OLB Group, Inc.: Form 10-Q for the period ended Jun 30, 2023

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward-looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, our actual results may differ significantly from management’s expectations. These risks and uncertainties include those factors described in greater detail in the risk factors disclosed in our Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those anticipated in these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or, in the case of documents referred to or incorporated by reference, the date of those documents.

The following discussion and analysis should be read in conjunction with our unaudited financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Company Overview and Description of Business

Overview

We are a FinTech company that focuses on a suite of products in the merchant services and payment facilitator verticals that seek to provide integrated business solutions to merchants throughout the United States. We seek to accomplish this by providing merchants with a wide range of products and services through our various online platforms, including financial and transaction processing services. We also have products that provide support for crowdfunding and other capital raising initiatives. We supplement our online platforms with certain hardware solutions that are integrated with our online platforms. Our business functions primarily through three wholly-owned subsidiaries, eVance, OmniSoft, and CrowdPay, though substantially all of our revenue has been generated from our eVance business (we began generating revenue from our OmniSoft and CrowdPay businesses in the second half of 2019). We expect to build out our OmniSoft software business and to rely more on our payment processing model for revenue so that we are not dependent on our revenue from our eVance business but there is no guarantee that we will be able to do so.

With respect to our eVance business, our merchants are currently processing over $100,000,000 in gross transactions monthly and average approximately 1,400,000 transactions a month. These transactions come from a variety of sources including direct accounts and ISO channels. The accounts consist of businesses across the United States with no concentration of industries or merchants.

We have integrated all the applications for OmniSoft and the ShopFast Omnicommerce solution with the eVance mobile payment gateway, SecurePay.comTM. SecurePay.comTM, is currently used by approximately 3,000 merchants processing over 32,000 transactions and approximately $9,000,000 of monthly gross transactions (though our revenue from these transactions is limited). In July 2019, we launched a new merchant and ISO boarding system that will be able to onboard merchants instantly. This provides the merchant with an automated approval and ISOs will have the ability to see all their merchants and their residuals as they load into the system.

On May 22, 2020, the Company purchased certain assets from POSaBIT Inc. (“POSaBIT”), including its contracts and arrangements with the Doublebeam merchant payment processing platform (the “POSaBIT Asset Acquisition”). The assets included, but were not limited to, software source codes, customer lists, customer contracts, hardware and website domains.

On May 14, 2021, the Company formed OLBit, Inc., a wholly-owned subsidiary (“OLBit”). The purpose of OLBit is to hold the Company’s assets and operate its business related to its emerging lending and transactional business.

On July 23, 2021, we formed DMINT, Inc., a wholly-owned subsidiary (“DMINT”) to operate in the cryptocurrency mining industry. DMINT has initiated the first phase of the Bitcoin mining operation by placing purchase orders for data centers and ASIC-based Antminer S19J Pro mining computers specifically configured to mine Bitcoin. The first lot of equipment is being used to establish a proof of concept before DMINT expands the number of computers in operation. As of September 30, 2022, DMint has purchased 1,000 computers, of which all computers have been delivered with 350 online and mining for Bitcoin and 400 computers are in process of being installed at the Company’s newly acquired building in Selmer, Tennessee. It has six data centers located in Pennsylvania where it has mined 25 Bitcoin. It has entered into an exclusive agreement whereby it has rights to all of the natural gas produced by 15 mines in Bradford, Pennsylvania. The natural gas is taken directly from the well heads to generate electricity required to power the mining computers. As configured, it is expected that the computers purchased will have a combined computing power of approximately 100 petahash per second. If the initial mining operation results are as anticipated, DMINT plans to expand the number of mining computers every quarter, whereby it would aim to have the computing power of 500 petahash per second by the end of 2022.

On November 24, 2021, we entered into an Asset Purchase Agreement (the “Agreement”) dated as of November 15, 2021 with FFS Data Corporation (“Seller”) whereby we acquired a portfolio of merchants utilizing financial transaction processing services (the “Acquired Merchant Portfolio”). The purchase price was $20 million, with $16 million paid at closing, $2 million payable within six months after closing, and a $2 million payment to be transferred to an escrow account, contingent upon an Attrition Adjustment, as described in the Agreement. However, on July 18, 2022, the Company notified the Seller of certain breaches of contract relating to, among other things, representations made by Seller in the Agreement, for which it will seek a reduction or cancellation of the final payment and a potential reduction in the overall purchase price.

On January 3, 2022, the Company entered into a share exchange agreement with all of the shareholders of Crowd Ignition, Inc. (“Crowd Ignition”) whereby the Company purchased 100% of the equity of Crowd Ignition).

