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March 23, 2022, 9:03 a.m. EDT

10-K: PAYSIGN, INC.

(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION and RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in "Risk Factors" included elsewhere in this Form 10-K.

Disclosure Regarding Forward-Looking Statements

This Annual Report on Form 10-K 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 contains 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 proposed 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 "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

Paysign, 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. We market our prepaid card solutions under our Paysign brand. As we are a payment processor and prepaid card program manager, we derive our revenue from all stages of the prepaid card lifecycle.

We provide a card processing platform consisting of proprietary systems and software applications based on the unique needs of our clients. We have extended our processing business capabilities through our proprietary Paysign platform. Through the Paysign platform, we provide a variety of services including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service. The Paysign platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform has allowed us 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. Our cards are sponsored by our issuing bank partners.

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 cards: (1) corporate and consumer reloadable, 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 (Visa, Interlink, Plus, MasterCard, Maestro, Cirrus, Discover and Pulse, 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 is one of the fastest growing segments of the payments industry in the U.S. This market 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 ("IVR"), and two-way short message service ("SMS") 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 technology 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. We have also identified opportunities in the European Union and are pursuing those opportunities.

In 2022, 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.

2021 Year Milestones

� Grew to approximately 4.3 million cardholders and 440 card programs as of December 31, 2021.

Results of Operations







        Fiscal Years Ended December 31, 2021 and 2020
        The following table summarizes our consolidated financial results:
                                                 Year ended December 31,                  Variance
                                                  2021             2020              $                %
        Revenues
        Plasma industry                       $ 25,918,150     $ 23,401,068     $  2,517,082           10.8%
        Pharma industry                          3,361,869          326,699        3,035,170          929.0%
        Other                                      184,830          392,667         (207,837 )        (52.9% )
        Total revenues                          29,464,849       24,120,434        5,344,415           22.2%
        Cost of revenues                        14,753,042       14,817,028          (63,986 )         (0.4% )
        Gross profit                            14,711,807        9,303,406        5,408,401           58.1%
        Gross margin %                               49.9%            38.6%
        Operating expenses
        Selling, general and administrative     14,953,322       15,091,432         (138,110 )         (0.9% )
        Impairment of intangible asset                   -          382,414         (382,414 )       (100.0% )
        Loss on abandonment of assets                    -           42,898          (42,898 )       (100.0% )
        Depreciation and amortization            2,497,918        2,124,762          373,156           17.6%
        Total operating expenses                17,451,240       17,641,506         (190,266 )         (1.1% )
        Loss from operations                  $ (2,739,433 )   $ (8,338,100 )   $  5,598,667          (67.1% )
        Net loss                              $ (2,721,334 )   $ (9,141,562 )   $ (6,420,228 )        (70.2% )
        Net margin %                                 (9.2% )         (37.9% )
        


The increase in total revenues of $5,344,415 for the year ended December 31, 2021 compared to the same period in the prior year consisted of a $2,517,082 increase in Plasma revenue, a $3,035,170 increase in Pharma revenue, and a reduction of $207,837 in Other revenue. The increase in Plasma revenue was primarily due to an increase in plasma donations and dollars loaded to card as COVID-19 related government stimulus payments were phased out, donation centers reopened, and mobility restrictions were lifted during the year. The increase in Pharma revenue was primarily due to the anniversary of a $6,293,203 adjustment that reduced Pharma revenue for a change in accounting estimate in recognizing settlement income for all Pharma programs in the third quarter of 2020 in accordance with applicable accounting guidance, as well as the recognition of settlement income for Pharma programs that ended throughout 2021, the launch of new Pharma programs during 2021, and the lifting of mobility restrictions allowing individuals to return to visiting doctor offices and pharmacies to receive pharmaceutical medicines.

Cost of revenues for the year ended December 31, 2021 decreased $63,986 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 costs, customer service, program management, application integration setup, and sales and commission expense. Cost of revenues decreased primarily due to operating leverage inherent in our Plasma business as many of the Plasma fees deliver a greater revenue contribution versus the costs that are provided by third-parties who charge us based on the number of transactions that occur during the period. In addition, there was a greater contribution of higher margin Pharma settlement income for the year ended December 31, 2021.

