1700 W. Horizon Ridge Parkway, Suite 200, Henderson,
Nevada 89012
Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
x
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
x
No
o
Indicate by check mark if disclosure of delinquent
filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
o
No
x
State the aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter. $4,062,058 based upon a market price of $0.163 per share.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date. 43,185,765 as of March 10, 2017.
List hereunder the following documents if
incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated:
(1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933.
This Annual Report on Form 10-K contains "forward-looking
statements." These forward-looking statements are based on our current expectations, assumptions, estimates and projections
about our business and our industry. Words such as "believe," "anticipate," "expect," "intend,"
"plan," "may," and other similar expressions identify forward-looking statements. In addition, any statements
that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially
from those reflected in the forward- looking statements. You are cautioned not to place undue reliance on these forward-looking
statements, which relate only to events as of the date on which the statements are made. We undertake no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. You should refer to
and carefully review the information in future documents we file with the Securities and Exchange Commission.
PART
I
ITEM 1. BUSINESS.
Overview
We were originally incorporated in Nevada as
G.K.W., Inc. on August 24, 1995. We changed our name to Antek International, Inc. on July 1, 1996. Our common stock was approved
for trading on the OTC Bulletin Board in 1998. We changed our name to Tika Corporation on October 12, 2005. We acquired 3PEA Technologies,
Inc., a payment solutions company, in March 2006, which resulted in 3PEA Technologies, Inc. becoming our wholly owned subsidiary.
We changed our name to Paypad Inc. on March 13, 2006. On October 19, 2006 we changed our name to 3PEA International, Inc. In 2007
we acquired control of Wow Technologies, Inc., a payment solutions company with a proprietary card processing platform, in a share
exchange agreement whereby Wow Technologies, Inc. became our majority-owned subsidiary.
The business of 3PEA Technologies, Inc., both
before and after we acquired it, was the development of a secure payment gateway and hardware device which utilized encryption
technology and secure key exchange to facilitate PIN debit transactions over the internet. We developed proprietary stored value
systems, secure key loading systems, and acted as an encryption service organization injecting keys into its proprietary payment
terminal called the PayPad®. Users could connect the device to their computers and utilize it to make purchases over the internet
without having to provide their credit card and other personal information to the seller. Due to the lack of market acceptance
of this concept, we ultimately determined to shelve the product and reevaluate the technology and markets for potential use in
the future. 3PEA Technologies, Inc. continues to focus on the evaluation of payment terminal software and hardware technology.
We then adapted the payment platform that we developed to support prepaid debit cards, which is our current business.
Business of Issuer
3PEA International, Inc. is a vertically integrated
provider of innovative prepaid card programs and processing services for corporate, consumer and government applications. Our corporate
incentive payment solutions are utilized by our corporate customers as a means to increase customer loyalty, reduce administration
costs and streamline operations. Public sector organizations can utilize the solutions to disburse public benefits or for internal
payments. We market our prepaid debit card solutions under our PaySign
®
brand. As we are a payment processor and
debit card program manager, we derive our revenue from all stages of the debit card lifecycle. We provide a card processing platform
consisting of proprietary systems and innovative software applications based on the unique needs of our programs. We have extended
our processing business capabilities through our proprietary PaySign platform. We design and process prepaid programs that run
on the platform through which our customers can define the services they wish to offer cardholders. Through the PaySign platform,
we provide a variety of services including transaction processing, cardholder enrollment, value loading, cardholder account management,
reporting, and customer service.
The PaySign platform was built on modern cross-platform
architecture and designed to be highly flexible, scalable and customizable. The platform has allowed 3PEA to significantly expand
its operational capabilities by facilitating our entry into new markets within the payments space through its flexibility and ease
of customization. The PaySign platform delivers cost benefits and revenue building opportunities to our partners.
We have developed prepaid card programs for
corporate and incentive rewards including, but not limited to healthcare reimbursement payments, pharmaceutical co-pay assistance,
corporate expense and per diem payments, donor payments for source plasma and automobile dealership incentives. We are expanding
our product offering to include additional corporate incentive products, payroll cards, general purpose re-loadable cards, travel
cards, and loyalty rewards cards for the hospitality industry. Our cards are offered to end users through our relationships with
bank issuers.
We manage all aspects of the debit card lifecycle,
from managing the card design and approval processes with partners and associations, to production, packaging, distribution, and
personalization. We also oversee inventory and security controls, renewals, lost and stolen card management and replacement. We
deploy a fully staffed, in-house customer service department which utilizes bi-lingual customer service agents, Interactive Voice
Response (“IVR”), and two way short message service (“SMS”) messaging.
In 2013, we began business development activities
related to opportunities in the European Union. We have identified opportunities within the prepaid debit card market in the EU
and we continue to pursue such opportunities.
To date, we have issued millions of prepaid
debit cards under programs implemented for several Fortune 500 companies and multinationals, including many top pharmaceutical
manufacturers, universities and social media companies.
Depending on the program selected by the client,
we generate the following types of revenues: setup charges; customized software development fees; data processing and report generation
fees; transaction fees from each transaction by a cardholder; interchange fees; fees from sourcing the debit cards used for the
program; fees related to customer service and administrative fees.
What Are Prepaid Cards?
Prepaid debit cards are issued by a financial
institution and are preloaded with funds and is used like a normal debit card. Prepaid debit cards are generally network branded
(Amex, Discover, MasterCard, Visa) and can be used anywhere the card brand is accepted. Network branded prepaid cards provide consumers,
businesses and governments with the efficiency, security and flexibility of digital payments through a non-credit payment option
and provide the end user security against fraud and theft.
While these cards work like traditional debit/credit
cards and offer many of the same fraud and loss protections, they access funds that have been pre-loaded onto the card by either
the cardholder, another person (as a gift), the government for benefits, employers/corporations for payroll, or by a corporation
for rewards/incentives or health benefits. As a non-credit payment tool, they help users control their budget.
According to The
Federal Reserve Payments
Study 2016
(2016 study), prepaid card payments reached 9.9 billion transactions with a value of $270 billion in 2015 and had
an annual growth rate of 5.6% from 2012 to 2015.
Today, millions of Americans use network branded
prepaid cards for the choice and protection they provide, including the estimated 40 million un-banked or underbanked who would
not otherwise have a way to participate in our card-based economy, parents of college-aged students who want a safe and secure
way to give money without the risk of running up debt, and recipients of government benefits who need an efficient way to receive
their welfare payments, child support payments, SNAP program payments or unemployment payments.
Types of Cards
This increasingly popular financial product
comes in many forms. Here are some examples to understand how they are used.
General Purpose Reloadable (“GPR”):
A type of prepaid card typically purchased by a consumer for his/her personal use to pay for purchases, pay bills and/or access
cash at ATMs. GPR cards may be purchased online and in retail locations from a variety of providers. Funds may be loaded onto the
card by direct deposit of wages or benefits or at retail locations offering prepaid card reload services.
Payroll: A Prepaid Card that is directly or
indirectly established through an employer and to which electronic fund transfers of the cardholder's wages, salary, or other employee
compensation (such as commissions), are made on a recurring basis.
Corporate Incentive Cards: Payment made to
a consumer or potential consumer as an incentive to, or reward for purchasing a product or completing a task, such as completing
a survey or test driving a vehicle. Payments can also be made by a company to an employee or agent as an incentive bonus.
Health Care: Pre-tax Benefit cards linked to
Health Savings Accounts (HSA), Flexible Spending Accounts (FSA) or Healthcare Reimbursement Accounts (HRA); funds can be used to
pay for current or future medical expenses.
Government Disbursement Cards: Prepaid cards
used for the purpose of disbursing government payments such as Social Security payments, disability payments, disaster relief payments,
WIC or Food Stamp disbursements or government payroll.
Gift Cards: A prepaid card that is purchased
by a gift giver to be given to a gift recipient.
Per Diem, Corporate Expense and Business Travel
Cards: A reloadable card that allows businesses, non –profits and government agencies the ability to control employee spending
while reducing administration costs by eliminating the need for traditional expense reports and eliminates the risks and expenses
of handling paper checks and cash.
Our Products and Services
We are a vertically integrated payment processor
and debit card program manager offering innovative payment solutions to corporations, government agencies, universities and other
organizations. Our payment solutions are utilized by our customers as a means to increase customer loyalty, reduce administration
costs and streamline operations. We market our prepaid debit card solutions under our PaySign
®
brand. As we are
a payment processor and debit card program manager, we derive our revenue from all stages of the debit card lifecycle. These revenues
can include fees from program set-up; customization and development; data processing and report generation; card production and
fulfillment; transaction fees derived from card usage; inactivity fees; card replacement fees and program administration fees.
We provide an in-house customer service center which includes live bi-lingual phone operators staffed 24/7 for incoming calls.
We also run in-house Interactive Voice Response and two way SMS messaging platforms. Our cards are offered to end users through
our relationships with bank issuers.
In our early years of operations, we focused
mainly on providing co-pay assistance prepaid cards to the pharmaceutical industry. In 2011, we developed a corporate incentive
prepaid card based payment solution which was initially targeted at the source plasma collection industry. In the last few years,
having built the necessary infrastructure and adding essential staff, we have increased our focus and sales efforts on corporate
incentive and corporate expense card programs. As of December 31, 2016, we had over one million cardholders participating in 120
card products an increase of 29 card products from December 31, 2015.
The PaySign Brand
In order to leverage the capabilities of the
PaySign platform and successfully expand our product offerings, we established the PaySign brand of prepaid cards and prepaid solutions.
The PaySign brand encompasses the entirety of our current and future prepaid product offerings, including but not limited to, corporate
incentives, healthcare related payment solutions for clinical trials, source plasma donations and co-pay assistance, payroll, settlement
payments, corporate expense cards and solutions designed for the public sector. PaySign is a registered trademark of ours in the
United States and other countries.
Corporate Incentives
Our PaySign corporate incentive cards offer
businesses a practical and contemporary way to reward and motivate existing and potential customers, employees, donors and participants
of clinical trials, sales professionals, agents and distributors. The PaySign Card is accepted anywhere Visa is accepted. Key benefits
of our corporate incentive cards are:
Operating and administrative costs associated
with processing traditional paper checks are reduced.
Our clients can promote their brands as the
card can include the corporate sponsor’s logo. The card itself acts as a wallet sized billboard.
Our PaySign platform allows for easy customization
of our corporate incentive card products. For example, our clients can select merchants or merchant categories which dictate where
the card will be accepted. Our clients can receive customized reports, track card usage and attach surveys to the activation process
to gain market intelligence.
Our clients can get rewards and incentives
to the intended recipients in a much quicker manner than traditional methods using our corporate incentive card products.
We develop incentive card programs that our
customers use for a wide variety of applications, including but not limited to: consumer rebates for large purchases or frequent
buyers; trade incentives for third party distributors, new product launches and commission based sales incentives; consumer promotions
such as automobile test drives, purchase incentives, remuneration for time and effort of donating, referral programs, event giveaways
and purchase incentives.
Per Diem/ Corporate Expense Payments
Per Diem, Corporate Expense and Business Travel
Cards: A reloadable prepaid card that allows businesses, non –profits and government agencies the ability to control employee
spending while reducing administration costs by eliminating the need for traditional expense reports. 3PEA is currently focusing
on marketing these card products to major universities and large corporations.
Source Plasma Donor Payments
Plasma derived therapies are lifesaving treatments
used to treat various rare conditions. In order for plasma based therapies to be produced, human plasma must be used in its manufacture.
Human Plasma is the yellow liquid portion of whole blood that can be easily replaced by the body. Plasma makes up approximately
57 percent of whole blood and consists primarily of water and proteins. Source plasma is the plasma collected from volunteer donors
that serves as the raw material for the further manufacture into these lifesaving therapies. Historically, source plasma donation
centers remunerated their donors with cash or checks. In the past several years, plasma donation centers have migrated to a prepaid
card based solution for donor payments.
3PEA offers a comprehensive customized payment
solution for source plasma collection centers under the PaySign brand. The solution consists of the PaySign Prepaid Debit Card,
the PaySign Connect Portal for administrators, and the PaySign Kiosk. The solution offers customized reporting and provides a level
of business analytics previously unavailable. The solution can be utilized either as a stand-alone web based solution or integrated
with existing donor management systems, giving plasma donation centers an increased level of flexibility.
Pharmaceutical Market
Historically, one of the promotional tools
utilized by pharmaceutical companies has been to provide promotional samples to physicians, which then distribute them to patients.
Our card is intended to replace the distribution of physical samples. Our PaySign Co-Pay Assistance Card is an adjudicated promotional
debit card that reimburses or contributes to the prescription drug purchase with promotional funds at retail pharmacies nationwide.
Our prescription solutions provide claims processing
and other administrative services for clients that are conducted online, in real-time, according to client benefit plan designs.
Our solutions present a cost-effective alternative to an in-house pharmacy claims adjudication system by providing real-time financial
incentives for both consumers and payers. Our offerings also allow clients to directly manage more of their pharmacy benefits and
include pharmacy claims adjudication, network and payer administration, client call center service and support, reporting, rebate
management, as well as implementation, training and account management.
PaySign Co-Pay Assistance
The PaySign Co-Pay Assistance Card is a promotional
pharmaceutical copay or discount card which is adjudicated as a primary or secondary insurance card at the retail pharmacy location.
This primary or secondary adjudication determines what funds will be loaded on to the card by applying business rules determined
by the sponsoring company. The loaded funds are then immediately applied to the prescription purchase at the pharmacy as a cost
offset for the patient. The card may be used to defer part or all the cost of the prescription or any co-pay or deductible, or
any combination thereof that the patient would otherwise have to pay under his or her insurance program or out of pocket to purchase
the drug. The PaySign Co-Pay Assistance Card can be offered as either a straight payment voucher card or a debit card or a combination
of the two. A voucher card is adjudicated just like a debit card, but differs from a debit card in that funds are remitted to the
pharmacy on a monthly or bi-monthly basis, unlike a debit card which is funded at the time of purchase. A voucher card is used
in promotional campaigns where it is not feasible to distribute a card with a magnetic strip, such as newspaper or magazine ads
or inserts. Key features and benefits of the PaySign Co-Pay Assistance Card are:
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Tracking and auditing "free samples" is no longer required, as the retail pharmacy network serves as the distribution mechanism for new prescriber promotions.
