3PEA International, Inc. (PaySign) — Q2 2017 Form 10-Q
Business and period: The filing covers the quarter and six months ended June 30, 2017. 3PEA provides prepaid card programs and processing services through its PaySign platform, serving corporate, consumer and government markets.
Financial highlights
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3.42 million | $2.38 million | $6.62 million | $4.56 million |
| Gross profit / margin | $1.56 million / 46% | $1.13 million / 48% | $2.93 million / 44% | $2.02 million / 44% |
| Operating income | $400,000 | $315,000 | $737,000 | $367,000 |
| Net income attributable to 3PEA | $384,000 | $336,000 | $754,000 | $418,000 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $2.31 million | $3.48 million |
- Q2 revenue increased about 44% year over year; six-month revenue increased about 45%. Management attributed growth to new and expanding corporate incentive card programs.
- Q2 gross margin declined to about 46% from 48%; six-month gross margin was approximately 44% in both years. Q2 operating income rose about 27%, and six-month operating income approximately doubled.
- Q2 and six-month diluted earnings per share were $0.01 and $0.02, respectively, versus $0.01 for each comparable 2016 period.
- At June 30, cash was $1.40 million, while restricted cash was $11.64 million and matched by customer card-funding liabilities. Total assets were $15.90 million and stockholders’ equity was $3.58 million.
- No notes payable remained at June 30; the company had paid off its notes during the first half. The $2.5 million legal settlement with PSKW was paid in full by March 31, 2017.
Cash flow, liquidity and capital
For the first half, operating activities provided $2.31 million, investing activities used $799,000 (including $399,000 of fixed-asset purchases and $400,000 of intangible-asset purchases), and financing activities used $102,000. Operating cash flow was lower than the prior-year period, partly reflecting a smaller increase in customer card funding and the settlement payment. The reported $1.41 million increase in cash and restricted cash does not mean unrestricted cash increased: unrestricted cash fell from $1.63 million at year-end to $1.40 million at June 30, while restricted cash rose.
Management said available cash and expected revenue should fund operations for the next 12 months. It also said additional capital could support faster expansion into new markets; without new capital, expansion could proceed using internally generated funds but would be slower.
Outlook, risks and other items
- Management expected revenue to continue trending upward and anticipated onboarding more than 60 additional corporate incentive card programs in the second half of 2017. The company managed 139 programs and served over 1.25 million participating cardholders at June 30.
- Hiring ahead of anticipated launches increased selling, general and administrative expense. Higher depreciation and amortization reflected capital spending and capitalized platform costs.
- The company identified investment in technology, sales and marketing, and regulatory compliance as needs for entering new markets. Forward-looking results remain subject to uncertainties; the filing does not quantify these risks.
- Management was assessing the impact of the new revenue-recognition standard and anticipated adoption on January 1, 2018, likely using the modified retrospective method.
- No material litigation was pending or known to be threatened, and no reportable subsequent events were disclosed. Management concluded disclosure controls were effective as of June 30, 2017.
Investor verification checklist
- Whether the expected 60-plus second-half program launches occurred and translated into revenue, margins and cash generation.
- How much reported operating cash flow depends on changes in customer card-funding balances, and the availability of unrestricted cash versus restricted program funds.
- Whether rising operating expenses and platform investment remain proportionate to growth, and whether additional capital is needed for expansion.
- The final transition impact and method for adopting the new revenue-recognition standard.