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 stockholders 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, 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 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 "Part II - 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.
13
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 and text alerts.
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 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. 14
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$721,000,000 and$630,000,000 for the nine months endedSeptember 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 endedSeptember 30, 2020 and 2019 were (0.07%) or (7) basis points ("bps"), and 4.29% or 429 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rates for the three months endedSeptember 30, 2020 and 2019 were (1.62%) or (162) bps, and 2.55% or 255 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion rates for the three months endedSeptember 30, 2020 and 2019 were (2.90%) or (290) bps, and 1.41% or 141 bps, respectively, of gross dollar volume loaded on cards. Our revenue conversion rates for the nine months endedSeptember 30, 2020 and 2019 were 2.34% or 234 bps, and 3.95% or 395 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rates for the nine months endedSeptember 30, 2020 and 2019 were 0.78% or 78 bps, and 2.25% or 225 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion rates for the nine months endedSeptember 30, 2020 and 2019 were (0.67%) or (67) bps, and 0.88% or 88 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 (loss), net income (loss), earnings (loss) 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" is 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, impairment of intangible asset and loss on abandonment of assets. Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Reconciliation of adjusted EBITDA to net income (loss): Net income (loss) attributable to Paysign, Inc.$ (6,152,135 ) $ 2,960,078 $ (4,830,404 ) $ 5,570,540 Income tax benefit (2,260,527 ) (563,854 ) (2,771,875 ) (556,068 ) Interest income (12,184 ) (113,667 ) (77,475 ) (364,652 ) Depreciation and amortization 537,792 318,508 1,546,645 1,047,779 EBITDA (7,887,054 ) 2,601,065 (6,133,109 ) 5,697,599 Impairment of intangible asset 382,414 - 382,414 - Loss on abandonment of assets - - 42,898 - Stock-based compensation 798,849 651,267 2,123,807 1,865,887 Adjusted EBITDA$ (6,705,791 ) $ 3,252,332 $ (3,583,990 ) $ 7,563,486 15 Results of Operations
Three Months Ended
The following table summarizes our consolidated financial results:
Three Months Ended
September 30, Variance
2020 2019 $ %
Revenues
Plasma industry $ 5,186,566 $ 6,937,066 $ (1,750,500 ) (25.2% )
Pharma industry (5,383,887 ) 2,071,051 (7,454,938 ) N/A
Other 44,780 - 44,780 N/A
Total revenues (152,541 ) 9,008,117 (9,160,658 ) N/A
Cost of revenues 3,281,888 3,641,595 (359,707 ) (9.9% )
Gross profit (3,434,429 ) 5,366,522 (8,800,951 ) N/A
Gross margin % (2,251.5% ) 59.6%
Operating expenses
Selling, general and
administrative 4,070,211 2,765,961 1,304,250 47.2%
Impairment of intangible asset 382,414 - 382,414 N/A
Depreciation and amortization 537,792 318,508 219,284 68.8%
Total operating expenses 4,990,417 3,084,469
1,905,948 61.8%
Income (loss) from operations
Net income (loss) attributable to Paysign, Inc.$ (6,152,135 ) $ 2,960,078 $ (9,112,213 ) N/A Net margin % (4,033.1% ) 32.9%
The decrease in total revenues of$9,160,658 compared to the same period in the prior year consisted of a 25.2% reduction in Plasma revenue and a$7,454,938 reduction in Pharma revenue. The decrease in Plasma revenue was primarily due to a decrease in plasma donations and dollars loaded to card and a reduction in card load fees. The Pharma revenue decrease included a$6,293,203 adjustment for a change in accounting estimate of breakage for recognizing settlement income for Pharma programs based on substantially different performance indicators observed, current trends in the industry regarding program management by third parties, and new information available in dollar loads and spending patterns compared to historical experience. This change in accounting estimate resulted in the Company constraining revenue on all Pharma programs in accordance with ASC 606 by changing the estimate of breakage to the remote method of revenue recognition for settlement income whereby the unspent balances will be recognized as revenue at the expiration of the cards and the respective program. This has resulted in the reversal of all previously recognized settlement income for all current Pharma programs. In addition, both industries were impacted by a novel coronavirus and the incidence of the related disease COVID-19. Cost of revenues for the three months endedSeptember 30, 2020 decreased$359,707 compared to the same period in the prior year. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production costs, customer service, program management, application integration setup, and sales and commission expense. There was a favorable volume variance of$3,703,260 due to the decrease in transactions, offset by an unfavorable rate variance of$3,343,553 resulting from a decrease in higher margin revenue business. 