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The patient's primary insurance pays the standard adjudicated amount for prescription fills that would historically be "free samples," thus turning the distribution of samples into a revenue generator.
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The distribution of cards enables far superior prescriber and patient data collection for the pharmaceutical company through the use of automated questionnaires required to activate the cards.
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The card can be implemented as a secondary insurance card (for private insurance patients), as a traditional voucher card (for Medicare patients), or as both on the same card.
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The marketing programs can be better designed exactly to meet the specifications and needs of the sponsoring pharmaceutical company, as compared to programs involving the distribution of physical samples.
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Because the card operates like a debit card, pharmacy retailers are paid instantly for the adjudicated promotional cost on covered prescription transactions.
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We provide a set of comprehensive, customizable reporting modules to our pharmaceutical clients.
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Buy and Bill
Where PaySign’s standard co-pay assistance
card provides payment for self-administered pharmaceuticals purchased at a pharmacy, PaySign’s Buy and Bill programs are
designed to provide a benefit for patients when purchasing directly from their physician’s office or through an infusion
center for physician administered therapies
.
Other Products
Survey Instant Rewards
We offer a Survey Instant Rewards card program
to organizations interested in gathering survey data, particularly for companies that have difficulty locating and inducing qualified
consumers to provide survey data for market research. The Survey Instant Rewards card program provides a better approach to survey
collection and market research by utilizing financial debit card technology to offer targeted survey respondents immediate financial
rewards for completing market research surveys.
We provide consumer product and service companies
with a simple and powerfully effective turnkey solution for collecting valuable market information about customers, competitors,
and markets. With a Survey Instant Rewards Program, the client mails a survey recipient an unloaded debit card and invites him
or her to take your online or phone based survey. When his survey is complete, the card is automatically loaded with the incentive
reward, which the recipient can immediately redeem at the nearest ATM machine or point of sale location.
Key features and benefits of Survey Instant
Rewards card program are:
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The immediacy of the reward, combined with the tangible nature of the physical debit card in the hand of the recipient, produces a powerful motivator for individuals to answer a few questions.
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The program is ideal for all size survey projects.
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We provide a complete turnkey solution, and an ability to integrate our debit card features into the client's existing survey collection capabilities.
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The programs can be quickly customized and implemented, and the results are immediately available online and in real time.
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The programs are extremely fast and efficient at collecting valuable information, resulting in vastly improved response rates and dramatically lower overall survey collection time than programs that use other common methods of reward, including coupons and mail in rebates.
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Increased survey response rates lower overall survey cost.
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Customer Service Center
In order to provide a full range of services
to our customers, we offer a fully staffed, in-house Customer Service Center which is operational 24 hours a day, 7 days per week
consisting of live bi-lingual phone operators for incoming calls. The PaySign Platform provides Interactive Voice Response (“IVR”),
SMS alerts and two way SMS messaging, allowing cardholders to set alerts and check their balances and history without the assistance
of a live customer service operator. We believe our in-house customer service center provides the highest quality customer service
experience for our clients as training is performed on-site by 3PEA staff, and the center performs customer service solely for
our products and services..
Other Markets
We have identified a variety of other markets
that our debit cards can be used as a reloadable debit card for use by consumers without a traditional bank account.
Technology
Our technology platform employs a standard
enterprise services bus in a service-oriented architecture, configured for 24/7/365 operations. We maintain two secure, interconnected,
environmentally-controlled data centers, with emergency power generation capabilities, and redundant functionalities. We use a
variety of proprietary and licensed standards-based technologies to implement our platforms, including those which provide for
orchestration, interoperability and process control. The platforms also integrate a data infrastructure to support both transaction
processing and data warehousing for operational support and data analytics.
Competition
The markets for financial products and services,
including prepaid debit cards and services related thereto, are intensely competitive. We compete with a variety of companies in
our markets and our competitors vary in size, scope and breadth of products and services offered. Certain segments of the
financial services and healthcare industries tend to be highly fragmented, with numerous companies competing for market share.
Highly fragmented segments currently include financial account processing, customer relationship management solutions, electronic
funds transfer and prepaid solutions. In addition to competition from other companies, we face competition from existing and potential
clients who already have or may develop their own product offerings.
Many of our existing and potential competitors
have longer operating histories, greater financial strength and more recognized brands in the industry. These competitors may be
able to attract customers more easily because of their financial resources and awareness in the market. Our larger competitors
can also devote substantially more resources to business development and may adopt more aggressive pricing policies. To compete
with these companies, we rely primarily on direct marketing strategies including strategic marketing partners.
Sales and Marketing
We primarily market our products and services
through direct marketing by the Company’s sales team. We may, at times, utilize independent contractors who make direct sales
for us and other companies and are paid on a commission basis only.
Markets and Major Customers
We have no major customers and we are not reliant on any program.
We manage multiple programs at any given time. As of December 31, 2016, we managed 120 card programs with over one million participating
cardholders.
Regulations
Introduction
We operate in a highly regulated environment
and are subject to extensive regulation, supervision and examination. Applicable laws and regulations may change, and there is
no assurance that such changes will not adversely affect our business. Regulatory authorities have extensive discretion in
connection with their supervisory and enforcement activities, including but not limited to the imposition of restrictions on the
operation of financial institutions we may work with. Any change in such regulation and oversight, whether in the form of
restrictions on activities, regulatory policy, regulations, or legislation, including but not limited to changes in the regulations
governing banks, could have a material impact on our operations.
Our products and services are generally subject
to federal, state and local laws and regulations, including:
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anti-money laundering laws;
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money transfer and payment instrument licensing regulations;
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privacy and information safeguard laws;
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consumer protection laws; and
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false claims laws and other fraud and abuse restrictions.
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privacy and security standards under HIPAA or other laws
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These laws are often evolving and sometimes
ambiguous or inconsistent, and the extent to which they apply to us or the banks that issue our cards, our clients or our third
party service providers is at times unclear. Any failure to comply with applicable law — either by us or by the card
issuing banks, our client or our third party service providers, over which we have limited legal and practical control —
could result in restrictions on our ability to provide our products and services, as well as the imposition of civil fines and
criminal penalties and the suspension or revocation of a license or registration required to sell our products and services. See
"Risk Factors" for additional discussion regarding the potential impacts of changes in laws and regulations to which
we are subject and failure to comply with existing or future laws and regulations.
We continually monitor and enhance our compliance
program to stay current with the most recent legal and regulatory changes. We also continue to implement policies and programs
and to adapt our business practices and strategies to help us comply with current legal standards, as well as with new and changing
legal requirements affecting particular services or the conduct of our business generally.
Anti-Money Laundering Laws
Our products and services are generally subject
to federal anti-money laundering laws, including the Bank Secrecy Act, as amended by the USA PATRIOT Act, and similar state laws.
On an ongoing basis, these laws require us, among other things, to:
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report large cash transactions and suspicious activity;
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screen transactions against the U.S. government's watch-lists, such as the watch-list maintained by the Office of Foreign Assets Control;
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prevent the processing of transactions to or from certain countries, individuals, nationals and entities;
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identify the dollar amounts loaded or transferred at any one time or over specified periods of time, which requires the aggregation of information over multiple transactions;
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gather and, in certain circumstances, report customer information;
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comply with consumer disclosure requirements;
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register or obtain licenses with state and federal agencies in the United States and seek registration of any retail distributors when necessary.
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Anti-money laundering regulations are constantly
evolving. We continuously monitor our compliance with anti-money laundering regulations and implement policies and procedures to
make our business practices flexible, so we can comply with the most current legal requirements. We cannot predict how these future
regulations might affect us. Complying with future regulation could be expensive or require us to change the way we operate our
business.
Money Transfer and Payment Instrument Licensing
Regulations
We are not currently subject to money transfer
and payment instrument licensing regulations; however, we have plans to introduce products in the future that would be subject
to such regulations. Currently, we believe that 39 U.S. jurisdictions would require us to obtain a license to operate a money
transfer business. As a licensee, we would be subject to certain restrictions and requirements, including reporting, net worth
and surety bonding requirements and requirements for regulatory approval of controlling stockholders, agent locations and consumer
forms and disclosures. We would also be subject to inspection by the regulators in the jurisdictions in which we are licensed,
many of which conduct regular examinations. In addition, we would be required to maintain "permissible investments" in
an amount equivalent to all "outstanding payment obligations."
Escheatment Laws
Unclaimed property laws of every U.S. jurisdiction
require that we track certain information on our card products and services and that, if customer funds are unclaimed at the end
of an applicable statutory abandonment period, the proceeds of the unclaimed property be remitted to the appropriate jurisdiction.
Privacy and Information Safeguard Laws
In the ordinary course of our business, we
or our third party service providers collect certain types of data, which subjects us to certain privacy and information security
laws in the United States, including, for example, the Gramm-Leach-Bliley Act of 1999, or the GLB Act, and other laws or rules
designed to regulate consumer information and mitigate identity theft. We are also subject to privacy laws of various states. These
state and federal laws impose obligations with respect to the collection, processing, storage, disposal, use and disclosure of
personal information, and require that financial institutions have in place policies regarding information privacy and security.
In addition, under federal and certain state financial privacy laws, we must provide notice to consumers of our policies and practices
for sharing nonpublic information with third parties, provide advance notice of any changes to our policies and, with limited exceptions,
give consumers the right to prevent use of their nonpublic personal information and disclosure of it to unaffiliated third parties.
Certain state laws may, in some circumstances, require us to notify affected individuals of security breaches of computer databases
that contain their personal information. These laws may also require us to notify state law enforcement, regulators or consumer
reporting agencies in the event of a data breach, as well as businesses and governmental agencies that own data. In order to comply
with the privacy and information safeguard laws, we have confidentiality/information security standards and procedures in place
for our business activities and with our third-party vendors and service providers. Privacy and information security laws evolve
regularly, requiring us to adjust our compliance program on an ongoing basis and presenting compliance challenges.
Bank Regulations
All of the cards that we service are issued
by a state-chartered bank. Thus, we are subject to the oversight of the regulators for, and certain laws applicable to, these card
issuing banks. These banking laws require us, as a servicer to the banks that issue our cards, among other things, to undertake
compliance actions similar to those described under "– Anti-Money Laundering Laws" above and to comply with
the privacy regulations promulgated under the GLB Act as discussed under "– Privacy and Information Safeguard Laws"
above.
Consumer Protection Laws
Certain products that we anticipate introducing
in the future would be subject to state and federal consumer protection laws, including laws prohibiting unfair and deceptive practices,
regulating electronic fund transfers and protecting consumer nonpublic information. Before we introduce those products, we will
have to develop appropriate procedures for compliance with these consumer protection laws.
Card Associations
In order to provide our products and services,
we, as well as the banks that issue our cards, must be registered with Visa and MasterCard, as well as any other networks that
we desire to use, such as Pulse, NYCE and Star, and, as a result, are subject to card association rules that could subject us to
a variety of fines or penalties that may be levied by the card association or network for certain acts or omissions. The banks
that issue our cards are specifically registered as "members" of the Visa and/or MasterCard card associations. Visa and
MasterCard set the standards with which we and the card issuing banks must comply.
False Claims Laws and Other Fraud and Abuse
Restrictions
We provide claims processing and other transaction
services to pharmaceutical companies that relate to, or directly involve, the reimbursement of pharmaceutical costs covered by
Medicare, Medicaid, other federal healthcare programs and private payers. As a result of these aspects of our business, we may
be subject to, or contractually required to comply with, state and federal laws that govern various aspects of the submission of
healthcare claims for reimbursement and the receipt of payments for healthcare items or services. These laws generally prohibit
an individual or entity from knowingly presenting or causing to be presented claims for payment to Medicare, Medicaid or other
third party payers that are false or fraudulent. False or fraudulent claims include, but are not limited to, billing for services
not rendered, failing to refund known overpayments, misrepresenting actual services rendered in order to obtain higher reimbursement,
improper coding and billing for medically unnecessary goods and services. Many of these laws provide significant civil and criminal
penalties for noncompliance and can be enforced by private individuals through “whistleblower” or qui tam actions.
To avoid liability, providers and their contractors must, among other things, carefully and accurately code, complete and submit
claims for reimbursement.
From time to time, constituents in the healthcare
industry, including us, may be subject to actions under the federal False Claims Act or other fraud and abuse provisions. We cannot
guarantee that state and federal agencies will regard any billing errors we process as inadvertent or will not hold us responsible
for any compliance issues related to claims we handle on behalf of providers and payers. Although we believe our editing processes
are consistent with applicable reimbursement rules and industry practice, a court, enforcement agency or whistleblower could challenge
these practices. We cannot predict the impact of any enforcement actions under the various false claims and fraud and abuse laws
applicable to our operations. Even an unsuccessful challenge of our practices could cause adverse publicity and cause us to incur
significant legal and related costs.
Privacy and Security Standards under HIPAA
or Other Laws.
The Health Insurance Portability and Accountability
Act of 1996 contains privacy regulations and the security regulations that apply to some of our operations. The privacy regulations
extensively regulate the use and disclosure of individually identifiable health information by entities subject to HIPAA. For example,
the privacy regulations permit parties to use and disclose individually identifiable health information for treatment and to process
claims for payment, but other uses and disclosures, such as marketing communications, require written authorization from the individual
or must meet an exception specified under the privacy regulations. The privacy regulations also provide patients with rights related
to understanding and controlling how their health information is used and disclosed. To the extent permitted by the privacy regulations,
ARRA and our contracts with our customers, we may use and disclose individually identifiable health information to perform our
services and for other limited purposes, such as creating de-identified information. Determining whether data has been sufficiently
de-identified to comply with the privacy regulations and our contractual obligations may require complex factual and statistical
analyses and may be subject to interpretation. The security regulations require certain entities to implement and maintain administrative,
physical and technical safeguards to protect the security of individually identifiable health information that is electronically
transmitted or electronically stored. We have implemented and maintain policies and processes to assist us in complying with the
privacy regulations, the security regulations and our contractual obligations. We cannot provide assurance regarding how these
standards will be interpreted, enforced or applied to our operations. If we are unable to properly protect the privacy and security
of health information entrusted to us, we could be subject to substantial penalties, damages and injunctive relief.
