Business context and reporting period
3PEA International, Inc. (which markets prepaid card programs under the PaySign brand) filed this Form 10-Q for the quarter ended June 30, 2016. The filing describes prepaid card processing and program-management services for corporate, consumer and government customers. The request metadata identifies Paysign, Inc.; the filing itself names 3PEA International, Inc.
Financial performance
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Revenue | $2.376 million; up 2.8% year over year | $4.557 million; up 16.6% |
| Gross profit and margin | $1.257 million; 52.9% (prior-year quarter: $1.331 million; 57.6%) | $2.263 million; 49.7% (prior-year period: $1.884 million; 48.2%) |
| Operating income | $315,467, down from $469,506 | $366,618, up from $43,029 |
| Net income attributable to 3PEA | $335,679, down from $507,555 | $417,618, up from $65,759 |
| Operating cash flow | $185,187 for the six months, versus $190,619 in the prior-year period |
Quarterly cost of revenue rose to 47% of sales from 42%, compressing gross margin. For the first half, cost of revenue was 50% of sales versus 52% a year earlier. No income tax provision was recorded in either comparative period. Basic and diluted earnings per share were $0.01 for the quarter and $0.01 for the first half of 2016.
Liquidity, debt and cash flow
At June 30, 2016, cash was $1.111 million, compared with $1.389 million at December 31, 2015. Restricted cash was $10.356 million, matched by an equal customer-card-funding liability; it should not be viewed as freely available operating cash. Total current assets were $11.853 million and current liabilities were $11.901 million, substantially reflecting those matched restricted-cash balances. Total liabilities were $11.926 million and stockholders’ equity was $1.613 million.
Six-month investing cash use was $403,380, primarily for fixed and intangible assets, including continued processing-platform development. Financing cash use was $59,888; unrestricted cash declined by $278,081 overall. Notes payable totaled $229,437, including a $185,227 unsecured shareholder note bearing 8% interest and due on demand. A remaining $758,427 legal-settlement obligation was current at period-end.
Changes, outlook and notable items
- Management attributed revenue growth primarily to plasma-donor compensation programs. It said revenue was expected to trend upward over the long term, but provided no quantified forecast or formal guidance.
- First-half operating income and net income improved substantially year over year, while second-quarter operating income, gross profit and net income declined despite modest revenue growth.
- The company said available cash and anticipated remaining-2016 revenue should support operations for the next 12 months. It was considering raising capital to expand into new markets; without new capital, management expected expansion could be slower.
- A $2.5 million settlement of PSKW’s claim was agreed in October 2015 and expensed in 2015. The action was dismissed with prejudice; the remaining balance was $758,427 at June 30, 2016. The filing reported no other material litigation then pending or, to management’s knowledge, threatened.
- The company issued 437,500 shares for current and previously accrued services during the first half, valued at $98,810. Shares outstanding were 42,948,265 as of August 1, 2016.
- Management reported disclosure controls as effective and no material changes in internal control over financial reporting during the quarter. The filing’s Risk Factors item was marked “Not applicable.”
Important facts for investors to verify
- Whether growth in plasma-donor programs continues and whether revenue growth translates into improved quarterly margins.
- How restricted customer funds, the demand note to a shareholder and remaining settlement installments affect cash available for operations.
- Whether operating cash generation can fund platform investment and planned market expansion, or whether additional capital will be needed.
- The treatment and timing of the remaining PSKW settlement payments, and the terms of any future financing or share issuance.
- The filing’s quarterly MD&A contains an apparent inconsistency in its prior-year operating-income discussion; the financial statements report $315,467 for Q2 2016 and $469,506 for Q2 2015.