Business context and reporting period
Filing identity: The supplied filing is the FY 2012 Form 10-K of 3PEA International, Inc., not Paysign, Inc. The filing covers the year ended December 31, 2012; it does not provide standalone fourth-quarter results. 3PEA provided prepaid card program management and processing, with activity in healthcare reimbursement, pharmaceutical assistance and corporate incentives. It cited growth from new card programs and plasma-donation payment solutions.
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $6.700 million | $3.300 million |
| Cost of revenue | $5.305 million | $2.430 million |
| Gross profit | $1.395 million | $0.870 million |
| Gross margin | 20.8% | 26.4% |
| Operating income | $0.575 million | $0.279 million |
| Net income attributable to 3PEA | $1.817 million | $0.215 million |
| Cash provided by operating activities | $2.055 million | $0.226 million |
Revenue increased about 103%. Operating income improved, but gross margin narrowed. FY 2012 net income included a $1.296 million gain on debt extinguishment, so it substantially exceeded operating income. Investing activities used $0.234 million, primarily for platform development and equipment; financing activities used $0.012 million, mainly for note repayments.
At year-end, cash was $1.873 million and restricted cash was $5.051 million; restricted cash was matched by $5.051 million of customer card-funding liabilities. Total current assets were $7.021 million versus current liabilities of $7.971 million. Notes payable declined from $1.944 million to $0.169 million, while related-party notes remained $0.538 million. Stockholders’ deficit improved from $2.911 million to $0.510 million. Management said available cash and expected 2013 revenue should fund operations for the next 12 months.
Changes, outlook, risks and unusual items
- Management attributed revenue growth to new programs and increased processing, program management, development, fulfillment and customer-service fees. Cost of revenue rose faster than revenue, primarily due to processing fees.
- In 2012, debt was converted or settled through equity and warrants, and other debt was forgiven or written off. The resulting extinguishment gain materially boosted reported earnings. The company also issued 3.386 million shares in debt-related transactions.
- Management planned further platform investment, new product launches and an additional bank partnership, with a new platform and integrated IVR/call center anticipated in early 2013. It expected continued revenue growth, but said expansion could be slower without additional capital; it was considering an equity offering and creditor debt-to-equity conversions.
- Key risks include volatile and difficult-to-forecast pharmaceutical card program timing and usage; competition and pricing pressure; dependence on issuing-bank and third-party vendor relationships; regulation and compliance; data security and system disruptions; and the need for capital. The company stated it did not carry business interruption insurance.
- The company reported no material legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2012; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Confirm the issuer identity: the provided document names 3PEA International, Inc., despite the Paysign, Inc. request metadata.
- Reconcile presentation discrepancies: the MD&A gives FY 2012 gross profit as $1.359 million, while the audited statements show $1.395 million; it also gives FY 2011 cost of revenue as $2.403 million, versus $2.430 million in the audited statements.
- Review the quality of FY 2012 earnings and operating cash flow, including the $1.296 million debt-extinguishment gain and working-capital movements.
- Confirm the terms and status of remaining debt, especially $0.538 million of related-party notes described as due on demand, and management’s liquidity assumptions.
- Check potential dilution and equity accounting: the filing describes a five-year vesting grant of 5 million shares to officers and directors and also contains conflicting statements about whether warrants were outstanding at year-end.