Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Paysign, Inc.Financial_Report.xls
EX-32.1 - CERTIFICATION - Paysign, Inc.tpnl_10q-ex3201.htm
EX-31.2 - CERTIFICATION - Paysign, Inc.tpnl_10q-ex3102.htm
EX-31.1 - CERTIFICATION - Paysign, Inc.tpnl_10q-ex3101.htm
EX-32.2 - CERTIFICATION - Paysign, Inc.tpnl_10q-ex3202.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
 
(Mark One)
 
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
or
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to __________
 
Commission file number 000-54123

 
3PEA INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)

Nevada
95-4550154
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

1700 W Horizon Ridge Parkway, Suite 102,
Henderson, Nevada 89012
 (Address of principal executive offices)

(702) 453-2221
 (Issuer’s telephone number, including area code)
_______________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 Accelerated filer o
Non-accelerated filer o
 Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o  No x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 35,250,391 shares as of October 31, 2011.

 
 

 


3PEA INTERNATIONAL, INC.

FORM 10-Q REPORT INDEX

 
PART I.  FINANCIAL INFORMATION
3
   
Item 1.  Financial Statements
3
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
12
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risk.
16
   
Item 4.  Controls and Procedures.
16
   
PART II.  OTHER INFORMATION.
16
   
Item 1.  Legal Proceedings.
16
   
Item 1A.  Risk Factors.
16
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
16
   
Item 3.  Defaults upon Senior Securities.
16
   
Item  4. (Removed and Reserved)
16
   
Item 5.  Other Information.
16
   
Item 6.  Exhibits.
17
   
SIGNATURES
17



 
2

 

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

3PEA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

   
September 30, 2011
   
December 31, 2010
 
   
(Unaudited)
   
(Audited)
 
ASSETS
 
             
Current assets
           
Cash
  $ 47,262     $ 42,214  
Cash Restricted
    4,366,648       4,409,068  
Accounts Receivable
    60,660       1,644,887  
Total current assets
    4,474,570       6,096,169  
                 
Fixed assets, net
    94,519       90,196  
                 
Intangible and other assets
               
Deposits
    3,551       3,551  
Intangible assets, net
    135,058       14,497  
                 
Total assets
  $ 4,707,698     $ 6,204,413  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
                 
Current liabilities
               
Accounts payable and accrued liabilities
  $ 871,280     $ 2,425,351  
Customer card funding
    4,366,648       4,409,068  
Notes payable- related parties
    538,000       538,000  
Convertible note payable
    10,000       10,000  
Notes payable
    1,943,900       1,948,900  
Total current liabilities
    7,729,828       9,331,319  
                 
Long-term liabilities
               
Notes payable, non-current portion
    --       --  
Total long Term liabilities
    --       --  
                 
Total liabilities
    7,729,828       9,331,319  
                 
Commitments and contingencies
    --       --  
 
Stockholders' deficit
           
             
Common stock; $0.001 par value; 150,000,000 shares authorized,
35,250,391 and 35,245,069 issued and outstanding
at September 30, 2011 and  December 31, 2010, respectively
    35,250       35,245  
Additional paid-in capital
    4,975,686       4,974,756  
Treasury stock at cost, 303,450 shares
    (150,000 )     (150,000 )
Accumulated deficit
    (7,940,452 )     (8,044,395 )
Total 3Pea International, Inc.'s stockholders' deficit
    (3,079,516 )     (3,184,394 )
Noncontrolling interest
    57,386       57,488  
Total stockholders' deficit
    (3,022,130 )     (3,126,906 )
                 
Total liabilities and stockholders' deficit
  $ 4,707,698     $ 6,204,413  

 
See accompanying notes to financial statements.

