OLB Group, Inc. — Q1 2020 Form 10-Q
Business and period: Unaudited consolidated results for the three months ended March 31, 2020, compared with Q1 2019. OLB provides merchant payment processing and related software and services; substantially all revenue came from eVance. The filing was signed May 15, 2020.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $2.614 million | $2.591 million | Up $23,099 (1%) |
| Operating expenses | $2.839 million | $2.694 million | Up $144,753 |
| Operating loss | $225,189 | $103,535 | Loss widened $121,654 |
| Net loss | $542,207 | $406,945 | Loss widened $135,262 |
| Basic and diluted loss per share | $0.10 | $0.08 | Loss per share increased |
| Cash used in operating activities | $50,268 | $113,741 | Use decreased $63,473 |
| Cash at period end | $434,533 | $42,845 | Compared with Q1 2019 end |
- Transaction and processing fees fell 9% to $2.336 million, which management attributed primarily to merchant attrition. Equipment sales and rental revenue was $20,262, versus $8,410. Other recurring-subscription revenue was $257,252, versus $6,200; $99,594 recognized in Q1 2020 related to services provided in the prior period.
- Processing and servicing costs were nearly flat at $1.720 million. Revenue less these costs was approximately $894,000, or 34.2% of revenue, versus approximately $873,000, or 33.7%, in Q1 2019. These are simple calculations, not a company-reported margin measure.
- General and administrative expense rose 75% to $473,932, driven by additional employee bonuses and professional fees. Salaries and wages fell 8% to $400,188; amortization declined 11% to $203,214. Interest expense was $317,441, up 4%.
Financial position and liquidity
- At March 31, 2020, total assets were $11.496 million and total liabilities were $14.764 million; stockholders’ deficit was $3.268 million. Cash was $434,533, current assets $944,706, and current liabilities $2.664 million. The company reported a $1.644 million working-capital deficit.
- Reported note payables totaled approximately $12.886 million: $9.5 million under the senior credit facility and $3.386 million related-party notes, including current portions. This excludes other accrued obligations. Senior debt bears 9% annual interest; the $3 million Herzog subordinated note bears 12%, and Yakov’s $386,467 loans are unsecured, bear 12%, and are due on demand.
- Operating cash outflow improved year over year, while cash declined $73,083 during Q1 2020. There was no investing cash flow in either comparative quarter. Financing cash outflow was $22,815, primarily deferred offering costs.
Material developments, outlook and risks
- COVID-19: Management reported transaction volume and revenue approximately 15% lower in March than February and 40% lower in April than March. It expected depressed or further declining transaction volumes and lower revenue and operating cash flows for the remainder of 2020. The duration and full financial impact were uncertain.
- Credit agreement: At March 31, the company was not compliant with certain financial covenants. Amendment No. 4, executed April 24, waived specified defaults and extended senior-debt maturity to April 9, 2022. It required a $125,000 payment upon execution, followed by $25,000 monthly payments from May 2020, with the remaining principal due at maturity. The lender also receives 100% of proceeds from favorable judgments and 20% of net proceeds from a future equity offering.
- After the amendment, the company said it was compliant, but warned that future covenant failure could permit acceleration or stricter terms. Covenants include a minimum 1.20:1.00 fixed-charge coverage ratio and trailing-12-month revenue thresholds of $9 million through June 30, 2021 and $10 million thereafter.
- Management said it believed operating cash flows, cost reductions, deferred payments, and potential related-party support would fund liquidity needs for at least 12 months from issuance of the statements. This assessment depended on uncertain assumptions: the company also identified potential expense cuts, further deferrals or borrowing, a possible public offering, and refinancing as options. Herzog’s stated working-capital support commitment ran only through the earlier of a public offering or November 2020; the company said it might have no recourse if that commitment were terminated.
- The company received a $236,231 Paycheck Protection Program loan on May 6, 2020, bearing 1% interest and potentially forgivable if qualifying use requirements are met. On May 13, related parties agreed, contingent on a public offering, to convert specified indebtedness into convertible Series A preferred stock. The offering and conversions were not assured.
- Disclosure controls and internal control over financial reporting were reported ineffective as of March 31, 2020. Identified material weaknesses included insufficient accounting personnel and segregation of duties, no independent audit committee, and incomplete documentation of control assessments. Management used additional review procedures and accounting consultants.
- The filing disclosed no pending or threatened legal proceedings known to the company. It described ordinary-course contingency accounting and an executive employment agreement with salary, benefits, and potential incentive and acquisition bonuses; no bonuses had been paid as of March 31.
Important facts for investors to verify
- Whether COVID-related declines in merchant transactions and revenue continued, and how they affected cash generation and the company’s liquidity assessment.
- Compliance with the amended credit covenants, ability to make required payments, and the lender’s rights under the agreement; confirm current debt balances and any refinancing.
- Availability and terms of related-party funding, completion of any public offering, and whether the proposed debt conversions occurred.
- PPP loan forgiveness eligibility and repayment status.
- Progress addressing the disclosed material weaknesses and whether financial reporting controls improved.
- The filing reports 5,411,905 shares issued and outstanding at March 31 and May 15, while Q1 weighted-average shares were 5,471,606; verify the basis for the difference and any subsequent dilution.