March 26, 2001
You can take this one to the bank. Companies almost never release good news after the close of business on a Friday. Bad news is a different story altogether. After all, management can hope that any disappointment will be blunted once financial markets have closed for the week, and people have shifted their attention to leisurely weekend activities. In any event, this allows a company to prepare for negative reactions over the weekend, while leaving investors powerless to do anything but panic and pout.
Infotopia, Inc.’s investors are likely to be doing a good deal of both this weekend. Early Friday afternoon, Infotopia dropped a bundle of surprises on the public – announcing that the Company had once again increased its authorized shares, and filing an annual report that may have raised more questions than it answered. And while the Company has already begun to spin the story, the facts would seem to resist any rosy interpretation. (For more on Infotopia, see STOCK OR SCHLOCK, INFOTOPIA, INC., PART I – IS THIS A LIMITED TIME OFFER?; PART II – FOR A FEW PRODUCTS MORE; PART III – BYE BYE SHARES; and PART IV – PREDICTIONS, PROJECTIONS AND PLANS FOR THE FUTURE).
Spinning Records
Infotopia is no stranger to positive spin. In recent weeks it has issued a series of press releases proclaiming “record” revenues since the beginning of January 2001. A March 16th press release claimed “[s]ales for the week ending March 11, 2001 exceeding $3,000,000.00 (unaudited).” It went on to say that “Infotopia has continued to set new records for sales and profits for each week since the 1st week of January.”Coincidentally and curiously, the Company says this run of “record” numbers began in January – meaning they are not reflected in the audited financial statements that accompany the Form 10-K filed by Infotopia on March 23, 2001. That 10-K covers the annual period ending December 31, 2000. As a result, the Company is not scheduled to file audited financial statements that would confirm those glowing “unaudited” reports for another year.
The audited revenues for January and February 2001 would have been included in the Form 10-K (which would then have been filed in May rather than March), but on February 23, 2001, the Company switched its fiscal year end from February 28th to December 31st – thereby eliminating those “record” revenues from immediate audit. (See RADAR’S DOGHOUSE, UPDATE: INFOTOPIA, INC. – THE BEST LAID PLANS).
Investors can only wonder why the Company chose to exclude such “record” revenues from the audited financial statements. Without them, those audited financial returns lack the luster that emanates from the Company’s myriad announcements of “unaudited” revenues. Indeed, the numbers in the 10-K seem notably lower than the Company’s earlier projections.
Hold That Tiger
Interest in Infotopia started to build after the Company began to trumpet sales of its flagship product, an exercise device called the “Torso Tiger.” Between August 22 and October 4, 2000, the Company issued a series of press release proclaiming revenues of about $7 million from sales of the Torso Tiger. On September 26th, Infotopia’s President Ernest Zavoral predicted that interest from retail and international distributors “should help to keep the sales of the Torso Tiger strong through the upcoming holiday season and beyond.” This view was reinforced by an October 24th press release, which declared that Infotopia had booked over $8 million in orders – or over $900,000 per week - since acquiring rights to the Torso Tiger on August 18, 2000.In view of such fanfare, investors might reasonably have expected the Torso Tiger to generate revenues of $10 million or more between September 1st and November 30th. After all, the Company said it had “booked over $8 million in orders” by mid-October. But when the Company filed its unaudited Form 10-Q quarterly report for that period on January 23, 2001, it turned out the Company had generated revenues of only $8.6 million for the first nine months of the year. Had sales dropped so precipitously – from close to $1 million per week to around $100,000 per week – during the last six weeks of the quarter? At the time, the Company offered no explanation.
The audited figures reflected in the Form 10-K are no more encouraging. They indicate that Infotopia’s revenues for the last ten months of 2000 totaled $9.1 million. That means either that revenues shrunk to $500,000 for December 2000, or that the auditors had cause to adjust the earlier numbers downward. Neither scenario can be too comforting to anyone who expected a steady stream of significant revenues from sales of the Torso Tiger.
