Paysign, Inc 10-Q for FY2021 Q1
Paysign, Inc. (PAYS)
About this 10-Q
Paysign, Inc filed this 10-Q on May 12, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6.28M
- down 40.6% from $10.58M a year earlier
- Net loss
- $1.62M
- compared with net income of $1.54M a year earlier
- Diluted EPS
- -$0.03
- compared with $0.03 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 001-38623
PAYSIGN, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 95-4550154 |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
2615 St. Rose Parkway,
Henderson, Nevada 89052
(Address of principal executive offices)
(702) 453-2221
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | PAYS |
The Nasdaq Stock Market LLC (The Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 x No o
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 o | Accelerated filer o |
| Non-accelerated filer x | Smaller reporting company x |
| Emerging growth company x |
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 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 50,786,932 shares as of May 7, 2021.
PAYSIGN, INC.
FORM 10-Q REPORT
| i |
PAYSIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, (Unaudited) | December 31, (Audited) | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 6,559,678 | $ | 7,829,453 | ||||
| Restricted cash | 58,773,488 | 48,100,951 | ||||||
| Accounts receivable | 635,576 | 654,859 | ||||||
| Prepaid expenses and other current assets | 1,947,984 | 1,375,364 | ||||||
| Total current assets | 67,916,726 | 57,960,627 | ||||||
| Fixed assets, net | 1,841,910 | 1,849,164 | ||||||
| Intangible assets, net | 3,722,642 | 3,699,033 | ||||||
| Operating lease right-of-use asset | 4,218,978 | 4,324,682 | ||||||
| Total assets | $ | 77,700,256 | $ | 67,833,506 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 2,311,685 | $ | 2,162,256 | ||||
| Operating lease, current portion | 325,470 | 320,636 | ||||||
| Customer card funding | 58,773,488 | 48,100,951 | ||||||
| Total current liabilities | 61,410,643 | 50,583,843 | ||||||
| Operating lease liability, long term portion | 3,930,395 | 4,013,598 | ||||||
| Total liabilities | 65,341,038 | 54,597,441 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock: $0.001 par value; 25,000,000 shares authorized; none issued and outstanding | – | – | ||||||
| Common stock; $0.001 par value; 150,000,000 shares authorized, 50,750,882 and 50,251,607 issued at March 31, 2021 and December 31, 2020, respectively | 50,751 | 50,252 | ||||||
| Additional paid-in capital | 15,135,071 | 14,388,890 | ||||||
| Treasury stock at cost, 303,450 shares | (150,000 | ) | (150,000 | ) | ||||
| Retained earnings (accumulated deficit) | (2,676,604 | ) | (1,053,077 | ) | ||||
| Total stockholders' equity | 12,359,218 | 13,236,065 | ||||||
| Total liabilities and stockholders' equity | $ | 77,700,256 | $ | 67,833,506 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 1 |
PAYSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | ||||||||
| Plasma industry | $ | 5,383,151 | $ | 7,343,410 | ||||
| Pharma industry | 882,830 | 3,020,377 | ||||||
| Other | 13,447 | 212,686 | ||||||
| Total revenues | 6,279,428 | 10,576,473 | ||||||
| Cost of revenues | 3,447,622 | 4,855,520 | ||||||
| Gross profit | 2,831,806 | 5,720,953 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative | 3,864,986 | 3,827,324 | ||||||
| Depreciation and amortization | 595,848 | 502,376 | ||||||
| Total operating expenses | 4,460,834 | 4,329,700 | ||||||
| Income (loss) from operations | (1,629,028 | ) | 1,391,253 | |||||
| Other income | ||||||||
| Interest income | 7,101 | 62,161 | ||||||
| Income (loss) before income tax provision (benefit) | (1,621,927 | ) | 1,453,414 | |||||
| Income tax provision (benefit) | 1,600 | (87,551 | ) | |||||
| Net income (loss) | $ | (1,623,527 | ) | $ | 1,540,965 | |||
| Net income (loss) per share | ||||||||
| Basic | $ | (0.03 | ) | $ | 0.03 | |||
| Diluted | $ | (0.03 | ) | $ | 0.03 | |||
| Weighted average common shares | ||||||||
| Basic | 50,351,971 | 48,713,163 | ||||||
| Diluted | 50,351,971 | 54,688,066 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 2 |
PAYSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| 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 | |||||||||||
| Issuance of stock for previously vested stock-based compensation | 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 | |||||||||||
| Stockholders' Equity Attributable to Paysign, Inc. | ||||||||||||||||||||||||||||
| Additional | Treasury | Non- | Total | |||||||||||||||||||||||||
| Common Stock | Paid-in | Stock | Retained | controlling | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Amount | Earnings | Interest | Equity | ||||||||||||||||||||||
| Balance, December 31, 2019 | 48,577,712 | $ | 48,578 | $ | 11,577,539 | $ | (150,000 | ) | $ | 8,088,485 | $ | (263,087 | ) | $ | 19,301,515 | |||||||||||||
| Issuance of stock for previously vested stock-based compensation | 428,558 | 428 | (428 | ) | – | – | – | – | ||||||||||||||||||||
| Exercise of stock options | 10,000 | 10 | 23,990 | – | – | – | 24,000 | |||||||||||||||||||||
| Stock-based compensation | – | – | 724,183 | – | – | – | 724,183 | |||||||||||||||||||||
| Dissolution of Paysign, Ltd. Subsidiary | – | – | (263,087 | ) | – | – | 263,087 | – | ||||||||||||||||||||
| Net income | – | – | – | – | 1,540,965 | – | 1,540,965 | |||||||||||||||||||||
| Balance, March 31, 2020 | 49,016,270 | $ | 49,016 | $ | 12,062,197 | $ | (150,000 | ) | $ | 9,629,450 | $ | – | $ | 21,590,663 | ||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 3 |
PAYSIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (1,623,527 | ) | $ | 1,540,965 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 595,848 | 502,376 | ||||||
| Stock-based compensation expense | 636,214 | 724,183 | ||||||
