Battles and Bids Over Pay by Touch
VeriFone (PAY) has quietly expressed interest in buying the assets of Pay By Touch, a biometrics company currently in Chapter 11, according to court filings obtained by BusinessWeek.com.
It's not clear what stage, if any, talks between the two companies have reached. Both VeriFone and Pay By Touch declined to comment.
The documents, included in filings by Pay By Touch with the U.S. Bankruptcy Court for the Central District of California, provide a glimpse into the swift decline of a company that has raised more than $300 million and is one of the foremost purveyors of products based on biometrics—the technology of identifying people by their unique physical traits. The papers also shed light on what analysts say is a last-ditch effort by another troubled company, VeriFone, to capitalize on those woes. In addition to bankruptcy proceedings, Pay By Touch is the subject of a dispute in the Delaware Chancery Court, pitting its lenders against founder and Chairman John Rogers for control of the company.
VeriFone's Stock Hit
VeriFone, a $581 million maker of credit-card readers and point-of-sale systems, is facing troubles of its own. On Dec. 3, the company disclosed that it would restate financial results for the first three fiscal quarters of the year ended Oct. 31. The San Jose (Calif.)-based company said accounting errors caused it to overstate its pre-tax profits by nearly $30 million. The company also delayed reporting its fourth-quarter earnings. The news sent VeriFone stock reeling as it fell $22, or more than 45%, erasing nearly $2 billion in shareholder value. The stock closed at $23.05 on Dec. 5. Analyst Robert Dodd of Morgan Keegan says any interest that VeriFone may have had in Pay By Touch has probably ended for now. "They're not in any position to be making acquisitions," he says.
VeriFone's overture was detailed in a Nov. 5 letter from one of Pay By Touch's lenders that was included in the bankruptcy filing. According to the letter, VeriFone's senior executives and corporate counsel contacted executives of Plainfield Asset Management, Pay By Touch's lead creditor, seeking information about buying Pay By Touch's assets. In the letter, Plainfield Managing Director Thomas Walper reminds Pay By Touch General Counsel Steve Zelinger that the company is required "to consider all options to insure maximum recovery to creditors."
VeriFone's interest in Pay By Touch, a San Francisco company founded in 2002 as Solidus Networks, stems from the company's early success in bringing biometric technology to the retail payments business. Pay By Touch raised more than $300 million from hedge funds, and venture capitalists Rembrandt Venture Partners, Mobius Venture Capital, and the J. Paul Getty Trust. Its gear, which allows consumers to pay retailers with their fingerprints, is installed in checkout lines at grocers Piggly Wiggly and Jewel-Osco, a unit of Supervalu (SVU).
Fingerprints: Not Sticky
Despite those early customers, processing fingerprint payments has not taken off as expected. Pay By Touch claims that it has fingerprint scanners in 3,000 stores, but the privately held company has never disclosed how many transactions it processes. For millions of consumers accustomed to using credit and debit cards, the proposition of using a fingerprint hasn't been all that appealing. "It's hard to fight the credit-card companies," says Gartner (IT) analyst Avivah Litan. "Consumers are so used to racking up frequent-flier miles and other rewards that it's like a David vs. Goliath situation. There's just not much of a value proposition for the consumer to use a fingerprint."
Pay By Touch, with revenues of approximately $70 million and at its height some 750 employees, has grown mainly through acquisition. Between 2005 and 2007, it bought at least six companies, including rival biometrics firm BioPay, and CardSystems Solutions, an Arizona-based credit-card payment processor. In December, 2006, Pay By Touch paid $100 million in cash and stock to acquire original loyalty marketer S&H Solutions, the 110-year old company behind S&H green stamps.
With its fingerprint payment technology slow to pay off, Pay By Touch this year started focusing on other lines of business. It signed grocers including Ohio's Dorothy Lane Markets and Harps Food Stores of Arkansas to a loyalty marketing program aimed at offering personalized coupons and deals to consumers who scanned their fingerprints with an in-store kiosk. Consumers who joined the program received personal offers and coupons based on purchasing history. Another line of business aimed at using fingerprints to help make check-cashing more secure had gained some traction with small banks.
But the company still needed more cash to fund operations. Last February, Pay By Touch raised $163 million from three hedge funds—Plainfield, Och-Ziff Capital Management (OZM), and Farallon Capital Management. Plainfield secured its portion of the loan, worth about $50 million, with Pay By Touch shares owned personally by company founder Rogers. Those shares amount to a 20% ownership stake in Pay By Touch but carry "supermajority" voting rights that give the holder control of 64% of the voting shares, enough to control the company.
The loan agreement calls for Plainfield to assume control of Rogers' shares in the event of a default. On Oct. 15, Plainfield's court complaint declared Pay By Touch in default because it failed to deliver its 2005 audited financial results by an Aug. 31, 2007, deadline. That set off a volley of lawsuits and legal moves. Having assumed Rogers' voting power, Plainfield created a new board of directors for Pay By Touch, reinstating two directors that Rogers had suddenly fired on Oct. 11, and a third who had resigned on Oct. 12.
On Oct. 18, Pay By Touch's Delaware lawyers disputed the validity of Plainfield's action, citing a technicality in the company's bylaws. Plainfield then issued a new order that would have seated Plainfield's new board on Nov. 1. But late on the night of Oct. 31, four Pay By Touch employees filed an involuntary petition aimed at forcing the company into bankruptcy. Rogers has also sought personal bankruptcy, in a case filed in the same court on the same day. Rogers didn't respond to an e-mail seeking comment, and Pay By Touch declined to make him available for an interview.
Usually a bankruptcy filing stays other pending litigation, but the judge in the bankruptcy case has allowed the Delaware case to proceed. A Delaware judge has issued a status quo order, forcing the company into management under the care of a temporary custodian and a temporary board of directors. A trial over control of the company in Delaware is set for Dec 21.
Finances and the Future of Biometrics
Without more funding, bankruptcy and liquidation seems likely. Court records paint a picture of a company that burned through a huge amount of funding and suffered from severe cash shortages. A Nov. 1 e-mail from Pay By Touch Human Resources Manager Judy Nelson (Rogers' mother) informed employees that the company would be unable to meet payroll for the period ended Oct. 31. As of Nov. 15, former executives say, the company was deficient in paying employees for at least six weeks, though since then some additional funding—$9 million obtained from Plainfield, Och-Ziff, and others—has been obtained and some employees have been paid.
A separate court filing by lawyers representing Och-Ziff urging the Delaware court to proceed claims that Pay By Touch is losing between $3 million and $4 million per month. A former Pay By Touch executive estimated revenue for the fiscal year ended Sept. 30 as between $65 million and $70 million, up from $20 million the year before.
Pay By Touch's largest unsecured creditors who aren't lenders include Accenture (ACN), owed more than $7 million; advertising firm Saatchi & Saatchi, owed $2.9 million; and IBM (IBM), owed $700,000. Two law firms are collectively owed $860,000. Another $750,000 is owed to PKV Racing, an auto-racing team that competes in the Champ Car racing series. Pay By Touch had sponsored one of PKV's two cars.
While Pay By Touch appeared to be one of the most successful companies in the nascent biometrics space, its plans of building a huge network of fingerprint-ready checkout lines around the world was enormously ambitious. Still, the troubles at Pay By Touch are not likely to deal a serious blow to the biometrics business in general. "It's the classic chicken-and-egg problem," says analyst Roger Kay of Endpoint Technologies Associates in Boston. "Their plans were very ambitious, but I'm not sure if they were to go out of business that it would change the dynamics of the marketplace."