Paysign, Inc. (3PEA International, Inc.) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The registrant was 3PEA International, Inc.; PaySign was its prepaid-card brand. The filing was signed August 9, 2018.
Business context
The company provides prepaid card programs and processing services for corporate, consumer, and government customers. Services span cardholder enrollment, processing, funding, account management, card production, reporting, and customer service. Management reported 227 card programs and more than 1.75 million participating cardholders at June 30, 2018.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $5.46 million | $3.42 million | $10.14 million | $6.62 million |
| Gross profit | $2.62 million | $1.56 million | $4.86 million | $2.93 million |
| Gross margin | Approximately 48% | Approximately 46% | Approximately 48% | Approximately 44% |
| Operating income | $0.70 million | $0.40 million | $1.12 million | $0.74 million |
| Net income attributable to 3PEA | $0.73 million | $0.38 million | $1.14 million | $0.75 million |
| Adjusted EBITDA | $1.19 million | $0.70 million | $1.99 million | $1.34 million |
Quarterly revenue increased about 60% year over year and six-month revenue about 53%. Net income attributable to the company rose about 90% for the quarter and 52% for the half-year. The company attributed revenue growth primarily to new corporate incentive programs and expansion within existing programs. Gross margin improved year over year in both periods.
Q2 cost of revenue was $2.84 million, or approximately 52% of revenue, versus $1.86 million, or 54%, a year earlier. Six-month cost of revenue was $5.27 million, or approximately 52% of revenue, versus $3.69 million, or 56%. SG&A rose to $1.67 million for Q2 and $3.25 million for the half-year; management cited added personnel and expansion of sales and marketing. Adjusted EBITDA is a non-GAAP measure; Q2 included $0.21 million and the six-month period $0.35 million of stock-based compensation added back.
Cash, liquidity, and debt
At June 30, 2018, cash available for corporate use was $3.07 million, compared with $2.75 million at year-end 2017. Restricted cash was $18.46 million, matched by an equal customer card funding liability and unavailable for corporate use. Total current assets were $22.78 million and current liabilities $19.15 million; the headline current-asset balance therefore includes restricted customer funds.
For the first six months, operating cash flow was $5.08 million, including a $4.05 million increase in customer card funding. Excluding that funding change, operating cash flow was $1.03 million, compared with $0.67 million a year earlier. Investing activities used $0.71 million, mainly for platform and other capitalized development, versus $0.80 million in 2017. Financing cash flow was zero; the prior-year period included note payments. The cash flow statement reports a $4.37 million increase in cash and restricted cash combined. The company reported no interest expense in 2018 and attributed improved other income partly to termination of notes payable. No debt balance was listed at June 30.
Total assets were $25.49 million, total liabilities $19.15 million, and total stockholders’ equity $6.33 million. The company reported $43.67 million common shares outstanding at June 30 and August 1; the filing also describes unissued restricted-share awards and outstanding options that may affect future dilution.
Outlook, risks, and unusual items
- Management expected revenue to continue trending upward as existing programs grow and new healthcare-payment and corporate-incentive programs are implemented. No quantified revenue or earnings guidance was provided.
- Management believed available unrestricted cash and expected revenue would fund operations for the next 12 months. Acquisitions could require debt or equity financing; availability and terms were uncertain. Management said expansion without new capital remained possible but could be slower.
- The company was devoting additional resources to sales and marketing and developing offerings including payroll, reloadable, travel, and expense-reimbursement cards. These plans entail investment in technology, sales, and regulatory compliance.
- On August 7, 2018, after quarter-end, the company received final approval to list its common stock on the Nasdaq Capital Market.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method and said adoption had no material effect on financial condition or results. It reported no material litigation, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30. Risk Factors were marked “Not applicable.”
Important facts for investors to verify
- Whether growth in card programs and cardholders translates into sustained revenue, margins, and cash generation.
- How much operating cash flow is recurring after excluding customer card funding movements, and that restricted cash remains unavailable for corporate use.
- The effect of rising SG&A, stock-based compensation, restricted-share awards, and options on future profitability and dilution.
- Whether the Nasdaq listing was completed and whether any acquisitions or related financing plans were pursued after the reporting date.
- The sustainability of management’s 12-month liquidity assessment and any material changes in business, regulatory, or financing risks.