Value Investors Club / PaySign (PAYS)

Description

$8.04 (5/16/19), $383M market cap.

Summary –PaySign is a company built on an unethical, poorly regulated and politically risky business. It is

attempting to grow extremely quickly and expand into other questionable business verticals. Changes in

the regulatory environment and/or the emergence of new competitors would be devastating for this stock

trading on + 60X 2019 earnings estimates. PAYS is a fast-growing prepaid card company with a specific

niche in two businesses:

- Plasma sales ‘donation’ reimbursement stored value cards

- Pharmaceutical co-pay marketing stored value cards

The stock trades on very high valuations and is dependent on growth in its two main verticals which

likely leave it more exposed to governmental/regulatory risk than any other stock in the financial space.

Timing will be difficult, but patient skeptics will likely be rewarded.

The Businesses:

1) PAYS’ main business is providing prepaid Visa debit cards to chains of private plasma ‘donation’

centers across the US. This was approximately 100% of revenue in 2018.

• While the word ‘donation’ is used, these businesses pay people on average $45 per visit which takes

60-120 minutes to draw their blood, run it through centrifuges to separate out the plasma and then

reinject the red blood cells (along with saline and some noxious chemicals) back into the ‘donor’.

• This plasma is used to make several high-margin pharmaceuticals for people with bleeding disorders,

auto-immune diseases and burn injuries.

• The US is the only major country that allows people to sell their plasma in violation of WHO

guidelines. Most nations allow people to make donations of plasma two times per month. However,

with a profit motive injected into the situation…the FDA allows people in the US to donate two times

per week.

• The number of plasma ‘donation’ centers are rising quickly. Almost all these centers are owned by

foreign-owned companies where the home domicile of these firms does not allow payment for plasma

donations. Four main players have consolidated the industry.

• The US is now known as ‘The OPEC of plasma’. No – I didn’t make that up. The industry association

website actually uses the term with pride. The number of collection centers has increased from 400 in

2000 to more than 600 in 2017.

• Just like OPEC – this is a business where the raw material is pumped out and exported overseas.

More than 95% of the plasma around the world in the drug industry comes from the US and plasma-

based drugs make up almost 2% of the value of all exports from our nation. According to The

Economist, the value of global plasma exports was greater than $120B in 2016 – more than exports of

airplanes.

• Who qualifies to be a client? Anyone who appears to be in generally good health, can provide a

government ID showing a permanent address, who is not obviously intoxicated and who states they

are not an IV-drug user nor have received a tattoo recently. Plasma collection centers are clustered in

inner cities, large state-school college towns and border communities (yes – Mexican IDs are just fine

and thousands of Mexican citizens cross the border daily to ‘donate’ and then return across the Rio

Grande where payment for such donations are illegal).

• Donors regularly give false answers when asked required questions regarding recent illness, receiving

tattoos and IV-drug use. Others wear extra clothing so they can ‘make weight’ of 110 lbs. to be

eligible to donate. Discussions I have had with employees of one of the industry’s major players tell

me that particularly ‘high’ or drunk donors are regularly told to ‘sober up and come back later’. I was

also told that regular donors receive an annual physical which often uncover new tattoos which had

not been disclosed over the course of the year as required before eligibility for each donation is

determined.

• The FDA has set guidelines so that heavier donors are paid more and more plasma is removed from

their bodies each donation. If you are lucky enough to weigh over 175 lbs. you are in the top payment

tier. Sadly, in the midst of a national obesity epidemic, our government is giving cash incentives to

poor people to put on weight. The plasma donation business also spurs alcoholism as the practice has

been known for years in the inner city as ‘ooze for booze’. Liquor stores almost always are sited in

the same strip mall as plasma donation centers and I have been told that one is able to get more drunk,

more quickly with less alcohol immediately after a plasma donation.

• Regular plasma donation often leads to lethargy, fainting, tingling sensations in the extremities, and

increased chance of contracting infections.

• The practice of paying cash for plasma donations from impoverished Americans has been attracting

the attention of several major news outlets:

ABC News 1/17 https://abcnews.go.com/US/thousands-low-income-americans-donate-blood-

plasma-profit/story?id=44710257

The Atlantic 3/18 https://www.theatlantic.com/business/archive/2018/03/plasma-donations/555599/

The New York Times 2/19 https://www.nytimes.com/2019/02/01/sunday-review/blood-plasma-

industry.html

The Economist 5/18 - took a different track and recently called on ending bans on paying for plasma in

other countries. In other words, everyone should be able to sell their plasma for profit; it is the Economist after all. If this change took place it would be very bad for PAYS as this would reduce demand at US donation centers:

https://www.economist.com/international/2018/05/10/bans-on-paying-for-human-blood-distort-a-

vital-global-market

• When a donor finishes the donation process, they are given a prepaid card on which more cash can be

loaded the next time they visit the plasma center and donate. The prepaid card company gets a small

fee from the plasma company, as well as the interchange fees, ATM surcharges and ‘nonuse’ charges.

