BYE BYE SHARES
February 2, 2001
Since Infotopia, Inc merged with Dr. Abravenal’s Formulas, Inc. last May, the Company has issued over sixty press releases – that’s about one news item every three days. As we have seen in our earlier installments on Infotopia, many of those announcements involved new products, projections and plans, even if details were sometimes sparse. There was little mention, however, of what may have been the Company’s most notable activity – issuing shares. So many in fact that Infotopia has had to increase its authorized shares twice in the past six months.
TIGER YES, TONY NO.
Shares of stock have been flying out of the Infotopia at a rapid pace. But that’s not all that has been leaving the Company. Since late September the Company has announced two notable departures. On October 5, 2000, the Company announced that its Chief Financial Officer and Director, Tony Ferracone, had resigned four days earlier. Another Director, James Kosta, departed from the firm on September 22nd.
In an October 5th press release, Mr. Ferracone sought to explain the reasons for his departure. “My role in the company was planned as one with a short term,” he stated. He went on to say that “Mr. Kosta and I were enlisted to help the company attain its initial positioning and fund its first product. As time has gone by we were both less and less involved in key decisions regarding the company's future. The Board of Directors as it stands now is the core group that has been responsible for the company's growth for the last 6 weeks.”
Does it seem that Mr. Ferracone was attempting to distance himself from the Company’s “key decisions” during those past six weeks? Was it coincidental that the period in question coincided with a series of press releases proclaiming revenues from Torso Tiger? The resignations of these two directors came only days after Infotopia announced it was ending its relationship with Strategic Communications, the public relations firm that had been issuing press releases for Infotopia since right after the reverse-merger with Dr. Abravenal’s Formulas, Inc.
Almost four months later, it does not appear that Infotopia has found a full-time replacement for Mr. Ferracone. On January 23, 2001, the Company filed its Form 10-Q for the period ended November 30, 2000. Marek Lozowicki, the Company’s Executive Vice-President and Secretary, signed that form as Assistant Chief Financial Officer.
DILUTE ME NOT
Meanwhile, the Company has been issuing shares with even more frequency than it has been announcing new products. On August 4th, the Company said that it had signed a Letter of Agreement to obtain a $20 million financing package that would allow it to “finance our operations and inventory, and will help us reach profitability much faster than we would have otherwise." Infotopia did not identify its financing partner, or offer any details of the proposed terms, but promised to do so in a Registration Statement that it intended to file “in the next two weeks.”
The press release did note, however, that the Company would be increasing its authorized shares from 40 million to 100 million “in order to prepare for future exercises of the financing.” At the same time, Infotopia’s President Ernest Zavoral reassured investors that the increase in authorized shares “does not mean that any more shares are issued or in the public float. It is important that people realize that increasing a company’s authorized shares is quite normal and does not mean any dilution.”
This did not mean that the shares would not be issued in the future – the near future. Two weeks came and went without any Registration Statement further detailing the financing. Instead, a September 28th letter to shareholders revealed that Infotopia had backed away from the financing because “of the high cost of warrants and fees attached.” The shareholder letter did not specify what those warrants and fees might have involved, but it did state that Infotopia continued to pursue financing; believed that new products would create the need for about $5 million in working capital for inventory and media; and wanted to satisfy both of these goals while creating “the least amount of Shareholder dilution.”
Dilution, however, was on its way. Approximately 34.3 million Infotopia shares were outstanding as of July 14, 2000. By October 23rd there were 99.4 million shares outstanding – almost a three-fold increase. And there was more to come.
AND ALL THOSE SHARES
On September 27th, Infotopia announced that it had raised more than $3 million since August 1st, through “equity placements with JB Marc and Associates, Oxford Capital, Thomson Kernaghan and others.” According to the release, those funds had been utilized to retire 100% of the Company’s long-term and short-term debt, purchase Torso Tiger inventory and for working capital purposes. The press release did not, however, address the terms of those deals, or indicate just how much equity had been placed, or at what price.
