Disclosure Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ("Forward Looking Statements"). All statements other than statements of historical fact included in this report are Forward Looking Statements. In the normal course of our business, we, in an effort to help keep our shareholders and the public informed about our operations, may from time-to-time issue certain statements, either in writing or orally, that contains or may contain Forward Looking Statements. Although we believe that the expectations reflected in such Forward Looking Statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by us, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating results. All phases of our operations are subject to a number of uncertainties, risks and other influences, many of which are outside of our control and any one of which, or a combination of which, could materially affect the results of our proposed operations and whether Forward Looking Statements made by us ultimately prove to be accurate. Such important factors ("Important Factors") and other factors could cause actual results to differ materially from our expectations are disclosed in this report, including those factors discussed in "Item 1A. Risk Factors." All prior and subsequent written and oral Forward Looking Statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Important Factors described below that could cause actual results to differ materially from our expectations as set forth in any Forward Looking Statement made by or on behalf of us.





Overview

We are a vertically integrated provider of prepaid card programs and processing services for corporate, consumer and government applications. Our payment solutions are utilized by our corporate customers as a means to increase customer loyalty, increase patient adherence rates, reduce administration costs and streamline operations. Public sector organizations can utilize our payment solutions to disburse public benefits or for internal payments. We market our prepaid card solutions under our PaySign brand. As we are a payment processor and prepaid card program manager, we derive our revenue from all stages of the prepaid card lifecycle. We provide a card processing platform consisting of proprietary systems and software applications based on the unique needs of our clients. We have extended our processing business capabilities through our proprietary PaySign platform. Through the PaySign platform, we provide a variety of services including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service. The PaySign platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform has allowed the Company to significantly expand its operational capabilities by facilitating our entry into new markets within the payments space through its flexibility and ease of customization. The PaySign platform delivers cost benefits and revenue building opportunities to our partners.

We have developed prepaid card programs for corporate incentive and rewards including, but not limited to, consumer rebates and rewards, donor compensation, healthcare reimbursement payments and pharmaceutical payment assistance. We have expanded our product offerings to include additional corporate incentive products and demand deposit accounts accessible with a debit card. In the future we expect to further expand our product offerings into payroll cards, travel cards, and expense reimbursement cards. Our cards are sponsored by our issuing bank partners.

Our revenues include fees generated from cardholder transactions, interchange, card program management fees and settlement income. Revenue from cardholder transactions, interchange and card program management fees is recorded when the performance obligation is fulfilled. Settlement income is recorded ratably throughout the program life cycle.

We have two categories for our prepaid debit cards: corporate and consumer reloadable, and non-reloadable cards.

Reloadable Cards: These types of cards are generally classified as payroll or considered general purpose reloadable ("GPR") cards. Payroll cards are issued by an employer to an employee in order to allow the employee to access payroll amounts that are deposited into an account linked to their card. 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.









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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 generally used as gift or incentive cards. Normally these types of cards are used for purchase of goods or services at retail locations and cannot be used to receive cash.

Both reloadable and non-reloadable cards may be open loop, closed loop or semi-closed loop. Open loop cards can be used to receive cash at ATM locations by PIN; or purchase goods or services by PIN or signature at retail locations virtually anywhere that the network brand (American Express, Discover, MasterCard, Visa, etc.) is accepted. Closed loop cards can only be used at a specific merchant. Semi-closed loop cards can be used at several merchants, such as all merchants at a specific 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 manage all aspects of the debit card lifecycle, from managing the card design and approval processes with partners and networks, 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 bilingual customer service representatives, Interactive Voice Response ("IVR"), and two-way short message service ("SMS") messaging.

Currently, we are focusing our marketing efforts on corporate incentive and expense prepaid card products, in various market verticals including but not limited to general corporate expense, healthcare related markets including co-pay assistance, clinical trials and donor compensation, loyalty rewards and incentive cards.

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

We have devoted more extensive resources to sales and marketing activities as we have added essential personnel to our marketing and sales team. We sell our products directly to customers in the U.S. but may work with a small number of resellers and third parties in international markets to identify, sell and support targeted opportunities. We have also identified opportunities in the European Union and are pursuing those opportunities.

In 2020, we plan to continue to invest additional funds in technology improvements, sales and marketing, customer service, and regulatory compliance. We are considering raising capital to enable us to diversify into new market verticals. If we do not raise new capital, we believe that we will still be able to expand into new markets using internally generated funds, but our expansion will not be as rapid.

Key Performance Indicators and Non-GAAP Measures

Management reviews a number of metrics to help us monitor the performance of and identify trends affecting our business. We believe the following measures are the primary indicators of our quarterly and annual revenues:

Gross Dollar Volume Loaded on Cards - Represents the total dollar volume of funds loaded to all of our prepaid card programs. Our gross dollar volume was $326 million and $215 million for the three months ended March 31, 2020 and 2019, respectively. We use this metric to analyze the total amount of money moving into our prepaid card programs.









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Conversion Rate on Gross Dollar Volume Loaded on Cards - Comprised of revenues, gross profit and net profit conversion rates of gross dollar volume loaded on cards. Our revenue conversion rate for the three months ended March 31, 2020 and 2019 were 3.24% or 324 basis points ("bps"), and 3.38% or 338 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rate for the three months ended March 31, 2020 and 2019 were 1.76% or 176 bps, and the same 1.76% or 176 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion rate for the three months ended March 31, 2020 and 2019 were 0.47% or 47 bps, and 0.41% or 41 bps, respectively, of gross dollar volume loaded on cards.

