10-K
1
paysign_10k-123120.htm
FORM 10-K
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
oTRANSITION
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)
2615 St. Rose Parkway, Henderson, Nevada
89052
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including
area code: (702) 453-2221
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, $0.001 par value per share PAYS 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 oNo x
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 oNo x
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 xNo
o
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 xNo o
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 o Accelerated filer o
Non-accelerated filer x Smaller reporting company x
Emerging growth company x
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. o
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. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes oNo x
State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter: $297,880,651 based upon a market price of $9.71 per share.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date: 50,447,432 as of March 23, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive
Proxy Statement for its 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on
Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the
registrant's fiscal year ended December 31, 2020.
TABLE OF CONTENTS
PART I 1
ITEM 1 BUSINESS. 1
ITEM 1A. RISK FACTORS. 11
ITEM 1B. UNRESOLVED STAFF COMMENTS. 19
ITEM 2. PROPERTIES. 19
ITEM 3 LEGAL PROCEEDINGS. 19
ITEM 4. MINE SAFETY DISCLOSURE. 20
ITEM 6. SELECTED FINANCIAL DATA. 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK. 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 29
ITEM 9A. CONTROLS AND PROCEDURES. 29
ITEM 9B. OTHER INFORMATION. 31
PART III 32
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. 32
ITEM 11. EXECUTIVE COMPENSATION. 32
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. 32
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. 34
ITEM 16 FORM 10-K SUMMARY
SIGNATURES 35
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," "may," and other similar expressions identify forward-looking statements. In addition,
any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking
statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward- looking statements. You are cautioned not to place undue reliance on these
forward-looking statements, which relate only to events as of the date on which the statements are made. We undertake no obligation
to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. You should
refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.
i
PART
I
ITEM 1. BUSINESS.
Overview
Paysign, Inc. (the “Company,”
“Paysign,” “we” or “our”) amended our articles of incorporation and changed our name from 3PEA
International, Inc. to Paysign, Inc. on April 23, 2019. Additionally, we changed our trading symbol on the Nasdaq Capital Market
to “PAYS.” The Company acquired 3Pea Technologies, Inc., a payment solutions company, in March 2006, which resulted
in 3Pea Technologies, Inc. becoming a wholly owned subsidiary.
Business of Issuer
Paysign, Inc. is a vertically integrated
provider of prepaid card products and processing services for corporate, consumer and government applications. Our payment solutions
are utilized by our corporate customers as a means to increase customer loyalty, increase patient adherence rates, reduce administration
costs and streamline operations. Public sector organizations can utilize our payment solutions to disburse public benefits or for
internal payments. We market our prepaid card solutions under our Paysign® brand. As we are a payment processor and prepaid
card program manager, we derive our revenue from all stages of the prepaid card lifecycle.
We provide a card processing platform consisting
of proprietary systems and software applications based on the unique needs of our clients. We have extended our processing business
capabilities through our proprietary Paysign platform. Through the Paysign platform, we provide a variety of services including
transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service. The
Paysign platform was built on modern cross-platform architecture and designed to be highly flexible, scalable and customizable.
The platform’s flexibility and ease of customization has allowed us to expand our operational capabilities by facilitating
our entry into new markets within the payments space. The Paysign platform delivers cost benefits and revenue building opportunities
to our partners.
We have developed prepaid card programs
for corporate incentive and rewards including, but not limited to, consumer rebates and rewards, donor compensation, clinical trials,
healthcare reimbursement payments and pharmaceutical payment assistance. We have expanded our product offerings to include additional
corporate incentive products and demand deposit accounts accessible with a debit card. In the future, we expect to further expand
our product offerings into other prepaid card offerings such as payroll cards, travel cards, and expense reimbursement cards. Our
cards are sponsored by our issuing bank partners.
Our revenues include fees generated from
cardholder fees, interchange, card program management fees, and settlement income. Revenue from cardholder fees, interchange and
card program management fees is recorded when the performance obligation is fulfilled. Settlement income is recorded at the expiration
of the card program.
What Are Prepaid Cards?
A prepaid card is a payment product that
is pre-funded and not directly linked to an individual bank account. Prepaid cards are unlike debit cards that are attached to
a personal or business checking account and draw funds from that linked account or a credit card that draws funds from a line of
credit.
