 57.5 $0.56 $0.55 38.7 $0.38 $0.37 132.6 $1.30 $1.26 41.6 $0.41 $0.40 8.4 $0.08 $0.08 Net (Loss) Income Basic EPS Diluted EPS Adjusted EBITDA1 Adjusted EBITDA Margin1 Adjusted Net Income1 Adjusted Basic EPS1 Adjusted Diluted EPS1 Balance Sheet and Cash Flow Cash and cash equivalents 644.3 674.9 558.1 Cash (used in) provided by operating activities Cash used in investing activities Free Cash Flow1 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". (30.4) (42.3) (30.1) (28.2) 207.3 175.3 111.6 (6.8) 84.1 493.1 (62.9) (8.3) (79.4) 562.7 230.1 (19.6) 211.3 360.5 85.8 310.7 94.2 (22.7) (46.9) 65.8 69.0 262.3 9.0 (64.0) (6.5) Seasonality factors cause the Company's operating results to fluctuate from quarter to quarter. In particular, Toy revenue is concentrated in the third and fourth quarters of a fiscal year with a significant portion of its Net Income earned and cash flows generated during the same period. Toy Gross Product Sales1 volume was pulled forward from the third quarter into the first and second quarters of 2022 as retailers ordered earlier in the year to minimize supply chain disruptions. In addition, the third and fourth quarters of 2022 were pressured by the macroeconomic environment, particularly from higher inflation compounded by foreign exchange volatility and a carry-over of inventory at retail from the first half of 2022. These factors resulted in a strong first half of 2022 with Toy Gross Product Sales1 representing 45 percent of the annual Toy Gross Product Sales1. The Company expects Toy Gross Product Sales1 seasonality to return to historical trends of 30 percent to 35 percent in the first and second quarter cumulatively, as compared to 2022. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 32 LIQUIDITY AND CAPITAL RESOURCES As at December 31, 2022, the Company had cash and cash equivalents of $644.3 million (December 31, 2021 - $562.7 million). The Company has an unsecured five-year revolving credit facility (the "Facility") with a borrowing capacity of $510.0 million which matures on September 28, 2026, and contains certain financial covenants. The Facility also has an option which permits the Company to increase the total capital available by an additional $200.0 million. Total financing costs of $1.7 million, which include Facility amendment fees and related legal fees, are recognized in Other assets and are being amortized over the term of the amended and restated agreement. As at December 31, 2022, there were $1.4 million (December 31, 2021 - $$0.4 million) in letters of credit outstanding under the Facility. As at December 31, 2022, there was $nil drawn (December 31, 2021 - $nil) under the Facility. The Company has an uncommitted Overdraft Facility Agreement (the "European Facility") for €15.0 million (US$16.1 million). The European Facility will be used to fund working capital requirements in Europe. As at December 31, 2022, the outstanding balance was $nil (December 31, 2021 - $nil). The Company has an uncommitted Revolving Credit Facility to finance television and film production. The limit of the credit facility (the "Production Facility") is 10.0 million CAD (US$7.4 million). As at December 31, 2022, the outstanding balance of the Production Facility was $nil (December 31, 2021 - $nil). As at December 31, 2022, the Company had unutilized liquidity of $1,154.3 million, comprised of $644.3 million in Cash and cash equivalents and $510.0 million under the Company's credit facilities. The Company’s primary source of liquidity is cash flow from operations. The Company’s primary capital needs are related to inventory financing, accounts payable funding, and capital expenditures for Toys tooling, Entertainment content creation and production, Digital Games development and to fund strategic acquisitions and minority investments. As a result of the seasonal nature of the toy industry, 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, however, may be impacted by the factors discussed below. The Company paid its first quarterly dividend in the third quarter of 2022. The declaration and payment of dividends on the Company’s subordinate voting shares and multiple voting shares and the amount thereof are at the discretion of the Company’s Board of Directors, which considers the Company’s financial results, capital requirements, available cash flow, future prospects of the Company’s business and other factors considered relevant from time to time. Cash flows from operations could be negatively impacted by lower demand for the Company’s products, which may result from factors such as adverse economic conditions and changes in 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. 33 The Company expects that cash on hand, future operating cash flows and the amount available under its committed credit facility, are sufficient to finance capital expenditures and ongoing business requirements over the next 12 months. However, in order to manage its capital allocation, the Company may adjust the amount of dividends paid to shareholders or whether dividends are paid at all, purchase shares for cancellation under its Normal Course Issuer Bid (the "NCIB") program, issue new shares or issue or repay borrowings to ensure sufficient liquidity is available to support its financial obligations, and to execute its operating and strategic plan. The Company may also adjust its capital structure in light of changes in economic conditions, utilize short-term funding sources to manage its seasonal working capital requirements and long-term funding sources to manage the long-term capital investments of the business. Short Form Base Shelf Prospectus The Company filed a short form base shelf prospectus dated November 2, 2021, pursuant to which, for a period of 25 months thereafter, the Company (and shareholders of the Company) may sell up to an aggregate of 1.0 billion CAD of subordinate voting shares, preferred shares, debt securities, subscription receipts, warrants or any combination thereof as a unit. This filing provides the Company with the flexibility to access debt and equity markets on a timely basis. The Company's previous base shelf prospectus in the amount of 750.0 million CAD, expired during the third quarter of 2021. Capital and Investment Framework Over the long term, the Company plans to use its cash on hand, cash from operations and its committed credit facility to fund seasonal working capital requirements related to product sales, television shows, feature films, short-form content, Digital Games development in addition to strategic acquisitions and minority investments. 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. The Company’s capital expenses are generally comprised of the purchase of tooling used in the manufacturing process of toys, entertainment content production and digital games development. 34 CASH FLOW The following table provide a summary of Spin Master’s consolidated cash flows for the three months ended December 31, 2022 and 2021: (US$ millions) Q4 2022 Q4 2021 $ Change Net cash flows (used in) provided by operating activities Net cash flows used in investing activities Net cash flows used in financing activities Net (decrease) increase in cash and cash equivalents (excluding the effect of foreign currency exchange rate changes) Effect of foreign currency exchange rate changes on cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period (6.8) (28.2) (8.5) (43.5) 12.9 674.9 644.3 230.1 (19.6) (3.5) 207.0 (4.8) 360.5 562.7 (236.9) (8.6) (5.0) (250.5) 17.7 314.4 81.6 The following table provides a summary of Spin Master’s consolidated cash flows for the year ended December 31, 2022 as compared to the same period in 2021: (US$ millions) 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 and cash equivalents (excluding the effect of foreign currency exchange rate changes) Effect of foreign currency exchange rate changes on cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Year Ended Dec 31 2022 249.3 (109.2) (20.3) 119.8 (38.2) 562.7 644.3 2021 419.1 (153.2) (18.3) 247.6 (5.5) 320.6 562.7 $ Change (169.8) 44.0 (2.0) (127.8) (32.7) 242.1 81.6 Cash from Operating Activities as compared to the same period in 2021: Cash flows used in operating activities were $6.8 million for the three months ended December 31, 2022 compared to cash flows provided by operating activities of $230.1 million driven by the change in net working capital (a decrease of $1.9 million as compared to an increase of $167.3 million in the comparative period) and lower Operating Income as a result of customers ordering earlier in the current year. Cash flows provided by operating activities were $249.3 million for the year ended December 31, 2022 compared to $419.1 million driven by the change in net working capital (a decrease of $67.7 million as compared to an increase of $49.9 million in the comparative period) and higher income taxes paid, offset by higher Operating Income. 35 The following table provides a summary of Spin Master’s net changes in non-cash working capital for the year ended December 31, 2022 as compared to the same period in 2021: (US$ millions) Decrease (increase) in: Trade receivables Other receivables Inventories Prepaid expenses and other assets Assets reclassified as held for sale (Decrease) increase in: Trade payables and accrued liabilities Deferred revenue Provisions Net changes in non-cash working capital Net Working Capital1 Year Ended Dec 31 2022 2021 $ Change 61.4 0.6 37.4 (11.4) — 88.0 (157.3) 0.6 1.0 (155.7) (67.7) (48.7) 8.3 (31.7) 4.7 (5.7) (73.1) 147.4 (14.5) (9.9) 123.0 49.9 110.1 (7.7) 69.1 (16.1) 5.7 161.1 (304.7) 15.1 10.9 (278.7) (117.6) The table below outlines key financial information pertaining to the Company's net working capital: (US$ millions) Trade receivables, net1,5 Other receivables2,5 Inventories, net3 Prepaid expenses and other assets Current assets Trade payables Accrued liabilities4 Deferred revenue Provisions Current liabilities Dec 31, 2022 Dec 31, 2021 $ Change 311.0 49.5 105.1 22.3 487.9 153.0 186.4 11.5 30.7 381.6 352.4 38.8 137.4 19.5 548.1 274.7 201.7 10.9 25.1 512.4 (41.4) 10.7 (32.3) 2.8 (60.2) (121.7) (15.3) 0.6 5.6 (130.8) 70.6 Net working capital 1 Trade receivables are net of allowance for doubtful accounts and provisions for sales allowances. Refer to Note 11 of the annual financial statements. 2 Other receivables include investment tax credits receivable, royalties, sales tax and other balances. Refer to Note 11 of the annual financial statements. 106.3 35.7 3 Inventories are net of write-downs. Refer to Note 12 of the annual financial statements. 4 Accrued liabilities are comprised of payroll related liabilities, accrued royalties, commodity tax, dividends payable and other balances. Refer to Note 18 of the annual financial statements. 5 Certain Entertainment receivables totaling $24.5 million from the prior year have been reclassified from Other receivables to Trade receivables to conform with current year presentation. Total net working capital increased by $70.6 million to $106.3 million at December 31, 2022 from $35.7 million. Excluding the impact of foreign exchange, total net working capital increased by $67.7 million. Trade receivables, net, decreased by $41.4 million to $311.0 million at December 31, 2022 from $352.4 million, driven by lower sales in the second half of 2022 compared to the prior year attributable to customers ordering earlier in the current year. Other receivables increased by $10.7 million to $49.5 million at December 31, 2022 from $38.8 million, driven by an increase in investment tax credits receivables and royalty receivables. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios" 36 Inventories decreased by $32.3 million to $105.1 million at December 31, 2022 from $137.4 million, due to the Company's focus on optimizing inventory levels as well as lower in-transit inventory resulting from an easing of supply chain restrictions and delays. Trade payables and accrued liabilities decreased by $137.0 million to $339.4 million at December 31, 2022 from $476.4 million, driven by the timing of payments in line with the seasonality of the business. Investing Activities as compared to the same period in 2021: The following table provide a summary of Spin Master’s consolidated cash flows used in investing activities for the three months ended December 31, 2022 and 2021: (US$ millions) Property, plant and equipment Tooling Other Total property, plant and equipment Intangible assets Entertainment content and Digital Games development Computer software Brands, licenses and trademark acquisitions Total intangible assets Total capital expenditures Business acquisitions, net of cash acquired Minority interest and other investments, net of investment distribution income Cash used in investing activities Q4 2022 Q4 2021 $ Change 5.5 2.0 7.5 14.8 1.0 — 15.8 23.3 1.4 3.5 28.2 4.3 (1.1) 3.2 14.6 0.5 0.5 15.6 18.8 0.7 0.1 19.6 1.2 3.1 4.3 0.2 0.5 (0.5) 0.2 4.5 0.7 3.4 8.6 Cash used in investing activities was $28.2 million for the three months ended December 31, 2022 compared to $19.6 million primarily as a result of higher investments related to Minority interest and other investments in the current year and investments in Tooling. The following table provides a summary of Spin Master’s consolidated cash flows used in investing activities for the year ended December 31, 2022 as compared to the same period in 2021: (US$ millions) Property, plant and equipment Tooling Other Total property, plant and equipment Intangible assets Entertainment content and Digital Games development Computer software Brands, licenses and trademark acquisitions Total intangible assets Total capital expenditures Business acquisitions, net of cash acquired Minority interest and other investments, net of investment distribution income Proceeds from sale of manufacturing operations Cash used in investing activities Year Ended Dec 31 2022 2021 $ Change 23.0 7.4 30.4 63.7 4.8 0.5 69.0 99.4 11.6 7.4 (9.2) 109.2 22.8 3.6 26.4 50.3 1.8 1.0 53.1 79.5 70.9 2.8 — 153.2 0.2 3.8 4.0 13.4 3.0 (0.5) 15.9 19.9 (59.3) 4.6 (9.2) (44.0) For the year ended December 31, 2022, cash used in investing activities was $109.2 million compared to $153.2 million. The decline was primarily related to a $59.3 million decrease in Business acquisitions, net of cash acquired in the current year for certain assets of SolidRoots and Nørdlight compared to the acquisitions of Rubik's, Originator and certain assets from a product invention and development company in the prior year, offset in part by higher investments in Entertainment content and Digital Games development. 37 Financing Activities as compared to the same period in 2021: Cash flows used in financing activities were $8.5 million for the three months ended December 31, 2022 compared to $3.5 million primarily from the payment of cash dividends, offset by lower payment of lease liabilities. For the year ended December 31, 2022, cash flows used in financing activities were $20.3 million compared to $18.3 million due to the payment of cash dividends, offset by lower payment of lease liabilities. Free Cash Flow1 as compared to the same period in 2021: The following table provides a reconciliation of Spin Master’s consolidated Free Cash Flow1 to cash from operating activities and cash used in investing activities for the three months ended December 31, 2022 and 2021: (US$ millions) Q4 2022 Q4 2021 $ Change Cash flows (used in) provided by operating activities Cash flows used in investing activities Add: Business acquisitions, net of cash acquired Investment in limited partnership Advance paid for business acquisitions Minority interest and other investments Free Cash Flow1 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". (6.8) (28.2) 0.4 — 1.0 3.5 230.1 (19.6) 0.7 0.1 — — (236.9) (8.6) (0.3) (0.1) 1.0 3.5 (30.1) 211.3 (241.4) Free Cash Flow1 was $(30.1) million for the three months ended December 31, 2022 compared to $211.3 million, a decrease of $241.4 million. Free Cash Flow1 decreased primarily due to lower revenue and collections in the current quarter as a result of customer shifts towards earlier quarters in the current year compared to the prior year. The following table provide a reconciliation of Spin Master’s consolidated Free Cash Flow1 to cash from operating activities and cash used in investing activities for the year ended December 31, 2022 as compared to the same period in 2021: (US$ millions) Cash flows provided by operating activities Cash flows used in investing activities Add: Business acquisitions, net of cash acquired Advance paid for business acquisitions Investment distribution income Investment in limited partnership Minority interest and other investments Proceeds from sale of manufacturing operations Free Cash Flow1 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". Year Ended Dec 31 2022 249.3 (109.2) 10.6 1.0 (0.1) — 7.5 (9.2) 2021 419.1 (153.2) 70.9 — (0.6) 1.0 2.4 — $ Change (169.8) 44.0 (60.3) 1.0 0.5 (1.0) 5.1 (9.2) 149.9 339.6 (189.7) For the year ended December 31, 2022, Free Cash Flow1 was $149.9 million compared to $339.6 million, a decrease of $189.7 million. Free Cash Flow1 decreased primarily due to lower cash flows provided by operating activities, which was in turn driven by the increase in net working capital. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 38 OUTLOOK The Company expects 2023 Toy Gross Product Sales1 to be flat to slightly down compared to 2022. The Company expects 2023 Toy Gross Product Sales1 seasonality to return to historical averages of 30%-35% in the first half of the year. The Company expects 2023 Revenue, excluding PAW Patrol: The Mighty Movie Distribution Revenue1 to be in line with 2022. The Company expects 2023 Adjusted EBITDA Margin, excluding PAW Patrol: The Mighty Movie Distribution Revenue1 to be flat to slightly up compared to 2022. CONTRACTUAL OBLIGATIONS & COMMITMENTS In the normal course of business, Spin Master enters into contractual arrangements to obtain and protect Spin Master’s right to create and market certain products and to ensure availability and timely delivery of future purchases of goods and services. These arrangements include commitments for future services, purchases, commitments to settle foreign currency forward contracts and royalty payments pursuant to licensing agreements. Certain of these commitments routinely contain provisions for guarantees or minimum expenditures during the terms of the contracts. Additionally, Spin Master routinely enters into non-cancellable lease agreements for premises and equipment, which contain minimum rental payments. The following table summarizes Spin Master's contractual commitments and obligations as at December 31, 2022, which are primarily for the leasing of offices and related office equipment and minimum guarantees due to licensors. The leases have been entered into with terms of between two and twelve years in length and minimum guarantees to licensors are primarily due within 24 months. (US$ millions) <1 Year 1-5 Years > 5 Years Total Lease obligations - undiscounted Guaranteed payments due to licensors Other Total commitments 14.8 21.0 6.2 42.0 39.6 27.6 13.9 81.1 39.2 — — 39.2 93.6 48.6 20.1 162.3 Less than 1 year to greater than 5 years OFF-BALANCE SHEET ARRANGEMENTS 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. CAPITALIZATION Share Capital As at March 8, 2023, there were 102.9 million shares outstanding comprised of 68.7 million multiple voting shares and 34.2 million subordinate voting shares. As of March 8, 2023, pursuant to grants under the Company's Long-Term Incentive Plan, 1.1 million subordinate voting shares were issuable under outstanding Restricted Stock Units, up to 2.0 million subordinate voting shares were issuable under outstanding Performance Share Units (assuming vesting at a maximum of 200% for units with an outstanding performance period) and 0.5 million subordinate voting shares were issuable under outstanding Share Option grants. Dividends in the amount of $4.6 million were paid on October 14, 2022 to shareholders of record at the close of business on September 30, 2022. Dividends in the amount of $4.6 million were accrued on December 31, 2022 and paid on January 13, 2023 to shareholders of record at the close of business on December 30, 2022. 1 Non-GAAP financial measure or ratio. See "Non-GAAP Financial Measures and Ratios". 39 On March 8, 2023, the Company’s Board of Directors declared a dividend of 0.06 CAD per outstanding subordinate voting share and multiple voting share, payable on April 14, 2023 to shareholders of record at the close of business on March 31, 2023. Secondary Offering On November 10, 2022, the Company announced a secondary offering (the “Secondary Offering”) on a bought deal basis of its subordinate voting shares through a secondary sale of shares by an entity owned and or controlled by a Director of the Company (the “Selling Shareholder”). The Secondary Offering of 1,900,000 subordinate voting shares raised gross proceeds of approximately 61.0 million CAD for the Selling Shareholder, at a price of 32.10 CAD per subordinate voting share and was completed on November 17, 2022. The Company did not receive any proceeds from the Secondary Offering, and the underwriting fees and other expenses related to the Secondary Offering were paid by the Selling Shareholder. To satisfy the sale under the Secondary Offering, the Selling Shareholder converted 1,900,000 multiple voting shares into subordinate voting shares on a one-for-one basis. Normal Course Issuer Bid On January 5, 2023, the Company launched, and the Toronto Stock Exchange ("TSX") accepted the notice to launch a Normal Course Issuer Bid (the "NCIB"). Under the NCIB, the Company may repurchase its subordinate voting shares on the open market at its discretion and subject to compliance with applicable securities laws. The NCIB period commenced on January 9, 2023, and will end on the earlier of January 8, 2024 and the completion of purchases under the NCIB, up to 2,845,904 subordinate voting shares, which represents approximately 10% of the "public float" (within the meaning of the rules of the TSX). Under the TSX rules, daily purchases on the TSX pursuant to the NCIB will be limited to 20,814 subordinate voting shares, other than purchases made pursuant to the block purchase exception. As at March 8, 2023, no shares have been purchased under the NCIB. RISKS RELATING TO SPIN MASTER'S BUSINESS An investment in securities of the Company involves significant risks. Investors should carefully consider the risks described below, the other information described elsewhere in this MD&A (as updated by subsequent interim MD&A) and those risks set out in the Company’s most recently filed Annual Information Form before making a decision to buy securities of the Company. If any of the following or other risks occur, the Company’s business, prospects, financial condition, financial performance and cash flows could be materially adversely impacted. In that case, the ability of the Company to make distributions to holders of Subordinate Voting Shares could be adversely affected, the trading price of securities of the Company could decline and investors could lose all or part of their investment in such securities. These factors are also currently, and in the future may be, amplified by the global economic or geopolitical climate and additional or unforeseen circumstances, developments, or risks, including pandemics or other public health crises. There is no assurance that risk management steps taken will avoid future loss due to the occurrence of the below described or other unforeseen risks. If Spin Master does not create original, or enhance existing, products, brands, entertainment properties, and digital games products 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 and sell original products, brands, entertainment properties, and digital games products and to identify changing consumer sentiments and 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 products, will depend on its ability to satisfy play preferences, enhance existing products, engineer, develop, introduce and achieve market acceptance of its original products, brands, entertainment properties, and digital games products. If the Company is unable to anticipate consumer preferences, its products, brands, entertainment properties, and digital games products may not be accepted by children, parents, or families, demand for the Company’s products, brands, entertainment properties, and digital games products could decrease and Spin Master’s business, financial condition and performance could be materially and adversely affected. 40 Spin Master’s business and financial performance depend largely upon the appeal of its products, brands, entertainment properties, and digital games products. Failure to anticipate, identify and react to changes in children’s interests and consumer preferences could significantly lower sales of its products, brands, entertainment properties, and digital games products 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 from year to year and season to season and are difficult to anticipate. Significant, sudden shifts in demand are caused by customer preferences, technologies and trends, which are often unpredictable and can result in short consumer life cycles. Even the Company’s successful brands and products typically have a relatively short period of high demand followed by a decrease in demand as the product matures or is superseded by newer technologies and / or brands and products. A decline in the popularity of the Company’s existing products, brands, entertainment properties, and digital games products or the failure of Spin Master’s original products, brands, entertainment properties, and digital games products 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 companies that develop, market and sell analog toys and games, products which combine analog and digital play, digital games products, and other entertainment and consumer products, as well as with retailers who offer such products under their own private labels often at lower prices. 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. In addition to existing customers, 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. 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. Spin Master also faces competition in the entertainment industry. Some of the Company’s competitors in the content market have interests in multiple media businesses which are often vertically integrated. Spin Master’s ability to compete in this market depends on a number of factors, including its ability to develop 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. 41 Failure to protect or enforce Spin Master’s IP rights and claims by third parties that the Company is infringing their IP 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 resources. 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 resources. If Spin Master or its licensors are found to be infringing on the IP rights of any third-party, Spin Master or its licensors may be required to obtain a license to use those rights, which may not be obtainable on reasonable terms, if at all. The Company also may be subject to significant damages or injunctions against the development and sale of some of its products or against the use of a trademark or copyright in the sale of some of its products. Spin Master’s insurance does not cover all types of IP claims and insurance levels for covered claims may not be adequate to indemnify the Company against all liability, which could materially and adversely harm its business, financial condition and performance. Spin Master 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 not renew its expiring licenses or 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. Spin Master may not be able to sustain or manage its growth strategy, which may prevent the Company from increasing its 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 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 42 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. 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, inflation, rising interest rates and mortgage rates, 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. Consumer spending habits, including spending on Spin Master products, are affected by, among other things, prevailing economic conditions, inflation, rising interest rates and mortgage rates, levels of employment, fuel prices, salaries and wages, the availability of consumer credit, foreclosures, bankruptcies, falling home prices, 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. In addition to experiencing potentially lower revenues during times of economic difficulty, in an effort to maintain sales during such times, Spin Master may need to reduce the price of its products, increase promotional spending and/or sales allowances, offer incentives or take other steps to encourage retailer and consumer purchase of its products. Those steps may lower the Company’s net revenues or increase its costs, thereby decreasing its operating margins and lowering its profitability. These challenges can be exacerbated if customers accumulate excess retail inventories over time due to their purchases of Spin Master’s products exceeding sales of those products to ultimate consumers. It can then take the Company significant time, working with retailers, to reduce those excess retail inventories, and in the interim its sales of new products can be negatively impacted. During periods of increased cost inflation, Spin Master has increased prices of certain products, and may in the future need to increase prices further in order to cover increased costs of goods sold, which may reduce demand for products. There can be no guarantee that Spin Master will be able to successfully increase prices in the future or that the price increases Spin Master has already taken will offset the entirety of additional costs it has incurred and may incur in the future. The inability to adequately increase prices to offset increased costs and inflationary pressures, or otherwise mitigate the impact of these macro-economic conditions and market disruptions, may also increase costs and/or decrease profit margins. While historically the Company’s sales have been resilient to recessionary environments, there is no assurance that this historical trend will continue, or that increased inflation or price sensitivity on the part of retailers or consumers will not have an effect on Spin Master’s sales. Any reduction in discretionary spending by consumers in the face of macroeconomic factors could unfavourably impact the Company’s future sales and materially and adversely affect its financial performance and results of operations. 