OLB Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. OLB provides merchant payment processing and related technology and services. Its 2018 acquisition of Excel-related assets and common-control combinations affect comparability with prior periods.
Financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | 2019: $2.582 million; 2018: $3.227 million | 2019: $5.173 million; 2018: $3.304 million |
| Operating income (loss) | 2019: $(165,000); 2018: $(132,000) | 2019: $(268,000); 2018: $(259,000) |
| Net loss | 2019: $(473,000); 2018: $(320,000) | 2019: $(880,000); 2018: $(447,000) |
| Interest expense, including related-party interest | 2019: $309,000; 2018: $188,000 | 2019: $613,000; 2018: $188,000 |
Q2 revenue declined about 20% year over year, which management attributed to insufficient sales and customer-retention efforts to replace lost merchants and attract new ones. Payment processing costs were 65% of revenue in Q2 and 66% in the first half, versus 65% and 63%, respectively, in the reported 2018 periods. The six-month reported revenue increase is not directly comparable: 2019 includes the acquired business throughout the period, while 2018 includes it only from April 9. The filing presents unaudited pro forma 2018 six-month revenue of $6.479 million and net loss of $1.385 million.
At June 30, cash was $55,418, current assets were $589,519, and current liabilities were $1.594 million, leaving a working-capital deficit of $1.004 million. Total liabilities were $14.094 million and stockholders’ deficit was $2.469 million. Debt included a $9.5 million term loan and $3.0 million of related-party notes, plus $157,789 of current related-party notes payable.
First-half operating cash outflow was $188,957; financing provided $132,789, consisting of loans from the CEO. Cash fell from $111,586 at year-end 2018 to $55,418. The company processed over $82 million in gross transactions monthly, according to management.
Changes, outlook and risks
- Management said it planned to build out its sales team, expand products and services, launch merchant/ISO onboarding tools, add ACH and cloud billing, and develop CrowdPay’s white-label crowdfunding services. No quantified financial guidance was provided.
- Management expected to fund operations through increased merchant activity and revenue. It cited a significant stockholder’s commitment to provide additional support if needed through November 2020 and said the company expected to have sufficient capital for at least 12 months from issuance of the statements. The CEO agreed to defer approximately $749,632 of amounts due until sufficient working capital is available. If financing or operating cash flow is inadequate, the company may need to reduce costs or curtail plans.
- The $3.0 million related-party note was extended to September 30, 2022; it bears 12% interest. The secured $9.5 million term loan matures April 9, 2021 and bears 9% interest. The lender had previously waived defaults, including a financial-covenant default, and amended covenants.
- Disclosure controls and procedures were deemed ineffective at June 30, 2019. Management identified potential material weaknesses involving limited accounting staff and segregation of duties, lack of an independent audit committee, and incomplete documentation of internal-control assessments.
- The filing reported no pending legal proceedings and no defaults upon senior securities. The company had a seven-year CEO employment agreement with annual salary of $375,000 and potential incentive and acquisition bonuses; no bonuses had been paid or accrued by June 30.
Investor verification points
- Assess merchant attrition, sales-team expansion, and whether management’s transaction-volume and product-launch plans translate into recurring revenue.
- Review cash needs and the availability, terms, and duration of related-party support, including the CEO’s deferrals and the stockholder support commitment.
- Confirm compliance with the secured loan’s amended covenants, repayment capacity, and the impact of interest costs and related-party debt.
- Evaluate the 2018 comparison on a pro forma basis, given the acquisition timing and reported-versus-pro-forma differences.
- Track remediation of the disclosed control weaknesses and the effect of the planned accounting-standard adoptions, including revenue recognition and leases.