1700 W. Horizon Ridge Parkway, Suite 200,
Henderson, Nevada 89012
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging
growth company” in Rule 12b-2 of the Exchange Act. (Check one)
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: $11,432,521 based upon a market price of $0.45 per share.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date: 43,670,765 as of March 10, 2018.
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. We design and process prepaid programs
that run on our Paysign 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 compensation. We are expanding our product offering to include additional corporate
incentive products, payroll cards, general purpose re-loadable cards, and travel cards. 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 plan on continuing 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; card fulfillment fees; 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.
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, increase
brand recognition, reward customers, agents and employees, while reducing administration costs and streamlining 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 began marketing a corporate incentive
prepaid card based payment solution. 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, 2017,
we had over 1,560,000 cardholders participating in 205 card programs an increase of 85 card programs from December 31, 2016.
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, donations and co-pay assistance, payroll, settlement
payments, corporate expense cards and solutions designed for the public sector as well as general spend reloadable prepaid cards.
PaySign is a registered trademark of 3PEA Technologies, Inc. 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. 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; loyalty rewards; compensation for time and effort of donating, referral programs, event giveaways
and purchase incentives. The PaySign solution can be integrated into existing payment management systems or as act as a stand-alone
solution. 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.
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.
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 cards can be used as a reloadable prepaid debit card for use by consumers without a traditional bank account.
The PaySign Communications Suite
To help maximize the cardholder experience,
cardholders can access their card balances and transaction history, as well as other information as dictated by the program, such
as ATM locator, loyalty point counter, geo-specific messaging through a number of touchpoints such as the PaySign kiosk, the PaySign
Mobile App, two way SMS, text alerts and the PaySign cardholder web portal.
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, 2017, we managed 205 card programs with over 1,560,000 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/or MasterCard, as well as any other networks that
we desire to use, such as Discover, 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, 2018, we had fifty one 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 2017, 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, 2016, 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 46% 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 43,670,765 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;
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fluctuations in customer retention rates;
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changes in the mix of products and services that we sell;
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changes in the mix of retail distributors through which we sell our products and services;
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the timing of commencement, renegotiation or termination of relationships with significant third party service providers;
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changes in our or our competitors' pricing policies or sales terms;
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the timing of commencement and termination of major advertising campaigns;
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the timing of costs related to the development or acquisition of complementary businesses;
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the timing of costs of any major litigation to which we are a party;
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the amount and timing of operating costs related to the maintenance and expansion of our business, operations and infrastructure;
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our ability to control costs, including third-party service provider costs;
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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
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changes in the regulatory environment affecting the banking or electronic payments industries generally or prepaid financial services specifically.
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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:
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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 $18,000 per month.
We lease space for our data centers in
Las Vegas, Nevada under co-location month to month agreements that have typical terms of 36 months. The agreements provide for
lease payments of approximately $4,800 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 2017 and 2016, our common stock
was traded on the OTCQB operated by OTC Markets Group, LLC under the symbol “TPNL”. The company is 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 2017 and 2016.
|
|
2017
|
|
|
2016
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
|
0.46
|
|
|
|
0.30
|
|
|
|
0.27
|
|
|
|
0.16
|
|
Second Quarter
|
|
|
0.48
|
|
|
|
0.39
|
|
|
|
0.25
|
|
|
|
0.15
|
|
Third Quarter
|
|
|
0.58
|
|
|
|
0.42
|
|
|
|
0.21
|
|
|
|
0.15
|
|
Fourth Quarter
|
|
|
0.74
|
|
|
|
0.43
|
|
|
|
0.40
|
|
|
|
0.17
|
|
There were approximately 720 shareholders
of record of the common stock as of December 31, 2017. 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, 2017 or 2016. 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,
2017, we issued 10,500 shares of common stock to an employee. 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,
2017, 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 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 compensation. We are expanding our product offering to include additional corporate
incentive products, payroll cards, general purpose re-loadable cards, and travel 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 and interchange 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, donor compensation, 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 donor compensation, loyalty rewards
and incentive cards.
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 2018, we plan to invest additional funds
in technology improvements, sales and marketing, customer service, and regulatory compliance. 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 2017 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 continued
profitability in 2017.
Fiscal Years Ended December 31, 2017
and 2016
Revenues for the year ended December 31,
2017 were $15,234,091, an increase of $4,817,419 compared to the year ended December 31, 2016, when revenues were $10,416,672.
