Fix failing businesses. You would never be able to pay off that debt. I make tough decisions. You know, youre causing strife right now. And i back them up with my own cash. Will you take a credit card . Its not always pretty. We dont like the fact that you can say no. Go stand in the corner and shut the [bleep] up. But this is business. I want you to think before you talk. Are we clear . I do it to save jobs and i do it to make money. Thanks for your business. This the profit. [upbeat music] skullduggery is a toy manufacturer located in anaheim, california. Purchased as a fossil replicamaker in 1987 by pete koehl iii, skullduggery is now run by his two sons, steve. We got to make sure we make this fast enough, okay . And peter. They wont be ready to ship till tomorrow. Who have expanded the company into more traditional toys, such as race cars, helicopters, and cast and paint kits. [laughs] although skullduggery racked up 1. 6 million worth of sales, they still showed a net loss of 50,000. Thats a big loss. And although the brothers are spending a lot of time and money launching new toys, they still do it without testing and research. Its more like we come up with something that we think is fun and then we go with that. If skullduggery doesnt find a way to generate sales. I mean, i dont know how were gonna come out with a new line of products. And get into a big box retailer, the debt is gonna come crashing down on them. Its my [bleep] life. I love this company. So were gettin to the point where were gonna have to scramble. [sighs] the toy business is very competitive, but its not complicated. With the proper marketing and strategy in place, i know i can make millions. [forklift beeping] careful there, buddy. [laughter] how are you . Im marcus. Marcus, im peter. Peter . How are you . Nice to meet you. Nice to meet you also. Warehouse is big. Yeah. 10,000 square feet, if you include the offices. And so what is your role here . Im the vice president. I am in charge of operations, logistics. Marcus, im steve. Nice to meet you. Nice to meet you too. Steven, my brother, the president. Im the boss. Okay. Im in charge of the company. I run the everyday business. Ive designed pretty much everythingscience kits, skulls, race cars, race sets. I wear many hats. And so when did the Company Start . 1987. My dad, hes the majority owner, was looking for a business to purchase. That was when it was all fossil replicas, so we hadnt gotten into the toy part of it yet. All of this stuff. Both yes. Thats where skullduggery comes from. We make sabertoothed tiger skulls, humans, hominids, primatesmuseumquality replicas. I was wondering where the name came from. Both yes. cause its not so toyfriendly. No. And so the skull line that you were telling me the business started with, what percentage of the business is skull business . Less than 10 . And so why are you guys still in it . We like to keep our guys busy in the slow season. I would love to see all the toys. Is there a way i can see them . Yeah, let me take you into the office. Okay. Ill give you a quick breakdown and then well give you a tour of the factory. Okay. The first toy that we ever came out with, casting kits. So casting came from the skull business. So the kids take the material, mix it up with water, pour it in the molds, sets in 30 minutes, airdries, and then they paint the pieces. It takes that Moldmaking Technology that we have and puts it into a toy. Casting and painting molded shapes isnt my idea of a hit toy. We have the marble copter, the max traxxx, and then the new tracer racers right here, which is our hottest item. Kind of taking racing with a track and cars to the next level. Its a car with two purple l. E. D. Lights in it. And when they go over the glowinthedark track, they leave traces on the track. I mean, its really cool. Very cool. Can i see how the car works . Yes. Is there somewhere we can test it . On the track . Sure. Yeah. Turn the lights off, pete. I came up with a Patent Pending where the tracks connect sidebyside so the kids could race. Cool. Isnt that neat . I love this product. Its pretty awesome. Very cool. Whats your favorite toy in the whole place . The aero flixx are awesome. This is a discthrowing game, kind of like disc golf, and when you hit the targets, they shoot up in the air, so the kids could play frisbee golf. Its in market today . Itswe went to toys r us last year. Uhhuh. It didnt do very well at market. I know, yeah. How come . Um, were not sure. It just didnt sell, and i know its a winner. All i essentially do is there you go, you got it. [laughs] [laughs] we wanted it to be somewhat challenging, you know . Almost got it. Well, i dont get this game. Its not fun. Theres no kid that wants to throw cardboard paper at a cardboard target. What research do you do to understand the market before you