Re:1/29/01 - [IFTP] Stock Patrol: Infotopia, Inc. (OTCBB:IFTP), Part I – Is this a Limited Time Offer?
INFOTOPIA, INC. (OTCBB:IFTP), PART I – IS THIS A LIMITED TIME OFFER?
January 29, 2001
Shares of Infotopia, Inc. flew off the shelves earlier this week after the Company released its financial report for the third quarter of 2000 and suggested that some mergers and acquisitions were on the horizon. Volume, which had been a healthy 8 million shares on Friday January 19th, leapt to 36 million shares on January 22nd. The following day another 32.5 million shares were traded. The Company can only hope that its products will sell at such a pace.
What caused the surge? Infotopia has been sending out a stream of press releases since early last summer announcing the introduction of new products, including something called the “Torso Tiger,” and offering revenue projections. But that has not been the only item on Infotopia’s agenda. Since September 1, 2000, the Company has issued about 137 million shares of its common stock. Now, there are around 190 million shares outstanding.
Earlier this month, on January 11th, the Company filed to register 34.7 million of those shares for sale. This was the second major Registration Statement filed by Infotopia in the last three months. Last November, the Company registered 96.8 million shares. That means Infotopia has registered more than 131 million shares for sale since November. And that does not include 51 million shares registered by Infotopia on nine separate S-8 Registration Statements between April 28, 2000 and November 9, 2000.
Making matters still more interesting, the Company’s CEO and Chairman Daniel Hoyng, its President Ernest Zavoral, and its Secretary Marek Lozowicki registered 7 million of their own shares back in November – which, according to the Registration Statement, represented all of their holdings at the time. It seems they may have received some more Infotopia stock since then. Messrs. Hoyng, Zavoral and Lozowicki registered another 3.36 million shares for themselves on the January 11th Registration Statement.
The January 11th Registration Statement was filed only days before the Company announced it was working on acquisitions that created the potential for a business “with $400,000,000 in revenue and $60,000,000 in profit.” Add to that the fact that Infotopia says it is looking to obtain NASDAQ listing – and, according to a January 24th letter from CEO Hoying to the shareholders, is exploring one scenario that could result in every stockholder receiving $10 worth of stock in a NASDAQ-listed company in exchange for every $4 of Infotopia stock. That sounds like a potentially great opportunity. Why then are so many shareholders, including members of senior management, looking to sell their shares? We decided to search for some clues in Infotopia’s statements and activities in recent months. How, we wondered, did Infotopia arrive at this juncture?
THE DOCTOR IS OUT
Infotopia was spun off as a public company in April 2000 by virtue of a reverse merger with a company called Dr. Abravenal’s Formulas, Inc. Prior to that time, Infotopia had been a wholly owned subsidiary of National Boston Medical, Inc. (NBM), which traded on the OTC Bulletin Board. A May 4, 2000 press release said that NBM had received 7,949,999 shares of Dr. Abravenal’s Formulas (55% of the outstanding stock) in exchange for 100% of Infotopia. The press release also said that Dr. Abravenal’s Formulas would assume responsibility for $2.5 million of NBM’s outstanding debt, and change its name to Infotopia.
As it turned out, NBM actually received 8,167,387 shares of stock as a result of the merger. That information, and more details, were contained in a Form 8-K filed by Infotopia on July 11, 2000 – two months after the transaction. The Form 8-K also revealed that Infotopia had current assets of about $1 million at the time of the merger, but only about $4,500 was cash. Its revenues for the nine months ended March 2000 were approximately $2.3 million, with losses of $4.5 million.
Who controlled NBM? The documents we found did not provide that information. At the time of the merger, NBM said that it planned to distribute the Infotopia shares to its stockholders. On June 9th, however, NBM announced that it was delaying the proposed distribution. Then, on August 4th, a press release announced that Infotopia had offered to repurchase 8.167 million shares of Infotopia stock from NBM at 15 cents a share utilizing “funds from the cash flows of the Torso Tiger and its equity line to facilitate the purchase.”
