Item 1. Financial Statements
3PEA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2017 AND DECEMBER 31, 2016
|
|
September 30,
2017
(Unaudited)
|
|
|
December 31,
2016
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,916,736
|
|
|
$
|
1,631,943
|
|
Cash Restricted
|
|
|
12,498,529
|
|
|
|
10,002,505
|
|
Accounts Receivable
|
|
|
183,521
|
|
|
|
110,269
|
|
Prepaid Expenses and other assets
|
|
|
521,895
|
|
|
|
270,634
|
|
Total current assets
|
|
|
15,120,681
|
|
|
|
12,015,531
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
852,136
|
|
|
|
300,761
|
|
|
|
|
|
|
|
|
|
|
Intangible and other assets
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
5,551
|
|
|
|
5,551
|
|
Intangible assets, net
|
|
|
1,524,063
|
|
|
|
1,550,044
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,502,431
|
|
|
$
|
13,871,707
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
806,454
|
|
|
$
|
765,596
|
|
Customer card funding
|
|
|
12,498,529
|
|
|
|
10,002,505
|
|
Legal settlement payable – current portion
|
|
|
–
|
|
|
|
254,900
|
|
Notes payable
|
|
|
–
|
|
|
|
124,168
|
|
Total current liabilities
|
|
|
13,304,983
|
|
|
|
11,147,169
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
–
|
|
|
|
27,892
|
|
Total long-term liabilities
|
|
|
–
|
|
|
|
27,892
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,304,983
|
|
|
|
11,175,061
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock; $0.001 par value; 150,000,000 shares authorized, 43,660,765 and 43,185,765 issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
43,661
|
|
|
|
43,186
|
|
Additional paid-in capital
|
|
|
7,085,324
|
|
|
|
6,797,759
|
|
Treasury stock at cost, 303,450 shares at September 30, 2017 and December 31, 2016
|
|
|
(150,000
|
)
|
|
|
(150,000
|
)
|
Accumulated deficit
|
|
|
(2,545,609
|
)
|
|
|
(3,799,613
|
)
|
Total 3Pea International, Inc.'s stockholders' equity
|
|
|
4,433,376
|
|
|
|
2,891,332
|
|
Noncontrolling interest
|
|
|
(235,928
|
)
|
|
|
(194,686
|
)
|
Total stockholders' equity
|
|
|
4,197,448
|
|
|
|
2,696,646
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
17,502,431
|
|
|
$
|
13,871,707
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2017 AND 2016
(UNAUDITED)
|
|
For the three months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
4,001,991
|
|
|
$
|
2,812,536
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
2,145,621
|
|
|
|
1,522,458
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,856,370
|
|
|
|
1,290,078
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
276,533
|
|
|
|
149,342
|
|
Selling, general and administrative
|
|
|
1,104,280
|
|
|
|
660,556
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,380,813
|
|
|
|
809,898
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
475,557
|
|
|
|
480,180
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
14,398
|
|
|
|
4,986
|
|
Interest expense
|
|
|
–
|
|
|
|
(20,483
|
)
|
Total other income (expense)
|
|
|
14,398
|
|
|
|
(15,497
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and noncontrolling interest
|
|
|
489,955
|
|
|
|
464,683
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
3,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling interest
|
|
|
486,955
|
|
|
|
464,683
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest
|
|
|
13,213
|
|
|
|
15,746
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to 3Pea International, Inc.
|
|
$
|
500,168
|
|
|
$
|
480,429
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Net income per common share - fully diluted
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
43,474,895
|
|
|
|
42,948,265
|
|
Weighted average common shares outstanding - fully diluted
|
|
|
44,544,895
|
|
|
|
43,138,279
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2017 AND 2016
(UNAUDITED)
|
|
For the nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
10,621,055
|
|
|
$
|
7,369,540
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
5,834,709
|
|
|
|
4,062,062
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,786,346
|
|
|
|
3,307,478
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
725,401
|
|
|
|
406,328
|
|
Selling, general and administrative
|
|
|
2,847,955
|
|
|
|
2,054,351
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,573,356
|
|
|
|
2,460,679
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,212,990
|
|
|
|
846,799
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
40,395
|
|
|
|
10,900
|
|
Interest expense
|
|
|
(31,623
|
)
|
|
|
(58,748
|
)
|
Total other income (expense)
|
|
|
8,772
|
|
|
|
(47,848
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and noncontrolling interest
|
|
|
1,221,762
|
|
|
|
798,951
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
9,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling interest
|
|
|
1,212,762
|
|
|
|
798,951
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest
|
|
|
41,242
|
|
|
|
99,097
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to 3Pea International, Inc.
