April 2, 2001
Infotopia, Inc. fulfilled a promise last week. No, the Company didn’t start the stock buyback program it announced on January 12, 2001. Nor did it complete the acquisitions of two private infomercial companies, or the proposed merger with a NASDAQ-ready company that it announced on January 22nd. Infotopia also did not reveal that it had completed plans to acquire control of Millennium Direct, Inc. as announced on January 23rd. So what did the Company do? Last week, as promised, Infotopia filed to register another 245 million shares of its common stock on behalf of a group of selling shareholders. (For more, see UPDATE: INFOTOPIA, INC. – FRIDAY NIGHT SPECIAL; 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).
Who are those selling shareholders, and why are they receiving almost 50% of the Company’s authorized common shares? They include Infotopia’s officers and directors, a new group of consultants, and several corporations that have – or may in the future – provide financing for the Company. Exactly what has Infotopia received for all of those shares? That, unfortunately, is difficult to say.
One Person, 20 Votes
Infotopia had issued so many common shares by early 2001 that it simply ran out. That’s right, even after increasing its authorized common stock on two occasions in 2000, Infotopia’s cupboard was bare – at least as far as common shares were concerned. But the Company still had 10 million preferred shares to issue, so it had room to maneuver. It is not unusual for companies to issue preferred stock when they do not have sufficient common stock authorized. The company then designates certain “rights” and “preferences” for the preferred shares. Those “rights” often include the ability to convert the preferred stock into common once the Company has authorized more common shares. So, while there was (and is) no public market for the Infotopia preferred shares, the Company had the power to designate “rights” that would make those shares extremely valuable.Which is precisely what Infotopia did. In March 2001, the Company issued all 10 million preferred shares – but not before affording them some sexy attributes. First, each preferred share would be entitled to 20 votes on any issue that came before shareholders. As a result, the 10 million preferred shares possessed 200 million votes – or 10 million more than all of the 190 million authorized common shares combined.
As it turns out, this was a pretty handy tool because it meant that the preferred shareholders had enough votes to amend the Company’s Certificate of Incorporation so that Infotopia could issue more common stock. And they could do it without the votes of any common shareholders. Why would the preferred shareholders want to increase Infotopia’s authorized common stock? One reason jumps out. When it was designating the “rights” for the preferred shares, Infotopia decided that each preferred share could be converted into 20 shares of common stock. Since there was (and is) a public market for Infotopia’s common stock, the preferred shareholders had a compelling motive to see to it that the Company had sufficient common shares available for that conversion.
Under the circumstances it should come as no shock that Infotopia amended its Certificate of Incorporation this month to authorize 500 million shares of common stock – more than enough for all of the preferred stockholders to convert their holdings into common shares. Now the Company is registering: (a) all 200 million common shares that are to be issued once the preferred stock is converted and (b) another 45 million common shares to boot. The potential dilution – more than doubling the public float - is enormous.
Why was Infotopia able to dilute existing shareholders without first seeking their consent? As a Nevada corporation, Infotopia has the right to give “super-voting” rights to the preferred shareholders that effectively disenfranchise the common shareholders. Other states do not permit a company to take such action without the consent of each class of stockholders – common and preferred.
Being an OTC Bulletin Board company did not impede the process either. National stock exchanges, like NASDAQ, restrict the ability of their listed companies to grant such “super-voting rights,” or to take certain corporate actions without the consent of existing shareholders. But the OTC Bulletin Board does not impose such restrictions.
The Price Is Right
So how did Infotopia go about handing out preferred shares? According to the SB-2 Registration Statement filed on March 27th, Infotopia issued 3.9 million shares of Series A Preferred Stock to insiders in March 2001. Each of the Series A Preferred Shares was convertible into 20 shares of Infotopia common stock – or an aggregate of 78 million common shares - all of which are being registered on this SB-2.Did the Company actually receive any cash for the Series A Preferred Shares? In describing the preferred stock, the SB-2 states that the Series A Preferred Shares were issued “for consideration of $1.40 per share or its equivalent.” Later, however, it suggests that “equivalent” is the operative word, saying that all 3.9 million shares were issued for “services rendered.”
Who rendered those “services” and received these shares? The SB-2 indicates that Infotopia’s officers and directors got 1.9 million of those 3.9 million Series A Preferred Shares. Those 1.9 million Series A Preferred Shares have now been converted into 38 million common shares – based upon the 20 for 1 formula.
The notion that some or all of these preferred shares were issued for “services rendered” might have come as a surprise to investors who read the “Chairman’s Message” dated March 23, 2001 that was been posted on the Infotopia website several days before the SB-2 was filed. That “message” from Company Chairman and Chief Executive Officer Daniel Hoyng stated that as a “show of confidence and faith the officers and directors collectively exercised options valued in excess of ($3.8 million) dollars for over (60 million) shares of Common Stock.” Hoyng went on to say that “[o]f all the options exercised by the officers and directors the Company will register 46,043,527 shares.”
As we now see, those 46,043,527 shares included the 38 million common shares received by officers and directors after they converted their Series A Preferred holdings. And, as the SB-2 suggests, those 38 million shares were issued for “services rendered” rather than for cash. Hoyng did not actually say that management paid $3.8 million dollars for over 60 million shares - but investors reading that message might well have drawn that inference.