43 Disruptions in Spin Master’s manufacturing operations or supply chain due to political instability, civil unrest, future pandemic or other public health crises, or earthquakes or other natural disasters outside of Spin Master’s control, and actions taken by governments, businesses, and individuals in response to such events have adversely affected and could further adversely affect Spin Master’s business, financial position, sales, and results of operations. Spin Master’s business and operations could be materially and adversely affected by political instability, civil unrest, future pandemics or other public health crises, earthquakes, natural disasters, and other natural or man- made economic, political, or environmental disruptions. Disruptions, and government responses to any disruption, could adversely affect Spin Master’s business, financial position, sales, and results of operations and may vary based on the length and severity of the disruption. For example, the COVID-19 pandemic and the actions taken by governments, businesses, and individuals in response thereto affected how Spin Master and its suppliers and partners operated their businesses, caused supply chain disruption and retail store closures, and adversely affected Spin Master’s operating results. While the impact of the COVID-19 pandemic has largely subsided, the impact of any new outbreaks of COVID-19, other variants, or other public health crises on Spin Master’s business and financial results will depend on future developments, which are highly uncertain and cannot be predicted. The Company utilizes third-party manufacturers and suppliers in China, as well as in Vietnam, India, Mexico and France. The risk of political instability and civil unrest in certain of these countries, which could temporarily or permanently damage the manufacturing operations of the Company or its third-party manufacturers. Outbreaks of communicable diseases have also been known to occur in certain of these countries and around the world. Other disruptions from public health crises such as these result from, among other things, workers contracting diseases, restrictions on factory openings, restrictions on travel, restrictions on shipping and shopping, and the closure of critical infrastructure. The design, development, manufacture, distribution and sale of the Company’s products has suffered and could further suffer if a significant number of the Company’s employees or the employees of its third-party manufacturers, their suppliers, or of businesses where the Company’s products are sold, contract communicable diseases such as these, or if the Company, the Company’s third-party manufacturers, or their suppliers are adversely affected by other impacts of such diseases. Furthermore, a catastrophic event where Spin Master or its third-party manufacturers and suppliers has important operations, such as an earthquake, tsunami, flood, typhoon, fire, power outage or other natural or manmade disaster, including as a result of climate change, could disrupt Spin Master’s operations or those of its business partners and impair production or distribution of its products, damage inventory, interrupt critical functions, or otherwise affect its business negatively. The impact of these events could further result in: • • • • third-party suppliers resulting in limitations on Spin Master’s ability to design, develop, manufacture, and distribute products effectively, efficiently, and in a timely manner; delays in entertainment content releases from licensors, or changes in release plans, that can adversely impact sales of the Company’s products; disruptions or restrictions on the ability of Spin Master’s employees, suppliers, and manufacturers to work effectively, including due to illness, quarantines, government actions, and facility closures or other similar restrictions; and increased operational risks, including increased risks of accounts receivable collection, insolvency of retailers (particularly specialty retailers), delays in payment, and negotiations with third parties over payment terms or the ability to perform under certain contracts or licenses. Any one of these factors, or a combination thereof, could impact Spin Master’s ability to meet demand for its products or could increase the costs of its products. To the extent any of these disruptions become prolonged or recur, particularly during seasonally high periods of production or distribution, Spin Master’s ability to meet demand may be materially impacted. Insurance for certain disruptions may not be available or affordable. Such disruptions in the markets in which Spin Master, its employees, consumers, customers, business partners, licensees, licensors, suppliers, and manufacturers operate, can have, and at times in the past have had, a significant negative impact on Spin Master’s business, liquidity, financial position, sales, and results of operations. In addition, the contingency plans the Company has developed to help mitigate the impact of disruptions in its operations, have not and may not prevent its business, financial position, sales, and results of operations from being adversely affected by a significant disruption to its operations, suppliers or demand for the Company’s products. 44 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 business is subject to seasonality factors, and therefore its annual financial performance depends, in large part, on its sales relating to the holiday seasons and the timing of its product launches. 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. Typically, a large percentage of the Company’s Toy revenue is concentrated in the third and fourth quarters, with a large percentage of retail sales occurring during the period from September through December in anticipation of the traditional holiday season. Generally, the first quarter is the period of lowest shipments and revenues in the toy industry and therefore, the least profitable because of certain fixed costs. Further, ecommerce continues to grow significantly and accounts for a higher portion of the ultimate sales of the Company’s products to consumers. Ecommerce retailers tend to hold less inventory and take inventory closer to the time of sale to consumers than traditional retailers. 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 and pandemics, terrorist attacks, wars or other conflicts, 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, that interfere with the manufacture or shipment of goods during critical months leading up to the peak purchasing season. If Spin Master fails to meet transportation schedules, it could damage the Company’s relationships with retailers, increase the Company’s distribution and logistics costs or cause sales opportunities to be delayed or lost. In order to be able to deliver its merchandise on a timely basis, Spin Master needs to maintain adequate inventory levels of the desired products. If the Company’s inventory forecasting and production planning processes result in Spin Master manufacturing inventory in excess of the levels demanded by its customers, the Company could be required to record inventory write-downs for excess and obsolete inventory, which could materially and adversely affect the Company’s financial performance. If the inventory of Spin Master products held by its retailers is too high, they may not place or may reduce orders for additional products, which could unfavourably impact the Company’s future sales and materially and adversely affect its financial performance. Spin Master’s dependence on third-party manufacturers, distributors, distribution centres and logistics service providers presents risks to the Company’s business and exposes it to risks associated with international operations. A majority of Spin Master’s products are manufactured by third-party manufacturers, most of which are located in Asia and primarily in China, and transported, 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 service providers, or if there was any material failure, inadequacy or interruption resulting from its third-party service providers due to factors beyond the Company’s control. Although Spin Master’s external sources of manufacturing and its distribution centres and logistics service providers 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, and significant capital investments could be required to remediate the problem. 45 Given that the majority of Spin Master’s products are manufactured by third-party manufacturers, public health crises, such as the COVID-19 pandemic, and other factors affecting political, social and economic activity where the Company’s manufacturers are located, may affect the movement of people and products into and from those locations to the Company’s major markets, including North America and Europe. Public health crises impacting the Company’s third-party manufacturers, distributors, distribution centres and logistics service providers had and can have a significant negative impact on Spin Master’s business. 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, including the impacts of climate change (which have resulted in rolling blackouts in China in previous years), 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 distribution centres and logistics service providers to transport its products to the markets in which they are sold and on third-party distributors to distribute those products within those markets. Any disruption affecting the ability of the Company’s third-party service providers to timely deliver or distribute its products to its customers could cause delays in product sales, cause customers to cancel orders, have a material adverse effect on Spin Master’s revenue and profitability, and harm its reputation. Spin Master’s significant use of third-party manufacturers outside of North America also exposes the Company to risks, including: • • • • • • • • • currency fluctuations; limitations on the repatriation of capital; 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. 46 Significant increases in the price of commodities, transportation, or labour, if not offset by declines in other input costs, or a reduction or interruption in the delivery of raw materials, components, and finished products from Spin Master’s vendors, could adversely affect Spin Master’s business, financial condition, and results of operations. Cost increases, whether resulting from rising costs of materials, transportation, services, labour, or compliance with existing or future regulatory requirements, impact the profit margins realized by Spin Master on the sale of its products. Because of market conditions, timing of pricing decisions, and other factors, there can be no assurance that Spin Master will be able to offset any of these increased costs by adjusting the prices of its products. Increases in prices of Spin Master’s products may not be sustainable and could 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 its suppliers and internal manufacturing capacity. Additionally, as Spin Master cannot guarantee the stability of its major suppliers, major suppliers may stop manufacturing components at any time with little or no notice. If Spin Master is required to use alternative sources, it may be required to redesign some aspects of the affected products, which may involve delays and additional expense. Reductions or interruptions in supplies or in the delivery of finished products, whether resulting from more stringent regulatory requirements, disruptions in transportation, port delays, labour strikes or disputes, lockouts, loss or impairment of key manufacturing facilities, discontinuity or disruptions in information technology systems, changes in trade policy, an outbreak of a severe public health crisis, natural disasters, including severe weather due to climate change or otherwise, the occurrence or threat of wars or other conflicts, or a significant increase in the price of one or more supplies (or an inability to procure sufficient supplies), such as fuel or resin (which is an oil-based product used in plastics), or otherwise, have at times adversely affected and could in the future adversely affect Spin Master business, financial condition, and results of operations. Additionally, the Company is looking to reduce the amount of virgin plastic it uses and to use sustainable alternatives where available. The availability, efficacy and cost effectiveness of these materials is essential to the future of Spin Master’s business, and an inability to continue to source these sustainable alternatives could in the future adversely affect Spin Master business, financial condition, and results of operations. Failure to leverage Spin Master’s portfolio of franchises 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 business, financial condition and performance. Risks Related to the Entertainment Industry. The entertainment industry involves a substantial degree of risk. Acceptance of children’s entertainment programming represents a response not only to the production’s artistic components, but also the quality and acceptance of other competing programs released into the marketplace at or near the same time, the availability of alternative forms of children’s entertainment and leisure time activities, general economic conditions, public tastes generally and other intangible factors, all of which could change rapidly or without notice and cannot be predicted with certainty. There is a risk that some or all of Spin Master’s programming will not be purchased or accepted by the public generally, resulting in a portion of costs not being recouped or anticipated direct and indirect profits not being realized, which could have a material and adverse effect on the Company’s business, financial condition and performance. There can be no assurance that revenue from existing or future programming will replace loss of revenue associated with the cancellation or unsuccessful commercialization of any particular production or that Spin Master’s entertainment programming will generate product sales. The business of producing and distributing television programs is highly competitive. There are numerous suppliers of entertainment content and Spin Master faces intense competition with other producers and distributors, many of whom are substantially larger and have greater resources. Further, vertical integration of the television broadcast industry worldwide and the creation and expansion of new networks, which create a substantial portion of their own programming, has decreased access for programs produced by third-party production companies. The Company competes with other television production companies for ideas and 47 storylines created by third parties as well as for access to animation studios, writers, producers, 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. Spin Master also faces competition from both regulated and unregulated players using existing or new technologies and from illegal services. The rapid deployment of new technologies, services and products have reduced the traditional lines between internet and broadcast services and further expanded the competitive landscape. The Company may also be affected by changes in customer discretionary spending patterns, which in turn are dependent on consumer confidence, disposable consumer income and general economic conditions. New or alternative media technologies and business models, such as video-on-demand, subscription-video-on-demand, high-definition television, personal video recorders, mobile television, internet protocol television, over-the-top internet-based video entertainment services, connected televisions, virtual multichannel programming distributors, audio streaming platforms, podcasting and direct-to-home satellite compete for audiences. As well, mobile devices like smartphones and tablets allow consumers to access content anywhere, anytime and are creating consumer demand for mobile, portable or free content. These technologies and business models may increase audience fragmentation. Technological developments may also disrupt traditional distribution platforms by enabling content owners to provide content directly to consumers, thus bypassing traditional content aggregators. 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 ultimately 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. Production of film and television programs requires a significant amount of capital. Unforeseen events such as labour disputes, changes related to technology, special effects or other aspects of production, shortage of necessary equipment, or other unforeseen events affecting aspects of production 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 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. Financial risks exist in productions relating to tax credits. There can be no assurance that industry funding assistance programs and government 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 or that Spin Master’s production projects will continue to qualify for them. 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 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 content. 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. If Spin Master produces a line of products based on entertainment-based properties, the success of the entertainment series has a critical impact on the level of consumer interest in the associated products being offered by the Company. Spin Master relies on the efforts of third parties, such as licensors, film studios, content producers and distribution channels with whom the Company works, with respect to development of content and timing of media development, release dates and the ultimate consumer interest in and success of these media efforts. Spin Master does not fully control when or if any particular project will be developed or released, and the Company’s licensors, media partners or other third parties may change their plans with respect to projects and release dates or cancel development all together. Lack of control can make it difficult for the Company to successfully develop and market products in conjunction with such entertainment projects, given the lengthy lead times involved in product development and successful marketing efforts. Any delay or 48 cancellation of planned product development work, releases, or media support may decrease the number of products sold by the Company, which could harm its business. If any production or entertainment releases are delayed, it could adversely affect the Company’s business, financial condition and performance. 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 brands. 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. 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. Cyberattacks are increasing in their frequency, sophistication and intensity, and are becoming increasingly difficult to detect. They are often carried out by motivated, well-resourced, skilled and persistent actors, including nation states, organized crime groups, “hacktivists” and employees or contractors acting with malicious intent. Cyberattacks could include the deployment of harmful malware and key loggers, ransomware, a denial of-service attack, a malicious website, the use of social engineering and other means to affect the confidentiality, integrity and availability of the Company’s technology systems and data or the compromise of our source code and games assets. Cyberattacks could also include supply chain attacks, which could cause a delay in the manufacturing of the Company’s products. Such incidents could also lead to product source codes and game distribution platform exploitation, should undetected viruses, spyware, or other malware be inserted into our products, services, or networks. 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, may be unable to detect an ongoing breach or may be delayed in detecting a breach. Spin Master has exposure to similar security risks faced by other large companies that have data stored on their information technology 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 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 and digital games business, 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. Spin Master relies extensively on information technology in its operations, and any material failure in design, inadequacy, interruption, or security breach of that technology could have a material adverse impact on the Company’s business, financial condition and performance. Spin Master relies extensively on various information technology systems and software applications across its operations to manage many aspects of the business, including product development, management of its supply chain, sale and delivery of its products, financial reporting, collection and storage of data, and various other processes and transactions. If Spin Master does not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, it could be subject to transaction errors, processing inefficiencies, loss of customers, business disruptions, or loss of or damage to intellectual property through security breach. Many of these systems are managed by third-party service providers. The Company relies on such third parties to provide services on a timely and effective basis, but the Company ultimately does not 49 control their performance. The Company is critically dependent on the integrity, security and consistent operations of these systems and related back-up systems. In addition, Spin Master’s distributors, suppliers, and other external business partners utilize their own information technology systems that are subject to similar risks to Spin Master as described above. Their failure to perform as expected or as required by contract, or a cyber-attack on them that disrupts their systems, could result in significant disruptions and costs to Spin Master’s operations or, in the case of third- party service providers, a penetration of Spin Master’s systems. These systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, malware and other security breaches, catastrophic events such as hurricanes, fires, floods, earthquakes, tornadoes, acts of war or terrorism and usage errors by employees or partners. The efficient operation and successful growth of Spin Master’s business depends on these information systems, including its ability to operate them effectively and to select and implement appropriate upgrades or new technologies and systems and adequate disaster recovery systems successfully. The failure of the information systems design, to perform as designed or Spin Master’s failure to implement and operate them effectively could disrupt the Company’s business, require significant capital investments to remediate a problem or subject the Company to liability and could have a material adverse effect on its business, financial condition and performance. 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 strategies and patterns 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 proportion of Spin Master’s revenue. 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, return substantial amounts of Spin Master’s products, favour its competitors or new entrants, or increase their competition with Spin Master by expanding their private label product lines, or seek material financial contributions from the Company towards price reductions at the retail level, the Company’s business, financial condition and performance could suffer. In addition, increased concentration among Spin Master’s customers could also negatively impact its ability to negotiate higher sales prices for its products, could result in lower 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. Failure to maintain existing relationships, or to develop new relationships, with 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 develop 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. 50 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 content. A portion of Spin Master’s entertainment properties, brands and content have been sourced from external collaborators. If Spin Master fails to maintain existing relationships or to develop 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 content, which in turn would materially and adversely harm its business, financial condition and 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 international growth strategy is subject to risks beyond its control, and accordingly, there can be no assurance that the Company’s international growth strategy will be successful. The lack of success in the Company’s international 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. 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. 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. An increasing portion of Spin Master’s business may come from new and emerging markets, and growing business in new and emerging markets presents additional challenges which could have a material adverse effect on the Company’s business, financial condition and performance. Spin Master expects an increasing portion of its revenues to come from new and emerging markets. Operating in new and emerging markets, each with its own unique consumer preferences and business climates, presents additional challenges that Spin Master must meet. In addition, sales and operations in new and emerging markets are subject to other risks associated with international operations. Such risks include, but are not limited to: complications in complying with different laws in varying jurisdictions; dealing with changes in governmental policies and the evolution of laws and regulations that impact Spin Master’s product offerings and related enforcement; difficulties understanding the retail climate, consumer trends, local customs and competitive conditions in foreign markets, which may be quite different from Canada and the U.S.; difficulties in moving materials and products from one country to another, including port congestion, strikes and other transportation delays and interruptions; potential challenges to Spin Master’s transfer pricing determinations and other aspects of its cross border transactions; and the impact of tariffs, quotas, or other protectionist measures. Spin Master’s business, financial condition and performance could be harmed if any of the risks described above are not appropriately managed, or if the Company is otherwise unsuccessful in managing its new and emerging market business. 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, which 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 51 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, which could result in liability to the Company or reputational harm among the Company’s customers. Individuals have asserted claims, and may in the future assert claims, that they have sustained injuries from the Company’s products, and Spin Master may be subject to lawsuits relating to these claims. There is a risk that these claims or liabilities may exceed, or fall outside of the scope of, Spin Master’s insurance coverage as Spin Master does not maintain separate product recall insurance. The Company has recorded, and in the future may record, charges and incremental costs relating to recalls, withdrawals or replacements of its products, based on the Company’s most recent estimates of retailer inventory returns, consumer product replacement costs, associated legal and other professional fees, and costs associated with advertising and administration of product recalls. As these current and expected future charges are based on estimates, they may increase as a result of numerous factors, many of which are beyond Spin Master’s control, including the amount of products that may be returned by consumers and retailers, the number and type of legal, regulatory, or legislative proceedings relating to product recalls, withdrawals or replacements or product safety proceedings in Canada, the U.S. and elsewhere that may involve the Company, as well as regulatory or judicial orders or decrees in Canada, the U.S. and elsewhere that may require the Company to take certain actions in connection with product recalls. 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. 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 meet product introduction schedules 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 increase its efficiency, reduce its costs, improve the execution of its core business, globalize and extend its brands, develop or extend entertainment properties, leverage new trends, create new brands or franchises, offer new innovative products and technologies, enhance product safety, develop its employees, improve productivity, simplify processes, maintain customer service levels, drive sales growth, 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 initiatives. In addition, Spin Master may anticipate introducing a specific product, product line or brand at a certain time in the future. There is no guarantee that Spin Master will be able to manufacture, source and ship new or continuing products in a timely manner and on a cost-effective basis. The risk is also 52 exacerbated by the increasing sophistication of many of the products the Company is designing, and the brands being developed in terms of combining digital and analog technologies and providing greater innovation and product differentiation. Unforeseen delays or difficulties in the development process or significant increases in the planned cost of development for new products may cause the introduction date for products to be later than anticipated or, in some situations, may cause a product or new product introduction to be discontinued. Failure to implement any of these initiatives, or the delay of the anticipated launch, or the failure of any of these initiatives or launches to produce the results anticipated by management, 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 raw materials and labour 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, whether resulting from more stringent regulatory requirements, disruptions in transportation, port delays, labour strikes, lockouts, an outbreak of a severe public health crisis, severe weather due to climate change or otherwise, the occurrence of threat of wars or other conflicts, or a significant increase in the price of one or more supplies, such as fuel and resin (which is a petroleum-based product), could have a material adverse effect on the Company’s business, financial condition and performance. Cost increases, whether resulting from shortages of materials or rising costs of materials, transportation, services or labour, could impact the profit margins on the sale of Spin Master’s products. Due to market conditions, timing of pricing decisions and other factors, the Company may not be able to offset any of these increased costs by adjusting the prices of its products. Increases in prices of the Company’s products could result in lower sales and have a material adverse effect on its financial condition and performance. Political developments, including trade relations, and the threat or occurrence of war or terrorist activities, and/or trade actions could adversely impact Spin Master, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions. Spin Master’s business is worldwide in scope, and can be directly and indirectly impacted in a negative way by geopolitical tensions. Political instability, civil unrest, the deterioration of the political, economic, or social situation in a country in which Spin Master has significant sales or operations, or the breakdown of trade relations between the U.S. and a foreign country in which Spin Master has significant manufacturing facilities or other operations, could adversely affect Spin Master’s business, financial condition and results of operations. For example, a change in trade status between the U.S. and a foreign country could result in a substantial increase in the import duty of toys manufactured in that foreign country and imported into the U.S. The U.S. has in the past implemented certain trade actions directed at China, including imposing increased tariffs on certain goods imported into the U.S. from China. China has also implemented various trade actions directed at the United States. Further trade actions by the United States or China could result in diverting more production to, or sourcing from, countries other than China, and could cause customers in some countries or regions, such as China, to seek domestic or non-U.S. sources for products that Spin Master sells, or to be pressured or incentivized by foreign governments not to purchase goods of U.S. or Canadian companies, all of which could harm Spin Master’s future sales in these markets. In addition, the United States, United Kingdom, and European Union, among other jurisdictions, have each imposed export controls, as well as financial and economic sanctions, currency controls, and other trade actions, on certain products, technologies, industry sectors, and parties in Russia as a result of the Russia- Ukraine war, which have resulted and could further result in retaliatory measures and actions by Russia. Any increased trade