Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
1 – ORGANIZATION AND OPERATIONS
Spiral
Toys, Inc (formerly known as Rocap Marketing Inc.)
Spiral
Toys, Inc. (Rocap Marketing Inc, (“Spiral Toys” or the “Company”) was incorporated under the laws of the
State of Nevada on September 2, 2010 under the name of Rocap Marketing Inc. In January 2015, the Company changed its name to Spiral
Toys, Inc.
Spiral
Toys LLC
Spiral
Toys LLC, (“Spiral”) was formed as a limited liability company under the laws of the State of California on July 12,
2011. Spiral develops entertainment products including both physical toys as well as digital media. The acquisition of 100% of
Spiral has been recorded using the purchase method of accounting in accordance with section 805-10-05 of the FASB Accounting Standards
Codification. The Company allocated the purchase price of Spiral to the tangible assets acquired and liabilities assumed based
on their estimated fair values.
See
Note 5.
During
2014, revenue was generated from two different sources. The first was consulting revenue and was recognized upon the fulfillment
of contractual milestones with pre-set remuneration. The Company was engaged by a major studio in the development of entertainment
properties. The second source was the sale of physical toys. The toys were sold through a third party distributor and the Company
received fifty percent of the net profit per item.
Commencing
in the second quarter of 2015, the Company recognized revenue from its physical toy line in two ways: The first is a result of
manufacturing. Spiral is producing the electronics that are a part of the CloudPets line.
The
unit is then assembled by a third party that is retained by our distributor. This revenue is recognized upon shipment of the completed
electronic part to the third party. The second revenue source, which represents royalty income from license fees, is earned when
the goods are shipped to the retailer.
The
Company also earned revenue during the year ended December 31, 2015 from product development consulting fees.
Divestiture
of Lexi-Luu Designs, Inc.
On
September 15, 2010, the Company acquired Lexi-Luu Designs, Inc. (Lexi-Luu) in exchange for 2.5 million shares of the Company’s
common stock.
Lexi-Luu manufactures and markets exclusive dancewear for youth.
On
July 1, 2014 Mr. Hubert J. Blanchette, CEO of Lexi-Luu, exercised his right to exchange his 2.5 million common shares of Rocap
for the return of 100 percent of the ownership of Lexi-Luu. This transaction effectively ended the parent-subsidiary relationship
of Rocap and Lexi-Luu. As such, all references to Lexi-Luu activity in the financial statements are referred to as discontinued
operations. See Footnote 5 “Discontinued Operations” for further discussion of the discontinued operations of Lexi-Luu.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
Formation
of Subsidiaries
During
2015, the Company formed two new subsidiaries.
Spiral
Toys LTD. is a British Columbia entity formed on February 27, 2015. The purpose of Spiral Toys LTD. is to engage in the development
of the Company’s products and offerings.
In
March 2015, the Company organized Spiral Toys Hong Kong Ltd. in Hong Kong. Spiral Toys Hong Kong Ltd. was formed to enable the
Company to monitor and oversee the production of Cloud Pets.
As
of December 31, 2015, Spiral Toys Hong Kong Ltd.’s only asset was an accounts receivable of $34,749 USD, which was 100%
reserved for bad debt and it had no liabilities; Spiral Toys LTD had no assets or liabilities as of December 31, 2015.
Basis
of Presentation
The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
Principle
of Consolidation
The
Company applies the guidance of Topic 810
“Consolidation”
of the FASB Accounting Standards Codification to
determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all
entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest
with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely
to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee.
Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting
interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent
of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also
exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.
The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
The
Company’s consolidated subsidiaries and/or entities are as follows:
Name of consolidated subsidiary or entity
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State or other jurisdiction of incorporation
or organization
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Date
of incorporation or formation
(date
of acquisition, if applicable)
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Attributable interest
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Spiral Toys LLC.
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State of California
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July 11, 2011
(July 1, 2014)
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100
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%
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Lexi-Luu Designs Inc.
(discontinued 7/1/2014)
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The State of Nevada
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September 3, 2010
(September 15, 2010)
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80
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%
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|
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|
|
|
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|
Spiral Toys LTD
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British Columbia
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February 27, 2015
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100
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%
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|
|
|
|
|
|
|
|
|
Spiral Toys Hong Kong Ltd.
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Hong Kong
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|
March 2015
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|
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100
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%
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The
consolidated financial statements include all accounts of the Company and its consolidated subsidiaries and/or entities as of
the reporting period ending dates and for the reporting periods then ended. All inter-company balances and transactions have been
eliminated.
Reclassification
Certain
amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications
had no effect on reported losses.
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses
during the reporting period.
The
Company’s significant estimates and assumptions include the fair value of financial instruments; allowance for doubtful
accounts; inventory valuation and obsolescence; the carrying value, recoverability and impairment, if any, of long-lived assets
including the values assigned to and the estimated useful lives of equipment, and goodwill; interest rate; revenue recognized
or recognizable; sales returns and allowances; income tax rate, income tax provision, deferred tax assets and valuation allowance
of deferred tax assets; and the assumption that the Company will continue as a going concern. Those significant accounting estimates
or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions,
and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates
the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and
circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates
are adjusted accordingly.
Actual
results could differ from those estimates.
Revenue
Recognition
Revenues
from the sales of our products are recognized when persuasive evidence of an arrangement exists, title and risk of loss have passed
to the buyer, the price is fixed or readily determinable and collection is reasonably assured.
Revenues
from royalty income and product sales are recognized when persuasive evidence of an arrangement exists, title and risk of loss
have passed to the buyer, the price is fixed or readily determinable and collection is reasonably assured, as noted in the appropriate
accounting guidance.
