Filing summary
Issuer and period: This is 3PEA International, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 12, 2019. The company markets its prepaid card and processing business under the PaySign brand. The supplied filing does not identify the registrant as “Paysign, Inc.”; investors should confirm the issuer identity. The financial results below are for the full fiscal year, not Q4 alone.
Business context
3PEA provides prepaid card programs and processing services for corporate, healthcare, pharmaceutical, plasma-donor, consumer and government applications. It earns fees from card transactions and interchange, program administration, card production and fulfillment, setup and related services. At year-end, it managed 250 programs with more than 2.25 million cardholders. Its cards are issued through bank partners.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $23.42 million | $15.23 million |
| Gross profit | $11.40 million | $6.70 million |
| Gross margin | 49% | 44% |
| Operating income | $2.47 million | $1.77 million |
| Net income attributable to 3PEA | $2.59 million | $1.79 million |
| Basic / diluted EPS | $0.06 / $0.05 | $0.04 / $0.04 |
| Adjusted EBITDA | $4.90 million | $2.97 million |
| Net cash from operations | $16.00 million | $7.15 million |
| Cash and restricted cash at year-end | $31.67 million | $17.16 million |
Revenue rose 54%, primarily from new and expanding corporate incentive programs. Cost of revenue excluding depreciation and amortization was 51% of revenue, down from 56%; management attributed the improvement to interchange margins and client mix. SG&A increased to $7.84 million from $4.06 million, mainly reflecting infrastructure, staffing and stock-based compensation. Operating margin was approximately 10.6%, versus 11.6% in 2017; net margin was approximately 11.1%, versus 11.8%.
Operating cash flow included a $11.54 million increase in customer card funding. Excluding that funding change, management reported operating cash flow of $4.45 million, compared with $2.74 million in 2017. Investing activities used $1.59 million, primarily for platform development and equipment. Financing activities provided $0.10 million from warrant exercises. The balance sheet reported $5.62 million of unrestricted cash and $26.05 million of restricted cash, substantially associated with card programs. Customer card funding liabilities were $25.96 million. Total liabilities were $27.29 million; the balance sheet shows no debt at year-end. Management said available unrestricted cash and expected 2019 operating cash flows would fund operations for at least 12 months.
The filing’s MD&A gives operating cash flow as $15,955,969 in one passage, while the cash flow statement and its summary table report $15,995,969. The filing text does not explain this discrepancy.
Material changes and notable items
- Card loads increased to $621 million from $409 million. Revenue conversion on loaded funds was 3.77% versus 3.75%; gross-profit conversion was 1.84% versus 1.64%; net-profit conversion was 0.42% versus 0.44%.
- Net operating loss carryforwards were used to produce a zero income tax provision in 2018, compared with a $6,000 provision in 2017. The company reported approximately $843,000 of NOL carryforwards remaining at year-end.
- Stock-based compensation was $1.37 million, versus $0.31 million. The company granted substantial restricted stock and options; potentially dilutive shares contributed to the difference between basic and diluted EPS.
- Common stock began trading on Nasdaq in August 2018. The stock’s reported 2018 quarterly high and low closing prices ranged from $0.71 to $4.95.
- The company adopted ASC 606 in 2018 and said adoption did not materially affect its financial condition or results. It expected adoption of the new lease standard in 2019 to have no material impact.
Outlook, risks and contingencies
Management expected 2019 revenue growth to be similar to 2018, with further gross-margin improvement from efficiencies and client mix, and slower SG&A growth supporting higher net margins. It anticipated pharmaceutical programs could contribute significantly to revenue and gross margins beginning in Q1 2019. Planned investments included technology, sales and marketing, customer service and regulatory compliance. PaySign Premier, a debit card linked to a demand deposit account, was expected to be marketed in 2019. These are expectations, not guaranteed results; the filing provides no formal earnings or revenue guidance.
Key risks include intense competition and pricing pressure; dependence on issuing-bank, card-network and third-party vendor relationships; evolving financial, consumer-protection, privacy and healthcare regulations; data breaches, processing errors and service interruptions; and the need to fund expansion. The company stated it did not carry business interruption insurance. It reported no material legal proceedings and no known pending or threatened litigation at year-end. It reported no material off-balance-sheet arrangements and no dividends planned for the foreseeable future.
The independent auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Confirm issuer and security identity: the filing is for 3PEA International, Inc. (ticker TPNL), using the PaySign brand.
- Reconcile the $40,000 inconsistency in reported 2018 operating cash flow and examine cash flow excluding customer card funding.
- Assess the quality and sustainability of 54% revenue growth, the effect of customer/program mix, and management’s 2019 growth and margin expectations.
- Review restricted cash and matching customer funding obligations separately from unrestricted liquidity; verify the company’s ability to maintain bank and network relationships.
- Evaluate stock-based compensation, the substantial unvested awards and potential dilution; compare year-end share counts with the later share count disclosed in the filing.
- Monitor execution and regulatory requirements for pharmaceutical programs and the planned PaySign Premier product, along with cybersecurity and compliance risks.