OLB Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. OLB provides merchant payment processing and related technology services, primarily through its eVance business. Its crowdfunding and Omnisoft activities were described as insignificant. The company reported one operating segment.
Financial performance and position
- Q3 revenue: $2.48 million, down 17% from $2.98 million in Q3 2018. Transaction and processing fees were $2.46 million.
- Q3 operating and net results: Operating loss was $85,130, versus $265,755 a year earlier; net loss was $401,859, versus $573,531. Basic and diluted loss per share was $0.07, versus $0.11.
- Nine-month results: The financial statements report revenue of $7.65 million versus $6.28 million, operating loss of $353,308 versus $524,519, and net loss of $1.28 million versus $1.02 million. The filing’s MD&A uses a different 2018 comparison that includes predecessor results before the April 2018 acquisition: revenue of $9.46 million and net loss of $1.77 million. On that basis, management says revenue declined 19% and net loss improved. The filing does not present these comparative bases consistently; investors should verify the reconciliation.
- Processing costs and margins: Q3 processing and servicing costs were $1.70 million, or 69% of revenue, compared with $1.96 million, or 66%, in Q3 2018. The corresponding revenue less these costs was approximately 31% and 34%. Nine-month 2019 processing costs were $5.10 million, or 67% of revenue; the 2018 comparator varies by presentation basis.
- Cash flow: Cash used in operations was $302,028 for the first nine months, compared with $124,546 in the 2018 statement presentation. Financing provided $215,914, primarily from CEO loans; investing cash flow was zero. Cash fell by $86,114 to $25,472.
- Liquidity: Working capital deficit was $1.15 million at September 30, 2019. Current assets were $659,066 and current liabilities $1.81 million. The CEO agreed to defer approximately $838,500 of amounts owed to him until the company has sufficient working capital.
- Debt and interest: Long-term debt included a $9.5 million secured loan and $3.0 million of subordinated related-party notes; current related-party notes were $240,914. Nine-month interest expense was $929,143 per MD&A, including related-party interest; cash interest paid was $660,750.
- Assets and equity: Total assets were $11.51 million, including $6.86 million goodwill and $3.54 million net intangible assets. Total liabilities were $14.31 million and stockholders’ deficit was $2.80 million.
Material changes and management commentary
- Management attributed lower quarterly revenue and processing costs to the lack of a sales team and customer-retention program, which contributed to merchant losses and fewer new merchants. Q3 gross transaction volume fell to $166.95 million from $219.95 million, and transaction count fell to 3.68 million from 4.81 million.
- For the first nine months, merchants processed $541.29 million across 12.09 million transactions, versus $718.32 million and 16.00 million in the 2018 comparison cited in MD&A.
- Management reduced staffing, commissions, and general and administrative spending to conserve cash. It said it aimed to build the sales team in Q4 2019 and into 2020, expand products and services, and was exploring refinancing options. These are plans, not quantified earnings guidance.
- The company said it expected to fund operations through improved operating cash flow and, if needed, related-party support through November 2020, excluding principal and interest obligations under the senior credit agreement. Management believed available capital would support operations for at least 12 months from issuance of the statements.
Outlook, risks, contingencies, and unusual items
- The senior debt covenants require a trailing-twelve-month fixed-charge coverage ratio of at least 1.10:1.00, increasing to 1.20:1.00 beginning after January 31, 2020, and consolidated net revenue of at least $10 million. The company had previously received a waiver of covenant defaults and amended covenant terms.
- Management warned that inability to refinance or meet obligations could require asset sales, less favorable replacement financing, or spending cuts. Liquidity is highly dependent on merchant growth, cash generation, and related-party support.
- Disclosure controls and procedures were deemed ineffective at September 30, 2019. Identified weaknesses included limited accounting staff and segregation of duties, no independent audit committee, and incomplete documentation of internal-control assessments. Planned remediation depended partly on available funds.
- Related-party financing includes $3.0 million in subordinated notes bearing 12% interest, extended to September 30, 2022, and CEO advances bearing 12% and due on demand. The CEO also had accrued compensation and other amounts owed by the company.
- After quarter-end, OLB effected a one-for-30 reverse stock split on November 12, 2019; the filing retroactively restated share and award data. No legal proceedings were reported, and the company reported no defaults upon senior securities.
Important facts for investors to verify
- Reconcile the 2018 nine-month revenue, expense, and loss comparisons across the financial statements, acquisition/predecessor disclosures, and MD&A.
- Review covenant compliance, the $10 million revenue requirement, debt maturity and repayment terms, and the status and terms of any refinancing.
- Assess cash runway, the availability and conditions of related-party support, and the timing of deferred CEO payments.
- Track merchant retention, sales-team rebuilding, transaction volumes, and whether these translate into revenue and operating cash flow.
- Monitor remediation of the disclosed control weaknesses and whether independent audit committee and accounting resources are established.