barriers or restrictions on global trade imposed by the U.S., or further retaliatory trade measures taken by China, Russia or other countries in response, could adversely affect Spin Master’s business, financial condition and performance. The occurrence of war or hostilities between countries or threat of terrorist activities, and the responses to and results of these activities, could adversely impact Spin Master, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions. 53 Global climate change, evolving stakeholder expectations for corporate responsibility matters, and Spin Master’s related goals present challenges to its business and reputation that could adversely affect Spin Master. The effects of global climate change create financial, operational, and reputational risks to Spin Master’s business, both directly and indirectly. There is a general consensus that greenhouse gas (“GHG”) emissions are linked to global climate change, and that these emissions must be reduced dramatically to avert the worst effects of climate change. Spin Master’s operations may be vulnerable to the adverse effects of climate change, which are predicted to increase the frequency and severity of weather events and other natural cycles such as wildfires, heatwaves, floods, and droughts. The effects of climate change may cause disruptions in Spin Master’s operations, including its supply chain and the productivity of its third-party manufacturers, increase Spin Master’s production costs, impose capacity restraints, and impact the types of products that consumers purchase, including for example an increased focus on eco-friendly toys, all of which may cause Spin Master to suffer losses and additional costs to maintain or resume operations. Spin Master may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for Spin Master’s products. In addition, Spin Master may incur capital expenditures, compliance costs, and other costs to comply with increasingly stringent environmental laws and enforcement policies. There are also certain areas, for example, the Pearl River Delta in southern China, which are major areas for toy manufacturing, but are also subject to severe flood threats from watershed floods, sea level rise and storm surges. Increased heat could cause working conditions to deteriorate for those employed in physical labour in the Company’s supply chains. Increased heat has also led to blackouts and brownouts in certain parts of the world, which would also impact the ability of the Company’s employees and supply chains to be productive or to access the Company’s systems. Droughts or inadequate water supply in certain parts of the world could also have a negative impact on the Company’s manufacturing facilities, for example in France, where the facilities are powered by nuclear energy which requires water to cool. Similarly, in areas where the Company may be powered by hydroelectric energy, such as in Canada or in certain parts of China, inadequate water supply could lead to a lack of energy production. This could be a risk in the medium and long-term for the Company. A variety of stakeholders, including regulators, investors, advisory firms, rating agencies, and customers, are establishing laws, regulations, expectations, and/or assessments reflecting their expectations for corporate practices related to climate change and other corporate responsibility matters. In 2022, Spin Master announced its intention to develop and release a climate action plan. Spin Master has previously purchased offsets relating to Scope 1 and 2 GHG emissions, as well as some of the Company’s Scope 3 GHG emissions. The Company has also planned for a 50% reduction in plastic packaging by 2025 and utilizing eco-friendly inks on 50% of packaging by 2025. Spin Master has subsequently established additional goals related to environmental, social, and governance (“ESG”) matters, some of which is detailed in the Company’s Corporate Social Responsibility reports, available on its website. Such goals are based on management’s current assumptions related to scientific or technological developments, carbon markets, the workforce and hiring market, and other matters that are subject to change in the future, as well as standards for measuring progress that are still in development, and subject to a number of significant risks and uncertainties. Spin Master’s efforts to be responsive to climate change, to reduce its carbon footprint, and regarding other ESG matters cannot provide assurance that Spin Master will successfully achieve its ESG goals, that related costs may not be higher than expected, that proposed regulation or deregulation related to climate change and other ESG matters will not be more aggressive than Spin Master’s measures and result in higher costs (or require additional resources), or that any investments Spin Master makes in furtherance of achieving such goals will meet expectations or any applicable binding or non-binding legal standards, any one of which could have an adverse effect on Spin Master’s financial condition, results of operations, or reputation. Spin Master’s failure, or perceived failure, to achieve its goals regarding climate change or other ESG matters could damage its reputation, causing investors, consumers, and other stakeholders to lose confidence in Spin Master and its brands, and negatively impact Spin Master’s operations. Climate-related litigation has increased in recent years, including claims involving the failure of organizations to mitigate their impacts on climate change, the failure of organizations to adapt to climate change, and the insufficiency of disclosure around material financial risks or inaccuracy of climate-related disclosure. Additionally, as consumers and customers continue to put an increased priority on purchasing products that are sustainably manufactured and packaged, Spin Master may need to incur increased costs in order to effectively source materials that are more sustainable, as well as increased costs for additional transparency, due diligence, and reporting. If Spin Master’s ESG practices do not meet, or are not viewed as meeting, investor or other stakeholder expectations and standards (which are continually evolving and may emphasize different priorities than the ones Spin Master chooses to focus on), or if Spin Master does not or appears not to achieve its ESG goals, then Spin Master’s brand, reputation, and employee retention may be negatively impacted. Furthermore, if regulators disagree with 54 the Company’s ESG disclosures, for example because they believe them to be incomplete or misleading, the Company may face regulatory enforcement action, and its business or reputation could be adversely affected. There is also a risk that a significant reorientation in the market following the implementation of measures relating to ESG disclosure requirements could be adverse to the Company’s business if the Company is perceived to be presenting a product or business as having green or sustainable characteristics where this is not, in fact, the case (i.e., “greenwashing”). Additionally, compliance with any new regulations or laws generally increases the Company’s regulatory burden and could make compliance more difficult and expensive, thereby adversely impacting the Company’s financial position. Spin Master’s operating procedures and product requirements are subject to change and may increase costs, which may materially and adversely affect its relationship with vendors and make it more difficult for it to produce, purchase and deliver products on a timely basis to meet market demands. Future conditions may require the Company to adopt further changes that may increase its costs and adversely affect the Company’s relationship with vendors. Spin Master’s operating procedures and requirements for both its own manufacturing facilities and 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. 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, systems, technological, personnel or financial problems associated with the integration of acquired businesses. The need to integrate the operations, systems, technologies, products and personnel of each acquired company, the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and unforeseen difficulties and expenditures that may arise in connection with integration. The Company may also face substantial expenses, delays or other operational or financial problems if it is unable to sustain the distribution channels and other relationships currently in place at an acquired business. The businesses, products, brands or properties the Company acquires may not achieve or maintain popularity with consumers, and other anticipated benefits may not be realized immediately or at all. Further, integration of an acquired business may divert the attention of the Company’s management from its core business. Acquisitions of businesses and brands could also be adversely affected by changes in Spin Master’s business strategy. In cases where Spin Master acquires businesses that have key 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. 55 Acquisitions also entail numerous other risks, including but not limited to: • unanticipated costs and legal liabilities; • adverse effects on the Company’s existing business relationships with its suppliers and customers; • risk of entering markets in which the Company has limited or no prior experience; • amortizing any acquired intangible assets; and • difficulties in maintaining uniform standards, procedures, controls and policies. Some or all of the foregoing risks could have a material adverse effect on Spin Master’s business, financial condition and performance. In addition, any businesses, products or technologies the Company may acquire may not achieve anticipated revenues or income and the Company may not be able to achieve cost savings and other benefits that it would hope to achieve with an acquisition. Acquisitions could also consume a substantial portion of Spin Master’s available cash, could result in incurring substantial debt which may not be available on favourable terms, and could result in the Company assuming contingent liabilities. In addition, if the business, product or technologies the Company acquires are unsuccessful it would likely result in the incurrence of a write-down of such acquired assets, that could adversely affect Spin Master’s financial performance. The Company’s failure to manage its acquisition strategy could have a material adverse effect on its business, financial condition and performance. Consistent with Spin Master’s past practice and in the normal course, the Company may have outstanding non- binding letters of intent and / or conditional agreements or may otherwise be engaged in discussions with respect to possible acquisitions which may or may not be material. However, there can be no assurance that any of these letters, agreements and / or discussions will result in an acquisition and, if they do, what the final terms or timing of any acquisition would be. If Spin Master fails to maintain an effective system of internal controls, Spin Master may not be able to report its financial results or prevent fraud, which could harm the Company’s financial performance and may cause investors to lose confidence in it. Spin Master must maintain effective internal financial controls for it to provide reliable and accurate financial reports. The Company’s compliance with the internal control reporting requirements will depend on the effectiveness of its financial reporting and data systems and controls. Spin Master expects these systems and controls to become increasingly complex to the extent that its business grows, including through acquisitions. To effectively manage such growth, the Company will need to continue to improve its operational, financial and management controls and its reporting systems and procedures. These measures may not ensure that Spin Master designs, implements and maintains adequate controls over its financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation or operation, could harm the Company’s financial performance or cause it to fail to meet its financial reporting obligations. Inferior internal controls could also cause investors to lose confidence in the Company’s reported financial information, which could have a material and adverse effect on the trading price of its stock and its access to capital. 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 56 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. Significant changes in currency exchange rates could have a material adverse effect on Spin Master’s business, financial condition and performance. Spin Master’s global operations means business is transacted in many different currencies and 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 and local currencies in which the Company operates 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. Spin Master is subject to various laws and government regulations, which, if violated, could subject Spin Master to sanctions or third-party litigation or, if changed, could lead to increased costs, changes in the Company’s effective tax rate or the interruption of normal business operations that would negatively impact the Company’s business, financial condition and performance. Spin Master operates in a highly regulated environment in the U.S., Canada and international markets, including its products and the importation and exportation of its products. These policies or regulations may include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws, and revised tax law interpretations), product safety and other safety standards, trade restrictions, duties and tariffs (including international trade laws and regulations, export controls, and economic sanctions), and regulations regarding currency and financial matters, anticorruption standards, environmental matters, advertising directed toward children, product content, screen time, cybersecurity and privacy and data protection, as well as other administrative and regulatory restrictions. In addition, as Spin Master enters into new areas of investment, product development, or other business activities, it will have to learn to navigate the regulatory framework surrounding those areas, which may be continuing to develop. The steps Spin Master takes to comply with these laws, regulations, and policies do not ensure that Spin Master will be in compliance in the future. Compliance with these various laws, regulations, and policies imposes significant costs on Spin Master’s business, and failure to comply could result in monetary liabilities and other penalties and could lead to negative media attention and consumer dissatisfaction, which could have an adverse effect on Spin Master’s business, financial condition, and results of operations. Many foreign countries have laws that permit governmental entities to restrict or prohibit marketing or distribution of interactive entertainment software products (and similar legislation has been introduced at one time or another at the federal and state levels in the U.S., including legislation that attempts to impose additional taxes based on content). In addition, certain jurisdictions have laws that restrict or prohibit marketing or distribution of interactive entertainment software products with random digital item mechanics, which some of our online games and services include, or subject such products to additional regulation and oversight, such as reporting to regulators, mandatory disclosure to consumers of item drop rates, and higher age ratings for products that contain such mechanics. In addition, changes in laws or regulations may lead to increased costs, changes in the Company’s effective tax rate, including with respect to changes related to the a new global minimum tax regime (“Pillar Two”), or the interruption of normal business operations that would materially and adversely impact its business, financial condition and performance. 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. 57 In addition, increases in import and excise duties and/or sales or value added taxes in the jurisdictions in which Spin Master operates could affect the affordability of Spin Master’s products and, therefore, reduce demand. The challenge of continuously developing and offering products and entertainment experiences 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 computers, 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 and digital games compete with the offerings of consumer electronics companies, gaming, digital media and social media companies. To meet this challenge, the Company is designing and marketing products and digital games 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 digital games and 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, the EU General Data Protection Regulation and the California Consumer Protection Act. Spin Master’s success depends on 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 key personnel, including, executives, designers, inventors, technical, sales, marketing and in the Entertainment and Digital Games creative centres. The loss of services of any of the Company’s key personnel could harm its business. Labour shortages and increased labour costs as a result of increased competition for qualified talent, higher employee turnover rates, increases in employee benefit costs, wage inflation, strikes, or other employee-related disruptions to Spin Master’s workforce can negatively impact its business. In addition, changes to Spin Master’s current and future work environments may not meet the needs or expectations of its employees or be perceived as less favorable compared to other companies’ policies, which could negatively impact Spin Master’s ability to hire and retain 58 qualified personnel. Recruiting and retaining skilled personnel is costly and highly competitive around the world. 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. Natural disasters or other catastrophic events out of Spin Master’s control may damage its operations, facilities or those of its contractors and could materially and adversely affect the Company’s business, financial condition and performance. A catastrophic event where Spin Master has operations, offices or manufacturing facilities, such as an earthquake, tsunami, flood, typhoon, fire or other natural or manmade disaster, terrorist attacks, wars and other conflicts, or an outbreak of a public health pandemic could disrupt the Company’s operations or those of its contractors and impair production or distribution of its products, damage inventory, interrupt critical functions, or otherwise affect its business negatively, and could materially and adversely affect the Company’s 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. 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. 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 59 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 may face increased costs in achieving its sustainability goals, and any failure to achieve its goals could result in reputational damage. Spin Master believes the long-term viability and health of the Company’s own operations and its supply chain, and the significant potential for environmental improvements, are critical to its business success. The Company has set key goals and objectives in this area. Spin Master devotes resources and expenditures to help achieve these goals. It is possible that the Company will incur expenses in trying to achieve these goals with no assurance that it will be successful. Additionally, Spin Master’s reputation could be damaged if it fails to achieve the sustainability goals, or if the Company or others in the industry do not act, or are perceived not to act, responsibly with respect to the production and packaging of its products. Spin Master may be subject to risks relating to its minority investments. Spin Master may invest in companies at different stages of development, including early-stage companies and emerging businesses, which are developing products, emerging technologies and pioneering services that will require significant additional development, testing and investment prior to any commercialization. There can be no assurance that the technologies or products these companies have under development will materialize, be capable of being produced in commercial quantities at reasonable costs or be successfully marketed, which could result in a loss of all or a substantial part of Spin Master’s investment in these companies. The Company expects that its minority investments will complement its acquisition strategy, however certain minority investments may not be suitable acquisition targets. If Spin Master’s minority investments are suitable acquisition targets, it may not be able to acquire these targets on acceptable terms. Spin Master may not realize the expected returns or anticipated benefits from its minority investments to the degree anticipated. 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 Spin Master’s 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. The decision to pay dividends on the subordinate voting shares and multiple voting shares and the amount of such dividends is subject to the discretion of Spin Master’s board of directors based on numerous factors and may vary from time to time. Although the Company currently pays quarterly cash dividends on its outstanding subordinate voting shares and multiple voting shares, these cash dividends may be reduced or suspended. The amount of cash available to the Company to pay dividends, if any, can vary significantly from period to period for a number of reasons, including, among other things: the Company’s operational and financial performance; fluctuations in market prices; the amount of cash required or retained for debt service or repayment; amounts required to fund capital expenditures and working capital requirements; access to capital markets; foreign currency exchange rates and interest rates; and the other risk factors set forth herein. The decision whether or not to pay dividends and the amount of any such dividends are subject to the discretion of the board of directors of the Company, which quarterly evaluates proposed dividend payments and the solvency test requirements of the Business Corporations Act (Ontario). In addition, the level of dividends per subordinate voting share and multiple voting share will be affected by the number of outstanding subordinate voting shares and multiple voting shares and other securities that may be entitled to receive cash dividends or other payments. Dividends may be increased, reduced or suspended depending on the Company’s operational success. The market value of subordinate voting shares may deteriorate if the Company is unable to meet dividend expectations in the future, and that deterioration may be material. 60 The market price of the subordinate voting shares has been volatile. Volatility in the Company’s business can result in significant subordinate voting share price and volume fluctuations. Factors such as changes in the Company’s operating results, announcements by the Company’s customers, competitors or other events affecting companies in the toy, entertainment or digital games industries, currency fluctuations, general market fluctuations, macro-economic conditions, and public health crises may cause the market price of the subordinate voting shares to decline. In addition, if the Company’s operating results do not meet the expectations of securities analysts or investors, the price of the subordinate voting share could decline. Furthermore, the existence of the Company’s NCIB may cause the subordinate voting share price to be higher than it would be in the absence of such a program, and repurchases under the NCIB expose the Company to risks resulting from a reduction in the size of its “public float”, which may reduce the Company’s trading volume as well as its subordinate voting share price. There can be no assurance that the Company will repurchase subordinate voting shares for cancellation. Although the Company currently has an NCIB in effect, whether the Company repurchases subordinate voting shares under such NCIB for cancellation, and the amount and timing of any such repurchases, is subject to capital availability and periodic determinations by management and the board of directors that subordinate voting share repurchases are in the best interest of the Company’s shareholders and are in compliance with all applicable laws and agreements. Any future permitted subordinate voting share repurchases, including their timing and amount, may be affected by, among other factors: the Company’s views on potential future capital requirements for strategic transactions, including acquisitions; changes to applicable tax laws or corporate laws; and changes to the Company’s business model. In addition, the amount the Company spends and the number of subordinate voting shares the Company is able to repurchase for cancellation under any NCIB or substantial issuer bid may further be affected by a number of other factors, including the price of the subordinate voting shares and blackout periods in which the Company is restricted from repurchasing subordinate voting shares (other than pursuant to an automatic share repurchase plan). The Company’s subordinate voting share repurchases may change from time to time, and the Company cannot provide assurance that it will repurchase any or, if commenced, continue to repurchase any subordinate for cancellation in any particular amounts or at all. Once commenced, a reduction in or elimination of the Company’s subordinate voting share repurchases could have a negative effect on the price of the subordinate voting shares. Pillar Two rules potential impact on Spin Master. Certain jurisdictions of the Organization for Economic Co-operation and Development have agreed to implement a new global minimum tax regime ("Pillar Two") based on model rules. The proposed Pillar Two rules are intended to ensure that large multinational enterprises pay a minimum tax of 15% on the income arising in each jurisdiction in which they operate. These rules may come into effect in 2024. Canada has announced its intention to implement Pillar Two and is expected to release domestic legislation later in 2023. We are actively monitoring future developments and any potential impact on the Company. 61 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. Management’s objective is to protect the Company and its subsidiaries on a consolidated basis against material economic exposures or the variability of results from various financial risks that include foreign currency risk, interest rate risk, credit risk and liquidity risk. Foreign currency risk Due to the structure 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 periodically enters into derivative financial instruments such as foreign exchange forward contracts to manage its foreign currency risk on cash flows denominated in currencies other than the US$. 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 may be exposed to interest rate risk should it borrow under its credit facilities at a variable rate. Credit risk and Customer Concentration The Company is dependent on three main retailers with respect to product sales for the majority of its products. These three customers accounted for 52.2% and 52.6% of consolidated Toy Gross Product Sales1 for the years ended December 31, 2022 and 2021 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 fulfil their financial obligations. This risk is mitigated through financial arrangements such as cash in advance of shipment, letters of credit or bank or parental guarantees. In addition, the Company purchases Accounts Receivables insurance for our global customer base, who are not covered by other financial arrangements. This process, in conjunction with an established credit limit and payment term, mitigates the Company’s risk of loss. The financial arrangements, insurance policies and customer credit limits are reviewed annually. RELATED PARTY TRANSACTIONS The Company periodically engages the services of a law firm whose managing partner is also a member of the Company’s Board of Directors. For the three months and year ended December 31, 2022, related party transactions were included in administrative expenses in the Consolidated statements of earnings and comprehensive income of the Company in the amount of $0.5 million (2021 - $0.3 million) and $1.3 million (2021 - $1.3 million). As at December 31, 2022, amounts payable to the director's law firm were $0.4 million (December 31, 2021 - $0.2 million). CRITICAL ACCOUNTING ESTIMATES The Company’s significant accounting policies are described in Note 2 of the Company's 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, related disclosures and the reported amounts of revenues and expenses during the periods covered by the financial statements. Refer to Note 3 of the Company's audited consolidated financial statements for additional information. 62 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 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 are CGUs of the Company. 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. Useful life of property, plant and equipment and intangible assets with finite useful lives The Company employs significant estimates to determine 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 useful lives, which require 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, if necessary, 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 of impairment. 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 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 inventories 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. Sales allowances A sales allowance is established to reflect amounts for programs which can be contractual or discretionary by nature, and can include negotiated discounts, customer audits, defective products and refund of costs incurred by customers to sell the Company’s products. Contractual allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Discretionary allowances can vary 63 depending on future outcomes such as nature of the product, customer sales volume, inventory position, product performance at retail, historical performance, market conditions and other considerations. The Company may adjust its estimate of sales allowances when facts and circumstances used in the estimation process change. 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 statements of earnings and comprehensive income 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 reliably estimated. Business combinations Business combinations are accounted for using the acquisition method of accounting. The Company determines the fair value of the identifiable assets acquired and the liabilities assumed 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 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. Refer to note 28 of the Consolidated financial statements for further details on acquisitions. National Instrument 51-107 Disclosure of Climate-related Matters The Canadian Securities Administrators have issued a proposed National Instrument 51-107 Disclosure of Climate-related Matters which details the additional reporting requirements for reporting issuers in Canada with the proposed effective date for periods ending December 31, 2023. Emissions, carbon and other regulations impacting climate and climate related matters are constantly evolving. With respect to environmental, social and governance ("ESG") and climate reporting, the International Sustainability Standards Board has issued an IFRS Sustainability Disclosure Standard with the goal to develop sustainability disclosure standards that are globally consistent, comparable and reliable. The Company continues to monitor progress on these reporting requirements and assess their impact on the Company's financial statements. 