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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, 2022

 

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

  

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: 52,246,932 shares as of November 3, 2022.

 

 

 

     

 

 

PAYSIGN, INC.

 

FORM 10-Q REPORT

 

INDEX

 

PART I. FINANCIAL INFORMATION.  
   
Item 1. Financial Statements. 3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 15
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 23
   
Item 4. Controls and Procedures. 23
   
PART II. OTHER INFORMATION.  
   
Item 1. Legal Proceedings. 24
   
Item 1A. Risk Factors. 24
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 24
   
Item 6. Exhibits. 25
   
SIGNATURES 26

 

 

 

 

 

 

 

 

 

 

 

 

  2  

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

             
   

September 30,
2022

(Unaudited)

   

December 31,
2021

(Audited)

 
ASSETS                
Current assets                
Cash   $ 7,981,953     $ 7,387,156  
Restricted cash     89,059,415       61,283,914  
Accounts receivable     4,032,985       3,393,940  
Other receivables     1,439,251       1,019,218  
Prepaid expenses and other current assets     1,954,152       1,242,967  
Total current assets     104,467,756       74,327,195  
                 
Fixed assets, net     1,334,661       1,642,981  
Intangible assets, net     4,848,057       4,086,962  
Operating lease right-of-use asset     3,711,462       3,993,655  
                 
Total assets   $ 114,361,936     $ 84,050,793  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities                
Accounts payable and accrued liabilities   $ 6,615,836     $ 5,765,478  
Operating lease liability, current portion     356,041       340,412  
Customer card funding     89,059,415       61,283,914  
Total current liabilities     96,031,292       67,389,804  
                 
Operating lease liability, long term portion     3,404,167       3,673,186  
                 
Total liabilities     99,435,459       71,062,990  
                 
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, 52,461,382 and 52,095,382 issued at September 30, 2022 and December 31, 2021, respectively     52,461       52,095  
Additional paid-in capital     18,483,747       16,860,119  
Treasury stock at cost, 303,450 shares     (150,000 )     (150,000 )
Accumulated deficit     (3,459,731 )     (3,774,411 )
Total stockholders' equity     14,926,477       12,987,803  
                 
Total liabilities and stockholders' equity   $ 114,361,936     $ 84,050,793  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

  3  

 

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

                         
    Three Months Ended
September 30,
   

Nine Months Ended

September 30,

 
    2022     2021     2022     2021  
Revenues                        
Plasma industry   $ 9,829,811     $ 7,035,546     $ 25,030,376     $ 18,366,010  
Pharma industry     693,353       660,331       2,273,232       2,184,198  
Other     73,264       71,312       112,235       147,699  
Total revenues     10,596,428       7,767,189       27,415,843       20,697,907  
                                 
Cost of revenues     4,847,780       3,797,919       11,971,135       10,744,264  
                                 
Gross profit     5,748,648       3,969,270       15,444,708       9,953,643  
                                 
Operating expenses                                
Selling, general and administrative     4,386,757       3,618,071       13,283,645       10,957,619  
Depreciation and amortization     738,883       628,324       2,131,234       1,838,354  
Total operating expenses     5,125,640       4,246,395       15,414,879       12,795,973  
                                 
Income (loss) from operations     623,008       (277,125 )     29,829       (2,842,330 )
                                 
Other income                                
Interest income, net     265,284       6,119       349,847       18,230  
                                 
Income (loss) before income tax provision     888,292       (271,006 )     379,676       (2,824,100 )
Income tax provision     36,183             64,996       2,400  
                                 
Net income (loss)   $ 852,109     $ (271,006 )   $ 314,680     $ (2,826,500 )
                                 
Net income (loss) per share                                
Basic   $ 0.02     $ (0.01 )   $ 0.01     $ (0.06 )
Diluted   $ 0.02     $ (0.01 )   $ 0.01     $ (0.06 )
                                 
Weighted average common shares                                
Basic     52,142,225       51,154,725       51,968,496       50,754,652  
Diluted     53,365,025       51,154,725       52,676,707       50,754,652  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

  4  

 

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

                                     
    Common Stock     Additional
Paid-in
    Treasury
Stock
    Accumulated     Total Stockholders’  
    Shares     Amount     Capital     Amount     Deficit     Equity  
Balance, December 31, 2021     52,095,382     $ 52,095     $ 16,860,119     $ (150,000 )   $ (3,774,411 )   $ 12,987,803  
                                                 
Stock issued upon vesting of restricted stock     123,000       123       (123 )                  
Stock-based compensation                 569,502                   569,502  
Net loss                             (309,395 )     (309,395 )
                                                 