At least one of those questions was answered the following day. In its September 28th letter to shareholders, Infotopia revealed that it had retired all of its outstanding debt by issuing over 25 million shares of stock. According to Infotopia, “[t]he success of the Torso Tiger and all the new products in development would not have been possible without the issuance of these shares.” That success was also limited by available funding. As the Company pointed out, “each new product in development requires in excess of $300,000 for the cost of the infomercial production, molds and tooling, product testing and other related miscellaneous developmental expenses, after launch the a [sic] product like the Torso Tiger can utilize between $1,000,000 for inventory and media prior to producing sales.”
The September 28th letter does not say who received those shares but, based upon the previous day’s press release, it would seem that a significant portion had gone to J.B. Marc, Oxford Capital and Thomson Kernaghan.
So just how was Infotopia doing in its efforts to create “the least amount of Shareholder dilution?” We found some answers in the Company’s public filings.
FAMILIAR FACES
Between April 28, 2000 and September 21, 2000, the Company registered over 36 million shares on eight separate S-8 Registration Statements. That stock had been issued to various consultants and lawyers, often within days of the time the Registration Statements were filed. Unlike most other Registration Statements, S-8s become effective at the time they are filed. That means the recipients of those shares are free to trade them immediately after the filing has been accepted by the Securities and Exchange Commission.
Who were those attorneys and consultants? Some of the names may be familiar to readers of Stock Patrol. For instance, several of the S-8s and accompanying opinion letters were filed by the law firm of Chapman & Flanagan, Ltd., whose experience with S-8 filings was chronicled in our recent series on another OTC Bulletin Board company, Bach-Hauser, Inc. (See Stock or Schlock?, Bach-Hauser, Inc. – A Haus Full of Consultants; Radar’s Doghouse, Bach-Hauser, Inc. - The First Thing We Do, Let’s Give Stock To All the Lawyers; and Radar’s Doghouse, Bach-Hauser, Inc. – Everyone Makes Misteaks). The Infotopia S-8s included a total of 1.125 million shares issued to the lawyers - Sean Flanagan and Daniel Chapman (Infotopia registered another 62,500 shares for an attorney named Herbert Jacobi. Jacobi, like Chapman and Flanagan, had been among the recipients of Bach-Hauser S-8 stock).
Chapman & Flanagan are not the only familiar names to have received S-8 shares from Infotopia. On May 23rd the Company registered 1.4 million shares for a pair of consultants named Alan Berkun, Esq. and Jeffrey E. Jacobson, Esq. Stock Patrol previously noted that Berkun received S-8 consulting shares from a company called Far East Ventures (See Stock or Schlock, Far East Ventures, Inc. Part III – Consultants To Spare) and that Jacobson was issued S-8 shares for consulting services to HIV-VAC, Inc. (See, Radar’s Doghouse – HIV-VAC – Out Of Africa?).
This time Berkun and Jacobson each received 700,000 shares from Infotopia under separate consulting agreements dated May 19th. Those agreements contained most of the same material terms as the ones that had been utilized by Far East Ventures and HIV-VAC. Here, each man agreed to “assist the Company in identifying acquisition targets for the Company and advise the Company in structuring mergers or other acquisitions.” As was the case with the Far East Ventures and HIV-VAC agreements, the shares issued to Berkun and Jacobson were “non-refundable,” but the Infotopia consulting agreements could be cancelled, by either party, on fifteen days notice. And, of course, Infotopia agreed to register the shares, on Form S-8, immediately.
Since the shares issued by Infotopia to Berkun and Jacobson were “non-refundable” this meant that each man could receive, register and sell the shares, and then cancel their agreements, without rendering any services. Indeed, the contracts contemplated this possibility, stating that “[n]othing contained herein constitutes a commitment on the part of the Consultant to find an acquisition target for the Company or, if such a target is found, that any transaction will be completed.” If, however, either Berkun or Jacobson did introduce a successful deal to Infotopia, he would receive an additional 700,000 shares – which would be registered within 14 days on yet another Form S-8.
Did Berkun and Jacobson introduce potential acquisitions to the Company, and if so were the transactions consummated? We were unable to find answers to those questions in the Company’s public disclosures. We also found no statement that would indicate whether the consulting agreements were cancelled or still remain in force. But we did discover that Infotopia registered an additional 1,325,000 shares for Allan Berkun, and another 1,325,000 shares for Jeffrey Jacobson on an S-8 filed just one month later, on June 19, 2000. This time, Infotopia said Berkun and Jacobson were receiving the shares in exchange for legal services. That same Form S-8 registered an additional 2,850,000 shares issued to three other individuals for legal and internet consulting services.