| Amortization of lease right-of-use asset | 177,465 | – | ||||||
| Deferred income taxes | – | (75,902 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 19,283 | (19,661 | ) | |||||
| Prepaid expenses and other current assets | (572,620 | ) | 32,525 | |||||
| Accounts payable and accrued liabilities | 142,291 | 475,442 | ||||||
| Operating lease | (142,992 | ) | – | |||||
| Customer card funding | 10,672,537 | 7,569,104 | ||||||
| Net cash provided by operating activities | 9,904,499 | 10,749,032 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | (124,696 | ) | (953,894 | ) | ||||
| Capitalization of internally developed software | (473,996 | ) | (485,102 | ) | ||||
| Purchase of intangible assets | (13,511 | ) | (57,127 | ) | ||||
| Net cash used in investing activities | (612,203 | ) | (1,496,123 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of stock options | 110,466 | 24,000 | ||||||
| Net cash provided by financing activities | 110,466 | 24,000 | ||||||
| Net change in cash and restricted cash | 9,402,762 | 9,276,909 | ||||||
| Cash and restricted cash, beginning of period | 55,930,404 | 45,572,305 | ||||||
| Cash and restricted cash, end of period | $ | 65,333,166 | $ | 54,849,214 | ||||
| Cash and restricted cash reconciliation: | ||||||||
| Cash | $ | 6,559,678 | $ | 9,424,385 | ||||
| Restricted cash | 58,773,488 | 45,424,829 | ||||||
| Total cash and restricted cash | $ | 65,333,166 | $ | 54,849,214 | ||||
| Supplemental cash flow information: | ||||||||
| Dissolution of noncontrolling interest | $ | – | $ | 263,087 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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PAYSIGN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT POLICIES
The foregoing unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the disclosures required by GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included on Form 10-K for the year ended December 31, 2020. In the opinion of management, the unaudited interim condensed consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.
The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material effect on the reported amounts of the Company’s financial position and results of operations.
Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Impact of COVID-19 Pandemic
The outbreak of a novel coronavirus and the incidence of the related disease (COVID-19) starting in late 2019 has continued, spreading throughout the United States and much of the world beginning in the first quarter of 2020. In March 2020, the World Health Organization declared the outbreak as a pandemic. While the disruption is currently expected to be temporary, there is uncertainty around the duration. The COVID-19 outbreak and the new stimulus packages signed into law during 2020 and 2021 have had and will continue to have an adverse effect on the Company's results of operations. Given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, management cannot reasonably estimate the impact to the Company's future results of operations, cash flows, or financial condition.
About Paysign, Inc.
Paysign, Inc. (the “Company,” “Paysign,” or “we,” formerly known as 3PEA International, Inc.) is a vertically integrated provider of prepaid card products and processing services for corporate, consumer and government applications. Our payment solutions are utilized by our corporate customers as a means to increase customer loyalty, increase patient adherence rates, reduce administration costs and streamline operations. Public sector organizations can utilize our payment solutions to disburse public benefits or for internal payments. The Company markets prepaid card solutions under our Paysign® brand. As we are a payment processor and prepaid card program manager, we derive revenue from all stages of the prepaid card lifecycle.
We provide a card processing platform consisting of proprietary systems and software applications based on the unique needs of our programs. We have extended our processing business capabilities through our proprietary Paysign platform. Through the Paysign platform, we provide a variety of services including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service. We design and process prepaid programs that run on the platform through which customers can define the services they wish to offer cardholders.
| 5 |
The Paysign brand offers prepaid card solutions or “card products” for corporate incentive and rewards including, but not limited to rebates and rewards, donor compensation, clinical trials, healthcare reimbursement payments and pharmaceutical payment assistance. We have expanded our product offerings to include additional corporate incentive products and demand deposit accounts accessible with a debit card. We plan to further expand our product offerings into other prepaid card products such as payroll cards, travel cards, and expense reimbursement cards. Our cards are sponsored by our issuing bank partners.
Our proprietary Paysign platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform’s flexibility and ease of customization has allowed us to expand our operational capabilities by facilitating our entry into new markets within the prepaid payments space. The Paysign platform delivers cost benefits and revenue building opportunities to our partners.
We manage all aspects of the prepaid card lifecycle, from managing the card design and approval processes with partners and networks, to production, packaging, distribution, and personalization. We oversee inventory and security controls, renewals, lost and stolen card management and replacement. We deploy a fully staffed, in-house customer service department which utilizes bilingual customer service agents, Interactive Voice Response (IVR), and two-way short message service (SMS) messaging and text alerts.
Principles of Consolidation – The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates – The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (iii) the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Restricted Cash – At March 31, 2021 and December 31, 2020, restricted cash consisted of funds held specifically for our card product programs that are contractually restricted to use. The Company includes changes in restricted cash balances with cash and cash equivalents when reconciling the beginning and ending total amounts in our condensed consolidated statements of cash flows.
Fixed Assets – Fixed assets are stated at cost less accumulated depreciation. Depreciation is principally recorded on the straight-line method over the estimated useful life of the asset, which is generally 3 to 10 years. The cost of repairs and maintenance is charged to expense as incurred. Leasehold improvements are capitalized and depreciated over the shorter of the remaining lease term or the estimated useful life of the improvements. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Intangible Assets – For intangible assets, we recognize an impairment loss if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.
Intangible assets with a finite life is amortized on a straight-line basis over its estimated useful life.
| 6 |
Internally Developed Software Costs - Computer software development costs are expensed as incurred, except for internal use software or website development costs that qualify for capitalization as described below, and include compensation and related expenses, costs of hardware and software, and costs incurred in developing features and functionality.
For computer software developed or obtained for internal use, costs that are incurred in the preliminary project and post implementation stages of software development are expensed as incurred. Costs incurred during the application and development stage are capitalized. Capitalized costs are amortized using the straight-line method over a 3 to 5 year estimated useful life, beginning in the period in which the software is available for use.
Earnings Per Share – Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period, using the treasury stock method. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.
Revenue and Expense Recognition – In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606), guidance on recognizing revenue from contracts with customers. The guidance outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the model is that an entity recognizes revenue to portray the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also expands disclosure requirements regarding revenue recognition. We adopted this guidance as of January 1, 2018 using the modified retrospective transition method. The adoption of the guidance did not have a material impact on our financial condition and results of operations. The standard also requires new, expanded disclosures regarding revenue recognition.
The Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of contracts with customers; (ii) determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company generates revenues from Plasma card programs through fees generated from cardholder fees and interchange fees. Revenues from Pharma card programs are generated through card program management fees, interchange fees, and settlement income.
Plasma and Pharma card program revenues include both fixed and variable components. Our cardholder fees represent an obligation to the cardholder based on a per transaction basis and recognized at a point in time when the performance obligation is fulfilled. Card program management fees include an obligation to our card program sponsors and are generally recognized when earned on a monthly basis pursuant to the contract terms which are generally multi-year contracts. Interchange fees are earned when customer-issued cards are processed through card payment networks as the nature of our promise to the customer is that we stand ready to process transactions at the customer’s requests on a daily basis over the contract term. Since the timing and quantity of transactions to be processed by us is not determinable, we view interchange fees to comprise an obligation to stand ready to process as many transactions as the customer requests. Accordingly, the promise to stand ready is accounted for as a single series performance obligation. The company uses the right to invoice practical expedient and recognizes revenue concurrent with the processing of card transactions.
Prior to September 30, 2020, settlement income from Pharma programs was recognized and recorded, after giving consideration to any revenue constraints, ratably throughout the program lifecycle based on the Company’s estimate of the unspent balances to be remaining on the card at program expiration. During 2020, the Company observed substantially different performance indicators, current trends in the industry regarding program management by third parties, and new information available in dollar loads and spending patterns compared to historical experience. As a result, the Company changed its estimate of breakage for recognizing settlement income for Pharma programs resulting in the Company constraining revenue on all Pharma programs in accordance with applicable accounting guidance. Based on the change in facts and circumstances during 2020, the Company now utilizes the remote method of revenue recognition for settlement income whereby the unspent balances will be recognized as revenue at the expiration of the cards and the respective program. The Company records all revenue on a gross basis since it is the primary obligor and establishes the price in the contract arrangement with its customers. The Company is currently under no obligation for refunding any fees, and the Company does not currently have any obligations for disputed claim settlements. Given the nature of the Company’s services and contracts, it has no contract assets.
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Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production and postage costs, customer service, program management, application integration setup, and sales and commission expense.
Operating leases – The Company determines if a contract is or contains a leasing element at contract inception or the date in which a modification of an existing contract occurs. In order for a contract to be considered a lease, the contract must transfer the right to control the use of an identified asset for a period of time in exchange for consideration. Control is determined to have occurred if the lessee has the right to (i) obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use and (ii) direct the use of the identified asset.
In determining the present value of lease payments at lease commencement date, the Company utilizes its incremental borrowing rate based on the information available, unless the rate implicit in the lease is readily determinable. The liability for operating leases is based on the present value of future lease payments. Operating lease expenses are recorded as rent expense, which is included within selling, general and administrative expenses within the consolidated statements of operations and presented as operating cash outflows within the consolidated statements of cash flows.
Stock-Based Compensation – The Company recognizes compensation expense for all restricted stock and stock option awards. The fair value of restricted stock is measured using the grant date trading price of our stock. The fair value of stock option awards is estimated at the grant date using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. We have elected to recognize compensation expense for all options with graded vesting on a straight-line basis over the vesting period of the entire option. The determination of fair value using the Black-Scholes pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility and the risk-free interest rate.
New Accounting Pronouncements – In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which intends to simplify the guidance by removing certain exceptions to the general principles and clarifying or amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted this new standard on January 1, 2021 and there was no material impact on its condensed consolidated financial statements.
