PREDICTIONS, PROJECTIONS AND PLANS FOR THE FUTURE February 5, 2001 Between June 1, 2000 and January 4, 2001, Infotopia, Inc. issued around 170 million shares of its common stock. That’s more than ten times the 19 million shares outstanding at the start of last June. As we saw in Part I of this series (See Stock or Schlock?, Infotopia, Inc., Part I - Is This A Limited Time Offer?), around 50 million of those shares were registered on a series of S-8 Registration Statements between April 2000 and November 2000. And the rest?
RUSHING TO REGISTER
Most recipients of Infotopia stock did not have to wait long to see their shares registered. On October 6, 2000 the Company filed an SB-2 Registration Statement with the Securities and Exchange Commission. By the time that filing reached its final amendment, on November 3rd, it included 96.73 million shares. The Registration Statement included 23.5 million shares for Thomas Kernaghan; 2.5 million shares for J.B. Marc; 3.7 million shares for Oxford Capital; 4.1 million for Capacity Unlimited; 3.1 million for First Equity Capital; 5 million for Vista Partners Ltd.; and 10 million for Bay Partners Ltd.
Perhaps most notably, the SB-2 also included 2.88 million shares registered for the Company’s CEO and Chairman Daniel Hoyng; 2.6 million shares registered for its President Ernest Zavoral; 1.475 million shares registered for its Secretary Marek Lozowicki; and 750,000 shares for Infotopia Director Clinton Smith. According to the Registration Statement, these represented all of the shares owned by Messrs. Hoyng, Zavoral, Lozowicki and Smith at the time. Which raises at least one interesting question – why was the Company’s senior management, which was predicting that revenues, and profits, would soon skyrocket, planning for the sale of all of their shares?
As it turns out, Messrs. Hoyng , Zavoral, and Lozowicki had more stock to register by the time the Company filed its next SB-2, registering 34.7 million more shares for a group of selling shareholders on January 11, 2001. This time those three corporate officers are registering some, but not all, of their stock – 1.12 million shares each.
Not all of the news was about selling stock. It seems that buying shares is on the agenda as well. On January 12th, the day after it filed the latest SB-2, the Company announced plans to spend about $12 million buying back shares of its common stock over the next 12 months. Does the plan include the purchase of any shares currently being registered? Will shares be purchased privately, or from the public float? The press release did not say. The Company said that the buyback program would “help minimize any further dilution,” but how much more dilution should investors be expecting. After all, Infotopia has again issued virtually all of its authorized common shares – even after the recent increase from 100 million to 200 million shares. Volume in Infotopia shares spiked sharply on January 12th. 14.5 million shares were traded – almost double the previous day’s volume.
The January 12th press release also stated that the Company “is projecting in excess of 60 million in profit over the next 18 months.” On that same day, Infotopia issued a second press release asserting that “preliminary sales figures” (of the Bun & Thigh Rocker, Backstroke, Hot Mommies ™, Torso Tiger, Body Rocker, and other products) for the two-week period ending January 11, 2001 were in excess of $4,000,000.
Investors may wish to consider these most recent projections in the context of the Company’s latest 10-Q, which was filed on January 23, 2001. That report, for the quarter ended November 30, 2000, indicated a net loss for the period of $25.4 million. Revenues were $8,657,000, but even that figure is somewhat less than might have been expected if sales of Torso Tiger maintained a pace of $800,000 to $1 million per week throughout the period. Infotopia says that the cost of those sales was $2.4 million, but then there were also selling and marketing expenses of $9.3 million and general and administrative costs of $4 million. That does not even include professional service and consulting fees of $16 million. Accounts receivable totaled $1.6 million, while accounts payable and accrued expenses were $2.3 million. And, despite the money generated from sales of stock and the issuance of debentures, the Company reported just $497,000 in cash.
One final thought about predictions and projections. We recently reviewed a July 23, 1999 press release issued by National Boston Medical, Inc. (NBM) concerning, among other things, the “Backstroke® Back Massager” – a product now being marketed by Infotopia. As we pointed out in Part I of this series (Stock or Schlock? – Infotopia, Inc., Pt. I – Is This A Limited Time Offer?), Infotopia was part of NBM before it was spun off as a separate company through a reverse-merger with Dr. Abrevanel’s Formulas, Inc.
That July 23, 1999 press release from NBM predicted that a new licensing agreement with Tristar Products of Parsippany, New Jersey, would “bring the Backstroke® to market with unprecedented speed and market clout.” In fact, Ernest Zavoral, then President of NBM’s Flex Marketing Division and now President of Infotopia, said “ased on our past success and Tristar Products success, we anticipate a minimum of 300,000 new units sold through infomercials and 500,000 through retail distribution at our average price to Tristar this should translate into $14,950,000 in sales and $4,250,000 in profit for National Boston Medical, Inc.”