 
3

 

3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)
 
   
For the three month ended Sept 30,
 
   
2011
   
2010
 
             
Revenues
  $ 278,009     $ 1,051,612  
                 
Cost of revenues
    90,050       873,187  
                 
Gross profit
    187,959       178,425  
                 
Operating expenses
               
Depreciation and amortization
    10,603       17,837  
Selling, general and administrative
    129,606       132,621  
                 
Total operating expenses
    140,209       150,458  
                 
Income (loss) from operations
    47,750       27,967  
                 
Other income (expense)
               
Interest expense
    (15,986 )     (16,555 )
Total other income (expense)
    (15,986 )     (16,555 )
                 
Income (loss) before provision for income taxes and noncontrolling interest
    31,764       11,412  
                 
Provision for income taxes
    --       --  
                 
Net income (loss) before noncontrolling interest
    31,764       11,412  
                 
Net income (loss) attributable to the noncontrolling interest
    3       42  
                 
Net income (loss) attributable to 3Pea International, Inc.
  $ 31,767     $ 11,454  
                 
Net income (loss) per common share - basic
  $ 0.00     $ 0.00  
                 
Weighted average common shares outstanding - basic
    35,249,122       35,233,639  
 
See accompanying notes to financial statements.

 
4

 

3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

   
For the nine months ended Sept 30,
 
   
2011
   
2010
 
             
Revenues
  $ 1,880,610     $ 2,535,427  
                 
Cost of revenues
      1,273,211       2,047,533  
                 
Gross profit
    607,399       487,894  
                 
Operating expenses
               
Depreciation and amortization
    34,126       88,413  
Selling, general and administrative
    421,790       391,275  
                 
Total operating expenses
    455,916       479,688  
                 
Income (loss) from operations
    151,483       8,206  
                 
Other income (expense)
               
Interest expense
    (47,642 )     (50,685 )
Total other income (expense)
    (47,642 )     (50,685 )
                 
Income (loss) before provision for income taxes and noncontrolling interest
    103,841       (42,479 )
                 
Provision for income taxes
    --       --  
                 
Net income (loss) before noncontrolling interest
    103,841       (42,479 )
                 
Net income (loss) attributable to the noncontrolling interest
    102       6,833  
                 
Net income (loss) attributable to 3Pea International, Inc.
  $ 103,943     $ (35,646 )
                 
Net income (loss) per common share - basic
  $ 0.00     $ (0.00 )
                 
Weighted average common shares outstanding - basic
    35,248,299       34,507,621  




See accompanying notes to financial statements.

 
5

 

3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(UNAUDITED)
 
   
Stockholders' Deficit Attributable to 3Pea International, Inc.
             
         
 
         
Treasury
         
Non-
   
Total
 
   
Common Stock
   
Additional
   
Stock
   
Accumulated
   
controlling
   
Stockholders'
 
   
Shares
   
Amount
   
Paid-in Capital
   
Amount
   
Deficit
   
Interest
   
Deficit
 
                                           
                                           
Balance, December 30, 2010
    35,245,069     $ 35,245     $ 4,974,756     $ (150,000 )   $ (8,044,395 )   $ 57,488     $ (3,126,906 )
                                                         
Issuance of stock related to merger with Wow Technologies $0.22 per share
    3,572       3       783       -       -       -       786  
Issuance of stock related to merger with Wow Technologies $0.15 per share
    322       1       48       -       -       -       49  
Issuance of stock related to merger with Wow Technologies $0.07 per share
    1,428       1       99       -       -       -       100  
                                                         
Net income (loss)
    -       -       -       -       103,943       (102 )     103,841  
                                                         
Balance, September 30, 2011
    35,250,391     $ 35,250     $ 4,975,686     $ (150,000 )   $ (7,940,425 )   $ 57,386     $ (3,022,130 )


 
See accompanying notes to financial statements.
 
 
 
 
 
 
 
 
 
 
 

 
6

 

3PEA INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

   
For the nine months ended Sept 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income (loss)
  $ 103,943     $ (35,646 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Change in noncontrolling interest
    (102 )     (6,833 )
Depreciation and amortization
    34,126       88,413  
Merger expense - stock based
    935       --  
Changes in operating assets and liabilities:
               
Change in restricted cash
    42,420       474,054  
Change in accounts receivable
    1,584,227       (743 )
Change in accounts payable and accrued liabilities
    (1,554,071 )     32,623  
Change in customer card funding
    (42,420 )     (474,054 )
Net cash provided by operating activities
    169,058       77,814  
                 
Cash flows from investing activities:
               
Purchase of fixed assets
    (36,130 )     --  
Capitalization of cost associated with intangible assets
    (122,880 )     --  
Net cash used by investing activities
    (159,010 )     --  
                 
Cash flows from financing activities:
               
