PAYSIGN, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in "Risk Factors" included elsewhere in this Form 10-K.
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Disclosure Regarding Forward Looking Statements
This Annual Report on Form 10-K 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 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
We have developed prepaid card programs for corporate incentive and rewards including, but not limited to, consumer rebates and rewards, donor compensation, clinical trials, 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 other prepaid card offerings such as payroll cards, travel cards, and expense reimbursement cards. Our cards are sponsored by our issuing bank partners.
Our revenues include fees generated from cardholder fees, interchange, card program management fees, and settlement income. Revenue from cardholder fees, interchange and card program management fees is recorded when the performance obligation is fulfilled. Settlement income is recorded at the expiration of the card program.
We have two categories for our prepaid cards: (1) corporate and consumer reloadable, and (2) 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
restricted-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,
The prepaid card market is one of the fastest growing segments of the payments
industry in the
We manage all aspects of the prepaid 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 technology
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
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
In 2021, 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 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.
2020 Year Milestones
· Grew to approximately 3.5 million cardholders and 360 card programs as of
December 31, 2020 .
· Year over year revenue declined 30%.
· Added 55 Plasma programs, a net of 5 new Pharmaceutical programs, and 1
additional Corporate Incentive program.
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Results of Operations
Fiscal Years Ended
The following table summarizes our consolidated financial results:
Year ended December 31, Variance
2020 2019 $ %
Revenues
Plasma industry $ 23,401,068 $ 26,994,929 $ (3,593,861 ) (13.3% )
Pharma industry 326,699 7,372,990 (7,046,291 ) (95.6% )
Other 392,667 298,734 93,933 31.4%
Total revenues 24,120,434 34,666,653 (10,546,219 ) (30.4% )
Cost of revenues 14,817,028 15,425,178 (608,150 ) (3.9% )
Gross profit 9,303,406 19,241,475 (9,938,069 ) (51.6% )
Gross margin % 38.6% 55.5%
Operating expenses
Selling, general and
administrative 15,091,432 11,656,681 3,434,751 29.5%
Impairment of intangible asset 382,414 - 382,414 N/A
Loss on abandonment of assets 42,898 - 42,898 N/A
Depreciation and amortization 2,124,762 1,483,140 641,622 43.3%
Total operating expenses 17,641,506 13,139,821 4,501,685 34.3%
Income (loss) from operations
Net income (loss) attributable to Paysign, Inc.$ (9,141,562 ) $ 7,454,319 $ (16,595,881 ) N/A Net margin % (37.9% ) 21.5%
The decrease in total revenues of
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Cost of revenues for the year ended
Gross profit for the year ended
Selling, general and administrative expenses ("SG&A") for the year ended
During the year ended
Depreciation and amortization expense for the year ended
For the year ended
Other income for the year ended
The effective tax rate was (10.8%) and (13.9%) for the years ended
The net income (loss) attributable to
Key Metrics, 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 card programs. Our gross dollar volume was
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Conversion Rate on Gross Dollar Volume Loaded on Cards - Represents the percent
of total gross dollar load volume onto our card programs that is converted into
revenue, gross profit and net profit dollars. Our revenue conversion rate for
the years ended
Management also reviews key performance indicators, such as revenues, gross profits, 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 revenues, operating income, 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, 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. A reconciliation of net income (loss)
attributable to
Year ended December 31,
2020 2019
Reconciliation of adjusted EBITDA to net income (loss):
Net income (loss) attributable to
$ (9,141,562 ) $ 7,454,319 Income tax provision (benefit) 894,182 (909,976 ) Interest income (90,720 ) (441,116 ) Depreciation and amortization 2,124,762 1,483,140 EBITDA (6,213,338 ) 7,586,367 Impairment of intangible asset 382,414 - Loss on abandonment of assets 42,898 - Stock-based compensation 2,971,777 2,528,613 Adjusted EBITDA$ (2,816,249 ) $ 10,114,980
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash for our last
two fiscal years ended
Year ended December 31,
2020 2019
Net cash provided by operating activities $ 13,775,819 $ 16,712,779
Net cash used in investing activities (3,344,855 ) (3,237,134 )
Net cash provided by (used in) financing activities (72,865 ) 430,919 Net increase in cash and restricted cash
$ 10,358,099 $ 13,906,564 26
Comparison of Fiscal 2020 and 2019
In fiscal 2020 and 2019, we financed our operations through internally generated funds.
