OLB Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The unaudited consolidated results include the payment-processing business acquired in April 2018 and subsidiaries added in May 2018. Comparisons with 2018 are not fully like-for-like; the filing presents legacy-company and predecessor figures, and MD&A also uses a combined 2018 comparison.
Business context and results
OLB provides merchant payment processing and related software and services, primarily through eVance and Securus. It also operates CrowdPay and Omnisoft, whose activities were described as insignificant to date. Management reported that merchants processed more than $82 million in gross transactions monthly, averaging 1.4 million transactions per month.
| Metric | Q1 2019 | Comparable information in filing |
|---|---|---|
| Revenue | $2.591 million | $3.175 million for predecessor Q1 2018; $3.252 million in the pro forma comparison |
| Processing and servicing costs | $1.718 million; 66.3% of revenue | $1.748 million; 55.0% of predecessor revenue |
| Operating loss | $103,535; approximately -4.0% operating margin | Predecessor reported $85,494 operating income; pro forma Q1 2018 operating loss was $153,315 |
| Net loss | $406,945 | Predecessor reported $746,162 loss; MD&A’s combined 2018 comparison reports $872,792 loss |
| Operating cash flow | -$113,741 | -$382,106 for predecessor Q1 2018 |
| Cash | $42,845 at March 31, 2019 | $111,586 at December 31, 2018 |
Revenue declined, which management attributed to the absence of a sales team and customer-retention program to replace lost merchants and win new ones. Management said it intended to build out sales in 2019. Interest expense was $303,954, versus $832,564 for the predecessor period; management attributed the reduction to restructuring of the GACP loan. The filing reports basic and diluted loss per share of approximately $0.00.
Financial position, debt, and liquidity
- Total assets were $11.77 million and total liabilities were $13.83 million at March 31, 2019. Stockholders’ deficit was $2.06 million.
- Working capital deficit was $783,788. Current liabilities were $1.33 million, including $720,001 of accrued related-party expenses; current assets were $550,389.
- Long-term debt included $9.5 million under the GACP term loan and $3.0 million under subordinated related-party notes. The GACP loan bears 9% annual interest and matures April 9, 2021. The related-party notes bear 12% interest and were extended to September 30, 2020. The company also reported $70,000 of current related-party notes payable.
- OLB borrowed $45,000 from its CEO during the quarter. CEO-related accrued payroll, note payable, and other expenses included in the working-capital deficit totaled $657,229; the CEO agreed to defer payment until the company had sufficient working capital.
- Management said a significant stockholder had committed to provide additional support, if needed, to satisfy obligations through May 2020, and that debt amendments and this support alleviated previously reported substantial doubt about going concern. OLB expects to fund needs through operating cash flow as merchants and revenue grow; it warned that inability to obtain capital could require curtailing plans and reducing costs.
Outlook, risks, and notable items
- No numerical financial guidance was provided. Management described plans to expand the sales team and product offering, integrate Omnisoft applications with the eVance payment gateway, launch online merchant and ISO boarding, and add ACH and cloud billing services. CrowdPay planned to offer white-label crowdfunding solutions.
- Management said the company’s proprietary gateway served approximately 3,000 merchants, processing over 32,000 transactions and approximately $9 million in monthly gross transactions. The filing also describes the company as bearing end-to-end credit risk under its PayFac model.
- On February 5, 2019, lenders waived an existing financial-covenant default and amended the covenants. Earlier, the company had missed scheduled payments and reporting requirements under the GACP facility; amendments and related-party borrowing enabled required payments. The filing does not provide the amended covenant thresholds.
- Disclosure controls and procedures were deemed ineffective for the quarter. Cited potential material weaknesses included limited accounting personnel and segregation of duties, no independent audit committee, and incomplete documentation of internal-control assessments. No material control changes during the quarter were reported.
- Intangible assets were $3.92 million, with $227,647 of quarterly amortization; goodwill was $6.86 million. The company stated that results for the quarter are not necessarily indicative of full-year results.
- The company reported no pending legal proceedings and no defaults upon senior securities. It disclosed a seven-year CEO employment agreement with a $375,000 annual salary and potential bonuses; no bonuses had been paid or accrued at March 31, 2019.
Key facts investors should verify
- Whether the stockholder’s support commitment is documented, sufficient, and available through May 2020, given low cash and the working-capital deficit.
- Current compliance with amended GACP covenants, remaining payment obligations, maturity terms, and the company’s ability to service debt and interest.
- Whether merchant losses have been addressed and sales, retention, and processing economics improve; clarify the differing 2018 comparison bases when assessing growth.
- Progress in remediating the disclosed control weaknesses and establishing effective financial reporting controls.
- Collection of receivables, related-party balances and accrued interest, and recoverability of merchant portfolios, trade name, and goodwill.