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Aug. 10, 2022, 9:44 a.m. EDT

10-Q: PAYSIGN, INC.

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(EDGAR Online via COMTEX) -- 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

Overview

Paysign, Inc. (the "Company," "Paysign," "we" or "our"), headquartered in Nevada, was incorporated on August 24, 1995, and trades under the symbol PAYS on The Nasdaq Stock Market LLC. Paysign is a vertically integrated provider of prepaid card products and processing services for corporate, consumer and government applications. Our payment solutions are utilized by our corporate customers as a means to increase customer loyalty, increase patient adherence rates, reduce administration costs and streamline operations. Public sector organizations can utilize our payment solutions to disburse public benefits or for internal payments. We market our prepaid card solutions under our Paysign(R) brand. As we are a payment processor and prepaid card program manager, we derive our revenue from all stages of the prepaid card lifecycle.

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

We have developed prepaid card programs for corporate incentive and rewards including, but not limited to, consumer rebates and rewards, donor compensation, clinical trials, healthcare reimbursement payments and pharmaceutical payment assistance. We have expanded our product offerings to include additional corporate incentive products and demand deposit accounts accessible with a debit card. In the future, we expect to further expand our product offerings into other prepaid card offerings such as payroll cards, travel cards, and expense reimbursement cards. Our cards are sponsored by our issuing bank partners.

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

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

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

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

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

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

We manage all aspects of the prepaid card lifecycle, from managing the card design and approval processes with partners and networks, to production, packaging, distribution, and personalization. We also oversee inventory and security controls, renewals, lost and stolen card management, and replacement. We deploy a fully staffed, in-house customer service department which utilizes bilingual customer service representatives, Interactive Voice Response, and two-way short message service messaging and text alerts.

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

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

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

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

The coronavirus ("COVID-19") pandemic, which started in late 2019 and reached the United States in early 2020, continues to significantly impact the economy of the United States and the rest of the world. While the direct disruption appears to have significantly mitigated due to the availability of vaccines and other factors, the ultimate duration and severity of the pandemic remain uncertain, particularly given the development of new variants that continue to spread, and the economic repercussions are still manifesting themselves. The COVID-19 outbreak caused plasma center closures, and the stimulus packages signed into law during 2020 and 2021 reduced the incentive for individuals to donate plasma for supplementary income. Additionally, labor shortages at plasma donation centers and restrictions preventing Mexican nationals with tourist visas from being compensated for donating plasma, have further impacted donations. Those developments have had, and are expected to continue to have, an adverse impact on the Company's results of operations. Offsetting those headwinds, inflationary pressures for food, gasoline, and other products and services appear to be driving individuals back into the plasma donation centers based upon the increase we experienced in the number of loads per average donation center in the second quarter of 2022 versus the first quarter of 2022. While we remain cautiously optimistic and have seen improvements in our operating results on an aggregated basis, we cannot foresee how long it may take the Company to attain pre-pandemic operating levels on a per plasma donation center basis. Given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and variants and around the imposition or relaxation of protective measures, management cannot at this time estimate with reasonable accuracy COVID-19's further impact on the Company's results of operations, cash flows or financial condition.







        Results of Operations
        Three Months Ended June 30, 2022 and 2021
        The following table summarizes our consolidated financial results:
                                                  Three Months Ended
                                                       June 30,
                                                      (unaudited)                      Variance
                                                 2022            2021              $              %
        Revenues
        Plasma industry                       $ 7,806,201     $ 5,947,313     $ 1,858,888          31.3%
        Pharma industry                           773,311         641,037         132,274          20.6%
        Other                                      19,264          62,940         (43,676 )       (69.4% )
        Total revenues                          8,598,776       6,651,290       1,947,486          29.3%
        Cost of revenues                        3,900,965       3,498,723         402,242          11.5%
        Gross profit                            4,697,811       3,152,567       1,545,244          49.0%
        Gross margin %                              54.6%           47.4%
        Operating expenses
        Selling, general and administrative     4,255,976       3,474,562         781,414          22.5%
        Depreciation and amortization             713,180         614,182          98,998          16,1%
        Total operating expenses                4,969,156       4,088,744         880,412          21.5%
        Loss from operations                  $  (271,345 )   $  (936,177 )   $   664,832         (71.0% )
        Net loss                              $  (228,034 )   $  (931,967 )   $   703,933         (75.5% )
        Net margin %                                (2.7% )        (14.0% )
        


The increase in total revenues of $1,947,486 for the three months ended June 30, 2022 compared to the same period in the prior year consisted primarily of a $1,858,888 increase in Plasma revenue and a $132,274 increase in Pharma revenue, offset by a $43,676 decrease in Other revenue. The increase in Plasma revenue was primarily due to an increase in the number of plasma centers and donations, and, consequently, dollars loaded to cards, cardholder fees, and interchange, as COVID-19 restrictions such as donation center closures, mobility restrictions and Federal government stimulus measures were relaxed compared to the prior year period. The increase in Pharma revenue was primarily due to the launch of new Pharma copay programs offset by the end of a number of Pharma prepaid programs. The decrease in Other revenue was primarily due to the recognition of settlement income from a rewards program that terminated in the second quarter of 2021.

