Hello, welcome to the Paysign 2020 third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question- and- answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. 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, expected 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, intends, anticipates, believes, estimates, projects, forecasts, expects, plans, and 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 to 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, a 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 is 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 go ahead.
Thank you, Kevin. Good afternoon, everyone, and thank you for joining us for Paysign's third quarter 2020 earnings call. I'm Mark Newcomer, President, Chief Executive Officer. Also on the call with me today is Mark Attinger, our Chief Financial Officer. We hope all 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 the 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 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.
Although we are disappointed with the quarter's financial results, the company did have significant wins in pharma, plasma, as well as in new business lines. We have integrated with a midsize hub provider and are completing integration with a Fortune 500 hub company, paving the way for additional patient affordability and clinical research solution programs. We have three new co-pay 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 bifold. We are confident with our product offerings, management, sales, and operational teams, which will lead to bigger wins in 2021. 26 of the 49 centers that were to be completed in October are now going to be completed in December due to client delays.
The implementation process of these centers has begun and will conclude the 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- 24 months. We continue to see 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, we also launched a new product line, the Paysign business expense card.
We have signed two new clients, which are currently in the implementation phase and expected to go live later this year and first quarter 2021. This product is targeted to small and medium-sized businesses, including sole proprietors 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.
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 Q3 2020 as compared to Q3 2019. Revenue for the quarter ended September 30th, 2020 was a - $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 Q3 2019, and an increase of 13% compared to Q2 2020. Pharma revenue was a - $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 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 for settlement income, whereby the unspent balances will be recognized as revenue at the expiration of the cards and the respective program. This has resulted in the reversal of all previously recognized settlement income for current pharma programs. Revenue excluding this change in accounting estimate in quarter three 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 -$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 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 - $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 - $0.12 compared to $0.05. Non-GAAP adjusted EBITDA for the quarter was a - $6.7 million, or a - $0.14, excuse me, per basic share compared to $3.3 million or $0.07 per basic share the prior year. The nine-month adjusted EBITDA was a - $3.6 million or a - $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 two. Working capital ending quarter three 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 three. Our liquidity, as measured by an adjusted current ratio excluding restricted cash and the card funding liability, was 4.3x coverage compared to 7.9x 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 a question- and- answer session. Thank you.
Thank you. We'll now be conducting a question- and- answer session. If you would like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing star one. Once again, that's star one to be placed in the question queue. One moment please while we poll for questions. Our first question today is coming from Austin Moldow from Canaccord Genuity. Your line is now live.
Thanks for taking my questions. On the pharma adjustment, in addition to changing the accounting to recognize revenue at card expiration, does the comment you made on changes in performance indicators mean programs are managing their unspent revenue more efficiently now?
Yes, that's correct, Austin. Sorry, I was on mute.
Okay. How should we factor that into our estimates going forward? Is this something that all of the different programs have made a meaningful change toward, or is it just one or two large ones? What do you think triggered the recent change?
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. By definition, if the ending unspent balances are less predictable, in accordance with ASC 606, you must constrain revenue fully by moving to the remote method of accounting versus the ratable method.
Okay. Got it. Does adding back that $6.3 million adjustment get us to, or close to, a pharma revenue number comparable to historical periods?
That would be correct. 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. That's lower settlement income as well as partially offset by higher plasma business. I caution you a little bit because we have moved to the remote method, and frankly, what that says is we don't have the predictability of the unspent balances. 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 the remote method.
Okay. On the revenue conversion rates, any commentary you can provide on the like-for-like changes in each of the segments?
Yeah. I apologize, Austin. I do not have the segment breakout on the revenue conversion rates handy with me, and we can do some offline detail into that category further. I didn't segment that out for this particular call, and I probably should have.
Okay. 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?
The industry as a whole is still down. 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 water mark. That was our lowest plasma month year. 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-over-year comparison is improving, but is still down approximately 20% in the most recent month compared to the prior year. As we indicated for the quarter, plasma is down by 25% on revenue. In the most recent month, it's continuing to get better and better relatively to the prior year.
Okay. Understood. Thanks very much for taking my questions.
Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Peter Heckmann from D.A. Davidson. Your line is now live.
Hey, good afternoon, everyone. In terms of how you'll think about pharma revenue going forward for those campaigns that required estimates for revenue recognition, should we expect to see a large amount of revenue recognized in the fourth quarter every year for annual programs? My perception was that most of the plans were annual. It went January to December. Are there other campaigns that they would have other different start and stop times?
The latter, Peter. We have programs ending in the first quarter, in the second quarter, and at the end of 2022. And in different months as well. The programs were secured at different points in time, and they typically have a two-year life. Those programs will be recognized. The revenue will be recognized when those programs end.
Got it. Can you talk about how many pharma campaigns you had at the end of the quarter? Talk a little bit about some of the patient affordability and clinical research opportunities that you mentioned signing more recently.
