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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2021

 

or

 

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 001-38623

 

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.)

 

2615 St. Rose Parkway,

Henderson, Nevada 89052

(Address of principal executive offices)

 

(702) 453-2221

(Registrant’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 No

 

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 such files). Yes No

 

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. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated Filer Accelerated Filer
Non-accelerated Filer Smaller reporting company
  Emerging growth company

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 51,691,932 shares as of November 5, 2021.

 

     

 

 

PAYSIGN, INC.

 

FORM 10-Q REPORT

INDEX

 

PART I. FINANCIAL INFORMATION 1
   
Item 1. Financial Statements. 1
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 13
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 21
   
Item 4. Controls and Procedures. 21
   
PART II. OTHER INFORMATION. 22
   
Item 1. Legal Proceedings. 22
   
Item 1A. Risk Factors. 22
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 22
   
Item 6. Exhibits. 22
   
SIGNATURES 23

 

 

 

  i  

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

             
   

September 30,
2021

(Unaudited)

   

December 31,
2020

(Audited)

 
ASSETS                
Current assets                
Cash   $ 6,926,969     $ 7,829,453  
Restricted cash     63,260,491       48,100,951  
Accounts receivable     1,680,441       654,859  
Prepaid expenses and other current assets     1,543,355       1,375,364  
Total current assets     73,411,256       57,960,627  
                 
Fixed assets, net     1,733,853       1,849,164  
Intangible assets, net     4,037,219       3,699,033  
Operating lease right-of-use asset     4,007,571       4,324,682  
                 
Total assets   $ 83,189,899     $ 67,833,506  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities                
Accounts payable and accrued liabilities   $ 3,451,411     $ 2,162,256  
Operating lease liability, current portion     335,357       320,636  
Customer card funding     63,260,491       48,100,951  
Total current liabilities     67,047,259       50,583,843  
                 
Operating lease liability, long term portion     3,760,208       4,013,598  
                 
Total liabilities     70,807,467       54,597,441  
Commitments and contingencies (Note 8)            
Stockholders' equity                
Preferred stock: $0.001 par value; 25,000,000 shares authorized; none issued and outstanding            
Common stock; $0.001 par value; 150,000,000 shares authorized, 51,636,382 and 50,251,607 issued at September 30, 2021 and December 31, 2020, respectively     51,636       50,252  
Additional paid-in capital     16,360,373       14,388,890  
Treasury stock at cost, 303,450 shares     (150,000 )     (150,000 )
Accumulated deficit     (3,879,577 )     (1,053,077 )
Total stockholders' equity     12,382,432       13,236,065  
                 
Total liabilities and stockholders' equity   $ 83,189,899     $ 67,833,506  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

  1  

 

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

                         
    Three Months Ended
September 30,
   

Nine Months Ended

September 30,

 
    2021     2020     2021     2020  
Revenues                                
Plasma industry   $ 7,035,546     $ 5,186,566     $ 18,366,010     $ 17,102,415  
Pharma industry     660,331       (5,383,887 )     2,184,198       (594,945 )
Other     71,312       44,780       147,699       359,527  
Total revenues     7,767,189       (152,541 )     20,697,907       16,866,997  
                                 
Cost of revenues     3,797,919       3,281,888       10,744,264       11,275,758  
                                 
Gross profit     3,969,270       (3,434,429 )     9,953,643       5,591,239  
                                 
Operating expenses                                
Selling, general and administrative     3,618,071       4,070,211       10,957,619       11,299,036  
Impairment of intangible asset           382,414             382,414  
Loss on abandonment of assets                       42,898  
Depreciation and amortization     628,324       537,792       1,838,354       1,546,645  
Total operating expenses     4,246,395       4,990,417       12,795,973       13,270,993  
                                 
Loss from operations     (277,125 )     (8,424,846 )     (2,842,330 )     (7,679,754 )
                                 
Other income (expense)                                
Interest income, net     6,119       12,184       18,230       77,475  
                                 
Loss before income tax provision (benefit)     (271,006 )     (8,412,662 )     (2,824,100 )     (7,602,279 )
Income tax provision (benefit)           (2,260,527 )     2,400       (2,771,875 )
                                 
Net loss   $ (271,006 )   $ (6,152,135 )   $ (2,826,500 )   $ (4,830,404 )
                                 
Net loss per share                                
Basic   $ (0.01 )   $ (0.12 )   $ (0.06 )   $ (0.10 )
Diluted   $ (0.01 )   $ (0.12 )   $ (0.06 )   $ (0.10 )
                                 
Weighted average common shares                                
Basic     51,154,725       49,433,473       50,754,652       49,055,492  
Diluted     51,154,725       49,433,473       50,754,652       49,055,492  

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  2  

 

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

                                       
    Common Stock     Additional
Paid-in
    Treasury
Stock
    Accumulated     Non-Controlling     Total Stockholders’  
    Shares     Amount     Capital     Amount     Deficit     Interest     Equity  
Balance, December 31, 2020     50,251,607     $ 50,252     $ 14,388,890     $ (150,000 )   $ (1,053,077 )         $ 13,236,065  
                                                         
Stock issued upon vesting of restricted stock   466,689       467       (467 )                          
Exercise of stock options     32,586       32       110,434                           110,466  
Stock-based compensation                 636,214                           636,214  
Net loss                             (1,623,527 )           (1,623,527 )
Balance, March 31, 2021     50,750,882       50,751       15,135,071       (150,000 )     (2,676,604 )           12,359,218  
                                                         
