SPIN MASTER CORP. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS. For the three and six months ended June 30, 2018

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1 SPIN MASTER CORP. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS For the three and six months ended June 30, 2018 The following Management s Discussion and Analysis ( MD&A ) for Spin Master Corp. ( Spin Master or the Company ) is dated August 1, 2018 and provides information concerning the Company s financial condition and financial performance for the three and six months ended June 30, 2018 ( second quarter, the quarter, Q2 ). This MD&A should be read in conjunction with the Company s unaudited condensed consolidated interim financial statements for the three and six months ended June 30, 2018 ( interim financial statements ), its audited annual consolidated financial statements and accompanying notes ( financial statements ) and its annual MD&A for the year ended December 31, 2017 ( Annual MD&A ). Additional information relating to the Company, including the Company s annual information form for the year ended December 31, 2017, can be found under the Company's profile on Some of the information in this MD&A contains forward-looking statements that involve risks and uncertainties. See Forward-Looking Statements. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those described in Risks Relating to Spin Master s Business in our Annual MD&A and elsewhere in our Annual MD&A and this MD&A. BASIS OF PRESENTATION The Company s interim financial statements and accompanying notes have been prepared in accordance with International Accounting Standard 34, Interim Reporting and all financial information is prepared in accordance with International Financial Reporting Standards ( IFRS ). However, certain financial measures contained in this MD&A are non-ifrs measures and are discussed further in the Non-IFRS Financial Measures section. All financial information is presented in United States dollars ("$", "dollars" and "USD") and has been rounded to the nearest thousand, except per share amounts and where otherwise indicated. Certain totals, subtotals and percentages throughout this MD&A may not reconcile due to rounding. OVERVIEW Spin Master is a leading global children s entertainment company that creates, designs, manufactures and markets a diversified portfolio of innovative toys, games, products and entertainment properties. The Company is driven by a desire to challenge and expand traditional play patterns through the creation of innovative products, entertainment and digital content. Spin Master s principal strategies to drive the Company s continued growth, both organically and through acquisitions, include: Innovation across the portfolio and expanding current business segments; Developing evergreen global entertainment properties; Increasing international sales in developed and emerging markets; and Leveraging its global platform through strategic acquisitions. Spin Master s business is separated into three geographic segments: North America, comprised of the U.S. and Canada; Europe, comprised of the United Kingdom, France, Italy, the Netherlands, Germany, Austria, Switzerland, Belgium, Luxembourg, Slovakia, Hungary, Romania, Czech Republic and Poland; and the Rest of World, comprised of Hong Kong, China, Vietnam, India, Australia, Mexico and all other areas of the world serviced by Spin Master s third party distribution network. Spin Master s diversified portfolio of children s products, brands and entertainment properties is reported under five product categories: (1) Activities, Games & Puzzles and Fun Furniture; (2) Remote Control and Interactive Characters; (3) Boys Action and High Tech Construction; (4) Pre School and Girls; and (5) Outdoor. 1

2 Highlights for the three months ended June 30, 2018: (all amounts in USD 000's, except per share) Revenue increased by 12.6% from $276,652 for the same period in 2017 to $311,544 in In Constant Currency terms (a non-ifrs measure), revenue increased by 11.8%. Gross profit as a percentage of revenue (a non-ifrs measure) for the three months ended June 30, 2018 decreased to 49.2% from 51.1% for the same period in the prior year. Net Income was $26,911 or $0.26 per share compared to $22,114 or $0.22 per share for the same period in Adjusted EBITDA (a non-ifrs measure) was $45,378 or 14.6% of revenue, compared to $43,724 or 15.8% of revenue for the same period in On April 2, 2018 the Company closed the previously announced acquisition of certain assets related to the Gund line of business from Enesco LLC. The Company acquired control of the Gund brand through the acquisition of certain assets, for total purchase consideration $77,287. Included in the total purchase consideration is cash consideration of $76,029, $752 related to the estimated fair value of the future royalty payments as at the acquisition date and $506 of working capital adjustments. The assets are included in the Activities, Games and Puzzles and Fun Furniture product category, in the North America segment. During the quarter, the Company was successful in a lawsuit as the plaintiff and agreed to a settlement of $15,500. Highlights for the six months ended June 30, 2018: (all amounts in USD 000's, except per share) Revenue increased by 18.4% from $504,363 for the same period in 2017 to $597,215 in In Constant Currency terms (a non-ifrs measure), revenue increased by 16.3%. Gross profit as a percentage of revenue (a non-ifrs measure) for the six months ended June 30, 2018 increased by 0.1% to 50.6% from 50.5% for the same period in Net Income was $35,610 or $0.35 per share compared to $32,201 or $0.32 per share for the same period in Adjusted EBITDA (a non-ifrs measure) was $88,640 compared to $74,542 and remained consistent as a percentage of revenue with the same period in 2017 at 14.8%. Toys "R" Us ("TRU") Chapter 11 and Companies' Creditors Arrangement Act ("CCAA") filing On March 15, 2018, TRU filed a motion seeking Bankruptcy Court approval to begin the process of conducting a winddown of its U.S. business and liquidation of inventory in all 735 of its U.S. stores, including stores in Puerto Rico. TRU also announced that it was pursuing a going concern reorganization and a sale process for its Canadian and international operations in Asia and Central Europe, including Germany, Austria and Switzerland. TRU's international operations in Australia, France, Poland, Portugal and Spain were considering their options in light of this announcement, including potential sale processes in their respective markets.tru closed and liquidated its entire UK business during the first quarter of As a result of the bankruptcy proceedings, the Company recorded a bad debt expense of $15,152 in the first quarter of On June 1, 2018, Fairfax Financial Holdings Limited announced the acquisition of TRU's Canadian operations. In addition, TRU completed the liquidation of its U.S. business during the second quarter of As a result of TRU's liquidation of its U.S. business, Gross Product Sales (a non-ifrs measure) of the Company were negatively impacted in the second quarter of

