Business context and reporting period
This is 3PEA International, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The filing describes a prepaid-card program management and processing business operating through the PaySign platform. The request identifies Paysign, Inc.; the filing itself names 3PEA International, Inc.
Financial highlights
| Metric | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2013 |
|---|---|---|
| Revenue | $1.061 million | $4.377 million |
| Gross profit / margin | $323,151 / approximately 30% | $1.248 million / approximately 29% |
| Operating income (loss) | $(77,669) | $257,834 |
| Net income (loss) attributable to 3PEA | $(92,547) | $213,696 |
| Operating cash flow | Not separately presented for the quarter | $(1.218) million |
For the quarter, revenue increased 70% year over year, but gross profit rose only $8,090 as cost of revenues grew sharply. For the nine-month period, revenue declined 6%, while gross profit increased 14%. Nine-month net income fell from $1.669 million in 2012, principally because the prior-year period included a $1.159 million gain on debt extinguishment. No income-tax provision was recorded in either comparative period.
Liquidity, debt and cash flow
At September 30, cash was $498,167, down from $1.873 million at December 31, 2012. Restricted cash of $5.430 million was matched by a $5.430 million customer-card-funding liability and should not be treated as freely available operating cash. Current liabilities were $6.982 million, including $704,400 in notes payable, of which $535,000 was payable to related parties. Stockholders’ deficit was $290,287.
Nine-month operating cash use was $1.218 million, compared with $341,341 provided in the prior-year period. The filing attributes much of the 2013 operating cash use to a $1.477 million reduction in accounts payable and accrued liabilities. Investing activities used $154,046, primarily for PaySign platform development; financing activities used $3,000 for note repayments. Total cash declined by $1.375 million.
Changes, outlook and risks
- Quarterly cost of revenues rose to 69% of revenue from 49% a year earlier. Management cited an approximately $200,000, non-recurring start-up payment to an independent sales organization for a newer card program.
- Quarterly SG&A more than doubled, reflecting expanded program management and call-center capacity and European Union business-development expenses. Nine-month SG&A also included approximately $102,000 of noncash stock-grant expense.
- Management said plasma-donation card programs launched in 2012 were gaining utilization and expected them to contribute more over the next 12–24 months. It expects growth from additional PaySign programs, product diversification and expanded customer services, but provided no quantified guidance.
- Management believed available cash and anticipated revenue would fund operations for the next 12 months. It was pursuing an equity raise, but had no investor commitments and could not specify terms; failure to raise capital could delay expansion. Management also planned to negotiate with remaining creditors.
- Management cautioned that pharmaceutical-card revenue and costs can fluctuate substantially with program timing, duration, loads and marketing activity. The filing also notes the need for additional investment in sales, marketing, technology and support to enter new markets.
- The company reported no legal proceedings, material off-balance-sheet arrangements, or material changes in internal control; disclosure controls were assessed as effective. It stated that interim results are not necessarily indicative of full-year results.
Investor facts to verify
- Whether the 12-month liquidity assessment remains supportable given low unrestricted cash and negative operating cash flow.
- Progress, terms and dilution implications of the proposed equity raise and creditor negotiations.
- Whether the approximately $200,000 start-up expense was non-recurring and whether newer programs can improve gross margins.
- Revenue concentration and program-level variability, particularly exposure to pharmaceutical-card timing and utilization.
- Potential dilution: 3,460,500 warrants were outstanding at September 30, 2013, exercisable at $0.50 per share; weighted-average diluted shares for the nine-month period were 42,393,861.