Stock issued upon vesting of restricted stock     390,000       390       (390 )                          
Exercise of stock options     2,500       2       9,673                           9,675  
Stock-based compensation                 540,921                           540,921  
Net loss                             (931,967 )           (931,967 )
Balance, June 30, 2021     51,143,382       51,143       15,685,275       (150,000 )     (3,608,571 )           11,977,847  
                                                         
Stock issued upon vesting of restricted stock     463,000       463       (463 )                          
Exercise of stock options     30,000       30       71,970                           72,000  
Stock-based compensation                 603,591                           603,591  
Net loss                             (271,006 )           (271,006 )
Balance, September 30, 2021     51,636,382     $ 51,636     $ 16,360,373     $ (150,000 )   $ (3,879,577 )         $ 12,382,432  

 

 

    Stockholders' Equity Attributable to Paysign, Inc.              
                Additional     Treasury           Non-        
    Common Stock     Paid-in     Stock     Retained     controlling     Total  
    Shares     Amount     Capital     Amount     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  
                                                         
Stock issued upon vesting of restricted stock     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. Subsidiary                 (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  
                                                         
Stock issued upon vesting of restricted stock     337,437       338       (338 )                        
Repurchase of employee common stock for taxes withheld                 (245,425 )                       (245,425 )
Stock-based compensation                 600,775                         600,775  
Issuance of stock for acquisition of contract assets     20,000       20       177,180                         177,200  
Net loss                             (219,234 )           (219,234 )
Balance, June 30, 2020     49,373,707       49,374       12,594,389       (150,000 )     9,410,216             21,903,979  
                                                         
Stock issued upon vesting of restricted stock     457,000       457       (457 )                        
Exercise of stock options     58,200       58       139,622                         139,680  
Stock-based compensation                 798,849                         798,849  
Net loss                             (6,152,135 )           (6,152,135 )
Balance, September 30, 2020     49,888,907     $ 49,889     $ 13,532,403     $ (150,000 )   $ 3,258,081     $     $ 16,690,373  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

  3  

 

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

             
    Nine Months Ended
September 30,
 
    2021     2020  
Cash flows from operating activities:                
Net loss   $ (2,826,500 )   $ (4,830,404 )
Adjustments to reconcile net loss to net cash provided by operating activities:                
Depreciation and amortization     1,838,354       1,546,645  
Stock-based compensation expense     1,780,726       2,123,807  
Noncash lease expense     317,111       83,274  
Impairment of intangible asset           382,414  
Loss on abandonment of assets           42,898  
Deferred income taxes           (2,760,226 )
Changes in operating assets and liabilities:                
Accounts receivable     (1,025,582 )     99,793  
Prepaid expenses and other current assets     (167,991 )     48,387  
Accounts payable and accrued liabilities     1,194,607       594,678  
Operating lease liability     (238,669 )     (43,832 )
Customer card funding     15,159,540       15,291,372  
Net cash provided by operating activities     16,031,596       12,578,806  
                 
Cash flows from investing activities:                
Purchase of fixed assets     (189,562 )     (1,096,591 )
Capitalization of internally developed software     (1,718,638 )     (1,403,470 )
Purchase of intangible assets     (58,481 )     (57,127 )
Net cash used in investing activities     (1,966,681 )     (2,557,188 )
                 
Cash flows from financing activities:                
Proceeds from exercise of stock options     192,141       163,680  
Repurchase of employee common stock for taxes withheld           (245,425 )
Net cash provided by (used in) financing activities     192,141       (81,745 )
                 
Net change in cash and restricted cash     14,257,056       9,939,873  
Cash and restricted cash, beginning of period     55,930,404       45,572,305  
                 
Cash and restricted cash, end of period   $ 70,187,460     $ 55,512,178  
                 
Supplemental cash flow information:                
Cash paid for taxes   $ 2,400     $  
Cash paid for interest   $ 3,704     $  
Fixed assets acquired through accounts payable   $ 94,549     $  
Operating lease right-of-use asset and operating lease liability   $     $ 4,455,271  
Issuance of stock for asset acquisition   $     $ 177,200  
Dissolution of noncontrolling interest   $     $ 263,087  

 

 

                 
    September 30, 2021     September 30, 2020  
Cash and restricted cash reconciliation:                
Cash   $ 6,926,969     $ 7,497,579  
Restricted cash     63,260,491       48,014,599  
Total cash and restricted cash   $ 70,187,460     $ 55,512,178  

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  4  

 

 

PAYSIGN, INC.

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 and nine months ended September 30, 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 coronavirus (COVID-19) pandemic, which started in late 2019 and reached the United States in early 2020, continues to significantly impact the economy of the United States and the rest of the world. While the disruption appears to be mitigating due to the availability of vaccines and other factors, the ultimate duration and severity of the pandemic remain uncertain, particularly given the development of new variants that continue to spread. The COVID-19 outbreak caused plasma center closures, and the stimulus packages signed into law during 2020 and 2021 reduced the incentive for individuals to donate plasma for supplementary income. Those developments have had and will continue to have an adverse impact on the Company’s results of operations. While we remain cautiously optimistic and have seen improvements in our operating results, we cannot foresee how long it may take the Company to attain pre-pandemic operating levels as COVID-19 related labor shortages at plasma donation centers, border closures, and other effects continue to weigh 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 variants and around the imposition or relaxation of protective measures, management cannot at this time estimate with reasonable accuracy COVID-19’s further impact on the Company’s 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 provider of prepaid card programs, comprehensive patient affordability offerings, digital banking services and integrated payment processing designed for businesses, consumers and government institutions. Founded in 2001 and headquartered in southern Nevada, the company creates customized, innovative payment solutions for clients across all industries, including pharmaceutical, healthcare, hospitality and retail. By using Paysign solutions, clients enjoy benefits such as lower administrative costs, streamlined operations, increased revenues, accelerated product adoption, and improved customer, employee and partner loyalty. 