just make an aero flixx . Do you do any . Not really. Is this focus grouped with kids . Whathow do you both no. Does that mean that youre the focus group . I dont need a focus group. I have a lot of experience in this business, so my focus group is about 20 years of just toys. And so who do you normally sell your toys to, major retailers . Independent retailers, momandpoptype places. Okay. Which is a shrinking business, and that is one of the reasons that we really feel we need to get into some big box retailers. What marketing do you do . Tv . We do not run anything on tv. You know . Youre talkin about a lot of capital. Okay, so i think that the key to this business in a very crowded toy space, where youre trying to get attention, is a licensing play, because thats whats gonna get some interest from these big box stores. The reason that licensing deals work is because you build on the brand that somebody else spends money on. You take the tracer racer, which is virtually unknown, and you slap that nascar sticker on it and you got a builtin fan base. Then you dont have to double spend and try to create your own brand. Can i see where the Assembly Line is . Yeah. Absolutely. [upbeat music] who manufactures this . Its called jb plastics. They are a injectionmold company over here in tustin. What does it cost to make this . That costs us about 1. 19 to make. Including the packaging . Including all our labor, including the packaging and everything. How good is your margin on that . 12 cents. These cars are a great toy, but theyre only make 10 margin on em. Thats way too low. How many do they make at once . On one cycle, its four pieces. Okay. So the machine spits in the material, pops open, four pieces pop out. Plastic manufacturing costs are all about time and efficiency because youre essentially renting the manufacturers equipment. The more you can make in a single run, the lower your cost. If you lower your costs, you have better margins. Better margins, more profit. I think you can take 10 out of this cost, cause in this game, pennies count. So when you guys come up with ideas to launch a new toy, whats the process . And well use the track as just an example. It takes quite a while. I mean, you have to come up with a prototype, so we have to outsource the sculpting, and our sculptors actually in new jersey. It takes a couple weeks for him to sculpt a piece. Oh. Yes, and then it keeps goin back and forth until we get the right angles, make sure the connectors fit. That seems super inefficient. It is super inefficient. And i worry about it, in a business like this, or any business, is if im not quick, who beats me to the market . And theyre there before we are. I think thats the achilles heel of this business is you got to be first. Well, how are the financials of the business . We had a little bit of a down year this year. Sales are down. Sales are down. From what to what . 1. 6 to 1. 45. Whoa, thats almost 10 drop. Both right. Were gonna have a bit of a loss this year. How much do you think youre gonna lose this year . Well, i think were gonna be around 50,000dollar loss. And then how much debt is in the business . Its about 800,000. Okay. How did you accumulate the debt . I think itsover 30 years, its just kind of creeped up on us. You know, umyou know, weve tried things and they havent worked, and mistakes. Mistakes, yeah. Definitely mistakes. How much total inventory is in this warehouse . About 365,000. And how much of it is aero flixx . Thats probably 60. 60,000 in aero flixx . Probably somewhere around there. We kind of went over the top when we got into toys r us with that, and we thought that it was gonna fly out the door. And thats part of the reason for the debt that we have. You know, being able to survive a 60,000dollar hit is tough for a business our size. What keeps you guys up at night . I dont know. I sleep really well. Yeah . I love my job. To be honest with you, you know, its a 1. 6 milliondollar business and it doesnt make any money. Mmhmm. Right. So it should keep you up at night. The fact that it doesnt keep you up at night freaks me out a little. How about you . Ive put half my life into this thing. I mean, i took a second mortgage out on my house for skullduggery. Its aover 200,000 more in debt than it should be. Why do you sleep at night . [laughing] id love to see the books and make sure everything checks out. All right. Of course. Weve put together somethin for you. This is all the debt. So i have it broken down. If you take all the debt together, including the family debt, thats the debt right there. So, peter, this is you, 224 . Yes, thats me. You have about a 1. 1 million of debt in total, not 800, and you have another 200,000 in payables. So between payables and debt, theres 1. 3 million. And how much is there in inventory . 360 . 