Management also reviews key performance indicators, such as revenues, gross profit, operational expenses as a percent of revenues, and cardholder participation. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment and investment in new card programs. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating activities as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:

"EBITDA" defined as earnings before interest, income taxes, depreciation and amortization expense and "Adjusted EBITDA" reflects the adjustment to EBITDA to exclude stock-based compensation expense.





                                                     Three Months Ended March 31,
                                                        2020                2019
Reconciliation of adjusted EBITDA to net income:
Net income attributable to Paysign, Inc.           $     1,540,965       $   871,671
Income tax benefit                                         (87,551 )         (15,490 )
Interest income                                            (62,161 )        (119,173 )
Depreciation and amortization                              502,376           333,761
EBITDA                                                   1,893,629         1,070,769
Stock-based compensation                                   724,183           646,710
Adjusted EBITDA                                    $     2,617,812       $ 1,717,479






Results of Operations

Three Months ended March 31, 2020 and 2019

Revenues for the three months ended March 31, 2020 were $10,576,473, an increase of $3,319,183 compared to the same period in the prior year, when revenues were $7,257,290. The increase in revenue approximating 46% was primarily due to an increase in new clients and new card programs with existing clients.

Cost of revenues for the three months ended March 31, 2020 was $4,855,520, an increase of $1,373,384 compared to the same period in the prior year, when cost of revenues was $3,482,136. Cost of revenues constituted approximately 46% and 48% of total revenues for the three months ended March 31, 2020 and 2019, respectively. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production costs, customer service and program management expenses, application integration setup, and sales and commission expense. Our cost of revenues as a percentage of revenues decreased primarily due to improved network interchange margins and a favorable client mix.

Gross profit for the three months ended March 31, 2020 was $5,720,953 an increase of $1,945,799 compared to the same period in the prior year, when gross profit was $3,775,154. Our overall gross margins were 54% and 52% during the three months ended March 31, 2020 and 2019, respectively, and an improvement of 207 bps resulting from favorable client industry mix.









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Selling, general and administrative expenses ("SG&A") for the three months ended March 31, 2020 was, $3,827,324, an increase of $1,122,375 or 41% compared to the same period in the prior year, when SG&A was $2,704,949. The increase in SG&A was primarily due to increased investments in technologies, sales and marketing staff; and increased stock-based compensation expense.

Depreciation and amortization for the three months ended March 31, 2020 was $502,376, an increase of $168,615 compared to the same period in the prior year, when depreciation and amortization was $333,761. The increase in depreciation and amortization was primarily due to continued capitalization of new technologies and enhancements to our platform which we expect to continue.

In the three months ended March 31, 2020, we recorded operating income of $1,391,253 as compared to operating income of $736,444 in the three months ended March 31, 2019, an increase of $654,809 or 89%.

Other income for the three months ended March 31, 2020 was $62,161, as compared to $119,173 in three months ended March 31, 2019, which represents a decrease of $57,012 primarily related to a decrease in interest income resulting from lower interest rates.

Our income tax benefit for the three months March 31, 2020 and 2019 was $87,551 and $15,490, respectively. The increase from prior year is a result of the tax benefit related to our stock-based compensation.

Net income attributable to Paysign, Inc. for the three months ended March 31, 2020 was $1,540,965 as compared to $871,671 in the three months ended March 31, 2019, which represents an increase of $669,294 or 77%. The overall change in net income attributable to Paysign, Inc. relates to the aforementioned factors.

Liquidity and Capital Resources

The following table sets forth the major sources and uses of cash for the three months ended March 31, 2020 and 2019:





                                              Three months ended March 31,
                                                 2020                2019

Net cash provided by operating activities $ 10,749,032 $ 20,032,971 Net cash used in investing activities

            (1,496,123 )        (559,415 )
Net cash provided by financing activities            24,000                 -

Net increase in cash and restricted cash $ 9,276,909 $ 19,473,556

Comparison of three months ended March 31, 2020 and 2019

During the three months ended March 31, 2020 and 2019, we financed our operations through internally generated funds.

Cash provided by operating activities decreased $9,283,939 in the three months ended March 31, 2020, as compared to the same period in the prior year. The decrease is primarily related to a $11,582,400 decrease in the change in customer card funding, offset by a $669,294 increase in net income and a $1,223,889 change in accounts payable and accrued liabilities as compared to the prior year period.

Cash used in investing activities increased $936,708 in the three months ended March 31, 2020, as compared to the same period in 2019, with the difference primarily attributed to an increase in fixed assets during the current period and enhancements to our processing platform.

Cash provided by financing activities was $24,000 in the three months ended March 31, 2020 as compared to $-0- for the three months ended March 31, 2019. In 2020, financing activities consisted of cash provided from exercises of stock options.





Sources of Liquidity

We believe that our available cash on hand, excluding restricted cash, at March 31, 2020 of $9,424,385, along with anticipated revenues and operating profits anticipated for the remainder of 2020 will be sufficient to sustain our operations for the next twelve months.









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Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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.

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

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