Paysign, Inc. Q3 FY2020 Earnings Call

Hello and welcome to the PaySign 2020 Third Quarter Earnings Conference Call. This presentation may include forward-looking statements. To the extent that the information presented in this presentation discusses financial projections, information or expectations about the company’s business plans, results of operations, the impact of COVID-19, returns on equity, expected gross margins, markets or otherwise makes statements about future events. Such statements are forward-looking. Such forward-looking statements can be identified by the use of words, such as should, may, intends, anticipates, believes, estimates, projects, forecasts, expects, plans and proposals. Although the company believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could actually cause actual results to differ materially from such forward-looking statements. You are urged to carefully review and consider any cautionary statement and other disclosures, including the statements made under the heading Risk Factors and elsewhere in the Form 10-Q. Forward-looking statements speak only as of the date of the document in which they are contained and the company does not undertake any duty to update any forward-looking statements except as may be required by law. This presentation also includes adjusted EBITDA, a non-GAAP financial measure, which is not prepared in accordance with nor an alternative to financial measures prepared in accordance with U.S. Generally Accepted Accounting Principles, GAAP. In addition, adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies. It’s now my pleasure to turn the call over to Mark Newcomer. Please go ahead.

Thank you, Kevin. Good afternoon everyone, and thank you for joining us for PaySign’s third quarter 2020 earnings call. I am Mark Newcomer, President and Chief Executive Officer. Also on the call with me today is Mark Attinger, our Chief Financial Officer. We hope all of you and your families are staying safe during the COVID-19 pandemic. We continue to focus on ensuring the health and safety of our employees while supporting our clients and cardholders and staying committed to the long-term success of PaySign. The COVID-19 outbreak has had and will continue to have an adverse effect on the company’s results of operations. Given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, management cannot reasonably estimate the impact of the company’s future results of operations, cash flows, or financial conditions. Although we might be disappointed with the quarter’s financial results, the company did have significant wins in pharma, plasma, as well as in new business lines. We have integrated with a mid-sized hub provider and are completing integration with a Fortune 500 health company, paving the way for additional patient affordability and clinical research solution programs. We have three new co-pay programs that will launch in December. We are executing extremely well in the pharma space, concentrating our commercial strategy on client satisfaction through a consultative approach. Based on performance and client satisfaction, we have recently expanded the small to mid-sized voucher program fivefold. We are confident with our product offerings, management, sales, and operational teams, which will lead to bigger wins in 2021. 26 of the 49 centers that were to be completed in October are now going to be completed in December due to client delays. The implementation process of these centers has begun, and we will conclude the go-live of all 49 plasma and blood collection centers previously mentioned in December. We have 304 donation centers at the end of Q3, up from 290 in Q2. Subsequently, we have gone live with six additional centers and have three more centers ready for implementation. This along with the aforementioned 26 brings the total number of centers to 339. Looking ahead, we are expecting to see an increase in new center openings from our plasma clients over the next 18 months to 24 months. We continue to see higher donation dollar amounts resulting from increased donor incentives and collection of COVID-19 plasma. Our pipeline remains robust in the plasma space. This quarter, we also launched a new product line, the PaySign business expense card. We have signed two new clients, which are currently in the implementation phase, and expect it to go live later this year and the first quarter of 2021. This product is targeted to small and medium-sized businesses, including sole proprietors who are self-employed, as an efficient way for management to stay in control while giving their employees or contractors the ability to pay for business-related expenses. At this time, I would like to turn it over to our CFO, Mark Attinger, who will discuss our third quarter results in detail.