360. Of which ill put 330 on it, cause i think some of its not good, and then receivables are 474 . So thats 770 in assets and 1. 3 million in debt. Why should somebody invest in this business as opposed to another toy business . What makes you guys unique . I think the infrastructures herei think we are organized, we know what were doing. Were very efficient with what we do. Were entrepreneurs, and we are ready to take that next step. So, the way i should think about it is that this is one step better than a startup because the tooling is there and theres some proprietary knowledge about the toy space . Right. Skullduggery seems like a good company. Theyre hurting themselves by putting their valuable resources into bad toys, like casting molds and disc games. If i can get them to focus on their core products, like cars, and license a big name, we can make millions. I came here because i like the toy business, and its fun. It makes people smile. But this company is about 1. 1 million in debt, and based on the earnings, youve lost anywhere between 30,000 and 50,000 for the last couple of years. You would never be able to pay off that debt. I think the other challenges is understanding where your revenue comes from and getting very focused on a set number of things, as opposed to being all over the place. From now on, i dont want to focus on anything but cars. I think you believe in the whole car model. It doesnt work without licensing, because as i go through that aisle, im not paying attention if i dont see a brand name that i know. Okay. So im gonna want to license everything, because i think thats how it stands out on the shelf. And i want the company to be as debtfree as possible, but i think that the amount of equity im gonna want is gonna be its gonna be painful for you guys. We both have gone over this. We all played you and asked questions we thought you would ask. [laughing] im marcus lemonis. [laughter] thats gonna cost you. [laughs] so heres the deal. My offer is, uh. Ill pay off the 1. 1 million of debt and ill provide another Million Dollars in a working capital line, and i want 50 of the business. No. Thats not gonna happen. Why not . cause were not gonna give you controlling interest of our company. Why is that . Because its part of who we are. Skullduggery is me. I am skullduggery. Its my company. Its our company, you know . Its not your company. You didnt spend 25 years building this company. So 1. 6 million in revenue, youve got no cash in the bank, and you lose money. And you think giving up half of the business is a bad deal . Youre asking for our whole life. Youre asking for everything that ive ever worked for. Yeah, i mean, it feels like a punch in the gut. I just offered to wipe out a Million Dollars worth of debt and then give you another Million Dollars in working capital, and youre acting insulted about it . I am insulted. And you think that i just pulled it out of my ass . You can pull whatever you want out of your ass. You have the money. Id rather be in more debt than have you running my company. Should we get the [bleep] out of here . Coming up. The, uh, aero flixx, it was kind of confusing. Can you read . And later. Were gonna pitch on licensing the nascar brand on one of our toys. I could give a [bleep] about nascar, to tell you the truth. Ok, were here. Heres dad. Mom. The twins. Aunt alice. You didnt tell me aunt alice was coming. Of course. Dont forget grandpa. Can the test drive be over now . Maybe just head back to the dealership . Dont you want to meet my family . Yep, totally. Its practically yours, but we still need your signature. The volkswagen sign then drive event. Zero due at signing, zero down, zero deposit, and zero first months payment on a new jetta and other select models. Hey, what are having . Is that coffee . Yea, its nespresso. I want in. Youre ready. Get ready to experience a cup above. Is that coffee . Nespresso. What else . Great change comes from doing the right thing. Like the radical idea that health isnt an industry. Its a cause. So we do things differently. We combine care and coverage. And believe prevention is the most powerful of cures. So forgive us for not going with the flow. We just think the flow should go with us. Which makes us rebels with one cause. Your health. Id rather be in more debt than have you running my company. Should we get the [bleep] out of here . He wants half our business. I mean, we just cant do that. Its not worth it. It doesnt make sense. 