Revenue
was comprised of:
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Consulting
and other revenue is recognized upon the fulfillment of contractual milestones with pre-set remuneration;
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Revenue
from the manufacture of the electronic component contained within the CloudPets line is recognized upon shipment of the completed
electronic part to the third party;
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Royalty
revenue from license fees and reimbursement of product development costs, which is earned when the Cloudpets are shipped to
the retailer.
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Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company follows paragraph 310-10-50-9
of the FASB Accounting Standards Codification to estimate the allowance for doubtful accounts. The Company performs on-going credit
evaluations of its customers and adjusts credit limits based upon payment history and the customers’ current credit worthiness,
as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical
write-off experience, customer specific facts and economic conditions.
Pursuant
to paragraph 310-10-50-2 of the FASB Accounting Standards Codification account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery is considered remote. The Company has adopted
paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determines when receivables are past due or delinquent
based on how recently payments have been received.
Outstanding
account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best
estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included
in general and administrative expenses, if any.
The
Company’s allowance for doubtful accounts was $48,191 for December 31, 2015 and $0 for 2014.
The
Company does not have any off-balance-sheet credit exposure to its customers.
Gross Margin
Gross margin is equal to product sales, net
of allowances less cost of goods sold. Cost of goods sold is associated with sales of our CloudPets products and includes direct
costs associated with the purchase of components, sub-assemblies, and finished goods, and costs associated with the packaging,
preparation, and shipment of the product.
Sales Return Allowances
.
The Company sells products to distributors
who resell the products to end customers. Sales returns allowances are estimated based on historical return data, and recorded
at the time of sale. If the quality or efficacy of our products deteriorates or market conditions otherwise change, actual returns
could be significantly higher than estimated, resulting in potentially material differences in cash flows from operating activities.
In the absence of substantial historical sales/return data, for the year ended December 31, 2015, the Company set up a reserve
for returned components. The estimate used is 0.5% of product sales and is recorded as a reduction in revenue. In future quarters,
the adequacy of this reserve will be ascertained and increased/decreased accordingly based on historical data.
Research and Development
Internal research and development costs are
expensed as incurred. Non-refundable third party research and development costs are expensed when the contracted work has been
performed.
Accounting for Debt Modifications and
Extinguishments
If a debt modification is deemed to have been
accomplished with debt instruments that are substantially different, the modification is accounted for as a debt extinguishment
in accordance with FASB ASC 470-50, whereby the new debt instrument is initially recorded at fair value, and that amount is used
to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. If the present
value of the cash flows under the terms of the new debt instrument is at least ten percent different from the present value of
the remaining cash flows under the terms of the original instrument, the modification is deemed to have been accomplished with
debt instruments that are substantially different. If it is determined that the present values of the original and new debt instruments
are not substantially different, then a new effective interest rate is determined based on the carrying amount of the original
debt instrument and the revised cash flows.
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10
of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37
of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial
instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in generally accepted accounting principles
(U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements
and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques
used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted)
in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of
fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
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Level
1
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Valuation based
on unadjusted quoted market prices in active markets for identical securities.
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Level
2
—
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Valuations based
on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted
prices in markets that are not active; or other inputs that are observable, either directly or indirectly.
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Level
3
—
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Valuations based
on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment.
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Financial assets are considered Level 3 when
their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one
significant model assumption or input is unobservable.
The fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable
inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the
categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts of the Company’s
financial assets and liabilities, such as cash, accounts receivable, other receivables, accounts payable salaries payable and
interest payable, approximate their fair values because of the short maturity of these instruments.
The Company’s notes payable line item
approximates the fair value of such instruments based upon management’s best estimate of interest rates that would be available
to the Company for similar financial arrangements at December 31, 2015.
Transactions involving related parties cannot
be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings
may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions
were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can
be substantiated.
It is not, however, practical to determine
the fair value of advances from stockholders, if any, due to their related party nature.
Beneficial Conversion Features of Notes
In accordance with FASB ASC 470-20, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, we recognize the
advantageous value of conversion rights attached to convertible debt. Such rights give the debt holder the ability to convert
debt into common stock at a price per share that is less than the trading price to the public on the day the loan is made to us.
The beneficial value is calculated as the intrinsic value (the market price of the stock at the commitment date in excess of the
conversion rate) of the beneficial conversion feature of debentures and related accruing interest is recorded as a discount to
the related debt and an addition to additional paid in capital. The discount is amortized over the remaining outstanding period
of related debt using the interest method.
Carrying Value, Recoverability and Impairment
of Long-Lived Assets
The Company has adopted paragraph 360-10-35-17
of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived assets, which include
property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable.
The Company assesses the recoverability of
its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group
of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any,
is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the
asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined
to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book
values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.
The Company considers the following to be
some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets
relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets
or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s
overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; and (v)
regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently
upon the occurrence of such events( See Footnote 6 “Acquisition of Spiral Toys LLC” for a discussion of the impairment
of goodwill and the subsequent charge-off.
Inherent Risk in the Estimates
Management makes estimates of fair values
based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained
from the management of the acquired companies. Critical estimates in valuing certain of the intangible assets include but are
not limited to: future expected cash flows from revenues, customer relationships, key management and market positions, assumptions
about the period of time the acquired trade names will continue to be used in the Company’s combined portfolio of products
and/or services, and discount rates used to establish fair value. These estimates are inherently uncertain and unpredictable.
Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy
or validity of such assumptions, estimates or actual results.
Cash Equivalents
For the purposes of the statement of cash
flows, the Company considers all investments with original maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost.
Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred.
Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated
residual values) over the assets estimated useful lives ranging from three to five years for tooling, five years for computers
and vehicles, and five to seven years for furniture and equipment. Upon sale or retirement of property and equipment, the related
cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statement
of operations.
