Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
☐ TRANSITION PURSUANT TO UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-38623
PAYSIGN, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
95-4550154
(I.R.S. Employer Identification No.)
2615 St. Rose Parkway, Henderson, Nevada 89052
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (702) 453-2221
Title of each class
Common Stock, $0.001 par value per share
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol
PAYS
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
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.
Large accelerated filer ☐
Non-accelerated filer ☒
Accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262 (b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
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: $100,192,362 based upon a market price of $3.18 per share.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 51,864,932 as of March 17,
2022.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2022 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, 2021.
PART I
ITEM 1
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 9C.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
TABLE OF CONTENTS
BUSINESS.
RISK FACTORS.
UNRESOLVED STAFF COMMENTS.
PROPERTIES.
LEGAL PROCEEDINGS.
MINE SAFETY DISCLOSURE.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES.
[RESERVED].
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
CONTROLS AND PROCEDURES.
OTHER INFORMATION.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
EXECUTIVE COMPENSATION.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
PART IV
ITEM 15.
ITEM 16
SIGNATURES
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
FORM 10-K SUMMARY
1
1
10
18
19
19
19
20
20
20
20
28
28
28
28
29
29
30
30
30
30
30
30
31
31
32
33
Note Regarding Forward Looking Statements
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," “propose,”
"may," and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections, estimates,
forecasts, 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.
i
ITEM 1. BUSINESS.
Overview
PART I
Paysign, Inc. (the “Company,” “Paysign,” “we” or “our”), headquartered in Nevada, was incorporated on August 24, 1995, and trades under the symbol
PAYS on The Nasdaq Stock Market LLC. Paysign 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 Visa, Interlink, Plus, MasterCard, Maestro, Cirrus, Discover or Pulse 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.
1
The Mercator Advisory Group’s 18th Annual U.S. Open-Loop Prepaid Cards Market Forecast 2021-2025, shows that “2020 has been an extraordinary year
for prepaid card loads as a result of government benefits in response to COVID-19. As these benefits subside, 2021 will see an initial drop in load values
followed by steady growth.” Mercator forecasts open-loop prepaid card loads will have a compound annual growth rate of 3.0% from 2021 to 2025, when
total loads are expected to reach $735 billion.
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 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 short message service (“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, 2021, we had approximately 4.3 million cardholders participating in approximately 440 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.
2
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, Interlink, Plus, MasterCard, Maestro, Cirrus, Discover and Pulse are accepted depending on the
brands used.
Key benefits of our corporate incentive cards are:
·
·
·
·
Reduced costs: Operating and administrative costs associated with processing traditional paper checks are reduced.
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.
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.
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.
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 according to client benefit plan designs. 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.
3
Patient Affordability Products and Services
Paysign provides targeted products and services designed to address financial barriers related to patients starting and remaining on brand name drug
therapies. Our products are specifically designed to work within the established workflow of the specific healthcare provider. These products can be used to
cover all or a portion of the patient’s financial responsibility. We continue to build out additional products as industry concerns continue to emerge
presenting new business opportunities. A critical component of all patient affordability products is the ability of a pharmaceutical manufacturer to access
and visualize data related to the performance of their affordability program, patient and prescriber behavior, and overall brand growth on a commercially
insured patient basis. To provide these insights, Paysign has data scientist and a team of analytic professionals dedicated to these products and clients.
Pharmacy Based Voucher and Copay Affordability Programs: Voucher and Copay programs have become an industry standard offering for
pharmaceutical brands entering a market or seeking to increase market share. These products are processed via the pharmacy transactional systems in
accordance with established standards. These products are the most common form of affordability programs and exist for almost every retail and specialty-
based branded pharmaceutical drug. Pharmacies process claims to one of Paysign’s chosen processors who grow and maintain their own individual
contractual networks. Claims may be submitted in the primary or secondary payor position where our processor will adjudicate the claim in accordance
with business rules defined by each client.
Medical Claims Based Affordability Programs: These programs are similar to pharmacy-based products but utilize internal networks developed
and maintained by Paysign. We are a direct processor of these claims and conduct adjudication on an internal proprietary platform specifically designed to
address the needs of our clients and their unique business rules. Payments for processed claims are made directly to a healthcare provider using our virtual
debit card products. We differentiate ourselves with this specific product by offering accelerated adjudication and payments relative to our competition.
This results in providers having a stronger willingness to utilize our products versus our competitors.
Debit Based Affordability Programs: We continue to utilize physical and virtual debit cards to address highly specific industry concerns related to
patient affordability. These issues include utilization of debit-based products to combat copay accumulators and maximizers, currently one of the largest
threats in the marketplace for pharmaceutical manufacturers.
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% 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 life saving 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 Company recently
introduced a number of enhancements to its Plasma solution, offering cardholders a point-of-sale cash back rewards program, a pharmacy prescription
discount card and a digital bank account to assist our Pharma clients in their efforts to maximize the donor experience. 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 35% of the plasma collection centers in
the United States.
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.
4
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 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,
2021, we managed approximately 440 card programs with approximately 4.3 million participating cardholders.
5
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:
·
·
·
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;
reduced disclosure obligations regarding executive compensation in periodic reports, proxy statements and registration statements; and
exemptions from the requirements of holding nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved.
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.
6
Our products and services are generally subject to federal, state and local laws and regulations, including:
·
anti-money laundering laws;
· money transfer and payment instrument licensing regulations;
·
·
·
·
·
·
escheatment laws;
privacy and information safeguard laws;
bank regulations;
consumer protection laws;
false claims laws and other fraud and abuse restrictions; and
privacy and security standards under the Health Insurance Portability and Accountability Act (“HIPAA”) or other laws.
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:
·
·
·
·
·
·
·
report large cash transactions and suspicious activity;
screen transactions against the U.S. government's watch-lists, such as the watch-list maintained by the Office of Foreign Assets Control;
prevent the processing of transactions to or from certain countries, individuals, nationals and entities;
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;
gather and, in certain circumstances, report customer information;
comply with consumer disclosure requirements; and
register or obtain licenses with state and federal agencies in the United States and seek registration of any retail distributors when necessary.
7
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. state require that certain information be tracked on card programs. If customer funds are unclaimed at the end of an
applicable statutory abandonment period, the proceeds of the unclaimed property must be remitted to the appropriate state. Analysis of facts and
circumstances of each card program under state unclaimed property laws determines whether funds under such programs are escheatable.
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.
8
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 Interlink, Plus, Maestro, Cirrus, Discover and Pulse, 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 card networks. The card networks 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, 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.
9
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, 2021, we had approximately eighty 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. 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.
10
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.