3 SUBSEQUENT EVENT On July 10, 2018, the Company announced further expansion in Europe as part of the Company's international growth strategy, with a direct sales presence in Russia, Switzerland, Austria and Greece effective The Company has formed a Russian subsidiary, Spin Master Rus LLC and will begin direct distribution in early The Company will service the Swiss and Austrian markets and the Greek market directly through existing offices in Germany and Italy, respectively. On July 10, 2018, the Company amended and extended its Credit Facility for an additional 18 months from December 21, 2021 to July 10, FINANCIAL PERFORMANCE For the three and six months ended June 30, 2018 compared to the three and six months ended June 30, Consolidated Results The following table provides a summary of Spin Master s consolidated results for the three and six months ended June 30, 2018 and 2017: Three Months Ended June 30 (All amounts in USD 000's) $ Change % Change Revenue 311, ,652 34, % Cost of sales 158, ,249 23, % Gross profit 153, ,403 11, % Selling, marketing, distribution and product development 63,675 54,030 9, % Administrative expenses 67,140 57,848 9, % Other (income) expenses (14,870) 3,247 (18,117) (558.0)% Foreign exchange (gain) (1,331) (6,706) 5,375 (80.2)% Finance costs 2,214 2,439 (225) (9.2)% Income before income tax expense 36,386 30,545 5, % Income tax expense 9,475 8,431 1, % Net income 26,911 22,114 4, % Six Months Ended June 30 (All amounts in USD 000's) $ Change % Change Revenue 597, ,363 92, % Cost of sales 295, ,633 45, % Gross profit 302, ,730 47, % Selling, marketing, distribution and product development 122,099 97,552 24, % Administrative expenses 144, ,775 32, % Other (income) expenses (14,843) 4,017 (18,860) (469.5)% Foreign exchange (gain) (1,328) (8,405) 7,077 (84.2)% Finance costs 3,814 5,303 (1,489) (28.1)% Income before income tax expense 48,213 44,488 3, % Income tax expense 12,603 12, % Net income 35,610 32,201 3, % 3

4 Revenue For the three months ended June 30, 2018 The following table provides a summary of Spin Master s revenue and breakdown by category for the three months ended June 30, 2018 and 2017: Three Months Ended June 30 (All amounts in USD 000's) $ Change % Change Activities, games and puzzles, and fun furniture 86,195 57,794 28, % Remote control and interactive characters 68,325 83,998 (15,673) (18.7)% Boys action and high-tech construction 21,175 17,570 3, % Pre-school and girls 87,440 90,248 (2,808) (3.1)% Outdoor 33,068 33,558 (490) (1.5)% Gross Product Sales (1) 296, ,168 13, % Other revenue 33,101 17,569 15, % Total Gross Sales (1) 329, ,737 28, % Sales allowances (1) 17,760 24,085 (6,325) (26.3)% Revenue 311, ,652 34, % (1) Non-IFRS measure. See Non-IFRS Financial measures. Gross Product Sales increased by $13,035, or 4.6%, to $296,203 with a favourable impact from changes in foreign exchange rates of $2,046. The liquidation of TRU's operations in the U.S. negatively impacted Gross Product Sales across all categories. Additionally, the Easter holiday fell in the first quarter of 2018 compared to the second quarter for 2017, resulting in decreased Gross Product Sales in the second quarter of 2018 compared to the prior year. Gross Product Sales in Activities, Games and Puzzles and Fun Furniture increased by $28,401, or 49.1% to $86,195. As of April 2, 2018, revenue attributed to the Gund product line is captured in this category. The increase is driven primarily by sales of Gund and increases in Cool Maker, Kinetic Sand and Spin Master s games portfolio, which includes Cardinal and Marbles. Gross Product Sales in Remote Control and Interactive Characters decreased by $15,673 or 18.7% to $68,325, due to decreased sales of Hatchimals, Zoomer, and Air Hogs, offset by increases in Luvabella. Gross Product Sales in Boys Action and High Tech Construction increased by $3,605 or 20.5% to $21,175 due to higher sales of Star Wars licensed merchandise including BB8, Flush Force, Boxer and Fugglers, partially offset by decreases in Meccano and Pirates of the Caribbean licensed products. Gross Product Sales in Pre School and Girls decreased by $2,808 or 3.1% to $87,440, driven by decreased sales of PAW Patrol, ZhuZhu Pets and Chubby Puppies, partially offset by sales of Party Popteenies and Twisty Petz. Gross Product Sales in Outdoor, comprised of sales of products under the Swimways, Kelysius, Coop and Aerobie brands, decreased by $490 or 1.5% to $33,068. Other revenue increased by $15,532 or 88.4% to $33,101, driven by increased royalty income from products marketed by third parties using Spin Master's owned intellectual property, increased television distribution income and app revenue from Toca Boca and Sago Mini. Sales allowances decreased by $6,325 or 26.3% to $17,760, primarily driven by the timing of promotional spending. As a percentage of Gross Product Sales, sales allowances decreased 2.5% to 6.0% from 8.5% in

