2e2's management admitted that its financial reporting practices were less than perfect in the final days leading up to its collapse, a report from the firm's administrator reveals.
According to the 16-page document penned by FTI Consulting, 2e2 presented a draft of its 2012 financial results [ending 31 December] to its banking backers on 24 January.
The draft accounts reported that "significant weaknesses in financial reporting and process [had] been identified" and that EBITDA had as a result been "readjusted" to £11.6m – compared with the £34.6m figure quoted in November.
In view of this financial bombshell, 2e2's secured lenders concluded that they were not in a position to bridge the immediate £25m funding gap the VAR needed to stay afloat and – just four days later – it was placed into administration.
The report, which was sent out to creditors on 20 March, also revealed that FTI raised £2.8m from the sale of its datacentre business to Daisy – a figure not publicised at the time the deal was transacted.
Other nuggets of information contained in the document, which has been seen by CRN, include the fact that:
* 70 interested parties expressed an interest in the UK business (which FTI failed to sell as a going concern).
* 19 offers were lodged for 2e2's continental European subsidiaries, a bidding war eventually won by Logicalis with its €24m (£20.3m) offer.
* G3 bought US arm Diagonal Consulting for $250,000.
* The firm collected £800,000 in funding from customers to keep its datacentres running. They had been asked to stump up amost £1m.
* The datacentre business was bought by Daisy but FTI reached a relatively advanced stage of negotiations with two interested parties.
* FTI has received notification of retention of title claims from 27 parties, 17 of which have been fully resolved and 12 of which are not yet resolved.
* Although FTI admitted that unsecured creditors will get nothing and secured creditors will see a significant shortfall on their collective debt of £257.2m, it claimed it is succeeding in its task of achieving a better result for creditors than if 2e2 had been wound up.
The report reveals just how rapidly the VAR's financial performance deteriorated in the run-up to its being placed into administration.
According to the document, 2e2 recorded a net loss of £48.9m in its unaudited 2012 draft accounts – almost double the £25.8m loss recorded a year earlier.
Revenue fell from £403.6m to £337.3m year on year.
FTI published a timeline of events leading up to it taking charge of the 1,400-strong UK arm of 2e2 on 28 January.
A chief financial restructuring officer was enlisted in December 2012 after 2e2 notified its secured creditors that it might breach its financial covenants.
By mid-January 2013, it was clear that 2e2 was facing a significant liquidity crisis, and needed £25m to stay alive until the end of February and £45m for the period until 20 April, FTI said. It attributed this to a prolonged deterioration in underlying profits, an unsustainable level of trade and other creditor liabilities (along with the loss of credit insurance) and an inability to finance further invoices through its arrangement with Hutton Collins – one of its two private equity backers alongside Duke Street.
Following failed attempts to secure more funding, 2e2's fate was sealed when the draft results cited above came to light a week or so later.
Bills, bills, bills
FTI did not go into any detail on the financial reporting weaknesses 2e2 had identified.
However, on point 7.4 of the report, it hints that the book debts it hoped to collect have been limited because some revenue had been recognised before services had been delivered.
"A number of factors have limited the recovery of book debts, including a significant number of invoices representing future billings for advanced periods for which 2e2 is unable to provide services," the report states.
Of the £43m debtor ledger, to date, realisations have totalled just £4.1m, FTI said.
The administrator said that it had incurred time costs of £2.48m for dealing with the administration of the firms.
Ian Kilpatrick, chairman of distributor Wick Hill, expressed his sympathy with staff and creditors suffering as a result of 2e2's demise.
"The failure is more a symptom of apparently misguided financial engineering than of underlying weakness in the channel," he said.
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