.comment-link {margin-left:.6em;}

Tuesday, November 08, 2005

As Seen on TV (ONTV) Apparent Fraud

As Seen On TV (ONTV), you know these guys. You've seen the ads on cheesy TV stations: George Forman grill, Ginsu knives, Flowbee, Sewing Genie, Oxy Clean, Aero Mattress Topper, Tap Light, Perfect Pancake, etc. etc. etc. There's like a million of them.

Over the past year, business has been improving and they started making a profit.

They issued a 10-K just this month, with a totally unqualified audit opinion. Current ratio is well over 1. Inventory is up somewhat. Wrote off 90% of intangibles. The balance sheet is really cleaned up.

They issued some shares for payments, but not much, otherwise there's not much share dilution: 23,593,819 shares.

In 2005, revenues climbed to $5 million. Gross margins were 36%. There was only $85K operating profit (plus a $72K gain on forgiveness of debt). No taxes paid.

But they generated about $250K free cash flow in 2005 which was used to repay debt.

Now read this from the 10-K above:
Based upon the past prices of its common stock the Company's management did not believe that its operations would ever attract sufficient interest among investors so that the Company's stock price and trading volumes would increase to meaningful levels.

Consequently, the Company's management believed it to be in the best interest of the Company's shareholders to dispose of its current business and attempt to acquire a new business which may provide more value to the Company's shareholders. To further this objective the Company entered into an agreement to sell to Daniel M. Fasano, the Company's President, all of the shares of Seen On TV, as well as the following other assets which are incidental to the business of Seen On TV.... [essentially the whole business] In return for the shares of Seen On TV and the assets described above, Mr. Fasano agreed to pay the Company $300,000 ("the Purchase Price") on the following terms....
So the CEO buys out the company (was there a shareholder vote? was this legal according to the company by-laws?) for three and a half times earnings before taxes! And to add insult to injury, he didn't even pay 100% cash! I might poke around and see if this was a fraud, maybe send a tip to the SEC. It sure looks like fraud.

The CEO owned enough preferred shares and a few common shares to have controlling interest and so simply pushed the matter through (pointless proxy statement).

To: enforcement@sec.gov
Subject: question about ONTV, Inc.

This is regarding the company ONTV, INC. (OTC BB ticker ONTV). In their latest proxy statement, the company sold itself to the CEO for $300,000. The company's 10-K statement for the same year shows them earning $159,453 and the cash flow from operations was $266,866 while only $10,625 was invested in capex. Revenues have increased over the past year and it's very likely the business is worth significantly more than $300,000 in an arm's length transaction.

The CEO gained controlling voting interest in the company via preferred shares issued during 2005 in payment of an apparent related party debt.

The auditors, Rotenberg & Co., LLP of Rochester, NY [same people who audited HQSM!!!] gave the company an unqualified opinion for the year.

Does this constitute a violation of securities laws or some other laws (they're incorporated in Delaware)? Thanks for your time.

Bruce ***********


Good catch.

And they didn't even try to re-invent the steam engine!!
Yeah, it really pissed me off because the stock was selling very cheap and the business was improving... and, yes, they weren't trying to re-invent the steam engine (that was hilarious). I sent the e-mail to the SEC. I doubt anything will happen since the auditors gave an unqualified opinion, it's likely that the whole thing was legal.
Why would this suspect transaction impune the company's auditors?

To my understanding, Rothenberg, or any other auditor, would have no authority to approve or disapprove either the legality or advisability of the transaction.

Further, what would a planned sale of any sort (or dubious propriety) have to do with whether an audit opinion should or should not be qualified?

Is it properly an auditor's role to state publicly; "we think the CEO is about to buy (or has just bought) the company too cheaply"?

These judgements would be the responsibility of corporate counsel, would they not?
Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?