Paysign, Inc. annual report, FY2016

Business context and reporting period

This is 3PEA International, Inc.’s audited Form 10-K for the fiscal year ended December 31, 2016, filed March 27, 2017. The company markets prepaid-card programs and processing services under the PaySign brand; the filing does not identify the registrant as Paysign, Inc.

Its platform supports corporate incentive and expense, healthcare, pharmaceutical co-pay, plasma-donor and other card programs. At year-end, the company managed 120 card products and reported more than one million participating cardholders. It relies on bank partners to issue its cards.

Financial performance and position

Revenue rose $2.31 million, or about 28.5%, attributed primarily to new and growing corporate incentive programs. SG&A decreased by $0.45 million to $3.29 million, while depreciation and amortization increased to $0.57 million. The filing reports no income-tax provision in either year. Basic and diluted earnings per share were $0.03 in 2016; basic loss per share was $0.06 in 2015.

At December 31, 2016, cash was $1.63 million, versus $1.39 million a year earlier. Restricted cash of $10.00 million was matched by an equal customer-card-funding liability and should not be treated as freely available operating cash. Total assets were $13.87 million and total liabilities $11.25 million. Notes payable totaled $152,060 at year-end; the company disclosed that it paid the remaining balance after year-end. It also paid the remaining $254,900 legal-settlement liability after year-end.

Material changes versus the prior period

• The company moved from a small operating loss and a $2.41 million parent-attributable net loss in 2015 to operating income of $1.36 million and parent-attributable net income of $1.40 million in 2016.
• The 2015 results included a $2.50 million legal-settlement expense. The settlement arose from a dispute over alleged marketing fees; the company denied liability and settled the action. The improvement in 2016 other expense largely reflects the absence of that charge.
• Operating cash flow turned positive, and unrestricted cash increased by $242,449. Investing outflows remained substantial, principally for platform development and equipment.
• Common shares outstanding increased from 42.51 million to 43.19 million. A five-million-share grant to officers and directors was disclosed as vesting over five years; verify issuance and vesting details, as the filing’s equity disclosures describe timing and share status in different ways.

Outlook, risks and other notable disclosures

Management expected accelerated revenue growth in 2017 from existing programs and anticipated new products, and expected gross margins to remain near 50%. It stated that available cash and anticipated 2017 revenues and operating profits should fund operations for the next 12 months. These are expectations, not reported results or formal quantified guidance. Management noted that expansion could be slower without additional capital.

Principal risks include intense competition and pricing pressure; dependence on issuing-bank relationships, card networks and third-party vendors; evolving financial, consumer-protection, privacy and healthcare regulation; cybersecurity incidents and processing disruptions; and the need to fund growth and retain key personnel. The company disclosed that it did not carry business-interruption insurance. It reported no material legal proceedings at the filing date and no material off-balance-sheet arrangements.

The auditor issued an unqualified opinion on the financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not attest to internal-control effectiveness. The company had no independent directors or audit committee and no audit committee financial expert. Management also said it was using tax filings that apply prior subsidiary losses against current profits; it considered an IRS challenge unlikely, but the filing notes that a challenge could affect earnings.

Important facts for investors to verify

• Confirm the issuer’s identity and ticker: this filing is for 3PEA International, Inc. (OTCQB/OTC Bulletin Board: TPNL), which uses the PaySign brand.
• Reconcile the filing’s net-income figures: the income statement shows $1.30 million before noncontrolling interest and $1.40 million attributable to 3PEA; confirm which measure is used in comparisons.
• Assess how much of reported cash is operationally available, excluding restricted customer funds, and confirm the disclosed post-year-end debt and settlement payments.
• Track whether expected 2017 growth materialized, whether margins held near 50%, and whether expansion required additional financing.
• Review dilution and share-grant disclosures, including vesting, issuance, warrants and the effect on the reported share count.
• Evaluate bank-partner and third-party concentration, compliance and cybersecurity exposure, and the tax treatment of prior losses.