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EX-31.1 - CERTIFICATION - 3PEA INTERNATIONAL, INC.tpnl_10q-ex3101.htm
EX-32.2 - CERTIFICATION - 3PEA INTERNATIONAL, INC.tpnl_10q-ex3202.htm
EX-31.2 - CERTIFICATION - 3PEA INTERNATIONAL, INC.tpnl_10q-ex3102.htm
EX-32.1 - CERTIFICATION - 3PEA INTERNATIONAL, INC.tpnl_10q-ex3201.htm
EXCEL - IDEA: XBRL DOCUMENT - 3PEA INTERNATIONAL, INC.Financial_Report.xls

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

or

 

£ 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. Yes S 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 £ Accelerated filer £ Non-accelerated filer £ 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 £ No x

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 38,936,106 shares as of July 31, 2013.

 

 
 

 

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. 11
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 16
   
Item 4.  Controls and Procedures.  
   
PART II.  OTHER INFORMATION. 17
   
Item 1.  Legal Proceedings. 17
   
Item 1A.  Risk Factors. 17
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 17
   
Item 3.  Defaults upon Senior Securities. 17
   
Item 4. Mine Safety Disclosures 17
   
Item 5.  Other Information. 17
   
Item 6.  Exhibits. 17
   
SIGNATURES 18

  

2
 


PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

3PEA INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2013 AND DECEMBER 31, 2012

(UNAUDITED)

 

   June 30, 2013   December 31, 2012 
ASSETS          
           
Current assets          
Cash  $865,635   $1,872,911 
Cash Restricted   5,006,285    5,050,867 
Accounts Receivable   118,189    81,333 
Prepaid Expenses and other assets   81,838    16,050 
Total current assets   6,071,947    7,021,161 
           
Fixed assets, net   110,068    108,938 
           
Intangible and other assets          
Deposits   4,896    3,551 
Intangible assets, net   416,134    326,625 
           
Total assets  $6,603,045   $7,460,275 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current liabilities          
Accounts payable and accrued liabilities  $1,086,989   $2,212,312 
Customer card funding   5,006,285    5,050,867 
Notes payable-related parties   538,000    538,000 
Notes payable   169,400    169,400 
Total current liabilities   6,800,674    7,970,579 
           
           
Total liabilities   6,800,674    7,970,579 
           
Stockholders' deficit          
Common stock; $0.001 par value; 150,000,000 shares authorized, 38,936,106 and 38,911,606 issued and outstanding at June 30, 2013 and  December 31, 2012, respectively   38,936    38,912 
Additional paid-in capital   5,570,406    5,563,931 
Treasury stock at cost, 303,450 shares   (150,000)   (150,000)
Accumulated deficit   (5,706,000)   (6,012,243)
Total 3Pea International, Inc.'s stockholders' deficit   (246,658)   (559,400)
Noncontrolling interest   49,029    49,096 
Total stockholders' deficit   (197,629)   (510,304)
           
Total liabilities and stockholders' deficit  $6,603,045   $7,460,275 

 

See accompanying notes to financial statements.

 

3
 

 

3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012

(UNAUDITED)

  

   For the three months ended June 30, 
   2013    2012 
Revenues  $1,204,386    $2,549,003 
            
Cost of revenues   799,559     2,033,264 
            
Gross profit   404,827     515,739 
            
Operating expenses           
Depreciation and amortization   9,899     11,276 
Selling, general and administrative   300,205     143,995 
            
Total operating expenses   310,104     155,271 
            
Income from operations   94,723     360,468 
            
Other income (expense)           
Interest expense   (14,944)    (15,706)
Gain on debt extinguishment        1,136,055 
Total other income (expense)   (14,944)    1,120,349 
            
Income before provision for income taxes and noncontrolling interest   79,779     1,480,817 
            
Provision for income taxes         
            
Net income before noncontrolling interest   79,779     1,480,817 
            
Net (income) loss attributable to the noncontrolling interest   (60)    (3)
            
Net income attributable to 3Pea International, Inc.  $79,839    $1,480,820 
            
Net income per common share - basic   0.00     0.04 
Net income per common share - fully diluted   0.00     0.04 
            
Weighted average common shares outstanding - basic   38,932,324     36,789,853 
Weighted average common shares outstanding - fully diluted   43,267,824     38,329,314 

  

See accompanying notes to financial statements.

