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Paysign (PAYS 0.22%)
Q3 2020 Earnings Call
Nov 17, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello and welcome to the Paysign 2020 third-quarter earnings conference call. [Operator instructions] As a reminder this conference is being recorded. This presentation may include forward-looking statements to the extent that the information presented in this presentation discusses financial projections, information or expectations about the company's business plans, results of operations, the impact of COVID-19, returns on equity, expecting gross margins, markets or otherwise makes statements about future events, such statements are forward-looking. Such forward-looking statements can be identified by the use of words such as should, may, intend, anticipates, believes, estimates, projects, forecasts, expects, plans or proposes.

Although the company believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could actually cause actual results differ materially from such forward-looking statements. You're urged to carefully review and consider any cautionary statement and other disclosures, including the statements made under the heading risk factors and elsewhere in the Form 10-Q. Forward-looking statements speak only as of the date of the document in which they are contained and the company does not undertake any duty to update any forward-looking statements except as may be required by law. This presentation also includes adjusted EBITDA and non-GAAP financial measure that is not prepared in accordance with nor an alternative to financial measures prepared in accordance with U.S.

Generally Accepted Accounting Principles, GAAP. In addition, adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and it's not necessarily comparable to similarly titled measures presented by other companies. It's now my pleasure to turn the call over to Mark Newcomer. Please please go ahead.

Mark Newcomer -- Co-Founder, Vice Chairman, and Chief Executive Officer

Thank you, Kevin. Good afternoon everyone, and thank you for joining us for a Paysign's third-quarter 2020 earnings call. I am Mark Newcomer, president and chief executive officer. Also on the call with me today is Mark Attinger our chief financial officer.

We hope all of you and your families are staying safe during the COVID-19 pandemic. We continue to focus on ensuring the health and safety of our employees while supporting our clients and cardholders, and stay committed to a long-term success of Paysign. The COVID-19 outbreak has had and will continue to have an adverse effect on the company's results of operations. Given the uncertainty around the extent -- given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, management cannot reasonably estimate the impact of the company's future results of operations, cash flows or financial conditions.

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Although we are disappointed with the quarter's financial results, the company did have significant wins in pharma and plasma, as well as, in new business lines. We have integrated with a midsize hub provider and are completing integration with the Fortune 500 hub company, paving the way for additional patient affordability and clinical research solution programs. We have three new copay programs that will launch in December. We are executing extremely well in the pharma space concentrating our commercial strategy on client satisfaction through a consultative approach.

Based on the performance and client satisfaction, we have recently expanded the small to midsize voucher program by [Inaudible]. We are confident with our product offerings, management, sales, and operational teams, which will lead to bigger wins in 2021. Twenty-six of the 49 centers that were to be completed in October are now known -- now going to be completed in December due to client delays. The implementation process of these centers has begun and will conclude to go live of all 49 plasma and blood collection centers previously mentioned in December.

We have 304 donation centers at the end of Q3, up from 290 in Q2. Subsequently, we have gone live with six additional centers and have three more centers ready for implementation. This, along with the aforementioned 26, brings the total number of centers to 339. Looking ahead, we're expecting to see an increase in new center openings from our plasma clients over the next 18 to 24 months.

We continue to see higher donations -- higher donation dollar amounts resulting from increased donor incentives and collection of COVID-19 plasma. Our pipeline remains robust in the plasma space. This quarter also -- we also launched new product line, the Paysign business expense card. We have signed two new clients, which are currently in the implementation phase and expected it to go live later this year and first quarter 2021.

This product is targeted to small and medium-sized businesses, including sole proprietors and their self-employed -- and the self-employed as an efficient way for management to stay in control while giving their employees or contractors the ability to pay for business-related expenses. At this time, I'd like to turn it over to our CFO, Mark Attinger who will discuss our third-quarter results in detail.

Mark Attinger -- Chief Financial Officer

Thank you, Mark. Good afternoon or evening. At this time, I'll take us through the third-quarter results and provide some variance commentary. As I proceed, reference to year-on-year changes in dollars or percent or comparisons to 2019 unless stated otherwise refers to the Q3 2020, as compared to Q3 2019.

Revenue for the quarter ended September 30th, 2020, with a negative $0.2 million, a decrease of $9.2 million, compared to the prior year of $9.0 million. Plasma revenue consisted of $5.2 million, a decrease of 25%, compared to Quarter 3 of 2019 and an increase of 13%, compared to Quarter 2, 2020. Pharma revenue was a negative $5.4 million. Both industries were impacted by the novel coronavirus and the incident of the related disease COVID-19.