Balance, March 31, 2022     52,218,382       52,218       17,429,498       (150,000 )     (4,083,806 )     13,247,910  
                                                 
Stock issued upon vesting of restricted stock     105,000       105       (105 )                  
Stock-based compensation                 488,287                   488,287  
Net loss                             (228,034 )     (228,034 )
                                                 
Balance, June 30, 2022     52,323,382       52,323       17,917,680       (150,000 )     (4,311,840 )     13,508,163  
                                                 
Stock issued upon vesting of restricted stock     138,000       138       (138 )                  
Stock-based compensation                 566,205                   566,205  
Net income                             852,109       852,109  
                                                 
Balance, September 30, 2022     52,461,382     $ 52,461     $ 18,483,747     $ (150,000 )   $ (3,459,731 )   $ 14,926,477  

 

    Common Stock     Additional
Paid-in
    Treasury
Stock
    Accumulated     Total Stockholders’  
    Shares     Amount     Capital     Amount     Deficit     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  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

  5  

 

 

PAYSIGN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

             
    Nine Months Ended
September 30,
 
    2022     2021  
Cash flows from operating activities:                
Net income (loss)   $ 314,680     $ (2,826,500
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Stock-based compensation expense     1,623,994       1,780,726  
Depreciation and amortization     2,131,234       1,838,354  
Noncash lease expense     282,193       317,111  
Changes in operating assets and liabilities:                
Accounts receivable     (639,045 )     (1,025,582
Other receivable     (420,033 )      
Prepaid expenses and other current assets     (711,185 )     (167,991
Accounts payable and accrued liabilities     850,358       1,194,607  
Operating lease liability     (253,390 )     (238,669
Customer card funding     27,775,501       15,159,540  
Net cash provided by operating activities     30,954,307       16,031,596  
                 
Cash flows from investing activities:                
Purchase of fixed assets     (75,661 )     (189,562
Capitalization of internally developed software     (2,508,348 )     (1,718,638
Purchase of intangible assets           (58,481
Net cash used in investing activities     (2,584,009 )     (1,966,681
                 
Cash flows from financing activities:                
Proceeds from exercise of stock options           192,141  
Net cash provided by financing activities           192,141  
                 
Net change in cash and restricted cash     28,370,298       14,257,056  
Cash and restricted cash, beginning of period     68,671,070       55,930,404  
                 
Cash and restricted cash, end of period   $ 97,041,368     $ 70,187,460  
                 
Cash and restricted cash reconciliation:                
Cash     7,981,953       6,926,969  
Restricted cash     89,059,415       63,260,491  
Total cash and restricted cash   $ 97,041,368     $ 70,187,460  
                 
Supplemental cash flow information:                
Non-cash financing activities                
Cash paid for taxes   $ 27,374     $ 2,400  
Interest paid   $ 221     $ 3,704  
Fixed assets acquired through accounts payable   $     $ 94,549  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

  6  

 

 

PAYSIGN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.     BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT POLICIES

 

The foregoing unaudited interim condensed 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, 2021. 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 nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

 

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 direct disruption appears to have abated 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, and the economic repercussions are still manifesting themselves. 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. Additionally, labor shortages at plasma donation centers and restrictions preventing Mexican nationals with tourist visas from being compensated for donating plasma, have further impacted donations. Those developments have had an adverse impact on the Company’s historical results of operations. On September 16, 2022, the United States District Court issued a preliminary injunction preventing the United States Customs and Border Protection from continuing to enforce its ban on plasma donations by Mexican nationals. Since then, we have seen an increase in donation activity from Mexican nationals, primarily in our plasma donation centers along the U.S.-Mexico border. Additionally, inflationary pressures for food, gasoline, rent, and other products and services appear to be driving individuals back into the plasma donation centers based upon the increase we experienced in the number of loads per average donation center in the third quarter of 2022 as compared to all preceding quarters in 2022 and 2021. While we remain cautiously optimistic and have seen improvements in donation activity and our operating results on an aggregated basis, we cannot foresee what potential issues may impact our operating results as new COVID-19 variants continue to evolve. 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.

 

Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law in 2020 and the subsequent extension of the CARES Act through September 30, 2021, the Company was eligible for a refundable employee retention credit subject to certain criteria. The Company has elected an accounting policy to recognize the government assistance when it is probable that the Company is eligible to receive the assistance and present the credit as a reduction of the related expense. As of September 30, 2022 and December 31, 2021, the Company has $1,296,488 and $876,456, respectively in other receivables on the condensed consolidated balance sheet related to Federal government refunds.

 

 

 

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About Paysign, Inc.