Most companies in the reloadable prepaid card space publish their schedule of fees and charges for

investors to evaluate. PAYS will not release its average pricing info ‘as card terms and conditions are

different for each plasma company client’

• Wirecard AG (WRCDF) is the main competitor with 67% market share…and it has been losing share

to PAYS which now has a third of the market. PAYS entered the plasma reimbursement market just a

couple of years ago and states that the market share gain has been due to having a system with better

(99.9%) uptime. And of course, Wirecard has been distracted with an accounting scandal. PAYS

guidance is 50% market share in the near future.

• In 2017 PAYS had 1.5M cardholders onto which it loaded $410M and generated $15.2M. In 2018

PAYS had 2.2M cardholders on which it loaded $620M and generated $23.4M in revenue from the

business. So 3.7% of the value loaded was pulled out in fees in both years. PAYS guidance is 50%

revenue growth from this vertical in 2019 due to 1) market share gains, 2) high demand for plasma is

leading to rising reimbursement rates for donations, 3) an expanding number of plasma company

collection centers across the country.

• PAYS executives are out there telling financial services/fintech investors that plasma is the new, new

thing for curing Alzheimer’s by injecting young person plasma into old farts like me and that demand

for plasma will soar. Such info is even making it into sell-side research reports. It is true that a few

people are doing this in hopes of a miracle cure – people used to inject young goat and ape gonad

tissue into themselves too a century ago for the same purpose. However, the FDA has taken the

unusual step of releasing a warning that this is unproven, and potentially dangerous:

https://www.fda.gov/news-events/press-announcements/statement-fda-commissioner-scott-

gottlieb-md-and-director-fdas-center-biologics-evaluation-and-0

To quote from this FDA warning, “Simply put, we’re concerned that some patients are being

preyed upon by unscrupulous actors touting treatments of plasma from young donors as cures

and remedies. Such treatments have no proven clinical benefits for the uses for which these

clinics are advertising them and are potentially harmful. There are reports of bad actors charging

thousands of dollars for infusions that are unproven and not guided by evidence from adequate

and well-controlled trials.”

2) PAYS is rapidly pushing into the Pharmaceutical marketing business as a new vertical. The company

until recently was named 3PEA and for years it traded on the pink sheets under the ticker TPNL. 3Pea

was in this exact same business with PSKW LLC (dba ConnectiveRx) as its marketing partner. For

years TPNL labored in this business as its main vertical and made little money. After being sued by

PSKW in 2015 (for allegedly not sharing breakage fees), 3Pea got out of the business and then

discovered the magic of plasma, Late last year PAYS made some new hires, is now back in the

pharma marketing business and current guidance is that it will make lots of money in the field in

2H19 and 2020.

• The business strategy here is to partner with a pharma company when it releases a new drug.

• The new drug may (or may not) be more efficacious than the current drug on the market, but it will

certainly have a higher price which costs insurance companies more and thus also has a higher out-of-

pocket cost to the patient. Said patient usually does not want to pay more out of pocket, so doctors are

given a stack of white-labeled prepaid debit cards to hand out to the patient along with a new

prescription. The patient uses this prepaid card at the pharmacy to pay for some, or all of the co-pay

for the drug Rx. Thus, the patient does not pay more out of pocket compared to the old medication

and only the insurance company loses (at least until the patient’s premium goes up the next year).

• “The real profits in these Pharmaceutical programs is the breakage which can run as 10% per year!”

(Jim McCroy, EVP of PAYS on 4/4/19). Breakage is an industry term for when, through non-use, the

card is deactivated and the card issuer keeps any cash value left on the card. The more negative side

effects in a new drug…the higher the propensity of the patient to not refill the Rx and increase the

‘breakage’ for an affiliated prepaid card program.

• PAYS has signed a bunch of these deals for 2019 and raised its guidance as a result. Total revenue

guidance is $38-$40M for 2019. It expects $7.5M in EBITDA from the plasma business and $2.5M to

$4.5M in EBITDA from the pharma marketing business. Additional contract wins could raise this

number. This is more than

3) PAYS is also planning to roll out a GPR (general reloadable card) business in the near future. It hopes

it will be able to convert some of the 2M prepaid cards it already has in the hands of donors from the

plasma business into cards that customers use for direct deposit and everyday spending. To spearhead

this effort, Dan Henry, former CEO of Netspend, has joined the PAYS Board. The company has been

making a big deal of this, and promises of big future profits likely helped move the stock upwards to

+$7.5 from less than $2 a share over the last 12 months

• Note that the GPR market has been around a for years with fierce competition from players including

Amex (Bluebird & Serve), Chase (Liquid), MetaBank (PayPower, Univision & RushCard), Total

System Services (NetSpend, Western Union), Green Dot, Brinks, H&R Block (Emerald Card), etc.

Unbanked/Underbanked customers have been able to get these cards and use them for basic banking

at multiple points of contact for years including: Walmart, Safeway, CVS, Kroger, Kmart, Walgreens,

bank branches, check cashers, liquor stores, tax preparers, etc.