The increase in revenue approximating 46% 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 continue to experience a
similar revenue growth rate in 2018 as compared to 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, 2017 were $ 8,534,272, an increase of $2,655,034 compared to the year ended December 31, 2016, when cost of revenues were $5,879,238.
Cost of revenues constituted approximately 56% and 56% 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, 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, 2017 was $6,699,819, an increase of $2,162,385 compared to the year ended December 31, 2016, when gross profit was $4,537,434.
Our overall gross profit percentage approximated 44% and 44% during the fiscal years 2017 and 2016 which is consistent with our
overall expectations. We believe our profit margins will improve in 2018.
Selling, general and administrative expenses
for the year ended December 31, 2017 were, $4,055,836 an increase of $1,449,331 compared to the year ended December 31, 2016, when
selling, general and administrative expenses were $2,606,505. The increase in selling, general and administrative expenses was
primarily due to the continued ramp up of our investment in infrastructure and staff as we continued to devote more resources to
our internal sales and marketing. In 2018, we believe we will experience growth rates comparable to or better than those experienced
in 2017 as a result of growth in our existing programs and the expected addition of new card products in various market verticals.
Depreciation and amortization for the year
ended December 31, 2017 were $876,191, an increase of $303,871 compared to the year ended December 31, 2016 when depreciation and
amortization were $572,320. The increase in depreciation and amortization was primarily due to continued capitalization on enhancements
to our platform which we expect to continue with further enhancements in the future.
In the fiscal year ended December 31, 2017,
we recorded operating income of $1,767,792 as compared to operating income of $1,358,609 in the fiscal year ended December 31,
2015, an increase of $409,183.
Other income (expense) for the year ended
December 31, 2017 was $23,918, as compared to other income (expense) of $(60,958) in year ended December 31, 2016, which represents
an increase in net other income (expense) of $84,876.
Our net income for the year ended December
31, 2017 was $1,791,141 as compared to net income of $1,400,799 in the year ended December 31, 2016, which represents an increase
in net income of $390,342. 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, 2017 and 2016:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash and restricted cash provided by operating activities
|
|
$
|
7,151,714
|
|
|
$
|
4,205,283
|
|
Net cash (used in) investing activities
|
|
|
(1,519,345
|
)
|
|
|
(887,009
|
)
|
Net cash (used in) financing activities
|
|
|
(102,060
|
)
|
|
|
(137,265
|
)
|
Net increase in cash, restricted cash and cash equivalents
|
|
$
|
5,530,309
|
|
|
$
|
3,181,009
|
|
Comparison of Fiscal 2017 and 2016
In fiscal 2017 and 2016, we financed our
operations through internally generated funds.
Operating activities provided $7,151,714
of cash in 2017, as compared to $4,205,280 of cash provided in fiscal 2016. Of the 2017 amount, $4,413,939 was provided by change
in customer card funding, which affected our restricted cash for the same amount. Excluding the change in restricted cash, net
cash provided by operating activities was $2,737,775. In 2016, $2,938,560 of cash was provided by change in customer card funding,
which affected our restricted cash for the same amount. Excluding the change in restricted cash, cash provided by operating activities
in 2016 was $1,266,720. Major non-cash items that affected our cash flow from operations in 2017 were non-cash stock based expenses
of $308,696 and depreciation and amortization of $876,191. Our operating assets and liabilities, excluding changes in customer
card funding, used $232,861 of cash, which resulted primarily from a decrease in legal settlement payable of $254,900.
Investing activities (used) $(1,519,345)
of cash in 2017, as compared to $(887,009) of cash in 2016, all of which related in both years to platform expansion and the purchase
of equipment used in our business.
Financing activities (used) $(102,060)
of cash in 2017 as compared to $(137,265) of cash (used) in 2016. Our cash used in financing activities in 2017 consisted of payments
of notes payable totaling $152,060 as well as cash received from stock warrant exercised with proceeds received totaling $50,000.
Financing activities (used in) 2016 related to net repayment of borrowings.
Liquidity and Sources of Financing
We believe that our available cash on hand,
excluding restricted cash, at December 31, 2017 of $2,729,062, along with anticipated revenues and operating profits anticipated
for 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 Policies and 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.
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, 2017 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, 2017. 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, 2017 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, 2017 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, 2017.