Leasehold improvements, if any, are amortized
on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter. Upon becoming fully amortized,
the related cost and accumulated amortization are removed from the accounts.
Related Parties
The Company follows subtopic 850-10 of the
FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related
parties include (a). affiliates of the Company; (b). entities for which investments in their equity securities would be required,
absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted
for by the equity method by the investing entity; (c). trusts for the benefit of employees, such as pension and profit-sharing
trusts that are managed by or under the trusteeship of management; (d). principal owners of the Company; (e). management of the
Company; (f). other parties with which the Company may deal if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its
own separate interests; and (g). other parties that can significantly influence the management or operating policies of the transacting
parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The financial statements shall include disclosures
of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the
ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined
financial statements is not required in those statements. The disclosures shall include: ( a). the nature of the relationship(s)
involved; (b). description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for
each of the periods for which income statements are presented, and such other information deemed necessary to an understanding
of the effects of the transactions on the financial statements; (c). the dollar amounts of transactions for each of the periods
for which income statements are presented and the effects of any change in the method of establishing the terms from that used
in the preceding period; and (d). amounts due from or to related parties as of the date of each balance sheet presented and, if
not otherwise apparent, the terms and manner of settlement.
Commitment and Contingencies
The Company follows subtopic 450-20 of the
FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the
consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one
or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings
or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature
of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally
not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based
upon information available at this time, that these matters will have a material adverse effect on the Company’s consolidated
financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially
and adversely affect the Company’s business, financial position, and results of operations or cash flows.
Non-controlling Interest
The Company follows paragraph 810-10-65-1
of the FASB Accounting Standards Codification to report the non-controlling interest in the consolidated balance sheets within
the equity section, separately from the Company’s stockholders’ equity. Non-controlling interest represents the non-controlling
interest holder’s proportionate share of the equity of the Company’s majority-owned subsidiary. Non-controlling interest
is adjusted for the non-controlling interest holder’s proportionate share of the earnings or losses and other comprehensive
income (loss), if any, and the non-controlling interest continues to be attributed its share of losses even if that attribution
results in a deficit non-controlling interest balance.
General and Administrative Expenses
General and administrative expenses include
those indirect costs of operating the business such as office supplies, travel and utilities. Net shipping and handling costs
are immaterial and are therefore included in general administrative expenses.
Share-Based Compensation
All issuances of the Company’s common
stock for non-cash consideration have been assigned a per share amount equaling either the market value of the shares issued or
the value of consideration received, whichever is more readily determinable. The majority of non-cash consideration received pertains
to services rendered by consultants and others and has been valued at the market value of the shares on the measurement date.
The Company accounts for equity instruments
issued to consultants and vendors in exchange for goods and services in accordance with the provisions of FASB ASC 505-50-30,
Equity-Based Payments to Non-Employees,
(“ASC 505-50-30”). Under ASC 505-30-30, the measurement date for the
fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In
the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the
consulting agreement.
Under the relevant accounting guidance, assets
acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments are not presented or classified as an
offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly,
the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as
prepaid expense in its consolidated balance sheet.
Stock-Based Compensation for Obtaining
Employee Services
The Company accounts for its stock based compensation
in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles
of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph
718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received
for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value
of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable
that performance will occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of
share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly
price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially
inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of each option award is estimated
on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:
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Expected term of
share options and similar instruments: The expected life of options and similar instruments represents the period of time
the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting
Standards Codification the expected term of share options and similar instruments represents the period of time the options
and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments
and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated
value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the
simplified method
,
i.e., expected term = ((vesting term + original contractual term) / 2)
, if (i) A company does not have sufficient historical
exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity
shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of
employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis
upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business
such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The
Company uses the simplified method to calculate expected term of share options and similar instruments as the company does
not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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Expected volatility
of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded
or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company
to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons
for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the
average historical volatility of the comparable companies over the expected contractual life of the share options or similar
instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations
would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations
for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent
trading in the market.
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Expected annual
rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term
shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield
is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within
the expected term of the share options and similar instruments.
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Risk-free rate(s).
An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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The Company’s
policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line
basis over the requisite service period for the entire award.
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Equity Instruments Issued to Parties
other than Employees for Acquiring Goods or Services
The Company accounts for equity instruments
issued to parties other than employees for acquiring goods or services under guidance of Subtopic 505-50 of the FASB Accounting
Standards Codification (“Subtopic 505-50”).
Pursuant to ASC Section 505-50-30, all transactions
in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the
performance is complete or the date on which it is probable that performance will occur. If the Company is a newly formed corporation
or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement
memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily
price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack
of consistent trading in the market.
Pursuant to ASC paragraph 505-50-25-7, if
fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods
or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination
of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor
shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding
cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements
of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may
conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity
instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific
performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity
by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the
balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other
than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement
date for transactions that are within the scope of this Subtopic.
Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9,
an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified
period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance
conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity
had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity
instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock option that the counterparty has
the right to exercise expires unexercised.
Pursuant to ASC paragraph 505-50-30-S99-1,
if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity
instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are
not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should
be recorded.
Income Taxes
The Company accounts for income taxes under
Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax
assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will
not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the Consolidated Statements of Income and Comprehensive Income in the period
that includes the enactment date.
The Company adopted section 740-10-25 of the
FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25,
the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty
(50) percent likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition,
classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
The estimated future tax effects of temporary
differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well
as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded
on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation
of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition,
the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s
opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies
from estimates, additional allowances or reversals of reserves may be necessary.
Uncertain Tax Positions
The Company did not take any uncertain tax
positions and had no material adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25
for the year ended December 31, 2015 or 2014.
Valuation Allowance and Risks and Uncertainties
Management assesses the available positive
and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.
