2615 St. Rose Parkway, Henderson, Nevada
89052
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter: $297,880,651 based upon a market price of $9.71 per share.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date: 50,447,432 as of March 23, 2021.
Portions of the registrant’s definitive
Proxy Statement for its 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on
Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the
registrant's fiscal year ended December 31, 2020.
This Annual Report on Form 10-K contains
"forward-looking statements." These forward-looking statements are based on our current expectations, assumptions, estimates
and projections about our business and our industry. Words such as "believe," "anticipate," "expect,"
"intend," "plan," "may," and other similar expressions identify forward-looking statements. In addition,
any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking
statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward- looking statements. You are cautioned not to place undue reliance on these
forward-looking statements, which relate only to events as of the date on which the statements are made. We undertake no obligation
to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. You should
refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.
PART
I
ITEM 1. BUSINESS.
Overview
Paysign, Inc. (the “Company,”
“Paysign,” “we” or “our”) amended our articles of incorporation and changed our name from 3PEA
International, Inc. to Paysign, Inc. on April 23, 2019. Additionally, we changed our trading symbol on the Nasdaq Capital Market
to “PAYS.” The Company acquired 3Pea Technologies, Inc., a payment solutions company, in March 2006, which resulted
in 3Pea Technologies, Inc. becoming a wholly owned subsidiary.
Business of Issuer
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’s flexibility and ease of customization has allowed us to expand our operational capabilities by facilitating
our entry into new markets within the payments space. 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.
What Are Prepaid Cards?
A prepaid card is a payment product that
is pre-funded and not directly linked to an individual bank account. Prepaid cards are unlike debit cards that are attached to
a personal or business checking account and draw funds from that linked account or a credit card that draws funds from a line of
credit.
Prepaid cards can either be open-loop,
closed-loop, or restricted-loop. Open-loop, or network-branded, prepaid cards carry an acceptance mark of a national or international
payment network such as American Express, Discover, Mastercard or Visa and can be used anywhere that card brand is accepted. Closed-loop
prepaid cards can only be used at a specific merchant whose name is typically branded on the card and are most likely not network
branded. Restricted-loop prepaid cards may carry a network brand and can be used only at a specific group of non-affiliated merchant
locations such as a shopping mall or a specific merchant category.
Open-loop, and some restricted-loop, prepaid
cards are issued by a financial institution under a license of the payment network. Open-loop prepaid cards provide consumers,
businesses and governments with the efficiency, security and flexibility of digital payments reducing costs associated with handling
cash, checks and other paper-based payment processes, and provides the end user a payment product that is accessible and with global
utility, convenient, safer than cash, can be used as a budgeting tool and contains protections against fraud and theft.
The prepaid market continues to experience
significant growth due to consumers, corporations and governments 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.
The Mercator Advisory Group’s 17th
Annual U.S. Open Loop Prepaid Cards Market Forecast 2020-2024, shows that $374 billion was loaded on open-loop prepaid
cards in the United States in 2019 and they are forecasting that total open-loop loads will have a compound annual growth rate
of 4.1% between 2020 and 2024, to $466.2 billion being loaded in 2024.
Consumers, both banked and unbanked, use
prepaid cards such as general purpose reloadable (GPR) cards, to conduct their day-to-day financial transactions such as paying
bills, depositing checks, and receiving direct deposits. According to the 2019 FDIC Survey of Household Use of Banking and Financial
Services, 8.5% of U.S. households or approximately 128 million households, use GPR prepaid cards.
Common Examples of Prepaid Cards
The prepaid card market is divided
into three macro categories based on who funds the card account. These categories are consumer-funded, corporate-funded and
government-funded.
Consumer-Funded
Programs: The consumer prepaid category consists of products such as general purpose reloadable (GPR) cards, gift cards, travel
money cards, and remittance/peer-to-peer (“P2P”) cards.
General Purpose Reloadable Cards:
A type of prepaid card typically purchased by a consumer for his/her personal use to pay for purchases, pay bills and/or access
cash at ATMs. GPR cards may be purchased online and in retail locations from a variety of providers. Funds may be loaded onto the
card by direct deposit of wages or benefits or at retail locations offering prepaid card reload services.
Gift Cards: A non-reloadable
prepaid card that is purchased by a gift giver to be given to a gift recipient.
Corporate-Funded Programs: The corporate
prepaid category consists of products such as employee/partner incentives, consumer incentives, payroll, employee benefits, healthcare,
corporate expense and business travel, insurance claim disbursement, etc.
Our Products and Services
As a payment processor and prepaid card
program manager, our payment solutions are utilized by our customers as a means to increase customer loyalty, increase brand recognition,
reward customers, agents and employees while reducing administration costs and streamlining operations. We manage all aspects of
the prepaid card lifecycle, from the card design and approval processes with partners and networks, to production, packaging,
distribution, and personalization. We also oversee inventory and security controls, renewals, and lost and stolen card management
and replacement. We provide in-house customer service which includes live bilingual customer care representatives staffed 24/7/365.
We also run in-house Interactive Voice Response (IVR) and two-way SMS messaging platforms. As we do not have our own banking license
to issue open-loop prepaid cards, our cards are offered to end users through our relationships with bank issuers.
As an end-to-end payment processor and
prepaid card program manager, we derive our revenue from all stages of the card lifecycle. These revenues can include fees from
program set-up; customization and development; data processing and report generation; card production and fulfillment; transaction
fees derived from card usage; inactivity fees; card replacement fees; program administration fees; and settlement income.
To date, we have issued millions of prepaid
cards under programs implemented for Fortune 500 companies, multinationals, as well as top pharmaceutical manufacturers, universities
and social media companies.
As of December 31, 2020, we had approximately
3.5 million cardholders participating in approximately 360 card programs.
In our early years of operations, we focused
mainly on providing co-pay assistance prepaid cards to the pharmaceutical industry. In 2011, we began marketing a corporate incentive
prepaid card-based payment solution targeting the plasma donation industry. More recently, having built the necessary infrastructure
and added essential staff, we have increased our focus and sales efforts on corporate incentive and corporate expense card programs
as well as retargeting the pharmaceutical industry with co-pay assistance, buy and bill and other prepaid programs designed to
maximize patient enrollment, adherence and retention.
The Paysign® Brand
In order to leverage the capabilities
of the Paysign platform and successfully expand our product offerings, we established the Paysign brand of prepaid cards and
solutions. The Paysign brand encompasses all of our current and future prepaid product offerings, including but not limited
to, corporate incentives, healthcare related payment solutions for clinical trials, donations and co-pay assistance, payroll,
settlement payments, corporate expense cards and solutions designed for the public sector as well as general purpose
reloadable prepaid cards. Paysign is a registered trademark of the Company in the United States and other countries.
Corporate Incentives
Our Paysign corporate incentive cards offer
businesses a practical and contemporary way to reward and motivate existing and potential customers, employees, donors, patients,
clinical trial participants, sales professionals, agents and distributors. We develop incentive card programs, either traditional
plastic or virtual, that our customers use for a wide variety of applications, including but not limited to: consumer rebates for
large purchases or frequent buyers; trade incentives for third party distributors; new product launches and commission based sales
incentives; consumer promotions such as automobile test drives; purchase incentives; loyalty rewards; compensation for the time
and effort of donating; pharmaceutical payment assistance; referral programs; event giveaways; and purchase incentives. The Paysign
solution can be integrated into existing payment management systems or act as a stand-alone solution. All Paysign cards are accepted
anywhere Visa is accepted.
Key benefits of our corporate incentive
cards are:
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Reduced costs: Operating and administrative costs associated with processing traditional paper checks are reduced.
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Co-Branding: Our clients can promote their brands as the card can include the corporate sponsor’s logo. The card itself advertises the sponsor’s brand.
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Customization: Our Paysign platform allows for easy customization of our corporate incentive card products. For example, our clients can select merchants or merchant categories which dictate where the card will be accepted. Our clients can receive customized reports, track card usage and attach surveys to the activation process to gain market intelligence.
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Speed to Market: Our clients can get rewards and incentives to the intended recipients in a much quicker manner than traditional methods using our corporate incentive card products.
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Per Diem/ Corporate Expense Payments
Per Diem, Corporate Expense and
Business Travel Cards are reloadable prepaid card that allows businesses, non –profits and government agencies the
ability to control employee spending while reducing administration costs by eliminating the need for traditional expense
reports. We are currently focusing on marketing these card products to large corporations.
Pharmaceutical Market
Our Paysign solutions for the pharmaceutical
industry are a specialized, adjudicated solution that pays all or a portion of a patient’s out-of-pocket costs associated
with a prescription drug purchase. Funds are provided by the sponsoring pharmaceutical company for use at retail pharmacies, specialty
pharmacies, hospitals, doctors’ offices and clinics nationwide.
Our pharmaceutical solutions provide payment
claims processing and other administrative services for clients, in real-time, according to client benefit plan designs. Our solutions
present a cost-effective payment delivery vehicle by providing real-time financial benefit for both consumers and pharmaceutical
companies. Our offerings also allow clients to directly manage more of their pharmacy benefits and include pharmacy claims adjudication,
network and payment administration, client call center service and support, reporting, rebate management, as well as implementation,
training and account management.
Co-Pay Assistance Program
Our Co-Pay Assistance Program is a
pharmaceutical payment card product which is adjudicated as a secondary claim at the point of purchase. The adjudication
process determines what funds will be loaded onto the card by applying business rules designed by the pharmaceutical company.
The loaded funds are then immediately applied to the prescription purchase at the point of purchase for the patient benefit.
The card is used to defray out-of-pocket costs for the prescription. Key features and benefits of our Paysign card for the
Co-Pay Assistance Program are:
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Tracking and auditing "free samples" is no longer required, as the retail pharmacy network serves as the distribution mechanism for new prescriber promotions.
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The patient's primary insurance pays the standard adjudicated amount for prescription fills that would historically be "free samples".
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The distribution of cards enables far superior prescriber and patient data collection for the sponsoring pharmaceutical company through the use of automated questionnaires required to activate the cards.
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The marketing programs can be better designed to meet the specifications and needs of the sponsoring pharmaceutical company as compared to programs involving the distribution of physical samples.
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Because the card operates like a debit card, pharmacy retailers are paid instantly for the adjudicated promotional cost on covered prescription transactions.
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We provide a set of comprehensive, customizable reporting modules to our pharmaceutical clients.
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Buy and Bill Program
Where Paysign’s standard pharmaceutical
Co-Pay Assistance Program provides payment for self-administered pharmaceuticals purchased at a pharmacy, Paysign’s Buy and
Bill Program is designed to provide a benefit for patients when purchasing directly from their physician’s office or through
an infusion center for physician administered therapies.
Source Plasma Donor Payments
Plasma derived therapies are lifesaving
treatments used to treat various rare conditions. Plasma based therapies are manufactured using human plasma, which is the yellow
liquid portion of whole blood that can be easily replaced by the body. Plasma makes up approximately 55 percent of whole blood
and consists primarily of water and proteins. Source plasma is the plasma collected from individual donors that serves as the raw
material for the further manufacture into these lifesaving therapies. Historically, source plasma donation centers compensated
their donors with cash or checks. Over the past several years, plasma donation centers have migrated to a prepaid card solution
for donor payments.
The Company offers a comprehensive customized
payment solution for source plasma collection centers under the Paysign brand. The solution consists of the Paysign Plasma Donor
Compensation Prepaid Card, the Paysign Partner Portal for administrators, and the Paysign Kiosk. The solution offers customized
reporting and provides a level of business analytics previously unavailable. The solution can be utilized either as a stand-alone
web-based solution or integrated with existing donor management systems, giving plasma donation centers an increased level of flexibility.
The Company entered the market in late 2011 and has seen significant growth in this market segment. Currently, the Company services
approximately 36% of the plasma collection centers in the US.
DDA Debit Cards—Paysign Premier
Recently, providers of GPR card products,
in response to changes in the regulatory environment, have introduced new products similar to a GPR card but that act as true demand
deposit accounts accessible with a debit card (“DDA Debit Card”). These DDA Debit Cards offer many of the features
and functionalities of a traditional debit card associated with a standard bank account, including overdraft protection. The Company
began marketing its DDA Debit Card, branded Paysign Premier Digital Bank Account, in the third quarter of 2019. The Company markets
this product to a targeted portion of its existing cardholder base through existing communication points and to customers and employees
of new clients.
Other Services
Customer Service Center
In order to provide a full range of services
to our customers, we offer a fully staffed, in-house Customer Service Center which is operational 24 hours a day, 7 days per week
consisting of live bilingual customer care representatives. The Paysign Platform provides Interactive Voice Response (“IVR”),
SMS alerts and two-way SMS messaging, allowing cardholders to set alerts and check their balances and transaction history without
the assistance of a live customer service operator. We believe our in-house customer service center provides the highest quality
customer service experience for our clients as training is performed on-site by Paysign staff.
