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


 

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 March 31, 2014

 

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 x No o

 

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: 38,936,606 shares as of April 30, 2014.

 

 
 

 

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. 14
   
Item 4.  Controls and Procedures. 15
   
PART II.  OTHER INFORMATION. 15
   
Item 1.  Legal Proceedings. 15
   
Item 1A.  Risk Factors. 15
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 15
   
Item 3.  Defaults upon Senior Securities. 15
   
Item 4. Mine Safety Disclosures 15
   
Item 5.  Other Information 15
   
Item 6.  Exhibits. 16
   
SIGNATURES 16

 

2
 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

3PEA INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2014 AND DECEMBER 31, 2013

(UNAUDITED)

 

   March 31,
2014
   December 31,
2013
 
ASSETS          
           
Current assets          
Cash  $1,880,172   $1,027,239 
Cash Restricted   5,022,865    6,905,680 
Accounts Receivable   203,895    391,611 
Prepaid Expenses and other assets   161,391    218,950 
Total current assets   7,268,323    8,543,480 
           
Fixed assets, net   163,941    121,078 
           
Intangible and other assets          
Deposits   5,796    4,896 
Intangible assets, net   551,260    495,252 
           
Total assets  $7,989,320   $9,164,706 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities          
Accounts payable and accrued liabilities  $2,172,444   $1,431,317 
Customer card funding   5,022,865    6,905,680 
Notes payable-related parties   567,990    533,000 
Notes payable   199,324    187,780 
Total current liabilities   7,962,623    9,057,777 
           
Total liabilities   7,962,623    9,057,777 
           
Stockholders' equity          
Common stock; $0.001 par value; 150,000,000 shares authorized, 38,936,606 and 38,936,606 issued and outstanding at March 31, 2014 and  December 31, 2013, respectively   38,936    38,936 
Additional paid-in capital   5,570,406    5,570,406 
Treasury stock at cost, 303,450 shares   (150,000)   (150,000)
Accumulated deficit   (5,480,634)   (5,400,559)
Total 3Pea International, Inc.'s stockholders' equity (deficit)   (21,292)   58,783 
Noncontrolling interest   47,989    48,146 
Total stockholders' equity   26,697    106,929 
           
Total liabilities and stockholders' equity  $7,989,320   $9,164,706 

 

See accompanying notes to financial statements.

 

3
 

 

3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

(UNAUDITED)

 

   For the three months ended March 31, 
   2014   2013 
         
Revenues  $2,407,675   $2,111,037 
           
Cost of revenues   1,929,267    1,591,471 
           
Gross profit   478,408    519,566 
           
Operating expenses          
Depreciation and amortization   33,947    10,181 
Selling, general and administrative   508,878    268,604 
           
Total operating expenses   542,825    278,785 
           
Income (loss) from operations   (64,417)   240,781 
           
Other income (expense)          
Interest expense   (15,815)   (14,383)
Total other income (expense)   (15,815)   (14,383)
           
Income (loss) before provision for income taxes and noncontrolling interest   (80,232)   226,398 
           
Provision for income taxes        
           
Net income (loss) before noncontrolling interest   (80,232)   226,398 
           
Net (income) loss attributable to the noncontrolling interest   (157)   (7)
           
Net income (loss) attributable to 3Pea International, Inc.  $(80,075)  $226,405 
           
Net income (loss) per common share - basic   (0.00)   0.01 
Net income (loss) per common share - fully diluted   N/A    0.01 
           
Weighted average common shares outstanding - basic   38,936,106    38,927,540 
Weighted average common shares outstanding - fully diluted   N/A    42,388,040 

  

See accompanying notes to financial statements.

 

4
 

 

3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2014

(UNAUDITED)

  

   Stockholders' Deficit Attributable to 3Pea International, Inc.         
           Additional   Treasury       Non-   Total 
   Common Stock   Paid-in   Stock   Accumulated   controlling   Stockholders' 
   Shares   Amount   Capital   Amount   Deficit   Interest   Equity 
Balance, December 31, 2013   38,936,606   $38,936   $5,570,406   $(150,000)  $(5,400,559)  $48,146   $106,929 
                                    
Net income                   (80,075)   (157)   (80,232)
Balance, March 31, 2014   38,936,606   $38,936   $5,570,406   $(150,000)  $(5,480,634)  $47,989   $26,697 

 

See accompanying notes to financial statements.

