Item 1. Financial Statements
3PEA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2018 AND DECEMBER 31, 2017
|
|
June 30,
2018
(Unaudited)
|
|
|
December 31,
2017
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,074,147
|
|
|
$
|
2,748,313
|
|
Cash restricted
|
|
|
18,464,027
|
|
|
|
14,416,444
|
|
Accounts receivable
|
|
|
189,582
|
|
|
|
165,523
|
|
Prepaid expenses and other current assets
|
|
|
1,048,143
|
|
|
|
572,789
|
|
Total current assets
|
|
|
22,775,899
|
|
|
|
17,903,069
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
809,234
|
|
|
|
854,402
|
|
|
|
|
|
|
|
|
|
|
Intangible and other assets
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,551
|
|
|
|
5,551
|
|
Intangible assets, net
|
|
|
1,895,560
|
|
|
|
1,639,557
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
25,485,244
|
|
|
$
|
20,402,579
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
688,537
|
|
|
$
|
1,145,083
|
|
Customer card funding
|
|
|
18,464,027
|
|
|
|
14,416,444
|
|
Total current liabilities
|
|
|
19,152,564
|
|
|
|
15,561,527
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
19,152,564
|
|
|
|
15,561,527
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock; $0.001 par value; 150,000,000 shares authorized, 43,670,765 issued and outstanding at June 30, 2018 and December 31, 2017, respectively
|
|
|
43,671
|
|
|
|
43,671
|
|
Additional paid-in capital
|
|
|
7,505,552
|
|
|
|
7,155,970
|
|
Treasury stock at cost, 303,450 shares at June 30, 2018 and December 31, 2017
|
|
|
(150,000
|
)
|
|
|
(150,000
|
)
|
Accumulated deficit
|
|
|
(863,909
|
)
|
|
|
(2,008,472
|
)
|
Total 3PEA International, Inc.'s stockholders' equity
|
|
|
6,535,314
|
|
|
|
5,041,169
|
|
Noncontrolling interest
|
|
|
(202,634
|
)
|
|
|
(200,117
|
)
|
Total stockholders' equity
|
|
|
6,332,680
|
|
|
|
4,841,052
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
25,485,244
|
|
|
$
|
20,402,579
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2018
AND 2017
(UNAUDITED)
|
|
For the three months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
5,460,723
|
|
|
$
|
3,418,169
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
2,840,876
|
|
|
|
1,855,539
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,619,847
|
|
|
|
1,562,630
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
250,447
|
|
|
|
234,413
|
|
Selling, general and administrative
|
|
|
1,667,856
|
|
|
|
928,585
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,918,303
|
|
|
|
1,162,998
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
701,544
|
|
|
|
399,632
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
29,890
|
|
|
|
5,901
|
|
Interest expense
|
|
|
–
|
|
|
|
(31,623
|
)
|
Total other income (expense)
|
|
|
29,890
|
|
|
|
(25,722
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and noncontrolling interest
|
|
|
731,434
|
|
|
|
373,910
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
–
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling interest
|
|
|
731,434
|
|
|
|
370,910
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the noncontrolling interest
|
|
|
622
|
|
|
|
13,533
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to 3PEA International, Inc.
|
|
$
|
732,056
|
|
|
$
|
384,443
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
Net income per common share - fully diluted
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
45,560,692
|
|
|
|
43,262,413
|
|
Weighted average common shares outstanding - fully diluted
|
|
|
46,036,447
|
|
|
|
44,189,913
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND
2017
(UNAUDITED)
|
|
For the six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
10,137,042
|
|
|
$
|
6,619,064
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
5,274,086
|
|
|
|
3,689,088
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,862,956
|
|
|
|
2,929,976
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
496,079
|
|
|
|
449,274
|
|
Selling, general and administrative
|
|
|
3,247,321
|
|
|
|
1,743,268
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,743,400
|
|
|
|
2,192,542
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,119,556
|
|
|
|
737,434
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
22,490
|
|
|
|
25,997
|
|
Interest expense
|
|
|
–
|
|
|
|
(31,623
|
)
|
Total other income (expense)
|
|
|
22,490
|
|
|
|
(5,626
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and noncontrolling interest
|
|
|
1,142,046
|
|
|
|
731,808
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
–
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling interest
|
|
|
1,142,046
|
|
|
|
725,808
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the noncontrolling interest
|
|
|
2,517
|
|
|
|
28,029
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to 3PEA International, Inc.