|
|
$
|
1,254,004
|
|
|
$
|
898,048
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
Net income per common share - fully diluted
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
43,308,750
|
|
|
|
42,844,570
|
|
Weighted average common shares outstanding - fully diluted
|
|
|
44,378,750
|
|
|
|
42,991,542
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2017
|
|
Stockholders' Equity
Attributable to 3Pea International, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Treasury
|
|
|
|
|
|
Non-
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Accumulated
|
|
|
controlling
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Amount
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
Balance, December 31, 2016 (Audited)
|
|
|
43,185,765
|
|
|
$
|
43,186
|
|
|
$
|
6,797,759
|
|
|
$
|
(150,000
|
)
|
|
$
|
(3,799,613
|
)
|
|
$
|
(194,686
|
)
|
|
$
|
2,696,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for services
(Unaudited)
|
|
|
75,000
|
|
|
|
75
|
|
|
|
12,807
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
12,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for employee
bonus (Unaudited)
|
|
|
200,000
|
|
|
|
200
|
|
|
|
84,200
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
84,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Based Compensation
(Unaudited)
|
|
|
–
|
|
|
|
–
|
|
|
|
140,758
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
140,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of Warrants (Unaudited)
|
|
|
200,000
|
|
|
|
200
|
|
|
|
49,800
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) (Unaudited)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,254,004
|
|
|
|
(41,242
|
)
|
|
|
1,212,762
|
|
Balance, September
30, 2017 (Unaudited)
|
|
|
43,660,765
|
|
|
$
|
43,661
|
|
|
$
|
7,085,324
|
|
|
$
|
(150,000
|
)
|
|
$
|
(2,545,609
|
)
|
|
$
|
(235,928
|
)
|
|
$
|
4,197,448
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2017 AND 2016
(UNAUDITED)
|
|
For the nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,254,004
|
|
|
$
|
898,048
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Change in noncontrolling interest
|
|
|
(41,242
|
)
|
|
|
(99,097
|
)
|
Depreciation and amortization
|
|
|
725,401
|
|
|
|
406,328
|
|
Stock based compensation
|
|
|
238,040
|
|
|
|
40,091
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Change in accounts receivable
|
|
|
(73,252
|
)
|
|
|
(93,531
|
)
|
Change in prepaid expenses
|
|
|
(251,261
|
)
|
|
|
4,028
|
|
Change in other assets
|
|
|
–
|
|
|
|
(2,000
|
)
|
Change in accounts payable and accrued liabilities
|
|
|
40,858
|
|
|
|
237,511
|
|
Change in customer card funding
|
|
|
2,496,024
|
|
|
|
1,726,127
|
|
Change in legal settlement payable
|
|
|
(254,900
|
)
|
|
|
(746,954
|
)
|
Net cash provided by operating activities
|
|
|
4,133,672
|
|
|
|
2,370,551
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(649,260
|
)
|
|
|
(52,111
|
)
|
Purchase of intangible assets
|
|
|
(601,535
|
)
|
|
|
(551,448
|
)
|
Net cash used in investing activities
|
|
|
(1,250,795
|
)
|
|
|
(603,559
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from borrowing on note payable
|
|
|
–
|
|
|
|
29,053
|
|
Proceeds from exercise of warrants
|
|
|
50,000
|
|
|
|
–
|
|
Payments on notes payable
|
|
|
(152,060
|
)
|
|
|
(126,308
|
)
|
Net cash used in financing activities
|
|
|
(102,060
|
)
|
|
|
(97,255
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and restricted cash
|
|
|
2,780,817
|
|
|
|
1,669,737
|
|
Cash and restricted cash, beginning of period
|
|
|
11,634,448
|
|
|
|
8,453,439
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash, end of period
|
|
$
|
14,415,265
|
|
|
$
|
10,123,176
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Transfer of accrued interest from accrued liabilities to notes payable
|
|
$
|
–
|
|
|
$
|
115,227
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
46,663
|
|
|
$
|
58,748
|
|
Income taxes paid
|
|
$
|
16,200
|
|
|
$
|
–
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT POLICIES
The foregoing unaudited consolidated interim
financial statements have been prepared in accordance with generally accepted accounting principles 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 with generally accepted accounting principles in the United States of America 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 and nine
months ended September 30, 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 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.