 

5
 

 

3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

(UNAUDITED)

  

   For the three months ended March 31, 
   2014   2013 
Cash flows from operating activities:          
Net income  $(80,075)  $226,405 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Change in noncontrolling interest   (157)   (7)
Depreciation and amortization   33,947    10,181 
Stock based compensation   39,706    43,713 
Changes in operating assets and liabilities:          
Change in restricted cash   1,882,815    738,554 
Change in prepaid expenses and other assets   56,309    (39,450)
Change in deposits   (900)     
Change in accounts receivable   187,716    27,567 
Change in accounts payable and accrued liabilities   702,671    (305,910)
Change in customer card funding   (1,882,815)   (738,554)
Net cash provided by (used in) operating activities   939,217    (37,501)
           
Cash flows from investing activities:          
Purchase of fixed assets   (54,329)   (18,690)
Purchase of intangible assets   (78,489)   (44,218)
Net cash used by investing activities   (132,818)   (62,908)
           
Cash flows from financing activities:          
    Proceeds from borrowing on note payable – related party   34,990     
Proceeds from borrowing on note payable   14,244     
Payments on notes payable   (2,700)    
Net cash used by financing activities   46,534     
           
Net change in cash   852,933    (100,409)
Cash, beginning of period   1,027,239    1,872,911 
           
Cash, end of period  $1,880,172   $1,772,502 

  

See accompanying notes to financial statements.

 

6
 

 

 

3PEA INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, 2013.. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.

 

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumption are inherent in the preparation of the Company’s financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material effect on the reported amounts of the Company’s financial position and results of operations.

 

Operating results for the three months ended March 31, 2014 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 providing prepaid debit program management and processing services. We provide a card processing platform consisting of proprietary systems and innovative software applications based on the unique needs of our programs. We have extended our processing business capabilities through the recent launch of our PaySign® platform. We design and process prepaid programs that run on the platform through which our customers can define the services they wish to offer cardholders. Through this platform, we provide a variety of services including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service.

 

We have developed prepaid card programs for healthcare reimbursement payments, pharmaceutical co-pay assistance and corporate and incentive rewards. We plan to expand our product offering to include 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 proprietary PaySign® platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform allows 3PEA to significantly expand its operational capabilities by facilitating our entry into new markets within the payments space through its flexibility and ease of customization. The PaySign® platform delivers cost benefits and revenue building opportunities to our partners.

 

We manage all aspects of the debit card lifecycle, from managing the card design and approval processes with partners and associations, to production, packaging, distribution, and personalization. We also oversee inventory and security controls, renewals, lost and stolen card management and replacement. We deploy a fully staffed, in-house customer service department which utilizes bi-lingual customer service agents, Interactive Voice Response, (IVR) and two way SMS messaging.

 

7
 

 

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.

 

Goodwill and intangible assets - Goodwill is the purchase premium after adjusting for the fair value of net assets acquired. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or when events or circumstances indicate a potential impairment, at the reporting unit level. A reporting unit, as defined under applicable accounting guidance, is a business segment or one level below a business segment. We may in any given period bypass the qualitative assessment and proceed directly to a two-step method to assess and measure impairment of the reporting units goodwill. We first assess qualitative factors to determine whether it is more likely-than-not (i.e., a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value. This step serves as the basis for determining whether it is necessary to perform the two-step quantitative impairment test. The first step of the quantitative impairment test involves a comparison of the estimated fair value of each reporting unit to its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired; however, if the carrying amount of the reporting unit exceeds its estimated fair value, then the second step of the quantitative impairment test must be performed. The second step compares the implied fair value of the reporting unit’s goodwill with its carrying amount to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 

For intangible assets, we recognize an impairment loss if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

 

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives.

 

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 March 31, 2014 and December 31, 2013, there were no deferred revenues recorded.

 

We generate the following types of revenues:

 

  · Administration and usage fees, charged to our prepaid card clients when our programs are created, distributed or reloaded. Such revenues are recognized when such services are performed.

 

  · Transaction fees, paid by the applicable networks and passed through by our card issuing banks when our SVCs 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.

 

8
 

 

 

  · 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.

 

2.     FIXED ASSETS

 

Fixed assets consist of the following:

 

   As of
March 31, 2014
   As of
December 31, 2013
 
Equipment  $250,675   $233,631 
Software   297,978    297,978 
Furniture and fixtures   75,118    65,118 
Organizational costs   13,934     
Leasehold equipment   34,494    21,143 
    672,199    617,870 
Less: accumulated depreciation   (508,258)   (496,792)
Fixed assets, net  $163,941   $121,078 

  

3.     INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

   As of
March 31, 2014
   As of
December 31, 2013
 
Patents and trademarks  $33,465   $33,465 
Licenses   25,176     
Platform development   558,090    504,777 
    616,731    538,242 
Less: accumulated amortization   (65,471)   (42,990)
Intangible assets, net  $551,260   $495,252 

 

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

 

9
 

 

4.     COMMON STOCK

 

At March 31, 2014, 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 38,936,606 shares of common stock, and no shares of preferred stock.

