Business context and reporting period
This is 3PEA International, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2016; the company markets prepaid card and processing services under the PaySign brand. The filing issuer is 3PEA International, Inc., not Paysign, Inc. It covers the three and nine months ended September 30, 2016, compared with the same 2015 periods.
Financial performance and position
Third quarter
- Revenue was $2.81 million, up $779,000 (38%) year over year, primarily from plasma donor compensation programs.
- Gross profit was $1.42 million; gross margin was approximately 51%, versus 54% in Q3 2015. Cost of revenue rose to $1.39 million from $929,000.
- Operating income was $480,000, versus an operating loss of $241,000. Net income attributable to 3PEA was $480,000, or $0.01 per basic and diluted share, versus a net loss of $2.61 million, or $0.06 per basic share.
Nine months
- Revenue was $7.37 million, up $1.43 million (24%) year over year. Gross profit was $3.69 million, with gross margin approximately 50%, broadly unchanged from 2015.
- Operating income was $847,000, versus an operating loss of $88,000. Net income attributable to 3PEA was $898,000, or $0.02 per basic and diluted share, compared with a net loss of $2.48 million, or $0.06 per basic share.
- Operating cash flow was $644,000, versus $178,000 in the prior-year period. Investing used $604,000, mainly for platform and other technology development; financing used $97,000. Unrestricted cash declined $56,000 to $1.33 million.
Balance sheet and liquidity
- At September 30, cash was $1.33 million and restricted cash was $8.79 million. Restricted cash was matched by an $8.79 million customer card funding liability and is not equivalent to cash available for general purposes.
- Total notes payable were $192,000, including $154,000 due on demand to a shareholder at 8% interest and equipment financing bearing 12.89%–15.14% interest. The remaining legal settlement payable was $508,000, all current.
- Total assets were $12.22 million and stockholders’ equity was $2.08 million. Current assets of $10.48 million included restricted cash; current liabilities were $10.13 million.
Material changes versus the prior comparable period
Revenue growth was driven mainly by plasma donor compensation programs. Lower selling, general and administrative expenses and higher revenue contributed to the move to operating profitability. The sharp improvement in net income versus 2015 also reflects the prior-year $2.5 million legal settlement expense, recorded in other expense; it did not recur in 2016. For the nine-month period, depreciation and amortization increased to $406,000 from $220,000, while SG&A decreased to $2.43 million from $2.86 million.
Outlook, commentary and risks
- Management expected revenue to continue trending upward over the long term and said cash on hand at September 30 plus anticipated revenue would be sufficient to sustain operations for the next 12 months.
- The company planned to expand products and markets, including payroll, general-purpose reloadable, travel and expense cards. Management said additional capital could support faster diversification and expansion; without new capital, expansion could proceed using internally generated funds but more slowly.
- The company had agreed to a $2.5 million settlement with PSKW, payable in installments over 18 months with 3% interest. The action was dismissed with prejudice, with the court retaining jurisdiction to enforce the agreement. The filing reported no other material litigation and no material off-balance-sheet arrangements.
- Management described forward-looking statements as subject to uncertainties and factors outside its control. It reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. The filing stated that risk factors were not applicable in this report.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for 3PEA International, Inc., which uses the PaySign brand.
- Assess how much revenue growth and future performance depend on plasma donor compensation programs and whether gross margins can be sustained.
- Distinguish restricted card-program cash from unrestricted liquidity, and monitor settlement payments and high-interest borrowing.
- Evaluate whether management’s 12-month liquidity expectation and planned expansion remain achievable without raising capital.
- Consider the effect of the prior-year $2.5 million settlement on reported year-over-year earnings comparisons.