In addition to HIPAA, numerous other state
and federal laws govern the collection, dissemination, use, access to and confidentiality of individually identifiable health information
and healthcare provider information. In addition, some states are considering new laws and regulations that further protect the
confidentiality, privacy and security of medical records or other types of medical information. In many cases, these state laws
are not preempted by the HIPAA privacy regulations and may be subject to interpretation by various courts and other governmental
authorities. Further, the U.S. Congress and a number of states have considered or are considering prohibitions or limitations
on the disclosure of medical or other information to individuals or entities located outside of the United States.
Patents and Trademarks
We protect our intellectual property rights
through a combination of trademark, patent, copyright and trade secrets laws.
In order to limit access to and disclosure
of our proprietary information, all of our employees and consultants have signed confidentiality and we enter into nondisclosure
agreements with third parties. We cannot provide assurance that the steps we have taken to protect our intellectual property rights,
however, will deter adequately infringement or misappropriation of those rights. Particularly given the international nature of
the Internet, the rate of growth of the Internet and the ease of registering new domain names, we may not be able to detect unauthorized
use of our intellectual property or take enforcement action.
Employees and Independent Contractors
As of March 1, 2017, we had forty employees
and independent contractors.
We have no collective bargaining agreements
with our employees, and believe all independent contractor and employment agreements relationships are satisfactory. We hire independent
contractors on an as-needed basis, and we may retain additional employees and consultants during the next twelve months, including
additional executive management personnel with substantial experience in development business.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other
information in this registration statement, including our consolidated financial statements and related notes included elsewhere
in this prospectus, before deciding to invest in our common stock. If any of the following risks actually occurs, our business,
financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the
market price of our common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business
Our growth rates may decline in the future.
In fiscal 2016, we experienced growth in our corporate incentives solution business. There can be no assurance that we will be
able to continue our current growth rate in future periods. In the near term, our continued growth depends in significant part
on our ability, among other things, to enter new markets and to continue to attract new clients, and to retain our current clientele.
Our continued growth also depends on our ability to develop and market other prepaid debit card products that can utilize the Paysign
platform.
As the prepaid financial services industry
continues to develop, our competitors may be able to offer products and services that are, or that are perceived to be, substantially
similar to or better than ours. This may force us to compete on the basis of price and to expend significant marketing, product
development and other resources in order to remain competitive. Even if we are successful at increasing our operating revenues
through our various initiatives and strategies, we will experience an inevitable decline in growth rates as our operating revenues
increase to higher levels and we may also experience a decline in margins. If our operating revenue growth rates slow materially
or decline, our business, operating results and financial condition could be adversely affected.
We operate in a highly regulated environment,
and failure by us or business partners to comply with applicable laws and regulations could have an adverse effect on our business,
financial position and results of operations.
We operate in a highly regulated environment,
and failure by us or our business partners to comply with the laws and regulations to which we are subject could negatively impact
our business. We are subject to state money transmission licensing requirements and a wide range of federal and other state laws
and regulations, which are described under "Business – Regulation" above. In particular, our products
and services are subject to an increasingly strict set of legal and regulatory requirements intended to protect consumers and to
help detect and prevent money laundering, terrorist financing and other illicit activities.
Many
of these laws and regulations are evolving, unclear and inconsistent across various jurisdictions, and ensuring compliance with
them is difficult and costly. For example, with increasing frequency, federal and state
regulators
are
holding businesses like ours to higher standards of training, monitoring and compliance, including monitoring for possible violations
of laws by the businesses that participate in our reload network. Failure by us or those businesses to comply with the laws and
regulations to which we are subject could result in fines, penalties or limitations on our ability to conduct our business, or
federal or state actions, any of which could significantly harm our reputation with consumers and other network participants, banks
that issue our cards and regulators, and could materially and adversely affect our business, operating results and financial condition.
Changes in the laws, regulations, credit card association rules
or other industry standards affecting our business may impose costly compliance burdens and negatively impact our business.
There may be changes in the laws, regulations,
card association rules or other industry standards that affect our operating environment in substantial and unpredictable ways.
Changes to statutes, regulations or industry standards, including interpretation and implementation of statutes, regulations or
standards, could increase the cost of doing business or affect the competitive balance. For example, more stringent anti-money
laundering regulations could require the collection and verification of more information from our customers, which could have a
material adverse effect on our operations. Regulation of the payments industry has increased significantly in recent years. A number
of regulations impacting the credit card industry were recently implemented. Additional changes may require us to incur significant
expenses to redevelop our products. Also, failure to comply with laws, rules and regulations or standards to which we are subject,
including with respect to privacy and data use and security, could result in fines, sanctions or other penalties, which could have
a material adverse effect on our financial position and results of operations, as well as damage our reputation.
A data security breach could expose us to
liability and protracted and costly litigation, and could adversely affect our reputation and operating revenues.
We, the banks that issue our cards and our
third party service providers receive, transmit and store confidential customer and other information in connection with our products
and services. The encryption software and the other technologies we and our partners use to provide security for storage, processing
and transmission of confidential customer and other information may not be effective to protect against data security breaches.
The risk of unauthorized circumvention of our security measures has been heightened by advances in computer capabilities and the
increasing sophistication of hackers. The banks that issue our cards, our clients and our third-party processors also may experience
similar security breaches involving the receipt, transmission and storage of our confidential customer and other information. Improper
access to our or these third parties' systems or databases could result in the theft, publication, deletion or modification of
confidential customer and other information.
A data security breach of the systems on which
sensitive cardholder data and account information are stored could lead to fraudulent activity involving our products and services,
reputational damage and claims or regulatory actions against us. If we are sued in connection with any data security breach, we
could be involved in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced to pay
damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our operating
revenues and profitability. We would also likely have to pay (or indemnify the banks that issue our cards for) fines, penalties
and/or other assessments imposed by Visa or MasterCard as a result of any data security breach. Further, a significant data security
breach could lead to additional regulation, which could impose new and costly compliance obligations. In addition, a data security
breach at one of the banks that issue our cards or our third party service providers could result in significant reputational harm
to us and cause the use and acceptance of our cards to decline, either of which could have a significant adverse impact on our
operating revenues and future growth prospects.
The industry in which we compete is highly
competitive, which could adversely affect our operating revenue growth.
We believe that our existing competitors have
longer operating histories, are substantially larger than we are, may already have or could develop substantially greater financial
and other resources than we have, may offer, develop or introduce a wider range of programs and services than we offer or may use
more effective advertising and marketing strategies than we do to achieve broader brand recognition, customer awareness and retail
penetration. We may also face price competition that results in decreases in the purchase and use of our products and services.
To stay competitive, we may have to increase the incentives that we offer to our marketing partners and decrease the prices of
our products and services, which could adversely affect our operating results.
We rely on relationships with card issuing
banks to conduct our business, and our results of operations and financial position could be materially and adversely affected
if we fail to maintain these relationships or we maintain them under new terms that are less favorable to us.
Our relationship with various banks is currently,
and will be for the foreseeable future, a critical component of our ability to conduct our business and to maintain our revenue
and expense structure, because we are currently unable to issue our own cards. If we lose or do not maintain existing banking relationships,
we would incur significant switching and other costs and expenses and we and users of our products and services could be significantly
affected, creating contingent liabilities for us. As a result, the failure to maintain adequate banking relationships could have
a material adverse effect on our business, results of operations and financial condition. Our agreement with the bank that issues
our cards provide for cost and expense allocations between the parties. Changes in the costs and expenses that we have to bear
under these relationships could have a material impact on our operating expenses. In addition, we may be unable to maintain adequate
banking relationships or renew our agreements with the banks that currently issue our cards under terms at least as favorable to
us as those existing before renewal.
We receive important services from third-party
vendors, and replacing them could entail unexpected integration costs.
Some services relating to our business, including
network connectivity and gateway services are outsourced to third-party vendors. All of our vendors could be replaced with competitors
if our vendor terminated our contract or went out of business. However, in some cases replacing a vendor would entail one-time
integration costs to connect our systems to the successor’s systems, and could result in less advantageous contract terms
for the same service, which could adversely affect our profitability.
Changes in credit card association or other
network rules or standards set by Visa and MasterCard, or changes in card association and debit network fees or products or interchange
rates, could adversely affect our business, financial position and results of operations.
We and the banks that issue our cards are subject
to Visa and MasterCard, Pulse, NYCE and Star association rules that could subject us to a variety of fines or penalties that may
be levied by the card associations or networks for acts or omissions by us or businesses that work with us. The termination of
the card association registrations held by us or any of the banks that issue our cards or any changes in card association or other
debit network rules or standards, including interpretation and implementation of existing rules or standards, that increase the
cost of doing business or limit our ability to provide our products and services could have an adverse effect on our business,
operating results and financial condition. In addition, from time to time, card associations increase the organization and/or processing
fees that they charge, which could increase our operating expenses, reduce our profit margin and adversely affect our business,
operating results and financial condition.
For example, a portion of our operating revenues
is derived from interchange fees. The amount of interchange revenues that we earn is highly dependent on the interchange rates
that Visa and MasterCard set and adjust from time to time. Interchange rates for certain products and certain issuing banks declined
significantly as a result of the enactment of the Dodd-Frank Bill. If interchange rates decline further, whether due to actions
by Visa or MasterCard or future legislation or regulation, we would likely need to change our fee structure to compensate for lost
interchange revenues. To the extent we increase the pricing of our products and services, we might find it more difficult to acquire
consumers and to maintain or grow card usage and customer retention. We also might have to discontinue certain products or services.
As a result, our operating revenues, operating results, prospects for future growth and overall business could be materially and
adversely affected.
We may not be able to successfully manage
our intellectual property and may be subject to infringement claims.
In the rapidly developing legal framework,
we rely on a combination of contractual rights and copyright, trademark and trade secret laws to establish and protect our proprietary
technology. Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual
property or may develop software or technology competitive to us. Our competitors may independently develop similar technology,
duplicate our products or services or design around our intellectual property rights. We may have to litigate to enforce and protect
our intellectual property rights, trade secrets and know-how or to determine their scope, validity or enforceability, which is
expensive and could cause a diversion of resources and may not prove successful. The loss of intellectual property protection or
the inability to secure or enforce intellectual property protection could harm our business and ability to compete.
We may also be subject to costly litigation
in the event our products and technology infringe upon another party’s proprietary rights. Third parties may have, or may
eventually be issued, patents that would be infringed by our products or technology. Any of these third parties could make a claim
of infringement against us with respect to our products or technology. We may also be subject to claims by third parties for breach
of copyright, trademark or license usage rights. Any such claims and any resulting litigation could subject us to significant liability
for damages. An adverse determination in any litigation of this type could require us to design around a third party’s patent
or to license alternative technology from another party. In addition, litigation is time consuming and expensive to defend and
could result in the diversion of the time and attention of our management and employees. Any claim from third parties may result
in limitations on our ability to use the intellectual property subject to these claims. As of December 31, 2015, we had not received
any notice or claim of infringement from any party.
Additional equity or debt financing may
be dilutive to existing stockholders or impose terms that are unfavorable to us or our existing stockholders.
We may raise capital in order to provide working
capital for our expansion into other products and services using our payments platform. If we raise additional funds by issuing
equity securities, our stockholders will experience dilution. Debt financing, if available, may involve arrangements that include
covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures
or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other
preferences that are not favorable to us or our current stockholders. If we raise additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies and products or grant unfavorable
license terms.
We depend on key personnel and could be
harmed by the loss of their services because of the limited number of qualified people in our industry.
Because of our small size, we require the continued
service and performance of our management team, sales and technology employees, all of whom we consider to be key employees. Competition
for highly qualified employees in the financial services and healthcare industry is intense. Our success will depend to a significant
degree upon our ability to attract, train, and retain highly skilled directors, officers, management, business, financial, legal,
marketing, sales, and technical personnel and upon the continued contributions of such people. In addition, we may not be able
to retain our current key employees. The loss of the services of one or more of our key personnel and our failure to attract additional
highly qualified personnel could impair our ability to expand our operations and provide service to our customers.
Our future success depends on our ability
to attract, integrate, retain and incentivize key personnel.
Our future success will depend, to a significant
extent, on our ability to attract, integrate, retain and incentivize key personnel, namely our management team and experienced
sales, marketing and program and systems management personnel. We must retain and motivate existing personnel, and we must also
attract, assimilate and motivate additional highly-qualified employees. We may experience difficulty assimilating our newly-hired
personnel, which may adversely affect our business. Competition for qualified management, sales, marketing and program and systems
management personnel can be intense. Competitors have in the past and may in the future attempt to recruit our top management and
employees. If we fail to attract, integrate, retain and incentivize key personnel, our ability to manage and grow our business
could be harmed.
Security and privacy breaches of our electronic
transactions may damage customer relations and inhibit our growth.
Any failures in our security and privacy measures
could have a material adverse effect on our business, financial condition and results of operations. Certain products we offer
require that we store personal information, including birth dates, addresses, bank account numbers, credit card information, social
security numbers and merchant account numbers. If we are unable to protect this information, or if consumers perceive that we are
unable to protect this information, our business and the growth of the electronic commerce market in general could be materially
adversely affected. A security or privacy breach may:
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cause our customers to lose confidence in our services;
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deter consumers from using our services;
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require that we expend significant additional resources related to our information security systems and could result in a disruption of our operations;
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expose us to liability;
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increase expenses related to remediation costs; and
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decrease market acceptance of electronic commerce transactions and prepaid use.