 

2014 Transactions: During the three months ended March 31, 2014, the Company issued shares of common stock as follows:

 

·None

 

2013 Transactions: During the three months ended March 31, 2013, the Company issued shares of common stock as follows:

 

·25,000 shares of common stock for an employee signing bonus valued at .26 per share

 

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 completely vested as of March 31, 2014 with an approximate value of $16,575, for which a payable has been recorded for the same amount as of March 31, 2014. As of March 31, 2014, none of the 75,000 shares granted have been issued.

 

5. NOTES PAYABLE – RELATED PARTIES

 

  

As of

March 31, 2014

  

As of

December 31, 2013

 
Note payable due to a shareholder of the company, bearing interest at 8.5%, renewable annually upon prepayment of one year’s interest, due on demand and unsecured.*  $501,000   $501,000 
Note payable due to a director of the company and shareholder, bearing no interest, due on demand and unsecured.   52,990    18,000 
Note payable due to a director of the company and shareholder, bearing no interest, due on demand and unsecured.   14,000    14,000 
           
   $567,990   $533,000 

 

*In March 2014, the Company entered an agreement with the noteholder to modify the repayment terms of the note.   The Company paid $50,000 on the note at the time of the modification, which was applied to accrued interest, and agreed to pay $5,000 per month until November 1, 2014.  In the event the Company raises at least $2,000,000 in debt or equity financing by November 1, 2014, the Company agreed to repay the note in full.  In the event the Company does not raise at least $2,000,000 in debt or equity financing by November 1, 2014, the Company agreed to make a further payment to the noteholder of $250,000, and the noteholder agreed to convert $250,000 of the amount due into common stock at the average closing price per share for the 20 consecutive trading days preceding November 1, 2014, provided that the Company will not issue any shares in conversion of the note if it would cause the noteholder to own in excess of 9.9% of the common stock.  The balance of any amount due on the note would be converted into a new note that also bears interest at 8.5% per annum, but is payable in equal monthly payments of principal and interest sufficient to amortize the balance over three years from the date of issuance of the new note.  The new note will also be payable in full at any time that the company raises at least $2,000,000 in debt or equity financing.

 

6. NOTES PAYABLE

 

Notes payable consist of the following:

  

As of

March 31, 2014

  

As of

December 31, 2013

 
Note payable due to a shareholder of the company, bearing interest at 8%, due on demand and unsecured.  $150,000   $150,000 
Note payable due to a shareholder of the company.   19,400    19,400 
Notes payable due to an equipment finance company bearing interest at 13.49% and 12.89%.   29,924    18,380 
    199,324    187,780 
Less: non-current portion        
   $199,324   $187,780 

 

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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 considered general purpose reloadable (“GPR”) cards. Payroll cards are issued to an employee by an employer to receive the direct deposit of their payroll. GPR cards can also be issued to a consumer at a retail location or mailed to a consumer after completing an on-line application. GPR cards can be reloaded multiple times with a consumer’s payroll, government benefit, a federal or state tax refund or through cash reload networks located at retail locations. Reloadable cards are generally open loop cards as described below.

 

Non-Reloadable Cards: These are generally one-time use cards that are only active until the funds initially loaded to the card are spent. These types of cards are gift or incentive cards. These cards may be open loop or closed loop. Normally these types of cards are used for purchase of goods or services at retail locations and cannot be used to receive cash.

 

These prepaid cards may be open loop, closed loop or semi-closed loop. Open loop cards can be used to receive cash at ATM locations or purchase goods or services by PIN or signature at retail locations. These cards can be used virtually anywhere that 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.

 

11
 

 

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 expense reimbursement cards. We plan to expand our product offering to include payroll cards, general purpose re-loadable cards and travel cards. Our cards are offered to end users through our relationships with bank issuers.  

 

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

 

Currently, the primary market for our cards is the healthcare reimbursement market, pharmaceutical marketing or drug sampling market, and the 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.  

 

During the first quarter of 2013 we launched our proprietary payment platform, the PaySign® platform. 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 existing and future software platform. To this end, we engage with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate, we use third-party technology components in the development of our software applications and service offerings. Third-party software may be used for highly specialized business functions, which we may not be able to develop internally within time and budget constraints. Our principal target markets for processing services include prepaid card issuers, retail and private-label issuers, small third-party processors, and small and mid-size financial institutions in the United States and in emerging international markets.

 

To date, we have focused on extensive development and limited sales activities in each of our target markets, as well as putting in place the infrastructure and processes to be able to scale the business successfully. This includes the design and development of a fully integrated IVR system and in house call center of which we was taken live in the first quarter of 2013. The company has begun to devote more extensive resources to sales and marketing activities as we have added essential personnel to our marketing and sales department in late 2013. We sell our products directly to customers in the U.S. but may work with a small number of resellers and third parties in international markets to identify, sell and support targeted opportunities. We have also identified large scale opportunities in the European Union and are aggressively pursuing those opportunities.