A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended
December 31, 2015. Such objective evidence limits the ability to consider other subjective evidence such as our projections for
future growth. On the basis of this evaluation, as of December 31, 2015, a valuation allowance of $2,235,200 has been recorded
to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax
asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are
reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight
may be given to subjective evidence such as our projections for growth. The Company’s policy is to recognize interest and
penalties related to income tax matters as a component of income tax expense.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed
pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net income (loss) per common share is computed
by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted
net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common
stock and potentially outstanding shares of common stock during the period to reflect the potential dilution that could occur
from common shares issuable through contingent share arrangements, stock options and warrants.
There were no potentially dilutive common
shares outstanding for the year ended December 31, 2015 or 2014.
Cash Flows Reporting
The Company adopted paragraph 230-10-45-24
of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether
they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect
or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards
Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating
activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected
future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash
receipts and payments.
Other Comprehensive Income and Foreign
Currency Translation
Statement of Financial Accounting Standards
(“SFAS”) No. 130,
Reporting Comprehensive Income
, establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and distribution to owners.
The accompanying consolidated financial statements
are presented in United States dollars. The functional currency of Spiral Toys LTD is the Canadian Dollar (“CAD”).
The balance sheet accounts of Spiral Toys LTD are translated into United States dollars from CAD at year end exchange rates and
all revenues and expenses are translated into United States dollars at average exchange rates prevailing during the periods in
which these items arise. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
Translation gains and losses are accumulated as accumulated other comprehensive income (loss), a component of stockholders’
equity.
Subsequent Events
The Company follows the guidance in Section
855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will disclose the
date through which subsequent events have been evaluated and that date is the date when the financial statements were issued.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
(Topic 606),
which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”)
605,
Revenue Recognition,
and most industry-specific guidance. The core principle of the guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The new guidance establishes a five-step model
to achieve that core principle and also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue
and cash flows arising from customer contracts. ASU 2014-09 was originally effective for interim and annual reporting periods
beginning after December 15, 2016. In July 2015, the FASB announced its approval to defer the effective date to annual reporting
periods beginning after December 15, 2017, and early application would be permitted after December 15, 2016. However, the FASB
has not yet issued an ASU to finalize the new effective date. The Company is currently evaluating the impact of the adoption of
ASU 2014-09 on its operating results and financial position.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
, which conforms US GAAP to IFRS by requiring that all deferred taxes be
presented as noncurrent. This guidance does not change the existing requirement that only permits offsetting within a jurisdiction.
ASU 2015-17 will be effective for interim and annual reporting periods beginning after December 15, 2016. Early application is
permitted. Spiral is currently evaluating the impact of the adoption of ASU 2015-17 on its financial position.
Functional and Reporting Currency
The consolidated financial statements are
presented in U.S. dollars. The Company’s functional currency is the U.S. dollar. The functional currency of Spiral Toys
Hong Kong, Ltd. is the Hong Kong dollar and the functional currency of Spiral Toys LTD is the Canadian dollar. Assets and liabilities
are translated using the exchange rate on the respective balance sheet dates. Items in the income statement and cash flow statement
are translated into U.S. dollars using the average rates of exchange for the periods involved. The resulting translation adjustments
are recorded as a separate component of other comprehensive income/(loss) within stockholders’ equity.
The functional currency of foreign entities
is generally the local currency unless the primary economic environment requires the use of another currency. Gains or losses
arising from the translation or settlement of foreign-currency-denominated monetary assets and liabilities into the functional
currency are recognized in the income in the period in which they arise. However, currency differences on intercompany loans that
have the nature of a permanent investment are accounted for as translation differences as a separate component of other comprehensive
income/(loss) within stockholders’ equity.
Litigation
We account for litigation losses in accordance
with U.S. GAAP, loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or
when a best estimate cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially developed
substantially earlier than when the ultimate loss is known, and the estimates are refined each accounting period, as additional
information is known. Accordingly, we are often initially unable to develop a best estimate of loss; therefore, the minimum amount,
which could be zero, is recorded. As information becomes known, either the minimum loss amount is increased or a best estimate
can be made, resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a lower amount when events
result in an expectation of a more favorable outcome than previously expected. Due to the nature of current litigation matters,
the factors that could lead to changes in loss reserves might change quickly and the range of actual losses could be significant,
which could materially impact our consolidated results of operations and comprehensive loss and cash flows from operating activities.
NOTE 3 – GOING CONCERN AND MANAGEMENT
PLANS
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization
of assets, and liquidation of liabilities in the normal course of business.
As reflected in the accompanying consolidated
financial statements, the Company had an accumulated deficit at December 31, 2015, a net loss and negative cash flows from operating
activities for the year then ended. These factors raise substantial doubt about the Company’s ability to continue as a going
concern.
While the Company is attempting to establish
an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern, the Company’s
cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional
funds by seeking equity and/or debt financing. Management believes that the actions presently being taken to further implement
its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company
believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances
to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further
implement its business plan and generate revenues.