As it turns out, Jacobson received still more Infotopia shares for his legal services. On August 11th, the Company filed an S-8 registering another 3 million shares for Jacobson, as well as 600,000 shares given to the law firm of Bondy & Schloss and another 1.3 million awarded to another consultant. (Bondy & Schloss later received an additional 1 million shares that are included in the Company’s most recent SB-2 Registration Statement).
There’s more. On August 25th Infotopia filed an S-8 registering 1.5 million shares that had been issued to Jacobson’s partner, Bruce Colfin. Mr. Colfin, like his partner, had also received S-8 shares from HIV-VAC, Inc. Then, on September 21st Infotopia amended that S-8. This time, it seemed, the Company registered those 1.5 million shares for Jacobson instead. (According to the Form 10-Q filed by the Company on January 23, 2001, 1.5 million shares issued to Jacobson were subsequently cancelled. It is not clear, however, whether shares were issued to Colfin).
The S-8s did not specify what legal services were to be provided by Berkun, Jacobson or Colfin. Mr. Jacobson is a partner in the law firm of Jacobson & Colfin, P.C., which specializes in Entertainment Law, Trademarks, Video, Comics and Toys, Literary Property, Theater and Intellectual Property Law. Mr. Colfin also specializes in Entertainment Law. We have found no similar resume reciting Mr. Berkun’s current practice.
As we reported in one of our articles on Far East Ventures, Inc. (Stock or Schlock? - Far East Ventures, Inc., Part III: Consultants To Spare), it appears that Mr. Berkun has shared office space with an individual named Joseph Blumenthal. Mr. Blumenthal is the President of J.B. Marc and Associates, Inc., a company that received S-8 stock from Far East Ventures. As we noted earlier, J.B. Marc was one of the companies that provided a portion of the $3 million funding that Infotopia says it used to retire outstanding debt. To be more specific, according to Infotopia’s Form 10Q for the quarter ended August 31, 2000, J.B. Marc purchased 2.5 million shares on August 21st for $967,000. All of those shares were registered on the Form SB-2 Registration Statement originally filed by Infotopia on October 6, 2000.
Is there a connection between Berkun and Blumenthal besides shared offices? Perhaps. Two individuals named Alan Berkun and Joseph Blumenthal were named in an order issued by the National Association of Securities Dealers in 1998. That NASD proceeding charged, among other things, that a New York brokerage firm called Lexington Capital Corporation and Berkun collaborated to defraud investors and impede regulatory scrutiny.
The NASD action alleged that Lexington Capital, acting through Berkun and others, engaged in improper business with a person who had been disqualified from working for a broker-dealer; violated penny stock rules; sold unregistered securities; charged customers excessive markups; and failed to disclose the amount of remuneration received by the firm. The NASD also concluded that the firm, acting through Berkun and others, had falsified firm records in order to conceal the fact that Blumenthal solicited and effected over 300 customer transactions when he was not properly registered with the NASD and several states. According to the NASD, transactions were improperly processed for Blumenthal under Berkun’s registered representative number.
The record indicates that the complaint was settled and that Berkun was fined $150,000, ordered to pay more than $200,000 in restitution, and barred from association with any NASD member, either as a principal or registered representative. Berkun agreed to resign from the firm and surrender all ownership interest in Lexington Capital. Blumenthal, who was fined $100,000, was also barred from associating with any NASD member in any capacity.
As it turned out, the 2 million or so S-8 shares that Berkun received from Infotopia were a mere drop in the bucket. On August 8th he filed a Form 144 with the SEC in order to sell 8,330,000 Infotopia shares under Rule 144. How did he receive that stock? As a consultant, a lawyer, or perhaps a private investor? The Form 144 did not say.
A LITTLE MORE DILUTION
We have been unable to find any indication that Infotopia gave, or sold, another 8,330,000 shares to Berkun, but the Company did issue exactly that number of shares to two consultants who would be managing the Torso Tiger campaign. On July 7th Infotopia filed an S-8 registering 8,330,000 shares on behalf of those consultants - Mark Levine (4,165,000) and David Richmond (4,165,000). This, it appears, was in addition to the shares (and of course the ongoing royalties and minimums) that Infotopia had agreed to pay for rights to Torso Tiger.