 

Built on the foundation of a powerful and reliable payments platform, Paysign’s end-to-end technologies securely enable a wide range of services, including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting and customer care. The modern cross-platform architecture is designed to be highly flexible, scalable and customizable, which delivers cost benefits and revenue-building opportunities to clients and partners.

 

 

  5  

 

 

As a full-service program manager, Paysign manages all aspects of the prepaid card lifecycle, from card design and bank approvals, production, packaging, distribution and personalization, to inventory and security controls, renewals, lost and stolen cards and card replacement. The company’s in-house, bilingual customer care is available 24/7/365 through live agents, interactive voice response (IVR), and two-way SMS alerts.

  

For more than 20 years major pharmaceutical and healthcare companies and multinational enterprises have relied on Paysign to provide full-service programs tailored to their unique requirements. The Company has designed and launched prepaid card programs for corporate rewards, employee incentives, consumer rebates, donor compensation, clinical trials, healthcare reimbursement payments and copay assistance.

 

Paysign’s expanded product offerings now include additional corporate incentive products and demand deposit accounts accessible with a debit card.

 

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.

 

Reclassifications – Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statement presentations.

 

Use of Estimates – The preparation of the condensed 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 condensed 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 September 30, 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 are 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.

 

 

  6  

 

 

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 – 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 and paid pursuant to the contract terms which are generally multi-year contracts. The Company uses the output method to recognize card program management fee revenue at the amount of consideration to which an entity has a right to invoice. The services are transferred to the customer when the performance obligation is completed which the Company determined to be monthly. 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 interchange fee revenue concurrent with the processing of card transactions. Interchange fees are settled in accordance with the card payment network terms and condition.

 

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.

 

 

  7  

 

 

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 Financial Accounting Standards Board (“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: 

           
    September 30,
2021
    December 31,
2020
 
Equipment   $ 2,082,533     $ 1,888,640  
Software     257,610       200,282  
Furniture and fixtures     757,662       752,212  
Website costs     68,971       67,816  
Leasehold improvements     229,772       203,488  
      3,396,548       3,112,438  
Less: accumulated depreciation     1,662,695       1,263,274  
Fixed assets, net   $ 1,733,853     $ 1,849,164  

 

Depreciation expense for the three months ended September 30, 2021 and 2020 was $134,296 and $115,778, respectively. Depreciation expense for the nine months ended September 30, 2021 and 2020 was $399,421 and $311,039, respectively. During the nine months ended September 30, 2020 the Company relocated its corporate headquarters and recognized a $42,898 loss on abandonment of assets primarily related to leasehold improvements.

 

 

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3.     INTANGIBLE ASSETS, NET

  

Intangible assets consist of the following: 

Schedule of intangible assets            
    September 30,
2021
    December 31,
2020
 
Platform   $ 9,279,844     $ 7,478,419  
Customer lists and contracts     1,177,200       1,177,200  
Licenses     209,282       234,282  
Trademarks     38,186       38,186  
      10,704,512       8,928,087  
Less: accumulated amortization     6,667,293       5,229,054  
Intangible assets, net   $ 4,037,219     $ 3,699,033  

 

Amortization expense for the three months ended September 30, 2021 and 2020 was $494,028 and $422,014, respectively. Amortization expense for the nine months ended September 30, 2021 and 2020 was $1,438,933 and $1,235,606, respectively.

 

During the three months ended September 30, 2020 the Company reviewed the carrying value of acquisition costs related to a business license and determined that there was an impairment necessary as the efforts to acquire the license had been suspended. As the impairment was deemed other than temporary, the impairment of $382,414 was recorded during the third quarter of 2020.

 

4.     LEASE

 

The Company entered into an operating lease for office space which became effective in June 2020. 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 September 30, 2021, the remaining lease term was 8.7 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 $189,950 and $614,150 for the three and nine months ended September 30, 2021, respectively. Operating lease cost included in selling, general and administrative expenses was $218,412 and $278,302 for the three and nine months ended September 30, 2020. Cash paid for operating lease was $142,992 and $132,992 for the three months ended September 30, 2021 and 2020, respectively. Cash paid for operating lease was $428,972 and $323,648 for the nine months ended September 30, 2021 and 2020, respectively. Short-term lease cost included in selling, general and administrative expense was $143,768 for the nine months ended September 30, 2020.

 

The following is the lease maturity analysis of our operating lease as of September 30, 2021:

 

Twelve months ending September 30, 

Schedule of operating lease liabilities      
2022   $ 571,968  
2023     571,968  
2024     571,968  
2025     594,847  
2026     640,604  
Thereafter     2,348,882  
Total lease payments     5,300,237  
Less: Imputed interest     (1,204,672 )
Present value of future lease payments     4,095,565  
Less: current portion of lease liability     (335,357 )
Long-term portion of lease liability   $ 3,760,208  

 

 

  9  

 

 

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: 

Schedule of contract liabilities            
   

Nine Months Ended

September 30,

 
    2021     2020  
Beginning balance   $ 48,100,951     $ 32,723,227  
Increase (decrease), net     15,159,540       15,291,372  
Ending balance   $ 63,260,491     $ 48,014,599  

 

The amount of revenue recognized during the nine months ended September 30, 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 September 30, 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 51,636,382 shares of common stock issued and 51,332,932 shares of common stock outstanding, and no shares of preferred stock outstanding.

