Creditors of fallen tablet maker KMS hit for £4m
Report from administrator confirms Google licensing issues at heart of tablet manufacturer and distributor's sudden failure
Trade creditors owed a collective £4m by fallen distributor and tablet maker KMS Components have been told they will get virtually none of their money back.
As revealed by CRN, Cardiff-based KMS collapsed suddenly in January amid speculation of a licensing spat with Google and largest tablet customer Argos.
Administrator Deloitte has told unsecured creditors they will get only a negligible return on their eye-popping £3.95m collective debts as it shed more light on the events leading up to KMS' demise. Its major secured creditor, Lloyds Bank Commercial Finance, is also likely to suffer a shortfall on the £4.6m it is owed.
Of KMS' largest trade creditors, vendor ASUS was owed £645,000 by KMS, with distributor Enta Tech and Samsung in for £412,000 and £355,000 respectively, the document reveals.
Distributors Avnet Technology Solutions and Microtronica were also owed sums of more than £200,000 although sources tell us that KMS' strong financial performance mean that the vast majority of its debts will have been credit insured.
"This was like a bolt from the blue," said one credit insurance source. "KMS' risk profile was strong so all the major insurers had cover. The problems started in October and it was all done by January - it fell like a pack of cards."
Sudden collapse
Deloitte confirmed that, in line with previous speculation, a licensing spat with Google - along with separate issues relating to warranty support and trademark infringements - triggered KMS' sudden demise.
Its woes began in October when Google contacted some of KMS' retail customers warning them their tablets must have a licence to use Google Mobile Services (GMS), something KMS had not provided, the report outlined. In November, Google turned the screw further, requesting KMS cease the sale of tablet products, which the firm claims cost it £10m in confirmed sales.
KMS tried to find a way around the issue by proposing to its customers that it use an "alternative solution", but these plans never got off the ground, leading its customers to seek alternative products from competitors. Adding to its misery, largest customer Argos withheld settlement of an outstanding debt of £3.2m, a move Deloitte confirmed is the subject of a legal dispute.
KMS' decision to enter into "a number of unfavourable contracts with regards to warranty support and returns" only added to its troubles, Deloitte confirmed.
A writ served to KMS on 18 December for "unspecified damages in respect of alleged trademark infringement in respect of the sale of certain electronic components", provided the final nail in the coffin, and the firm was entered into administration on 8 January.
Just three months earlier, KMS had seemed like a healthy, even flourishing, business, with revenue for the 10 months to 31 October 2013 hitting £52.5m, well up on the £47m total generated in the whole of 2012. EBIT for that 10-month period was £1.59m, up on the £1.41m recorded for the whole of 2012.
Deloitte said it had enjoyed limited success in its quest to sell KMS' assets, despite receiving expressions of interest from 44 parties and KMS' stock commanding a theoretical book value of £2.62m. The administrator said it is also seeking offers of more than £1m for its property in Penarth, near Cardiff.
Credit insurers have been jittery about the channel since the credit crunch took hold in 2008 and Rich Marsden, director of rival distributor VIP, urged against a knee-jerk reaction to KMS.
"This has been a big hit to the industry but it's important we [all] put some confidence back in the market and support resellers to ensure they have sufficient credit," he said.
There will be no creditors' meeting, Deloitte said, as there is "no prospect of any funds being returned to unsecured creditors other than by virtue of the PP (a negligible fund for unsecured creditors set aside out of the company's net property)".