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Although management believes that we have utilized
proven applications designed for premium data security and integrity in electronic transactions, our use of these applications
may be insufficient to address changing market conditions and the security and privacy concerns of existing and potential customers.
The market for electronic commerce services
is evolving and may not continue to develop or grow rapidly enough for us to become profitable.
If the number of electronic commerce transactions
does not continue to grow or if consumers or businesses do not continue as projected to adopt our products and services, it could
have a material adverse effect on our business, financial condition and results of operations. Management believes future growth
in the electronic commerce market will be driven by the cost, ease of use and quality of products and services offered
to consumers and businesses. In order to reach and thereafter maintain our profitability, consumers and businesses must continue
to adopt our products and services.
If we do not respond to rapid technological
change or changes in industry standards, our products and services could become obsolete and we could lose our customers.
If competitors introduce new products and services,
or if new industry standards and practices emerge, our existing product and service offerings, technology and systems may become
obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards,
we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results
of operations. The electronic commerce industry is changing rapidly. To remain competitive, we must continue to enhance and improve
the functionality and features of our products, services and technologies.
Changes in the Bank Secrecy Act and/or the
USA PATRIOT Act could impede our ability to circulate cards that can be easily loaded or issued.
Our current compliance program and screening
process for the distribution and/or sale of prepaid card products is designed to comply with the Bank Secrecy Act (“BSA”)
and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the
“USA PATRIOT Act”). These regulations require financial institutions to obtain and confirm information related to their
respective cardholders. If the BSA and/or the USA PATRIOT Act or subsequent legislation increases the level of scrutiny that we
must apply to our cardholders and customers, it may be costly or impractical for us to continue to profitably issue and load cards
for our customers.
Internal processing errors could result
in our failing to appropriately reflect transactions in customer accounts.
In the event of a system failure that goes
undetected for a substantial period of time, we could allow transactions on blocked accounts, confirm false authorizations, fail
to deduct charges from accounts or fail to detect systematic fraud or abuse. Errors or failures of this nature could adversely
impact our operations, our credibility and our financial standing.
Our business is dependent on the efficient
and uninterrupted operation of computer network systems and data centers.
Our ability to provide reliable service to
our clients and cardholders depends on the efficient and uninterrupted operation of our computer network systems and data centers
as well as those of our third party service providers. Our business involves movement of large sums of money, processing of large
numbers of transactions and management of the data necessary to do both. Our success depends upon the efficient and error-free
handling of the money. We rely on the ability of our employees, systems and processes and those of the banks that issue our cards,
our third party service providers to process and facilitate these transactions in an efficient, uninterrupted and error-free manner.
In the event of a breakdown, a catastrophic
event (such as fire, natural disaster, power loss, telecommunications failure or physical break-in), a security breach or malicious
attack, an improper operation or any other event impacting our systems or processes, or those of our vendors, or an improper action
by our employees, agents or third-party vendors, we could suffer financial loss, loss of customers, regulatory sanctions and damage
to our reputation. The measures we have taken, including the implementation of disaster recovery plans and redundant computer systems,
may not be successful, and we may experience other problems unrelated to system failures. We may also experience software defects,
development delays and installation difficulties, any of which could harm our business and reputation and expose us to potential
liability and increased operating expenses. We currently do not carry business interruption insurance.
Difficult conditions in the economy generally
may materially adversely affect our business and results of operations, and we do not expect these conditions to improve in the
near future.
Our results of operations are materially affected
by conditions in the economy generally. The capital and credit markets have been experiencing extreme volatility and disruption
for more than twelve months at unprecedented levels. Recently, concerns over inflation, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining U.S. real estate market have contributed to increased
volatility and diminished expectations for the economy and consumer spending. These factors in declining business and consumer
confidence and increased unemployment, have precipitated an economic slowdown and national recession. These events and the continuing
market upheavals may have an adverse effect on us because we are dependent upon customer and consumer behavior. Our revenues are
likely to decline in such circumstances. In addition, in the event of extreme and prolonged market events, such as the global credit
crisis, we could incur significant losses.
Factors such as consumer spending, business
investment, the volatility and strength of the capital markets, and inflation all affect the business and economic environment
and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower
family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our prepaid card
products and services could be adversely affected. Adverse changes in the economy could affect our results negatively and could
have a material adverse effect on our business and financial condition. The current mortgage crisis and economic slowdown has also
raised the possibility of future legislative and regulatory actions that could further impact our business. We cannot predict whether
or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations and financial
condition.
The soundness of other institutions and companies could adversely
affect us.
Our ability to engage in loading and purchasing
transactions could be adversely affected by the actions and failure of other institutions and companies, our card issuing banks
and distributors that carry our prepaid card products. As such, we have exposure to many different industries and counterparties.
As a result, defaults by, or even questions or rumors about, one or more of these institutions or companies could lead to losses
or defaults by us or other institutions. Losses related to these defaults or failures could materially and adversely affect our
results of operations.
A prolonged economic downturn could reduce
our customer base and demand for our products.
. Our success significantly depends upon the
growth of demand of our products from a growing customer base and our success at entering new market verticals. If prevailing economic
conditions locally, nationally or internationally are unfavorable, there may be a negative impact on our business. A prolonged
economic downturn would likely contribute to the deterioration of the demand for our products and services, which in turn would
negatively impact our business. A prolonged economic downturn could, therefore, result in losses that could materially and adversely
affect our business.
Risks Related to Our Common Stock
There Is A Limited Market For Our Common Stock.
The trading market for our common stock is
limited. Our common stock is dual listed on the OTCQB and OTC Bulletin Board under the symbol “TPNL” and is not eligible
for trading on any national or regional securities exchange or the NASDAQ National Market. A more active trading market for our
common stock may never develop, or if such a market develops, it may not be sustained.
Our Common Stock is Subject to the "Penny
Stock" Rules of the SEC and the Trading Market in Our Securities is Limited, Which Makes Transactions in Our Stock Cumbersome
and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has
adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a person's account for transactions in penny stocks; and
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the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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In order to approve a person's account for
transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The broker or dealer must also deliver, prior
to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which,
in highlight form:
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sets forth the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally, brokers may be less willing to execute
transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose
of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks
of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and the rights and remedies available to an investor in
cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in penny stocks.
Concentration of ownership among our existing
directors, executive officers and principal stockholders may prevent new investors from influencing significant corporate decisions.
Our current directors, executive officers,
holders of more than 5% of our total shares of common stock outstanding and their respective affiliates will, in the aggregate,
beneficially own approximately 43% of our outstanding common stock. As a result, these stockholders will be able to exercise a
controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant
corporate transactions, and will have significant influence over our management and policies for the foreseeable future. Some of
these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals
and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent
a change in control of our company or otherwise discourage a potential acquirer from attempting to obtain control of our company,
which in turn could reduce the price of our common stock. In addition, these stockholders, some of which have representatives sitting
on our board of directors, could use their voting control to maintain our existing management and directors in office, delay or
prevent changes of control of our company, or support or reject other management and board of director proposals that are subject
to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.
Our stock price could decline due to the
large number of outstanding shares of our common stock eligible for future sale.
We have outstanding 43,185,765 shares of
our common stock, assuming no exercise of outstanding options or warrants. None of the shares are subject to any lock-up
agreements, and all are eligible for sale, subject in some cases to volume and other restrictions imposed by Rule 144. Sales
of substantial amounts of our common stock in the public market, or even the perception that these sales could occur, could
cause the trading price of our common stock to decline. These sales could also make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem appropriate.
We Incur Significant Costs As A Result Of
Operating As A Public Company. We May Not Have Sufficient Personnel For Our Financial Reporting Responsibilities, Which May Result
In The Untimely Close Of Our Books And Record And Delays In The Preparation Of Financial Statements And Related Disclosures.
As a registered public company, we have experienced
an increase in legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”),
as well as new rules subsequently implemented by the SEC, has imposed various requirements on public companies, including requiring
changes in corporate governance practices. Our management and other personnel need to devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and make
some activities more time-consuming and costly.
If we are not able to comply with the requirements
of Sarbanes-Oxley Act, or if we or our independent registered public accounting firm identifies additional deficiencies in our
internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline
and we could be subject to sanctions or investigations by the SEC and other regulatory authorities.
Our operating results may fluctuate in the
future, which could cause our stock price to decline.
Our quarterly and annual results of operations
may fluctuate in the future as a result of a variety of factors, many of which are outside of our control. If our results of operations
fall below the expectations of investors or any securities analysts who follow our common stock, the trading price of our common
stock could decline substantially. Fluctuations in our quarterly or annual results of operations may be due to a number of factors,
including, but not limited to:
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the timing and volume of purchases, use and reloads of our prepaid cards and related products and services;
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the timing and success of new product or service introductions by us or our competitors;
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seasonality in the purchase or use of our products and services;
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reductions in the level of interchange rates that can be charged;
|
|
·
|
fluctuations in customer retention rates;
|
|
·
|
changes in the mix of products and services that we sell;
|
|
·
|
changes in the mix of retail distributors through which we sell our products and services;
|
|
·
|
the timing of commencement, renegotiation or termination of relationships with significant third party service providers;
|
|
·
|
changes in our or our competitors' pricing policies or sales terms;
|
|
·
|
the timing of commencement and termination of major advertising campaigns;
|
|
·
|
the timing of costs related to the development or acquisition of complementary businesses;
|
|
·
|
the timing of costs of any major litigation to which we are a party;
|
|
·
|
the amount and timing of operating costs related to the maintenance and expansion of our business, operations and infrastructure;
|
|
·
|
our ability to control costs, including third-party service provider costs;
|
|
·
|
volatility in the trading price of our common stock, which may lead to higher stock-based compensation expenses or fluctuations in the valuations of vesting equity; and
|
|
·
|
changes in the regulatory environment affecting the banking or electronic payments industries generally or prepaid financial services specifically.
|
The price of our common stock may be volatile,
and you could lose all or part of your investment.
In the recent past, stocks generally, and financial
services company stocks in particular, have experienced high levels of volatility. The trading price of our common stock may fluctuate
substantially. The trading price of our common stock will depend on a number of factors, including those described in this "Risk
Factors" section, many of which are beyond our control and may not be related to our operating performance. These fluctuations
could cause you to lose all or part of your investment in our common stock as you may be unable to sell your shares at or above
the price you paid. Factors that could cause fluctuations in the trading price of our common stock include the following:
|
·
|
price and volume fluctuations in the overall stock market from time to time;
|
|
·
|
significant volatility in the market prices and trading volumes of financial services company stocks;
|
|
·
|
actual or anticipated changes in our results of operations or fluctuations in our operating results;
|
|
·
|
actual or anticipated changes in the expectations of investors or the recommendations of any securities analysts who follow our common stock;
|
|
·
|
actual or anticipated developments in our business or our competitors' businesses or the competitive landscape generally;
|
|
·
|
the public's reaction to our press releases, other public announcements and filings with the SEC;
|
|
·
|
litigation involving us, our industry or both or investigations by regulators into our operations or those of our competitors;
|
|
·
|
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
|
|
·
|
changes in accounting standards, policies, guidelines, interpretations or principles;
|
|
·
|
general economic conditions; and
|
|
·
|
sales of shares of our common stock by us or our stockholders.
|
In the past, many companies that have experienced
volatility in the market price of their stock have become subject to securities class action litigation. We may be the target of
this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's
attention from other business concerns, which could seriously harm our business.
If securities analysts do not publish research
or reports about our business or if they publish negative evaluations of our common stock, the trading price of our common stock
could decline.
We expect that the trading price for our common
stock will be affected by any research or reports that securities analysts publish about us or our business. If one or more of
the analysts who may elect to cover us or our business downgrade their evaluations of our common stock, the price of our common
stock would likely decline. If one or more of these analysts cease coverage of our company, we could lose visibility in the market
for our common stock, which in turn could cause our stock price to decline.
We do not intend to pay dividends for the
foreseeable future.
We have never declared or paid any cash dividends
on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate
paying any cash dividends in the foreseeable future. As a result, you will likely receive a return on your investment in our common
stock only if the market price of our common stock increases.
ITEM 1B. UNRESOLVED STAFF
COMMENTS.
Because we are a smaller reporting company,
we are not required to provide the information called for by this Item.
ITEM 2. PROPERTIES.
We lease approximately 10,000 square feet of
office space at 1700 W Horizon Ridge Parkway, Henderson, Nevada 89012, under a lease of approximately $14,000 per month.
We lease space for our data centers in Las
Vegas, Nevada under co-location agreements that have typical terms of 36 months. The agreements provide for lease payments of approximately
$4,600 per month.
We believe that we have satisfactory title
to the properties owned and used in our business, subject to liens for taxes not yet payable, liens incident to minor encumbrances,
liens for credit arrangements and easements and restrictions that do not materially detract from the value of these properties,
our interests in these properties, or the use of these properties in our business. We believe that our properties are adequate
and suitable for us to conduct business in the future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings at
this time.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
During 2016 and 2015, our common stock was
traded on the OTCQB operated by OTC Markets Group, LLC under the symbol “TPNL”. The company is now fully reporting
and dual listed on the OTCQB and on the OTC Bulletin Board. The following table summarizes the low and high prices for our common
stock for each of the calendar quarters of 2016 and 2015.
|
2016
|
2015
|
|
High
|
Low
|
High
|
Low
|
First Quarter
|
0.27
|
0.16
|
0.69
|
0.23
|
Second Quarter
|
0.25
|
0.15
|
0.95
|
0.36
|
Third Quarter
|
0.21
|
0.15
|
0.47
|
0.33
|
Fourth Quarter
|
0.40
|
0.17
|
0.37
|
0.20
|
There were 363 shareholders of record of the
common stock as of December 31, 2016. This number does not include an indeterminate number of shareholders whose shares are held
by brokers in “street name.”