 

Paysign, Inc. (the “Company,” “Paysign,” “we” or “our”) was incorporated on August 24, 1995, and trades under the symbol PAYS on The Nasdaq Stock Market LLC. Paysign 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. Headquartered in Nevada, the company creates customized, innovative payment solutions for clients across all industries, including pharmaceutical, healthcare, hospitality and retail.

 

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 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.

 

Cash and Cash Equivalents – The Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents for the purposes of the statement of cash flows. The Company had no cash equivalents at September 30, 2022 and December 31, 2021.

 

Restricted Cash – At September 30, 2022 and December 31, 2021, 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.

 

Concentrations of Credit Risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and restricted cash. Paysign maintains its cash and cash equivalents and restricted cash in various bank accounts that, at times, may exceed federally insured limits. Paysign has not experienced, nor does it anticipate, any losses with respect to such accounts. At September 30, 2022 and December 31, 2021, the Company had approximately $42,575,691 and $31,828,826 in excess of federally insured bank account limits, respectively.

 

The Company also has a concentration of accounts receivable risk at September 30, 2022 as two Pharma program customers associated with our Pharma copay programs each individually represent 44% and 14% of our accounts receivable balance. Two Pharma program customers each individually represented 52% and 17% of our accounts receivable balance at December 31, 2021.

 

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.

 

 

 

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Intangible Assets – For intangible assets, the Company recognizes 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, which is generally 3 to 15 years.

 

Internally Developed Software Costs - Computer software development costs are expensed as incurred, except for internal use software or website development costs that qualify for capitalization as described below, and include compensation and related expenses, costs of hardware and software, and costs incurred in developing features and functionality.

 

For computer software developed or obtained for internal use, costs that are incurred in the preliminary project and post implementation stages of software development are expensed as incurred. Costs incurred during the application and development stage are capitalized. Capitalized costs are amortized using the straight-line method over a three year estimated useful life, beginning in the period in which the software is available for use.

 

Customer Card Funding – At September 30, 2022 and December 31, 2021, customer card funding represents funds loaded or available to be loaded on cards for our card product programs.

 

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 on the diluted earnings per share calculation is anti-dilutive.

 

Revenue and Expense Recognition – 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, transaction claims processing fees, interchange fees, and settlement income.

 

Plasma and Pharma card program revenues include both fixed and variable components. Cardholder fees represent an obligation to the cardholder based on a per transaction basis and are recognized at a point in time when the performance obligation is fulfilled. Card program management fees and transaction claims processing fees include an obligation to our card program sponsors and are generally recognized when earned on a monthly basis and are typically due within 30 days 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 performance obligation is satisfied when the services are transferred to the customer which the Company determined to be monthly, as the customer simultaneously receives and consumes the benefit from the Company’s performance. 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 are 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 conditions, which is typically within a few days.

 

 

 

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The Company 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.

 

Leases with an initial term of 12 months or less are not recorded on the balance sheet, with lease expense for these leases recognized on a straight-line basis over the lease term.

 

Stock-Based Compensation – The Company recognizes compensation expense for all restricted stock awards and stock options. The fair value of restricted stock awards is measured using the grant date trading price of our stock. The fair value of stock options 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.

 

Recently Issued Accounting Pronouncements – In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides updated guidance on how an entity should measure credit losses on all financial instruments carried at amortized cost (including loans held for investment and held-to-maturity debt securities, as well as trade receivables, reinsurance recoverables, and receivables that relate to repurchase agreements and securities lending agreements), a lessor’s net investments in leases, and off-balance sheet credit exposures not accounted for as insurance or as derivatives, including loan commitments, standby letters of credit, and financial guarantees. Subsequently, in November 2018 the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments–Credit Losses, which clarified that receivables arising from operating leases are not within the scope of Subtopic 326-20, but instead should be accounted for in accordance with Topic 842, Leases. In March 2022 the FASB issued ASU No. 2022-02, Financial Instruments—Credit Losses: Troubled Debt Restructurings and Vintage Disclosures which clarified accounting treatment required for trouble debt restructurings by creditors and enhanced disclosures for write-offs. The new standard and related amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact of adopting this guidance on our Financial Statements; however, we do not expect it to have a material impact on the Company’s consolidated financial statements.

 

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). This guidance is effective for the Company beginning on January 1, 2023 and is not expected to have a material impact on the Company’s consolidated financial statements.

 

 

 

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2.     FIXED ASSETS, NET

 

Fixed assets consist of the following:

           
    September 30,
2022
    December 31,
2021
 
Equipment   $ 2,135,995     $ 2,067,834  
Software     323,355       315,855  
Furniture and fixtures     757,662       757,662  
Website costs     69,881       69,881  
Leasehold improvements     229,772       229,772  
      3,516,665       3,441,004  
Less: accumulated depreciation     2,182,004       1,798,023  
Fixed assets, net   $ 1,334,661     $ 1,642,981  

 

Depreciation expense for the three months ended September 30, 2022 and 2021 was $113,758 and $134,296, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $383,980 and $399,421, respectively.

