Filing summary
Entity and period: The filing is a Form 10-Q for the quarter and six months ended June 30, 2011. The filing identifies the registrant as 3PEA International, Inc.; the request metadata names Paysign, Inc., so the relationship between those names should be verified. 3PEA describes its business as payment processing and stored-value/prepaid card solutions, primarily for pharmaceutical marketing and healthcare-related programs.
Financial performance
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $665,033 | $1,034,951 | $1,602,601 | $1,483,816 |
| Gross profit | $232,859 | $174,690 | $419,441 | $309,468 |
| Gross margin | 35.0% | 16.9% | 26.2% | 20.9% |
| Operating income (loss) | $75,513 | $14,900 | $97,656 | ($19,763) |
| Net income (loss) attributable to 3PEA | $59,642 | $302 | $66,017 | ($47,102) |
| Operating cash flow | Not presented by quarter | $177,789 | $201,920 |
Second-quarter revenue fell about 36% year over year, while gross profit increased; management attributed the revenue decline to program timing and lower processing activity. For the first half, revenue grew about 8% and the company moved from an operating and net loss to profit. Basic earnings per share was reported as $0.00 for the quarter and $0.00 for the first half in 2011.
Financial position and liquidity
- At June 30, 2011, total assets were $3.62 million, including $96,698 of unrestricted cash, $3.27 million of restricted cash, and $45,504 of accounts receivable. Restricted cash is associated with customer card programs and is matched by a $3.27 million customer-card-funding liability.
- Current liabilities were $6.67 million, including $906,458 of accounts payable and accrued liabilities and $2.49 million of current notes and other borrowings. Total stockholders’ deficit was $3.05 million.
- Unrestricted cash increased from $42,214 at December 31, 2010 to $96,698 at June 30, 2011. First-half operating cash flow was $177,789; investing activities used $119,805, primarily for platform development and fixed assets; financing activities used $3,500.
- Management said many payables were past due and that it could meet essential operating expenses from ongoing revenue, but not necessarily material creditor demands. The filing states the company lacked sufficient operating capital to pay all indebtedness then due.
Outlook, risks, and unusual items
- Management expected near-term revenue to remain flat or trend downward, citing smaller average programs amid economic conditions; it expected longer-term growth as the economy improved and new card products were introduced. These are expectations, not quantified guidance.
- The company planned to seek equity financing and negotiate with creditors to restructure or convert debt to equity. It had no broker-dealer agreement or investor commitments, and stated there was no assurance it could raise capital on acceptable terms.
- The filing raises substantial doubt about the company’s ability to continue as a going concern. Continuity depended on additional capital, continued profitable operations, and creditors refraining from legal action or converting debt. The statements include no adjustments for a possible inability to continue as a going concern.
- Revenue and costs can fluctuate substantially with pharmaceutical program launch timing, card distribution, marketing, duration, and usage. Management also noted reliance on pharmaceutical programs and the need for funding to enter other markets.
- No legal proceedings or material off-balance-sheet arrangements were reported. The company reported no material change in internal controls and concluded disclosure controls were adequate. Adoption of new milestone revenue guidance had no reported impact on the six-month results.
Important facts for investors to verify
- Confirm the registrant’s identity and any connection between 3PEA International, Inc. and Paysign, Inc.
- Assess creditor maturity status, past-due payables, and the likelihood and terms of proposed debt conversions or new financing.
- Review unrestricted liquidity separately from restricted customer-program cash, and assess exposure if creditors seek repayment.
- Check the cash-flow presentation: the statements report a $54,484 net increase in cash, while the MD&A table labels $96,698 as the net increase; $96,698 is also the period-end cash balance.
- Evaluate whether first-half profitability and improved margins can persist given program timing variability and management’s near-term flat-to-down revenue outlook.