PAYS Paysign Inc

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

On March 4, 2019, our board of directors and stockholders holding a majority of our outstanding common stock agreed to amend our articles of incorporation to change our name from 3PEA International, Inc. to Paysign, Inc. As a result, we amended our articles of incorporation on April 23, 2019 for such name change. Additionally, we changed our trading symbol on the NASDAQ Capital Market to “PAYS”.

We are a vertically integrated provider of innovative 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 of the prepaid card lifecycle. We provide a card processing platform consisting of proprietary systems and innovative 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.

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 are expanding our product offerings to include additional corporate incentive products, payroll cards, demand deposit accounts accessible with a debit card, travel cards, and expense reimbursement cards. Our cards are sponsored by our issuing bank partners.

The Paysign platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform has allowed us 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.

Our revenues include fees generated from cardholder transactions, interchange and card program management fees. Revenue from cardholder transactions, interchange and card program management fees is recorded when the performance obligation is fulfilled. We provide an in-house customer service center which includes live bi-lingual phone operators staffed 24/7/365, for incoming calls. We also provide in house Interactive Voice Response and two-way SMS messaging platforms.

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 incentive, payroll or considered general purpose reloadable (“GPR”) cards. Payroll cards are issued to an employee by an employer to receive the direct deposit of their payroll. 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 gift or incentive cards. These cards may be open loop or closed loop. Normally these types of cards are used for purchase of goods or services at retail locations and cannot be used to receive cash.

These prepaid cards may be open loop, closed loop or semi-closed loop. Open loop cards can be used to receive cash at ATM locations or purchase goods or services by PIN or signature at retail locations. These cards can be used virtually anywhere that the network brand (Visa, MasterCard, Discover, 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 a 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 have developed prepaid card products for healthcare reimbursement payments, pharmaceutical assistance, donor compensation, corporate and incentive rewards and expense reimbursement cards. We plan to expand our product offering to include payroll cards, general purpose re-loadable cards and travel cards. Our cards are offered to end users through our relationships with bank issuers.

Our products and services are aimed at capitalizing on the growing demand for stored value and reloadable ATM/prepaid card financial products in a variety of market niches. Our proprietary platform is scalable and customizable, delivering cost benefits and revenue building opportunities to partners. We manage all aspects of the debit card lifecycle, from managing the card design and approval processes with banking partners and card networks, to production, packaging, distribution, and personalization. We also oversee inventory and security controls, renewals, lost and stolen card management and replacement.

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.

During 2019, we will 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 $205 million and $149 million for the three months ended June 30, 2019 and 2018, respectively. Our gross dollar volume was $397 million and $276 million for the six months ended June 30, 2019 and 2018, respectively. We use this metric to analyze the total amount of money moving into our prepaid card programs.

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 June 30, 2019 and 2018 were 4.21% or 421 basis points (“bps”), and 3.66% or 366 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rate for the three months ended June 30, 2019 and 2018 were 2.45% or 245 bps, and 1.76% or 176 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion rate for the three months ended June 30, 2019 and 2018 were 0.85% or 85 bps, and 0.49% or 49 bps, respectively, of gross dollar volume loaded on cards. Our revenue conversion rate for the six months ended June 30, 2019 and 2018 were 4.01% or 401 basis points (“bps”), and 3.67% or 367 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rate for the six months ended June 30, 2019 and 2018 were 2.22% or 222 bps, and 1.76% or 176 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion rate for the six months ended June 30, 2019 and 2018 were 0.66% or 66 bps, and 0.41% or 41 bps, respectively, of gross dollar volume loaded on cards.

In addition, management 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.

Results of Operations

Three Months ended June 30, 2019 and 2018

Revenues for the three months ended June 30, 2019 were $8,636,271, an increase of $3,175,548 compared to the same period in the prior year, when revenues were $5,460,723. The increase in revenue approximating 58% was primarily due to an increase in the number of new corporate incentive prepaid card products and growth within our existing corporate incentive prepaid card products. We believe we will continue to experience equal or better revenue growth rate for the rest of 2019 as a result of growth in our existing product lines and industry verticals and the expected addition of new card products in various industry verticals.

Cost of revenues (excluding depreciation and amortization) for the three months ended June 30, 2019 were $3,598,038, an increase of $757,162 compared to the same period in the prior year, when cost of revenues were $2,840,876. Cost of revenues constituted approximately 42% and 52% of total revenues for the three months ended June 30, 2019 and 2018, 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 (excluding depreciation and amortization) as a percentage of revenues decreased due to improved network interchange margins and a favorable client mix.

Gross profit for the three months ended June 30, 2019 was $5,038,233, an increase of $2,418,386 compared to the same period in the prior year, when gross profit was $2,619,847. Our overall gross margins were 58% and 48% during the three months ended June 30, 2019 and 2018, respectively, which was consistent with our expectations and an improvement of 1036 bps resulting from favorable client industry mix. Gross margins are expected to perform at these levels or slightly better the balance of the year, based on increased revenues and favorable client mix.

Depreciation and amortization for the three months ended June 30, 2019 were $395,510, an increase of $145,063 compared to the same period in the prior year, when depreciation and amortization were $250,447. The increase in depreciation and amortization was primarily due to continued capitalized enhancements to our platform which we expect to continue. Additionally, investments in fixed assets and software licensing contributed to the variance.

Selling, general and administrative expenses (“SG&A”) for the three months ended June 30, 2019 were, $3,012,971 an increase of $1,345,115 compared to the same period in the prior year, when SG&A were $1,667,856. The increase in SG&A was primarily due to the carry through effect of investments in infrastructure, staffing and stock-based compensation occurring in the second half of 2018, along with additional investments in infrastructure and staffing in 2019. In 2019, SG&A has increased at a slower rate of growth, increasing just $421,029 in the current quarter or approximately 16% compared to the fourth quarter 2018.

