Business context and reporting period
This is 3PEA International, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011—not a filing under the Paysign, Inc. name in the request metadata. 3PEA provided payment-processing solutions, principally prepaid stored-value cards for pharmaceutical marketing, with expansion plans into other card markets.
Financial performance and position
- Third quarter: Revenue was $278,009, down 74% from $1,051,612 a year earlier. Gross profit rose to $187,959 from $178,425; gross margin was approximately 68% versus 17%. Operating income was $47,750, compared with $27,967, and net income attributable to 3PEA was $31,767 versus $11,454. Basic earnings per share rounded to $0.00 in both periods.
- Nine months: Revenue was $1,880,610, down 26% from $2,535,427. Gross profit increased to $607,399 from $487,894; gross margin was approximately 32% versus 19%. Operating income was $151,483 versus $8,206, and net income attributable to 3PEA was $103,943 versus a $35,646 loss. Basic earnings per share rounded to $0.00 versus $(0.00).
- Cash flow: Nine-month operating cash flow was $169,058, investing cash use was $159,010, and financing cash use was $5,000, leaving a $5,048 increase in unrestricted cash. Operating cash flow included a $1.58 million reduction in accounts receivable, largely offset by a $1.55 million reduction in accounts payable and accrued liabilities. Investing outlays primarily related to the processing platform.
- Liquidity and debt: At September 30, unrestricted cash was $47,262; restricted cash of $4,366,648 was matched by customer card-funding liabilities and is not freely available for general operations. Current assets were $4,474,570 and current liabilities $7,729,828, a deficit of approximately $3.26 million. Current loans totaled $2,491,900, and accounts payable and accrued liabilities were $871,280, many past due. Stockholders’ deficit was $3,022,130.
- Balance-sheet changes: Compared with December 31, 2010, total assets fell to $4,707,698 from $6,204,413, with accounts receivable declining to $60,660 from $1,644,887. Intangible assets increased to $135,058, including $122,880 of platform development costs.
Material changes, outlook, and risks
- Management attributed lower revenue to the timing and utilization of pharmaceutical card programs. Despite more card-load transactions—247,535 in the quarter versus approximately 192,883, and 628,717 year to date versus approximately 463,942—current-period program cards were not all fully utilized. Program timing and promotional activity can produce significant revenue and cost volatility.
- Management expected near-term revenue to remain flat or trend downward, citing smaller average program sizes amid economic conditions; it expected longer-term growth as conditions improve and additional card products launch. No quantified revenue or earnings guidance was provided.
- 3PEA began upgrading its payment infrastructure and implementing a new payments system. Management expected certification with Visa, Interlink, and Plus networks in the fourth quarter of 2011; the filing provides no outcome of that expected certification.
- Going concern: The filing states that accumulated losses and insufficient operating capital raise substantial doubt about the company’s ability to continue as a going concern. Management was seeking debt renegotiation or conversion to equity and additional equity financing, but had no broker-dealer agreement or investor commitments. Management’s assertion that available cash and anticipated revenue could sustain operations for 12 months was conditional on avoiding material payments of delinquent payables, accrued interest, and current notes—an important qualification to the stated going-concern doubt.
- Management said essential vendors were being paid while some nonessential vendors remained unpaid, and warned that creditor legal action could jeopardize operations. The filing reported no legal proceedings and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Availability of financing, debt conversions, or revised creditor terms, and the maturity and payment status of current debt and past-due payables.
- Unrestricted cash needs and whether operating cash generation can continue without relying on unusually large receivables collections or deferring vendor payments.
- Revenue trends, card utilization, program concentration and timing, and whether the anticipated expansion into new card markets produces material business.
- Completion and network certification of the new payments platform, including actual costs, timing, and commercial impact.
- The company-name discrepancy between the request metadata and this filing: the registrant identified in the 10-Q is 3PEA International, Inc.