Fuhu Inc. Files for Bankruptcy Protection; Mattel Inc. to the Rescue

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In just a year, El Segundo’s Fuhu Inc. has gone from the nation’s reported fastest growing company to one applying for Chapter 11 bankruptcy protection in advance of a possible sale for less than $10 million.

Disagreements with the key manufacturer of its nabi tablets for children, the mobile devices that make up company’s core product line, have left the company unable to sell its products and with minimal cash to pay key vendors and employees.

Those problems could mean millions of already sold nabi tablets would stop working because Fuhu’s operating software would be shut down.

Fuhu filed for bankruptcy protection in Delaware on Monday and simultaneously disclosed in the filing that it is receiving more than $3 million in emergency funding from fellow El Segundo toy maker Mattel Inc. as part of a deal in which Mattel would acquire Fuhu’s assets for $9.5 million. The final agreement has yet to be signed, Fuhu said in the bankruptcty documents, so other bidders could come in with offers. All bids are subject to approval by the bankruptcy court.

Chief Executive Jim Mitchell said in a statement the company considered various alternatives and decided that Chapter 11 protection was the most effective and efficient process to enhance its assets for stakeholders. It has sought offers since September, when communications continued to dissolve with its chief manufacturer, Taiwanese manufacturing group Foxconn Technology Group, reportedly the world’s largest contract electronics manufacturer.

“We expect to be able to satisfy ongoing obligations to customers, vendors and employees pending the sale and ensure the bright future of the nabi franchise with the proposed acquisition and with the protections afforded by the Bankruptcy Code,” Mitchell said. “Most importantly, we expect to continue to ship our award-winning nabi products to our customers, provide support and troubleshooting to our customers, honor existing nabi Shop gift cards, and continue to develop our award-winning software, including nabi Pass, the kid-safe app and content subscription service.”

Fuhu said its revenue grew about 160 percent between 2010 and 2013 to $195 million in 2013. Fuhu said it has sold more than 4 million tablets.

Fuhu estimated in bankruptcy documents that it owes between $100 million and $500 million to more than 100,000 creditors. Meanwhile, the company only holds between $10 million to $50 million in assets despite generating $195 million in 2013 revenue.

Fuhu still owes $46.2 million to Foxconn, its largest creditor. The company said that after it moved engineering, development and manufacturing of its nabi tablets to Foxconn in 2013, the electronics giant didn’t deliver product late last year in time for the holiday season. Fuhu returned about $90 million worth of product to Foxconn, saying it would buy the goods back as needed. However, Foxconn decided to stop making the products and in September pursued payment through Fuhu’s lenders.

Fuhu’s lenders subsequently issued notices of default and refused to release additional funds through November. The situation has left Fuhu with $2 million in cash, the documents said.

Fuhu said it owes $862,000 and $1 million to its most critical vendors – Amazon Web Services Inc., which controls four million tablets, and Ocala, Fla. warehouse company R&L Global Inc., which houses about 631,300 of Fuhu units.

Mattel was the only potential buyer that could move quickly enough to lend the company money, and the two entered into an agreement for a sale and assumption of liabilities on Dec. 6.

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