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. Restricted cash is not available to the company for corporate
use.
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 unit’s 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. No impairment was deemed necessary in the three and nine month period ended September 30,2017.
Intangible assets with finite lives are
amortized on a straight-line basis over their estimated useful lives.
Platform and Licenses are comprised of
costs associated with our development and continual development of our platform which includes direct development costs, software
and licenses.
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 September 30, 2017 and December 31, 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 SVCs (Stored Value Cards) are used in a purchase or ATM transaction. Such revenues are recognized when such services are performed.
|
|
·
|
Maintenance, administration, transaction fees, charged to an SVC 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 ASC 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 or cash flows. During the first quarter of 2017, the Company concluded that
it was appropriate to reclassify its customer service center costs from general and administration expense to cost of sales for
the three and nine months ended September 30, 2016. In the second quarter of 2017, the company concluded that it was appropriate
to reclassify stock payable from liabilities to additional paid in capital for the three and nine month period ended September
30, 2017. These changes 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.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"), which supersedes nearly all existing revenue
recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are
transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods
or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates
may be required within the revenue recognition process than are required under existing GAAP. ASU 2014-09, as amended by ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
is effective for annual periods
beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for annual
reporting periods beginning after December 15, 2016. The FASB has also issued a number of additional technical corrections since
the initial ASU, all of which follow the effective dates of the new revenue recognition guidance under Topic 606. The amendment
allows companies to use either a full retrospective or a modified retrospective approach to adopt this ASU. We have formed
a project team and are currently assessing the impact of the adoption of this principle on our consolidated financial statements.
We anticipate adopting this ASU on January 1, 2018 using the modified retrospective approach, however, may opt for the
full retrospective method depending on the final outcome of our evaluation.
In February 2016, the FASB issued Accounting Standards Update
No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a
lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance
or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective
transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements, with certain practical expedients available. Management
is currently assessing the impact of this pronouncement on the Company’s financial statements.
2.
FIXED ASSETS
Fixed assets consist of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Equipment
|
|
$
|
1,343,717
|
|
|
$
|
746,117
|
|
Software
|
|
|
120,795
|
|
|
|
117,163
|
|
Furniture and fixtures
|
|
|
119,550
|
|
|
|
107,141
|
|
Website Costs
|
|
|
21,117
|
|
|
|
–
|
|
Leasehold improvements
|
|
|
50,999
|
|
|
|
36,499
|
|
|
|
|
1,656,178
|
|
|
|
1,006,920
|
|
Less: accumulated depreciation
|
|
|
(804,042
|
)
|
|
|
(706,159
|
)
|
Fixed assets, net
|
|
$
|
852,136
|
|
|
$
|
300,761
|
|
Fixed assets are depreciated over their useful lives ranging
from periods of 3 to 7 years.
3.
INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Patents and trademarks
|
|
$
|
34,940
|
|
|
$
|
34,771
|
|
Platform and licenses
|
|
|
2,602,924
|
|
|
|
2,008,307
|
|
Kiosk development
|
|
|
64,802
|
|
|
|
64,802
|
|
Licenses
|
|
|
389,165
|
|
|
|
382,414
|
|
|
|
|
3,091,831
|
|
|
|
2,490,294
|
|
Less: accumulated amortization
|
|
|
(1,567,768
|
)
|
|
|
(940,250
|
)
|
Intangible assets, net
|
|
$
|
1,524,063
|
|
|
$
|
1,550,044
|
|
Intangible assets are amortized over their
useful lives ranging from periods of 3 to 5 years.
4.
