Paysign, Inc. (then 3PEA International, Inc.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. The company provides prepaid card programs and payment processing under its PaySign brand.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $4.68 million | $3.20 million; up 46% |
| Gross profit / margin | $2.24 million / 48% | $1.37 million / 43% |
| Operating income / margin | $418,053 / 8.9% | $337,802 / 10.6% |
| Net income attributable to 3PEA | $412,548 | $369,394; up 12% |
| Adjusted EBITDA | $795,987 | $640,162 |
| Cash provided by operating activities | $1.68 million | $1.47 million |
| Cash used in investing activities | $352,533 | $244,099 |
At March 31, cash available for corporate use was $2.17 million. Restricted cash of $16.32 million was matched by customer card funding liabilities and was not available for corporate use. Total current liabilities were $16.86 million, principally that customer funding obligation; the filing reports no notes payable at quarter-end. Stockholders’ equity totaled $5.39 million.
Changes and management commentary
- Revenue growth was attributed primarily to new corporate incentive card products and expansion in existing programs. The company reported 217 managed card programs and more than 1.7 million participating cardholders.
- Cost of revenue rose 33%, slower than revenue growth, and gross margin increased to approximately 48% from 43%. SG&A rose to $1.58 million from $814,277, mainly reflecting expansion in compliance, technology, customer service, operations, and sales and marketing.
- Operating income grew 24%, but operating margin declined to 8.9% from 10.6%. Net income increased more modestly, partly as other income of $20,096 in Q1 2017 became other expense of $7,400 in Q1 2018.
- Reported operating cash flow included a $1.91 million increase in customer card funding. Excluding that change, management said operating activities used $225,389 of cash. Investing outlays were primarily for processing-platform enhancements.
Outlook, risks, and unusual items
- Management expected revenue to continue trending upward through the rest of 2018 as card programs and cardholders grew, while noting that first-quarter results are affected by seasonality.
- Management believed unrestricted cash, together with expected revenue and operating earnings, would fund operations for the next 12 months. It was considering raising capital to diversify into new market verticals; without new capital, expansion could be slower.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method and reported no material impact on financial condition or results.
- Stock-based compensation was $137,401, versus $52,001 in the cash flow statement for Q1 2017. January 2018 restricted-stock awards had not been issued as of quarter-end. Subsequent to quarter-end, two directors received restricted shares and another received options to purchase 1.5 million shares.
- The company reported no material litigation, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2018. The filing’s Risk Factors item was marked “Not applicable”; it also cautioned that forward-looking statements are subject to uncertainty.
Important facts for investors to verify
- Whether revenue and cardholder growth continued after Q1, and the extent of seasonal effects.
- How much operating cash generation is recurring after separating customer card funding movements and working-capital changes.
- Whether higher SG&A and ongoing platform investment translate into sustained operating-margin improvement.
- The availability of unrestricted liquidity for planned expansion and whether the company raises additional capital.
- The potential dilution and future compensation expense associated with outstanding restricted-stock awards and subsequent director equity grants.