The coronavirus (COVID-19) pandemic, which started in late 2019 and reached the United States in early 2020, continues to significantly impact the
economy of the United States and the rest of the world. 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. While the disruption appears to be mitigating due to the availability of vaccines and other factors, the ultimate
duration and severity of the pandemic remain uncertain, particularly given the development of new variants that continue to spread. The COVID-19
outbreak caused plasma center closures, and the stimulus packages signed into law during 2020 and 2021 reduced the incentive for individuals to donate
plasma for supplementary income. Those developments have had and will continue to have an adverse impact on the Company’s results of operations.
While we remain cautiously optimistic and have seen improvements in our operating results, we cannot foresee how long it may take the Company to attain
pre-pandemic operating levels as COVID-19 related labor shortages at plasma donation centers, border closures, and other effects continue to weigh 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 variants
and around the imposition or relaxation of protective measures, management cannot at this time estimate with reasonable accuracy COVID-19’s further
impact on the Company’s results of operations, cash flows or financial condition.
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 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.
11
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 card networks 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.
12
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:
·
·
·
·
·
·
·
cause our customers to lose confidence in our services;
deter consumers from using our services;
harm our reputation;
require that we expend significant additional resources related to our information security systems and could result in a disruption of our
operations;
expose us to liability;
increase expenses related to remediation costs; and
decrease market acceptance of electronic commerce transactions and prepaid use.
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.
13
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, Interlink, Plus, MasterCard, Maestro, Cirrus, Discover and Pulse 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 the card networks 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 the card networks 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.
14
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.
15
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 2021, our stock price fluctuated between $1.37 and $5.69. 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.
16
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 17, 2022, approximately 39% 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 51,864,932 shares of common stock outstanding as of March 17, 2022, assuming no exercise of outstanding options 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 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.
17
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:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
the timing and volume of purchases, use and reloads of our prepaid cards and related products and services;
the timing and success of new product or service introductions by us or our competitors;
seasonality in the purchase or use of our products and services;
reductions in the level of interchange rates that can be charged;
fluctuations in customer retention rates;
changes in the mix of products and services that we sell;
changes in the mix of retail distributors through which we sell our products and services;
the timing of commencement, renegotiation or termination of relationships with significant third party service providers;
changes in our or our competitors' pricing policies or sales terms;
the timing of commencement and termination of major advertising campaigns;
the timing of costs related to the development or acquisition of complementary businesses;
the timing of costs of any major litigation to which we are a party;
the amount and timing of operating costs related to the maintenance and expansion of our business, operations and infrastructure;
our ability to control costs, including third-party service provider costs;
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
changes in the regulatory environment affecting the banking or electronic payments industries generally or prepaid financial services specifically.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
18
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 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 (collectively, the “Complaints” or “Securities Class Action”). Smith & Duvall v. Paysign, Inc. et. al. 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 19, 2019 through March 31, 2020, inclusive. The Complaints generally allege that the Company, Mark 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,
which Plaintiffs opposed via an opposition brief filed on April 29, 2021, to which Defendants replied on June 1, 2021. Thus, the motion is now fully
briefed. The Court has not set a hearing date on the motion, or informed the parties whether it intends to entertain oral argument or rule upon the papers
filed. 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 United States District Court for the District of Nevada:
Andrzej Toczek, derivatively on behalf of Paysign, Inc. v. Mark 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 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.
19
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 2021 and 2020.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$
2021
5.69 $
4.69
3.72
2.99
Low
High
Low
2020
3.80 $
2.87
2.34
1.37
10.36 $
10.93
10.98
6.22
3.63
3.90
5.33
3.84
There were approximately 11,145 shareholders of record of the common stock as of December 31, 2021.
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, 2021 or 2020. 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.
During the quarter ended December 31, 2021, we did not purchase any shares of our common stock.
Issuer Purchases of Equity Securities
ITEM 6. [RESERVED]
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.
20
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 us 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 (Visa, Interlink, Plus, MasterCard,
Maestro, Cirrus, Discover and Pulse, 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.
21
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 2022, 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.
2021 Year Milestones
·
·
·
Grew to approximately 4.3 million cardholders and 440 card programs as of December 31, 2021.
Year over year revenue increased 22%.
Added 26 net new Plasma programs, launched 2 net new Pharma programs, and added 4 net new Other prepaid programs.
Results of Operations
Fiscal Years Ended December 31, 2021 and 2020
The following table summarizes our consolidated financial results:
Revenues
Plasma industry
Pharma industry
Other
Total revenues
Cost of revenues
Gross profit
Gross margin %
Operating expenses
Selling, general and administrative
Impairment of intangible asset
Loss on abandonment of assets
Depreciation and amortization
Total operating expenses
Loss from operations
Net loss
Net margin %
Year ended December 31,
2020
2021
Variance
$
%
25,918,150 $
3,361,869
184,830
29,464,849
14,753,042
14,711,807
49.9%
14,953,322
–
–
2,497,918
17,451,240
(2,739,433) $
23,401,068 $
326,699
392,667
24,120,434
14,817,028
9,303,406
38.6%
15,091,432
382,414
42,898
2,124,762
17,641,506
(8,338,100) $
2,517,082
3,035,170
(207,837)
5,344,415
(63,986)
5,408,401
(138,110)
(382,414)
(42,898)
373,156
(190,266)
5,598,667
10.8%
929.0%
(52.9%)
22.2%
(0.4%)
58.1%
(0.9%)
(100.0%)
(100.0%)
17.6%
(1.1%)
(67.1%)
(2,721,334) $
(9.2%)
(9,141,562) $
(37.9%)
(6,420,228)
(70.2%)
$
$
$
22
The increase in total revenues of $5,344,415 for the year ended December 31, 2021 compared to the same period in the prior year consisted of a $2,517,082
increase in Plasma revenue, a $3,035,170 increase in Pharma revenue, and a reduction of $207,837 in Other revenue. The increase in Plasma revenue was
primarily due to an increase in plasma donations and dollars loaded to card as COVID-19 related government stimulus payments were phased out, donation
centers reopened, and mobility restrictions were lifted during the year. The increase in Pharma revenue was primarily due to the anniversary of a
$6,293,203 adjustment that reduced Pharma revenue for a change in accounting estimate in recognizing settlement income for all Pharma programs in the
third quarter of 2020 in accordance with applicable accounting guidance, as well as the recognition of settlement income for Pharma programs that ended
throughout 2021, the launch of new Pharma programs during 2021, and the lifting of mobility restrictions allowing individuals to return to visiting doctor
offices and pharmacies to receive pharmaceutical medicines.