That transaction apparently did not come to fruition. Instead, NBM declared bankruptcy. In an August 22nd press release, NBM stated that it had filed a petition for reorganization under the United States Bankruptcy Code, claiming that Infotopia failed to “honor and otherwise assume certain obligations of NBM” which Infotopia had agreed to assume as part of the consideration for the merger. NBM also said that “management of Infotopia (some of whom were former Board members of NBM) has refused to honor its representations.” NBM did not elaborate upon those statements (or name the former Directors it had in mind), but it did promise to pursue appropriate claims against Infotopia, among others, as part of the Bankruptcy Proceeding. A June 7, 2000 press release from NBM indicated that Daniel Hoyng, Ernest Zavoral and Clinton Smith had recently resigned as NBM Directors, and that Marek Lozowicki had stepped down as an officer of NBM. All four individuals are now associated with Infotopia.
Did NBM ever distribute the Infotopia shares? Apparently not. 8.167 million shares were registered – in the name of NBM – on the Registration Statement filed by Infotopia in November 2000. Who received the proceeds from that stock sale? Did they go to NBM’s creditors? Or perhaps to the former NBM shareholders – whomever they may be?
INFOMATION PLEASE!
Since the merger, Infotopia has issued a series of press releases announcing plans to market various products through infomercials, advertisements, the World Wide Web and other media. Infomercials are long-form advertisements that sometimes seem more like actual television programs than commercials. They can be expensive – with production costs generally running between $150,000 and $250,000 and ranging as high as $1 million according to one report. And that does not include the cost of air time. One direct marketing professional has suggested that it can cost $100,000 to $500,000 per week to air a successful infomercial.
With costs like this, sales volume needs to be significant – and so do product markups. Where does that leave Infotopia? Announcing product launches and projecting revenues at a brisk pace.
HOLD THAT TIGER
So far, Infotopia’s flagship product seems to be an exercise device called “Torso Tiger.” On May 10th, the Company said it had signed a letter of intent to acquire “exclusive rights” to the Torso Tiger from Torso Tiger, Inc. According to that press release, the exercise equipment, which had debuted in February 2000, had already produced revenues of $10 million from the sale of more than 97,000 units. The Company also noted that the Torso Tiger had been rated the sixth most successful infomercial the previous month, based upon frequency of airings in the United States.
But does “frequency of airings” translate to sales, or does it simply mean that the owners of Torso Tiger had purchased the sixth greatest amount of air time? How much had it cost to air the infomercial with such frequency? Could the Company afford to sustain that level of exposure? The press release did not address those matters.
What were the terms of the “exclusive rights” agreement? How much would Infotopia have to pay for each piece of equipment, what would it charge the public, and how much was it required to remit to the developers of Torso Tiger on each sale? These questions were crucial since every required cost – production, marketing, license fees – would affect the profitability of the product. Infotopia said that Torso Tigers had been generating revenues at a rate of $800,000 to $1 million per week. But do products sold through infomercials have limited life-cycles? If so, had Torso Tiger already run a significant portion of its course before Infotopia acquired the rights?
It seems that Torso Tiger had been selling for about $100 per unit before Infotopia acquired the “exclusive rights” to market the device - 97,000 units producing $10 million in sales. Now, however, Infotopia’s web site says the Torso Tiger is selling at $68.97. That raises yet another question – how much does Infotopia pay for each Torso Tiger? In other words, what is the spread between its cost and the price charged to the public? How many Torso Tigers would Infotopia need to sell in order to make a profit? Could revenues at the rate of $800,000 to $1 million a week be maintained, and would that be sufficient to make the product profitable? If, as it seems, Torso Tiger is now being sold at a lower price, wouldn’t sales have to increase – just to keep pace?
Of course, any potential profits would also be affected by the amount Infotopia was paying to acquire the Torso Tiger rights. On June 26th, the Company announced that it had “acquired exclusive rights to market the Torso Tiger” in exchange for 10 million shares of Infotopia stock. At the time, that was almost 30% of the Company, based upon the 34 million shares outstanding on July 14, 2000.
