On the 363 Auction Block: Imperial Toy LLC

Imperial Toy LLC has filed for chapter 11 protection in the Northern District of California. The company intends to run a sale process with a stalking horse offer in hand for $13 million from competitor Ja-Ru, Inc. (also providing $5.75 million in DIP financing). The goal? An expedited auction process with a proposed bid deadline of December 12th and a closing before year end. Have cash? Imperial Toy is seeking approval of a $650,000 breakup fee for Ja-Ru and overbids of $100,000, with an initial required overbid of $13.750 million.

Company Overview

Imperial Toy is a California-based manufacturer of bubbles, novelty toys and other children’s products.  Its brands include Blitz, Super Miracle Bubbles, KiddyUp, Zooma, Splat X, and KAOS with sub-brands such as Life-Like and Googly. The company has licensed products with Disney, Marvel, DC Comics, Little Tikes, Thomas the Train and Teenage Mutant Ninja Turtles. 

Imperial Toy has facilities in five locations globally, including its headquarters in North Hills, CA; a San Diego distribution facility; a sales office in Bentonville, AK; and two manufacturing and packaging facilities in Tijuana. Its subsidiary, Imperial Entertainment International, also has a facility in Hong Kong focused on product development and supply chain management. More than 60% of Imperial Toy’s materials are sourced from the subsidiary.

Imperial generated approximately $106.7 million in revenue in 2018, roughly $78.4 million of which is domestic, and $28.2 million generated in Hong Kong.

The Slippery Slide into Bankruptcy

Various external market factors contributed to Imperial Toy’s struggles. In particular, an unusually wet spring delayed the start of its peak sales period and triggered a sharp decline in revenue. And threats of trade tariffs prompted both an inventory accumulation to protect profit margins and a drop in orders as retailers sought to limit their exposure to price increases. These trends “combined to push [Imperial Toy] into an operating loss during the time of year when it should have been profitable and drove a steeper than usual investment in working capital.”

The situation likely wasn’t helped by the fact that Imperial Toy not only took on significant indebtedness to fund growth of the business, but in February of 2018 it entered into an agreements to redeem from the Hirsch Trust 40% of the equity interests in the company. According to the debtor:

“The obligations to the Hirsch Trust originated in February 2018, when the Debtor entered into a series of redemption, loan, security and related agreements with the trust to repurchase and redeem from the Hirsch Trust 40% of the then outstanding equity of the Debtor. The Hirsch Trust received a number of promissory notes from the Debtor and Path Global Ltd., a Hong Kong entity. The Hirsch Trust began to receive cash payments from the Debtor and Path Global relating to the redemption in July 2019 [?] and such payments from the Debtor and IEI continued through the remainder of 2018. . . . The loan obligations are secured (but subordinated) . . . .

Interesting….

/Mette K.

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