Quick Rise, Sudden Fall

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Quick Rise, Sudden Fall
Powered Down: Jim Mitchell with nabi tablet at Fuhu’s El Segundo office in 2013.

El Segundo’s fast-rising star Fuhu Inc. came crashing down to Earth with a filing for bankruptcy last week.

Fuhu – which gained national exposure for its quick growth – blames problems with a supplier. But whether the company can straighten out its issues and remain independent and viable is an open question.

Veteran toy company and El Segundo neighbor Mattel Inc. has offered to buy Fuhu for only $9.5 million, which could be a tactic to attract subsequent – and larger – bids after agreeing to lend emergency funds to the 8-year-old company.

That’s far below the roughly $65 million Fuhu had raised from investors such as DreamWorks Animation, Fountain Valley computer chip maker Kingston Technology and Taiwanese electronics firm Acer. Another of its investors, Taiwanese electronics giant Foxconn Technology Group, which Fuhu tapped to manufacture its nabi tablets, wound up being closely involved in its downfall, according to Fuhu.

Should Mattel succeed with its bid, the acquisition could benefit the company if it uses Fuhu’s technology to help keep its brands relevant with kids as they age out of dolls and trucks and into consumer electronics.

Fuhu launched in 2008 with its core product, the 7-inch nabi Android tablet for kids. Under parental control features, children can watch licensed content, chat with friends and family members or go online using mobile applications and a subscription service.

Since then, Fuhu has varied its offerings, releasing tablets with TV-size screens and recently kids’ versions of fitness wristbands.

The tablets pushed Fuhu to the top of Inc. Magazine’s fastest-growing companies list in 2013; its revenue had grown nearly 160 percent since 2010 to $195 million. Fuhu topped the list again last year.

Likewise, the company was No. 1 on the Business Journal’s list of 100 Fastest Growing Private Companies in both 2013 and last year. The company did not appear in this year’s rankings year, which came out last month.

Fuhu, co-founded by Robb Fujioka, Steve Hui and John Hui, and led by Chief Executive Jim Mitchell, did not provide financial figures to the Business Journal for the list this year.

Rise, fall

Fuhu could be facing a problem with consumer demand for its products.

After growing rapidly since 2010, tablet sales generally experienced their first decline this year, said Shawn DuBravac, chief economist for the Consumer Electronics Association in Washington, D.C. Year to date, tablet sales by unit volume are down 19 percent compared with the year-ago period. Although those figures are for tablets for adults, he assumes much the same is occurring for kids’ devices.

“Consumers aren’t replacing them at the same rates as they were,” DuBravac said.

However, Fuhu attributed its Chapter 11 filing less to declining sales than to supply problems with Foxconn, its chief supplier and key investor, which is reportedly the world’s largest contract electronics manufacturer.

According to Fuhu’s bankruptcy filings, Foxconn was late delivering product for the tablet maker’s critical holiday season last year, which was “a significant loss” during what is normally Fuhu’s most profitable season of the year. The products were delivered after Christmas, which meant Fuhu was then overstocked.

The company returned $90 million in goods to Foxconn, saying it would buy them back as needed. But, according to the filing, Foxconn stopped making or delivering Fuhu’s products. Fuhu has “significant disputes” with Foxconn due to this and other events, the company says in the documents.

In September, Foxconn aggressively went after Fuhu for unpaid bills, refusing to supply more products. Fuhu said Foxconn eventually did provide it with about $4 million worth of items, possibly in exchange for securities in Fuhu, and Fuhu was able to sell those. But Foxconn then again stopped all communications and after that, Fuhu’s lender issued notices of default and removed more than $4.5 million from Fuhu’s bank accounts, leaving it almost no money to continue operating, according to Fuhu.

In a statement to the Business Journal, Foxconn denied Fuhu’s claims.

“Foxconn wishes to clarify that the allegations reportedly made by Fuhu about our company in relation to that company filing for bankruptcy are inaccurate,” reads the statement. “We reserve the right to take legal action against such unfounded allegations.”

Fuhu still owes $46.2 million to Foxconn, its largest creditor. Last week, a Delaware bankruptcy court allowed Fuhu access to its remaining cash so it could temporarily keep the business operating.

Mattel has agreed to loan Fuhu $3.3 million under a deal in which Mattel would acquire Fuhu’s assets for $9.5 million. Fuhu is also pursuing other bids, according to bankruptcy documents.

Mattel and Fuhu did not respond to requests for comment.

Integration

Acquiring Fuhu’s tablets and other products could be good for Mattel, said Jaime Katz, an analyst who follows Mattel for Morningstar Investment Services Inc. in Chicago. The company’s technological innovation has lagged some of its competitors, such as Hasbro Inc. of Pawtucket, R.I.

“There’s lots of digital exposure that they’re lacking and this is a way they can pick this up,” Katz said. “They can use a tablet like that through a child’s lifecycle. They could officially have something for Fisher-Price, and then American Girl, Barbie and Monster High. It helps build its brands through another data point or touch point.”

Additionally, the $9.5 million price would be a low-capital-risk opportunity that wouldn’t strain Mattel’s balance sheet, as it has cash on hand, she said. Fuhu is not a winning opportunity for very many possible acquirers because its tablet has limited uses and a very niche demographic, she added.

“They can stay alive as part of someone else’s business, or fold,” Katz said.

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