Re: 7/2/01 - [IFTA] Stockpatrol: Update: Infotopia, Inc. (OTCBB:IFTA) - Split Decisions
UPDATE: INFOTOPIA, INC. (OTCBB:IFTA) – SPLIT DECISIONS
July 2, 2001
Remember Linda Blair in “The Exorcist,” with her head spinning around out of control? Maybe she was just trying to keep up with recent events at Infotopia, Inc. Indeed, it’s enough to make any investor’s head spin. Since early May, the Company has (i) revised plans to merge with an American Stock Exchange company; (ii) effected a surprising 1 for 200 reverse split of its common shares; (iii) changed symbols (from IFTP to IFTA); (iv) moved from Massachusetts to Ohio and; (v) filed a lawsuit against a group of alleged stock “bashers” and Raging Bull, the Internet Message Board the alleged bashers frequent. And The Company still has had time for periodic announcements of new projects and projected revenues.
In The Numbers
In fact, Infotopia has issued 22 press releases since May 2nd. Some of those announcements have focused on the Company’s revenue projections. These included a May 8th press release disclosing revenues of $23.6 million and net income of $1.6 million for the first quarter of 2001. Those figures were unaudited, and the net income figure did not reflect the Company’s continued liability for $5.1 million owed in connection with media and accounts receivable financing. When would those obligations become due? What are the payment terms of media loans? Did any of that amount represent expenses that the Company had deferred – and which would have reduced that net income amount if paid during the quarter? The Form 10-Q filed by Infotopia did not reveal the terms of those advances.
Those revenue numbers marked a significant step forward for the Company, but not quite what it had been projecting. On April 6th, the Company said it anticipated gross sales of $26.2 million and net income of $3.4 million for the first quarter. One week before that, on March 26th, the Company was even more optimistic, predicting sales of $28.3 million and net income after taxes of $4.2 million
Soon after the first quarter numbers were released, Infotopia began trumpeting its second quarter results. On May 24th, the Company announced $21.3 million in gross revenues and $1.6 million in net revenues for the first seven weeks of the second quarter. Two weeks later, on June 7th, it announced biweekly revenues of $6.1 million and estimated net profits of $540,000 for the two week period. Combined with the May 24th announcement, that seemed to suggest that Infotopia had realized revenues of $27.4 million for the first nine weeks of the quarter.
But later press releases created some confusion over those numbers. On June 20th the Company announced that its year-to-date revenues exceeded $50 million and net profits for the period were over 4 million. By our calculations, the Company had already projected revenues of $51 million through June 7th (consisting of $23.6 million for the first quarter and the $27.4 million projected on May 24th and June 7th). Did that mean the Company had no revenues during the two weeks from June 7th through June 20th – or had earlier reports been overly optimistic? The numbers increased again when a June 25th press release estimated that revenues for the second quarter would exceed $36 million with profits of more than $2.2 million. In just five days it appeared that revenue projections had increased by as much as $10 million.
Entre Nous
Since our last article was published on May 1st, Infotopia has revised the terms of its proposed deal with EntrePort Corporation. (See Update: Infotopia – A Slice of American Pie). Now, under the “definitive agreement,” announced on June 15th, EntrePort will acquire all of the assets and liabilities of Infotopia in exchange for 13.1 million units of EntrePort securities. Each of those EntrePort units will consist of one share of EntrePort common stock, one warrant to purchase one half share of EntrePort common stock at $5.00 per full share, and one warrant to purchase one quarter share of EntrePort common stock at $10.00 per full share.
On the date the “definitive agreement” was announced, EntrePort shares were trading at 15 cents, but the companies plan to deal with that as well. Prior to the acquisition, EntrePort shares will undergo a 1-for-18.55 reverse split of its common shares.
The “definitive agreement” also provides for EntrePort to receive $500,000 from Infotopia. All of this, however, is still subject to approval by the EntrePort shareholders – who must be prepared to surrender over 85% of their company.
This “definitive agreement” differs from the originally announced deal in several material respects. When the transaction was first announced on April 26th, EntrePort was slated for a 1-for-30 reverse split of its shares (rather than 1-for-18.55) and Infotopia agreed to give EntrePort $2 million – not $500,000. At that time the EntrePort units were going to consist of one share of EntrePort common stock, 1/2 share common stock purchase warrant exercisable at $10.00 per full share and 1/4 share common stock purchase warrant exercisable at $15.00 per full share.