5 The following table provides a summary of Spin Master s Gross Product Sales by geographic segment for the three months ended June 30, 2018 and 2017: Three Months Ended June 30 (All amounts in USD 000's) $ Change % Change North America 201, ,699 5, % Europe 44,381 47,749 (3,368) (7.1)% Rest of world 50,279 39,720 10, % Gross Product Sales (1) 296, ,168 13, % (1) Non-IFRS measure. See Non-IFRS Financial measures. Gross Product Sales in North America increased by $5,844 or 3.0% to $201,543 with a favourable impact from changes in foreign exchange rates of $192. The increase was driven by Gund, Cool Maker, Star Wars licensed products such as BB8 and Spin Master s games portfolio, which includes Cardinal and Marbles, more than offsetting declines in Hatchimals, Air Hogs and Zoomer. Gross Product Sales in Europe decreased by $3,368 or 7.1% to $44,381, with a favourable impact from changes in foreign exchange rates of $2,163. The decrease was primarily driven by Hatchimals and PAW Patrol. Gross Product Sales in Rest of World increased by $10,559 or 26.6% to $50,279, with an unfavourable impact from changes in foreign exchange rates of $312. Growth was primarily driven by increases in Hatchimals and PAW Patrol. For the six months ended June 30, 2018 The following table provides a summary of Spin Master s revenue and breakdown by category for the six months ended June 30, 2018 and 2017: Six Months Ended June 30 (All amounts in USD 000's) $ Change % Change Activities, games and puzzles, and fun furniture 143, ,776 38, % Remote control and interactive characters 159, ,530 28, % Boys action and high-tech construction 37,900 30,728 7, % Pre-school and girls 170, ,924 (4,911) (2.8)% Outdoor 73,068 70,293 2, % Gross Product Sales (1) 584, ,251 71, % Other revenue 62,940 38,080 24, % Total Gross Sales (1) 647, ,331 96, % Sales allowances (1) 49,973 45,968 4, % Revenue 597, ,363 92, % (1) Non-IFRS measure. See Non-IFRS Financial measures. Gross Product Sales increased by $71,997, or 14.1%, to $584,248 with a favourable impact from changes in foreign exchange rates of $10,789. Gross Product Sales in Activities, Games and Puzzles and Fun Furniture increased by $38,010 or 35.9% to $143,786, primarily driven by increases in Kinetic Sand, Cool Maker and Spin Master s games portfolio, which includes Cardinal and Marbles, offset by decreases in Bunchems, Rube Goldberg, and Build a Bear. As of April 5

6 2, 2018, revenue attributed to the Gund product line is captured in this category, which also contributed to the increased sales. Gross Product Sales in Remote Control and Interactive Characters increased by $28,951 or 22.2% to $159,481, primarily due to higher sales of Hatchimals and Luvabella, which offset declines in Air Hogs and Zoomer. Gross Product Sales in Boys Action and High Tech Construction increased by $7,172 or 23.3% to $37,900, primarily as a result of increases in Flush Force, Star Wars licensed products including BB8, and Tech Deck, partially offset by decreased sales of Meccano and Pirates of the Caribbean licensed products. Gross Product Sales in Pre School and Girls decreased by $4,911 or 2.8% to $170,013, driven by declines in Teletubbies and Power Puff Girls licensed products PAW Patrol and ZhuZhu Pets, offset by increases in Party Popteenies and Twisty Petz. Gross Product Sales in Outdoor, comprised of sales of products under the Swimways, Kelysius, Coop and Aerobie brands, increased by $2,775 or 3.9% to $73,068. Other revenue increased by $24,860 or 65.3%, to $62,940, driven by increased royalty income from products marketed by third parties using Spin Master s owned intellectual property, increased television distribution income, and app revenue from Toca Boca and Sago Mini. Sales allowances increased by $4,005 or 8.7% to $49,973, driven primarily by higher Gross Product Sales. Sales allowances, as a percentage of Gross Product Sales decreased by 0.4% to 8.6% from 9.0% in The following table provides a summary of Spin Master s Gross Product Sales by geographic segment for the six months ended June 30, 2018 and 2017: Six Months Ended June 30 (All amounts in USD 000's) $ Change % Change North America 386, ,277 35, % Europe 111,174 97,809 13, % Rest of world 86,887 64,165 22, % Total Gross Product Sales (1) 584, ,251 71, % (1) Non-IFRS measure. See Non-IFRS Financial measures. Gross Product Sales in North America increased by $35,910 or 10.3% to $386,187 with a favourable impact from changes in foreign exchange rates of $617. Growth was driven primarily by increases in sales of Hatchimals, Gund, Cool Maker, Star Wars licensed products such as BB8 and Spin Master s games portfolio, which includes Cardinal and Marbles, which more than offset declines in Air Hogs, Zoomer, Meccano, ZhuZhu Pets and Pirates of the Caribbean licensed products. Gross Product Sales in Europe increased by $13,365 or 13.7% to $111,174 with a favourable impact from changes in foreign exchange rates of $9,722. Growth was primarily driven by higher sales of Hatchimals and increased sales of Spin Master s games portfolio, which includes Cardinal. Gross Product Sales in Rest of World increased by $22,722 or 35.4% to $86,887 with a favourable impact from changes in foreign exchange rates of $450. The increases were primarily driven by increases in Hatchimals and PAW Patrol. 6