64 FINANCIAL INSTRUMENTS Foreign exchange forward contracts The Company periodically enters into derivative financial instruments such as foreign exchange forward contracts to manage its foreign currency risk on cash flows denominated in currencies other than the US dollar. As at December 31, 2022, the Company is committed under outstanding foreign exchange contracts representing a total net sell commitment of $20.3 million (December 31, 2021 - net purchase commitment of $11.6 million). These foreign exchange contracts have maturity dates varying from January 2023 to April 2024. The fair value of foreign exchange forward contracts at December 31, 2022 resulted in an unrealized gain of $1.7 million, which is recorded in Other assets (2021 - $3.4 million) and an unrealized loss of $6.3 million recorded in accrued liabilities (2021 - $1.0 million). For the year ended December 31, 2022, realized gains on the Company’s matured hedges were $3.1 million (2021 - realized gain of $0.8 million) and are included in the Consolidated statements of earnings and comprehensive income. These fair values are categorized within Level 2 of the fair value hierarchy. The fair values of over-the-counter derivative financial instruments are based on broker or observable market rates. Those quotes are tested for reasonableness by discounting expected future cash flows using market interest and exchange rates for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument for the Company and counterparty when appropriate. 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. Realized and unrealized gains and losses on derivative financial instruments may be offset by realized and unrealized losses and gains on the underlying exposures being hedged and are recorded in earnings as they occur. Investment in a limited partnership The fair value of the investment in a limited partnership as at December 31, 2022 is recorded in Other assets at $3.9 million (December 31, 2021 - $3.9 million) with $nil of net unrealized losses (2021 - net unrealized gain of $0.9 million) recognized in Other expense, net in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. For the year ended December 31, 2022, the Company recognized $0.1 million (2021 - $0.6 million) of distribution income in Other expense, net, respectively. This fair value is categorized within Level 3 of the fair value hierarchy. The fair value of the investment in a limited partnership is estimated using various valuation techniques through the partnership based on the type of investment held by the fund. The quantitative unobservable inputs used in the fair value measurement are not developed by the Company and include assumptions regarding long-term revenue growth rates and discount rates, among others. From inception, the Company has paid $2.9 million and is obligated to pay the remaining $0.1 million upon receiving capital calls over the remaining term of the limited partnership agreement. The investment in a limited partnership is held for medium to long-term strategic purposes. Minority interest and other investments The fair value of the Minority interest and other investments recorded in other assets are as follows: (US$ millions) Minority interest and other investments classified as FVTOCI Minority interest and other investments classified as FVTPL Minority interest and other investments Dec 31, Dec 31, 2022 3.0 5.8 8.8 2021 0.6 1.8 2.4 For the year ended December 31, 2022, a fair value loss of $0.5 million (2021 - $nil), was recognized for Minority interest and other investments classified as FVTPL in Other expense, net in the Consolidated statements of earnings and comprehensive income. For the year ended December 31, 2022, there were gains of $0.1 million, respectively (2021 - $nil) recognized for Minority interest and other investments classified as FVTOCI in the Consolidated statements of earnings and comprehensive income within Other comprehensive loss. 65 These investments are categorized within Level 3 of the fair value hierarchy. The fair value of these investments is estimated using various valuation techniques. The quantitative unobservable inputs used in the fair value measurement are not developed by the Company and include assumptions regarding long-term revenue growth rates and discount rates, among others. DISCLOSURE CONTROLS AND PROCEDURES The Chief Executive Officer 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, 2022 and have concluded that the Company's DC&P was effective as at December 31, 2022. 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, 2022 and have concluded that the Company's ICFR was effective as at December 31, 2022. There have been no changes in the Company’s ICFR during the year ended December 31, 2022 which have materially affected, or are reasonably likely to materially affect, the Company’s ICFR and its disclosure controls and procedures. LIMITATIONS OF AN INTERNAL CONTROL SYSTEM The Chief Executive Officer and the Chief Financial Officer believe that any Disclosure Controls and Procedures 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. 66 NON-GAAP FINANCIAL MEASURES AND RATIOS In addition to using financial measures prescribed under IFRS, references are made in this MD&A to the following terms, each of which is a non-GAAP financial measure: • • • • • • • • • • • • • • Adjusted EBITDA Adjusted Operating Income (Loss) Adjusted Net Income (Loss) Free Cash Flow Toy Gross Product Sales Revenue, excluding PAW Patrol: The Mighty Movie Distribution Revenue Revenue, excluding PAW Patrol: The Movie Distribution Revenue Adjusted EBITDA, excluding PAW Patrol: The Movie Distribution Revenue Constant Currency Toy Gross Product Sales Constant Currency Digital Games Revenue Constant Currency Revenue, excluding PAW Patrol: The Movie Distribution Revenue Constant Currency Revenue Adjusted Selling, General and Administration Expenses ("Adjusted SG&A") Net Working Capital Non-GAAP financial measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. Additionally, references are made in this MD&A to the following terms, each of which is a non-GAAP financial ratio: • • • • • • • • • • Adjusted EBITDA Margin Adjusted Operating Margin Adjusted Basic EPS Adjusted Diluted EPS Sales Allowance as a percentage of Toy Gross Product Sales Adjusted SG&A as a percentage of Revenue Percentage change in Constant Currency Toy Gross Product Sales Percentage change in Constant Currency Digital Games Revenue Percentage change in Constant Currency Revenue Percentage change in Constant Currency Revenue, excluding PAW Patrol: The Movie Distribution Revenue • Gross Margin, excluding PAW Patrol: The Movie Distribution Revenue • Operating Margin, excluding PAW Patrol: The Movie Distribution Revenue • • • Adjusted Operating Margin, excluding PAW Patrol: The Movie Distribution Revenue Adjusted EBITDA Margin, excluding PAW Patrol: The Mighty Movie Distribution Revenue Adjusted EBITDA Margin, excluding PAW Patrol: The Movie Distribution Revenue Non-GAAP financial ratios are ratios or percentages that are calculated using a Non-GAAP financial measure. Non-GAAP financial ratios do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. Management believes the Non-GAAP financial measures and Non-GAAP financial ratios defined above are important supplemental measures of operating performance and highlight trends in the business. Management believes that these measures allow for assessment of the Company’s operating performance and financial condition on a basis that is consistent and comparable between reporting periods. The Company believes that investors, lenders, securities analysts and other interested parties frequently use these Non-GAAP financial measures and Non-GAAP financial ratios in the evaluation of issuers. Non-GAAP Financial Measures Adjusted EBITDA is calculated as Net Income (Loss) before finance costs, income tax expense (recovery) and depreciation and amortization (EBITDA) excluding adjustments that do not necessarily reflect the Company’s 67 underlying financial performance. These adjustments include restructuring and other related costs, foreign exchange gains or losses, share based compensation expenses, acquisition related contingent consideration, impairment of intangible assets, impairment of goodwill, investment distribution income, loss on Minority interest and other investments, acquisition related deferred incentive compensation, net unrealized gain on investment, impairment of property, plant and equipment, legal settlement, transaction costs, gain on disposal of asset and bad debt recovery. Adjusted EBITDA is used by management as a measure of the Company’s profitability. Refer to the "Reconciliation of Non-GAAP Financial Measures" section below for a reconciliation of this metric to Operating Income (Loss), the closest IFRS measure. Adjusted Operating Income (Loss) is calculated as Operating Income (Loss) excluding adjustments (as defined in Adjusted EBITDA). Adjusted Operating Income (Loss) is used by management as a measure of the Company’s profitability. Refer to the "Reconciliation of Non-GAAP Financial Measures" section below for a reconciliation of this metric to Operating Income (Loss), the closest IFRS measure. Adjusted Net Income (Loss) is calculated as Net Income excluding adjustments (as defined in Adjusted EBITDA), the corresponding impact these items have on income tax expense. Management uses Adjusted Net Income (Loss) to measure the underlying financial performance of the business on a consistent basis over time. Refer to the "Reconciliation of Non-GAAP Financial Measures" section below for a reconciliation of this metric to Operating Income (Loss), the closest IFRS measure. Free Cash Flow is calculated as cash flows provided by/used in operating activities reduced by cash flows used in investing activities and adding back cash used for business acquisitions and investment in limited partnership and Minority interest and other investments, net of investment distribution income. Management uses the Free Cash Flow metric to analyze the cash flows being generated by the Company’s business. In the third quarter of 2021, the calculation of this metric was revised to include the impact of investment distribution income as Management believes this composition to be relevant to investors, lenders, securities analysts and other interested parties of the Company. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for a reconciliation of this metric to Cash flow from operating activities, the closest IFRS measure. Toy Gross Product Sales represent Toy revenues, excluding the impact of Sales Allowances. As Sales Allowances are generally not associated with individual products, the Company uses Toy Gross Product Sales to provide meaningful comparisons across product category and geographical results to highlight trends in Spin Master’s business. For a reconciliation of Toy Gross Product Sales to Revenue, the closest IFRS measure, refer to the "Revenue" section within the "Financial Performance" section for the three and year ended December 31, 2022, and the "Reconciliation of Non-GAAP Financial Measures" section for the previous eight fiscal quarters. Revenue, excluding PAW Patrol: The Movie Distribution Revenue is calculated as revenue excluding distribution revenue of $26.0 million related to PAW Patrol: The Movie recognized in 2021. Revenue, excluding PAW Patrol: The Movie Distribution Revenue is used to measure the underlying financial performance of the business on a consistent basis over time. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for a reconciliation of this metric to Revenue, the closest IFRS measure. Revenue, excluding PAW Patrol: The Mighty Movie Distribution Revenue is calculated as revenue excluding distribution revenue of $17.0 million related to PAW Patrol: The Mighty Movie. Revenue, excluding PAW Patrol: The Mighty Movie Distribution Revenue is used to measure the underlying financial performance of the business on a consistent basis over time. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for a reconciliation of this metric to Revenue, the closest IFRS measure. Adjusted EBITDA, excluding PAW Patrol: The Movie Distribution Revenue is calculated as Adjusted EBITDA excluding distribution revenue of $26.0 million related to PAW Patrol: The Movie recognized in 2021. Adjusted EBITDA, excluding PAW Patrol: The Movie Distribution Revenue is used by management as a measure of the Company’s profitability on a consistent basis over time. Refer to the "Reconciliation of Non-GAAP Financial Measures" section below for a reconciliation of this metric to Net Income, the closest IFRS measure. Adjusted EBITDA, excluding PAW Patrol: The Mighty Movie Distribution Revenue is calculated as Adjusted EBITDA excluding distribution revenue of $17.0 million related to PAW Patrol: The Mighty Movie. Adjusted 68 EBITDA, excluding PAW Patrol: The Movie Distribution Revenue is used by management as a measure of the Company’s profitability on a consistent basis over time. Refer to the "Reconciliation of Non-GAAP Financial Measures" section below for a reconciliation of this metric to Net Income, the closest IFRS measure. Constant Currency Toy Gross Product Sales, Constant Currency Digital Games Revenue, Constant Currency Revenue, excluding PAW Patrol: The Movie Distribution Revenue and Constant Currency Revenue represent Toy Gross Product Sales, Digital Games revenue, Revenue, excluding PAW Patrol: The Movie Distribution Revenue and Revenue presented excluding the impact from changes in foreign currency exchange rates, respectively. The current period and prior period results for entities reporting in currencies other than the US dollar are translated using consistent exchange rates, rather than using the actual exchange rate in effect during the respective periods. The difference between the current period and prior period results using the consistent exchange rates reflects the changes in the underlying performance results, excluding the impact from fluctuations in foreign currency exchange rates. Management uses Constant Currency Toy Gross Product Sales, Constant Currency Digital Games Revenue, Constant Currency Revenue, excluding PAW Patrol: The Movie Distribution Revenue and Constant Currency Revenue to measure the underlying financial performance of the business on a consistent basis over time. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for a reconciliation of these metrics to Revenue, the closest IFRS measure. Adjusted SG&A is calculated as selling, general and administrative expenses adjusted for restructuring and other related costs, share based compensation expenses, transaction costs and bad debt recovery. Refer to the Adjusted SG&A table for the three months and year ended December 31, 2022 as compared to the same period in 2021 in this MD&A. Management uses Adjusted SG&A to measure the underlying financial performance of the business on a consistent basis over time. Refer to the "Selling, General & Administrative Expenses" section within the "Financial Performance" section for a reconciliation of these metrics to selling, general & administrative Expenses, the closest IFRS measure. Net Working Capital is calculated as the difference between total current assets and total current liabilities. Refer to the Total Net Working Capital table for the year ended December 31, 2022 as compared to the same period in 2021 in this MD&A. Management uses Net Working Capital to measure the underlying financial performance of the business on a consistent basis over time. Refer to the "Cash Flow" section for a composition of this metric to total current assets and total current liabilities, the closest IFRS measures. Non-GAAP Financial Ratios 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 Operating Margin is calculated as Adjusted Operating Income (Loss) divided by Revenue. Management uses Adjusted Operating Margin to evaluate the Company’s performance compared to internal targets and to benchmark its performance against key competitors. Adjusted Basic EPS is calculated by dividing Adjusted Net Income by the weighted average number of shares outstanding during the period. Adjusted Diluted EPS is calculated by dividing Adjusted Net Income (Loss) by the weighted average number of common shares outstanding, assuming the conversion of all dilutive securities were exercised during the period. Management uses Adjusted Basic EPS and Adjusted Diluted EPS to measure the underlying financial performance of the business on a consistent basis over time. Sales Allowances as a percentage of Toy Gross Product Sales is calculated by dividing Sales Allowances by Toy Gross Product Sales. Management uses Sales Allowance as percentage of Toy Gross Product Sales to identify and compare the cost of doing business with individual retailers, different geographic markets and amongst various distribution channels. Adjusted SG&A as a percentage of Revenue is calculated by dividing Adjusted SG&A by Revenue. Management uses Adjusted SG&A as a percentage of Revenue to measure the underlying financial performance of the business on a consistent basis over time. 69 Percentage change in Constant Currency Toy Gross Product Sales is calculated by dividing the change in Toy Gross Product Sales excluding the impact from changes in foreign currency exchange rates by the Toy Gross Product Sales of the comparative period. Management uses Percentage change in Constant Currency Toy Gross Product Sales to measure the underlying financial performance of the business on a consistent basis over time excluding the impact from changes in foreign currency exchange rates. Percentage change in Constant Currency Digital Games Revenue is calculated by dividing the change in Digital Games revenue excluding the impact from changes in foreign currency exchange rates by the Digital Games revenue of the comparative period. Management uses Percentage change in Constant Currency Digital Games Revenue to measure the underlying financial performance of the business on a consistent basis over time excluding the impact from changes in foreign currency exchange rates. Percentage change in Constant Currency Revenue is calculated by dividing the change in Revenue excluding the impact from changes in foreign currency exchange rates by the Revenue of the comparative period. Management uses Percentage change in Constant Currency Revenue to measure the underlying financial performance of the business on a consistent basis over time excluding the impact from changes in foreign currency exchange rates. Percentage change in Constant Currency Revenue, excluding PAW Patrol: The Movie Distribution Revenue is calculated by dividing the change in Revenue, excluding PAW Patrol: The Movie Distribution Revenue excluding the impact from changes in foreign currency exchange rates by the Revenue of the comparative period. Management uses Constant Currency Revenue, excluding PAW Patrol: The Movie Distribution Revenue to measure the underlying financial performance of the business on a consistent basis over time excluding the impact from changes in foreign currency exchange rates. Adjusted EBITDA Margin, excluding PAW Patrol: The Movie Distribution Revenue is calculated as Adjusted EBITDA excluding PAW Patrol: The Movie Distribution Revenue divided by Revenue, excluding PAW Patrol: The Movie Distribution Revenue. Management uses Adjusted EBITDA Margin excluding PAW Patrol: The Movie Distribution Revenue to evaluate the Company’s performance compared to internal targets and to benchmark its performance against key competitors on a consistent basis over time. Gross Margin, excluding PAW Patrol: The Movie Distribution Revenue is calculated as Gross Profit excluding PAW Patrol: The Movie Distribution Revenue divided by Revenue, excluding PAW Patrol: The Movie Distribution Revenue. Management uses Gross Margin excluding PAW Patrol: The Movie Distribution Revenue to evaluate the Company’s performance compared to internal targets and to benchmark its performance against key competitors on a consistent basis over time. Operating Margin, excluding PAW Patrol: The Movie Distribution Revenue is calculated as Operating Income excluding PAW Patrol: The Movie Distribution Revenue divided by Revenue, excluding PAW Patrol: The Movie Distribution Revenue. Management uses Operating Margin excluding PAW Patrol: The Movie Distribution Revenue to evaluate the Company’s performance compared to internal targets and to benchmark its performance against key competitors on a consistent basis over time. Adjusted Operating Margin, excluding PAW Patrol: The Movie Distribution Revenue is calculated as Adjusted Operating Income excluding PAW Patrol: The Movie Distribution Revenue divided by Revenue, excluding PAW Patrol: The Movie Distribution Revenue. Management uses Adjusted Operating Margin excluding PAW Patrol: The Movie Distribution Revenue to evaluate the Company’s performance compared to internal targets and to benchmark its performance against key competitors on a consistent basis over time. 70 Reconciliation of Non-GAAP Financial Measures The following table presents a reconciliation of Operating income to Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA, excluding PAW Patrol: The Movie Distribution Revenue and Adjusted Net Income for the years ended December 31, 2022, 2021 and 2020: (in US$ millions) Net income Income tax expense (recovery) Finance costs Depreciation and amortization expenses EBITDA Operating income Adjustments Foreign exchange gain1 Share based compensation2 Acquisition related deferred incentive compensation3 Transaction costs4 Loss on Minority interest and other investments5 Acquisition related contingent consideration6 Impairment of intangible assets7 Restructuring and other related costs8 Impairment of goodwill9 Legal settlement10 Impairment of property, plant and equipment11 Gain on disposal of asset12 Investment distribution income13 Net unrealized gain on investment14 Adjusted Operating Income Depreciation and amortization Adjusted EBITDA Distribution revenue related to PAW Patrol: The Movie Adjusted EBITDA, excluding PAW Patrol: The Movie Distribution Revenue Distribution revenue related to PAW Patrol: The Movie Income tax (expense) recovery Finance costs Depreciation and amortization Tax effect of adjustments15 Adjusted Net Income Year Ended Dec 31 2022 2021 2020 261.3 198.6 79.1 2.9 68.2 411.5 343.3 (61.4) 17.6 10.3 1.0 0.5 2.6 1.1 4.9 — (0.5) 1.9 — (0.1) — 321.2 68.2 389.4 — 389.4 — (79.1) (2.9) 63.4 10.2 111.9 384.1 272.2 45.5 (36.1) 12.1 103.0 124.5 21.5 (2.9) 15.3 27.6 12.2 6.8 2.8 — 2.7 2.6 2.5 1.9 — — (0.2) (0.6) (0.9) 302.2 111.9 414.1 (26.0) 388.1 26.0 (63.4) (10.2) — 0.9 — 3.7 0.4 5.3 — 5.5 0.5 — — — 77.6 103.0 180.6 — 180.6 — 36.1 (12.1) (68.2) (111.9) (103.0) 5.1 244.3 (7.3) 221.3 (14.9) 53.4 1 Includes foreign exchange (gains) losses generated by the translation and settlement of monetary assets/liabilities denominated in a currency other than the functional currency of the applicable entity and (gains) losses related to the Company's hedging programs. See Note 8 of the Consolidated financial statements. 2 Related to non-cash expenses associated with the Company's share option expense and long-term incentive plan. See Note 22 of the Consolidated financial statements. 3 Deferred incentive compensation associated with acquisitions. See Note 5 of the Consolidated financial statements. 4 Professional fees incurred relating to acquisitions and other transactions. 5 Fair value loss on the Minority interest and other investments classified as FVTPL. 6 Expense associated with contingent consideration for acquisitions. See Note 5 of the Consolidated financial statements. 7 Impairment of intangible assets related to entertainment content. See Note 5 of the Consolidated financial statements. 8 Restructuring and other related costs primarily relates to changes in personnel. Restructuring and other related costs in the prior year includes costs related to changes in senior leadership. See Note 7 of the Consolidated financial statements. 9 Impairment of goodwill associated with assets held for sale and one other CGU. See Note 5 of the Consolidated financial statements. 10 Legal settlement in the first, second and fourth quarters of 2022. See Note 5 of the Consolidated financial statements. 11 Impairment of property plant and equipment related to Tooling. See Note 5 of the Consolidated financial statements. 12 Gain on disposal of intangible asset in 2021. 13 Distribution income related to investment in limited partnership. See Note 5 of the Consolidated financial statements. 14 Net unrealized gain related to investment in limited partnership. See Note 5 of the Consolidated financial statements. 15 Tax effect of adjustments (Footnotes 1-14). Adjustments are tax effected at the effective tax rate of the given period. 71 The following table provides reconciliations of Operating (Loss) Income to Adjusted Operating (Loss) Income, Adjusted EBITDA, Adjusted EBITDA, excluding PAW Patrol: The Movie Distribution Revenue and Adjusted Net Income for the previous eight fiscal quarters: (in US$ millions) Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Operating (Loss) Income (24.0) 187.4 118.2 61.7 39.1 179.5 46.9 Restructuring and other related costs1 Foreign exchange loss (gain)2 Share based compensation3 Impairment of goodwill4 Impairment of property, plant and equipment5 Impairment of intangible assets6 Legal settlement7 Acquisition related deferred incentive compensation8 Net unrealized loss (gain) on investment9 Investment distribution income10 Loss on Minority interest and other investments11 Acquisition related contingent consideration12 Transaction costs13 Gain on disposal of asset14 Adjusted Operating (Loss) Income Depreciation and amortization Adjusted EBITDA Distribution revenue related to PAW Patrol: The Movie15 Adjusted EBITDA, excluding PAW Patrol: The Movie Distribution Revenue Distribution revenue related to PAW Patrol: The Movie15 Income tax recovery (expense) Finance costs Depreciation and amortization Tax effect of normalization adjustments16 Adjusted Net Income (0.2) 4.8 4.7 — — 4.5 (43.5) (32.3) 4.3 — 4.5 — — — 0.9 1.0 1.1 1.6 — — 0.6 9.6 4.1 — — — 1.4 0.4 (0.7) (10.8) 4.0 1.9 — 1.2 — 4.1 — — — — — 4.9 4.0 — — 0.5 — (0.6) (1.5) 2.2 2.8 2.6 2.7 2.6 2.7 1.5 6.7 0.7 3.7 3.2 — — 0.9 — — 0.1 — — — — — (0.1) (0.1) 0.5 — — — 0.3 — (0.3) (0.9) — — (0.2) (0.4) — — — — 3.1 (0.5) — — 3.4 — — (0.7) 0.2 — 0.3 — (5.5) 151.8 17.9 15.8 0.4 — 97.6 16.1 12.4 167.6 113.7 0.1 — 77.3 18.4 95.7 2.1 — 0.1 (0.2) 55.3 175.6 23.0 41.7 78.3 217.3 0.6 — 57.7 24.1 81.8 — — 13.6 23.1 36.7 — — — — — (26.0) — — 12.4 167.6 113.7 95.7 78.3 191.3 81.8 36.7 — — — — — 26.0 — — 8.5 1.7 (45.6) (27.8) (14.2) (0.4) (2.3) (1.9) (9.5) (3.1) (41.8) (11.1) (2.3) (2.3) (1.0) (2.5) (17.9) (15.8) (16.1) (18.4) (23.0) (41.7) (24.1) (23.1) (4.7) 8.6 4.9 — 114.4 72.4 (3.7) 57.5 (4.0) 1.1 38.7 132.6 (2.7) 41.6 (1.7) 8.4 1 Restructuring and other related costs primarily relates to changes in personnel. Restructuring and other related costs in the prior year includes costs related to changes in senior leadership. 2 Includes foreign exchange (gains) losses generated by the translation and settlement of monetary assets/liabilities denominated in a currency other than the functional currency of the applicable entity and (gains) losses related to the Company's hedging programs. 3 Related to non-cash expenses associated with the Company's share option expense and long-term incentive plan. 4 Impairment of goodwill associated with assets held for sale and one other CGU. 5 Impairment of property plant and equipment related to tooling. 6 Impairment of intangible assets related to entertainment content. 7 Legal settlement in the first, second and fourth quarters of 2022. 8 Deferred incentive compensation associated with acquisitions. 9 Net unrealized gain related to investment in limited partnership. 10 Distribution income related to investment in limited partnership. 11 Fair value loss on the Minority interest and other investments classified as FVTPL. 12 Expense associated with contingent consideration for acquisitions. 13 Professional fees incurred relating to acquisitions and other transactions. 14 Gain on disposal of intangible asset. 15 Distribution revenue related to PAW Patrol: The Movie recognized in Q3 2021 within Entertainment revenue. 16 Tax effect of adjustments (Footnotes 1-15). Adjustments are tax effected at the effective tax rate of the given period. 72 The following table provides reconciliations from Cash provided by operating activities and Cash used in investing activities to Free Cash Flow for the years ended December 31, 2022, 2021 and 2020: (US$ millions) Cash provided by operating activities Cash used in investing activities Year Ended Dec 31 2022 2021 2020 249.3 (109.2) 419.1 (153.2) 310.8 (84.9) 7.5 70.9 10.6 Add: Business acquisitions, net of cash acquired1 Minority interest and other investments2 Investment in limited partnership3 Advance paid for business acquisitions4 Proceeds from sale of investments5 Investment distribution income6 Free Cash Flow 1 Cash paid relating to acquisitions of SolidRoots and Nørdlight in 2022 (2021 - Rubik's, Originator Inc. and a product invention and development company). 2 Cash paid in relation to the Minority interest and other investments during 2021 and 2022. 3 Cash paid to fund capital calls relating to the Investment in a limited partnership in 2021. 4 Cash advance paid in 2022 relating to the acquisition of 4D Brands International Inc., and Innovation First, Inc. 5 Cash received for the sale of manufacturing assets located in Tarboro, North Carolina in Q1 2022. 6 Distribution income earned relating to the investment in a limited partnership. 149.9 339.6 (9.2) (0.1) (0.6) 1.0 1.0 2.4 — — — (0.7) — 1.8 3.0 (0.3) — 232.1 73 The following table provides reconciliations from Cash provided by operating activities and Cash used in investing activities to Free Cash Flow for the previous eight fiscal quarters: (in US$ millions) Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Cash (used in) provided by operating activities (6.8) 207.3 111.6 (62.9) 230.1 85.8 94.2 9.0 Cash used in investing activities (28.2) (42.3) (30.4) (8.3) (19.6) (22.7) (46.9) (64.0) Add (Deduct): — — — 48.5 0.7 0.4 10.2 21.7 — — — — — — — — — 0.1 1.0 0.9 Business acquisitions, net of cash acquired1 Investment in limited partnership2 Advance paid for business acquisitions3 Investment distribution income4 Minority interest and other investments5 Proceeds from sale of manufacturing operations6 Free Cash Flow (6.5) 1 Cash paid relating to acquisitions of SolidRoots and Nørdlight, both in Q3 2022 (2021 - Rubik's in Q1 2021, Originator Inc. in Q2 2021 and a product invention and development company in Q2 2021). 2 Cash paid to fund capital calls relating to the Investment in a limited partnership in 2021. 3 Cash advance paid in 2022 relating to the acquisition of 4D Brands International Inc., and Innovation First, Inc. 4 Distribution income earned relating to the investment in a limited partnership. 5 Cash paid in relation to the Minority interest and other investments during 2021 and 2022. 6 Cash received for the sale of manufacturing assets located in Tarboro, North Carolina in Q1 2022. 