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 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 products 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 ofthe 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 proprietaryPaysign platform. Through thePaysign platform, we provide a variety of services including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service. ThePaysign platform was built on a 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. ThePaysign 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, 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. As we do not have our own banking license to issue open-loop prepaid cards for our prepaid card programs, our cards are offered to end users through our relationships with bank issuers. 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 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 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,Visa , etc.) is accepted. Closed-loop cards can only be used at a specific merchant. Restricted-loop cards can be used at several merchants, or a defined group of merchants, such as all merchants at a specific shopping mall. The prepaid card market in theU.S. 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, orwho could not qualify for, a checking or savings account. 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 provide in-house customer service which includes live bilingual customer care representatives staffed 24/7/365. We also run in-house Interactive Voice Response (IVR) and two-way SMS messaging platforms.
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 andMexico .
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. 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. The outbreak of a novel coronavirus and the incidence of the related disease (COVID-19) starting in late 2019 has continued, spreading throughoutthe United States and much of the world beginning in the first quarter of 2020. InMarch 2020 , theWorld Health Organization declared the outbreak as a pandemic. While the disruption is currently expected to be temporary, there is uncertainty around the duration. The COVID-19 outbreak and the new stimulus packages signed into law during 2020 and 2021 have had and will continue to have an adverse effect on the Company's results of operations. Given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, management cannot reasonably estimate the impact to the Company's future results of operations, cash flows, or financial condition. 14 Results of Operations
Three Months Ended
The following table summarizes our consolidated financial results:
Three Months Ended
March 31,
(unaudited) Variance
2021 2020 $ %
Revenues
Plasma industry $ 5,383,151 $ 7,343,410 $ (1,960,259 ) (26.7% )
Pharma industry 882,830 3,020,377 (2,137,547 ) (70.8% )
Other 13,447 212,686 (199,239 ) (93.7% )
Total revenues 6,279,428 10,576,473 (4,297,045 ) (40.6% )
Cost of revenues 3,447,622 4,855,520 (1,407,898 ) (29.0% )
Gross profit 2,831,806 5,720,953 (2,889,147 ) (50.5% )
Gross margin % 45.1% 54.1%
Operating expensesSelling, general and administrative 3,864,986 3,827,324 37,662 1.0% Depreciation and amortization 595,848 502,376 93,472 18.6% Total operating expenses 4,460,834 4,329,700 131,134 3.0% Income (loss) from operations$ (1,629,028 ) $ 1,391,253 $ (3,020,281 ) N/A Net income (loss)$ (1,623,527 ) $ 1,540,965 $ (3,164,492 ) N/A Net margin % (25.9% ) 14.6% The decrease in total revenues of$4,297,045 for the three months endedMarch 31, 2021 compared to the same period in the prior year consisted primarily of a$1,960,259 reduction in Plasma revenue and a$2,137,547 reduction in Pharma revenue. The decrease in Plasma revenue was primarily due to a decrease in plasma donations, and, consequently, dollars loaded to cards and cardholder fees, which were significantly impacted by COVID-19 related donation center closures and mobility restrictions. Pharma revenue decreased$2,137,547 primarily due to the constraining of revenue on all Pharma programs for settlement income whereby the unspent balances will be recognized as revenue at the expiration of the cards and the respective program. Pharma programs were also negatively impacted by COVID-19 as new pharmaceutical medicines were delayed and individuals limited their exposure to pharmacies and doctor offices. Cost of revenues for the three months endedMarch 31, 2021 decreased$1,407,898 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 and postage costs, customer service, program management, application integration setup, and sales and commission expense. Cost of revenues decreased primarily due to the decline in Plasma transactions as many of the Plasma transaction costs are variable in nature which are provided by third-partieswho charge us based on the number of transactions
that occurred during the period. 15
Gross profit for the three months endedMarch 31, 2021 decreased$2,889,147 compared to the same period in the prior year resulting from the reduction in Plasma and Pharma revenue, and the associated cost of sales as described above. 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 endedMarch 31, 2021 increased$37,662 or 1.0% compared to the same period in the prior year and consisted primarily of an increase in compensation and benefits of$175,000 related to severance costs in the current year period, an increase in professional services for tax, audit and consultants of$100,000 , a decrease in stock-based compensation of$90,000 , a decrease in technologies and telecom of$51,000 , an increase in rent, utilities, and maintenance of$141,000 related to a new office lease entered into inJune 2020 , a decrease in travel of$89,000 , and a decrease in other operating expenses of$146,000 . Depreciation and amortization expense for the three months endedMarch 31, 2021 increased$93,472 compared to the same period in the prior year. The increase in depreciation and amortization expense was primarily due to continued capitalization of new software and equipment, continued enhancements to our platform, and new furniture and fixtures and leasehold improvements associated with the new building we moved into inJune 2020 . For the three months endedMarch 31, 2021 we recorded a loss from operations of$1,629,028 representing a net decrease of$3,020,281 in income from operations compared to the same period last year related to the aforementioned factors. Other income for the three months endedMarch 31, 2021 decreased$55,060 related to a decrease in interest income primarily from lower average outstanding restricted cash bank balances due to a decline in our Plasma business and better program management by third parties on our Pharma programs. The effective tax rate was (0.1%) and (6.0%) for the three months endedMarch 31, 2021 and 2020. The effective tax rates vary, primarily as a result of the full valuation on our deferred tax asset in the current year and the tax benefit related to our stock-based compensation and a pretax loss in the prior year period.