NOTES PAYABLE
Notes payable consist of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Note payable due to a shareholder of the Company, bearing fixed interest at 8%, at December 31, 2016 due on demand and unsecured.
|
|
$
|
–
|
|
|
$
|
102,613
|
|
Notes payable due to various equipment finance companies bearing interest from 12.89% to 15.14% at December 31, 2016.
|
|
|
–
|
|
|
|
49,447
|
|
|
|
|
–
|
|
|
|
152,060
|
|
Less: current portion
|
|
|
–
|
|
|
|
(124,168
|
)
|
Notes payable – long term portion
|
|
$
|
–
|
|
|
$
|
27,892
|
|
5.
COMMON STOCK
At September 30, 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. On that date, the Company had outstanding 43,660,765 shares of common stock, and no shares of preferred
stock.
2017 Transactions
: During the nine
months ended September 30, 2017, the Company issued shares of common stock as follows:
|
·
|
75,000
shares of common stock for current services rendered totaling $12,882 or $0.17 per share (average cost).
|
|
|
|
|
·
|
200,000 shares of common stock issued to an employee as a bonus totaling $84,400 or $0.42 per share (average cost)
|
|
|
|
|
·
|
200,000 shares of common stock were issued related to exercise of a warrant with an exercise price of $0.25 for a total of $50,000 in cash proceeds.
|
2016 Transactions
: During the nine
months ended September 30, 2016, the Company issued shares of common stock as follows:
|
·
|
437,500 shares of common stock for current services rendered
and prior services which had previously been recorded as accrued liability totaling $98,810 or $0.23 per share (average cost).
|
Stock and Warrant Grants:
In July 2017 the Company granted 200,000
shares of restricted common stock to an employee of the Company with a total value of $84,400 or $0.422 per share. These shares
have been issued. Concurrently, the Company also granted the employee four equal tranches of 200,000 restricted common shares,
each valued at $84,400 which will vest in equal amounts over a four year period on the last day of each quarter, commencing December
31, 2017. None of these shares have been issued.
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 the three and nine months ended September 30, 2017 was $39,397 and $118,191 respectively. As of September 30,
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 the three and nine months
ended September 30, 2017 was $2,758 and $8,274, respectively. The approximate value vested for 2016 is $2,758. As of September
30, 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, 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 and is fully vested as of September 30, 2017. The approximate value vested for the three and nine months ended
September 30, 2017 and 2016 was $2,100, and $6,300, respectively. As of September 30, 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 thirty-six months had vested as of September 30,
2017. The approximate value vested for the three months ended September 30, 2017 and 2016 $5,100 respectively and for the nine
months ended September 30, 2017 and 2016 was $14,200 and $15,300, respectively. As of September 30, 2017, all of the 150,000 shares
were issued and the 300,000 warrants granted have expired.
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 had a vesting period of nine months and were fully vested as March 31, 2015. 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. As of September
30, 2017, warrants relating to 200,000 shares have been exercised for total proceeds of $50,000.
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 and is fully vested as of September 30, 2017. The approximate value vested for the three
months and nine months ended September 30, 2017 and 2016 was $2,700 and $8,100, respectively. As of September 30, 2017, all 150,000
of the shares 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 per share 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 and nine months ended
September 30, 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 was payable by an initial payment of $1,000,000 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 settlement was paid in full.
7.
SUBSEQUENT EVENTS
There were no reportable subsequent events
after September 30, 2017 through the date of this filing.
Item 2. Management’s
discussion and analysis of financial condition and results of operations.
Disclosure Regarding Forward Looking
Statements
This Quarterly Report on Form 10-Q 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 programs 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. 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,
donor compensation 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 expense reimbursement cards. 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 (IVR), SMS alerts and two way SMS messaging platforms.
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 programs
for healthcare reimbursement payments, 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.
As part of our platform expansion development
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.
The Company is devoting more extensive
resources to sales and marketing activities as we have added essential personnel to our marketing and sales department. 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.
In order to expand into new markets, we
will 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
Three Months ended September 30, 2017
and 2016
Revenues for the three months ended September
30, 2017 were $4,001,991, an increase of $1,189,455 compared to the same period in the prior year, when revenues were $2,812,536.