 

3.     INTANGIBLE ASSETS, NET

  

Intangible assets consist of the following:

           
    September 30,
2022
    December 31,
2021
 
Patents and trademarks   $ 38,186     $ 38,186  
Platform     12,362,866       9,853,823  
Customer lists and contracts     1,177,200       1,177,200  
Licenses     209,282       209,282  
      13,787,534       11,278,491  
Less: accumulated amortization     8,939,477       7,191,529  
Intangible assets, net   $ 4,848,057     $ 4,086,962  

 

Intangible assets are amortized over their useful lives ranging from periods of 3 to 15 years. Amortization expense for the three months ended September 30, 2022 and 2021 was $625,125 and $494,028, respectively. Amortization expense for the nine months ended September 30, 2022 and 2021 was $1,747,254 and $1,438,933, respectively.

 

 

 

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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, 2022, the remaining lease term was 7.7 years and the discount rate was 6%.

 

Operating lease cost included in selling, general and administrative expenses was $184,214 and $551,764 for the three and nine months ended September 30, 2022, respectively. 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.

 

The following is the lease maturity analysis of our operating lease as of September 30, 2022:

 

Year ending December 31,

     
2022 (excluding the nine months ended September 30, 2022)   $ 142,992  
2023     571,968  
2024     571,968  
2025     612,006  
2026     640,604  
Thereafter     2,188,731  
Total lease payments     4,728,269  
Less: Imputed interest     (968,061 )
Present value of future lease payments     3,760,208  
Less: current portion of lease liability     (356,041 )
Long-term portion of lease liability   $ 3,404,167  

 

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:

           
   

Nine Months Ended

September 30,

 
    2022     2021  
Beginning balance   $ 61,283,914     $ 48,100,951  
Increase, net     27,775,501       15,159,540  
Ending balance   $ 89,059,415     $ 63,260,491  

 

The amount of revenue recognized during the nine months ended September 30, 2022 and 2021 that was included in the opening contract liability for prepaid cards was $1,485,005 and $1,023,055, respectively.

  

 

 

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6.     COMMON STOCK

 

At September 30, 2022, 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 52,461,382 shares of common stock issued and 52,157,932 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, 2022 was $566,205 and $1,623,994, respectively. Stock-based compensation expense for the three and nine months ended September 30, 2021 was $603,591 and $1,780,726, respectively.

 

2022 Transactions: During the three and nine months ended September 30, 2022 the Company issued 138,000 and 366,000 shares, respectively, of common stock for vested stock awards and no exercise of stock options. During the three and nine months ended September 30, 2022 the Company also granted 2,430,000 and 2,530,000 restricted stock awards, respectively. Stock awards granted vest over a period of 1one to5 five years.

 

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.

 

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 and nine months ended September 30, 2022 and 2021: 

                       
    Three Months Ended September 30,    

Nine Months Ended September 30,

 
    2022     2021     2022     2021  
Numerator:                        
Net income (loss)   $ 852,109     $ (271,006 )   $ 314,680     $ (2,826,500 )
Denominator:                                
Weighted average common shares:                                
Denominator for basic calculation     52,142,225       51,154,725       51,968,496       50,754,652  
Weighted average effects of potentially diluted common stock:                                
Stock options (calculated using the treasury method)     594,553             457,256        
Unvested restricted stock awards     628,247             250,955        
Denominator for fully diluted calculation     53,365,025       51,154,725       52,676,707       50,754,652  
Net income (loss) per common share:                                
Basic   $ 0.02     $ (0.01 )   $ 0.01     $ (0.06 )
Fully diluted   $ 0.02     $ (0.01 )   $ 0.01     $ (0.06 )

 

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.

 

 

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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 Newcomer, and Mark Attinger violated Section 10(b) of the Securities Exchange Act of 1934 (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.

 

The Company has also been named as a nominal defendant in two stockholder derivative actions in the United States District Court for the District of Nevada. The first derivative action is entitled Andrzej Toczek, derivatively on behalf of Paysign, Inc. v. Mark R. Newcomer, et al. and was 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 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. The second derivative action is entitled John K. Gray, derivatively on behalf of Paysign, Inc. v. Mark Attinger, et al. and was filed on May 9, 2022. This action involves the same alleged conduct raised in the Toczek action and asserts claims for breach of fiduciary duty in connection with financial reporting, breach of fiduciary duty in connection with alleged insider trading against certain individual defendants, and unjust enrichment. On June 3, 2022, 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 $27,561 and $109,314 during the three and nine months ended September 30, 2022, respectively, with the related party law firm. During the three and nine months ended September 30, 2021 the Company incurred legal expense of $28,366 and $439,250, respectively, with the related party law firm.