The pharma revenue decrease included a $6.3 million adjustment for a change in accounting estimate in the third quarter related to our recognition of settlement income based on substantially different performance indicators observed, trends regarding program management, and new information available in low dollar loads and spending patterns, all of which were different than our historical experience. This change in accounting estimate resulted in the company constraining revenue in accordance with ASC 606. By changing its estimate of breakage to the remote method of revenue recognition or settlement income, whereby, the unspent balances will be recognized as revenue at the expiration of the cards and the respective program. This has resulted in the reversal of all previously recognized settlement income for current pharma programs.

Revenue excluding this change in accounting estimate in Quarter 3 was $6.1 million, a 4.7% decrease from the prior quarter, primarily resulting from the lower settlement income offset by a 13% quarter-on-quarter increase in plasma. Revenue for October was approximately $2.3 million. Cost of revenues were $3.3 million and decreased 10% or $360,000 versus the year-ago period. The decrease was primarily due to the decrease in transactions offset by an unfavorable rate variance, resulting from a decrease in higher margin revenue business.

Gross profit for the three months ended September 30th, 2020, decreased $8.8 million to a negative $3.4 million due to the reduction in revenue and the disproportionate decrease in cost of sales. Total operating expenses were $5.0 million, an increase of 62%, compared to 2019 or a 40% increase, excluding charges in the quarter of $659,000 for intangible impairment, legal fees pertaining to mergers and acquisitions activities. I should say and legal fees pertaining to mergers and acquisitions activity. The remaining increase was primarily related to an increase in staffing and compensation, professional fees, stock based compensation, technologies and telecom, depreciation, amortization, and rent costs, slightly offset by a decrease in travel.

Additional granularity can be reviewed in the 10-Q MD&A section. Paysign's net income for the quarter was a net loss of $6.2 million or a negative $0.12 per basic share, compared to a net income of $3.0 million or $0.06 per basic share the same period the prior year. Diluted EPS was also a negative $0.12, compared to $0.05. Non-GAAP adjusted EBITDA for the quarter was a negative $6.7 million or a negative $0.14, compared to basic share -- excuse me or a negative $0.14 per basic share, compared to $3.3 million or $0.07 per basic share the prior year.

The nine-month adjusted EBITDA was a negative $3.6 million or negative $0.07 per basic share, compared to $7.6 million or $0.16 per basic share the same nine-month period the prior year. Our gross dollar volume loaded to cards was $212 million versus $210 million, up 1.2% versus the prior year and up 16.3%, compared to $183 million the prior quarter. From a balance sheet perspective, consolidated cash of $55.5 million including restricted cash has increased $9.9 million or 22%, compared to the $45.6 million at year end 2019. Unrestricted cash was $7.5 million, compared to $7.6 million at the end of Quarter 2.

Working capital ending Quarter 3, 2020 was $7.3 million, compared to $13.6 million at year end 2019. Impacted by the change to the card funding liability resulting from the settlement income change in the Quarter 3. Our liquidity as measured by an adjusted current ratio, excluding restricted cash and the card funding liability was 4.3 times coverage, compared to 7.9 times coverage at year end 2019. We remain with no debt on the balance sheet and are adequately capitalized for the coming 12 months.

At this time, I'll turn it back over to our moderator, Kevin, to begin the question-and-answer session. Thank you.

Questions & Answers:


Operator

[Operator instructions] Our first question today is coming from Austin Moldow from Canaccord Genuity. Your line is now live.

Austin Moldow -- Canaccord Genuity -- Analyst

Thanks for taking my questions. On the pharma adjustment, in addition to changing the accounting to recognize revenue card expiration, does the comment you made on change in -- changes in performance indicators mean programs are managing their unspent revenue more efficiently now?

Mark Attinger -- Chief Financial Officer

Yes, that's correct, Austin. Sorry I was on mute.

Austin Moldow -- Canaccord Genuity -- Analyst

OK. How should we factor that into our estimates going forward? And is this -- is this something that all of the different programs have have made a meaningful change toward or is it just one or two large ones? And what do you think sort of triggered the recent change?

Mark Attinger -- Chief Financial Officer

So I would -- I would kind of refer to the statements that essentially the evaluation of the performance indicators and the revenue trends were substantially different than our experience and that data came about in the third quarter. And so by definition, if the ending unspent balances are less predictable as in accordance with ASC 606 you must constrain revenue fully by removing to the -- to moving to the remote method of accounting versus the ratable method.