The Paysign Communications Suite
To help maximize the cardholder experience,
cardholders can access their card balances and transaction history, as well as other information as dictated by the program, such
as an ATM locator, a loyalty point counter, and geo-specific messaging through a number of touchpoints such as the Paysign kiosk,
the Paysign Mobile App, two-way SMS, text alerts and the Paysign cardholder web portal.
Technology
Our technology platform employs a standard
enterprise services bus in a service-oriented architecture, configured for 24/7/365 transaction processing and operations. We utilize
two secure, interconnected, environmentally-controlled data centers, with emergency power generation capabilities, and fully redundant
capabilities. We use a variety of proprietary and licensed standards-based technologies to implement our platforms, including those
which provide for orchestration, interoperability and process control. The platforms also integrate a data infrastructure to support
both transaction processing and data warehousing for operational support and data analytics.
Competition
The markets for financial products and
services, including prepaid cards and services related thereto, are intensely competitive. We compete with a variety of companies
in our markets and our competitors vary in size, scope and breadth of products and services offered. Certain segments of the financial
services and healthcare industries tend to be highly fragmented, with numerous companies competing for market share. Highly fragmented
segments currently include financial account processing, customer relationship management solutions, electronic funds transfer
and prepaid solutions.
Many of our existing and potential competitors
have longer operating histories, greater financial strength and more recognized brands in the industry. These competitors may be
able to attract customers more easily because of their financial resources and awareness in the market. Our larger competitors
can also devote substantially more resources to business development and may adopt more aggressive pricing policies. To compete
with these companies, we rely primarily on direct marketing strategies including strategic marketing partners.
Sales and Marketing
We market our Paysign payment solutions
through direct marketing by the Company’s sales team. Our primary market focus is on companies and municipalities that require
a streamlined payment solution for rewards, rebates, payment assistance, and other payments to their customers, employees, agents
and others. To reach these markets, we focus our sales efforts on direct contact with our target market and attendance at various
industry specific conferences. We may, at times, utilize independent contractors who make direct sales and are paid on a commission
basis only.
We market our Paysign Premier product through
existing communication channels to a targeted segment of our existing cardholders, as well as to a broad group of individuals,
ranging from non-banked to fully banked consumers with a focus on long term users of our product.
Markets and Major Customers
We have no major customers and are not reliant on any individual
card program. We manage multiple programs at any given time. As of December 31, 2020, we managed approximately 360 card programs
with approximately 3.5 million participating cardholders.
Implications of Being an Emerging Growth
Company
Paysign qualifies as an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company
may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include,
but are not limited to:
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the option to present only two years of audited financial statements and two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K;
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reduced disclosure obligations regarding executive compensation in periodic reports, proxy statements and registration statements; and
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exemptions from the requirements of holding nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
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We have elected to take advantage of certain
reduced disclosure obligations in this Annual Report on Form 10-K and may elect to take advantage of other reduced reporting requirements
in future filings. As a result, the information that we provide to our stockholders may be different from what you might receive
from other public reporting companies in which you hold equity interests.
In addition, under the JOBS Act, emerging
growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.
We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial
statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable
to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at
any time, which election is irrevocable.
We will remain an emerging growth company
until the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion;
(ii) the last day of 2024; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended (referred to as the Exchange Act), which would occur if the market value
of our common equity held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed
second fiscal quarter; or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities
during any three-year period.
Regulations
Introduction
We operate in a highly regulated environment
and are subject to extensive regulation, supervision and examination. Applicable laws and regulations may change, and there is
no assurance that such changes will not adversely affect our business. Regulatory authorities have extensive discretion in connection
with their supervisory and enforcement activities, including but not limited to the imposition of restrictions on the operation
of financial institutions we may work with. Any change in such regulation and oversight, whether in the form of restrictions on
activities, regulatory policy, regulations, or legislation, including but not limited to changes in the regulations governing banks,
could have a material impact on our operations.
Our products and services are generally
subject to federal, state and local laws and regulations, including:
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anti-money laundering laws;
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money transfer and payment instrument licensing regulations;
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privacy and information safeguard laws;
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consumer protection laws;
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false claims laws and other fraud and abuse restrictions; and
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privacy and security standards under the Health Insurance Portability and Accountability Act (HIPAA) or other laws.
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These laws are often evolving and sometimes
ambiguous or inconsistent, and the extent to which they apply to us or the banks that issue our cards, our clients or our third
party service providers is at times unclear. Any failure to comply with applicable law — either by us or by the card
issuing banks, our client or our third party service providers, over which we have limited legal and practical control —
could result in restrictions on our ability to provide our products and services, as well as the imposition of civil fines and
criminal penalties and the suspension or revocation of a license or registration required to sell our products and services. See
"Risk Factors" for additional discussion regarding the potential impacts of changes in laws and regulations to which
we are subject and failure to comply with existing or future laws and regulations.
We continually monitor and enhance our
compliance program to stay current with the most recent legal and regulatory changes. We also continue to implement policies and
programs and to adapt our business practices and strategies to help us comply with current legal standards, as well as with new
and changing legal requirements affecting particular services or the conduct of our business generally.
Anti-Money Laundering Laws
Our products and services are generally
subject to federal anti-money laundering laws, including the Bank Secrecy Act, as amended by the USA PATRIOT Act, and similar state
laws. On an ongoing basis, these laws require us, among other things, to:
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report large cash transactions and suspicious activity;
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screen transactions against the U.S. government's watch-lists, such as the watch-list maintained by the Office of Foreign Assets Control;
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prevent the processing of transactions to or from certain countries, individuals, nationals and entities;
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identify the dollar amounts loaded or transferred at any one time or over specified periods of time, which requires the aggregation of information over multiple transactions;
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gather and, in certain circumstances, report customer information;
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comply with consumer disclosure requirements; and
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register or obtain licenses with state and federal agencies in the United States and seek registration of any retail distributors when necessary.
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Anti-money laundering regulations are constantly
evolving. We continuously monitor our compliance with anti-money laundering regulations and implement policies and procedures to
make our business practices flexible, so we can comply with the most current legal requirements. We cannot predict how these future
regulations might affect us. Complying with future regulation could be expensive or require us to change the way we operate our
business.
Money Transfer and Payment Instrument
Licensing Regulations
We are not currently subject to money transfer
and payment instrument licensing regulations; however, we have plans to introduce products in the future that would be subject
to such regulations. Currently, we believe that 39 U.S. jurisdictions would require us to obtain a license to operate a money
transfer business. As a licensee, we would be subject to certain restrictions and requirements, including reporting, net worth
and surety bonding requirements and requirements for regulatory approval of controlling stockholders, agent locations and consumer
forms and disclosures. We would also be subject to inspection by the regulators in the jurisdictions in which we are licensed,
many of which conduct regular examinations. In addition, we would be required to maintain "permissible investments" in
an amount equivalent to all "outstanding payment obligations."
Escheatment Laws
Unclaimed property laws of every U.S. jurisdiction
require that we track certain information on our card products and services and that, if customer funds are unclaimed at the end
of an applicable statutory abandonment period, the proceeds of the unclaimed property be remitted to the appropriate jurisdiction.
Privacy and Information Safeguard Laws
In the ordinary course of our business,
we or our third party service providers collect certain types of data, which subjects us to certain privacy and information security
laws in the United States, including, for example, the Gramm-Leach-Bliley Act of 1999, and other laws or rules designed to regulate
consumer information and mitigate identity theft. We are also subject to privacy laws of various states. These state and federal
laws impose obligations with respect to the collection, processing, storage, disposal, use and disclosure of personal information,
and require that financial institutions have in place policies regarding information privacy and security. In addition, under federal
and certain state financial privacy laws, we must provide notice to consumers of our policies and practices for sharing nonpublic
information with third parties, provide advance notice of any changes to our policies and, with limited exceptions, give consumers
the right to prevent use of their nonpublic personal information and disclosure of it to unaffiliated third parties. Certain state
laws may, in some circumstances, require us to notify affected individuals of security breaches of computer databases that contain
their personal information. These laws may also require us to notify state law enforcement, regulators or consumer reporting agencies
in the event of a data breach, as well as businesses and governmental agencies that own data. In order to comply with the privacy
and information safeguard laws, we have confidentiality/information security standards and procedures in place for our business
activities and with our third-party vendors and service providers. Privacy and information security laws evolve regularly, requiring
us to adjust our compliance program on an ongoing basis and presenting compliance challenges.
Bank Regulations
All of the cards that we service are issued
by a state-chartered bank. Thus, we are subject to the oversight of the regulators for, and certain laws applicable to, these card
issuing banks. These banking laws require us, as a servicer to the banks that issue our cards, among other things, to undertake
compliance actions similar to those described under "Anti-Money Laundering Laws" above and to comply with the privacy
regulations promulgated under the Gramm-Leach-Bliley Act as discussed under "Privacy and Information Safeguard Laws"
above.
Consumer Protection Laws
Certain products that we anticipate introducing
in the future will likely be subject to additional state and federal consumer protection laws, including laws prohibiting unfair
and deceptive practices, regulating electronic fund transfers and protecting consumer nonpublic information. Before we can introduce
those products, we will have to develop appropriate procedures for compliance with these consumer protection laws.
Card Networks
In order to provide our products and services,
we, as well as the banks that issue our cards, must be registered with Visa and/or MasterCard, as well as any other networks that
we desire to use, such as Discover, Pulse, NYCE and Star, and, as a result, are subject to card association rules that could subject
us to a variety of fines or penalties that may be levied by the card association or network for certain acts or omissions. The
banks that issue our cards are specifically registered as "members" of the Visa and/or MasterCard card networks. Visa
and MasterCard set the standards with which we and the card issuing banks must comply.
False Claims Laws and Other Fraud and
Abuse Restrictions
We provide claims processing and other
transaction services to pharmaceutical companies that relate to, or directly involve, the reimbursement of pharmaceutical costs
covered by Medicare, Medicaid, other federal healthcare programs and private payers. As a result of these aspects of our business,
we may be subject to, or contractually required to comply with, state and federal laws that govern various aspects of the submission
of healthcare claims for reimbursement and the receipt of payments for healthcare items or services. These laws generally prohibit
an individual or entity from knowingly presenting or causing to be presented claims for payment to Medicare, Medicaid or other
third party payers that are false or fraudulent. False or fraudulent claims include, but are not limited to, billing for services
not rendered, failing to refund known overpayments, misrepresenting actual services rendered in order to obtain higher reimbursement,
improper coding and billing for medically unnecessary goods and services. Many of these laws provide significant civil and criminal
penalties for noncompliance and can be enforced by private individuals through “whistleblower” or qui tam actions.
To avoid liability, providers and their contractors must, among other things, carefully and accurately code, complete and submit
claims for reimbursement.
From time to time, participants in the
healthcare industry, including us, may be subject to actions under the federal False Claims Act or other fraud and abuse provisions.
We cannot guarantee that state and federal agencies will regard any billing errors we process as inadvertent or will not hold us
responsible for any compliance issues related to claims we handle on behalf of providers and payers. Although we believe our editing
processes are consistent with applicable reimbursement rules and industry practice, a court, enforcement agency or whistleblower
could challenge these practices. We cannot predict the impact of any enforcement actions under the various false claims and fraud
and abuse laws applicable to our operations. Even an unsuccessful challenge of our practices could cause adverse publicity and
cause us to incur significant legal and related costs.
Privacy and Security Standards under
HIPAA or Other Laws.
The Health Insurance Portability and Accountability
Act of 1996 contains privacy regulations and the security regulations that apply to some of our operations. The privacy regulations
extensively regulate the use and disclosure of individually identifiable health information by entities subject to HIPAA. For example,
the privacy regulations permit parties to use and disclose individually identifiable health information for treatment and to process
claims for payment, but other uses and disclosures, such as marketing communications, require written authorization from the individual
or must meet an exception specified under the privacy regulations. The privacy regulations also provide patients with rights related
to understanding and controlling how their health information is used and disclosed. To the extent permitted by the privacy regulations
from the American Recovery and Reinvestment Act (ARRA), and our contracts with our customers, we may use and disclose individually
identifiable health information to perform our services and for other limited purposes, such as creating de-identified information.
