10-Q 1 paysign_10q-033120.htm FORM 10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to __________

 

Commission file number 000-54123

 

PAYSIGN, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 95-4550154
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

 

1700 W Horizon Ridge Parkway, Suite 200,

Henderson, Nevada 89012

(Address of principal executive offices)

 

(702) 453-2221

(Issuer’s telephone number, including area code)

 

                    N/A                    

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class Trading Symbol Name of each exchange on which registered
Common Stock, $0.001 par value per share PAYS

The Nasdaq Stock Market LLC

(The Nasdaq Capital Market)

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company under Rule 12b-2 of the Exchange Act. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o Accelerated filer x
Non-accelerated filer o Smaller reporting company x
  Emerging growth company x 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 49,163,707 shares as of May 4, 2020.

 

 

   

 

 

PAYSIGN, INC.

 

FORM 10-Q REPORT

INDEX

 

PART I. FINANCIAL INFORMATION 3
   
Item 1. Financial Statements. 3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 12
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 16
   
Item 4. Controls and Procedures. 16
   
PART II. OTHER INFORMATION. 17
   
Item 1. Legal Proceedings. 17
   
Item 1A. Risk Factors. 17
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 17
   
Item 6. Exhibits. 17
   
SIGNATURES 18

 

 

 

 

 

 

 2 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2020 AND DECEMBER 31, 2019

 

   March 31,
2020
(Unaudited)
   December 31,
2019
(Audited)
 
ASSETS          
           
Current assets          
Cash  $9,424,385   $9,663,746 
Restricted cash   45,424,829    35,908,559 
Accounts receivable   911,597    891,936 
Prepaid expenses and other current assets   1,380,683    1,413,208 
Total current assets   57,141,494    47,877,449 
           
Fixed assets, net   1,798,751    937,185 
Intangible assets, net   3,948,413    3,816,232 
Deferred tax asset   993,382    917,480 
           
Total assets  $63,882,040   $53,548,346 
           
LIABILITIES AND EQUITY          
           
Current liabilities          
Accounts payable and accrued liabilities  $1,999,046   $1,523,604 
Customer card funding   40,292,331    32,723,227 
Total current liabilities   42,291,377    34,246,831 
           
Total liabilities   42,291,377    34,246,831 
           
Stockholders’ equity          
Preferred stock: $0.001 par value; 25,000,000 shares authorized; none issued and outstanding at March 31, 2020 and December 31, 2019        
Common stock: $0.001 par value; 150,000,000 shares authorized, 49,016,270 and 48,577,712 issued at March 31, 2020 and December 31, 2019, respectively   49,016    48,578 
Additional paid-in capital   12,062,197    11,577,539 
Treasury stock at cost, 303,450 shares   (150,000)   (150,000)
Retained earnings   9,629,450    8,088,485 
Total Paysign, Inc.'s stockholders' equity   21,590,663    19,564,602 
Noncontrolling interest       (263,087)
Total stockholders’ equity   21,590,663    19,301,515 
           
Total liabilities and stockholders’ equity  $63,882,040   $53,548,346 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 3 

 

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(UNAUDITED)

 

   For the three months ended
March 31,
 
   2020   2019 
Revenues        
Plasma industry  $7,343,410   $5,884,577 
Pharma industry   3,020,377    1,372,713 
Other   212,686     
Total revenues   10,576,473    7,257,290 
           
Cost of revenues   4,855,520    3,482,136 
           
Gross profit   5,720,953    3,775,154 
           
Operating expenses          
Selling, general and administrative   3,827,324    2,704,949 
Depreciation and amortization   502,376    333,761 
Total operating expenses   4,329,700    3,038,710 
           
Income from operations   1,391,253    736,444 
           
Other income          
Interest income   62,161    119,173 
Total other income, net   62,161    119,173 
           
Income before income tax benefit and noncontrolling interest   1,453,414    855,617 
           
Income tax benefit   (87,551)   (15,490)
           
Net income before noncontrolling interest   1,540,965    871,107 
           
Net loss attributable to noncontrolling interest       564 
           
Net income attributable to Paysign, Inc.  $1,540,965   $871,671 
           
Net income per common share - basic  $0.03   $0.02 
Net income per common share - fully diluted  $0.03   $0.02 
           
Weighted average common shares outstanding - basic   48,713,163    49,961,079 
Weighted average common shares outstanding - fully diluted   54,688,066    54,508,835 