|
|
$
|
1,144,563
|
|
|
$
|
753,837
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
Net income per common share - fully diluted
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
45,359,479
|
|
|
|
43,224,301
|
|
Weighted average common shares outstanding - fully diluted
|
|
|
45,893,265
|
|
|
|
44,151,801
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(UNAUDITED)
|
|
Stockholders' Equity
Attributable to 3PEA International, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Treasury
|
|
|
|
|
|
Non-
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Accumulated
|
|
|
controlling
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Amount
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
Balance, December 31, 2017
(Audited)
|
|
|
43,670,765
|
|
|
$
|
43,671
|
|
|
$
|
7,155,970
|
|
|
$
|
(150,000
|
)
|
|
$
|
(2,008,472
|
)
|
|
$
|
(200,117
|
)
|
|
$
|
4,841,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
(Unaudited)
|
|
|
–
|
|
|
|
–
|
|
|
|
349,582
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
349,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) (Unaudited)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,144,563
|
|
|
|
(2,517
|
)
|
|
|
1,142,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2018 (Unaudited)
|
|
|
43,670,765
|
|
|
$
|
43,671
|
|
|
$
|
7,505,552
|
|
|
$
|
(150,000
|
)
|
|
$
|
(863,909
|
)
|
|
$
|
(202,634
|
)
|
|
$
|
6,332,680
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND
2017
(UNAUDITED)
|
|
For the six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,144,563
|
|
|
$
|
753,837
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Change in noncontrolling interest
|
|
|
(2,517
|
)
|
|
|
(28,029
|
)
|
Depreciation and amortization
|
|
|
496,079
|
|
|
|
449,274
|
|
Stock based compensation
|
|
|
349,582
|
|
|
|
102,908
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Change in accounts receivable
|
|
|
(24,059
|
)
|
|
|
(8,261
|
)
|
Change in prepaid expenses
|
|
|
(475,354
|
)
|
|
|
(258,196
|
)
|
Change in other assets
|
|
|
1,000
|
|
|
|
1,000
|
|
Change in accounts payable and accrued liabilities
|
|
|
(456,546
|
)
|
|
|
(84,884
|
)
|
Change in customer card funding
|
|
|
4,047,583
|
|
|
|
1,641,313
|
|
Change in legal settlement payable
|
|
|
–
|
|
|
|
(254,900
|
)
|
Net cash provided by operating activities
|
|
|
5,080,331
|
|
|
|
2,314,062
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(61,473
|
)
|
|
|
(398,891
|
)
|
Intangible assets
|
|
|
(645,441
|
)
|
|
|
(399,930
|
)
|
Net cash used in investing activities
|
|
|
(706,914
|
)
|
|
|
(798,821
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
–
|
|
|
|
50,000
|
|
Payments on notes payable
|
|
|
–
|
|
|
|
(152,060
|
)
|
Net cash used in financing activities
|
|
|
–
|
|
|
|
(102,060
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and restricted cash
|
|
|
4,373,417
|
|
|
|
1,413,181
|
|
Cash and restricted cash, beginning of period
|
|
|
17,164,757
|
|
|
|
11,634,448
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash, end of period
|
|
$
|
21,538,174
|
|
|
$
|
13,047,629
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
–
|
|
|
$
|
46,663
|
|
Income taxes paid
|
|
$
|
–
|
|
|
$
|
13,200
|
|
See accompanying notes to consolidated financial
statements.
3PEA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT POLICIES
The foregoing unaudited consolidated interim
financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).
Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles
in the United States of America for complete financial statements. These unaudited interim financial statements should be read
in conjunction with the audited financial statements and the notes thereto included on Form 10-K for the year ended December 31,
2017. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of
which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.
The preparation of financial statements
in accordance with generally accepted accounting principles in the United States of America requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of
the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period.
Uncertainties with respect to such estimates and assumption are inherent in the preparation of the Company’s financial statements;
accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material
effect on the reported amounts of the Company’s financial position and results of operations.
Operating results for the three and six
months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31,
2018.
About 3PEA International, Inc.
3PEA International, Inc. is a vertically
integrated provider of innovative prepaid card programs and processing services for corporate, consumer and government applications.