Thank you, Mark. Good afternoon or evening. At this time, I will take us through the third quarter results and provide some variance commentary. As I proceed, references to year-on-year changes in dollars or percent or comparisons to 2019 unless stated otherwise, refer to Q3 2020 as compared to Q3 2019. Revenue for the quarter ended September 30, 2020, was a negative $0.2 million, a decrease of $9.2 million compared to the prior year of $9.0 million. Plasma revenue consisted of $5.2 million, a decrease of 25% compared to quarter three 2019 and an increase of 13% compared to the quarter two 2020. Pharma revenue was a negative $5.4 million. Both industries were impacted by the novel coronavirus and the incidence of the related disease COVID-19. The pharma revenue decrease included a $6.3 million adjustment for a change in accounting estimate in the third quarter related to our recognition of settlement income based on substantially different performance indicators observed, trends regarding program management, and new information available in dollar loads and spending patterns, all of which were different than our historical experience. This change in accounting estimate resulted in the company constraining revenue in accordance with ASC 606 by changing its estimate of breakage to the remote method of revenue recognition for settlement income whereby the unspent balances will be recognized as revenue at the expiration of the cards in the respective program. This has resulted in the reversal of all previously recognized settlement income for current pharma programs. Revenue, excluding this change in accounting estimate, in quarter three was $6.1 million, a 4.7% decrease from the prior quarter, primarily resulting from the lower settlement income offset by a 13% quarter-on-quarter increase in plasma. Revenue for October was approximately $2.3 million. Cost of revenues were $3.3 million and decreased 10% or $360,000 versus the year-ago period. The decrease was primarily due to the decrease in transactions offset by an unfavorable rate variance resulting from a decrease in higher margin revenue business. Gross profit for the three months ended September 30, 2020 decreased $8.8 million to a negative $3.4 million due to the reduction in revenue and the disproportionate decrease in cost of sales. Total operating expenses were $5.0 million, an increase of 62% compared to 2019 or a 40% increase excluding charges in the quarter of $659,000 for intangible impairment and legal fees pertaining to mergers and acquisitions activity. The remaining increase was primarily related to an increase in staffing and compensation, professional fees, stock-based compensation, technologies and telecom, depreciation, amortization, and rent costs slightly offset by a decrease in travel. Additional granularity can be reviewed in the 10-Q MD&A section. PaySign’s net income for the quarter was a net loss of $6.2 million, or a negative $0.12 per basic share compared to a net income of $3.0 million or $0.06 per basic share in the same period the prior year. Diluted EPS was also a negative $0.12 compared to $0.05. Non-GAAP adjusted EBITDA for the quarter was a negative $6.7 million or a negative $0.14 per basic share compared to $3.3 million or $0.07 per basic share the prior year. The nine-month adjusted EBITDA was a negative $3.6 million or a negative $0.07 per basic share compared to $7.6 million or $0.16 per basic share in the same nine-month period the prior year. Our gross dollar volume loaded to cards was $212 million versus $210 million, up 1.2% versus the prior year, and up 16.3% compared to $183 million the prior quarter. From a balance sheet perspective, consolidated cash of $55.5 million including restricted cash has increased $9.9 million or 22% compared to the $45.6 million at year-end 2019. Unrestricted cash was $7.5 million compared to $7.6 million at the end of quarter two. Working capital ending quarter three 2020 was $7.3 million compared to $13.6 million at year-end 2019, impacted by the change to the card funding liability resulting from the settlement income change in quarter three. Our liquidity, as measured by an adjusted current ratio, excluding restricted cash and the card funding liability, was 4.3x coverage compared to 7.9x coverage at year-end 2019. We remain with no debt on the balance sheet and are adequately capitalized for the coming 12 months. At this time, I will turn it back over to our moderator, Kevin, to begin the question-and-answer session. Thank you.

Thank you. Our first question today is coming from Austin Moldow from Canaccord Genuity. Your line is now live.

Thanks for taking my questions. On the pharma adjustment, in addition to changing the accounting to recognize revenue at card expiration, does the comment you made on changes in performance indicators mean programs are managing around spend revenue more efficiently now?

Yes, that’s correct, Austin. Sorry, I was on mute.

Okay. How should we factor that into our estimates going forward? Is this something that all of the different programs have made a meaningful change toward or is it just one or two large ones and what do you think sort of triggered the recent change?

So I would refer to the statements that essentially the evaluation of the performance indicators and the revenue trends were substantially different than our experience, and that data came about in the third quarter. By definition, if the ending unspent balances are less predictable according to ASC 606, you must constrain revenue fully by moving to the remote method of accounting versus the ratable method.

Okay, got it. Does adding back that $6.3 million adjustment get us to close to a pharma revenue number comparable to historical periods?

That would be correct. So, I think I mentioned during the call that prior to that adjustment, revenue would be approximately $6.1 million, which would be down 4.7% in the quarter compared to the prior quarter. That’s lower settlement income as well as higher, partially offset by higher plasma business. But I caution you a little because we have moved to the remote method, which means we don’t have the predictability of the unspent balances, requiring that we constrain the revenues fully to comply with regulations.

Okay. On the revenue conversion rates, any commentary you can provide on the like-for-like changes in each of the segments?

Yes, I apologize, Austin. I do not have the segment breakout on the revenue conversion rates handy with me, but we can do some offline detail into that category further. I did not segment that out for this call, and I probably should have.

Okay. And then my last question is on plasma, what have you seen industry-wide for plasma volume trend year-over-year or maybe sequentially from last quarter?

So the industry as a whole is still down, but what we’ve seen is the year-on-year comparison is improving. When we compare ourselves now in July, August, September, and even October to the prior year, the comparison is improving, although it's still down approximately 20% in the most recent month compared to the prior year. For the quarter, plasma is down by 25% on revenue, but in the most recent month, it’s continuing to get better relative to the prior year.

Okay, understood. Thanks for taking my questions.

Thank you. Our next question is coming from Peter Heckmann from D.A. Davidson. Your line is now live.

Good afternoon, everyone. In terms of how you will think about pharma revenue going forward, for those campaigns that required estimates for revenue recognition, should we expect to see a large amount of revenue recognized in the fourth quarter for annual programs that have started, or are there other campaigns with different start and stop times?

So the latter, Pete. We have programs ending in the first quarter, in the second quarter, and at the end of 2022 and in different months as well. The programs were secured at different points in time and they typically have a two-year life, meaning the revenue will be recognized when those programs end.

Got it. Can you talk about how many pharma campaigns you had at the end of the quarter and then talk a little bit about some of the physician affordability and clinical research opportunities that you mentioned recently?