Determining whether data has been sufficiently de-identified to comply with the privacy regulations and our contractual obligations
may require complex factual and statistical analyses and may be subject to interpretation. The security regulations require certain
entities to implement and maintain administrative, physical and technical safeguards to protect the security of individually identifiable
health information that is electronically transmitted or electronically stored. We have implemented and maintain policies and processes
to assist us in complying with the privacy regulations, the security regulations and our contractual obligations. We cannot provide
assurance regarding how these standards will be interpreted, enforced or applied to our operations. If we are unable to properly
protect the privacy and security of health information entrusted to us, we could be subject to substantial penalties, damages and
injunctive relief.
In addition to HIPAA, numerous other state
and federal laws govern the collection, dissemination, use, access to and confidentiality of individually identifiable health information
and healthcare provider information. In addition, some states are considering new laws and regulations that further protect the
confidentiality, privacy and security of medical records or other types of medical information. In many cases, these state laws
are not preempted by the HIPAA privacy regulations and may be subject to interpretation by various courts and other governmental
authorities. Further, the U.S. Congress and a number of states have considered or are considering prohibitions or limitations
on the disclosure of medical or other information to individuals or entities located outside of the United States.
Patents and Trademarks
We protect our intellectual property rights
through a combination of trademark, patent, copyright and trade secrets laws.
In order to limit access to and disclosure
of our intellectual property and proprietary information, all of our employees and consultants have signed confidentiality and
we enter into nondisclosure agreements with third parties. We cannot provide assurance that the steps we have taken to protect
our intellectual property rights, however, will deter adequately infringement or misappropriation of those rights. Particularly
given the international nature of the Internet, the rate of growth of the Internet and the ease of registering new domain names,
we may not be able to detect unauthorized use of our intellectual property or proprietary information, or to take enforcement action.
Employees and Independent Contractors
As of December 31, 2020, we had approximately
seventy employees and independent contractors.
We have no collective bargaining agreements
with our employees, and believe all independent contractor and employment agreement relationships are satisfactory. We hire independent
contractors on an as-needed basis, and we may retain additional employees and consultants during the next twelve months, including
additional executive management personnel with substantial experience in development business.
Available Information
Our internet address is www.paysign.com.
Information on our website does not constitute part of this Annual Report.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other
information in this Form 10-K, including our consolidated financial statements and related notes. If any of the following risks
actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely
affected. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
All forward-looking statements made by us or on our behalf are qualified by the risks described below.
Risks Related to Our Business
We may be unable to grow our business
in future periods, and if our revenue growth slows, or our revenues decline further, our business and financial conditions could
be adversely affected.
Our growth rates may decline in the future.
In fiscal 2020, we experienced declines in our revenues. There can be no assurance that we will be able to grow our business in
future periods. In the near term, our growth depends in significant part on our ability, among other things, to enter new markets
and to continue to attract new clients, and to retain our current clientele. Our growth also depends on our ability to develop
and market other prepaid card products that can utilize the Paysign platform.
As the prepaid financial services industry
continues to develop, our competitors may be able to offer products and services that are, or that are perceived to be, substantially
similar to or better than ours. This may force us to compete on the basis of price and to expend significant marketing, product
development and other resources in order to remain competitive. Even if we are successful at increasing our operating revenues
through our various initiatives and strategies, we will experience an inevitable decline in growth rates as our operating revenues
increase to higher levels and we may also experience a decline in margins. If our operating revenue growth rates slow materially
or decline, our business, operating results and financial condition could be adversely affected.
As a result of the COVID-19 pandemic,
our business, financial condition, profitability, and cash flows have been, and are likely to continue to be, negatively impacted.
On March 11, 2020, the World Health Organization
declared COVID-19 as a pandemic. Federal, state and local authorities in the United States imposed measures intended to reduce
the spread of the virus, including restrictions on freedom of movement and business operations such as travel bans, business limitations
and closures, quarantines and shelter-in-place orders. These measures had a significant impact on the global economy and financial
markets, and adversely affected the demand for our products and services. We experienced plasma donations and dollars added to
cards at a slower pace during the second and third quarters of 2020 with a slight recovery in the fourth quarter of 2020. We anticipate
that the negative economic impacts of the COVID-19 pandemic will continue for a significant portion of 2021. There is, however,
still substantial uncertainty around the remaining duration and breadth of the COVID-19 pandemic and, as a result, the ultimate
impact on our business, financial condition and results of operations cannot be reasonably estimated at this time.
We operate in a highly regulated environment,
and failure by us or business partners to comply with applicable laws and regulations could have an adverse effect on our business,
financial position and results of operations.
We operate in a highly regulated environment,
and failure by us or our business partners to comply with the laws and regulations to which we are subject could negatively impact
our business. We are subject to state money transmission licensing requirements and a wide range of federal and other state laws
and regulations, which are described under "Business – Regulations" above. In particular, our products
and services are subject to an increasingly strict set of legal and regulatory requirements intended to protect consumers and to
help detect and prevent money laundering, terrorist financing and other illicit activities.
Many
of these laws and regulations are evolving, unclear and inconsistent across various jurisdictions, and ensuring compliance with
them is difficult and costly. For example, with increasing frequency, federal and state regulators are
holding businesses like ours to higher standards of training, monitoring and compliance, including monitoring for possible violations
of laws by the businesses that participate in our reload network. Failure by us or those businesses to comply with the laws and
regulations to which we are subject could result in fines, penalties or limitations on our ability to conduct our business, or
federal or state actions, any of which could significantly harm our reputation with consumers and other network participants, banks
that issue our cards and regulators, and could materially and adversely affect our business, operating results and financial condition.
Changes in the laws, regulations, credit card association
rules or other industry standards affecting our business may impose costly compliance burdens and negatively impact our business.
There may be changes in the laws, regulations,
card association rules or other industry standards that affect our operating environment in substantial and unpredictable ways.
Changes to statutes, regulations or industry standards, including interpretation and implementation of statutes, regulations or
standards, could increase the cost of doing business or affect the competitive balance. For example, more stringent anti-money
laundering regulations could require the collection and verification of more information from our customers, which could have a
material adverse effect on our operations. Regulation of the payments industry has increased significantly in recent years. A number
of regulations impacting the credit card industry were recently implemented. Additional changes may require us to incur significant
expenses to redevelop our products. Also, failure to comply with laws, rules and regulations or standards to which we are subject,
including with respect to privacy and data use and security, could result in fines, sanctions or other penalties, which could have
a material adverse effect on our financial position and results of operations, as well as damage our reputation.
A data security breach could expose
us to liability and protracted and costly litigation, and could adversely affect our reputation and operating results.
We, the banks that issue our cards and
our third-party service providers receive, transmit and store confidential customer and other information in connection with our
products and services. The encryption software and the other technologies we and our partners use to provide security for storage,
processing and transmission of confidential customer and other information may not be effective to protect against data security
breaches. The risk of unauthorized circumvention of our security measures has been heightened by advances in computer capabilities
and the increasing sophistication of hackers. The banks that issue our cards, our clients and our third-party service providers
also may experience similar security breaches involving the receipt, transmission and storage of our confidential customer and
other information. Improper access to our or these third parties' systems or databases could result in the theft, publication,
deletion or modification of confidential customer and other information.
A data security breach of the systems on
which sensitive cardholder data and account information are stored could lead to fraudulent activity involving our products and
services, reputational damage and claims or regulatory actions against us. If we are sued in connection with any data security
breach, we could be involved in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced
to pay damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on
our operating revenues and profitability. We would also likely have to pay (or indemnify the banks that issue our cards for) fines,
penalties and/or other assessments imposed by Visa or MasterCard as a result of any data security breach. Further, a significant
data security breach could lead to additional regulation, which could impose new and costly compliance obligations. In addition,
a data security breach at one of the banks that issue our cards or our third-party service providers could result in significant
reputational harm to us and cause the use and acceptance of our cards to decline, either of which could have a significant adverse
impact on our operating results and future growth prospects.
We may have deficiencies or weaknesses
in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial
condition and results of operations in a timely and accurate manner, decrease investor confidence in our Company, and reduce the
value of our common stock.
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act and based upon the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO framework”). Management is also responsible for reporting on the
effectiveness of internal control over financial reporting.
Deficiencies or weaknesses in our internal
control over financial reporting that are not promptly identified and remediated may adversely affect our ability to report our
financial condition and results of operations in a timely and accurate manner, decrease investor confidence in our Company, and
reduce the value of our common stock. Although we believe we have taken appropriate actions to remediate previously reported control
deficiencies that we have identified and to strengthen our internal control over financial reporting, we cannot assure you that
we will not discover other deficiencies or weaknesses in the future.
Security and privacy breaches of our
electronic transactions may damage customer relations and inhibit our growth.
Any failures in our security and privacy
measures could have a material adverse effect on our business, financial condition and results of operations. Certain products
we offer require that we store personal information, including birth dates, addresses, bank account numbers, credit card information,
social security numbers and merchant account numbers. If we are unable to protect this information, or if consumers perceive that
we are unable to protect this information, our business and the growth of the electronic commerce market in general could be materially
adversely affected. A security or privacy breach may:
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cause our customers to lose confidence in our services;
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deter consumers from using our services;
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require that we expend significant additional resources related to our information security systems and could result in a disruption of our operations;
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expose us to liability;
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increase expenses related to remediation costs; and
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decrease market acceptance of electronic commerce transactions and prepaid use.
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Although
management believes that we have utilized proven systems designed for robust data security and integrity in electronic transactions,
our use of these applications may be insufficient to address changing technological or market conditions and the security and
privacy concerns of existing and potential customers.
The industry in which we compete is
highly competitive, which could adversely affect our operating revenue growth.
We believe that our existing competitors
have longer operating histories, are substantially larger than we are, may already have or could develop substantially greater
financial and other resources than we have, may offer, develop or introduce a wider range of programs and services than we offer
or may use more effective advertising and marketing strategies than we do to achieve broader brand recognition, customer awareness
and retail penetration. We may also face price competition that results in decreases in the purchase and use of our products and
services. To stay competitive, we may have to increase the incentives that we offer to our marketing partners and decrease the
prices of our products and services, which could adversely affect our operating results.
We rely on relationships with card issuing
banks to conduct our business, and our results of operations and financial position could be materially and adversely affected
if we fail to maintain these relationships or we maintain them under new terms that are less favorable to us.
Our relationships with various banks is
currently, and will be for the foreseeable future, a critical component of our ability to conduct our business and to maintain
our revenue and expense structure, because we are currently unable to issue our own cards. If we lose or do not maintain existing
banking relationships, we would incur significant switching and other costs and expenses and we and users of our products and services
could be significantly affected, creating contingent liabilities for us. As a result, the failure to maintain adequate banking
relationships could have a material adverse effect on our business, results of operations and financial condition. Our agreement
with the bank that issues our cards provide for cost and expense allocations between the parties. Changes in the costs and expenses
that we have to bear under these relationships could have a material impact on our operating expenses. In addition, we may be unable
to maintain adequate banking relationships or renew our agreements with the banks that currently issue our cards under terms at
least as favorable to us as those existing before renewal.
We receive important services from third-party
vendors, and replacing them could entail unexpected integration costs.
Some services relating to our business,
including network connectivity and gateway services are outsourced to third-party vendors. All of our vendors could be replaced
with competitors if our vendor terminated our contract or went out of business. However, in some cases replacing a vendor would
entail one-time integration costs to connect our systems to the successor’s systems, and could result in less advantageous
contract terms for the same service, which could adversely affect our profitability.
Changes in credit card association or
other network rules or standards set by Visa and MasterCard, or changes in card association and debit network fees or products
or interchange rates, could adversely affect our business, financial position and results of operations.
We and the banks that issue our cards are
subject to Visa and MasterCard, Pulse, NYCE and Star association rules that could subject us to a variety of fines or penalties
that may be levied by the card networks for acts or omissions by us or businesses that work with us. The termination of the card
association registrations held by us or any of the banks that issue our cards or any changes in card association or other debit
network rules or standards, including interpretation and implementation of existing rules or standards, that increase the cost
of doing business or limit our ability to provide our products and services could have an adverse effect on our business, operating
results and financial condition. In addition, from time to time, card networks increase the organization and/or processing fees
that they charge, which could increase our operating expenses, reduce our profit margin and adversely affect our business, operating
results and financial condition.
For example, a portion of our operating
revenues is derived from interchange fees (i.e., transaction fees paid by the merchant). The amount of interchange revenues that
we earn is highly dependent on the interchange rates that Visa and MasterCard set and adjust from time to time. Interchange rates
for certain products and certain issuing banks declined significantly as a result of the enactment of the Dodd-Frank Bill. If interchange
rates decline further, whether due to actions by Visa or MasterCard or future legislation or regulation, we would likely need to
change our fee structure to compensate for lost interchange revenues. To the extent we increase the pricing of our products and
services, we might find it more difficult to acquire consumers and to maintain or grow card usage and customer retention. We also
might have to discontinue certain products or services. As a result, our operating revenues, operating results, prospects for future
growth and overall business could be materially and adversely affected.
We may not be able to successfully manage
our intellectual property or may be subject to infringement claims.
In the rapidly developing legal framework,
we rely on a combination of contractual rights and copyright, trademark and trade secret laws to establish and protect our proprietary
technology. Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual
property or may develop software or technology competitive to us. Our competitors may independently develop similar technology,
duplicate our products or services or design around our intellectual property rights. We may have to litigate to enforce and protect
our intellectual property rights, trade secrets and know-how or to determine their scope, validity or enforceability, which is
expensive and could cause a diversion of resources and may not prove successful. The loss of intellectual property protection or
the inability to secure or enforce intellectual property protection could harm our business and ability to compete.
We may also be subject to costly litigation
in the event our products and technology infringe upon another party’s proprietary rights. Third parties may have, or may
eventually be issued, patents that would be infringed by our products or technology. Any of these third parties could make a claim
of infringement against us with respect to our products or technology. We may also be subject to claims by third parties for breach
of copyright, trademark or license usage rights. Any such claims and any resulting litigation could subject us to significant liability
for damages. An adverse determination in any litigation of this type could require us to design around a third party’s patent
or to license alternative technology from another party. In addition, litigation is time consuming and expensive to defend and
could result in the diversion of the time and attention of our management and employees. Any claim from third parties may result
in limitations on our ability to use the intellectual property subject to these claims. As of the date of this filing, we had not
received any notice or claim of infringement from any party.
The market for electronic commerce services
is evolving and may not continue to develop or grow rapidly enough for us to become profitable.
If the number of electronic commerce transactions
does not continue to grow or if consumers or businesses do not continue as projected to adopt our products and services, it could
have a material adverse effect on our business, financial condition and results of operations. Management believes future growth
in the electronic commerce market will be driven by the cost, convenience, ease of use and quality of products and services offered
to consumers and businesses. In order to reach and thereafter maintain our profitability, consumers and businesses must continue
to adopt our products and services.
If we do not respond to rapid technological
change or changes in industry standards, our products and services could become obsolete and we could lose our customers.
If competitors introduce new products and
services, or if new industry standards and practices emerge, our existing product and service offerings, technology and systems
may become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging
industry standards, we may lose current and future customers, which could have a material adverse effect on our business, financial
condition and results of operations. The electronic commerce industry is changing rapidly. To remain competitive, we must continue
to enhance and improve the functionality and features of our products, services and technologies.
Changes in the Bank Secrecy Act and/or
the USA PATRIOT Act could impede our ability to circulate cards that can be easily loaded or issued.
Our current compliance program and screening
process for the distribution and/or sale of prepaid card products is designed to comply with the Bank Secrecy Act (“BSA”)
and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the
“USA PATRIOT Act”). These regulations require financial institutions to obtain and confirm information related to their
respective cardholders. If the BSA and/or the USA PATRIOT Act or subsequent legislation increases the level of scrutiny that we
must apply to our cardholders and customers, it may be costly or impractical for us to continue to profitably issue and load cards
for our customers.
Internal processing errors could result
in our failing to appropriately reflect transactions in customer accounts.
In the event of a system failure that goes
undetected for a substantial period of time, we could allow transactions on blocked accounts, confirm false authorizations, fail
to deduct charges from accounts or fail to detect systematic fraud or abuse. Errors or failures of this nature could adversely
impact our operations, our credibility and our financial standing.
Our business is dependent on the efficient
and uninterrupted operation of computer network systems and data centers.
Our ability to provide reliable service
to our clients and cardholders depends on the efficient and uninterrupted operation of our computer network systems and data centers
as well as those of our third-party service providers. Our business involves movement of large sums of money, processing of large
numbers of transactions and management of the data necessary to do both. Our success depends upon the efficient and error-free
handling of the money. We rely on the ability of our employees, systems and processes and those of the banks that issue our cards,
our third-party service providers to process and facilitate these transactions in an efficient, uninterrupted and error-free manner.
In the event of a breakdown, a catastrophic
event (such as fire, natural disaster, power loss, telecommunications failure or physical break-in), a security breach or malicious
attack, an improper operation or any other event impacting our systems or processes, or those of our vendors, or an improper action
by our employees, agents or third-party vendors, we could suffer financial loss, loss of customers, regulatory sanctions and damage
to our reputation. The measures we have taken, including the implementation of disaster recovery plans and redundant computer systems,
may not be successful, and we may experience other problems unrelated to system failures. We may also experience software defects,
development delays and installation difficulties, any of which could harm our business and reputation and expose us to potential
liability and increased operating expenses. We currently do not carry business interruption insurance.
The soundness of other institutions
and companies could adversely affect us.
Our ability to engage in loading and purchasing
transactions could be adversely affected by the actions and failure of other institutions and companies, our card issuing banks
and distributors that carry our prepaid card products. As such, we have exposure to many different industries and counterparties.
As a result, defaults by, or even questions or rumors about, one or more of these institutions or companies could lead to losses
or defaults by us or other institutions. Losses related to these defaults or failures could materially and adversely affect our
results of operations.
Additional equity or debt financing
may be dilutive to existing stockholders or impose terms that are unfavorable to us or our existing stockholders.
We may raise capital in order to provide
working capital for our expansion into other products and services using our payments platform. If we raise additional funds by
issuing equity securities, our stockholders will experience dilution. Debt financing, if available, may involve arrangements that
include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital
expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation
and other preferences that are not favorable to us or our current stockholders. If we raise additional funds through collaboration
and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies and products
or grant unfavorable license terms.
We depend on key personnel and could
be harmed by the loss of their services because of the limited number of qualified people in our industry.
Because of our small size, we require the
continued service and performance of our management team, sales and technology employees, all of whom we consider to be key employees.
Competition for highly qualified employees in the financial services and healthcare industry is intense. Our success will depend
to a significant degree upon our ability to attract, train, and retain highly skilled directors, officers, management, business,
financial, legal, marketing, sales, and technical personnel and upon the continued contributions of such people. In addition, we
may not be able to retain our current key employees. The loss of the services of one or more of our key personnel and our failure
to attract additional highly qualified personnel could impair our ability to expand our operations and provide service to our customers.
Our future success depends on our ability
to attract, develop, incentivize and retain key personnel.
Our future success depends, to a significant
extent, on our ability to attract, develop, incentivize and retain key personnel, namely our management team and experienced sales,
marketing and program and technology personnel. We must motivate and retain existing personnel and also attract, source, hire,
develop and retain highly-qualified employees. We may experience difficulty fully integrating our newly-hired personnel, which
may adversely affect our business. Competition for qualified management, sales, marketing and program and technology personnel
can be intense. Competitors have in the past and may in the future attempt to recruit our top management and employees. If we fail
to attract, integrate, incentivize and retain key personnel, our ability to manage and grow our business could be harmed.
Risks Related to Ownership of Our Common Stock
Our stock price is volatile and you
may not be able to sell your shares at a price higher than what was paid.
The market for our common stock is highly
volatile. In 2020, our stock price fluctuated between $3.63 and $10.98. The trading price of our common stock could be subject
to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, announcements
of technological innovations or new products by our competitors or us, changes in prices of our products and services or our competitors'
products and services, changes in product mix, or changes in our revenue and revenue growth rates.
If securities analysts do not publish
research or reports about our business or if they publish negative evaluations of our common stock, the trading price of our common
stock could decline.
We expect that the trading price for our
common stock will be affected by any research or reports that securities analysts publish about us or our business. If one or more
of the analysts who may elect to cover us or our business downgrade their evaluations of our common stock, the price of our common
stock would likely decline. If one or more of these analysts cease coverage of our company, we could lose visibility in the market
for our common stock, which in turn could cause our stock price to decline.
We do not intend to pay dividends for
the foreseeable future.
We have never declared or paid any cash
dividends on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business, and we
do not anticipate paying any cash dividends in the foreseeable future. As a result, you will likely receive a return on your investment
in our common stock only if the market price of our common stock increases.
Concentration of ownership among our
existing directors, executive officers and principal stockholders may prevent new investors from influencing significant corporate
decisions.
Our directors, executive officers, and
holders of more than 5% of our total shares of common stock outstanding and their respective affiliates, in the aggregate, beneficially
own, as of March 23, 2021, approximately 41% of our outstanding common stock. As a result, these stockholders will be able to exercise
a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant
corporate transactions, and will have significant influence over our management and policies for the foreseeable future. Some of
these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals
and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent
a change in control of our company or otherwise discourage a potential acquirer from attempting to obtain control of our company,
which in turn could reduce the price of our common stock. In addition, these stockholders, some of which have representatives sitting
on our board of directors, could use their voting control to maintain our existing management and directors in office, delay or
prevent changes of control of our company, or support or reject other management and board of director proposals that are subject
to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.
Our stock price could decline due to
the large number of outstanding shares of our common stock eligible for future sale.
We have 50,447,432 shares of common stock outstanding as of March 23, 2021,
assuming no exercise of outstanding options, warrants or unvested restricted stock awards. None of the shares of common stock
are subject to any lock-up agreements, and all are eligible for sale, subject to registration under the Securities Act and in
some cases to volume and other restrictions imposed by Rule 144. Sales of substantial amounts of our common stock in the
public market, or even the perception that these sales could occur, could cause the trading price of our common stock to decline.
These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price
that we deem appropriate.
We incur significant costs as a result
of operating as a public company. We may not have sufficient personnel for our financial reporting responsibilities, which may
result in the untimely close of our books and records and delays in the preparation of financial statements and related disclosures.
As a registered public company, we have
experienced an increase in legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act”), as well as new rules subsequently implemented by the SEC, has imposed various requirements on public companies, including
requiring changes in corporate governance practices. Our management and other personnel need to devote a substantial amount of
time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs
and make some activities more time-consuming and costly. In addition, two putative class action lawsuits were recently filed against
us, which could require our management to devote significant time to defending. See “Item 3. Legal Proceedings” for
additional information.
If we are not able to comply with the requirements
of Sarbanes-Oxley Act, or if we or our independent registered public accounting firm identify additional deficiencies in our internal
control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we
could be subject to sanctions or investigations by the SEC and other regulatory authorities.
Our operating results may fluctuate
in the future, which could cause our stock price to decline.
Our quarterly and annual results of operations
may fluctuate in the future as a result of a variety of factors, many of which are outside of our control. If our results of operations
fall below the expectations of investors or any securities analysts who follow our common stock, the trading price of our common
stock could decline substantially. Fluctuations in our quarterly or annual results of operations may be due to a number of factors,
including, but not limited to:
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the timing and volume of purchases, use and reloads of our prepaid cards and related products and services;
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the timing and success of new product or service introductions by us or our competitors;
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seasonality in the purchase or use of our products and services;
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reductions in the level of interchange rates that can be charged;
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fluctuations in customer retention rates;
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changes in the mix of products and services that we sell;
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changes in the mix of retail distributors through which we sell our products and services;
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the timing of commencement, renegotiation or termination of relationships with significant third party service providers;
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changes in our or our competitors' pricing policies or sales terms;
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the timing of commencement and termination of major advertising campaigns;
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the timing of costs related to the development or acquisition of complementary businesses;
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the timing of costs of any major litigation to which we are a party;
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the amount and timing of operating costs related to the maintenance and expansion of our business, operations and infrastructure;
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our ability to control costs, including third-party service provider costs;
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volatility in the trading price of our common stock, which may lead to higher stock-based compensation expenses or fluctuations in the valuations of vesting equity; and
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changes in the regulatory environment affecting the banking or electronic payments industries generally or prepaid financial services specifically.
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ITEM 1B. UNRESOLVED
STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We have an operating lease for office
space at 2615 St. Rose Parkway, Henderson, Nevada 89052. The lease will expire in 2030 and allows for two optional extensions
of 5 years each. Lease payments are approximately $58,000 per month.
We lease space on a monthly basis for our
data centers in Las Vegas, Nevada under co-location agreements. The agreement provides for lease payments of approximately $8,000
per month.
We believe that we have satisfactory title
to the properties owned and used in our business, subject to liens for taxes not yet payable, liens incident to minor encumbrances,
liens for credit arrangements and easements and restrictions that do not materially detract from the value of these properties,
our interests in these properties, or the use of these properties in our business. We believe that our properties are adequate
and suitable for us to conduct business in the future.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved
in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
The Company has been named as a defendant
in three complaints filed in the United States District Court for the District of Nevada: Yilan Shi v. Paysign, Inc. et. al., filed
on March 19, 2020 (“Shi”), Lorna Chase v. Paysign, Inc. et. al., filed on March 25, 2020 (“Chase”),
and Smith & Duvall v. Paysign, Inc. et. al., filed on April 2, 2020 (“Smith” and collectively, the “Complaints”
or “Securities Class Action”). Smith was voluntarily dismissed on May 21, 2020. On May 18, 2020, the Shi plaintiffs
and another entity called the Paysign Investor Group each filed a motion to consolidate the remaining Shi and Chase actions and
to be appointed lead plaintiff. The Complaints are putative class actions filed on behalf of a class of persons who acquired the
Company’s common stock from March 12, 2019 through March 31, 2020, inclusive. The Complaints generally allege that the Company,
Mark R. Newcomer, and Mark Attinger violated Section 10(b) of the Exchange Act, and that Messrs. Newcomer and Attinger violated
Section 20(a) of the Exchange Act, by making materially false or misleading statements, or failing to disclose material facts,
regarding the Company’s internal control over financial reporting and its financial statements. The Complaints seek class
action certification, compensatory damages, and attorney’s fees and costs. On December 2, 2020, the Court consolidated Shi
and Chase as In re Paysign, Inc. Securities Litigation and appointed the Paysign Investor Group as lead plaintiff. On January 12,
2021, Plaintiffs filed an Amended Complaint in the consolidated action. Defendants filed a Motion to Dismiss the Amended Complaint
on March 15, 2021.
The Company has also been named as a nominal defendant in a
stockholder derivative action in the U.S. District Court for the District of Nevada: Andrzej Toczek, derivatively on behalf of
Paysign, Inc. v. Mark, R. Newcomer, et. al., filed on September 17, 2020. This action alleges violations of Section 14(a) of the
Exchange Act, breach of fiduciary duty, unjust enrichment, and waste, largely in connection with the failure to correct information
technology controls over financial reporting alleged in the Securities Class Action, thereby causing the Company to face exposure
in the Securities Class Action. The derivative complaint also alleges insider trading, violations against certain individual defendants.
On December 16, 2020, the Court approved a stipulation staying the action until the Court in the consolidated Securities Class
Action issues a ruling on the anticipated Motion to Dismiss. As of the date of this filing, Paysign cannot give any meaningful
estimate of likely outcome or damages.
ITEM 4. MINE SAFETY
DISCLOSURES.
Not applicable.
PART II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock trades on the Nasdaq Capital
Market under the symbol “PAYS”. The following table summarizes the low and high closing prices for our common stock
for each of the calendar quarters of 2020 and 2019.
|
|
2020
|
|
|
2019
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
10.36
|
|
|
$
|
3.63
|
|
|
$
|
8.29
|
|
|
$
|
3.53
|
|
Second Quarter
|
|
|
10.93
|
|
|
|
3.90
|
|
|
|
13.37
|
|
|
|
7.16
|
|
Third Quarter
|
|
|
10.98
|
|
|
|
5.33
|
|
|
|
17.95
|
|
|
|
9.47
|
|
Fourth Quarter
|
|
|
6.22
|
|
|
|
3.84
|
|
|
|
12.19
|
|
|
|
8.86
|
|
There were approximately 273 shareholders
of record of the common stock as of December 31, 2020. This number does not include an indeterminate number of shareholders whose
shares are held by brokers in “street name.”
The shares were issued pursuant to an exemption
from registration provided by Section 4(2) of the Securities Act of 1933.
Dividend Policy
We have not declared any cash dividends
on our Common Stock during our fiscal years ended on December 31, 2020 or 2019. Our Board of Directors has made no determination
to date to declare cash dividends during the foreseeable future, but is not likely to do so. There are no restrictions on our ability
to pay dividends.
Issuer Purchases of Equity Securities
During the quarter ended December 31, 2020,
we did not purchase any shares of our common stock.
ITEM 6. SELECTED
FINANCIAL DATA.
Because we are a smaller reporting company,
we are not required to provide the information called for by this Item.
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 the Company 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 (American Express, Discover,
MasterCard, Visa, 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 2021, 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.
2020 Year Milestones
|
·
|
Grew to approximately 3.5 million cardholders and 360 card programs as of December 31, 2020.
|
|
·
|
Year over year revenue declined 30%.
|
|
·
|
Added 55 Plasma programs, a net of 5 new Pharmaceutical programs, and 1 additional Corporate Incentive program.
|
Results of Operations
Fiscal Years Ended December 31, 2020
and 2019
The following table summarizes our consolidated financial results:
|
|
Year ended December 31,
|
|
|
Variance
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Plasma industry
|
|
$
|
23,401,068
|
|
|
$
|
26,994,929
|
|
|
$
|
(3,593,861
|
)
|
|
|
(13.3%
|
)
|
Pharma industry
|
|
|
326,699
|
|
|
|
7,372,990
|
|
|
|
(7,046,291
|
)
|
|
|
(95.6%
|
)
|
Other
|
|
|
392,667
|
|
|
|
298,734
|
|
|
|
93,933
|
|
|
|
31.4%
|
|
Total revenues
|
|
|
24,120,434
|
|
|
|
34,666,653
|
|
|
|
(10,546,219
|
)
|
|
|
(30.4%
|
)
|
Cost of revenues
|
|
|
14,817,028
|
|
|
|
15,425,178
|
|
|
|
(608,150
|
)
|
|
|
(3.9%
|
)
|
Gross profit
|
|
|
9,303,406
|
|
|
|
19,241,475
|
|
|
|
(9,938,069
|
)
|
|
|
(51.6%
|
)
|
Gross margin %
|
|
|
38.6%
|
|
|
|
55.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
15,091,432
|
|
|
|
11,656,681
|
|
|
|
3,434,751
|
|
|
|
29.5%
|
|
Impairment of intangible asset
|
|
|
382,414
|
|
|
|
–
|
|
|
|
382,414
|
|
|
|
N/A
|
|
Loss on abandonment of assets
|
|
|
42,898
|
|
|
|
–
|
|
|
|
42,898
|
|
|
|
N/A
|
|
Depreciation and amortization
|
|
|
2,124,762
|
|
|
|
1,483,140
|
|
|
|
641,622
|
|
|
|
43.3%
|
|
Total operating expenses
|
|
|
17,641,506
|
|
|
|
13,139,821
|
|
|
|
4,501,685
|
|
|
|
34.3%
|
|
Income (loss) from operations
|
|
$
|
(8,338,100
|
)
|
|
$
|
6,101,654
|
|
|
$
|
(14,439,754
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Paysign, Inc.
|
|
$
|
(9,141,562
|
)
|
|
$
|
7,454,319
|
|
|
$
|
(16,595,881
|
)
|
|
|
N/A
|
|
Net margin %
|
|
|
(37.9%
|
)
|
|
|
21.5%
|
|
|
|
|
|
|
|
|
|
The decrease in total revenues of $10,546,219 for the
year ended December 31, 2020 compared to the same period in the prior year consisted of a $3,593,861 reduction in Plasma revenue
and a $7,046,291 reduction in Pharma revenue. The decrease in Plasma revenue was primarily due to a decrease in plasma donations
and dollars loaded to card, significantly impacted by COVID-19 related donation center closures and mobility restrictions, which
also resulted in a reduction in card load fees. The Pharma revenue decrease included a $6,293,203 adjustment for a change in accounting
estimate in recognizing settlement income for Pharma programs based on substantially different performance indicators observed,
current trends in the industry regarding program management by third parties, and new information available in dollar loads and
spending patterns compared to historical experiences. This change resulted in the Company constraining revenue on all Pharma programs
in accordance with applicable accounting guidance. Based on the recently observed change in facts and circumstances, the Company
utilizes the remote method of revenue recognition for settlement income whereby the unspent balances will be recognized as revenue
at the expiration of the cards and the respective program. This has resulted in the reversal of all previously recognized settlement
income for all current Pharma programs. Pharma programs were also negatively impacted by COVID-19 as new pharmaceutical medicines
were delayed and individuals limited their exposure to pharmacies and doctor offices.
Cost of revenues for the year ended December 31, 2020 decreased $608,150 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. There was a favorable cost variance of $4,692,617 due to the variable
cost structure associated with a decrease in transactions, offset by an unfavorable cost variance of $4,084,467 resulting from
a decrease in higher margin Pharma revenue and fixed costs primarily resulting from the change in accounting estimate and the revenue
recognition for settlement income.
Gross profit for the year ended December 31, 2020 decreased $9,938,069 compared to the prior year resulting from the reduction in revenue described above, and the disproportionate
decrease in cost of sales. The decrease in gross margin resulted from the lower revenue conversion rate and an unfavorable cost
of revenue rate variance.
Selling, general and administrative expenses
(“SG&A”) for the year ended December 31, 2020 increased $3,434,751 or 29.5% compared to the prior year and consisted
primarily of an increase in staffing and compensation of $1,804,000, professional services for legal, accounting, tax, and consultants
of $690,000, stock-based compensation of $443,000, technologies and telecom of $494,000, and rent of $409,000 related to a new
office lease entered into in June 2020; offset by a decrease in travel and entertainment of $325,000 due to COVID-19 restrictions
in 2020.
During the year ended December 31, 2020,
we reviewed the carrying value of acquisition costs related to a business license and determined that there was an impairment necessary
as the efforts to acquire the license had been suspended. An impairment of intangible asset of $382,414 was recorded.
Depreciation and amortization expense for
the year ended December 31, 2020 increased $641,622 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, 2020, we
recorded a loss from operations of $8,338,100, a decrease of $14,439,754 from the period ending December 31, 2019, related to the
aforementioned factors.
Other income for the year ended December
31, 2020 decreased $350,396 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
(10.8%) and (13.9%) for the years ended December 31, 2020 and 2019. The effective tax rates vary, primarily as a result
of the tax benefit related to our stock-based compensation and a valuation allowance and pretax loss in the current year period.
The net income (loss) attributable to Paysign,
Inc. for the year ended December 31, 2020 decreased $16,595,881. The overall change in net income (loss) attributable to Paysign,
Inc. 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 $968 million and $882 million for the
years ended December 31, 2020 and 2019, 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, 2020 and 2019 were 2.49% or 249 basis
points (“bps”), and 3.93% or 393 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rate
for the years ended December 31, 2020 and 2019 were 0.96% or 96 bps, and 2.18% or 218 bps, respectively, of gross dollar volume loaded
on cards. Our net profit conversion rate for the years ended December 31, 2020 and 2019 were (0.95%) or (95) bps, and 0.84% or 84 bps,
respectively, of gross dollar volume loaded on cards. The decline in conversion rates was primarily attributable to a change in accounting
estimate for Pharma settlement income.
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 income (loss) attributable to Paysign Inc. to Adjusted EBITDA is provided in the table below.
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Reconciliation of adjusted EBITDA to net income (loss):
|
|
|
|
|
|
|
Net income (loss) attributable to Paysign, Inc.
|
|
$
|
(9,141,562
|
)
|
|
$
|
7,454,319
|
|
Income tax provision (benefit)
|
|
|
894,182
|
|
|
|
(909,976
|
)
|
Interest income
|
|
|
(90,720
|
)
|
|
|
(441,116
|
)
|
Depreciation and amortization
|
|
|
2,124,762
|
|
|
|
1,483,140
|
|
EBITDA
|
|
|
(6,213,338
|
)
|
|
|
7,586,367
|
|
Impairment of intangible asset
|
|
|
382,414
|
|
|
|
–
|
|
Loss on abandonment of assets
|
|
|
42,898
|
|
|
|
–
|
|
Stock-based compensation
|
|
|
2,971,777
|
|
|
|
2,528,613
|
|
Adjusted EBITDA
|
|
$
|
(2,816,249
|
)
|
|
$
|
10,114,980
|
|
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, 2020 and 2019:
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net cash provided by operating activities
|
|
$
|
13,775,819
|
|
|
$
|
16,712,779
|
|
Net cash used in investing activities
|
|
|
(3,344,855
|
)
|
|
|
(3,237,134
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(72,865
|
)
|
|
|
430,919
|
|
Net increase in cash and restricted cash
|
|
$
|
10,358,099
|
|
|
$
|
13,906,564
|
|
Comparison of Fiscal 2020 and 2019
In fiscal 2020 and 2019, we financed our
operations through internally generated funds.
Operating activities provided $13,775,819
of cash in 2020, a decrease of $2,936,960 in cash generated compared to 2019. The decrease is primarily due to the increase in the
customer card funding liability offset by the decrease in net income (loss) and deferred income taxes. The increase in the card
funding liability is partially related to the change in estimate and reversal of previously recognized settlement income on Pharma
programs.
Investing activities used $3,344,855 of
cash in 2020, as compared to $3,237,134 of cash in 2019. The increase is primarily attributable to an increase in fixed assets
purchased during the current year and ongoing enhancements to our processing platform and infrastructure. The purchase of intangible
assets decreased $1.2 million due to the acquisition of customer lists and contracts in 2019.