2. FIXED ASSETS, NET
Fixed assets consist of the following:
| March 31, 2021 | December 31, 2020 | |||||||
| Equipment | $ | 1,981,603 | $ | 1,888,640 | ||||
| Software | 200,282 | 200,282 | ||||||
| Furniture and fixtures | 757,662 | 752,212 | ||||||
| Website costs | 67,816 | 67,816 | ||||||
| Leasehold improvements | 229,772 | 203,488 | ||||||
| 3,237,135 | 3,112,438 | |||||||
| Less: accumulated depreciation | 1,395,225 | 1,263,274 | ||||||
| Fixed assets, net | $ | 1,841,910 | $ | 1,849,164 | ||||
Depreciation expense for the three months ended March 31, 2021 and 2020 was $131,950 and $92,328, respectively.
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3. INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
| March 31, 2021 | December 31, 2020 | |||||||
| Platform | $ | 7,952,415 | $ | 7,478,419 | ||||
| Customer lists and contracts | 1,177,200 | 1,177,200 | ||||||
| Licenses | 247,793 | 234,282 | ||||||
| Trademarks | 38,186 | 38,186 | ||||||
| 9,415,594 | 8,928,087 | |||||||
| Less: accumulated amortization | 5,692,952 | 5,229,054 | ||||||
| Intangible assets, net | $ | 3,722,642 | $ | 3,699,033 | ||||
Intangible assets are amortized over their useful life ranging from periods of 3 to 15 years. Amortization expense for the three months ended March 31, 2021 and 2020 was $463,897 and $410,048, respectively.
4. LEASE
The Company entered into an operating lease for an office space which became effective in June 2020 when the construction was complete and we were given access to occupy the space. The lease term is 10 years from the effective date and allows for two optional extensions of five years each. The two optional extensions are not recognized as part of the right-of-use asset or lease liability since it is not reasonably certain that the Company will extend this lease. As of March 31, 2021, the remaining lease term was 9.2 years and the discount rate was 6%. The lease for our previous office space was accounted for as a short-term lease.
Operating lease cost included in selling, general and administrative expenses was $215,144 for the three months ended March 31, 2021. Short-term lease cost included in selling, general and administrative expense was $82,441 for the three months ended March 31, 2020.
The following is the lease maturity analysis of our operating lease as of March 31, 2021:
Twelve months ending March 31,
| 2022 | $ | 571,968 | ||
| 2023 | 571,968 | |||
| 2024 | 571,968 | |||
| 2025 | 571,968 | |||
| 2026 | 629,165 | |||
| Thereafter | 2,669,184 | |||
| Total lease payments | 5,586,221 | |||
| Less: Imputed interest | (1,330,356 | ) | ||
| Present value of future lease payments | 4,255,865 | |||
| Less: current portion of lease liability | (325,470 | ) | ||
| Long-term portion of lease liability | $ | 3,930,395 |
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5. CUSTOMER CARD FUNDING LIABILITY
The Company issues prepaid cards with various provisions for cardholder fees or expiration. Revenue generated from cardholder transactions and interchange fees are recognized when the Company’s performance obligation is fulfilled. Unspent balances left on Pharma cards are recognized as settlement income at the expiration of the cards and the program. Contract liabilities related to prepaid cards represent funds on card and client funds held to be loaded to card before the amounts are ultimately spent by the cardholders or recognized as revenue by the Company. Contract liabilities related to prepaid cards are reported as Customer card funding liability on the condensed consolidated balance sheet.
The opening and closing balances of the Company's contract liabilities are as follows:
Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Beginning balance | $ | 48,100,951 | $ | 32,723,227 | ||||
| Increase (decrease), net | 10,672,537 | 7,569,104 | ||||||
| Ending balance | $ | 58,773,488 | $ | 40,292,331 | ||||
The amount of revenue recognized during the three months ended March 31, 2021 and 2020 that was included in the opening contract liability for prepaid cards was $1,023,055 and $844,514, respectively.
6. COMMON STOCK
At March 31, 2021, the Company's authorized capital stock was 150,000,000 shares of common stock, par value $0.001 per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. On that date, the Company had 50,750,882 shares of common stock issued and 50,447,432 shares of common stock outstanding, and no shares of preferred stock outstanding.
Stock-based compensation expense related to Company grants for the three months ended March 31, 2021 was $636,214. Stock-based compensation expense for the three months ended March 31, 2020 was $724,183.
2021 Transactions: During the three months ended March 31, 2021 the Company also issued 499,275 shares of common stock for vested stock awards and the exercise of stock options and received proceeds of $110,466.
2020 Transactions: During the three months ended March 31, 2020, the Company issued 500,000 stock options valued at $2.86 per share that will vest over four years. The assumptions used in the Black Scholes option-pricing model for the 2020 options was a risk-free interest rate of 0.38%, expected volatility of 100%, dividend yield of -0- and a weighted-average expected life of 5 years. The Company also issued 438,558 shares of common stock for vested stock awards and the exercise of stock options and received proceeds of $24,000.