The consolidated financial statements do not
include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 4 – NOTES PAYABLE
Notes Payable-Related Parties
At December 31, 2015 and December 31, 2014
the Company had the following uncollateralized notes payable to related parties:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
Note dated October 25, 2010, with interest at 12% per annum, due
on demand
|
|
$
|
-
|
|
|
$
|
15,000
|
|
Note dated January 27, 2012, non-interest bearing, due on January 26, 2013
|
|
|
-
|
|
|
|
5,000
|
|
Note dated February 27, 2012, non-interest bearing, due on February 26, 2013
|
|
|
-
|
|
|
|
5,000
|
|
Note dated March 31, 2012, non-interest bearing, due on March 30, 2013
|
|
|
-
|
|
|
|
250
|
|
Note dated April 18, 2012, with interest at 10% per annum, due on April 17, 2013
|
|
|
-
|
|
|
|
2,472
|
|
Note dated April 18, 2012, with interest at 10% per annum, due on April 17, 2013
|
|
|
-
|
|
|
|
2,471
|
|
Note dated June 15, 2012, with interest at 10% per annum, due on June 14, 2013
|
|
|
-
|
|
|
|
5,000
|
|
Note dated June 15, 2012, with interest at 10% per annum, due on June 14, 2013
|
|
|
-
|
|
|
|
5,000
|
|
Note dated June 15, 2012, with interest at 10% per annum, due on June 14, 2013
|
|
|
-
|
|
|
|
2,943
|
|
Note dated January 23, 2013, with interest at 10% per annum, due on demand
|
|
|
-
|
|
|
|
2,970
|
|
Note dated March 5, 2013, with interest at 10% per annum, due on demand
|
|
|
-
|
|
|
|
7,500
|
|
Note dated March 20, 2013, with interest at 10% per annum, due on demand
|
|
|
-
|
|
|
|
8,700
|
|
Note dated June 3, 2013, with interest at 10% per annum, due on demand
|
|
|
-
|
|
|
|
10,000
|
|
Note dated June 12, 2013, with interest at 10% per annum, due on demand
|
|
|
-
|
|
|
|
10,000
|
|
Note dated October 9, 2013, with interest at 10% per annum, due on demand
|
|
|
-
|
|
|
|
8,432
|
|
Note dated December 12, 2013, with interest at 10% per annum, due on demand
|
|
|
-
|
|
|
|
15,000
|
|
Note dated March 25, 2014, with interest at 10% per annum,
due on demand
|
|
|
-
|
|
|
|
10,000
|
|
Total related-party notes payable
- current
|
|
$
|
-
|
|
|
$
|
115,738
|
|
In connection with the acquisition of Spiral,
the holders of the Notes Payable-related parties agreed the notes would not be payable until the Company has raised at least $2
million in financing, and the Company agreed that the holders could, at any time, convert the principal and interest on the notes
into common stock at $0.25 per share.
Convertible Short Term Notes
In July 2014, Spiral engaged a firm to provide
marketing services. As part of the agreement, the vendor receives $7,000 per month in convertible notes which can be exchanged
for common stock at $0.25 per share. Should the vendor chose to receive the common stock, it receives an equal number of shares
in a “bonus” payment. As of December 31, 2014, $42,000 was due the vendor as a result of services provided during
the fourth quarter of 2014. These shares (amounting to 168,000) were issued in March 2015. A comparable amount of Notes and shares
were issued in November 2014 for amounts outstanding as of September 30, 2014.
The Company has recognized interest expense
of $52,521 and $54,065 for the twelve months ending December 31, 2015 and 2014, respectively. For the year ended December 31,
2105, $42,000 was reported related to the above referenced convertible notes to the marketing firm and $9,175 for the related
party notes. Of the amounts reported in 2014, $12,065 relates to the notes payable- related parties while $42,000 was incurred
as interest on convertible short term notes during the Year.
NOTE 5 – DISCONTINUED OPERATIONS
On July 1, 2014 the Company transferred to
Mr. Hubert J. Blanchette, CEO of Lexi-Luu Designs, Inc., (“Lexi-Luu”) 2,500,000 shares of common stock of Lexi-Luu,
representing 80% of the issued and outstanding shares in Lexi-Luu Designs, Inc. In exchange for the interest in Lexi-Luu, Mr.
Blanchette surrendered to the Company 2,500,000 shares of the Company’s common stock.
The Company originally purchased the 2,500,000
shares of Lexi-Luu in 2010 pursuant to a Stock Purchase and Share Exchange Agreement dated as of September 30, 2010 (“the
Agreement”). The transfers on July 1, 2014 occurred upon Mr. Blanchette’s exercise of an option given him in Section
3.3 of the Agreement, which provided Mr. Blanchette the right to exchange his shares in the Company for the shares of Lexi-Luu
if the Company entered into an acquisition transaction that resulted in the dilution of Mr. Blanchette’s interest in the
Company. The Company completed such an acquisition with its acquisition of Spiral Toys LLC. on July 1, 2014.
The Company’s financial statements have
been retroactively restated so as to segregate the operations of the Lexi-Luu subsidiary, and to re-label such operations as discontinued.
The Company’s financial statements as of December 31, 2014 report the gain on the Lexi-Luu disposition based on the removal
of the balances as of July 1, 2014 as an increase in additional paid-in capital. The following table shows the assets and liabilities
of Lexi-Luu as of July 1, 2014 as well as results of operations for the six months ended July 1, 2014.
|
|
July 1, 2014
|
|
Assets
|
|
$
|
71,339
|
|
Liabilities
|
|
$
|
512,840
|
|
Net Revenues
|
|
$
|
210,767
|
|
Net Income (Loss)
|
|
$
|
(23,752
|
)
|
Upon disposition of Lexi-Luu on July 1, 2014,
the net assets and liabilities were removed from the balances of the Company resulting in $373,408 being posted to additional
paid in capital of the Company. As these transactions were with a related party, the gain on the disposition was recorded as an
addition to Additional Paid in Capital.