With all of this talk about EntrePort reverse stock splits, Infotopia shareholders could hardly have been prepared for what happened next.
The Big Split
The makeover continues. On June 14th the Company announced it would move its corporate offices from Massachusetts to Canfield, Ohio by the first week of July. Apparently it didn’t take that long. By June 19th the Company’s press releases reflected a Canfield location.
But there was bigger news on the horizon. On June 21st the Company revealed that its Board of Directors had approved a 1-for-200 reverse stock split – effective that day. The reverse split had been engineered without prior notice to shareholders, most of whom must have been shocked, and many of whom may be wondering why the Company would subject them to a reverse split on the eve of the anticipated EntrePort deal. Under other circumstances, Infotopia might have taken this action to increase share prices and therefore improve its chances to qualify for listing on a national stock exchange. But that was no longer necessary once the EntrePort deal materialized and Infotopia decided to try and gain EntrePort’s AMEX listing.
If shareholders were surprised, perhaps it was because they had heeded the words of a poster on the Infotopia Message Board at Raging Bull who called himself IFTPONE and claimed to be Infotopia CEO Daniel Hoyng. IFTPONE sought to reassure investors, on more than one occasion since early 2001, that the Company had no plans for a reverse split. Speaking about a possible reverse split on February 7th, the poster declared that “there are no plans, at this time, to reverse the stock.” Nor would there be “a twenty to one exchange in the Company” with which Infotopia was then discussing a merger. Then, on March 4th, IFTPONE asserted “there will be no reverse split, it is not even being considered at this time.”
Was IFTPONE really Daniel Hoyng? If so, why did the Company shift its position and effect the dramatic reverse split? Are there plans to issue new Infotopia shares, and thereby reduce the number of EntrePort units that would go to the current public shareholders of Infotopia? The Company did not say.
Different Strokes
Perhaps IFTPONE was alluding to the fact that shares issued, and issuable, to Hoyng would not be affected by a reverse split. Investors who reviewed the Company’s Amended Form 10-K Annual Report filed on June 12th, would have discovered the following:
The Company has a three-year employment agreement with Daniel Hoyng, its Chief Executive Officer. The term runs through April 26, 2003 and, unless notified by the Board of Directors or the Executive Committee of the Company, the agreement will automatically be renewed for one year, each year thereafter. In addition to a base salary, bonuses and other incentives, Mr. Hoyng will be granted 1,000,000 shares of common stock annually on the anniversary date of the agreement. These shares carry an anti-dilution provision and are not subject to any reverse split.
Employment Agreements signed by the Company’s President, Ernest Zavoral, and its Executive Vive President, Marek Lozowicki, contain substantially the same provisions. Those options would not be affected by any reverse split either.
There’s more. According to the Employment Agreements, those shares vest on May 1, 2001, May 21, 2002 and May 1, 2003 - but Hoyng, Zavoral and Lozowicki - are entitled to vote all of those shares, even before they vest. That means that the three management members may have up to an additional 9 million – undiluted – votes. That number seems particularly significant in light of the Company’s announcement, on June 21st, that, by virtue of the reverse split there were approximately 4,063,000 outstanding common shares as of today, fully diluted with all outstanding warrants, preferred stock and options taken into consideration.
Could that possibly include the Hoyng, Zavoral and Lozowicki options that were not affected by the reverse split? And what does this mean for the potential distribution of those 13.1 million EntrePort units? Would the Infotopia management team receive a disproportionate portion of those securities as well by virtue of their undiluted options?
Investors may wish to note that Infotopia’s management team has still more stock options. Hoyng’s Employment Agreement also included “no less than 3,000,000 options to purchase the Company’s stock over three years,” and the option to convert one third of his annual salary into Infotopia stock each year, at the lowest price for Infotopia stock during the preceding twelve months. The Zavoral and Lozowicki agreements contain similar provisions.
Paying the Price
Did Infotopia believe that the reverse split would lead to higher values for the Company’s shares? So far, that hasn’t been the result. On June 20th Infotopia shares were trading at about 1.8 cents per share. On June 29th the stock closed at $1.04 – the equivalent of 5/10ths of a cent on a pre-split basis. Shareholders have seen their holdings decrease by almost 75% since the split.
