OLB Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. The company offers monthly health-benefit subscription packages and ecommerce development and consulting services. Financial statement amounts are presented in dollars.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / December 31, 2016 |
|---|---|---|
| Revenue | $15,498 | $26,039 in Q1 2016 |
| Gross profit (reported as “gross margin”) | $10,029; 64.7% of revenue | $20,354; 78.2% of revenue |
| Operating expenses | $96,228 | $94,073 in Q1 2016 |
| Operating loss | $(86,199) | $(73,719) in Q1 2016 |
| Interest expense | $7,529 | None reported in Q1 2016 |
| Net loss | $(93,728); basic loss per share $(0.01) | $(73,719); basic loss per share $(0.01) |
| Operating cash flow | $(15,239) | $(5,886) in Q1 2016 |
| Cash | $1,421 | $1,160 at December 31, 2016 |
| Current liabilities | $423,559 | $329,570 at December 31, 2016 |
| Working capital | Deficit of $422,138 | Not stated for the comparative date |
| Related-party loan principal | $178,500 | $163,000 at December 31, 2016 |
Changes versus Q1 2016
- Revenue fell $10,541, or about 40%, despite $2,975 of development-services revenue; subscription revenue declined $13,516, which management attributed to fewer subscribers to the insurance program.
- Gross profit decreased $10,325 and gross margin contracted to 64.7% from 78.2%.
- Net loss widened by $20,009. Management cited lower revenue and $7,529 of related-party interest expense; general and administrative costs rose $2,155.
- Cash used in operations increased by $9,353. Financing provided $15,500 in Q1 2017, from a related-party note, compared with $7,580 from an officer in Q1 2016.
Liquidity, debt, outlook and risks
- Liquidity is highly constrained: $1,421 cash compared with $423,559 in current liabilities, including $184,825 accrued compensation, $40,846 accounts payable and $178,500 related-party loan principal.
- A director and affiliated company have provided related-party financing. The loans are secured by 3,850,000 common shares, accrue interest at 18% annually, and mature in three years. The filing reports $15,734 accrued interest due at March 31, 2017.
- Management says related parties have indicated in writing an intention to provide support, but there is no binding agreement or legal obligation to fund the company. Management says it expects sufficient resources through the next 12 months in MD&A; the liquidity note describes sufficiency through year-end 2017. Funding may not be available, and management may need to cut costs if support stops.
- The company reported no material subsequent events through the date the statements were available to be issued. No specific revenue or earnings guidance was provided.
- Disclosure controls and internal control over financial reporting were both deemed ineffective as of March 31, 2017. The stated material weakness is inadequate segregation of duties due to limited personnel; no material change in internal controls during the quarter was reported.
Important facts for investors to verify
- Whether related-party funding will continue and on what terms, given the absence of a binding funding commitment and the substantial working-capital deficit.
- The loan balance, accrued interest, payment status and maturity/security terms; reconcile the reported accrued interest with the balance-sheet liability presentation.
- Whether subscriber declines can be reversed and development-services revenue can grow enough to improve gross profit and cash generation.
- Management’s differing liquidity-projection horizons: through year-end 2017 in the note versus the next 12 months in MD&A.
- What remediation is planned for ineffective disclosure and financial-reporting controls, particularly the segregation-of-duties weakness.