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
|
|
|
52
|
|
|
President & CEO, Chairman, Director
|
Brian Polan
|
|
|
58
|
|
|
CFO
|
Daniel H. Spence
|
|
|
54
|
|
|
CIO, Director
|
Joan M. Herman
|
|
|
61
|
|
|
COO
|
Anthony E. DePrima, Esq.
|
|
|
78
|
|
|
General Counsel, Secretary, Director
|
The following information sets forth the
backgrounds and business experience of the directors and executive officers.
Mark R. Newcomer, Chairman, Chief Executive
Officer, 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 Mr. 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., General Counsel, 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. Mr. DePrima served as Advisory Director and General Counsel of
Coal Brick Oven Pizzeria, Inc., a Nevada corporation (Grimaldi’s Pizzeria chain of restaurants) from 2002 to 2017. 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.
Joan M. Herman, Chief Operating Officer.
Ms. Herman serves as our Chief Operating Officer since September 2017. Ms. Herman‘s experience in payments spans more than
30 years, holding various management positions in operations, product development, and sales and marketing on both the issuing
and acquiring sides of the card business. Ms. Herman’s previous employers and directorships include Sunrise Bank from June
2012 to August 2017, UMB Bank from 2010 to 2012 and Heartland Bank from 2006 to 2010, and served as a Director at Heartland Payment
Systems from 1997 to 2006. Ms. Herman is a member of the Board of Directors of the National Branded Prepaid Card Association (NBPCA)
and serves as its Treasurer. Ms. Herman earned her B.A. and M.A. in business and marketing from Webster University, St. Louis,
Missouri.
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 2017, our board of directors had five (5) 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 currently have independent directors
nor an audit, nominating or compensation committee. We have not had such committees to date because we were not seeking to
add independent directors to the board. We are in the process of identifying and appointing independent directors and will be establishing
an audit, nominating and compensation committee. We will also establish charters for such committees.
We do not have any director who would
qualify as an audit committee financial expert on our board.
Code of Ethics
Our Board of Directors has adopted a Code
of Business Conduct and Ethics, which are filed as Exhibits 14.1, 14.2 and 14.3 to this Form 10-K.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires
directors, executive officer and persons who beneficially own more than 10% of a registered class of our equity securities to
file with the SEC initial reports of ownership and reports or changes in ownership of such equity securities. Such persons are
also required to furnish us with copies of all Section 16(a) forms that they file. Based upon a review of the copies of the forms
furnished to us and written representations from certain reporting persons, we believe that, during the year ended December 31,
2017, none of our executive officers, directors or beneficial owners of more than 10% of any class of registered equity security
failed to file on a timely basis any such report, except as follows: Joan Herman filed her initial report of ownership on Form
3 on October 16, 2017, which was more than 10 days after her commencement of employment as our chief operating officer.
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
$
|
|
|
Bonus
$(1)
|
|
|
Other
$ (2)
|
|
|
|
Stock Grant
$ (3)(4)
|
|
|
|
Total
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark R. Newcomer, President & CEO
|
|
|
2017
|
|
|
$
|
424,188
|
|
|
$
|
60,000
|
|
|
$
|
4,500
|
|
|
$
|
63,036
|
|
|
$
|
551,724
|
|
|
|
|
2016
|
|
|
$
|
300,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
15,759
|
|
|
$
|
315,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Polan, CFO
|
|
|
2017
|
|
|
$
|
152,883
|
|
|
$
|
–
|
|
|
$
|
5,000
|
|
|
$
|
15,759
|
|
|
$
|
173,642
|
|
|
|
|
2016
|
|
|
$
|
89,539
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
3,940
|
|
|
$
|
93,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel H. Spence, CIO
|
|
|
2017
|
|
|
$
|
318,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
63,036
|
|
|
$
|
381,536
|
|
|
|
|
2016
|
|
|
$
|
178,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
15,759
|
|
|
$
|
194,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony E. DePrima, Esq.
|
|
|
2017
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
176,500
|
|
|
$
|
15,759
|
|
|
$
|
192,259
|
|
General Counsel, Secretary
|
|
|
2016
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
16,500
|
|
|
$
|
3,940
|
|
|
$
|
20,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joan M. Herman, COO
|
|
|
2017
|
|
|
$
|
76,923
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
21,100
|
|
|
$
|
98,023
|
|
|
(1)
|
The bonus paid to Mr. Newcomer in 2017 was a discretionary bonus determined by the Board of Directors
and was not based on the fulfillment of any formula, criteria, or fulfillment of any performance target, goal or condition.