Operating activities provided
Investing activities used
Financing activities used
Liquidity and Sources of Financing
We believe that our available cash on hand, excluding restricted cash, at
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
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.
Fixed assets - Fixed assets are stated at cost less accumulated depreciation. Depreciation is principally recorded on the straight-line method over the estimated useful lives of the assets, which are generally 3 to 10 years. The cost of repairs and maintenance is charged to expense as incurred. Leasehold improvements are capitalized and depreciated over the shorter of the remaining lease term or the estimated useful life of the improvements. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
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Intangible assets - 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.
Internally Developed Software Costs - Computer software development costs are expensed as incurred, except for internal use software or website development costs that qualify for capitalization as described below, and include compensation and related expenses, costs of hardware and software, and costs incurred in developing features and functionality.
For computer software developed or obtained for internal use, costs that are incurred in the preliminary project and post implementation stages of software development are expensed as incurred. Costs incurred during the application and development stage are capitalized. Capitalized costs are amortized using the straight-line method over a three to five year estimated useful life, beginning in the period in which the software is available for use.
Income taxes - Our income tax expense is comprised of current and deferred income tax expense. Current income tax expense approximates taxes to be paid or refunded for the current period. Deferred income tax expense results from the changes in deferred tax assets and liabilities during the periods. These gross deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary differences between the basis of assets and liabilities as measured by tax laws and their basis as reported in our consolidated financial statements. We also recognize deferred tax assets for tax attributes such as net operating loss carryforwards and tax credit carryforwards. We record valuation allowances to reduce deferred tax assets to the amounts we conclude are more likely-than-not to be realized in the foreseeable future.
We recognize and measure income tax benefits based upon a two-step model: 1) a tax position must be more likely-than-not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely-than-not to be sustained upon settlement. The difference between the benefit recognized for a position and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit. We accrue income tax related interest and penalties, if applicable, within income tax expense.
We have filed consolidated tax returns whereby past subsidiary losses are used
to offset tax liabilities on current profits. This approach could be challenged
by the Internal Revenue Service ("IRS") and if not accepted, may affect net
income and earnings per share. Management believes that the likelihood of the
Revenue 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 contract 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 obligations.
The Company generates revenues from Plasma card programs through fees generated from cardholder fees and interchange fees. Revenues from Pharma card programs are generated through card program management fees, interchange fees, and settlement income.
Plasma and Pharma card program revenues include both fixed and variable components. Our cardholder fees represent an obligation to the cardholder based on a per transaction basis and recognized at a point in time when the performance obligation is fulfilled. Card program management fees include an obligation to our card program sponsors and are generally recognized when earned on a monthly basis pursuant to the contract terms which are generally multi-year contracts. Interchange fees are earned when customer-issued cards are processed through card payment networks as the nature of our promise to the customer is that we stand ready to process transactions at the customer's requests on a daily basis over the contract term. Since the timing and quantity of transactions to be processed by us is not determinable, we view interchange fees to comprise an obligation to stand ready to process as many transactions as the customer requests. Accordingly, the promise to stand ready is accounted for as a single series performance obligation. The company uses the right to invoice practical expedient and recognizes revenue concurrent with the processing of card transactions.
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Previously, settlement income from Pharma programs was recognized and recorded, after giving consideration to any revenue constraints, 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 2020, the Company observed substantially different performance indicators, 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. As a result, the Company changed its estimate of breakage for recognizing settlement income for Pharma programs resulting in the Company constraining revenue on all Pharma programs in accordance with applicable accounting guidance. Based on the recently observed change in facts and circumstances, the Company utilizes 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.
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.
Stock-Based Compensation - The Company recognizes compensation expense for all restricted stock and stock option awards. The fair value of restricted stock is measured using the grant date trading price of our stock. The fair value of stock option awards is estimated at the grant date using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. We have elected to recognize compensation expense for all options with graded vesting on a straight-line basis over the vesting period of the entire option. The determination of fair value using the Black-Scholes pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility and the risk-free interest rate.
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