Cost of revenues for the year ended December 31, 2021 decreased $63,986 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. Cost of revenues decreased primarily due to operating leverage inherent in
our Plasma business as many of the Plasma fees deliver a greater revenue contribution versus the costs that are provided by third-parties who charge us
based on the number of transactions that occur during the period. In addition, there was a greater contribution of higher margin Pharma settlement income
for the year ended December 31, 2021.
Gross profit for the year ended December 31, 2021 increased $5,408,401 compared to the prior year resulting primarily from the increase in revenue
described above, coupled with the slight year-over-year decrease in cost of sales. The increase in gross margin resulted from a higher revenue conversion
rate generated from revenues with a larger portion of fixed costs versus those that have a variable cost component.
Selling, general and administrative expenses for the year ended December 31, 2021 decreased $138,110 or 0.9% compared to the prior year and consisted
primarily of an increase in staffing and compensation of $1,260,000, insurance of $250,000, and travel and entertainment of $170,000; offset by a decrease
in stock-based compensation of $690,000, technologies and telecom of $265,000, and professional services for legal, accounting, tax, and consultants of
$260,000.
During the year ended December 31, 2021 there was no intangible asset impairment charge or loss on the abandonment of assets. The impairment of
intangible asset of $382,414 in December 31, 2020 was related to a write down of the carrying value of acquisition costs related to a business license that
had been suspended.
Depreciation and amortization expense for the year ended December 31, 2021 increased $373,156 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, 2021, we recorded a loss from operations of $2,739,433, an increase of $5,598,667 from the period ending December 31,
2020, related to the aforementioned factors.
Other income for the year ended December 31, 2021 decreased $62,423 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 (0.4%) and (10.8%) for the years ended December 31, 2021 and 2020. The effective tax rates vary, primarily due to the Company
establishing a full valuation allowance against its deferred tax assets during the year ended December 31, 2020. The Company continues to have a full
valuation allowance against its deferred tax assets as of December 31, 2021.
The net loss for the year ended December 31, 2021 decreased $6,420,228. The overall change in net loss 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
$1,066 million and $968 million for the years ended December 31, 2021 and 2020, respectively. We use this metric to analyze the total amount of money
moving into our card programs.
23
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, 2021 and 2020 were 2.76% or
276 basis points (“bps”), and 2.49% or 249 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rate for the years ended
December 31, 2021 and 2020 were 1.38% or 138 bps, and 0.96% or 96 bps, respectively, of gross dollar volume loaded on cards. Our net profit conversion
rate for the years ended December 31, 2021 and 2020 were (0.25%) or (25) bps, and (0.95%) or (95) bps, respectively, of gross dollar volume loaded on
cards. The increase in conversion rates was primarily attributable to improving revenue and operating results throughout 2021 and the change in accounting
estimate for Pharma settlement income in 2020.
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 loss to
Adjusted EBITDA is provided in the table below.
Reconciliation of adjusted EBITDA to net loss:
Net loss
Income tax provision
Interest income, net
Depreciation and amortization
EBITDA
Impairment of intangible asset
Loss on abandonment of assets
Stock-based compensation
Adjusted EBITDA
Liquidity and Capital Resources
Year ended December 31,
2021
2020
(2,721,334) $
10,198
(28,297)
2,497,918
(241,515)
–
–
2,280,931
2,039,416 $
(9,141,562)
894,182
(90,720)
2,124,762
(6,213,338)
382,414
42,898
2,971,777
(2,816,249)
$
$
The following table sets forth the major sources and uses of cash for our last two fiscal years ended December 31, 2021 and 2020:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net increase in cash and restricted cash
24
Year ended December 31,
2021
2020
15,228,189 $
(2,679,664)
192,141
12,740,666 $
13,775,819
(3,344,855)
(72,865)
10,358,099
$
$
Comparison of Fiscal 2021 and 2020
In fiscal 2021 and 2020, we financed our operations through internally generated funds.
Operating activities provided $15,228,189 of cash in 2021, an increase of $1,452,370 compared to 2020. The increase is primarily due to the decrease in the
net loss, offset by a decrease in cash flows from changes in operating assets and liabilities, and decreases in stock-based compensation expense, impairment
of intangible asset, loss on abandonment of assets, and deferred income taxes. The large year-over-year changes in operating assets and liabilities related to
accounts receivable and accounts payable and accrued liabilities was primarily due to the launch of new Pharma programs and the timing of collections and
payments whereby we collect money from pharmaceutical and HUB service companies and reimburse the pharmacy claims processor, healthcare providers
and patients for their out-of-pocket drug costs. The decrease in the customer card funding liability is partially related to the recognition of settlement
income on Pharma programs that terminated or switched to a new business model during the year.
Investing activities used $2,679,664 of cash in 2021, as compared to $3,344,855 of cash in 2020. The decrease is primarily attributable to a decrease in
fixed assets purchased relative to the prior year when we moved into a new office location, offset by increases in the capitalization of internally developed
software related to ongoing enhancements to our processing platform and infrastructure.
Financing activities provided $192,141 of cash in 2021 as compared to the use of $72,865 of cash in 2020. Our cash provided in financing activities for
2021 related entirely to cash received from the exercise of stock options. Our cash used in financing activities for 2020 related to cash received from the
exercise of stock options totaling $172,560 offset by $245,425 for the repurchase of stock for taxes withheld.
Liquidity and Sources of Financing
Unrestricted cash declined $442,297 to $7,387,156, due to the negative impact of COVID-19 on our operating results, particularly in March and April of
2021 when government stimulus checks were widely distributed to individuals throughout the United States. Our operating results did improve throughout
2021 whereby we were able to generate positive cash flow from operations in the second half of the year to help offset our unrestricted cash balance decline
that we experienced in the first half of the year. Restricted cash of $61,283,914 are funds used for customer card funding with a corresponding offset under
current liabilities. The increase in 2021 versus 2020 was predominately related to increases in funds on card, increased Plasma deposits, and new Plasma
and Pharma customers, offset by declines from Pharma customers whose contracts terminated during the year. We experienced large increases in accounts
receivable and accounts payable primarily due to the launch of six new Pharma programs during the year whereby Paysign invoices its customers for
reimbursement to pharmacy networks, pharmacies, or individuals for their out-of-pocket costs and remits those funds to cover the accounts payable
liability. We believe that our unrestricted cash on hand at December 31, 2021 of $7,387,156, along with anticipated revenues and operating profits
anticipated for 2022, and our account receivable and account payable process, 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.
25
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, Paysign recognizes 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 ranging from periods of 3 to 15 years.
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, as the Platform asset. 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 – 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.
Income tax benefits are recognized and measured 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. Income tax related interest and penalties, if applicable, are accrued within income tax expense.