Our common stock is subject to rules adopted
by the Securities and Exchange Commission ("Commission") regulating broker dealer practices in connection with transactions
in "penny stocks." Those disclosure rules applicable to "penny stocks" require a broker dealer, prior to a
transaction in a "penny stock" not otherwise exempt from the rules, to deliver a standardized disclosure document prepared
by the Commission. That disclosure document advises an investor that investment in "penny stocks" can be very risky and
that the investor's salesperson or broker is not an impartial advisor, but rather paid to sell the shares. The disclosure contains
further warnings for the investor to exercise caution in connection with an investment in "penny stocks," to independently
investigate the security, as well as the salesperson the investor is working with and to understand the risky nature of an investment
in this security. The broker dealer must also provide the customer with certain other information and must make a special written
determination that the "penny stock" is a suitable investment for the purchaser, and receive the purchaser's written
agreement to the transaction. Further, the rules require that, following the proposed transaction, the broker provide the customer
with monthly account statements containing market information about the prices of the securities. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many brokers may be
unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult
for stockholders to dispose of their shares.
Dividend Policy
We have not declared any cash dividends on
our Common Stock during our fiscal years ended on December 31, 2016 or 2015. Our Board of Directors has made no determination to
date to declare cash dividends during the foreseeable future, but is not likely to do so. There are no restrictions on our ability
to pay dividends.
Securities Issued in Unregistered Transactions
During the quarter ending December 31, 2016,
we issued 237,500 shares of common stock to an employee and two members of the Board of Advisors. The shares were issued pursuant
to an exemption from registration provided by Section 4(2) of the Securities Act of 1933.
Issuer Purchases of Equity Securities
During the quarter ending December 31, 2016,
we did not purchase any shares of our common stock.
ITEM 6. SELECTED FINANCIAL
DATA.
Because we are a smaller reporting company,
we are not required to provide the information called for by this Item.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION and RESULTS OF OPERATION.
Disclosure Regarding Forward Looking
Statements
This Annual Report on Form 10-K includes forward
looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (“Forward Looking Statements”). All statements other than statements of historical
fact included in this report are Forward Looking Statements. In the normal course of our business, we, in an effort to help keep
our shareholders and the public informed about our operations, may from time-to-time issue certain statements, either in writing
or orally, that contains or may contain Forward-Looking Statements. Although we believe that the expectations reflected in such
Forward Looking Statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Generally,
these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans
or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions made by or to
be made by us, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating
results. All phases of our operations are subject to a number of uncertainties, risks and other influences, many of which are outside
of our control and any one of which, or a combination of which, could materially affect the results of our proposed operations
and whether Forward Looking Statements made by us ultimately prove to be accurate. Such important factors (“Important Factors”)
and other factors could cause actual results to differ materially from our expectations are disclosed in this report, including
those factors discussed in “Item 1A. Risk Factors.” All prior and subsequent written and oral Forward Looking
Statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Important Factors
described below that could cause actual results to differ materially from our expectations as set forth in any Forward Looking
Statement made by or on behalf of us.
Overview
3PEA International, Inc. is a vertically integrated
provider of innovative prepaid card products and processing services for corporate, consumer and government applications. Our payment
solutions are utilized by our corporate customers as a means to increase customer loyalty, reduce administration costs and streamline
operations. Public sector organizations can utilize the solutions to disburse public benefits or for internal payments. We market
our prepaid debit card solutions under our PaySign brand. As we are a payment processor and debit card program manager, we derive
our revenue from all stages of the debit card lifecycle. We provide a card processing platform consisting of proprietary systems
and innovative software applications based on the unique needs of our programs. We have extended our processing business capabilities
through our proprietary PaySign platform. We design and process prepaid card products that run on the platform through which our
customers can define the services they wish to offer cardholders. Through the PaySign platform, we provide a variety of services
including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer
service.
The PaySign platform was built on modern cross-platform
architecture and designed to be highly flexible, scalable and customizable. The platform has allowed 3PEA to significantly expand
its operational capabilities by facilitating our entry into new markets within the payments space through its flexibility and ease
of customization. The PaySign platform delivers cost benefits and revenue building opportunities to our partners.
We have developed prepaid card products for
corporate and incentive rewards including, but not limited to healthcare reimbursement payments, pharmaceutical co-pay assistance,
donor payments for source plasma, corporate expense and per diem payments. We are expanding our product offering to include additional
corporate incentive products, payroll cards, general purpose re-loadable cards, travel cards, and reward cards for the hospitality
industry. Our cards are offered to end users through our relationships with bank issuers.
We are a vertically integrated payment processor
and debit card program manager offering innovative payment solutions to corporations, government agencies, universities and other
organizations. Our payment solutions are utilized by our customers as a means to increase customer loyalty, reduce administration
costs and streamline operations. We market our prepaid debit card solutions under our PaySign brand. As we are a payment processor
and debit card program manager, we derive our revenue from all stages of the debit card lifecycle. These revenues can include fees
from program set-up; customization and development; data processing and report generation; card production and fulfillment; transaction
fees derived from card usage; inactivity fees; card replacement fees and program administration fees. We provide an in-house customer
service center which includes live bi-lingual phone operators staffed 24/7, for incoming calls. We also provide in house Interactive
Voice Response and two way SMS messaging platforms.
The Company divides prepaid cards into two
general categories: corporate and consumer reloadable, and non-reloadable cards.
Reloadable Cards: These types of cards are
generally incentive, payroll or considered general purpose reloadable (“GPR”) cards. Payroll cards are issued to an
employee by an employer to receive the direct deposit of their payroll. GPR cards can also be issued to a consumer at a retail
location or mailed to a consumer after completing an on-line application. GPR cards can be reloaded multiple times with a consumer’s
payroll, government benefit, a federal or state tax refund or through cash reload networks located at retail locations. Reloadable
cards are generally open loop cards as described below.
Non-Reloadable Cards: These are generally one-time
use cards that are only active until the funds initially loaded to the card are spent. These types of cards are gift or incentive
cards. These cards may be open loop or closed loop. Normally these types of cards are used for purchase of goods or services at
retail locations and cannot be used to receive cash.
These prepaid cards may be open loop, closed
loop or semi-closed loop. Open loop cards can be used to receive cash at ATM locations or purchase goods or services by PIN or
signature at retail locations. These cards can be used virtually anywhere that the network brand (Visa, MasterCard, Discover, etc.)
is accepted. Closed loop cards can only be used at a specific merchant. Semi-closed loop cards can be used at several merchants
such as a shopping mall.
The prepaid card market is one of the fastest
growing segments of the payments industry in the U.S. This market has experienced significant growth in recent years due to consumers
and merchants embracing improved technology, greater convenience, more product choices and greater flexibility. Prepaid cards have
also proven to be an attractive alternative to traditional bank accounts for certain segments of the population, particularly those
without, or who could not qualify for, a checking or savings account.
We have developed prepaid card products for
healthcare reimbursement payments, pharmaceutical assistance, plasma donor remuneration, corporate and incentive rewards and expense
reimbursement cards. We plan to expand our product offering to include payroll cards, general purpose re-loadable cards and travel
cards. Our cards are offered to end users through our relationships with bank issuers.
Our products and services are aimed at capitalizing
on the growing demand for stored value and reloadable ATM/prepaid card financial products in a variety of market niches. Our proprietary
platform is scalable and customizable, delivering cost benefits and revenue building opportunities to partners. We manage all aspects
of the debit card lifecycle, from managing the card design and approval processes with banking partners and card associations,
to production, packaging, distribution, and personalization. We also oversee inventory and security controls, renewals, lost and
stolen card management and replacement.
Currently, we are focusing our marketing efforts
on corporate incentive and expense prepaid card products, in various market verticals including but not limited to general corporate
expense, healthcare related markets including co-pay assistance, clinical trials and source plasma donations expense and per diem
cards targeting universities, loyalty rewards and incentive cards targeting the automotive markets and other market niches.
As part of our continuing platform expansion
process, we evaluate current and emerging technologies for applicability to our existing and future software platform. To this
end, we engage with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate,
we use third-party technology components in the development of our software applications and service offerings. Third-party software
may be used for highly specialized business functions, which we may not be able to develop internally within time and budget constraints.
Our principal target markets for processing services include prepaid card issuers, retail and private-label issuers, small third-party
processors, and small and mid-size financial institutions in the United States and in emerging international markets.
We have devoted more extensive resources to
sales and marketing activities as we have added essential personnel to our marketing and sales team. We sell our products directly
to customers in the U.S. but may work with a small number of resellers and third parties in international markets to identify,
sell and support targeted opportunities. We have also identified opportunities in the European Union and are pursuing those opportunities.
In order to expand into new markets, we may
need to invest additional funds in technology improvements, sales and marketing expenses, and regulatory compliance costs. We are
considering raising capital to enable us to diversify into new market verticals. If we do not raise new capital, we believe that
we will still be able to expand into new markets using internally generated funds, but our expansion will not be as rapid.
Results of Operations
In 2016 we increased our focus on sales and
new product development while continuing to invest in our core infrastructure, platform development and the addition of essential
personnel in order to allow us to successfully scale our business. As a result, we experienced record annual revenue and a return
to profitability in 2016.
Fiscal Years Ended December 31, 2016 and
2015
Revenues for the year ended December 31, 2016
were $10,416,672, an increase of $2,309,131 compared to the year ended December 31, 2015, when revenues were $8,107,541. The increase
in revenue was primarily due to an increase in the number of new corporate incentive prepaid card products and growth within our
existing corporate incentive prepaid card products. We believe we will experience accelerated revenue growth in 2017 as a result
of growth in our existing and the expected addition of new card products in various market verticals.
Cost of revenues for the year ended December
31, 2015 were $5,197,370, an increase of $1,177,856 compared to the year ended December 31, 2015, when cost of revenues were $4,019,514.
Cost of revenues constituted approximately 50% and 50% of total revenues in 2016 and 2015, respectively. Cost of revenues is comprised
of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production costs, customer
service and program management expenses, application integration setup, and sales and commission expense.
Gross profit for the year ended December 31,
2016 was $5,219,302, an increase of $1,131,275 compared to the year ended December 31, 2015, when gross profit was $4,088,027.
Our overall gross profit percentage approximated 50% and 50% during the fiscal years 2016 and 2015 which is consistent with our
overall expectations. We believe our profit margins will remain near the same level in 2017.
Selling, general and administrative
expenses for the year ended December 31, 2016 were, 3,288,373 a decrease of $445,814 compared to the year ended December 31,
2015, when selling, general and administrative expenses were $3,734,187. The decrease in selling, general and administrative
expenses was primarily due to a decrease in costs associated with our expansion into the European Union. We continued to ramp
up our investment in infrastructure and processes during 2016. In fiscal 2016, we devoted more resources to our internal
sales and marketing team and expect to continue to do so in 2017.
In the fiscal year ended December 31, 2016,
we recorded operating income of $1,358,609 as compared to operating (loss) of $(8,872) in the fiscal year ended December 31, 2015,
an increase of $1,367,481.
Other income (expense) for the year ended December
31, 2016 was $(60,958), as compared to other income (expense) of $(2,540,705) in year ended December 31, 2015, which represents
an increase in net other income (expense) of $2,479,747. The increase in net other income in 2016 as compared to 2015 was primarily
due to a legal settlement totaling $2,500,000 we recorded as an expense in 2015 which is further discussed in detail in Note 8
of our Consolidated Financial Statements.
Our net income (loss) for the year ended December
31, 2016 was $1,400,799 as compared to net income (loss) of $(2,410,337) in the year ended December 31, 2015, which represents
an increase in net income (loss) of $3,811,136. The overall change in net income is attributable to the aforementioned factors.
Liquidity and Capital Resources
The following table sets forth the major
sources and uses of cash for our last two fiscal years ended December 31, 2016 and 2015:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash provided by (used in) operating activities
|
|
$
|
1,266,723
|
|
|
$
|
(719,504
|
)
|
Net cash (used in) investing activities
|
|
|
(887,009
|
)
|
|
|
(926,182
|
)
|
Net cash (used in) financing activities
|
|
|
(137,265
|
)
|
|
|
(851,788
|
)
|
Net increase (decrease) in unrestricted cash and cash equivalents
|
|
$
|
242,449
|
|
|
$
|
(2,497,474
|
)
|
Comparison of Fiscal 2016 and 2015
In fiscal 2016 and 2015, we financed our
operations through internally generated funds.
Operating activities provided (used) $1,266,723
of cash in 2016, as compared to $(719,504) of cash (used) in fiscal 2015. Major non-cash items that affected our cash flow from
operations in 2016 were non-cash stock based expenses of $92,939 and depreciation and amortization of $572,320. Our operating assets
and liabilities provided (used) $696,190 of cash, which resulted primarily from a decrease in legal settlement payable of $999,758.
Investing activities used $(887,007) of
cash in 2016, as compared to $(926,182) of cash in 2015, all of which related in both years to platform expansion and the purchase
of equipment used in our business.
Financing activities provided (used in)
$(137,265) of cash in 2016 as compared to $(851,788) of cash(used) in 2015. Our cash used in financing activities in 2016 and
2015 related to net repayment of borrowings during both years.
Liquidity and Sources of Financing
We believe that our available cash on hand
at December 31, 2016 of $1,631,943, along with anticipated revenues and operating profits anticipated for 2017, will be sufficient
to sustain our operations for the next twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies and Estimates
Our significant accounting policies are described
in Note 2 of Notes to Financial Statements. At this time, we are not required to make any material estimates and assumptions that
affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses.
Our estimates will be based on our experience
and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results
may differ significantly from our estimates. Our estimates will be based on our experience and our interpretation of economic,
political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES OF MARKET RISK.
Because we are a smaller reporting company,
we are not required to provide the information called for by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
The financial statements required by Article
8 of Regulation S-X are attached hereto as
Exhibit A
.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
During the two fiscal years ended December
31, 2015 and 2016, we have not filed any Current Report on Form 8-K reporting any change in accountants in which there was a reported
disagreement on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedure.