Our payment solutions are utilized by our customers as a means to increase customer loyalty, reduce administration costs and streamline
operations. Public sector organizations can utilize our solutions to disburse public benefits or for internal payments. We market
our prepaid debit card solutions under our PaySign
®
brand. As we are a payment processor and debit card program
manager, we derive our revenue from all stages of the debit card lifecycle. We provide a card processing platform consisting of
proprietary systems and innovative software applications based on the unique needs of our programs. We have extended our processing
business capabilities through our proprietary PaySign platform. We provide a variety of services including transaction processing,
cardholder enrollment, value loading, cardholder account management, reporting, and customer service.
We have developed prepaid card programs
for healthcare reimbursement payments, pharmaceutical co-pay assistance, plasma donor compensation and corporate incentive and
rewards. We plan to expand our product offering to include payroll cards, general purpose re-loadable cards, travel cards, and
expense reimbursement and per diem cards. Our cards are offered to end users through our relationships with bank issuers.
Our proprietary PaySign
®
platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform
allows 3PEA to significantly expand its operational capabilities by facilitating our entry into new markets within the payments
space through its flexibility and ease of customization. The PaySign platform delivers cost benefits and revenue building opportunities
to our partners.
We manage all aspects of the debit card
lifecycle, from managing the card design and approval processes with partners and associations, to production, packaging, distribution,
and personalization. We also oversee inventory and security controls, renewals, lost and stolen card management and replacement.
We deploy a fully staffed, in-house customer service department which utilizes bi-lingual customer service agents, Interactive
Voice Response, (IVR), SMS alerts and two way SMS messaging.
Principles of consolidation
–
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Use of estimates
– The preparation
of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
restricted and Customer card funding
– At June 30, 2018 and December 31, 2017, restricted cash consists of funds held
specifically for our card products for which we have recorded a corresponding customer card funding liability in the same amount.
Restricted cash is not available for corporate use.
Intangible assets
–
Internally
Developed Software Costs -
Computer software development costs are expensed as incurred, except for internal use software or
website development costs that qualify for capitalization as described below, and include compensation and related expenses, costs
of hardware and software, and costs incurred in developing features and functionality.
For computer software developed or obtained
for internal use, costs that are incurred in the preliminary project and post implementation stages of software development are
expensed as incurred. Costs incurred during the application and development stage are capitalized. Capitalized costs are amortized
using the straight-line method over a three-year estimated useful life, beginning in the period in which the software is available
for use.
For intangible assets, we recognize an
impairment loss if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of
the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from
the use of the asset.
Intangible assets with finite lives are
amortized on a straight-line basis over their estimated useful lives.
Income Taxes
The Company intends on using their net operating loss carryforwards
to offset any future taxable income and therefore has not recorded a provision for income taxes for the three and six months ended
June 30, 2018.
Revenue and expense recognition (Adoption
of ASC 606,
Revenue from Contracts with Customers)
–
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contacts with Customers (ASC Topic 606),
guidance on recognizing revenue from contracts with customers. The
guidance outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. The core principle of the model is that an entity
recognizes revenue to portray the transfer of goods and services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The standard also expands disclosure requirements regarding
revenue recognition. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017 and
may be applied retrospectively to each prior period presented or using a modified retrospective approach with the cumulative effect
recognized as of the date of initial application. Early adoption is permitted for interim and annual reporting periods beginning
after December 15, 2016. We adopted this guidance as of January 1, 2018 using the modified retrospective transition method. The
adoption of the guidance did not have a material impact on our financial condition and results of operations. The standard also
requires new, expanded disclosures regarding revenue recognition. Several ASU’s have been issued since the issuance of ASU
2014-09. These ASU’s, which modify certain sections of ASU 2014-09 are intended to promote a more consistent interpretation
ad application of the principles outlined in the standard.
The Company recognizes revenue when goods
or services are transferred to customers in an amount that reflects the consideration which it expects to receive in exchange for
those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company performs
the following five-step analysis: (i) identification of contract with customers; (ii) determination of performance obligations;
(iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition
of revenue when (or as) the Company satisfies each performance obligations.
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.
Recent Accounting Pronouncements
– In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows – Restricted
Cash a consensus of the FASB Emerging Issues Task Force.” This standard requires restricted cash and cash equivalents to
be included with cash and cash equivalents on the statement of cash flows under a retrospective transition approach. The guidance
became effective for fiscal years beginning December 15, 2017 and interim periods within those fiscal years. The Company has retrospectively
adopted ASU 2016-18.
2.