The following table shows the results of operations
of Lexi-Luu during certain periods when it was owned by the Company:
|
|
For the Period Ended
|
|
|
|
December 31, 2015
|
|
|
June 30, 2014
|
|
Sales
|
|
$
|
-
|
|
|
$
|
210,767
|
|
Cost of Goods Sold
|
|
|
-
|
|
|
|
110,368
|
|
Gross Profit
|
|
|
-
|
|
|
|
100,399
|
|
Operating Expenses
|
|
|
-
|
|
|
|
115,969
|
|
Loss from Operations
|
|
|
-
|
|
|
|
(15,570
|
)
|
Other Income (Expenses)
|
|
|
-
|
|
|
|
(8,182
|
)
|
Net Loss
|
|
$
|
-
|
|
|
$
|
(23,752
|
)
|
NOTE 6 – ACQUISITION OF SPIRAL TOYS
LLC
Spiral, LLC Share Exchange Agreement
On May 27, 2014 the Company entered into a
Share Exchange Agreement (“the Agreement”) with Spiral Toys LLC, a California limited liability company (“Spiral”)
and Mark Meyers, the sole member of Spiral. The Agreement was amended on June 30, 2014. On July 1, 2014, the acquisition and other
transactions contemplated by the Agreement were completed.
Pursuant to the Agreement, on July 1, 2014
the Company purchased from Mark Meyers all of the membership interest in Spiral. In exchange for ownership of Spiral, the Company
issued 18,130,667 shares of its common stock to Mark Meyers and his assignees, representing 50% of the outstanding shares. The
shares were valued at $0.15 per share which is the common stock for cash sales price at the time of the transaction. Rocap also
agreed to institute a bonus program pursuant to which Mark Meyers could earn an additional 4,126,133 shares of common stock based
upon performance criteria as follows:
|
●
|
If during any fiscal quarter, the Company’s Operations
provide net cash, calculated in accordance with generally accepted accounting principles, then the Company will issue to Meyers
2,063,067 shares of common stock;
|
|
|
|
|
●
|
If during each of the three consecutive calendar months the
Company records “Adjusted Income from Operations derived from the Company Operations, then Meyers will be issued 2,063,066
shares of common stock. Adjusted Income from Operations shall mean income from Operations, calculated in accordance
with generally accepted accounting principles, including appropriate accruals but excluding any non-cash transactions such
as stock-based compensation of amortization of goodwill.
|
|
|
|
|
●
|
In the event that the Company becomes a party to a merger or
consolidation in which the Company is not the surviving entity, or in the event that the Company sells substantially all of
its asset and adopts a plan of liquidation, and if, on the date the Company executes the contract agreeing to such merger,
consolidation or sale, the Company has recorded revenue during the preceding fiscal quarter, then the day prior to the effective
date of such transaction the Company share issue 4,126,133 shares of common stock, less any stock issued in 1 and 2 above
|
Effective July 1, 2014 in connection with
the acquisition, the Company recognized cash of $8 and liabilities (Advance from distributor) of $120,567. The Company recognized
$2,840,203 of goodwill with this transaction.
At the closing on July 1, 2014, pursuant to
the Agreement, Mr. William Clayton resigned from the Company’s Board of Directors and from his position on as Chief Operations
Officer of the Company. The Board thereupon appointed Mark Meyers to serve as a member of the Board of Directors and as Chief
Executive Officer of the Company.
In connection with the closing, Gordon McDougall
(for himself and his company, Tezi Advisory) and Peter Henricsson agreed to modify the loans payable to them from the Company,
which have an aggregate balance of approximately $120,000. The loans will be payable only when the Company has obtained financing
of no less than $2,000,000, but will be convertible into the Company’s common stock at the creditor’s option at any
time at a conversion rate of $0.25 per share.
Additionally, salaries payable of $276,250
were forgiven as part of the Spiral acquisition. These amounts, principally to two individuals, were eliminated and credited to
Additional Paid in Capital.
Goodwill of $2,840,203 was recorded upon the
acquisition of Spiral. The Company analyzes the goodwill periodically and if impairment is determined, adjusts the balances accordingly.
During the fourth quarter of 2014, management determined that a complete write-off of the goodwill was justified and recorded
an impairment charge of the full amount.
For the twelve-month period ended December
31, 2014 the operations of Spiral consisted of the following:
|
|
12/31/2014
|
|
Sales
|
|
$
|
290,480
|
|
Operating Expenses
|
|
|
(618,567
|
)
|
|
|
|
|
|
Net Loss
|
|
$
|
(328,087
|
)
|
NOTE 7- COLLABORATIVE ARRANGEMENTS
The Company entered into a distribution agreement
with a Hong Kong based entity in 2013. Spiral receives 50% of the revenue generated in the sale of the items, net of the toy’s
cost of production and a 10% allocation to the distributor for overhead. In addition, certain development costs were funded by
the distribution entity and will be repaid out of the proceeds of the toy sales. At the end of 2014, the amount due the distributor
totaled $0. Sales recorded during 2014 were $194,321. There was no operations in 2015.
NOTE 8 – STOCKHOLDERS’ EQUITY
(DEFICIT)
Shares Authorized
Upon formation the total number of shares
of all classes of stock which the Company is authorized to issue is Seventy Five Million (75,000,000) shares of which One Million
(1,000,000) shares are preferred stock, par value $0.001 per share, and Seventy Four Million (74,000,000) shares are common stock,
par value $0.001 per share.
Common Stock Issued for Services
The Company entered into agreements with vendors
providing legal services, investment banking services, public relations services and marketing services, who received all or a
portion of their remuneration in common stock equity. The Company records the appropriate expense as the shares are earned over
the terms of their underlying agreements. As of December 31, 2015, all shares issued for these services were vested. In accordance
with FASB ASC 505-50, the shares issued are periodically valued, as earned, through the vesting period.
On
January 12, 2015, the Company issued 312,500 shares of common stock to three consultants initially valued at $46,875 in satisfaction
of outstanding accounts payable of which $9,375 represented amounts incurred in 2014. The Company records the appropriate expense
as the shares are earned over the terms of their underlying agreements. During the year ended December 31, 2015, the Company recorded
$37,500 as legal and professional expenses.
