OLB Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results. OLB provides merchant payment processing, related software and equipment, and other services; substantially all revenue was generated by eVance.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2.308 million | $2.477 million | $6.922 million | $7.650 million |
| Operating loss | $425,422 | $85,130 | $846,481 | $353,308 |
| Net loss | $657,358 | $401,859 | $1.710 million | $1.282 million |
| Basic and diluted loss per share | $0.11 | $0.07 | $0.31 | $0.24 |
- Q3 revenue fell about 7% year over year; nine-month revenue fell about 10%. Transaction and processing fees declined, while subscription revenue rose to $157,248 for Q3 and $564,091 for the nine-month period.
- Q3 general and administrative expense rose to $706,430 from $316,962, reflecting higher legal, audit and stock-based compensation costs. Nine-month G&A was $1.603 million versus $1.154 million.
- Processing and servicing costs were $1.486 million in Q3 and $4.501 million for nine months. Revenue less these costs was approximately 35.6% and 35.0% of revenue, respectively; the filing does not present these as reported gross margins.
- Nine-month operating cash use was $529,118, versus $188,957 in 2019. Investing cash use was $125,000. Financing provided $4.269 million, primarily from the public offering, partly offset by debt repayments.
- At September 30, cash was $4.123 million, working capital was $3.412 million, current assets were $4.576 million and current liabilities were $1.164 million. Total liabilities were $9.287 million. Notes payable totaled about $8.366 million; the senior term loan carried 9% interest and matured April 9, 2022.
- Stockholders’ equity was $5.702 million, compared with a $2.800 million deficit at December 31, 2019. Common shares outstanding were 6,160,054 at September 30; 6,160,054 shares were reported as of November 11.
Changes, capital and debt
- An August public offering of 700,000 common-stock units, with warrants, generated $6.45 million gross and approximately $5.6 million net proceeds. OLB used $1.120 million of net proceeds to repay senior debt.
- Related-party debt and accrued obligations were converted in August into 4,633 Series A preferred shares and warrants. The preferred shares carry a 12% annual dividend, voting rights and liquidation preference; conversion to common stock is permitted only after the term loan is repaid in full.
- The company received a $236,231 Paycheck Protection Program loan at 1% interest. Forgiveness is uncertain.
- In October 2020, after quarter-end, Amendment No. 5 removed the senior loan’s 1.20:1.00 fixed-charge-coverage covenant, required at least $1 million in a controlled operating account and required a $450,000 payment. The loan also retains trailing-12-month revenue minimums of $9 million through June 30, 2021 and $10 million thereafter.
Outlook, risks and other matters
- Management reported transaction activity fell 15% from February to March and 30% from March to April, then increased month over month through September. It cautioned that transaction volumes and revenue could remain below prior-year levels or decline again depending on the pandemic and business restrictions.
- Management stated it expected liquidity to support operations for at least 12 months, citing improving transaction trends and capital raised. This depends on operating performance and continued access to liquidity; management also disclosed covenant-compliance concerns and was exploring refinancing.
- As of September 30, the company disclosed noncompliance with certain financial covenants; the filing also describes a June 30 fixed-charge-coverage default waived by the lender in August. Failure to comply with remaining requirements could permit acceleration or stricter terms.
- Disclosure controls and internal control over financial reporting were both deemed ineffective. Cited material weaknesses included limited accounting staffing and segregation of duties, no independent audit committee, and incomplete documentation of control assessments.
- No quantitative revenue or earnings guidance is provided. Management’s COVID-19 outlook and liquidity expectations are forward-looking and subject to substantial uncertainty.
Important facts for investors to verify
- Reconcile MD&A revenue-change figures with the statements: the filing’s MD&A cites a Q3 decline of $327,166 and a nine-month decline of $1,281,415, while reported total revenue implies declines of $169,395 and $728,201, respectively. The larger figures match the reported decreases in transaction and processing fees.
- Reconcile the cash flow statement’s 2019 nine-month net loss of $879,783 with the statement of operations’ $1,281,642 net loss for the same period.
- Confirm covenant status after Amendment No. 5, the $450,000 payment, minimum-cash requirement and revenue tests, as well as the company’s refinancing plan before the April 2022 maturity.
- Track cash burn, merchant transaction volumes and revenue recovery, PPP loan forgiveness, and the dilution and dividend implications of outstanding warrants and Series A preferred stock.