HP-2020-000016 - [2025] EWHC 1451 (Ch)

Cabo launched Worldeez with no formal business plan or financial projections. The only financial projection was one put together for the purposes of the negotiations with Nickelodeon in March 2017. Mr Cohen claimed that the figures in that projection were conservative. In a WhatsApp message between the Cabo founders in April 2018, however, Mr Michaelson described the projection as “very ambitious”, and Mr Lazarus in his evidence said that the projection was “trying to big up the company” to pitch the deal to Nickelodeon. He said that the figures were “all over the place” and not based on any forensic science; rather “they were largely based on dream and hope from both Singleton and the Cabo team”.

The evidence of Mr Lazarus was, on this point, entirely consistent with the other material before the court. I will address in turn the main elements of the financial projection, namely sales volumes, retail and wholesale prices, cost of goods, and the profit margin figures.

Sales volumes. The toy experts agreed that forecasting demand was critical for suppliers to meet demand and to be profitable. Mr Cohen accepted that the likely level of sales was not a matter within the experience of the Cabo founders. The sales volume projections were therefore initially prepared by Singleton (likely Mr Lazarus), but those figures were not based on any market research or analysis of comparators. They seem, rather, to have been figures plucked from the air. Mr Cohen then significantly increased the 2019 projected sales figures without discussing this with Singleton, and with no analytical basis other than his view that he “would have expected growth”.

No-one appears to have considered whether these projections were realistic, given the market conditions at the time. In fact, even the projections for 2017 (1.2m units of the globe in the seven months from June to December) would have made Worldeez the best-selling doll (by sales volumes) in the UK, ahead of both Shopkins and LOL Surprise. That was wildly implausible – there was nothing in any of the evidence to support the suggestion that Worldeez would have outperformed both of those phenomenally successful products. Mr Cohen’s projections of over 2.7m globes in 2018 and almost 3.4m globes in 2019 were even more far-fetched.

Retail price. The projection assumed a retail price for the globe of £3.49. In reality, that was rapidly reduced to £2.99, with Mr Sivner explaining in a WhatsApp message on 30 March 2017 that £3.49 was above the market average for a 2-pack collectible, and that the price point needed to be a maximum of £2.99. The toy experts agreed that this was the right price. There was no evidence of any realistic prospect that the price could thereafter have been increased; indeed a 2018 email discussion with a potential distributor indicated that it was unlikely to be possible to raise the price after the £2.99 had been established on launch in 2017.

Wholesale price. The projection assumed a wholesale price of £1.75. Mr Cohen, when asked about this, said that Cabo had discussed a lower price of £1.50, but had retained the figure of £1.75 in the marketing deck on the basis that “God loves a tryer. May as well try it at £1.75, and it would give us a bit of negotiation, if necessary, down to the £1.50.” The problem with a wholesale price of £1.75 was that it would have given a retail margin of only 30% by reference to the ex VAT retail price of £2.49. That wholesale price was only paid by one retailer who took a very small amount of Worldeez stock (Bargainmax). ToyTown paid £1.65, but again only took a small quantity of stock.

No larger retailer agreed a wholesale price which gave a margin of less than 40%. B&M agreed a wholesale price of £1.50, which provided a margin of 40%. The Entertainer negotiated a £1.20 wholesale price, giving a retail margin of 52%. Mr Michaelson, who was responsible for attending sales meetings with the retailers, initially contended that this gave Cabo a “good margin”. When pressed on the point, however, he was unwilling to explain further, saying that he would leave it to Mr Cohen to respond. The reality was that he was well aware that the wholesale price negotiated with The Entertainer was unviable. He had commented in May and September 2017 that Cabo was “making nothing” from its sales to The Entertainer, and that “with the margin Entertainer were offered we would have made no money from them”.