In the three months ended June 30, 2019, we recorded operating income of $1,629,752 as compared to operating income of $701,544 in the three months ended June 30, 2018, an increase of $928,208 or 132%.

Other income, net for the three months ended June 30, 2019 was $131,811, as compared to other income, net of $29,890 in three months ended June 30, 2018, which represents an increase in net other income, net of $101,921. The increase in our other income, net is attributable to increased interest earnings on our cash balances, which we expect to continue in future periods.

Our income tax expense for the three months June 30, 2019 was $23,276, as compared to $-0- for the three months ended June 30, 2018, an increase of $23,276. 

Our net income attributable to Paysign, Inc. for the three months ended June 30, 2019 was $1,738,791 as compared to net income of $732,056 in the three months ended June 30, 2018, which represents an increase in net income of $1,006,735 or 138%. The overall change in net income is attributable to the aforementioned factors.

Six Months ended June 30, 2019 and 2018

Revenues for the six months ended June 30, 2019 were $15,893,561, an increase of $5,756,519 compared to the same period in the prior year, when revenues were $10,137,042. The increase in revenue approximating 57% was primarily due to an increase in the number of new corporate incentive prepaid card products and growth within our existing corporate incentive prepaid card products. We believe we will continue to experience equal or better revenue growth rate for the rest of 2019 as a result of growth in our existing product lines and industry verticals and the expected addition of new card products in various industry verticals.

Cost of revenues (excluding depreciation and amortization) for the six months ended June 30, 2019 were $7,080,174, an increase of $1,806,088 compared to the same period in the prior year, when cost of revenues were $5,274,086. Cost of revenues constituted approximately 45% and 52% of total revenues for the six months ended June 30, 2019 and 2018, 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 (excluding depreciation and amortization) as a percentage of revenues decreased due to improved network interchange margins and a favorable client mix.

Gross profit for the six months ended June 30, 2019 was $8,813,387, an increase of $3,950,431 compared to the same period in the prior year, when gross profit was $4,862,956. Our overall gross margins were 55% and 48% during the six months ended June 30, 2019 and 2018 which was consistent with our overall expectation and an improvement of 405 bps resulting from favorable client industry mix. We believe gross margin will perform at these levels or slightly better than those recorded for the most recent three month period.

Depreciation and amortization for the six months ended June 30, 2019 were $729,271, an increase of $233,192 compared to the same period in the prior year, when depreciation and amortization were $496,079. The increase in depreciation and amortization was primarily due to continued capitalized enhancements to our platform which we expect to continue.

Selling, general and administrative expenses (“SG&A”) for the six months ended June 30, 2019 were, $5,727,921 an increase of $2,470,600 compared to the same period in the prior year, when SG&A were $3,247,321. The increase in SG&A was primarily due to the continued ramp up of our investment in infrastructure, increased staffing, and increased stock based compensation as inducement grants.

In the six months ended June 30, 2019, we recorded operating income of $2,366,195 as compared to operating income of $1,119,556 in the six months ended June 30, 2018, an increase of $1,246,639 or 111%.

Other income, net for the six months ended June 30, 2019 was $250,985, as compared to other income, net of $22,490 in six months ended June 30, 2018, which represents an increase in net other income, net of $228,495. The increase in our other income, net is attributable to increased interest earnings on our cash balances, which we expect to continue in future periods.

Our income tax expense for the six months June 30, 2019 was $7,786, as compared to $-0- for the six months ended June 30, 2018, an increase of $7,786.

Our net income attributable to Paysign, Inc. for the six months ended June 30, 2019 was $2,610,462 as compared to net income of $1,144,563 in the six months ended June 30, 2018, which represents an increase in net income of $1,465,899 or 128%. The overall change in net income is attributable to the aforementioned factors.

Comparison of six months ended June 30, 2019 and 2018

During the six months ended June 30, 2019 and 2018, we financed our operations primarily through internally generated funds.

Operating activities provided $18,191,317 of cash in the six months ended June 30, 2019, as compared to $5,080,331 of cash provided by the same period in the prior year. In the six months ended June 30, 2019, $14,362,643 of cash was provided by change in customer card funding. Reconciling non-cash items that affected our cash flow from operations in the six months ended June 30, 2019 were non-cash charges of $729,271 for depreciation and amortization, and stock-based compensation of $1,214,620. Our operating assets and liabilities, excluding customer card funding, used $(724,611) of cash in the six months ended June 30, 2019, resulted from changes in accounts receivable of $(611,589) and, accounts payable and accrued expenses of $(321,630), offset by changes in prepaid expenses of $208,608. Reconciling non-cash items that affected our cash flow from operations in the six months ended June 30, 2018 were non-cash charges of $496,079 for depreciation and amortization, and stock-based compensation of $349,582.  Our operating assets and liabilities in the six months ended June 30, 2018, excluding customer card funding, used $(954,959) of cash, resulted from a decrease in accounts payable of $(456,546) and an increase in prepaid expenses, accounts receivable and other assets of $(498,413).

Investing activities used $(967,620) of cash in the six months ended June 30, 2019, as compared to $(706,914) of cash used in the same period in 2018, with the difference primarily attributed to enhancements to our processing platform and investments in our telephony and equipment infrastructure.

Sources of Financing

We believe that our available cash on hand, excluding restricted cash, at June 30, 2019 of $6,289,008, combined with revenues and operating earnings anticipated for the remainder of 2019 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 Estimates

Our significant accounting policies are described in Note 1 of Notes to Financial Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Any estimates we make 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.