OLB Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018. The company provides merchant payment processing and related technology, crowdfunding and merchant software services. Its results reflect significant 2018 acquisitions and a change in reporting basis; periods before and after April 9, 2018 are identified as predecessor and successor and are not fully comparable.
Financial results and liquidity
Unless otherwise stated, amounts are U.S. dollars.
| Metric | Q3 2018 | Q3 2017 |
|---|---|---|
| Revenue | $2.976 million | $3.598 million |
| Processing costs and portfolio amortization | $2.324 million | $2.374 million |
| Gross profit and margin, calculated | $651,000; 21.9% | $1.224 million; 34.0% |
| Operating loss | $299,000 | $356,000 |
| Interest expense | $315,000 | $795,000 |
| Net loss | $614,000 | $1.130 million |
- For April 9–September 30, 2018, successor-period revenue was $6.192 million and net loss was $784,000. The predecessor reported a $413,000 loss for January 1–April 8. Combined January–September revenue was $9.382 million and combined loss was approximately $1.198 million. The comparable 2017 nine-month figures were revenue of $11.782 million and net loss of $3.237 million; acquisitions and the reporting-basis change limit comparisons.
- At September 30, cash was $92,486; current assets were $688,496 and current liabilities $4.117 million, a working-capital deficit of approximately $3.429 million. Total assets were $12.680 million, total liabilities $13.499 million, and stockholders’ deficit $819,000.
- Cash used in operating activities during the successor period was $19,559. Successor-period ending cash was $92,486. Cash-flow statements separately report $200,445 used in operating activities in the predecessor period and $763,890 used in the nine months ended September 30, 2017.
- The April 2018 acquisition was financed with a $12.5 million secured term loan at 9% interest, maturing April 9, 2021. At September 30, $11.5 million principal remained, including a $2 million installment then due; the balance sheet reports $2 million current and $9.368 million long-term net of debt discount. Related-party borrowing included a $1 million note at 12% and a $25,000 CEO loan at 12%.
Material changes, outlook and risks
- Q3 revenue fell about 17% year over year. Gross margin declined from approximately 34.0% to 21.9%, despite lower processing costs, while operating expenses also declined. The smaller net loss chiefly coincided with lower interest expense.
- The company acquired substantially all assets of Excel and related businesses through a foreclosure sale on April 9 for $12.5 million of financed consideration. Assets were acquired “as is,” without surviving representations or indemnification rights. The preliminary allocation included $5.523 million of goodwill and $4.353 million of residual portfolio value; management said valuations could be adjusted during the measurement period.
- Management reported processing more than $82 million in gross transactions per month at a run rate of about 1.4 million transactions monthly. It planned software beta testing in Q4 2018 and launches in Q1 2019, and described plans to pursue Payment Facilitator status, additional payment services, and crowdfunding-platform growth. These are plans, not financial guidance; no quantified earnings or revenue forecast is provided.
- Management said operating cash flow should cover operating expenses and interest for the next twelve months, while also describing a planned capital raise. The filing gives inconsistent raise targets: up to $7.5 million in the liquidity note and up to $5 million in MD&A. It also records only $92,486 cash at quarter-end and reliance on related-party support.
- The lender waived defaults after the company missed the initial $1 million payment deadline and financial-reporting requirements. On November 14, 2018, the company paid the $2 million installment due October 31, funded by a new $2 million related-party note at 12%, due November 14, 2019. The company stated that it was no longer in default after the payment.
- Management and the CFO concluded that disclosure controls and internal control over financial reporting were ineffective at September 30. The disclosed material weakness was insufficient personnel to maintain adequate segregation of duties. The company also checked “No” for having filed all required Exchange Act reports during the preceding 12 months.
Important facts for investors to verify
- Current debt balances, compliance with loan covenants, repayment terms and the extent of continued reliance on related-party financing.
- Cash runway and whether the stated capital raise was completed; clarify the conflicting $5 million and $7.5 million targets.
- Actual launch, adoption and revenue contribution of the acquired businesses and planned software products, compared with management’s transaction-volume claims.
- Final acquisition valuations, including goodwill and residual portfolios, and any resulting impairment or adjustment.
- Whether disclosure and financial-reporting control weaknesses were remediated and whether required SEC filings were brought current.