On
February 18 and March 19, 2015, the Company issued 89,636 shares of common stock initially valued at $26,891 to Uptick Capital
LLC under a consulting service agreement. During the year ended December 31, 2015, the Company recorded $26,891 legal and professional
expenses.
During the
second quarter ended June 30, 2015, the Company issued 589,082 shares of common stock initially valued at $183,868 to six consultants.
200,000 shares of common stock were issued in exchange for legal services, 20,000 shares of common stock for public relations
services, 33,333 shares of common stock for marketing services and 335,749 shares of common stock for investor relations services.
During the year ended December 31, 2015, the Company recorded $183,868 as legal and professional expenses.
During
the third quarter ended September 30, 2015, the Company issued 28,063 shares of common stock initially valued at $14,909 to Uptick
Capital LLC under a consulting service agreement. In addition, 75,000 shares of common stock valued at $37,875 was issued to a
member of the board of directors for services rendered. During the year ended December 31, 2015, the Company recorded $52,784
as legal and professional expenses.
During the
fourth quarter ended December 31, 2015, the Company issued 143,388 shares of common stock initially valued at $53,786 to two consultants.
103,388 shares of common stock were issued in exchange for legal services and 40,000 shares of common stock for public relations
services. The Company recorded $53,842 as legal and professional expenses.
Convertible Notes Payable
On March 1 and June 26, 2015, Echo Factory
converted notes payable and was issued a total of 336,000 shares of common stock valued initially at $84,000 in connection with
the conversion of notes payable (see Note 4).
Private Placements
During the three months ended June 30, 2014,
the Company completed a private placement of its common stock. The Company received $104,250 in aggregate gross proceeds from
the sale of a total of 695,000 shares of common stock at a price of $0.15 per share.
During the three months ended September 30,
2014, the Company completed a private placement of its common stock. The Company received $115,350 in aggregate gross proceeds
from the sale of a total of 769,000 shares of common stock at a price of $0.15 per share.
During the three months ended December 30,
2014, the Company completed a private placement of its common stock. The Company received $558,500 in aggregate gross proceeds
from the sale of a total of 3,383,333 shares of common stock at a price of $0.15 per share.
During the three months ended March 31, 2015,
the Company completed a private placement of its common stock. The Company received $124,900 in aggregate gross proceeds from
the sale of a total of 416,333 shares of common stock at a price of $0.30 per share.
During the three months ended June 30, 2015,
the Company completed a private placement of its common stock. The Company received $1,055,800 in aggregate gross proceeds from
the sale of a total of 3,586,061 shares of common stock at a price between $0.25 and $0.30 per share.
During the three months ended September 30,
2015, the Company completed a private placement of its common stock. The Company received $864,535 in aggregate gross proceeds
from the sale of a total of 1,921,189 shares of common stock at a price of $0.45 per share.
Spiral Toys LLC and disposition of Lexi-Luu
A total of 18,130,887 shares were issued in
connection with the acquistion of Spiral Toys LLC and a reduction in the number of outstanding shares of 2,500,000 was recorded
in connection with the disposition of Lexi-Luu.
NOTE 9 – MANAGEMENT CONTRACTS
On September 1, 2010, the Company entered
into a management agreement (“Management Agreement”) with Peter Henricsson for consulting services to be provided
by him (“Consultant”) in the capacity of President of the Company which required that the Company (i) to pay the Consultant
$3,250 per month for three (3) years from date of signing and (ii) to issue the Consultant a total of 960,000 shares of the Company’s
common stock payable on a quarterly basis over the term of the management agreement of 12 quarters (3 years). These shares were
valued at $0.002 per share or $1,920 on the date of grant and amortized over the vesting period, or $160 per quarter.
On September 1, 2010, the Company entered
into a management agreement (“Management Agreement”) with Tezi Advisory Inc. for consulting services to be provided
by Gordon C. McDougall (“Consultant”) in the capacity of Vice President Finance of the Company which required that
the Company to (i) pay the Consultant $3,250 per month for three (3) years from date of signing and (ii) to issue the Consultant
a total of 960,000 shares of its common stock payable on a quarterly basis over the term of the management agreement of 12 quarters
(3 years). These shares were valued at $0.002 per share or $1,920 on the date of grant and amortized over the vesting period,
or $160 per quarter.
In connection with the acquisition of Spiral
Toys LLC, all management agreements were ended and all accrued amounts due were modified. The Related Party Note was settled for
a total of $100,000 during the third quarter of 2015.
NOTE 10-– CONCENTRATIONS
As of December 31, 2015, amounts due from
one customer, Animal Magic Asia, Limited represents 86% of accounts receivable.
NOTE 11 – INCOME TAX
The Company and its subsidiaries are included
in a consolidated Federal income tax return.
The provision for income taxes is as follows:
|
|
|
2015
|
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total Current
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
-
|
|
|
|
-
|
|
Total provision for income taxes:
|
|
|
-
|
|
|
|
-
|
|
The provision (benefit) for income taxes differs
from the amount computed by applying the statutory U.S. Federal income tax rate of 42.8% in 2015 and 41% in 2014 to the loss before
income taxes due to the following for the years ended December 31:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Book Income
|
|
$
|
(981,800
|
)
|
|
$
|
(1,482,400
|
)
|
Goodwill amortization
|
|
|
(81,100
|
)
|
|
|
1,176,200
|
|
Allowance for Doubtful Accounts
|
|
|
5,800
|
|
|
|
-
|
|
Meals and Entertainment
|
|
|
4,000
|
|
|
|
1,000
|
|
Unrealized gain/loss on exchange rate
|
|
|
-
|
|
|
|
-
|
|
Stock Compensation Expense
|
|
|
-
|
|
|
|
3,900
|
|
Valuation allowance
|
|
|
1,053,100
|
|
|
|
301,300
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net deferred tax liabilities consist of the
following components as of December 31, 2014 and 2013:
The Components of the Company’s deferred
tax assets and liabilities are as follows:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL Carryover
|
|
$
|
1,233,100
|
|
|
$
|
288,400
|
|
Allowance for Doubtful Accounts
|
|
|
5,200
|
|
|
|
-
|
|
Related Party Accruals
|
|
|
-
|
|
|
|
-
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Goodwill Amortization
|
|
|
996,900
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(2,235,200
|
)
|
|
|
(288,400
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2015, the Company had net
operating loss carryforwards of approximately $3,162,000 that may be offset against future taxable income from the year 2016 through
2035. No tax benefit has been reported in the December 31, 2015 consolidated financial statements since the potential tax benefit
is offset by a valuation allowance of the same amount.
