Re: 4/25/02 - [IFTA/JSHT/Kernaghan] Stock Patrol: Zero Degrees of Separation, the Next Generation - Part 1
ZERO DEGREES OF SEPARATION, THE NEXT GENERATION
INFOTOPIA, INC (OTCBB: IFTAE) AND JOSHUA TREE CONSTRUCTION, INC. (OTCBB: JSHT) PART I - FADE OUT, FADE IN
April 25, 2002
Fool me once, shame on you.
Fool me twice, shame on me.
Anonymous
Wishin’ and Hopin’
It seems like barely a year ago – it was – that Infotopia, Inc. (OTCBB: IFTAE) was busy turning out press releases with breathtaking frequency - predicting record revenues, announcing landmark sales results, touting plans to acquire companies, promising to buy back shares, and describing efforts to move upward from the Over The Counter Bulletin Board to the American Stock Exchange or NASDAQ.
At the same time, Infotopia’s Chairman Daniel Hoyng was actively promoting the Company’s prospects in “Chairman’s Messages” on the Company website, and on Internet Message Boards like Raging Bull. All the while, the Company was handing out shares of stock like trick or treat surprises to management, a collection of consultants and attorneys, and offshore companies like Canadian investment dealer, Thomson Kernhagan & Co. Ltd. See Infotopia, Inc., Parts I, II, III and IV; Zero Degrees of Separation, Parts I, II and III..
It may have been a treat for those insiders, whose shares were quickly registered, but many public investors soon felt tricked. In June 2001, after issuing almost 500 million shares of common stock, Infotopia surprised shareholders with a 1 for 200 reverse-split. Then the Company started all over again, issuing shares into many of the same friendly hands at an equally impressive pace.
The wheels started to come off this wagon in November 2001 when Infotopia revealed a net loss of $12.6 million for the third quarter of 2001. The news kept getting worse. An amended Form 10-Q for the second quarter of 2001 revealed that Infotopia lost $1.9 million for that period. Infotopia originally claimed profits of $1.5 million for that June 2001 quarter. (See, Update : Infotopia – What A Difference Three Months M ake). All of those lofty claims of profitability had disappeared in the face of disappointing results. The profits had disappeared, the mergers had fizzled and so had plans to move upward to NASDAQ or the AMEX. The Company seemed to be headed in a different direction - to the Pink Sheets.
And then there was silence. Infotopia’s Form 10-K Annual Report, with audited financial statements for 2001, was due to be filed by April 1, 2002, but the Company instead informed the SEC that the filing would be delayed because:
there will be significant changes in, among other aspects of its results of operations, its net revenues, cost of sales, gross profit, loss from operations, net loss and net loss per share. Due primarily to a material asset acquisition that took place during the fourth quarter of 2001, which was described in a Current Report on 8-K filed by the Registrant on January 18, 2002, Registrant does not have sufficient information to provide a more detailed explanation or estimate of the anticipated changes.
That seemed to make little sense. Infotopia’s purported acquisition of certain assets on January 3, 2002, should not have impeded the Company’s ability to report its results for the previous year. Still, Infotopia promised that the Form 10-K would be filed no more than fifteen days after it was due. It still has not been filed. Instead, an “E” has been appended to the IFTA stock symbol, reflecting the Company’s failure to file. If the Company does not become current in its public filings within 30 days, Infotopia shares will be relegated to the Pink Sheets.
All of those insiders, consultants and executives who received Infotopia shares back when the Company was loudly promoting its prospects are likely long gone, and, we suspect, many are a good deal richer after selling out while Infotopia shares still had value. Meanwhile, Infotopia stock is virtually worthless, and public investors have lost a bundle.
And what of the Company that once hyped its projections with such vigor. Its Internet site still promises “Better Products for a Better World,” but all information has been removed from the site – which the Company claims it is “currently updating.”
Otherwise, there is silence from Infotopia. Is the Company hard at work to rebuild its business and move forward, or have its principals moved on to their next project, their next public company? Where is Daniel Hoyng? How about Infotopia’s Senior Vice President and Secretary, Marek Lozowicki? Two words – “Joshua Tree” – and we’re not talking about the National Park or the album by U-2.
“I Still Haven't Found What I'm Looking For”
from the U-2 Album, The Joshua Tree
The Joshua Tree in focus here is Joshua Tree Construction, Inc., a Nevada corporation that trades on the OTC Bulletin Board. Has Joshua Tree found what it’s looking for? The Company, which used to do construction finish work, had no operations, and no revenues, for most of the year 2001. Then, in January 2002, Joshua Tree found a new business, a new management team, a new financial benefactor, and new offices.
They may be new to Joshua Tree, but the individuals who are now running that Company are familiar to Infotopia shareholders. On January 31, 2002 Daniel Hoyng (Infotopia’s Chairman of the Board and Chief Executive Officer) became President and a Director of Joshua Tree. On that same date, Marek Lozowicki (Infotopia’s Senior Vice President, Secretary and Director), became Senior Vice President, Secretary and Director of Joshua Tree.
There are other ties that bind the two companies. Joshua Tree, which used to maintain offices in Las Vegas, Nevada, now subleases space from Infotopia at 3635 Boardman Canfield Road in Canfield, Ohio. And Joshua Tree’s new financial partners are the Canadian investment house, Thomson Kernaghan (a frequent recipient of Infotopia shares); Thomson Kernaghan’s Chief Executive Officer, Mark Valentine; and a pair of companies under Valentine’s control, Canadian Advantage Limited Partnership (CALP) and Advantage [Bermuda] Fund, Ltd. (ABFL).
