Battles and Bids Over Pay by Touch

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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.

Control Battles

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."

Hesseldahl is a reporter for BusinessWeek.com.