Don’t expect sales of the Torso Tiger to pick up in the future. According to the Form 10-K, the Company “discontinued the sale of Torso Tiger” as of December 31, 2000. This disclosure is likely to come as a surprise to anyone who has read the Company’s March 6th and March 16th press releases, which referred, respectively, to “continuing sales” and “ongoing sales” of Torso Tiger. In fact, the demise of Torso Tiger does not appear to have been publicly disclosed by Infotopia prior to the March 23rd 10-K filing – despite the fact that the Company dropped its flagship product almost three months ago. Even now, only the most diligent readers are likely to see that disclosure – which is buried at Note 11 to the Audited Financial Report.
The Company does not say why the product was dropped. Why did sales of the product seem to plunge so precipitously in the last months of 2000? Did Infotopia fail to meet thresholds required to retain rights to Torso Tiger? Did it fail to pay required licensing fees? Was it delinquent on other payments? The Form 10-K does not say.
More Stock, Preferably
The Form 10-K contains still more distressing information for shareholders They’ve been diluted once again. Although Infotopia has, in the past, said it wished to avoid shareholder dilution, the Company continues to print stock certificates like they’re going out of style. According to the 10-K the Company issued options for 4,667,667 shares to a company called Modern Health Sciences, options for another 4,667,667 to an unnamed “consultant,” and options for 3 million shares to an unidentified financial public relations consultant.But those 12 million plus shares are just the tip of the iceberg. As it turns out, the Company has issued another 120 million or so shares. How is that possible? After all, Infotopia had previously handed out virtually all of its 190 million authorized common shares. Simple. The company has amended its Certificate of Incorporation – again. On March 23rd the Company filed a form 14C Information Statement with the SEC stating that a majority of shareholders had agreed to increase authorized common shares from 190 million to 500 million and authorized preferred shares from 10 million to 30 million.
This marks the third time the Company has increased authorized shares since last August. How did Infotopia get a majority of shareholders to go along? The Form 14C does not say, but it does contain some possible clues. According to the 14C the Company has issued 10 million shares of preferred stock as follows:
1.9 million Series A Preferred Shares went to a management group consisting of Chairman Daniel Hoyng, President Ernest Zavoral, Vice-President Marek Lozowicki and director Clinton Smith for services rendered.
Another 2 million Series A Preferred Shares was sold to an entity identified only as Gorda Investments [TK] at a price of $1.40 per share – or $2.8 million.
Finally, 6.1 million shares of Series B Preferred Shares went to Gorda Investments, Ltd. for $10,000.
The Form 14C does not say who owns or controls Gorda Investments – or the nature of its business. It doesn’t even say where it is incorporated. Perhaps the [TK] provides a faint clue. We found that designation - [TK] - used to refer to Tokelau, a group of three small islands clustered in the South Pacific. Does that mean Gorda Investments is a Tokelau corporation? As of July 2000 the population of Tokelau was estimated at 1,458 and per capita income was negligible. At present, they’re drafting a constitution. We have no way of determining at this time whether Gorda Investments hails from Tokelau but chances are, even if it was formed there, its principals reside elsewhere. After all, Gorda has already paid $2.8 million to Infotopia, while the people of Tokelau reportedly make ends meet with the assistance of aid from relatives in New Zealand and revenues from the sale of “copra”, postage stamps, souvenir coins and handicrafts.
Still, Infotopia shareholders learning for the first time that the Company has increased the authorized shares can reasonably wonder where the votes came from. It seems they could have come from those preferred shareholders. As the Form 14C reveals, each share of preferred stock entitles the holder to twenty votes. That means that the holders of 10 million preferred shares – Infotopia’s management plus Gorda Investments – have 200 million votes. That’s more than all common shareholders combined. As a result, the preferred shareholders can control any corporate vote.
What are the other terms of the preferred shares? For instance, are they convertible into common stock? The 14C does not say and, as best we can determine, the Company has not disclosed those terms in any other SEC filing.
When were the preferred shares issued? The Form 10-K does not indicate that any preferred stock had been issued as of December 31, 2000, which suggests they were issued subsequently. Just in time to vote.
