How they affect income statements and Bowser Ratings

A number of Bowser recommendations reported non-cash and/or one-time expenses on their recent earnings reports. These charges can affect earnings in a large way, even turning profits to losses.

Over the past two quarters, two large charges in particular resulted in losses for two Bowser companies. Each of these companies would have posted positive earnings had it not been for these charges.

BAD DEBT EXPENSE

Bad debt expense occurs when a company offers a product or service to an individual or another organization on credit and the customer does not pay the amount due.

Here’s how it works: After offering the product or service, the company invoices the customer, reporting the invoiced amount as revenues on its income statement. The invoiced amount also appears on the balance sheet under assets as “accounts receivable.”

Initially, this is good for the company for two reasons:

1. A boost in reported sales; and

2. A strengthened balance sheet.

However, if the customer does not pay, the invoiced amount is written off as a “bad debt expense” on the company’s income statement. In addition, the accounts receivable is reduced by the invoiced amount. Reporting a bad debt expense results in the reduction of both earnings and assets.

In the most recent quarter, MeetMe, Inc. (MEET) reported a $2 million loss. However, the company posted a $5.7 million bad debt expense, which was the result of MEET writing off an accounts receivable balance for Beanstock Media. MEET terminated its advertising agreement with them on 06/02/15 because Beanstock failed to pay amounts owed to MeetMe. Failure to pay resulted in the above-normal bad debt expense.

It’s common for companies to report bad debt expense quarterly, but the amount relating to Beanstock is far above normal, and therefore is a one-time charge.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY

Certain companies report their warrants outstanding as liabilities because of the terms of the warrants. This liability is listed on the company’s balance sheet as “fair value of warrant liability,” or simply “warrant liability.”

Each quarter, the company must revaluate the warrants’ fair value. Every time the company’s warrant liability increases, it must report the change as an expense on its income statement. Conversely, if the liability decreases, the company will report the change as income on its income statement.

If the common share price goes up, so does the value of the warrants. If the share price goes down, so does the value of the warrants. Therefore, good share performance results in an expense on the income statement, while poor performance results in income.

In LightPath Technologies’ (LPTH) fourth quarter, which ended June 30, 2015, the company reported a $367,234 loss, which included an $839,347 expense accounting for the company’s change in fair value of warrant liability. During the company’s fourth quarter, its share price increased over 80%, which led to the increase in warrant liability.

This expense is a non-cash charge with revaluation being done on a quarterly basis.

EFFECTS ON BOWSER RATINGS

Current earnings account for two points in the Bowser Ratings System. If quarterly earnings are up year-over-year, the company in question receives two points. If they are down year-over-year, the company does not receive these points.

According to The Bowser Report’s founder, R. Max Bowser, “[One time gains or losses] should be eliminated when comparing the current [quarterly] earnings with the previous year since they are one-time occurrences and alter the true picture of how the company is doing.”* One-time charges related to acquisitions, litigation, etc. are taken out when comparing earnings.

All charges like those above are considered on a per-company business. A one-time, above-normal bad debt expense, as MeetMe reported, does not affect a company’s rating. Regular bad debt expense is taken into account, but because MEET’s bad debt was largely related to one entity, it is considered one-time.

Change in fair value of warrant liability is revaluated quarterly. For company’s like LightPath to get rid of this expense, the warrants must be redeemed or expire. An above-normal charge is not considered in a company’s rating.

ORIGINALLY FEATURED IN NOVEMBER 2015 NEWSLETTER.