175.3 211.3 (79.4) (30.1) 65.8 84.1 69.0 (9.2) (0.1) (0.6) 2.4 3.0 3.5 1.0 — — — — — — — — — — — — — — — — — — — — — 74 The following table provides reconciliations of Toy Gross Product Sales to revenue for the previous eight fiscal quarters: (in US$ millions) Toy Gross Product Sales Sales Allowances Toy revenue Entertainment revenue Digital Games revenue Revenue Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 479.2 617.7 484.4 397.5 627.5 681.2 359.0 294.7 (82.5) (65.3) (46.8) (46.6) (85.5) (73.4) (32.6) (39.1) 396.7 552.4 437.6 350.9 542.0 607.8 326.4 255.6 31.2 37.9 37.0 34.6 28.4 40.3 22.2 51.1 28.5 50.0 52.9 53.8 27.5 36.9 26.9 34.1 465.8 624 506.3 424.2 620.5 714.5 390.8 316.6 The following table presents a reconciliation of Revenue to Revenue, excluding PAW Patrol: The Movie Distribution Revenue for the previous eight fiscal quarters: (in US$ millions) Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Revenue 465.8 624.0 506.3 424.2 620.5 714.5 390.8 316.6 Distribution revenue related to PAW Patrol: The Movie Revenue, excluding PAW Patrol: The Movie Distribution Revenue — — — — — (26.0) — — 465.8 624.0 506.3 424.2 620.5 688.5 390.8 316.6 The following table presents a reconciliation of Revenue to Revenue, excluding PAW Patrol: The Movie Distribution Revenue for the year ended December 31, 2022 and 2021: (US$ millions) Revenue Distribution revenue related to PAW Patrol: The Movie Revenue, excluding PAW Patrol: The Movie Distribution Revenue Year Ended Dec 31 2022 2021 2,020.3 $ 2,042.4 — (26.0) 2,020.3 $ 2,016.4 $ $ 75 The following tables present reconciliations of Revenue to Constant Currency Toy Gross Product Sales, Revenue to Constant Currency Digital Games revenue and Revenue to Constant Currency Revenue for the three months and year ended December 31, 2022 and 2021: (US$ millions) Q4 2022 Q4 2021 Constant Currency Toy Gross Product Sales Impact of foreign exchange Toy Gross Product Sales Sales Allowances Toy revenue Entertainment revenue Constant Currency Digital Games Revenue Impact of foreign exchange Digital Games revenue Constant Currency Revenue Impact of foreign exchange Revenue 498.3 (19.1) 479.2 (82.5) 396.7 31.2 40.1 (2.2) 37.9 484.2 (18.4) 465.8 629.0 (1.5) 627.5 (85.5) 542.0 28.5 50.7 (0.7) 50.0 622.1 (1.6) 620.5 Year Ended Dec 31 2022 2,030.6 (51.8) 1,978.8 (241.2) 1,737.6 118.8 171.9 (8.0) 163.9 2,071.1 (50.8) 2,020.3 2021 1,950.1 12.3 1,962.4 (230.6) 1,731.8 135.8 172.5 2.3 174.8 2,025.2 17.2 2,042.4 The following tables present the composition of Percentage change in Constant Currency Toy Gross Product Sales, Percentage change in Constant Currency Digital Games Revenue, Percentage change in Constant Currency Revenue and Percentage change in Constant Currency Revenue, excluding PAW Patrol: The Movie Distribution Revenue for the three months and year ended December 31, 2022 and 2021: (US$ millions) Toy Gross Product Sales Digital Games revenue Revenue (US$ millions) Toy Gross Product Sales Digital Games revenue Revenue Revenue excluding PAW Patrol: The Movie Distribution Revenue Q4 2022 Q4 2021 $ Change Impact of foreign exchange As reported % Change In Constant Currency As reported In Constant Currency 479.2 37.9 465.8 627.5 $ (148.3) $ 19.1 $ (129.2) 50.0 $ (12.1) $ 2.2 $ (9.9) 620.5 $ (154.7) $ 18.4 $ (136.3) (23.6) % (24.2) % (24.9) % (20.6) % (19.8) % (22.0) % Year Ended Dec 31 2022 2021 $ Change Impact of foreign exchange As reported % Change In Constant Currency As reported In Constant Currency 1,978.8 163.9 2,020.3 1,962.4 174.8 2,042.4 $ $ $ 16.4 $ 51.8 $ (10.9) $ 8.0 $ (22.1) $ 50.8 $ 68.2 (2.9) 28.7 0.8 % (6.2) % (1.1) % 3.5 % (1.7) % 1.4 % 2,020.3 2,016.4 $ 3.9 $ 50.8 $ 54.7 0.2 % 2.7 % 76 ADDENDUM Effective January 1, 2022, the Company revised its reportable operating segments to align with its current business structure and how the Company’s new CODM reviews operations and makes decisions. The following table presents 2021 segments in the same format that the Company presents its operating segments in 2022. (US$ millions) Revenue Year Ended December 31, 2021 Digital Games Corporate & Other Entertainment Total Toys 1,731.8 Operating Income Restructuring and other related costs Foreign exchange gain Share based compensation Impairment of goodwill Impairment of intangible assets Acquisition related deferred incentive compensation Net unrealized gain on investment Investment distribution income Acquisition related contingent consideration Transaction costs Gain on disposal of asset Adjusted Operating Income Depreciation and amortization Adjusted EBITDA 159.0 2.3 — 13.4 1.9 — 4.3 — — 2.7 — (0.2) 183.4 56.3 239.7 135.8 174.8 — 2,042.4 53.4 67.5 (7.7) 272.2 — — 0.4 — 2.1 — — — — — — 0.2 — 1.5 — 0.5 2.5 — — — — — 55.9 48.2 104.1 72.2 7.4 79.6 — (2.9) — — — — (0.9) (0.6) — 2.8 — (9.3) — (9.3) 2.5 (2.9) 15.3 1.9 2.6 6.8 (0.9) (0.6) 2.7 2.8 (0.2) 302.2 111.9 414.1 (US$ millions) Revenue Operating Income (Loss) Restructuring and other related costs Foreign exchange loss Share based compensation Impairment of intangible assets Net unrealized gain on investment Acquisition related contingent consideration Adjusted Operating Income (Loss) Depreciation and amortization Adjusted EBITDA Toys Entertainment Q1 2021 Digital Games Corporate & Other Total 255.6 26.9 34.1 — 316.6 (12.1) 10.6 13.2 0.7 — 2.8 — — (0.7) (9.3) 14.4 5.1 — — 0.1 0.9 — — 11.6 6.6 18.2 — — 0.3 — — — 13.5 2.1 15.6 (5.0) — 3.7 — — (0.9) — (2.2) — (2.2) 6.7 0.7 3.7 3.2 0.9 (0.9) (0.7) 13.6 23.1 36.7 77 (US$ millions) Revenue Toys Entertainment Q2 2021 Digital Games Corporate & Other Total 326.4 27.5 36.9 — 390.8 Operating Income Foreign exchange loss Share based compensation Impairment of intangible assets Acquisition related deferred incentive compensation Net unrealized gain on investment Investment distribution income Transaction costs Adjusted Operating Income Depreciation and amortization Adjusted EBITDA 28.5 12.5 12.8 — 3.7 — 1.3 — — — 33.5 13.8 47.3 — 0.1 — — — — — 12.6 8.4 21.0 — 0.2 0.5 0.2 — — — 13.7 1.9 15.6 (6.9) 4.9 — — — (0.3) (0.4) 0.6 (2.1) — (2.1) 46.9 4.9 4.0 0.5 1.5 (0.3) (0.4) 0.6 57.7 24.1 81.8 (US$ millions) Revenue Toys Entertainment Q3 2021 Digital Games Corporate & Other Total 607.8 52.9 53.8 — 714.5 Operating Income Restructuring and other related costs Foreign exchange gain Share based compensation Acquisition related deferred incentive compensation Investment distribution income Transaction costs Gain on disposal of asset Adjusted Operating Income Depreciation and amortization Adjusted EBITDA 128.0 18.2 24.2 0.4 — 3.4 1.5 — — (0.2) 133.1 13.4 146.5 — — 0.1 — — — — 18.3 26.9 45.2 — — 0.6 1.2 — — — 26.0 1.4 27.4 9.1 — 179.5 0.4 (10.8) (10.8) — — (0.2) 0.1 — 4.1 2.7 (0.2) 0.1 (0.2) (1.8) 175.6 — 41.7 (1.8) 217.3 (US$ millions) Revenue Toys Entertainment Q4 2021 Digital Games Corporate & Other Total 542.0 28.5 50.0 — 620.5 Operating Income Restructuring and other related costs Foreign exchange gain Share based compensation Impairment of goodwill Impairment of intangible assets Acquisition related deferred incentive compensation Net unrealized loss on investment Acquisition related contingent consideration Transaction costs Adjusted Operating Income Depreciation and amortization Adjusted EBITDA 14.6 1.2 — 3.5 1.9 — 1.5 — 3.4 — 26.1 14.7 40.8 12.1 — 17.3 0.2 — 0.1 — 1.2 — — — — 13.4 6.3 19.7 — 0.4 — — 1.1 — — — 19.0 2.0 21.0 (4.9) — (0.7) — — — — 0.3 — 2.1 (3.2) — (3.2) 39.1 1.4 (0.7) 4.0 1.9 1.2 2.6 0.3 3.4 2.1 55.3 23.0 78.3 78 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 2023 (see “Outlook”); future growth expectations in 2023 and beyond; the Company's dividend policy; drivers and trends for such growth and financial performance; the successful execution of its strategies for growth; the integration of and benefits from acquisitions; the Company's SMV initiative; content and product pipeline; financial position, cash flows, purchases under the NCIB, and financial performance; and the creation of long term shareholder value. 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 Company’s dividend payments being subject to the discretion of the Board of Directors and dependent on a variety of factors and conditions existing from time to time; seasonality; ability of factories to manufacture products, including labour size and allocation, tooling, raw material and component availability, ability to shift between product mix, and customer acceptance of delayed delivery dates; the steps taken will create long term shareholder value; 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 and minority investment 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 employees, suppliers, retailers and license partners; the Company will continue to attract qualified personnel to support its development requirements; and the Company's key personnel 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, and the factors discussed in the Company's disclosure materials, including the Annual or subsequent, most recent interim 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. 79 Spin Master Corp. Consolidated financial statements For the years ended December 31, 2022 and December 31, 2021 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 Table of contents Independent auditor’s report ......................................................................................................................................... Consolidated statements of financial position ............................................................................................................. Consolidated statements of earnings and comprehensive income ......................................................................... Consolidated statements of changes in shareholders' equity ................................................................................... Consolidated statements of cash flows ........................................................................................................................ 1 4 5 6 7 Notes to the Consolidated financial statements .......................................................................................................... 8 - 54 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 Independent Auditor’s Report To the Shareholders and the Board of Directors of Spin Master Corp. Opinion We have audited the consolidated financial statements of Spin Master Corp. (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2022 and 2021, and the consolidated statements of earnings and comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2022 and 2021, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matter A key audit matter is a matter that, in our professional judgment, was of most significance in our audit of the consolidated financial statements for the year ended December 31, 2022. This matter was addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter. Key Audit Matter Description The Company routinely enters into arrangements with its customers to provide sales incentives, support customer promotional activities and provide compensation for defective merchandise. Such arrangements are considered variable consideration for revenue recognition purposes, and the Company uses the expected value method to quantify the variable consideration. A sales allowance is established to reflect amounts for programs which can be contractual or discretionary by nature. Contractual allowances are fixed and determinable at the time of sale, which do not require management to make significant judgments. The determination of the provisions for discretionary sales allowances is impacted by various current and forward-looking factors including customer sales volumes, channel inventory positions, product performance at retail, historical performance, market conditions and other considerations. Given the significant judgements made by management to estimate the provisions for discretionary sales allowances, performing audit procedures to evaluate their reasonableness required a high degree of auditor judgment and an increased extent of audit effort. How the Key Audit Matter Was Addressed in the Audit Our audit procedures related to the determination of the provisions for discretionary sales allowances included the following procedures, among others: • • • • • Evaluated management’s methods regarding the development of the provisions for discretionary sales allowances. Evaluated the reasonableness of the assumptions used by management to develop the provisions for discretionary sales allowances, including assessing the completeness and appropriateness of information considered by management. Tested the underlying inputs used in the determination of the provisions for discretionary sales allowances. Assessed management’s historical ability to estimate the provisions for discretionary sales allowances by comparing the prior year estimated amounts to actual allowances utilized in the current year. Evaluated the reasonableness of the provisions for discretionary sales allowances by comparing a sample to the actual results of transactions occurring after year end. Other Information Management is responsible for the other information. The other information comprises: Management’s Discussion and Analysis The information, other than the financial statements and our auditor’s report thereon, in the Annual Report Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements, or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. 2 As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Mark Bernardi. /s/ Deloitte LLP Chartered Professional Accountants Licensed Public Accountants March 8, 2023 3 Spin Master Corp. Consolidated statements of financial position (in US$ millions) Assets Current assets Cash and cash equivalents Trade receivables, net Other receivables Inventories, net Prepaid expenses and other assets Assets held for sale Non-current assets Intangible assets Goodwill Right-of-use assets Property, plant and equipment Deferred income tax assets Other assets Total assets Liabilities Current liabilities Trade payables and accrued liabilities Deferred revenue Provisions Income tax payable Lease liabilities Non-current liabilities Provisions Deferred income tax liabilities Lease liabilities Total liabilities Shareholders’ equity Share capital Retained earnings Contributed surplus Accumulated other comprehensive (loss) income Total shareholders’ equity Total liabilities and shareholders’ equity Approved by the Board of Directors on March 8, 2023. Notes Dec 31, 2022 Dec 31, 2021 10 11 11 12 13 14 16 17 26 15 9 13 18 19 21 9 26 21 9 26 22 644.3 311.0 49.5 105.1 22.3 — 1,132.2 267.2 179.0 62.9 36.0 94.7 20.5 660.3 1,792.5 339.4 11.5 30.7 26.4 16.3 424.3 15.1 55.7 54.9 125.7 550.0 562.7 352.4 38.8 137.4 19.5 8.9 1,119.7 227.2 173.1 65.2 39.8 97.0 14.7 617.0 1,736.7 476.4 10.9 25.1 36.2 13.3 561.9 14.0 48.7 59.7 122.4 684.3 754.7 468.1 40.7 (21.0) 1,242.5 1,792.5 736.9 216.0 40.8 58.7 1,052.4 1,736.7 The accompanying notes on pages 8 to 54 are an integral part of these Consolidated financial statements. 4 Spin Master Corp. Consolidated statements of earnings and comprehensive income (in US$ millions, except earnings per share) Notes Year Ended Dec 31, 2022 2021 Revenue Cost of sales Gross profit Expenses Selling, general and administrative Depreciation and amortization Other expense, net Foreign exchange gain Operating Income Interest income Interest expense Income before income tax expense Income tax expense Net Income Earnings per share Basic Diluted Weighted average number of shares (in millions) Basic Diluted (in US$ millions) Net Income 4 7 7 5 8 6 6 9 23 23 23 23 Items that may be subsequently reclassified to Net Income Foreign currency translation loss Items that are not subsequently reclassified to Net Income Gain on Minority interest and other investments 13, 29 Other comprehensive loss Total comprehensive income 2,020.3 2,042.4 916.5 985.8 1,103.8 1,056.6 782.1 28.9 10.9 (61.4) 343.3 (10.7) 13.6 340.4 79.1 261.3 2.54 2.45 102.9 106.4 742.5 33.5 11.3 (2.9) 272.2 (1.1) 11.3 262.0 63.4 198.6 1.94 1.89 102.3 105.3 Year Ended Dec 31, 2022 261.3 2021 198.6 (79.8) (5.4) 0.1 (79.7) 181.6 — (5.4) 193.2 The accompanying notes on pages 8 to 54 are an integral part of these Consolidated financial statements. 5 Spin Master Corp. Consolidated statements of changes in shareholders' equity Note Share capital Retained earnings Contributed surplus Accumulated other comprehensive income (loss) (in US$ millions) Balance at January 1, 2021 Net Income Other comprehensive loss - foreign currency translation Share-based compensation Shares released from equity participation Share options exercised and common shares issued Shares issued upon settlement of long-term incentive plan Balance at December 31, 2021 Balance at January 1, 2022 Net Income Other comprehensive loss - foreign currency translation Other comprehensive income - other Share-based compensation Dividends declared Share options exercised and common shares issued Shares issued upon settlement of long-term incentive plan Balance at December 31, 2022 724.8 — 17.4 198.6 — — 2.2 1.3 8.6 — — — — — 736.9 216.0 736.9 — 216.0 261.3 — — — — 0.2 17.6 754.7 — — — (9.2) — — 468.1 36.6 — — 15.3 (2.2) (0.3) (8.6) 40.8 40.8 — — — 17.6 — (0.1) (17.6) 40.7 22 22 22 22 22 22 22 22 64.1 — (5.4) — — — — Total 842.9 198.6 (5.4) 15.3 — 1.0 — 58.7 1,052.4 58.7 — 1,052.4 261.3 (79.8) 0.1 — — — — (79.8) 0.1 17.6 (9.2) 0.1 — (21.0) 1,242.5 The accompanying notes on pages 8 to 54 are an integral part of these Consolidated financial statements. 6 Spin Master Corp. Consolidated statements of cash flows (in US$ millions) Operating activities Net Income Adjustments to reconcile Net Income to cash provided by operating activities Income tax expense Interest income Depreciation and amortization Loss on disposal of non-current assets Accretion expense Amortization of Facility fee costs Gain on investment in limited partnership, net of distribution income Impairment of non-current assets Loss on Minority interest and other investments Unrealized foreign exchange gain, net Share-based compensation expense Net changes in non-cash working capital Net change in provisions and other assets Income taxes paid Income taxes received Interest received Cash provided by operating activities Investing activities Investment in property, plant and equipment Investment in intangible assets Business acquisitions, net of cash acquired Advance paid for business acquisitions Investment distribution income Investment in limited partnership Minority interest and other investments Proceeds from sale of manufacturing operations Cash used in investing activities Financing activities Payment of lease liabilities Dividends paid Proceeds from issuance of common shares from exercise of share options Payment of financing costs related to Facility Cash used in financing activities Notes Year Ended Dec 31, 2021 2022 261.3 198.6 9 6 7 14, 15 6 6 29 15, 16 5 8 22 24 15 16 28 5 13 13, 29 14 26 22 22 13, 20 79.1 (10.7) 68.2 1.5 5.5 0.4 — 3.0 0.5 (40.3) 17.6 (67.7) 1.0 (83.6) 4.5 9.0 249.3 (30.4) (69.0) (10.6) (1.0) 0.1 — (7.5) 9.2 (109.2) (15.8) (4.6) 0.1 — (20.3) 63.4 (1.1) 111.9 0.2 6.0 0.4 (1.5) 4.5 — (0.4) 15.3 49.9 9.2 (42.0) 3.7 1.0 419.1 (26.4) (53.1) (70.9) — 0.6 (1.0) (2.4) — (153.2) (17.6) — 1.0 (1.7) (18.3) Effect of foreign currency exchange rate changes on cash and cash equivalents (38.2) (5.5) Net increase in cash and cash equivalents during the year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 81.6 562.7 644.3 242.1 320.6 562.7 The accompanying notes on pages 8 to 54 are an integral part of these Consolidated financial statements. 7 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 1. Description of business Spin Master Corp. was formed by the amalgamation of Spin Master Corp. (formerly SML Investments Inc. which was incorporated on June 9, 2004 under the Business Corporations Act (Ontario)), SML Investments 2008 Inc. and Varadi Bee Corp. pursuant to the filing of articles of amalgamation under the Business Corporations Act (Ontario) on July 29, 2015. The Company is a leading global children's entertainment company, creating exceptional play experiences through its three creative centres: Toys, Entertainment and Digital Games. Its head and registered office is located at 225 King Street West, Suite 200, Toronto, Canada, M5V 3M2. Spin Master Corp. and its subsidiaries are together referred to, in these Consolidated financial statements, as the “Company” or “Spin Master”. The Company has three reportable operating segments: Toys, Entertainment and Digital Games (see Note 30). 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”) as issued by the International Accounting Standards Board ("IASB"). All financial information is presented in millions of United States dollars ("US$") and has been rounded to the nearest hundred thousand, except as otherwise indicated. These Consolidated financial statements were approved and authorized for issuance by the Board of Directors on March 8, 2023. 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 Onerous Contracts — Cost of Fulfilling a Contract (Amendments to IAS 37) IAS 37 has been amended to specify the costs to be included in the cost of fulfilling a contract. This amendment is applicable to annual reporting periods beginning on or after January 1, 2022. The Company has assessed this change and has determined that the impact is immaterial. Annual Improvements to IFRS Standards 2018–2020 Changes have been made to the following standards: Standard IFRS 1 - Amendment IFRS 9 - Amendment IFRS 16 - Amendment IAS 41 - Amendment Description First Time Adoption of IFRS Financial Instruments Leases Agriculture These changes are applicable to annual reporting periods beginning on or after January 1, 2022. The Company has assessed these changes and has determined that the impact is immaterial. Property, Plant and Equipment — Proceeds before Intended Use (Amendments to IAS 16) IAS 16 has been amended to prohibit certain treatment of proceeds from the cost of property, plant and equipment (“PPE”) being sold. The amendment is applicable beginning on or after January 1, 2022. The Company has assessed these changes and has determined that the impact is immaterial. Reference to the Conceptual Framework (Amendments to IFRS 3) Certain outdated references to the Conceptual Framework in IFRS 3 have been updated without significantly changing the requirements in the standard. These updates are applicable beginning on or after January 1, 2022. The Company has assessed these changes and has determined that the impact is immaterial. 8 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (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; 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 statements of earnings and comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. 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. Segment information Effective January 1, 2022, the Company revised its reportable operating segments to align with its current business structure and how the Company’s new Chief Operating Decision Maker (“CODM”) reviews operations and makes decisions. The revision of the reportable operating segments did not change the Company’s previously reported consolidated revenue, net income or earnings per share. See Note 30 for more information on the Company’s 2022 segment information. The Company has three reportable operating segments: Toys, Entertainment and Digital Games. (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 to 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 Company in a business combination includes 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 a liability are accounted for in accordance with the relevant policy. Other contingent consideration is remeasured to fair value at subsequent reporting dates with changes in fair value recognized in profit or loss. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company 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 impairments, 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. 9 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (E) Goodwill A CGU to which goodwill has been allocated is tested for impairment annually, or quarterly 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 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 for goodwill is recognized directly in profit or loss, and an impairment 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 Toy revenue The Company’s Toy revenue is derived from the sale of toys and related products to customers who are retailers or distributors in domestic and international markets. Toy revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The Company recognizes revenue when control of the goods has transferred, which is determined by respective shipping terms and certain additional considerations. Invoices are generally issued at the time of delivery (which is when the Company has satisfied its performance obligations under the arrangement). As such, a receivable is recognized as the consideration is unconditional and only the passage of time is required before payment is due. The Company does not have performance obligations subsequent to delivery of the sale of goods to customers and revenues from sale of goods are recognized upon the passing of control to the customer. The Company routinely enters into arrangements to provide sales allowances requested by customers relating to cooperative advertising, contractual and negotiated discounts, volume rebates, and costs incurred by customers to sell the Company’s products. Such programs are based primarily on the customer inventory position, purchase levels, customer performance of specified promotional activities and other specified factors, as agreed to with customers as well as the nature of the product. Toy gross product sales represent sales of the Company’s products to customers, excluding the impact of sales allowances. Toy revenue represents the amount of consideration to which the Company expects to be entitled through the sale of goods excluding sales tax and after the application of the variable consideration constraint. Variable consideration includes estimates for sales allowances, defective products, and returns by customers made based on certain judgments, contractual terms and conditions and historical data. The Company uses the expected value method to quantify the variable consideration. The Company monitors periodic results against historical data and makes any adjustments to both sales allowances and returns accruals as required. Note 3 - Significant accounting judgments and estimates outlines additional details on sales allowances. Entertainment revenue Entertainment revenues are comprised of distribution revenues and licensing and merchandising revenues. Distribution revenues are primarily generated through the sale of entertainment content produced by the Company, in accordance with the relevant agreements. Such agreements are assessed as either providing the customer with a 'right-to-use' or 'right-to-access'. Applicable revenues are recognized at a point-in-time or over time based on the classification determined. Judgment is required in determining the appropriate classification. Licenses to distribute entertainment content grants licensees a right to use the Company's brands and other intellectual property. Licensees pay a fixed fee for licenses of the produced content. Revenue is recognized upon delivery of the entertainment programming and is measured based on the consideration to which the Company expects to be entitled upon delivery. There are no future performance obligations associated with the delivery of the entertainment content. Licensing and merchandising revenues are generated through licensing the Company’s brands and other intellectual property. The license agreements relating to the Company’s brands provide access to the intellectual property over the term of the licenses and are considered right-to-access licenses of intellectual property. The Company records sales-based or usage-based royalty revenues for right-to-access licenses upon occurrence of the licensees’ subsequent sale or usage. Customer advances on licensing and merchandising and/or content distribution, are recorded in deferred revenue until all of the foregoing revenue recognition conditions have been met. 10 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (F) Revenue recognition (continued) Digital Games revenue The Company develops digital games which are distributed via third-party platform providers. The Company controls most aspects of the digital games delivered to the end user. The third-party platform providers are providing the service of distributing digital games via their online store/marketplace and administrating payment receipt from the end users. The Company has determined that it is the principal in the arrangement and accordingly, Digital Games revenues are recorded on a gross basis. The fees charged by the third-party platform providers are recorded within cost of sales. Revenue associated with the sale of digital games is recognized when control is transferred. This condition is typically met when the end-user purchases and downloads the digital games from the third-party. The end users can make in-app purchases and the Company recognizes revenue at the time of sale as there are no additional performance obligations other than the delivery of digital games to the third-party platform providers or the delivery of the item purchased within the digital games. The Company also generates recurring subscription revenue from certain digital games. Revenue is recognized ratably over the contractual subscription term, beginning on the date that the subscription is made available to the end user. Disaggregation of revenue The Company disaggregates its revenues into Toys, Entertainment and Digital Games. The Company also disaggregates components of Toy revenues by geographic segment: North America, Europe and Rest of World as well as into four major product categories as follows: (i) Preschool and Dolls & Interactive, (ii) Activities, Games & Puzzles and Plush, (iii) Wheels & Action and (iv) Outdoor. In the fourth quarter of 2021, the "Preschool and Girls" product category was renamed "Preschool and Dolls & Interactive" and the "Boys" product category was renamed "Wheels & Action". The Company believes the disaggregation of revenue described above collectively depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. See Note 30 Segment information for further information. (G) Leases The Company assesses whether a contract is or contains a lease, at inception of a contract. The Company recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Company recognizes the leases as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are assumed. The Company considers the lease term to be the noncancellable period of the lease, including any extension options where the Company is reasonably certain to exercise the option, and any termination options where the Company is reasonably certain not to exercise the option. Lease liability Lease liabilities are initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate. The incremental borrowing rate is defined as the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. Lease payments included in the measurement of the lease liability comprise: • • • • • fixed lease payments (including in-substance fixed payments), less any lease incentives receivable; variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; the amount expected to be payable by the lessee under residual value guarantees; the exercise of purchase options, if the lessee is reasonably certain to exercise the options; and payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease. 11 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (G) Leases (continued) The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Company remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: • • • the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); and a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. Right-of-use asset Right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairments. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The Company applies IAS 36 Impairment of Assets to determine whether a right-of-use asset is impaired. Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognized as an expense in the period in which the event or condition that triggers those payments occurs and are included in administrative expenses in the Consolidated statements of earnings and comprehensive income. As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components and instead account for any lease and associated non-lease components as a single arrangement. The Company has elected to use this practical expedient. (H) Foreign currencies The Company reports its financial results in United States dollars. The functional currency of Spin Master Corp. is the Canadian dollar ("CAD"). The functional currency of the Company's consolidated subsidiaries is typically the economic currency in the associated jurisdiction. At December 31, 2022 and 2021, the functional currencies of the Company's subsidiaries included the US dollar, the Canadian dollar, the Euro, the Great Britain pound sterling, the Hong Kong dollar, the Mexican peso, the Chinese yuan, the Vietnamese dong, the Japanese yen, the Swedish krona, the Australian dollar, the Indian rupee, the Polish zloty, and the Russian ruble. For the purposes of presenting these Consolidated financial statements, the Company's monetary assets and liabilities denominated in foreign currencies are translated using the closing exchange rate at the balance sheet date. Non-monetary items carried at fair value that are denominated in a foreign currency are translated at the rate prevailing when the fair value was determined. Non-monetary items denominated in a foreign currency that are measured at historical cost are translated using the exchange rate at the date of the transaction. Foreign currency exchange gains or losses are recognized in profit or loss. Assets and liabilities of the Company’s consolidated subsidiaries whose functional currency is other than the presentation currency are translated into US$ using the closing exchange rate at the balance sheet date. Income and expenses are translated using the average exchange rate for the period. The resulting foreign exchange gains and losses are recognized in the foreign currency translation adjustment as part of other comprehensive income. Realized gains and losses are recognized in profit or loss at the time of settlement. 12 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (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, assuming the conversion of all dilutive securities were exercised during the period. Securities refer to all outstanding share options, Restricted Stock Units ("RSUs") and Performance Share Units ("PSUs"). (J) Income taxes Income tax expense or recovery represents the sum of the taxes currently payable or receivable 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 (recovery)” as reported on the Consolidated statements of earnings 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 expense or recovery is calculated using income 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 income 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. Deferred tax liabilities and assets are measured at the income 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 income tax rates (and income 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 expense or recovery 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 expenses are also recognized in other comprehensive income or directly in equity, respectively. Where current deferred taxes arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. (K) Cash and cash equivalents Cash and cash equivalents is net of outstanding bank overdrafts, if applicable. Cash equivalents consist of highly liquid marketable investments with a maturity date of 90 days or less. (L) Property, plant and equipment Property, plant and equipment are stated at cost, net of accumulated depreciation and accumulated impairments, if any. Depreciation is recognized so as to depreciate the cost or valuation of assets less their residual values over their useful lives, using the straight-line method or declining balance method. Repairs and maintenance costs are recognized in profit or loss as incurred. 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. 13 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (L) Property, plant and equipment (continued) The following are the estimated useful lives for the major classes of property, plant and equipment: Classes Land Buildings Moulds, dies and tools Office equipment Leasehold improvements Computer hardware Machinery and equipment Estimated Useful Life Indefinite 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: Classes Brands Trademarks and licenses Customer lists Intellectual property ("IP") Digital Games development Entertainment content development Computer software Computer software - other Estimated Useful Life Indefinite 5 years 5 years 10 years 1-5 years 1-5 years 30% declining balance 1-5 years Intangible assets acquired separately in an asset acquisition Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairments, 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 that are acquired separately are carried at cost less accumulated impairments. 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 values 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 impairments, 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 and recorded as Product development expenses within Selling, general and administrative in the Consolidated statements of earnings and comprehensive income. 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: 14 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (M) Intangible assets (continued) • • • • • • 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 impairments, on the same basis as intangible assets that are acquired separately. Entertainment content development Entertainment content development includes film and television production assets. The Company has access to government programs, including tax credits that are designed to aid in the film and television production and distribution in Canada. The federal and provincial tax credits are not recognized until there is reasonable assurance that the Company will comply with the conditions attached to them and that the tax credits will be received. Capitalized costs net of expected 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 for television programming. These costs for film and television productions are charged to amortization expense once the content is delivered. Deferred revenue related to entertainment content development assets arises as a result of consideration received in advance of the Company fulfilling its obligations. Digital Games development Digital Games development includes digital games related applications. The Company has access to government programs, including tax credits that are designed to aid in the development of interactive digital media in Canada. These tax credits are not recognized until there is reasonable assurance that the Company will comply with the conditions attached to them and that the tax credits will be received. These capitalized costs, net of expected provincial tax credits, are charged to amortization expense based on the useful life of the related digital game. 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 of impairment. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment (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 of allocation can be identified, corporate assets are also allocated to individual CGUs, 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 or that are not yet available for use are tested for impairment at least annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs of disposal 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 equal to the difference between the carrying and recorded amounts is recognized immediately in profit or loss. 15 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (M) Intangible assets (continued) When an impairment subsequently reverses, the carrying amount of the asset (or 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 been recognized for the asset (or CGU) in prior years. A reversal of an impairment 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 for a portion 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 expensed immediately in profit or loss. (O) Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method. Cost 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. Deferred consideration Where the Company is committed to pay royalties on sales of acquired brands, the future royalty obligation is based on the Company’s estimate of the related brands future sales, discounted for the timing of expected payments. 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 earnings and comprehensive income. Supplier obligations Supplier obligations represent the estimated compensation to be paid to suppliers for lower than expected volumes purchased, resulting in the supplier having excess raw material and finished goods inventories. 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 consigned parts and finished goods inventory. (Q) Share-based payments The Company has a Long-Term Incentive Plan (“LTIP”) which provides for the issuance of securities under which grants may be made by the Company to employees. The Company, at the discretion of the Board of Directors, grants options to purchase subordinate voting shares, share units (in the form of RSUs and PSUs), stock appreciation rights, shares of restricted stock and any other equity based awards. These awards may be settled in cash or issued shares, or a combination of both at the discretion of the Board of Directors. LTIP liabilities are recorded in shareholders equity and not marked to market. Under the plan, the exercise price of each option equals the market price of the Company’s shares on the date of grant and the options have a maximum term of ten years. Options vest between zero and four years. The costs of equity-settled awards are measured using the Black-Scholes valuation model using management’s inputs and assumptions. Share-based compensation expense for equity-settled awards is recognized in administrative expenses over the vesting period of each award, with a corresponding increase to contributed 16 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (Q) Share-based payments (continued) surplus, based on the vesting period that has elapsed and the Company’s best estimate of the number of equity instruments that will vest. (R) Dividends The Company has a policy of declaring dividends at the discretion of the Board of Directors. Dividends declared are payable to the Company's shareholders and recognized as a liability in the Consolidated statements of financial position in the period in which the dividends are approved by the Company's Board of Directors. (S) 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 statements of financial position date based on relevant market information and information about the financial instrument. All financial instruments are classified into either: fair value through profit or loss (“FVTPL”), fair value through other comprehensive income ("FVTOCI") or amortized cost. The Company has made the following classifications: Cash and cash equivalents Trade receivables Other receivables Other assets Investment in a limited partnership Minority interest and other investments Trade payables and accrued liabilities Loans and borrowings Interest payable Foreign exchange forward contracts Amortized cost Amortized cost Amortized cost Amortized cost FVTPL FVTPL/FVTOCI Amortized cost Amortized cost Amortized cost FVTPL The Company classifies its financial assets in the following measurement categories: • • those to be measured at amortized cost; and those to be measured subsequently at fair value (either through OCI or through profit or loss) The classification of financial assets depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets at amortized cost Financial assets at amortized cost are non-derivative financial assets which are held within a business model whose objective is to hold assets to collect contractual cash flows and whose contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A financial asset (unless it is a trade receivable without a significant financing component that is initially measured at the transaction price) is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition. Subsequent to initial recognition, financial assets are measured at amortized cost using the effective interest method, less any impairment. 17 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (S) Financial assets (continued) Financial assets at fair value 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; 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. For financial assets measured at fair value, gains and losses will either be recorded in profit or loss (within Other expense, net) or OCI. Financial assets at fair value - Investment in a limited partnership and Minority interest and other investments The Company measures the Investment in a limited partnership and Minority interest and other investments (collectively, "investments") at fair value. For investments in equity instruments that are not held for trading, FVTPL or FVTOCI designation will depend on whether the Company has made an irrevocable election at the time of initial recognition to account for the equity investment at FVTOCI. If the irrevocable election is made, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Distribution income from investments are recognized in profit or loss within Other expense, net when the Company’s right to receive payments is established, irrespective of fair value designation. 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 decreased. The carrying amount of the financial asset is reduced by the impairments 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. Loss allowances are based on the lifetime expected credit losses that result from all possible default events over the expected life of the trade receivable, using the simplified approach. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment 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. (T) 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. 18 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 2. Summary of significant accounting policies (continued) (T) Financial liabilities and equity instruments (continued) Other financial liabilities Other financial liabilities (including loans and borrowings and trade payables and other liabilities) 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. (U) 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 at their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss. (V) Fair value hierarchy and liquidity risk disclosure Fair value measurements are classified using a fair value hierarchy that reflects the significance of 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 and cash equivalents, trade and other receivables, as well as trade payables and other liabilities. Fair value amounts represent point-in-time estimates and may not reflect fair value in the future. (W) Non-current assets held for sale Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a competed sale within one year from the date of classification. When the Company is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Company will retain a non-controlling interest in its former subsidiary after the sale. (X) Future changes in accounting standards Certain new accounting standards, amendments to accounting standards and interpretations have been published that are not yet effective for periods beginning on or after January 1, 2022 and have not been early adopted by the Company. The Company is currently assessing the impact, if any, on the Consolidated financial statements. • • • • • • • IFRS 17 Insurance Contracts Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) Definition of Accounting Estimates (Amendments to IAS 8) Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12) Classification of Liabilities as Current or Non-Current (Amendments to IAS 1) Lease Liability in a Sale and Leaseback (Amendment to IFRS 16) Non-current Liabilities with Covenants (Amendments to IAS 1) 19 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 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. As these estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant, actual results may differ. The estimates and underlying assumptions are reviewed on an ongoing basis. Adjustments are recognized in the period in which the estimate is modified if the change affects only that period, or in the period the estimate is modified 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 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 the Company's financial results or 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 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 useful lives, which require 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, if necessary, its depreciation methods and assumptions prospectively. 20 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 3. Significant accounting judgments and estimates (continued) (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 of impairment. 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 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 inventories 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 amounts for programs which can be contractual or discretionary by nature, and can include negotiated discounts, customer audits, defective products and refund of costs incurred by customers to sell the Company’s products. Contractual allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Discretionary allowances can vary depending on future outcomes such as nature of the product, customer sales volume, inventory position, product performance at retail, historical performance, market conditions and other considerations. The Company may adjust its estimate of sales allowances when facts and circumstances used in the estimation process change. (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 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 statements of earnings and comprehensive income 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 reliably estimated. (F) Business combinations Business combinations are accounted for using the acquisition method of accounting. The Company determines the fair value of the identifiable assets acquired and the liabilities assumed 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 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. Refer to note 28 for further details on acquisitions. 21 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 4. Revenue The Company earns revenue from the following primary sources: Toy, Entertainment and Digital Games revenue. (US$ millions) Toy revenue Entertainment revenue Digital Games revenue Revenue 5. Other expense, net (US$ millions) Acquisition related deferred incentive compensation Acquisition related deferred consideration expense Impairment of non-current assets Loss on Minority interest and other investments Investment distribution income Net unrealized gain on investment Legal settlement Other Other expense, net Year Ended Dec 31, 2022 2021 1,737.6 1,731.8 118.8 163.9 135.8 174.8 2,020.3 2,042.4 Year Ended Dec 31, 2022 10.3 2.6 3.0 0.5 (0.1) — (0.5) (4.9) 10.9 2021 6.8 2.7 4.5 — (0.6) (0.9) — (1.2) 11.3 Notes 28 21 16 13 29 29 Acquisition related deferred incentive compensation includes amounts related to the acquisition of certain assets of SolidRoots LLC and Nørdlight Games AB, both in August 2022, the acquisition of Originator Inc. in June 2021, and to the acquisition of certain assets from a product invention and development company in April 2021. These amounts are contingent on the continued employment of key principals as well as the achievement of certain performance metrics, over their respective requisite service periods (see Note 28). 6. Interest expense and Interest income (US$ millions) Bank fees and financing charges Accretion expense Amortization of Facility fee costs Interest expense Interest income Year Ended Dec 31, 2022 7.7 5.5 0.4 13.6 2021 4.9 6.0 0.4 11.3 (10.7) (1.1) 22 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 7. Expenses Expenses include selling, general and administrative expenses and depreciation and amortization. Selling, general and administrative expenses (US$ millions) Administrative Selling Marketing Distribution Product development Selling, general and administrative Administrative expenses include the following: (US$ millions) Employee compensation and benefits Professional services, recruiting and training Technology, property, travel and office costs Other Administrative expenses Employee compensation and benefits (US$ millions) Salaries, wages and bonuses Employee benefits Employee compensation and benefits expenses in cost of sales Salaries, wages and bonuses Employee benefits Share-based compensation Restructuring expense Employee compensation and benefits in administrative expenses Employee compensation and benefits Year Ended Dec 31, 2022 353.8 144.2 185.1 67.9 31.1 782.1 2021 330.3 133.8 179.7 71.3 27.4 742.5 Year Ended Dec 31, 2022 250.6 43.8 44.8 14.6 2021 239.0 42.6 32.3 16.4 353.8 330.3 Year Ended Dec 31, 2022 3.0 0.9 3.9 2021 5.5 1.1 6.6 194.8 192.3 33.4 17.6 4.8 250.6 254.5 28.9 15.3 2.5 239.0 245.6 23 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 7. Expenses (continued) Depreciation and amortization (US$ millions) Property, plant and equipment Moulds, dies and tools, included in cost of sales Equipment, included in cost of sales Equipment Building and leasehold improvements Computer hardware Intangible assets Entertainment content development, included in cost of sales Trademarks, licenses, IP & customer lists - definite Digital Games development, included in cost of sales Computer software Right-of-use assets Depreciation and amortization (US$ millions) Included in cost of sales Included in expenses Depreciation and amortization Year Ended Dec 31, 2022 2021 20.5 24.5 0.1 1.7 5.6 0.8 0.4 2.9 6.2 1.2 28.7 35.2 14.4 5.1 4.3 3.5 27.3 47.7 6.1 5.8 3.9 63.5 12.2 13.2 68.2 111.9 Year Ended Dec 31, 2022 39.2 29.0 68.2 2021 78.4 33.5 111.9 During the year ended December 31, 2021, the Company delivered PAW Patrol: The Movie, and accordingly, amortized Entertainment content development costs in the amount of $23.0 million. 8. Foreign exchange (US$ millions) Unrealized foreign exchange gain, net Realized foreign exchange gain, net Foreign exchange gain, net Year Ended Dec 31, 2022 (40.3) (21.1) (61.4) 2021 (0.4) (2.5) (2.9) Unrealized foreign exchange gains and losses are generated by the translation of monetary assets and liabilities denominated in a currency other than the functional currency and also includes gains and losses related to the Company's hedging programs. Realized foreign exchange gains and losses are recognized when monetary assets and liabilities denominated in a currency other than the functional currency of the applicable entity are settled. The Company uses derivative financial instruments such as foreign exchange forward contracts to manage foreign currency risk (see Note 29). 24 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 9. Income tax The income tax expense recognized in the Consolidated statements of earnings and comprehensive income comprises of the following: (US$ millions) Current income tax expense Deferred income tax expense Income tax expense The income tax expense is calculated as follows: (US$ millions) Income before income tax expense Income tax expense at Canadian statutory tax rate of 26.5% (2021 - 26.5%) Effect of: Different tax rates of subsidiaries operating in other jurisdictions Unused tax losses and tax attributes not recognized as deferred tax assets Expenses not deductible in determining taxable income Other Income tax expense Year Ended Dec 31, 2022 2021 69.8 9.3 79.1 52.3 11.1 63.4 Year Ended Dec 31, 2022 340.4 2021 262.0 90.2 26.5 % 69.4 26.5 % (9.8) (2.9) % (9.0) 1.1 0.8 (3.2) 79.1 0.3 % 0.2 % (0.9) % 23.2 % 3.5 0.2 (0.7) 63.4 (3.4) % 1.3 % 0.1 % (0.3) % 24.2 % The tax rates used for the reconciliations above are the Canadian statutory tax rates of Spin Master Corp., payable by corporate entities in the Company, on taxable profits under tax laws in the respective jurisdictions in which the Company operates. Current tax assets and liabilities As at December 31, 2022, the Company had income tax payable of $26.4 million (2021 - $36.2 million). Deferred income tax balances The following is the analysis of deferred income tax assets and liabilities presented in the Consolidated statements of financial position: (US$ millions) Deferred income tax assets Deferred income tax liabilities Deferred income tax assets, net of deferred income tax liabilities The sources of deferred income tax balances are as follows: 2022 94.7 (55.7) 39.0 2021 97.0 (48.7) 48.3 (US$ millions) Property, plant and equipment Intangible assets Provisions Allowance for doubtful accounts Benefits of tax loss carryforwards Other temporary differences Deferred income tax assets, net of deferred income tax liabilities Recognized in net income Recognized on business combination (3.7) (8.3) (0.5) 0.4 (3.2) 4.2 — (9.7) — — — — (11.1) (9.7) 2020 7.0 42.2 16.1 (0.3) 7.6 (3.5) 69.1 2021 3.3 24.2 15.6 0.1 4.4 0.7 48.3 25 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 9. Income tax (continued) (US$ millions) Property, plant and equipment Intangible assets Provisions Allowance for doubtful accounts Benefits of tax loss carryforwards Other temporary differences Deferred income tax assets, net of income tax liabilities Unused tax losses Recognized in net income (2.3) (6.4) 3.2 — (3.0) (0.8) (9.3) 2021 3.3 24.2 15.6 0.1 4.4 0.7 48.3 2022 1.0 17.8 18.8 0.1 1.4 (0.1) 39.0 As at December 31, 2022, the Company had unused tax losses of $8.7 million (2021 - $8.4 million). Unused tax losses of $0.4 million will expire between 2023 and 2032, $3.7 million will expire beyond 2032 and $4.6 million may be carried forward indefinitely. There were no unrecognized deductible temporary differences for the year ended December 31, 2022 (2021 - $nil). 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, 2022 are $338.2 million (2021 - $315.0 million). 10. Cash and cash equivalents (US$ millions) Cash Cash equivalents Cash and cash equivalents Dec 31, 2022 544.3 100.0 644.3 Dec 31, 2021 562.7 — 562.7 As at December 31, 2022, the Company held $100.0 million (2021 - $nil) in short term investments with a maturity date of 90 days or less. 11. Trade and other receivables, net Trade receivables (US$ millions) Trade receivables1 Provisions for sales allowances Allowance for doubtful accounts Trade receivables, net Dec 31, 2022 514.7 (202.2) (1.5) 311.0 Dec 31, 2021 517.6 (164.5) (0.7) 352.4 1 Certain Entertainment receivables totaling $24.5 million from the prior year have been reclassified from Other receivables to Trade receivables to conform with current year presentation as a result of the Company's revised reportable operating segments. 26 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 11. Trade and other receivables, net (continued) Trade receivables disclosed above include amounts that are past due as at the end of the reporting period. Trade receivables past due but not impaired (US$ millions) 61-90 days 91-120 days > 120 days Total trade receivables past due but not impaired Movement in the allowance for doubtful accounts (US$ millions) Balance, beginning of year Net impairments (net recoveries) recognized Amounts written off during the year as uncollectible Foreign currency translation Balance, end of year Dec 31, 2022 Dec 31, 2021 8.0 3.7 11.1 22.8 7.3 2.6 5.5 15.4 Dec 31, 2022 Dec 31, 2021 0.7 0.8 (0.1) 0.1 1.5 3.2 (0.5) (2.1) 0.1 0.7 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. Other receivables (US$ millions) Investment tax credits receivables Sales tax receivables Digital Games receivables Entertainment receivables1 Other1 Other receivables Dec 31, Dec 31, 2022 37.3 3.9 0.6 0.2 7.5 2021 27.3 6.3 0.2 0.1 4.9 49.5 38.8 1 Certain Entertainment receivables totaling $24.5 million from the prior year have been reclassified from Other receivables to Trade receivables to conform with current year presentation as a result of the Company's revised reportable operating segments. 12. Inventories, net (US$ millions) Raw materials Finished goods Inventories, net Dec 31, Dec 31, 2022 7.7 97.4 105.1 2021 6.8 130.6 137.4 Inventories recorded as at December 31, 2022 are net of $8.8 million that was recorded for the write-down of finished goods inventories to net realizable value (December 31, 2021 - $6.6 million). The cost of inventories recognized as an expense in cost of sales during the year ended December 31, 2022 was $819.2 million (2021 - $845.3 million). During the year ended December 31, 2022, included within cost of sales in the Consolidated statements of earnings and comprehensive income was a cost of $5.8 million (2021 - $0.9 million) related to finished goods inventories written down to net realizable value. 27 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 13. Prepaid expenses and other assets (US$ millions) Prepaid expenses Advances on royalties Unrealized foreign exchange gain Prepaid expenses and other assets (US$ millions) Advances on royalties Investment in a limited partnership Investment tax credits - non-current portion Minority interest and other investments Other Other assets, non-current Minority interest and other investments Notes Notes 29 Dec 31, 2022 13.9 6.7 1.7 22.3 Dec 31, 2021 9.0 7.1 3.4 19.5 Dec 31, 2022 Dec 31, 2021 2.9 3.9 3.6 8.8 1.3 20.5 4.1 3.9 2.7 2.4 1.6 14.7 In 2022, the Company acquired minority interests in privately-held entities for a total of $7.5 million. The investments are held for medium to long term strategic purposes. Four investments are classified as fair value through profit or loss ("FVTPL") and one classified as fair value through other comprehensive income ("FVTOCI"). Minority interest and other investments classified as FVTOCI comprise of equity instruments that the Company has irrevocably elected to recognize in this category. These are strategic investments and the Company considers this classification to be more relevant. In the third quarter of 2022, the Company acquired the remaining ownership interest and control of a Minority interest investment classified as FVTOCI. As part of the step acquisition to 100% ownership of the entity, the existing investment was deemed to be disposed and reacquired at fair value of $0.7 million (see Note 28). The carrying value of the five Minority interest and other investments held as at December 31, 2022 (December 31, 2021 - two investments) were as follows: (US$ millions) Minority interest and other investments classified as FVTOCI Minority interest and other investments classified as FVTPL Minority interest and other investments Initial investment 3.6 6.3 9.9 Carrying value at, Dec 31, 2022 Dec 31, 2021 3.0 5.8 8.8 0.6 1.8 2.4 For the year ended December 31, 2022, there were losses of $0.5 million (2021 - $nil) recognized for Minority interest and other investments classified as FVTPL in the Consolidated statements of earnings and comprehensive income within Other expense, net. For the year ended December 31, 2022, there were gains of $0.1 million (2021 - $nil) recognized for Minority interest and other investments classified as FVTOCI in the Consolidated statements of earnings and comprehensive income within Other comprehensive loss. 28 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 14. Assets held for sale On February 7, 2022, the Company divested manufacturing assets located in Tarboro, North Carolina and certain related brands associated with its Outdoor business for proceeds of $9.2 million. Upon closing of the sale, a loss on disposal of $0.1 million was recognized in Other expense, net in the Consolidated statements of earnings and comprehensive income. As at December 31, 2021, these assets, which included inventories of $5.7 million, property, plant and equipment of $2.1 million and goodwill of $1.1 million were classified as "Assets held for sale" and were presented separately in the Consolidated statements of financial position. 