NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT POLICIES
The foregoing unaudited interim financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with the instructions for Form 10-Q and Regulation S-X as promulgated by the Securities and
Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the disclosures required
by generally accepted accounting principles in the United States of America for complete financial statements. These unaudited
interim financial statements should be read in conjunction with the audited financial statements and the notes thereto included
on Form 10-K for the year ended December 31, 2016. In the opinion of management, the unaudited interim financial statements furnished
herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for
the interim period presented.
The preparation of financial statements in
accordance GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts
of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumption are inherent
in the preparation of the Company’s financial statements; accordingly, it is possible that the actual results could differ
from these estimates and assumptions that could have a material effect on the reported amounts of the Company’s financial
position and results of operations.
Operating results for the three months ended
March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
About 3PEA International, Inc.
3PEA International, Inc. is a vertically integrated
provider of innovative prepaid card programs and processing services for corporate, consumer and government applications. Our payment
solutions are utilized by our customers as a means to increase customer loyalty, reduce administration costs and streamline operations.
Public sector organizations can utilize our 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 provide a variety of services including transaction processing, cardholder
enrollment, value loading, cardholder account management, reporting, and customer service.
We have developed prepaid card programs for
healthcare reimbursement payments, pharmaceutical co-pay assistance, donor compensation and corporate incentive and rewards. We
plan to expand our product offering to include payroll cards, general purpose re-loadable cards, travel cards, and expense reimbursement
and per diem cards. Our cards are offered to end users through our relationships with bank issuers.
Our proprietary PaySign
®
platform
was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform allows
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 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), SMS alerts and two way SMS messaging.
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.
Use of estimates
– The preparation
of consolidated financial statements in conformity with GAAP 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.
Restricted cash
– Restricted cash
is a cash account controlled by the Company which funds are received related to the card programs from our customers. The Company
has recorded a corresponding customer card funding liability.
Intangible assets
-
Internally Developed
Software Costs -
Computer software development costs are expensed as incurred, except for internal use software or website
development costs that qualify for capitalization as described below, and include compensation and related expenses, costs of hardware
and software, and costs incurred in developing features and functionality.
For computer software developed or obtained
for internal use, costs that are incurred in the preliminary project and post implementation stages of software development are
expensed as incurred. Costs incurred during the application and development stage are capitalized. Capitalized costs are amortized
using the straight-line method over a three year estimated useful life, beginning in the period in which the software is available
for use
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.
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 March 31, 2017 and 2016, there were no deferred revenues recorded.
We generate the following types of revenues:
|
·
|
Administration and usage fees, charged to our prepaid card clients when our programs are created, distributed or reloaded. Such revenues are recognized when such services are performed.
|
|
·
|
Transaction fees, paid by the applicable networks and passed through by our card issuing banks when our cards are used in a purchase or ATM transaction. Such revenues are recognized when such services are performed.
|
|
·
|
Maintenance, administration, transaction fees, charged to a card and not under any multiple element arrangements. Such revenues are recognized when such services are performed.
|
|
·
|
Program maintenance management fees charged to our clients. Such revenues are not under any multiple element arrangements and are recognized when such services are performed.
|
|
·
|
Software development and consulting services to our clients. Such revenues are recognized in accordance with Accounting Standards Update 985-605.
|
The Company records all revenues on gross basis
in accordance with 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.
Earnings (loss) per share
- Basic earnings
(loss) per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings (loss) 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.
Reclassification of prior year presentation
- Certain prior
year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect
on the reported results of operations. In first quarter of March 31, 2016, the Company concluded that it was appropriate to reclassify
its customer service center costs from general and administration expense to cost of sales. This change in classification does
not affect previously reported cash flows from operations in the Consolidated Statement of Cash Flows, and had no effect on the
previously reported net income of the Consolidated Statement of Income for any period.
Recent Accounting Pronouncements
– In November 2016,
the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows – Restricted Cash a consensus of the
FASB Emerging Issues Task Force.” This standard requires restricted cash and cash equivalents to be included with cash and
cash equivalents on the statement of cash flows under a retrospective transition approach. The guidance became effective for fiscal
years beginning December 15, 2017 and interim periods within those fiscal years. The Company has retrospectively adopted ASU 2016-18.
2.
