Sumo ‘likely to have been insolvent from July’

Administrators for Sumo Visual say the collapsed retail printer was ‘likely to have been insolvent since July’, and amassed debts of $2.5m in that time alone.

Administrators Craig Crosbie and David McEvoy at PPB Advisory also believe 30 unnamed creditors were given unfair preferential payments totalling $800,000 in the year leading up to the collapse.

They say company was propped up by $3m in payments from its private equity investors between May and September this year.

The administrators do not expect any return for the mass of 341 trade creditors that are looking for some of their money back.

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In a detailed 39-page investigative report to creditors obtained by ProPrint, administrators say Sumo accumulated debts of more than $7.5m since July 1 last year – the month after founder Matt Huber was replaced as chief executive following a heart attack.

Senior Sumo managers told ProPrint it was from this point on that things started to go badly for the company, as executives appointed by major private equity shareholder Harbert Management Corporation managed to derail the company in less than 18 months.

The administrators have given up on finding a buyer for the business or its assets, and recommend the creditors resolve to liquidate the company.

They did manage to sell in-house developed software Sumo Tools for an undisclosed sum, this is likely the $800,000 MIS system senior managers say was ill-conceived and contributed to Sumo’s downfall.

The production kit will be auctioned by Dominion Group next Thursday December 4 at Sumo’s Port Melbourne facility.

According to the report, Sumo has total debts to creditors of $12.6m, much of it to Harbert, which has a 28.9 per cent stake, and an unknown co-investor which owns 48.2 per cent of the company and is owed a secured debt of $2.8m.

Other secured creditors include National Australia Bank, owed $1.5m, debtor finance company Scottish Pacific, owed $1.2m, and 22 industry suppliers including Colorpak, Paperlinx, HP, and Konica Minolta that are owed undisclosed sums adding up to $1.2m.

Unsecured creditors are owed $4.9m including $2.5m to trade creditors, almost $900,000 to statutory creditors like the Australian Tax Office, and $980,000 in unsecured loans to Harbert and the co-investor.

Only the top 10 trade creditors are listed and include $106,000 to Avery Denison, $60,000 to TMA, and $56,000 to Toll.

Colorlux Philippines, owed $44,600, is revealed as the eleventh-hour buyer for the business that fell through the day before Sumo went into administration.

Employees are owed more than $1.5m, mostly in redundancies and payments in lieu of notice from when the 80 remaining staff were terminated by administrators on October 29.

The report says the decision to immediately shut the business down was due to overheads of $170,000-190,000 a week and insufficient funds to keep trading with rapidly diminishing goodwill.

The administrators say Sumo’s collapse can be attributed to ‘failure to improve profit margins and/or reduce overhead costs in a timely manner and in line with available working capital; significant customers materially reducing demand and/or ceasing to trade; reducing margins to win new customers; increase in overhead costs to support aggressive growth plan; and turnover of senior management’.

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A section of the report on Sumo’s recent financial history shows in addition to losing $7.2m since last July, EBITDA fell from $1.2m in FY13 to negative $3.4m in FY14, and was negative $2.4m for the first quarter of FY15 alone.

Margin also collapsed dramatically from 32.5 per cent in FY13 to 16.5 per cent in FY14. By the first quarter of this financial year it was doing work at a loss of 11.5 per cent.

The decline in margin, driven by chasing lower margin work and slashing prices to win business, is considered a major reason for the company’s difficulties, along with significant investment in new supervisory staff.

Senior managers say Sumo was losing about $1m a year on a Woolworths contract won in July 2013 due to faulty costings.

Forecasts differed wildly from actual results, expecting 30 per cent revenue and 215 per cent EBITDA growth in FY14 ‘based largely on unidentified business, assuming that an expanded sales team would generate new business’.

In reality, revenue was below budget by $7.5m and EBIDTA lost $3.4m.

Administrators say Sumo ‘relied solely on retail sector to generate sales’ and that 15 retail customers accounted for 80 per cent of its revenue.

Its biggest client, Masters, made up 30 per cent by itself and announced a five-month hiatus from May that senior managers say executives failed to adequately prepare for.

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Administrators say preliminary investigations indicate Sumo showed 10 of the 14 ‘general indicators of insolvency’ from at least July and would likely have been insolvent much earlier if creditors owed almost $1m in overdue bills had not agreed to extend payment terms.

In July the ATO also agreed to defer an overdue debt of $617,000 on a six month payment plan.

Sumo’s working capital ratio was also in the red from FY14 onwards, crashing from $1.2m to negative $3.2m in 12 months. The ratio was only 0.46 by September 30.

The administrators say the $800,000 in preferential creditor payments are voidable by law and an insolvent trading claim could be pressed by creditors.

However, they caution that such claims are ‘difficult and costly to pursue, and even if successful they may not generate an additional return’.

The administrators say they have not conclusively identified any criminal offences by the directors or others, but ominously add that ‘if a liquidator is appointed we consider that further investigations are warranted’.

If found guilty of trading while insolvent, or other related offences, directors can face fines of up to $200,000 and up to five years in jail.

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