|
|
(2)
|
Other is comprised of a 401(k) employer matching contributions for Mark R Newcomer and Brian Polan. For Anthony
E. DePrima, Other is comprised of payments to Mr. DePrima’s law firm (DePrima Law, PC) in consideration for legal services
rendered to us.
|
|
(3)
|
In November 2016, the Company granted Mark Newcomer, Daniel Spence, Anthony E. DePrima and Brian Polan a total of 2,000,000,
2,000,000,500,000 and 500,000 shares of restricted common stock, respectively, which had a total value of $315,180, $315,180, $78,000
and $78,800, respectively, based upon a value of $0.15759 per share. 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 officer is are still employed by us at the
time. None of these shares have been issued.
|
|
(4)
|
In July 2017, the Company granted Joan M. Herman 200,000 shares of restricted common stock with
a value of $84,400, which are fully vested and have been issued. At the same time, the Company granted but has not issued Ms. Herman
four equal tranches of two hundred thousand restricted common shares each, which vest quarterly in equal amounts over a four year
period on the last day of each quarter, commencing December 31, 2017, if Ms. Herman is still employed by us at that time.
|
We did not grant any stock options or stock
appreciation rights to our named executive officers in the last fiscal year. We did not reprice any options or stock appreciation
rights during the last fiscal year. We did not waive or modify any specified performance target, goal or condition to payout with
respect to any amount included in any incentive plan compensation included in the summary compensation table.
Employment Agreements
We do not have any employment agreements with our officers.
Potential Payments Upon Termination or
Change in Control
We do not have any agreements with our
named executive officers that contain provisions requiring that we make payments to the name executive officer at, following, or
in connection with the resignation, retirement or other termination of the named executive officer, or a change in control of us,
or a change in the named executive officer's responsibilities following a change in control.
Outstanding Equity Awards at Fiscal Year-End
|
|
|
Option Awards
|
|
|
|
Stock Awards
|
Name
(a)
|
|
|
Number
of
Securities
Underlying
Unexercised
options
(#) (b)
|
|
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised Unearned
Options
(#)
(c)
|
|
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised Unearned
Options
(#)
(d)
|
|
|
|
Option
Exercise
Price
($)
(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 R. Newcomer (2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,500,000
|
|
|
$
|
1,095,000
|
|
Daniel H. Spence (2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,500,000
|
|
|
$
|
1,095,000
|
|
Brian Polan (3)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
375,000
|
|
|
$
|
273,751
|
|
Anthony E. DePrima, Esq.(3)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
375,000
|
|
|
$
|
273,751
|
|
Joan M. Herman (4)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
750,000
|
|
|
$
|
547,500
|
|
|
(1)
|
The value of the unearned awards is based upon the closing price of our common stock on December 29, 2017, which was $0.73
per share.
|
|
(2)
|
The restricted stock grant consisted of 2,000,000 shares issued on November 21, 2016, which vest on a quarterly basis over
five years to the extent the executive is still employed by us at the end of each quarter.
|
|
(3)
|
The restricted stock grant consisted of 500,000 shares issued on November 21, 2016, which vest on a quarterly basis over five
years to the extent the executive is still employed by us at the end of each quarter.
|
|
(4)
|
The restricted stock grant consisted of 800,000 shares issued on July 3, 2017, which vest on a quarterly basis over four years
to the extent the executive is still employed by us at the end of each quarter.
|
We do not have any policy regarding
compensation of our directors. However, we anticipate developing a board compensation policy that is consistent with that provided
to board members of other companies within our industry, in order to attract qualified candidates to our board.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain
information, as of March 6, 2018, 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 R. Newcomer (2) (3)
|
|
|
8,610,000
|
|
|
|
20.7%
|
|
|
|
|
|
|
|
|
|
|
Daniel H. Spence (2) (4)
|
|
|
8,110,000
|
|
|
|
19.5%
|
|
|
|
|
|
|
|
|
|
|
Anthony E. DePrima, Esq. (2) (5)
|
|
|
2,895,163
|
|
|
|
6.9%
|
|
|
|
|
|
|
|
|
|
|
Brian Polan (2) (6)
|
|
|
206,390
|
|
|
|
0.7%
|
|
|
|
|
|
|
|
|
|
|
Joan M. Herman (2) (7)
|
|
|
300,000
|
|
|
|
1.4%
|
|
|
|
|
|
|
|
|
|
|
All Officers and Directors as a Group(1)
|
|
|
20,121,553
|
|
|
|
48.2%
|
|
(1)
|
Based upon 43,670,765 shares of Common Stock issued and outstanding as of March 6, 2018. 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 1,600,000 vest within sixty days of March 6, 2018.