Gross profit for the year ended December 31, 2021 increased $5,408,401 compared to the prior year resulting primarily from the increase in revenue described above, coupled with the slight year-over-year decrease in cost of sales. The increase in gross margin resulted from a higher revenue conversion rate generated from revenues with a larger portion of fixed costs versus those that have a variable cost component.

Selling, general and administrative expenses for the year ended December 31, 2021 decreased $138,110 or 0.9% compared to the prior year and consisted primarily of an increase in staffing and compensation of $1,260,000, insurance of $250,000, and travel and entertainment of $170,000; offset by a decrease in stock-based compensation of $690,000, technologies and telecom of $265,000, and professional services for legal, accounting, tax, and consultants of $260,000.

During the year ended December 31, 2021 there was no intangible asset impairment charge or loss on the abandonment of assets. The impairment of intangible asset of $382,414 in December 31, 2020 was related to a write down of the carrying value of acquisition costs related to a business license that had been suspended.

Depreciation and amortization expense for the year ended December 31, 2021 increased $373,156 compared to the prior year. The increase in depreciation and amortization expense was primarily due to continued capitalization of new technologies and enhancements to our processing platform and infrastructure.

For the year ended December 31, 2021, we recorded a loss from operations of $2,739,433, an increase of $5,598,667 from the period ending December 31, 2020, related to the aforementioned factors.

Other income for the year ended December 31, 2021 decreased $62,423 related to a decrease in interest income resulting primarily from the reduction in the federal funds rate to near 0% beginning in the first quarter of 2020.

The effective tax rate was (0.4%) and (10.8%) for the years ended December 31, 2021 and 2020. The effective tax rates vary, primarily due to the Company establishing a full valuation allowance against its deferred tax assets during the year ended December 31, 2020. The Company continues to have a full valuation allowance against its deferred tax assets as of December 31, 2021.

The net loss for the year ended December 31, 2021 decreased $6,420,228. The overall change in net loss relates to the aforementioned factors.

Key Metrics, 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 card programs. Our gross dollar volume was $1,066 million and $968 million for the years ended December 31, 2021 and 2020, respectively. We use this metric to analyze the total amount of money moving into our card programs.

Conversion Rate on Gross Dollar Volume Loaded on Cards - Represents the percent of total gross dollar load volume onto our card programs that is converted into revenue, gross profit and net profit dollars. Our revenue conversion rate for the years ended December 31, 2021 and 2020 were 2.76% or 276 basis points ("bps"), and 2.49% or 249 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rate for the years ended December 31, 2021 and 2020 were 1.38% or 138 bps, and 0.96% or 96 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion rate for the years ended December 31, 2021 and 2020 were (0.25%) or (25) bps, and (0.95%) or (95) bps, respectively, of gross dollar volume loaded on cards. The increase in conversion rates was primarily attributable to improving revenue and operating results throughout 2021 and the change in accounting estimate for Pharma settlement income in 2020.

Management also reviews key performance indicators, such as revenues, gross profits, 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 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 revenues, 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, depreciation and amortization expense and "Adjusted EBITDA" reflects the adjustment to EBITDA to exclude stock-based compensation expense, impairment of intangible asset and loss on abandonment of assets. A reconciliation of net loss to Adjusted EBITDA is provided in the table below.