Crowd Ignition is a web-based crowdfunding software system. Ronny Yakov, Chairman and CEO of the Company and John Herzog, a shareholder of the Company, owned 100% of the equity of Crowd Ignition. The software provides broker-dealer, merchant banks and law firms a platform to market crowdfunding offerings, collect payments and issue securities. The software has been developed in response to, and to comply with, recent changes in investment regulations including Regulation D 506(b) and 506(v), Regulation A+ and Title III of the Jobs Act (Regulation CF), including raising the crowdfunding limit from $1.07 million to $5.0 million. Crowd Ignition is one of only about 50 companies registered with the SEC to provide the services permitted under Regulation CF.

On June 15, 2023, the Company acquired 80.1% of the membership interests of Cuentas SDI, LLC, a Florida limited liability company (“SDI”). SDI will enable the Company to focus on marketing to the underbanked communities utilizing the SDI debit and calling card platform’s ability for users to reload cash to their account and provide instant access to digital products to their customers’ Mobile App and digital wallet into its electronic portal. The Company plans to market to the SDI merchant network, which currently has approximately 31,600 locations in the United States, the ability of having one POS system that will allow the retail customer to purchase products using OLB’s payment processing solutions along with the ability to reload payment cards and their mobile phone minutes.

Results of Operations

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) includes a discussion of the consolidated results from operations of The OLB Group, Inc. and its subsidiaries for the three and six months ended June 30, 2023 and 2022.

Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

For the three months ended June 30, 2023, we had total revenue of $8,344,012 compared to $8,372,435 of revenue for the three months ended June 30, 2022, a decrease of $58,721 or 0.8%. We earned $7,755,248 in transaction and processing fees, $22,519 in merchant equipment rental and sales, $71,268 in other revenue from monthly recurring subscriptions, $137,541 of revenue from the Cryptocurrency Mining segment and $357,436 of revenue from the sale of digital products. For the three months ended June 30, 2022, we earned $7,813,969 in transaction and processing fees, $18,174 in merchant equipment rental and sales, $332,326 in other revenue from monthly recurring subscriptions and $207,966 of other revenue from the Cryptocurrency Mining segment. The decrease in revenue was a result of a decrease in the amount of fees earned from merchant processing transactions compared to the prior year primarily due to the removal and termination of service of approximately 700 merchants that were part of the Acquired Merchant Portfolio due to their non-compliance with the credit card processing rules. The removal of the merchants is the subject of ongoing litigation discussed in the notes to our financial statements above. Processing and servicing costs decreased by $1,281,466 or 19.2%, from $6,672,141 in the prior period to $5,390,675 for the same reason.

Amortization and depreciation expense for the three months ended June 30, 2023, was $899,831 compared to $903,353 for the three months ended June 30, 2022, a decrease of $3,522 or 0.4%, thus fairly consistent between periods. We record amortization expense on our merchant portfolio, trademarks and natural gas purchase rights. Depreciation expense for our Cryptocurrency Mining segment for the three months ended June 30, 2023 was $799,716 compared to $702,494 for the three months ended June 30, 2022, an increase of $97,222 or 13.8% due to depreciating more bitcoin mining equipment in the current period.

Salary and wage expense for the three months ended June 30, 2023, was $692,480 compared to $622,914 for the three months ended June 30, 2022, an increase of $69,566 or 11.2%. Salary and wage expenses have increased due to an increase in salary and bonuses paid to our officers during the 2023 period.

Professional fees for the three months ended June 30, 2023, were $219,782 compared to $294,747 for the three months ended June 30, 2023, a decrease of $74,965 or 25.4%. Professional fees consist mainly of audit and legal fees. The decrease in the current period is due to less litigation-related legal expenses during the 2023 period.

General and administrative expenses for the three months ended June 30, 2023 was $973,264 compared to $1,007,908 for the three months ended June 30, 2022, a decrease of $34,644 or 3.4%, remaining fairly consistent over time.

For the three months ended June 30, 2023, we had total other income of $42,193 from a realized gain of $48,683 on the sale of cryptocurrency and an unrealized loss on investment of $6,490, compared to other income of $393,168 for the three months ended June 30, 2022. In the prior period we recognized a gain of $393,158 from the reversal of a liability associated with a prior adverse judgement on appeal.

For the three months ended June 30, 2023, we had $1,725 of net income attributed to the non-controlling interest of Cuentas SDI, LLC, due to the acquisition of 80.01% interest of the entity during the current period.

Our net loss for the three months ended June 30, 2023, after the reduction for minority interest, was $587,818 compared to $1,437,954 for the three months ended June 30, 2023. This was an increase in our net loss of $850,136 for the reasons discussed above.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

For the six months ended June 30, 2023, we had total revenue of $14,966,601 compared to $17,158,894 of revenue for the six months ended June 30, 2022, a decrease of $2,118,679 or 13.1%. We earned $14,108,719 in transaction and processing fees, $47,283 in merchant equipment rental and sales, $148,873 in other revenue from monthly recurring subscriptions, $304,290 of other revenue from the Cryptocurrency Mining segment and $357,436 of revenue from the sale of digital products during the six months ended June 30, 2023, compared to $16,227,398 in transaction and processing fees, $35,342 in merchant equipment rental and sales, $423,848 in other revenue from monthly recurring subscriptions and $472,306 of other revenue from the Cryptocurrency Mining segment during the six months June 30, 2022. The decrease in revenue was a result of a decrease in the amount of fees earned from merchant processing transactions compared to the prior year primarily due to the removal and termination of service of approximately 700 merchants that were part of the Acquired Merchant Portfolio due to their non-compliance with the credit card processing rules. The removal of the merchants is the subject of ongoing litigation discussed in the notes to our financial statements above. Processing and servicing costs decreased by $2,462,169 or 19% from $12,930,278 in the prior period to $10,468,109 for the same reason.