Cabo tried to get around that difficulty by describing the £1.20 price for The Entertainer as an “introductory rate” which would have been increased if Worldeez had performed well. But there is no evidence that this was what The Entertainer agreed. On the contrary, Mr Grant said that the margin of 52% was The Entertainer’s “absolute minimum” margin requirement. He was not challenged on this point, and Ms Munt confirmed that The Entertainer was well-known for expecting a minimum 50% margin.

Cabo also contended that Smyths and TRU would have purchased the globe at £1.75, based on the fact that those were the wholesale prices presented to them on the marketing deck. The difficulty with that submission is that (as set out at §§96–102 above) while Cabo have expected orders to follow the meetings with Smyths and TRU, neither of those retailers did in fact place an order for Worldeez, so there was no agreement by either of them to any price. Nor is there any evidence of either Smyths or TRU confirming, even provisionally, that a wholesale price of £1.75 would be acceptable to them. As to the expert evidence on this point, the toy experts agreed that small suppliers tend to offer retail margins of 45% or more (which would have implied a wholesale price of £1.37 or less). Ms Munt’s evidence was that if a retailer did accept a lower headline margin, it would expect additional preferential trading terms such as discounts, rebates and promotional support.

Ultimately, therefore, there was no evidence supporting a general wholesale price of £1.75. Rather the evidence indicated that the realistic wholesale price for the larger retailers was in the range of £1.20 to £1.50. The average wholesale price would therefore have fallen somewhere between those figures. A mid-point of around £1.35 is in my judgment a suitable figure to adopt.

Cost of goods. The projection gave figures for the cost of goods as £0.75 for the globe, £1.60 for the 5-pack and £2.75 for the 10-pack, but MGA contended that the costs were in fact £0.82, £1.78 and £3.19. Whichever figures were accurate, there was a consistent concern that Cabo’s costs were too high when compared with the selling price of the product. The contemporaneous documents making this point included a message from Graham Mottram, who was assisting Cabo with sales in September 2017, suggesting that Cabo should have been paying $0.50 for the globe. That was also Mr Mowbray’s evidence.As discussed further below, this presented a significant problem for Cabo’s attempts to secure international distribution of Worldeez.

Profit margin. The projection forecast a gross profit margin for Cabo of over 55% for every year covered by the forecast (2017 to 2019), and operating profit margins in the same years of 40–43%. Those figures were unrealistic. A wholesale price of £1.35 for the globe would have given Cabo a gross profit margin of 44%, assuming cost of goods as being £0.75 (and obviously a lower margin if the cost of goods was higher than that). As for the operating profit, Mr Harper’s evidence was that successful global toy companies would make an operating profit of in the range of 5–20% of net sales, with the best audited profit performance of the biggest toy companies being Hasbro in 2017 with profits of 16% of annual sales. He considered that for UK-only companies the profits were generally in the 5–10% range, and that this reflected the profit range of the smaller toy companies he had worked with. He was not aware of any individual brand exceeding an operating profit of around 24%. Ms Munt said that in her experience the operating profits of smaller toy companies ranged between 10–15%. Whatever the differences between the experts as to the precise ranges, it was clear from their evidence that Cabo’s projected profit margins were unachievably high. There is, moreover, no evidence that these forecasts were ever revised, or kept under review through (for example) regular P&L accounts or cash flow reports.

The overall picture is of a set of financial projections which were implausible, indeed on some points wildly implausible, and which were never reviewed even when it became clear that the various elements of those projections were inaccurate and/or unachievable. That is indicative of a business with no robust financial control mechanisms – or indeed any clear structure for making financial decisions. None of the Cabo founders were paying serious attention to the accounts or P&L figures; rather, they appear to have left this to Singleton. But Singleton, likewise, was not exercising any real financial management; it was simply providing Cabo with the cash flow required during 2017. I agree with MGA’s submission that this was a serious problem for the viability of the business. As Mr Harper said, “any toy business that does not have a firm grip on its finances is unlikely to succeed”.