Revenue and Expense 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 contracts 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 obligation.
26
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. 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 and paid typically due with 30 days pursuant to the contract
terms which are generally multi-year contracts. The Company uses the output method to recognize card program management fee revenue at the amount of
consideration to which an entity has a right to invoice. The services are transferred to the customer when the performance obligation is completed which
the Company determined to be monthly, as the customers simultaneously receives and consumes the consumes the benefit from the Company’s
performance. 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 interchange fee revenue concurrent with the processing of card transactions. Interchange fees are settled in
accordance with the card payment network terms and conditions, which is typically within a few days.
Prior to September 30, 2020, 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 change in facts and circumstances during 2020, the Company now 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 and
postage 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.
Leases with an initial term of 12 months or less are not recorded on the balance sheet, with lease expense for these leases recognized on a straight-line basis
over the lease term.
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. The
Company has 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 the Company’s 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.
27
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, 2021 and 2020, 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, 2021. 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, 2021. 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:
·
·
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
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
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
28
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, 2021, 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. 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, 2021.
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, 2021.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2021 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
29
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
PART III
The information required by this Item is incorporated by reference to our proxy statement for our 2022 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the year end December 31, 2021.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to our proxy statement for our 2022 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the year end December 31, 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The information required by this Item is incorporated by reference to our proxy statement for our 2022 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the year end December 31, 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to our proxy statement for our 2022 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the year end December 31, 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to our proxy statement for our 2022 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the year end December 31, 2021.
30
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)
The following documents are filed as a part of the report:
PART IV
(1) All financial statements: Audited financial statements of Paysign, Inc. as of December 31, 2021 and 2020, and for the years ended
December 31, 2021 and 2020, including balance sheets, statements of income, statements of cash flows, and statements of changes in stockholders’ equity
required to be filed hereunder are listed in Exhibit A.
(2) Those financial statement schedules required to be filed by Item 8 of this form, and by paragraph (b) below: none.
(3) Those exhibits required by Item 601 of Regulation S-K (Section 229.601 of this chapter) and by paragraph (b) below. Identify in the list
each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 15(b) of this report.: See
below.
(b)
Exhibits.
Exhibit
Description of Exhibits
Number
Amended and Restated Articles of Incorporation dated April 23, 2019 (1)
3.1
Amended and Restated Bylaws (2)
3.2
Form of Warrant (3)
4.1
Description of Paysign, Inc.’s Securities(4)
4.2
Share Exchange Agreement between 3PEA International, Inc. and WOW Technologies, Inc. (5)
10.1
Form of Restricted Stock Award (6)
10.2
2018 Incentive Compensation Plan (7)
10.3
Form of Incentive Stock Option Agreement (8)
10.4
Form of Non-Qualified Stock Option Agreement (9)
10.5
Form of Restricted Stock Agreement (10)
10.6
Non-Qualified Stock Option Agreement for Dan Henry (11)
10.7
Code of Ethics (12)
14
Subsidiaries of Registrant(13)
21
Consent of BDO USA, LLP
23.1*
Rule 13a-14(a)/15d-14(a) Certifications
31.1*
Rule 13a-14(a)/15d-14(a) Certifications
31.2*
Section 1350 Certifications
32.1*
Section 1350 Certifications
32.2*
101.INS
XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL
101.LAB XBRL Label Linkbase Document
101.PRE
101.DEF
104
XBRL Presentation Linkbase Document
XBRL Definition Linkbase Document
Cover Page Interactive Data File
XBRL Calculation Linkbase Document
31
* Filed herewith.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on September 9, 2019 (File Number 001-38623).
Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on May 22, 2018 (File Number 000-54123).
Incorporated by reference to Exhibit 4.2 to our Registration Statement on Form 10 filed on September 16, 2010 (File Number 000-54123).
Incorporated by reference to Exhibit 4.2 to our Annual Report on Form 10-K filed on April 3, 2020 (File Number 001-38623).
Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form 10 filed on September 16, 2010 (File Number 000-54123).
Incorporated by reference to Exhibit 4.1 to our Form S-8 filed on March 29, 2019 (File Number 333-230634).
Incorporated by reference to Exhibit 4.1 to our Form S-8 filed on March 29, 2019 (File Number 333-230632).
Incorporated by reference to Exhibit 4.2 to our Form S-8 filed on March 29, 2019 (File Number 333-230632).
Incorporated by reference to Exhibit 4.3 to our Form S-8 filed on March 29, 2019 (File Number 333-230632).
Incorporated by reference to Exhibit 4.4 to our Form S-8 filed on March 29, 2019 (File Number 333-230632).
Incorporated by reference to Exhibit 4.3 to our Form S-8 filed on August 22, 2019 (File Number 333-233400).
Incorporated by reference to Exhibit 14.1 to our Annual Report on Form 10-K filed on April 3, 2020 (File Number 001-38623).
Incorporated by reference to Exhibit 21 to our Annual Report on Form 10-K filed on March 26, 2021 (File Number 001-38623).
(c)
Other Financial Statement Schedules: None.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
32
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 23, 2022
PAYSIGN, INC.
By:
/s/ Mark Newcomer
Mark Newcomer, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Dated: March 23, 2022
Dated: March 23, 2022
Dated: March 23, 2022
Dated: March 23, 2022
Dated: March 23, 2022
Dated: March 23, 2022
Dated: March 23, 2022
Dated: March 23, 2022
/s/ Mark Newcomer
Mark Newcomer, Chief Executive Officer and Director (Principal Executive
Officer)
/s/ Jeff Baker
Jeff Baker, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
/s/ Joan Herman
Joan Herman, Executive Vice President and Director
/s/ Dan Henry
Dan Henry, Director and Chairman
/s/ Bruce Mina
Bruce Mina, Director
/s/ Daniel Spence
Daniel H. Spence, Director
/s/ Dennis Triplett
Dennis Triplett, Director
/s/ Quinn Williams
Quinn Williams, Director
33
EXHIBIT A
PAYSIGN, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
WITH AUDIT REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Las Vegas, NV; PCAOB ID #243)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
F-1
PAGE
F-2
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Paysign, Inc.
Henderson, NV
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Paysign, Inc. (the “Company”) as of December 31, 2021 and 2020, the related
consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the
related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2020.