FIXED ASSETS
Fixed assets consist of the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Equipment
|
|
$
|
772,355
|
|
|
$
|
746,117
|
|
Software
|
|
|
117,661
|
|
|
|
117,163
|
|
Furniture and fixtures
|
|
|
113,471
|
|
|
|
107,141
|
|
Website Costs
|
|
|
10,342
|
|
|
|
–
|
|
Leasehold equipment
|
|
|
43,499
|
|
|
|
36,499
|
|
|
|
|
1,057,328
|
|
|
|
1,006,920
|
|
Less: accumulated depreciation
|
|
|
730,719
|
|
|
|
706,159
|
|
Fixed assets, net
|
|
$
|
326,609
|
|
|
$
|
300,761
|
|
3.
INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Patents and trademarks
|
|
$
|
34,771
|
|
|
$
|
34,771
|
|
Platform
|
|
|
2,200,247
|
|
|
|
2,008,307
|
|
Kiosk
|
|
|
64,802
|
|
|
|
64,802
|
|
Licenses
|
|
|
384,165
|
|
|
|
382,414
|
|
|
|
|
2,683,985
|
|
|
|
2,490,294
|
|
Less: accumulated amortization
|
|
|
1,130,957
|
|
|
|
940,250
|
|
Intangible assets, net
|
|
$
|
1,553,028
|
|
|
$
|
1,550,044
|
|
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:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Note payable due to a shareholder of the Company, bearing fixed interest at 8%, due on demand and unsecured.
|
|
|
–
|
|
|
|
102,613
|
|
Notes payable due to an equipment finance Company bearing interest at 13.49% and 12.89%.
|
|
|
–
|
|
|
|
49,447
|
|
|
|
|
–
|
|
|
|
152,060
|
|
Less: current portion
|
|
|
–
|
|
|
|
124,165
|
|
Notes payable – long-term portion
|
|
$
|
–
|
|
|
$
|
27,892
|
|
5.
COMMON STOCK
At March 31, 2017, 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. As of that date, the Company had outstanding 43,185,765 shares of common stock, and no shares of preferred
stock.
During the three months ended March 31, 2017,
the Company did not issue any shares.
During the three months ended March 31, 2016,
the Company issued shares of common stock as follows:
|
·
|
212,500 shares of common stock for prior services which had previously been recorded as accrued liability for $28,199 or $0.13 per share
|
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 2017 is $39,397, for which a payable has been recorded for the same vested amount as of December 31, 2016. As of March 31,
2017, 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 March 31, 2017, 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 one month, and were fully vested as of March 31, 2016. As of March
31, 2017, 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 thirty two had vested as of March 31, 2017. The approximate value vested for the three months ended March 31, 2017
and 2016 was $2,100 and $2,100, respectively As of March 31, 2017, 100,000 shares granted 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 $19,250 or $0.13 per share (including a 15% discount of fair market value due to these shares being restricted
and lacking market liquidity. The 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 nineteen months had vested as of March 31,
2016. The approximate value vested for the three months ended March 31, 2017 and 2016 was $5,100 and $5,100, respectively. As
of March 31, 2017, 112,500 of the 150,000 shares and none 300,000 warrants granted has 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 150,000 shares and 200,000
warrants granted had a vesting period of six months and were fully vested as March 31, 2016. During the three months ended March
31, 2016 the company had issued the 200,000 shares and warrant for 200,000 shares of common stock.
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 eighteen months had vested as of March 31, 2016. The approximate value vested
for the three months ended March 31, 2017 and 2016 was $2,700 and $2,700, respectively. As of March 31, 2017, 112,500 of the shares
previously vested have been issued.
In November 2014, the Company issued a warrant for 100,000 shares
of common stock as part of a debt settlement, whereby the noteholder returned 2,442,000 shares of the Company’s common stock
in connection with the Company’s satisfaction of all principal and interest due on the note. 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 $0.15 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 and was fully vested as of October 2016. The approximate value vested for the three months ended March 31,
2017 and 2016 was $0.00 and $3,200, respectively. As of March 31, 2017, all 300,000 shares granted have been issued.
6.
LEGAL SETTLEMENT PAYABLE
On August 11, 2015, PSKW, LLC (“PSKW”)
served the Company, with a complaint titled
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. As of March 31, 2017, the remaining unpaid balance of $254,900 was paid in full.
7.
SUBSEQUENT EVENTS
In April 2017, the Company issued 12,500 shares
to a member of the board of advisors, which had been previously accrued for as a stock payable at March 31, 2017.
In April 2017, the Company issued 12,500 shares
to a member of the board of advisors, which had been previously accrued for as a stock payable at March 31, 2017.