 

4
 

 

3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(UNAUDITED)

 

 

   For the six months ended June 30, 
   2013    2012 
Revenues  $3,315,423    $4,033,595 
            
Cost of revenues   2,391,030     3,255,069 
            
Gross profit   924,393     778,526 
            
Operating expenses           
Depreciation and amortization   20,080     28,874 
Selling, general and administrative   568,810     297,096 
            
Total operating expenses   588,890     325,970 
            
Income from operations   335,503     452,556 
            
Other income (expense)            
Interest expense   (29,327)    (31,459)
Gain on debt extinguishment        1,136,055 
Total other income (expense)   (29,327)    1,104,596 
            
Income before provision for income taxes and noncontrolling interest   306,176     1,557,152 
            
Provision for income taxes         
            
Net income before noncontrolling interest   306,176     1,557,152 
            
Net (income) loss attributable to the noncontrolling interest   (67)    (8)
            
Net income attributable to 3Pea International, Inc.  $306,243    $1,557,160 
            
Net income per common share - basic   0.01     0.04 
Net income per common share - fully diluted   0.01     0.04 
            
Weighted average common shares outstanding - basic   38,932,324     36,038,449 
Weighted average common shares outstanding - fully diluted   43,267,824     36,826,506 

  

See accompanying notes to financial statements.

 

5
 

 

3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(UNAUDITED)

  

   Stockholders' Deficit Attributable to 3Pea International, Inc.         
   Common Stock   Additional Paid-in   Treasury Stock   Accumulated   Non-controlling   Total Stockholders' 
   Shares   Amount   Capital   Amount   Deficit   Interest   Deficit 
Balance, December 31, 2012   38,911,606   $38,912   $5,563,931   $(150,000)  $(6,012,243)  $49,096   $(510,304)
                                    
Issuance of stock for signing bonus, $0.26 per share   25,000    25    6,475                6,500 
Cancellation of shares   (500)   (1)                   (1)
Net income                   306,243    (67)   306,176 
Balance, June 30, 2013   38,936,106   $38,936   $5,570,406   $(150,000)  $(5,706,000)  $49,029   $(197,629)

 

See accompanying notes to financial statements.

 

6
 

 

3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(UNAUDITED)

 

   For the six months ended June 30, 
   2013   2012 
Cash flows from operating activities:          
Net income  $306,243   $1,557,160 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Change in noncontrolling interest   (67)   8 
Depreciation and amortization   20,080    28,874 
Stock based compensation   83,252     
Gain on extinguishment of debt-stock based       (1,136,055)
Changes in operating assets and liabilities:          
Change in restricted cash   44,582    (64,577)
Change in prepaid expenses and other assets   (69,632)   (155)
Change in accounts receivable   (36,856)   (856,857)
Change in accounts payable and accrued liabilities   (1,199,577)   577,678 
Change in customer card funding   (44,582)   64,577 
Net cash provided by (used in) operating activities   (896,557)   170,653 
           
Cash flows from investing activities:          
Purchase of fixed assets   (19,672)   (25,350)
Purchase of intangible assets   (91,047)   (79,758)
Net cash used by investing activities   (110,719)   (105,108)
           
Cash flows from financing activities:          
Payments on notes payable       (11,750)
Net cash used by financing activities       (11,750)
           
Net change in cash   (1,007,276)   53,795 
Cash, beginning of period   1,872,911    63,826 
           
Cash, end of period  $865,635   $117,621 

  

See accompanying notes to financial statements.

