See accompanying notes to unaudited condensed consolidated
financial statements.
See accompanying notes to unaudited condensed consolidated
financial statements.
See accompanying notes to unaudited condensed consolidated
financial statements.
See accompanying notes to unaudited condensed consolidated
financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT POLICIES
The foregoing unaudited interim condensed consolidated
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 consolidated 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, 2020. In the opinion of management,
the unaudited interim condensed consolidated 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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Impact
of COVID-19 Pandemic
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. The COVID-19
outbreak and the new stimulus packages signed into law during 2020 and 2021 have had and
will continue to have an adverse effect on the Company's results of operations. Given the uncertainty around the extent and timing of
the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, management cannot
reasonably estimate the impact to the Company's future results of operations, cash flows, or financial condition.
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. 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. 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. 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 design and process prepaid programs
that run on the platform through which customers can define the services they wish to offer cardholders.
The Paysign brand offers prepaid card solutions
or “card products” for corporate incentive and rewards including, but not limited to rebates and rewards, donor compensation,
clinical trials, healthcare reimbursement payments and pharmaceutical payment assistance. We have expanded our product offerings to include
additional corporate incentive products and demand deposit accounts accessible with a debit card. We plan to further expand our product
offerings into other prepaid card products such as payroll cards, travel cards, and expense reimbursement cards. Our cards are sponsored
by our issuing bank partners.
Our proprietary Paysign platform was built on
modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform’s flexibility and
ease of customization has allowed us to expand our operational capabilities by facilitating our entry into new markets within the prepaid
payments space. The Paysign platform delivers cost benefits and revenue building opportunities to our partners.
We manage all aspects of the prepaid card lifecycle,
from managing the card design and approval processes with partners and networks, to production, packaging, distribution, and personalization.
We 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.
Principles of Consolidation – The
condensed 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 (i) the
reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and (iii) the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates.
Restricted Cash – At March 31, 2021
and December 31, 2020, 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 life
of the asset, which is 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 a finite life is amortized
on a straight-line basis over its estimated useful life.
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 3 to 5 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 share is computed using the
weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted
average number of common and common stock equivalent shares outstanding during the period, using the treasury stock method. Common stock
equivalent shares are excluded from the computation if their effect is antidilutive.
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.
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.
The Company generates revenues from Plasma card
programs through fees generated from cardholder fees and interchange fees. Revenues from Pharma card programs are generated through card
program management fees, interchange fees, and settlement income.
Plasma and Pharma card program revenues include
both fixed and variable components. Our cardholder fees represent an obligation to the cardholder based on a per transaction basis and
recognized at a point in time when the performance obligation is fulfilled. Card program management fees include an obligation to our
card program sponsors and are generally recognized when earned on a monthly basis pursuant to the contract terms which are generally multi-year
contracts. Interchange fees are earned when customer-issued cards are processed through card payment networks as the nature of our promise
to the customer is that we stand ready to process transactions at the customer’s requests on a daily basis over the contract term.
Since the timing and quantity of transactions to be processed by us is not determinable, we view interchange fees to comprise an obligation
to stand ready to process as many transactions as the customer requests. Accordingly, the promise to stand ready is accounted for as a
single series performance obligation. The company uses the right to invoice practical expedient and recognizes revenue concurrent with
the processing of card transactions.
Prior to September 30, 2020, settlement income
from Pharma programs was recognized and recorded, after giving consideration to any revenue constraints, ratably throughout the program
lifecycle based on the Company’s estimate of the unspent balances to be remaining on the card at program expiration. During 2020,
the Company observed substantially different performance indicators, current trends in the industry regarding program management by third
parties, and new information available in dollar loads and spending patterns compared to historical experience. As a result, the Company
changed its estimate of breakage for recognizing settlement income for Pharma programs resulting in the Company constraining revenue on
all Pharma programs in accordance with applicable accounting guidance. Based on the change in facts and circumstances during 2020, the
Company now utilizes the remote method of revenue recognition for settlement income whereby the unspent balances will be recognized as
revenue at the expiration of the cards and the respective program. The Company records all revenue on a gross basis since it is the primary
obligor and establishes the price in the contract arrangement with its customers. The Company is currently under no obligation for refunding
any fees, and the Company does not currently have any obligations for disputed claim settlements. Given the nature of the Company’s
services and contracts, it has no contract assets.
Cost of revenues is comprised of transaction processing
fees, data connectivity and data center expenses, network fees, bank fees, card production and postage costs, customer service, program
management, application integration setup, and sales and commission expense.
Operating leases
– The Company determines if a contract is or contains a leasing element at contract inception or the date in which a modification
of an existing contract occurs. In order for a contract to be considered a lease, the contract must transfer the right to control the
use of an identified asset for a period of time in exchange for consideration. Control is determined to have occurred if the lessee has
the right to (i) obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use and
(ii) direct the use of the identified asset.
In determining the present
value of lease payments at lease commencement date, the Company utilizes its incremental borrowing rate based on the information available,
unless the rate implicit in the lease is readily determinable. The liability for operating leases is based on the present value of future
lease payments. Operating lease expenses are recorded as rent expense, which is included within selling, general and administrative expenses
within the consolidated statements of operations and presented as operating cash outflows within the consolidated statements of cash flows.