Amortization and depreciation expense for the six months ended June 30, 2023, was $1,799,662 compared to $1,901,943 for the six months ended June 30, 2022, a decrease of $102,943 or 5.4% due to fully depreciating certain assets in the prior year. We record amortization expense on our merchant portfolio, trademarks and natural gas purchase rights. Depreciation expense for our cryptocurrency mining segment was $1,599,433 in the current period compared to $1,594,250 in the prior period, an increase of $5,183 or 0.3%, thus fairly consistent between periods.

Salary and wage expense for the six months ended June 30, 2023 was $1,382,832 compared to $1,156,773 for the six months ended June 30, 2022 an increase of $226,059 or 19.5%. Salary and wage expenses have increased due to an increase in salary and bonuses paid to our officers during the 2023 period.

Professional fees for the six months ended June 30, 2023 were $589,126 compared to $619,154 for the six months ended June 30, 2022, a decrease of $30,028 or 4.9%. Professional fees consist mainly of audit and legal fees and the decrease was due to less litigation-related legal expenses during the 2023 period.

General and administrative expenses (“G&A”) for the six months ended June 30, 2023 was $2,161,309 compared to $2,243,225 for the six months ended June 30, 2022, a decrease of $81,916 or 3.7%. Some of our larger G&A expenses included insurance policy expense of $216,000 as a result of the cost to insure the cryptocurrency mining machines and the increase in the size of the Company’s business, travel of $160,000 from $179,000 in the same period of 2022, marketing and promotion of $58,000 from $183,000 in the same period of 2022, contracted services of $229,000 from $439,000 in the same period of 2022, utilities of $280,00 from $231,000 in the same period of 2022 and computer and internet expense of $350,000 from $277,000 in the same period of 2022.

For the six months ended June 30, 2023, we had total other expense of $171,078 compared to other income $393,179 for the six months ended June 30, 2022. In the current period we had a loss of $279,242 from the sale of cryptocurrency, an unrealized loss on investment of $6,490, and other income of $114,654, compared to other income of $393,179 for the six months ended June 30, 2022. In the prior period we recognized a gain of $393,158 from the reversal of a liability associated with a prior adverse judgement on appeal.

For the six months ended June 30, 2023, we had $1,725 of net income attributed to the non-controlling interest of Cuentas SDI, LLC, due to the acquisition of 80.01% interest of the entity during the current period.

Our net loss for the six months ended June 30, 2023, after the reduction for minority interest, was $3,203,223 compared to $2,893,550 for the six months ended June 30, 2022. We had an increase in our net loss of $309,673 for the reasons discussed above.

Liquidity and Capital Resources

Changes in Cash Flows

For the six months ended June 30, 2023, we received $1,002,249 of cash from operating activities, which included our net loss of $3,204,948 plus our operating lease expense, net of repayment of $8,444 offset by $3,399,095 for amortization and depreciation expense, $132,788 for stock-based compensation, $279,242 from the loss on sale of cryptocurrency and net changes in operating assets and liabilities of $1,254,516.

For the six months ended June 30, 2023, we used net cash of $157,077 in financing activities as a result of a cash overdraft of $8,050 and payments on a note payable of $149,027 and used $1,995,421 in investing activities as a result of the acquisition of property and equipment of $1,145,421 and the purchase of an 80.01% interest in Cuentas SDI, LLC for $850,000.

Liquidity and Capital Resources

At June 30, 2023, the Company had cash of $133,777 and a working capital deficit of $2,136,160. The Company has approximately $5,371,000 of outstanding liabilities.

The Company has reviewed its projected operating cash flows for the remainder of 2023 and performed an overall analysis of market trends to determine whether or not it has sufficient liquidity to continue as a going concern for a period of at least twelve months from the date of this Quarterly Report. As a result of (a) improving transaction volume trends and positive cash flow in the second quarter, and (b) an increase in revenues created from the purchase of Cuentas SDI, LLC in June 2023, the Company believes it has sufficient liquidity in order to sustain operations for at least the twelve months following the filing of this Quarterly Report.

Critical Accounting Policies

Refer to our Form 10-K for the year ended December 31, 2022, for a full discussion of our critical accounting policies.

Subsequent Events

None.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item.

During the second quarter ended June 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the required time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2023, that have materially or are reasonably likely to materially affect our internal controls over financial reporting.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item.