|
|
|
(2)
|
The address for the shareholder is 1700 W Horizon Ridge Pkwy, Suite 102, Henderson, NV 89012.
|
|
|
(3)
|
Mr. Newcomer’s ownership consists of 8,010,000 shares owned outright and 600,000 shares that vest within 60 days of March 6, 2018 which Mr. Newcomer has a right to receive. Mr. Newcomer’s ownership does not include 1,400,000 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 600,000 shares that vest within 60 days of March 6, 2018 which Mr. Spence has a right to receive. Mr. Spence’s ownership does not include 1,400,000 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 150,000 shares that vest within 60 days of March 6, 2018 which Mr. DePrima has a right to receive. Mr. DePrima’s ownership does not include 350,000 additional shares granted to Mr. DePrima that have not yet vested.
|
|
|
(6)
|
Mr. Polan’s ownership consists of 56,390 shares owned outright and 150,000 that vest within 60 days of March 6, 2018 which Mr. Polan has a right to receive. Mr. Polan’s ownership does not include 350,000 additional shares granted to Mr. Polan that have not yet vested.
|
(7)
|
Ms. Herman’s ownership includes 200,000 shares owed outright and 100,000 shares that vest within 60 days of March 6, 2018, which Ms. Herman has a right to receive. Ms. Herman’s ownership does not include 700,000 additional shares granted to Ms. Herman that have not yet vested.
|
Equity Compensation
Plan Information
The following table provides information as of December 31,
2017 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 NASDAQ Stock Market. Under applicable NASDAQ Stock Market rules, a director
would not be considered an “independent director” if the director at any time in the past three years (a) was employed
by us, (b) received more than $120,000 in compensation from us, other than for board services, (c) had a family member who was
employed as an executive officer of us, (d) was, or had a family member that was, a partner, controlling shareholder or executive
officer of any organization that received payments for property or services that exceeded the greater of 5% of the recipient’s
gross revenues or $200,000, (e) was, or had a family member that was, employed as an executive officer of another entity during
the past three years where any of the executive officers of us serve on the compensation committee, or (f) was, or had a family
member that was, a partner in our auditor at any time in the past three years. At 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 Nevada 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.
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.
Our independent public accountants for
the fiscal years ended December 31, 2016 and 2017 were Sarna & Company and Squar Milner LLP, respectively. 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. The following table presents fees for professional audit services and other services rendered to the Company by such
accountants for the fiscal years ended December 31, 2017 and 2016.
|
|
Fiscal Year
2017
|
|
|
Fiscal Year
2016
|
|
Audit Fees
|
|
$
|
50,000
|
|
|
$
|
32,500
|
|
Audit-Related Fees
|
|
|
30,000
|
|
|
|
7,500
|
|
Tax Fees
|
|
|
–
|
|
|
|
–
|
|
All Other Fees
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
80,000
|
|
|
$
|
40,000
|
|
__________________
(1)
|
Audit Fees.
Audit services include work performed for the audit of our financial statements and the review of financial statements included in our quarterly reports, as well as work that is normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings.
|
(2)
|
Audit-related services
. Audit-related services are for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not covered above under “audit services.”
|
(3)
|
Tax services
. Tax services include all services performed by the independent registered public accounting firm’s tax personnel for tax compliance, tax advice and tax planning.
|
(4)
|
Other services
. Other services are those services not described in the other categories.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
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, donor compensation 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, 2017 and 2016, 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.
Leasehold improvements are capitalized and depreciated over the useful life of the improvements. 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.
Intangible assets
– 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 have filed consolidated tax returns
whereby past subsidiary losses are used to offset tax liabilities on current profits. This approach could be challenged by the
Internal Revenue Service (“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, 2017 and 2016, 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.
Reclassification of prior year
presentation
- Certain prior year amounts have been reclassified for consistency with the current year presentation.
These reclassifications had no effect on the reported results of operations or cash flows. During the year ended December 31,
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 year ended December 31, 2016. Additionally, the company concluded that it was
appropriate to reclassify stock payable from liabilities to additional paid in capital for the year ended December 31, 2017.
These changes in classification do 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.