He’s Number IFTPONE
Infotopia Chairman Daniel Hoyng reportedly habituates the Company’s Raging Bull Message Board using the moniker “IFTPONE.” He also communicates with shareholders through “Chairman’s Messages” posted on the Company’s website (although we noticed that most of the archived “Chairman’s Messages” seem to have been removed from the site this past weekend, together with Hoyng’s photograph).On March 23rd, the same date Infotopia filed its Forms 10-K and 14C with the SEC, a new message from Chairman Hoyng appeared on the Infotopia website. After briefly recounting the Company’s excitement over recent revenue growth, Hoyng reveals that the Company plans to file yet another Form SB-2 Registration Form. Infotopia filed to register 96.8 million shares in October 2000 and another 34.7 million shares in January 2001. That’s on top of 50 million shares registered on a series of S-8 Registration Statements between April and November 2000.
This time, Hoyng says, the Company is registering
• 60 million shares for Thomson Kernaghan and Altea Ltd.;
• 46 million shares for the Company’s officers and directors; and
• 120 million shares for Gorda Investments;
These names are becoming quite familiar to Infotopia shareholders. The Company has already registered 14.4 million shares of common stock for Altea (a British Virgin Islands company) and 23.5 million shares for Thomson Kernaghan. Why are they now receiving more stock? That is not completely clear. Chairman Hoyng’s March 23rd message says that the Company recently raised $7 million through the sale of stock to Altea and Thomas Kernaghan and by “utilizing media and accounts receivable financing through our Infomercial Management Company.” But Hoyng doesn’t say how much of the money came from each source so it is not possible to determine what the two selling shareholders paid for their stock.
Hoyng’s message indicates that officers and directors of Infotopia recently “exercised options valued in excess of three million eight hundred thousand dollars for over sixty million shares of common stock.” Of course, he doesn’t say that the management team actually paid that sum for the shares – or what the nature of the consideration was. The Company plans to include 46 million of the officer and directors shares on the SB-2 Registration Statements, but Hoyng hastens to assure shareholders that they have no present intention to sell those shares. It is worth noting, however, that Messrs. Hoyng, Zavoral, and Lozowicki collectively registered about 10.3 million shares on the previous two Registration Statements. According to the From 14C, as of March 22, 2001, Hoyng, Zavoral and Lozwicki owned no common shares.
That leaves the 120 million common shares to be registered on behalf of Gorda Investments. Is there any wonder, therefore, that Gorda would cast its preferred votes in favor of the additional authorized shares? Why are so many shares – over 25% of the common shares – designated for Gorda? Hoyng says that the shares “underwrite a series of preferred stock and could provide in excess of twenty million dollars in additional funding to the Company.” However, he maintains that those preferred shares will not be converted into common shares unless the Company needs more capital. How likely is that? Up until now the Company has repeatedly needed more funds.
The description of the Gorda Investment shares is somewhat vague. How, for example, would Infotopia receive $20 million if Gorda converts preferred shares into common stock? Hoyng does not provide those details. Nor does he describe the terms of that possible conversion. Hoyng states only that a “series of preferred stock” held by Gorda can be converted into common stock. Does that mean that Gorda’s 6.1 million shares of Series B Preferred Stock can be converted into 120 million common shares – a conversion rate of about 20 common shares for each preferred share. That would mirror the number of votes per preferred share.
Whatever Happened To…?
The March 23rd Chairman’s Message seeks to “ease shareholder concerns” about the upcoming SB-2. But shareholders may feel ill at ease when they consider the fate of some of the Company’s other recent announcements.• The Company’s stock buyback – announced on January 12, 2001 – has already been placed on hold because sufficient funds are not available in the Company coffers.
• The acquisition of two private infomercial companies – announced on January 22, 2001 – has been quietly abandoned. At the time, Hoyng, in yet another Chairman’s Message, maintained that it “has been and will continue to be the belief of the Directors and Officer that further dilution of the stock for new products or Companies must increase the Earnings Per Share or new projects will not be acquired.”
• A planned merger with a NASDAQ-ready company – also announced on January 22, 2001 – apparently is no longer on the immediate horizon.
• The Company has not reported any progress on its acquisition of a controlling interest in Millennium Direct, Inc. – initially announced by Infotopia on January 23, 2001.
And, of course, there is the quiet demise of Torso Tiger. All things considered, it may take a lot more than a message from the Chairman to ease any shareholder concerns.
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