Prepaid cards can either be open-loop,
closed-loop, or restricted-loop. Open-loop, or network-branded, prepaid cards carry an acceptance mark of a national or international
payment network such as American Express, Discover, Mastercard or Visa and can be used anywhere that card brand is accepted. Closed-loop
prepaid cards can only be used at a specific merchant whose name is typically branded on the card and are most likely not network
branded. Restricted-loop prepaid cards may carry a network brand and can be used only at a specific group of non-affiliated merchant
locations such as a shopping mall or a specific merchant category.
Open-loop, and some restricted-loop, prepaid
cards are issued by a financial institution under a license of the payment network. Open-loop prepaid cards provide consumers,
businesses and governments with the efficiency, security and flexibility of digital payments reducing costs associated with handling
cash, checks and other paper-based payment processes, and provides the end user a payment product that is accessible and with global
utility, convenient, safer than cash, can be used as a budgeting tool and contains protections against fraud and theft.
The prepaid market continues to experience
significant growth due to consumers, corporations and governments embracing improved technology, greater convenience, more product
choices and greater flexibility. Prepaid cards have also proven to be an attractive alternative to traditional bank accounts for
certain segments of the population, particularly those without, or who could not qualify for, a checking or savings account.
The Mercator Advisory Group’s 17th
Annual U.S. Open Loop Prepaid Cards Market Forecast 2020-2024, shows that $374 billion was loaded on open-loop prepaid
cards in the United States in 2019 and they are forecasting that total open-loop loads will have a compound annual growth rate
of 4.1% between 2020 and 2024, to $466.2 billion being loaded in 2024.
Consumers, both banked and unbanked, use
prepaid cards such as general purpose reloadable (GPR) cards, to conduct their day-to-day financial transactions such as paying
bills, depositing checks, and receiving direct deposits. According to the 2019 FDIC Survey of Household Use of Banking and Financial
Services, 8.5% of U.S. households or approximately 128 million households, use GPR prepaid cards.
Common Examples of Prepaid Cards
The prepaid card market is divided
into three macro categories based on who funds the card account. These categories are consumer-funded, corporate-funded and
government-funded.
Consumer-Funded
Programs: The consumer prepaid category consists of products such as general purpose reloadable (GPR) cards, gift cards, travel
money cards, and remittance/peer-to-peer (“P2P”) cards.
General Purpose Reloadable Cards:
A type of prepaid card typically purchased by a consumer for his/her personal use to pay for purchases, pay bills and/or access
cash at ATMs. GPR cards may be purchased online and in retail locations from a variety of providers. Funds may be loaded onto the
card by direct deposit of wages or benefits or at retail locations offering prepaid card reload services.
Gift Cards: A non-reloadable
prepaid card that is purchased by a gift giver to be given to a gift recipient.
Corporate-Funded Programs: The corporate
prepaid category consists of products such as employee/partner incentives, consumer incentives, payroll, employee benefits, healthcare,
corporate expense and business travel, insurance claim disbursement, etc.
Our Products and Services
As a payment processor and prepaid card
program manager, our payment solutions are utilized by our customers as a means to increase customer loyalty, increase brand recognition,
reward customers, agents and employees while reducing administration costs and streamlining operations. We manage all aspects of
the prepaid card lifecycle, from the card design and approval processes with partners and networks, to production, packaging,
distribution, and personalization. We also oversee inventory and security controls, renewals, and lost and stolen card management
and replacement. We provide in-house customer service which includes live bilingual customer care representatives staffed 24/7/365.
We also run in-house Interactive Voice Response (IVR) and two-way SMS messaging platforms. As we do not have our own banking license
to issue open-loop prepaid cards, our cards are offered to end users through our relationships with bank issuers.
As an end-to-end payment processor and
prepaid card program manager, we derive our revenue from all stages of the card lifecycle. These revenues can include fees from
program set-up; customization and development; data processing and report generation; card production and fulfillment; transaction
fees derived from card usage; inactivity fees; card replacement fees; program administration fees; and settlement income.
To date, we have issued millions of prepaid
cards under programs implemented for Fortune 500 companies, multinationals, as well as top pharmaceutical manufacturers, universities
and social media companies.