  

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

 4 

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020

  

   Stockholders' Equity Attributable to Paysign, Inc.         
           Additional           Non-   Total 
   Common Stock   Paid-in   Treasury   Retained   controlling   Stockholders’ 
   Shares   Amount   Capital   Stock   Earnings   Interest   Equity 
Balance, December 31, 2019   48,577,712   $48,578   $11,577,539   $(150,000)  $8,088,485   $(263,087)  $19,301,515 
                                    
Issuance of stock for previously vested stock-based compensation   428,558    428    (428)                
                                    
Exercise of stock options   10,000    10    23,990                24,000 
                                    
Stock-based compensation           724,183                724,183 
                                    
Dissolution of Paysign, Ltd.           (263,087)            263,087     
                                    
Net income                   1,540,965        1,540,965 
Balance, March 31, 2020   49,016,270   $49,016   $12,062,197   $(150,000)  $9,629,450   $   $21,590,663 

 

 

FOR THE THREE MONTHS ENDED MARCH 31, 2019

  

   Stockholders' Equity Attributable to Paysign, Inc.         
           Additional           Non-   Total 
   Common Stock   Paid-in   Treasury   Retained   controlling   Stockholders’ 
   Shares   Amount   Capital   Stock   Earnings   Interest   Equity 
Balance, December 31, 2018   46,440,765   $46,441   $8,620,144   $(150,000)  $579,582   $(206,930)  $8,889,237 
                                    
Issuance of stock for previously vested stock-based compensation   291,147    291    (291)                
                                    
Stock-based compensation           646,710                646,710 
                                    
Net income (loss)                   871,671    (564)   871,107 
Balance, March 31, 2019   46,731,912   $46,732   $9,266,563   $(150,000)  $1,451,253   $(207,494)  $10,407,054 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

 5 

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(UNAUDITED)

  

   For the three months ended
March 31,
 
   2020   2019 
Cash flows from operating activities:          
Net income attributable to Paysign, Inc.  $1,540,965   $871,671 
Adjustments to reconcile net income attributable to Paysign, Inc. to net cash provided by operating activities:          
Change in noncontrolling interest       (564)
Depreciation and amortization   502,376    333,761 
Stock-based compensation   724,183    646,710 
Deferred taxes   (75,902)    
Changes in operating assets and liabilities:          
Change in accounts receivable   (19,661)   (330,548)
Change in prepaid expenses and other current assets   32,525    108,884 
Change in accounts payable and accrued liabilities   475,442    (748,447)
Change in customer card funding   7,569,104    19,151,504 
Net cash provided by operating activities   10,749,032    20,032,971 
           
Cash flows from investing activities:          
Purchase of fixed assets   (953,894)   (195,460)
Increase in intangible assets   (542,229)   (363,955)
Net cash used in investing activities   (1,496,123)   (559,415)
           
Cash flows from financing activities:          
Proceeds from exercise of options   24,000     
Net cash provided by financing activities   24,000     
           
Net change in cash and restricted cash   9,276,909    19,473,556 
Cash and restricted cash, beginning of period   45,572,305    31,665,741 
           
Cash and restricted cash, end of period  $54,849,214   $51,139,297 
           
Cash and Restricted Cash Reconciliation:          
Cash  $9,424,385   $5,211,161 
Restricted cash   45,424,829    45,928,136 
Total cash and restricted cash  $54,849,214   $51,139,297 
           
Interest paid  $   $ 
Income taxes paid  $   $ 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 6 

 

 

PAYSIGN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

  

1.     BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT POLICIES

 

The foregoing unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the disclosures required by GAAP for complete financial statements. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto included on Form 10-K for the year ended December 31, 2019. In the opinion of management, the unaudited interim condensed financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.

 

The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material effect on the reported amounts of the Company’s financial position and results of operations.

 

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

About Paysign, Inc.

 

Paysign, Inc. (the “Company,” “Paysign,” or “we”, formerly known as 3PEA International, Inc.) is a vertically integrated provider of prepaid card products and processing services for corporate, consumer and government applications. The Company markets prepaid card solutions under our PaySign® brand. As we are a payment processor and prepaid card program manager, we derive 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 programs. We have extended our processing business capabilities through our proprietary PaySign platform. We design and process prepaid programs that run on the platform through which customers can define the services they wish to offer cardholders. 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 brand offers prepaid card based solutions or “card products” for corporate incentive rewards and corporate expense, per diem and travel payments, healthcare reimbursement payments, pharmaceutical co-pay assistance, donor compensation and clinical trials. We plan to expand our product offering to include payroll cards, general purpose re-loadable cards, and others. Our cards are offered to end users through our relationships with bank issuers.

