OLB GROUP, INC. quarterly report, Q2 FY2020

OLB Group, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020; financial statements are unaudited. OLB provides merchant payment processing and related software and services, primarily through eVance. Management says substantially all revenue was generated by eVance; OmniSoft and CrowdPay were smaller businesses.

Financial performance

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Revenue	$2.00 million	$2.58 million	$4.61 million	$5.17 million
Operating loss	$195,870	$164,643	$421,059	$268,178
Net loss	$510,409	$472,838	$1.05 million	$879,783
Net loss per share, basic and diluted	$0.09	$0.09	$0.19	$0.16

• Q2 revenue fell 23% year over year; six-month revenue fell 11%. Q2 transaction and processing fees declined $714,444, while recurring subscription revenue rose to $149,591 from $6,186. Six-month subscription revenue was $406,843, including $99,594 recognized for prior-period services.
• Six-month transaction and processing revenue declined $954,249, attributed to merchant attrition and COVID-19-related transaction declines. Processing and servicing costs also fell, by 23% in Q2 and 11% for the six-month period.
• Calculated processing contribution margin—revenue less processing and servicing costs, before other operating expenses—was approximately 35% in both Q2 periods and 34.7% versus 34.3% for the six-month periods. This is not a company-defined GAAP margin.
• Six-month operating cash use was $90,595, compared with $188,957 in 2019. Investing cash use was $125,000; financing provided $38,416. Cash declined $177,179 to $330,437.

Financial position, debt and liquidity

• At June 30, cash was $330,437, current assets $820,048, and current liabilities $2.35 million; the reported working-capital deficit was $1,525,475. Total assets were $11.30 million and total liabilities $15.01 million, leaving a stockholders’ deficit of $3.70 million.
• Balance-sheet note payables included a $1.50 million current portion, $8.41 million long-term note payable (net), and related-party notes of $3.39 million. The senior term loan bears 9% interest, requires monthly $25,000 principal payments under its amended schedule, and matures April 9, 2022 with the remaining balance due then.
• At June 30 the company was not compliant with certain financial covenants. The senior lender later waived the June 30 fixed-charge coverage ratio default on August 10. Covenants include a minimum 1.20:1 fixed-charge coverage ratio and trailing-12-month revenue minimums of $9 million through June 30, 2021 and $10 million thereafter.
• On August 11, after quarter-end, OLB closed a public offering of 700,000 units for $6.45 million gross proceeds, with the underwriter exercising its warrant over-allotment. The filing gives net proceeds of approximately $5.4 million in one discussion and $5.5 million in another; it reports using $1,120,155 to repay term debt and having $5.6 million cash immediately after the offering. Following the repayment and conversions of related-party debt, OLB reported $8.4 million of outstanding debt.
• After quarter-end, CEO Ronny Yakov and significant stockholder John Herzog converted approximately $4.63 million of debt and accrued amounts into Series A preferred stock and warrants. The preferred stock carries a 12% annual dividend, voting rights on an as-converted basis, a liquidation preference, and conversion rights only after the term loan is repaid in full.
• OLB received a $236,231 PPP loan, bearing 1% interest and potentially eligible for partial or full forgiveness; forgiveness is not assured.

Changes, outlook and risks

• Management attributed the revenue decline to COVID-19 disruption and merchant attrition. Transaction volume and revenue were approximately 15% lower in March than February and 30% lower in April than March; transactions then rose 5% in May and 7% in June compared with the preceding month.
• Management expected transactions and revenue to remain depressed or decline further versus the prior year until restrictions eased, consumer purchasing recovered, or merchants expanded contactless and online options. The filing provides no specific revenue or earnings guidance.
• At June 30, the company had incurred a six-month net loss of $1.05 million and faced a working-capital deficit and covenant noncompliance. Management said cost reductions, the debt amendment, improving May–June volume and post-quarter financing supported its belief that liquidity would be sufficient for at least 12 months. That assessment depends on operating trends, covenant compliance and capital availability.
• The company disclosed restrictive debt covenants, prior covenant breaches and the risk that future noncompliance could allow acceleration or stricter terms. It was exploring refinancing; failure to refinance or meet obligations could require asset sales or less favorable replacement debt.
• Disclosure controls and internal control over financial reporting were both reported ineffective as of June 30. Identified material weaknesses included limited accounting staffing and segregation of duties, no independent audit committee, and incomplete documentation of control assessments. Management reported using additional review procedures and accounting consultants.
• Other notable items: a new 39-month office lease beginning September 2020, with total rent of approximately $315,044; no pending or threatened legal proceedings were reported. The filing identifies no formal guidance.

Important facts for investors to verify

• Whether transaction volumes and recurring software revenue recover, and how much of subscription revenue is recurring versus prior-period recognition.
• Post-offering cash, debt repayment and related-party conversions, including the differing net-proceeds figures disclosed in the filing and the potential dilution from warrants and preferred stock.
• Compliance with the senior debt’s coverage and revenue covenants, the remaining maturity balloon, and progress toward refinancing.
• Whether cash generation supports management’s 12-month liquidity assessment and whether the PPP loan is forgiven.
• Remediation of the disclosed material weaknesses and improvement in disclosure and financial-reporting controls.