 

Stock-based compensation expense related to Company grants for the three and nine months ended September 30, 2021 was $603,591 and $1,780,726, respectively. Stock-based compensation expense for the three and nine months ended September 30, 2020 was $798,849 and $2,123,807, respectively.

 

2021 Transactions: During the three and nine months ended September 30, 2021 the Company issued 493,000 and 1,384,775 shares, respectively, of common stock for vested stock awards and the exercise of stock options and received proceeds of $72,000 and $192,141, respectively.

 

2020 Transactions: During the three and nine months ended September 30, 2020, the Company issued -0- and 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 five years. During the three and nine months ended September 30, 2020 the Company also issued 515,200 and 1,291,195 shares of common stock, respectively, for restricted stock awards previously granted, earned and vested, and for the exercise of vested stock options and received proceeds of $139,680 and $163,680, respectively. In addition, for the nine months ended September 30, 2020, the Company issued 20,000 shares of common stock related to the acquisition of customer lists and contracts valued at $8.86 per share.

 

 

 

  10  

 

 

7.        BASIC AND FULLY DILUTED NET LOSS PER COMMON SHARE

 

The following table sets forth the computation of basic and fully diluted net loss per common share for the nine months ended September 30, 2021 and 2020: 

Computation of earnings per share                        
   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
    2021     2020     2021     2020  
Numerator:                                
Net loss   $ (271,006 )   $ (6,152,135 )   $ (2,826,500 )   $ (4,830,404 )
Denominator:                                
Weighted average common shares:                                
Denominator for basic calculation     51,154,725       49,433,473       50,754,652       49,055,492  
Weighted average effects of potentially diluted common stock:                                
Stock options (calculated using the treasury method)                        
Unvested restricted stock grants                        
Denominator for fully diluted calculation     51,154,725       49,433,473       50,754,652       49,055,492  
Net loss per common share:                                
Basic   $ (0.01 )   $ (0.12 )   $ (0.06 )   $ (0.10 )
Fully diluted   $ (0.01 )   $ (0.12 )   $ (0.06 )   $ (0.10 )

 

Due to the net loss for the three and nine months ended September 30, 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 both periods. For the three and nine months ended September 30, 2021, the amount of potential common share equivalents excluded were 1,923,200 for stock options and 1,530,000 for unvested restricted stock awards. Due to the net loss for the three and nine months ended September 30, 2020, 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. For the three and nine months ended September 30, 2020, the amount of potential common share equivalents excluded were 2,746,400 for stock options and 3,075,500 for unvested restricted stock awards.

  

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 Plaintiffs opposed via an opposition brief filed on April 29, 2021, to which Defendants replied on June 1, 2021. Thus, the motion is now fully briefed. The Court has not set a hearing date on the motion, or informed the parties whether it intends to entertain oral argument or rule upon the papers filed. As of the date of this filing, Paysign cannot give any meaningful estimate of likely outcome or damages.

 

 

  11  

 

 

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 for various other legal matters. The Company incurred legal expense of $28,366 and $439,250 during the three and nine months ended September 30, 2021, respectively, with the related party law firm. During each of the three and nine months ended September 30, 2020 the Company incurred legal expense of $429,380 and $544,868, respectively, with the related party law firm.

 

10.        INCOME TAX BENEFIT

 

The effective tax rate (income tax provision (benefit) as a percentage of loss before income tax provision (benefit)) was 0.0% for the three months ended September 30, 2021, as compared to 26.9% for the three months ended September 30, 2020. The effective tax rate was (0.1%) and 36.5% for the nine months ended September 30, 2021 and 2020, respectively. The effective tax rates vary, primarily as a result of the full valuation on our deferred tax asset in the current year and the tax benefit related to our stock-based compensation and a pretax loss in the prior year period.

 

 

 

 

 

 

  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 contain, or may contain, Forward-Looking Statements. Although we believe that the expectations reflected in such Forward-Looking Statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by us, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating results. All phases of our operations are subject to a number of uncertainties, risks and other influences, many of which are outside of our control and any one of which, or a combination of which, could materially affect the results of our operations and whether Forward-Looking Statements made by us ultimately prove to be accurate. Such important factors (“Important Factors”) and other factors could cause actual results to differ materially from our expectations are disclosed in this report, including those factors discussed in “Part II - Item 1A. Risk Factors.” All prior and subsequent written and oral Forward-Looking Statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Important Factors described below that could cause actual results to differ materially from our expectations as set forth in any Forward-Looking Statement made by or on behalf of us.

 

Overview

 

We are a provider of prepaid card programs, comprehensive patient affordability offerings, digital banking services and integrated payment processing designed for businesses, consumers and government institutions. Founded in 2001 and headquartered in southern Nevada, the company creates customized, innovative payment solutions for clients across all industries, including pharmaceutical, healthcare, hospitality and retail. By using Paysign solutions, clients enjoy benefits such as lower administrative costs, streamlined operations, increased revenues, accelerated product adoption, and improved customer, employee and partner loyalty. 