Proceeds from borrowings on notes payable-related parties
    --       3,576  
Proceeds from stock sales
    --       250  
Payments on notes payable-related parties
    --       (8,951 )
Payments on notes payable
    (5,000 )     (10,100 )
Net cash provided by financing activities
    (5,000 )     (15,225 )
                 
Net change in cash
    5,048       62,589  
Cash, beginning of period
    42,214       2,903  
                 
Cash, end of period
  $ 47,262     $ 65,492  
                 
Supplemental disclosure of cash flow information:
               
Non cash financing transactions:
               
Issuance of 6,100,000 shares of common stock for satisfaction of accounts payable and accrued liabilities
  $ --     $ 85,029  



See accompanying notes to financial statements.

 
7

 
 
 
3PEA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2011
(UNAUDITED)


1.      BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT POLICIES

The foregoing unaudited 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, 2010. 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 nine month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

About 3PEA International, Inc.

3PEA International, Inc. is a transaction-based solutions provider. 3PEA through its wholly owned subsidiary 3PEA Technologies, Inc., focuses on delivering reliable and secure payment solutions to help healthcare companies, pharmaceutical companies and payers businesses succeed in an increasingly complex marketplace.  By serving as a single source for payment processing and unique Healthcare solutions, 3Pea sets new standards in convenience, reliability and innovation.

Going concern – The Company incurred accumulated net losses of approximately $7,947,425  as of  September 30, 2011 and does not have sufficient operating capital to sustain its operating activities for the twelve months, raising substantial doubt about the Company’s ability to continue as a going concern.  The Company will seek additional sources of capital through the issuance of debt or equity financing, but there can be no assurance the Company will be successful in accomplishing its objectives.  The ability of the Company to continue as a going concern is dependent on additional sources of capital and the success of generating sufficient revenues to fund its operating activities.  The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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.




 
8

 
 
 
1.
DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued)
 
Restricted cash – restricted cash is a cash account controlled by the Company which funds are received related to the card programs from our customers.  The Company has recorded a corresponding customer card funding liability.

Revenue and expense recognition – We recognize revenue when (1) there is persuasive evidence of an arrangement existing, (2) delivery has occurred, (3) our price to the buyer is fixed or determinable and (4) collectability of the receivables is reasonably assured. We recognize the costs of these revenues at the time revenue is recognized.  Any fees paid up front are deferred until such time such services have been considered rendered.  As of  September 30, 2011 and December 31, 2010, there are no deferred revenues recorded.

We generate the following types of revenues:
 
 
·
Administration and usage fees, charged to our prepaid card clients when our programs are created, distributed or reloaded.  Such revenues are recognized when such services are performed.
 
·
Transaction fees, paid by the applicable networks and passed through by our card issuing banks when our SVCs are used in a purchase or ATM transaction.  Such revenues are recognized when such services are performed.
 
·
Maintenance, administration, transaction fees, charged to an SVC and not under any multiple element arrangements. Such revenues are recognized when such services are performed.
 
·
Program maintenance management fees charged to our clients.  Such revenues are not under any multiple element arrangements and are recognized when such services are performed.
 
·
Software development and consulting services to our clients.  Such revenues are recognized in accordance with ASC 985-605.
 
The Company records all revenues on gross basis in accordance with ASC 605-45 since it is the primary obligor and establishes the price in the revenue arrangement.  The Company is currently under no obligation for refunding any fees or has any obligations for disputed claim settlements.

Earnings (loss) per share - Basic earnings (loss) per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings (loss) per share is computed using the weighted-average number of outstanding common stocks during the applicable period. Diluted earnings per share is computed using the weighted-average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.

New accounting pronouncements - In April 2010, the FASB reached a consensus on the Milestone Method of Revenue Recognition which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The updated guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. We adopted the provisions of the guidance as of January 1, 2011 on a prospective basis. The prospective application had no impact on our consolidated financial statements for the nine months ended September 30, 2011.