 

7
 

 

3PEA INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2013

(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, 2012. 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 six months period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

 

About 3PEA International, Inc.

 

3PEA International, Inc. is a payment solutions company which currently focuses on providing prepaid debit program management and processing services. 3PEA provides a card processing platform consisting of proprietary systems and innovative software applications. 3PEA develops prepaid card programs for healthcare reimbursement payments, pharmaceutical assistance, corporate and incentive rewards, and general purpose re-loadable cards, travel cards, and expense reimbursement cards. 3PEA cards are offered to end users through our relationships with bank issuers.

 

Principles of consolidation – The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

 

Use of estimates - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Restricted cash – restricted cash is a cash account controlled by the Company which funds are received related to the card programs from our customers. The Company has recorded a corresponding customer card funding liability.

 

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 June 30, 2013 and December 31, 2012, there are no deferred revenues recorded.

 

8
 

 

1.     DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued)

 

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 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.

 

2.     FIXED ASSETS

 

Fixed assets consist of the following:

 

   As of
June 30, 2013
   As of
December 31, 2012
 
Equipment  $200,972   $188,019 
Software   297,978    297,978 
Furniture and fixtures   65,118    61,821 
Leasehold equipment   21,143    17,721 
    585,211    565,539 
Less: accumulated depreciation   475,143    456,601 
Fixed assets, net  $110,068   $108,938 

 

3.     INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

   As of
June 30, 2013
   As of
December 31, 2012
 
Patents and trademarks  $33,465   $33,465 
Platform development in process   409,376    318,329 
    442,841    351,794 
Less: accumulated amortization   26,707    25,169 
Intangible assets, net  $416,134   $326,625 

 

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

 

9
 

 

4.     COMMON STOCK

 

At June 30, 2013, 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 38,936,106 shares of common stock, and no shares of preferred stock.

 

2013 Transactions: During the six months ended June 30, 2013, the Company issued shares of common stock in the following transactions:

 

·On February 1, 2013, the Company issued 25,000 shares of common stock for an employee signing bonus valued at $0.26 per share.
·On April 14, 2013, 500 shares were cancelled by request of an individual investor, valued less than $1.00.

 

2012 Transactions: During six months ended June 30, 2012, the Company issued shares of common stock in the following transactions:

 

  3,335,500 shares of common stock and warrants for 3,335,500 shares of common stock for extinguishment of debts totaling $1,667,750 . The shares were valued at the market price of our common stock on the date of issuance and warrants valued using the Black-Scholes options pricing model whereby both shares and warrants collectively were valued at $531,695.

 

Warrants

 

As of June 30, 2013, the Company had outstanding the following warrants:

 

Date of Issuance   Number of Warrants   Exercise Price   Contractual Life   Number of  Shares Exercisable 
 05/31/2012    1,834,525   $0.50    3 years    1,834,525 
 05/31/2012    1,500,975   $0.50    3 years   1,500,975 
 07/30/2012    75,000   $0.50    3 years    75,000 
 10/30/2012    50,000   $0.50    3 years    50,000 
      3,460,500              3,460,500 

 

Stock Grants:

 

In February 2013, the Company granted 75,000 shares of common stock to an employee of the Company with a total value of $16,575 or $0.22 per share (including a 15% discount of fair market value due to these shares being restricted and lacking market liquidity). The 75,000 shares granted have a vesting period of one year of which five months have vested with an approximate value of $6,811 during the period ended June 30, 2013 for which a payable has been recorded for the same amount as of June 30, 2013. As of June 30, 2013, none of the 75,000 shares granted have been issued.

 

In August 2012, the Company granted a total of 5,000,000 shares of common stock to various officers and directors of the Company with a total value of $680,000 or $0.14 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 granted have a vesting period of five years of which ten months have vested as of June 30, 2013. The approximate value vested during the year ended December 31, 2012 and for the six month period ended June 30, 2013 was $52,000 and $67,400, respectively. As of December 31, 2012 and June 30, 2013, the Company has a recorded a payable in the amount of $52,000 and $119,400, respectively, which represents the value of the common stock that had vested as of such dates. As of June 30, 2013, none of the 5,000,000 shares granted have been issued.