 

Built on the foundation of a powerful and reliable payments platform, Paysign’s end-to-end technologies securely enable a wide range of services, including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting and customer care. The modern cross-platform architecture is designed to be highly flexible, scalable and customizable, which delivers cost benefits and revenue-building opportunities to clients and partners.

 

As a full-service program manager, Paysign manages all aspects of the prepaid card lifecycle, from card design and bank approvals, production, packaging, distribution and personalization, to inventory and security controls, renewals, lost and stolen cards and card replacement. The company’s in-house, bilingual customer care is available 24/7/365 through live agents, interactive voice response (IVR), and two-way SMS alerts.

 

For more than 20 years major pharmaceutical and healthcare companies and multinational enterprises have relied on Paysign to provide full-service programs tailored to their unique requirements. The Company has designed and launched prepaid card programs for corporate rewards, employee incentives, consumer rebates, donor compensation, clinical trials, healthcare reimbursement payments and copay assistance.

 

Paysign’s expanded product offerings now include additional corporate incentive products and demand deposit accounts accessible with a debit card.

 

 

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Our revenues include fees generated from cardholder fees, interchange, card program management fees, and settlement income. Revenue from cardholder fees, interchange and card program management fees is recorded when the performance obligation is fulfilled. Settlement income is recorded at the expiration of the card program.

 

We have two categories for our prepaid debit cards: (1) corporate and consumer reloadable cards, and (2) non-reloadable cards.

 

Reloadable Cards: These types of cards are generally classified as payroll or considered general purpose reloadable (“GPR”) cards. Payroll cards are issued by an employer to an employee in order to allow the employee to access payroll amounts that are deposited into an account linked to their card. GPR cards can also be issued to a consumer at a retail location or mailed to a consumer after completing an on-line application. GPR cards can be reloaded multiple times with a consumer’s payroll, government benefit, a federal or state tax refund or through cash reload networks located at retail locations. Reloadable cards are generally open-loop cards as described below.

  

Non-Reloadable Cards: These are generally one-time use cards that are only active until the funds initially loaded to the card are spent. These types of cards are generally used as gift or incentive cards. Normally these types of cards are used for purchase of goods or services at retail locations and cannot be used to receive cash.

 

Both reloadable and non-reloadable cards may be open-loop, closed-loop, or restricted-loop. Open-loop cards can be used to receive cash at ATM locations by PIN; or purchase goods or services by PIN or signature at retail locations virtually anywhere that the network brand (American Express, Discover, MasterCard, Visa, etc.) is accepted. Closed-loop cards can only be used at a specific merchant. Restricted-loop cards can be used at several merchants, or a defined group of merchants, such as all merchants at a specific shopping mall.

 

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

 

Currently, we are focusing our marketing efforts on corporate incentive and expense prepaid card products in various market verticals including, but not limited to, general corporate expense, healthcare related markets including co-pay assistance, clinical trials and donor compensation, loyalty rewards and incentive cards.

 

As part of our continuing platform expansion process, we evaluate current and emerging technologies for applicability to our existing and future software platform. To this end, we engage with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate, we use third-party technology components in the development of our software applications and service offerings. Third-party software may be used for highly specialized business functions, which we may not be able to develop internally within time and budget constraints. Our principal target markets for processing services include prepaid card issuers, retail and private-label issuers, small third-party processors, and small and mid-size financial institutions in the United States and Mexico.

  

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.

 

In 2021, we plan to continue to invest additional funds in technology improvements, sales and marketing, customer service, and regulatory compliance. From time to time, we evaluate raising capital to enable us to diversify into new market verticals. If we do not raise new capital, we believe that we will still be able to expand into new markets using internally generated funds.

 

 

  14  

 

 

The coronavirus (COVID-19) pandemic, which started in late 2019 and reached the United States in early 2020, continues to significantly impact the economy of the United States and the rest of the world. While the disruption appears to be mitigating due to the availability of vaccines and other factors, the ultimate duration and severity of the pandemic remain uncertain, particularly given the development of new variants that continue to spread. The COVID-19 outbreak caused plasma center closures, and the stimulus packages signed into law during 2020 and 2021 reduced the incentive for individuals to donate plasma for supplementary income. Those developments have had and will continue to have an adverse impact on the Company’s results of operations. While we remain cautiously optimistic and have seen improvements in our operating results, we cannot foresee how long it may take the Company to attain pre-pandemic operating levels as COVID-19 related labor shortages at plasma donation centers, border closures, and other effects continue to weigh 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 variants and around the imposition or relaxation of protective measures, management cannot at this time estimate with reasonable accuracy COVID-19’s further impact on the Company’s results of operations, cash flows or financial condition.

 

Results of Operations

 

Three Months Ended September 30, 2021 and 2020

 

The following table summarizes our consolidated financial results:

 

   

Three Months Ended

September 30,

(unaudited)

    Variance  
    2021     2020     $     %  
Revenues                                
Plasma industry   $ 7,035,546     $ 5,186,566     $ 1,848,980       35.6%  
Pharma industry     660,331       (5,383,887 )     6,044,218       NA  
Other     71,312       44,780       26,532       59.2%  
Total revenues     7,767,189       (152,541 )     7,919,730       NA  
Cost of revenues     3,797,919       3,281,888       516,031       15.7%  
Gross profit     3,969,270       (3,434,429 )     7,403,699       NA  
Gross margin %     51.1%       (2,251.5% )                
                                 