 

10.        INCOME TAX PROVISION

 

The effective tax rate (income tax provision as a percentage of income (loss) before income tax provision) was 4.1% for the three months ended September 30, 2022, as compared to (0.1%) for the three months ended September 30, 2021. The effective tax rate was 17.1% and (0.1%) for the nine months ended September 30, 2022 and 2021, 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.

 

 

 

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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. These Forward-Looking Statements are based on our current expectations, assumptions, estimates and projections about our business and our industry. Words such as "believe," "anticipate," "expect," "intend," "plan," “propose,” "may," and other similar expressions identify 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. In addition, any statements that refer to expectations, projections, estimates, forecasts, or other characterizations of future events or circumstances are Forward-Looking Statements. These Forward-Looking Statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the Forward-Looking Statements. Such important factors (“Important Factors”) and other factors 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. You are cautioned not to place undue reliance on these Forward-Looking Statements, which relate only to events as of the date on which the statements are made. We undertake no obligation to publicly revise these Forward-Looking Statements to reflect events or circumstances that arise after the date hereof. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.

 

Overview

 

Paysign, Inc. (the “Company,” “Paysign,” “we” or “our”), headquartered in Nevada, was incorporated on August 24, 1995, and trades under the symbol PAYS on The Nasdaq Stock Market LLC. Paysign 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. We market our prepaid card solutions under our Paysign® brand. As we are a payment processor and prepaid card program manager, we derive our revenue from all stages of the prepaid card lifecycle.

 

We provide a card processing platform consisting of proprietary systems and software applications based on the unique needs of our clients. We have extended our processing business capabilities through our proprietary Paysign platform. Through the Paysign platform, we provide a variety of services including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service. The Paysign platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform’s flexibility and ease of customization has allowed us to expand our operational capabilities by facilitating our entry into new markets within the payments space. The Paysign platform delivers cost benefits and revenue building opportunities to our partners.

 

We have developed prepaid card programs for corporate incentive and rewards including, but not limited to, consumer rebates and rewards, donor compensation, 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. In the third quarter of 2022 we expanded our prepaid product offering to include payroll cards. In the future, we expect to further expand our product offerings into other prepaid card offerings such as travel cards and expense reimbursement cards. Our cards are sponsored by our issuing bank partners.

 

 

 

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Our revenues include fees generated from cardholder fees, interchange, card program management fees, transaction claims processing fees, and settlement income. Revenue from cardholder fees, interchange, card program management fees, and transaction claims processing 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.

 

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 also oversee inventory and security controls, renewals, lost and stolen card management, and replacement. We deploy a fully staffed, in-house customer service department which utilizes bilingual customer service representatives, Interactive Voice Response, and two-way short message service messaging and text alerts.

 

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 market our Paysign payment solutions through direct marketing by the Company’s sales team. Our primary market focus is on companies and municipalities that require a streamlined payment solution for rewards, rebates, payment assistance, and other payments to their customers, employees, agents and others. To reach these markets, we focus our sales efforts on direct contact with our target market and attendance at various industry specific conferences. We may, at times, utilize independent contractors who make direct sales and are paid commissions and/or restricted stock awards. We market our Paysign Premier product through existing communication channels to a targeted segment of our existing cardholders, as well as to a broad group of individuals, ranging from non-banked to fully banked consumers with a focus on long term users of our product.

 

 

 

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In 2022, we plan to continue to invest additional funds in technology improvements, sales and marketing, fraud and disputes, customer service, and regulatory compliance. From time to time, we evaluate raising capital to enable us to diversify into new market verticals. If we do not raise new capital, we believe that we will still be able to expand into new markets using internally generated funds.

 

The 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 direct disruption appears to have abated 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, and the economic repercussions are still manifesting themselves. 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. Additionally, labor shortages at plasma donation centers and restrictions preventing Mexican nationals with tourist visas from being compensated for donating plasma, have further impacted donations. Those developments have had an adverse impact on the Company’s historical results of operations. On September 16, 2022, the United States District Court issued a preliminary injunction preventing the United States Customs and Border Protection from continuing to enforce its ban on plasma donations by Mexican nationals. Since then, we have seen an increase in donation activity from Mexican nationals, primarily in our plasma donation centers along the U.S.-Mexico border. Additionally, inflationary pressures for food, gasoline, rent, and other products and services appear to be driving individuals back into the plasma donation centers based upon the increase we experienced in the number of loads per average donation center in the third quarter of 2022 as compared to all preceding quarters in 2022 and 2021. While we remain cautiously optimistic and have seen improvements in donation activity and our operating results on an aggregated basis, we cannot foresee what potential issues may impact our operating results as new COVID-19 variants continue to evolve. 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, 2022 and 2021