Sure. At the end of September, we actually finished with a total of 11 pharma programs. Of those 11, three of them are in the co-pay 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. In Mark's comments, and I'll let him comment a little bit further, we have been successful signing three additional co-pay programs that are preparing to go live, and those were actually signed in October. Mark, do you want to add to that?
Nothing more than that they're expected to go live before the end of the year. Obviously we have the business product line, the business expense card product line which is in the commercial BIN, and that's going to obviously pay us a little more interchange. We're looking forward to that as well.
Just to define the nomenclature. When you say co-pay, that's the type of campaign where you're going 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.
Yeah, 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. Those are still very profitable programs and you still have settlement income. You just recognize it at the end. Just wanted to paint that picture for you.
Got it. One last question before I get in the queue. In terms of the other programs, 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 September, have you signed any of these additional business T&E type programs since that time?
At the end of September, just to be crystal clear, we had 304 plasma programs. That included 14 new pharma plasma programs in the quarter. We had 11 pharma. We had seven others, up from four. That seven was four new corporate incentive programs, less one program that ended. We have a total at the end of September of 324 programs. As Mark mentioned to you, plasma should end the year with 339. After the end of September, we signed those three additional programs we just referenced in pharma. That gets us to 14. 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.
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 increase from 324 programs in September to 365 programs in December.
Got it. That's very helpful. I'll get back in the queue. Thank you.
You bet.
Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Michael Diana from Maxim Group. Your line is now live.
Okay. 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?
That is the new method of recognition, and we will only talk new going forward. All results that are 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.
Okay, great. Thank you.
yeah, $2.3 million.
Yeah
the new method. Yep.
Thank you.
You're welcome.
Thank you. Once again, that's star one to be placed in the question queue. Our next question is coming from Jon Hickman from Ladenburg Thalmann. Your line is now live.
This is Graham Hickman actually on for Jon. How much variability, as you're talking about this evolution in 324 programs up to 365, can you give us a sense, is there a lot of variability in contract or program size? I guess, can you put some range around that for us? Secondly, kind of following up to an earlier question. It seems like with this new revenue recognition method, makes the business a bit more difficult to forecast. I guess, what would need to change, or when might you feel comfortable giving some sort of guidance again? Thank you.
Those are both really good questions, Graham. 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. 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. There's quite a bit of variability, and it would be very difficult on a call like this, and for us, and we probably wouldn't anyways, to give too much visibility due to, frankly, the uncertainty of how those will perform.
You're basing it on what you're learning in the contracting process from your client, and as you're going live, and then you're observing performance.
Right. Okay.
On your second question, remember that these programs that we have that have historically had settlement income are of differing sizes and do have expiration dates. As we begin to work on new business on the pharma side, the team is having tremendous success in new programs that are priced differently and where our earnings are coming from different revenue streams than the reliance upon money left on card. 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 12-24 months on the settlement income that you recognize all at the end when those programs conclude.
Yeah. I guess that's what I'm getting at. You mentioned that there are management fees, load fees, and I know there's diversification happening. Is it the settlement needs to become a smaller percentage, and then you'll feel comfortable putting a range around what the range of outcomes could be? Is that how you're thinking about it? Maybe correct me if I'm wrong there.
I think that's right. 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. The bigger challenge I see, and I'd be interested 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 prepaid business and the plasma business. That's more of the challenge than projecting based on what we see in the pipeline and based on what we are executing on right now.
Yeah. Unfortunately, to Mark's point, we don't have a crystal ball. That does make it very difficult for us. We look towards the future very much hoping that the vaccine comes out in a timely manner and that helps reduce the closures of various states. It's something we continue to keep an eye on. It's just hard to pinpoint what's going to happen with that.
Right. Okay, thanks. I'll jump back in.
Thank you. Once again, that's star one to be placed into the question queue. Our next question is a follow-up from Peter Heckmann from D.A. Davidson. Your line is now live.
Does management have any thoughts on the sale of Wirecard North America? Any early impressions of the buyer and whether or not that improves or doesn't improve your competitive position in the U.S. in terms of potential for gaining market share?
I believe it does. I believe North Lane and Syncapay, I'm not sure just how much of a healthcare approach they have to the market. I'm not sure plasma's in their wheelhouse. That said, the Wirecard division has continuously gone after that space. We will find ourselves competing harder and harder to pull down additional business opportunities in that space.
Yeah. The one thing I would add 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 Wirecard before that could transpire. That was actually helpful to clearing the air, if you will, in letting that particular client
Provide us that opportunity on the first week of December. That said, I'm not convinced that there's 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.
Got it. Just to put a finer point 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? Did you find that had been an overestimate and the amount of revenue to be recognized still will be significantly lower than that $6.3 million?
We don't have visibility on that, and that's why we had to constrain the revenues and revert the methodology. I wouldn't want to speculate. We will certainly have settlement income.
Okay. Thank you.
Thank you. As a reminder, that's star one to be placed in the question queue. One moment, please, while we poll for further questions. We've 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.
Thank you, Kevin. Again, although our business continues to be adversely impacted by the effects of the 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.
Thank you. That does conclude tonight's teleconference and webinar. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation.