Paysign, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are with fiscal 2018. The filing was signed April 3, 2020. This is an annual report, not a standalone fourth-quarter report.
Business context
Paysign provides prepaid card programs and processing services for corporate, healthcare, consumer and government applications. At year-end, it managed approximately 300 programs with about 3 million cardholders. Plasma-related programs remained the largest business, contributing about 78% of revenue; pharmaceutical programs contributed about 21%.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $34.67 million | $23.42 million |
| Gross profit / margin | $19.24 million / 56% | $11.40 million / 49% |
| Operating income | $6.10 million | $2.47 million |
| Net income attributable to Paysign | $7.45 million | $2.59 million |
| Basic / diluted earnings per share | $0.16 / $0.14 | $0.06 / $0.05 |
| Cash from operating activities | $16.71 million | $16.00 million |
| Cash used in investing activities | $3.24 million | $1.59 million |
Revenue grew 48%, driven principally by pharmaceutical revenue, which increased to $7.37 million from $0.37 million, and plasma revenue, which rose to $26.99 million from $23.03 million. Cost of revenue increased 28%, slower than revenue growth, and declined to 44% of revenue from 51%. SG&A rose to $11.66 million from $7.84 million, mainly due to staffing and stock-based compensation. The company reported a $0.91 million income tax benefit in 2019, versus no tax benefit in 2018.
At December 31, 2019, cash was $9.66 million and restricted cash was $35.91 million, compared with $5.62 million and $26.05 million, respectively, a year earlier. Restricted cash principally supports card programs and is contractually restricted. Total liabilities were $34.25 million, primarily customer card funding of $32.72 million; the filing reports no debt. Management said cash on hand, excluding restricted cash, and expected 2020 revenue and operating profits should fund operations for the next 12 months. The filing contains an apparent year error in one liquidity sentence (“December 31, 2010”); the balance sheet shows the 2019 cash amount.
Management’s non-GAAP adjusted EBITDA was $10.11 million, compared with $4.90 million in 2018; it excludes stock-based compensation. Gross and net profit conversion rates on card loads improved to 224 and 88 basis points, respectively, from 183 and 42 basis points, with management attributing improvement mainly to the increased pharmaceutical contribution.
Outlook, risks and unusual items
- Management expected strong revenue growth in 2020 from new programs, existing verticals, new industries and product launches. It expected full-year gross margin to be similar to 2019, while noting less predictability as product and market mix changes.
- The company planned further investment in technology, sales and marketing, customer service and regulatory compliance. It was considering raising capital to diversify into new verticals; without new capital, management expected expansion to be slower.
- PaySign Premier, a debit card linked to a demand deposit account, launched in the third quarter of 2019. The company also added seven pharmaceutical programs during the year.
- COVID-19 was identified as a potential risk to demand and operations. As of the filing, the company reported no observed adverse business impact but said the financial effect could not be reasonably estimated.
- Management and the auditor concluded internal control over financial reporting was ineffective at year-end due to material weaknesses, including deficiencies in management’s control assessment and IT access/change controls. The auditor also cited inadequate monitoring and disclosure controls relating to a part-time employee who was barred from SEC practice and assisted with accounting matters for 2017–2019. Management described remediation steps begun in late 2019 and continuing in 2020.
- Two putative securities class actions filed in March 2020 allege misleading statements or omissions concerning internal controls and financial statements. They seek damages and fees; the complaints had not been served on the company as of the filing.
- Key business risks include dependence on issuing-bank relationships, regulation and card-network rules, data security, competition, and concentration in plasma programs. The company also disclosed it did not carry business interruption insurance.
Most important facts for investors to verify
- Whether the internal-control material weaknesses have been remediated and whether subsequent filings report effective controls.
- Progress, potential exposure and outcomes of the securities class actions.
- Revenue and margin trends by plasma, pharmaceutical and other programs, including the sustainability of rapid pharmaceutical growth and concentration in plasma.
- Cash available for corporate use versus restricted card-program funds, and the source and timing of any planned capital raise.
- Actual effects of COVID-19, the PaySign Premier launch and other new programs on 2020 results.
- The 2019 income tax benefit and use of tax attributes, including the filing’s disclosure that the IRS could challenge the treatment of prior subsidiary losses.