3PEA International, Inc. (PaySign) — Q3 2015 Form 10-Q
Business context and period: The filing is for the quarter and nine months ended September 30, 2015. The registrant is 3PEA International, Inc., which markets prepaid card programs and processing services under the PaySign brand. It serves corporate, consumer and government markets.
Financial performance and position
- Third quarter: Revenue was $2.03 million, up 19% from $1.71 million. Gross profit was $1.10 million, with a 54% gross margin versus 37% a year earlier. Operating loss was $241,224, compared with operating income of $47,252. A $2.5 million legal-settlement charge contributed to a net loss attributable to 3PEA of $2.61 million, versus net income of $31,077.
- First nine months: Revenue was $5.94 million, up 11% from $5.35 million. Gross profit was $2.99 million and gross margin was 50%, versus $1.64 million and 31%. Operating loss narrowed to $88,223 from $103,427, but the $2.5 million settlement drove a net loss attributable to 3PEA of $2.48 million, compared with a $151,420 loss in 2014.
- Cash flow: Operating activities provided $178,264; investing used $622,139, primarily for platform enhancements; financing used $847,964, primarily for note repayments. Unrestricted cash declined $1.29 million to $2.60 million. Restricted cash was $7.50 million and was matched by an equal customer-card-funding liability.
- Liquidity and debt: Current assets were $10.29 million and current liabilities $10.05 million, including the restricted-cash/customer-funding pair and $2.0 million of current settlement payable. Notes payable totaled $177,922, all current; related-party notes had been repaid. Total stockholders’ equity was $1.12 million.
Changes, outlook and notable matters
- Plasma donation programs were the principal source of revenue growth; the company serviced 89 plasma centers, versus 75 a year earlier. Growth was partly offset by lower pharmaceutical co-pay assistance revenue.
- Management attributed improved gross margins to new programs, migration of programs to the PaySign platform and plasma-program growth. It expected revenue to trend upward over the long term and margins to improve as more corporate incentive programs were added. No specific numerical guidance was provided.
- SG&A rose to $1.27 million in Q3 and $2.86 million for nine months, reflecting added customer-support, sales, finance and technology staff, as well as planned European Union expansion.
- On October 2, 2015, the company agreed to settle PSKW’s $5.8 million claim for $2.5 million; the full amount was accrued at September 30. The initial $1.0 million was paid in October; the remaining $1.5 million is payable in equal monthly installments over 18 months with 3% interest. The case was dismissed with prejudice, and a wholly owned subsidiary guaranteed payment.
- Management said cash on hand at September 30 and anticipated remaining-2015 revenue would be sufficient for the next 12 months. It also said additional capital could accelerate expansion into new markets; without it, expansion would be slower. The company identified technology investment, sales and marketing costs, and regulatory compliance as needs of expansion.
- Management reported disclosure controls effective as of September 30 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Settlement payment schedule, interest, and impact on cash and future liquidity.
- Whether plasma-program growth and new customer programs sustain revenue and margin improvements, given the decline in pharmaceutical co-pay revenue.
- Actual costs, timing and funding for European and other market expansion; management’s 12-month liquidity assessment.
- Share dilution: common shares outstanding increased to 42.50 million from 36.67 million at year-end, including issuance of 5.0 million shares for a previously recorded $680,000 stock payable.
- Restricted cash is customer-program funding, not freely available operating cash; assess liquidity using unrestricted funds and scheduled obligations.