7 Gross Profit Three Months Ended June 30 (All amounts in USD 000's) $ Change % Change Gross profit 153, ,403 11, % Gross profit as % of revenue % 51.1% n.m. (1.9)% (1) Non-IFRS Financial Measure. See "Non-IFRS Financial Measures". For the three months ended June 30, 2018, gross profit increased by $11,811 or 8.4% to $153,214. As a percentage of revenue, gross profit decreased to 49.2% from 51.1%. Six Months Ended June 30 (All amounts in USD 000's) $ Change % Change Gross profit 302, ,730 47, % Gross profit as % of revenue % 50.5% n.m. 0.1% (1) Non-IFRS Financial Measure. See "Non-IFRS Financial Measures". For the six months ended June 30, 2018, gross profit increased by $47,316 or 18.6% to $302,046. As a percentage of revenue, gross profit increased marginally from 50.5% to 50.6%, primarily due to increases in owned intellectual property products and increased licensing and merchandising revenues offset by an increase in sales of discontinued product lines and increased amortization attributed to entertainment properties. Selling, Marketing, Distribution and Product Development Expenses 2018 Three Months Ended June 30 as a % of revenue 2017 as a % of revenue $ Change % Change Marketing expenses 26, % 20, % 6, % Product development expenses 6, % 4, % 2, % Selling expenses 19, % 18, % % Distribution expenses 11, % 10, % % Total 63, % 54, % 9, % Marketing expenses increased by $6,061 or 29.8%, to $26,406, primarily as a result of increased media spending as well as increased spending on trade shows, content and merchandising initiatives. Marketing expenses as a percentage of revenue increased to 8.5% from 7.4% in Product development expenses increased by $2,455 or 54.6%, to $6,952, related to the timing of projects primarily in the Remote Control and Interactive Characters and Boys Action and High-Tech Construction categories. Selling expenses increased by $762, or 4.2%, to $19,082. Selling expenses as a percentage of revenue decreased to 6.1% from 6.6% in Distribution expenses increased by $367 or 3.4% to $11,235. Distribution expenses as a percentage of revenue decreased to 3.6% from 3.9%. 7

8 2018 Six Months Ended June 30 as a % of revenue 2017 as a % of revenue $ Change % Change Marketing expenses 51, % 32, % 19, % Product development expenses 12, % 10, % 1, % Selling expenses 34, % 33, % 1, % Distribution expenses 22, % 21, % 1, % Total 122, % 97, % 24, % Marketing expenses increased by $19,787 or 61.5%, to $51,969, primarily as a result of increased media spending, including increased spending on trade shows, merchandising initiatives and strategic marketing spend. As a percentage of revenue, marketing expenses increased to 8.7% from 6.4%. Product development expenses increased by $1,746, or 16.0%, to $12,631, primarily due to investments in the Remote Control and Interactive Characters and Boys Action and High-Tech Construction categories. Selling expenses increased by $1,544 or 4.6%, to $34,770. As a percentage of revenue, selling expenses decreased to 5.8% from 6.6%. Distribution expenses increased by $1,470, or 6.9%, to $22,729, primarily due to inventory storage costs resulting from higher inventory levels associated with growth in Europe. As a percentage of revenue, distribution expenses decreased to 3.8% from 4.2%. Administrative Expenses For the three months ended June 30, 2018 compared to the same period in 2017, administrative expenses increased by $9,292, or 16.1%, to $67,140. Administrative expenses as a percentage of revenue increased to 21.6% from 20.9% in the same period in Excluding the impact of share-based compensation expense associated with the equity participation agreement with employees at the time of the Company's initial public offering ("IPO"), administrative expenses as a percentage of revenue increased to 20.9% compared to 19.9% in Included in administrative expenses are mark-to-market adjustments to the Company's obligation for cashsettled long-term incentive plans of $4,655 compared to nil in the same period in For the six months ended June 30, 2018 compared to the same period in 2017, administrative expenses increased by $32,316, or 28.9%, to $144,091. The increase was primarily due to the bad debt expense related to TRU of $15,152 incurred in the first quarter of 2018 and increase of personnel associated with the growth of the Company, offset in part by lower share-based compensation expenses associated with the equity participation arrangement with employees at the time of the Company's IPO. Administrative expenses as a percentage of revenue increased to 24.1% from 22.2% in the same period in Excluding the impact of share-based compensation, administrative expenses as a percentage of revenue increased to 23.4% from 21.1% in Excluding the impact of sharebased compensation and the non-recurring bad debt expense related to TRU, administrative expenses as a percentage of revenue decreased to 20.9% from 21.1% in In addition, included in administrative expenses are mark-to-market adjustments to the Company's obligation for cash-settled long-term incentive plans of $6,044 compared to $1,309 in the same period in Finance Costs For the three months ended June 30, 2018, finance costs decreased by $225 to $2,214 compared to the same period in For the six months ended June 30, 2018, finance costs decreased by $1,489 to $3,814 compared to the same period in The decrease was primarily driven by lower borrowings on the Company s five-year secured revolving facility ("Credit Facility"). Net income Net income for the three months ended June 30, 2018 increased by $4,797 to $26,911 from $22,114 for the same period in 2017, primarily as a result of higher gross profit and other income offset by higher administrative expenses, increased selling, marketing, distribution and product development expenses and lower foreign exchange gains. 8