 

The following table summarizes our consolidated financial results:

 

   

Three Months Ended

September 30,

(Unaudited)

    Variance  
    2022     2021     $     %  
Revenues                        
Plasma industry   $ 9,829,811     $ 7,035,546     $ 2,794,265       39.7%  
Pharma industry     693,353       660,331       33,022       5.0%  
Other     73,264       71,312       1,952       2.7%  
Total revenues     10,596,428       7,767,189       2,829,239       36.4%  
Cost of revenues     4,847,780       3,797,919       1,049,861       27.6%  
Gross profit     5,748,648       3,969,270       1,779,378       44.8%  
Gross margin %     54.3%       51.1%                  
                                 
Operating expenses                                
Selling, general and administrative     4,386,757       3,618,071       768,686       21.2%  
Depreciation and amortization     738,883       628,324       110,559       17.6%  
Total operating expenses     5,125,640       4,246,395       879,245       20.7%  
Income (loss) from operations   $ 623,008     $ (277,125 )   $ 900,133       (324.8% )
                                 
Net income (loss)   $ 852,109     $ (271,006 )   $ 1,123,115       (414.4% )
Net margin %     8.0%       (3.5% )                

 

 

 

  17  

 

 

The increase in total revenues of $2,829,239 for the three months ended September 30, 2022 compared to the same period in the prior year consisted primarily of a $2,794,265 increase in Plasma revenue, a $33,022 increase in Pharma revenue, and a $1,952 increase in Other revenue. The increase in Plasma revenue was primarily due to an increase in the number of plasma centers and 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 launch of new Pharma copay programs offset by the end of a number of Pharma prepaid programs. The increase in Other revenue was primarily due to the launch of a new payroll program.

 

Cost of revenues for the three months ended September 30, 2022 increased $1,049,861 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 during the third quarter of 2022 primarily due to an increase in cardholder usage activity, an increase in plastics, collateral and postage, an increase in network expenses related to our Pharma copay business, a new direct network connection with Mastercard, and an increase in customer service expenses, offset by a decline in sales commissions related to the restructuring of an agreement in the first quarter of 2022.

 

Gross profit for the three months ended September 30, 2022 increased $1,779,378 compared to the same period in the prior year resulting from the increase in Plasma revenue, the restructuring of an agreement mentioned above, and the beneficial impact of a variable cost structure 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. The increase in gross profit was offset by an increase in network expenses related to our Pharma copay business, a new direct network connection with Mastercard, and an increase in customer service expenses relating to the overall growth of our business. The increase in gross margin resulted from the aforementioned factors.

 

Selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2022 increased $768,686 or 21.2% compared to the same period in the prior year and consisted primarily of an increase in compensation and benefits of approximately $537,000, due to continued hiring to support the company’s growth, a tight labor market and increased personnel insurance costs, and an increase in technologies and telecom of approximately $224,000.

 

Depreciation and amortization expense for the three months ended September 30, 2022 increased $110,559 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, and continued enhancements to our platform.

 

For the three months ended September 30, 2022, we recorded income from operations of $623,008 representing a net increase of $900,133 compared to the same period last year related to the aforementioned factors.

 

Other income for the three months ended September 30, 2022, increased $259,165 related to an increase in interest rates and the associated interest income received on higher bank account balances at our sponsor bank and lower interest expense related to the financing of insurance premiums.

 

We recorded an income tax expense of $36,183 for the three months ended September 30, 2022, which equates to an effective tax rate of 4.1% primarily as a result of the full valuation on our deferred tax asset in both the current and prior period and the tax benefit related to our stock-based compensation and a pretax loss in the prior period. We did not record an income tax expense for the three months ended September 30, 2021.

 

The net income for the three months ended September 30, 2022 was $852,109, an improvement of $1,123,115 compared to the net loss of $271,006 for the three months ended September 30, 2021. The overall change in net income relates to the aforementioned factors.

