Before he raised some $300 million for Pay By Touch, and then pissed it away on ill-thought-out acquisitions, John Rogers was charged with destroying an ex-girlfriend's kitchen and threatening to make her life a "living hell." (The conviction, the company liked to note, was converted from a felony to a misdemeanor.) If you're a football fan, you know the plaintiffs' names — Drew Bledsoe, Rick Mirer, Craig Nall, Alex Van Pelt and Mark Campbell. If you're not, just believe me when I say they were about as good on the football field as they are with their money. (Photo by AP/Widman)

Solidus Networks, which does business as Pay By Touch, sold its two "noncore assets," and plans to auction the main business, the biometrics payment business, on March 14. One subsidiary, which Pay By Touch purchased for $82 million, sold for just $4.2 million. The other, bought for $30 million, went for $600,000. Now all that's left are questions.

Dissecting a Bankruptcy: ATMDirect

February 27, 2008

I thought it might be interesting to dissect a recent bankruptcy sale we were involved with. You might want to catch up by reading my post title, "Section 363 of the U.S. Bankruptcy Code". Those of you who have been following Nicholas Carlson's coverage of the Pay By Touch bankruptcy won't be surprised that the company is running their Chapter 11 reorganization as well as they ran their business. Pay By Touch operated a business unit here in Dallas (Irving) called ATMDirect. Our team spent the past month conducting diligence on the business and ultimately participated in the auction to purchase ATMDirect last week.

The local ATMDirect people (both current and former employees) were very helpful and simply wanted to keep their business up and running. The Pay By Touch people (in general) were less than helpful and at every turn seemed to be erecting roadblocks. The creditors hired a company called FTI to sell off non-core assets like ATMDirect and to reorganize the core operations of the parent company Pay By Touch. FTI installed Thomas Lumsden as 'Chief Restructuring Officer' who, by looking at his CV, seems to be very qualified for the position.

After our first meeting with the local ATMDirect people I was certain we wanted to make an offer for the assets. Evidently Thomas had set a bid deadline, which failed attract even a single bid. I called him and offered to serve as the 'stalking horse' so that an auction could be held. He suggested that he intended to draft his own asset purchase agreement (APA) and that he would be scheduling another auction in a couple of weeks. I suggested that it might be in the interest of the debtor to have one of the bidders (i.e. us) prepare the APA. Thomas didn't agree and in a confusing twist became somewhat belligerent. Our subsequent communication was exclusively electronic, much of it rather silly.

Despite the fact that I was in contact with Thomas on a daily basis, we didn't receive his APA until two business days prior to the deadline for bids. There simply wasn't enough time to get our lawyers to review the document, circulate it to my team and complete it in time for submission to Pay By Touch. Some members of my team assumed this was by design (i.e. the conspiracy theorists in my group), while I simply assumed it was a matter of incompetence. This brings me to my thesis: 'Bankruptcy is inherently chaotic and as a result creates real opportunity for anyone willing to endure the process'. Thomas' sale process was broken and a result there was a good chance very few bidders would be willing to stay in the game resulting in a lower price.

We began digging into the business and we quickly realized that the asset value of the associated personal property (i.e. servers, networking equipment, computers and office equipment) was worth between $300,000 (quick and nasty sale) and $600,000 (current value based on recent ebay sales). Within two weeks we had a buyer willing to pay $475,000 for the equipment. With this information we began attempting to value the associated intellectual property (a lovely patent) ultimately finding an IP litigation boutique who suggested that (depending on the prosecution history) that they would buy litigation rights for the patent for $750,000 at a minimum. It wasn't my intent to immediately liquidate the equipment or sell off the litigation rights of the patent, but these data points helped me understand the minimum value of the assets ($1.2MM). One interesting data point was that Pay By Touch had bought ATMDirect in 2006 for approximately $8MM ($4MM in cash and the remainder in debt/stock).

Working under my two assumptions a) the process was broken and b) the assets were worth $1.2MM I spent my weekend marking up the debtor provided APA. I settled on a total bid of $1MM ($250K in cash and $750K in a 24 month note). My business plan allowed us to attempt to execute on the underlying business (there were significant risk factors) for up-to 24 months and ensured that if the business failed we would break even (on a cash basis, obviously our time would be lost). We were prepared to bid as much as $750,000 cash plus up-to $500,000 in debt for a total bid of $1.5MM (risking around $700K in cash at this price).

