Business context and reporting period
3PEA International, Inc. (which markets prepaid card solutions under the PaySign brand) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company provides prepaid card programs and processing services, including programs for plasma donor payments, healthcare and pharmaceutical assistance, and corporate incentives.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2.311 million | $1.233 million | $3.910 million | $3.641 million |
| Gross profit | $1.331 million | $0.530 million | $1.884 million | $1.008 million |
| Gross margin | 58% | 43% | 48% | 28% |
| Operating income (loss) | $469,506 | $(86,264) | $43,029 | $(150,681) |
| Net income (loss) attributable to 3PEA | $507,555 | $(102,424) | $65,759 | $(182,497) |
Q2 revenue increased approximately 87%, primarily due to plasma donation program growth. Six-month revenue grew approximately 7%; growth in plasma programs was partly offset by lower pharmaceutical co-pay assistance revenue. The company served 85 plasma centers at June 30, 2015, versus 49 a year earlier. Cost of revenue declined as a share of revenue, while selling, general and administrative expense rose to $1.695 million for the half-year from $1.089 million, mainly due to European Union expansion, staffing, and technology costs.
For the six months, operating cash flow was $190,619, investing cash flow was $(415,736), and financing cash flow was $(844,289), primarily reflecting debt repayments. Cash declined by $1.069 million to $2.818 million. Restricted cash was $4.692 million and matched by a customer card-funding liability. At June 30, total assets were $8.957 million, total liabilities $5.387 million, and stockholders’ equity $3.570 million. Current notes payable totaled $181,597; related-party notes of $700,440 outstanding at year-end were repaid during January 2015.
Outlook, risks, and notable items
- Management expects revenue to trend upward over the long term, with less quarter-to-quarter variation, and expects margins to improve as additional programs are added to the PaySign platform. No specific quantified guidance was provided.
- Management stated that cash on hand and anticipated revenue should fund operations for the next 12 months. It was considering raising capital to diversify into new markets; without additional capital, expansion may be slower.
- During the half-year, the company invested $364,485 in intangible assets, primarily related to platform development, and $51,251 in fixed assets.
- The company issued 5 million shares to settle a previously recorded $680,000 stock payable. Shares outstanding were reported as 41,925,765 at June 30 and 41,975,765 at August 1, 2015.
- Management reported no material litigation, no material off-balance-sheet arrangements, and no material changes to internal control over financial reporting. The filing’s risk-factors section states “Not applicable.”
Important facts for investors to verify
- Reconcile the income statement’s Q2 operating income of $469,506 with MD&A’s stated $465,109, and clarify the presentation of net income attributable to the company versus noncontrolling interest.
- Assess the quality and sustainability of reported operating cash flow, which includes matching changes in restricted cash and customer card-funding liabilities.
- Review the growth and profitability contribution of plasma programs against the decline in pharmaceutical co-pay assistance revenue, and the costs and prospects of European expansion.
- Confirm the effect of the 5 million-share issuance and other equity awards on dilution, and evaluate whether liquidity supports planned expansion as well as the stated 12-month operating outlook.
- Note that the controls evaluation is described as having been performed as of March 31, 2015, although this is a June 30 quarter filing.