Explanation of the major component of the quarterly-loss.
Reported today on the 10-Q was a net loss for the quarter ended 11/30/14 of $5,052,804. That is a very large number by any measure, but especially when compared to the total revenue for the quarter of $320,108.
What is important to understand though, is what the vast majority (4,575,975 of the $5,052,804, or about 90%) of that loss represents. The line item encompassing this figure is called 'Change in fair value of derivatives'. So what exactly causes this to occur? Share price fluctuations, from beginning of the reporting period to the end, trigger a restatement of a balance sheet item known as 'Derivative Liabilities'. This sits on the balance as a liability of the organization, but not the kind of liability that you would typically settle with actual money, such as rent or salaries payable. Simply stated, it is sort of a theoretical amount computed based upon the the terms of the derivative instrument(s), which in this case happen to be convertible notes.
So dilutive convertible notes, which are all too common in the OTC (where an ever increasing number of shares have to be issued to settle those notes, as a corp's share price declines), impact this account from period-to-period. When the computed liability amount goes up from period-to-period (as happened in the 10-q that was just released), the increase is booked as a loss for the period (even though no cash went out the door, or will need to go out the door to settle that liability increase). For example, based upon the share price fluctuations, that same computed liability account balance could go back down by more than $4 million next quarter (without any payment being made to satisfy it), and an offsetting gain would then be booked next quarter as large as the loss on the derivative liabilities increase that was booked this period.
But just because it's not a cash loss, and just because it could disappear as quickly as it came, that does not mean that there's no negatives associated with this type of liability. Any derivative liability represents real uncertainty to the organization responsible (such as the possibility of extreme dilution from convertible debt with highly unfavorable terms).
But I believe that it is important to distinguish a loss generated from derivative liabilities from a loss that resulted from real operational expenditures. Mainly because real operational expenses (i.e. rent, salaries, marketing, product development) are recurring and sort of consistent from period-to-period, whereas the derivatives liabilities loss may completely disappear (and even show a huge gain) the very next reporting period. And once again, a widely fluctuating share price is the main cause of such a phenomenon.
I hope this information is somewhat helpful. And as always, simply my opinion.
STTK