The day of the auction arrived and two other bidders were present. After several hiccups on the teleconference Thomas explained to us that the prevailing bid was $1MM cash. This was more cash than I had wanted to bid and after a few moments of consideration I told him we weren't interested in meeting the offer. I was disappointed, but I learned long ago not to bid on emotion. The two remaining bidders remained and Thomas terminate our connection to the conference bridge. To our shock and dismay on Monday we learned from the debtor that the prevailing bidder paid $600,000 cash for the business. The sale hearing had already occurred earlier in the day and as we had assumed Thomas had given us accurate information we had no reason to object to the sale. Had we known the sale went through at the $600K price we would have certainly objected to the sale.

This morning we discussed our options and instead of dragging the process out in court and objecting to the sale we have decided to move on as it is our understanding and belief that the prevailing buyer would have bid as much as $800,000 cash. This bid would have been higher than ours. The only damage seems to have been borne by the creditors. I am no expert, but within fourteen days I was able to secure buyers for key assets for a cash price of $1.2MM; however, after months of 'marketing' and tens of thousands of dollars in legal fees Thomas Lumsden was only able to recover half of that amount. What is wrong with this picture?

Everything, but at the end of the day the important thing to remember is that it is the very process that can create value for you as a buyer. Think about the motives of the parties involved. The seller (i.e. the debtor) is being run by employees who almost certainly don't have a future with the company. How concerned are they going to be with their duty to obtain the highest and best price for the creditors? Not very. Ironically, according to insiders at Pay By Touch, in this case the creditors hired FTI to sell off assets and agreed to pay them a percentage of the sale price. Anyone would assume that Thomas Lumsden would be more than interested in getting the highest and best price for the assets. Again, in this case it was KEY that we understand the motives of everyone involved. For example, I couldn't understand why Thomas wanted to draft the APA instead of having one of the bidders bear this cost. But it didn't take long to figure out that, the costs associated with the process are not deducted from his firm's commission. Secondly, by controlling the APA he was able to control the definitions, definitions that would dictate how much money he would make. Specifically, he defined the purchase price as not only the price paid by the buyer, but by the value of the 'assumed liabilities' (i.e. executory contracts such as the lease). Our fatal flaw was realizing this too late. In our APA we rejected almost all contracts of the seller (the most powerful feature of a 363 sale). We felt that we could negotiate new contracts on better terms. From Thomas' point of view, $600,000 plus the assumed liabilities was more valuable to HIM than $1.5MM without the assuming liabilities. Of course, from the secured creditors perspective, the $1.5MM would have been far more valuable as the assumed liabilities would have never come into play (i.e. none of them were secured).

Turns out the creditors are VERY aware that their interests aren't being protected. Just last week according to Nicholas Carlson, "On Friday, a party of creditors filed a restraining order with a court in Los Angeles to prevent management from "shutting down the operations of Pay By Touch Payment Solutions"- its main business."

Serve free beer, of course! At the National Retail Federation's expo held this week in New York, the company sponsored a drinkfest, according to this photographic evidence from an attendee. Our advice to those who go: Don't sign anything. We're still not sure how John Rogers & Co. got $300 million in funding in the first place.

Nelson leaves behind enemies and a lawsuit. In June, Nelson's immediate predecessor as HR head, Bernadette Robertson, sued Pay By Touch for wrongful termination. Robertson said she was fired for investigating sexual harassment claims against Rogers.

Then, in late November, Nelson made no friends when, in an email eventually leaked to Valleywag, she told ex-employees that despite what Pay By Touch had once promised, it would not pay them back wages.

A tipster tells us Nelson will leave Pay By Touch and return to her former employer, the Orthopedic Institute in Sioux Falls.

Answer: In a bankruptcy, shareholders' equity disappears faster than blow up an addict's nose. But Rogers cleverly arranged matters so that he's also a creditor, giving him pull in the bankruptcy proceedings.

Grant Rogers this much: He's a man who keeps his promises. But when he once said, "I'll fucking mess you up," I'm pretty sure he meant his old girlfriend, not Pay By Touch's 750 employees.