9 Excluding share-based compensation expense, foreign exchange losses and other non-recurring items, Adjusted Net Income (a non-ifrs measure) for the three months ended June 30, 2018 decreased by $4,541 to $17,676 from $22,217 for the same period in Net income for the six months ended June 30, 2018 increased by $3,409 to $35,610 from $32,201 for the same period in Excluding share-based compensation expense, restructuring and foreign exchange gains, Adjusted Net Income (a non-ifrs measure) for the six months ended June 30, 2018 increased by $3,921 to $39,695 from $35,774 for the same period in OUTLOOK For the full year 2018, organic Gross Product Sales 1 are expected to be in line with prior guidance, which was for mid-single digit organic growth compared to Including Gund, Gross Product Sales 1 are expected to be in line with prior guidance, which was for mid-to-high single digit growth compared to This growth outlook is in line with the Company's long-term growth target of mid-to-high single digits. Seasonality of Gross Product Sales 1 for 2018 is consistent with prior guidance and is expected to be approximately 32%-33% in H1. Adjusted EBITDA Margin 1 in 2018, is now expected to be slightly higher than Adjusted EBITDA Margin 1 achieved in Previous guidance announced in connection with the release of Q results in May 2018 was for Adjusted EBITDA Margin 1 in 2018, to be in line with Adjusted EBITDA Margin 1 in Adjusted EBITDA Margin 1 is calculated on Revenue and not Gross Product Sales 1. (1) Non-IFRS Financial Measure. See "Non-IFRS Financial Measures". SELECTED QUARTERLY FINANCIAL INFORMATION Seasonality factors cause Spin Master s operating results to fluctuate significantly from quarter to quarter. A majority of the Company s annual sales occur during the third and fourth quarters of the Company s fiscal year with a significant portion of its net income earned during the same period. The following table provides selected historical information and other data, which should be read in conjunction with the financial statements of the Company. Three Months Ended (All amounts in USD 000's except EPS) Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Dec 31, 2016 Sep 30, 2016 Revenue 311, , , , , , , ,015 Adjusted EBITDA (1) 45,378 43,262 47, ,308 43,724 30,818 22, ,261 Adjusted EBITDA margin (1) 14.6% 15.1% 10.7% 28.1% 15.8% 13.5% 6.8% 28.1% Net income 26,911 8,699 20, ,825 22,114 10,087 2,727 83,253 Basic and diluted EPS $0.26 $0.09 $0.21 $1.07 $0.22 $0.10 $0.03 $0.82 Adjusted Net Income (1) 17,676 22,019 25, ,711 22,217 13,557 9,347 87,482 Basic and diluted adjusted EPS (1) $0.17 $0.22 $0.25 $1.10 $0.22 $0.13 $0.09 $0.86 Free cash flow (1) 19,511 (28,334) 18, ,169 24,835 4,998 (3,881) 117,238 1) See Non-IFRS Financial Measures" 9

10 The following table provides reconciliations of net income to EBITDA, Adjusted EBITDA and Adjusted Net Income. Three Months Ended (All amounts in USD 000's) Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Dec 31, 2016 Sep 30, 2016 Net income 26,911 8,699 20, ,825 22,114 10,087 2,727 83,253 Finance costs 2,214 1,600 2,584 2,558 2,439 2,864 2,414 2,575 Depreciation and amortization 19,645 11,438 12,422 12,670 10,602 9,214 8,173 9,420 Income tax expense 9,475 3,128 4,843 42,233 8,431 3, ,319 EBITDA (1) 58,245 24,865 39, ,286 43,586 26,021 13, ,567 Normalization adjustments Restructuring (2) 615 1, Foreign exchange (gain) loss (3) (1,331) 3 2,866 (5,831) (6,706) (1,699) 6,634 (129) Share based compensation (4) 2,108 2,027 2,076 2,425 2,857 2,724 2,146 4,996 Legal settlement (5) (15,500) Acquisition related incentive compensation (6) 1,241 (840) Amortization of fair market value adjustments (7) 450 2,355 Transaction costs (8) Bad debt expense (9) 15,152 5,382 Royalty recovery (10) (2,200) Recovery of contingent liability (11) (222) Impairment of intangible assets (12) 2,531 3,800 2, Adjusted EBITDA (1) 45,378 43,262 47, ,308 43,724 30,818 22, ,262 Finance costs 2,214 1,600 2,584 2,558 2,439 2,864 2,414 2,575 Depreciation and amortization 19,645 11,438 12,422 12,670 10,602 9,214 8,173 9,420 Income tax expense 9,475 3,128 4,843 42,233 8,431 3, ,319 Tax effect of normalization adjustments (13) (3,632) 5,077 1,982 1, ,327 2,470 1,465 Adjusted Net Income (1) 17,676 22,019 25, ,711 22,217 13,557 9,347 87,483 Footnotes: 1) Non-IFRS financial measure. See "Non-IFRS Financial Measures". 2) Restructuring primarily relates to organizational changes. 3) Includes foreign exchange (gains) losses generated by the translation 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. 4) Related to non-cash expenses associated with subordinate voting shares granted to equity participants and restricted stock units granted to employees at the time of the IPO and share option expense. 5) Non-recurring legal settlement in the Company s favour in the second quarter of ) Remuneration expense associated with contingent consideration for the Swimways acquisition. 7) Amortization of fair market value adjustments to inventory relating to the acquisition of Marbles and Aerobie in the second and third quarters of 2017 respectively and Swimways in the third quarter of ) Non-recurring transaction costs relating to the Marbles acquisition in the second quarter of ) Non-recurring bad debt expense related to the bankruptcy declaration and liquidation proceedings of TRU during the first quarter of 2018 and the third quarter of ) Non-recurring royalty income recovery related to ) A reversal of a portion of a contingent consideration liability related to a future earn-out provision associated with the acquisition of Spy Gear occurred as sales targets were not met to achieve the additional payout. 12) Non-cash impairment charges for intangible assets relating to licenses, content development, brands and trademarks. 13) Tax effect of normalization adjustments (Footnotes 2-12). Normalization adjustments are tax effected at the effective tax rate of the given period. 10