 
9

 
 
 
2.     FIXED ASSETS

Fixed assets consist of the following:

   
As of
September 30, 2011
   
As of
 December 31, 2010
 
Equipment
  $ 477,796     $ 441,667  
Software
    257,092       257,092  
Furniture and fixtures
    58,120       58.120  
Leasehold equipment
    14,780       14,780  
      807,788       768,659  
Less: accumulated depreciation
    713,269       681,463  
Fixed assets, net
  $ 94,519     $ 90,196  
 
3.     INTANGIBLE ASSETS

Intangible assets consist of the following:
 
   
As of
September 30, 2011
   
As of
 December 31, 2010
 
Patents and trademarks
  $ 33,465     $ 33,465  
Platform development
    122,880        -0-  
      156,345       33,465  
Less: accumulated amortization
    21,287       18,968  
Intangible assets, net
    135,058     $ 14,497  

Intangible assets are amortized over their useful lives ranging from periods of 5 to 15 years.

4.    COMMON STOCK

At September 30, 2011, 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 35,250,391 shares of common stock, and no shares of preferred stock.
 
2011 Transactions:  During the nine months ended September 30, 2011, the Company issued shares 5,322 shares of common stock to various shareholders of Wow Technologies, Inc. valued at $0.07 to $0.22 per share.
 
All shares issued (or cancelled) for services or in exchange for Wow common stock are valued on the market price on the date issuance.



 
10

 
 
 
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 its business, the Company, in an effort to help keep its shareholders and the public informed about the Company’s operations, may from time-to-time issue certain statements, either in writing or orally, that contain or may contain Forward-Looking Statements. Although the Company believes that the expectations reflected in such Forward Looking Statements are reasonable, it 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 the Company, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating results. All phases of the Company operations are subject to a number of uncertainties, risks and other influences, many of which are outside the control of the Company and any one of which, or a combination of which, could materially affect the results of the Company’s proposed operations and whether Forward Looking Statements made by the Company ultimately prove to be accurate. Such important factors (“Important Factors”) and other factors could cause actual results to differ materially from the Company’s expectations are disclosed in this report. All prior and subsequent written and oral Forward Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Important Factors described below that could cause actual results to differ materially from the Company’s expectations as set forth in any Forward Looking Statement made by or on behalf of the Company.
 
Overview
 
We are a payment solutions company which currently focuses on providing proprietary transaction processing solutions for healthcare and financial applications providing prepaid debit cards, which are also known as stored value cards (SVCs).  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 partners and associations, to production, packaging, distribution, and personalization. We also oversee inventory and security controls, renewals, lost and stolen card management and replacement.  
 
Currently, the primary market for our cards is the pharmaceutical marketing or drug sampling market, and secondarily the surveys and rewards card market, although we are expanding into other markets for SVC's, including, pharmacy benefits cards, payment distribution and reimbursement cards, and payroll cards.
 
We also 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.  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.
 
We have identified a variety of other markets that our debit cards can be used in, such as corporate incentive or reimbursement programs, gift cards, payroll payments, government benefit payments, and as a reloadable debit card for use by consumers without a traditional bank account.  
 
In order to expand into new markets, in 2011 we have invested funds in platform development and technology improvements, sales and marketing expenses, and regulatory compliance costs.
 

 
11

 
 
 
In second quarter 2011, 3PEA outlined a business requirement for the implementation of new payments solution. The company settled on the requirement of a more modern, agile and powerful payments system at the strategic core of the company. The system would need to be highly scalable, support current and future compliance, as well as emerging payments technologies such as contactless chip and mobile payments as both a card issuing and acquiring processor.
 
The benefits of upgrading the company’s payments infrastructure are:

•  
Reduced time to market for card programs for 3PEA customers.
•  
More flexible options for customers with the implementation of a modern and agile card management system.
•  
New authorization features such as chip card and Near Field Communication “NFC” (contactless) chip card for future compliance.
•  
Better support for non-prepaid programs, with integration capabilities to bank accounting systems to enhance the company’s offering as an agent processor to banks.
•  
Support strategic relationships with retail merchants due to better capabilities to implement cutting edge custom card solutions under bi-lateral agreements.
•  
Meet current and future compliance regimes.
•  
More powerful reporting capabilities with integration to Data Warehouse and General Ledger.
•  
More powerful administrative and customer support capabilities for managing card programs.
•  
Transaction switching capability that can support financial and non-financial transactions, allowing 3PEA to explore opportunities for processing contracts in vertical markets.
 