Adams said the company still owes $3 million in back pay, and, according to our source, new investors in the company have demanded that money not be paid. Which of course leads to a pressing question: Pay By Touch has new investors? For their sake, let's hope company founder John Rogers didn't set their price.

We are a supplier to Pay By Touch or were a supplier. When we first met them, they were quite concerned that as a small company, we would be able to scale to meet their demands. Originally, we told them that we could do anything so long as there was enough money available.

We were told no problem. We were told that big money was behind PBT and that the Getty Foundation among others were behind Pay By Touch. Initially, we were told that we would get money in advance. Then we were told COD [cash on delivery]. After that 10 days and finally net 30.

Our first orders seemed way beyond what we could manage and finance but Pay By Touch told us that if we wanted to play in the big leagues, we had to step up to the plate. Somehow, we scraped up enough money for the first order. This was the biggest order we had ever handled but we pulled it off. Instead of 30 days, it took about 50 days to get paid.

It was a long 50 days too. Orders continued to come in. We shipped and each payment period took longer. After getting a P.O. for about $800,000.00 we were told that there was a hold on the software and we had to wait to ship until they updated their software. We wound up holding inventory for seven months until they resolved their software issues.

During this time, we didn't get paid for the units we had already shipped. Our cash was all tied up. Finally, PBT resolved their issued and asked us to urgently ship. They told us they needed us to ship as fast as possible and they ordered another $560,000 worth of product. They told us that we could expect another $2.5 million in orders through the rest of 2007.

Once again, we were pushed to ship. After shipping the last shipment, we got news there would be a delay in paying us. This was unbelievably bad news as $560,000 was a huge amount of money to have tied up so long.

We were told that there was no real danger. There were investors standing by to invest and it was just a delay. After a few weeks, we were told that we would be getting payments and they would let us know when the transfers were made. Each time we checked, no transfers were made. Over and over, we were told we would get payments. We never received any money.

Our company is a small company. We are quite different than PBT. When we had to travel together, we went coach and they went business class. We stayed at different hotels. I was once showed a business card and told it cost $7.00. The person showing it to me explained that this was required for image. I showed them my business card which I printed with an Epson printer.

When we first started working with Pay By Touch, we had visions of over 100,000 of our systems in the field. While we were quite grateful to get orders for thousands of machines, it was clear that there was no way a few thousand systems could generate the revenue needed to justify the expenditures.

I certainly hope that something happens that will allow Pay By Touch to operate and pay down their debts. This period has been one of the most stressful in my life. It is even worse than watching my Sun stock drop from its highs. Needless to say, I hope for a miracle and that Pay By Touch is able to come back.

There, it says Rogers recently sold 26 million shares of the company, in order to loan the company money so it could pay employees' salaries. Flip to page 18, section 2, and you'll see the sale totaled $3 million, or about $0.11 per share. That's a lot less than $5. You have to wonder: Did Rogers disclose this 4,500 percent markup to potential investors? Sounds like Rogers knows what Pay By Touch is really worth — and it's not what he's trying to charge for it.

According to his bankruptcy filing, Rogers spends — or hopes the bankruptcy court will believe he spends — $2,000.00 a month on electricity and heating fuel, $1,000 for water and sewer, and $1,000 for his telephone line, and yes, $1,000 for clothing.

Now, before you get to feeling self-righteous, do note that Rogers also set aside $500 per month for "charitable contributions," the very exact same amount he spends on "recreation, clubs and entertainment, newspapers, magazines, etc."

Here's the page from the filing detailing Roger's expense. Click on the image to expand.

Here's the complete filing (PDF).

The policy of paying terminated employees has changed since you had your exit interview now that we have a custodian in place. Our plan when you terminated your employment is different than what is happening now.

Eula Adams is a C.P.A. and a recognized expert in financial matters. Are we to believe that Adams didn't know the company lost $125 million in 2006, that the company was near insolvency several times, and that the company's primary product, biometric payments, was producing an average of two transactions per store per day? [Had] Adams planned to let the company fail so he could save himself and the investors he consorted with to take over the company? Insiders think so.

