From briefing.com
The ImaginOn Story
ImaginOn (IMON) closed Tuesday at just over $11 a share, on volume of more than 24 million shares. It was the third most active stock on the NASDAQ, just behind Microsoft (MSFT), and just ahead of Intel (INTC).
Considering that the stock has only been trading as IMON since January 5, has now risen more than 1000%, and has no significant revenue of any kind, this is quite a remarkable event.
Since we had never heard of the stock, until yesterday when it showed up on our "In Play" screen at Briefing.com, we spent some time Tuesday researching it. Here's what we learned.
Recent Trading
First, a brief summary of the recent action in IMON stock.
•January 5: California Pro Sports, a public company trading as CALP, changes its name to ImaginOn Inc, and its symbol to IMON, and trades at $1 5/8, about where it has been for two years. Volume is 775,000 shares. •January 12: ImaginOn.com, a separate company at this point, but under an eleven month old merger agreement with California Pro Sports-ImaginOn Inc., releases a press release announcing the "First All-In-One Internet 'Supra-Search Engine'" The product is WebZinger, a software search engine that returns actual images of search result pages, not just links. Nearly 2.5 million shares trade, closing at 1 1/2. •January 15: On no apparent news, the stock skyrockets to a high of 6 1/8, on 23.8 million shares. Over 1000 entries are made in the Yahoo Message Board for IMON. •January 19-21: Over three days, on declining volume, the price drops to 3 5/8, and then closes at 5 13/16. •January 21: ImaginOn Inc issues a press release announcing the merger with ImaginOn.com, which has been planned since February 23, 1998. •January 22: ImaginOn issues press release stating that WebZinger patent approval is expected within 90 days. 9.2 million shares trade, closing at 6 13/16. •January 25: 18 million shares trade, closing at 9 5/8. After the close, a message in the Yahoo Message Board, number 10987, states that AOL is going to license the WebZinger software. Despite being denied by the President of IMON in message 11090, the AOL rumor is repeated. •January 26: Dow Jones releases a story stating that IMON's tremendous rise is due to a rumor that AOL is interested. The stock skyrockets, reaching a high of 15 1/4. NASDAQ calls the company to inquire about activity in the stock. IMON issues a press release stating that the rumor is false and "all relevant information" has already been released. 24.7 million shares trade, closing at 11 11/16.
Pretty exciting activity for a stock with no significant revenues. With over 32 million shares outstanding, ImaginOn has a market capitalization of more than $300 million. For now.
Company History
Like so many stocks that really shouldn't be public companies yet, ImaginOn reached public status through a reverse merger.
California Pro Sports (CALP) was a retailer of sports equipment. However, things were not going well, according to statements in the company's SEC filings. In fact, the company had been notified by the NASD that it would soon be delisted, unless net assets were raised above $2 million.
The retailer of skis, skates, and snowboards simply decided, in late 1997, to terminate its line of business, sell everything, and find some way to get value of whatever was left. This included licensing an existing product name to another firm for $30,000 per year.
But the most valuable item was the fact that the company was public.
California Pro Sports decided to find a company to merge with. In a reverse merger, the existing public company merges with a private company, but the private company takes a majority stake. The public company officers then typically resign from the merged company, becoming mere shareholders. Those stockholders are then free to sell stock in the open market, generally without filing 144 forms.
And what better company to merge with than an internet company.
Company Profile
The company California Pro Sports choose to merge with was ImaginOn.com, a struggling firm founded by David Schwartz and in the development stage since 1996.
ImaginOn's main product of interest is WebZinger. WebZinger is a software product that searches the net, like a search engine, but returns thumbnail images of the pages it finds, not links. The product is being released on January 29, but free downloads of the beta version are available at the company's web site, www.imaginon.com. Be prepared to have a powerful machine however, as it is a resource hog. We weren't able to test it by the time this piece was written.