On October 6, 2000, Infotopia stated that it planned to reintroduce the Backstroke® Back Massager, noting that the device had generated aggregate revenues of $5 million since February 1999. What happened to those projected $14.9 million in sales? NBM’s November 22, 1999 Form 10-Q (the only 10-Q report filed by NBM before it ceased to file regular reports with the SEC and withdrew as a filing company in February 2000), acknowledged that the device had contributed significantly to NBM’s revenues of $1.2 million for the quarter ended September 30, 2000. But NBM added a cautionary note, stating that “the Company does not believe prior growth rates are indicative of future operating results, especially in light of the fact that the Company's Backstroke™ product has a finite lifespan.” That leaves investors to ponder projections, and wonder what revenues Infotopia can realistically expect from future sales of this product.
VISIONS FOR THE FUTURE
Despite the lack of available cash in its bank account and shares in the treasury, on January 22nd the Company announced that it was pursuing the acquisition of two “Infomercial related Companies with revenues in excess of $175,000,000 and profits in excess of $8,000,000.” “Due to the sensitivity of the negotiations” the Company declined to identify the targets.
In that same press release, Infotopia said it was seeking to merge or exchange shares with a “NASDAQ ready” company, noting that these acquisitions and mergers created “the potential for a Company with $400,000,000 in revenue and $60,000,000 in profit.” We can only assume that the phrase “NASDAQ ready” refers to a company that would qualify for NASDAQ listing. The Company did not say whether it had even identified such a potential NASDAQ-ready merger partner. Nor did it provide a basis for its revenue and profit projections. But most importantly, Infotopia did not say how it planned to pay for these various transactions – or what the terms of each deal might be.
This absence of details did not discourage investors, who traded 36 million shares on January 22nd and another 32.5 million shares on January 23rd. Who was selling all of those shares? There’s no way to know for certain. It is worth noting, however, that the January 11th SB-2 contemplates that selling shareholders might engage in short selling. Short sales occur when someone sells shares that he or she does not own, or does own but may not be able to, or desire to, deliver at the time of the sale. The short seller later “covers” the sale by delivering the shares – something the selling shareholders of the SB-2 would be able to do once that Registration Statement is declared effective by the SEC.
The increased volume did not escape the notice of Infotopia CEO Daniel Hoyng. On January 24th he sent a public letter to shareholders, beginning “[w]ow sixty-eight million shares in volume the past two day, I am amazed at how big a following Infotopia continues to assemble.” Just four months earlier, on September 28, 2000, Hoyng had sent another open letter to Infotopia shareholders. Then, he had thanked them for trading 318 million shares during the preceding three months, taking particular care to commend “supporters” in Internet “chat rooms, and, in particular, one poster on the Raging Bull Message Board who apparently had posted “due diligence” information about the Company with particular vigor.
It was a most unusual public proclamation by a corporate CEO – praising “chatters.” In his January 24th message, Hoyng said he wanted to clarify some recent announcements about the Company. First, he addressed the third quarter financial statements, suggesting that “the majority of the expenses incurred will not be repeated in future quarters.” However, while Infotopia may not have to incur additional production and development costs for products that are already on the market, or ready to be introduced, won’t it be required to incur similar expenditures each time it wants to introduce a new product in the future? And doesn’t Infotopia plan to introduce such new merchandise from time to time? Surely, even the most successful products in the current pipeline will eventually run their course and have to be replaced with fresh ideas. If that is the case, shouldn’t the Company expect to keep incurring those production and development costs?
Mr. Hoyng predicts that “January should finish with about ten million in sales and two million in profit.” Sales of the Bun & Thigh Rocker, he indicates, are growing weekly. In a January 12th press release, the Company had stated that, for the previous two weeks, sales of various products, including the Bun & Thigh Rocker, Backstroke, Hot Mommies™, Torso Tiger, and BodyRocker, totaled around $4 million. Can sales increase at the pace necessary to achieve Mr. Hoying’s prediction? Infotopia recently said it planned to change its fiscal year from a November year-end to a December year-end. That, unfortunately, could mean another delay before audited financial statements become available. Now, it appears, investors will not know for sure whether the Company achieved these revenues and profits for about four months – when the annual report is filed containing the first audited financial statements since Infotopia started selling Torso Tiger.