FIXED ASSETS
Fixed assets consist of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Equipment
|
|
$
|
1,436,881
|
|
|
$
|
1,387,589
|
|
Software
|
|
|
128,299
|
|
|
|
123,913
|
|
Furniture and fixtures
|
|
|
132,868
|
|
|
|
126,174
|
|
Website Costs
|
|
|
25,467
|
|
|
|
25,467
|
|
Leasehold improvements
|
|
|
51,694
|
|
|
|
50,999
|
|
|
|
|
1,775,209
|
|
|
|
1,714,142
|
|
Less: accumulated depreciation
|
|
|
965,975
|
|
|
|
859,740
|
|
Fixed assets, net
|
|
$
|
809,234
|
|
|
$
|
854,402
|
|
3.
INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Patents and trademarks
|
|
$
|
36,072
|
|
|
$
|
34,771
|
|
Platform and licenses
|
|
|
3,413,299
|
|
|
|
2,808,886
|
|
Kiosk development
|
|
|
64,802
|
|
|
|
64,802
|
|
Licenses
|
|
|
433,685
|
|
|
|
393,958
|
|
|
|
|
3,947,858
|
|
|
|
3,302,417
|
|
Less: accumulated amortization
|
|
|
2,052,298
|
|
|
|
1,662,860
|
|
Intangible assets, net
|
|
$
|
1,895,560
|
|
|
$
|
1,639,557
|
|
Intangible assets are amortized over their
useful lives ranging from periods of 3 to 15 years.
4.
COMMON STOCK
At June 30, 2018, the Company's authorized
capital stock was 150,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par
value $0.001 per share. As of June 30, 2018, the Company had outstanding 43,670,765 shares of common stock, and no shares of preferred
stock.
2018 Transactions
: During the six
months ended June 30, 2018, the Company issued shares of common stock as follows:
2017 Transactions
: During the six
months ended June 30, 2017, the Company issued shares of common stock as follows:
|
·
|
25,000 shares of common stock for current services rendered totaling $4,294 or $0.17 per share (average cost).
|
|
|
|
|
·
|
200,000 shares of common stock were issued
as a result of the exercise of a warrant with an exercise price of $0.25 for a total of $50,000 in cash proceeds.
|
Stock, Options and Warrant Grants:
On March 29, 2018, the Company appointed
Bruce A. Mina to its board of directors as an independent director. In connection with his appointment, the Company granted Mr.
Mina 200,000 shares of restricted common stock which vest over a four-year period from the date of his appointment. The shares
have a fair market value of $234,000 or $1.17 per share. The amount vested and expensed of this grant for the three and six months
ended June 30, 2018 totaled $14,625 and $14,625, respectively. As of June 30, 2018 none of the shares have been issued.
On April 13, 2018, the Company appointed
Quinn Williams to its board of directors as an independent director. In connection with his appointment, the Company granted Mr.
Williams 200,000 shares of restricted common stock which vest over a four-year period from the date of his appointment. The shares
have a fair market value of $320,000 or $1.60 per share. The amount vested and expensed of this grant for the three and six months
ended June 30, 2018 totaled $17,334 and $17,334, respectively. As of June 30, 2018 none of the shares have been issued.
On May 3, 2018, the Company appointed Dennis
Triplett to its board of directors as an independent director. In connection with his appointment, the Company granted Mr. Triplett
200,000 shares of restricted common stock which vest over a four-year period from the date of his appointment. The shares have
a fair market value of $268,000 or $1.34 per share. The amount vested and expensed of this grant for the three and six months ended
June 30, 2018 totaled $11,166 and $11,166, respectively. As of June 30, 2018 none of the shares have been issued.
On May 3, 2018, the Company appointed Dan
R. Henry to its board of directors as an independent director. In connection with his appointment, the Company issued Mr. Henry
options to purchase 1,500,000 shares common stock exercisable for five years at $1.049 per share, which vest over a four-year period
from the date of his appointment. The amount vested and expensed of this grant for the three and six months ended June 30, 2018
totaled $65,563 and $65,563, respectively. As of June 30, 2018 none of the options have vested or been exercised.
In January 2018, the Company granted 1,140,000
shares of restricted common stock to certain employees of the Company with a fair market value of $808,450 with a range of $0.67
to $0.74 per share. The 1,140,000 shares have an annual vesting period of five years with the first vesting period occurring on
December 31, 2018. The amount vested and expensed of this grant for the three and six months ended June 30, 2018 totaled $21,448
and $77,884, respectively. As of June 30, 2018, none of the shares have been issued.