ITEM 9A. CONTROLS AND PROCEDURES.
Management’s Report on Internal Control
over Financial Reporting and Remediation Initiatives
Evaluation of Disclosure Controls and Procedures
Mark Newcomer, our chief executive officer,
and Brian Polan, our chief financial officer, are responsible for establishing and maintaining our disclosure controls and procedures.
Disclosure controls and procedures means controls and other procedures that are designed to ensure that information we are required
to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure
that information required to be disclosed by us in those reports is accumulated and communicated to our management, including our
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December
31, 2016. Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the evaluation
date, such controls and procedures were effective.
Changes in internal controls
There were no changes in our internal controls
over financial reporting that occurred during the year ended December 31, 2016 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control
over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control
over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a
process designed by, or under the supervision of our principal executive officer and principal financial officer and implemented
by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting
includes those policies and procedures that:
|
·
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
|
|
·
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and
|
|
·
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements
|
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As of December 31, 2016 we conducted an evaluation,
under the supervision and with the participation of our chief executive officer (our principal executive officer), our chief operating
officer and our chief financial officer (also our principal financial and accounting officer) of the effectiveness of our internal
control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Management's assessment included an evaluation of
the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
A material weakness is defined within the Public
Company Accounting Oversight Board's Auditing Standard No. 5 as a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely basis. Based upon this assessment, management concluded that
our internal control over financial reporting was effective as of December 31, 2016.
This annual report does not include an attestation
report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by the company’s registered public accounting firm because it is neither an accelerated
filer or a large accelerated filer.
ITEM 9A(T). controls and
procedures.
None.
ITEM 9B. OTHER INFORMATION.
None.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS and CORPORATE GOVERNANCE.
Listed below are the current directors and
executive officers of the Company.
Name
|
Age
|
Present Positions with Company
|
Mark R. Newcomer
|
51
|
President & CEO, Chairman, Director
|
Brian Polan
|
57
|
CFO
|
Daniel H. Spence
|
53
|
CIO, Director
|
Anthony E. DePrima, Esq.
|
77
|
Secretary, Director
|
The following information sets forth the backgrounds
and business experience of the directors and executive officers.
Mark R. Newcomer, Chairman, CEO, President,
Director
. Mr. Newcomer serves as our President and Chief Executive Officer and has served in this capacity and as a director
since March 2006. From February of 2001 to present, Mr. Newcomer continues to serve as chairman and CEO of 3PEA Technologies,
Inc., a payment solutions company he co-founded in 2001 with Mr. Spence. Mr. Newcomer continues to be a driving force in guiding
the company's growth through technology investments, acquisitions, new product lines, and strategic partnerships. Mr. Newcomer
attended Cal-Poly San Luis Obispo where he majored in Bio-Science. We believe Mr. Newcomer should serve as our chairman based
on the perspective and experience he brings to our board of directors as our founder and Chief Executive Officer, which adds historical
knowledge, operational expertise and continuity to our board of directors.
Daniel H. Spence, Chief Information Officer,
Director
. Mr. Spence serves as our Chief Information Officer and has served as a director since March 2006. Mr. Spence is responsible
for the design and architecture of the PaySign® payments platform. Prior to founding 3PEA Technologies, Inc. with co-founder
Mark Newcomer, Mr. Spence designed and developed secure middleware for Internet financial processing systems in various contract
positions. From 1995-1997, Mr. Spence was Systems Manager at The Associated Press. From 1997-1999, Mr. Spence was Director of Technology
Planning at The Associated Press, the world’s largest news gathering organization with over 4000 employees in 227 countries.
From 1984-1994, Mr. Spence was with Coca-Cola in Australia implementing financial and line of business systems for Coca-Cola operations
worldwide. In 2007-2008, he was Project Manager for the implementation of Medicare Easyclaim for ANZ Bank in Australia. Easyclaim
allows patients and medical practitioners to lodge Medicare claims using the existing EFTPOS infrastructure. In 2010-2011 he was
Business Analyst on the EFT and Banking Stream that was responsible for the upgrade of POS Terminals to EMV capability for Australia
Post. Previously for 3PEA, he designed and developed EFTPOS terminals and secure key injection systems, and the software tools
(API/SDK) for the EFTPOS terminal integration by third party developers. He has certified several financial interchanges in the
ISO8583 and AS2805 standards to various EFT networks in the United States and Australia. He has over 25 years’ experience
deploying large-scale technology solutions for major international corporations. We believe that Mr. Spence should serve as a director
based on his experience in internet financial processing systems and as a founder of our company.
Anthony E. DePrima, JD., Secretary,
Director
. Mr. DePrima serves as our Secretary and has served as a director since October 2009. Mr. DePrima is a highly experienced
attorney licensed in Arizona with broad corporate management experience. He has been an active member of the State Bar of Arizona
since April 1967 to the present, and a former member of the American Bar Association. During this time, he served as a Member of
the U.S. Department of Commerce District Export Council for District of Arizona, and Chairman of the International Section of the
Arizona Bar, Chairman of the Legal Advisory Committee of the Arizona Mexico Commission, and Director of the Arizona Mexico Commission.
His law practice has included Corporate, Commercial, Business, International Trade and US Customs Law, as well as general trial
practice with numerous court and jury trials. Mr. DePrima is currently a member of DePrima Law, PC. He is an Advisory Director
and General Counsel of Coal Brick Oven Pizzeria, Inc., a Nevada corporation (Grimaldi’s Pizzeria chain of restaurants). For
over 20 years he has been Director and Secretary of Media Concepts, Inc., an Arizona corporation which publishes Native Peoples
Magazine. From 1983 to 1998 he held various management positions in Computer Easy International, Inc. and American Architectural
Products Corporation, a NASDAQ traded company, including Chief Executive Officer, President, Secretary, Executive Vice President,
Chief Financial Officer, Vice President General Counsel, and Chairman of Board of Directors. Mr. DePrima has a BS in General Business
from Arizona State University School of Business, and Juris Doctorate from the University of Arizona. We believe that Mr. DePrima
should serve as a director based on his extensive experience as an attorney and as an officer and director of other public companies.
Executive Officers Who Are Not Directors
Brian Polan, Chief Financial Officer
.
Mr. Polan serves as our Chief Financial Officer since October 2015. Mr. Polan previously served as our VP of Corporate Finance
since October 2013 and VP of Investor Relations from June 2012 to September 2013. Mr. Polan’s experience in the private sector
includes serving as financial advisor with DLG Wealth Management LLC from January 2010 to June 2012, and various retail brokerages
from 1983 to December 2012. Mr. Polan received his BS Degree in Business Administration from the State University of New York at
Buffalo.
None of the above directors and executive officers
has been involved in any legal proceedings as listed in Regulation S-K, Section 401(f).
Board of Directors
Our board currently consists of three directors.
During 2016, our board of directors had two meetings. All directors attended every meeting held during the time in which they served
as directors. There have been no material changes to the procedures by which security holders may recommend nominees to the board
of directors.
Board Committees
We do not have an audit, nominating or compensation
committee. We intend, however, to establish an audit committee and a compensation committee of our Board of Directors in the future,
once we have independent directors. We envision that the audit committee will be primarily responsible for reviewing the services
performed by our independent auditor, evaluating our accounting policies and our system of internal controls. The compensation
committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options)
and other compensation of our executive officers.
We do not have an audit committee financial
expert on our board because we do not have any independent directors.
Code of Ethics
Our Board of Directors has adopted a Code of
Business Conduct and Ethics, which was filed as Exhibit 14 to our Registration Statement on Form 10 filed on September 16, 2010.
Section 16(a) Beneficial Ownership Reporting
Compliance
During the fiscal year ended 2016, the officers
and directors were current on their filing obligations.
ITEM 11. EXECUTIVE COMPENSATION.
Summary compensation table
The following table sets forth the compensation
earned by our named Executive Officers during the last two fiscal years and other officers who received compensation in excess
of $100,000 during any of the last two fiscal years. In accordance with Item 402(m)(4), we have omitted certain columns from
the table required by Item 402(n).
Name and Principal Position
|
|
Year
|
|
|
Salary
$
|
|
|
Stock Grant
$ (1)
|
|
|
Total
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Newcomer, President & CEO
|
|
2016
|
|
|
$
|
300,000
|
|
|
$
|
15,759
|
|
|
$
|
315,759
|
|
|
|
2015
|
|
|
$
|
218,000
|
|
|
$
|
-
|
|
|
$
|
218,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Polan, CFO
|
|
2016
|
|
|
$
|
89,539
|
|
|
$
|
3,940
|
|
|
$
|
93,479
|
|
|
|
2015
|
|
|
$
|
17,000
|
|
|
$
|
-
|
|
|
$
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel Spence CIO
|
|
2016
|
|
|
$
|
178,500
|
|
|
$
|
15,759
|
|
|
$
|
194,259
|
|
|
|
2015
|
|
|
$
|
163,500
|
|
|
$
|
-
|
|
|
$
|
163,500
|
|
(1) In November 2016, the Company granted Mark
Newcomer, Daniel Spence and Brian Polan a total of 2,000,000, 2,000,000, and 500,000 shares of common stock, respectively, which
had a total value of $315,180, $315,180 and $78,800, respectively, based upon a value of $0.15759 per share that vest over five
(5) years. The value per share was based on the market value on the date of grant, less a 15% discount due to the shares being
restricted and lacking market liquidity. The stock grants vest in equal amounts over a period of five years as of the end of each
calendar quarter to the extent the officers were still employed by us at the time.
We did not grant any stock options or stock
appreciation rights to our named executive officers in the last fiscal year. We did not reprice any options or stock appreciation
rights during the last fiscal year.
Employment Agreements
We do not have any employment agreements with our officers.
Outstanding Equity Awards at Fiscal Year-End
|
|
Option Awards
|
|
Stock Awards
|
Name
(a)
|
|
Number
of
Securities
Underlying
Unexercised
options
(#) (b)
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised Unearned
Options
(#)
(c)
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised Unearned
Options
(#)
(d)
|
|
Option
Exercise
Price
($)
(e)
|
|
Option
Expiration
Date
($)
(f)
|
|
Number of
Shares or
Units of
Stock that
have not Vested
(#)
(g)
|
|
Market
Value of
Shares of
Units of
Stock that
Have not Vested
($)
(h)
|
|
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or
Other
Rights that
have not
Vested
(#)
(i)
|
|
Equity Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or other
Rights that
have not
Vested
($)
(j)
|
Mark Newcomer
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
1,900,000
|
|
$299,421
|
Daniel Spence
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
1,900,000
|
|
$299,421
|
Brian Polan
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
450,000
|
|
$74,855
|
Director Compensation
Name
|
|
Fees Earned
or Paid in
Cash ($)
|
|
|
Stock
Grants
($)(1)
|
|
|
Option
Awards ($)
|
|
|
Non-Equity Incentive
Plan Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
|
|
All Other
Compensation ($)(2)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony DePrima
|
|
|
–
|
|
|
$
|
3,940
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
16,500
|
|
|
$
|
20,440
|
|
We do not have any policy regarding compensation of our directors.
(1) In November 2016, Mr. DePrima was granted
500,000 shares of common stock which had a total value of $78,800 based upon a value of $0.15759 per share that vest over a five
(5) year period. The value per share was based on the market value on the date of grant, less a 15% discount due to the shares
being restricted and lacking market liquidity. The stock grants vest in equal amounts over a period of five years as of the end
of each calendar quarter to the extent the director is still a member of the board of directors
(2) Mr. DePrima received a total of $16,500
in consideration for consulting and legal services rendered to the Company.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information,
as of March 16, 2016, with respect to the beneficial ownership of our common stock by (i) all of our directors, (ii) each of our
executive officers named in the Summary Compensation Table, (iii) all of our directors and named executive officers as a group,
and (iv) all persons known to us to be the beneficial owner of more than five percent (5%) of any class of our voting securities.
Name and Address of Beneficial Owner
|
|
Amount and Nature of
Beneficial Ownership
|
|
Percent of
Class (1)
|
Mark Newcomer (2) (3)
|
|
8,210,000
|
|
19.01%
|
|
|
|
|
|
Daniel H. Spence (2) (4)
|
|
7,710,000
|
|
17.85%
|
|
|
|
|
|
Anthony E. DePrima (2) (5)
|
|
2,795,163
|
|
6.47%
|
|
|
|
|
|
Brian Polan (2) (6)
|
|
106,390
|
|
0.25%
|
|
|
|
|
|
|
|
|
|
|
All Officers and Directors as a Group
|
|
18,821,553
|
|
43.58%
|
(1)
|
Based upon 43,185,765 shares of Common Stock issued and outstanding as of March 16, 2017. The outstanding shares do not include any of the 5,000,000 shares issued under a stock grant program dated November 11, 2016 of which 250,000 had vested as of March 6, 2017.
|
|
|
(2)
|
The address for the shareholder is 1700 W Horizon Ridge Pkwy, Suite 102, Henderson, NV 89012.
|
|
|
(3)
|
Mark Newcomer’s ownership consists of 8,010,000 shares owned outright and 200,000 shares that vest within 60 days of March 6, 2017 which Mr. Newcomer has a right to receive. Mr. Newcomer’s ownership does not include 1,800,000 additional shares granted to Mr. Newcomer that have not yet vested.
|
|
|
(4)
|
Mr. Spence’s ownership consists of 7,510,000 shares owned outright and 200,000 shares that vest within 60 days of March 6, 2017 which Mr. Spence has a right to receive. Mr. Spence’s ownership does not include 1,800,000 additional shares granted to Mr. Spence that have not yet vested.
|
|
|
(5)
|
Mr. DePrima’s ownership consists of 2,745,163 shares owned outright and 50,000 shares that vest within 60 days of March 6, 2017 which Mr. DePrima has a right to receive. Mr. DePrima’s ownership does not include 450,000 additional shares granted to Mr. DePrima that have not yet vested.
|
|
|
(6)
|
Mr. Polan’s ownership consists of 56,390 shares owned outright and 50,000 that vest within 60 days of March 6, 2017 which Mr. Polan has a right to receive. Mr. Polan’s ownership does not include 450,000 additional shares granted to Mr. Polan that have not yet vested.
|
Equity Compensation Plan
Information
The following table provides information as of December 31, 2016
about our outstanding compensation plans under which shares of stock have been authorized:
Plan Category
|
|
Number of
securities to be issued upon exercise of
outstanding options, warrants
and rights
(a)
|
|
Weighted-
average exercise price of
outstanding options, warrants
and rights
(b)
|
|
Number of
securities
remaining
available for
future issuance
(c)
|
Equity compensation plans approved by security holders
|
|
–
|
|
–
|
|
–
|
Equity compensation plans not approved by security holders
|
|
5,000,000
|
|
$0.15759
|
|
0
|
Total
|
|
5,000,000
|
|
$0.15759
|
|
0
|
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Transactions
None.
