Is SunnComm a sham or the next, big DRM success?
From hell to hell and maybe heaven
The not so Quiet Tiger
SunnComm found its patsy in Fan Energy.
This firm's past goes back to the 1920s, when it started operations as an oil and gas exploration concern. The company stumbled along all the way until 2001 when it sold off all of its oil and gas assets for a mere $75,777 and acquired of all things a 3.5 inch floppy disk manufacturing firm. Fan Energy valued its disk manufacturing assets at $3.8m, although it never actually produced a disk and the equipment currently sits unused in a warehouse, according to SEC filings. This outcome isn't terribly surprising if you think back to the status of the floppy disk market in 2001. The technology had already been rapidly replaced by smaller disks and was facing CDs as the medium of choice for most PCs.
In a deal best described as unorthodox, Fan Energy agreed to acquire SunnComm's Project 1000 DRM technology for 23.8m shares of its stock. As it turns out, that gave Project 1000 - then a SunnComm subsidiary - the majority ownership (53 percent) of Fan Energy - the very company meant to be acquiring Project 1000. At this point, Fan Energy changes its name to Quiet Tiger and enters the DRM market.
There is where the shareholders get real angry, and things become rather complex.
A complaint allegedly sent to the SEC charges that Fan Energy/Quiet Tiger misrepresented the value of its assets - the $3.8m in floppy disk gear. There's no record that a single disk was ever produced, although Fan Energy does appear to have done one deal as a type of floppy disk reseller, generating only $4,000.
"It is without doubt that Fan Energy (now Quiet Tiger) had no serious business plan to manufacture floppy disks and the equipment was acquired for no other reason than to place an asset in their balance sheet that they could use to bolster the value of the company by misrepresenting its true value," the complaint states. "Additionally, SunnComm fortified the deception by stating they were committing to using 50 percent of the capacity and in turn caused its own shareholders to be deceived in regards to the true intrinsic value of the shares they were to receive as a property dividend."
Fan Energy's description of its floppy disk business is certainly questionable. In various filings, the company suggests that it could be a major player in a multi-billion dollar market and churn out as many as 6m disks per month. Given that the company never actually produced a single disk and that it admits at times to having no employees, it seems the investors have a point about Fan Energy not being a serious floppy disk contender.
Jacobs, however, insists that Fan Energy was intent on being a real technology company and was just searching for its niche. As soon as SunnComm/Project 1000 took control of Fan Energy, it wrote down the $3.8m in floppy disk assets to just $100,000.
"When we took it over, we were not in a position to question how they audited their stuff," Jacobs said. "As soon as we got in, we devalued those assets as fast as we could."
Quiet Tiger - the failed oil and gas / floppy disk maker - now functions as a DRM marketing company, hawking SunnComm's MediaMax technology. Quiet Tiger pays its owner SunnComm more than $100,000 a quarter to remain the "exclusive" dealer of MediaMax and covers all selling expenses for the technology. Bill Whitmore, SunnComm's former President, now runs Quiet Tiger, although Jacbos held the position of CEO for some time.
While SunnComm's critics charge that Quiet Tiger is more or less a fictional operation, Jacobs presents it more as a division that benefits both Quiet Tiger and SunnComm investors, which are more or less one and the same these days.
"We had to come up with ways to create value that were not traditional," Jacobs said. "Because of the profile SunnComm realized, Quiet Tiger has increased their volume, and its share price has gone up from a couple of cents to 8 or 10 cents. It's been a positive experience for them. They had no prospects before."
Sponsored: What next after Netezza?