Meanwhile, what’s been happening with EntrePort shares? On April 26th, the day the merger was first announced, EntrePort stock closed at 29 cents per share. By May 31st, when a press release said that the companies were negotiating some changes in the merger terms, the stock had descended to 19 cents per share. Volume had also decreased. Between April 26th and May 30th, daily volume exceeded 40,000 shares on 18 of 24 trading days. On May 31st only 900 shares of EntrePort were traded.
On June 15th, Infotopia announced its “definitive agreement” with EntrePort. EntrePort shares, which closed at 8 cents on June 7th, recovered to close at 15 cents on June 15th, only to descend again to 10 cents by June 25th. The next day, however, EntrePort stock closed at 19 cents, as volume increased almost tenfold, from 25,000 shares on June 25th to 242,000 shares on June 26th. But that was nothing compared to the day after that. On June 27th EntrePort shares traded as high as 80 cents – 800% more than June 25th’s closing price, before closing at 27 cents. Almost 1.6 million shares traded that day. As best we can determine, EntrePort had issued no new news on June 26th or June 27th, although Infotopia issued a press release on June 25th, declaring anticipated revenues of $36 million for the second quarter of 2001. Perhaps the increase in EntrePort shares should not be surprising since some investors may be betting that the merger will be completed, and that those revenues will soon belong to EntrePort. In other words, should management be truly surprised to see EntrePort shares rise on such news while Infotopia shares fall? In any event, by June 29th, EntrePort shares were back down (to 19 cents) and so was volume (25,700 shares).
The Blame Game
On the other hand, why shoot the messenger when you can just sue him? Who is to blame for the drop in Infotopia share prices? On June 14th the Company said it would file a lawsuit “within next week against the Internet ‘bashers’ who have been providing false information through Internet Message Boards.” The Company claimed that “this misleading information has had a direct effect on the share price of Infotopia's common stock.” Infotopia Chairman and CEO Daniel Hoyng had this to say:
The amount of calls and emails coming into our corporate offices by concerned shareholders over recent volatility of Infotopia's common stock and questions about the Company's stability has left the Company with little alternative but to defend its good name. We have received many calls concerning the share price and market valuation of Infotopia. Let me say this with absolute certainty, Infotopia is not now, nor has it ever been, in danger of failing. We, as a company, are more financially viable than we have ever been, our negotiations with EntrePort have been progressing nicely, and our products and infomercials are exceeding our expectations. A number of the issues that have been raised by these shareholders' emails and phone calls stem from the "basher" elements on the various Internet message boards. The fact is, as a company, we've never been better or stronger
Hoyng went on to lay blame for the floundering stock prices:
Many shareholders fail to realize that this share pricing is a direct result of supply and demand, when shares are sold or shorted, which, we feel has historically been practiced, that effectively increases supply, if demand does not increase as well, price falls. The stock price falls, that's all, and it does not affect the profits and losses of the Company. Inherently, as a bulletin board company, we are at the mercy of the trading prices set by market makers. These market makers at times want a low stock price and at other times a high stock price, these "swings" help create volume and thus "profits" for these market makers. It's funny to me that as a profitable, fully reporting, public company, we have a market valuation that is less than the revenue derived from operations over a period of less than a month. That is a big factor in our decision to make the move to the AMEX market. We feel that we will be given a much more fair valuation, and have the opportunity to draw from the institutional support that will be made available to the Company."
Of course, if all that is true, and the stock is controlled by the actions of market makers and short sellers, what was the purpose of the reverse-split? Wouldn’t those same market makers and short sellers just drive prices back down if that were their goal?
As it turned out, the Company was not finished with its attack on those “message board” bashers. On June 25th, the Company announced that it had filed a lawsuit in a Taunton, Massachusetts state court against Raging Bull, its parent Lycos Terra Network, Inc., and several unnamed individuals who it claimed have been “utilizing message boards for the purpose of posting various misleading and harmful information about Infotopia and its officers and directors.” (That’s right, the same Raging Bull where IFTPONE freely posted his own views about the Company – like those comments on a potential reverse-split). Infotopia alleges that these negative messages have damaged the Company’s stock value.
But could there be other reasons for the dip in Infotopia shares? Like the massive dilution caused by the issuance of over 400 million shares of common stock since July 2000? Or the 1-for-200 reverse split that was followed almost immediately by another dramatic downturn in stock prices? Or was it just those troublesome “bashers” making negative comments about the Company’s practices? Who would you blame if you managed Infotopia?
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