Review, Approval and Ratification of Related Party Transactions
The board of directors has responsibility for
establishing and maintaining guidelines relating to any related party transactions between us and any of our officers or directors.
We do not currently have any written guidelines for the board of directors which will set forth the requirements for review and
approval of any related party transactions, but we plan to adopt such guidelines once we add independent board members.
Director Independence
Our common stock is currently quoted on the
OTC Bulletin Board, or the OTCBB, and OTCQB. Since neither the OTCBB nor the OTCQB has its own rules for director independence,
we use the definition of independence established by the NYSE Amex (formerly the American Stock Exchange). Under applicable
NYSE Amex rules, a director will only qualify as an “independent director” if, in the opinion of our Board, that person
does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities
of a director.
We periodically review the independence of
each director. Pursuant to this review, our directors and officers, on an annual basis, are required to complete and forward to
the Corporate Secretary a detailed questionnaire to determine if there are any transactions or relationships between any of the
directors or officers (including immediate family and affiliates) and us. If any transactions or relationships exist, we then consider
whether such transactions or relationships are inconsistent with a determination that the director is independent. As this time,
we do not have any independent directors.
Conflicts Relating to Officers and Directors
To date, we do not believe that there are any
conflicts of interest involving our officers or directors, other than as disclosed above. With respect to transactions involving
real or apparent conflicts of interest, we have not adopted any formal policies or procedures. In the absence of any formal policies
and procedures regarding conflicts, we intend to follow the provisions of Delaware corporate law regarding conflicts, which generally
requires that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to
the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved
by a majority of our disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it
is authorized or approved by our directors.
ITEM 14. PRINCIPAL ACCOUNTING
FEES AND SERVICES.
In the last two fiscal years ended December
31, 2016 and 2015, we have retained Sarna & Company as our principal accountants. We understand the need for our principal
accountants to maintain objectivity and independence in their audit of our financial statements. To minimize relationships that
could appear to impair the objectivity of our principal accountants, our board has restricted the non-audit services that our principal
accountants may provide to us primarily to tax services and audit related services. We are only to obtain non-audit services from
our principal accountants when the services offered by our principal accountants are more effective or economical than services
available from other service providers, and, to the extent possible, only after competitive bidding. The board has adopted policies
and procedures for pre-approving work performed by our principal accountants.
After careful consideration, the board has
determined that payment of the audit fees is in conformance with the independent status of our principal independent accountants.
Audit Fees: The aggregate fees billed for the
fiscal years ended December 31, 2016 and 2015 for professional services rendered by the principal accountant for the audit of our
annual financial statements for 2016 and 2015 was $32,500 and $15,000, respectively.
Audit-Related Fees: The aggregate fees billed
for the fiscal years ended December 31, 2016 and 2015 for assurance and related services by the principal accountant that are reasonably
related to the performance of the audit or review for the audit or review of our annual financial statements and the review of
financial statements and are not reported under the previous item was $7,500 and $0, respectively.
Tax Fees: The aggregate fees billed for the
fiscal years ended December 31, 2016 and 2015 for professional services rendered by the principal accountant for tax compliance
and tax planning was $0 and $0, respectively.
All Other Fees: The aggregate fees billed for
the fiscal years ended December 31, 2016 and 2015 for products and services provided by the principal accountant other than the
services reported above was $0 and $0, respectively.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND
2015 (AUDITED)
1.
Description
of business, HISTORY and summary of significant policies
Description of business
– 3PEA
International, Inc. (the “Company” or “3PEA”) was incorporated on August 24, 1995 under the name of Antek
International, Inc. The Company had undergone several name changes eventually changing it to the name 3Pea International,
Inc. on October 19, 2006. The Company acquired 3Pea Technologies, Inc., a payment solutions company, in March 2006, which resulted
in 3Pea Technologies, Inc. becoming a wholly owned subsidiary.
About 3PEA International, Inc.
3PEA International, Inc. is a vertically integrated
provider of innovative prepaid card products and processing services for corporate, consumer and government applications. Our payment
solutions are utilized by our corporate customers as a means to increase customer loyalty, reduce administration costs and streamline
operations. Public sector organizations can utilize the solutions to disburse public benefits or for internal payments. The Company
markets prepaid debit card solutions under our PaySign
®
brand. As the Company is a payment processor and debit card
program manager, the Company derives revenue from all stages of the debit card lifecycle. The Company provides a card processing
platform consisting of proprietary systems and innovative software applications based on the unique needs of our programs. The
Company has extended its processing business capabilities through its proprietary PaySign platform. The Company designs and processes
prepaid programs that run on the platform through which customers can define the services they wish to offer cardholders. Through
the PaySign platform, The Company provides a variety of services including transaction processing, cardholder enrollment, value
loading, cardholder account management, reporting, and customer service.
The PaySign brand offers prepaid card based
solutions, or “card products” for corporate incentive rewards and corporate expense, per diem and travel payments,
healthcare reimbursement payments, pharmaceutical co-pay assistance, plasma donor remuneration and clinical trials. The Company
plans to expand its product offering to include payroll cards, general purpose re-loadable cards, and others. Our cards are offered
to end users through our relationships with bank issuers.
The Company’s proprietary PaySign
®
platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform
allows The Company to significantly expand its operational capabilities by facilitating entry into new markets within the payments
space through its flexibility and ease of customization. The PaySign platform delivers cost benefits and revenue building opportunities
to our partners.
The Company manages all aspects of the debit
card lifecycle, from managing the card design and approval processes with partners and associations, to production, packaging,
distribution, and personalization. The Company oversees inventory and security controls, renewals, lost and stolen card management
and replacement. The Company deploys a fully staffed, in-house customer service department which utilizes bi-lingual customer service
agents, Interactive Voice Response (IVR), and two way short message service (SMS) messaging and text alerts.
Principles of consolidation
–
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Year end
– The Company’s
year-end is December 31.
Use of estimates
– The preparation
of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
– The
Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of purchase
to be cash equivalents for the purposes of the statement of cash flows.
Cash restricted and Customer card funding
– At December 31, 2016 and 2015, cash restricted are funds held specifically for our card products which we have recorded
a corresponding customer card funding liability in the same amount.
Fixed assets
– Fixed assets are
stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated
useful lives of the assets, which are generally 3 to 10 years. The cost of repairs and maintenance is charged to expense as incurred.
Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost
and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether
events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining
balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash
flows over the remaining life of the fixed assets in measuring their recoverability.
Goodwill and intangible assets
–
Goodwill is the purchase premium after adjusting for the fair value of net assets acquired. Goodwill is not amortized but is reviewed
for potential impairment on an annual basis, or when events or circumstances indicate a potential impairment, at the reporting
unit level. A reporting unit, as defined under applicable accounting guidance, is a business segment or one level below a business
segment. We may in any given period bypass the qualitative assessment and proceed directly to a two-step method to assess and measure
impairment of the reporting units goodwill. We first assess qualitative factors to determine whether it is more likely-than-not
(i.e., a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value. This step
serves as the basis for determining whether it is necessary to perform the two-step quantitative impairment test. The first step
of the quantitative impairment test involves a comparison of the estimated fair value of each reporting unit to its carrying amount,
including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit
is not impaired; however, if the carrying amount of the reporting unit exceeds its estimated fair value, then the second step of
the quantitative impairment test must be performed. The second step compares the implied fair value of the reporting unit’s
goodwill with its carrying amount to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined
in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit’s
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
For intangible assets, we recognize an impairment
loss if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible
asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the
asset.
Intangible assets with finite lives are amortized
on a straight-line basis over their estimated useful lives.
Fair value of financial instruments
–
Under applicable accounting guidance, fair value is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date.
We determine the fair values of our financial
instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following describes the
three-level hierarchy:
Level 1 – Unadjusted quoted prices in
active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities.
Level 2 – Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
We currently do not have any assets or liabilities in this category.
Level 3 – Unobservable inputs that are
supported by little or no market activity and that are significant to the overall fair value of the assets or liabilities. Level
3 assets and liabilities include financial instruments for which the determination of fair value requires significant management
judgment or estimation. The fair value for such assets and liabilities is generally determined using pricing models, market comparables,
discounted cash flow methodologies or similar techniques that incorporate the assumptions a market participant would use in pricing
the asset or liability. We currently do not have any assets or liabilities in this category.
Earnings per share
– Basic earnings
per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using
the weighted-average number of outstanding common stocks during the applicable period. Diluted earnings per share is computed using
the weighted-average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent
shares are excluded from the computation if their effect is antidilutive.
Income taxes
– Our income tax
expense is comprised of current and deferred income tax expense. Current income tax expense approximates taxes to be paid or refunded
for the current period. Deferred income tax expense results from the changes in deferred tax assets and liabilities during the
periods. These gross deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future
because of future reversals of temporary differences between the basis of assets and liabilities as measured by tax laws and their
basis as reported in our consolidated financial statements. We also recognize deferred tax assets for tax attributes such as net
operating loss carryforwards and tax credit carryforwards. We record valuation allowances to reduce deferred tax assets to the
amounts we conclude are more likely-than-not to be realized in the foreseeable future.
We recognize and measure income tax benefits
based upon a two-step model: 1) a tax position must be more likely-than-not to be sustained based solely on its technical merits
in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely-than-not
to be sustained upon settlement. The difference between the benefit recognized for a position and the tax benefit claimed on a
tax return is referred to as an unrecognized tax benefit. We accrue income tax related interest and penalties, if applicable, within
income tax expense.
We are in the process of filing certain consolidated
tax returns whereby past subsidiary losses are used to offset tax liabilities on current profits. This approach could be challenged
by the IRS and if not accepted, may affect net income and earnings per share. Management believes that the likelihood of the IRS
not accepting such filings is minimal.
Revenue and expense recognition
–
We recognize revenue when (1) there is persuasive evidence of an arrangement existing, (2) delivery has occurred, (3) our price
to the buyer is fixed or determinable and (4) collectability of the receivables is reasonably assured. We recognize the costs of
these revenues at the time revenue is recognized. Any fees paid up front are deferred until such time such services have been considered
rendered. As of December 31, 2016 and 2015, there are no deferred revenues recorded.
The Company generates revenues primarily from
fees generated by cardholder transactions and interchange.
Such revenues are recognized in accordance
with FASB ASC 985-605.
The Company records all revenues on gross basis
in accordance with FASB ASC 605-45 since it is the primary obligor and establishes the price in the revenue arrangement. The
Company is currently under no obligation for refunding any fees or has any obligations for disputed claim settlements.
Stock-Based Compensation
– Stock
based compensation is accounted for using the Equity-Based Payments to Non-Employee Topic of the FASB ASC
,
which establishes
standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value
of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. We determine the value
of stock issued at the date of grant. We also determine at the date of grant the value of stock at fair market value or the value
of services rendered (based on contract or otherwise) whichever is more readily determinable.
Shares issued to employees are expensed upon
issuance.
Stock based compensation for employees is accounted
for using the Stock Based Compensation Topic of the FASB ASC. We use the fair value method for equity instruments granted to employees
and will use the Black Scholes model for measuring the fair value of options, if issued. The stock based fair value compensation
is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date)
and is recognized over the vesting periods.
Advertising costs
– Advertising
costs incurred in the normal course of operations are expensed as incurred.
Research and development costs
–
Research and development costs are charged to expense as incurred.
New accounting pronouncements
–In
November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB
Emerging Issues Task Force).
The amendments in this update require that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU
No. 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that
reporting period, with early adoption permitted. The application of this guidance is not expected to have a material impact on
our consolidated financial statements
.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
("ASU
2016-09") that will simplify how companies account for certain aspects of share-based payments to employees, including the
accounting for income taxes upon vesting or exercise of share-based payments, classification of awards as either equity or liabilities
with respect to statutory tax withholding thresholds, accounting for forfeitures, as well as certain classifications on the statement
of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those
annual periods. The Company will adopt the provisions of ASU 2016-09 effective January 1, 2017.
Under ASU 2016-09, all excess tax benefits
and tax deficiencies related to stock compensation will be recognized as income tax expense or benefit in the income statement
instead of additional paid-in capital on the consolidated balance sheets. The impact of adopting this standard on our consolidated
financial statements is dependent upon the intrinsic value of share-based compensation awards at the time of exercise, vesting
or expiration and may result in more variability in our effective tax rate and net profit or loss, as well as impact our share
dilution. The Company has not assessed the impact of this application as of the date of this report and is unable to make any determination
as to any impact to its consolidate financial statements.
Additionally, upon adoption of ASU 2016-09,
we will elect to account for forfeitures on stock-based compensation as they occur, rather than estimate future expected forfeitures.
We do not expect the change in our accounting policy for forfeitures to have a material impact on our financial results and, except
as described above with respect to excess tax benefits, do not expect any of the other provisions of ASU 2016-09 to have a material
impact to our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
The guidance in this ASU supersedes the leasing guidance in
Leases (Topic 840).