                                                            Year ended December 31,
                                                             2021             2020
        Reconciliation of adjusted EBITDA to net loss:
        Net loss                                         $ (2,721,334 )   $ (9,141,562 )
        Income tax provision                                   10,198          894,182
        Interest income, net                                  (28,297 )        (90,720 )
        Depreciation and amortization                       2,497,918        2,124,762
        EBITDA                                               (241,515 )     (6,213,338 )
        Impairment of intangible asset                              -          382,414
        Loss on abandonment of assets                               -           42,898
        Stock-based compensation                            2,280,931        2,971,777
        Adjusted EBITDA                                  $  2,039,416     $ (2,816,249 )
        


Liquidity and Capital Resources

The following table sets forth the major sources and uses of cash for our last two fiscal years ended December 31, 2021 and 2020:







                                                                 Year ended December 31,
                                                                  2021             2020
        Net cash provided by operating activities             $ 15,228,189     $ 13,775,819
        Net cash used in investing activities                   (2,679,664 )     (3,344,855 )
        Net cash provided by (used in) financing activities        192,141          (72,865 )
        Net increase in cash and restricted cash              $ 12,740,666     $ 10,358,099
        


Comparison of Fiscal 2021 and 2020

In fiscal 2021 and 2020, we financed our operations through internally generated funds.

Operating activities provided $15,228,189 of cash in 2021, an increase of $1,452,370 compared to 2020. The increase is primarily due to the decrease in the net loss, offset by a decrease in cash flows from changes in operating assets and liabilities, and decreases in stock-based compensation expense, impairment of intangible asset, loss on abandonment of assets, and deferred income taxes. The large year-over-year changes in operating assets and liabilities related to accounts receivable and accounts payable and accrued liabilities was primarily due to the launch of new Pharma programs and the timing of collections and payments whereby we collect money from pharmaceutical and HUB service companies and reimburse the pharmacy claims processor, healthcare providers and patients for their out-of-pocket drug costs. The decrease in the customer card funding liability is partially related to the recognition of settlement income on Pharma programs that terminated or switched to a new business model during the year.

Investing activities used $2,679,664 of cash in 2021, as compared to $3,344,855 of cash in 2020. The decrease is primarily attributable to a decrease in fixed assets purchased relative to the prior year when we moved into a new office location, offset by increases in the capitalization of internally developed software related to ongoing enhancements to our processing platform and infrastructure.

Financing activities provided $192,141 of cash in 2021 as compared to the use of $72,865 of cash in 2020. Our cash provided in financing activities for 2021 related entirely to cash received from the exercise of stock options. Our cash used in financing activities for 2020 related to cash received from the exercise of stock options totaling $172,560 offset by $245,425 for the repurchase of stock for taxes withheld.

Liquidity and Sources of Financing

Unrestricted cash declined $442,297 to $7,387,156, due to the negative impact of COVID-19 on our operating results, particularly in March and April of 2021 when government stimulus checks were widely distributed to individuals throughout the United States. Our operating results did improve throughout 2021 whereby we were able to generate positive cash flow from operations in the second half of the year to help offset our unrestricted cash balance decline that we experienced in the first half of the year. Restricted cash of $61,283,914 are funds used for customer card funding with a corresponding offset under current liabilities. The increase in 2021 versus 2020 was predominately related to increases in funds on card, increased Plasma deposits, and new Plasma and Pharma customers, offset by declines from Pharma customers whose contracts terminated during the year. We experienced large increases in accounts receivable and accounts payable primarily due to the launch of six new Pharma programs during the year whereby Paysign invoices its customers for reimbursement to pharmacy networks, pharmacies, or individuals for their out-of-pocket costs and remits those funds to cover the accounts payable liability. We believe that our unrestricted cash on hand at December 31, 2021 of $7,387,156, along with anticipated revenues and operating profits anticipated for 2022, and our account receivable and account payable process, 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

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 will be based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects.

Fixed Assets - Fixed assets are stated at cost less accumulated depreciation. Depreciation is principally recorded on the straight-line method over the estimated useful lives of the assets, which are 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, Paysign recognizes an impairment loss if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives ranging from periods of 3 to 15 years.

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

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

Income Taxes - Income tax expense is comprised of current and deferred income tax expense. Current income tax expense approximates taxes to be paid or refunded for the current period. Deferred income tax expense results from the changes in deferred tax assets and liabilities during the periods. These gross deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary . . .

Mar 23, 2022

COMTEX_404642644/2041/2022-03-23T09:03:02

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