Cost of revenues for the three months ended June 30, 2022 increased $402,242 compared to the same period in the prior year. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production and postage costs, customer service, program management, application integration setup, and sales and commission expense. Cost of revenues increased during the second quarter of 2022 primarily due to the increase in cardholder usage activity, the increase in plastics, collateral and postage related to upfront costs associated with new openings and competitive conversion of 62 plasma donation centers, the increase in network expenses related to our Pharma copay business, and the increase in customer service expenses, offset by a decline in sales commissions related to the restructuring of an agreement in the first quarter of 2022.

Gross profit for the three months ended June 30, 2022 increased $1,545,244 compared to the same period in the prior year resulting from the increase in Plasma revenue, the restructuring of an agreement mentioned above, and the beneficial impact of a variable cost structure as many of the Plasma transaction costs are variable in nature which are provided by third parties who charge us based on the number of transactions that occurred during the period. The increase in gross profit was offset by the upfront costs associated with the 62 new plasma donation centers that were added during the quarter and the increase in customer service expenses relating to the overall growth of our business. The increase in gross margin resulted from the aforementioned factors.

Selling, general and administrative expenses ("SG&A") for the three months ended June 30, 2022 increased $781,414 or 22.5% compared to the same period in the prior year and consisted primarily of an increase in compensation and benefits of $890,000, a decrease in stock-based compensation of $52,600, a decrease in outside professional services for legal, tax, accounting and consultants of $151,400, a decrease in insurance of $15,000, an increase in technologies and telecom of $237,000, a decrease in rent, utilities, and maintenance of $14,100, an increase in travel and entertainment of $57,200, and an increase in other operating expenses of $210,000. The remainder of the difference is primarily related to an increase in capitalized software development costs.

Depreciation and amortization expense for the three months ended June 30, 2022 increased $98,998 compared to the same period in the prior year. The increase in depreciation and amortization expense was primarily due to continued capitalization of new software and equipment, and continued enhancements to our platform.

For the three months ended June 30, 2022 we recorded a loss from operations of $271,345 representing a net increase of $664,832 compared to the same period last year related to the aforementioned factors.

Other income for the three months ended June 30, 2022 increased $65,217 related to an increase in interest rates and the associated interest income received on higher bank account balances at our sponsor bank and lower interest expense related to the financing of insurance premiums.

We recorded an income tax expense of $26,916 for the three months ended June 30, 2022, which equates to an effective tax rate of (13.4%) primarily as a result of the full valuation on our deferred tax asset in both the current and prior period and the tax benefit related to our stock-based compensation and a pretax loss in the prior period. We recorded an income tax expense of $800 for the three months ended June 30, 2021 due to estimated state tax payments.

The net loss for the three months ended June 30, 2022 was $228,034, an improvement of $703,933 compared to the net loss of $931,967 for the three months ended June 30, 2021. The overall change in net loss relates to the aforementioned factors.







        Six Months Ended June 30, 2022 and 2021
        The following table summarizes our consolidated financial results:
                                                    Six Months Ended
                                                        June 30,
                                                       (unaudited)                       Variance
                                                  2022             2021              $              %
        Revenues
        Plasma industry                       $ 15,200,565     $ 11,330,464     $ 3,870,101          34.2%
        Pharma industry                          1,579,879        1,523,867          56,012           3.7%
        Other                                       38,971           76,387         (37,416 )       (49.0% )
        Total revenues                          16,819,415       12,930,718       3,888,697          30.1%
        Cost of revenues                         7,123,355        6,946,345         177,010           2.5%
        Gross profit                             9,696,060        5,984,373       3,711,687          62.0%
        Gross margin %                               57.6%            46.3%
        Operating expenses
        Selling, general and administrative      8,896,888        7,339,548       1,557,340          21.2%
        Depreciation and amortization            1,392,351        1,210,030         182,321          15.1%
        Total operating expenses                10,289,239        8,549,578       1,739,661          20.3%
        Loss from operations                  $   (593,179 )   $ (2,565,205 )   $ 1,972,026         (76.9% )
        Net loss                              $   (537,429 )   $ (2,555,494 )   $ 2,018,065         (79.0% )
        Net margin %                                 (3.2% )         (19.8% )
        