As of December 31, 2020, we had approximately
3.5 million cardholders participating in approximately 360 card programs.
In our early years of operations, we focused
mainly on providing co-pay assistance prepaid cards to the pharmaceutical industry. In 2011, we began marketing a corporate incentive
prepaid card-based payment solution targeting the plasma donation industry. More recently, having built the necessary infrastructure
and added essential staff, we have increased our focus and sales efforts on corporate incentive and corporate expense card programs
as well as retargeting the pharmaceutical industry with co-pay assistance, buy and bill and other prepaid programs designed to
maximize patient enrollment, adherence and retention.
The Paysign®Brand
In order to leverage the capabilities
of the Paysign platform and successfully expand our product offerings, we established the Paysign brand of prepaid cards and
solutions. The Paysign brand encompasses all of our current and future prepaid product offerings, including but not limited
to, corporate incentives, healthcare related payment solutions for clinical trials, donations and co-pay assistance, payroll,
settlement payments, corporate expense cards and solutions designed for the public sector as well as general purpose
reloadable prepaid cards. Paysign is a registered trademark of the Company in the United States and other countries.
Corporate Incentives
Our Paysign corporate incentive cards offer
businesses a practical and contemporary way to reward and motivate existing and potential customers, employees, donors, patients,
clinical trial participants, sales professionals, agents and distributors. We develop incentive card programs, either traditional
plastic or virtual, that our customers use for a wide variety of applications, including but not limited to: consumer rebates for
large purchases or frequent buyers; trade incentives for third party distributors; new product launches and commission based sales
incentives; consumer promotions such as automobile test drives; purchase incentives; loyalty rewards; compensation for the time
and effort of donating; pharmaceutical payment assistance; referral programs; event giveaways; and purchase incentives. The Paysign
solution can be integrated into existing payment management systems or act as a stand-alone solution. All Paysign cards are accepted
anywhere Visa is accepted.
Key benefits of our corporate incentive
cards are:
Per Diem/ Corporate Expense Payments
Per Diem, Corporate Expense and
Business Travel Cards are reloadable prepaid card that allows businesses, non –profits and government agencies the
ability to control employee spending while reducing administration costs by eliminating the need for traditional expense
reports. We are currently focusing on marketing these card products to large corporations.
Pharmaceutical Market
Our Paysign solutions for the pharmaceutical
industry are a specialized, adjudicated solution that pays all or a portion of a patient’s out-of-pocket costs associated
with a prescription drug purchase. Funds are provided by the sponsoring pharmaceutical company for use at retail pharmacies, specialty
pharmacies, hospitals, doctors’ offices and clinics nationwide.
Our pharmaceutical solutions provide payment
claims processing and other administrative services for clients, in real-time, according to client benefit plan designs. Our solutions
present a cost-effective payment delivery vehicle by providing real-time financial benefit for both consumers and pharmaceutical
companies. Our offerings also allow clients to directly manage more of their pharmacy benefits and include pharmacy claims adjudication,
network and payment administration, client call center service and support, reporting, rebate management, as well as implementation,
training and account management.
Co-Pay Assistance Program
Our Co-Pay Assistance Program is a
pharmaceutical payment card product which is adjudicated as a secondary claim at the point of purchase. The adjudication
process determines what funds will be loaded onto the card by applying business rules designed by the pharmaceutical company.
The loaded funds are then immediately applied to the prescription purchase at the point of purchase for the patient benefit.
The card is used to defray out-of-pocket costs for the prescription. Key features and benefits of our Paysign card for the
Co-Pay Assistance Program are:
Buy and Bill Program
Where Paysign’s standard pharmaceutical
Co-Pay Assistance Program provides payment for self-administered pharmaceuticals purchased at a pharmacy, Paysign’s Buy and
Bill Program is designed to provide a benefit for patients when purchasing directly from their physician’s office or through
an infusion center for physician administered therapies.