In January 2018, the Company granted 300,000
shares of restricted common stock to an employee of the Company with a fair market value of $213,000, or $0.71 per share. The 300,000
shares have an annual vesting period of three years with the first vesting period occurring on December 31, 2018. The amount vested
and expensed of this grant for the three and six months ended June 30, 2018 totaled $17,750 and $35,500, respectively. As of June
30, 2018, none of the shares have been issued.
In July 2017 the Company granted 200,000
shares of restricted common stock to an officer of the Company with a total fair value of $84,400 or $0.422 per share which 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. The amount vested and expensed of this grant for the three and six months ended June 30, 2018 totaled $21,100 and $42,200,
respectively. None of the shares subject to vesting restrictions have been issued.
In November 2016, the Company granted a
total of 5,000,000 shares to certain officers and directors of the Company with a total value of $787,950 or $0.15759 per share
(including a 15% discount of fair market value due to these shares being restricted and lacking market liquidity). The 5,000,000
shares have a quarterly vesting period of five years with the first vesting period occurring on December 31, 2016. The approximate
value vested for the three and six months ended June 30, 2018 was $39,397 and $78,794 respectively. As of June 30, 2018, none of
the shares have been issued.
In November 2016, the Company granted 210,000
shares to a consultant. The shares were valued at $33,094 or $0.15759 per share (including a 15% discount of fair market value
due to these shares being restricted and lacking market liquidity). The 210,000 shares have a quarterly vesting period of three
years with the first vesting period occurring on December 31, 2016. The approximate value vested for the three and six months ended
June 30, 2018 was $2,758 and $5,516, respectively. As of June 30, 2018, none of the shares have been issued.
5.
SUBSEQUENT EVENTS
On August 7th, 2018 the company received
confirmation that its application to list the Company's common stock on the Nasdaq Capital Market has received final approval.
Item 2. Management’s
discussion and analysis of financial condition and results of operations.
Disclosure Regarding Forward Looking
Statements
This Quarterly Report on Form 10-Q includes
forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (“Forward Looking Statements”). All statements other than statements of
historical fact included in this report are Forward Looking Statements. In the normal course of our business, we, in an effort
to help keep our shareholders and the public informed about our operations, may from time-to-time issue certain statements, either
in writing or orally, that contains or may contain Forward-Looking Statements. Although we believe that the expectations reflected
in such Forward Looking Statements are reasonable, we can give no assurance that such expectations will prove to have been correct.
Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of
such plans or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions made
by or to be made by us, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects
of operating results. All phases of our operations are subject to a number of uncertainties, risks and other influences, many of
which are outside of our control and any one of which, or a combination of which, could materially affect the results of our proposed
operations and whether Forward Looking Statements made by us ultimately prove to be accurate. Such important factors (“Important
Factors”) and other factors could cause actual results to differ materially from our expectations are disclosed in this report,
including those factors discussed in “Item 1A. Risk Factors.” All prior and subsequent written and oral Forward
Looking Statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Important
Factors described below that could cause actual results to differ materially from our expectations as set forth in any Forward
Looking Statement made by or on behalf of us.
Overview
3PEA International, Inc. is a vertically
integrated provider of innovative prepaid card programs and processing services for corporate, consumer and government applications.
Our payment solutions are utilized by our corporate customers as a means to increase customer loyalty, reduce administration costs
and streamline operations. Public sector organizations can utilize the solutions to disburse public benefits or for internal payments.
We market our prepaid debit card solutions under our PaySign brand. As we are a payment processor and debit card program manager,
we derive our revenue from all stages of the debit card lifecycle. We provide a card processing platform consisting of proprietary
systems and innovative software applications based on the unique needs of our programs. We have extended our processing business
capabilities through our proprietary PaySign platform. Through the PaySign platform, we provide a variety of services including
transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service.
The PaySign platform was built on modern
cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform has allowed 3PEA to significantly
expand its operational capabilities by facilitating our entry into new markets within the payments space through its flexibility
and ease of customization. The PaySign platform delivers cost benefits and revenue building opportunities to our partners.
We have developed prepaid card programs
for corporate and incentive rewards including, but not limited to, healthcare reimbursement payments, pharmaceutical co-pay assistance,
donor compensation and automobile dealership incentives. We are expanding our product offering to include additional corporate
incentive products, payroll cards, general purpose re-loadable cards, travel cards, and expense reimbursement cards. Our cards
are offered to end users through our relationships with bank issuers.
