While most investors have been salivating over the endless possibilities from the advent of the Internet of Everything, one area that often gets overlooked is the multi-billion dollar toy market. From smart cars, to smart homes, to smart health, the excitement toward a more connected experience in everyday life is palpable.
Leveraging their expertise in mobile connected technologies and experience in consumer entertainment products, Spiral Toys (STOY) is looking to corner this market in the children and adolescent toy industry. With its lead product CloudPets, Spiral Toys is establishing itself as one of the early pioneers in the smart toy market.
The company is implementing a multi-revenue stream model that effectively retains and monetizes customers with each product purchase. Even more compelling, is the company’s long-term vision to leverage its unique technology platform into becoming a dominant brand of its own.
Equities.com had the opportunity to speak with Mark Meyers, Founder and CEO of Spiral Toys, to learn more about the company’s technology platform, business model, and significant momentum as it prepares for its upcoming national TV campaign for CloudPets.
EQ: Can you provide us a brief overview of Spiral Toys and its focus?
Meyers:At Spiral Toys, we're focused on creating different technologies in the connected mobile space that bring new entertainment experiences by connecting physical items to mobile devices. These items can be toys, consumer products, and anything that you think of as entertainment. We then connect those items back to an iPad or tablet device through various different kinds of connection platforms that we've created and patented.
EQ: Looking at your company's business model, you actually touch on a lot of hot markets right now. You can look at the toy market, but you also address the Internet of Things, apps and other areas. Can you give us the scope of the markets that you're targeting right now?
Meyers:Right now, we are targeting two major markets: the toy market with kids and then a consumer product market with tweens. We are really creating app experiences. That’s the market that we're in. We are addressing market needs by bridging the divide between toys or physical items and different connected platforms. From there we can create strong, unique brands around these platforms.
For example, we built the CloudPet product line leveraging Bluetooth Low Energy technology, and partnered with a toy company to launch the brand. We collect initial revenue from the purchase of each physical toy, and then continue to monetize through the sale of complementary apps and content to those same customers in the digital space.
With the Vinyl brand, we are targeting the tween market by utilizing near-field technology embedded into physical stickers, which enables kids to share games, photos, music, videos and other digital content with one another.
By creating new and engaging entertainment apps and social platforms around physical items we are building an entirely new retail ecosystem that leverages retail sales and maximizes marketing efforts. We're not just out there on a virtual level, but also on a physical level.
EQ: What is the size of the market you’re addressing with your products?
Meyers:In the mobile-connected toy arena, Disney (DIS) and Skylanders (ATVI) , which I consider to be two major players in the space, both averaged around $1 billion in revenue last year. I believe Activision, through Skylanders, did more than $1 billion. There is also the educational market with leaders such as LeapFrog (LF) bringing in half a billion annually alone. This is another sought-after space that toy companies are trying to push into. Altogether, I look at the connected toy space to be an $8 billion to $10 billion market this year and fully anticipate it to keep expanding at an aggressive rate.
That being said, the market for near-field technologies and other digitally connected platforms leaves a gap to fill in the tween and young adult market, which is completely unaddressed. We’re looking at what could be a $10 billion to $12 billion space in 2016. So between the two, we believe there is at least a $20 billion opportunity there. We seem to be one of the few companies focused on addressing both sides of that space. And by leveraging the Apple (AAPL) and Android (GOOG) operating systems we are tapping into a much larger user base than that of dedicated game consoles like the PlayStation 4 (SNE) or the Xbox One (MSFT) .
EQ: Interconnectivity seems to be the direction that everything is moving towards. As you mentioned, there’s not a lot of competitors in this space yet, so what are some of your advantages in establishing your leadership?
Meyers:First of all, we entered a space that has a very high entry point, meaning both money and time are heavily invested upfront. To be competitive with Spiral Toys at this juncture a company would have to develop a similar technology platform, create iPhone and Android apps to leverage that technology, and then launch a toy into the retail sales space with all of this in place. This process takes years of R&D and investors with deep pockets and patience.
