The Survival Case Study of EcoHydra Australia

ECOHYDRA (AUSTRALIA) LIMITED

A CASE STUDY: THE SURVIVAL AND BUSINESS TURNAROUND OF ECOHYDRA (AUSTRALIA) LTD, AN AUSTRALIAN PUBLIC COMPANY IN THE OTC PHARMACEUTICAL PRODUCTS INDUSTRY

Warning: This webpage contains information about my role as a key member of a small team of three that turned around EcoHydra Australia when the company was facing serious financial, trading and managerial difficulties that had placed the company’s continued existence in jeopardy. I understand how important this information is to you when making up your mind as to who can best help you if you are faced with a distress situation. Consequently, as the guide covers a lot of ground, expect a long read 

The survival case study of EcoHydra Australia: the story starts here

Business relocation & refocus. In 2002, a United Kingdom company, EcoHydra Limited, made a commercial decision to relocate to Australia and refocus its operations on the OTC pharmaceutical products industry. The company retained me (in my capacity as a freelance small business consultant) to assist in the implementation of this decision and help make the company investment ready and investor friendly. Accordingly, I helped to register and establish a new public (unlisted) company, EcoHydra (Australia) Limited (hereafter EcoHydra Australia), as a going concern. In this role, I also helped the company to prepare and implement its business plan.

Business model. My assignment concluded in December 2002. From that date, I had no further contact with the company until the Company Chairman contacted me towards the end of 2006. I will explain the purpose of this contact shortly, but firstly, it will be helpful if I describe EcoHydra Australia’s business model. The company’s business was based on its exclusive international rights to manufacture, distribute and market unique ‘over-the-counter’ (OTC) pharmaceutical products that had approval from both the Australian Therapeutic Goods Administration (TGA) and the United States of America’s Food & Drug Administration (FDA).

Identification of the Niche Market

Antibiotic resistant infectious diseases. The principal focus of EcoHydra Australia’s business was the rising number of antibiotic resistant infections causing widespread alarm worldwide. Company research clearly showed that the major source of infection was poor hand hygiene. Therefore effective hand hygiene was identified as the single most important defence against infections, and was the number one defence against transmittable viruses such as SARS (Severe Acute Respiratory Syndrome), Monkeypox, Ebola and Avian Flu. The control of infectious diseases was therefore a major worldwide problem.

Control vector: hand hygiene. EcoHydra Australia’s research into this serious problem showed that the great majority of hand hygiene products used alcohol as the active ingredient. Independent studies on healthcare products using alcohol as the active ingredient showed a reduction in their efficacy with repeated use. This frequent and repeated use of such products often caused skin damage, skin dryness and skin irritation. Consequently, healthcare workers and consumers became reluctant to use these products on a long-term, repeat-buying basis in accordance with healthcare protocols. Naturally, this was an undesirable situation, but it provided the market niche for EcoHydra’s business focus.

New Unique Products

The EcoHydra USP. EcoHydra Australia addressed the hand wash problem by developing a new generation of unique antimicrobial infection control products that did not use alcohol at all. The active ingredient of the EcoHydra range of antimicrobial products was Benzalkonium Chloride (BAC), chosen because of its broad-spectrum killing power. Moreover, because the effectiveness and safety of BAC had been conclusively demonstrated over a number of years, BAC was widely used in a variety of commercial and industrial applications from preservatives to disinfectants.

No serious competitors. Despite BAC’s broad-spectrum killing properties, very few companies used it for hand hygiene. The reason for BAC’s lack of use for hand hygiene is that it requires specialist expertise and knowledge in order to mix it with cosmetic ingredients while keeping the compound both stable and active. When mixed together correctly, the key ingredients combine to produce results unequalled by other products. The delivery system is critical: the surfactants deliver the formula below the surface of the skin, whilst the emollients coat the sub-surface skin cells allowing the active ingredient to attack only the germs.

Product longevity. This ability to present to the market a product without any of the harsh stinging and irritation effects of alcohol was therefore a major technological advance. That the products promoted continued antimicrobial activity on the hands for several hours after application, along with portability and ease of use, were added bonuses that created a highly marketable product range.

Company Operational Focus

The EcoHydra Australia business plan therefore rested upon a number of serious worldwide health issues:

  • Hospital infections were on the rise.
  • The rapid emergence of illnesses such as SARS, Monkeypox, Ebola, Avian Flu and Swine Flu was causing widespread alarm globally.
  • Diseases once thought to be under control or eradicated were re-emerging (e.g. tuberculosis, whooping cough, measles)
  • Superbugs and antibiotic-resistant bacterial strains were on the increase.
  • Food poisoning was becoming endemic.
  • Inadequate hand hygiene was a major cause of disease transfer between people.
  • Hand hygiene in the medical profession was inadequate.
  • The public was becoming increasingly concerned about the threat of infection.
  • Preventable infections, spread by hand cross-contamination, cost the world economy billions of dollars.