Austin Moldow -- Canaccord Genuity -- Analyst

OK. Got it. Does adding back that $6.3 million adjustment get us to or close to a pharma revenue number comparable to historical periods?

Mark Attinger -- Chief Financial Officer

That would be correct. So I think I mentioned -- I think I mentioned during the call that prior to that adjustment revenue would be approximately $6.1 million, which would be down 4.7% in the quarter, compared to the prior quarter. And that's lower settlement income, as well as, higher -- partially offset by higher plasma business. But I -- but I caution you a little bit because we have moved to a remote method, and frankly, what that says is, we don't have the predictability of the unspent balances.

And so that's what requires that when you can no longer predict it in your models and you can't assure that no revenue will be reversed, you are required to constrain the revenues fully and move to remote method.

Austin Moldow -- Canaccord Genuity -- Analyst

OK. On the revenue conversion rates, any commentary you can provide on the like-for-like changes in each of the segments?

Mark Attinger -- Chief Financial Officer

Yeah. I apologize Austin, I do not have the segment breakout on the revenue conversion rates handy with me and we can -- we can do some offline detail into that category further. But I didn't segment that out for this particular call and I probably should have.

Austin Moldow -- Canaccord Genuity -- Analyst

OK. And then my last question is on plasma. What have you seen industry wide for plasma volume trends year over year or maybe sequentially from last quarter?

Mark Attinger -- Chief Financial Officer

So the -- I mean the industry as a whole is still down, but what we've seen is the percentage. And I think this is somewhat indicative in the industry from the press releases that we've been reading probably just like yourselves is that, when we look at, for example, and we talked about this previously, May was our low watermark, that was our lowest plasma month -- year. And when we compare ourselves in May to the prior year and we compare ourselves now in July, August, September, and even October to the prior year, the year-on-year improvement or excuse me, the year-on-year comparison is improving, but is still down approximately 20% in the most recent month compared to the prior year. But as we indicated for the quarter, plasma is down by 25% on revenue but in the most recent month, it's continuing to get better and better relatively to the prior year.

Austin Moldow -- Canaccord Genuity -- Analyst

OK. Understood. Thanks very much for taking my questions.

Operator

Thank you. [Operator instructions] Our next question is coming from Peter Heckmann from the D.A. Davidson. Your line is now live.

Peter Heckmann -- D.A. Davidson -- Analyst

Hey, good -- good afternoon, everyone. So in terms of how you'll think about pharma revenue going forward for those campaigns that that required estimates for the revenue recognition. Do we expect to see a large amount of revenue recognized in the fourth quarter every year for, I guess, on annual programs that have started? Or will it be -- I mean, I guess my perception was that most of the plans were annual around January or December. Are there other campaigns that they would have other different start and stop times?

Mark Newcomer -- Co-Founder, Vice Chairman, and Chief Executive Officer

So that the latter, Pete. We have programs ending in the first quarter, in the second quarter, and at the end of 2022, so in different months as well. So the programs were secured at different points in time and they typically have a two-year life. And so those those programs will be recognized when those -- the revenue would be recognized when those programs end.

Peter Heckmann -- D.A. Davidson -- Analyst

Got it. Can you talk about how many then pharma campaigns you had at the end of the quarter? And then talk a little bit about some of the issues of affordability and clinical research opportunities that you mentioned planning more recently?

Mark Newcomer -- Co-Founder, Vice Chairman, and Chief Executive Officer

Sure. So at the end of September, we actually finished with a total of 11 pharma programs. And of those 11, three of them are in the copay space and the other eight are programs that would have had and do have and will have settlement income that will now be recognized at the end of those programs. But in Mark's comments and I'll let him comment a little bit further.

We have been successful signing three additional copay programs that are preparing to go live and those were actually signed on in October. But, Mark, do you want to add to that?

Mark Attinger -- Chief Financial Officer

Nothing more than that they're expected to go before the end of the year. And you know, obviously, we have the the business products -- product line the business expense car product line which is in the commercial end and that's going to obviously pay us a little more [Inaudible] and we're looking forward to that as well.

Peter Heckmann -- D.A. Davidson -- Analyst

OK. OK. So just to define the [Inaudible] here, when you say copay that's the type of campaign where you're to be paid more on a fixed rate basis. There's not an uncertainty of how much cash will be left on the cards at the end?

