Business context and reporting period
The filing is a Form 10-Q for the quarter ended September 30, 2012, filed November 13, 2012. The issuer named in the filing is 3PEA International, Inc., a prepaid-card program management and processing company. The request identifies Paysign, Inc.; the filing text does not explain that name discrepancy.
The company served healthcare reimbursement, pharmaceutical assistance, and corporate incentive programs, and described expansion into payroll, reloadable, travel, and expense-reimbursement cards. Pharmaceutical marketing cards remained its largest revenue source.
Financial performance and position
| Metric | Three months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2012 | Prior-year comparable period |
|---|---|---|---|
| Revenue | $622,368 | $4,655,964 | $278,009 quarterly; $1,880,610 nine-month |
| Gross profit / margin | $315,061 / approximately 51% | $1,093,588 / approximately 23% | $187,959 / approximately 68% quarterly; $607,399 / approximately 32% nine-month |
| Operating income | $107,858 | $560,383 | $47,750 quarterly; $151,483 nine-month |
| Net income attributable to 3PEA | $112,191 | $1,669,152 | $31,767 quarterly; $103,943 nine-month |
| Operating cash flow | Not stated for the quarter | $341,341 | $169,058 nine-month |
- Nine-month revenue rose approximately 148% year over year; quarterly revenue rose approximately 124%. Nine-month cost of revenue increased to $3,562,376 from $1,273,211, and gross margin narrowed to approximately 23% from 32%.
- Nine-month net income included a $1,159,432 gain on debt extinguishment; the gain was a major contributor to reported earnings and was not operating revenue. Quarterly net income included a separate $23,377 debt-extinguishment gain.
- Nine-month investing cash outflow was $190,561, primarily for platform-related fixed and intangible assets; financing cash outflow was $11,750. Unrestricted cash increased by $139,030 to $202,856.
- At September 30, total assets were $5,762,693 and total liabilities were $6,436,843; stockholders’ deficit was $674,150. Current assets were $5,352,614 versus current liabilities of $6,436,843. Restricted cash of $4,739,491 was matched by an equal customer card-funding liability and should not be treated as unrestricted liquidity.
- Notes payable, related-party notes, and convertible notes totaled $792,400 at quarter-end, versus $2,491,900 at December 31, 2011. The filing reports that $1,667,750 of debt was converted into shares and warrants; it also reports a debenture write-off.
Material changes, outlook, and risks
- Revenue growth was attributed to increased processing and new plasma-donation incentive programs. Management said pharmaceutical marketing cards would remain the majority of revenue for the next 24 months.
- Management anticipated adding a bank partner to its newest platform and rolling out products with that bank in late 2012. It expected longer-term revenue growth from additional products, but provided no quantified guidance.
- Management believed cash on hand and anticipated revenue would fund operations for the next 12 months. It also sought additional equity capital and further debt conversions; no broker-dealer agreement or investor commitments were in place. Management said a failure to raise capital could delay market expansion.
- Management described substantial variability in pharmaceutical-card revenue and costs due to program timing, card distribution, marketing campaigns, program duration, and card load amounts. Expansion would also require investment in technology, sales and marketing, and regulatory compliance.
- The filing reports no legal proceedings and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material quarterly change in internal controls.
Important facts for investors to verify
- Confirm the relationship between the requested Paysign, Inc. name and the filing’s issuer, 3PEA International, Inc.
- Reconcile the debt-extinguishment amounts: the income statement reports $1,159,432 for the nine months, while the cash-flow adjustment reports $1,142,306; the notes describe a $1,136,055 conversion gain plus a $23,377 write-off gain.
- Assess recurring operating profitability and cash generation excluding the nonrecurring debt gain, and the sustainability of the sharp revenue growth amid lower nine-month gross margin.
- Evaluate liquidity using unrestricted cash and the working-capital deficit, separately from restricted customer card funds; verify whether planned financing or debt conversions occurred.
- Check the filing’s MD&A for inconsistencies: it says nine-month SG&A decreased, although reported expense rose from $421,790 to $488,676, and some margin descriptions refer to fiscal years rather than the periods presented.