Business context and reporting period
This is 3PEA International, Inc.’s audited Form 10-K for the fiscal year ended December 31, 2014—not a quarterly report. The company marketed prepaid card programs and processing services under its PaySign brand. The filing identifies the issuer as 3PEA International, Inc.; investors should verify the relationship to the “Paysign, Inc.” company named in the request.
Programs included corporate incentives, healthcare and pharmaceutical copay assistance, and source-plasma donor payments. Revenue comes from program, processing, transaction, interchange, card fulfillment, and administration fees. The company reported 78 plasma-related programs or centers at year-end, compared with 46 a year earlier.
Financial results and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $10.29 million | $6.31 million |
| Gross profit / margin | $5.64 million / 54.8% | $2.20 million / 35.0% |
| Operating income | $2.75 million | $0.67 million |
| Net income attributable to 3PEA | $2.61 million | $0.61 million |
| Operating cash flow | $3.08 million | $(0.62) million |
| Capital investment cash outflow | $(0.53) million | $(0.24) million |
Revenue increased 63% year over year, primarily from corporate incentive programs, including healthcare reimbursement, copay assistance, and plasma donor payments. Gross margin improved to approximately 55% from 35%. Net margin was approximately 25% in 2014. Selling, general and administrative expense rose to $2.72 million from $1.48 million, including $600,641 of stock-based expense; operating income nevertheless increased substantially.
At year-end, unrestricted cash was $3.89 million, versus $1.03 million in 2013. Restricted cash of $7.79 million was matched by an equal customer card-funding liability and should not be treated as freely available liquidity. Total current assets were $11.98 million and current liabilities were $10.18 million. Year-end notes payable totaled approximately $1.03 million, in addition to the $7.79 million customer-funding liability and $680,000 of stock payable to related parties. The company reported $2.78 million of total stockholders’ equity, versus $107,000 in 2013.
Management said year-end cash and expected 2015 revenue would be sufficient to fund operations for the next 12 months. The company used $527,912 in investing activities, principally for platform development and equipment, and reported $305,106 of net financing cash inflow.
Material changes and unusual items
- Net cash from operations swung to $3.08 million from a $620,273 outflow in 2013.
- In November 2014, the company retired 2,442,000 shares as part of a debt settlement reported as totaling $666,000 in principal and interest.
- The company accelerated vesting of its 5,000,000-share 2012 officer and director grant through December 31, 2014. The shares were fully vested but had not been issued; the filing records the vested amount as payable. The acceleration contributed to higher noncash compensation expense.
- In January 2015, the company reported repaying several notes totaling approximately $818,000, including related-party borrowings. Investors should verify the remaining debt balance and the cash impact of these repayments.
- Cash increased despite the year-end share retirement and investment spending; the filing attributes the improvement principally to stronger operating cash generation.
Outlook, commentary and risks
Management planned to expand PaySign programs, pursue additional corporate incentive and other prepaid-card products, and target opportunities in the European Union. It expected margins to improve as more programs used the PaySign platform. The company was considering raising capital to accelerate expansion, while stating that internal funds could support slower growth without a new raise. No quantified revenue or earnings guidance was provided.
Key risks include extensive and changing payments, consumer-protection, privacy, healthcare and anti-money-laundering regulation; reliance on issuing banks, card networks and third-party vendors; cybersecurity and service interruptions; competition and pressure on interchange revenue; and volatile, difficult-to-forecast pharmaceutical program activity. The company disclosed that it did not carry business interruption insurance. It also said certain consolidated tax filings using prior subsidiary losses could be challenged by the IRS, although management considered rejection unlikely. No material legal proceedings were reported.
The audit firm gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not provide an internal-control attestation. The company had no audit, compensation or nominating committee and no independent directors at the time described.
Most important facts for investors to verify
- Confirm issuer identity and reporting period: the filing is for 3PEA International, Inc. and the full year ended December 31, 2014.
- Review the audited statements and notes for the quality and repeatability of revenue growth, gross-margin gains, and operating cash flow.
- Reconcile restricted cardholder funds, customer-funding liabilities, stock payable, year-end debt, and the January 2015 debt repayments.
- Assess the implications of 5 million vested but unissued shares, the 2.442 million shares retired in the debt settlement, and outstanding warrants.
- Evaluate concentration of voting control: directors, officers and major holders were reported to beneficially own approximately 71.8% of common stock.
- Track execution of expansion plans, dependence on bank and network partners, compliance costs, and potential security or service disruptions.