Mark Attinger -- Chief Financial Officer

Yeah. More -- more transactional in nature. More transactional in nature versus settlement income. Now keep in mind, those programs that have settlement income still have monthly management fees, have load fees, and earn interchange.

And so those are still very profitable programs and you still have them -- and you still have settlement income, you just recognize it at the end. So just want to paint that picture for you.

Peter Heckmann -- D.A. Davidson -- Analyst

Got it. Got it. And one last question before I get in the queue. In terms of the other programs and I think you had said at the end of the second quarter you had something like six.

Where would you have been at the end of the September? And then have you signed any of the additional business T&E type programs since that time?

Mark Newcomer -- Co-Founder, Vice Chairman, and Chief Executive Officer

So at the end of September just to be crystal clear, we had 304 plasma programs. We had -- and that included 14 new pharma -- plasma programs in the quarter. We had 11 pharma, we had seven others up from four, and that seven was four new corporate incentive programs, less one program that ended. So we have a total at the end of September of 324 programs.

But as Mark mentioned to you, plasma should end the year with 339 and after the end of September, we signed those three additional programs we just referenced in pharma. So that gets us to 14 and we also have a pretty active pipeline on other new programs, two of which were actually signed in the fourth quarter bringing other to nine from seven. So essentially, based on what we know right now without securing any new business in the pipeline and again, under the assumption that the things that Mark indicated on the plasma side take us to 339 and we get those executed in the fourth quarter. We'll be at -- will increase from 324 programs in September to 365 programs in December.

Peter Heckmann -- D.A. Davidson -- Analyst

Got it. Got it. That's very helpful. I'll get back in the queue.

Thank you.

Mark Newcomer -- Co-Founder, Vice Chairman, and Chief Executive Officer

You bet.

Operator

Thank you. [Operator instructions] Our next question is coming from Michael Diana from Maxim Group. Your line is now live.

Michael Diana -- Maxim Group -- Analyst

OK. Hey, Mark Attinger. I think you said in October your revenues were $2.3 million. Is that using the new method of recognition or the old?

Mark Attinger -- Chief Financial Officer

That's -- that is the new method of recognition and we will only talk new going forward. And all -- all results that are our GAAP and reflected in the Q and in the press release are entirely GAAP with the exception of the adjusted EBITDA table in the very back exhibit of that press release.

Michael Diana -- Maxim Group -- Analyst

OK. Great. And the 2Q?

Mark Attinger -- Chief Financial Officer

Yeah. Yeah. $2.3 million is that -- is for the new method.

Michael Diana -- Maxim Group -- Analyst

Yeah. Thank you.

Mark Attinger -- Chief Financial Officer

You're welcome.

Operator

Thank you. [Operator instructions] Our next question is coming from Jon Hickman from Ladenburg Thalmann. Your line is now live.

Graham Hickman -- Ladenburg Thalmann -- Analyst

This is Graham Hickman actually on for Jon. How much variability, as you're talking about this evolution and you know, 324 programs up to 365. Can you give us a sense, is there a lot of variability in contract or program size? Or I guess, kind of, can you put some range around that for us? And then secondly, kind of following up to an earlier question. Seems like with this new revenue recognition method makes the business a bit more difficult to forecast.

So I guess, what would need to change or when might you feel comfortable giving some sort of guidance again? Thank you.

Mark Attinger -- Chief Financial Officer

Yeah. I mean those are both really good questions, Graham. You know first of all, there is quite a bit of variability between a new deal that is secured. Not so much on the plasma side, we have a much better read on those and given the number of centers, they tend to be a little bit closer in size.

But when you look at the non-plasma business and in particular, the corporate incentive programs like the business card program. They are quite disparate in size and could be real contributors in 2021 to where we're headed. So there's -- there's quite a bit of variability. You know it would be very difficult on a call like this and for us, and we probably wouldn't any ways to give too much visibility due to, frankly, the uncertainty of how those will perform.

Because you're basing it on what you're learning in the -- in the contracting process from your client and as you're going live and then you're observing performance.

Graham Hickman -- Ladenburg Thalmann -- Analyst

Right. Right. OK.

Mark Attinger -- Chief Financial Officer

And then on your second question. Remember that these programs that we have that are -- that have historically had has settlement income are of differing sizes and do have expiration dates. As we begin to work on new business on the pharma aside, the team is having tremendous success in new programs that are -- that are priced differently and where our earnings are coming from different revenue streams than the reliance upon money left on card, and that's more of a partnering outcome of that approach. Therefore, we see that revenues will be much more predictable than they have been.

