Paysign, Inc. (3PEA International, Inc.) — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017, compared with the same 2016 periods. The filing identifies the registrant as 3PEA International, Inc., which markets prepaid card services under the PaySign brand.
Business context
The company provides prepaid card programs and processing services for corporate, consumer, and government customers. It reported managing 175 card programs with more than 1.39 million participating cardholders at September 30, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4.00 million | $2.81 million | $10.62 million | $7.37 million |
| Gross profit | $1.86 million | $1.29 million | $4.79 million | $3.31 million |
| Gross margin | 46% | 46% | 45% | 45% |
| Operating income | $476,000 | $480,000 | $1.21 million | $847,000 |
| Net income attributable to 3PEA | $500,000 | $480,000 | $1.25 million | $898,000 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4.13 million | $2.37 million |
Q3 revenue increased approximately 42% year over year, while attributable net income rose approximately 4%. For the nine-month period, revenue increased approximately 44% and attributable net income approximately 40%. Q3 operating income was slightly lower year over year as selling, general and administrative costs and depreciation and amortization increased. Operating margin was approximately 11.9% in Q3 2017 versus 17.1% in Q3 2016, and approximately 11.4% for the first nine months of 2017 versus 11.5% in 2016.
Liquidity, cash flow, and debt
- At September 30, 2017, cash was $1.92 million and restricted cash was $12.50 million. Restricted cash funds customer card programs and is matched by a $12.50 million customer card funding liability; it is not available for corporate use.
- For the first nine months, operating activities provided $4.13 million, investing activities used $1.25 million, and financing activities used $102,000. Operating cash flow included a $2.50 million increase in customer card funding.
- Total liabilities were $13.30 million, including customer card funding. Notes payable were zero at quarter-end, compared with $152,000 at December 31, 2016. The prior legal settlement payable was paid in full by March 31, 2017.
- Management said unrestricted cash and anticipated revenues were expected to fund operations for at least the next 12 months.
Changes, outlook, and risks
- Revenue growth reflected new corporate incentive card products and expansion of existing programs. Hurricane-related disruption in Texas and Florida slightly affected Q3 card usage.
- Management expected revenue to continue trending upward and anticipated onboarding more than 35 additional corporate incentive card programs in Q4 2017. It also said expansion into new markets could require additional capital; without raising capital, expansion could be slower.
- Cost of revenue remained about 54% of Q3 revenue and 55% for the nine-month period. Higher Q3 setup and launch costs, increased staffing, and investment in platform development contributed to expenses.
- Cash investment increased, including $649,000 of fixed-asset purchases and $602,000 of intangible-asset purchases during the first nine months. No impairment was recorded for intangible assets.
- The filing reported no material litigation and no reportable subsequent events. The PSKW settlement, originally $2.5 million, was fully paid. Management reported disclosure controls were effective; the filing lists risk factors as not applicable.
- The company was assessing the impact of adopting the new revenue-recognition standard, with adoption anticipated January 1, 2018; it was also assessing the future lease-accounting standard.
Important facts for investors to verify
- Whether the expected Q4 onboarding of more than 35 programs occurred and translated into recurring revenue and card usage.
- How much reported operating cash flow is attributable to customer card funding movements, which are restricted and not available for general corporate needs.
- Whether rising operating expenses and platform investment affect margins, and whether additional capital is needed to support expansion.
- The effects of the upcoming revenue-recognition and lease-accounting standards, which management had not yet quantified.
- Potential dilution: 43,660,765 common shares were outstanding at November 1, 2017, and the filing describes additional restricted-stock awards that vest over time.