3PEA International, Inc. (PaySign) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 15, 2015. The registrant is 3PEA International, Inc., which markets its prepaid-card solutions under the PaySign brand.
Business context
The company provides prepaid-card programs, payment processing and program-management services for corporate, consumer and government customers. Its focus includes healthcare reimbursement, pharmaceutical copay assistance, plasma-donor payments and corporate incentives. Management described plans to pursue additional products and markets, including European opportunities.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $1.598 million | $2.408 million; down $809,266 (34%) |
| Gross profit / margin | $553,152 / approximately 35% | $478,408 / approximately 20% |
| Operating expenses | $979,630 | $542,825 |
| Operating loss | $426,478 | $64,417 |
| Net loss attributable to 3PEA | $441,795 | $80,075 |
| Operating cash flow | $(495,079) | $939,217 |
| Investing / financing cash flow | $(389,868) / $(821,356) | $(132,818) / $46,534 |
| Cash, March 31 | $2.181 million unrestricted; $5.346 million restricted | Unrestricted cash was $3.887 million at December 31, 2014 |
| Total liabilities | $6.646 million | $10.178 million at December 31, 2014 |
Cost of revenues fell to $1.045 million from $1.929 million and represented approximately 65% of revenue, versus 80% a year earlier. The restricted cash balance is matched by a $5.346 million customer-card-funding liability and should not be treated as unrestricted liquidity. At quarter-end, current liabilities were $6.646 million and stockholders’ equity was $2.422 million.
Material changes and notable items
- Revenue declined primarily because certain product-life-cycle-related revenue events did not recur; management also cited first-quarter seasonality in plasma-donation card usage.
- Gross profit and gross margin improved despite lower revenue. Management attributed the increase in SG&A, to $907,870 from $508,878, mainly to planned European Union expansion, staffing and technology expenses.
- Operating loss widened by $362,061 year over year. The net loss included an $11,337 gain on debt extinguishment and $16,785 of interest expense.
- The company repaid $700,440 of related-party notes in January 2015; those balances were zero at March 31. Other notes payable were $185,130, all current, including a $150,000 shareholder note bearing 8% interest and payable on demand.
- Cash declined by $1.706 million during the quarter. Investing outflows included $286,669 for an investment and $94,210 for intangible assets; financing outflows included debt repayments.
- Common shares outstanding rose to 36,913,265 from 36,669,106 at year-end, including shares issued for services and accrued liabilities. The filing also describes consultant and adviser share-and-warrant grants, some of which remained unissued or subject to vesting.
Outlook, risks and contingencies
Management expected revenue to trend upward during the rest of 2015, citing newly launched long-term corporate incentive programs and anticipated later-year growth in plasma-donor payments. It also expected margins to continue improving as it pursued corporate incentive programs on the PaySign platform. Management believed unrestricted cash of $2.181 million at March 31 and anticipated revenue would fund operations for the next 12 months. It said additional capital could support faster diversification and expansion; without it, expansion may be slower. The filing cautions that quarterly results are not necessarily indicative of full-year results.
The company reported no material litigation and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no materially affecting changes in internal controls during the quarter. The filing states that risk factors were “not applicable,” while also cautioning that forward-looking results are subject to uncertainties and risks.
Facts for investors to verify
- Whether the expected revenue recovery and plasma-payment growth occurred after Q1, and how much revenue depended on nonrecurring product-life-cycle events.
- Whether unrestricted cash and operating cash generation were sufficient to support the stated 12-month outlook, excluding restricted customer funds.
- The performance and funding needs of the European expansion and newly launched incentive programs, including their effect on SG&A and margins.
- The terms, repayment status and related-party nature of remaining debt, as well as potential dilution from outstanding or unissued shares and warrants.
- The filing is by 3PEA International, Inc.; confirm the entity and reporting-period match if using it for Paysign, Inc. research.