Las Vegas, Nevada
March 23, 2022
F-2
PAYSIGN, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2021 AND 2020
ASSETS
Current assets
Cash
Restricted cash
Accounts receivable
Other receivables
Prepaid expenses and other current assets
Total current assets
Fixed assets, net
Intangible assets, net
Operating lease right-of-use asset
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities
Operating lease liability, current portion
Customer card funding
Total current liabilities
Operating lease liability, long term portion
Total liabilities
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock: $0.001 par value; 25,000,000 shares authorized; none issued and outstanding
Common stock; $0.001 par value; 150,000,000 shares authorized, 52,095,382 and 50,251,607 issued
at December 31, 2021 and 2020, respectively
Additional paid-in capital
Treasury stock at cost, 303,450 shares
Accumulated deficit
Total stockholders' equity
$
$
$
December 31,
2021
December 31,
2020
7,387,156 $
61,283,914
3,393,940
1,019,218
1,242,967
74,327,195
1,642,981
4,086,962
3,993,655
7,829,453
48,100,951
512,097
142,762
1,375,364
57,960,627
1,849,164
3,699,033
4,324,682
84,050,793 $
67,833,506
5,765,478 $
340,412
61,283,914
67,389,804
2,162,256
320,636
48,100,951
50,583,843
3,673,186
4,013,598
71,062,990
54,597,441
–
–
52,095
16,860,119
(150,000)
(3,774,411)
12,987,803
50,252
14,388,890
(150,000)
(1,053,077)
13,236,065
Total liabilities and stockholders' equity
$
84,050,793 $
67,833,506
See accompanying notes to consolidated financial statements.
F-3
Revenues
Plasma industry
Pharma industry
Other
Total revenues
Cost of revenues
Gross profit
Operating expenses
Selling, general and administrative
Impairment of intangible asset
Loss on abandonment of assets
Depreciation and amortization
Total operating expenses
Loss from operations
Other income
Interest income, net
Loss before income tax provision
Income tax provision
Net loss
Loss per share
Basic
Diluted
Weighted average common shares
Basic
Diluted
PAYSIGN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
$
$
$
$
Year ended
December 31,
2021
2020
25,918,150 $
3,361,869
184,830
29,464,849
23,401,068
326,699
392,667
24,120,434
14,753,042
14,817,028
14,711,807
9,303,406
14,953,322
–
–
2,497,918
17,451,240
15,091,432
382,414
42,898
2,124,762
17,641,506
(2,739,433)
(8,338,100)
28,297
90,720
(2,711,136)
10,198
(8,247,380)
894,182
(2,721,334) $
(9,141,562)
(0.05) $
(0.05) $
(0.19)
(0.19)
50,975,794
50,975,794
49,272,494
49,272,494
See accompanying notes to consolidated financial statements.
F-4
PAYSIGN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
Stockholders' Equity Attributable to Paysign, Inc.
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Treasury
Stock
Amount
Retained
Earnings/
(Accumulated
Deficit)
Non-
controlling
Interest
Total
Stockholders’
Equity
Balance, December 31, 2019
48,577,712 $
48,578 $ 11,577,539 $ (150,000) $
8,088,485 $ (263,087) $ 19,301,515
Stock issued upon vesting of restricted
stock
Exercise of stock options
Stock-based compensation
Dissolution of Paysign, Ltd. Subsidiary
Repurchase of employee common stock
for taxes withheld
Issuance of stock for acquisition of
contract assets
Net loss
Balance, December 31, 2020
Stock issued upon vesting of restricted
stock
Exercise of stock options
Stock-based compensation
Net loss
Balance, December 31, 2021
1,581,995
71,900
–
–
1,582
72
(1,582)
172,488
– 2,971,777
(263,087)
–
–
–
(245,425)
–
–
–
–
–
–
–
–
–
–
20,000
–
50,251,607
20
–
177,180
–
50,252 14,388,890
–
–
(150,000)
–
(9,141,562)
(1,053,077)
1,778,689
65,086
–
–
52,095,382 $
1,779
64
(1,779)
192,077
– 2,280,931
–
–
–
–
–
(2,721,334)
52,095 $ 16,860,119 $ (150,000) $ (3,774,411) $
–
–
–
–
–
–
–
263,087
–
172,560
2,971,777
–
–
(245,425)
177,200
–
(9,141,562)
–
– 13,236,065
–
–
192,141
–
2,280,931
–
–
(2,721,334)
– $ 12,987,803
See accompanying notes to consolidated financial statements.
F-5
PAYSIGN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
Cash flows from operating activities:
Net loss
Adjustments to reconcile net income loss to net cash provided by operating activities:
Stock-based compensation expense
Depreciation and amortization
Noncash lease expense
Impairment of intangible asset
Loss on abandonment of assets
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Other receivables
Prepaid expenses and other current assets
Accounts payable and accrued liabilities
Operating lease liability
Customer card funding
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of fixed assets
Capitalization of internally developed software
Purchase of intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Repurchase of employee common stock for taxes withheld
Net cash provided by (used in) financing activities
Net change in cash and restricted cash
Cash and restricted cash, beginning of period
Cash and restricted cash, end of period
Cash and restricted cash reconciliation:
Cash
Restricted cash
Total cash and restricted cash
Supplemental cash flow information:
Non-cash financing activities
Operating lease right-of-use asset and operating lease liability
Issuance of stock for asset acquisition
Dissolution of noncontrolling interest
Interest paid
Cash paid for taxes
Year ended
December 31,
2021
2020
$
(2,721,334) $
(9,141,562)
2,280,931
2,497,918
331,027
–
–
–
(2,881,843)
(876,456)
132,397
3,603,222
(320,636)
13,182,963
15,228,189
(328,566)
(2,288,680)
(62,418)
(2,679,664)
192,141
–
192,141
2,971,777
2,124,762
188,977
382,414
42,898
917,480
237,077
–
(20,544)
815,853
(121,037)
15,377,724
13,775,819
(1,383,311)
(1,880,283)
(81,261)
(3,344,855)
172,560
(245,425)
(72,865)
12,740,666
55,930,404
10,358,099
45,572,305
68,671,070 $
55,930,404
7,387,156 $
61,283,914
68,671,070 $
7,829,453
48,100,951
55,930,404
– $
– $
– $
4,587 $
4,073 $
4,455,271
177,200
263,087
–
–
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F-6
PAYSIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND HISTORY
About Paysign, Inc.
Paysign, Inc. (the “Company,” “Paysign,” “we” or “our”) was incorporated on August 24, 1995, and trades under the symbol PAYS on The Nasdaq Stock
Market LLC. Paysign. is a provider of prepaid card programs, comprehensive patient affordability offerings, digital banking services and integrated
payment processing designed for businesses, consumers and government institutions. Headquartered in Nevada, the company creates customized,
innovative payment solutions for clients across all industries, including pharmaceutical, healthcare, hospitality and retail.