16 Gross profit for the three months endedSeptember 30, 2020 decreased$8,800,951 compared to the same period in the prior year resulting from the reduction in revenue described above, and the disproportionate decrease in cost of sales. The decrease in gross margin resulted from the lower revenue conversion rate and an unfavorable cost of revenue rate variance. Selling, general and administrative expenses ("SG&A") for the three months endedSeptember 30, 2020 increased$1,304,250 or 47% compared to the same period in the prior year and consisted primarily of an increase in staffing and compensation of$420,000 , professional services for tax, audit and consultants of$524,000 , stock-based compensation of$148,000 , technologies and telecom of$87,000 , and rent of$171,000 related to a new office lease entered into inJune 2020 ; offset by a decrease in travel of$47,000 . For the three months endedSeptember 30, 2020 , we reviewed the carrying value of acquisition costs related to a business license and determined that there was an impairment necessary as the efforts to acquire the license had been suspended. An impairment of intangible asset of$382,414 was recorded. Depreciation and amortization expense for the three months endedSeptember 30, 2020 increased$219,284 compared to the same period in the prior year. The increase in depreciation and amortization expense was primarily due to continued capitalization of new technologies and enhancements to our platform.
For the three months ended
Other income for the three months endedSeptember 30, 2020 decreased$101,483 related to a decrease in interest income resulting primarily from the reduction beginning in the first quarter of 2020 to a near 0% federal funds rate. The effective tax rate was 26.9% and (23.5%) for the three months endedSeptember 30, 2020 and 2019. The effective tax rates vary, primarily as a result of the tax benefit related to our stock-based compensation and a pretax loss in the current year period. The net income (loss) attributable toPaysign, Inc. for the three months endedSeptember 30, 2020 decreased$9,112,213 . The overall change in net income (loss) attributable toPaysign, Inc. relates to the aforementioned factors. 17
Nine Months Ended
The following table summarizes our consolidated financial results:
Nine Months Ended September 30, Variance
2020 2019 $ %
Revenues
Plasma industry $ 17,102,415 $ 19,364,298 $ (2,261,883 ) (11.7% )
Pharma industry (594,945 ) 5,537,380 (6,132,325 ) N/A
Other 359,527 - 359,527 N/A
Total revenues 16,866,997 24,901,678 (8,034,681 ) (32.3% )
Cost of revenues 11,275,758 10,721,769 553,989 5.2%
Gross profit 5,591,239 14,179,909 (8,588,670 ) (60.6% )
Gross margin % 33.1% 56.9%
Operating expenses
Selling, general and
administrative 11,299,036 8,483,882 2,815,154 33.2%Impairment of intangible asset 382,414 - 382,414 N/A Loss on abandonment of assets 42,898 - 42,898 N/A Depreciation and amortization 1,546,645 1,047,779 498,866 47.6% Total operating expenses 13,270,993 9,531,661
3,739,332 39.2%
Income (loss) from operations
Net income (loss) attributable to Paysign, Inc.$ (4,830,404 ) $ 5,570,540 $ (10,400,944 ) N/A Net margin % (28.6% ) 22.4% Total revenues for the nine months endedSeptember 30, 2020 decreased$8,034,681 compared to the same period in the prior year. The 32.3% decrease in total revenues was primarily due to the effects of COVID-19 in the second and third quarter, offset by an increase of approximately 20% in new card programs year over year, contributing to a strong first quarter. In addition, The Pharma revenue decrease included a$6,293,203 adjustment for a change in accounting estimate of breakage for recognizing settlement income for Pharma programs based on substantially different performance indicators observed, current trends in the industry regarding program management by third parties, and new information available in dollar loads and spending patterns compared to historical experience. This change in accounting estimate resulted in the Company constraining revenue on all Pharma programs in accordance with ASC 606 by changing the estimate of breakage to the remote method of revenue recognition for settlement income whereby the unspent balances will be recognized as revenue at the expiration of the cards and the respective program. This has resulted in the reversal of all previously recognized settlement income for all current Pharma programs. Cost of revenues for the nine months endedSeptember 30, 2020 increased$553,889 compared to the same period in the prior year. Cost of revenues constituted approximately 66.9% and 43.1% of total revenues for the nine months endedSeptember 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, program management, application integration setup, and sales and commission expense. Our cost of revenues as a percentage of revenues increased due to a mix change towards lower gross margin non-Pharma business, partially offset by lower transaction volumes in non-Pharma lines of business. Gross profit for the nine months endedSeptember 30, 2020 decreased$8,588,670 compared to the same period in the prior year. Our overall gross margins were 33.1% and 56.9% during the nine months endedSeptember 30, 2020 and 2019, respectively, a decrease of 2,379 bps with reasons consistent with the change in cost of revenues as a percent of revenues. 18 Selling, general and administrative expenses for the nine months endedSeptember 30, 2020 increased$2,815,154 or 33% compared to the same period in the prior year. The increase in SG&A consisted primarily of an increase in staffing and wages of$1,199,000 , professional services for tax, audit and consultants of$776,000 , technologies and telecom of$334,000 , stock-based compensation of$258,000 and rent of$260,000 related to a new office lease entered into in
June 2020 . For the nine months endedSeptember 30, 2020 , we reviewed the carrying value of acquisition costs related to a business license and determined that there was an impairment necessary as the efforts to acquire the license had been suspended. An impairment of intangible asset of$382,414 was recorded.