 

Our proprietary PaySign platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform allows us to expand our operational capabilities by facilitating 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 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 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 agents, Interactive Voice Response (IVR), and two-way short message service (SMS) messaging and text alerts.

 

 

 

 7 

 

 

Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

 

Use of Estimates – The preparation of consolidated financial statements in conformity with GAAP 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.

 

Restricted Cash – At March 31, 2020 and December 31, 2019, restricted cash consisted of funds held specifically for our card product programs that are contractually restricted to use. The Company includes changes in restricted cash balances with cash and cash equivalents when reconciling the beginning and ending total amounts in our condensed consolidated statements of cash flows.

 

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.

 

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.

 

Earnings Per Share– Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings per common share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per common share is computed using the weighted average number of common and common stock equivalent share outstanding during the period, using the treasury stock method. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. For the three months ended March 31, 2020 and 2019 there were no antidilutive common stock equivalent shares to be excluded.

 

Revenue and Expense Recognition – In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606), guidance on recognizing revenue from contracts with customers. The guidance outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the model is that an entity recognizes revenue to portray the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also expands disclosure requirements regarding revenue recognition. We adopted this guidance as of January 1, 2018 using the modified retrospective transition method. The adoption of the guidance did not have a material impact on our financial condition and results of operations. The standard also requires new, expanded disclosures regarding revenue recognition.

 

 

 

 8 

 

  

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. All of the Company’s revenues are recognized over time.

 

The Company generates revenue through fees generated from cardholder transactions, interchange, card program management fees and settlement income. Revenue from cardholder transactions, interchange and card program management is recorded when the performance obligation is fulfilled. Settlement income is recognized and recorded ratably throughout the account and program life cycle. 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 or has any obligations for disputed claim settlements. Given the nature of the Company’s services and contracts, it has no contract assets.

 

Stock-Based Compensation –Stock based compensation is accounted for using the Stock Based Compensation Topic of the FASB ASC. We use the fair value method for equity instruments and use the Black Scholes model for measuring the fair value of options, if issued. The stock based fair value compensation is determined as of the date of the grant and is recognized as an expense over the requisite service periods, on a straight-line basis.

 

New Accounting Pronouncements - In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU No. 2018-13 provide clarification and modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement. The amendments in this ASU No. 2018-13 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this as of January 1, 2020 and there was no material impact on the Company’s consolidated financial statements.

 

2.     FIXED ASSETS, NET

 

Fixed assets consist of the following:

 

   March 31,
2020
   December 31,
2019
 
Equipment  $2,119,533   $2,026,549 
Software   180,224    180,223 
Furniture and fixtures   950,743    149,684 
Website costs   65,071    34,971 
Leasehold improvements   82,644    52,894 
    3,398,215    2,444,321 
Less: accumulated depreciation   1,599,464    1,507,136 
Fixed assets, net  $1,798,751   $937,185 

 

 

 

 9 

 

 

3.     INTANGIBLE ASSETS, NET

 

Intangible assets consist of the following:

 

   March 31,
2020
   December 31,
2019
 
Trademarks  $39,053   $39,053 
Platform   6,083,238    5,598,136 
Customer lists and contracts   1,177,200    1,177,200 
Kiosk   64,802    64,802 
Licenses   591,696    534,569 
    7,955,989    7,413,760 
Less: accumulated amortization   4,007,576    3,597,528 
Intangible assets, net  $3,948,413   $3,816,232 

 

Intangible assets are amortized over their useful lives ranging from periods of 3 to 5 years.

 

4.     COMMON STOCK

 

At March 31, 2020, the Company's authorized capital stock was 150,000,000 shares of common stock, par value $0.001 per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. On that date, the Company had 49,016,270 shares of common stock issued and outstanding, and no shares of preferred stock outstanding.

 

Stock-based compensation expense related to Company grants for the three months ended March 31, 2020 was $724,183. Stock-based compensation expense for the three months end March 31, 2019 was $646,710.  

