Paysign, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 6, 2019. Paysign provides prepaid card products and processing and program-management services. The company changed its name from 3PEA International, Inc. in April 2019 and began trading as PAYS.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $9.01 million | $6.42 million | $24.90 million | $16.56 million |
| Gross profit | $5.37 million | $3.04 million | $14.18 million | $7.91 million |
| Gross margin | 60% | 47% | 57% | 48% |
| Operating income | $2.28 million | $0.76 million | $4.65 million | $1.88 million |
| Net income attributable to Paysign | $2.96 million | $0.80 million | $5.57 million | $1.95 million |
| Diluted EPS | $0.05 | $0.02 | $0.10 | $0.04 |
| Adjusted EBITDA | $3.25 million | $1.45 million | $7.56 million | $3.39 million |
Q3 revenue increased 40% year over year; nine-month revenue rose approximately 50%. Management attributed growth to new clients, industry verticals, and programs for existing clients. Improved interchange margins and client mix supported higher gross margins. SG&A increased 39% in Q3 and 62% for the nine-month period, reflecting spending on infrastructure, staffing, and stock-based compensation.
Cash, liquidity, and capitalization
- At September 30, cash was $7.99 million and restricted cash was $33.23 million, versus $5.62 million and $26.05 million, respectively, at year-end 2018. Restricted cash is contractually held for card programs.
- Nine-month operating cash flow was $10.80 million, investing cash outflow was $1.50 million, and financing cash inflow was $0.25 million. Cash and restricted cash together increased $9.55 million to $41.22 million.
- Current liabilities were $31.03 million, including $29.57 million of customer card funding. The balance sheet reports no debt. Customer card funding obligations should be considered alongside restricted cash when assessing liquidity.
- Total equity was $16.58 million. Common shares issued increased to 48.10 million from 46.44 million at December 31, 2018; weighted-average diluted shares were 54.29 million for Q3.
- Management said available unrestricted cash, together with anticipated revenue and operating earnings, should fund operations for at least the next 12 months. It noted that raising capital could speed expansion; without new capital, expansion could be slower.
Outlook, risks, and notable items
- Management expected Q4 growth to be comparable to or better than the prior-year rate and anticipated strong growth through the remainder of 2019 and into 2020. It expected gross margins to remain near the current trend or decline slightly in the next quarter, partly due to seasonality and business mix. These are management expectations, not formal quantified guidance.
- Management plans continued investment in technology, sales and marketing, customer service, and regulatory compliance. The filing identifies competition, execution, regulatory and other uncertainties as risks; it reports no material change to the risk factors in the 2018 Form 10-K.
- The company recorded income tax benefits of $0.56 million for both Q3 and the nine-month period, attributed to stock-based compensation. Stock-based compensation expense was $0.65 million in Q3 and $1.87 million year to date.
- No material litigation, material off-balance-sheet arrangements, or reportable subsequent events were disclosed. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether customer and program growth can continue at the pace implied by management’s outlook, and how much revenue depends on particular clients or verticals.
- Whether improved gross margins persist as client mix and seasonality change; the filing does not quantify client concentration.
- How much of reported cash is available for general corporate use, given the substantial restricted cash and customer card funding balances.
- The sustainability of earnings and cash generation after considering higher SG&A, ongoing platform investment, and stock-based compensation and dilution.
- The income-tax-benefit figures: the financial statements report $563,854 for Q3, while the MD&A contains a slightly different Q3 figure of $563,864.