Business context and reporting period
The supplied filing is 3PEA International, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed March 30, 2012. It describes a prepaid-card processing and program-management business, with a focus on pharmaceutical assistance and sampling cards. The filing does not identify the registrant as Paysign, Inc.; confirm the issuer and filing before relying on this summary. The period is a full fiscal year, not standalone fourth-quarter results.
Financial results and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $3.30 million | $4.35 million |
| Cost of revenue | $2.43 million | $3.61 million |
| Gross profit / margin | $870,088 / 26% | $739,715 / 17% |
| Operating income | $278,886 | $81,907 |
| Net income (loss) attributable to 3PEA | $215,291 | $(8,292) |
| Operating cash flow | $225,922 | $64,325 |
| Investing cash flow | $(199,310) | $(2,988) |
| Financing cash flow | $(5,000) | $(22,026) |
| Unrestricted cash at year-end | $63,826 | $42,214 |
Revenue declined about 24% year over year, while gross profit increased as cost of revenue fell faster than revenue. The audited statements report total assets of $7.10 million, current liabilities of $10.01 million, and a stockholders’ deficit of $2.91 million at year-end. Restricted cash of $5.51 million corresponds to customer card-funding liabilities; it is not freely available operating cash. Management reported a $2.91 million working-capital deficit after excluding restricted cash and related card-funding liabilities.
Current debt included $1.94 million of notes payable, $538,000 of related-party notes, and a $10,000 convertible note; the filing classifies these as current, with several notes due on demand or past due. Accounts payable and accrued liabilities were $2.00 million, and some vendor balances were past due. The company reported no income-tax provision. No standalone fourth-quarter financial results or separate margin figures are provided.
Changes, outlook, and notable matters
- Management attributed lower revenue to reduced processing of program cards, although reported program-card load transactions increased to approximately 925,000 from 717,000. It said average program size had declined, partly due to economic conditions.
- Management expected revenue to trend upward in the short term and over the longer term, citing new pharmaceutical clients, an improving economy, and expansion into other card markets. It reported completing a new processing-platform certification in Q4 2011 and launching an incentive program for donation centers; eight centers had launched. No quantified revenue or earnings guidance was given.
- The company planned to seek equity financing and ask creditors to convert debt to equity, to fund expansion and address indebtedness. Management said operations could be sustained for the next 12 months only if it did not have to pay material amounts of delinquent payables, accrued interest, or current notes. The auditor expressed substantial doubt about the company’s ability to continue as a going concern; the financial statements contain no adjustments for a possible failure to continue.
- Material risks include limited unrestricted cash, overdue and callable debt, reliance on Monterey County Bank as the card issuer, competitive and volatile pharmaceutical program activity, regulatory and data-security exposure, and dependence on obtaining financing. The bank agreement was due to expire in 2013. The company reported no material legal proceedings and no material off-balance-sheet arrangements.
- The audited statements show 2011 cost of revenue of $2,430,125; the MD&A section gives $2,403,125. The audited figure reconciles to reported gross profit, so the conflicting MD&A amount should be checked.
Investor verification priorities
- Verify the issuer identity: the filing names 3PEA International, Inc., not Paysign, Inc.
- Reconcile the cost-of-revenue discrepancy and confirm the audited financial statements are the controlling source.
- Assess available unrestricted liquidity, the status and maturity of notes, overdue vendor balances, and the terms and feasibility of proposed financing or debt conversions.
- Review the auditor’s going-concern qualification against management’s conditional 12-month liquidity assertion.
- Confirm the status of the Monterey County Bank relationship and the timing, scale, and economics of new programs and market expansion.