11 LIQUIDITY AND CAPITAL RESOURCES The Company s primary source of liquidity is cash flow from operations. In addition, as at June 30, 2018, the Company had $474 million available under its Credit Facility, which was originally set to mature in December Total capital available under the Credit Facility is $510 million which may be used for general corporate purposes including refinancing existing indebtedness, funding working capital requirements, permitted acquisitions and permitted distributions. Subsequent to the end of the quarter, on July 10, 2018, the Company amended and extended its Credit Facility for an additional 18 months from December 21, 2021 to July 10, Management believes that cash flows from its ongoing operations, plus cash on hand and availability under the Credit Facility provide sufficient liquidity to support ongoing operations over the next 12 months. Cash flows from operations could be negatively impacted by decreased demand for the Company s products, which may result from factors such as adverse economic conditions and changes in public and consumer preferences, the loss of confidence by the Company s principal customers in the Company and its product lines, or by increased costs associated with manufacturing and distribution of products. The Company s primary capital needs are related to inventory financing, accounts payable funding, debt servicing and capital expenditures for tooling, film production, and to fund strategic acquisitions. As a result of the seasonal nature of the toy and children s entertainment industries, working capital requirements are variable throughout the year. Working capital needs typically grow through the first three quarters as inventories are built up for the peak sales periods for retailers in the fourth quarter. The Company s cash flows from operating activities are typically at their highest levels of the year in the fourth quarter. The Company has separately financed $519 of the Little Charmers production costs. The financing of the production costs of Little Charmers is directly related to the expected receipt of eligible government tax credits. The Company intends to continue to use this type of borrowing to fund the costs of future television productions. Capital and Investment Framework Over the long term, the Company plans to use its free cash flows to fund seasonal working capital requirements related to product sales, television show and mobile digital development and strategic acquisitions. Spin Master primarily uses third parties to manufacture, warehouse and distribute its products. As a result, the Company does not have to incur material investments in property, plant and equipment on an annual basis. The Company s annual capital expenses are generally comprised of the purchase of tooling used in the manufacturing process and entertainment property production. CASH FLOW The following tables provide a summary of Spin Master s consolidated cash flows for three and six months ended June 30, 2018 and 2017: Three Months Ended June 30 (All amounts in USD 000's) $ Change Net cash flows provided by operating activities 3,622 19,668 (16,046) Net cash flows used in investing activities (103,257) (23,378) (79,879) Net cash flows provided by (used in) financing activities 5,202 (30,055) 35,257 Net decrease in cash (94,433) (33,765) (60,668) Effect of foreign currency exchange rate changes on cash (2,804) (4,307) 1,503 Cash at beginning of period 132,910 94,968 37,942 Cash at end of period 35,673 56,896 (21,223) 11

12 Six Months Ended June 30 (All amounts in USD 000's) $ Change Net cash flows provided by operating activities 14,721 44,537 (29,816) Net cash flows used in investing activities (130,354) (39,811) (90,543) Net cash flows provided by (used in) financing activities 35,251 (44,481) 79,732 Net decrease in cash (80,382) (39,755) (40,627) Effect of foreign currency exchange rate changes on cash (1,207) (2,765) 1,558 Cash at beginning of period 117,262 99,416 17,846 Cash at end of period 35,673 56,896 (21,223) Cash from Operating Activities Cash flows provided by operating activities were $3,622 for the three months ended June 30, 2018 compared to $19,668 for the same period in For the six months ended June 30, 2018, cash flows from operating activities were $14,721 compared to $44,537 for the same period in The decrease was driven by higher cash income taxes paid and higher investment in net working capital. Investing Activities The following table provides a summary of Spin Master s consolidated cash flows used in investing activities for the three and six months ended June 30, 2018 and 2017: Three Months Ended June 30 (All amounts in USD 000's) $ Change Capital expenditure in property, plant and equipment Tooling 8,907 7,367 1,540 Other 7, ,731 Total capital expenditures in property, plant and equipment 16,612 8,341 8,271 Capital expenditure in intangible assets Content development 10,512 10, Computer software (232) Total capital expenditures in intangible assets 10,616 10, Total capital expenditures 27,228 18,703 8,525 Business acquisitions 76,029 4,675 71,354 Cash used in investing activities 103,257 23,378 79,879 Six Months Ended June 30 (All amounts in USD 000's) $ Change Capital expenditure in property, plant and equipment Tooling 13,209 10,695 2,514 Other 20,422 1,769 18,653 Total capital expenditures in property, plant and equipment 33,631 12,464 21,167 Capital expenditure in intangible assets Content development 19,545 21,706 (2,161) Computer software (817) Total capital expenditures in intangible assets 19,694 22,672 (2,978) Total capital expenditures 53,325 35,136 18,189 Business acquisitions 77,029 4,675 72,354 Cash used in investing activities 130,354 39,811 90,543 Cash used in investing activities was $103,257 for the three months ended June 30, 2018 compared to $23,378 for the same period in The increase was driven primarily by higher cash flows used for business acquisitions 12