All toys are usually sold 12 months prior to them being on the shelf. Toys that you see in during the holidays of 2015 are actually sold in October and November of 2014. It takes time. It’s not like the app space and the social gaming space. People see a new app, they go and they replicate that gameplay experience and they can put an app back into the marketplace with the exact same experience in just a month or two. With toys, it takes two to three years to create the same hardware experience, the same software experience, the same brand, and to launch it into retail. The life cycle is much longer. We’re built to protect the space because of the nature of the industry and the strength of our partnerships in the manufacturing process.
We also have several IPs and patents which offers us protection for the technology we have created. We’ve built an expertise in Bluetooth Low Energy and Near Field Communication that very few companies currently have. It is a fairly new technology and we got into it almost a year and a half before it was viable to even bring a product into the market. In addition, we have constructed a robust technology library which gives us a substantial competitive advantage over our competitors.
EQ: Geographically, what markets are you targeting right now?
Meyers:To maximize our efficiency, we have carefully selected geographic locations best suited for the different functions and departments of our company. Geographically, our headquarters, which houses the publishing side of our business, is in Los Angeles. This is primarily because it’s where the brands and the properties are, and where deals happen. The development of our software experiences and hardware is done in British Columbia where we can take advantage of tax credits that only a few Canadian provinces provide. By doing this we expect to get upwards of 30% to 35% of any salaries that we spend on research and development back as a credit from the BC government next year.
We’ve also created an Asian entity in Hong Kong whose primary job is to work with our toy and consumer product partners. They work directly with the factories to bring the whole product package together. This enables us to sell these products to our partners and to export directly from China.
Spiral Toys Hong Kong offers us two major advantages. First, we wanted an entity that would be able to work with both factories as well as with toy companies. Most toy companies have Hong Kong entities to deal with invoicing and clearing, and to work with the factories in Asia before exporting out. Having a presence there gives us the ability to seamlessly work with a multitude of partners and customers that we wouldn’t otherwise have ready access to. Secondly, by manufacturing products that are already embedded with Spiral’s technology, we are maximizing a revenue potential which was previously limited to licensing agreements and royalty fees. . This builds a predictable and consistent revenue stream for Spiral and allows us to manage the quality of our product.
By spreading out globally, we are able to effectively offer everything from licensing, to the creation of new technology, software applications, manufacturing and soon, direct response marketing technologies and programs.
EQ: You’ve described your executive team as world class. There’s certainly a lot of experience and pedigree there. Can you tell us about some of the members on your team?
Meyers:I founded Spiral Toys when I saw the direction technology was heading while working in the video game industry where I held several executive positions with Sony Computer Entertainment and the Walt Disney Company. From 2004-2011 I was a head of a product development team at Disney Interactive. Spiral Toys was born when I saw I could develop the mobile-connected platforms the market was going to need, and I left my position at Disney to do just that.
Jorge Freitas, our CTO was our first hire. He worked for Electronic Arts (EA) as a Technical Director for several different products that they had in development. He was also a Studio Tech Director for Disney and a very well respected technologist and technology leader in Vancouver. That gives us some really competitive advantages in terms of finding the right developers to do the right job.
Bob Stewart, our CFO, has had years of experience working not only on the public side but also on the private side. Bob has been involved in this company since the beginning and has helped us transition and grow both with the building of our products and the company. He brings a great breadth of experience and knowledge of developing a company at our stage and preparing for the future.
Recently, we brought in two new general managers that both come from the gaming world. They are taking on the management of our product lines. We have also engaged several digital app development studios to further advance our products. We have brought on an engineering firm and manufacturing contract firm dedicated to Spiral Toys Hong Kong to support our efforts there. I am amazed at the level of creativity and proficiency each member brings to the team and believe that building out these products requires finding the right people to work together to bring great products to market.
EQ: Looking at some of the news that you guys have rolled out year-to-date, it looks like you've built a lot of momentum with a lot of announcements on multiple fronts. Can give us some highlights on these recent achievements?