The increase in revenue is 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. However, our revenue during this period was slightly impacted by
diminished card usage in areas affected by hurricanes in Texas and Florida. As of September 30, 2017, we managed 175 card programs
with over 1,390,000 participating cardholders.
The Company expects revenues to continue
to trend upwards for the foreseeable future as we expect to onboard over 35 additional corporate incentive card programs in the
fourth quarter of 2017.
Cost of revenues for the three months ended
September 30, 2017 were $2,145,621, an increase of $623,163 compared to the same period in the prior year, when cost of revenues
was $1,522,458. Cost of revenues constituted approximately 54% and 54% of total revenues in the same quarter 2017 and 2016, respectively.
Although cost of revenues remained relatively constant when compared to the same period in the previous year, cost of revenue in
the period ended September 30, 2017 was impacted by costs associated with program set up and launch. Cost of revenues is comprised
of transaction processing fees, data connectivity and data center expenses, network fees, card production costs, customer service
and program management expenses, application integration setup and sales expense.
Gross profit for the three months ended
September 30, 2017 was $1,856,370, an increase of $566,292 compared to the same period in the prior year, when gross profit was
$1,290,078. Our overall gross profit percentage approximated 46% and 46% during the second quarters of 2017 and 2016 which is consistent
with our overall expectations.
Depreciation and amortization for the three
months ended September 30, 2017 were $276,533, an increase of $127,191 compared to the same period prior year of $149,342. Overall
increase in depreciation and amortization was primarily a result of an increase in depreciation related to an increase in capital
expenditures and amortization expense related to additional capitalized platform costs.
Selling, general and administrative expenses
for the three months ended September 30, 2017 were $1,104,280, an increase of $443,724 compared to the same period in the prior
year, when selling, general and administrative expenses were $660,556. The increase in selling, general and administrative expenses
was due to increases in staff as we experienced an accelerated rate of new card product launches in the second half of 2017.
In the three months ended September 30,
2017, we recorded operating income of $475,557, as compared to $480,180 in the same period in the prior year, representing a decrease
in operating income of $(4,623).
Other income (expense) for the three months ended September
30, 2016 was $14,398 an increase in net other income (expense) of $29,895 compared to the same period in the prior year when other
income (expense) was $(15,497) which is within our overall expectations.
Net income before noncontrolling interest
for the three months ended September 30, 2017 was $489,955, an increase of $25,272 compared to the same period in the prior year
of $464,683. The increase in our net income before noncontrolling interest is attributable to the aforementioned factors.
Net loss attributable to noncontrolling
interest for the three months ended September 30, 2017 was $13,213, a decrease of $2,533 compared to the same period in the prior
year of $15,746 The decrease in net loss attributable to noncontrolling interest is primarily due to a decrease in expenses related
to our European operations.
Net income attributable to 3Pea International,
Inc. for the three months ended September 30, 2017 was $500,168, an increase of $19,739 compared to the same period in the prior
year, when we recorded net income of $480,429. The increase in our net income is attributable to the aforementioned factors.
Nine Months ended September 30, 2017
and 2016
Revenues for the nine months ended September
30, 2017 were $10,621,055, an increase of $3,251,515 compared to the same period in the prior year, when revenues were $7,369,540.
The increase in revenue is 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.
Cost of revenues for the nine months ended
September 30, 2017 were $5,834,709, an increase of $1,772,647 compared to the same period in the prior year, when cost of revenues
was $4,062,062. Cost of revenues constituted approximately 55% and 55% of total revenues in 2017 and 2016, respectively. Cost of
revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, card production
costs, customer service and program management expenses, application integration setup and sales expense.
Gross profit for the nine months ended
September 30, 2017 was $4,786,346, an increase of $1,478,868 compared to the same period in the prior year, when gross profit was
$3,307,478. Our overall gross profit percentage approximated 45% and 45% during the first nine months of 2017 and 2016 which is
consistent with our overall expectations.
Depreciation and amortization for the nine
months ended September 30, 2017 were $725,401, an increase of $319,073 compared to the same period prior year of $406,328. Overall
increase in depreciation and amortization was primarily a result of an increase in amortization expense related to additional capitalized
platform costs.
