Business context and reporting period
The OLB Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. It offers monthly subscription packages that include health-related benefits and provides e-commerce development and consulting services. Financial statement amounts below are in dollars unless otherwise noted.
Financial results and position
- Third-quarter revenue: $8,152, down 47% from $15,411 in Q3 2015. All Q3 revenue was from subscriptions; the filing attributes the decline to fewer subscribers and lower premiums for some subscribers.
- Nine-month revenue: $53,445, up 18% from $45,432. Subscription revenue fell to $39,789 from $42,932, while development revenue rose to $13,656 from $2,500; development work is described as irregular.
- Gross margin: $2,930 in Q3, or about 36% of revenue, versus $8,797, or 57%, a year earlier. For nine months, gross margin was $37,624, or about 70%, versus $25,370, or 56%.
- Operating expenses and losses: Q3 operating expenses were $89,726, compared with $92,416; net loss widened to $89,768 from $88,132. Nine-month operating expenses were $276,755, compared with $287,084; net loss narrowed to $242,448 from $268,727. Basic and diluted loss per share was $0.01 for Q3 and $0.02 for nine months in both periods presented.
- Cash flow: Operating activities used $111,186 in the first nine months, versus $151,559 in 2015. Financing provided $110,000, all from related-party notes, versus $152,687 in 2015. Cash declined by $1,186 to $1,689.
- Liquidity and debt: Current assets were $1,689 and current liabilities were $259,595, producing the disclosed working-capital deficit of $257,906. Liabilities included $110,000 of related-party notes payable, $3,317 of accrued related-party interest, $111,569 of accrued compensation, and $34,709 of accounts payable. The related-party loans are unsecured, due at any time, and accrue interest at 18%.
- Equity: Stockholders’ deficit was $252,941 at September 30, 2016, compared with $10,493 at December 31, 2015. The company reported 13,479,297 common shares outstanding as of November 10, 2016.
Material changes and management commentary
Quarterly subscription revenue declined substantially, while nine-month total revenue increased because of project-based development services. Nine-month losses and operating cash use improved year over year, but the company ended the period with minimal cash and a large working-capital deficit. Management said related parties had indicated an intention to provide support, but no binding funding agreement exists and they have no legal obligation to provide capital. Management stated it was managing liabilities and costs and believed projected resources would be sufficient; the filing gives differing horizons: through year-end 2016 in Note 2 and through the next twelve months in MD&A.
Risks, controls, and other notable items
- The company depends on related-party financing. If that support is withdrawn, management said it may need to reduce operating costs.
- Related-party notes carry an 18% interest rate; 12% interest is payable monthly and the remaining 6% at maturity.
- Management concluded disclosure controls were effective, but internal control over financial reporting was not effective as of September 30, 2016. The identified material weakness was insufficient personnel to maintain adequate segregation of duties.
- The filing reports no legal proceedings, unregistered equity sales, or defaults upon senior securities. It provides no market-risk disclosure because the company is a smaller reporting company.
Important facts for investors to verify
- Whether related-party funding remains available, and the timing and terms of repayment of the $110,000 in notes.
- Whether management’s liquidity projection is for year-end 2016 or the next twelve months, and what assumptions support it.
- Whether subscription revenue and subscriber counts stabilize, and whether development revenue recurs.
- How the company plans to address the material weakness in financial reporting controls given its limited personnel.
- The filing’s financial statements show only $1,689 of cash against $259,595 of current liabilities; investors should assess near-term funding and payment needs accordingly.