That is not all Torso Tiger Inc. received for the “exclusive rights.” The final agreement, which was later attached to the Company’s July 24, 2000 Form 10Q, stated that Infotopia would issue Torso Tiger, Inc. (or its designees) $500,000 worth of Infotopia stock; pay weekly royalties ranging from 5% to 17% (depending on the manner and place of sale); and pay additional contingent bonuses based upon sales levels. It also required the Company to make minimum weekly “media buys,” or risk the loss of some of the Torso Tiger revenues. Has Infotopia maintained those minimum requirements? We were unable to find that information in the Company’s public filings or press releases. Even if revenues continued to run from $800,000 to $1 million per week (as Infotopia projected) how much would be left for the Company after it paid for the product, remitted these fees to Torso Tiger, Inc. , and bought the necessary air time?
According to the June 26th press release, “under the terms of the agreement, Torso Tiger's highly successful management team will continue to manage the Torso Tiger campaign and all existing contracts and agreements will remain intact.” The Company did not say what those contracts required, who they were with, or how long the obligation would last. It would be difficult, therefore, to calculate any additional costs of this project.
Despite these unanswered questions, investors were apparently intrigued. Almost 14 million shares of Infotopia stock were traded between June 26th and June 28th.
TIGER, TIGER BURNING BRIGHT
Despite these earlier statements, it was not until August 15th that the Company announced that the Torso Tiger deal had been completed. One week later, on August 22nd, the Company said that sales had commenced and, according to Chief Financial Officer, Tony Ferracone, “[t]he final figures are being tallied now, but it appears that we have done over $950,000 in revenues in one week with the Torso Tiger. In just one week we have beaten our entire first quarter.” The following week, on August 29th, Ferracone announced an additional $750,000 in sales. Investors responded again. Almost 75 million shares were traded between August 22nd and August 29th – share prices, which were around 10 cents on August 21st, hit 53 cents on August 29th ( a day that saw 21.6 million shares change hands).
From September 6th through October 4th, Infotopia issued a series of press releases announcing Torso Tiger sales exceeding $1 million a week – more than $5 million in all. A September 24th press release said that the Company had received “orders from nations all over the globe” representing “the first step toward a projected worldwide rollout that should add significantly to sales revenues of the already successful product.”
But those numbers hardly told the entire story. What was the net effect of those sales on the Company’s profitability? One press release, on October 4th, said that the Company had posted earnings of $205,000 on the previous week’s sales of Torso Tiger. But did that include consideration of related marketing costs and license fees? And how could the Company provide that figure only a week after the sales had been completed since it still had to await possible cancellations and returns? Although such question had yet to be answered, trading volume remained brisk – especially on and around those days that the Company released its revenue figures and projections.
Have revenues continued at the projected pace? In a September 28th letter to shareholders, the Company’s CEO Daniel Hoyng said that Infotopia was “forecasting sixteen million in sales [of Torso Tiger] for the balance of the year.” Less than a month later, an October 24th press release said that the Company had already “booked over $8 million in orders. But wait - on November 8th Infotopia announced that revenues through October, for units actually shipped, were approximately $6.3 million. That was about $2 million less than the Company said it had already “booked” two weeks earlier.
These various announcements raise other questions as well. October sales accounted for about $4.7 million of that $6.3 million total. That left just $1.6 million representing pre-October sales. But hadn’t the Company noted about $5 million in revenues in a series of press releases issued between September 6th and October 4th?
Have subsequent sales kept pace with October 2000? When we last checked, the Company’s website said that revenues “to date” from the Torso Tiger have been approximately $7.5 million. Could sales have dropped so precipitously? Or is the web site information just out of date?
Perhaps a better indication of revenues can be found in the Company’s Form 10-Q filing for the quarter ended November 30th. At a rate of $800,000 to $1 million per week, investors might have expected sales of Torso Tiger to have approximated $10 to $13 million for the quarter. Instead the Company reported sales – of all products – totaling about $8.6 million. That suggests sales of $2.3 million in November – about half of the October number. Do those quarterly revenues reflect sales of any other products? If so, the drop in Torso Tiger sales seems even more dramatic.
Even a robust Tiger needs help. Products - including the most successful – eventually plateau or run their course. So it should come as no surprise that Infotopia has been introducing other products to the market, and announcing even more in the pipeline. Have those projects generated any revenues for the Company? What else is on the horizon? We examine these questions, and others, in our next installment of this series on Infotopia.
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