OLB Group, Inc. — Q2 2017 Form 10-Q
Period: Quarter and six months ended June 30, 2017. Unaudited results. OLB offers monthly health-benefit subscription packages and ecommerce development and consulting services.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenue | 2017: $18,137; 2016: $19,254 | 2017: $33,635; 2016: $45,293 |
| Gross margin | 2017: $13,137 (72.4%); 2016: $14,340 (74.5%) | 2017: $23,166 (68.9%); 2016: $34,694 (76.6%) |
| Operating expenses | 2017: $104,349; 2016: $92,956 | 2017: $200,577; 2016: $187,029 |
| Operating loss | 2017: $91,212; 2016: $78,616 | 2017: $177,411; 2016: $152,335 |
| Interest expense | 2017: $8,704; 2016: $345 | 2017: $16,233; 2016: $345 |
| Net loss | 2017: $99,916; 2016: $78,961 | 2017: $193,644; 2016: $152,680 |
Basic and diluted loss per share was $0.01 for both periods in 2017 and 2016. Six-month operating cash used was $52,909, compared with $38,359 in 2016; related-party financing provided $53,500, compared with $35,484. Cash increased by $591 to $1,751.
At June 30, 2017, total assets were $6,716, including $1,751 cash; current and total liabilities were $523,805, and stockholders’ deficit was $517,089. Working capital deficiency was $522,054. Related-party loans payable were $216,500, with $24,437 accrued interest. No revenue was reported from development services in Q2; six-month development revenue was $2,975.
Changes versus prior comparable periods
- Q2 subscription revenue rose $8,330 to $18,137, which management attributed to more insurance-program subscribers. Total quarterly revenue nevertheless declined $1,117, as development revenue fell to zero from $9,447.
- For the first half, subscription revenue declined $5,186 to $30,660; management attributed the decrease to fewer subscribers early in the year. Total revenue fell $11,658.
- G&A expense increased $11,393 in Q2 and $13,548 for the first half, primarily due to higher computer and internet spending, according to management. Officer compensation was unchanged year over year.
- Net loss widened by $20,955 in Q2 and $40,964 for the first half. Management attributed the higher interest expense to related-party loans.
Outlook, risks and unusual items
- Management said projected capital resources should cover cash requirements through the next 12 months; the liquidity note instead says through year-end 2017. These statements differ in stated time horizon.
- Liquidity depends on related-party support. A director and affiliated company have lent funds and indicated an intention to provide support, but there is no binding obligation to fund future needs. Management says it may reduce operating costs if support is withdrawn.
- The company is in default on required interest payments under the related-party notes. The notes bear 18% interest, with 12% payable monthly and the remaining 6% due at maturity; principal matures in three years and is secured by 3,850,000 common shares.
- The founder and president’s employment agreement runs through February 28, 2018 and provides a $275,000 annual salary, benefits, and a potential $100,000 incentive bonus subject to performance criteria.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2017. The disclosed material weakness is inadequate segregation of duties due to limited personnel.
- No legal proceedings or material subsequent events were disclosed. The filing cautions that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether related parties continue providing funds and whether the company can meet its obligations, including overdue interest payments.
- The basis for management’s liquidity outlook, given the different time horizons stated in the MD&A and liquidity note and the very low cash balance.
- Subscriber trends and the sustainability of subscription revenue, along with the absence of Q2 development revenue.
- Whether the company has remediated the disclosed control weaknesses and ineffective disclosure controls.
- The terms, accrued interest, collateral and payment status of the related-party notes, and the remaining obligations under the employment agreement.