 

 

 

  18  

 

 

Nine Months Ended September 30, 2022 and 2021

 

The following table summarizes our consolidated financial results:

 

   

Nine Months Ended

September 30,

(Unaudited)

    Variance  
    2022     2021     $     %  
Revenues                        
Plasma industry   $ 25,030,376     $ 18,366,010     $ 6,664,366       36.3%  
Pharma industry     2,273,232       2,184,198       89,034       4.1%  
Other     112,235       147,699       (35,464 )     (24.0% )
Total revenues     27,415,843       20,697,907       6,717,936       32.5%  
Cost of revenues     11,971,135       10,744,264       1,226,871       11.4%  
Gross profit     15,444,708       9,953,643       5,491,065       55.2%  
Gross margin %     56.3%       48.1%                  
                                 
Operating expenses                                
Selling, general and administrative     13,283,645       10,957,619       2,326,026       21.2%  
Depreciation and amortization     2,131,234       1,838,354       292,880       15.9%  
Total operating expenses     15,414,879       12,795,973       2,618,906       20.5%  
Income (loss) from operations   $ 29,829     $ (2,842,330 )   $ 2,872,159       (101.0% )
                                 
Net income (loss)   $ 314,680     $ (2,826,500 )   $ 3,141,180       (111.1% )
Net margin %     1.1%       (13.7% )                

 

The increase in total revenues of $6,717,936 for the nine months ended September 30, 2022 compared to the same period in the prior year consisted primarily of a $6,664,366 increase in Plasma revenue and a $89,034 increase in Pharma revenue, offset by a $35,464 decrease in Other revenue. The increase in Plasma revenue was primarily due to an increase in the number of plasma centers and 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 launch of new Pharma copay programs offset by the end of a number of Pharma prepaid programs. The decrease in Other revenue was primarily driven by the recognition of settlement income from a rewards program that ended during the second quarter of 2021.

 

Cost of revenues for the nine months ended September 30, 2022 increased $1,226,871 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 during the nine months of 2022 primarily due to the increase in cardholder usage activity, an increase in plastics, collateral and postage related to the launch of new plasma donation centers that we service, an increase in network expenses related to our Pharma copay business, a new direct network connection with Mastercard, and an increase in customer service expenses, offset by a decline in sales commissions related to the restructuring of an agreement in the first quarter of 2022.

 

 

 

  19  

 

 

Gross profit for the nine months ended September 30, 2022 increased $5,491,065 compared to the same period in the prior year resulting from the increase in Plasma revenue, the restructuring of an agreement mentioned above, and the beneficial impact of a variable cost structure as many of the Plasma transaction costs are provided by third parties who charge us based on the number of transactions that occurred during the period, with a lower per-transaction cost at larger numbers of transactions. The increase in Gross profit was offset by the upfront costs associated with the launch of new plasma donation centers and an increase in customer service expenses relating to the overall growth of our business. The increase in gross margin resulted from the aforementioned factors.

 

SG&A for the nine months ended September 30, 2022 increased $2,326,026 or 21.2% compared to the same period in the prior year and consisted primarily of an increase in compensation and benefits of $1,650,000, due to continued hiring to support the company’s growth, a tight labor market and increased personnel insurance costs, an increase in travel and entertainment of $149,000, and an increase in other operating expenses of $478,000.

 

Depreciation and amortization expense for the nine months ended September 30, 2022 increased $292,880 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 and continued enhancements to our platform.

 

For the nine months ended September 30, 2022, we recorded income from operations of $29,829 representing a net increase of $2,872,159 compared to the same period last year related to the aforementioned factors.

 

Other income for the nine months ended September 30, 2022 increased $331,617 related to an increase in interest rates and the associated interest income received on higher bank account balances at our sponsor bank and lower interest expense related to the financing of insurance premiums.

 

We recorded an income tax expense of $64,996 for the nine months ended September 30, 2022, which equates to an effective tax rate of 17.1% primarily as a result of the full valuation on our deferred tax asset in both the current and prior period and the tax benefit related to our stock-based compensation and a pretax loss in the prior period. We recorded an income tax expense of $2,400 for the nine months ended September 30, 2021 due to estimated state tax payments.

 

The net income for the nine months ended September 30, 2022 was $314,680, an improvement of $3,141,180 compared to the net loss of $2,826,500 for the nine months ended September 30, 2021. The overall change in net income 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 $462 million and $293 million for the three months ended September 30, 2022 and 2021, respectively. That gross dollar volume was $1,161 million and $839 million for the nine months ended September 30, 2022 and 2021, respectively. We use this metric to analyze the total amount of money moving into our prepaid card programs.