We are a vertically integrated payment
processor and debit card program manager offering innovative payment solutions to corporations, government agencies, universities
and other organizations. Our payment solutions are utilized by our customers as a means to increase customer loyalty, reduce administration
costs and streamline operations. We market our prepaid debit card solutions under our PaySign brand. As we are a payment processor
and debit card program manager, we derive our revenue from all stages of the debit card lifecycle. These revenues can include fees
from program set-up; customization and development; data processing and report generation; card production and fulfillment; transaction
fees derived from card usage; inactivity fees; card replacement fees and program administration fees. We provide an in-house customer
service center which includes live bi-lingual phone operators staffed 24/7, for incoming calls. We also provide in house Interactive
Voice Response (IVR), SMS alerts and two way SMS messaging platforms.
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.
Our products and services are aimed
at capitalizing on the growing demand for stored value and reloadable ATM/prepaid card financial products in a variety of market
niches. Our proprietary platform is scalable and customizable, delivering cost benefits and revenue building opportunities to partners.
We manage all aspects of the debit card lifecycle, from managing the card design and approval processes with banking partners and
card associations, to production, packaging, distribution, and personalization. We also oversee inventory and security controls,
renewals, lost and stolen card management and replacement.
As part of our platform expansion development
process, we evaluate current and emerging technologies for applicability to our existing and future software platform. To this
end, we engage with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate,
we use third-party technology components in the development of our software applications and service offerings. Third-party software
may be used for highly specialized business functions, which we may not be able to develop internally within time and budget constraints.
Our principal target markets for processing services include prepaid card issuers, retail and private-label issuers, small third-party
processors, and small and mid-size financial institutions in the United States and in emerging international markets.
The Company is devoting more extensive
resources to sales and marketing activities as we have added essential personnel to our marketing and sales department, specifically
in the healthcare and traditional corporate incentive markets. We sell our products directly to customers in the U.S. but may work
with a small number of resellers and third parties in international markets to identify, sell and support targeted opportunities.
In order to expand into new markets, we
will need to invest additional funds in technology improvements, sales and marketing expenses, and regulatory compliance costs,
as well as seek acquisition candidates that have long standing reputations and demonstrated growth and profitability. We may consider
raising capital in order to accomplish the aforementioned. 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.
Key Performance Indicators and Non-GAAP
Measures
Management reviews key performance indicators
including revenue, gross profits, growth in card programs and cardholder participation. In addition, we consider certain non-GAAP
(or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods
presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist
investors in assessing our financial performance and measures our ability to generate capital for deployment and investment in
new card programs. These adjusted metrics are consistent with how management views our business and are used to make financial,
operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be
considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating
activities as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly
titled measures reported by other companies, to be key performance indicators:
·
|
“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense and "Adjusted EBITDA" reflects the adjustment to EBITDA to exclude stock-based compensation.
|
|
|
Three months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Reconciliation of adjusted EBITDA to net income:
|
|
|
|
|
|
|
|
|
Net income attributable to 3PEA International, Inc.
|
|
$
|
732,056
|
|
|
$
|
384,443
|
|
Provision for income taxes
|
|
|
–
|
|
|
|
3,000
|
|
Interest expense
|
|
|
–
|
|
|
|
31,623
|
|
Depreciation and amortization
|
|
|
250,447
|
|
|
|
234,413
|
|
EBITDA
|
|
|
982,503
|
|
|
|
653,479
|
|
Stock-based compensation
|
|
|
212,181
|
|
|
|
50,407
|
|
Adjusted EBITDA
|
|
$
|
1,194,684
|
|
|
$
|
703,886
|
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Reconciliation of adjusted EBITDA to net income:
|
|
|
|
|
|
|
|
|
Net income attributable to 3PEA International, Inc.
|
|
$
|
1,144,563
|
|
|
$
|
753,837
|
|
Provision for income taxes
|
|
|
–
|
|
|
|
6,000
|
|
Interest expense
|
|
|
–
|
|
|
|
31,623
|
|
Depreciation and amortization
|
|
|
496,079
|
|
|
|
449,274
|
|
EBITDA
|
|
|
1,640,642
|
|
|
|
1,240,734
|
|
Stock-based compensation
|
|
|
349,582
|
|
|
|
102,908
|
|
Adjusted EBITDA
|
|
$
|
1,990,224
|
|
|
$
|
1,343,642
|
|
Results of Operations
Three Months ended June 30, 2018 and
2017
Revenues for the three months ended June
30, 2018 were $5,460,723, an increase of $2,042,554 compared to the same period in the prior year, when revenues were $3,418,169.