Stock-Based Compensation – The Company
recognizes compensation expense for all restricted stock and stock option awards. The fair value of restricted stock is measured using
the grant date trading price of our stock. The fair value of stock option awards is estimated at the grant date using the Black-Scholes
option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service
period. We have elected to recognize compensation expense for all options with graded vesting on a straight-line basis over the vesting
period of the entire option. The determination of fair value using the Black-Scholes pricing model is affected by our stock price as well
as assumptions regarding a number of complex and subjective variables, including expected stock price volatility and the risk-free interest
rate.
New Accounting Pronouncements – In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which
intends to simplify the guidance by removing certain exceptions to the general principles and clarifying or amending existing guidance.
ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The
Company adopted this new standard on January 1, 2021 and there was no material impact on its condensed consolidated financial statements.
2. FIXED ASSETS, NET
Fixed assets consist of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Equipment
|
|
$
|
1,981,603
|
|
|
$
|
1,888,640
|
|
Software
|
|
|
200,282
|
|
|
|
200,282
|
|
Furniture and fixtures
|
|
|
757,662
|
|
|
|
752,212
|
|
Website costs
|
|
|
67,816
|
|
|
|
67,816
|
|
Leasehold improvements
|
|
|
229,772
|
|
|
|
203,488
|
|
|
|
|
3,237,135
|
|
|
|
3,112,438
|
|
Less: accumulated depreciation
|
|
|
1,395,225
|
|
|
|
1,263,274
|
|
Fixed assets, net
|
|
$
|
1,841,910
|
|
|
$
|
1,849,164
|
|
Depreciation expense for the three months ended
March 31, 2021 and 2020 was $131,950 and $92,328, respectively.
3. INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Platform
|
|
$
|
7,952,415
|
|
|
$
|
7,478,419
|
|
Customer lists and contracts
|
|
|
1,177,200
|
|
|
|
1,177,200
|
|
Licenses
|
|
|
247,793
|
|
|
|
234,282
|
|
Trademarks
|
|
|
38,186
|
|
|
|
38,186
|
|
|
|
|
9,415,594
|
|
|
|
8,928,087
|
|
Less: accumulated amortization
|
|
|
5,692,952
|
|
|
|
5,229,054
|
|
Intangible assets, net
|
|
$
|
3,722,642
|
|
|
$
|
3,699,033
|
|
Intangible assets are amortized over their useful
life ranging from periods of 3 to 15 years. Amortization expense for the three months ended March 31, 2021 and 2020 was $463,897 and $410,048,
respectively.
4. LEASE
The Company entered into an operating lease for
an office space which became effective in June 2020 when the construction was complete and we were given access to occupy the space. The
lease term is 10 years from the effective date and allows for two optional extensions of five years each. The two optional extensions
are not recognized as part of the right-of-use asset or lease liability since it is not reasonably certain that the Company will extend
this lease. As of March 31, 2021, the remaining lease term was 9.2 years and the discount rate was 6%. The lease for our previous office
space was accounted for as a short-term lease.
Operating lease cost included in selling, general
and administrative expenses was $215,144 for the three months ended March 31, 2021. Short-term lease cost included in selling, general
and administrative expense was $82,441 for the three months ended March 31, 2020.
The following is the lease maturity analysis of our operating lease
as of March 31, 2021:
Twelve months ending March 31,
2022
|
|
$
|
571,968
|
|
2023
|
|
|
571,968
|
|
2024
|
|
|
571,968
|
|
2025
|
|
|
571,968
|
|
2026
|
|
|
629,165
|
|
Thereafter
|
|
|
2,669,184
|
|
Total lease payments
|
|
|
5,586,221
|
|
Less: Imputed interest
|
|
|
(1,330,356
|
)
|
Present value of future lease payments
|
|
|
4,255,865
|
|
Less: current portion of lease liability
|
|
|
(325,470
|
)
|
Long-term portion of lease liability
|
|
$
|
3,930,395
|
|
5. CUSTOMER CARD FUNDING LIABILITY
The Company issues prepaid cards with various
provisions for cardholder fees or expiration. Revenue generated from cardholder transactions and interchange fees are recognized when
the Company’s performance obligation is fulfilled. Unspent balances left on Pharma cards are recognized as settlement income at
the expiration of the cards and the program. Contract liabilities related to prepaid cards represent funds on card and client funds held
to be loaded to card before the amounts are ultimately spent by the cardholders or recognized as revenue by the Company. Contract liabilities
related to prepaid cards are reported as Customer card funding liability on the condensed consolidated balance sheet.
The opening and closing balances of the Company's contract liabilities
are as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Beginning balance
|
|
$
|
48,100,951
|
|
|
$
|
32,723,227
|
|
Increase (decrease), net
|
|
|
10,672,537
|
|
|
|
7,569,104
|
|
Ending balance
|
|
$
|
58,773,488
|
|
|
$
|
40,292,331
|
|
The amount of revenue recognized during the three
months ended March 31, 2021 and 2020 that was included in the opening contract liability for prepaid cards was $1,023,055 and $844,514,
respectively.