New accounting pronouncements
– In May 2014, the
FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"), and has since
been modified through additional technical corrections since its original issuance. ASU 2014-09 supersedes nearly all existing
revenue recognition guidance under current 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. The standard 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. The standard allows
companies to apply either a full retrospective approach, which requires applying the standard to each prior year reporting period
presented, or a modified retrospective approach with a cumulative effect adjustment recognized upon adoption. The standard is effective
for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We will adopt the standard on
January 1, 2018 using the modified retrospective approach.
We have completed our assessment of the
impact under the new revenue standard on our consolidated financial statements. Based on our assessment, we have concluded that
our financial statements will not be materially impacted upon adoption.
In January 2016, the FASB issued ASU No.
2016-01,
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities
("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 ASU 2016-01 may
result in a cumulative adjustment to retained earnings as of the beginning of the year of adoption. We will adopt ASU 2016-01 on
January 1, 2018, the effect of which will not have a material impact on our consolidated financial statements as we do not currently
hold any financial instruments in the scope of the updated standard.
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
("ASU 2016-02") in order to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous
GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments and a right-of-use asset representing
its right to use the underlying asset for leases with a term greater than 12 months. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and
early adoption is permitted. We are currently in the process of evaluating the impact of adoption of ASU 2016-02 on our consolidated
financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
("ASU
2016-13") that requires financial assets measured at amortized cost be presented at the net amount expected to be collected.
Credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited by the amount
that the fair value is less than amortized cost. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of ASU 2016-13 on
our consolidated financial statements.
In November 2016, the FASB issued ASU No.
2016-18,
Restricted Cash
("ASU 2016-18"), to require that restricted cash and restricted cash equivalents be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement
of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating,
investing or financing sections of the cash flow statement. The amendments are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied retrospectively
to each period presented. We have elected to early adopt ASU 2016-18 which resulted in a change in presentation on our consolidated
statement of cash flows, but not on our consolidated financial results.
In January 2017, the FASB issued ASU No.
2017-04,
Intangibles - Goodwill and Other ("ASU 2017-04"): Simplifying the Test for Goodwill Impairment
,
which simplifies the existing two-step guidance for goodwill impairment testing by eliminating the second step resulting in a write-down
to goodwill equal to the initial amount of impairment determined in step one. The ASU is to be applied prospectively for reporting
periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed
after January 1, 2017. We are currently evaluating the impact of the provisions of ASU 2017-04 on our consolidated financial
statements, however, we do not anticipate it will have a material impact upon adoption.
2.
FIXED ASSETS
Fixed assets consist of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Equipment
|
|
$
|
1,387,589
|
|
|
$
|
746,117
|
|
Software
|
|
|
123,913
|
|
|
|
117,163
|
|
Furniture and fixtures
|
|
|
126,174
|
|
|
|
107,141
|
|
Website Costs
|
|
|
25,467
|
|
|
|
–
|
|
Leasehold improvements
|
|
|
50,999
|
|
|
|
36,499
|
|
|
|
|
1,714,142
|
|
|
|
1,006,920
|
|
Less: accumulated depreciation
|
|
|
859,740
|
|
|
|
706,159
|
|
Fixed assets, net
|
|
$
|
854,402
|
|
|
$
|
300,761
|
|
3.
INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Patents and trademarks
|
|
$
|
34,771
|
|
|
$
|
34,771
|
|
Platform
|
|
|
2,808,886
|
|
|
|
2,008,307
|
|
Kiosk Development
|
|
|
64,802
|
|
|
|
64,802
|
|
Licenses
|
|
|
393,958
|
|
|
|
382,414
|
|
|
|
|
3,302,417
|
|
|
|
2,490,294
|
|
Less: accumulated amortization
|
|
|
1,662,860
|
|
|
|
940,250
|
|
Intangible assets, net
|
|
$
|
1,639,557
|
|
|
$
|
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:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Note payable bearing interest at 8%, due on demand and unsecured.
|
|
$
|
–
|
|
|
$
|
102,613
|
|
Notes payable due to various equipment finance companies bearing interest from 12.89% to 15.14%.
|
|
|
–
|
|
|
|
49,447
|
|
|
|
|
–
|
|
|
|
152,060
|
|
Less: non-current portion
|
|
|
–
|
|
|
|
27,892
|
|
|
|
$
|
–
|
|
|
$
|
124,168
|
|
5.