The increase in revenue is primarily due to an increase in the number of new corporate incentive prepaid card programs and growth
within our existing corporate incentive prepaid card products. As of June 30, 2018, we managed 227 card programs with over 1,750,000
participating cardholders.
The Company expects revenues to continue
to trend upwards for the foreseeable future as we continue to grow revenue in our existing card programs and implement new programs
within the healthcare payment vertical, as well as corporate incentive payments. As part of our long term growth initiative, we
are actively pursuing acquisition candidates that have long standing reputations and demonstrated growth and profitability.
Cost of revenues for the three months ended
June 30, 2018 were $2,840,876, an increase of $985,337 compared to the same period in the prior year, when cost of revenues were
$1,855,539. Cost of revenues constituted approximately 52% and 54% of total revenues during the second quarter of 2018 and 2017,
respectively. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network
fees, card production costs, customer service and program management expenses, application integration setup and sales expense.
Gross profit for the three months ended
June 30, 2018 was $2,619,847, an increase of $1,057,217 compared to the same period in the prior year, when gross profit was $1,562,630.
Our overall gross profit percentage approximated 48% and 46% during the second quarters of 2018 and 2017 which is consistent with
our overall expectations.
Selling, general and administrative expenses
for the three months ended June 30, 2018 were $1,667,856, an increase of $739,271 compared to the same period in the prior year,
when selling, general and administrative expenses were $928,585. The increase in selling, general and administrative expenses was
due to increased staffing necessary to support the growth of our business which as well as additional expenses related to the expansion
of our sales and marketing departments.
Depreciation and amortization for the three
months ended June 30, 2018 was $250,447, an increase of $16,034 compared to the same period prior year of $234,413.
In the three months ended June 30, 2018,
we recorded operating income of $701,544, as compared to $399,632 in the same period in the prior year, representing an increase
in operating income of $301,912.
Other income (expense) for the three months ended June 30, 2018
was $29,890, an increase in net other income (expense) of $55,612 compared to the same period in the prior year when other income
(expense) was $(25,722) which is due to termination of debt (Notes Payable) and increased interest income and is within our overall
expectations.
Net income before noncontrolling interest
for the three months ended June 30, 2018 was $731,434, an increase of $360,524 compared to the same period in the prior year of
370,910. The increase in our net income before noncontrolling interest is attributable to the aforementioned factors.
Net loss attributable to the noncontrolling
interest for the three months ended June 30, 2018 was $622, a decrease of $12,911 compared to the same period in the prior year
of $13,533.
Net income attributable to 3PEA International,
Inc. for the three months ended June 30, 2018 was $732,056, an increase of $347,613 compared to the same period in the prior year,
when we recorded net income of $384,443. The increase in our net income is attributable to the aforementioned factors.
Six Months ended June 30, 2018 and 2017
Revenues for the six months ended June
30, 2018 were $10,137,042, an increase of $3,517,978 compared to the same period in the prior year, when revenues were $6,619,064.
The increase in revenue is primarily due to an increase in the number of new corporate incentive prepaid card products as well
as growth within our existing corporate incentive prepaid card products.
Cost of revenues for the six months ended
June 30, 2018 were $5,274,086, an increase of $1,584,998 compared to the same period in the prior year, when cost of revenues were
$3,689,088. Cost of revenues constituted approximately 52% and 56% of total revenues in 2018 and 2017, respectively. Cost of revenues
is comprised of transaction processing fees, data connectivity and data center expenses, network fees, card production costs, customer
service and program management expenses, application integration setup and sales expense.
Gross profit for the six months ended June
30, 2018 was $4,862,956, an increase of $1,932,980 compared to the same period in the prior year, when gross profit was $2,929,976.
Our overall gross profit percentage approximated 48% and 44% during the first six months of 2018 and 2017 which is consistent with
our overall expectations.
Selling, general and administrative expenses
for the six months ended June 30, 2018 were $3,247,321, an increase of $1,504,053 compared to the same period in the prior year,
when selling, general and administrative expenses were $1,743,268. The increase in selling, general and administrative expenses
was due to increased staffing necessary to support the growth of our business as well as additional expenses related to the expansion
of our sales and marketing departments.
Depreciation and amortization for the six
months ended June 30, 2018 were $496,079, an increase of $46,805 compared to the same period prior year of $449,274. Overall increase
in depreciation and amortization was primarily a result of an increase in amortization expense related to additional capitalized
platform costs.
In the six months ended June 30, 2018,
we recorded operating income of $1,119,556, as compared to $737,434 in the same period in the prior year, an increase in operating
income of $382,122.
Other income (expense) for the six months
ended June 30, 2018 was $22,490, an increase in net other income (expense) of $28,116 compared to the same period in the prior
year when other income (expense) was $(5,626) which is due to termination of debt (Notes Payable) and increased interest income
and is within our overall expectations.
Net income before noncontrolling interest
for the six months ended June 30, 2018 was $1,142,046, an increase of $416,238 compared to the same period in the prior year of
$725,808. The increase in our net income before noncontrolling interest is attributable to the aforementioned factors.
Net loss attributable to the noncontrolling
interest for the six months ended June 30, 2018 was $2,517, a decrease of $25,512 compared to the same period in the prior year
of $28,029. The decrease in net loss attributable to noncontrolling interest is primarily due to a decrease in expenses related
to our European subsidiary.
Net income attributable to 3PEA International,
Inc. for the six months ended June 30, 2018 was $1,144,563, an increase of $390,726 compared to the same period in the prior year,
when we recorded net income of $753,837. The increase in our net income is attributable to the aforementioned factors.
Liquidity and Sources of Capital
The following table sets forth the major
sources and uses of cash for the six months ended June 30, 2018 and 2017:
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash provided by operating activities
|
|
$
|
5,080,331
|
|
|
$
|
2,314,062
|
|
Net cash used in investing activities
|
|
|
(706,914
|
)
|
|
|
(798,821
|
)
|
Net cash used in financing activities
|
|
|
–
|
|
|
|
(102,060
|
)
|
Net increase in unrestricted cash and cash equivalents
|
|
$
|
4,373,417
|
|
|
$
|
1,413,181
|
|
Comparison of six months ended June 30, 2018 and 2017
During the six months ended June 30, 2018
and 2017, we financed our operations entirely through revenues generated from operations.
Operating activities provided $5,080,331
of cash in the six months ended June 30, 2018, as compared to $2,314,062 of cash provided by the same period in the prior year.
Excluding the change in customer card funding, net cash provided by operating activities was $1,032,748 in the six months ended
June 30, 2018, as compared to $672,749 in the same period in the prior year. In 2018, $4,047,583 of cash was provided by change
in customer card funding, which affected our restricted cash for the same amount. Major non-cash items that affected our cash flow
from operations in the six months ended June 30, 2018 were non-cash charges of $496,079 for depreciation and amortization, as well
as stock-based compensation of $349,582. Our operating assets and liabilities, excluding customer card funding, used $954,959 of
cash, most of which resulted from a decrease in accounts payable and accrued liabilities of $(456,546), and an increase in prepaid
expenses and other assets of $475,354. Major non-cash items that affected our cash flow from operations in the six months ended
June 30, 2017 were non-cash charges of $449,274 for depreciation and amortization, as well as stock-based compensation of $102,908.
Our operating assets and liabilities in the six months ended June 30, 2017, excluding customer card funding, used $(605,241)
of cash, most of which resulted from a decrease in legal settlements payable of $(254,900), and increase in prepaid expenses of
$258,196, and a decrease in accounts payable of $(84,884).
Investing activities used $(706,914) of
cash in the six months ended June 30, 2018, as compared to $(798,821) of cash used in the same period in 2017. In both periods,
investing activities consisted of capital expenditures to improve and enhance the processing platform used in our business.
Financing activities used $0 of cash in
the six months ended June 30, 2018 as compared to $(102,060) of cash used in the six months ended June 30, 2017. In 2017, cash
used in financing activities consisted of payments on notes payables totaling $152,060 offset by $50,000 received from the exercise
of a warrant.
Sources of Financing
We believe that our available cash on hand,
excluding restricted cash, at June 30, 2018 of $3,074,147 and revenues anticipated for the remainder of 2018 will be sufficient
to sustain our operations for the next twelve months. However, as noted above, we are pursuing possible acquisitions of complimentary
businesses. If we locate a suitable acquisition candidate, we may be required to raise capital through a debt or equity offering
to finance the acquisition. There is no assurance that we will be able to negotiate and acquisition on favorable terms, or that
we will be able to arrange financing for an acquisition on attractive terms.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
Our significant accounting policies are
described in Note 1 of Notes to Financial Statements. At this time, we are not required to make any material estimates and assumptions
that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses.
Any estimates we make will be based on
our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects.
Actual results may differ significantly from our estimates.