 

2020 Transactions: During the three months ended March 31, 2020, the Company issued 500,000 stock options valued at $2.86 per share that will vest over four years. The Company also issued 438,558 shares of common stock for restricted stock awards previously granted, earned and vested, and for the exercise of vested stock options and received proceeds of $24,000.

 

2019 Transactions: During the three months ended March 31, 2019, the Company issued 291,147 shares of common stock for restricted stock awards previously granted, earned and vested.

 

5.        BASIC AND FULLY DILUTED NET INCOME PER COMMON SHARE

 

The following table sets forth the computation of basic and fully diluted net income per common share for the three months ended March 31, 2020 and 2019:

 

   2020   2019 
Numerator:          
Net income attributable to Paysign, Inc.  $1,540,965   $871,671 
Denominator:          
Weighted average common shares:          
Denominator for basic calculation   48,713,163    46,961,079 
Weighted average effects of potentially diluted common stock:          
Stock options (calculated using the treasury method)   1,824,903    2,027,756 
Unvested restricted stock grants   4,150,000    5,520,000 
Denominator for fully diluted calculation   54,688,066    54,508,835 
Net income per common share:          
Basic  $0.03   $0.02 
Fully diluted  $0.03   $0.02 

 

 

 

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6.        COMMITMENTS AND CONTINGENCIES

 

The Company has been named as a defendant in three recent complaints filed in the United States District Court for the District of Nevada: Yilan Shi v. Paysign, Inc. et. al., filed on March 19, 2020, Lorna Chase v. Paysign, Inc. et. al., filed on March 25, 2020 and Smith & Duvall v. Paysign, Inc. et. al., filed on April 2, 2020 (collectively, the “Complaints”). All three complaints are putatively class action lawsuits filed on behalf of a class of persons who acquired the Company’s common stock from March 12, 2020 through March 30, 2020, inclusive. The Complaints allege that the Company, Mark R. Newcomer, and Mark Attinger violated Section 10(b) of the Exchange Act, and Messrs. Newcomer and Attinger violated Section 20(a) of the Exchange Act, by making materially false or misleading statements, or failing to disclose material facts, regarding our internal control over financial reporting and our financial statements. The Complaints seek certification as a class action, compensatory damages, and attorney’s fees and costs. Paysign has not been served any of the complaints as of the date of this filing and cannot give any meaningful probability of outcome or damages. 

 

The outbreak of a novel coronavirus and the incidence of the related disease (COVID-19) starting in late 2019 has continued, spreading throughout the United States and much of the world beginning in the first quarter of 2020. In March 2020, the World Health Organization declared the outbreak as a pandemic. While the disruption is currently expected to be temporary, there is uncertainty around the duration. We have not seen a negative impact to our business, results of operations, and financial position, however the related financial impact cannot be reasonably estimated at this time.

 

7.        RELATED PARTY

 

A member of our Board of Directors is also a partner in a law firm that the Company incurred $19,000 and $-0- during the three months ended March 31, 2020 and 2019, respectively.

 

8.        SUBSEQUENT EVENTS

 

The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements and concluded that no other subsequent events occurred that required recognition to the financial statements or disclosures in the Notes to Consolidated Financial Statements or Cash Flows.

 

 

 

 12 

 

 

Item 2. Management’s discussion and analysis of financial condition and results of operations.

 

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 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 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 life cycle.

 

We have two categories for our prepaid debit cards: corporate and consumer reloadable, and 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 semi-closed loop. Open loop cards can be used to receive cash at ATM locations by PIN; or purchase goods or services by PIN or signature at retail locations virtually anywhere that the network brand (American Express, Discover, MasterCard, Visa, etc.) is accepted. Closed loop cards can only be used at a specific merchant. Semi-closed loop cards can be used at several merchants, such as all merchants at a specific shopping mall.

 

The prepaid card market is one of the fastest growing segments of the payments industry in the U.S. This market has experienced significant growth in recent years due to consumers and merchants embracing improved technology, greater convenience, more product choices and greater flexibility. Prepaid cards have also proven to be an attractive alternative to traditional bank accounts for certain segments of the population, particularly those without, or who could not qualify for, a checking or savings account.

 

We manage all aspects of the debit card lifecycle, from managing the card design and approval processes with partners and networks, to production, packaging, distribution, and personalization. We also oversee inventory and security controls, renewals, lost and stolen card management and replacement. We deploy a fully staffed, in-house customer service department which utilizes bilingual customer service representatives, Interactive Voice Response (“IVR”), and two-way short message service (“SMS”) messaging.

