Paysign, Inc. (3PEA International, Inc.) — Q3 2018 Form 10-Q
Business and period: The filing is by 3PEA International, Inc., which markets prepaid card and processing services under the PaySign brand. It covers the quarter and nine months ended September 30, 2018; interim financial statements are unaudited. Revenue is generated across prepaid card program setup, processing, card production, transactions and administration. At quarter-end, the company managed 244 card programs with more than 2 million participating cardholders.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $6.42 million | $4.00 million | $16.56 million | $10.62 million |
| Gross profit | $3.04 million | $1.86 million | $7.91 million | $4.79 million |
| Gross margin | 47% | 46% | 48% | 45% |
| Operating income | $0.76 million | $0.48 million | $1.88 million | $1.21 million |
| Net income attributable to 3PEA | $0.80 million | $0.50 million | $1.95 million | $1.25 million |
| Adjusted EBITDA | $1.49 million | $0.91 million | $3.48 million | $2.26 million |
Q3 revenue increased about 60% year over year and nine-month revenue about 56%. Management attributed growth primarily to new and expanding corporate incentive card programs. SG&A rose to $2.00 million for Q3 and $5.24 million for the nine-month period, mainly reflecting added staffing and expanded sales and marketing. Adjusted EBITDA is a non-GAAP measure that excludes stock-based compensation.
Cash flow, balance sheet and liquidity
- Cash: At September 30, 2018, cash was $4.30 million and restricted cash was $20.44 million. Restricted cash backs customer card funding liabilities in the same amount and is unavailable for corporate use.
- Cash flows, nine months: Operating activities provided $8.65 million, investing activities used $1.18 million, and financing activities provided $0.10 million. The increase in cash and restricted cash was $7.57 million. Excluding the $6.02 million increase in customer card funding, operating cash flow was $2.63 million.
- Liquidity: Current assets were $26.23 million and current liabilities $21.49 million, with much of both totals consisting of matched restricted cash and customer card funding. Management said unrestricted cash and expected remaining-2018 revenue were sufficient to sustain operations for the next 12 months.
- Debt: The balance sheet reported no notes payable or other debt at quarter-end; 2018 nine-month interest expense was zero. The filing does not provide a separate debt maturity schedule.
- Equity: Total stockholders’ equity was $7.64 million, compared with $4.84 million at December 31, 2017. Shares outstanding were 44.10 million at September 30 and 44.10 million as of November 9, 2018.
Changes, outlook and risks
- For the first nine months, gross margin improved to 48% from 45%; SG&A increased about $2.40 million, while operating income rose about $0.67 million and net income attributable to 3PEA rose about $0.69 million.
- Management expected revenue to continue trending upward as existing programs grow and new healthcare and corporate incentive programs are implemented. It planned to introduce a general-spend reloadable prepaid card, initially targeting its existing cardholder base. No numerical guidance was provided.
- The company was pursuing acquisition candidates and stated that an acquisition could require debt or equity financing; favorable terms or financing were not assured. Management said expansion without new capital could continue using internally generated funds, but would be slower.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method and reported no material impact on financial condition or results. It reported no material litigation, no material off-balance-sheet arrangements, and no reportable subsequent events. Management considered disclosure controls effective and reported no material change in internal controls during the quarter.
- Stock-based compensation increased to $0.76 million for the first nine months, compared with $0.24 million a year earlier. The filing also describes significant option and restricted-stock awards; these create compensation expense and potential dilution.
Important facts for investors to verify
- Whether reported program and cardholder growth converts into recurring revenue and sustained margins.
- How much operating cash generation persists excluding changes in customer card funding, which is matched by restricted cash.
- The expected pace and cost of sales, marketing, staffing and platform investment, and their effect on profitability.
- Potential dilution and future compensation expense from outstanding options, restricted stock and other awards.
- Any acquisition plans, financing needs and terms, and whether management’s 12-month liquidity assessment remains valid.