15. Property, plant and equipment (US$ millions) Cost Balance at December 31, 2020 Additions Disposals Assets acquired through business combinations Foreign currency translation Transfer to intangible assets Assets reclassified as held for sale 14 Balance at December 31, 2021 Additions Disposals Asset impairments Foreign currency translation Balance at December 31, 2022 Accumulated depreciation Balance at December 31, 2020 Depreciation Disposals Foreign currency translation Assets reclassified as held for sale 14 Balance at December 31, 2021 Depreciation Disposals Asset Impairments Foreign currency translation Balance at December 31, 2022 Net carrying amount Balance at December 31, 2021 Balance at December 31, 2022 Note Moulds, dies and tools Equipment Land, building and leasehold improvements Computer hardware 152.5 22.8 (4.3) 0.1 2.6 — (1.1) 172.6 23.0 (7.0) (1.6) (10.9) 176.1 (130.6) (24.5) 4.3 (1.6) 1.0 (151.4) (20.5) 5.8 (0.3) 9.5 31.2 2.0 (0.2) 0.3 (0.6) — (4.6) 28.1 3.6 (0.4) — (1.1) 30.2 (21.5) (3.3) 0.2 (0.4) 2.7 (22.3) (1.8) 0.4 — 0.6 40.1 0.3 (0.4) — (0.2) — (0.2) 39.6 2.7 (0.8) — (1.8) 39.7 (21.8) (6.2) 0.4 0.1 0.1 (27.4) (5.6) 0.7 — 1.4 15.0 1.3 (0.7) — (1.0) (2.2) — 12.4 1.1 (0.5) — (0.4) 12.6 (11.5) (1.2) 0.7 0.2 — (11.8) (0.8) 0.4 — 0.5 Total 238.8 26.4 (5.6) 0.4 0.8 (2.2) (5.9) 252.7 30.4 (8.7) (1.6) (14.2) 258.6 (185.4) (35.2) 5.6 (1.7) 3.8 (212.9) (28.7) 7.3 (0.3) 12.0 (156.9) (23.1) (30.9) (11.7) (222.6) 21.2 19.2 5.8 7.1 12.2 8.8 0.6 0.9 39.8 36.0 At December 31, 2022, the Company assessed tangible assets for any indication of impairment and noted no indicators with the exception of those related to certain tooling assets. Impairments are recorded when the carrying amount of the asset exceeds its recoverable amount. For the year ended December 31, 2022, the Company recorded impairments of $1.9 million (2021 - $nil) related to tooling in the Consolidated statements of earnings and comprehensive income 29 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 16. Intangible assets (US$ millions) Cost Balance at December 31, 2020 Additions Asset impairments Assets acquired through business combinations Foreign currency translation Transfer from property, plant and equipment Balance at December 31, 2021 Additions Asset impairments Assets acquired through business combinations Foreign currency translation Balance at December 31, 2022 Accumulated amortization Balance at December 31, 2020 Amortization Foreign currency translation Balance at December 31, 2021 Amortization Foreign currency translation Balance at December 31, 2022 Net carrying amount Balance at December 31, 2021 Balance at December 31, 2022 Note Brands - indefinite Trademarks, licenses, IP & customer lists - definite Entertainment content development Digital game and app development Computer software Total 28 28 117.5 — — 39.7 0.1 — 157.3 — — 4.4 (2.0) 159.7 — — — — — — — 54.8 1.0 — 0.8 (0.2) — 56.4 0.5 — — (0.8) 56.1 (26.2) (6.1) 0.2 (32.1) (5.1) 0.5 (36.7) 211.1 43.9 (2.1) — 0.1 — 253.0 54.6 (1.1) — (15.7) 290.8 (176.4) (47.7) (1.5) (225.6) (14.4) 13.7 (226.3) 13.1 5.6 (0.5) 6.7 0.5 2.2 27.6 9.1 — — (1.9) 34.8 32.7 429.2 1.8 — — 0.1 52.3 (2.6) 47.2 0.6 — 2.2 34.6 528.9 4.8 — — (2.5) 36.9 69.0 (1.1) 4.4 (22.9) 578.3 (9.2) (5.8) 0.2 (25.4) (237.2) (3.9) 0.1 (63.5) (1.0) (14.8) (29.2) (301.7) (4.3) 1.4 (3.5) 2.3 (27.3) 17.9 (17.7) (30.4) (311.1) 157.3 159.7 24.3 19.4 27.4 64.5 12.8 17.1 5.4 6.5 227.2 267.2 The Company’s Entertainment content development and Digital Games development assets are comprised primarily of internally generated intangible assets. As at December 31, 2022, the weighted-average remaining useful lives of definite life intangible assets based on their net carrying amount was one to five years. During the year ended December 31, 2021, the Company delivered PAW Patrol: The Movie, and accordingly, amortized Entertainment content development costs in the amount of $23.0 million. 30 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 16. Intangible assets (continued) The carrying amount of indefinite life brands by CGU is as follows: (US$ millions) Rubik's Games and Puzzles GUND SwimWays Etch A Sketch Meccano Toys intangible assets Digital Games1 intangible assets Total 1 In the fourth quarter of 2021, the "Toca Boca" CGU was renamed "Digital Games". Dec 31, 2022 37.4 35.6 33.9 28.0 7.1 2.4 144.4 15.3 159.7 Dec 31, 2021 37.4 33.5 33.9 27.8 7.2 2.2 142.0 15.3 157.3 Intangible asset impairment - indefinite life brands The Company has assessed these intangible assets to have indefinite useful lives as they will generate economic benefit with no foreseeable limit. Therefore, the Company does not amortize these intangible assets, but tests for impairment in accordance with the Company's policy. In assessing indefinite life intangible assets for impairment at December 31, 2022 and 2021, the Company compared the aggregate recoverable amount of the assets included in CGUs to their respective carrying amounts. The recoverable amount of a CGU is determined based on a value in use calculation which uses cash flow projections based on financial forecasts covering a five-year period and a terminal value. The terminal value is the value attributed to the CGU's cash flows beyond the five-year period. The key assumptions used in the value in use calculation are discount rates, projected revenues and margins. The discount rate applied to each CGU to determine the value in use is a pre-tax discount rate that reflects current market assessments of the time value of money and considers the risk-free rate, market equity risk premium, size premium and the risks specific to each CGU's cash flow projections. The pre-tax discount rates used by the Company for the purpose of its value in use calculations ranged from 14.8% to 23.0% (2021 -12.0% to 29.5%). Revenue growth rates are based on management's best estimates considering historical and expected future operating and plans, economic considerations and the general outlook for the industry and markets in which the CGU operates. Cash flow projections during the forecast period are determined using expected gross margins and raw materials price inflation throughout the forecast period. The projections are prepared separately for each of the Company's CGUs and are based on the most recent financial budgets approved by management. The terminal value is projected using a 1.0% (2021 - 1.0%) per annum growth rate in perpetuity which is the projected long-term average growth rate. The Company has conducted a sensitivity analysis on the key assumptions used to determine the recoverable amount for each of the CGUs. Management believes that any reasonable 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 related CGUs. For the year ended December 31, 2022, the Company completed its annual impairment tests for indefinite life intangible assets and concluded there was no impairment (2021 - $nil). Intangible asset impairment - definite life assets For the year ended December 31, 2022, the Company recorded impairments of $1.1 million (2021 - $2.1 million) related to entertainment content projects no longer in active development and $nil (2021 - $0.5 million) related to Digital Games app development within Other expense, net in the Consolidated statements of earnings and comprehensive income. 31 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 17. Goodwill (US$ millions) Balance, beginning of year Additions during the year Assets reclassified as held for sale Impairments recognized in the year Foreign currency translation Balance, end of year The carrying amount of goodwill was allocated to these CGUs as follows: (US$ millions) Games and Puzzles SwimWays Rubik's Digital Games1 GUND Orbeez Toys Other Goodwill 1 In the fourth quarter of 2021, the "Toca Boca" CGU was renamed "Digital Games". Notes 28 14 Dec 31, 2022 173.1 7.2 — — (1.3) Dec 31, 2021 138.0 38.3 (1.1) (1.9) (0.2) 179.0 173.1 Dec 31, 2022 51.3 40.1 23.0 22.6 20.3 8.0 7.5 6.2 Dec 31, 2021 48.3 40.1 22.6 19.7 20.3 8.0 7.5 6.6 179.0 173.1 The company tests goodwill for impairment in accordance with the Company's policy. In assessing goodwill for impairment at December 31, 2022 and 2021, the Company compared the aggregate recoverable amount of the assets included in CGUs to their respective carrying amounts. The recoverable amount of the CGUs for goodwill have been determined on the same basis and assumptions as the indefinite lived intangible assets (see Note 16) with the exception of the goodwill associated with the disposal group noted in Note 14. For the year ended December 31, 2022, there were $nil (2021 - $1.9 million in respect of assets held for sale (see Note 14) and one other CGU) of impairments recognized with respect to goodwill, within Other expense, net in the Consolidated statements of earnings and comprehensive income. 32 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 18. Trade payables and accrued liabilities (US$ millions) Trade payables Accrued liabilities Trade payables and accrued liabilities Dec 31, 2022 153.0 186.4 339.4 Dec 31, 2021 274.7 201.7 476.4 Accrued liabilities are comprised of payroll related liabilities, accrued royalties, commodity tax, dividends payable and other. As at December 31, 2022, $4.6 million of dividends payable is included in accrued liabilities (December 31, 2021 - $nil) (see Note 22 (a)). As at December 31, 2022, a restructuring liability of $0.4 million (December 31, 2021 - $1.4 million) is included in accrued liabilities. 19. Deferred revenue Deferred revenue is comprised of advances on contracts relating to Entertainment revenue and subscriptions relating to Digital Games revenue. These amounts represent consideration received in advance of the Company fulfilling its performance obligations. As at December 31, 2022, the Company had deferred revenue of $11.5 million (December 31, 2021 - $10.9 million). For the year ended December 31, 2022, the Company recognized revenue of $8.3 million (2021 - $22.9 million) relating to amounts previously deferred. 20. Loans and borrowings Unsecured Debt Bank Facilities The Company has an unsecured five-year revolving credit facility (the "Facility") with a borrowing capacity of $510.0 million which matures on September 28, 2026, and contains certain financial covenants. The Facility also has an option which permits the Company to increase the total capital available by an additional $200.0 million. Total financing costs of $1.7 million, which include Facility amendment fees and related legal fees, are recognized in Other assets and are being amortized over the term of the amended and restated agreement. As at December 31, 2022, there were $1.4 million (December 31, 2021 - $0.4 million) in letters of credit outstanding under the Facility. As at December 31, 2022, there was $nil drawn (December 31, 2021 - $nil) under the Facility. As at December 31, 2022, Unamortized Facility fee costs in the amount of $1.2 million (December 31, 2021 - $1.6 million) recognized in the Consolidated statements of financial position. This Facility is subject to the maintenance of certain financial covenants. The Company was in compliance with all financial covenants as at December 31, 2022 and December 31, 2021. Bank Overdraft Facility The Company has an uncommitted Overdraft Facility Agreement (the "European Facility") for €15.0 million (US$16.1 million). The European Facility will be used to fund working capital requirements in Europe. As at December 31, 2022, the outstanding balance was $nil (December 31, 2021 - $nil). Secured Debt Bank Facilities The Company has an uncommitted Revolving Credit Facility to finance television and film production. The limit of the credit facility (the "Production Facility") is 10.0 million CAD (US$7.4 million). As at December 31, 2022, the outstanding balance of the Production Facility was $nil (December 31, 2021 - $nil). 33 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 21. Provisions (US$ millions) Deferred Consideration(i) Defectives(ii) Supplier liabilities(iii) Provisions Current Non-current Provisions (US$ millions) December 31, 2020 Provisions recognized Accretion recognized Payments Revaluation of provisions December 31, 2021 Provisions recognized Accretion recognized Payments Revaluation of provisions December 31, 2022 Dec 31, 2022 26.7 13.6 5.5 45.8 30.7 15.1 45.8 Deferred consideration(i) Defectives(ii) Supplier liabilities(iii) 15.8 10.6 1.6 (7.4) 2.7 23.3 12.5 1.3 (12.6) 2.2 26.7 13.0 7.9 — (11.0) — 9.9 11.4 — (7.6) (0.1) 13.6 5.6 1.9 — (1.6) — 5.9 2.0 — (2.4) — 5.5 Dec 31, 2021 23.3 9.9 5.9 39.1 25.1 14.0 39.1 Total 34.4 20.4 1.6 (20.0) 2.7 39.1 25.9 1.3 (22.6) 2.1 45.8 (i) Certain business combinations include agreement terms associated with royalty payables or deferred incentive compensation and are based on the achievement of certain financial performance criteria and/ or continued employment. The accretion of the royalties is recorded in Interest expense in the Consolidated statements of earnings and comprehensive incentive compensation is recorded in Other expense, net in the Consolidated statements of earnings and comprehensive income. Subsequent reviews of financial performance may result in the recording of additional considerations or reductions of the existing provision and are recorded in Other expense, net in the Consolidated statements of earnings and comprehensive income. income. Accrued deferred (ii) Defectives occur 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 of the product and reduces the revenue figure in the Consolidated statements of earnings and comprehensive income. (iii) Supplier liabilities represent the estimated amounts to be paid to suppliers for lower than expected volumes purchased, resulting in the supplier having excess raw material and/or finished goods inventory. While such payments are not legally required, the Company may 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/or finished goods inventory. The provision for supplier obligations is recorded in cost of sales in the Consolidated statements of earnings 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 probable 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. 34 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 22. Share capital (a) Authorized as at December 31, 2022 and December 31, 2021 • • • Unlimited number of multiple voting shares with no par value; Unlimited number of subordinate voting shares with no par value; and Unlimited number of preferred shares issuable in series with no par value. Multiple voting shares and subordinate voting shares entitle the holder to receive dividends, and to receive the proceeds of liquidation, dissolution or winding up the Company in proportion to the number of shares held. These rights are subject to the prior rights of the holders of any shares ranking prior to the multiple voting shares and the subordinate voting shares. The holders of the multiple voting shares are entitled to 10 votes for each share held and the holders of the subordinate voting shares are entitled to 1 vote for each share held. Multiple voting shares are convertible at any time into an equivalent number of subordinate voting shares. Subordinate voting shares do not have any redemption or conversion rights. Preferred shares of each series will be entitled to preference over the multiple voting shares and subordinate voting shares with respect to the payment of dividends and to receive the proceeds of liquidation, dissolution or winding up of the Company. Multiple voting shares: Outstanding, beginning of year Conversion to subordinate voting shares Outstanding, end of year Subordinate voting shares: Outstanding, beginning of year Issuance of subordinate voting shares Conversion from multiple voting shares Outstanding, end of year Shares issued and outstanding, end of period Year Ended Dec 31, Year Ended Dec 31, 2022 2021 Shares (millions) Amount (US$ millions) Shares (millions) Amount (US$ millions) 70.6 (1.9) 68.7 31.8 0.5 1.9 34.2 102.9 360.2 (9.7) 350.5 376.7 17.8 9.7 404.2 754.7 70.6 — 70.6 31.4 0.4 — 31.8 102.4 360.5 (0.3) 360.2 364.3 12.1 0.3 376.7 736.9 As at December 31, 2022, the Company does not hold any of its outstanding shares (December 31, 2021 - $nil). On November 10, 2022, the Company announced a secondary offering (the “Secondary Offering”) on a bought deal basis of its subordinate voting shares through a secondary sale of shares by an entity owned and or controlled by a Director of the Company (the “Selling Shareholder”). The Secondary Offering of 1,900,000 subordinate voting shares raised gross proceeds of approximately 61.0 million CAD for the Selling Shareholder, at a price of 32.10 CAD per subordinate voting share and was completed on November 17, 2022. The Company did not receive any proceeds from the Secondary Offering, and the underwriting fees and other expenses related to the Secondary Offering were paid by the Selling Shareholder. To satisfy the sale under the Secondary Offering, the Selling Shareholder converted 1,900,000 multiple voting shares into subordinate voting shares on a one-for-one basis. On January 5, 2023, the Company launched, and the Toronto Stock Exchange ("TSX") accepted the notice to launch a Normal Course Issuer Bid (the "NCIB"). Under the NCIB, the Company may repurchase its subordinate voting shares on the open market at its discretion and subject to compliance with applicable securities laws. The NCIB period commenced on January 9, 2023, and will end on the earlier of January 8, 2024 and the completion of purchases under the NCIB, up to 2,845,904 subordinate voting shares, which represents approximately 10% of the "public float" (within the meaning of the rules of the TSX). Under the TSX rules, daily purchases on the TSX pursuant to the NCIB will be limited to 20,814 subordinate voting shares, other than purchases made pursuant to the block purchase exception. As at March 8, 2023, no shares have been purchased under the NCIB. 35 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 22. Share capital (continued) As at December 31, 2022, the Company had dividends declared of $9.2 million at a rate of 0.06 CAD per outstanding subordinate voting share and multiple voting share of Spin Master. Dividends in the amount of $4.6 million were paid on October 14, 2022 to shareholders of record at the close of business on September 30, 2022. Dividends in the amount of $4.6 million were accrued on December 31, 2022 and paid on January 13, 2023 to shareholders of record at the close of business on December 30, 2022. On March 8, 2023, the Company’s Board of Directors declared a dividend of 0.06 CAD per outstanding subordinate voting share and multiple voting share, payable on April 14, 2023 to shareholders of record at the close of business on March 31, 2023. (b) Share-based plans The total expense recognized for employee services received during the year ended for December 31, 2022 equity- settled transactions is shown in the following table: (US$ millions) Equity-settled RSUs and PSUs Equity-settled Participation Arrangement transactions Share purchase options Share based compensation expense Year Ended Dec 31, 2022 17.5 — 0.1 17.6 2021 14.6 0.2 0.5 15.3 Share based compensation expense is recorded in administrative expenses in the Consolidated statements of earnings and comprehensive income with a corresponding amount recorded in contributed surplus. Long-Term Incentive Plan The Company has an equity based compensation plan providing for the issuance of securities from treasury under which the grants will be made by the Company. Under the Long-Term Incentive Plan ("LTIP"), the Board may at its discretion from time to time, grant share options, share units, in the form of RSUs and PSUs, stock appreciation rights, restricted stock and any other equity based awards. As at December 31, 2022, the aggregate number of subordinate voting shares that may be issued pursuant to grants under the LTIP may not exceed 9,669,599 (December 31, 2021 - 9,669,599). As at December 31, 2022, 3,656,929 (December 31, 2021 - 4,142,665) subordinate voting shares remained reserved for issuance under the LTIP. The Company settled vested LTIP grants during the year ended December 31, 2022 through the issuance of shares. The settlements resulted in a transfer of $17.8 million (2021 - $8.6 million) from contributed surplus to share capital. Restricted Stock Units ("RSUs") Below is a summary of the activity related to RSUs outstanding as at December 31, 2022 and December 31, 2021. (number of units) Outstanding, beginning of year Granted Exercised Forfeited Outstanding, end of year Dec 31, 2022 942,931 412,676 Dec 31, 2021 826,116 388,693 (214,456) (252,763) (58,728) (19,115) 1,082,423 942,931 36 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 22. Share capital (continued) Performance Share Units ("PSUs") Below is a summary of the activity related to PSUs outstanding as at December 31, 2022 and December 31, 2021. (number of units) Outstanding, beginning of year Granted Exercised Forfeited Outstanding, end of year Deferred Share Units ("DSUs") Dec 31, 2022 1,091,862 276,410 (318,179) (43,761) Dec 31, 2021 918,929 285,463 (62,815) (49,715) 1,006,332 1,091,862 Below is a summary of the activity related to the DSUs outstanding as at December 31, 2022 and December 31, 2021. (number of units) Outstanding, beginning of year Granted Exercised Outstanding, end of year Dec 31, 2022 Dec 31, 2021 157,293 121,771 55,479 (24,908) 35,522 — 187,864 157,293 Share based compensation expense of $1.7 million (2021 - $1.2 million) was recorded for the year ended December 31, 2022. A mark to market gain of $1.7 million on DSUs outstanding (2021 - loss of $2.0 million) was recorded for the year ended December 31, 2022, respectively. The share based compensation and mark to market gain related to DSUs are reflected in administrative expenses in the Consolidated statements of earnings and comprehensive income. A corresponding amount was recorded in accrued liabilities. Share Purchase Options (“Options”) The Company has one share option plan for key employees, which forms part of their LTIP. Under this plan, the exercise price of each option equals the market price of the Company’s shares on the date of grant and the Options have a maximum term of ten years. The Options vest ratably over a four-year vesting period. The Company did not issue any Options in 2022 and 2021. As at December 31, 2022, 483,426 (December 31, 2021 - 497,733) Options were outstanding with a weighted average exercise price of 34.97 CAD (December 31, 2021 - 35.22 CAD). Outstanding, beginning of year Exercised Forfeited and/or expired Outstanding, end of year Exercisable options Dec 31, 2022 Weighted average exercise price (CAD) 35.22 37.96 46.02 34.97 34.82 Number of share options 497,733 (4,157) (10,150) 483,426 460,496 Dec 31, 2021 Weighted average exercise price (CAD) 34.42 25.87 37.96 35.22 33.96 Number of share options 545,322 (46,924) (665) 497,733 425,749 37 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 22. Share capital (continued) Number of Share Options Outstanding 179,069 125,516 87,570 5,817 85,454 483,426 Dec 31, 2022 Weighted average remaining contractual life (years) 3.3 Dec 31, 2021 Weighted average remaining contractual life (years) 4.2 5.2 6.9 1.3 5.9 5.3 Number outstanding 179,069 125,516 96,129 5,817 91,202 497,733 4.2 6.1 0.3 5.2 4.3 Exercise price $22.94 $37.64 $37.96 $49.80 $52.20 Total 23. Earnings per share (US$ millions, except per share amounts) Net Income Weighted average number of shares (in millions) Dilutive effect of equity1 Diluted weighted average number of shares (in millions) Basic earnings per share Diluted earnings per share 1 The dilutive effect of equity includes equity instruments which comprise of employee stock options. 24. Net changes in non-cash working capital (US$ millions) Decrease (increase) in: Trade receivables Other receivables Inventories Prepaid expenses and other assets Assets reclassified as held for sale (Decrease) increase in: Trade payables and accrued liabilities Deferred revenue Provisions Net changes in non-cash working capital Year Ended Dec 31, 2021 2022 198.6 261.3 102.9 3.5 106.4 2.54 2.45 102.3 3.0 105.3 1.94 1.89 Year Ended Dec 31, 2022 2021 61.4 0.6 37.4 (11.4) — 88.0 (157.3) 0.6 1.0 (155.7) (67.7) (48.7) 8.3 (31.7) 4.7 (5.7) (73.1) 147.4 (14.5) (9.9) 123.0 49.9 38 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 25. Related party transactions In the normal course of operations, the Company engaged the services of a law firm whose managing partner is also a member of the Company's Board of Directors, which have been made on terms equivalent to those that prevail in arm's length transactions. For the year ended December 31, 2022, related party transactions were included in administrative expenses in the Consolidated statements of earnings and comprehensive income of the Company in the amount of $1.3 million (2021 - $1.3 million). As at December 31, 2022, amounts payable to the director's law firm were $0.4 million (December 31, 2021 - $0.2 million). Compensation of key management personnel The compensation of directors and other key management personnel during the years were as follows: (US$ millions) Salaries, wages and bonuses Share-based compensation Employee benefits Total compensation of key management personnel 2022 5.7 3.3 0.3 9.3 2021 6.7 3.3 0.1 10.1 39 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 26. Leases Amounts recognized in the Consolidated statements of financial position Leased office buildings represented approximately 90% of the right-of-use assets with the remainder comprised of leases of distribution centres, information technology ("IT") equipment, and vehicles. The Company has categorized classes of assets for leases of office buildings and distribution centres as "Building" and IT equipment and vehicles are as "Equipment". The weighted average lease term is 11 years (2021 - 11 years). The carrying value of right-of-use assets and depreciation by class of underlying assets are as follows: (US$ millions) January 1, 2021 Additions Assets recognized upon acquisition (Note 28) Modifications Depreciation and amortization Foreign currency translation December 31, 2021 (US$ millions) Additions Modifications Depreciation and amortization Foreign currency translation December 31, 2022 (US$ millions) January 1, 2021 Additions Liabilities recognized upon acquisition (Note 28) Modifications Accretion Lease payments Foreign currency translation December 31, 2021 (US$ millions) Additions Modifications Accretion Lease payments Foreign currency translation December 31, 2022 (US$ millions) Lease liabilities, current Lease liabilities, non-current Total lease liabilities Building Equipment Right-of-use assets 65.0 0.5 0.6 10.9 (12.1) (1.0) 63.9 2.0 0.5 — — (1.1) (0.1) 1.3 67.0 1.0 0.6 10.9 (13.2) (1.1) 65.2 Building Equipment Right-of-use assets 12.0 0.5 (11.5) (2.8) 62.1 0.3 0.1 (0.7) (0.2) 0.8 12.3 0.6 (12.2) (3.0) 62.9 Lease liabilities 74.4 1.0 0.7 10.9 4.4 (17.6) (0.8) 73.0 Lease liabilities 12.3 0.6 4.2 (15.8) (3.1) 71.2 Dec 31, 2021 13.3 59.7 73.0 Dec 31, 2022 16.3 54.9 71.2 Extension and termination options are included in a number of property and equipment leases across the Company. These terms are used to maximize operational flexibility in terms of managing contracts. Extension and termination options are exercisable only by the Company and not by the respective lessor. 40 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 26. Leases (continued) Amounts recognized in the Consolidated statements of earnings and comprehensive income (US$ millions) Depreciation expense on right-of-use assets Accretion expense on lease liabilities Expense relating to leases of short term and low value assets Expense relating to variable lease payments not included in measurement of lease liability Total 2022 2021 12.2 4.2 1.9 4.6 22.9 13.2 4.4 1.1 5.9 24.6 The total cash outflows for leases for the year ended December 31, 2022 was $22.9 million (2021 - $24.6 million). 27. Commitments for expenditures Licensing and similar agreements in effect at December 31, 2022 that contain provisions for future minimum payments, include the following: As at December 31, 2022 (US$ millions) Lease liabilities - undiscounted Guaranteed payments due to licensors Other Total commitments Less than 1 year to greater than 5 years < 1 Year 1-5 Years > 5 Years Total 14.8 21.0 6.2 42.0 39.6 27.6 13.9 81.1 39.2 — — 39.2 93.6 48.6 20.1 162.3 28. Business acquisitions Acquisition of certain assets from SolidRoots, LLC On August 2, 2022, the Company acquired certain assets from SolidRoots, LLC (“SolidRoots”), a creator of family board games. Management performed an analysis under IFRS 3, Business Combinations ("IFRS 3") and has determined that the assets and processes acquired comprised a business and therefore, accounted for the transaction as a business combination using the acquisition method of accounting. This acquisition is expected to complement the Company's existing board games offering and has been reported in the Toys segment within the Activities, Games & Puzzles and Plush product category and included in the Games and Puzzles CGU beginning from the date of acquisition. The purchase consideration of $10.7 million is comprised of $8.5 million of cash consideration and $2.2 million of contingent consideration related to the estimated fair value of future royalties. The purchase agreement also included total deferred incentive compensation of $1.0 million, which is contingent on the continued employment of key principals as well as certain performance metrics, over a five-year period. These payments are considered a remuneration expense and are accrued over the related service period. Deferred incentive compensation of less than $0.1 million is included in Other expense, net in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. The contingent consideration and deferred incentive compensation are recorded in provisions in the Consolidated statements of financial position. Purchase consideration of $10.7 million has been allocated as follows: $4.4 million to intangible assets (related to the brand), $2.0 million to inventories and $0.1 million to prepaid expenses and other assets, with the remainder of $4.2 million allocated to goodwill. The Company incurred $0.2 million in transaction related costs which were included in administrative expenses in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. 41 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 28. Business acquisitions (continued) Assets acquired and liabilities recognized at the date of acquisition (US$ millions) Assets acquired Intangible assets Inventories Prepaid expenses and other assets Fair value of identifiable net assets acquired Goodwill arising on acquisition Cash consideration Present value of contingent consideration Total purchase consideration Fair value of identifiable net assets acquired Goodwill arising from transaction Net cash outflow on acquisition Cash consideration Net cash outflow on acquisition Fair value as at August 2, 2022 4.4 2.0 0.1 6.5 8.5 2.2 10.7 6.5 4.2 8.5 8.5 Goodwill arose on the acquisition as the consideration paid effectively included amounts for the benefit of expected 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, $4.2 million of goodwill is expected to be deductible for income tax purposes and is being amortized for tax purposes over 15 years. The total purchase consideration includes $2.2 million in deferred payments for future royalties. The future royalties are payable to the vendor upon the achievement of key performance indicators over a five-year period. The potential undiscounted amount of all future payments that the Company could be required to make under this contingent consideration arrangement is between $nil and $3.1 million. Impact of acquisition on the results of the Company Included in the Company's financial results for the year ended December 31, 2022 is $1.6 million in revenue attributable to the acquisition. 