Source Plasma Donor Payments
Plasma derived therapies are lifesaving
treatments used to treat various rare conditions. Plasma based therapies are manufactured using human plasma, which is the yellow
liquid portion of whole blood that can be easily replaced by the body. Plasma makes up approximately 55 percent of whole blood
and consists primarily of water and proteins. Source plasma is the plasma collected from individual donors that serves as the raw
material for the further manufacture into these lifesaving therapies. Historically, source plasma donation centers compensated
their donors with cash or checks. Over the past several years, plasma donation centers have migrated to a prepaid card solution
for donor payments.
The Company offers a comprehensive customized
payment solution for source plasma collection centers under the Paysign brand. The solution consists of the Paysign Plasma Donor
Compensation Prepaid Card, the Paysign Partner Portal for administrators, and the Paysign Kiosk. The solution offers customized
reporting and provides a level of business analytics previously unavailable. The solution can be utilized either as a stand-alone
web-based solution or integrated with existing donor management systems, giving plasma donation centers an increased level of flexibility.
The Company entered the market in late 2011 and has seen significant growth in this market segment. Currently, the Company services
approximately 36% of the plasma collection centers in the US.
DDA Debit Cards—Paysign Premier
Recently, providers of GPR card products,
in response to changes in the regulatory environment, have introduced new products similar to a GPR card but that act as true demand
deposit accounts accessible with a debit card (“DDA Debit Card”). These DDA Debit Cards offer many of the features
and functionalities of a traditional debit card associated with a standard bank account, including overdraft protection. The Company
began marketing its DDA Debit Card, branded Paysign Premier Digital Bank Account, in the third quarter of 2019. The Company markets
this product to a targeted portion of its existing cardholder base through existing communication points and to customers and employees
of new clients.
Other Services
Customer Service Center
In order to provide a full range of services
to our customers, we offer a fully staffed, in-house Customer Service Center which is operational 24 hours a day, 7 days per week
consisting of live bilingual customer care representatives. The Paysign Platform provides Interactive Voice Response (“IVR”),
SMS alerts and two-way SMS messaging, allowing cardholders to set alerts and check their balances and transaction history without
the assistance of a live customer service operator. We believe our in-house customer service center provides the highest quality
customer service experience for our clients as training is performed on-site by Paysign staff.
The Paysign Communications Suite
To help maximize the cardholder experience,
cardholders can access their card balances and transaction history, as well as other information as dictated by the program, such
as an ATM locator, a loyalty point counter, and geo-specific messaging through a number of touchpoints such as the Paysign kiosk,
the Paysign Mobile App, two-way SMS, text alerts and the Paysign cardholder web portal.
Technology
Our technology platform employs a standard
enterprise services bus in a service-oriented architecture, configured for 24/7/365 transaction processing and operations. We utilize
two secure, interconnected, environmentally-controlled data centers, with emergency power generation capabilities, and fully redundant
capabilities. We use a variety of proprietary and licensed standards-based technologies to implement our platforms, including those
which provide for orchestration, interoperability and process control. The platforms also integrate a data infrastructure to support
both transaction processing and data warehousing for operational support and data analytics.
Competition
The markets for financial products and
services, including prepaid cards and services related thereto, are intensely competitive. We compete with a variety of companies
in our markets and our competitors vary in size, scope and breadth of products and services offered. Certain segments of the financial
services and healthcare industries tend to be highly fragmented, with numerous companies competing for market share. Highly fragmented
segments currently include financial account processing, customer relationship management solutions, electronic funds transfer
and prepaid solutions.
Many of our existing and potential competitors
have longer operating histories, greater financial strength and more recognized brands in the industry. These competitors may be
able to attract customers more easily because of their financial resources and awareness in the market. Our larger competitors
can also devote substantially more resources to business development and may adopt more aggressive pricing policies. To compete
with these companies, we rely primarily on direct marketing strategies including strategic marketing partners.
Sales and Marketing
We market our Paysign payment solutions
through direct marketing by the Company’s sales team. Our primary market focus is on companies and municipalities that require
a streamlined payment solution for rewards, rebates, payment assistance, and other payments to their customers, employees, agents
and others. To reach these markets, we focus our sales efforts on direct contact with our target market and attendance at various
industry specific conferences. We may, at times, utilize independent contractors who make direct sales and are paid on a commission
basis only.
