Paul Pearson learned a lot when he watched the sinking of startup darling Alphatise from the helm.
Many of those lessons are around good corporate governance. For example, he was forced to repay part of a $50,000 pay rise he gave himself without approval from the board.
Pearson is now personally trying to resurrect Alphatise after it spectacularly imploded earlier this year.
The Australian online shopping startup generated huge media coverage for itself around the world when it launched a competition for “the world’s best internship”, which carried a $100,000 package for the successful applicant. When companies like this fail they usually slink away quietly into the shadows but Pearson is attempting to dust himself off and rebuild the startup.
Pearson told Business Insider he was on a $100,000 remuneration package and had a fuel card. In the weeks leading up to the company entering administration he granted himself the $50,000 pay rise, citing the high cost of living in Sydney as one of the reasons for allocating himself some more cash.
“I executed a pay rise outside of the board. It was a governance breach,” he said. “It should’ve been approved by the board, it was a governance breach.”
When the issue was raised, Pearson wrote to the board, apologising for the oversight. “I immediately paid the money back.”
The e-commerce startup closed suddenly in March when Pearson opted to put it into voluntary administration under Deloitte. It couldn’t pay its bills and staff. The creditors’ report, released late last week, shows the company had just $961 cash in the bank.
Deloitte subsequently tried to recapitalise or sell the company. Previous managers of the company, including Pearson, attempted to raise almost $2 million from existing shareholders, without success. The administrators later accepted a $200,000 offer from Pearson’s new company, Alphatise Australia, to acquire the original Alphatise and its assets when no other offers were accepted.
After taking control of Alphatise’s assets at the end of June, Pearson is now mounting a campaign to resurrect the company out of its voluntary administration depths and relaunch it ahead with a view to a possible reverse takeover listing on the Australian Stock Exchange.
“We went back to all the existing shareholders, our existing investors and we didn’t get the support. We didn’t get close enough. We got about half-a-million which was too far from what we needed,” Pearson said.
In FY15, the company had a $3.1 million loss (NPBT). Deloitte said preliminary investigations suggested Alphatise it became apparent to management in February that there was insufficient working capital, that it was unable to pay wages and that it couldn’t raise more funds from shareholders.
Alphatise had invested in three company cars, which it called Alpha Bugs. Deloitte has since sold them at a loss of about $18,000. The company also took out a three year lease for an office down on Sydney Harbour at a cost of $36,833.33 plus GST per month. As a result rental outlays grew from $92,902 in FY14 to $212,297 in YTD FY15.
“It appears that insufficient due diligence was undertaken by the Directors regarding the significant financial commitments associated with this lease and its impact on the cash flow,” Deloitte said, adding getting rid of the lease was one of the first things it did after taking control of the company.
“It appears the company was not in a position to finance the requirements of the new property lease in the short term unless new external funding had been sourced.”
Between FY13 and FY15 Alphatise raised $4.576 million from seventy-seven shareholders. This chart shows the profile of investment over time:
Creditors have so far realised $243,506. There’s an R&D rebate that’s expected from the government but it is not believed to be more than $500,000. As a result it’s unlikely there will be enough money to allow a dividend to be paid to unsecured creditors, and there’ll be no return to shareholders.
With insufficient assets to repay creditors in full, administrators have recommended the original Alphatise company be wound up.
“The company lacked sufficient cash flow to pay its ongoing liabilities on their due date. This became apparent on Friday 27 February 2015 when the Company was unable to facilitate the payment of its fortnightly wages to its staff. This indicates that poor cash flow management was evident,” Deloitte said in its creditor report, issued late last week.
Why the original Alphatise failed
The company’s three directors have each detailed why they believe the company fell over. Richard Frey and Paul Pearson blamed a loss of investor support and the inability to raise new capital from existing shareholders. Pearson said there was a cash flow problem, telling Business Insider at one point the cash burn rate exceeded $80,000 a month.
Pearson also cited an announcement to list on the ASX which he says dried up investment, and an internal takeover bid run by fellow director Kent Hulme, as reasons for Alphatise’s failure.
Hulme disagrees with this, telling Business Insider the company wasn’t being run properly and that it was burning through too much cash. He told Deloitte there was a culture of excessive spending, inadequate cash flow and high cash use as well as poor financial control, including a lack of records at Alphatise.
Pearson says that the takeover bid from Hulme “removed all of my options”.
“We were trapped. We only had the option of a backdoor listing at that point, or to significantly drop the valuations,” Pearson said.
Pearson says after announcing Alphatise was going to list on the ASX last year “the momentum that we’d built in the private sector for raising cash was gone.”
The new Alphatise Australia entity has been set up in a way that gives shares to about 50 investors from the first incarnation of the company.
“I knew that I’d be able to raise money under that structure. I had some support from major shareholders including John Grace and Paul Xiradis from Ausbil,” he said.
But many shareholders from the original company have had money “wiped”, Pearson admits.
“I didn’t plan on that happening. It was never a part of the plan. I think Alphatise as a business is a fantastic company. I think there were a series of failures that took place and unfortunately, for me and every other person, there’s been a huge loss – that’s not just cash shareholders that’ve been hurt by that.”
He says he has made contact by either phone or email with all the previous shareholders. “I’m sorry for what happened. What more can you say? You can explain the reasons why it happened. We’d given all of the shareholders an opportunity to reinvest.”
The valuation is now much lower than the lofty numbers Pearson was throwing around last year when he claimed he raised money at more than $22 million and then again at $32 million. In contrast he claims the latest $500,000 injection was raised on a $1.2 million valuation.
Alphatise had 24 employees when it entered administration. Pearson’s new outfit now has six but he’s the only one working full time. He told Business Insider he had brought the cash burn down to $25,000 a month and has no fixed office.
“We’re very conscious of the burn,” he said. “We’ll be looking at raising a large amount of money at some time in the future.
“I defend this business with everything.”
As for what Alphatise will look like, Pearson says its working on three joint ventures with entrepreneurs in the UK, India and the Philippines where the platform will be licenced out in those countries. He also says he is working on a white label version which could be farmed out to retailers. He will maintain control over Australia, the US and China but says his “primary goal” is to land joint ventures in “40 to 60 countries over the next two years.”
On management he said: “I will stay as CEO, no matter what, period.”