During the nine months ended
Depreciation and amortization expense for the nine months endedSeptember 30, 2020 increased$498,866 compared to the same period in the prior year. The increase in depreciation and amortization expense 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.
For the nine months ended
Other income for the nine months endedSeptember 30, 2020 decreased$287,177 related to a decrease in interest income primarily resulting from the reduction beginning in the first quarter of 2020 to a near 0% federal funds rate. The effective tax rate was 36.5% and (11.1%) for the nine months endedSeptember 30, 2020 and 2019. The effective tax rates vary, primarily as a result of the tax benefit related to our stock-based compensation and a pretax loss in the current year period.
Net income (loss) attributable to
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash:
Nine Months Ended September 30,
2020 2019Net cash provided by operating activities$ 12,578,806 $ 10,798,115 Net cash used in investing activities (2,557,188 ) (1,496,976 ) Net cash (used in) provided by financing activities (81,745 )
252,813
Net increase in cash and restricted cash$ 9,939,873
$ 9,553,952 19
Comparison of Nine Months Ended
During the nine months ended
Cash provided by operating activities increased$1,780,691 in the nine months endedSeptember 30, 2020 , as compared to the same period in the prior year. The increase is primarily due to the increase in the customer card funding liability offset by the decrease in net income (loss) and deferred income taxes. The increase in the card funding liability is partially related to the change in estimate and reversal of previously recognized settlement income on Pharma programs. Cash used in investing activities increased$1,060,212 in the nine months endedSeptember 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. Cash used in financing activities was$81,745 in the nine months endedSeptember 30, 2020 as compared to cash provided by financing activities of$252,813 for the nine months endedSeptember 30, 2019 . The change between years primarily consists of shares withheld to cover taxes as well as the cash received from exercises of stock options. Sources of Liquidity We believe that our available cash on hand, excluding restricted cash, atSeptember 30, 2020 of$7,497,579 , along with our forecast for revenues and cash flows for the remainder of the year and for 2021, 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 are 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. Revenue and Expense Recognition-The Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of contracts with customers; (ii) determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company generates revenue for the Plasma industry through fees generated from cardholder transactions, interchange and card program management fees. For the Pharma industry, the Company generates revenue from interchange, program management fees and settlement income. Revenue from cardholder transactions, interchange and card program management is recorded when the performance obligation is fulfilled. Previously, settlement income from breakage on Pharma programs was recognized and recorded ratably throughout the program lifecycle based on the Company's estimate of the unspent balances to be remaining on the card at program expiration. During the quarter endedSeptember 30, 2020 , the Company changed its estimate of breakage for recognizing the settlement income for Pharma programs resulting in the Company constraining revenue on all Pharma programs in accordance with ASC 606 by changing the estimate of breakage to the remote method of revenue recognition for settlement income whereby the unspent balances will be recognized as revenue at the expiration of the cards and the respective program. The Company records all revenue on a gross basis since it is the primary obligor and establishes the price in the contract arrangement with its customers. The Company is currently under no obligation for refunding any fees, and the Company does not currently have any obligations for disputed claim settlements. Given the nature of the Company's services and contracts, it has no contract assets. 20
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