Paysign, Inc. — Q2 2021 Form 10-Q
Business and period: Paysign provides prepaid card programs, patient-affordability services, digital banking and payment processing. This unaudited report covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $6.65 million | $6.44 million | $12.93 million | $17.02 million |
| Gross profit / margin | $3.15 million / 47.4% | $3.30 million / 51.3% | $5.98 million / 46.3% | $9.03 million / 53.0% |
| Operating income (loss) | $(0.94) million | $(0.65) million | $(2.57) million | $0.75 million |
| Net income (loss) | $(0.93) million | $(0.22) million | $(2.56) million | $1.32 million |
| Adjusted EBITDA | $0.22 million | $0.50 million | $(0.18) million | $3.12 million |
Revenue mix and changes: Q2 revenue rose 3.2% year over year: Plasma revenue increased 30.1% to $5.95 million, while Pharma revenue fell 63.8% to $0.64 million. For the first half, revenue declined 24.0%; Plasma fell 4.9% to $11.33 million and Pharma fell 68.2% to $1.52 million. Management attributed Plasma improvement in Q2 to more donations as pandemic restrictions eased; first-half Plasma weakness reflected first-quarter donation-center closures and mobility restrictions. Pharma revenue was lower in part because settlement income is now recognized when cards and programs expire, rather than ratably, and because of pandemic-related disruption to pharmaceutical programs.
Gross margin declined in both comparisons. Management cited the lower contribution from Pharma settlement income, lower revenue conversion and fixed costs as factors. Q2 operating expenses rose 3.5%, including higher depreciation and amortization; first-half operating expenses rose 3.2%.
Cash, liquidity and obligations
- At June 30, cash was $6.62 million and restricted cash was $65.76 million, for combined cash and restricted cash of $72.37 million. Restricted funds are contractually tied to card programs and are matched by a $65.76 million customer card funding liability.
- Six-month operating cash flow was $17.58 million, versus $4.26 million in 2020. The increase was primarily driven by the $17.65 million increase in customer card funding liability; it should not be read as cash generated solely from earnings.
- Investing cash outflow was $1.26 million, mainly for internally developed software and fixed assets. Financing provided $0.12 million from stock-option exercises.
- Total liabilities were $72.80 million, including customer card funding and operating leases. The filing reports no borrowing debt; lease liabilities totaled $4.18 million, including $0.33 million current.
- Stockholders’ equity was $11.98 million. Management stated that unrestricted cash, together with forecast revenue and cash flows, was expected to fund operations for at least the next 12 months.
Outlook, risks and notable matters
- No specific revenue or earnings guidance was provided. Paysign planned further investment in technology, sales and marketing, customer service and regulatory compliance; management said expansion into new markets could use internally generated funds if it did not raise additional capital.
- Management said results had improved but remained below pre-pandemic levels. The duration and effects of COVID-19 and variants were uncertain, and the company could not reasonably estimate future effects on results, cash flows or financial condition.
- A securities class action alleging misstatements or omissions regarding internal controls and financial statements was pending; defendants’ motion to dismiss was fully briefed, and the company could not meaningfully estimate outcome or damages. A related derivative action was stayed pending the class-action motion ruling.
- The filing reported disclosure controls were effective as of June 30, 2021, with no material changes in internal control during the quarter. It also stated that risk factors had not materially changed from the 2020 Form 10-K.
- Related-party legal expense paid to a law firm whose partner sits on the board was $410,884 for the first half, including $390,172 in Q2.
Investor verification priorities
- Reconcile an apparent MD&A error: the six-month net income-to-loss change is $3.88 million based on the financial statements, but the MD&A table shows $712,733, the Q2 change.
- Check the stock-based compensation disclosure: Note 6 states $1.78 million for the first half, while the cash-flow statement and Adjusted EBITDA reconciliation show $1.18 million.
- Assess the quality and sustainability of operating cash flow, given its dependence on card-program funding balances and the substantial restricted-cash/customer-funding amounts.
- Monitor Pharma revenue recognition at program expiration, Plasma donation volumes, gross-margin conversion and progress toward pre-pandemic operating levels.
- Track the securities and derivative litigation, including any court ruling, potential costs or financial exposure.