Business context and reporting period
This is 3PEA International, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, filed March 26, 2018. The company markets prepaid card programs and processing services under its PaySign brand; it is not identified in the filing as Paysign, Inc. Its revenue comes from card program, processing, transaction, interchange, fulfillment, and administrative fees.
At year-end, the company managed 205 card programs and reported more than 1.56 million participating cardholders, up by 85 programs from year-end 2016. Management said growth was driven primarily by corporate incentive card programs.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $15.23 million | $10.42 million | Up 46% |
| Gross profit / margin | $6.70 million / 44% | $4.54 million / 44% | Gross profit up $2.16 million |
| Operating income | $1.77 million | $1.36 million | Up $409,183 |
| Net income attributable to 3PEA | $1.79 million | $1.40 million | Up $390,342 |
| Basic and diluted EPS | $0.04 | $0.03 | Up $0.01 |
| Net cash provided by operating activities | $7.15 million | $4.21 million | Includes customer-card funding movements |
| Cash used in investing activities | $1.52 million | $0.89 million | Primarily platform development and equipment |
| Cash used in financing activities | $102,060 | $137,265 | 2017 included debt repayments |
Cost of revenue was approximately 56% of revenue in both years. SG&A rose to $4.06 million from $2.61 million, and depreciation and amortization increased to $876,191 from $572,320, reflecting investments in staff, infrastructure, and platform enhancements.
Year-end cash was $2.75 million and restricted cash was $14.42 million; the restricted balance was matched by a $14.42 million customer-card-funding liability. Total liabilities were $15.56 million and stockholders’ equity was $4.84 million. Notes payable were fully repaid by year-end; the company reported no material off-balance-sheet arrangements. Management said available cash and expected operating profits would fund operations for the next 12 months.
Material changes versus the prior year
- Revenue increased $4.82 million, principally from new and expanding corporate incentive card products.
- Net income increased by about 28%, while gross margin remained approximately 44%.
- Operating cash flow included a $4.41 million increase in customer-card funding. Excluding that movement, management reported operating cash flow of $2.74 million in 2017 versus $1.27 million in 2016.
- The company spent $1.52 million on investing activities, up from $887,009, including greater fixed-asset purchases and continued platform investment.
- The remaining $254,900 legal-settlement payable was paid in 2017. Notes payable also fell from $152,060 at year-end 2016 to zero.
Outlook, risks, and notable disclosures
- Management expected 2018 revenue growth at a rate similar to 2017, with comparable or better growth rates from existing programs and new products; it also anticipated improved margins. These are forward-looking expectations, not guarantees.
- Planned 2018 spending included technology, sales and marketing, customer service, and regulatory compliance. Management was considering raising capital to accelerate entry into new markets; internally generated funds could support expansion at a slower pace if no capital were raised.
- Key risks include intense competition, dependence on card-issuing banks and third-party vendors, changing payments and consumer-protection rules, cybersecurity and data-privacy incidents, and operational interruptions. The company disclosed that it did not carry business-interruption insurance.
- The company said it had no major customer dependence and no material legal proceedings or threatened litigation at year-end. It described the prepaid-card business as highly regulated and noted possible exposure to fines, licensing restrictions, and healthcare claims-related enforcement.
- Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2017. The auditor did not attest to internal-control effectiveness. The company reported no independent directors and no audit, nominating, or compensation committees, while saying it planned to add independent directors and establish committees.
- The filing reports adoption of the restricted-cash cash-flow standard, with a presentation change but no effect on financial results. Management expected adoption of the new revenue standard in 2018 to have no material impact; lease-accounting effects were still under evaluation.
Important facts for investors to verify
- Confirm the issuer and period: the supplied filing is for 3PEA International, Inc. and fiscal 2017, not a quarterly 10-K for an entity named Paysign, Inc.
- Reconcile cash disclosures: the balance sheet reports cash of $2,748,313, while MD&A cites unrestricted cash of $2,729,062, a difference of $19,251.
- Reconcile the reported 2017 cash-flow figures and comparisons: the cash-flow statement shows 2016 operating cash flow of $4,205,283, while MD&A gives $4,205,280 in one passage.
- Check the income-tax presentation: the 2017 income statement shows a $6,000 tax provision, while the tax note’s reconciliation states an income-tax provision of zero.
- Review the significant customer-funding balances and restricted cash separately from funds available for general corporate use; most reported cash is restricted and matched by a liability.
- Review potential dilution from restricted-stock awards and other share issuance: common shares outstanding increased to 43,670,765, and the filing describes a 5 million-share officer/director grant with vesting over five years.