Business context and reporting period
3PEA International, Inc. (the issuer named in the filing; associated with the Paysign name) filed this unaudited Form 10-Q for the quarter ended March 31, 2014, comparing results with Q1 2013. The company provides prepaid debit card program management and processing through its PaySign platform, serving healthcare reimbursement, pharmaceutical assistance, and corporate incentive programs. It was investing in sales, infrastructure, and platform development while pursuing additional markets.
Key financial results
| Metric | Q1 2014 / March 31, 2014 | Q1 2013 / December 31, 2013 |
|---|---|---|
| Revenue | $2.408 million | $2.111 million |
| Gross profit | $478,408 | $519,566 |
| Gross margin | 19.9% | 24.6% |
| Operating income (loss) | $(64,417) | $240,781 |
| Net income (loss) attributable to 3PEA | $(80,075) | $226,405 |
| Operating cash flow | $939,217 | $(37,501) |
| Investing cash flow | $(132,818) | $(62,908) |
| Financing cash flow | $46,534 | $0 |
| Unrestricted cash | $1,880,172 | $1,027,239 at December 31, 2013 |
Revenue increased 14.1% year over year, attributed primarily to new corporate incentive reward programs. Cost of revenue rose faster, to 80% of revenue from 75%, reducing gross margin. SG&A increased to $508,878 from $268,604 as the company expanded staffing and infrastructure. Depreciation and amortization was $33,947 versus $10,181; interest expense was $15,815 versus $14,383. Basic loss per share was reported as $(0.00); diluted EPS was not applicable in the loss period.
Liquidity, debt, and balance sheet
At March 31, 2014, total assets were $7.989 million, total liabilities $7.963 million, and total stockholders’ equity $26,697. Current liabilities included $2.172 million of accounts payable and accrued liabilities, $5.023 million of customer card funding, $567,990 of related-party notes, and $199,324 of other notes. All reported debt was current; total notes payable were approximately $767,000.
Cash flow from operations was positive, but largely reflected working-capital movements, including a $702,671 increase in accounts payable and accrued liabilities and $187,716 of collections from accounts receivable. Restricted cash of $5.023 million was matched by an equal customer card funding liability and should not be treated as freely available liquidity. Investing outflows primarily funded fixed assets and platform-related intangible assets. The company reported no material off-balance-sheet arrangements.
Changes, outlook, and risks
- Management said it expected revenue to trend upward as new incentive programs launched and product offerings and customer support expanded. It anticipated margin improvement from new programs on the PaySign platform.
- Management believed available cash and anticipated 2014 revenue would be sufficient to sustain operations for the next 12 months. It also said new capital could accelerate expansion; without it, expansion would be slower.
- In March 2014, the company modified a $501,000, 8.5% related-party note. Terms include monthly payments of $5,000 through November 1, 2014. If the company raises at least $2 million in debt or equity by then, the note is due in full. Otherwise, the company agreed to pay a further $250,000, with $250,000 of the amount due convertible into common shares subject to a 9.9% ownership limit; the remaining balance would convert to a new three-year amortizing note. The filing says a $50,000 payment was made at modification and applied to accrued interest.
- The filing identifies risks from uncertainty in estimates and from business, market, regulatory, and financing factors that could cause forward-looking results to differ. It lists no legal proceedings and marks risk factors “not applicable.” Management reported disclosure controls effective as of March 31, 2014 and no material quarterly change in internal controls.
Important facts for investors to verify
- Whether revenue growth from new incentive programs continued and whether gross margins recovered from the Q1 decline.
- The sustainability and composition of operating cash flow, particularly the reliance on higher accounts payable and accrued liabilities; also distinguish restricted customer funds from available cash.
- Progress on the $2 million financing condition and the repayment, conversion, and potential dilution terms of the related-party note.
- Whether management’s 12-month liquidity assessment and expansion plans were achieved, including any additional financing needs.
- The filing identifies the registrant as 3PEA International, Inc.; investors should confirm the applicable issuer identity and relationship to Paysign for the period.