The saga of Pay By Touch is well-known to Valleywag readers, but the San Francisco Chronicle provides a useful recap. Rogers ran afoul of the law in Minnesota, where he worked at various startups, and then moved to San Francisco, where he charmed investors, including the ultrawealthy Getty family and a group backed by supermarket mogul Ron Burkle, out of $340 million. San Francisco Mayor Gavin Newsom's dad, an advisor to the Gettys, invested $50,000 and served on Pay by Touch's board until last year.

Investment bankers at UBS never bothered to dig into his past when peddling his company to would-be backers; if they had, they'd have learned that Rogers's former girlfriends had placed two restraining orders on him in Minnesota. One accused him of slamming her head against a car window; he trashed the other's house, and was ordered to pay $35,000 in restitution for the damage. He'd also been arrested on narcotics charges. But he somehow escaped serious charges for all of these incidents.

According to charges laid out by investors and ex-employees, Rogers was seriously coked up. The allegations include Rogers offering a board member cocaine; ordering a female employee to submit a false expense report to pay for drugs; and going through a failed intervention in a Las Vegas hotel room reportedly orchestrated by a board member.

So where's Rogers today? The Chronicle reached him by phone, where he said he was living in Southern California and working on a new startup. He filed for personal bankruptcy a year ago; in court documents, he told a judge he needed $1,000 a month just for clothes.

In fact, Valleywag has learned, Rogers is living in an upscale apartment complex in Beverly Hills called Blü, where rents range from $3,300 to $12,900 a month. (Residents there are called the "lucky fü.") and he's driving a $90,000 Mercedes-Benz G-Class SUV. Who knows where he gets the money? His company is bankrupt; he's bankrupt; and 750 people are out of their jobs. But John Rogers is still at large, living large.

(Mug shot by Minnesota police)

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."

Click to expand these images.

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.

When issues were raised, we spent $50,000 hiring a firm to interview people and try to determine whether allegations were valid or invalid. And we were prepared to take action.

We've chronicled allegations of sexual harrassment, wrongful termination, drug use in the office, property destruction, more wrongful termination and threatening emails. Makes us wonder who, exactly, did these investigators speak to, and did they hear the truth? Let us know.

All of it confirms a rumor posted by a commenter a few weeks back. "Rumor has it that TODAY IS LAYOFF DAY! Again!"

Thanks for weathering the storm where we did not pay you for six weeks! Sorry for that month we still OWE you! uhm, yeah and we won't be paying you out when you go, and we'll probably just keep your vacation. So hoist a few and call a lawyer! It'll be fun!

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).