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7. BASIC AND FULLY DILUTED NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and fully diluted net income (loss) per common share for the three months ended March 31, 2021 and 2020:
| 2021 | 2020 | |||||||
| Numerator: | ||||||||
| Net income (loss) | $ | (1,623,527 | ) | $ | 1,540,965 | |||
| Denominator: | ||||||||
| Weighted average common shares: | ||||||||
| Denominator for basic calculation | 50,351,971 | 48,713,163 | ||||||
| Weighted average effects of potentially diluted common stock: | ||||||||
| Stock options (calculated using the treasury method) | – | 1,824,903 | ||||||
| Unvested restricted stock grants | – | 4,150,000 | ||||||
| Denominator for fully diluted calculation | 50,351,971 | 54,688,066 | ||||||
| Net income (loss) per common share: | ||||||||
| Basic | $ | (0.03 | ) | $ | 0.03 | |||
| Fully diluted | $ | (0.03 | ) | $ | 0.03 | |||
Due to the net loss for the three months ended March 31, 2021, the effect of all potential common share equivalents was anti-dilutive, and therefore, all such shares were excluded from the computation of diluted weighted average shares outstanding for the period. The amount of potential common share equivalents excluded were 2,241,014 for stock options and 1,975,000 for unvested restricted stock awards for the three months ended March 31, 2021.
8. COMMITMENTS AND CONTINGENCIES
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
The Company has been named as a defendant in three complaints filed in the United States District Court for the District of Nevada: Yilan Shi v. Paysign, Inc. et. al., filed on March 19, 2020 (“Shi”), Lorna Chase v. Paysign, Inc. et. al., filed on March 25, 2020 (“Chase”), and Smith & Duvall v. Paysign, Inc. et. al., filed on April 2, 2020 (collectively, the “Complaints” or “Securities Class Action”). Smith & Duvall v. Paysign, Inc. et al. was voluntarily dismissed on May 21, 2020. On May 18, 2020, the Shi plaintiffs and another entity called the Paysign Investor Group each filed a motion to consolidate the remaining Shi and Chase actions and to be appointed lead plaintiff. The Complaints are putative class actions filed on behalf of a class of persons who acquired the Company’s common stock from March 19, 2019 through March 31, 2020, inclusive. The Complaints generally allege that the Company, Mark R. Newcomer, and Mark Attinger violated Section 10(b) of the Exchange Act, and that Messrs. Newcomer and Attinger violated Section 20(a) of the Exchange Act, by making materially false or misleading statements, or failing to disclose material facts, regarding the Company’s internal control over financial reporting and its financial statements. The Complaints seek class action certification, compensatory damages, and attorney’s fees and costs. On December 2, 2020, the Court consolidated Shi and Chase as In re Paysign, Inc. Securities Litigation and appointed the Paysign Investor Group as lead plaintiff. On January 12, 2021, Plaintiffs filed an Amended Complaint in the consolidated action. Defendants filed a Motion to Dismiss the Amended Complaint on March 15, 2021, which is expected to be fully briefed by June 1, 2021. As of the date of this filing, Paysign cannot give any meaningful estimate of likely outcome or damages.
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The Company has also been named as a nominal defendant in a stockholder derivative action in the United States District Court for the District of Nevada: Andrzej Toczek, derivatively on behalf of Paysign, Inc. v. Mark, R. Newcomer, et. al., filed on September 17, 2020. This action alleges violations of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, and waste, largely in connection with the failure to correct information technology controls over financial reporting alleged in the Securities Class Action, thereby causing the Company to face exposure in the Securities Class Action. The derivative complaint also alleges insider trading, violations against certain individual defendants. On December 16, 2020, the Court approved a stipulation staying the action until the Court in the consolidated Securities Class Action issues a ruling on the Motion to Dismiss. As of the date of this filing, Paysign cannot give any meaningful estimate of likely outcome or damages.
9. RELATED PARTY
A member of our Board of Directors is also a partner in a law firm that the Company engages for services to review regulatory filings and various legal matters. The Company incurred legal expense of $252,836 during the three months ended March 31, 2021, with the related party law firm. During the three months ended March 31, 2020 the Company incurred legal expense of $18,733 with the related party law firm.
10. INCOME TAX BENEFIT
The effective tax rate (income tax benefit as a percentage of income (loss) before income tax benefit) was (0.1%) for the three months ended March 31, 2021, as compared to (6.0%) for the three months ended March 31, 2020. The effective tax rates vary, primarily as a result of the full valuation on our deferred tax asset in the current year and the tax benefit related to our stock-based compensation and a pretax loss in the prior year period.
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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. In the normal course of our business, we, in an effort to help keep our shareholders and the public informed about our operations, may from time-to-time issue certain statements, either in writing or orally, that contain, or may contain, Forward-Looking Statements. Although we believe that the expectations reflected in such Forward-Looking Statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by us, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating results. All phases of our operations are subject to a number of uncertainties, risks and other influences, many of which are outside of our control and any one of which, or a combination of which, could materially affect the results of our operations and whether Forward-Looking Statements made by us ultimately prove to be accurate. Such important factors (“Important Factors”) and other factors could cause actual results to differ materially from our expectations are disclosed in this report, including those factors discussed in “Part II - Item 1A. Risk Factors.” All prior and subsequent written and oral Forward-Looking Statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Important Factors described below that could cause actual results to differ materially from our expectations as set forth in any Forward-Looking Statement made by or on behalf of us.
Overview
We are a 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 a modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform has allowed the Company to significantly expand its operational capabilities by facilitating our entry into new markets within the payments space through its flexibility and ease of customization. The Paysign platform delivers cost benefits and revenue building opportunities to our partners.