In the third quarter 2011, 3PEA began upgrading its infrastructure to support the objective of a new core payments solution. This included:
 
•  
Network segmentation and re-alignment of existing infrastructure.
•  
Deployment of new Servers and Operating System upgrades.
•  
Deployment of new security systems.
•  
Deploying new internal and external network security appliances and system security applications.
•  
Deployment of new Host Security Modules to handle cryptographic requirements in relation to payments interchanges to EFT networks
•  
Deployment of new hardware fault-tolerant servers to run the payments platform.

Parallel with the infrastructure upgrades, 3PEA began the implementation of its new payments system. The key management implementations and integration and development of interchanges to various US EFT payments networks are underway. The system is undergoing further development and customization to meet the company’s business requirements specification. The company expects to certify the new platform with access to Visa, Interlink and Plus networks in the fourth quarter 2011.
 
Results of Operations
 
Three Months ended September 30, 2011 and 2010
 
Revenues for the three months ended September 30, 2011 were $278,009, a decrease of $773,603 compared to the same period in the prior year, when revenues were $1,051,612. The decrease in revenue is due to a decrease in processing of program cards compared to the prior year primarily due to the cyclical timing of the implementation and utilization of our pharmaceutical marketing cards as discussed further below.  Program card load transactions for the three months ended September 30, 2011 approximated 247,535 compared to approximately 192,883 for the same period in the prior year. However, not all of our program cards were fully utilized during the current period. In particular, more pharmaceutical companies are beginning to recognize the substantial benefits of providing drug samples by means of debit card rather than distributing actual samples to doctors. We expect our revenues for the short term to remain flat or trend downward.  While we continue to gain new pharmaceutical companies as clients, we have seen the average size of programs decline due to the economy.  Over the longer term, we expect our revenues to trend upward as the economy improves and as we roll out additional debit card products utilizing our processing platform.
 

 
12

 
 
 
Cost of revenues for the three months ended September 30, 2011 were $90,050, a decrease of $783,137 compared to the same period in the prior year, when cost of revenues were $873,187. Cost of revenues constituted approximately 32% and 83% of total revenues in 2011 and 2010, 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.
 
Our revenues and cost of revenues from our pharmaceutical marketing cards, which is our primary line of business, fluctuate widely due to a variety of factors beyond our control.  The pharmaceutical companies often do not distribute the debit cards via their pharmaceutical sales representatives to various end points for distribution until days, weeks or months after it creates a program, often with little advance warning to us. We also experience dramatic usage swings based on collateral marketing efforts by the pharmaceutical companies, such as print, web, radio and television advertising campaigns that run in association with one of our card programs. Constant variations in program start and stop dates, variations in program timelines which range anywhere between six and thirty six months, and variations in program characteristics such as the monetary value of the load, all contribute to provide dramatic swings in the revenue generated from the programs.  As a result, our revenues and cost of revenues do no correlate neatly to the number of cards in circulation or even the number of programs that are active at any given time.
 
Gross profit for the three months ended September 30, 2011 was $187,959, an increase of $9,534 compared to the same period in the prior year, when gross profit was $178,425.  Our overall gross profit percentage approximated 68% and 17% during the fiscal years 2011 and 2010 which is consistent with our overall expectations.
 
Selling, general and administrative expenses for the three months ended September 30, 2011 were $129,606, a decrease of $3,015 compared to the same period in the prior year, when selling, general and administrative expenses were $132,621.  The decrease in selling, general and administrative expenses was attributable to business development expenses during 2011 primarily related to travel and related expenses.
 
In the three months ended September 30, 2011, we recorded operating income of $47,750, as compared to operating income of $27,967 in the same period in the prior year, an improvement of $19,783.  
 
Other income (expense) for the three months ended September 30, 2011 was ($15,986), a decrease in net other income (expense) of $569 compared to the same period in the prior year when other income (expense) was ($16.555).  The overall decrease in net other income (expense) in 2011 is consistent with our overall debt.  
 
Our net income for the three months ended September 30, 2011 was $31,767, an increase of $20,313 compared to the same period in the prior year, when we recorded a net income of $11,454.  The overall change in net loss is attributable to the aforementioned factors.
 