 

 

 

  20  

 

 

Conversion Rates on Gross Dollar Volume Loaded on Cards – Equals revenues, gross profit or 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, 2022 and 2021 were 2.29% or 229 basis points (“bps”), and 2.65% or 265 bps, respectively, of gross dollar volume loaded on cards. Our total gross profit conversion rates for the three months ended September 30, 2022 and 2021 were 1.24% or 124 bps, and 1.35% or 135 bps, respectively, of gross dollar volume loaded on cards. Our net income conversion rates for the three months ended September 30, 2022 and 2021 were 0.18% or 18 bps, and (0.09)% or (9) bps, respectively, of gross dollar volume loaded on cards. Our total revenue conversion rates for the nine months ended September 30, 2022 and 2021 were 2.36% or 236 bps, and 2.47% or 247 bps, respectively, of gross dollar volume loaded on cards. Our total gross profit conversion rates for the nine months ended September 30, 2022 and 2021 were 1.33% or 133 bps, and 1.19% or 119 bps, respectively, of gross dollar volume loaded on cards. Our net income conversion rates for the nine months ended September 30, 2022 and 2021 were 0.03% or 3 bps, and (0.34)% or (34) 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. A reconciliation of net income (loss) to Adjusted EBITDA is provided in the table below.

  

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2022     2021     2022     2021  
Reconciliation of Adjusted EBITDA to net income (loss):                        
Net income (loss)   $ 852,109     $ (271,006 )   $ 314,680     $ (2,826,500 )
Income tax provision     36,183             64,996       2,400  
Interest income, net     (265,284 )     (6,119 )     (349,847 )     (18,230 )
Depreciation and amortization     738,883       628,324       2,131,234       1,838,354  
EBITDA     1,361,891       351,199       2,161,063       (1,003,976 )
Stock-based compensation     566,205       603,591       1,623,994       1,780,726  
Adjusted EBITDA   $ 1,928,096     $ 954,790     $ 3,785,057     $ 776,750  

 

 

 

  21  

 

 

Liquidity and Capital Resources

 

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

 

   

Nine Months Ended September 30,

(Unaudited)

 
    2022     2021  
Net cash provided by operating activities   $ 30,954,307     $ 16,031,596  
Net cash used in investing activities     (2,584,009 )     (1,966,681 )
Net cash provided by financing activities           192,141  
Net increase in cash and restricted cash   $ 28,370,298     $ 14,257,056  

  

Comparison of Nine Months Ended September 30, 2022 and 2021

 

During the nine months ended September 30, 2022 and 2021, we financed our operations through internally generated funds.

 

Cash provided by operating activities increased $14,922,711 for the nine months ended September 30, 2022, as compared to the same period in the prior year. The increase in cash flow is primarily due to an improvement in net income from operations of $3,141,180, increased customer card funding of $12,615,961 related to growth in our existing businesses and launch of new plasma and pharma programs, increased amount of depreciation and amortization of $292,880, and favorable collections in accounts receivable of $386,537. Offsetting positive cash flow was a decrease in stock-based compensation of $156,732, accounts payable and accrued liabilities of $344,249 primarily associated with the timing of payments due to third-party service providers, other receivables of $420,033 related to employee retention credits posted in the current period, and an increase of $543,194 in prepaid expenses and other current assets related to inventory for new plasma donation centers, software licenses, and insurance.

 

Cash used in investing activities increased $617,328 for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The change between periods was primarily attributed to an increase in the capitalization of internally developed software as we continue to invest in our technology platform.

 

Cash provided by financing activities was zero for the nine months ended September 30, 2022 as compared to cash provided by financing activities of $192,141 for the nine months ended September 30, 2021. Cash provided by financing activities in the 2021 period consisted of cash received from the exercise of employee stock options totaling $192,141.

  

Sources of Liquidity

 

We believe that our available cash on hand, excluding restricted cash, at September 30, 2022 of $7,981,953, along with our forecast for revenues and cash flows for the remainder of the year and for 2023, 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.

 

 

 

  22  

 

 

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, 2021.

 

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, 2022. 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, 2022, 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, 2022, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

  

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 two stockholder derivative actions in the United States District Court for the District of Nevada. The first derivative action is entitled Andrzej Toczek, derivatively on behalf of Paysign, Inc. v. Mark R. Newcomer, et al. and was 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 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. The second derivative action is entitled John K. Gray, derivatively on behalf of Paysign, Inc. v. Mark Attinger, et al. and was filed on May  9, 2022. This action involves the same alleged conduct raised in the Toczek action and asserts claims for breach of fiduciary duty in connection with financial reporting, breach of fiduciary duty in connection with alleged insider trading against certain individual defendants, and unjust enrichment. On June 3, 2022, 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.

 

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

 

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

 

During the quarter ended September 30, 2022, we issued, pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, a total of 138,000 shares of common stock for restricted stock awards previously earned and vested to certain directors, consultants and employees.

 

 

 

  24  

 

 

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).

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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 9, 2022 /s/ Mark Newcomer
 

By: Mark Newcomer, Chief Executive Officer

(principal executive officer)

   
   
Date: November 9, 2022 /s/ Jeff Baker
 

By: Jeff Baker, Chief Financial Officer

(principal financial and accounting officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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