6. COMMON STOCK
At March 31, 2021, 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 50,750,882 shares of common stock issued and 50,447,432 shares of common stock outstanding, and no
shares of preferred stock outstanding.
Stock-based compensation expense related to Company
grants for the three months ended March 31, 2021 was $636,214. Stock-based compensation expense for the three months ended March 31,
2020 was $724,183.
2021 Transactions:
During the three months ended March 31, 2021 the Company also issued 499,275 shares of common stock for vested stock awards and the
exercise of stock options and received proceeds of $110,466.
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 assumptions used in the Black Scholes option-pricing model for the 2020 options was a risk-free interest rate of
0.38%, expected volatility of 100%, dividend yield of -0- and a weighted-average expected life of 5 years. The Company also issued 438,558
shares of common stock for vested stock awards and the exercise of stock options and received proceeds of $24,000.
7. BASIC
AND FULLY DILUTED NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation
of basic and fully diluted net income (loss) per common share for the three months ended March 31, 2021 and 2020:
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,623,527
|
)
|
|
$
|
1,540,965
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
50,351,971
|
|
|
|
48,713,163
|
|
Weighted average effects of potentially diluted common stock:
|
|
|
|
|
|
|
|
|
Stock options (calculated using the treasury method)
|
|
|
–
|
|
|
|
1,824,903
|
|
Unvested restricted stock grants
|
|
|
–
|
|
|
|
4,150,000
|
|
Denominator for fully diluted calculation
|
|
|
50,351,971
|
|
|
|
54,688,066
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.03
|
|
Fully diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.03
|
|
Due to the
net loss for the three months ended March 31, 2021, the effect of all potential common share equivalents was anti-dilutive, and therefore,
all such shares were excluded from the computation of diluted weighted average shares outstanding for the period. The amount of potential
common share equivalents excluded were 2,241,014 for stock options and 1,975,000 for unvested restricted stock awards for the three months
ended March 31, 2021.
8. COMMITMENTS AND CONTINGENCIES
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.
The Company has been named as a defendant in three
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 (“Shi”), Lorna Chase v. Paysign, Inc. et. al., filed on March 25, 2020 (“Chase”), and Smith &
Duvall v. Paysign, Inc. et. al., filed on April 2, 2020 (collectively, the “Complaints” or “Securities Class Action”).
Smith & Duvall v. Paysign, Inc. et al. was voluntarily dismissed on May 21, 2020. On May 18, 2020, the Shi plaintiffs and another
entity called the Paysign Investor Group each filed a motion to consolidate the remaining Shi and Chase actions and to be appointed lead
plaintiff. The Complaints are putative class actions filed on behalf of a class of persons who acquired the Company’s common stock
from March 19, 2019 through March 31, 2020, inclusive. The Complaints generally allege that the Company, Mark R. Newcomer, and Mark Attinger
violated Section 10(b) of the Exchange Act, and that 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 the Company’s internal control over
financial reporting and its financial statements. The Complaints seek class action certification, compensatory damages, and attorney’s
fees and costs. On December 2, 2020, the Court consolidated Shi and Chase as In re Paysign, Inc. Securities Litigation and appointed the
Paysign Investor Group as lead plaintiff. On January 12, 2021, Plaintiffs filed an Amended Complaint in the consolidated action. Defendants
filed a Motion to Dismiss the Amended Complaint on March 15, 2021, which is expected to be fully briefed by June 1, 2021. As of the date of this filing, Paysign cannot give any meaningful estimate
of likely outcome or damages.
The Company has also been named as a nominal defendant
in a stockholder derivative action in the United States District Court for the District of Nevada: Andrzej Toczek, derivatively on behalf
of Paysign, Inc. v. Mark, R. Newcomer, et. al., filed on September 17, 2020. This action alleges violations of Section 14(a) of the Exchange
Act, breach of fiduciary duty, unjust enrichment, and waste, largely in connection with the failure to correct information technology
controls over financial reporting alleged in the Securities Class Action, thereby causing the Company to face exposure in the Securities
Class Action. The derivative complaint also alleges insider trading, violations against certain individual defendants. On December 16,
2020, the Court approved a stipulation staying the action until the Court in the consolidated Securities Class Action issues a ruling
on the Motion to Dismiss. As of the date of this filing, Paysign cannot give any meaningful estimate
of likely outcome or damages.
9. RELATED PARTY
A member of our Board of Directors is also a partner
in a law firm that the Company engages for services to review regulatory filings and various legal matters. The Company incurred legal
expense of $252,836 during the three months ended March 31, 2021, with the related party law firm. During the three months ended March
31, 2020 the Company incurred legal expense of $18,733 with the related party law firm.
10. INCOME TAX BENEFIT
The effective tax rate (income
tax benefit as a percentage of income (loss) before income tax benefit) was (0.1%) for the three months ended March 31, 2021, as compared
to (6.0%) for the three months ended March 31, 2020. The effective tax rates vary, primarily as a result of the full valuation
on our deferred tax asset in the current year and the tax benefit related to our stock-based compensation and a pretax loss in the prior
year period.