 

In order to expand into new markets, we will need to invest additional funds in technology improvements, sales and marketing expenses, and regulatory compliance costs. We are considering raising capital to enable us to diversify into new market verticals. If we do not raise new capital, we believe that we will still be able to expand into new markets using internally generated funds, but our expansion will not be as rapid.

 

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The Company added an additional bank partner to our newest processing platform and launched new programs with this bank in early 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 March 31, 2014 and 2013

 

Revenues for the three months ended March 31, 2014 were $2,407,675, an increase of $296,638 compared to the same period in the prior year, when revenues were $2,111,037. The increase in revenue is due to new corporate incentive reward programs. We expect our revenues to continue to trend upward as we continue roll new incentive reward programs utilizing our newest 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 March 31, 2014 were $1,929,267, an increase of $337,796 compared to the same period in the prior year, when cost of revenues were $1,591,471.. Cost of revenues constituted approximately 80% and 75% of total revenues in 2014 and 2013, respectively. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, card production costs, customer service and program management expenses, application integration setup and sales expense.

 

Gross profit for the three months ended March 31, 2014 was $478,408, a decrease of $41,158 compared to the same period in the prior year, when gross profit was $519,566. Our overall gross profit percentage approximated 20% and 25% during the fiscal years 2014 and 2013 which is consistent with our overall expectations. We believe our profit margins will continue to improve in the future as we continue to pursue new corporate incentive reward programs utilizing our PaySign® Platform.

 

Selling, general and administrative expenses for the three months ended March 31, 2014 were $508,878, an increase of $240,274 compared to the same period in the prior year, when selling, general and administrative expenses were $268,604.  We continued to ramp up our investment in staffing, infrastructure and processes to be able to scale our business successfully.

 

In the three months ended March 31, 2014, we recorded operating loss of $(64,417), as compared to operating income of $240,781 in the same period in the prior year, a decrease in operating income of $305,198.

 

Other income (expense) for the three months ended March 31, 2014 was $(15,815), an increase in net other income (expense) of $1,432 compared to the same period in the prior year when other income (expense) was $(14,383) which is within our overall expectations.   

 

Our net income (loss) for the three months ended March 31, 2014 was $(80,075), a decrease of $306,480 compared to the same period in the prior year, when we recorded net income of $226,405. The decrease 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 three months ended March 31, 2014 and 2013:

 

   Three months ended March 31, 
   2014   2013 
Net cash provided by (used) in operating activities  $939,217   $(37,501)
Net cash provided by (used) in investing activities   (132,818)   (62,908)
Net cash provided by (used) in financing activities   46,534     
Net (decrease) increase in unrestricted cash and cash equivalents   852,933    (100,409)

 

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Comparison of Three months ended March 31, 2014 and 2013

 

During the three months ended March 31, 2014 and 2013, we financed our operations primarily through internally generated funds.

 

Operating activities provided $939,217 of cash in 2014, as compared to $(37,501) of cash (used in) the same period in the prior year. Major non-cash items that affected our cash flow from operations in 2014 were non-cash charges of $33,947 for depreciation and amortization, and stock-based compensation of $39,706. Our operating assets and liabilities provided $946,796 of cash, most of which resulted from increase in our accounts payable and accrued liabilities of $702,671, and collections from our accounts receivable of $187,716. Major non-cash items that affected our cash flow from operations in 2013 were non-cash charges of $10,181 for depreciation and amortization, and stock-based compensation of $43,713.  Our operating assets and liabilities in 2013 used $(317,793) of cash.

 

Investing activities used $(132,818) of cash in 2014, as compared to $(62,908) of cash used in 2013, all of which primarily related to the enhancement of the processing platform used in our business.

 

Financing activities provided $46,534 of cash in 2014 as compared to $-0- of cash in 2013. In 2014, cash provided from financing activities consisted of borrowings totaling $49,234.

 

Sources of Financing

 

We believe that our available cash on hand at March 31, 2014 of $1,880,172 and revenues anticipated for the remainder of 2014 will be sufficient to sustain our operations for the next twelve months.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Critical Accounting Estimates

 

Our significant accounting policies are described in Note 1 of Notes to Financial Statements. At this time, we are not required to make any material estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses.  

 

Any estimates we make will be based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.

  

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.

 

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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 March 31, 2014. 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 March 31, 2014 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.

 

None.

 

Item 3.  Defaults upon Senior Securities.

 

None.

 

Item 4.  MINE SAFETY DISCLOSURES

 

None

 

Item 5.  Other Information.

 

None.

 

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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

  

 

 

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: May 15, 2014

 

/s/ Mark Newcomer

 

By: Mark Newcomer, Chief Executive Officer

(principal executive officer)

   
Date: May 15, 2014

 

/s/ Arthur De Joya

 

By: Arthur De Joya, Chief Financial Officer

(principal financial and accounting officer)

 

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