COMMON STOCK
At December 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. On that date, the Company had outstanding 43,670,765 shares of common stock, and no shares of
preferred stock.
2017 Transactions:
During the year
ended December 31, 2017, the Company issued shares of common stock as follows:
|
·
|
210,000 shares of common stock issued to
employees as signing bonuses with a fair value of $91,800.
|
|
|
|
|
·
|
75,000 shares of common stock issued to
the Company’s Board of Advisors with a fair value of $12,882.
|
|
|
|
|
·
|
200,000 shares of common stock issued related
to an exercise of a warrant with an exercise price of $0.25 granted in fiscal year 2015 totaling cash proceeds of $50,000.
|
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 with a fair value of $147,340.
|
Warrants:
As of December 31, 2017, 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
|
|
|
3.5 years
|
|
|
200,000
|
|
Total
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
200,000
|
|
Stock and Warrant Grants:
In December 2017, the Company granted an
employee 10,000 shares of restricted common stock to an employee with a fair value of $7,400. These shares have been issued.
In July 2017 the Company granted 200,000
shares of restricted common stock to an employee of the Company with a total fair 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 vested 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 2017 is $157,590, and the value vested for 2016 is $39,397, As of December 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 2017 is $11,031 and the value
vested for 2016 is $2,758. 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 warrants to purchase 200,000 shares of common stock 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; 3.5 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 all shares and warrants had vested as
of December 31, 2017. As of December 31, 2017, the 200,000 shares have been issued and the warrants for 200,000 shares were granted.
In August 2014, the Company granted 200,000
shares of common stock to a consultant of which 50,000, with a total value of $8,500 or $.017 per share, vested in August 2014,
and the other 150,000 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
all shares had vested as of December 31, 2017. The approximate value vested for the years ended December 31, 2016 and 2017 was
$8,500 and $4,936. As of December 31, 2017, 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 twenty eight months had vested as of December
31, 2016 and all shares and warrants were vested as of December 31, 2017. The approximate value vested for the years ended December
31, 2016 and 2017 was, $20,700 and $14,200. As of December 31, 2016, all of the 150,000 shares have been issued and all of the
class A warrants and class B warrants 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 have a vesting period of six months. As of December 31, 2017, the 200,000 shares and 200,000 warrants
had been issued and granted. The warrants have been exercised in 2017.
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 27 months had vested as of December 31, 2016 and were fully vested as of December
31, 2017, respectively. The approximate value vested for the year ended December 31, 2016 and 2017 was $13,000 and $11,300. As
of December 31, 2017, all 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. The warrants have expired.
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, 2016. The approximate value vested for
the year ended December 31, 2016 was $12,750 and 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 $17,511 per month. Lease
payments plus common area maintenance fees for the year ended December 31, 2017 and 2016 totaled $208,975 and $174,725 respectively.
Data Center Lease
– The Company
leases space on a monthly basis for its data centers in Nevada under a co-location agreement. The agreement provides for lease
payments of $4,807 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, 2017,
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 $6,000 and $-0- for the years ended December 31, 2017 and 2016, respectively. Deferred tax assets are
comprised of the following at December 31:
|
|
2017
|
|
|
2016
|
|
Net operating loss carryforward
|
|
$
|
5,670,000
|
|
|
$
|
5,510,000
|
|
Temporary differences
|
|
|
540,000
|
|
|
|
303,000
|
|
Less valuation allowance
|
|
|
(6,210,000
|
)
|
|
|
(5,813,000
|
)
|
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, 2017 and 2016, 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, 2017 and 2016, net operating loss carryforwards were approximately $6,210,000 and $5,813,000, respectively, for
federal tax purposes that expire at various dates from 2015 through 2032.
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, 2017 and 2016, the provision
for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (34% in 2017 and 2016) to income
taxes as follows:
|
|
2017
|
|
|
2016
|
|
Tax provision computed at 34%
|
|
$
|
609,000
|
|
|
$
|
65,000
|
|
Change in valuation allowance
|
|
|
302,000
|
|
|
|
460,000
|
|
Change in carryovers and tax attributes
|
|
|
(911,000
|
)
|
|
|
(525,000
|
)
|
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. During the year ended
December 31, 2017, the Company paid the remaining balance owed totaling $254,900.
9.
SUBSEQUENT EVENTS
We do not have any significant reportable
subsequent events impacting the accompanying consolidated financial statements up through the date of our report.