Then there are those pending acquisitions. How will the Company pay for these businesses? Mr. Hoyng says that Infotopia is insisting that the “purchase price will be stock,” with additional shares allocated to bonuses for new employees. But the Company has already issued virtually all of its authorized common stock, so where will these shares come from? There is no indication that the Company has yet to commence its stock buy-back program, or that it has available cash to buy-back any significant number of shares at the present time. Does that mean Infotopia will soon look to increase its authorized shares once again – for the third time in less than a year? What of the “slower dilution” that Mr. Hoyng predicts for this fiscal year?
The January 24th letter to shareholders also addresses the Company’s plans for NASDAQ listing. Last September 18th, the Company issued a press release saying it intended to seek listing on the American Stock Exchange, a process that it said “normally takes eight weeks but can vary depending on how busy the American (sic) Exchange review committee is.” But eight weeks might have been somewhat optimistic in view of AMEX listing guidelines. In order to gain listing, the AMEX requires a company to have $750,000 in pre-tax income for the latest fiscal year or two of the three most recent years; a public float valued at $3 million; a share price of $3; and stockholders equity of $4 million. Infotopia’s 10-Q for the quarter ended August 31, 2000 showed pre-tax loses of $11 million and stockholders had a negative equity of $3.5 million. Add to that the fact that Infotopia shares were trading at about $1 on September 12th and the chances for AMEX listing seemed quite remote. (Alternative AMEX guidelines also required $4 million in shareholders equity as well as a $3 share price).
In any event, Infotopia soon abandoned its quest for an AMEX listing. Less than two weeks after issuing that press release, the Company said it would instead pursue NASDAQ Small-Cap or National Market listing in response to “emails and calls to the Company” from shareholders who expressed that preference. In any event the Company, which would not have met the qualifications for listing on either of those NASDAQ markets at that time, said it would delay the process until early 2001. By then, Infotopia said, “this delay will hopefully allow the share price to reach the $3.00 to $5.00 level and eliminate the consideration for a reverse split, to achieve the minimum required trading price for a national exchange.” It is now early 2001, and with Infotopia shares presently trading at around 16 cents a share they still have a long way to go.
Nevertheless, it seems the Company says it wants to gain NASDAQ listing because the Company’s “strong, revenue growth, solid base of products, projected cash flow, and undervalued share price” makes it “a prime target for potential takeover bids.” From a practical perspective, however, isn’t the likelihood of a takeover remote? The Risk Factors contained in the latest SB-2 filing certainly suggest that the Company’s future success depends upon the continued participation of its management team. Would they remain with the Company in the wake of a hostile takeover? And don’t takeover experts most frequently target businesses that have lots of cash? At last report, Infotopia did not.
Mr. Hoying’s January 24th letter suggests two possible scenarios for becoming a NASDAQ company. In the first, Infotopia would merge with another, debt-free entity that would meet NASDAQ listing qualifications. Infotopia shareholders would receive $10 worth of stock for every $4 of Infotopia shares that they owned. If that is a possibility, why would all of those existing shareholders – including members of management - be registering their shares for sale now – at prices around 20 cents per share. Wouldn’t they rather get two and one half times the value of their shares after such a merger?
In the second scenario, Infotopia would sell its operating subsidiary to a NASDAQ-ready company. In that case Infotopia would continue to trade on the OTC Bulletin Board as a holding company, and would own a controlling interest in the new NASDAQ listed entity that the Company says would be valued at approximately $50 million. At some future point, Hoyng’s letter suggests, shares in Infotopia might be exchanged for those in the NASDAQ company.
But the Company does not say whether it has identified a potential candidate for either scenario – or why a company that could qualify for NASDAQ would want to pursue a merger that seems to be weighed so heavily in favor of Infotopia. After all, Infotopia still would not, on its own, satisfy the requirements for listing on either the NASDAQ Small Cap Market or NASDAQ National Market.
Finally, the Hoyng letter says that Infotopia has “quietly been investing” in a project that targets customers through “viral” email. Investing what? Shares, of course. According to CEO Hoyng, “[m]any shares of the Company’s common stock have been issued for Internet design and promotion.” How many shares? Infotopia does not say.
It seems that the Company has been planning to send unsolicited emails to its database of customers. It would also encourage those customers to forward the unsolicited “viral” emails to their friends and families – in exchange for “Info Bucks” that could be applied against the purchase price of Infotopia products.
Is the unsolicited email campaign likely to produce willing customers? Or will recipients of the emails just feel they have been “spammed” – a word that defines unsolicited and unwelcome email messages. In any event, Infotopia says it has decided to license this process to Millenium Direct Inc., a Pink Sheet company, in exchange for 85% of that entity and certain royalties. That way, the Company says, it can generate even more sales by building “a potential two hundred million dollar company with fifty million in profit in less than two years.” What is the basis for such lofty projections? The Company doesn’t say. And why would Millenium Direct surrender control to Infotopia? That, perhaps, is another story.
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