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 future, we expect to further expand our product offerings into other prepaid card offerings such as payroll cards, travel cards, and expense reimbursement cards. As we do not have our own banking license to issue open-loop prepaid cards for our prepaid card programs, our cards are offered to end users through our relationships with bank issuers.
Our revenues include fees generated from cardholder fees, interchange, card program management fees, and settlement income. Revenue from cardholder fees, interchange and card program management fees is recorded when the performance obligation is fulfilled. Settlement income is recorded at the expiration of the card program.
We have two categories for our prepaid debit cards: (1) corporate and consumer reloadable, and (2) non-reloadable cards.
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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 provide in-house customer service which includes live bilingual customer care representatives staffed 24/7/365. We also run in-house Interactive Voice Response (IVR) and two-way SMS messaging platforms.
Currently, we are focusing our marketing efforts on corporate incentive and expense prepaid card products in various market verticals including but not limited to general corporate expense, healthcare related markets including co-pay assistance, clinical trials and donor compensation, loyalty rewards and incentive cards.
As part of our continuing platform expansion process, we evaluate current and emerging technologies for applicability to our existing and future software platform. To this end, we engage with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate, we use third-party technology components in the development of our software applications and service offerings. Third-party software may be used for highly specialized business functions, which we may not be able to develop internally within time and budget constraints. Our principal target markets for processing services include prepaid card issuers, retail and private-label issuers, small third-party processors, and small and mid-size financial institutions in the United States and Mexico.
We have devoted more extensive resources to sales and marketing activities as we have added essential personnel to our marketing and sales team. We sell our products directly to customers in the U.S. but may work with a small number of resellers and third parties in international markets to identify, sell and support targeted opportunities.
In 2021, we plan to continue to invest additional funds in technology improvements, sales and marketing, customer service, and regulatory compliance. From time to time, we evaluate raising capital to enable us to diversify into new market verticals. If we do not raise new capital, we believe that we will still be able to expand into new markets using internally generated funds.
The outbreak of a novel coronavirus and the incidence of the related disease (COVID-19) starting in late 2019 has continued, spreading throughout the United States and much of the world beginning in the first quarter of 2020. In March 2020, the World Health Organization declared the outbreak as a pandemic. While the disruption is currently expected to be temporary, there is uncertainty around the duration. The COVID-19 outbreak and the new stimulus packages signed into law during 2020 and 2021 have had and will continue to have an adverse effect on the Company's results of operations. Given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, management cannot reasonably estimate the impact to the Company's future results of operations, cash flows, or financial condition.
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Results of Operations
Three Months Ended March 31, 2021 and 2020
The following table summarizes our consolidated financial results:
Three Months Ended March 31, (unaudited) | Variance | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Revenues | ||||||||||||||||
| Plasma industry | $ | 5,383,151 | $ | 7,343,410 | $ | (1,960,259 | ) | (26.7% | ) | |||||||
| Pharma industry | 882,830 | 3,020,377 | (2,137,547 | ) | (70.8% | ) | ||||||||||
| Other | 13,447 | 212,686 | (199,239 | ) | (93.7% | ) | ||||||||||
| Total revenues | 6,279,428 | 10,576,473 | (4,297,045 | ) | (40.6% | ) | ||||||||||
| Cost of revenues | 3,447,622 | 4,855,520 | (1,407,898 | ) | (29.0% | ) | ||||||||||
| Gross profit | 2,831,806 | 5,720,953 | (2,889,147 | ) | (50.5% | ) | ||||||||||
| Gross margin % | 45.1% | 54.1% | ||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | 3,864,986 | 3,827,324 | 37,662 | 1.0% | ||||||||||||
| Depreciation and amortization | 595,848 | 502,376 | 93,472 | 18.6% | ||||||||||||
| Total operating expenses | 4,460,834 | 4,329,700 | 131,134 | 3.0% | ||||||||||||
| Income (loss) from operations | $ | (1,629,028 | ) | $ | 1,391,253 | $ | (3,020,281 | ) | N/A | |||||||
| Net income (loss) | $ | (1,623,527 | ) | $ | 1,540,965 | $ | (3,164,492 | ) | N/A | |||||||
| Net margin % | (25.9% | ) | 14.6% | |||||||||||||
The decrease in total revenues of $4,297,045 for the three months ended March 31, 2021 compared to the same period in the prior year consisted primarily of a $1,960,259 reduction in Plasma revenue and a $2,137,547 reduction in Pharma revenue. The decrease in Plasma revenue was primarily due to a decrease in plasma donations, and, consequently, dollars loaded to cards and cardholder fees, which were significantly impacted by COVID-19 related donation center closures and mobility restrictions. Pharma revenue decreased $2,137,547 primarily due to the constraining of revenue on all Pharma programs for settlement income whereby the unspent balances will be recognized as revenue at the expiration of the cards and the respective program. Pharma programs were also negatively impacted by COVID-19 as new pharmaceutical medicines were delayed and individuals limited their exposure to pharmacies and doctor offices.
Cost of revenues for the three months ended March 31, 2021 decreased $1,407,898 compared to the same period in the prior year. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production and postage costs, customer service, program management, application integration setup, and sales and commission expense. Cost of revenues decreased primarily due to the decline in Plasma transactions as many of the Plasma transaction costs are variable in nature which are provided by third-parties who charge us based on the number of transactions that occurred during the period.