We market our Paysign Premier product through
existing communication channels to a targeted segment of our existing cardholders, as well as to a broad group of individuals,
ranging from non-banked to fully banked consumers with a focus on long term users of our product.
Markets and Major Customers
We have no major customers and are not reliant on any individual
card program. We manage multiple programs at any given time. As of December 31, 2020, we managed approximately 360 card programs
with approximately 3.5 million participating cardholders.
Implications of Being an Emerging Growth
Company
Paysign qualifies as an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company
may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include,
but are not limited to:
We have elected to take advantage of certain
reduced disclosure obligations in this Annual Report on Form 10-K and may elect to take advantage of other reduced reporting requirements
in future filings. As a result, the information that we provide to our stockholders may be different from what you might receive
from other public reporting companies in which you hold equity interests.
In addition, under the JOBS Act, emerging
growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.
We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial
statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable
to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at
any time, which election is irrevocable.
We will remain an emerging growth company
until the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion;
(ii) the last day of 2024; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended (referred to as the Exchange Act), which would occur if the market value
of our common equity held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed
second fiscal quarter; or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities
during any three-year period.
Regulations
Introduction
We operate in a highly regulated environment
and are subject to extensive regulation, supervision and examination. Applicable laws and regulations may change, and there is
no assurance that such changes will not adversely affect our business. Regulatory authorities have extensive discretion in connection
with their supervisory and enforcement activities, including but not limited to the imposition of restrictions on the operation
of financial institutions we may work with. Any change in such regulation and oversight, whether in the form of restrictions on
activities, regulatory policy, regulations, or legislation, including but not limited to changes in the regulations governing banks,
could have a material impact on our operations.
Our products and services are generally
subject to federal, state and local laws and regulations, including:
· 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
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;
· gather and, in certain circumstances, report customer information;
· comply with consumer disclosure requirements; and
Anti-money laundering regulations are constantly
evolving. We continuously monitor our compliance with anti-money laundering regulations and implement policies and procedures to
make our business practices flexible, so we can comply with the most current legal requirements. We cannot predict how these future
regulations might affect us. Complying with future regulation could be expensive or require us to change the way we operate our
business.
Money Transfer and Payment Instrument
Licensing Regulations
We are not currently subject to money transfer
and payment instrument licensing regulations; however, we have plans to introduce products in the future that would be subject
to such regulations. Currently, we believe that 39 U.S. jurisdictions would require us to obtain a license to operate a money
transfer business. As a licensee, we would be subject to certain restrictions and requirements, including reporting, net worth
and surety bonding requirements and requirements for regulatory approval of controlling stockholders, agent locations and consumer
forms and disclosures. We would also be subject to inspection by the regulators in the jurisdictions in which we are licensed,
many of which conduct regular examinations. In addition, we would be required to maintain "permissible investments" in
an amount equivalent to all "outstanding payment obligations."
Escheatment Laws
Unclaimed property laws of every U.S. jurisdiction
require that we track certain information on our card products and services and that, if customer funds are unclaimed at the end
of an applicable statutory abandonment period, the proceeds of the unclaimed property be remitted to the appropriate jurisdiction.
Privacy and Information Safeguard Laws
In the ordinary course of our business,
we or our third party service providers collect certain types of data, which subjects us to certain privacy and information security
laws in the United States, including, for example, the Gramm-Leach-Bliley Act of 1999, and other laws or rules designed to regulate
consumer information and mitigate identity theft. We are also subject to privacy laws of various states. These state and federal
laws impose obligations with respect to the collection, processing, storage, disposal, use and disclosure of personal information,
and require that financial institutions have in place policies regarding information privacy and security. In addition, under federal
and certain state financial privacy laws, we must provide notice to consumers of our policies and practices for sharing nonpublic
information with third parties, provide advance notice of any changes to our policies and, with limited exceptions, give consumers
the right to prevent use of their nonpublic personal information and disclosure of it to unaffiliated third parties. Certain state
laws may, in some circumstances, require us to notify affected individuals of security breaches of computer databases that contain
their personal information. These laws may also require us to notify state law enforcement, regulators or consumer reporting agencies
in the event of a data breach, as well as businesses and governmental agencies that own data. In order to comply with the privacy
and information safeguard laws, we have confidentiality/information security standards and procedures in place for our business
activities and with our third-party vendors and service providers. Privacy and information security laws evolve regularly, requiring
us to adjust our compliance program on an ongoing basis and presenting compliance challenges.