25 is our line in the sand. I mean, its a line in the cement. [knocks] come in. You ready . Yeah. Hey. How you guys doin . Were hangin in there. Sure. Okay, why dont we sit down at the table . These guys are not acting professional. You invite somebody into your business, you ask for help. We sit down for a negotiation. You dont get up, run into the office, and slam the door. And so i wanted to bring them back to the table, kind of coach them through that process. Peter, what thoughts do you have . You know, i came into this whole thing hoping we could do something, but there are certain areas we wont go. We have drawn some lines in the sand. I cant take that offer. Yeah, i mean, to have to take such a reduced percentage of the company would be extremely painful. But you have a business that doesnt make money today. To be debtfree and to have working capital and to have a 10, 15, 20milliondollar business has to be worth something. 20 . No. To tell somebody that if they provide all this stuff, that they will then share in 1 5th of it, its a tough sell to me. I feel like the companys worth more than youre putting your eyes on. I think its worth a lot. Based on todays numbers, you61,000 in profit in 2010. 36,000 loss. 38,000 loss. 127,000 loss. 200,000 in payables. I mean, come on, guys. [sighs] you give me this line in the sand, so the way that i think would be a good compromise for me would be pay off the debt of 1. 1 million, but im not also going to give you a Million Dollars in working capital. All the debt on the Balance Sheet is cleared. Hmm. I want 30 of the business, and thats a test of whether you really are guys who compromise as opposed to everythings going to be a line in the sand. Im down to a much smaller number, one that makes me wildly uncomfortable. Im nervous about having 30 of any business, because that means im not in control, and that makes my investment a lot more vulnerable. So i want to be able to have control over the financial side. In order for me to protect myself, i need to put in some very basic deal points that put in specific controls. You control the creative side, but i possess financial control. Financial control is very simple for me. I dont want you taking on any debt or taking on any other partners without me being okay with it. I think thats fair. What do you think, peter . You want to shake on it . So do we need to run this by your dad . No, i dont think so. He trusts me. He trusts my judgment. If i had to ask him everything i did, then this place would just slow to a halt. Do we have a deal . I feel good about it. This is a 1. 1 million check. I think marcus is lucky to do a deal with skullduggery. We have the most innovative and unique new products out there. Lets do it. We got a deal. Yep, we got a deal. Heres your money. Thank you. Oh, boy. [laughs] its time for a drink. Hey, guys. Were gonna talk as a group. What i wanted to do is get everybody together today so we can talk about what is happening. Peter and steven and myself have made a business deal, and im gonna become an investor and an owner in this business, and a lot of things are gonna change. I focus on people, process, and product. In the case of this business, i think we have good people. I think the process is a little broken. Not only the way we design toys, but the way we bring them to market. In terms of the product, you have some things that make a lot of sense. You have a lot of things that dont make a lot of sense. Were gonna be narrowing our skus down for the ones that do sell. A sku is a common term that describes a singular product or piece of inventory. Right now, skullduggery has way too many skus, and many of them, they dont make any money. Were gonna eliminate the skus the customers dont want, and were gonna get very focused on the ones they dothe cars. Number two, we need to get our foot in the door to the big box retailers. I believe the secret ingredient is licenses, because the consumer ultimately recognizes the brand and the big box retailers see our ability to sell through to the market. Number three, in order to have a successful toy company, you have to have a toy lab. Until now, creating prototypes for skullduggery has been a lengthy and expensive process. So were gonna create a toy lab with the right technology and the right equipment so that the staff can bounce crazy ideas off each other and come up with great caroriented products, whether its racetracks, selfpropelled cars, whatever it may be. And then once we have the prototypes, i actually want to put it in front of a focus group in this lab and get feedback from people. I dont want to just launch things without focus groups and without research. Its bad business. And then the last thing is, were gonna lower the cost of things that we make. Its my expectation that we double or triple this business in the next couple years. Thank you. We have a lot of work. Lets get to work. Guys, how are you . Good. Hows it goin . So i brought you here for a focus group and research. Going forward, before we launch a product, were gonna bring it to kids. Were gonna find out what they like and what their parents like. All right. So lets go inside. Hi, everybody all hi. How are you . Hi. [laughs