The net loss for the three months ended
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
Conversion Rates on Gross Dollar Volume Loaded on Cards - Comprised of revenues, gross profit and net income conversion rates of gross dollar volume loaded on cards which are calculated by taking our total revenues, gross profit or net income (loss), respectively, as a numerator and dividing by the gross dollar volume loaded on cards as a denominator. As we derive a number of our financial results from cardholder fees, we utilize these metrics as an indication of the amount of money that is added to cards and will eventually be converted to revenues, gross profit and net income. Our revenue conversion rates for the three months endedMarch 31, 2021 and 2020 were 2.27% or 227 basis points ("bps"), and 3.24% or 324 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rates for the three months endedMarch 31, 2021 and 2020 were 1.02% or 102 bps, and 1.75% or 175 bps, respectively, of gross dollar volume loaded on cards. Our net income conversion rates for the three months endedMarch 31, 2021 and 2020 were (0.59)% or (59) bps, and 0.47% or 47 bps, respectively, of gross dollar volume loaded on cards. 16
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 financial 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
(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. A reconciliation of net income
(loss) to Adjusted EBITDA is provided in the table below.
Three Months Ended March 31,
(unaudited)
2021 2020
Reconciliation of adjusted EBITDA to net income:
Net income (loss) $ (1,623,527 ) $1,540,965
Income tax provision (benefit) 1,600 (87,551 ) Interest income (7,101 ) (62,161 ) Depreciation and amortization 595,848
502,376 EBITDA (1,033,180 ) 1,893,629 Stock-based compensation 636,214 724,183 Adjusted EBITDA$ (396,966 ) $ 2,617,812
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash:
Three months ended March 31 ,
(unaudited)
2021 2020
Net cash provided by operating activities
(612,202 ) (1,496,123 )
Net cash provided by financing activities 110,466 24,000
Net increase in cash and restricted cash
Comparison of Three Months Ended
During the three months ended
17 Cash provided by operating activities decreased$844,534 for the three months endedMarch 31, 2021 , as compared to the same period in the prior year. The decrease is primarily due to the decrease in net income (loss) partially offset by a net increase in cash flows from changes in operating assets and liabilities, particularly the customer card funding liability, offset by decreases related to prepaid expenses, accounts payable and accrued liabilities. The increase in the cash provided by the customer card funding liability is mainly due to the increase in customer card funding restricted cash during the period. The cash flow related to the increase in prepaid expenses is due to prepaid insurance premiums in March of 2021 and the cash flow related to an increase in accounts payable and accrued liabilities in March of 2020 is due to the timing of expenditures related to our office relocation. Cash used in investing activities decreased$883,921 for the three months endedMarch 31, 2021 , as compared to the same period in 2020, with the difference primarily attributed to a decrease in fixed assets during the current period. Fixed asset purchases in the prior year period were related to our office relocation. Cash provided by financing activities increased$86,466 for the three months endedMarch 31, 2021 as compared to the three months endedMarch 30, 2020 . The change between periods consists of an increase in the cash received from exercises of stock options. Sources of Liquidity We believe that our available cash on hand, excluding restricted cash, atMarch 31, 2021 of$6,559,678 , along with our forecast for revenues and cash flows for the remainder of the year and for 2022, 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. 18
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