"The list of who stays and who goes appears to be crudely based on who was in the John Rogers camp vs. the Eula Adams/John Morris camp," our tipster writes. Eula Adams is a former Pay By Touch board member brought back as COO by the company's court-appointed overseer, Tom Lumsden. Executive John Morris is considered one of Adams's allies in the company.

What's more, he's persuaded ex-COO Eula Adams to return to his post. Adams was fired in one of former CEO John Rogers's final "erratic actions" before a court took control. If only Lumsden could spin the world around and reverse time all the way back to before Pay By Touch was founded, and stop Rogers from starting this ill-fated company in the first place — now that would be really cool. (Photo by Mark and Allegra Jaroski-Biava)

Pay By Touch did not convince credit card networks to reduce transaction rates for Pay By Touch accepting merchants. Such a network would want exclusivity to do so, limiting consumer adoption. Even so, Pay By Touch would not compel consumers to switch credit card companies. Customers care more about "rewards."

(Click on the pages to see the full-size version.)

• In September 2003, investors sued, claiming executives misrepresented revenues when Pay By Touch's predecessors, Indivos and Solidus Networks, merged in 2003. Indivos investors sued again for the same reason in 2006. Both cases were dismissed.
• Former HR head Bernadette Robertson sued for wrongful termination in June, saying she was fired for investigating sexual harassment claims against Rogers. Rogers's mother takes Robertson's job.
• In July, Eric Maundu sues for unpaid compensation.
• In September, former Pay By Touch head of sales Jon Siegal sues for Security Fraud and alerts investors to Rogers's past behavior: threatening an old girlfriend ("I'll fucking mess you up"), doing coke at the office, skipping meetings, destroying property, and writing "crude and profane" emails. Siegal sues again, claiming Rogers fired him to cover up lies to investors and a failure to pay wages.

These cases will no doubt drag on for months, if not years. But the market is making a speedier judgment: This is, by all appearances, a failed company. Send us more evidence to make the case.

It has come to my attention that you have been contacting our investors including the Getty family, and presenting them with slanderous, untrue, and malicious information. Enclosed is a copy of the "report" that you have been disseminating. When you present false facts, as you have, you open yourself to SERIOUS damages. Be advised that we will come after you legally, to the fullest extent possible. I hope you or your family have very deep pockets. We will use our private investigator, a former Israeli Mossad agent, to find out every last detail about you, to track your activities, and determine what other illegal activities you are engaged in, besides extortion — since I am certain there are many. We will not tolerate such disgusting, deviant, and damaging behavior. You will have a very steep price to pay for your actions.

John Rogers
Chairman, Founder, CEO

I am writing out of concern. The company did not pay its employees at the end of May. The company has amassed debt and not paid vendors and contractors for months. Key personnel have begun to resign, including the fifth CFO in the last 4 years. Employees have little confidence in the CEO and the board. Change is warranted. Elect a board beholden to all and not a few shareholders.The current CEO is responsible for the current situation.

Since Pay By Touch launched in 2003, its chief financial officers have included Gus Spanos, son of San Diego Chargers' president Dean Spanos; David Siminoff from Capital Research; Larry Lowry from McKinsey; Davies Beller from Bear Stearns; and John Costello from Home Depot. Pay By Touch's current CFO, Robert Sigler, works for one of the company's biggest hedge-fund investors. Former Pay By Touch CEOs include founding CEO Brian Miller and Craig Ramsey, a former top executive at Siebel Systems.

All of this raises the question: Have any of these high-powered executives heard of the telephone? You know, that device with which you dial the previous occupant of a job and ask if there's anything you should be concerned about?

• Rogers admits he has a "checkered past," including unpaid tax liens and other civil judgments.
• He once owed the state of Minnesota more than $20,000 in unpaid taxes.
• In the early 1990s, Rogers bought an apartment building, collected rents, and then never made loan payments until the bank foreclosed.
• One former girlfriend, Kelli Carlson, took out a restraining order against Rogers in 1998 after he promised to put her in jail "and make your life hell."
• Finally, the woman whose husband Rogers turned over to the IRS took out a restraining order against him because of "threatening and intimidating behavior" by Rogers as well as "possessiveness and intrusion into my current life."

Yes, this is the guy Pay By Touch backer's put $190 million behind. Silicon Valley is such a forgiving place. When there's money to be made, background checks just slow things down.