Within that context, the company had a ready-made international market for its useful range of modestly priced products.

Corporate Developments

Offer and acceptance. This was the company’s background when the Chairman contacted me with an invitation to join the Board as an Executive Director. He invited me to join the Board to help turn the company around. The reason for the invitation was that the company had fallen on hard times because the two Australian-based directors did not effectively manage the affairs of the company. In short, these directors took actions not approved by the Board, kept other of their actions secret from the Board and did not carry out decisions made by the Board. I accepted.

Restructure commences. Naturally, this was untenable. The Chairman (who resided in London, UK) and the Technical Director (who resided in Los Angeles, USA) had little choice but to request an Extraordinary General Meeting to consider their recommendation that the Australian-based directors be removed from office for inadequate performance. The Extraordinary General Meeting approved the removal of the directors from office for inadequate performance. I was appointed to the position of Executive Director soon after.

At this point, the company faced serious managerial, trading and financial difficulties that threatened the close-down of the company with a total loss of the shareholders’ investments.

Survival Management  & Business Turnaround

Unique issues faced. I was one of three Executive Directors. This was an unusual Board because of the widely different locations of the directors. The Board Chairman resided in London, United Kingdom, the technical director resided in Los Angeles, California USA, and the other two directors resided in Brisbane, Queensland, Australia. Board meetings therefore required telephone hook-up arrangements that had to take into account significant international time zone differences.

As I was considered the more experienced of the Australian-based directors, I carried out most of the day-to-day managerial and administrative functions associated with the turnaround, as well being closely involved in the Board’s decision-making activities. The small dynamic Board successfully turned the company around as illustrated by the achievement of the following milestones:

  • A stringent cash management strategy was implemented to ensure that the company remained solvent at all times,
  • All legitimate creditors were identified and paid in full.
  • Because the directors removed from office had not reported EcoHydra Australia’s financial dealings correctly to the external accountant, nor carried out audits required by law, the Board made a strategic decision to convert the company to a proprietary company to give greater protection to the Directors now dealing with this difficult situation. Given the surrounding circumstances, the Australian Securities and Investments Commission accepted this action.
  • EcoHydra Australia had incurred debts through the actions taken by the directors removed from office. Legal advice was obtained as to the possibility of reclaiming funds to cover these debts from the directors personally. Unfortunately, this was not possible because even though the debts were incurred without Board approval or knowledge, they were still legitimate debts against EcoHydra Australia because directors acting in that role had incurred them.
  • By shareholder agreement through an Extraordinary General Meeting, a corporate restructure based on a new business model transferred the business of EcoHydra Australia to a newly created company registered in the United Kingdom, EcoHydra Technologies Ltd.
  • This newly created United Kingdom company was 60% owned by EcoHydra Australia. Newly recruited investors resident in the United Kingdom owned the remaining shares.
  • All of EcoHydra Australia’s intellectual property rights, manufacturing rights and international sales and distribution rights were protected from loss through timely legal transference to the United Kingdom company.
  • A pro-rata share-buyback arrangement was proposed to a further Extraordinary General Meeting of EcoHydra Australia shareholders. EcoHydra Australia offered the shares it held in the United Kingdom company as consideration for the pro-rata share buy-back purchase of the EcoHydra Australia shares. The Extraordinary General Meeting approved the proposal.

EcoHydra Australia’s shareholders thus became direct shareholders in the United Kingdom company.

Following the success of the share buy-back arrangement, another EcoHydra Australia Extraordinary General Meeting appointed me as the Australian-based Liquidator to close down the company. The company was then wound-up in accordance with Corporations Act 2001 requirements and Australian Securities and Investments Commission regulations.

Shareholders saved. With the finalisation of the share transition arrangement and the transfer of managerial responsibility, EcoHydra Technologies began trading profitably. EcoHydra Australia shareholders had paid $AUD 0.20 cents per share as their investment in EcoHydra Australia. At the date of my appointment as a Director, the shares were valueless. A ‘willing seller-willing buyer’ sale of EcoHydra Technologies shares in mid-2007 was concluded at a sale price of $AUD1.00 per share. So at that date, former EcoHydra Australia shareholders had secured a reasonable profit on their initial investment of 20 cents, after facing a disastrous loss situation.

Personal disclosure. Since 2007, I have not had any association with the ongoing venture. I am however, modestly proud that the case study in survival and business turnaround of EcoHydra Australia shows my participation in a favourable light

Yours sincerely,

Graham  Segal

Chiron! the business doctor.™ ... relieves business pain!™ 

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© Graham Segal, Author. March 2013. All Rights Reserved

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This website and the associated webpages content are produced by Graham Segal trading as Chiron! the business doctor.™. They are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License based on Graham's work at http://chironthebusinessdoctor.com.

Date this webpage last reviewed/updated: 6 July 2014

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