Under the new
guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously
classified as operating leases. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December
15, 2018, including interim periods within that reporting period, with early adoption permitted. We are currently evaluating the
impact of adopting this ASU on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities
(Topic 825) ("ASU
2016-01"). ASU 2016-01 revises the classification and measurement of investments in certain equity investments and the
presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU 2016-01 requires
the change in fair value of many equity investments to be recognized in net income. The standard is effective for interim
and annual periods beginning after December 15, 2017, with early adoption permitted. The adoption of the ASU may result in
a cumulative adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact
of the provisions of ASU 2016-01, however, we do not expect the adoption of the ASU to have a material impact on our consolidated
financial statements.
2.
FIXED ASSETS
Fixed assets consist of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Equipment
|
|
$
|
746,117
|
|
|
$
|
660,813
|
|
Software
|
|
|
117,163
|
|
|
|
114,097
|
|
Furniture and fixtures
|
|
|
107,141
|
|
|
|
85,646
|
|
Leasehold improvements
|
|
|
36,499
|
|
|
|
36,499
|
|
|
|
|
1,006,920
|
|
|
|
897,055
|
|
Less: accumulated depreciation
|
|
|
706,159
|
|
|
|
625,088
|
|
Fixed assets, net
|
|
$
|
300,761
|
|
|
$
|
271,967
|
|
3.
INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Patents and trademarks
|
|
$
|
34,771
|
|
|
$
|
34,771
|
|
Platform
|
|
|
2,008,307
|
|
|
|
1,284,551
|
|
Kiosk Development
|
|
|
64,802
|
|
|
|
64,802
|
|
Licenses
|
|
|
382,414
|
|
|
|
329,028
|
|
|
|
|
2,490,294
|
|
|
|
1,713,152
|
|
Less: accumulated amortization
|
|
|
940,250
|
|
|
|
449,001
|
|
Intangible assets, net
|
|
$
|
1,550,044
|
|
|
$
|
1,264,151
|
|
Intangible assets are amortized over their useful lives ranging
from periods of 3 to 15 years.
4.
NOTES PAYABLE
Notes payable consist of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Note payable bearing interest at 8%, due on demand and unsecured.
|
|
$
|
102,613
|
|
|
$
|
150,000
|
|
Notes payable due to various equipment finance companies bearing interest from 12.89% to 15.14%.
|
|
|
49,447
|
|
|
|
24,098
|
|
|
|
|
152,060
|
|
|
|
174,098
|
|
Less: non-current portion
|
|
|
27,892
|
|
|
|
–
|
|
|
|
$
|
124,168
|
|
|
$
|
174,098
|
|
5.
COMMON STOCK
At December 31, 2016, the Company’s authorized
capital stock was 150,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par
value $0.001 per share. On that date, the Company had outstanding 43,185,765 shares of common stock, and no shares of preferred
stock.
2016 Transactions:
During the year ended
December 31, 2016, the Company issued shares of common stock as follows:
|
·
|
675,000 shares of common stock for current services rendered and prior services which had previously
been recorded as stocks payable totaling $131,305.
|
At December 31, 2015, the Company's authorized
capital stock was 150,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par
value $0.001 per share. On that date, the Company had outstanding 42,510,765 shares of common stock, and no shares of preferred
stock.
2015 Transactions
: During the year ended
December 31, 2015, the Company issued shares of common stock as follows:
|
·
|
629,159 shares of common stock issued for various services valued at $202,550.
|
|
·
|
212,500 shares of common stock issued for prior services which had previously been recorded as an accrued liability totaling $67,914 in 2014.
|
|
·
|
5,000,000 shares of common stock issued related to previously recorded stock payable for $680,000 in 2014.
|
Warrants:
As of December 31, 2016, warrants outstanding
consisted of the following:
Date of Issuance or Declaration
|
|
Number of
Warrants
|
|
|
Exercise
Price
|
|
|
Contractual
Life
|
|
Number of
Shares
Exercisable
|
|
March 18, 2015
|
|
|
200,000
|
|
|
|
0.50
|
|
|
3 years
|
|
|
200,000
|
|
September 10, 2014
|
|
|
150,000
|
|
|
|
0.25
|
|
|
3 years
|
|
|
150,000
|
|
September 10, 2014
|
|
|
150,000
|
|
|
|
0.50
|
|
|
3 years
|
|
|
150,000
|
|
September 18, 2014
|
|
|
200,000
|
|
|
|
0.25
|
|
|
3 years
|
|
|
200,000
|
|
November 05, 2014
|
|
|
100,000
|
|
|
|
0.50
|
|
|
3 years
|
|
|
100,000
|
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
800,000
|
|
Stock and Warrant Grants:
In November 2016 the Company granted a total
of 5,000,000 shares to certain officers and directors of the Company with a total value of $787,950 or $0.15759 per share (including
a 15% discount of fair market value due to these shares being restricted and lacking market liquidity). The 5,000,000 shares have
a quarterly vesting period of five years with the first vesting period occurring on December 31, 2016. The approximate value vested
for 2016 is $39,397, for which a payable has been recorded for the same vested amount as of December 31, 2016. As of December 31,
2016, none of the shares have been issued.
In November 2016 the Company granted 210,000
shares to a consultant. The shares were valued at $33,094 or $0.15759 per share (including a 15% discount of fair market value
due to these shares being restricted and lacking market liquidity). The 210,000 shares have a quarterly vesting period of three
years with the first vesting period occurring on December 31, 2016. The approximate value vested for 2016 is $2,758 for which a
payable has been recorded for the same vested amount as of December 31, 2016. As of December 31, 2016, none of the shares have
been issued.
In March 2015, the Company granted 200,000
shares of common stock along with 200,000 warrants to a consultant. The shares were valued at $30,600 or $0.16 per share (including
a 15% discount of fair market value due to these shares being restricted and lacking market liquidity). The warrants were valued
at $34,611, using the Black-Scholes options pricing model under the following assumptions: stock price at issuance of $0.18 per
share; exercise price of $0.50; 3 year life; discount rate of 2.00%; and volatility rate of 245%. The 200,000 shares and 200,000
warrants granted have a vesting period of six months of which seven months had vested as of December 31, 2015. As of December 31,
2016, the 200,000 shares have been issued and the warrants for 200,000 shares were granted.
In August 2014, the Company granted 150,000
shares of common stock to a consultant with a total value of $25,500 or $0.17 per share (including a 15% discount of fair market
value due to these shares being restricted and lacking market liquidity). The 150,000 shares granted have a vesting period of three
years of which five and seventeen months had vested as of December 31, 2014. The approximate value vested for the years ended December
31, 2015 and 2016 was $12,000 and $12,000, for which a payable has been recorded for the same vested amount as of December 31,
2014 and 2015. As of December 31, 2016, 100,000 shares have been issued.
In September 2014, the Company granted 150,000
shares of common stock along with 150,000 Class A warrants and 150,000 Class B warrants to an advisory board member. The shares
were valued at $19,125 or $0.13 per share (including a 15% discount of fair market value due to these shares being restricted and
lacking market liquidity. The warrants were valued at $42,761, using the Black-Scholes options pricing model under the following
assumptions: stock price at issuance of $0.15 per share; exercise price of $0.25 for the Class A warrants and $0.50 for the Class
B warrants; 3 year life; discount rate of 2.00 %; and volatility rate of 245%. The 150,000 shares and 300,000 warrants granted
vest over a 3 year period, at 50,000 shares and 100,000 warrants per year of which sixteen and twenty eight months had vested as
of December 31, 2015 and 2016, respectively. The approximate value vested for the years ended December 31,2015 and 2016 was,$20,700
and $20,700, for which a payable has been recorded for $20,700 as of December 31, 2015 and $17,321 for 2016. As of December 31,
2016, 112,500 of the 150,000 shares have been issued and none of the 300,000 warrants have been issued.
In September 2014, the Company granted 200,000
shares of common stock along with 200,000 warrants to a consultant. The shares were valued at $30,600 or $0.16 per share (including
a 15% discount of fair market value due to these shares being restricted and lacking market liquidity). The warrants were valued
at $34,611, using the Black-Scholes options pricing model under the following assumptions: stock price at issuance of $0.18 per
share; exercise price of $0.25; 3 year life; discount rate of 2.00%; and volatility rate of 245%. The 200,000 shares and 200,000
warrants granted have a vesting period of six months. As of December 31, 2015, the 200,000 shares and 200,000 warrants had been
issued and granted.
In October 2014, the Company granted
150,000 shares of common stock to an advisory board member with a total value of $32,400 or $0.21 per share (including a 10%
discount of fair market value due to these shares being restricted and lacking market liquidity). The 150,000 shares granted
will vest over a 3 year period, at 50,000 shares per year of which fifteen and 27 months had vested as of December 31,2015
and 2016, respectively. The approximate value vested for the year ended December 31, 2015 and 2016 was $13,000 and $11,300.
As of December 31, 2016, 112,500 shares of the 150,000 shares granted have been issued.
In November 2014, the Company issued a warrant
for 100,000 shares of common stock as part of an issuance of note payable totaling $100,000. The warrant has an exercise price
of $0.50 and life of three years.
In October 2013, the Company granted 300,000
shares of common stock to an employee of the Company with a total value of $38,250 or $0.13 per share (including a 15% discount
of fair market value due to these shares being restricted and lacking market liquidity). The 300,000 shares granted have a vesting
period of three years of which twenty-six months and was fully vested as of December 31, 2015 and 2016, respectively. The approximate
value vested for the years ended December 31, 2015 and 2016 were $12,750 and $12,750, for which a payable has been recorded for
the same vested amounts as of December 31, 2014 and 2015. As of December 31, 2016, all of the 300,000 shares granted have been
issued.
6.
COMMITMENTS
AND CONTINGENCIES
Office lease
– The Company
has an operating lease for an office space that expires April 30, 2019. The monthly lease payment totals $17,080 per month.
Lease payments plus common area maintenance fees for the year ended December 31, 2016 and 2015 totaled $174,725 and $177,234
respectively.
Data Center Lease
– The Company
leases space for its data centers in Nevada under a co-location agreement. The agreement provides for lease payments of $4,674
per month.
Pending of threatened litigation
–
We may become involved in litigation from time to time in the ordinary course of business. However at December 31, 2016, to the
best of our knowledge, no such litigation exists or is threatened.
7.
INCOME
TAXES
The provision for income taxes on the statements
of operations consists of $-0- and $-0- for the years ended December 31, 2016 and 2015, respectively. Deferred tax assets are comprised
of the following at December 31:
|
|
2016
|
|
|
2015
|
|
Net operating loss carryforward
|
|
$
|
5,510,000
|
|
|
$
|
6,034,000
|
|
Temporary differences
|
|
|
303,000
|
|
|
|
238,000
|
|
Less valuation allowance
|
|
|
(5,813,000
|
)
|
|
|
(6,272,000
|
)
|
Deferred tax asset, net
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred taxes arise from temporary differences
in the recognition of certain expenses for tax and financial reporting purposes. At December 31, 2016 and 2015, management determined
that realization of these benefits is not assured and has provided a valuation allowance for the entire amount of such benefits.
At December 31, 2016 and 2015, net operating loss carryforwards were approximately $5,813,000 and $6,272,000, respectively, for
federal tax purposes that expire at various dates from 2014 through 2031.
Utilization of net operating loss carryforwards
may be subject to substantial annual limitations due to the "change in ownership" provisions of the Internal Revenue
Code of 1986, as amended, and similar state regulations. The annual limitation may result in the expiration of substantial net
operating loss carryforwards before utilization.
For December 31, 2016 and 2015, the provision
for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (34% in 2016 and 2015) to income
taxes as follows:
|
|
2016
|
|
|
2015
|
|
Tax benefit computed at 34%
|
|
$
|
65,000
|
|
|
$
|
81,000
|
|
Change in valuation allowance
|
|
|
460,000
|
|
|
|
(323,000
|
)
|
Change in carryovers and tax attributes
|
|
|
(525,000
|
)
|
|
|
242,000
|
|
Income tax provision
|
|
$
|
–
|
|
|
$
|
–
|
|
8.
LEGAL SETTLEMENT
On August 11, 2015, PSKW, LLC (“PSKW”)
served the Company, with a complaint styled
PSKW, LLC v. 3Pea International, Inc.
, filed in the United States District
Court for the Northern District of California, Case No. 5:15-cv-03576-RMW, San Jose Division (the “Action”). In the
Action, PSKW asserted claims against the Company for $5,800,000 for marketing fees allegedly due by the Company. The Company contended,
among other things, that PSKW breached its agreement with the Company, for which the Company was damaged in an amount in excess
of the amount which PSKW claimed was owed by the Company to PSKW. The parties each denied liability, and entered into a Settlement
Agreement and Release on October 2, 2015 whereby the Company agreed to pay $2,500,000 to PSKW in full settlement of the Action.
The settlement amount is payable by an initial payment of $1,000,000 no later than October 7, 2015, which was paid in October 2015,
with the balance of $1,500,000 being payable in equal monthly installments over 18 months with interest at 3% per annum commencing
on November 1, 2015. The Court dismissed the Action with prejudice, but retained jurisdiction to enforce the Settlement Agreement.
3Pea Technologies, Inc., a wholly-owned subsidiary of the Company, guaranteed the amount due under the Settlement Agreement. The
Company expensed the entire $2,500,000 settlement during the year ended December 31, 2015 since the principal terms of the Settlement
Agreement had been agreed to as of that date. During the year ended December 31, 2016, the Company has paid a total of $999,758
and accrued the remaining unpaid balance totaling $254,900 as a settlement payable as of December 31, 2016.
9.
SUBSEQUENT
EVENTS
As of March, 2017, the Company paid the total
remaining accrued balance as of December 31, 2016 in the amount of $254,900 for the Legal Settlement liability.
Additionally, the Company paid the total remaining
balance of a note payable as of December 31, 2016 in the amount of $152,060.