If you find all these numbers somewhat confusing – they are. And not all investor questions can be answered by reviewing the SB-2. Take, for example, those 60 million shares that Hoyng said had been issued to officers and directors. The SB-2 indicates that only 43.5 million shares would currently be held by officers and directors upon exercise of all conversion and option rights. So where are the other 16.5 million shares that Hoyng alluded to?
Did officers and directors pay for any of the shares that are now being registered? After all, the SB-2 is registering 43.5 million shares for those individuals – or 5.5 million more common shares than they received after converting the Series A Preferred stock. Was that additional common stock obtained by exercising options, and if so, what were the terms of that exercise? Did they pay cash, or simply waive rights to other compensation in return for the shares?
And what of the remaining 2 million shares of Series A Preferred stock registered on the March 27th SB-2? Those shares were apparently issued to the firm of Thomson Kernaghan, which has received Infotopia stock in the past. Did Thomson Kernaghan pay for those preferred shares, or did it, as the SB-2 implies, render services? What services could possibly have merited the issuance of 2 million shares of preferred stock, convertible into 40 million shares of common stock currently worth more than $3 million?
Again, the March 23rd “Chairman’s Message” only lends to the confusion. It said that Infotopia had completed financing arrangements for $7 million “with the sale of equity to Altea Ltd. and Thomson Kernaghan and utilizing media and accounts receivable financing through our Infomercial Management Company.” How much of that sum – if any – had been paid by Thomson Kernaghan? What had been paid by Altea? The SB-2 registers 11.6 million shares for Altea. Where did those shares come from if they were not issued in connection with the conversion of preferred stock? Questions abound.
Alphabet Soup
Thomson Kernaghan and Altea Investments Ltd. own approximately 65 million of the 245 million common shares registered on the March 27th SB-2. However, the largest number of shares, 120 million, are being registered for a company called Gorda Investments Ltd. The Registration Statement does not say who controls Gorda, the nature of its business, or even where it is incorporated. How did Gorda become entitled to almost 25% of the Company’s common stock? As it turns out, Gorda purchased 6.1 million shares of Infotopia’s Series B Preferred Stock for a total of $10,000 in March 2001. Gorda is entitled to convert each of those preferred shares into 20 shares of common stock at the rate of at least 7 cents per share of common stock, or about $8.5 million.Hoyng’s March 23rd “Chairman’s Message” indicates that while this provides a source of additional capital for the Company, “it is not anticipated that many of the shares will ever need to be converted.” Still, the SB-2 does not indicate that the Company can prevent Gorda from converting those shares if it elects to do so. Nor does it indicate whether any of the shares have been converted so far.
The “Chairman’s Message” also stated that “a small amount of additional shares” would be registered for “certain consultants.” Indeed, a total of 14.5 million shares have now been registered for a group of consultants, including 3 million for the Company’s attorneys Bondy & Schloss. Here again, Infotopia does not provide detailed information about any of those consultants (other than Bondy & Schloss which is identified as Infotopia’s corporate counsel). Although the SB-2 does state that one consultant received 3 million shares of stock in February 2001 for providing financial and public relations advice, it does not identify that consultant by name. Instead, it lists three separate entities – Pali Financial Group, Inc.; KMI, Inc.; and RMK Investments, Inc. – each of which holds 3 million newly registered shares.
Who controls this alphabet soup of consultants? What services are they providing and on what terms? Where are these companies located? Are they offshore entities, like Altea Investments?
While the SB-2 does not provide the answers to those questions, some clues about KMI, Inc. surfaced in a recent series of emails. On March 20th, a group of online newsletters began touting Infotopia stock and extolling the Company’s prospects. This, of course, was only days before the Company made public its plans to issue and register an additional 245 million common shares. In fact, we received virtually identical “newsletters” from three of these promoters, services identifying themselves as “Red Alert,” “US Investor,” and “Bull Stocks.”
Each of the “newsletters” quoted from a message posted on the Infotopia message board at Raging Bull which suggested that the Company’s shares were undervalued – based upon the 200 million common shares then outstanding. In the words of each promoter, Infotopia “could be a 10 to 20 bagger.” We admit that’s new lingo to us, but the implication was clear. The writers thought that Infotopia was a potentially great investment.
Why were “Red Alert,” “US Investor,” and “Bull Stocks” so eager to pump up interest in Infotopia shares? Consider this. Each of those services acknowledged receiving 100,000 shares from a company called KMI to distribute their “advertisement” about Infotopia. Why would KMI want to generate interest in Infotopia? There are 3 million reasons according to the March 27th SB-2.
What is KMI, and did it know of Infotopia’s plans to issue additional shares when it placed the “advertisements?” The public filings do not indicate what KMI knew, or when.
When can investors expect all of these newly registered shares to hit the market? Hoyng’s March 23rd “Chairman’s Message” indicated that the shares held by Altea and Thomson Kernaghan would “be brought into the market slowly each day.” As for those shares held by management, Hoyng assured shareholders that officers and directors who recently purchased shares through the exercise of options “would not find it beneficial to sell their shares unless a significant increase of share price occurred.” Of course, that does not seem to address all of those shares issued for “services rendered.” Those would appear to be profitable at any price.
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