Selling, general and administrative expenses
for the nine months ended September 30, 2017 were $2,847,955, an increase of $793,604 compared to the same period in the prior
year, when selling, general and administrative expenses were $2,054,351. The increase in selling, general and administrative expenses
was due to increases in staff in anticipation of an accelerated rate of new card product launches in the second half of 2017.
In the nine months ended September 30,
2017, we recorded operating income of $1,212,990, as compared to $846,799 in the same period in the prior year, an increase in
operating income of $366,191.
Other income (expense) for the nine months
ended September 30, 2017 was $8,772, an increase in net other income (expense) of $56,620 compared to the same period in the prior
year when other income (expense) was $(47,848) which is within our overall expectations.
Net income before noncontrolling interest
for the nine months ended September 30, 2017 was $1,212,762, an increase of $413,811 compared to the same period in the prior year
of $798,951. The increase in our net income before noncontrolling interest is attributable to the aforementioned factors.
Net loss attributable to noncontrolling
interest for the nine months ended September 30, 2017 was $41,242, a decrease of $(57,855) compared to the same period in the prior
year of $99,097. The decrease in net loss attributable to noncontrolling interest is primarily due to a decrease in expenses related
to our European subsidiary.
Net income attributable to 3Pea International,
Inc. for the nine months ended September 30, 2017 was $1,254,004, an increase of $355,956 compared to the same period in the prior
year, when we recorded net income of $898,048. The increase in our net income is attributable to the aforementioned factors.
Liquidity and Sources of Capital
The following table sets forth the major
sources and uses of cash for the nine months ended September 30, 2017 and 2016:
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
4,133,672
|
|
|
$
|
2,370,551
|
|
Net cash (used) in investing activities
|
|
|
(1,250,795
|
)
|
|
|
(603,559
|
)
|
Net cash (used) in financing activities
|
|
|
(102,060
|
)
|
|
|
(97,255
|
)
|
Net increase in cash, restricted cash and cash equivalents
|
|
$
|
2,780,817
|
|
|
$
|
1,669,737
|
|
Comparison of nine months ended September 30, 2017 and 2016
During the nine months ended September
30, 2017 and 2016, we financed our operations primarily through revenues generated from operations.
Operating activities provided $4,133,672
of cash and restricted cash in the nine months ended September 30, 2017, as compared to $2,370,551 of cash and restricted cash
in the same period in the prior year. Restricted cash increased by $2,496,024 as a result of an increase in customer card funding.
Major non-cash items that affected our cash flow from operations in the nine months ended September 30, 2017 were non-cash charges
of $725,401 for depreciation and amortization and stock based compensation of $238,040. Our operating assets and liabilities provided
1,957,469 of cash, most of which resulted from an increase in customer card funding of $2,496,024 a decrease in prepaid expenses
of $(251,261) and a decrease in our legal settlement payable of $(254,900). Major non-cash items that affected our cash flow from
operations in the nine months ended September 30, 2016 were non-cash charges of $406,328 for depreciation and amortization and
stock based compensation of $40,091. Our operating assets and liabilities provided $1,125,181 of cash, most of which resulted
from an increase in customer card funding of $1,726,127, offset by a decrease in our legal settlement payable of $(746,954).
Investing activities used $(1,250,795)
of cash in the nine months ended September 30, 2017, as compared to $(603,559) of cash used in the same period in 2016, in both
periods, cash used in investing activities related to capital expenditures and the continuous enhancement of the processing platform
used in our business.
Financing activities used $(102,060)
of cash in the nine months ended September 30, 2017 as compared to $(97,255) of cash used in the nine months ended September 30,
2016. In 2017, cash used in financing activities consisted of payments on notes payables totaling $152,060 offset by $50,000 received
from the exercise of a warrant. In 2016, cash used in financing activities consisted of payments on notes payables totaling $126,308
offset by $29,053 received from a note payable.
Sources of Financing
We believe that our available unrestricted
cash on hand at September 30, 2017 of $1,916,736 and revenues anticipated for the remainder of 2017and 2018 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 Estimates
Our significant accounting policies are
described in Note 1 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.
Any estimates we make 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.