The CEO and cofounder of StrongRoom AI allegedly conceded to EVP investor Misha Saul that the company’s revenue and debt figures were “wilful fraud”.
Details of an extraordinary conversation and confession by CEO Max Mito were outlined in submissions in Federal Court legal action by the Sydney VC, after it successfully applied to freeze the assets of StrongRoom, five directors and the startup’s administrators and receivers, just weeks after investing $10.4 million as part of a $17 million raise. There are 13 defendants in the case.
EVP alleges the Melbourne startup claimed to be profitable, but was in fact losing $800,000 a month, and misled them on debt levels by more than $4 million.
Documents before Justice Roger Derrington in the Federal Court in Brisbane on Thursday said that EVP was “profoundly misled” with the cofounders engaged in “false, misleading or deceptive conduct” and “deliberate fraud” to secure the investment from EVP’s $41 million Opportunities Fund.
An affidavit from fund boss Misha Saul outlined a conversation he had with Mito about the company’s revenue and financials where the cofounder admitted to booking loans and other funds as customer revenue, and conceded the revenue figures “may be inaccurate”, but Mito told Saul he “didn’t intend to mislead you”.
Saul alleges he said to Mito, in the presence of fellow director and investor Rohan Gray, from Artesian Investments, that: “You faked the revenue and customer numbers across different product lines and just walked us through how much of each line is fake versus real. That is wilful fraud, isn’t it?”
“Yes,” Mito replied.
Misha Saul, EVP’s Opportunities Fund boss
The startup was placed in voluntary administration by its board last Friday after a lender appointed receivers to seize control of the banking assets.
On Monday, EVP successfully applied for an interim freeze on the company’s assets.
While EVP had declined to comment publicly on the “potentially serious issue” that led the VC to call the police on March 24, less than six weeks after transferring the $10.4m, three whistleblowers who worked for the startup, including two who supplied affidavits supporting the EVP case, allege StrongRoom was a company with poor governance and financial record keeping that treated its staff poorly.
CFO blows whistle
The company’s CFO, who worked there from January this year to March “resigned because she felt she was being stonewalled by Mr Mito (as the CEO of SRT) and could not implement changes to improve governance and financial controls”.
She left earlier than planned on March 6, and appears to have alerted Saul to problems in the company in a meeting on March 12, having prepared a PowerPoint on governance failings and “financial discrepancies between the accounts and actual position” on February 28, which the investor learnt about nearly a fortnight later.
On March 18, Saul learnt about the $800,000 monthly cash burn and the next day, the former CFO told him “that capital raisings had been applied as payments from customers”.
Saul blocked Mito’s access to the company’s ANZ bank accounts the following day and the next day, March 21, a fraud/scam report was lodged with ANZ.
StrongRoom was founded in Melbourne 2017 by university colleagues Mito, Christopher Durre and Kieran Start. Its software streamlines medication tracking, dosage management, and patient adherence.
Start is not part of the legal action.
The company claimed in its $17m raise announcement on March 14 that it had $13 million in annual revenue by the end of 2024, with more than 1,500 customers, in Australia and the UK.
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.
Other investors include Artesian Venture Partners, Boab AI, an Artesian subsidiary, Kalytix and InterValley Ventures, as well as UK-based Tyson & Blake.
Kalytix is run by StrongRoom director Peter Bruce-Clark, who was named the startup’s global president two years ago. He’s also listed as a strategic partner to Tyson & Blake, which has been a strident critic of EVP’s actions for not consulting with other investors.
EVP’s submission alleges that part of its investment was used to pay Kalytix, as well as claiming that Bruce-Clark took a personal trip to Morocco in 2024 on StrongRoom’s tab.
EVP claims Bruce-Clark sent an email in February 2024 “in which he expressed dissatisfaction with the financial reporting by SRT” going on to claim that in January this year “Bruce-Clark noted that SRT was waiting on the investment from EVP to discharge payroll liabilities to staff, as well as to other creditors. He said at the time that his own personal finances were tight, which indicates that any assets he has acquired since that time can be expected to be guarded, and potentially dissipated to put beyond the reach of creditors, including EVP.”
Tax evasion claims
StrongRoom’s former Head of Operations from January 2021 to July 2022, who resigned “because she felt that she was managed out of the business” provided an affidavit in support of EVP’s case.
It includes a whistleblower alert to the ATO in June 2024, alleging tax evasion and fraud.
She also sent an email to Durre in December last year, saying “I have heard some very disturbing things from various staff members that include questionable practices to things that are downright illegal” and warning the cofounder and director that they “knew you were not the perpetrator of most of the indiscretions, but now, you are complicit”.
The other affidavit comes the former Financial Officer, who rose to the position from bookkeeper in December 2021 before resigning in September 2023 “because of the toxic work environment… and his inability to implement any changes to the financial operations”.
They too raised concerns about the startup’s accounts, including the R&D tax incentive.
StrongRoom AI claimed $1.642 million from the RDTI in FY2022.
Concerns about the way the business was run are not new, with Capital Brief’s Bronwen Clune revealing that in the first half of 2024 the startup was in front of the Fair Work Commission in a dispute with former director who also claimed to be an employer. That case was dismissed.
But Commissioner Scott Connolly said “the governance of Strong Room Technology left much to be desired” and Mito had “inexperience and informality in his approach to the structure and governance of his enterprise”.
The current Federal Court case also involves another StrongRoom director Divesh Dipak Sanghvi, who EVP alleges is “expected to have the same knowledge as Mr Bruce-Clark”.
Sanghvi is a director of Pharmarix, which is subject to the freeze order, and Morton Court Pty Ltd, which EVP said ” appears to be controlled by relatives of Mr Sanghvi”.
Thursday’s hearing added a property owned by Morton Court, in the exclusive holiday town of Portsea on Victoria’s Mornington Peninsula, to the freeze order.
EVP alleges that both Morton Court and Pharmarix received funds in relation to the acquisition of healthcare loyalty program Member Benefits Australia (MBA), from the EVP investment.
MBA is also associated with Sanghvi.
Meanwhile, administrators HLB Mann Judd are hoping to sell the StrongRoom AI or its assets, with expressions of interest closing on Monday, ahead of the first meeting of the startup’s creditors in Sydney the following morning, April 8.
The matter will return to court on April 17. Directors Mito, Durre and Bruce-Clark have yet to respond to the case.
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