 

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 (“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 contains 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

 

3PEA International, Inc. is a payment solutions company that focuses on providing prepaid debit program management and processing services. Utilizing its PaySign® Platform, the Company offers customizable prepaid debit card solutions for a variety of consumer and corporate applications. As part of the Company’s customized prepaid card solutions 3Pea provides transaction processing, card creation and fulfillment, cardholder enrollment, value loading, cardholder account management, reporting and in-house customer service. 3Pea strives to provide its clients with significant time-to market, cost, scalability, reliability and security benefits.

 

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 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.

 

11
 

 

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 Visa® or MasterCard® is accepted. Closed loop cards can only be used at a specific merchant. Semi-closed loop cards can be used at several merchants such as a shopping mall.

 

The prepaid card market is one of the fastest growing segments of the payments industry in the U.S. This market has experienced significant growth in recent years due to consumers and merchants embracing improved technology, greater convenience, more product choices and greater flexibility. Prepaid cards have also proven to be an attractive alternative to traditional bank accounts for certain segments of the population, particularly those without, or who could not qualify for, a checking or savings account.

 

We have developed prepaid card programs for healthcare reimbursement payments, pharmaceutical assistance, corporate and incentive rewards, and are expanding into 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.

 

Our products and services are aimed at capitalizing on the growing demand for stored value and reloadable ATM/prepaid card financial products in a variety of market niches. Our proprietary platform is scalable and customizable, delivering cost benefits and revenue building opportunities to partners. We manage all aspects of the debit card lifecycle, from managing the card design and approval processes with banking partners and card associations, to production, packaging, distribution, and personalization. We also oversee inventory and security controls, renewals, lost and stolen card management and replacement.

 

Currently, the primary market for our cards is the healthcare reimbursement market, pharmaceutical marketing or drug sampling market, and corporate incentive card market, although we are expanding into other markets for stored value cards, including, pharmacy benefits cards, payment distribution and reimbursement cards and payroll cards. In the fourth quarter of 2011, we completed integration and launch of an incentive reward program targeting plasma donation centers. We anticipate steady growth of these programs over the next twenty-four months, having launched twenty five donation centers to date.

 

During the second quarter of 2013 we launched our newest payments platform, known as the PaySign® platform. The PaySign® platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform will allow 3Pea to significantly expand its operational capabilities, allowing 3Pea to enter new markets within the payments processing space. The PaySign® platform was designed to easily incorporate new payment technologies and applications as they evolve, keeping 3Pea at the forefront of payment innovation. The platform provides the flexibility and efficiencies that will allow 3Pea to significantly reduce the time and cost related to card program development and customization, resulting in increasing operating margins. The PaySign® platform is equipped to facilitate EMV (EuroPay, MasterCard, and Visa) smart card payment system (Chip and PIN) payments on a global basis. We expect to continue our practice of investing an appropriate level of resources to maintain, enhance and extend the functionality of our proprietary systems and existing software applications, to develop new and innovative software applications and systems in response to the needs of our customers, and to enhance the capabilities surrounding our infrastructure. In addition, we intend to offer products and services that are compatible with new and emerging delivery channels.

 

As part of our platform expansion development process, we evaluate current and emerging technology for applicability to our 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.

 

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To date, we have focused on developing a highly scalable business model through extensive investment in technology and infrastructure. , including the design and development of a fully integrated IVR system and in house call center. The company plans to devote more extensive resources to sales and marketing activities in the near future. 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 capital in sales and marketing, technology and support services. We are considering raising capital in a private placement to enable us to diversify into new market verticals. If we do not raise new capital, we believe that we will still be able to expand into new markets using internally generated funds, but our expansion will not be as rapid.

