PAYSIGN, INC. 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 contain, 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 lifecycle.
We have two categories for our prepaid debit cards: (1) corporate and consumer reloadable, and (2) non-reloadable cards.
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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.
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 rewardsand 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 inthe 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 theU.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 theEuropean 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. From time to time, we evaluate raising capital as we continue to explore merger and acquisition opportunities and seek to further diversify into new industry 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. 15
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$509 million and$420 million for the six months endedJune 30, 2020 and 2019, respectively. We use this metric to analyze the total amount of money moving into our prepaid card programs. Conversion Rates 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 rates for the three months endedJune 30, 2020 and 2019 were 3.53% or 353 basis points ("bps"), and 4.21% or 421 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rates for the three months endedJune 30, 2020 and 2019 were 1.81% or 181 bps, and 2.45% or 245 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion rates for the three months endedJune 30, 2020 and 2019 were -0.12% or -12 bps, and 0.85% or 85 bps, respectively, of gross dollar volume loaded on cards. Our revenue conversion rates for the six months endedJune 30, 2020 and 2019 were 3.35% or 335 bps, and 3.78% or 378 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rates for the six months endedJune 30, 2020 and 2019 were 1.77% or 177 bps, and 2.10% or 210 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion rates for the six months endedJune 30, 2020 and 2019 were 0.26% or 26 bps, and 0.62% or 62 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, and depreciation and amortization expense and "Adjusted EBITDA" reflects the adjustment to EBITDA to exclude stock-based compensation expense and loss on abandonment of assets.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Reconciliation of adjusted
EBITDA to net income:
Net income (loss) attributable
to Paysign, Inc. $ (219,234 ) $ 1,738,791 $ 1,321,731 $ 2,610,462
Income tax provision (benefit) (423,797 ) 23,276 (511,348 ) 7,786
Interest income (3,130 ) (131,812 ) (65,291 ) (250,985 )
Depreciation and amortization 506,477 395,510 1,008,853 729,271
EBITDA (139,684 ) 2,025,765 1,753,945 3,096,534
Loss on abandonment of assets 42,898 - 42,898 -
Stock-based compensation 600,775 567,910 1,324,958 1,214,620
Adjusted EBITDA $ 503,989 $ 2,593,675 $ 3,121,801$ 4,311,154 16 Results of Operations
Three Months Ended
The following table summarizes our consolidated financial results:
Three Months Ended June 30, Variance
2020 2019 $ %
Revenues
Plasma industry $ 4,572,439 $ 6,542,655 $ (1,970,216 ) (30.1 %)
Pharma Industry 1,768,565 2,093,616 (325,051 ) (15.5 %)
Other 102,061 - 102,061 N/A
Total revenues 6,443,065 8,636,271 (2,193,206 ) (25.4 %)
Cost of revenues 3,138,350 3,598,038 (459,688 ) (12.8 %)
Gross profit 3,304,715 5,038,233 (1,733,518 ) (34.4 %)
Gross margin % 51.3 % 58.3 %
Operating expenses
Selling, general and
administrative 3,401,501 3,012,972 388,529 12.9 %Loss on abandonment of assets 42,898 - 42,898 N/A Depreciation and amortization 506,477 395,510 110,967 28.1 % Total operating expenses 3,950,876 3,408,482 542,394 15.9 %
Income (loss) from operations
Net income (loss) attributable to Paysign, Inc.$ (219,234 ) $ 1,738,791 $ (1,958,025 ) N/A Net margin % (3.4 %) 20.1 % 17
The decrease in total revenues of$2,193,206 compared to the same period in the prior year approximating 25%, consisted of a 30% reduction in Plasma revenue and a 16% reduction in Pharma revenue. This decrease was primarily due to a significant decrease in plasma donations and dollars loaded to card; combined with a smaller decrease in Pharma revenues resulting from lower unspent balances and improved client program management. Both industries were impacted by a novel coronavirus and the incidence of the related disease COVID-19. Cost of revenues for the three months endedJune 30, 2020 decreased$459,688 compared to the same period in the prior year and constituted approximately 49% and 42% of total revenues for the three months endedJune 30, 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. There was a favorable volume variance of$914 thousand due to the decrease in transactions, offset by an unfavorable rate variance of$454 thousand resulting from a decrease in higher margin revenue business. Gross profit for the three months endedJune 30, 2020 decreased$1,733,518 compared to the same period in the prior year resulting from the reduction in revenue aforementioned, and the disproportionate decrease in cost of sales. The decrease of 705 basis points ("bps") in gross margin resulted from an unfavorable cost of revenue rate variance and a lower revenue conversion rate. Selling, general and administrative expenses ("SG&A") for the three months endedJune 30, 2020 increased$388,529 or 13% compared to the same period in the prior year and consisted primarily of an increase in staffing and compensation of$329 thousand , technologies and telecom of$87 thousand , and rent of$65 thousand ; offset by a decrease in travel of$103 thousand .