 

Currently, we are focusing our marketing efforts on corporate incentive and expense prepaid card products, in various market verticals including but not limited to general corporate expense, healthcare related markets including co-pay assistance, clinical trials and donor compensation, loyalty 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 in the 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 the U.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 the European 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. We are considering 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, but our expansion will not be as rapid.

 

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 $326 million and $215 million for the three months ended March 31, 2020 and 2019, respectively. We use this metric to analyze the total amount of money moving into our prepaid card programs.

 

 

 

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Conversion Rate 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 rate for the three months ended March 31, 2020 and 2019 were 3.24% or 324 basis points (“bps”), and 3.38% or 338 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rate for the three months ended March 31, 2020 and 2019 were 1.76% or 176 bps, and the same 1.76% or 176 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion rate for the three months ended March 31, 2020 and 2019 were 0.47% or 47 bps, and 0.41% or 41 bps, respectively, of gross dollar volume loaded on cards.

 

Management also reviews key performance indicators, such as revenues, gross profit, operational expenses as a percent of revenues, and cardholder participation. In addition, we consider certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment and investment in new card programs. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating activities as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:

  

“EBITDA” defined as earnings before interest, income taxes, depreciation and amortization expense and "Adjusted EBITDA" reflects the adjustment to EBITDA to exclude stock-based compensation expense.

 

   Three Months Ended March 31, 
   2020   2019 
Reconciliation of adjusted EBITDA to net income:        
Net income attributable to Paysign, Inc.  $1,540,965   $871,671 
Income tax benefit   (87,551)   (15,490)
Interest income   (62,161)   (119,173)
Depreciation and amortization   502,376    333,761 
EBITDA   1,893,629    1,070,769 
Stock-based compensation   724,183    646,710 
Adjusted EBITDA  $2,617,812   $1,717,479 

 

 

Results of Operations

 

Three Months ended March 31, 2020 and 2019

 

Revenues for the three months ended March 31, 2020 were $10,576,473, an increase of $3,319,183 compared to the same period in the prior year, when revenues were $7,257,290. The increase in revenue approximating 46% was primarily due to an increase in new clients and new card programs with existing clients.

 

Cost of revenues for the three months ended March 31, 2020 was $4,855,520, an increase of $1,373,384 compared to the same period in the prior year, when cost of revenues was $3,482,136. Cost of revenues constituted approximately 46% and 48% of total revenues for the three months ended March 31, 2020 and 2019, respectively. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production costs, customer service and program management expenses, application integration setup, and sales and commission expense. Our cost of revenues as a percentage of revenues decreased primarily due to improved network interchange margins and a favorable client mix.

 

Gross profit for the three months ended March 31, 2020 was $5,720,953 an increase of $1,945,799 compared to the same period in the prior year, when gross profit was $3,775,154. Our overall gross margins were 54% and 52% during the three months ended March 31, 2020 and 2019, respectively, and an improvement of 207 bps resulting from favorable client industry mix.

  

 

 

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Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2020 was, $3,827,324, an increase of $1,122,375 or 41% compared to the same period in the prior year, when SG&A was $2,704,949. The increase in SG&A was primarily due to increased investments in technologies, sales and marketing staff; and increased stock-based compensation expense.

 

Depreciation and amortization for the three months ended March 31, 2020 was $502,376, an increase of $168,615 compared to the same period in the prior year, when depreciation and amortization was $333,761. The increase in depreciation and amortization was primarily due to continued capitalization of new technologies and enhancements to our platform which we expect to continue.

  

In the three months ended March 31, 2020, we recorded operating income of $1,391,253 as compared to operating income of $736,444 in the three months ended March 31, 2019, an increase of $654,809 or 89%.

 

Other income for the three months ended March 31, 2020 was $62,161, as compared to $119,173 in three months ended March 31, 2019, which represents a decrease of $57,012 primarily related to a decrease in interest income resulting from lower interest rates.

 

Our income tax benefit for the three months March 31, 2020 and 2019 was $87,551 and $15,490, respectively. The increase from prior year is a result of the tax benefit related to our stock-based compensation.

 

Net income attributable to Paysign, Inc. for the three months ended March 31, 2020 was $1,540,965 as compared to $871,671 in the three months ended March 31, 2019, which represents an increase of $669,294 or 77%. The overall change in net income attributable to Paysign, Inc. relates to the aforementioned factors.