ImaginOn also has other products, including CD-ROM based "virtual travel guides" and an interactive CD-ROM movie developed for Atari, and then purchased from Atari when Atari collapsed. But none of the products have produced any revenues to date.
In the merger, ImaginOn.com shareholders received 60% of the new company. Shareholders of California Pro Sports, the defunct sports retailer, wound up with 40% of the outstanding shares.
Briefing.com Talks to the President
On Tuesday, Briefing.com called David Schwartz, CEO of ImaginOn to hear his side of the story.
First we asked about action in the stock. "What can I say?" Mr. Schwartz told Briefing.com. "It's insane."
Why a reverse merger? "It was the only way I could raise money." Mr. Schwartz had previously tried to take his ideas to the standard Silicon Valley venture capitalists, the so-called "Sand Hill Road" set. He was not well received, nor was he happy when they valued his development stage company at only $6 million. Although he had been initially financed by "angel" investors, he needed money to market his WebZinger product. The reverse merger deal gave him this opportunity.
How did the company benefit from the reverse merger? "We sold preferred stock: [prior to the merger]" said Mr. Schwartz. The recent S/3 filing shows that the private placement investors paid $1 per share. Over $5 million was raised. The S/3 filing registers the convertible preferred shares, and allows the owners to sell their newly converted common shares on the open market. At current market values.
Technically, it was the merging company, California Pro Sports, that sold the preferred stock. But upon the merger, the cash in the company became available to ImaginOn.
How will the company make money? "We plan on using the Netscape model" says Mr. Schwartz. The free downloadable WebZinger is designed only to raise interest in the product. ImaginOn expects to sell site licenses to institutions and schools for WebZinger.
How many employees do you have? "8 full time employees, but we have 19 contractors" says Mr. Schwartz.
Has anyone at ImaginOn sold any shares? "No, we all have 1 year lockup agreements," says Mr. Schwartz.
What about the Dow Jones story reporting the AOL rumor? "It was complete bullshit. They never even called me to confirm it," says Mr. Schwartz.
Briefing.com's Analysis
To paraphrase Mr. Schwartz, what can we say?
ImaginOn shares, IMON, became the darling of the daytrading crowd at the exact same time that the California Pro Sports shareholders became able to sell their shares. The original CALP shareholders are the real winners in this story. The stock market has rewarded a failed ski and skate retailer.
As entrepreneurs ourselves, we can sympathize with Mr. Schwartz's desire to raise money for his venture. But the reverse merger method makes the development stage company a public company before there is any proof-of-concept of the company's business. ImaginOn's technology may be fantastic, but business history is littered with good technology that couldn't find a market.
What the reverse merger does is make venture capitalists out of holders of IMON stock. The real funders of the company, the purchasers of private placement Preferred Stock, will be able to sell their stakes long before the company gets any real revenue. The original shareholders of California Pro Sports can sell anytime. Their 40% of the company will be dumped onto the public, probably as fast as possible. It may have already occurred.
And the professional daytraders who cause the incredible volume and price runups? They don't hold any stock overnight. Daytrading firms that provide the daytrading systems require all positions to be closed at the end of the day. Who knows where the stock will open tomorrow? If the daytraders move on to something else, good luck finding a buyer.
This isn't the way the capital markets are supposed to work.
Instead of the funders of the company assuming the risk, in exchange for their reward, the person taking all the risk is now the one holding IMON overnight.
ImaginOn.com may have a fantastic new technology. We actually want to try it out. And, as fellow internet entrepreneurs, Briefing.com wishes ImaginOn terrific success.
But at $11 per share, ImaginOn is probably already well over its terminal value, the estimated value of the company if it fulfills its business plan without a hitch. The company has, essentially, a single product, with no recurring element to their business model. Even the independent appraiser hired for a fairness appraisal during the merger negotiations valued the company at only $10 million, or about $0.30 a share.
But, if you really want to get in on the ground floor of an Internet business, you can with IMON. And at $11 a share, you'll pay 50 times what the professional venture capitalists were willing to pay. |