 

In early 2013 the Company added an additional bank partner to our newest processing platform and rolled out new products with this bank in the first quarter of 2013. The Company is currently in the process of adding an additional bank partner to our processing platform and anticipates roll out of new products with this bank in the third quarter of 2013. We will work with various banks to distribute prepaid cards to consumers throughout the U.S. The Company will work with these banks to develop additional financial services for consumers, and to increase the functionality of both the programs and prepaid card usage.

 

Results of Operations

 

Three Months ended June 30, 2013 and 2012

 

Revenues for the three months ended June 30, 2013 were $1,204,386, a decrease of $1,344,617 compared to the same period in the prior year, when revenues were $2,549,003. The decrease in revenue is primarily due to the timing of implementation and utilization of our pharmaceutical card programs, as discussed further below, which makes up the majority of our revenues. We expect our revenues to continue to trend upward as the economy improves and as we roll out additional debit card programs utilizing our PaySign® processing platform, diversify our product line and increase the number of support services offered to our customers.

 

Cost of revenues for the three months ended June 30, 2013 were $799,559, a decrease of $1,233,705 compared to the same period in the prior year, when cost of revenues were $2,033,264. Cost of revenues constituted approximately 66% and 80% of total revenues in 2013 and 2012, 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 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 they create 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 variances 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 June 30, 2013 was $404,827, a decrease of $110,912 compared to the same period in the prior year, when gross profit was $515,739. Our overall gross profit percentage approximated 34% and 20% during the fiscal years 2013 and 2012. The increase in our gross profit percentage can be attributed to a relative increase in higher margin revenue sources.

 

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Selling, general and administrative expenses for the three months ended June 30, 2013 were $300,205, an increase of $156,210 compared to the same period in the prior year, when selling, general and administrative expenses were $143,995.  The increase is primarily due to additional costs incurred related to our card program management and customer call center which was launched during the first quarter of 2013. The increase is consistent with our overall expectations.

 

In the three months ended June 30, 2013, we recorded operating income of $94,723, as compared to operating income of $360,468 in the same period in the prior year, a decrease of $265,745.

 

Other income (expense) for the three months ended June 30, 2013 was $(14,944), a decrease in net other income (expense) of $1,135,293 compared to the same period in the prior year when other income (expense) was $1,120,349.  The overall decrease in net other income (expense) in 2012 is primarily due to gain on debt extinguishments in the prior year in the same period which is considered a non-recurring transaction.  

 

Our net income for the three months ended June 30, 2013 was $79,839, a decrease of $1,400,981 compared to the same period in the prior year, when we recorded net income of $1,480,820. The increase in our net income is attributable to the aforementioned factors.

 

Six Months ended June 30, 2013 and 2012

 

Revenues for the six months ended June 30, 2013 were $3,315,423, a decrease of $718,172compared to the same period in the prior year, when revenues were $4,033,595. The decrease in revenue is primarily due to the timing of implementation and utilization of our pharmaceutical card programs, as discussed further below, which makes up the majority of our revenues. We expect our revenues to continue to trend upward as the economy improves and as we roll out additional debit card programs utilizing our PaySign® processing platform, diversify our product line and increase the number of support services offered to our customers.

 

Cost of revenues for the six months ended June 30, 2013 were $2,391,030, a decrease of $864,039 compared to the same period in the prior year, when cost of revenues were $3,255,069. Cost of revenues constituted approximately 72% and 81% of total revenues in 2013 and 2012, 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 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 they create 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 variances 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 six months ended June 30, 2013 was $924,393, an increase of $145,867 compared to the same period in the prior year, when gross profit was $778,526. Our overall gross profit percentage approximated 28% and 19% during the fiscal years 2013 and 2012. The increase in our gross profit percentage can be attributed to a relative increase in higher margin revenue sources.