Financing activities used $72,865 of cash
in 2020 as compared to $430,919 of cash provided in 2019. Our cash used in financing activities for 2020 related to cash received
from the exercise of stock warrants totaling $172,560 offset by $245,425 for the repurchase of stock for taxes withheld. Our cash
provided in financing activities in 2019 consisted of cash received from the exercise of employee stock options totaling $430,919.
Liquidity and Sources of Financing
We believe that our available cash on hand,
excluding restricted cash, at December 31, 2020 of $7,829,453, along with anticipated revenues and operating profits anticipated
for 2021, 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, we recognize 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.
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. 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 – Our 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 differences between the basis of assets and liabilities as measured by tax laws
and their basis as reported in our consolidated financial statements. We also recognize deferred tax assets for tax attributes
such as net operating loss carryforwards and tax credit carryforwards. We record valuation allowances to reduce deferred tax assets
to the amounts we conclude are more likely-than-not to be realized in the foreseeable future.
We recognize and measure income tax benefits
based upon a two-step model: 1) a tax position must be more likely-than-not to be sustained based solely on its technical merits
in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely-than-not
to be sustained upon settlement. The difference between the benefit recognized for a position and the tax benefit claimed on a
tax return is referred to as an unrecognized tax benefit. We accrue income tax related interest and penalties, if applicable, within
income tax expense.
We have filed consolidated tax returns
whereby past subsidiary losses are used to offset tax liabilities on current profits. This approach could be challenged by the
Internal Revenue Service (“IRS”) and if not accepted, may affect net income and earnings per share. Management believes
that the likelihood of the IRS not accepting such filings is minimal.
Revenue recognition – The
Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which
it expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts
with customers, the Company performs the following five-step analysis: (i) identification of contract with customers; (ii) determination
of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance
obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligations.
The Company generates revenues from Plasma
card programs through fees generated from cardholder fees and interchange fees. Revenues from Pharma card programs are generated
through card program management fees, interchange fees, and settlement income.
Plasma and Pharma card program revenues
include both fixed and variable components. Our cardholder fees represent an obligation to the cardholder based on a per transaction
basis and recognized at a point in time when the performance obligation is fulfilled. Card program management fees include an obligation
to our card program sponsors and are generally recognized when earned on a monthly basis pursuant to the contract terms which are
generally multi-year contracts. Interchange fees are earned when customer-issued cards are processed through card payment networks
as the nature of our promise to the customer is that we stand ready to process transactions at the customer’s requests on
a daily basis over the contract term. Since the timing and quantity of transactions to be processed by us is not determinable,
we view interchange fees to comprise an obligation to stand ready to process as many transactions as the customer requests. Accordingly,
the promise to stand ready is accounted for as a single series performance obligation. The company uses the right to invoice practical
expedient and recognizes revenue concurrent with the processing of card transactions.
Previously, settlement income from
Pharma programs was recognized and recorded, after giving consideration to any revenue constraints, ratably throughout the program
lifecycle based on the Company’s estimate of the unspent balances to be remaining on the card at program expiration. During
2020, the Company observed substantially different performance indicators, current trends in the industry regarding program management
by third parties, and new information available in dollar loads and spending patterns compared to historical experience. As a result,
the Company changed its estimate of breakage for recognizing settlement income for Pharma programs resulting in the Company constraining
revenue on all Pharma programs in accordance with applicable accounting guidance. Based on the recently observed change in facts
and circumstances, the Company utilizes the remote method of revenue recognition for settlement income whereby the unspent balances
will be recognized as revenue at the expiration of the cards and the respective program. The Company records all revenue on a gross
basis since it is the primary obligor and establishes the price in the contract arrangement with its customers. The Company is
currently under no obligation for refunding any fees, and the Company does not currently have any obligations for disputed claim
settlements. Given the nature of the Company’s services and contracts, it has no contract assets.
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.
Stock-Based Compensation –
The Company recognizes compensation expense for all restricted stock and stock option awards. The fair value of restricted stock
is measured using the grant date trading price of our stock. The fair value of stock option awards is estimated at the grant date
using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation
cost over the requisite service period. We have elected to recognize compensation expense for all options with graded vesting on
a straight-line basis over the vesting period of the entire option. The determination of fair value using the Black-Scholes pricing
model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected
stock price volatility and the risk-free interest rate.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Because we are a smaller reporting company,
we are not required to provide the information called for by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
The financial statements required by Article
8 of Regulation S-X are attached hereto as Exhibit A.
ITEM 9. CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
During the two fiscal years ended December 31, 2020 and 2019, we did not file any Current Report on Form 8-K reporting any change in accountants in which there was a reported
disagreement on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedure.
ITEM 9A. CONTROLS
AND PROCEDURES.
Management’s Report on Internal
Control over Financial Reporting and Remediation Initiatives
Disclosure Controls and Procedures
We have evaluated, under the supervision
of our chief executive officer and chief financial officer and with the participation of other members of management, the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)
as of December 31, 2020. Disclosure controls and procedures means controls and other procedures that are designed to ensure that
the information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and to ensure that information required to be disclosed by us in those reports is accumulated and communicated
to our management, including our principal executive and principal financial officers, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of December 31, 2020. Based on that evaluation, our chief executive officer and chief financial officer
concluded that, as of the evaluation date, such controls and procedures were effective.
Management's Annual Report on Internal
Control Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control
over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a
process designed by, or under the supervision of our principal executive officer and principal financial officer and implemented
by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting
includes those policies and procedures that:
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·
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pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
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·
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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and
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·
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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements
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Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As of December 31, 2020, we conducted an
evaluation, under the supervision and with the participation of our chief executive officer (our principal executive officer),
our chief operating officer and our chief financial officer (also our principal financial and accounting officer) of the effectiveness
of our internal control over financial reporting based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's assessment included
an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those
controls.
Based upon this assessment, management
concluded that our internal control over financial reporting was effective as of December 31, 2020.
This annual report is not required and
does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting
as of December 31, 2020.
Changes in Internal Control over Financial
Reporting
We implemented our remediation plan for
the previously reported material weaknesses in internal control over financial reporting, described in Part II, Item 9A of our
2019 10-K, which included taking steps to improve the design and methods for testing internal controls, adding resources to carry
out such practices, and instituting new procedures for managing system user access and change control. As previously described
in Part I, Item 4 of our 10-Q for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020, our remediation was
on-going throughout 2020.
The following actions contributed to the
remediation efforts:
|
·
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Strengthened the Technology Department,
including hiring a new Chief Technology Officer and creating and filling a new Info Security Manager position.
|
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·
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Secured technical training on COSO’s
Internal Control – Integrated Framework, cybersecurity and regulatory compliance.
|
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·
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Hired an accounting firm to independently
test the design and operating effectiveness of our internal control over financial reporting.
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·
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Substantially refined process narratives
and created risk control matrices as a basis for the design of our internal control over financial reporting, including IT general
controls.
|
|
·
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Defined and implemented multiple user
roles to enhance access controls to our core processing platform.
|
|
·
|
Refined the change control process for system changes,
including forming an IT Change Review Board and implementing software monitoring of production system changes.
|
As of December 31, 2020, management concluded
that the remediated controls were operating effectively and the deficiencies that contributed to the material weaknesses had been
effectively corrected.
Other than the changes related to our
remediation efforts described above, we made no changes in our internal control over financial reporting during the quarter ended
December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description
of business AND HISTORY
Paysign, Inc. (the “Company,”
“Paysign,” “we” or “our”, formerly known as 3PEA International, Inc.) was incorporated on
August 24, 1995 under the name of Antek International, Inc. The Company has undergone several name changes before eventually amending
our articles of incorporation and changing our name from 3PEA International, Inc. to Paysign, Inc. on April 23, 2019. Additionally,
we changed our trading symbol on the NASDAQ Capital Market to “PAYS.” The Company acquired 3Pea Technologies, Inc.,
a payment solutions company, in March 2006, which resulted in 3Pea Technologies, Inc. becoming a wholly owned subsidiary. The
Company dissolved its Paysign, Ltd. Subsidiary during 2020, eliminating the related non-controlling interest.
Impact
of COVID-19 Pandemic
The
outbreak of a novel coronavirus and the incidence of the related disease (COVID-19) starting in late 2019 has continued, spreading
throughout the United States and much of the world beginning in the first quarter of 2020. In March 2020, the World Health Organization
declared the outbreak as a pandemic. While the disruption is currently expected to be temporary, there is uncertainty around the
duration. The COVID-19 outbreak has had and will continue to have an adverse effect on the Company's results of operations. Given
the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition
or relaxation of protective measures, management cannot reasonably estimate the impact to the Company's future results of operations,
cash flows, or financial condition.
New stimulus packages signed into law during
2020 have not had a material impact on the Company’s condensed consolidated financial statements.
About Paysign
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. The Company markets prepaid card solutions under our Paysign® brand. As we are a payment processor
and prepaid card program manager, we derive 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 programs. 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. We
design and process prepaid programs that run on the platform through which customers can define the services they wish to offer
cardholders.
The Paysign brand offers prepaid card solutions
or “card products” for corporate incentive and rewards including, but not limited to 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. We plan to further
expand our product offerings into other prepaid card products such as payroll cards, travel cards, and expense reimbursement cards.
Our cards are sponsored by our issuing bank partners.
Our proprietary Paysign platform was built
on modern cross-platform architecture and designed to be highly flexible, scalable and customizable. The platform’s flexibility
and ease of customization has allowed us to expand our operational capabilities by facilitating our entry into new markets within
the payments space. The Paysign platform delivers cost benefits and revenue building opportunities to our partners.
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 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 agents, Interactive Voice
Response (IVR), and two-way short message service (SMS) messaging and text alerts.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation –
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Year end – The Company’s
year-end is December 31.
Use of estimates – The preparation
of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and (iii) the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents –
The Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of
purchase to be cash equivalents for the purposes of the statement of cash flows. The Company had no cash equivalents at December 31, 2020 and 2019.
Restricted cash – At December
31, 2020 and 2019, restricted cash consist of funds held specifically for our card product programs that are contractually restricted
to use. The Company includes changes in restricted cash balances with cash and cash equivalents when reconciling the beginning
and ending total amounts in our consolidated statements of cash flows.
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, we recognize 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.
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. 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.
Customer card funding – At
December 31, 2020, customer card funding represents funds loaded on our prepaid card programs. At December 31, 2019, customer card
funding represents funds loaded on our prepaid card programs less settlement income recognized on current programs.
Fair value of financial instruments
– Under applicable accounting guidance, fair value is defined as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
We determine the fair values of our financial
instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following describes the
three-level hierarchy:
Level 1 – Unadjusted quoted prices
in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities.
Level 2 – Observable inputs other
than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or
other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities. We currently do not have any assets or liabilities in this category.
Level 3 – Unobservable inputs that
are supported by little or no market activity and that are significant to the overall fair value of the assets or liabilities.
Level 3 assets and liabilities include financial instruments for which the determination of fair value requires significant management
judgment or estimation. The fair value for such assets and liabilities is generally determined using pricing models, market comparables,
discounted cash flow methodologies or similar techniques that incorporate the assumptions a market participant would use in pricing
the asset or liability. We currently do not have any assets or liabilities in this category.
Earnings per share– Basic
earnings per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings per common share
is computed using the weighted-average number of outstanding common stock shares during the applicable period. Diluted earnings
per common share is computed using the weighted-average number of common and common stock equivalent shares outstanding during
the period, using the treasury stock method Common stock equivalent shares are excluded from the computation if their effect is
antidilutive. (See Note 8).
Income taxes – Our 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 differences between the basis of assets and liabilities as measured by tax laws
and their basis as reported in our consolidated financial statements. We also recognize deferred tax assets for tax attributes
such as net operating loss carryforwards and tax credit carryforwards. We record valuation allowances to reduce deferred tax assets
to the amounts we conclude are more likely-than-not to be realized in the foreseeable future. While the Company has considered
future taxable income and ongoing prudent and feasible tax strategies in assessing the need for the valuation allowance, if these
estimates and assumptions change in the future, the Company may be required to adjust its valuation allowance.
We recognize and measure income tax benefits
based upon a two-step model: 1) a tax position must be more likely-than-not to be sustained based solely on its technical merits
in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely-than-not
to be sustained upon settlement. The difference between the benefit recognized for a position and the tax benefit claimed on a
tax return is referred to as an unrecognized tax benefit. We accrue income tax related interest and penalties, if applicable, within
income tax expense.