Sure. At the end of September, we actually finished with a total of 11 pharma programs; and of those 11 three are in the co-pay space, while the other eight will be recognized at the end of those programs. Recently, we have successfully signed three additional co-pay programs preparing to go live, which were signed in October. Mark, do you want to add to that?

Nothing more than that they are expected to go live before the end of the year. And obviously, we have the business expense card product line, which is commercial and that’s going to help us increase our interchange revenue as well.

Okay, okay. So just to define the nomenclature, when you say co-pay, that’s the type of campaign where you are going to pay more on a fixed-rate basis without uncertainty about how much cash would be left on the cards at the end?

Yes, it’s more transactional in nature, more transactional in nature versus settlement income. Those programs that have settlement income still have monthly management fees, load fees, and earn interchange, so they're still profitable programs but recognized at the end.

Got it, got it. One last question before I get in the queue. In terms of the other programs, I think you had said at the end of the second quarter that you had something like six. Where would you have been at the end of September, and have you signed any additional business T&E type programs since that time?

At the end of September, just to be clear, we had 304 plasma programs, which included 14 new pharma plasma programs in the quarter. Additionally, we had 11 pharma, and there were seven others, up from four. That means at the end of September we had a total of 324 programs. Plasma should end the year with 339, and after the end of September we signed three additional programs in pharma, bringing the total to 14. We also have a robust pipeline of other new programs. Based on our current knowledge, without securing any new business, we expect to increase from 324 programs in September to 365 programs in December. You bet.

Thank you. Our next question is coming from Michael Diana from Maxim Group. Your line is now live.

Okay, hey, Mark Attinger. I think you said in October your revenues were $2.3 million; is that using the new method of recognition or the old?

That is the new method of recognition, and we will only talk new going forward. All results that are GAAP and reflected in the Q and in the press release are entirely GAAP with the exception of the adjusted EBITDA table in the very back exhibit of that press release.

Okay, great. And then 2Q?

$2.3 million is for the new method.

You are welcome.

Thank you. Our next question is coming from Jon Hickman from Ladenburg Thalmann. Your line is now live.

This is Graham Hickman actually on for Jon. How much variability, as you are talking about this evolution in 324 programs up to 365, can you give us a sense? Is there a lot of variability in contract or program size, or can you put some range around that for us? Secondly, kind of following up to an earlier question, it seems like this new revenue recognition method makes the business a bit more difficult to forecast. What would need to change, or when might you feel comfortable giving some sort of guidance again? Thank you.

Yes, those are both really good questions, Graham. First of all, there is quite a bit of variability between a new deal that is secured. Not so much on the plasma side, we have a much better read on those; given the number of centers, they tend to be a little bit closer in size. When you look at the non-plasma business and particularly the corporate incentive programs like the business card program, they vary quite a bit in size and could be real contributors in 2021 to where we are headed. It would be very difficult on a call like this for us to provide too much visibility due to the uncertainty of how those will perform. And then regarding your second question, remember that the programs historically with settlement income are of differing sizes and have expiration dates. As we work on new business on the pharma side, the team is finding tremendous success in new programs priced differently, and where our earnings are coming from various revenue streams. We see that revenues will be more predictable than they have been; however, the bigger challenge is the uncertainty around COVID-19, affecting PaySign business and the Plasma business. That’s more challenging than projecting based on our current pipeline.

Unfortunately, on to Mark’s point, we don’t have a crystal ball, which makes it difficult for us. We look towards the future very much hoping that the vaccine comes out in a timely manner, which will help. It’s something we continue to monitor, but it’s hard to pinpoint what’s going to happen.

Right. Okay, thanks. I will jump back in.

Thank you. Our next question is a follow-up from Peter Heckmann from D.A. Davidson. Your line is now live.

Does management have any thoughts on the sale of Wirecard North America? Any early impressions of the buyer and whether or not that improves or doesn’t improve your competitive position in the U.S. in terms of potential for gaining market share?

I believe it does. I believe North Lane and Syncapay have a unique approach to the market. It does – I’m not sure plasma is in their wheelhouse. The Wirecard division has continuously gone after that set. We will find ourselves competing harder and harder for additional business opportunities. The conclusion of who the buyer is and that transaction resulted in us securing those 25 centers, allowing the industry to process what was happening with Wirecard.

That said, I’m not convinced that there are no other clients out there that might be looking to make a transition, and therefore, we continue to engage with stakeholders in the marketplace.

Got it. To put a finer point on the pharma $6.3 million revenue reversal, would you still expect to recognize the majority of that amount as all of the existing settlement income campaigns are completed, or has the estimate found that the amount to be recognized will be significantly lower?

We don’t have visibility on that, which is why we constrained the revenues and reverted the methodology. I wouldn’t want to speculate. We will certainly have settlement income.

Thank you. We reach the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Thanks, Kevin. Again, although our business continues to be adversely impacted by the effect of the COVID-19 pandemic, we continue to invest in our company so we can resume our long-term growth trajectory in 2021 and beyond. Thank you for your continued interest, your questions, and your participation in this earnings call. Stay safe and have a nice evening. Thank you.

Thank you. That does conclude today’s teleconference webinar. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.