13 and $5,800 of increased investment in leasehold improvements related to the Company's new corporate office in Toronto. For the six months ended June 30, 2018 cash used in investing activities was $130,354 compared to $39,811 for the same period in The increase in cash used in investing activities was primarily due to higher cash flows used for business acquisitions and $14,780 of increased investment in leasehold improvements related to the Company's new corporate office in Toronto, partially offset by lower net investments in content development in the current year. Financing Activities Cash flows provided by financing activities were $5,202 for the three months ended June 30, 2018 compared to cash flows used in financing activities of $30,055 for the for the same period in For the six months ended June 30, 2018, cash flows provided by financing activities were $35,251 compared to cash flows used in financing activities of $44,481 for the comparable period in Cash flows provided by financing activities increased as a result of higher net borrowings in the current year. Free Cash Flow The following tables provide a reconciliation of Spin Master s consolidated Free Cash Flow (a non-ifrs measure) to cash from operations for the three and six months ended June 30, 2018 and 2017: Three Months Ended June 30 (All amounts in USD 000's) $ Change Cash flows provided by operating activities 3,622 19,668 (16,046) Changes in net working capital 43,117 23,870 19,247 Net cash flows provided by operating activities before net working capital changes 46,739 43,538 3,201 Cash flows used in investing activities (103,257) (23,378) (79,879) Cash used for license, brand and business acquisitions 76,029 4,675 71,354 Free Cash Flow (1) 19,511 24,835 (5,324) Six Months Ended June 30 (All amounts in USD 000's) $ Change Cash flows provided by operating activities 14,721 44,537 (29,816) Changes in net working capital 29,781 20,432 9,349 Net cash flows provided by operating activities before net working capital changes 44,502 64,969 (20,467) Cash flows used in investing activities (130,354) (39,811) (90,543) Cash used for license, brand and business acquisitions 77,029 4,675 72,354 Free Cash Flow (1) (8,823) 29,833 (38,656) (1) Non-IFRS Financial Measure. See "Non-IFRS Financial Measures". Free Cash Flow was $19,511 for the three months ended June 30, 2018 compared to $24,835 for the same period in For the six months ended June 30, 2018, Free Cash Flow was negative $8,823, a decrease of $38,656 compared to the same period in The decrease in Free Cash Flow was driven by lower cash flows provided by operating activities before net working capital changes and increased expenditures related to the Company's new corporate office in Toronto. COMMITMENTS In the normal course of business, Spin Master enters into contractual arrangements to obtain and protect Spin Master s right to create and market certain products and to ensure availability and timely delivery of future purchases of goods and services. These arrangements include commitments for future services, purchases and royalty payments pursuant to licensing agreements. Certain of these commitments routinely contain provisions for guarantees or minimum expenditures during the terms of the contracts. Additionally, Spin Master routinely 13

14 enters into non cancellable lease agreements for premises and equipment, which contain minimum rental payments. During the six months ended June 30, 2018, there were no material changes to contractual obligations specified in the Company s MD&A for the fiscal year ended December 31, 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. OUTSTANDING SHARE CAPITAL As at August 1, 2018, there were 101,789,488 shares outstanding comprised of 73,549,812 Multiple Voting Shares and 28,239,676 Subordinate Voting Shares. As of August 1, 2018, pursuant to grants under the Company's Long-Term Incentive Plan, 309,649 Subordinate Voting Shares were issuable under outstanding Restricted Stock Units, up to 1,067,712 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 671,527 Subordinate Voting shares were issuable under outstanding Share Option grants. CRITICAL ACCOUNTING ESTIMATES Included in the Company's 2017 financial statements, as well as in the Company's 2017 Annual MD&A, are the accounting policies under IFRS and estimates that are critical to the understanding of the business and to the results of operations. For the six months ended June 30, 2018 there were no changes to the critical accounting estimates of the Company from those reported in the 2017 Annual MD&A and financial statements. CHANGES IN ACCOUNTING POLICIES There have been no changes to the Company s accounting policies from those found in our 2017 Annual MD&A, except as set forth below. Accounting standards implemented in 2018: IFRS 15 Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, which replaces IAS 11 Construction Contracts, IAS 18 Revenue, International Financial Reporting Interpretations Committee 13 Customer Loyalty Programs ("IFRIC 13") and related interpretations regarding revenue. The guidance permits two methods of adoption: retrospectively, with each prior reporting period restated (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company adopted IFRS 15, Revenue from Contracts with Customers, effective January 1, 2018, using the full retrospective method, with no significant impact on the Company's condensed consolidated interim financial statements. Accordingly, the information presented for 2017 has not been restated and is presented as previously reported under IAS 18, IAS 11 and related interpretations. Under IAS 18, revenue was measured at the fair value of the consideration received or receivable. Revenue from the sale of goods was recognized when the significant risks and rewards of ownership had been transferred to the customer, recovery of the consideration was probable, the associated costs and possible return of goods could be estimated reliably, there was no continuing management involvement with the goods and the amount of revenue could be measured reliably. 14