Bank Regulations
All of the cards that we service are issued
by a state-chartered bank. Thus, we are subject to the oversight of the regulators for, and certain laws applicable to, these card
issuing banks. These banking laws require us, as a servicer to the banks that issue our cards, among other things, to undertake
compliance actions similar to those described under "Anti-Money Laundering Laws" above and to comply with the privacy
regulations promulgated under the Gramm-Leach-Bliley Act as discussed under "Privacy and Information Safeguard Laws"
above.
Consumer Protection Laws
Certain products that we anticipate introducing
in the future will likely be subject to additional state and federal consumer protection laws, including laws prohibiting unfair
and deceptive practices, regulating electronic fund transfers and protecting consumer nonpublic information. Before we can introduce
those products, we will have to develop appropriate procedures for compliance with these consumer protection laws.
Card Networks
In order to provide our products and services,
we, as well as the banks that issue our cards, must be registered with Visa and/or MasterCard, as well as any other networks that
we desire to use, such as Discover, Pulse, NYCE and Star, and, as a result, are subject to card association rules that could subject
us to a variety of fines or penalties that may be levied by the card association or network for certain acts or omissions. The
banks that issue our cards are specifically registered as "members" of the Visa and/or MasterCard card networks. Visa
and MasterCard set the standards with which we and the card issuing banks must comply.
False Claims Laws and Other Fraud and
Abuse Restrictions
We provide claims processing and other
transaction services to pharmaceutical companies that relate to, or directly involve, the reimbursement of pharmaceutical costs
covered by Medicare, Medicaid, other federal healthcare programs and private payers. As a result of these aspects of our business,
we may be subject to, or contractually required to comply with, state and federal laws that govern various aspects of the submission
of healthcare claims for reimbursement and the receipt of payments for healthcare items or services. These laws generally prohibit
an individual or entity from knowingly presenting or causing to be presented claims for payment to Medicare, Medicaid or other
third party payers that are false or fraudulent. False or fraudulent claims include, but are not limited to, billing for services
not rendered, failing to refund known overpayments, misrepresenting actual services rendered in order to obtain higher reimbursement,
improper coding and billing for medically unnecessary goods and services. Many of these laws provide significant civil and criminal
penalties for noncompliance and can be enforced by private individuals through “whistleblower” or qui tam actions.
To avoid liability, providers and their contractors must, among other things, carefully and accurately code, complete and submit
claims for reimbursement.
From time to time, participants in the
healthcare industry, including us, may be subject to actions under the federal False Claims Act or other fraud and abuse provisions.
We cannot guarantee that state and federal agencies will regard any billing errors we process as inadvertent or will not hold us
responsible for any compliance issues related to claims we handle on behalf of providers and payers. Although we believe our editing
processes are consistent with applicable reimbursement rules and industry practice, a court, enforcement agency or whistleblower
could challenge these practices. We cannot predict the impact of any enforcement actions under the various false claims and fraud
and abuse laws applicable to our operations. Even an unsuccessful challenge of our practices could cause adverse publicity and
cause us to incur significant legal and related costs.
Privacy and Security Standards under
HIPAA or Other Laws.
The Health Insurance Portability and Accountability
Act of 1996 contains privacy regulations and the security regulations that apply to some of our operations. The privacy regulations
extensively regulate the use and disclosure of individually identifiable health information by entities subject to HIPAA. For example,
the privacy regulations permit parties to use and disclose individually identifiable health information for treatment and to process
claims for payment, but other uses and disclosures, such as marketing communications, require written authorization from the individual
or must meet an exception specified under the privacy regulations. The privacy regulations also provide patients with rights related
to understanding and controlling how their health information is used and disclosed. To the extent permitted by the privacy regulations
from the American Recovery and Reinvestment Act (ARRA), and our contracts with our customers, we may use and disclose individually
identifiable health information to perform our services and for other limited purposes, such as creating de-identified information.