On January 4, 2002, CALP and ABFL purchased 200,000 shares of Joshua Tree common stock from the Company’s principal shareholder, First Capital Partners MM, Inc. for $375,000. Vincent Hesser, who controlled First Capital Partners , was the President and sole director of Joshua Tree at the time. The purchase gave the Valentine-controlled entities 64.05% of Joshua Tree’s outstanding shares, and control of the Company. They were not done. By March 20th, Valentine and his companies (Thomson Kernaghan, CSLP, and ABFL) had increased their collective position dramatically; they now owned 13,220,072 of the 15,319,802 common shares outstanding, or 86.29% of the voting securities.
How did the Valentine group acquire those additional shares? Like this.
a. The Series A Convertible Preferred
On January 11, 2002, Joshua Tree sold 200,000 shares of Series A Convertible Preferred Stock to CALP under Regulation S. Regulation S, or Reg. S as it is commonly known, permits public companies in the United States to sell securities to certain non-U.S. investors – including Canadian entities like CALP – without first registering those shares.
The Agreement reflecting the Reg. S transaction has been attached to a Form 13 D filed by Thomson Kernhagan on February 22, 2002. The terms of the Agreement are somewhat confusing. They are also inconsistent, and contradict the summary provided by Joshua Tree in its public filings. The Agreement between Joshua Tree and CALP states that:
The Company has authorized the issuance, sale, and delivery of 200,000 shares (the "Shares") of the Company's Series A Convertible Preferred Stock, par value $0.001 (the "Series A Preferred") at a price per Share of $.01, in currency of the United States of America, for a total purchase price of $20,000;
So which is correct? Did CALP buy 200,000 Series A Preferred Shares at one cent a share – for a total of $2000. Or did CALP pay $20,000 (which would be 10 cents a share), as indicated by the Agreement and Joshua Tree’s public filings?
Then there is this “minor” discrepancy. The Agreement states the following:
Each Share of Series A is convertible into one share of the Company’s common stock.”
That would entitle CALP to 200,000 shares of common stock if it elected to convert the Series A Preferred Stock. A Form 8-K filed by Joshua Tree on April 16, 2002 disagrees. According to the Form 8-K:
The shares of Series A Convertible Preferred Stock are convertible into shares of the Registrant's common stock, at the holders' option, at the ratio of 100 shares of common stock for each share of Series A Convertible Preferred Stock.
Again, which is accurate? Can a share of Series A Preferred Stock convertible stock be converted into one share of common stock, or one hundred shares of common stock? Joshua Tree’s SEC filings do not include the Certificate of Designation dated January 16, 2002 containing the accurate conversion terms.
The difference is particularly significant since CALP (and ABFL, which received a portion of the CALP shares) have already converted 32,500 of the Series A Preferred shares into 3,250,000 shares of common stock – using the 100 for one conversion ratio. Oddly, the remaining 167,500 Series A Preferred Shares purchased by CALP were cancelled on February 15, 2002.
Why would CALP agree to cancel 167,500 shares that it had already paid for? There is no indication that Joshua Tree refunded a proportionate share of the purchase price. Could it be because CALP (and ABFL) already had received over 3.2 million more shares of common stock than would have been issued if the preferred stock had been converted into common stock on a one-for-one basis?
The difference is striking. Joshua Tree does not say when CALP and ABFL converted their shares, but on February 15th, when CALP agreed to cancel the remaining preferred stock, the Company’s common shares were trading at prices ranging from 40 cents to 59 cents. That would make 3,250,000 shares worth roughly between $1.3 million and $1.9 million. Not a bad return, even if CALP paid $20,000 rather than $2000 for the preferred stock.
On the other hand, if each share of Series A Preferred Stock had been converted into just one share of common stock – or 32,500 shares – those common shares would have been worth about $13,000 to $19,000. That would have signaled a loss on that $20,000 investment.
In any event, on January 11th Joshua Tree agreed to register the 3,250,000 shares “as soon as is practicable.” So far, the Company has not filed a Registration Statement. As we will see below, however, a Registration Statement for this, and more, appears to be on the horizon.
b. The Thomson Kernaghan Purchases
As it turns out, those 3,250,000 common shares issued to CALP represented only about one third of the common stock being accumulated by the Valentine group. On January 15, 2002, February 14, 2002, and March 4, 2002, Thomson Kernaghan agreed to buy a total of 3 million shares of Joshua Tree common stock from the Company for $750,000 - 25 cents a share.
Then, on April 15, 2002, Thomson Kernaghan subscribed for an additional 6,770,072 shares, again at a price of 25 cents a share, for an aggregate cost of $1,692,518, According to Joshua Tree, $492,518 of that sum was due on April 15th, with the balance to be paid in weekly $100,000 installments. The stock was to be held in escrow pending those payments.
Joshua Tree has not indicated whether it agreed to register the shares issued to Thomson Kernaghan. The Company says it will file copies of the Thomson Kernhagan Subscription Agreements at a future time.
With all those shares in the pipeline, Joshua Tree is starting to make noise - with a new business, an acquisition, ambitious projections, and the Hoyng-Lozowicki team at the helm. Sound familiar? In our next installment we will see where Joshua Tree now is looking to plant its roots.
©2002 Stock Patrol.com. All rights reserved.
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