Nine Months ended September 30, 2011 and 2010
 
Revenues for the nine months ended September 30, 2011 were $1,880,610, a decrease of $654,817 compared to the same period in the prior year, when revenues were $2,535,427.  The decrease in revenue is due to a decrease in processing of program cards compared to the prior year primarily due to the cyclical timing of the implementation and utilization of our pharmaceutical marketing cards as discussed further below.  Program card load transactions for the nine months ended September 30, 2011 approximated 628,717 compared to approximately 463,942 for the same period in the prior year. In particular, more pharmaceutical companies are beginning to recognize the substantial benefits of providing drug samples by means of debit card rather than distributing actual samples to doctors. We expect our revenues for the short term to remain flat or trend downward.  While we continue to gain new pharmaceutical companies as clients, we have seen the average size of programs decline due to the economy.  Over the longer term, we expect our revenues to trend upward as the economy improves and as we roll out additional debit card products utilizing our processing platform.
 
Cost of revenues for the nine months ended September 30, 2011 were $1,273,211, a decrease of $774,322 compared to the same period in the prior year, when cost of revenues were $2,047,533. Cost of revenues constituted approximately 68% and 81% of total revenues in 2011 and 2010, 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.
 

 
13

 
 
 
Our revenues and cost of revenues from our pharmaceutical marketing cards, which is our primary line of business, fluctuate widely due to a variety of factors beyond our control.  The pharmaceutical companies often do not distribute the debit cards via their pharmaceutical sales representatives to various end points for distribution until days, weeks or months after it creates a program, often with little advance warning to us. We also experience dramatic usage swings based on collateral marketing efforts by the pharmaceutical companies, such as print, web, radio and television advertising campaigns that run in association with one of our card programs. Constant variations in program start and stop dates, variations in program timelines which range anywhere between six and thirty six months, and variations in program characteristics such as the monetary value of the load, all contribute to provide dramatic swings in the revenue generated from the programs.  As a result, our revenues and cost of revenues do no correlate neatly to the number of cards in circulation or even the number of programs that are active at any given time.
 
Gross profit for the nine months ended September 30, 2011 was $607,399, an increase of $119,505 compared to the same period in the prior year, when gross profit was $487,894.  Our overall gross profit percentage approximated 32% and 19% during the fiscal years 2011 and 2010 which is consistent with our overall expectations.
 
Selling, general and administrative expenses for the nine months ended September 30, 2011 were $421,790, an increase of $30,515 compared to the same period in the prior year, when selling, general and administrative expenses were $391,275. The increase in selling, general and administrative expenses was attributable to business development expenses during 2011 primarily related to travel and related expenses.
 
In the nine months ended September 30, 2011, we recorded operating income of $151,483, as compared to an operating income of $8,206 in the same period in the prior year, an improvement of $143,277.
 
Other income (expense) for the nine months ended September 30, 2011 was ($47,642), a decrease in net other income (expense) of $3,043 compared to the same period in the prior year when other income (expense) was $($50,685).  The overall decrease in net other income (expense) in 2011 is consistent with our overall debt.
 
Our net income for the nine months ended September 30, 2011 was $103,943, an increase of $139,589 compared to the same period in the prior year, when we recorded a net loss of ($35,646).  The overall change in net loss 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 three months ended September 30, 2011 and 2011:
 
   
Nine months ended September 30,
 
   
2011
   
2010
 
Net cash provided by (used) in operating activities
  $ 169,058     $ 77,814  
Net cash provided by (used) in investing activities
    (159,010 )     --  
Net cash provided by (used) in financing activities
    (5,000 )     (15,225 )
Net (decrease) increase in unrestricted cash and cash equivalents
    5,048       62,589  

Comparison of Nine months Ended September 30, 2011 and 2010
 
During the nine months ended September 30, 2011 and 2010, we financed our operations primarily through internally generated funds.
 
Operating activities provided $169,058 of cash in 2011, as compared to $77,814 of cash in the same period in the prior year. Major non-cash items that affected our cash flow from operations in 2011 were non-cash charges of $34,126 for depreciation and amortization. Our operating assets and liabilities provided $5,048 of cash, most of which resulted from an increase in collections of our accounts receivable of $1,584,227, offset by a reduction in our accounts payable and accrued liabilities of $1,554,071. Major non-cash items that affected our cash flow from operations in 2010 were non-cash charges of $88,412 for depreciation and amortization.  Our operating assets and liabilities provided $32,623 of cash, all of which resulted from an increase in accounts payable and accrued liabilities of $32,623.  
 

