OLB Group, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing was signed April 29, 2020. Financial statements are audited and presented under U.S. GAAP. Per-share and share data reflect the November 2019 one-for-thirty reverse stock split.
Business context
OLB is a financial technology and payment facilitator company operating primarily through eVance, a merchant payment-processing ISO, with OmniSoft commerce software and CrowdPay capital-raising software. eVance generated substantially all revenue; OmniSoft and CrowdPay began contributing revenue in the second half of 2019 but remained immaterial. The company reported one operating segment surrounding its ISO operations.
Financial results and liquidity
| Metric | 2019 | 2018 comparison |
|---|---|---|
| Revenue | $10.292 million | $9.020 million reported; $12.194 million pro forma including Excel for the full year |
| Operating loss | $268,863 | $533,066 reported; $124,442 pro forma |
| Net loss | $1.343 million | $1.394 million reported; $1.290 million pro forma |
| Net loss per share, basic and diluted | $0.25 | $0.26 reported |
| Cash from operating activities | $244,868 provided | $131,092 used for April 9–December 31, 2018 |
| Cash from investing activities | None | $217,678 provided for April 9–December 31, 2018 |
| Cash from financing activities | $151,162 provided per cash flow statement | $25,000 provided for April 9–December 31, 2018 |
Revenue increased 14% against reported 2018 results, which include the acquired Excel business only from April 9, 2018. Against the 2018 pro forma figure, 2019 revenue was lower, primarily due to merchant attrition. Management said attrition exceeded new monthly sales amid the absence of a sales team. Net loss improved against reported 2018 results but was higher than the pro forma loss.
Processing and servicing costs were $6.724 million, up from $5.993 million reported in 2018; amortization was $812,857, up from $541,904. Interest expense, including related-party interest, totaled approximately $1.249 million, compared with approximately $883,000 in 2018. The filing does not present a consolidated gross-margin measure.
At year-end, cash was $507,616, current assets $1.112 million, current liabilities $2.494 million, and working capital deficit $1.382 million. Total liabilities were $14.669 million, against stockholders’ deficit of $2.800 million. Debt included $9.5 million under the GACP term loan ($325,000 current and $9.175 million long-term) and $3.0 million of subordinated related-party notes, plus $386,467 of current related-party notes payable. The company reported no income tax expense and no dividends paid.
Gross merchant processing volume was $726.8 million across 16.6 million transactions in 2019, versus $937.9 million and 23.3 million transactions in 2018; the 2018 volume includes pre-acquisition activity. SecurePay served approximately 3,000 merchants processing about $9 million in monthly gross transactions, with limited revenue to OLB.
Material changes, outlook, and risks
- COVID-19: The company reported disruptions and declining transaction volume after year-end. Management expected April 2020 transaction volume and resulting revenue could be as much as 40% below March and anticipated lower 2020 revenue and operating cash flow than in 2019. Duration and full impact were uncertain.
- Debt amendment after year-end: On April 24, 2020, GACP extended the term-loan maturity to April 9, 2022 and waived specified defaults. OLB paid $125,000 and agreed to monthly principal payments of $25,000 beginning May 2020, with a remaining balloon payment at maturity. The lender is entitled to 100% of proceeds from favorable judgments in ongoing litigation and 20% of net proceeds from future equity offerings until repayment.
- Covenants and financing: The amended loan requires a trailing-twelve-month fixed-charge coverage ratio of at least 1.20:1.00 and minimum net revenue of $9 million through June 30, 2021, then $10 million. The company had experienced covenant defaults and needed waivers; it said it was compliant after the amendment. GACP debt bears 9% interest and is secured by company and subsidiary assets. Failure to comply could permit acceleration or foreclosure.
- Liquidity support: Management believed operating cash flow, cost reductions, deferred CEO compensation, and shareholder support would fund operations for at least 12 months from the financial statements’ issuance. Shareholder John Herzog committed working-capital support through the earlier of a proposed offering or November 2020, subject to stated exclusions. OLB also applied for an approximately $225,000 CARES Act PPP loan and planned a public offering; neither source of proceeds was assured.
- Unusual items: A December 2019 litigation settlement generated $734,250; $172,390 was recorded as a gain and the balance as revenue. The company acquired Excel assets for $12.5 million in 2018 through a foreclosure sale, financed by the GACP loan. Goodwill was $6.858 million at year-end, with no impairment recorded.
- Controls and operating risks: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end and identified material weaknesses, including limited accounting resources, inadequate segregation of duties, no independent audit committee, and incomplete control documentation. The auditor issued an unqualified opinion on the financial statements but did not opine on internal-control effectiveness.
- Other principal risks: Reliance on eVance, merchant attrition and chargebacks, intense competition, cybersecurity and service interruptions, complex payments and crowdfunding regulation, covenant compliance, related-party financing dependence, and possible dilution. OLB’s common stock traded on OTC Pink, with no established active market.
Important facts for investors to verify
- Reconcile 2019 revenue and the reported 2018 comparison to the 2018 pro forma results, and confirm the effects of merchant attrition and transaction-volume trends.
- Confirm the company’s liquidity runway, actual access to shareholder support, status of the PPP application or planned offering, and ability to meet monthly and balloon debt payments.
- Review the GACP amendment, outstanding covenant calculations, collateral and proceeds-sweep provisions, and all related-party debt and accrued amounts.
- Track COVID-related processing volumes, merchant losses, chargebacks, and cash flow against management’s 2020 expectations.
- Assess remediation of the disclosed material weaknesses and verify future reporting timeliness and accuracy.
- Clarify filing inconsistencies: MD&A reports 2019 financing cash flow of $151,616, while the cash flow statement reports $151,162; the filing’s revenue-source disclosure also appears to present transaction and processing fees inconsistently with the statements of operations.