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 provider of prepaid card programs, comprehensive patient affordability
offerings, digital banking services and integrated payment processing designed
for businesses, consumers and government institutions. Founded in 2001 and
headquartered in southern Nevada , the company creates customized, innovative
payment solutions for clients across all industries, including pharmaceutical,
healthcare, hospitality and retail. By using Paysign solutions, clients enjoy
benefits such as lower administrative costs, streamlined operations, increased
revenues, accelerated product adoption, and improved customer, employee and
partner loyalty.
Built on the foundation of a powerful and reliable payments platform, Paysign's
end-to-end technologies securely enable a wide range of services, including
transaction processing, cardholder enrollment, value loading, cardholder account
management, reporting and customer care. The modern cross-platform architecture
is designed to be highly flexible, scalable and customizable, which delivers
cost benefits and revenue-building opportunities to clients and partners.
As a full-service program manager, Paysign manages all aspects of the prepaid
card lifecycle, from card design and bank approvals, production, packaging,
distribution and personalization, to inventory and security controls, renewals,
lost and stolen cards and card replacement. The company's in-house, bilingual
customer care is available 24/7/365 through live agents, interactive voice
response (IVR), and two-way SMS alerts.
For more than 20 years major pharmaceutical and healthcare companies and
multinational enterprises have relied on Paysign to provide full-service
programs tailored to their unique requirements. The Company has designed and
launched prepaid card programs for corporate rewards, employee incentives,
consumer rebates, donor compensation, clinical trials, healthcare reimbursement
payments and copay assistance.
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. 13
We have two categories for our prepaid debit cards: (1) corporate and consumer reloadable cards, 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.
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. 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 given the development of new variants that appear to be spreading. 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. While we remain cautiously optimistic and have seen improvements in our operating results, we are not back to pre-pandemic operating levels. Given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and variants 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
June 30,
(unaudited) Variance
2021 2020 $ %
Revenues
Plasma industry $ 5,947,313 $ 4,572,439 $ 1,374,874 30.1%
Pharma industry 641,037 1,768,565 (1,127,528 ) (63.8% )
Other 62,940 102,061 (39,121 ) (38.3% )
Total revenues 6,651,290 6,443,065 208,225 3.2%
Cost of revenues 3,498,723 3,138,350 360,373 11.5%
Gross profit 3,152,567 3,304,715 (152,148 ) (4.6% )
Gross margin % 47.4% 51.3%
Operating expenses Selling, general and administrative 3,474,562 3,401,501 73,061
2.1%
Loss on abandonment of assets - 42,898 (42,898 ) N/A
Depreciation and amortization 614,182 506,477 107,705 21.3% Total operating expenses 4,088,744 3,950,876 137,868 3.5% Loss from operations$ (936,177 ) $ (646,161 ) $ (290,016 ) (44.9% ) Net loss$ (931,967 ) $ (219,234 ) $ (712,733 ) 325.1% Net margin % (14.0% ) (3.4% )
The increase in total revenues of$208,225 for the three months endedJune 30, 2021 compared to the same period in the prior year consisted primarily of a$1,374,874 increase in Plasma revenue and a$1,127,528 reduction in Pharma revenue. The increase in Plasma revenue was primarily due to an increase in plasma donations, and, consequently, dollars loaded to cards, cardholder fees, and interchange, as COVID-19 restrictions such as donation center closures and mobility restrictions were relaxed compared to the prior year period. Pharma revenue decreased$1,127,528 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. Cost of revenues for the three months endedJune 30, 2021 increased$360,373 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 increased primarily due to the increase 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. Gross profit for the three months endedJune 30, 2021 decreased$152,148 compared to the same period in the prior year resulting from the reduction in Pharma revenue, offset by an increase in Plasma revenue and the impact of a variable cost structure as described above. The decrease in gross margin resulted from a higher mix of Pharma settlement income recorded in the prior year, offset by an increase in Plasma gross margin. 15
Selling, general and administrative expenses ("SG&A") for the three months ended
June 30, 2021 increased $73,061 or 2.1% compared to the same period in the prior
year and consisted primarily of an increase in compensation and benefits of
$80,500 , a decrease in stock-based compensation of $60,000 , an increase in
outside professional services for tax, audit and consultants of $40,000 , an
increase in licensing and insurance of $97,000 , a decrease in technologies and
telecom of $40,000 , an increase in rent, utilities, and maintenance of $94,000
related to a new office lease entered into in June 2020 , an increase in travel
of $68,000 , and a decrease in other operating expenses of $56,700 .
