On4 Communications Inc (ONCI)

[QTRADERQ]

FOR NEW INVESTORS, ONCI IS A PONZI SCHEME

Here's my opinion (as a CPA) on why ONCI's $1.7MM annual sales are substantially overstated. Steve's revenue recognition is not realistic.

Here's a typical contract for a regional dealership.

IN MONTH ONE
Steve gets a signed contract and automatically records 1/12th of the total "executed contract". On a $1.2MM contract, he would record $100k/mo as revenue (400 units @ $250 each = $100k).

Seems legit, except for one thing ...

The customer (a successful Nissan dealership, largest in the US) who received the 400 units in the first month only sold 20% of the total, or 80 units. And only paid ONCI $20k for those 80 units (80 units @ $250 each = $20k).

IN MONTH TWO, THREE, FOUR, ETC
Steve AGAIN records 1/12th of the total contract, or $100k in each of the next three months.

But, the customer is no dummy. They are NOT going to "take" another 400 units because they only sold 80 units in the first month. Instead, the customer reorders -0- units in month(s) two, three, etc until they have established normal replenishment levels . Meaning ... since they only sold 80 units in the first month, they will NOT need to reorder again until they are down to a 2 months supply (160 units). (ONCI order lead time is likely 1.5 - 2 months which allows for mfg, air freight and customs.)

So, IN MONTH TWO, THREE, FOUR, ETC, Steve receives NO CASH PAYMENTS from this customer.

This is why my analysis of the accounts receivable for 12 mos (from 11/1/16 to 10/31/17) showed poor collections.

The collections in the 3Q & 4Q were just awful. $52k in collections on $1.3 mil billed. For the year, they collected $212k on $1.7 mil billed.

https://investorshub.advfn.com/boards/read_msg.aspx?message_id=138263624

Had Steve not booked fictitious pro-rata sales each month (as explained above), the cash collections would have appeared more normalized based on net 30 terms

If anyone wants to get a sense of ONCI "true recurring sales", I would suggest using cash collections---as unorthodox as that may sound. ONCI collected $212k for the 12 months ended 10/31/17. If you multiply 212k annual sales by a generous 10x revenue multiple, you get ~1 mil mkt cap, or a .0005 - .0006 stock price (on 3.9 Bil OS). That is where ONCI is headed in the short term.

Steve's method of recording the pro-rata portion of each signed contract is simply overstating sales of $1.7MM to the uninformed reader. There's no question about it. And for that reason, the books are fictitious (which is a very nice way of saying "cooked").

The market seems to have caught on to Steve's methodology of recording fake revenue's and that's why the stock is plummeting.

WHAT WILL HAPPEN IN MONTHS FIVE, SIX, SEVEN, EIGHT USING STEVE'S METHODOLOGY is the sales pipeline to the dealerships will eventually become stuffed with unsold product at some or most dealerships. Replenishment rates by weaker selling dealerships will significantly drop.

Meanwhile, this ponzi scheme Steve created can only survive by adding additional dealerships who will "take" that initial large order in month one. The moment Steve and the other 1099 sales reps he contracted with stop adding additional dealerships their product returns from existing dealerships will exceed billings. Think about that for a moment!!! ONCI could have NEGATIVE SALES in mid-late 2018. That is when this ponzi scheme business model Steve created will be shown for what it is. A non-sustainable business which has been over reporting sales since Day 1, and in turn overstating Steve's 12.5% commission check Big money being paid to him. (His commission rate during most of the fiscal year was 20%. $1.7MM * 19% blended rate = $324k commission in Steve' pocket.)

LASTLY, ON4 COMMUNICATIONS TAX RETURN. Their Form 1120 will report sales on a 'cash basis' since the corporation income tax return allows businesses to reconcile their 'book income' to 'taxable income'. In that reconciliation, On4's tax preparer will simply reclassify the fictitious sales, and identify them as "deferred sales" (a liability). Everything that he does on the tax return, stays on the tax return. We, as ONCI shareholder's will never see it unless Steve posts it on Twitter. We only get to see the FINS which are posted on the OTC website. The IRS tax return is basically a separate set of books, which is allowed as per IRS regulations (provided the tax preparer how a reconciliation between tax accounting and GAAP accounting)

As always. JMO
$ONCI