Other than to I think what you're alluding to the uncertainty in the coming 12 to 24 months on the settlement income that you recognize, all at the end when those programs conclude.

Graham Hickman -- Ladenburg Thalmann -- Analyst

Yeah. I guess that's what I'm getting at, is kind of there -- you know, you mentioned that there are management fees, load fees, that you know -- and I know there's kind of diversification happening. So that kind of these settlement needs to become a smaller percentage? And then you'll feel comfortable kind of putting a range around what -- what the range of outcome could be? And is that kind of how you're thinking about it or maybe correct me if I'm wrong there?

Mark Attinger -- Chief Financial Officer

I think that's right. I mean we will still make estimates for what we think that breakage might be at the end of those programs. But we don't have as much visibility and therefore, had to constrain revenues to be in compliance with ASC 606. It's become less predictable, so we will be very conservative in those estimates, and the bigger the bigger challenge I see and I'd be in Mark's comments on this as well.

But the bigger issue that I see is the uncertainty around COVID-19 and how that affects previous business in the plasma business. That's -- that's more of a challenge than projecting based on what we see in the pipeline and based on what we are executing on right now.

Mark Newcomer -- Co-Founder, Vice Chairman, and Chief Executive Officer

Yeah. Unfortunately, you know, to Mark's point. We don't have a crystal ball for that. That does make it very difficult for us.

You know, we look toward the future very much hoping that the vaccine come out in a timely manner and that helps reduce the closures of various states. So it's something we can continue to keep an eye on, but no -- it's just hard to pinpoint what's going to happen with that.

Graham Hickman -- Ladenburg Thalmann -- Analyst

Right. OK. Thanks. I'll jump back in.

Operator

Thank you. [Operator instructions] Our next question is a follow up from Peter Heckmann from D.A. Davidson. Your line is now live.

Peter Heckmann -- D.A. Davidson -- Analyst

Does management have any thoughts on the sale of Water Card North America? Any early impressions of the buyer and whether or not that it -- that improves or doesn't improve your competitive position in the U.S. in terms of potential for gaining market share?

Mark Attinger -- Chief Financial Officer

I believe it does. I believe North Lane and [Inaudible], I'm not sure just how much of the healthcare approach they have to the market. It does -- I'm not sure plasma's in their wheelhouse. That said, the Wirecard division has continuously gone after that sales.

You know we -- we will find ourselves competing harder and harder to to pull down additional business opportunities in that space.

Mark Newcomer -- Co-Founder, Vice Chairman, and Chief Executive Officer

Yeah. The one thing I would add to to Mark's comments is, the conclusion of who the buyer is and that transaction, resulted in us securing those 25 centers and letting the industry as a whole digest what was happening with Wiredcard before that could transpire. And so that was actually helpful to clearing the air if you will and letting that particular client provide us that opportunity on the first week of December.

Mark Attinger -- Chief Financial Officer

And that said, I'm not convinced that there is not other clients out there that are looking to make a transition. And that's therefore, why we continue to talk with folks out in the marketplace.

Peter Heckmann -- D.A. Davidson -- Analyst

Got it. Got it. And just to put a finer point on the -- within pharma, the $6.3 million revenue reversal. Would you still expect to recognize the majority of that $6.3 million as all of the existing settlement income campaigns are completed? Or did you find that had been -- that had been an overestimate and the amount of revenue to be recognized still will be significantly lower than that $6.3 million?

Mark Attinger -- Chief Financial Officer

Yeah. We don't have visibility on that and that's why we had to constrain the revenues and revert the methodology. So I wouldn't want to speculate. We will certainly have settlement income.

Peter Heckmann -- D.A. Davidson -- Analyst

OK. Thank you.

Operator

Thank you. [Operator instructions] We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Mark Newcomer -- Co-Founder, Vice Chairman, and Chief Executive Officer

Thanks, Kevin. Again, although our business continues to be adversely impacted by the effects of COVID-19 pandemic, we continue to make the investments in our company that will enable us to resume our long-term growth trajectory in 2021 and beyond. Thank you for your continued interest, your questions, and your participation in this earnings call. Stay safe and have a nice evening.

Thank you.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Mark Newcomer -- Co-Founder, Vice Chairman, and Chief Executive Officer

Mark Attinger -- Chief Financial Officer

Austin Moldow -- Canaccord Genuity -- Analyst

Peter Heckmann -- D.A. Davidson -- Analyst

Michael Diana -- Maxim Group -- Analyst

Graham Hickman -- Ladenburg Thalmann -- Analyst

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