42 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 28. Business acquisitions (continued) Acquisition of the remaining shares of Nørdlight Games AB On August 24, 2021, the Company acquired 18.53% of the shares in Nørdlight Games AB (“Nørdlight”), a company that creates and develops digital games, based in Sweden. On August 8, 2022, the Company acquired the remaining 81.47% of the shares of Nørdlight, resulting in ownership and control of 100% of the voting shares in Nørdlight. This investment was classified in 2021 as an equity instrument measured at FVTOCI. Management performed an analysis under IFRS 3 and determined that the assets and processes acquired comprised a business and therefore, accounted for the transaction as a business combination using the acquisition method of accounting. The acquisition has been reported under the Digital Games segment and CGU beginning from the date of acquisition. The Company paid cash consideration of $2.5 million. The total purchase consideration has been allocated to the identifiable assets of $0.5 million, and liabilities of $0.2 million, with the remainder $2.9 million allocated to goodwill. The purchase agreement also includes contingent consideration of $4.9 million which is payable on achieving certain performance metrics and has been allocated a fair value of $nil in the total purchase consideration. The Company incurred $0.1 million in transaction related costs which were included in administrative expenses in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. Assets acquired and liabilities recognized at the date of acquisition (US$ millions) Assets acquired Cash Other receivables Liabilities assumed Trade payables and accrued liabilities Fair value of identifiable net assets acquired Goodwill arising on acquisition Cash consideration Fair value of previously held equity interest Total purchase consideration Fair value of identifiable net assets acquired Goodwill arising from transaction Net cash outflow on acquisition Cash consideration Less: Cash balance acquired Net cash outflow on acquisition Fair value as at August 8, 2022 0.4 0.1 0.5 0.2 0.2 0.3 2.5 0.7 3.2 0.3 2.9 2.5 0.4 2.1 43 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 28. Business acquisitions (continued) Goodwill arose on the acquisition as the consideration paid effectively included amounts for the benefit of expected 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. Goodwill recognized is not expected to be deductible for income tax purposes. The purchase agreement includes total deferred incentive compensation of $7.8 million, which is contingent on the continued employment of key principals as well as certain performance metrics, over a five-year period. These payments are considered an incentive-related remuneration expense and are accrued over the related service period. Deferred incentive compensation of $1.4 million is included in Other expense, net in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. The deferred incentive compensation is recorded in provisions in the Consolidated statements of financial position. Summary of prior year acquisitions Acquisition of Rubik's Brand Limited On January 4, 2021, the Company completed the acquisition of Rubik's Brand Limited by acquiring 100% of the shares of its holding company, Rubiks Malta Holding Company Limited (“Rubik’s”). Rubik’s is a licensor and distributor of various editions of the Rubik’s product lines and qualifies as a business under IFRS 3. The Company secured the global intellectual property for the Rubik’s portfolio and the ability to sell, market and license for further penetration directly to wholesale customers or continue to sell indirectly through distributors into markets as well as expansion into new territories. The brand has been reported in the Toys segment within the Activities, Games & Puzzles and Plush product category and included in the Rubik's CGU beginning from the date of acquisition. Total purchase consideration of $55.2 million was comprised of $51.4 million of cash consideration plus $3.8 million related to the estimated fair value of future royalties. The total purchase consideration has been allocated to the identifiable intangible assets based on their estimated fair values of $38.1 million (related to brands and customer relationships), tangible assets of $6.5 million and assumed liabilities of $12.0 million with the remainder allocated to goodwill. Acquisition of certain assets from a product invention and development company On April 16, 2021, the Company acquired assets and assumed liabilities of a product invention and development company which constitutes a business under IFRS 3. Included in the acquisition is an assembled workforce to complement the Company's toy innovation and development capabilities. The acquisition has been reported in the Toys segment and CGU from the date of acquisition. Total purchase consideration was comprised of $7.5 million of cash consideration and has been allocated as $0.7 million of tangible assets and $0.7 million of assumed liabilities with the remainder allocated to goodwill. The purchase agreement also included deferred incentive compensation of $14.5 million, which is contingent on continued employment of key principals over a five-year period. These payments are considered an incentive- remuneration expense and are accrued over the five-year period. Acquisition of Originator Inc. On June 14, 2021, the Company acquired 100% of the shares of Originator Inc., which qualifies as a business under IFRS 3. Originator Inc. is a developer and publisher of education focused mobile digital games for kids and families and was acquired to complement Sago Mini's edutainment digital games offering. The acquisition has been reported in the Digital Games segment and CGU and its revenue is included within Digital Games revenue from the date of acquisition. Total purchase consideration was comprised of $15.0 million of cash consideration. The total purchase consideration has been allocated to identifiable intangible assets based on their estimated fair values of $9.1 million (related to brands, customer relationships and Digital Games development), tangible assets of $0.6 million and assumed liabilities of $2.9 million with the remainder allocated to goodwill. 44 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 28. Business acquisitions (continued) The purchase agreement also included total deferred incentive compensation of $10.0 million, which is contingent on the continued employment of key principals as well as certain performance metrics, over a five-year period. These payments are considered an incentive-related remuneration expense and are accrued over the five-year period. Assets acquired and liabilities recognized at the date of acquisition (US$ millions) Assets acquired Cash Trade receivables Inventories Prepaid expenses and other assets Property, plant and equipment Right-of-use assets Intangible assets Liabilities assumed Trade payables and accrued liabilities Lease liabilities Deferred income tax liabilities Income tax payable Fair value of identifiable net assets acquired Goodwill arising on acquisition Cash consideration Purchase price adjustment Present value of future royalties Total purchase consideration Fair value of identifiable net assets acquired Goodwill arising from transaction Net cash outflow on acquisition Cash consideration Less: cash balance acquired Total net cash outflow Less: advance paid in 2020 Net cash outflow on acquisition Rubik's Brand Limited Product invention and development company Originator Inc. Fair value as at January 4, 2021 Fair value as at April 16, 2021 Fair value as at June 14, 2021 1.1 4.0 0.7 0.5 0.2 — 38.1 44.6 4.4 — 7.2 0.4 12.0 32.6 — — — — 0.1 0.6 — 0.7 — 0.7 — — 0.7 — 0.2 0.4 — — — — 9.1 9.7 0.4 — 2.5 — 2.9 6.8 Rubik's Brand Limited Product invention and development company Originator Inc. 52.6 (1.2) 3.8 55.2 32.6 22.6 7.5 — — 7.5 — 7.5 15.0 — — 15.0 6.8 8.2 Rubik's Brand Limited Product invention and development company Originator Inc. 52.6 1.1 51.5 3.0 48.5 7.5 — 7.5 — 7.5 15.0 0.2 14.8 — 14.8 45 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 29. Financial instruments and risk management Capital management Management includes the following items in its definition of capital: (US$ millions) Share capital Contributed surplus Retained earnings Capital Dec 31, 2022 754.7 40.7 468.1 1,263.5 Dec 31, 2021 736.9 40.8 216.0 993.7 The Company makes adjustments to its capital structure based on the funds available to the Company in supporting the operations of the business and to ensure that the subsidiaries of the Company will be able to continue on a going concern basis. The Company manages its capital structure, and may make adjustments 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 strategy for reasonability on an ongoing basis and believes that this approach is reasonable. The Company declared a quarterly dividend beginning with the third quarter of 2022 and subsequent to year-end, the Company launched a NCIB, as described in Note 22. The Facility requires the Company to comply with certain financial covenants. As at December 31, 2022, the Company was in compliance with such 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 or 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 structure 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 periodically enters into derivative financial instruments such as foreign exchange forward contracts to manage its foreign currency risk on cash flows denominated in currencies other than the US dollar. As at December 31, 2022, the Company is committed under outstanding foreign exchange contracts representing a total net sell commitment of $20.3 million (December 31, 2021 - net purchase commitment of $11.6 million). These foreign exchange contracts have maturity dates varying from January 2023 to April 2024. For the year ended December 31, 2022, realized gains on the Company’s matured hedges were $3.1 million (2021 - realized gain of $0.8 million) and are included in the Consolidated statements of earnings and comprehensive income. As at December 31, 2022 (in millions) Foreign exchange contracts Buy US$ Buy US$ Buy US$ Sell US$ Buy US$ Total Notional value: foreign currency Notional value: US$ Unrealized gain (loss): US$ 60.5 EUR 17.5 GBP 655.0 MXN (186.6) CAD 4.5 AUD (66.2) (22.0) (31.1) 142.6 (3.0) 20.3 0.9 0.9 (1.9) (4.4) (0.1) (4.6) 46 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 29. Financial instruments and risk management (continued) As at December 31, 2021 (in millions) Foreign exchange contracts Buy US$ Buy US$ Buy US$ Sell US$ Sell US$ Total Notional value: foreign currency Notional value: US$ Unrealized (loss) gain: US$ 40.4 EUR 20.1 GBP 515.0 MXN (109.5) CAD (242.0) JPY (48.5) (28.0) (24.5) 87.3 2.1 (11.6) 2.5 0.8 (0.2) (0.8) — 2.3 Foreign currency risk - sensitivity analysis The Company is mainly exposed to the Canadian dollar, the Great Britain pound sterling, the Mexican peso and the Euro. The following table details the Company's sensitivity to a 5.0% change in currency units against the US$. The sensitivity analysis includes all outstanding foreign currency denominated current monetary assets and liabilities and adjusts their translation as at the end of the reporting period for a 5.0% change in foreign currency rates. A positive number below indicates an increase in a foreign exchange gain where the currency unit strengthens 5.0% against US$. (US$ millions) Canadian dollar Great Britain pound sterling Mexican peso Euro Australian dollar Dec 31, Dec 31, 2022 (6.4) 0.5 2.0 1.0 0.5 2021 (7.6) 0.4 1.4 (0.2) 0.4 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 may be exposed to interest rate risk should it borrow under its credit facilities at a variable rate. Interest rate risk - sensitivity analysis The Company is exposed to interest rate risk mainly relating to interest income on its cash and cash equivalents balances and interest expense on loans and borrowings. For the year ended December 31, 2022, with all other variables held constant, a 50-basis point decrease in interest rates would have resulted in a decrease to interest income of $2.8 million for the year (2021 - a decrease to interest income of $1.0 million). A 50-basis point increase in interest rates would have resulted in an increase to interest income of $2.8 million for the year (2021 - an increase to interest income of $2.2 million). These amounts are determined by considering the impact of the interest rates on the Company’s loans and borrowings and cash and cash equivalents balances as at December 31, 2022. 47 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 29. 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 fulfil their financial obligations. This risk is mitigated through financial arrangements such as cash in advance of shipment, letters of credit or bank or parental guarantees. In addition, the Company purchases Accounts Receivables insurance for our global customer base, who are not covered by other financial arrangements. This process, in conjunction with an established credit limit and payment term, mitigates the Company’s risk of loss. The financial arrangements, insurance policies and customer credit limits are reviewed annually. As at December 31, 2022, approximately 48.6% (2021 - 52.0%) of the Company’s trade receivables are due from three major retail customers which represent approximately 52.2% of Toy gross product sales for the year ended December 31, 2022 (2021 - 52.6%). The Company mitigates credit risk on its cash balance by ensuring 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: As at December 31, 2022 (US$ millions) < 1 year 1-5 years > 5 years Total Derivative financial liabilities Foreign exchange forward contracts Non-derivative financial liabilities Trade payables and accrued liabilities 254.7 14.0 339.4 594.1 — 14.0 — — — 268.7 339.4 608.1 Financing facilities (US$ millions) Bank loan facilities Amount undrawn Bank loan facilities Dec 31, 2022 533.5 533.5 Dec 31, 2021 534.9 534.9 48 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 29. Financial instruments and risk management (continued) Fair value measurements The following table presents the fair value of financial assets and financial liabilities. The carrying values of the Company’s financial instruments approximate their fair values with the exception of foreign exchange forward contracts, Investment in a limited partnership and Minority interest and other investments which are recorded at fair value. (US$ millions) Financial assets Cash and cash equivalents Trade receivables Other receivables Other assets: Minority interest and other investments Investment in a limited partnership Investment tax credits - non-current portion Unrealized foreign exchange gain Financial assets Financial liabilities Trade payables and accrued liabilities Financial liabilities Dec 31, 2022 Dec 31, 2021 644.3 311.0 49.5 8.8 3.9 3.6 1.7 1,022.8 339.4 339.4 562.7 352.4 38.8 2.4 3.9 2.7 3.4 966.3 476.4 476.4 With the exception of foreign exchange forward contracts, Investment in a limited partnership and Minority interest and other investments described below, all other financial instruments are categorized within Level 1 of the fair value hierarchy. The fair value of foreign exchange forward contracts at December 31, 2022 resulted in an unrealized gain of $1.7 million, which is recorded in Other assets (December 31, 2021 - $3.4 million) and an unrealized loss of $6.3 million recorded in accrued liabilities (December 31, 2021 - $1.0 million). These fair values are categorized within Level 2 of the fair value hierarchy. The fair values of over-the-counter derivative financial instruments are based on broker or observable market rates. Those quotes are tested for reasonableness by discounting expected future cash flows using market interest and exchange rates for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument for the Company and counterparty when appropriate. 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. Realized and unrealized gains and losses on derivative financial instruments may be offset by realized and unrealized losses and gains on the underlying exposures being hedged and are recorded in earnings as they occur. The fair value of the investment in a limited partnership as at December 31, 2022 is recorded in Other assets at $3.9 million (December 31, 2021 - $3.9 million) with $nil of net unrealized losses (2021 - net unrealized gain of $0.9 million) recognized in Other expense, net in the Consolidated statements of earnings and comprehensive income for the year ended December 31, 2022. For the year ended December 31, 2022, the Company recognized $0.1 million (2021 - $0.6 million) of distribution income in Other expense, net, respectively. This fair value is categorized within Level 3 of the fair value hierarchy. The fair value of the investment in a limited partnership is estimated using various valuations techniques through the partnership based on the type of investment held by the fund. The quantitative unobservable inputs used in the fair value measurement are not developed by the Company and include assumptions regarding long-term revenue growth rates and discount rates, among others. 49 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 29. Financial instruments and risk management (continued) From inception, the Company has paid $2.9 million and is obligated to pay the remaining $0.1 million upon receiving capital calls over the remaining term of the limited partnership agreement. The investment in a limited partnership is held for medium to long-term strategic purposes. The fair value of the Minority interest and other investments recorded in other assets are as follows: (US$ millions) Minority interest and other investments classified as FVTOCI Minority interest and other investments classified as FVTPL Minority interest and other investments Dec 31, Dec 31, 2022 3.0 5.8 8.8 2021 0.6 1.8 2.4 For the year ended December 31, 2022, a fair value loss of $0.5 million (2021 - $nil), was recognized for Minority interest and other investments classified as FVTPL in Other expense, net in the Consolidated statements of earnings and comprehensive income. For the year ended December 31, 2022, there were gains of $0.1 million, respectively (2021 - $nil) recognized for Minority interest and other investments classified as FVTOCI in the Consolidated statements of earnings and comprehensive income within Other comprehensive loss. These investments are categorized within Level 3 of the fair value hierarchy. The fair value of these investments is estimated using various valuation techniques. The quantitative unobservable inputs used in the fair value measurement are not developed by the Company and include assumptions regarding long-term revenue growth rates and discount rates, among others. 30. Segment information Spin Master is a global children's entertainment company with a portfolio that includes children’s products, brands, and entertainment content spanning toys, games, licensed products, film and television programming and digital games. Effective January 2021, the Company appointed a new Global President, who also assumed the role of Chief Executive Officer ("CEO") in April 2021, and identifying the role as CODM. A President was appointed to each of the three creative centres who report directly to the Global President & CEO. As a result of Spin Master’s reorganization, financial reporting, performance management, approval of allocations for capital and growth strategies and opportunities were aligned to this new organizational structure effective January 1, 2022. The Company has three reportable operating segments, which are as follows: (i) Toys (ii) Entertainment (iii) Digital Games The Toys segment engages in the creation, design, manufacturing, licensing, and marketing of toys, games, and products around the world. The Entertainment segment engages in the creation and production of multi-platform content, stories and characters in original shows, short-form series and films. The Digital Games segment engages in the creation of digital games which include subscription services. The Company also presents Corporate & Other which includes certain corporate costs, foreign exchange and merger and acquisition-related costs, as well as fair value gains and losses and distribution income on Minority interest and other investments. The CODM measures total segment performance based on Adjusted EBITDA, as reported internally to management. The accounting policies of the reportable segments are the same as the Company’s accounting policies described in Note 2. Reclassifications of certain prior year segment results and account balances have been made to conform to the current-year presentation. None of the segment changes impact the Company's previously reported consolidated revenue, net income or earnings per share. 50 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 30. Segment information (continued) The Company’s results from operations for Toys, Entertainment, and Digital Games reportable operating segments and Corporate & Other segment for the years end December 31, 2022 and December 31, 2021 are as follows: (US$ millions) Toys Year Ended Dec 31, 2022 Digital Games Corporate & Other Entertainment Total Revenue 1,737.6 118.8 163.9 — 2,020.3 Operating Income 170.1 76.7 46.5 Restructuring and other related costs Foreign exchange gain Share based compensation Impairment of property, plant and equipment Impairment of intangible assets Legal settlement Acquisition related deferred incentive compensation Investment distribution income Loss on Minority interest and other investments Acquisition related deferred consideration Transaction costs Depreciation and amortization Adjusted EBITDA (US$ millions) 4.6 — 12.4 1.9 — — 5.4 — — 3.5 — 0.1 — 1.2 — 1.1 — — — — — — 0.2 — 2.3 — — — 4.9 — — — — 46.7 244.6 14.8 93.9 6.6 60.5 Year Ended Dec 31, 2022 Toys Entertainment Digital Games Corporate & Other Capital expenditures 32.4 54.9 12.1 — (US$ millions) Toys Year Ended Dec 31, 2021 Digital Games Corporate & Other Entertainment Revenue 1,731.8 135.8 174.8 — 2,042.4 Operating Income 159.0 53.4 67.5 Restructuring and other related costs Foreign exchange gain Share based compensation Impairment of goodwill Impairment of intangible assets Acquisition related deferred incentive compensation Net unrealized gain on investment Investment distribution income Acquisition related deferred consideration Transaction costs Gain on disposal of asset Depreciation and amortization Adjusted EBITDA (US$ millions) 2.3 — 13.4 1.9 — 4.3 — — 2.7 — (0.2) 56.3 239.7 — — 0.4 — 2.1 — — — — — — 0.2 — 1.5 — 0.5 2.5 — — — — — 48.2 104.1 7.4 79.6 Toys Entertainment Year Ended Dec 31, 2021 Digital Games Corporate & Other Capital expenditures 26.8 44.0 8.7 — 79.5 51 50.0 — (61.4) 1.7 — — (0.5) — (0.1) 0.5 (0.9) 1.0 0.1 (9.6) (7.7) — (2.9) — — — — (0.9) (0.6) — 2.8 — — (9.3) 343.3 4.9 (61.4) 17.6 1.9 1.1 (0.5) 10.3 (0.1) 0.5 2.6 1.0 68.2 389.4 Total 99.4 Total 272.2 2.5 (2.9) 15.3 1.9 2.6 6.8 (0.9) (0.6) 2.7 2.8 (0.2) 111.9 414.1 Total Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 30. Segment information (continued) Revenue reported by segment above represents revenue generated from external customers. There were no inter- segment revenue in any year. The following table provides a reconciliation of the Company's consolidated Adjusted EBITDA to Income before income tax expense for the years end December 31, 2022 and December 31, 2021: (US$ millions) Adjusted EBITDA Adjusting Items: Depreciation and amortization Restructuring and other related costs Foreign exchange gain Share based compensation Impairment of goodwill Impairment of property, plant and equipment Impairment of intangible assets Legal settlement Acquisition related deferred incentive compensation Net unrealized gain on investment Investment distribution income Loss on Minority interest and other investments Acquisition related contingent consideration Transaction costs Gain on disposal of asset Operating Income Add (Deduct): Interest income Interest expense Income before income tax expense Revenue from major product categories Spin Master’s Toys segment is organized into four major product categories as follows: (i) Preschool and Dolls & Interactive (ii) Activities, Games & Puzzles and Plush (iii) Wheels & Action (iv) Outdoor The Company’s revenues based on its major product categories are as follows: (US$ millions) Preschool and Dolls & Interactive Activities, Games & Puzzles and Plush Wheels & Action Outdoor Toy gross product sales1 Sales allowances Toy revenue Entertainment revenue Digital Games revenue Revenue 1Toy gross product sales represent sales of the Company’s products to customers, excluding sales allowances. 2,020.3 Year Ended Dec 31, 2022 389.4 2021 414.1 (68.2) (4.9) 61.4 (17.6) — (1.9) (1.1) 0.5 (10.3) — 0.1 (0.5) (2.6) (1.0) — (111.9) (2.5) 2.9 (15.3) (1.9) — (2.6) — (6.8) 0.9 0.6 — (2.7) (2.8) 0.2 343.3 272.2 10.7 (13.6) 340.4 1.1 (11.3) 262.0 Year Ended Dec 31, 2022 867.0 561.7 450.8 99.3 2021 809.6 587.8 445.6 119.4 1,978.8 1,962.4 (241.2) (230.6) 1,737.6 1,731.8 118.8 163.9 135.8 174.8 2,042.4 52 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 30. Segment information (continued) Geographical information Revenue by geographical area is based on the location of the customers and non-current assets are based on geographic location of the entity which holds the assets. The North American geographic area is comprised of the United States and Canada. The European geographic area is comprised of the United Kingdom, France, Italy, the Netherlands, Germany, Austria, Switzerland, Belgium, Luxembourg, Slovakia, Hungary, Romania, Czech Republic, Poland, Turkey, Russia, Greece and Spain. The Rest of World is primarily comprised of Hong Kong, China, Vietnam, India, Australia, New Zealand, Japan and Mexico, and all other areas of the world serviced by the Company’s third party distribution network. Entertainment and Digital Games revenue are tracked on a global basis and are presented as such in the table below. The Company's revenues are derived from the following geographical areas: (US$ millions) North America Europe Rest of World Toy gross product sales Sales allowances Toy revenue Entertainment revenue Digital Games revenue Revenue Year Ended Dec 31, 2022 2021 1,189.8 1,197.3 525.0 264.0 530.7 234.4 1,978.8 1,962.4 (241.2) (230.6) 1,737.6 1,731.8 118.8 163.9 135.8 174.8 2,020.3 2,042.4 Toy gross product sales for North America include amounts attributable to the United States of $1,093.3 million (2021 - $1,105.6 million) and Canada of $96.5 million (2021 - $91.7 million) for the year ended December 31, 2022. Non-current assets by major geographic region are detailed as follows: (US$ millions) Non-current assets North America Europe Rest of World Non-current assets Other Total non-current assets Dec 31, 2022 Dec 31, 2021 404.1 79.0 18.7 501.8 158.5 660.3 388.9 83.2 18.6 490.7 126.3 617.0 Other includes non-current assets not directly attributable to a specific geographic area. Non-current assets for North America include assets attributable to Canada of $164.5 million as at December 31, 2022 (December 31, 2021 - $134.5 million). 53 Spin Master Corp. Consolidated financial statements for the year ended December 31, 2022 and December 31, 2021 30. Segment information (continued) Major customers Sales to the Company's three largest customers accounted for 52.2% (2021 - 52.6%) of Toy gross product sales for the year ended December 31, 2022. The Toys segment sells products to each of the Company’s three largest customers. Other than the top three customers, which have remained the same as compared to the comparative period, no other single customer contributed 10% or more to Toy gross product sales for the year ended December 31, 2022 and 2021. (US$ millions) Toy gross product sales Customer 1 Customer 2 Customer 3 Total Year Ended Dec 31, 2022 2021 422.0 333.3 277.5 423.9 346.6 261.2 1,032.8 1,031.7 31. Subsequent events Acquisition of certain assets from 4D Brands International Inc On November 8, 2022, the Company entered into an agreement with 4D Brands International Inc., and 4D Cityscape Worldwide Limited, (collectively, the “Vendors”) to acquire certain assets of the Vendors. The transaction closed on January 17, 2023. The acquisition will be reported in the Activities, Games & Puzzles and Plush product category. Given the proximity of the transaction to the reporting date, the Company is in the process of determining the fair values of the assets acquired and liabilities assumed. The estimated purchase allocation will be disclosed in the Company's first quarter of 2023 condensed consolidated interim financial statements. Acquisition of certain assets from Innovation First, Inc On December 21, 2022, the Company entered into an agreement with Innovation First, Inc., Innovation First International, Inc., Innovation First Labs, Inc. and Innovation First Logistics, Inc. (collectively, the “Vendors”) to acquire certain assets of the Vendors (including the HEXBUG brand). The transaction closed on February 1, 2023. The acquisition will be reported in the Activities, Games & Puzzles and Plush product category. Given the proximity of the transaction to the reporting date, the Company is in the process of determining the fair values of the assets acquired. The estimated purchase allocation will be disclosed in the Company's first quarter of 2023 condensed consolidated interim financial statements. 32. Prior year comparatives Certain prior year comparatives have been reclassified to conform with current year presentation. 54 Corporate Directory Board of Directors Leadership Ronnen Harary Chair & Co-Founder Anton Rabie Director & Co-Founder Ed Clark C.M. Deputy Chair Charles Winograd Lead Director Michael Blank Director Jeffrey I. Cohen Director Reggie Fils-Aimé Director Kevin Glass Director Dina Howell Director Christina Miller Director Max Rangel Director, Global President & Chief Executive Officer Christi Strauss Director Ben Varadi Director, Executive Vice President & Chief Creative Officer Brian Whipple Director Max Rangel Director, Global President & Chief Executive Officer Mark Segal Executive Vice President & Chief Financial Officer Chris Beardall President, Toys Jennifer Dodge President, Entertainment Fredrik Loving President, Digital Games Paul Blom Executive Vice President, Global Operations & Supply Chain Tara Deakin Executive Vice President & Chief People Officer Christopher Harrs Executive Vice President & General Counsel, Corporate Secretary Jeremy Tucker Executive Vice President & Global Chief Marketing Officer Ben Varadi Director, Executive Vice President & Chief Creative Officer Jason Wilson Executive Vice President & Chief Information Officer The trademarks contained in this report are owned by Spin Master Corp. or by its subsidiaries. Trademarks that are not owned by Spin Master Corp. are used with permission. Head Office 225 King Street West, Suite 200 Toronto, ON M5V 3M2 Toronto Stock Exchange Listing Trading symbol: TOY Securities listed: Subordinate Voting Shares Auditor Deloitte LLP 8 Adelaide Street West, Suite 200 Toronto, ON M5H 0A9 Registrar & Transfer Agent Computershare Investor Services Inc. 100 University Avenue, 8th Floor Toronto, ON M5J 2Y1 Annual Meeting of Shareholders May 4, 2023 Investor Contact Information Email: investor.relations@spinmaster.com Spin Master Corp.’s financial reports, regulatory filings and news releases are available at sedar.com and on our website at spinmaster.com/en-US/ corporate/investor-relations. 2 0 2 2 A N N U A L R E P O R T S P I N M A S T E R C O R P . Spin Master Corp. 225 King Street West, Suite 200, Toronto, ON M5V 3M2 Tel. (416) 364-6002 Fax (416) 364-5097 spinmaster.com

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