Business context and reporting period
The filing is a unaudited Form 10-Q for the three months ended March 31, 2013. Although the request metadata names Paysign, Inc., the filing itself identifies the registrant as 3PEA International, Inc.; verify the entity identity. 3PEA provides prepaid debit card program management and processing, with primary markets in healthcare reimbursement, pharmaceutical marketing, and corporate incentives.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $2.111 million | $1.485 million | Up 42.2% |
| Gross profit / margin | $519,566 / 24.6% | $262,787 / 17.7% | Margin up about 6.9 percentage points |
| Operating income / margin | $240,781 / 11.4% | $92,228 / 6.2% | Up 160.9% |
| Net income attributable to 3PEA | $226,405 | $76,390 | Up 196.4% |
| Operating cash flow | $(38,501) | $104,350 | Decreased |
| Investing cash flow | $(61,908) | $(60,845) | — |
Cost of revenues was $1.591 million, or about 75% of revenue, versus $1.222 million, or about 82%, a year earlier. SG&A increased to $268,604 from $153,733, which management primarily attributed to added customer call-center employees. Interest expense was $14,383; no income-tax provision was recorded. Basic and diluted earnings per share were each reported as $0.01 for Q1 2013.
Balance sheet, debt, and liquidity
At March 31, 2013, cash was $1.772 million, down from $1.873 million at year-end. Restricted cash of $4.312 million was matched by a $4.312 million customer card-funding liability; it should not be treated as freely available operating cash. Current assets totaled $6.193 million and current liabilities $6.962 million. Total liabilities were $6.962 million, including $538,000 in related-party notes and $169,400 in notes payable. Stockholders’ deficit was $277,406, improved from $510,304 at December 31, 2012.
Cash declined by $100,409 during the quarter. Investing outflows primarily funded processing-platform enhancements; there were no financing cash flows in Q1 2013. The company reported 38,936,606 common shares outstanding at March 31 and April 30, 2013.
Material changes, outlook, and risks
- Revenue growth was attributed to card programs launched in late 2012 and increased processing, program-management, development, fulfillment, and customer-service fees. Management said it expected revenue to trend upward as additional programs and services were rolled out.
- In early 2013, the company added a bank partner and launched products; it anticipated launching products with another bank partner in the third quarter of 2013.
- Management believed cash on hand and anticipated revenue would support operations for the next 12 months. It also sought equity capital to support market expansion, but reported no broker-dealer agreement or investor commitments. Management said failure to raise capital could slow expansion, but would not jeopardize ongoing operations.
- Management highlighted volatility in pharmaceutical-card revenue and costs, driven by program timing, card distribution, usage, and customer marketing campaigns. Expansion plans also require investment in technology, sales and marketing, and regulatory compliance.
- The filing reports no legal proceedings, material off-balance-sheet arrangements, or defaults upon senior securities. Management concluded disclosure controls were effective and reported no material changes to internal controls during the quarter.
Important facts to verify
- Confirm that this 3PEA International, Inc. filing is the intended filing for Paysign, Inc.
- Reconcile MD&A inconsistencies: it gives prior-year operating income as $148,553 in one passage, while the financial statements report $92,228; its liquidity table labels the comparative period “2011,” although the statements and discussion compare with 2012.
- Reconcile the MD&A’s 2013 investing cash outflow of $62,908 with the cash-flow statement’s $61,908.
- Assess cash available for operations separately from restricted customer-program funds, and evaluate the negative operating cash flow and current-liability position.
- Review dilution exposure: 3,460,500 warrants were outstanding at a $0.50 exercise price, in addition to unissued employee and officer/director stock grants described in the notes.