Business context and reporting period
3PEA International, Inc. (which markets its prepaid-card services under the PaySign brand) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. It provides prepaid card programs and processing services for corporate, consumer, and government customers. At quarter-end, it managed 126 card programs with more than 1.15 million participating cardholders.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $3.20 million | $2.18 million; up 46.7% |
| Gross profit / margin | $1.37 million / 42.7% | $0.89 million / 40.7% |
| Operating income / margin | $337,802 / 10.6% | $51,153 / 2.3% |
| Net income attributable to 3PEA | $369,394; $0.01 per basic and diluted share | $81,940; reported per-share amount $0.00 |
| Operating cash flow | $1.47 million | $331,260 |
| Investing / financing cash flow | $(244,099) / $(152,060) | $(186,646) / $(5,938) |
Revenue growth was attributed primarily to new corporate incentive card products and expansion of existing programs. Cost of revenue was 57% of revenue versus 59% a year earlier. SG&A rose to $814,277 from $713,894, and depreciation and amortization increased to $215,267 from $123,633, mainly due to capitalized platform costs. Other income was $20,096; the company recorded $3,000 of income tax expense.
At March 31, cash was $1.43 million and restricted cash was $11.27 million, compared with $1.63 million and $10.00 million, respectively, at year-end 2016. Restricted cash funds card programs and is matched by a customer card funding liability; it should not be treated as freely available liquidity. Total assets were $15.03 million, total liabilities $12.00 million, and stockholders’ equity $3.03 million. Notes payable were zero at quarter-end, versus $152,060 at December 31, 2016. The remaining $254,900 legal settlement balance was paid in full during the quarter.
Material changes, outlook, and risks
- Operating cash flow improved year over year, but included a $1.27 million increase in customer card funding liabilities. Investing outflows primarily reflected processing-platform enhancement.
- Management said first-quarter card-program revenue is typically seasonal and expected revenue to continue trending upward during the rest of 2017 as the cardholder base grows. No quantified financial guidance was provided.
- Management stated available unrestricted cash, together with anticipated revenues and operating earnings, would be sufficient for the next 12 months. It also said additional capital could support faster expansion into new markets; without it, expansion could be slower.
- Management cited an expected accelerated rollout of new card programs later in the year as a reason for higher SG&A. The filing cautions that interim results may not indicate full-year performance.
- The company reported no material litigation and no material off-balance-sheet arrangements. It said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and cardholder growth continue beyond the seasonally affected first quarter, and whether new programs launch as expected.
- How much operating cash flow is recurring versus attributable to movements in restricted customer funds and other working-capital items.
- The availability of unrestricted liquidity for expansion, given the substantial restricted-cash balance and management’s mention of possible capital raising.
- The filing’s cash-flow statement heading refers to 2016 and 2015 despite presenting 2017 and 2016 columns; management’s discussion also contains a prior-period reference to 2015. Confirm the intended comparative periods against the filed statements.