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Gross profit for the three months ended March 31, 2021 decreased $2,889,147 compared to the same period in the prior year resulting from the reduction in Plasma and Pharma revenue, and the associated cost of sales as described above. The decrease in gross margin resulted from the lower revenue conversion rate and an unfavorable cost of revenue rate variance.
Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2021 increased $37,662 or 1.0% compared to the same period in the prior year and consisted primarily of an increase in compensation and benefits of $175,000 related to severance costs in the current year period, an increase in professional services for tax, audit and consultants of $100,000, a decrease in stock-based compensation of $90,000, a decrease in technologies and telecom of $51,000, an increase in rent, utilities, and maintenance of $141,000 related to a new office lease entered into in June 2020, a decrease in travel of $89,000, and a decrease in other operating expenses of $146,000.
Depreciation and amortization expense for the three months ended March 31, 2021 increased $93,472 compared to the same period in the prior year. The increase in depreciation and amortization expense was primarily due to continued capitalization of new software and equipment, continued enhancements to our platform, and new furniture and fixtures and leasehold improvements associated with the new building we moved into in June 2020.
For the three months ended March 31, 2021 we recorded a loss from operations of $1,629,028 representing a net decrease of $3,020,281 in income from operations compared to the same period last year related to the aforementioned factors.
Other income for the three months ended March 31, 2021 decreased $55,060 related to a decrease in interest income primarily from lower average outstanding restricted cash bank balances due to a decline in our Plasma business and better program management by third parties on our Pharma programs.
The effective tax rate was (0.1%) and (6.0%) for the three months ended March 31, 2021 and 2020. The effective tax rates vary, primarily as a result of the full valuation on our deferred tax asset in the current year and the tax benefit related to our stock-based compensation and a pretax loss in the prior year period.
The net loss for the three months ended March 31, 2021 was $1,623,527 compared to net income of $1,540,965 for the three months ended March 31, 2020, a $3,164,492 decrease. The overall change in net income (loss) relates to the aforementioned factors.
Key Performance Indicators and Non-GAAP Measures
Management reviews a number of metrics to help us monitor the performance of and identify trends affecting our business. We believe the following measures are the primary indicators of our quarterly and annual revenues:
Gross Dollar Volume Loaded on Cards – Represents the total dollar volume of funds loaded to all of our prepaid card programs. Our gross dollar volume was $277 million and $326 million for the three months ended March 31, 2021 and 2020, respectively. We use this metric to analyze the total amount of money moving into our prepaid card programs.
Conversion Rates on Gross Dollar Volume Loaded on Cards – Comprised of revenues, gross profit and net income conversion rates of gross dollar volume loaded on cards which are calculated by taking our total revenues, gross profit or net income (loss), respectively, as a numerator and dividing by the gross dollar volume loaded on cards as a denominator. As we derive a number of our financial results from cardholder fees, we utilize these metrics as an indication of the amount of money that is added to cards and will eventually be converted to revenues, gross profit and net income. Our revenue conversion rates for the three months ended March 31, 2021 and 2020 were 2.27% or 227 basis points (“bps”), and 3.24% or 324 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rates for the three months ended March 31, 2021 and 2020 were 1.02% or 102 bps, and 1.75% or 175 bps, respectively, of gross dollar volume loaded on cards. Our net income conversion rates for the three months ended March 31, 2021 and 2020 were (0.59)% or (59) bps, and 0.47% or 47 bps, respectively, of gross dollar volume loaded on cards.
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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 March 31, (unaudited) | ||||||||
| 2021 | 2020 | |||||||
| Reconciliation of adjusted EBITDA to net income: | ||||||||
| Net income (loss) | $ | (1,623,527 | ) | $ | 1,540,965 | |||
| Income tax provision (benefit) | 1,600 | (87,551 | ) | |||||
| Interest income | (7,101 | ) | (62,161 | ) | ||||
| Depreciation and amortization | 595,848 | 502,376 | ||||||
| EBITDA | (1,033,180 | ) | 1,893,629 | |||||
| Stock-based compensation | 636,214 | 724,183 | ||||||
| Adjusted EBITDA | $ | (396,966 | ) | $ | 2,617,812 | |||
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash:
Three months ended March 31, (unaudited) | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 9,904,498 | $ | 10,749,032 | ||||
| Net cash used in investing activities | (612,202 | ) | (1,496,123 | ) | ||||
| Net cash provided by financing activities | 110,466 | 24,000 | ||||||
| Net increase in cash and restricted cash | $ | 9,402,762 | $ | 9,276,909 | ||||
Comparison of Three Months Ended March 31, 2021 and 2020
During the three months ended March 31, 2021 and 2020, we financed our operations through internally generated funds.
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Cash provided by operating activities decreased $844,534 for the three months ended March 31, 2021, as compared to the same period in the prior year. The decrease is primarily due to the decrease in net income (loss) partially offset by a net increase in cash flows from changes in operating assets and liabilities, particularly the customer card funding liability, offset by decreases related to prepaid expenses, accounts payable and accrued liabilities. The increase in the cash provided by the customer card funding liability is mainly due to the increase in customer card funding restricted cash during the period. The cash flow related to the increase in prepaid expenses is due to prepaid insurance premiums in March of 2021 and the cash flow related to an increase in accounts payable and accrued liabilities in March of 2020 is due to the timing of expenditures related to our office relocation.
