RMHB 2015 Audit explanations of material accounting methods
On Christmas Eve the company posted its long awaited audit. This Audit has taken a very long time to be completed as it looks back over the prior failed venture, bankruptcy, toxic debt structuring, what has been converted and the decrease in company values resulting from nearly two years of conversions and revenue expenditures.
The income portion of the Audit includes revenues generated from about 100 days of beneficial operations.
At first glance it looks pretty awful. I will emphasize “At first glance” and here is what you need to understand about this Audit and the accounting methods that are being used.
The first thing that stands out to me is the “Black-Scholes Model” is a mathematical model of a financial market containing derivative investment instruments.
What does this mean to the investors?
First thing is the losses on Page 4 Referencing the term “Net Loss” of 16,624.202. This loss is calculated using the Black-Scholes Model. This is not a total cash loss but a calculated value loss based on this model.
Now, I would like to provide a quote from Berkshire Hathaway’s 2008 Shareholders letter in which Warren Buffet wrote: “I believe the Black-Scholes formula, even though it is the standard for establishing the dollar liability for options, produces strange results when the long-term variety are being valued… The Black-Scholes formula has approached the status of holy writ in finance… if the formula is applies to extended timer periods, however, it can produce absurd results. In fairness, Black and Scholes almost certainly understood this point well. But their devoted followers may be ignoring whatever caveats the two men attached when they first unveiled the formula.”
Now, while the Audit uses this model to formulate losses does not apply well to a company that had failed, went bankrupt, reorganized, had many ghosts of Christmases past, and moved forward with a new direction and mission.
The Audit period was 24 months of which only 4 months (or ~16%) of the Audit was actively involved in sales.
So, what is the upside to this model?
This initial loss appears to permit revenues of ~16,6 Million to be made without any taxes being paid to the IRS.
What this opens the door to is a potential suitor down the road. Let’s say for example a buyer (must be in the same industry) were to purchase this company.
This loss calculation would be assumable by the purchasing company and therefor a major boom in the purchasing company’s bottom line without even considering the products added value to their clients and cash flows or profits generated.
If this company were publicly traded the net benefit of the taxes ~34% would be ~5.64M at tax time.
Let’s say this company trades at 20 times earnings. This would add ~112M to the value of that company which would translate into the offering price of the company.
The Black-Scholes Model showing RMHB with a loss adds a potential value of over 100m to a purchase offer.
Next up is the Accountants method of calculating the profit and loss. This statement lowered the net revenues of the company using a newer version of accounting methods.
This new method is ASC Topic 605 and was recently revised this year. In short, most accounting methods use either a cash or accrual basis.
This is neither, it is a hybrid of cash and accrual and assigning values based on mathematical formulas that may or may not apply to newly starting companies.
What has this done to the numbers we have seen before?
Well, the sales went down and the losses went up!
How did this happen?
The Auditors (working within the generally accepted accounting principles for Audited Financials) had determined that some of the sales needed to be reduced and applied to the following quarter’s financials according to the equations they were applying.
This revenue will now be applied to the company’s next quarter’s revenues which will be the first quarter. Since we have already reviewed the non-audited numbers these will change also due to the new accounting methodology being implemented.
What to think of the Accountants letter?
All language in the letter is what they MUST say in an accountant’s review of a newly developing company. All language including the Going Concern is normal.
In paragraph 4 they state “These factors, among other, raise substantial doubt about the ability of the Company to continue as a going concern.”
To be totally fair I would say the same thing!
The company did not have a product to sell for 20 months up to the ending date of the Audit. Who in their right mind would think they could have survived this long?
But, survive they did! We can see in the Audit how they did it. Toxic notes, dilutions and by whatever means necessary to keep going.
What does this mean to the shareholders?
Well, to be quite blunt…everything! THEY SURVIVED THE WORST UNDER TERRIBLE DURESS! Now, what they have is new stores coming on every day and additional products coming as cash flow permits.
What has happened to the toxic note holders and debts?
Well, the company has been moving product and now making a profit. One of the note holders we were informed about has been paid off which is straight out good news.
My summary: This Audit (which many said would never happen did) Reading this Audit is like common core comes to the stock market.
While the numbers are there and accurate according to this accepted method of accounting is a bit like the story of the pilot who was lost over Seattle in a heavy fog. He sees the Microsoft building and see Bill Gates on his balcony. He yells to Bill and says he is lost and asks where he is? Bill yells back “you’re right there!”
While the information was accurate it was not particularly valuable.
What is valuable is that it is done, that sales continue to grow, that new products are coming online, that the ghosts of Christmases past are being fixed and a young company with huge potential is growing.
Oh yes, the company is now fully reporting and will be using this accounting method from here on out. Learning how to read and interpret is important as this is your money and your future!
Next up will be the uplisting which should happen 60 days after the audit is accepted and application completed.
