Paysign, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Paysign provides prepaid card programs and processing services, including in plasma and pharmaceutical markets. Financial statements are unaudited.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $(0.15) million | $9.01 million | $16.87 million | $24.90 million |
| Gross profit (loss) | $(3.43) million | $5.37 million | $5.59 million | $14.18 million |
| Gross margin | (2,251.5%) | 59.6% | 33.1% | 56.9% |
| Operating income (loss) | $(8.42) million | $2.28 million | $(7.68) million | $4.65 million |
| Net income (loss) attributable to Paysign | $(6.15) million | $2.96 million | $(4.83) million | $5.57 million |
| Adjusted EBITDA, non-GAAP | $(6.71) million | $3.25 million | $(3.58) million | $7.56 million |
| Operating cash flow | Not separately presented | Not separately presented | $12.58 million | $10.80 million |
Q3 basic and diluted loss per share was $0.12; nine-month basic and diluted loss per share was $0.10. For the nine-month period, card loads were $721 million, compared with $630 million in 2019.
Liquidity and balance sheet
- At September 30, 2020, cash was $7.50 million and restricted cash was $48.01 million. Restricted cash is contractually designated for card programs and should not be treated as general-purpose liquidity.
- Total assets were $71.06 million; total liabilities were $54.37 million; stockholders’ equity was $16.69 million.
- Customer card funding liabilities were $48.01 million, matched by the same amount of restricted cash. The liability increased $15.29 million during the first nine months.
- The filing reports no borrowings. Operating lease liabilities totaled approximately $4.41 million, including $0.32 million current and $4.10 million long term.
- Cash and restricted cash increased $9.94 million in the first nine months. Operating cash flow benefited substantially from the increase in customer card funding; investing activities used $2.56 million, primarily for fixed assets and platform development.
Changes, outlook and risks
- Pharma revenue estimate change: Paysign reversed previously recognized settlement income on current Pharma programs and will recognize unspent balances only when cards and programs expire, when breakage is no longer considered remote. The change reduced Pharma revenue by $6.29 million and increased net loss after tax by $4.97 million, or $0.10 per share, for both the quarter and nine-month period as reported.
- Revenue and margins: Nine-month revenue fell 32.3%, gross profit declined 60.6%, and gross margin fell to 33.1% from 56.9%. Management cited COVID-19 effects, lower plasma donations and card loads, and a mix shift toward lower-margin non-Pharma business. New card programs increased approximately 20% year over year, supporting a strong first quarter.
- Costs and unusual items: Nine-month SG&A rose 33.2% to $11.30 million, including increased staffing, professional services, technology and rent. Q3 included a $0.38 million impairment for suspended efforts to acquire a business license. A $0.04 million asset-abandonment loss followed the headquarters relocation.
- COVID-19 and liquidity outlook: Management said the pandemic adversely affected results but could not reasonably estimate its future impact. It believed unrestricted cash, forecast revenue and cash flows would be sufficient to sustain operations for the next 12 months. No specific earnings or revenue guidance was provided.
- Controls and litigation: Disclosure controls were not effective because previously reported material weaknesses in internal control over financial reporting remained under remediation. The company faces securities class-action complaints and a stockholder derivative action; it could not estimate the probability of outcome or damages. The filing reports no material changes to the risk factors in the 2019 Form 10-K.
- Legal expense paid to a law firm connected to a director was $0.54 million for the first nine months, versus $0.03 million in the comparable 2019 period.
Important facts for investors to verify
- How the revised Pharma breakage estimate affects future revenue recognition, program economics and reported results.
- Whether plasma activity, Pharma programs and card-load growth recover from pandemic-related effects, and how revenue mix affects margins.
- How much of operating cash flow reflects sustainable operating performance versus movements in customer card funding and restricted cash.
- Progress in remediating internal-control material weaknesses and any developments in the securities and derivative litigation.
- Whether the $7.50 million of unrestricted cash and forecast cash flows remain adequate, considering operating needs and lease commitments.