 

Liquidity and Capital Resources

 

The following table sets forth the major sources and uses of cash for the three months ended March 31, 2020 and 2019:

 

   Three months ended March 31, 
   2020   2019 
Net cash provided by operating activities  $10,749,032   $20,032,971 
Net cash used in investing activities   (1,496,123)   (559,415)
Net cash provided by financing activities   24,000     
Net increase in cash and restricted cash  $9,276,909   $19,473,556 

 

Comparison of three months ended March 31, 2020 and 2019

 

During the three months ended March 31, 2020 and 2019, we financed our operations through internally generated funds.

 

Cash provided by operating activities decreased $9,283,939 in the three months ended March 31, 2020, as compared to the same period in the prior year. The decrease is primarily related to a $11,582,400 decrease in the change in customer card funding, offset by a $669,294 increase in net income and a $1,223,889 change in accounts payable and accrued liabilities as compared to the prior year period.

 

Cash used in investing activities increased $936,708 in the three months ended March 31, 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 provided by financing activities was $24,000 in the three months ended March 31, 2020 as compared to $-0- for the three months ended March 31, 2019. In 2020, financing activities consisted of cash provided from exercises of stock options.

  

Sources of Liquidity

 

We believe that our available cash on hand, excluding restricted cash, at March 31, 2020 of $9,424,385, along with anticipated revenues and operating profits anticipated for the remainder of 2020 will be sufficient to sustain our operations for the next twelve months.

 

 

 

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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 December 31, 2019.

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Our estimates will be based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Because the Company is a smaller reporting company, it is not required to provide the information called for by this Item.

  

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures.

 

We have evaluated, under the supervision of our chief executive officer and chief financial officer and with participating of other members of management, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2020. Management necessarily applies its judgment in assessing the costs and benefits of those controls and procedures, which by their nature, can provide only reasonable assurance about management’s control objectives. You should note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were not effective due to previously reported material weakness in internal control over financial reporting, which were described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 10-K”).

 

Remediation of Material Weakness

 

We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated as soon as possible. We continue to implement our remediation plan for the previously reported material weakness in internal control over financial reporting, described in Part II, Item 9A of our 2019 10-K, which includes taking steps to improve the design and methods for testing internal controls, adding resources to carry out such practices, and instituting new procedures for managing system user access and change control. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Changes in Internal Control over Financial Reporting

 

Other than the changes related to our remediation efforts described above, we made no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

Three recent complaints were filed, Yilan Shi v. Paysign, Inc. et. al., filed on March 19, 2020, Lorna Chase v. Paysign, Inc. et. al., filed on March 25, 2020 and Smith & Duvall v. Paysign, Inc. et. al., filed on April 2, 2020 (collectively, the “Complaints”). All three putative class action lawsuits were filed in the United States District Court for the District of Nevada on behalf of a class of persons who acquired the Company’s common stock from March 12, 2020 through March 30, 2020, inclusive. The Complaints allege that the Company, Mark R. Newcomer, and Mark Attinger violated Section 10(b) of the Exchange Act, and Messrs. Newcomer and Attinger violated Section 20(a) of the Exchange Act, by making materially false or misleading statements, or failing to disclose material facts, regarding our internal control over financial reporting and our financial statements. The Complaints seek certification as a class action, compensatory damages, and attorney’s fees and costs. Paysign has not been served any of the complaints as of the date of this filing and cannot give any meaningful probability of outcome or damages.

 

Item 1A. Risk Factors.

 

There have been no material changes with respect to the risk factors disclosed in Part I. Item 1A of our annual report on Form 10-K for the year ended December 31, 2019.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the quarter ending March 31, 2020, we issued, pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933, a total of 428,558 shares of common stock for restricted stock shares previously earned and vested as well as 10,000 shares of common stock for stock options exercised.

 

 

Item 6. Exhibits.

 

31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.LAB XBRL Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document
101.DEF XBRL Definition Linkbase Document

 

 

 

 

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   
  PAYSIGN, INC.
   
   
Date: May 8, 2020 /s/ Mark Newcomer
 

By: Mark Newcomer, Chief Executive Officer

(principal executive officer)

   
   
Date: May 8, 2020 /s/ Mark Attinger
 

By: Mark Attinger, Chief Financial Officer

(principal financial and accounting officer)

 

 

 

 

 

 

 

 

 

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