Operating expenses                                
Selling, general and administrative     3,618,071       4,070,211       (452,140 )     (11.1% )
Impairment of intangible asset           382,414       (382,414 )     (100.0% )
Depreciation and amortization     628,324       537,792       90,532       16.8%  
Total operating expenses     4,246,395       4,990,417       (744,022 )     (14.9% )
Loss from operations   $ (277,125 )   $ (8,424,846 )   $ 8,147,721       (96.7% )
                                 
Net loss   $ (271,006 )   $ (6,152,135 )   $ 5,881,129       (95.6% )
Net margin %     (3.5% )     (4,033.1% )                

 

The increase in total revenues of $7,919,730 for the three months ended September 30, 2021 compared to the same period in the prior year consisted primarily of a $1,848,980 increase in Plasma revenue and a $6,044,218 increase in Pharma revenue. The increase in Plasma revenue was primarily due to an increase in plasma donations, and, consequently, dollars loaded to cards, cardholder fees, and interchange, as COVID-19 restrictions such as donation center closures, mobility restrictions and Federal government stimulus measures were relaxed compared to the prior year period. The increase in Pharma revenue was primarily due to the constraining of revenue on all Pharma programs for settlement income whereby the unspent balances are recognized as revenue at the expiration of the cards and the respective program and the launch of seven new Pharma programs in 2021.

 

 

  15  

 

 

Cost of revenues for the three months ended September 30, 2021 increased $516,031 compared to the same period in the prior year. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production and postage costs, customer service, program management, application integration setup, and sales and commission expense. Cost of revenues increased primarily due to the increase in Plasma transactions as many of the Plasma transaction costs are variable in nature which are provided by third parties who charge us based on the number of transactions that occurred during the period.

 

Gross profit for the three months ended September 30, 2021 increased $7,403,699 compared to the same period in the prior year resulting from the increase in Plasma and Pharma revenue and the impact of a variable cost structure as described above. The increase in gross margin resulted from continued revenue growth and operating leverage of our Plasma business coupled with positive Pharma revenue versus the prior year.

 

Selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2021 decreased $452,140 or 11.1% compared to the same period in the prior year and consisted primarily of an increase in compensation and benefits of $179,000, a decrease in stock-based compensation of $195,250, a decrease in outside professional services for tax, audit and consultants of $342,250, an increase in insurance of $72,500, a decrease in technologies and telecom of $16,250, a decrease in rent, utilities, and maintenance of $29,500, an increase in travel of $32,000, and an increase in other operating expenses of $94,000.

 

Impairment of intangible asset for the three months ended September 30, 2021 declined by $382,414 compared to the same period in the prior year as this was a non-recurring impairment taken in the third quarter of 2020.

 

Depreciation and amortization expense for the three months ended September 30, 2021 increased $90,532 compared to the same period in the prior year. The increase in depreciation and amortization expense was primarily due to continued capitalization of new software and equipment, continued enhancements to our platform, and new furniture and fixtures and leasehold improvements associated with the new building we moved into in June 2020.

 

For the three months ended September 30, 2021 we recorded a loss from operations of $277,125 representing a net increase of $8,147,721 compared to the same period last year related to the aforementioned factors.

 

Other income for the three months ended September 30, 2021 decreased $6,065 related to lower interest income received from our sponsor bank and interest expense related to the financing of insurance premiums.

 

The effective tax rate for the three months ended September 30, 2021 was zero percent primarily as a result of the tax benefit related to our stock-based compensation and the full valuation on our deferred tax asset in the current year. We recorded an income tax benefit of $2,260,527 for the three months ended September 30, 2020 due to the tax benefit related to our stock-based compensation and pretax loss from operations during the same period.

 

The net loss for the three months ended September 30, 2021 was $271,006, an improvement of $5,881,129 compared to the net loss of $6,152,135 for the three months ended September 30, 2020. The overall change in net loss relates to the aforementioned factors.

 

 

 

  16  

 

 

Nine Months Ended September 30, 2021 and 2020

 

The following table summarizes our consolidated financial results:

 

   

Nine Months Ended

September 30,

(unaudited)

    Variance  
    2021     2020     $     %  
Revenues                        
Plasma industry   $ 18,366,010     $ 17,102,415     $ 1,263,595       7.4%  
Pharma industry     2,184,198       (594,945 )     2,779,143       NA  
Other     147,699       359,527       (211,828 )     (58.9% )
Total revenues     20,697,907       16,866,997       3,830,910       22.7%  
Cost of revenues     10,744,264       11,275,758       (531,494 )     (4.7% )
Gross profit     9,953,643       5,591,239       4,362,404       78.0%  
Gross margin %     48.1%       33.1%                  
                                 
Operating expenses                                
Selling, general and administrative     10,957,619       11,299,036       (341,417 )     (3.0% )
Impairment of intangible asset           382,414       (382,414 )     (100.0% )
Loss on abandonment of assets           42,898       (42,898 )     (100.0% )
Depreciation and amortization     1,838,354       1,546,645       291,709       18.9%  
Total operating expenses     12,795,973       13,270,993       (475,020 )     (3.6% )
Income (loss) from operations   $ (2,842,330 )   $ (7,679,754 )   $ 4,837,424       (63.0% )
                                 
Net income (loss)   $ (2,826,500 )   $ (4,830,404 )   $ 2,003,904       (41.5% )
Net margin %     (13.7% )     (28.6% )                

 

