jhild:
I agree with you. This was a cleverly worded release.
Mountain Energy owns and controls the mineral rights in West Virginia that contain approximately 1.98 billion cubic feet of gas and 10,000,000 tons of coal, as well as other properties that all combined, have an estimated fair market value in excess of $200,000,000 with approximately 70,000,000 shares outstanding after the acquisition. This translates to approximately $2.85 per share.
However, I think the lawyers would argue long and hard about accountability. Let me provide some context.
The most widely recognized and accepted standard of value is fair market value. It is the standard that applies to all federal and state tax matters, such as estate, gift, inheritance, income, and ad valorem taxes. It is also the legal standard of value in many others - though not all valuation situations. The definition of fair market value is almost universally accepted as the cash, or cash equivalent price, at which property would change hands between a willing buyer and willing seller, both adequately informed of the relevant facts and neither being compelled to buy or to sell. There is also general agreement that the definition implies that the parties have the ability as well as the willingness to buy or to sell. The market in this definition can be thought of as all potential buyers and sellers of like businesses and practices.
In the legal interpretation of fair market value, the willing buyer and willing seller are hypothetical persons dealing at arm's length rather than any "particular" buyer or seller. In other words, a price would not be considered as representative of fair market value if influenced by motivations not characteristic of a typical buyer or seller.
The concept of fair market value also presumes prevalent economic conditions at the date of the particular valuation. You have probably often heard someone say, "I couldn't get anywhere near the value of my house if I put it on the market today" or "The value of XYZ Company stock is really much more (or less) than the price it is selling for on the New York Stock Exchange today." The standard of value implied in these statements is some other than fair market value, since the concept of fair market value means the cash-equivalent price at which the transaction could be expected to take place under conditions existing as of the valuation date. Also, one important aspect of the definition of fair market value is that it is denominated in cash or cash equivalents, not some combination of cash and non-marketable notes....
Valuing a Business: The Analysis and Appraisal of Closely Held Companies. Shannon Pratt. Second Edition. Pg 22-23.
In the appraisal of real property, i.e., real estate, all costs associated with extracting the value must be considered. Raw land is only worth raw land, not the land plus a fully-rented Empire State Building on it. There has been talk on the thread of extraction and transportation costs. Neglected were G&A expenses, federal and state taxes and most importantly, cost for reclamation of the land. An independent appraisal would compute these costs and the cash flow derived from the sale of the minerals, discounted over time and summed, would be the estimated fair market value of the property.
Consequently, the press release is carefully worded to talk about the estimated fair market value of the minerals themselves, as if delivered to the commodity market right now.
In contrast, lets look at the fair market value of the private company, Mountain Energy. At the time the reverse merger was pre-announced by Joe Gort, ICVI was trading at approx. 5 cents. Multiply that by the 65 million outstanding shares you get a valuation of approx $3.2 million for the combined company. Because 50 million of the shares are restricted, it would be almost mandatory to take a "marketability" discount which for the sake of simplicity I won't do. A marketability discount would lower the value even further. Assuming this was an "arms length transaction, ME and ICVI themselves computed a fair market value of the combined company of something less than $3.2 million.
Assuming for the sake of argument that everything is on the up- and-up, the private company ME paid for an OTC:BB listing with approximately 23% (approx 15 million existing shares divided by a new total issued shares of 65 million) of the total economic value of the transaction. At $3.2 million, this would be approx $730 thousand dollars. Is this unreasonable? Probably not. Flotation costs associated with taking a private company public would not be much more than this and maybe less presuming the company could easily meet listing requirements.
In contrast, using a $2.85 asset value per share is ridiculous. No sane person can argue that the private company, Mountain Energy, paid $46 million dollars for an OTC:BB listing (23% of $200 million). ME could have done a 504 registration, raised up to a million dollars in cash, and the existing stockholders of the private ME could have kept a far larger share of the economic value of the new public company. Since by all appearances, ME received no cash out of the transaction, except the working capital that was in the ICVI shell (again which we have absolutely zero information about), the decision to go the "reverse merger" route is even more difficult to justify based upon any financial or fund-raising standard I know of.
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