Depreciation and amortization expense for the three months ended June 30, 2021
increased $107,705 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 in June 2020 .
For the three months ended June 30, 2021 we recorded a loss from operations of
$936,177 representing a net decrease of $290,016 compared to the same period
last year related to the aforementioned factors.
Other income for the three months ended June 30, 2021 increased $1,880 related
to an increase in interest income due to higher average outstanding restricted
cash bank balances primarily from the increase in our Plasma business.
The effective tax rate was (0.1%) and 65.9% for the three months ended June 30,
2021 and 2020, respectively. 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 June 30, 2021 was $931,967 , a $712,733
greater loss compared to the net loss of $219,234 for the three months ended
June 30, 2020 . The overall change in net loss relates to the aforementioned
factors.
Six Months Ended
The following table summarizes our consolidated financial results:
Six Months Ended
June 30,
(unaudited) Variance
2021 2020 $ %
Revenues
Plasma industry $ 11,330,464 $ 11,915,849 $ (585,385 ) (4.9% )
Pharma industry 1,523,867 4,788,942 (3,265,075 ) (68.2% )
Other 76,387 314,747 (238,360 ) (75.7% )
Total revenues 12,930,718 17,019,538 (4,088,820 ) (24.0% )
Cost of revenues 6,946,345 7,993,870 (1,047,525 ) (13.1% )
Gross profit 5,984,373 9,025,668 (3,041,295 ) (33.7% )
Gross margin % 46.3% 53.0%
Operating expensesSelling, general and administrative 7,339,548 7,228,825 110,723 1.5% Loss on abandonment of assets - 42,898 (42,898 ) N/A Depreciation and amortization 1,210,030 1,008,853 201,177 19.9% Total operating expenses 8,549,578 8,280,576 269,002 3.2% Income (loss) from operations$ (2,565,205 ) $ 745,092 $ (3,310,297 ) N/A Net income (loss)$ (2,555,494 ) $ 1,321,731 $ (712,733 ) N/A Net margin % (19.8% ) 7.8% 16
The decrease in total revenues of$4,088,820 for the six months endedJune 30, 2021 compared to the same period in the prior year consisted primarily of a$585,385 reduction in Plasma revenue and a$3,265,075 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 during the first quarter of 2021 compared to the same period in the prior year. Pharma revenue decreased$3,265,075 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. In addition, 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 six months endedJune 30, 2021 decreased$1,047,525 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 during the first quarter of 2021 compared to the same period in the prior year 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. Gross profit for the six months endedJune 30, 2021 decreased$3,041,295 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 resulting from the portion of our cost of revenues that are fixed in nature. SG&A for the six months endedJune 30, 2021 increased$110,723 or 1.5% compared to the same period in the prior year and consisted primarily of an increase in compensation and benefits of$255,000 , a decrease in stock-based compensation of$148,000 , an increase in professional services for tax, audit and consultants of$139,000 , an increase in licensing and insurance of$97,000 , a decrease in technologies and telecom of$91,000 , an increase in rent, utilities, and maintenance of$235,000 related to a new office lease entered into inJune 2020 , a decrease in travel of$21,500 , and a decrease in other operating expenses
of$203,000 . Depreciation and amortization expense for the six months endedJune 30, 2021 increased$201,177 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 six months endedJune 30, 2021 we recorded a loss from operations of$2,565,205 representing a net decrease of$3,310,297 compared to the same period last year related to the aforementioned factors. Other income for the six months endedJune 30, 2021 decreased$53,180 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 (63.1%) for the six months endedJune 30, 2021 and 2020, respectively. 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 six months endedJune 30, 2021 was$2,555,494 compared to net income of$1,321,731 for the six months endedJune 30, 2020 , a$3,877,225 decrease. The overall change in net income (loss) relates to the aforementioned factors. 17