The increase in total revenues of $3,830,910 for the nine months ended September 30, 2021 compared to the same period in the prior year consisted primarily of an increase in Plasma revenue of $1,263,595 and an increase in Pharma revenue of $2,779,143, reduced by a decline in Other revenue of $211,828. The increase in Plasma revenue was primarily due to an increase in plasma donations, and, consequently, dollars loaded to cards and cardholder fees, which have improved year-over-year in the second and third quarters of 2021 as COVID-19 restrictions such as donation center closures, mobility restrictions and Federal government stimulus measures were relaxed compared to the prior year periods. Pharma revenue increased $2,779,143 primarily due to the constraining of revenue on all Pharma programs for settlement income in the third quarter of 2020 whereby the unspent balances are recognized as revenue at the expiration of the cards and the respective program. Additionally, we have launched seven new Pharma programs in 2021. Lastly, Pharma programs were also negatively impacted by COVID-19 as new pharmaceutical medicines were delayed and individuals limited their exposure to pharmacies and doctor offices. As COVID-19 restrictions have abated, individuals have returned to pharmacies and doctor offices and acquiring pharmaceutical medicines for treatments.

 

Cost of revenues for the nine months ended September 30, 2021 decreased $531,494 compared to the same period in the prior year. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production and postage costs, customer service, program management, application integration setup, and sales and commission expense. Cost of revenues decreased primarily due to operating leverage inherent in our Plasma business as many of the Plasma fees deliver a greater revenue contribution versus the costs that are provided by third-parties who charge us based on the number of transactions that occurred during the period.

 

 

  17  

 

 

Gross profit for the nine months ended September 30, 2021 increased $4,362,404 compared to the same period in the prior year resulting from the increase in Plasma and Pharma revenue, and the associated cost of sales as described above. The increase in gross margin for the nine months ended September 30, 2021 to 48.1% versus 33.1% for the same period in the prior year resulted from the higher revenue conversion rate and a favorable cost of revenue rate variance resulting from the portion of our cost of revenues that are fixed in nature.

 

SG&A for the nine months ended September 30, 2021 decreased $341,417 or 3.0% compared to the same period in the prior year and consisted primarily of an increase in compensation and benefits of $434,500, a decrease in stock-based compensation of $343,000, a decrease in professional services for tax, audit and consultants of $203,000, an increase in insurance of $170,000, a decrease in technologies and telecom of $107,000, an increase in rent, utilities, and maintenance of $205,500 related to a new office lease entered into in June 2020, an increase in travel of $10,500, and a decrease in other operating expenses of $66,250.

 

Impairment of intangible asset for the nine months ended September 30, 2021 declined by $382,414 compared to the same period in the prior year as this was a non-recurring impairment taken in the third quarter of 2020. Loss on abandonment of assets for the nine months ended September 30, 2021 declined by $42,898 compared to the same period in the prior year as this was a non-recurring loss taken in the second quarter of 2020.

 

Depreciation and amortization expense for the nine months ended September 30, 2021 increased $291,709 compared to the same period in the prior year. The increase in depreciation and amortization expense was primarily due to continued capitalization of new software and equipment, continued enhancements to our platform, and new furniture and fixtures and leasehold improvements associated with the new building we moved into in June 2020.

 

For the nine months ended September 30, 2021 we recorded a loss from operations of $2,842,330 representing a net increase of $4,837,424 compared to the same period last year related to the aforementioned factors.

 

Other income for the nine months ended September 30, 2021 decreased $59,245 related to lower interest income received from our sponsor bank and interest expense related to the financing of insurance premiums.

 

The effective tax rate was (0.1%) and 36.5% for the nine months ended September 30, 2021 and 2020, respectively. The effective tax rates vary, primarily as a result of the tax benefit related to our stock-based compensation and the full valuation on our deferred tax asset in the current year. We recorded an income tax benefit of $2,771,875 for the nine months ended September 30, 2020 due to the tax benefit related to our stock-based compensation and pretax loss from operations during the same period.

 

The net loss for the nine months ended September 30, 2021 was $2,826,500 compared to a net loss of $4,830,404 for the nine months ended September 30, 2020, a $2,003,904 increase. The overall change in net loss relates to the aforementioned factors.

 

Key Performance Indicators and Non-GAAP Measures

 

Management reviews a number of metrics to help us monitor the performance of and identify trends affecting our business. We believe the following measures are the primary indicators of our quarterly and annual revenues:

 

Gross Dollar Volume Loaded on Cards – Represents the total dollar volume of funds loaded to all of our prepaid card programs. Our gross dollar volume loaded on cards was $265 million and $213 million for the three months ended September 30, 2021 and 2020, respectively. That gross dollar volume was $788 million and $722 million for the nine months ended September 30, 2021 and 2020, respectively. We use this metric to analyze the total amount of money moving into our prepaid card programs.

 

 

  18  

 

 

Conversion Rates on Gross Dollar Volume Loaded on Cards – Comprised of revenues, gross profit and net income conversion rates of gross dollar volume loaded on cards which are calculated by taking our total revenues, gross profit or net income (loss), respectively, as a numerator and dividing by the gross dollar volume loaded on cards as a denominator. As we derive a number of our financial results from cardholder fees, we utilize these metrics as an indication of the amount of money that is added to cards and will eventually be converted to revenues, gross profit and net income. Our total revenue conversion rates for the three months ended September 30, 2021 and 2020 were 2.93% or 293 basis points (“bps”), and (0.07)% or (7) bps, respectively, of gross dollar volume loaded on cards. Our total gross profit conversion rates for the three months ended September 30, 2021 and 2020 were 1.50% or 150 bps, and (1.61)% or (161) bps, respectively, of gross dollar volume loaded on cards. Our net income conversion rates for the three months ended September 30, 2021 and 2020 were (0.10)% or (10) bps, and (2.89)% or (289) bps, respectively, of gross dollar volume loaded on cards. Our total revenue conversion rates for the nine months ended September 30, 2021 and 2020 were 2.63% or 263 bps, and 2.34% or 234 bps, respectively, of gross dollar volume loaded on cards. Our total gross profit conversion rates for the nine months ended September 30, 2021 and 2020 were 1.26% or 126 bps, and 0.77% or 77 bps, respectively, of gross dollar volume loaded on cards. Our net income conversion rates for the nine months ended September 30, 2021 and 2020 were (0.36)% or (36) bps, and (0.67)% or (67) bps, respectively, of gross dollar volume loaded on cards.