Impact of COVID-19 Pandemic
The coronavirus (“COVID-19”) pandemic, which started in late 2019 and reached the United States in early 2020, continues to significantly impact the
economy of the United States and the rest of the world. While the disruption appears to be mitigating due to the availability of vaccines and other factors,
the ultimate duration and severity of the pandemic remain uncertain, particularly given the development of new variants that continue to spread. The
COVID-19 outbreak caused plasma center closures, and the stimulus packages signed into law during 2020 and 2021 reduced the incentive for individuals
to donate plasma for supplementary income. Those developments have had and will continue to have an adverse impact on the Company’s results of
operations. While we remain cautiously optimistic and have seen improvements in our operating results, we cannot foresee how long it may take the
Company to attain pre-pandemic operating levels as COVID-19 related labor shortages at plasma donation centers, border closures, and other effects
continue to weigh 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 variants and around the imposition or relaxation of protective measures, management cannot at this time estimate with reasonable accuracy
COVID-19’s further impact on the Company’s results of operations, cash flows or financial condition.
Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law in 2020 and the subsequent extension
of the CARES Act through September 30, 2021, the Company was eligible for a refundable employee retention credit subject to certain criteria. The
Company has elected an accounting policy to recognize the government assistance when it is probable that the Company is eligible to receive the assistance
and present the credit be as a reduction of the related expense. During the years ended December 31, 2021 and 2020, the Company recorded $876,456 and
$0, respectively, related to the employee retention credit included as a reduction of payroll expense within selling, general and administrative expenses in
the consolidated statements of operations. As of December 31, 2021 the Company has filed for refunds and recorded $876,456 in other receivables on the
consolidated balance sheet.
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.
Reclassifications – Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial
statement presentations.
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.
F-7
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, 2021 and 2020.
Restricted Cash – At December 31, 2021 and 2020, restricted cash consisted 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.
Concentrations of Credit Risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and
cash equivalents and restricted cash. Paysign maintains its cash and cash equivalents and restricted cash in various bank accounts that, at times, may exceed
federally insured limits. Paysign has not experienced, nor does it anticipate, any losses with respect to such accounts. At December 31, 2021 and 2020, the
Company had approximately $31,828,826 and $26,761,183 in excess of federally insured limits, respectively.
The Company also has a concentration of accounts receivable risk at December 31, 2021 as two Pharma programs each individually representing 52% and
17% of our accounts receivable balance, of which both balances are current. There was no single program representing more than 10% of our accounts
receivable balance at December 31, 2020.
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, the Company recognizes 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 ranging from periods of 3 to 15 years.
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, as the Platform asset. 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, 2021 and 2020, customer card funding represents funds loaded on our prepaid card 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.
The Company determines 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:
F-8
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 share is
computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per 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.
Income Taxes – 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. The
Company also recognizes deferred tax assets for tax attributes such as net operating loss carryforwards and tax credit carryforwards. Valuation allowances
are recorded 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.
Income tax benefits are recognized and measured 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. Income tax related interest and penalties, if applicable, are accrued within income tax expense.
Revenue and Expense Recognition – In determining when and how revenue is recognized from contracts with customers, the Company performs the
following five-step analysis: (i) identification of contracts 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 obligation.
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.
F-9
Plasma and Pharma card program revenues include both fixed and variable components. 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 and paid typically due within 30 days pursuant to the contract
terms which are generally multi-year contracts. The Company uses the output method to recognize card program management fee revenue at the amount of
consideration to which an entity has a right to invoice. The performance obligation is satisfied when the services are transferred to the customer which the
Company determined to be monthly, as the customers simultaneously receives and consumes the benefit from the Company’s performance. 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 interchange fee revenue concurrent with the processing of card transactions. Interchange fees are settled in accordance with the
card payment network terms and conditions, which is typically within a few days.
Prior to September 30, 2020, 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 change in facts and circumstances during 2020, the Company now 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 principal 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 and
postage 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.
Leases with an initial term of 12 months or less are not recorded on the balance sheet, with lease expense for these leases recognized on a straight-line basis
over the lease term.
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.
F-10
Advertising Costs – Advertising costs incurred in the normal course of operations are expensed as incurred. During the years ended December 31, 2021 and
2020, the Company expensed $227,387 and $99,312, respectively, included in selling, general and administrative expense.
Recently Issued Accounting Pronouncements – In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial
Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which provides updated guidance on
how an entity should measure credit losses on all financial instruments carried at amortized cost (including loans held for investment and held-to-maturity
debt securities, as well as trade receivables, reinsurance recoverables, and receivables that relate to repurchase agreements and securities lending
agreements), a lessor’s net investments in leases, and off-balance sheet credit exposures not accounted for as insurance or as derivatives, including loan
commitments, standby letters of credit, and financial guarantees. Subsequently, in November 2018 the FASB issued ASU No. 2018-19, Codification
Improvements to Topic 326, Financial Instruments–Credit Losses (“AS 2018-19”), which clarified that receivables arising from operating leases are not
within the scope of Subtopic 326-20, but instead should be accounted for in accordance with Topic 842, Leases. The new standard and related amendments
are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact
of adopting this guidance on our Financial Statements; however, we do not expect it to have a material impact on the Company’s consolidated financial
statements.
In December 2019, 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 Company adopted this new standard on January 1, 2021 and
there was no material impact on its consolidated financial statements.
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government
Assistance (“ASU 2021-10), which requires increased disclosure on an annual basis about transactions with domestic, foreign, local, regional and national
governments, including entities related to those governments and intergovernmental organizations, that are accounted for by applying a grant or
contribution accounting model by analogy to other accounting guidance. The Company adopted this new standard beginning on January 1, 2021 and there
was no material impact on the its consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from
Contracts with Customers (“ASU 2021-08”). This ASU requires contract assets and contract liabilities acquired in a business combination to be recognized
and measured by the acquirer on the acquisition date in accordance with ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). This
guidance is effective for the Company beginning on January 1, 2023 and is not expected to have a material impact on the Company’s consolidated financial
statements.
3. FIXED ASSETS, NET
Fixed assets consist of the following:
Equipment
Software
Furniture and fixtures
Website costs
Leasehold improvements
Less: accumulated depreciation
Fixed assets, net
December 31,
2021
December 31,
2020
2,067,834 $
315,855
757,662
69,881
229,772
3,441,004
1,798,023
1,642,981 $
1,888,640
200,282
752,212
67,816
203,488
3,112,438
1,263,274
1,849,164
$
$
Depreciation expense for the year ended December 31, 2021 and 2020 was $534,749 and $428,434, 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.