For a Company that said it wanted to create the “least amount” of shareholder dilution, Infotopia has certainly not been shy about issuing shares. On June 1, 2000 Infotopia had 19.5 million shares outstanding. By January 4, 2001, the Company had issued 190 million shares. In order to accomplish this it was required to increase the number of authorized shares twice – from 40 million to 100 million on August 20, 2000, and then to 200 million (of which 190 million were common shares) in October 2000. That’s right. They’re almost out of stock again. For the time being, at least, it seems that Infotopia has issued all of the shares it can. So much for minimal dilution.
Who (in addition to those S-8 recipients mentioned earlier) has been receiving all of these shares? A few examples:
• over 17 million shares went to various product and management consultants
• more than 32 million shares were issued to various investor relations, marketing and financial consultants.
• almost 25 million shares were issued for various license fees.
• over 7 million shares were distributed to various officers and directors, including shares issued to satisfy certain prepaid expenses.
• approximately 2.5 million shares were given to First Equity Capital as compensation for their services relating to the issuance of promissory notes with warrants attached.
• 14.4 million shares were issued to a British Virgin Islands company called Altea Investments on January 4, 2001. According to Infotopia’s January 23rd 10-Q, this included 12 million shares issued as collateral for a $600,000 loan and 2.4 million shares given to Altea for financing fees. The 10-Q indicated that the 12 million shares are to be returned to Infotopia when the debt is paid in full, or retained by Altea if timely payment is not made.
There are, however, more details to the Altea transaction. In December 2000, Infotopia issued a three year Convertible Debenture to Altea for $600,000. Altea can convert the debenture into shares of the Company’s stock – beginning forty five days after the debenture was issued. Such conversion would in effect preclude Infotopia from repaying the loan. The Company can refuse to accept the conversion if Infotopia’s stock price is below 5 cents per share at that time. Even then, in order to prevent the conversion, Infotopia must pay Altea 135% of the portion of the loan that Altea was seeking to convert. Infotopia is obligated to include these shares in a Registration Statement that is declared effective by March 1, 2001. The Company may prepay the loan once a Registration Statement has been effective for a designated period of time – but again must pay 135% of the amount due. At the time of the financing, Infotopia also issued Altea a warrant to purchase 2.4 million shares of Infotopia stock at $.001 per share. (Details of the agreement between Infotopia and Altea are contained in the documents attached as exhibits to the January 11th SB-2).
• about 12 million shares were issued upon the conversion of promissory notes
• approximately 500,000 shares were distributed for settlement of debts.
• 6.5 million shares were issued to Thomas Kernaghan to settle obligations of National Boston Medical that were assumed by the Company at the time of the reverse-merger
• over 45 million shares were sold, for approximately $7 million, to investors including, Corinthian Financier Groupe; Thomas Kernaghan; Oxford Capital; J.B. Marc and Associates, Inc. (Mr. Blumenthal’s firm); MLJ Management; Capacity Unlimited; Bay Partners, Ltd.; and Vista Partners.
Infotopia’s public filings provide scant information about some of these purchasers, aside from their names, the number of shares issued, and the amounts paid for those shares. In some cases, however, the Company indicates that not all payments for those shares were made at the time they were issued. Instead, in the case of some shares sold to Thomas Kernaghan and Capacity Unlimited in particular, Infotopia deferred a portion of that payment until the Registration Statements for those shares had been declared effective. Thus, in effect, it appears that these particular “purchasers” would be paying for shares with the proceeds from their sale.
Of course, not all shares issued by Infotopia have been registered on Forms S-8. That registration form can only be used for certain stock issued to consultants or attorneys, for specified categories of services. Other shares require more detailed Registration Statements, like Form SB-2 and, when a company qualifies, Form S-3.
Were all of these new shareholders here for the long haul – ready to ride the Company’s revenue and profit projections to riches? Or were more Registration Statements on the immediate horizon? In our next installment we will explore this question and some of the Company’s more recent announcements.
http://www.stockpatrol.com/schlock/articles/infotopia3.html
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It's also possible that there just are a whole lot of them that have been intentionally set up to fail, too. The pickens are pretty easy. :-/ 