We have filed consolidated tax returns
whereby past subsidiary losses are used to offset tax liabilities on current profits. This approach could be challenged by the
Internal Revenue Service (“IRS”) and if not accepted, may affect net income and earnings per share. Management believes
that the likelihood of the IRS not accepting such filings is minimal.
Revenue and expense recognition
– In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from
Contracts with Customers (ASC Topic 606), guidance on recognizing revenue from contracts with customers. The guidance
outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most
current revenue recognition guidance, including industry-specific guidance. The core principle of the model is that an entity recognizes
revenue to portray the transfer of goods and services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The standard also expands disclosure requirements regarding revenue
recognition. We adopted this guidance as of January 1, 2018 using the modified retrospective transition method. The adoption of
the guidance did not have a material impact on our financial condition and results of operations. The standard also requires new,
expanded disclosures regarding revenue recognition.
The Company recognizes revenue when goods
or services are transferred to customers in an amount that reflects the consideration which it expects to receive in exchange for
those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company performs
the following five-step analysis: (i) identification of contract with customers; (ii) determination of performance obligations;
(iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition
of revenue when (or as) the Company satisfies each performance obligations.
The Company generates revenues from Plasma
card programs through fees generated from cardholder fees and interchange fees. Revenues from Pharma card programs are generated
through card program management fees, interchange fees, and settlement income.
Plasma and Pharma card program revenues
include both fixed and variable components. Our cardholder fees represent an obligation to the cardholder based on a per transaction
basis and recognized at a point in time when the performance obligation is fulfilled. Card program management fees include an obligation
to our card program sponsors and are generally recognized when earned on a monthly basis pursuant to the contract terms which are
generally multi-year contracts. Interchange fees are earned when customer-issued cards are processed through card payment networks
as the nature of our promise to the customer is that we stand ready to process transactions at the customer’s requests on
a daily basis over the contract term. Since the timing and quantity of transactions to be processed by us is not determinable,
we view interchange fees to comprise an obligation to stand ready to process as many transactions as the customer requests. Accordingly,
the promise to stand ready is accounted for as a single series performance obligation. The company uses the right to invoice practical
expedient and recognizes revenue concurrent with the processing of card transactions.
Previously,
settlement income from Pharma programs was recognized and recorded, after giving consideration to any revenue constraints, ratably
throughout the program lifecycle based on the Company’s estimate of the unspent balances to be remaining on the card at program
expiration. During 2020, the Company observed substantially different performance indicators, current trends in the industry regarding
program management by third parties, and new information available in dollar loads and spending patterns compared to historical
experience. As a result, the Company changed its estimate of breakage for recognizing settlement income for Pharma programs resulting
in the Company constraining revenue on all Pharma programs in accordance with applicable accounting guidance. Based on the recently
observed change in facts and circumstances, the Company utilizes the remote method of revenue recognition for settlement income
whereby the unspent balances will be recognized as revenue at the expiration of the cards and the respective program. The Company
records all revenue on a gross basis since it is the primary obligor and establishes the price in the contract arrangement with
its customers. The Company is currently under no obligation for refunding any fees, and the Company does not currently have any
obligations for disputed claim settlements. Given the nature of the Company’s services and contracts, it has no contract
assets.
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.
Operating leases
– The Company determines if a contract is or contains a leasing element at contract inception or the date in which a modification
of an existing contract occurs. In order for a contract to be considered a lease, the contract must transfer the right to control
the use of an identified asset for a period of time in exchange for consideration. Control is determined to have occurred if the
lessee has the right to (i) obtain substantially all of the economic benefits from the use of the identified asset throughout the
period of use and (ii) direct the use of the identified asset.
In determining
the present value of lease payments at lease commencement date, the Company utilizes its incremental borrowing rate based on the
information available, unless the rate implicit in the lease is readily determinable. The liability for operating leases is based
on the present value of future lease payments. Operating lease expenses are recorded as rent expense, which is included within
selling, general and administrative expenses, within the consolidated statements of operations and presented as operating cash
outflows within the consolidated statements of cash flows.
Stock-based compensation –
The Company recognizes compensation expense for all restricted stock awards and stock options. The fair value of restricted stock
awards is measured using the grant date trading price of our stock. The fair value of stock options is estimated at the grant date
using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation
cost over the requisite service period. We have elected to recognize compensation expense for all options with graded vesting on
a straight-line basis over the vesting period of the entire option. The determination of fair value using the Black-Scholes pricing
model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected
stock price volatility and the risk-free interest rate.
Advertising costs – Advertising
costs incurred in the normal course of operations are expensed as incurred. During the years ended December 31, 2020 and 2019,
the Company expensed $99,312 and $165,940, respectively, included in Selling, general and administrative expense.
New accounting pronouncements –
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU No. 2018-13 provide clarification
and modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement. The amendments in this ASU
No. 2018-13 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years, with early adoption permitted. We adopted this new standard on January 1, 2020, and there was
no material impact to our financial statements.
In December 2019, the FASB
issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which intends to simplify
the guidance by removing certain exceptions to the general principles and clarifying or amending existing guidance. ASU 2019-12
is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The standard
allows for the adoption on a prospective basis. The Company is currently evaluating the impact of the adoption of ASU 2019-12
on its consolidated financial statements.
3. FIXED
ASSETS
Fixed assets consist of the following:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Equipment
|
|
$
|
1,888,640
|
|
|
$
|
2,026,549
|
|
Software
|
|
|
200,282
|
|
|
|
180,223
|
|
Furniture and fixtures
|
|
|
752,212
|
|
|
|
149,684
|
|
Website costs
|
|
|
67,816
|
|
|
|
34,971
|
|
Leasehold improvements
|
|
|
203,488
|
|
|
|
52,894
|
|
|
|
|
3,112,438
|
|
|
|
2,444,321
|
|
Less: accumulated depreciation
|
|
|
1,263,274
|
|
|
|
1,507,136
|
|
Fixed assets, net
|
|
$
|
1,849,164
|
|
|
$
|
937,185
|
|
Depreciation expense for the year ended December 31, 2020 and
2019 was $428,434 and $410,019, respectively. During the year ended December 31, 2020, the Company relocated its corporate headquarters
and recognized a $42,898 loss on abandonment of assets primarily related to leasehold improvements.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Patents and trademarks
|
|
$
|
38,186
|
|
|
$
|
39,053
|
|
Platform
|
|
|
7,478,419
|
|
|
|
5,598,136
|
|
Customer lists and contracts
|
|
|
1,177,200
|
|
|
|
1,177,200
|
|
Kiosk development
|
|
|
–
|
|
|
|
64,802
|
|
Licenses
|
|
|
234,282
|
|
|
|
534,569
|
|
|
|
|
8,928,087
|
|
|
|
7,413,760
|
|
Less: accumulated amortization
|
|
|
5,229,054
|
|
|
|
3,597,528
|
|
Intangible assets, net
|
|
$
|
3,699,033
|
|
|
$
|
3,816,232
|
|
Intangible assets are amortized over their
useful lives ranging from periods of 3 to 5 years. Amortization expense for the year ended December 31, 2020 and 2019 was $1,696,329
and $1,073,121, respectively. During 2020, the Company reviewed the carrying value of acquisition costs related to a business license
and determined that there was an impairment necessary due to the fact that the efforts to acquire the license had been suspended.
As the impairment was deemed other than temporary, an impairment of $382,414 was recorded during the third quarter of 2020. During
the year ended December 31, 2019, we acquired customer lists and contracts from a third party totaling $1,177,200, which is being
amortized over a period of 3 to 5 years.
Estimated future amortization expense is
as follows:
2021
|
|
$
|
1,637,130
|
|
2022
|
|
|
1,170,935
|
|
2023
|
|
|
583,438
|
|
2024
|
|
|
224,192
|
|
2025
|
|
|
8,986
|
|
Thereafter
|
|
|
74,352
|
|
Total amortization expense
|
|
$
|
3,699,033
|
|
5. LEASE
The Company entered into an operating lease
for an office space which became effective in June 2020 when the construction was complete and we were given access to occupy the
space. The lease term is 10 years from the effective date and allows for two optional extensions of five years each. The two optional
extensions are not recognized as part of the right-of-use asset or lease liability since it is not reasonably certain that the
Company will extend this lease. As of December 31, 2020, the remaining lease term was 10 years and the discount rate was 6%.
The lease for our previous office space was accounted for as a short-term lease.
Operating lease cost included in selling,
general and administrative expenses was $489,104 for the year ended December 31, 2020. Short-term lease cost included in selling,
general and administrative expense was $94,906 and $223,847 for the year ended December 31, 2020 and 2019, respectively.
The following is the lease maturity analysis of our operating
lease as of December 31, 2020:
Twelve months ending December 31,
2021
|
|
$
|
571,968
|
|
2022
|
|
|
571,968
|
|
2023
|
|
|
571,968
|
|
2024
|
|
|
571,968
|
|
2025
|
|
|
612,006
|
|
Thereafter
|
|
|
2,829,335
|
|
Total lease payments
|
|
|
5,729,213
|
|
Less: Imputed interest
|
|
|
1,394,979
|
|
Present value of future lease payments
|
|
|
4,334,234
|
|
Less: current portion of lease liability
|
|
|
(320,636
|
)
|
Long-term portion of lease liability
|
|
$
|
4,013,598
|
|
6. CUSTOMER CARD FUNDING LIABILITY
The Company issues prepaid cards with
various provisions for cardholder fees or expiration. Revenue generated from cardholder fees and interchange fees are
recognized when the Company's performance obligation is fulfilled. Unspent balances left on Pharma cards are recognized as
settlement income at the expiration of the cards and the program (Note 2). Contract liabilities related to prepaid cards
represent funds on card and client funds held to be loaded to card before the amounts are ultimately spent by the cardholders
or recognized as revenue by the Company. Contract liabilities related to prepaid cards are reported as Customer card funding
liability on the consolidated balance sheet.
The opening and closing balances of the Company's contract liabilities
are as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
32,723,227
|
|
|
$
|
25,960,974
|
|
Increase (decrease), net
|
|
|
15,377,724
|
|
|
|
6,762,253
|
|
Ending balance
|
|
$
|
48,100,951
|
|
|
$
|
32,723,227
|
|
The amount of revenue recognized during
the years ended December 31, 2020 and 2019 that was included in the opening contract liability for prepaid cards was $844,514
and $818,889, respectively.
7. COMMON STOCK
At December 31, 2020, the Company’s
authorized capital stock was 150,000,000 shares of common stock, par value $0.001 per share, and 25,000,000 shares of preferred
stock, par value $0.001 per share. On that date, the Company had issued 50,251,607 shares of common stock, and no shares of preferred
stock outstanding.
In 2019, the Company’s shareholders
approved the 3Pea International, Inc. 2018 Incentive Compensation Plan (the “2018 Plan”), which was approved by the
board of directors on July 18, 2018. The Plan permits the Company to issue awards or options to the officers, directors, employees,
consultants and other persons who provide services to our company or any related entity. Pursuant to the 2018 Plan, 5,000,000 shares
of the Company’s common stock are reserved for issuance. Any awards or options that are not settled in shares of common stock
are not counted against the limit. Stock options granted under the 2018 Plan generally vest over four or five years and expire in
ten years. Stock awards granted under the 2018 Plan generally vest over four of five years. In general, if an employee is terminated,
any unvested options or awards as of the date of termination will be forfeited. As of December 31, 2020, there were 3,478,533 shares
available for future grants under the 2018 Plan.
The Company issues new shares of common stock upon exercise
of stock options or vesting stock awards.
Stock-based compensation expense for the
years ended December 31, 2020 and 2019 was $2,971,777 and $2,528,613, respectively, and is included in selling, general and administrative
expense. As of December 31, 2020, the Company’s unrecognized stock-based compensation expense related to stock options
and stock awards was $2,722,518 and $5,117,179, respectively, which are expected to be recognized over a weighted-average period
of 2.60 year for stock options and 3.45 years for stock awards.