Determining whether data has been sufficiently de-identified to comply with the privacy regulations and our contractual obligations
may require complex factual and statistical analyses and may be subject to interpretation. The security regulations require certain
entities to implement and maintain administrative, physical and technical safeguards to protect the security of individually identifiable
health information that is electronically transmitted or electronically stored. We have implemented and maintain policies and processes
to assist us in complying with the privacy regulations, the security regulations and our contractual obligations. We cannot provide
assurance regarding how these standards will be interpreted, enforced or applied to our operations. If we are unable to properly
protect the privacy and security of health information entrusted to us, we could be subject to substantial penalties, damages and
injunctive relief.
In addition to HIPAA, numerous other state
and federal laws govern the collection, dissemination, use, access to and confidentiality of individually identifiable health information
and healthcare provider information. In addition, some states are considering new laws and regulations that further protect the
confidentiality, privacy and security of medical records or other types of medical information. In many cases, these state laws
are not preempted by the HIPAA privacy regulations and may be subject to interpretation by various courts and other governmental
authorities. Further, the U.S. Congress and a number of states have considered or are considering prohibitions or limitations
on the disclosure of medical or other information to individuals or entities located outside of the United States.
Patents and Trademarks
We protect our intellectual property rights
through a combination of trademark, patent, copyright and trade secrets laws.
In order to limit access to and disclosure
of our intellectual property and proprietary information, all of our employees and consultants have signed confidentiality and
we enter into nondisclosure agreements with third parties. We cannot provide assurance that the steps we have taken to protect
our intellectual property rights, however, will deter adequately infringement or misappropriation of those rights. Particularly
given the international nature of the Internet, the rate of growth of the Internet and the ease of registering new domain names,
we may not be able to detect unauthorized use of our intellectual property or proprietary information, or to take enforcement action.
Employees and Independent Contractors
As of December 31, 2020, we had approximately
seventy employees and independent contractors.
We have no collective bargaining agreements
with our employees, and believe all independent contractor and employment agreement relationships are satisfactory. We hire independent
contractors on an as-needed basis, and we may retain additional employees and consultants during the next twelve months, including
additional executive management personnel with substantial experience in development business.
Available Information
Our internet address is www.paysign.com.
Information on our website does not constitute part of this Annual Report.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other
information in this Form 10-K, including our consolidated financial statements and related notes. If any of the following risks
actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely
affected. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
All forward-looking statements made by us or on our behalf are qualified by the risks described below.
Risks Related to Our Business
We may be unable to grow our business
in future periods, and if our revenue growth slows, or our revenues decline further, our business and financial conditions could
be adversely affected.
Our growth rates may decline in the future.
In fiscal 2020, we experienced declines in our revenues. There can be no assurance that we will be able to grow our business in
future periods. In the near term, our growth depends in significant part on our ability, among other things, to enter new markets
and to continue to attract new clients, and to retain our current clientele. Our growth also depends on our ability to develop
and market other prepaid card products that can utilize the Paysign platform.
As the prepaid financial services industry
continues to develop, our competitors may be able to offer products and services that are, or that are perceived to be, substantially
similar to or better than ours. This may force us to compete on the basis of price and to expend significant marketing, product
development and other resources in order to remain competitive. Even if we are successful at increasing our operating revenues
through our various initiatives and strategies, we will experience an inevitable decline in growth rates as our operating revenues
increase to higher levels and we may also experience a decline in margins. If our operating revenue growth rates slow materially
or decline, our business, operating results and financial condition could be adversely affected.
As a result of the COVID-19 pandemic,
our business, financial condition, profitability, and cash flows have been, and are likely to continue to be, negatively impacted.
On March 11, 2020, the World Health Organization
declared COVID-19 as a pandemic. Federal, state and local authorities in the United States imposed measures intended to reduce
the spread of the virus, including restrictions on freedom of movement and business operations such as travel bans, business limitations
and closures, quarantines and shelter-in-place orders. These measures had a significant impact on the global economy and financial
markets, and adversely affected the demand for our products and services. We experienced plasma donations and dollars added to
cards at a slower pace during the second and third quarters of 2020 with a slight recovery in the fourth quarter of 2020. We anticipate
that the negative economic impacts of the COVID-19 pandemic will continue for a significant portion of 2021. There is, however,
still substantial uncertainty around the remaining duration and breadth of the COVID-19 pandemic and, as a result, the ultimate
impact on our business, financial condition and results of operations cannot be reasonably estimated at this time.