15 IFRS 15 establishes a single comprehensive framework for recognizing revenue from contracts with customers; except for contracts that are within the scope of the standards on leases, non-monetary transactions, insurance contracts and financial instruments. Under IFRS 15, 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 principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. Sale of Goods The majority of the Company s revenue is derived from the sales of toys and related products to retail customers and distributors in select international markets. Although the criteria for revenue recognition from the sale of goods to customers has changed under the new standard, there is no significant impact on the Company's condensed consolidated interim financial statements. Under IFRS 15, revenue is measured based on the consideration to which an entity expects to be entitled to in exchange for transferring promised goods and excludes amounts collected on behalf of third parties. The Company recognizes revenue when control of the goods has transferred, which is determined by respective shipping terms and certain additional considerations. Payment is generally due 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 on the sale of goods to customers and revenues from sale of goods are recognized upon passing of control to the customer. Revenue represents the fair value of the sale of goods excluding value added tax and after deduction of variable consideration. Variable consideration includes estimates for defective products, sales allowances and returns to 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 discounts and returns accruals as required. Television distribution, royalty and license sales Television distribution sales, which are generated by the use of the Company's brands and other intellectual property through the production of television and streaming programming for licensing to third parties, are recognized in accordance with the substance of the relevant agreements. The license is assessed as either providing the customer with a 'right to use' or 'right to access' license and revenue is recognized at a point-in-time or over time based on the classification determined. The license to distribute television and streaming programming grants a right to use the Company's brands and other intellectual property. The licensee pays a fixed fee for the license of the produced content. Revenue is recognized upon delivery of the television or streaming programming is measured based on the consideration to which the Company expects to be entitled to upon delivery. There are no future performance obligations associated with the delivery of the programs. For royalty and licensing revenues, that are generated by the use the Company s brands and other intellectual property the license is assessed as either providing the customer with a right to use or right to access license and revenue is recognized at a point-in-time or over time based on the classifications determined. Judgment is required in determining the appropriate classification. The license of the Company s brands provide access to the intellectual property over the term of the license and is considered a right-to-access license 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 contracts, licensing and/or television distribution, are recorded in deferred revenue until all of the foregoing revenue recognition conditions have been met. Digital applications ("apps") The Company develops apps which are hosted by third-party platform providers. Revenue associated with the sale of apps are recognized when control is transferred. This condition is typically met when the end-user purchases and downloads the app from the third-party. The end users can make in-app purchases and the Company recognizes revenue at the time of sale. The Company has no additional performance obligations other than delivery of apps to the third-party platform providers. The Company controls all aspects of the apps delivered to the end user. The third party platform providers are providing the service of hosting and administrating receipt from the 15

16 end users. The Company is the principal in the arrangement and revenues are recorded in other revenue on a gross basis. The fee charged by the third-party platform providers are recorded within cost of sales. Disaggregation of revenue The Company disaggregates its revenues from contracts with customers by segment: North America, Europe and Rest of World. The Company further disaggregates revenues by product category: Activities, games and puzzles and fun furniture, Remote control and interactive characters, Boys action and high-tech construction, Pre-school and girls and Outdoor. The Company believes these collectively depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. IFRS 9 Financial Instruments IFRS 9 sets out requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces a new expected credit loss ("ECL") model for all financial assets in scope of the impairment requirements. The new ECL results in an allowance for credit losses being recorded on financial assets regardless of whether there has been an actual loss event. The Company adopted IFRS 9, Financial Instruments effective January 1, 2018, using the full retrospective method, with no significant impact on the Company's condensed consolidated interim financial statements. IFRS 2 Share Based Payments The IASB issued amendments to IFRS 2 Share Based Payments. The amendments are intended to clarify the estimation of the fair value of cash settled share based payments. The Company adopted the amendments to IFRS 2, Share Based Payments, effective January 1, 2018, using the full retrospective method, with no significant impact on the Company's condensed consolidated interim financial statements. IFRIC 22 Foreign Currency Transactions and Advance Consideration IFRIC 22 clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The interpretation addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. The IASB has reached the consensus that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, a date of transaction is established for each payment or receipt. The Company evaluated the amendments to IFRIC 22, Foreign Currency Transactions and Advance Consideration, and has adopted the amendments effective January 1, 2018, with no significant impact on the Company's condensed consolidated interim financial statements. INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in the Company s Internal Control over Financial Reporting ( ICFR ) during the six months ended June 30, 2018 which have materially affected, or are reasonably likely to materially affect, the Company s ICFR. SPIN MASTER S SCOPE LIMITATION ON DISCLOSURE CONTROLS AND PROCEDURES & INTERNAL CONTROL OVER FINANCIAL REPORTING The Company s management, as permitted by securities legislation, for the three months ended June 30, 2018, has limited the scope of its design of disclosure controls and procedures and ICFR to exclude controls, policies and procedures of Gund, which Spin Master acquired on April 2, Included in Spin Master s consolidated financial statements for the three months ended June 30, 2018 are the following amounts related to Gund: 16