Hemp Inc (HEMP)

[Det_Robert_Thorne]

Report filed. Paper profits. 390M more outstanding shares

HEMP filed its Q/14 disclosure earlier this afternoon, and while it shows nearly $2.4M in stock-based revenue revenue and $1.8M in paper profits, it follows the usual pattern of confusing numbers, loans from Perlowin, and preferred share conversions and grants, ultimately resulting in the number of outstanding shares at 2.533B shares, up nearly 390M from the 2.1B shares reported at the end of 1Q/14.

Revenues are reported as $2,365,763, which is a 57% decline from the $5.5M in 1Q/14. Nearly 99% of the revenue ($2.33M) was in the form of stock from consulting clients. Only $34K was revenue from something other than stock received. Was some of it that the sale of Kenaf to the Kins Domain in Arizona?

What about the $50K/month of nutraceuticals that Perlowin himself is supposed to buy from HEMP, for two years, per the press release of April 26, 2013. Where's that $150K and the attendant cost of goods sold?

Net income is reported as $1.8M, which is down 30% sequentially from 1Q/14, but on an EPS basis, due to the increase in outstanding shares, it's a 42% decline!

Regarding those outstanding shares, they increased by 390M due to combination of share conversions and a payment of common shares as compensation for services. This increased the number of Outstanding Shares to 2.533 billion shares. Preferred shares decreased by 42M, becoming 105M commons, and while Preferred K shares showed a net increase of 57M shares, that's after 85M Pref K shares were issued, so roughly 28M Pref K shares were converted into 280M commons.

About those 85M Pref Ks handed out, that was to retire about $802K in debt, unfortunately, though it should, the filing does not say who these shares were given to. I suspect that it could be Perlowin, but could be wrong.

Speaking of loans from Perlowin, at the end of 1Q/14, HEMP owed him $229K, but at the end of 2Q/14, the amount owed Bruce is now about $856 thousand. If the $800K repaid with PrefK's was from him as well, then that would mean that he loaned HEMP about $1.4M in 2Q/14, perhaps to buy the decorticator.

We now come to the value of the shares that were given to HEMP as payment by consulting clients. There's the value as revenue, and the value on the Balance Sheet.

At the end of 1Q/14, HEMP recorded the value of the shares received on the Bal Sheet as $5,602,350. They then added another $2,331,459 in new shares (as Revenue) to those shares already on the Balance Sheet. Those two items total $7,933,809 . But if one looks at the 2Q/14 Balance Sheet, HEMP reports the value of Securities Held for Sale as $4,616,849. What happened to the difference of $3,316,960? It should be the Mark-to-Market difference between what the "first quarter" stock was worth on March 31, 2014 and the value of the "second quarter" stock on the day it was paid by the client.

In the past, HEMP has explained Mark-to-Market change of value on the balance sheet by saying that "... the marketable securities account was adjusted to reflect the change in market value.", which is a perfectly reasonable, and quite accurate, description.

But HEMP didn't use that phrasing in the 2Q/14 report. Take a look at page 13 of the filing, and one will see the following statement:

Through June 30, 2014 the Company has recorded $3,316,960 in other comprehensive losses

There's that $3.317 million, but even though it's clearly a markdown in the value of the stock on the balance sheet, Perlowin is calling it "other comprehensive losses".

Did he think that someone wouldn't figure this out, and that by changing the language, nobody would realize that the value of the shares received over the past two quarters have lost 42% of their value?

I could go on and mention the $200,964 Note Payable that appeared as a new liability, but isn't explained, but I think I'd rather talk about all the things Bruce said in the filing about the decorticator:

Nothing. Zip. Zero. Nada.

No mention of the Kenaf, the hemp hearts, a contract with that Chinese company to grow more hemp, etc.

I have no idea why anyone would want to buy or hold this stock.

Finally, I wrote nearly a month ago that lower revenues should be expected, and that one of the reasons I thought this was because Perlowin didn't talk at all about 2Q/14 results before the filing.