Due to the change in ownership provisions
of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual
limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
NOTE 12- SHARE BASED COMPENSATION
On October 12, 2015, the Company adopted the
Amended and Restated 2015 Equity Incentive Plan (“Performance Plan”) whereby up to 3,000,000 shares of the Company’s
common stock may be issued under the Performance Plan.
There were no shares issued in 2015 and accordingly
no expense has been recorded in connection with the Performance Plan.
NOTE 13-COMMITMENTS AND CONTINGENCIES
Purchase Orders
We issue inventory purchase orders, which
represent authorizations to purchase that are cancelable by their terms. We do not consider purchase orders to be firm inventory
commitments. If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred
prior to cancellation under certain circumstances.
Indemnities and Guarantees
The Company has executed certain contractual
indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified party. The Company
has agreed to indemnify its directors, officers, employees and agents to the maximum extent permitted under the laws of the State
of Nevada.
Pursuant to various Sale and Purchase Agreements,
the Company has indemnified the holders of registrable securities for any claims or losses resulting from any untrue, allegedly
untrue or misleading statement made in a registration statement, prospectus or similar document.
The duration of the guarantees and indemnities
varies, and in many cases is indefinite. These guarantees and indemnities do not provide for any limitation of the maximum potential
future payments the Company could be obligated to make. Historically, the Company has not been obligated to make any payments
for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated
balance sheets.
Tax Matters
The Company is required to file federal and
state income tax returns in the United States. The preparation of these income tax returns requires the Company to interpret the
applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company.
The Company, in consultation with its tax advisors, bases its income tax returns on interpretations that are believed to be reasonable
under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing authorities in
the jurisdictions in which the Company files its income tax returns. As part of these reviews, a taxing authority may disagree
with respect to the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional
taxes.
Litigation
On September 30, 2015, Shana
Lee McCart-Pollak d/b/a LOL Buddies Enterprises, filed a complaint against On Demand Direct Response, LLC and On Demand Direct
Response III, LLC, As Seen on TV, Inc., Spiral Toys LLC, Mark Meyers, Dragon-I Toys LLC, Jay at Play Int’l, Digital Target
Marketing, Hutton Miller and Echo Factory in the United States District Court for the District of Nevada alleging conversion and
that the CloudPets technology infringed upon Ms. Pollak’s inventions “Lots of Love Buddies”. Ms. Pollak’s
action seeks unspecified damages. The Company believes these claims have no merit.
In the ordinary course of business, there
may be other potential claims and lawsuits brought by or against the Company.
NOTE 14 — RELATED PARTY TRANSACTIONS
During the year ended December 31, 2015, the
Company received insurance services from EBNY Insurance Services, which a member of Company’s board of directors is a employee
The board member referred EBNY and was not compensated.
NOTE 15 – SUBSEQUENT EVENTS
On January 8
,
2016
the Company
issued 90,000 shares of common stock initially valued at $26,100 in exchange for services.
On January 8, 2016, the Company issued 125,000
shares of common stock to two persons under the Company’s Amended and Restated 2015 Equity Incentive Plan (“Performance
Plan”).
On January 22, 2016 (“Issue Date”),
Spiral Toys, Inc. (the “Company”) entered into a Securities Purchase Agreement (“Purchase Agreement”),
with two accredited investors pursuant to which the Company issued and sold for an aggregate purchase price of $200,000 (the “Purchase
Price”) securities consisting of (a) original issue discount convertible promissory notes for an aggregate principal amount
of $216,000 (collectively, the “Notes”) and (b) warrants (collectively, the “Warrants”) to purchase up
to 470,000 shares (the “Warrant Shares”) of the Company’s common stock, par value $0.001 per share (“Common
Stock”) at an exercise price of $0.50 per share, each dated as of the Closing Date. The Notes are subject to a one-time
interest charge of 8%, and the principal amount underlying each Note and the interest accrued thereon is due and payable on the
eighth month anniversary of the Issue Date. The Company may prepay the obligation within the 180 day period immediately following
the issuance date without penalty. Upon the occurrence of any event of default that has not been cured as described in the Note,
each note holder shall have the right, but not the obligation, to convert the outstanding balance of the Note along with all unpaid
interest into an aggregate number of shares of the Company’s Common Stock (“Conversion Shares”) at a conversion
price equal to 65% of the lowest sale price occurring during the fifteen (15) consecutive trading days immediately preceding the
applicable conversion date on which the purchaser elects to convert all or part of the Note; provided, however, in no event shall
the conversion price be lower than $0.01 per share. If the Company fails to convert the Notes into shares of Common Stock, the
principal amount of the Note shall increase by $1,000 every day until the Company issues and delivers a certificate for the Conversion
Shares.
11,469,304
Shares of Common Stock
SPIRAL
TOYS INC.
PROSPECTUS
YOU
SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL COMMON STOCK AND IS NOT SOLICITING
AN OFFER TO BUY COMMON STOCK IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
The
Date of This Prospectus is ______________, 2016
PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS