NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 — MANAGEMENT’S REPRESENTATION
The
accompanying condensed consolidated financial statements of Spiral Toys, Inc (the “Company,” “Spiral,”
“we,” or “our”), have been prepared in accordance with accounting principles generally accepted in the
United States, or “GAAP”. In the opinion of the Company’s management, the unaudited condensed consolidated financial
statements have been prepared on the same basis as the audited consolidated financial statements in the Annual Report on Form
10-K for the year ended December 31, 2015 and include all normal recurring adjustments necessary for the fair presentation of
the Company’s statement of financial position as of March 31, 2016, and its results of operations for the three months ended
March 31, 2016 and 2015 and cash flows for the three months ended March 31, 2016 and 2015. The condensed consolidated balance
sheet as of December 31, 2015 has been derived from the December 31, 2015 audited financial statements. The interim financial
information contained in this quarterly report is not necessarily indicative of the results to be expected for any other interim
period or for the entire year.
It
is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K.
The report of the Company’s independent registered public accounting firm on the consolidated financial statements included
in Form 10-K contains a qualification regarding the substantial doubt about the Company’s ability to continue as a going
concern.
The
Company has evaluated subsequent events through the filing date of this Form 10-Q, and determined that no subsequent events have
occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto, other than
as disclosed in the accompanying notes.
Interim
Financial Information
The
interim financial information of the Company as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 is unaudited,
and the balance sheet as of December 31, 2015 is derived from audited financial statements. The accompanying condensed
consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim
financial statements. Accordingly, they omit or condense notes and certain other information normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles. The accounting policies followed
for quarterly financial reporting conform with the accounting policies disclosed in Note 2 to the Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of management,
all adjustments necessary for a fair presentation of the financial information for the interim periods reported have been made. All
such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2016
and 2015 are not necessarily indicative of the results that can be expected for the fiscal year ending December 31, 2016. The
unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements
and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015
NOTE
2 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Spiral
Toys Inc (formerly known as Rocap Marketing Inc.)
Spiral
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 LLC”) was formed as a limited liability company under the laws of the State of California on July
12, 2011. Spiral LLC develops entertainment products that include both physical toys as well as digital media.
During
2015, the Company recognized revenue from its physical toy line in two ways: The primary revenue source was royalty income from
license fees, which are earned when the goods are shipped to the retailer. However, Spiral also became involved in the manufacturing
of the CloudPets line, to the extent that Spiral outsourced the fabrication of the electronic components for the CloudPets units,
purchased the components and then resold them to the entity that assembled the CloudPets.
The
Company terminated its involvement in manufacturing in the fourth quarter of 2015, and realized no royalty income in the three
months ended March 31, 2016. The Company earned $10,000 in revenue during the period ended March 31, 2015 from product development
consulting fees.
SPIRAL
TOYS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Formation
of Subsidiaries
During
2015, the Company initiated formation of 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 its products in China.
Spiral
Toys Hong Kong Ltd. had no asset or liabilities as of March 31, 2016 and no income or expense for the three months ended March
31, 2016. Spiral Toys LTD had $7,959USD in assets, liabilities of $110,233USD as of March 31, 2016 and expenses of $122,405USD
for the three months ended March 31, 2016.
The
Company’s consolidated subsidiaries and/or entities are as follows:
Name of
|
|
State or other
jurisdiction of
|
|
Date of incorporation
or formation
|
|
|
|
consolidated
subsidiary or entity
|
|
incorporation or
organization
|
|
(date of acquisition, if
applicable)
|
|
Attributable
interest
|
|
Spiral Toys LLC.
|
|
State of California
|
|
11-Jul-11
|
|
|
100
|
%
|
|
|
|
|
(July 1, 2014)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spiral Toys LTD
|
|
British Columbia
|
|
27-Feb-15
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Spiral Toys Hong Kong Ltd.
|
|
Hong Kong
|
|
Mar-15
|
|
|
100
|
%
|
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; 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 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.
SPIRAL
TOYS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Actual
results could differ from those estimates.
Revenue
Recognition
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
from product development contracts is recognized upon the fulfillment of contractual milestones with pre-set remuneration.
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 (“ASC”) 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 ASC paragraph 310-10-50-2 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 ASC paragraph 310-10-50-6 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 as of March 31, 2016 and $0 for the same period in 2015.
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
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, 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.
SPIRAL
TOYS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Derivative
Financial Instruments
The
Company applies the provisions of FASB ASC 815-10,
Derivatives and Hedging
(“ASC 815-10”). Derivatives within
the scope of ASC 815-10 must be recorded on the balance sheet at fair value. During the three months ended March 31, 2016, the
Company issued promissory notes with warrants and recorded derivative liabilities related to the reset provision associated with
the exercise price of the warrants. The fair value of these derivative liabilities on the grant date was $82,530 as computed using
the Black Scholes option pricing model. Due to the reset provisions within the warrants, the Company determined that the Black-Scholes
Model was most appropriate for valuing this instrument.
In
January 2016, the Company granted 470,000 warrants to two investors in connection with sale of a promissory note.
The
exercise price of the warrants has reset provisions which are accounted for as derivative instruments in accordance with relevant
accounting guidance. At the date of grant, the warrants were valued at $82,530 which reasonably represents the fair value as computed
using the Black-Scholes option pricing model.
The
Company re-measured the fair values of its derivative liabilities as of each period end and recorded an aggregate increase of
$5,700 in the fair value of the derivative liabilities as a component of other expense during the three months ended March 31,
2016.
Fair
Value of Financial Instruments
The
Company follows ASC paragraph 825-10-50-10 for disclosures about fair value of its financial instruments and ASC 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:
|
Level
1
—
|
Valuation
based on unadjusted quoted market prices in active markets for identical securities.
|
|
|
|
|
|
|
Level
2
—
|
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.
|
|
|
|
|
|
|
Level
3
—
|
Valuations
based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment.
|
|
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.
SPIRAL
TOYS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
applying the Black-Scholes options model, the Company used the following assumptions to value its derivative liabilities during
the three months ended March 31, 2016:
|
|
For the
three months ended
|
|
|
|
March
31, 2016
|
|
|
|
|
|
Annual
dividend yield
|
|
|
-
|
|
Expected
life (years)
|
|
|
2.84
- 3.00
|
|
Risk-free
interest rate
|
|
|
0.87%
— 1.11%
|
|
Expected
volatility
|
|
|
122.47%
— 123.56%
|
|
The
warrants contain an optional cashless exercise provision. The cashless exercise provision expires once the underlying instrument’s
shares are registered.
The
following table presents the Company’s warrants measured at fair value on a recurring basis as of March 31, 2016
|
|
Level 3 Carrying Value at
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
88,230
|
|
|
$
|
-
|
|
Total derivative liability
|
|
$
|
88,230
|
|
|
$
|
-
|
|
The
following table shows the classification of the Company’s liability at March 31, 2016 that are subject to fair value measurement
and the roll-forward of these liabilities from December 31, 2015:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivative liabilities added-warrants
|
|
|
82,530
|
|
|
|
|
|
Net change in fair value included in net loss
|
|
|
5,700
|
|
|
|
-
|
|
Ending balance
|
|
$
|
88,230
|
|
|
$
|
-
|
|
The
carrying amounts of the Company’s cash, accounts payable and accrued expenses approximate their estimated fair values due
to the short-term maturities of those financial instruments. The Company believes the carrying amount of its promissory note,
net of discount approximates its fair value based on rates and other terms currently available to the Company for similar debt
instruments.
Cash
Equivalents
For
the purposes of the condensed statement of cash flows, the Company considers all investments with original maturities of three
months or less to be cash equivalents.
Basic
and Diluted Income (Loss) Per Share
Basic
net loss per common share from operations is computed based on the weighted-average number of shares outstanding for the period.
Diluted net loss per share from operations is computed by dividing net loss by the weighted-average shares outstanding assuming
all dilutive potential common shares were issued. In periods of losses from operations, basic and diluted loss per share before
operations is the same as the effect of shares issuable upon the conversion of debt and issuable upon the exercise of stock options
and warrants which is anti-dilutive. Basic and diluted income per share from operations are also the same, as FASB ASC 260-10
requires the use of the denominator used in the calculation of loss per share from operations in all other calculations of earnings
per share presented, despite the dilutive effect of potential common shares.
SPIRAL
TOYS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Based
on the conversion prices in effect, the potentially dilutive effects of 470,000 warrants were not considered in the calculation
of EPS as the effect would be anti-dilutive on March 31, 2016. There were no warrants outstanding as of March 31, 2015.
Functional
and Reporting Currency
The
condensed 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.
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.
Risks
and Uncertainties
Cash
The
Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000.
Customers
As
of March 31, 2016, amounts due from one customer, Animal Magic Asia, Limited represents approximately 88% of accounts receivable.
Recent
Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases
(Topic 842).” ASU 2016-02 was issued to increase transparency and comparability among entities by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key information about lease arrangements. ASU 2016-02 is effective for
public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company
is currently evaluating the impact of adopting ASU 2016-02 on the Company’s results of operations and financial condition.
In
March 2016, the FASB issued an accounting standards update as part of its simplification initiative. The new standard will modify
several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including
the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings,
as well as the accounting for award forfeitures over the vesting period. Other provisions of the new standard relate to nonpublic
entities and eliminate guidance that had not become effective. The new standard is effective for fiscal years beginning after
December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating
the impact the adoption of this new standard will have on its condensed consolidated financial statements.
SPIRAL
TOYS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
The
Company incurred losses from operations of $1,009,626 and $578,751 for the three months ended March 31, 2016 and 2015, respectively,
and had an accumulated deficit of $7,738,402 at March 31, 2016. In addition, the Company used cash in operating activities
of $437,039 for the three months ended March 31, 2016. 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 adequate 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
condensed 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 — COMMITMENTS AND CONTINGENCIES
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.
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.
On
February 24, 2016, we filed a motion in the United States District Court, District of Nevada, a motion to dismiss third-party
defendants Spiral Toys LLC and Mark Meyers from the third party compliant filed by Shana Lee McCart-Pollak. In the event that
the Court does not dismiss the Third Party compliant, the Third Party defendants requests the Court order Shana Lee McCart-Pollack
file a more definite statement relating to any claim not dismissed.
SPIRAL
TOYS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCKHOLDERS’ (DEFICIT)
EQUITY
Shares
Authorized
The
total number of shares of all classes of stock which the Company is authorized to issue is One Hundred Fifty Million (150,000,000)
shares of which One Million (1,000,000) shares are preferred stock, par value $0.001 per share, and One Hundred Forty Nine Million
(149,000,000) 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, which 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 March 31, 2016, 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 8
,
2016
the Company
issued 85,000 shares of common stock initially valued at $24,650 in exchange for services.
On January 8, 2016, the Company issued 130,000
shares of common stock to three persons under the Company’s Amended and Restated 2015 Equity Incentive Plan (“Performance
Plan”). During the three months ended March 31, 2016, the Company recorded $37,700 as legal and professional fees related
to shares issued to those professionals.
NOTE
6 - FINANCING ACTIVITIES
On
January 22, 2016 (“Issue Date”), 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.
During
the quarter ended March 31, 2016, the Company received $100,000 from an accredited investor in connection with a subscription
for 400,000 shares of its common stock, at a per share price of $0.25, A certificate for the shares was issued subsequent to March
31, 2016.
SPIRAL
TOYS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Warrants
A
summary of activity with respect to warrants outstanding follows:
|
|
Three months ended
|
|
|
|
March 31, 2016
|
|
|
|
Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable, January 1, 2016
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
470,000
|
|
|
|
0.50
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable, March 31, 2016
|
|
|
470,000
|
|
|
|
0.50
|
|
NOTE
7 - SUBSEQUENT EVENTS
On
April 6, 2016 the Company filed a Certificate of Amendment to its Articles of Incorporation which increased the number of authorized
shares of common stock from 74,000,000 to 149,000,000.
On
April 11, 2016 the Company entered into a Securities Purchase Agreement and a Registration Rights Agreement with two accredited
institutional investors. The Securities Purchase Agreement provides for the sale by the Company of 10% Original Issue Discount
Senior Convertible Debentures Due April 12, 2017 (the “Debentures”) at two closings. The initial closing occurred
on April 12, 2016, at which time the Company sold Debentures in the aggregate principal amount of $756,250 for an aggregate purchase
price of $625,000. The aggregate principal amount of the Debentures sold on April 12, 2016 will be reduced to $675,800, if the
Company’s registration statement for resale of the shares underlying the Debentures (the “Registration Statement”)
is declared effective by the Securities and Exchange Commission (“SEC”) prior to July 11, 2016, or prior to August
10, 2016 if the SEC performs a full review of the Registration Statement.
When
the SEC declares the Registration Statement effective, the second closing will occur, subject to customary closing conditions.
At the second closing, the Company will sell to the investors Debentures in the aggregate principal amount of $594,000 for a purchase
price of $550,000.
Each
Debenture matures one year from its date of issuance. The Debentures bear interest at 10% per annum, which is payable in common
stock or in cash, subject to a make-whole provision if a Debenture is converted or redeemed prior to maturity. The holder may
convert the principal amount of a Debenture into shares of the Company’s common stock - initially at a conversion price
of $.50 per share, then at $.35 per share after the Registration Statement is declared effective. If at any time the five day
average VWAP for the Company’s common stock falls below $.22 or the single day VWAP falls below $.15, the conversion price
will be adjusted to equal 60% of the lowest VWAP (70% if the Registration Statement is effective) during the 15 trading days prior
to conversion.
Once
each month, commencing on the day before the five month anniversary of the issuance of a Debenture, the Company is required to
pay one-eighth of the principal amount of the Debenture plus the interest and make-whole with respect to that one-eighth, in cash
or in stock. If the Company opts to make the payment in stock, the conversion price per share will equal the lesser of $.35 or
60% of the lowest VWAP (70% if the Registration Statement is effective) during the 15 trading days prior to the payment date.
Subject
to customary equity conditions, the Company may redeem all or part of the principal amount of the Debentures by paying 110% of
the principal amount redeemed plus the accrued interest and the make-whole with respect to the redeemed principal amount.