We operate in a highly regulated environment,
and failure by us or business partners to comply with applicable laws and regulations could have an adverse effect on our business,
financial position and results of operations.
We operate in a highly regulated environment,
and failure by us or our business partners to comply with the laws and regulations to which we are subject could negatively impact
our business. We are subject to state money transmission licensing requirements and a wide range of federal and other state laws
and regulations, which are described under "Business – Regulations" above. In particular, our products
and services are subject to an increasingly strict set of legal and regulatory requirements intended to protect consumers and to
help detect and prevent money laundering, terrorist financing and other illicit activities.
Many
of these laws and regulations are evolving, unclear and inconsistent across various jurisdictions, and ensuring compliance with
them is difficult and costly. For example, with increasing frequency, federal and state regulators are
holding businesses like ours to higher standards of training, monitoring and compliance, including monitoring for possible violations
of laws by the businesses that participate in our reload network. Failure by us or those businesses to comply with the laws and
regulations to which we are subject could result in fines, penalties or limitations on our ability to conduct our business, or
federal or state actions, any of which could significantly harm our reputation with consumers and other network participants, banks
that issue our cards and regulators, and could materially and adversely affect our business, operating results and financial condition.
Changes in the laws, regulations, credit card association
rules or other industry standards affecting our business may impose costly compliance burdens and negatively impact our business.
There may be changes in the laws, regulations,
card association rules or other industry standards that affect our operating environment in substantial and unpredictable ways.
Changes to statutes, regulations or industry standards, including interpretation and implementation of statutes, regulations or
standards, could increase the cost of doing business or affect the competitive balance. For example, more stringent anti-money
laundering regulations could require the collection and verification of more information from our customers, which could have a
material adverse effect on our operations. Regulation of the payments industry has increased significantly in recent years. A number
of regulations impacting the credit card industry were recently implemented. Additional changes may require us to incur significant
expenses to redevelop our products. Also, failure to comply with laws, rules and regulations or standards to which we are subject,
including with respect to privacy and data use and security, could result in fines, sanctions or other penalties, which could have
a material adverse effect on our financial position and results of operations, as well as damage our reputation.
A data security breach could expose
us to liability and protracted and costly litigation, and could adversely affect our reputation and operating results.
We, the banks that issue our cards and
our third-party service providers receive, transmit and store confidential customer and other information in connection with our
products and services. The encryption software and the other technologies we and our partners use to provide security for storage,
processing and transmission of confidential customer and other information may not be effective to protect against data security
breaches. The risk of unauthorized circumvention of our security measures has been heightened by advances in computer capabilities
and the increasing sophistication of hackers. The banks that issue our cards, our clients and our third-party service providers
also may experience similar security breaches involving the receipt, transmission and storage of our confidential customer and
other information. Improper access to our or these third parties' systems or databases could result in the theft, publication,
deletion or modification of confidential customer and other information.
A data security breach of the systems on
which sensitive cardholder data and account information are stored could lead to fraudulent activity involving our products and
services, reputational damage and claims or regulatory actions against us. If we are sued in connection with any data security
breach, we could be involved in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced
to pay damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on
our operating revenues and profitability. We would also likely have to pay (or indemnify the banks that issue our cards for) fines,
penalties and/or other assessments imposed by Visa or MasterCard as a result of any data security breach. Further, a significant
data security breach could lead to additional regulation, which could impose new and costly compliance obligations. In addition,
a data security breach at one of the banks that issue our cards or our third-party service providers could result in significant
reputational harm to us and cause the use and acceptance of our cards to decline, either of which could have a significant adverse
impact on our operating results and future growth prospects.
We may have deficiencies or weaknesses
in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial
condition and results of operations in a timely and accurate manner, decrease investor confidence in our Company, and reduce the
value of our common stock.
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act and based upon the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO framework”). Management is also responsible for reporting on the
effectiveness of internal control over financial reporting.
Deficiencies or weaknesses in our internal
control over financial reporting that are not promptly identified and remediated may adversely affect our ability to report our