The increase in total revenues of $3,888,697 for the six months ended June 30, 2022 compared to the same period in the prior year consisted primarily of a $3,870,101 increase in Plasma revenue and a $56,012 increase in Pharma revenue, offset by a $37,416 decrease in Other revenue. The increase in Plasma revenue was primarily due to an increase in the number of plasma centers and donations, and, consequently, dollars loaded to cards, cardholder fees, and interchange, as COVID-19 restrictions such as donation center closures, mobility restrictions and Federal government stimulus measures were relaxed compared to the prior year period. The increase in Pharma revenue was primarily due to the launch of new Pharma copay programs offset by the end of a number of Pharma prepaid programs. The decrease in Other revenue was primarily driven by the recognition of settlement income from a rewards program that ended during the second quarter of 2021.

Cost of revenues for the six months ended June 30, 2022 increased $177,010 compared to the same period in the prior year. Cost of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, bank fees, card production and postage costs, customer service, program management, application integration setup, and sales and commission expense. Cost of revenues increased during the six months of 2022 primarily due to the increase in cardholder usage activity, the increase in plastics, collateral and postage related to upfront costs associated with the de novo opening or competitive conversion of 71 plasma donation centers that we service, the increase in network expenses related to our Pharma copay business, and the increase in customer service expenses, offset by a decline in sales commissions related to the restructuring of an agreement in the first quarter of 2022.

Gross profit for the six months ended June 30, 2022 increased $3,711,687 compared to the same period in the prior year resulting from the increase in Plasma revenue, the restructuring of an agreement mentioned above, and the beneficial impact of a variable cost structure as many of the Plasma transaction costs are provided by third parties who charge us based on the number of transactions that occurred during the period, with a lower per-transaction cost at larger numbers of transactions. The increase in Gross profit was offset by the upfront costs associated with the 71 new plasma donation centers that were added during the six month period and the increase in customer service expenses relating to the overall growth of our business. The increase in gross margin resulted from the aforementioned factors.

SG&A for the six months ended June 30, 2022 increased $1,557,340 or 21.2% compared to the same period in the prior year and consisted primarily of an increase in compensation and benefits of $1,294,200, a decrease in stock-based compensation of $119,300, a decrease in outside professional services for legal, tax, accounting and consultants of $245,800, an increase in legal settlements of $354,000, an increase in insurance of $95,800, an increase in technologies and telecom of $415,100, a decrease in rent, utilities, and maintenance of $43,900, an increase in travel and entertainment of $131,800, and an increase in other operating expenses of $375,100. The remainder of the difference is primarily related to an increase in capitalized software development costs.

Depreciation and amortization expense for the six months ended June 30, 2022 increased $182,300 compared to the same period in the prior year. The increase in depreciation and amortization expense was primarily due to continued capitalization of new software and equipment and continued enhancements to our platform.

For the six months ended June 30, 2022 we recorded a loss from operations of $593,179 representing a net increase of $1,972,026 compared to the same period last year related to the aforementioned factors.

Other income for the six months ended June 30, 2022 increased $72,452 related to an increase in interest rates and the associated interest income received on higher bank account balances at our sponsor bank and lower interest expense related to the financing of insurance premiums.

We recorded an income tax expense of $28,813 for the six months ended June 30, 2022, which equates to an effective tax rate of (5.7%) percent primarily as a result of the full valuation on our deferred tax asset in both the current and prior period and the tax benefit related to our stock-based compensation and a pretax loss in the prior period. We recorded an income tax expense of $2,400 for the six months ended June 30, 2021 due to estimated state tax payments.

The net loss for the six months ended June 30, 2022 was $537,429, an improvement of $2,018,065 compared to the net loss of $2,555,494 for the six months ended June 30, 2021. The overall change in net loss relates to the aforementioned factors.

Key Performance Indicators and Non-GAAP Measures

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

Gross Dollar Volume Loaded on Cards - Represents the total dollar volume of funds loaded to all of our prepaid card programs. Our gross dollar volume loaded on cards was $376 million and $267 million for the three months ended June 30, 2022 and 2021, respectively. That gross dollar volume was $699 million and $546 million for the six months ended June 30, 2022 and 2021, 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 - Equals revenues, gross profit or net income conversion rates of gross dollar volume loaded on cards which are calculated by taking our total revenues, gross profit or net income

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 . . .

Aug 10, 2022

COMTEX_412000794/2041/2022-08-10T09:43:33

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