StrongRoom AI’s administrators recommend liquidation

The administrators of medication management startup StrongRoom AI have recommended putting the business in liquidation ahead of a 2nd creditor’s meeting on Tuesday.

The decision comes a fortnight before the Federal Court is due to hold another hearing in the legal action by VC firm EVP to recover $10.4 million it invested in the business just weeks earlier.

Administrators HLB Mann Judd said they’re in advanced discussions with shortlisted parties regarding a sale and/or recapitalisation of StrongRoom, having received 8 final bids earlier this month. The latest report says there were 71 interested buyers.

But the legal action launched by Sydney VC EVP, which froze the company’s assets, has added to the complexity of finding a buyer and the administrator believes the best option to recover funds is receivership. The freezing orders apply to several directors as well as HLB Mann Judd.

On top of that, StrongRoom, which told potential investors it was profitable, when raising $17 million earlier this year, will lose another $800,000 during the month it’s been in administration, including fees for that.

The administrators estimate than in the best possible outcome would see secured creditors would receive 74 cents in the $1, and employees their full entitlements, while unsecured creditors, such as investors, will score around 14 cents in the $1, or potentially nothing. Employees are also at risk of not receiving and of what they’re owed.

The company has assets valued $13.09 million and the administrators put the unsecured creditor figure at somewhere between $3.69 million and $24.59 million, based on where VC investors stand in the queue.

If the Federal Court rules they’re at the back as unsecured creditors, it would potentially cost EVP all of its $10.4 million investment.

EVP alleges in court documents that StrongRoom AI CEO Max Mito admitted to fraud using fake revenue numbers, a claim Mito, one of the cofounders, denies.

The report reveals that the board became aware of issues around Mito’s conduct in late March and suspended him.

“It appears there have been a number of factors that have led to the Administration of SRT [Strong Room Technologies]; however, the major factor that began that process appears to be the issues being raised in early March 2025 around conduct and disclosures that impacted the ability of SRT to raise further funds to continue to operate,” the report to creditors says.

“The balance sheet was positive from 30 June 2021 to the date of appointment; however, it is unclear if all liabilities have been recorded correctly and a significant portion of the assets relate to investments whereby the value is currently unknown.”

Administrator Todd Gammel wrote to creditors in documents filed with the corporate regulator, ASIC, that it’s difficult to assess the merits of EVP’s propriety claim. The matter could spent several months, if not years, before the courts.

“Such a proprietary claim will depend on EVP establishing some intentionally dishonest and/or recklessly false and misleading warranties, statements and representations,” Gammel wrote.

“At this stage, EVP has only prepared its evidence to establish at least a serious question to be tried to successfully obtain freezing orders and EVP’s directors have not yet responded to that evidence.

“The administrators can only conclude at this stage that EVP’s claim presents a litigation risk for the company, which must feature in the commercial judgments to be exercised by the Administrators.”

Separately, the Administrators entered into a confidential Binding Term Sheet with EVP and the secured creditor to deal with their funding for the administration period. It may depend on a sale for any investor to see some of their funds again.

HLB Mann Judd is keen to clear their desk of the StrongRoom problem, which has so far cost $450,000 in administration, saying “there are material issues identified that require significant further investigation; however, this may lead to material potential recoveries” for all creditors.

“As such, a material consideration in comparison of alternatives is the preservation of such claims for the potential benefit for all creditors, and the powers and recovery avenues available in a liquidation,” the administrator said.

No matter what the business sells for, EVP’s legal action has the potential to shape who gets paid and how much from the leftover funds.

Gammel proposed the liquidation to creditors on the basis that a DOCA (deed of company arrangement) proposal hadn’t been received that the administrators recommend and there “are material potential recoveries available in a liquidation scenario”.

Gammel said they’re progressing negotiations with a potential purchaser of StrongRoom’s assets and if the sale goes through, it will happen before the creditor’s meeting.

Ace Pharmacy founder Joe Zhou has been tipped as the potential suitor after  buying StrongRoom’s secured debt last month.

“At this stage, provided a sale of the assets of SRT occurs prior to the second meeting as currently contemplated, the Administrators do recommend that SRT be wound up,” the report concludes.

Picking through the entrails of the business has revealed a far more perilous financial state for the business amid broader alleged misrepresentations to investors as well as the media when the  $17 million raise was announced publicly in early April.

Insolvent trading concerns

The administrators have formed the view that the company may have become insolvent around October 28 (if not earlier) last when quarterly superannuation payments were due but not paid.

“It appears until the major recent equity raising in late 2024 and into 2025, many historical liabilities were overdue and unpaid until funds raised were used to retire the historical debts,” Gammel wrote.

“Our initial estimate of a potential insolvent trading claim for SRT is circa $3.0m to $3.4m based on our assessment of the increase in liabilities during from the end of October 2024 to appointment. This assessment may not necessarily reflect the new debts incurred in that time; however, it is indicative of the potential gravity of any such claim.”

$18m in losses

The raise announcement at the time claimed the business c.$13 million in annualised revenue by the end of 2024. Court documents put the revenue at around $1.7 million in the 12 months to January this year. EVP invested at a pre-money valuation above $50 million, believing at the time that the annual revenue was around $6.1 million.

The administrators found that:

In FY2023, management accounts record a negative EBITDA of $5.748m and net loss after tax of $5.820m.

In FY2024, anagement accounts record a negative EBITDA of $3.404m and net loss after tax of $3.514m.

In the 9 months of FY25 before the voluntary administrators were called in by the board, there was a negative EBITDA of $5.211m and net loss after tax of $5.265m.

StrongRoom AI’s combined net losses after tax since the 2020 financial year exceed $18.5 million.

The company incorrectly allocated the receipt of loans totalling $2.1m in FY25 against sales invoices, with trade debtors understated by $2.1m understated; and loans and equity understated by $2.1m.

“In summary, invoicing for the FY24 and YTD 25 periods have been overstated by a total of $1.9m being $0.6m in FY24 and $1.3m in YTD 25,” Gammel wrote.

“The remaining $200k from the loan above relates to GST paid on the invoicing.”

The report reveals that around $1.987m of EVP’s investment in StrongRoom was for secondary share sales, but from what the administrator can see, a majority of shareholders who sold didn’t get their payments.

Uncommercial transactions

The role of one of the defendants in the EVP case, StrongRoom director Divesh Sanghvi,  are also revealed in the analysis by Gammel.

StrongRoom had agreed to buy his company, Members Benefits Australia (MBA), in a deal worth between $9.8m and $10.5m, including $8.82m in cash.

Gammel believes multiple aspects of that deal warrant further investigation, including a failure to record the debt and equity deal.

The acquisition was all-cash on the StrongRoom balance sheet, but also involved vendor finance, with MBA lending the startup the funds, although StrongRoom fell behind on repayments. The bulk of the EVP funding went to pay for MBA.

HLB Mann Judd says the payment couldn’t be made without raising additional funds and raises the issue of potential unfair preference payments – transactions that occur in the six months prior to a company being wound up – as well as uncommercial transactions, “including potential related party uncommercial transactions”.

“Our investigations to date have identified potential unfair preference transactions of $9.891m; however, there may be more identified as further investigations are undertaken, and the date of insolvency is proven to be earlier in a liquidation,” Gammel wrote.

“If SRT is wound up, further investigations would be undertaken to confirm assessment of potential unfair preference payments.”