2020 Transactions: During the year
ended December 31, 2020, the Company issued shares of common stock as follows:
|
·
|
71,900 shares of common stock were issued related to the exercise of vested stock options and received cash proceeds totaling $172,560.
|
|
·
|
1,581,995 shares of common stock were issued for vested stock awards to employees.
|
|
·
|
20,000 shares of common stock were issued
for an asset acquisition.
|
2019 Transactions: During the year
ended December 31, 2019, the Company issued shares of common stock as follows:
|
·
|
245,800 shares of common stock were issued related to the exercise of vested stock options and received cash proceeds totaling $430,919.
|
|
·
|
1,891,147 shares of common stock were issued for vested stock awards to employees.
|
Stock Options
A summary of stock options activity for
the years ended December 31, 2020 and 2019 is presented as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
Outstanding at December 31, 2018
|
|
|
2,707,327
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(245,800
|
)
|
|
|
1.75
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(57,727
|
)
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
2,403,800
|
|
|
$
|
2.01
|
|
|
|
8.45
|
|
|
$
|
19,565,450
|
|
Granted
|
|
|
500,000
|
|
|
|
3.87
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(71,900
|
)
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(144,200
|
)
|
|
|
2.91
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
2,687,700
|
|
|
$
|
2.30
|
|
|
|
7.74
|
|
|
$
|
6,294,948
|
|
Exercisable at December 31, 2020
|
|
|
896,100
|
|
|
$
|
1.91
|
|
|
|
7.42
|
|
|
$
|
2,445,264
|
|
A summary of unvested options activity
for the years ended December 31, 2020 and 2019 was as follows:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at December 31, 2018
|
|
|
2,707,327
|
|
|
$
|
2.00
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Forfeited/expired
|
|
|
(57,727
|
)
|
|
|
2.40
|
|
Vested
|
|
|
(610,200
|
)
|
|
|
1.91
|
|
Unvested at December 31, 2019
|
|
|
2,039,400
|
|
|
$
|
2.01
|
|
Granted
|
|
|
500,000
|
|
|
|
3.87
|
|
Forfeited/expired
|
|
|
(144,200
|
)
|
|
|
2.91
|
|
Vested
|
|
|
(603,600
|
)
|
|
|
1.91
|
|
Unvested at December 31, 2020
|
|
|
1,791,600
|
|
|
$
|
2.49
|
|
The weighted average grant date fair value
of options granted and the total intrinsic value of options exercised for the years ended December 31, 2020 and 2019 is as follows:
|
|
2020
|
|
|
2019
|
|
Weighted average grant date fair value of options granted
|
|
$
|
2.86
|
|
|
$
|
–
|
|
Intrinsic value of options exercised
|
|
$
|
370,764
|
|
|
$
|
2,605,923
|
|
The
Company uses the Black-Scholes option pricing model to estimate the fair value and compensation cost associated with employee stock
options, which requires the consideration of historical employee exercise behavior, the volatility of the Company’s stock
price, the weighted-average risk-free interest rate and the weighted-average expected life of the options. Forfeitures are included
when they are incurred. Any changes in these assumptions may materially affect the estimated fair value of the share-based award.
The weighted-average assumptions used in the Black-Scholes option-pricing model for the year ended December 31, 2020
was a risk-free interest rate of 0.38% consistent with the expected term of the options, expected volatility of 100% based on the
historical actual volatility of the Company’s stock, dividend yield of -0- as the Company has no history of paying dividends
and the weighted-average expected life of 5 years.
Stock Awards
A summary of stock awards activity for
the years ended December 31, 2020 and 2019 was as follows:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
Outstanding at December 31, 2018
|
|
|
5,795,000
|
|
|
$
|
0.94
|
|
Granted
|
|
|
576,147
|
|
|
|
9.50
|
|
Forfeited
|
|
|
(170,000
|
)
|
|
|
4.47
|
|
Vested
|
|
|
(1,801,147
|
)
|
|
|
0.68
|
|
Outstanding at December 31, 2019
|
|
|
4,400,000
|
|
|
$
|
2.06
|
|
Granted
|
|
|
254,747
|
|
|
|
7.80
|
|
Forfeited
|
|
|
(792,500
|
)
|
|
|
4.61
|
|
Vested
|
|
|
(1,629,558
|
)
|
|
|
0.89
|
|
Outstanding at December 31, 2020
|
|
|
2,232,689
|
|
|
$
|
2.70
|
|
8. BASIC
AND FULLY DILUTED NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation
of basic and fully diluted net income (loss) per common share for the years ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Paysign, Inc.
|
|
$
|
(9,141,562
|
)
|
|
$
|
7,454,319
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
Denominator for basic calculation
|
|
|
49,272,494
|
|
|
|
47,436,754
|
|
Weighted average effects of potentially diluted common stock:
|
|
|
|
|
|
|
|
|
Stock options (calculated under treasury method)
|
|
|
–
|
|
|
|
2,079,669
|
|
Unvested restricted stock awards
|
|
|
–
|
|
|
|
5,033,946
|
|
Denominator for fully diluted calculation
|
|
|
49,272,494
|
|
|
|
54,550,369
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.19
|
)
|
|
$
|
0.16
|
|
Fully diluted
|
|
$
|
(0.19
|
)
|
|
$
|
0.14
|
|
Due
to the net loss for the year ended December 31, 2020, the effect of all potential common share equivalents was
anti-dilutive, and therefore, all such shares were excluded from the computation of diluted weighted average shares
outstanding for the period. The amount of potential common share equivalents excluded were 2,687,700 stock
options and 2,232,689 unvested restricted stock awards for the year ended
December 31, 2020.
9. COMMITMENTS
AND CONTINGENCIES
Data Center Lease – The Company
leases space on a monthly basis for its data centers in Nevada under a co-location agreement. The agreement provides for lease
payments of approximately $8,000 per month.
Pending of threatened litigation
–From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from
time to time that may harm our business.
The Company has been named as a defendant
in three complaints filed in the United States District Court for the District of Nevada: Yilan Shi v. Paysign, Inc. et. al., filed
on March 19, 2020 (“Shi”), Lorna Chase v. Paysign, Inc. et. al., filed on March 25, 2020 (“Chase”),
and Smith & Duvall v. Paysign, Inc. et. al., filed on April 2, 2020 (“Smith” and collectively, the “Complaints”
or “Securities Class Action”). Smith was voluntarily dismissed on May 21, 2020. On May 18, 2020, the Shi plaintiffs
and another entity called the Paysign Investor Group each filed a motion to consolidate the remaining Shi and Chase actions and
to be appointed lead plaintiff. The Complaints are putative class actions filed on behalf of a class of persons who acquired the
Company’s common stock from March 12, 2019 through March 31, 2020, inclusive. The Complaints generally allege that the Company,
Mark R. Newcomer, and Mark Attinger violated Section 10(b) of the Exchange Act, and that Messrs. Newcomer and Attinger violated
Section 20(a) of the Exchange Act, by making materially false or misleading statements, or failing to disclose material facts,
regarding the Company’s internal control over financial reporting and its financial statements. The Complaints seek class
action certification, compensatory damages, and attorney’s fees and costs. On December 2, 2020, the Court consolidated Shi
and Chase as In re Paysign, Inc. Securities Litigation and appointed the Paysign Investor Group as lead plaintiff. On January 12,
2021, Plaintiffs filed an Amended Complaint in the consolidated action. Defendants filed a Motion to Dismiss the Amended Complaint
on March 15, 2021. As of the date of this filing, Paysign cannot give any meaningful estimate of likely outcome or damages.
The Company has also been named as a nominal
defendant in a stockholder derivative action in the U.S. District Court for the District of Nevada: Andrzej Toczek, derivatively
on behalf of Paysign, Inc. v. Mark, R. Newcomer, et. al., filed on September 17, 2020. This action alleges violations of Section
14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, and waste, largely in connection with the failure to correct
information technology controls over financial reporting alleged in the Securities Class Action, thereby causing the Company to
face exposure in the Securities Class Action. The derivative complaint also alleges insider trading, violations against certain
individual defendants. On December 16, 2020, the Court approved a stipulation staying the action until the Court in the consolidated
Securities Class Action issues a ruling on the anticipated Motion to Dismiss. As of the date of this filing, Paysign cannot give
any meaningful estimate of likely outcome or damages.
10. RELATED PARTY
A member of our Board of Directors is also
a partner in a law firm that the Company paid approximately $609,459 and $42,000 during the years ended December 31, 2020 and 2019.
11. INCOME TAXES
The income tax provision (benefit) on the
statements of operations was comprised of the following for the years ended December 31:
|
|
2020
|
|
|
2019
|
|
Current income taxes
|
|
$
|
(23,298
|
)
|
|
$
|
–
|
|
Deferred income tax provision (benefit)
|
|
|
917,480
|
|
|
|
(909,976
|
)
|
Income tax provision (benefit)
|
|
$
|
894,182
|
|
|
$
|
(909,976
|
)
|
Deferred tax assets are comprised of the
following at December 31:
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
4,261,552
|
|
|
$
|
837,327
|
|
Operating lease obligation
|
|
|
1,016,847
|
|
|
|
–
|
|
Stock-based compensation
|
|
|
650,737
|
|
|
|
497,760
|
|
Tax credits
|
|
|
491,261
|
|
|
|
175,859
|
|
Capital loss carryforward and other
|
|
|
270,551
|
|
|
|
5,825
|
|
|
|
|
6,690,948
|
|
|
|
1,516,771
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of intangibles assets
|
|
|
(548,149
|
)
|
|
|
(430,885
|
)
|
Depreciation of fixed assets
|
|
|
(435,218
|
)
|
|
|
(168,406
|
)
|
Right-of-use assets
|
|
|
(1,014,606
|
)
|
|
|
–
|
|
|
|
|
(1,997,973
|
)
|
|
|
(599,291
|
)
|
Less valuation allowance
|
|
|
(4,692,975
|
)
|
|
|
–
|
|
Deferred tax asset, net
|
|
$
|
–
|
|
|
|
917,480
|
|
Deferred taxes arise from temporary differences
in the recognition of certain expenses for tax and financial reporting purposes. At December 31, 2020, management determined that
its more-likely-than-not that the Company’s net deferred tax assets would not be realized in the near future and placed a
full valuation allowance on the deferred tax assets. At December 31, 2020 and 2019, net operating loss carryforwards were $18,164,542
and $3,987,271, respectively. $882,542 of the net operating loss carryforwards will expire from 2034 through 2037. At December 31, 2020 state net operating loss carryforwards range from $0 to $4,518,949 which expire from 2034 to 2040. During the year ended
December 31, 2020, none of the net operating loss carryforward was utilized.
For the years ended December 31, 2020 and
2019, the reconciliation of the federal statutory tax rate to the benefit rate for income taxes is as follows:
|
|
2020
|
|
|
2019
|
|
Statutory federal tax rate
|
|
|
21.0%
|
|
|
|
21.0%
|
|
Permanent differences – stock-based compensation
|
|
|
14.9
|
|
|
|
(33.9
|
)
|
Permanent differences – R&D tax credit
|
|
|
1.3
|
|
|
|
(0.9
|
)
|
Return-to-provision adjustments
|
|
|
2.8
|
|
|
|
–
|
|
Change in valuation allowance
|
|
|
(56.9
|
)
|
|
|
–
|
|
Change in carryovers and tax attributes
|
|
|
6.1
|
|
|
|
(0.1
|
)
|
Effective tax rate
|
|
|
(10.8
|
)%
|
|
|
(13.9
|
)%
|
12. CHANGE
IN ACCOUNTING ESTIMATE
The Company generates settlement income
from breakage on Pharma industry programs which was previously recognized and recorded ratably throughout the account and program
lifecycle based on expected dollar loads, spending patterns and historical experience. The Company accumulated data trends on over
100 Pharma programs over the last 10 years and has historically realized settlement income from breakage at an average rate of
approximately 23.5%, calculated as unspent balances as a percentage of dollars loaded to card. The most recent completed programs
in the prior year performed consistent with our historical breakage estimates. During the third quarter of 2020, the Company changed
its estimate of breakage for recognizing settlement income for Pharma programs based on substantially different performance indicators
observed, current trends in the industry regarding program management by third parties, and new information available in dollar
loads and spending patterns compared to historical experience. Given these triggering events based on the new information observed,
this change in accounting estimate resulted in the Company constraining revenue on all Pharma programs in accordance with ASC 606
by changing the estimate of breakage to the remote method of revenue recognition for settlement income whereby the unspent balances
will be recognized as revenue at the expiration of the cards and the respective program. This has resulted in the reversal of all
previously recognized settlement income for all current Pharma programs. The adjustment was a $6,293,203 reduction in Pharma revenue
and an increase in net loss after the impact of income taxes of $4,971,630 or $(0.10) per basic and diluted share for the year
ended December 31, 2020.
13. SUBSEQUENT EVENTS
In 2021, we issued to employees a total
of 466,689 shares of common stock for vested stock awards and 32,586 shares for exercised options.
On February 24, 2021 the Company announced
that Mr. Mark K. Attinger resigned from his position as Chief Financial Officer of the Company, effective February 19, 2021, and
that the Board had appointed Jeffery Baker to succeed Mr. Attinger as Chief Financial Officer, effective February 22, 2021. Per
the terms of Mr. Attinger’s severance agreement, the Company will continue to pay his salary and benefits through September
30, 2021 and his stock options and stock awards will continue to vest through March 2021 and October 2021, respectively.