Business Context and Reporting Period
3PEA International, Inc. (the issuer named in this filing; operating its PaySign® platform) filed this unaudited Form 10-Q for the quarter ended June 30, 2014. The company provides prepaid debit card program management and processing services, including cardholder enrollment, funding, account management, reporting, and customer service. Its programs serve healthcare reimbursement, pharmaceutical assistance, corporate incentives, and rewards. The filing describes plans to expand into additional prepaid-card markets.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | 2014: $1.23 million; 2013: $1.20 million | 2014: $3.64 million; 2013: $3.32 million |
| Gross profit and margin | 2014: $529,892 (43%); 2013: $404,827 (34%) | 2014: $1.01 million (28%); 2013: $924,393 (28%) |
| Operating income (loss) | 2014: $(86,264); 2013: $94,723 | 2014: $(150,681); 2013: $335,503 |
| Net income (loss) attributable to 3PEA | 2014: $(102,424); 2013: $79,839 | 2014: $(182,497); 2013: $306,243 |
| Cash from operating activities | Not provided for the quarter | 2014: $(186,789); 2013: $(896,557) in the cash flow statement |
- Quarterly revenue increased 2.4% year over year; six-month revenue increased 9.8%. Gross margin improved in Q2, while the six-month margin was essentially unchanged.
- Operating costs rose sharply: six-month selling, general and administrative expense increased to $1.09 million from $568,810, and depreciation and amortization increased to $69,572 from $20,080.
- At June 30, cash was $686,880, down from $1.03 million at year-end. Restricted cash was $5.96 million and matched the customer card-funding liability; it should not be viewed as unrestricted liquidity.
- Total assets were $7.70 million and total liabilities $7.76 million. Stockholders’ equity was a deficit of $60,810, versus positive equity of $106,929 at December 31, 2013.
- Current debt included $567,990 owed to related parties and $214,337 of other notes payable. The filing reports no noncurrent portion. Debt includes demand obligations and equipment financing at stated rates of 8%–13.49%.
- Investing activities used $215,117, primarily for platform enhancements; financing activities provided $61,547, including $66,920 of borrowings. Net cash declined by $340,359 during the six months.
Changes, Outlook, and Risks
Management attributed revenue growth to new corporate incentive reward programs. It expected several large-scale, long-term programs for new customers to launch in Q3 2014, and anticipated further PaySign program launches and margin improvement. These are forward-looking expectations, not reported results. Management said June 30 cash and anticipated remainder-of-year revenue would be sufficient to sustain operations for the next 12 months, while also noting that raising capital could accelerate expansion into new markets.
Higher staffing, infrastructure, sales and marketing, and customer-service costs contributed to the shift from prior-year profits to losses. The company also reported investing in platform development and pursuing new markets, which may require additional technology, sales, and regulatory-compliance spending. Liquidity is constrained by low unrestricted cash, operating cash outflow, and debt obligations. Management discussed a modified $501,000 related-party note: $5,000 monthly payments through November 1, 2014; if at least $2 million of financing were raised by then, the note would be repaid in full. Otherwise, the agreement provides for a further $250,000 payment and conversion of $250,000 into shares subject to a 9.9% ownership cap, with the remaining balance converted into a new amortizing note. The filing reports no legal proceedings, defaults on senior securities, or material off-balance-sheet arrangements. Management concluded disclosure controls were effective as of June 30, 2014.
Important Facts for Investors to Verify
- Whether the anticipated Q3 customer-program launches occurred, and their contribution to revenue, gross margin, and cash generation.
- Unrestricted liquidity, cash burn, and the assumptions supporting management’s stated 12-month operating runway; restricted customer funds are matched by a funding liability.
- Status and terms of the related-party note, including payments, any financing condition, potential conversion, and maturity or refinancing obligations.
- Whether elevated operating expenses and platform investment can be supported by recurring program growth, and whether margins improve as management expects.
- Potential future capital needs and dilution: the company issued 100,000 shares for an employee bonus during the six months; 39,036,106 shares were outstanding at June 30.