Cash used in investing activities decreased $883,921 for the three months ended March 31, 2021, as compared to the same period in 2020, with the difference primarily attributed to a decrease in fixed assets during the current period. Fixed asset purchases in the prior year period were related to our office relocation.
Cash provided by financing activities increased $86,466 for the three months ended March 31, 2021 as compared to the three months ended March 30, 2020. The change between periods consists of an increase in the cash received from exercises of stock options.
Sources of Liquidity
We believe that our available cash on hand, excluding restricted cash, at March 31, 2021 of $6,559,678, along with our forecast for revenues and cash flows for the remainder of the year and for 2022, will be sufficient to sustain our operations for the next twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
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.
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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 March 31, 2021. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2021, the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2021, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
The Company has been named as a defendant in three complaints filed in the United States District Court for the District of Nevada: Yilan Shi v. Paysign, Inc. et. al., filed on March 19, 2020 (“Shi”), Lorna Chase v. Paysign, Inc. et. al., filed on March 25, 2020 (“Chase”), and Smith & Duvall v. Paysign, Inc. et. al., filed on April 2, 2020 (collectively, the “Complaints” or “Securities Class Action”). Smith & Duvall v. Paysign, Inc. et. al. was voluntarily dismissed on May 21, 2020. On May 18, 2020, the Shi plaintiffs and another entity called the Paysign Investor Group each filed a motion to consolidate the remaining Shi and Chase actions and to be appointed lead plaintiff. The Complaints are putative class actions filed on behalf of a class of persons who acquired the Company’s common stock from March 19, 2019 through March 31, 2020, inclusive. The Complaints generally allege that the Company, Mark R. Newcomer, and Mark Attinger violated Section 10(b) of the Exchange Act, and that Messrs. Newcomer and Attinger violated Section 20(a) of the Exchange Act, by making materially false or misleading statements, or failing to disclose material facts, regarding the Company’s internal control over financial reporting and its financial statements. The Complaints seek class action certification, compensatory damages, and attorney’s fees and costs. On December 2, 2020, the Court consolidated Shi and Chase as In re Paysign, Inc. Securities Litigation and appointed the Paysign Investor Group as lead plaintiff. On January 12, 2021, Plaintiffs filed an Amended Complaint in the consolidated action. Defendants filed a Motion to Dismiss the Amended Complaint on March 15, 2021, which is expected to be fully briefed by June 1, 2021.
The Company has also been named as a nominal defendant in a stockholder derivative action in the United States District Court for the District of Nevada: Andrzej Toczek, derivatively on behalf of Paysign, Inc. v. Mark, R. Newcomer, et. al., filed on September 17, 2020. This action alleges violations of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, and waste, largely in connection with the failure to correct information technology controls over financial reporting alleged in the Securities Class Action, thereby causing the Company to face exposure in the Securities Class Action. The derivative complaint also alleges insider trading, violations against certain individual defendants. On December 16, 2020, the Court approved a stipulation staying the action until the Court in the consolidated Securities Class Action issues a ruling on the Motion to Dismiss.
There have been no material changes with respect to the risk factors disclosed in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended March 31, 2021, we issued, pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933, a total of 466,689 shares of common stock for restricted stock shares previously earned and vested as well as 32,586 shares of common stock for stock options exercised.
| 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 | XBRL Instance Document |
| 101.SCH | XBRL Schema Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 20 |
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: May 12, 2021 | /s/ Mark Newcomer |
|
By: Mark Newcomer, Chief Executive Officer (principal executive officer) | |
| Date: May 12, 2021 | /s/ Jeff Baker |
|
By: Jeff Baker, Chief Financial Officer (principal financial and accounting officer) |
| 21 |
Exhibit 31.1
CERTIFICATION
I, Mark Newcomer, hereby certify that:
(1) I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2021 (the “report”) of Paysign, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: May 12, 2021 | /s/ Mark Newcomer |
|
Mark Newcomer Chief Executive Officer (principal executive officer) |
Exhibit 31.2
CERTIFICATION
I, Jeff Baker, hereby certify that:
(1) I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2021 (the “report”) of Paysign, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: May 12, 2021 | /s/ Jeff Baker |
|
Jeff Baker Chief Financial Officer (principal financial and accounting officer) |
Exhibit 32.1
SECTION 1350 CERTIFICATIONS
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Mark Newcomer, the Chief Executive Officer of Paysign, Inc., a Nevada corporation (the "Company"), does hereby certify, to the best of my knowledge, that:
1. The Quarterly Report on Form 10-Q for the period ended March 31, 2021 (the "Report") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Mark Newcomer
Mark Newcomer
Chief Executive Officer
(principal executive officer)
Date: May 12, 2021
Exhibit 32.2
SECTION 1350 CERTIFICATIONS
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Jeff Baker, the Chief Financial Officer of Paysign, Inc., a Nevada corporation (the "Company"), does hereby certify, to the best of my knowledge, that:
1. The Quarterly Report on Form 10-Q for the period ended March 31, 2021 (the "Report") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Jeff Baker
Jeff Baker
Chief Financial Officer
(principal financial and accounting officer)
Date: May 12, 2021