 

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

 

“EBITDA” is defined as earnings before interest, income taxes, and depreciation and amortization expense and "Adjusted EBITDA" reflects the adjustment to EBITDA to exclude stock-based compensation expense, impairment of intangible asset, and loss on abandonment of assets. A reconciliation of net loss to Adjusted EBITDA is provided in the table below.

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
    2021     2020     2021     2020  
Reconciliation of adjusted EBITDA to net loss:                        
Net loss   $ (271,006 )   $ (6,152,135 )   $ (2,826,500 )   $ (4,830,404 )
Income tax provision (benefit)           (2,260,527 )     2,400       (2,771,875 )
Interest income, net     (6,119 )     (12,184 )     (18,230 )     (77,475 )
Depreciation and amortization     628,324       537,792       1,838,354       1,546,645  
EBITDA     351,199       (7,887,054 )     (1,003,976 )     (6,133,109 )
Impairment of intangible asset           382,414             382,414  
Loss on abandonment of assets                       42,898  
Stock-based compensation     603,591       798,849       1,780,726       2,123,807  
Adjusted EBITDA   $ 954,790     $ (6,705,791 )   $ 776,750     $ (3,583,990 )

 

 

  19  

 

 

Liquidity and Capital Resources

 

The following table sets forth the major sources and uses of cash:

 

   

Nine Months Ended September 30,

(unaudited)

 
    2021     2020  
Net cash provided by operating activities   $ 16,031,596     $ 12,578,806  
Net cash used in investing activities     (1,966,681 )     (2,557,188 )
Net cash provided by (used in) financing activities     192,141       (81,745 )
Net increase in cash and restricted cash   $ 14,257,056     $ 9,939,873  

  

Comparison of Nine Months Ended September 30, 2021 and 2020

 

During the nine months ended September 30, 2021 and 2020, we financed our operations through internally generated funds.

 

Cash provided by operating activities increased $3,452,790 for the nine months ended September 30, 2021, as compared to the same period in the prior year. The increase is primarily due to an increase in cash flows from changes in operating assets and liabilities, particularly an improvement in net loss from operations and deferred income taxes, offset by a decrease in accounts receivable.

 

Cash used in investing activities decreased $590,507 for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The change between periods was primarily attributed to a decrease in purchases of fixed assets during the current period. Fixed asset purchases in the prior year period were largely related to our office relocation.

 

Cash provided by financing activities was $192,141 for the nine months ended September 30, 2021 as compared to cash used in financing activities of $81,745 the nine months ended September 30, 2020. Cash provided by financing activities in the 2021 period consisted of cash received from the exercise of employee stock options totaling $192,141. Cash used in financing activities for the 2020 period related to $245,425 for the repurchase of stock for taxes withheld offset by cash received from the exercise of stock options totaling $163,680.

  

Sources of Liquidity

 

We believe that our available cash on hand, excluding restricted cash, at September 30, 2021 of $6,926,969, along with our forecast for revenues and cash flows for the remainder of the year and for 2022, will be sufficient to sustain our operations for the next twelve months.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

 

 

  20  

 

 

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

 

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Because we are a smaller reporting company, we are not required to provide the information called for by this Item.

  

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures.

 

Disclosure controls and procedures means controls and other procedures that are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in those reports is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer evaluated 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 September 30, 2021. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2021, the end of the period covered by this Quarterly Report on Form 10-Q.

  

Changes in Internal Control over Financial Reporting

 

During the quarter ended September 30, 2021, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

  21  

 

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.

  

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 Plaintiffs opposed via an opposition brief filed on April 29, 2021, to which Defendants replied on June 1, 2021. Thus, the motion is now fully briefed. The Court has not set a hearing date on the motion, or informed the parties whether it intends to entertain oral argument or rule upon the papers filed.

 

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. 

 

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, 2020.

 

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

 

During the quarter ended September 30, 2021, we issued, pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, a total of 463,000 shares of common stock for restricted stock shares previously earned and vested as well as 30,000 shares of common stock for stock options exercised.

 

Item 6. Exhibits.

 

31.1 Rule 13a-14(a)/15d-14(a) Certifications
31.2 Rule 13a-14(a)/15d-14(a) Certifications
32.1 Section 1350 Certifications
32.2 Section 1350 Certifications
101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted in iXBRL, and included in exhibit 101).

 

  

  22  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   
  PAYSIGN, INC.
   
   
Date: November 10, 2021 /s/ Mark Newcomer
 

By: Mark Newcomer, Chief Executive Officer

(principal executive officer)

   
   
Date: November 10, 2021 /s/ Jeff Baker
 

By: Jeff Baker, Chief Financial Officer

(principal financial and accounting officer)

 

 

 

 

 

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