 
14

 
 
 
Investing activities used $159,010 of cash in 2011, as compared to $-0- of cash in 2010, all of which related to the enhancement of the processing platform used in our business.
 
Financing activities used $5,000 of cash in 2011 as compared to $15,225 of cash in 2010. In both years, our use of cash from financing activities consisted of the repayment of certain loans.
 
Sources of Financing
 
In both 2011 and 2010, our operations were focused on developing our pharmaceutical debit card, which were financed largely from notes issued in 2008.  In 2009, revenues from our pharmaceutical debit card reached the point that we were able to operate at a breakeven level from operations.  
 
At September 30, 2011, our current liabilities included $871,280 of accounts payable and accrued liabilities, many of which are past due, and $2,491,900 of loans payable that are classified as current because the loan is either evidenced by a note that has matured or is not documented by a note at all.  We are currently able to pay our accounts payable that are essential to our continued operation in the ordinary course of business from our ongoing revenues, but have not paid other accounts payable that are held by nonessential vendors.  We have managed to forestall any legal action by all of our creditors by maintaining good relations with our creditors.  However, if any material creditor decides to commence legal action to collect from us, it could jeopardize our ability to continue in business.  Our plan is to renegotiate the payment terms of our indebtedness or request that creditors convert their debt into common stock.  
 
We believe that our available cash on hand at September 30, 2011 of $47,262 and revenues anticipated for the remainder of 2011 will be sufficient to sustain our operations for the next twelve months, provided that we are not required to pay any material amount of our delinquent accounts payable, accrued interest or our current notes payable. We plan to request that some of our creditors convert their debt into equity to improve our financial position.  We are also seeking to raise additional capital during the next twelve months through an equity offering to high net worth and institutional investors. However, at this time we do not have an agreement with a broker-dealer to raise money for us and we do not have commitments from any investors.  There is no assurance we will be able to obtain additional capital, or obtain the capital on acceptable terms and conditions.  We plan to use the proceeds to finance our entry into other markets for our debit cards, and to repay indebtedness.  Our failure to obtain new capital will delay our entry into new markets, but will not jeopardize our ability to remain in business.
 
Going Concern
 
Our financial statements have been presented on the basis that we continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As shown in the accompanying financial statements, we have substantial indebtedness that is due and payable. These factors create an uncertainty about our ability to continue as a going concern.  We are currently trying to convince some of our creditors to convert their debts into equity, and we are also trying to raise capital from high net worth and institutional investors.  However, there can be no guarantee that we will be successful in either endeavor.  Our ability to continue as a going concern is dependent on the success of this plan.  The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
 
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.
 

 
15

 
 
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Because the Company is a smaller reporting company, it is not required to provide the information called for by this Item.
 
ITEM 4.  CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures
 
Our chief executive officer and 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 the 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 September 30, 2011.  Based on that evaluation, our chief executive officer and chief financial officer have 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 quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II.  OTHER INFORMATION.
 
ITEM 1.  LEGAL PROCEEDINGS.
 
None.
 
ITEM 1A.  RISK FACTORS.
 
Not applicable.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
During the three months ended September 30, 2011, we issued 1,750 shares of our common stock to shareholders of Wow Technologies, Inc. valued at $149, which was their market value on the date of issuance.  The shares were issued in reliance on the exemption from registration provided by Section 3(a)(10) of the Securities Act of 1933.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.
 
None.
 
ITEM  4. (REMOVED AND RESERVED)
 
ITEM 5.  OTHER INFORMATION.
 
None.
 

 
16

 
 
 
ITEM 6.  EXHIBITS.
 
31.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
31.2
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
 
 
SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
 
3PEA INTERNATIONAL, INC.
Date: November 14, 2011
 
/s/ Mark Newcomer
 
By: Mark Newcomer, Chief Executive Officer
(principal executive officer)
   
Date: November 14, 2011
 
/s/ Arthur De Joya
 
By: Arthur De Joya, Chief Financial Officer
(principal financial and accounting officer)
 
 
 
 
 
 
 
 
 

17