Meyers:One of our biggest achievements was the launch of our first product, the Toy-Fi Teddy. We shipped about 80,000 units of that product through last year’s holiday season. It was a great experience and great exposure for the company, but we didn’t really fulfill what we were hoping to do with our product. It was more of a test to see how our technology would work in the marketplace.
We just signed a partnership agreement with a prominent company called Jay@Play and Jay Franco and Sons. Together we are able to bring Spiral’s products to market, and it’s absolutely amazing the traction we've got.
In April, we are launching our TV campaign for CloudPets, which will run for the remainder of the year. In early summer, we're placing products at major retailers. There’s a lot of excitement around our CloudPets property, and in fact, Toys R Us Canada gave the product the “Overall Best Toy” award at their vendor show this past fall.
Actually, things are going so well that we're on our way back to Asia to up our production capabilities because the orders that we have received exceed the capacity of the factories that we're currently using. I suppose this is a great problem to have. We will bring new factories online to be able to fulfill the demand of our customer base.
Those are very significant developments at this still early stage of the company’s development. I want to make sure that we have some very strong milestones in place. I want to see Q2 and Q3 become fundamentally sound for the company and then start building digital revenue. We may assess whether we should bring the company onto a more senior exchange, which is a goal that we do have. But, again, it's about hitting our milestones and hitting the goals of the company. So far everything that we want to hit, we have hit.
EQ: You’ve identified the significant milestones for the next six months, but, longer term, what is the bigger vision that you have for Spiral Toys?
Meyers:Longer term, we want to see a shift coming from the development side into our lines of revenue. We actually have three lines of revenue for each product that we sell. We have a manufacturing side, we have royalties from licensing the property, as well as the digital revenue. What I think is important for the investment community to realize is that from a cash flow standpoint, we not only hit but maximize each one of those revenue streams.
I am excited to see what’s going to happen next as all of our plans begin to take shape and the realization of all our hard work in everything that we've done. Our products sales and earnings statements will tell a clear story of our progress for our investment community.
We want to have good transparency so that everybody can track our progress and get behind a company that really has some high growth potential. We’re here to build a company that is going to be here for 50 years, not something that is going to be gone tomorrow. That is our philosophy and that is how we will measure our success.
EQ: Is the CloudPets model easy to replicate when you sign additional licenses?
Meyers: That is an interesting question. Having gone through the complete lifecycle of the CloudPets product Iine, I can see where applying the Spiral technology to products to create a new line could seem fairly easy. However we are more focused on creating brands than we are products.
I want to use our technology and innovation to build the CloudPets brand. Brands live forever. Brands are tough to marginalize. Technology can be marginalized. It always is, so for us, I don’t want to use our technology and innovation that we invested our time and money behind to go and help another company to continue to build their dominance in properties.
We're very selective with how we partner and who we partner with, because otherwise our technology will be marginalized. I want our products to be known as the one and only CloudPets. There might be replicas and there might be something that is similar, but it's not the same. For example, as CloudPets becomes a highly successful brand we would be positioned to create a Disney-branded CloudPet. This is different than simply licensing software to another company to use in their physical products, and it’s a much stronger business model.
We build brands with the benefit of a high valuation because of their ability to continue to bring new experiences on the same brand. Every time we do that, it's going to be get easier and easier, and more profitable and more money is going to come into the company.
EQ: So you have a very clear focus and specific target of what you want this company to be. Any additional closing comments or final takeaways that you want to share with our readers?
Meyers:The beauty of our company is in our products. Having prominent products that utilize all types of media offers the company a great deal of exposure and strengthens our brand. We’re very focused on how we continue to build not only products and revenue, but also building a brand and an awareness of the strengths and capabilities of the company we’re creating. I think that's where we drive the shareholder's value.
A company can be generating the most money in the world, but if nobody knows about you, it's very hard to see the share price move. We are very focused on making the right products, the right technology, getting the right exposure, and on being profitable. For the company to continue to grow and excel, that’s something that we're very focused on. We want to align the company in the right way to take full advantage of that growth.
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