 

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Selling, general and administrative expenses for the six months ended June 30, 2013 were $568,810, an increase of $271,714 compared to the same period in the prior year, when selling, general and administrative expenses were $297,096.  The increase is primarily due to additional costs incurred related to our card program management and customer call center which was launched during the first quarter of 2013. The increase is consistent with our overall expectations.

 

In the six months ended June 30, 2013, we recorded operating income of $335,503, as compared to operating income of $452,556 in the same period in the prior year, a decrease of $117,053.

 

Other income (expense) for the six months ended June 30, 2013 was $(29,327), a decrease in net other income (expense) of $1,133,923 compared to the same period in the prior year when other income (expense) was $1,104,596.  The overall decrease in net other income (expense) in 2012 is primarily due to gain on debt extinguishments in the prior year in the same period which is considered a non-recurring transaction.  

 

Our net income for the six months ended June 30, 2013 was $306,243, a decrease of $1,250,917 compared to the same period in the prior year, when we recorded net income of $1,557,160. 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, 2013 and 2012:

 

   Six months ended June 30, 
   2013   2012 
Net cash provided by (used) in operating activities  $(896,558)  $170,653 
Net cash provided by (used) in investing activities   (110,719)   (105,108)
Net cash provided by (used) in financing activities       (11,750)
Net (decrease) increase in unrestricted cash and cash equivalents   (1,007,277)   53,795 

  

Comparison of Six months ended June 30, 2013 and 2012

 

During the six months ended June 30, 2013 and 2012, we financed our operations primarily through internally generated funds.

 

Operating activities provided (used) $(896,558) of cash in 2013, as compared to $170,653 of cash in the same period in the prior year. Major non-cash items that affected our cash flow from operations in 2013 were non-cash charges of $20,080 for depreciation and amortization and stock-based compensation of $83,252. Our operating assets and liabilities used $(1,306,066) of cash, most of which resulted from reductions in our accounts payable and accrued liabilities of $(1,199,577). Major non-cash items that affected our cash flow from operations in 2012 were non-cash charges of $28,874 for depreciation and amortization.  Our operating assets and liabilities in 2012 used $(279,179) of cash, most of which resulted from an increase in accounts receivable of $856,857, offset by an increase in accounts payable of $577,678.

 

Investing activities used $110,719 of cash in 2013, as compared to $105,108 of cash in 2012, all of which was related to the enhancement of the PaySign® platform.

 

Financing activities used $-0- of cash in 2013 as compared to $11,750 of cash in 2012. In 2012, our use of cash from financing activities consisted of the repayment of certain loans.

 

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Sources of Financing

 

We believe that our available cash on hand at June 30, 2013 of $865,635 and revenues anticipated for the remainder of 2013 will be sufficient to sustain our operations for the next twelve months. We were successful at convincing some of our larger debt holders to convert their loans into a combination of common stock and warrants during 2012, and we plan to request that some of our remaining 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. We plan to use the proceeds to finance our entry into other markets for our debit cards, and to ramp up business development, sales and product expansion. We recently entered into an agreement with a capital market advisor to raise money for us, but we do not have commitments from any investors at this time and do not even know the terms under which we may be able to raise capital. There is no assurance we will be able to obtain additional capital, or obtain the capital on acceptable terms and conditions.  Our failure to obtain new capital may delay our entry into new markets, but will not jeopardize our ability to remain in business nor hinder our operations.

 

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.

  

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 June 30, 2013 . 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 June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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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.

 

None.

 

Item 3.  Defaults upon Senior Securities.

 

None.

 

Item 4. MINE SAFETY DISCLOSURES

 

None

 

Item 5.  Other Information.

 

None.

 

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.LAB XBRL Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document
101.DEF XBRL Definition Linkbase Document

 

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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: August 13, 2013

/s/ Mark Newcomer

 

By: Mark Newcomer, Chief Executive Officer

(principal executive officer)

   
Date: August 13, 2013

/s/ Arthur De Joya

 

By: Arthur De Joya, Chief Financial Officer

(principal financial and accounting officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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