During the three months ended
Depreciation and amortization for the three months endedJune 30, 2020 increased$110,967 compared to the same period in the prior year. The increase in depreciation and amortization was primarily due to continued capitalization of new technologies and enhancements to our platform.
In the three months ended
Other income for the three months ended
Our income tax benefit for the three months
The net income (loss) attributable to
18
Six Months Ended
The following table summarizes our consolidated financial results:
Six Months Ended June 30, Variance
2020 2019 $ %
Revenues
Plasma industry $ 11,915,849 $ 12,427,232 $ (511,383 ) (4.14 %)
Pharma Industry 4,788,942 3,466,329 1,322,613 38.2 %
Other 314,747 - 314,747 N/A
Total revenues 17,019,538 15,893,561 1,125,977 7.1 %
Cost of revenues 7,993,870 7,080,174 913,696 12.9 %
Gross profit 9,025,668 8,813,387 212,281 2.4 %
Gross margin % 53.0 % 55.5 %
Operating expenses
Selling, general and
administrative 7,228,825 5,717,921 1,510,904 26.4 %Loss on abandonment of assets 42,898 - - N/A
Depreciation and amortization 1,008,853 729,271 279,582
38.3 %
Total operating expenses 8,280,576 6,447,192 1,833,384 28.4 %
Income from operations $ 745,092 $ 2,366,195 $ (1,621,103 ) (68.5 %)
Net income attributable to Paysign, Inc.$ 1,321,731 $ 2,610,462 $ (1,288,731 ) (49.4 )% Net margin % 7.8 % 16.4 % Total revenues for the six months endedJune 30, 2020 increased of$1,125,977 compared to the same period in the prior year The increase in revenue approximating 7% was primarily due to an approximate increase of 20% in new card programs year over year, contributing to a strong first quarter, offset primarily due to the effects of COVID-19 in the second quarter. Cost of revenues for the six months endedJune 30, 2020 increased$913,696 compared to the same period in the prior year. Cost of revenues constituted approximately 47% and 45% of total revenues for the six months endedJune 30, 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 increased due to an unfavorable rate variance resulting from a change in transaction mix, combined with an unfavorable volume variance. Gross profit for the six months endedJune 30, 2020 increased$212,281 compared to the same period in the prior year. Our overall gross margins were 53% and 55% during the six months endedJune 30, 2020 and 2019, respectively, a decrease of 242 bps consistent with the change in cost of revenues as a percent of revenues. 19
Selling, general and administrative expenses for the six months endedJune 30, 2020 increased$1,510,904 or 26% compared to the same period in the prior year. The increase in SG&A consisted primarily of an increase in staffing and wages of$1,004 thousand , professional services for tax, audit and consultants of$252 thousand , stock-based compensation of$110 thousand and rent of$94 thousand . During the six months endedJune 30, 2020 the Company relocated its corporate headquarters and recognized a$42,898 loss on abandonment of assets primarily related to leasehold improvements. Depreciation and amortization for the six months endedJune 30, 2020 increased$279,582 compared to the same period in the prior year. 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 as the company continues to grow.
In the six months ended
Other income for the six months endedJune 30, 2020 decreased$185,694 related to a decrease in interest income primarily resulting from a significantly lower federal funds rate. Our income tax provision (benefit) for the six monthsJune 30, 2020 and 2019 was a benefit of$511,348 and a provision of$7,786 , respectively. The change from prior year is primarily a result of the tax benefit related to our stock-based compensation.
Net income attributable toPaysign, Inc. for the six months endedJune 30, 2020 decreased$1,288,731 or 49%. The overall change in net income attributable toPaysign, Inc. relates to the aforementioned factors.
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash:
Six Months Ended June 30,
2020 2019
Net cash provided by operating activities
(221,425 ) -
Net increase in cash and restricted cash $ 1,982,027 $ 17,223,697
Comparison of Six Months Ended
During the six months ended
Cash provided by operating activities decreased
Cash used in investing activities increased$1,092,877 in the six months endedJune 30, 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. 20
Cash used in financing activities was
Sources of Liquidity We believe that our available cash on hand, excluding restricted cash, atJune 30, 2020 of$7,633,149 , 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.
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
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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