F-11
4. INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
Patents and trademarks
Platform
Customer lists and contracts
Licenses
Less: accumulated amortization
Intangible assets, net
December 31,
2021
December 31,
2020
$
$
38,186 $
9,853,823
1,177,200
209,282
11,278,490
7,191,529
4,086,962 $
38,186
7,478,419
1,177,200
234,282
8,928,087
5,229,054
3,699,033
Amortization expense for the year ended December 31, 2021 and 2020 was $1,963,169 and $1,696,329, 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.
Estimated future amortization expense is as follows:
2022
2023
2024
2025
2026
Thereafter
Total amortization expense
5. LEASE
$
$
1,939,949
1,367,600
682,733
23,440
8,986
64,254
4,086,962
The Company entered into an operating lease for an office space which became effective in June 2020. 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, 2021, the remaining lease term was 8.4 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 $623,987 and $489,104 for the years ended December 31, 2021 and 2020,
respectively. Cash paid for operating lease was $571,968 and $323,648 for the years ended December 31, 2021 and 2020, respectively. Short-term lease
cost included in selling, general and administrative expense was $0 and $94,906 for the years ended December 31, 2021 and 2020, respectively.
F-12
The following is the lease maturity analysis of our operating lease as of December 31, 2021:
Twelve months ending December 31,
2022
2023
2024
2025
2026
Thereafter
Total lease payments
Less: Imputed interest
Present value of future lease payments
Less: current portion of lease liability
Long-term portion of lease liability
6. CUSTOMER CARD FUNDING LIABILITY
$
$
571,968
571,968
571,968
612,006
640,604
2,188,731
5,157,245
(1,143,647)
4,013,598
(340,412)
3,673,186
The Company issues prepaid cards with various provisions for cardholder fees or expiration. Revenue generated from cardholder transactions 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). 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. 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 liabilities are as follows:
Beginning balance
Increase (decrease), net
Ending balance
Year Ended
December 31,
$
$
2021
2020
48,100,951 $
13,182,963
61,283,914 $
32,723,227
15,377,724
48,100,951
The amount of revenue recognized during the years ended December 31, 2021 and 2020 that was included in the opening liability for prepaid cards was
$1,023,055 and $844,519, respectively.
7. COMMON STOCK
At December 31, 2021, 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 52,095,382 shares of common stock and 51,791,932 shares of
common stock outstanding, 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, 2021,
there were 3,075,553 shares available for future grants under the 2018 Plan.
F-13
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, 2021 and 2020 was $2,280,931 and $2,971,777, respectively, and is included in
selling, general and administrative expense. As of December 31, 2021, the Company’s unrecognized stock-based compensation expense related to stock
options and stock awards was $759,394 and $4,368,961, respectively, which are expected to be recognized over a weighted-average period of 1.71 year for
stock options and 3.65 years for stock awards. 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.
2021 Transactions: During the year ended December 31, 2021, the Company issued shares of common stock as follows:
·
·
65,086 shares of common stock were issued related to the exercise of vested stock options and received cash proceeds totaling $192,141.
1,778,689 shares of common stock were issued for vested stock awards to employees.
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.
Stock Options
A summary of stock options activity for the years ended December 31, 2021 and 2020 is presented as follows:
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Outstanding at December 31, 2019
Granted
Exercised
Forfeited/expired
Outstanding at December 31, 2020
Granted
Exercised
Forfeited/expired
Outstanding at December 31, 2021
Exercisable at December 31, 2021
Shares
2,403,800 $
500,000
(71,900)
(144,200)
2,687,700 $
–
(65,086)
(702,614)
1,920,000 $
1,200,800 $
2.01
3.87
2.40
2.91
2.30
–
2.95
3.40
1.87
1.65
A summary of unvested options activity for the years ended December 31, 2021 and 2020 was as follows:
Unvested at December 31, 2019
Granted
Forfeited/expired
Vested
Unvested at December 31, 2020
Granted
Forfeited/expired
Vested
Unvested at December 31, 2021
F-14
7.74 $
6,294,948
6.54
6.32 $
351,000
253,500
Weighted-
Average
Grant Date
Fair Value
2.01
3.87
2.91
1.91
2.49
–
3.42
1.97
2.25
Shares
2,039,400 $
500,000
(144,200)
(603,600)
1,791,600 $
–
(506,950)
(565,450)
719,200 $
The weighted average grant date fair value of options granted and the total intrinsic value of options exercised for the years ended December 31, 2021 and
2020 is as follows:
Weighted average grant date fair value of options granted
Intrinsic value of options exercised
2021
2020
$
$
– $
70,938 $
2.86
370,764
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. There were no options granted during the year ended December 31, 2021.
Stock Awards
A summary of stock awards activity for the years ended December 31, 2021 and 2020 was as follows:
Outstanding at December 31, 2019
Granted
Forfeited
Vested
Outstanding at December 31, 2020
Granted
Forfeited
Vested
Outstanding at December 31, 2021
Shares
4,400,000 $
254,747
(792,500)
(1,629,558)
2,232,689 $
845,000
(388,000)
(1,353,689)
1,336,000 $
Weighted-
Average Grant
Date Fair Value
2.06
7.80
4.61
0.89
2.70
3.60
5.54
1.28
3.89
8. BASIC AND FULLY DILUTED NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and fully diluted net loss per common share for the years ended December 31, 2021 and 2020:
Numerator:
Net loss attributable to Paysign, Inc.
Denominator:
Weighted average common shares:
Denominator for basic calculation
Weighted average effects of potentially diluted common stock:
Stock options (calculated under treasury method)
Unvested restricted stock awards
Denominator for fully diluted calculation
Net loss per common share:
Basic
Fully diluted
F-15
2021
2020
$
(2,721,334) $
(9,141,562)
50,975,794
49,272,494
–
–
50,975,794
(0.05) $
(0.05) $
–
–
49,272,494
(0.19)
(0.19)
$
$
Due to the net loss for the years ended December 31, 2021 and 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 both periods. For the year ended December 31,
2021, the amount of potential common share equivalents excluded were 1,920,000 for stock options and 1,336,000 for unvested restricted stock awards.
For the year ended December 31, 2020, the amount of potential common share equivalents excluded were 2,687,700 for stock options and 2,232,689 for
unvested restricted stock awards.
9. COMMITMENTS AND CONTINGENCIES
Pending or 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.
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 (collectively, the “Complaints” or “Securities Class Action”). Smith & Duvall v. Paysign, Inc. et. al. 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 19, 2019 through March 31, 2020, inclusive. The Complaints generally allege that the Company, Mark 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,
which Plaintiffs opposed via an opposition brief filed on April 29, 2021, to which Defendants replied on June 1, 2021. Thus, the motion is now fully
briefed. The Court has not set a hearing date on the motion, or informed the parties whether it intends to entertain oral argument or rule upon the papers
filed. 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 United States District Court for the District of Nevada:
Andrzej Toczek, derivatively on behalf of Paysign, Inc. v. Mark 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 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 $479,684 and $609,459 during the years ended
December 31, 2021 and 2020.
11. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan that covers all employees who meet certain age and length of service requirements and allows an
employer contribution of up to 50% of the first 3% of each participating employee’s eligible compensation contributed to the plan and 50% of the next two
percent of each participating employee’s eligible compensation. Participants are 100% vested in these matching contributions when they are made. Eligible
employees may elect to defer pre-tax contributions regulated under Section 401(k) of the Internal Revenue Code. Employer matching expense was
$205,146 and $193,724 for the years ended December 31, 2021 and 2020, respectively.
F-16
12. INCOME TAXES
The income tax provision on the statements of operations was comprised of the following for the years ended December 31:
Current:
Federal
State
Current income tax provision (benefit)
Deferred:
Federal
State
Deferred income tax provision
Income tax provision
2021
2020
– $
10,198
10,198
–
–
–
10,198 $
(23,298)
–
(23,298)
917,480
–
917,480
894,182
$
$
For the years ended December 31, 2021 and 2020, the reconciliation of the federal statutory tax rate to the benefit rate for income taxes is as follows:
Federal taxes at U.S statutory rate
Stock-based compensation
IRC Section 162(m) limitation
Tax credits
Other permanent differences
State taxes
Change in state rate
Return-to-provision adjustments
Change in valuation allowance
Change in carryovers and tax attributes
Effective tax rate
Deferred tax assets are comprised of the following at December 31:
Deferred tax assets:
Net operating loss carryforward
Operating lease obligation
Stock-based compensation
Tax credits
Capital loss carryforward and other
Other carryforwards
Accrued bonuses
Deferred tax assets, gross
Deferred tax liabilities:
Intangible assets
Fixed assets
Right-of-use assets
Less valuation allowance
Deferred tax asset, net
F-17
2021
2020
21.0%
4.0
(7.4)
4.1
(0.3)
0.7
(1.8)
7.5
(2.3)
(25.9)
(0.4)%
21.0%
14.9
–
1.3
–
–
–
2.8
(56.9)
6.1
(10.8)%
2021
2020
4,082,474 $
1,079,312
621,460
526,549
–
3,603
285,336
6,598,734
(651,767)
(111,255)
(1,079,507)
(1,842,529)
(4,756,205)
– $
4,261,552
1,016,847
650,737
491,261
270,551
–
–
6,690,948
(548,149)
(435,218)
(1,014,606)
(1,997,973)
(4,692,975)
–
$
$
As of December 31, 2021, the Company has gross Federal net operating loss carryforwards of approximately $20,087,818 and gross state net operating loss
carryforwards of approximately $4,470,645. Approximately $882,542 of the Federal net operating loss carryforwards begin to expire in 2034 and the
remaining Federal net operating losses can be carried forward indefinitely. The carryforwards of the Company's state net operating losses range from ten
years to an indefinite carryforward period and begin to expire in 2031.
Pursuant to Sections 382 and 383 of the Internal Revenue Code ("IRC"), Federal and state tax laws impose significant restrictions on the utilization of net
operating losses and other tax carryforwards in the event of a change in ownership of the Company. The Company's federal and state net operating losses at
December 31, 2021 are not materially impacted by IRC Section 382 nor IRC Section 383.
Deferred taxes arise from temporary differences in the recognition of certain expenses for tax and financial reporting purposes. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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. The Company continues to have a full valuation allowance in 2021. The Company's
valuation allowance represents the amount of tax benefits that are likely to not be realized. The net change in the valuation allowance from December 31,
2020 was $63,230.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance as of December 31, 2019
Additions for current year
Additions for prior year
Subtractions for current year
Balance as of December 31, 2020
Additions for current year
Additions for prior year
Subtractions for current year
Balance as of December 31, 2021
$
$
–
–
–
–
–
28,041
337,324
–
365,365
As of December 31, 2021 and 2020, the Company has no accrual for interest and penalties related to its unrecognized tax benefits. The balance of the
unrecognized tax benefits as of December 31, 2021 are included in the deferred tax asset, net. The Company's effective tax rate would not be impacted if its
uncertain tax benefits were recognized due to the Company's full valuation allowance. There are no positions for which it is reasonably possible that the
uncertain tax benefit will significantly increase or decrease within twelve months. The Company files income tax returns in the United States and various
state jurisdictions. The federal statute of limitation remains open for the 2018 tax year to present. The state statutes of limitation remain open for the 2020
tax year through present.
13. 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 2019 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 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.
14. SUBSEQUENT EVENTS
In 2022, we issued to employees a total of 73,000 shares of common stock for vested stock awards.
F-18
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-230632, No. 333-230634 and No. 333-233400)
of Paysign, Inc. of our report dated March 23 2022, relating to the consolidated financial statements, which appears in this Form 10-K.
/s/ BDO USA, LLP
Las Vegas, Nevada
March 23 2022
Exhibit 31.1
I, Mark Newcomer, certify that:
CERTIFICATIONS
(1) I have reviewed this annual report on Form 10-K for the period ended December 31, 2021 (the “report”) of Paysign, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 23 2022
/s/ Mark Newcomer
Mark Newcomer
Chief Executive Officer
(principal executive officer)
Exhibit 31.2
I, Jeff Baker, certify that:
CERTIFICATIONS
(1) I have reviewed this annual report on Form 10-K for the period ended December 31, 2021 (the “report”) of Paysign, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 23 2022
/s/ Jeff Baker
Jeff Baker
Chief Financial Officer
(principal financial officer)
Exhibit 32.1
SECTION 1350 CERTIFICATIONS
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Mark Newcomer, the Chief Executive
Officer of Paysign, Inc., a Nevada corporation (the "Company"), does hereby certify, to the best of my knowledge, that:
1. The Annual Report on Form 10-K for the period ended December 31, 2021 (the "Report") of the Company fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Mark Newcomer
Mark Newcomer,
Chief Executive Officer
(principal executive officer)
Date: March 23 2022
Exhibit 32.2
SECTION 1350 CERTIFICATIONS
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Jeff Baker, the Chief Financial Officer of
Paysign, Inc., a Nevada corporation (the "Company"), does hereby certify, to the best of my knowledge, that:
1. The Annual Report on Form 10-K for the period ended December 31, 2021 (the "Report") of the Company complies fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Jeff Baker
Jeff Baker
Chief Financial Officer
(principal financial officer)
Date: March 23 2022