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 loaded on cards was$246 million and$183 million for the three months endedJune 30, 2021 and 2020, respectively. That gross dollar volume was$523 million and$509 million for the six months endedJune 30, 2021 and 2020, 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 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 total revenue conversion rates for the three months endedJune 30, 2021 and 2020 were 2.70% or 270 basis points ("bps"), and 3.52% or 352 bps, respectively, of gross dollar volume loaded on cards. Our total gross profit conversion rates for the three months endedJune 30, 2021 and 2020 were 1.28% or 128 bps, and 1.81% or 181 bps, respectively, of gross dollar volume loaded on cards. Our net income conversion rates for the three months endedJune 30, 2021 and 2020 were (0.38)% or (38) bps, and (0.12)% or (12) bps, respectively, of gross dollar volume loaded on cards. Our total revenue conversion rates for the six months endedJune 30, 2021 and 2020 were 2.47% or 247 bps, and 3.34% or 334 bps, respectively, of gross dollar volume loaded on cards. Our total gross profit conversion rates for the six months endedJune 30, 2021 and 2020 were 1.14% or 114 bps, and 1.77% or 177 bps, respectively, of gross dollar volume loaded on cards. Our net income conversion rates for the six months endedJune 30, 2021 and 2020 were (0.49)% or (49) bps, and 0.26% or 26 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 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 and loss on abandonment of assets. A reconciliation of net income (loss) to Adjusted EBITDA is provided in the table below. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Reconciliation of adjusted EBITDA to net income: Net income (loss)$ (931,967 ) $ (219,234 ) $ (2,555,494 ) $ 1,321,731
Income tax provision (benefit) 800 (423,797 ) 2,400 (511,348 ) Interest income (5,010 ) (3,130 ) (12,111 ) (65,291 ) Depreciation and amortization 614,182 506,477 1,210,030 1,008,853 EBITDA (321,995 ) (139,684 ) (1,355,175 ) 1,753,945 Loss on abandonment of assets - 42,898
- 42,898
Stock-based compensation 540,921 600,775 1,177,135 1,324,958
Adjusted EBITDA $ 218,926 $ 503,989 $ (178,040 ) $ 3,121,801
18
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash:
Six Months Ended June 30 ,
(unaudited)
2021 2020Net cash provided by operating activities$ 17,581,753 $
4,263,949
Net cash used in investing activities (1,261,556 ) (2,060,497 ) Net cash provided by (used in) financing activities 120,141 (221,425 ) Net increase in cash and restricted cash$ 16,440,338 $
1,982,027
Comparison of Six Months Ended
During the six months ended
Cash provided by operating activities increased$13,317,804 for the six months endedJune 30, 2021 , as compared to the same period in the prior year. The increase is primarily due to an increase in cash flows from changes in operating assets and liabilities, particularly the customer card funding liability, offset by the decrease in net income (loss). 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. Cash used in investing activities decreased$798,941 for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 . The change between periods was primarily attributed to a decrease in purchases of 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 was$120,141 for the six months endedJune 30, 2021 as compared to cash used in financing activities of$221,425 the six months endedJune 30, 2020 . Cash provided by financing activities in the 2021 period consisted of cash received from the exercise of employee stock options totaling$120,141 . Cash used in financing activities for the 2020 period related to$245,425 for the repurchase of stock for taxes withheld offset by cash received from the exercise of stock options totaling$24,000 . Sources of Liquidity We believe that our available cash on hand, excluding restricted cash, atJune 30, 2021 of$6,615,180 , 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. 19
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.
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