• Now PAYS thinks that plasma centers will be a great way to attract GPR customers and suggests that

investors model out profits if only…only (!) 5% of its cardholders (100,000 donors) started using its

cards for direct deposit and daily transactions. Wouldn’t you want to have some street cred and flash

an Octapharma plasma donation GPR card when you pay for something when out with your friends?

Risks to the Stock:

As with any fast-growing company with a stock that has been moving straight up, identifying and

timing the catalyst is the toughest part of a short. However, time and again, we have seen that companies

that expand quickly off the backs of the poor and unbanked tend to blow up spectacularly. Here are some

large risks for PAYS –

A) Secondary Offering: 40% of the stock is owned by the two founders. The company claims they don’t

have any plans to sell in the near future – though the share price has moved up from $1.40 to +$7.50

over the last 24 months. The founders used to have stock worth $8M two years ago. Now it is worth

around $150M. They may want to ‘lighten up’ just a bit

B) Where the heck is Elizabeth Warren when you need her? Ok, sure she is busy right now, but doesn’t

this plasma-for-cash business seem almost perfectly designed for one of the ‘Progressives’ running

for President to take on an as an issue to get some screen time? Even Trump could latch onto this –

come on, these foreign companies are sucking the blood out of working-class Americans and shipping

it overseas! Changes in the law regarding the sale of plasma donations or restrictions on its export

would be devastating for PAY’s business model. Proper oversight of plasma donations requiring that

the FDA rules are actually followed at these businesses would reduce the number of donations made.

C) Medicare for all: I have no idea if this might pass, but these pharma marketing program cards are not

for Medicare/Medicaid patients. If Mr. Market believes there will be a large expansion of Medicare,

PAYS’ new vertical would be negatively impacted.

D) Prescription drug price legislation. One of the very few things the GOP and Democrats agree on these

days is that new drug prices are too high. The President announced recently that new bipartisan

legislation on this would be released soon. Any reduction in drug prices, or lower prices for newly

released medicines would be a negative for PAYS new pharmaceutical marketing business.

E) Execution risk: In the last six months the company has named a new CFO, Chief Legal Counsel,

Chief Information Officer and Chief Marketing Officer. It is growing quickly and entering new

verticals. Its guidance calls for very rapid top and bottom-line growth – small companies often are

unable to scale up as quickly as promised.

F) Emergent competitors. GDOT, TSS, and others may decide that if TPNL is going to get into the GPR

business, perhaps they may want to get into the plasma card business. Blackhawk and Incomm also

might be interested.

G) The stock declined after reporting 1Q19 recently as…it did not raise its guidance. PAYS stock has

been a rocket launch over the last year on new business announcements, hires and raised expectations.

Reality may set in if the company is unable to pull new rabbits out of the hat over the rest of the year.

Notes – the ‘Big 4’ in the cash-4-plasma business (80% of the market) are:

- CSL Limited (Australia)

- Grifols (Spain)

- Octapharma (Switzerland)

- Shire (Ireland)

Here is some data from the Plasma industry website PPTA: https://www.pptaglobal.org/

Exports of Plasma from the US in millions of liters:

Europe - 15.9, Canada - 0.08, Asia Pacific – 0.074, Latin America 0.055

As you can see, most US Plasma exports are to Europe

Worldwide blood-plasma collections in millions of liters: US +30, Rest of the world less than 15.

Side Effects of Donating Plasma:

https://www.healthline.com/health/donating-plasma-side-effects#tips

Basic company financials

($ in thousands)

12/31/2018

12/31/2017

12/31/2016

12/31/2015

Revenue

23,424

15,234

10,417

8,108

Operating Income

2,473

1,768

1,359

-9

Net Income

2,588

1,791

1,401

-2,410

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Risks to the Stock:

As with any fast-growing company with a stock that has been moving straight up, identifying and timing the catalyst is the toughest part of a short. However, time and again, we have seen that companies that expand quickly off the backs of the poor and unbanked tend to blow up spectacularly. Here are some large risks for PAYS –

A) Secondary Offering: 40% of the stock is owned by the two founders. The company claims they don’t have any plans to sell in the near future – though the share price has moved up from $1.40 to +$7.50 over the last 24 months. The founders used to have stock worth $8M two years ago. Now it is worth around $150M. They may want to ‘lighten up’ just a bit

B) Where the heck is Elizabeth Warren when you need her? Ok, sure she is busy right now, but doesn’t this plasma-for-cash business seem almost perfectly designed for one of the ‘Progressives’ running for President to take on an as an issue to get some screen time? Even Trump could latch onto this – come on, these foreign companies are sucking the blood out of working-class Americans and shipping it overseas! Changes in the law regarding the sale of plasma donations or restrictions on its export would be devastating for PAY’s business model. Proper oversight of plasma donations requiring that the FDA rules are actually followed at these businesses would reduce the number of donations made.

C) Medicare for all: I have no idea if this might pass, but these pharma marketing program cards are not for Medicare/Medicaid patients. If Mr. Market believes there will be a large expansion of Medicare, PAYS’ new vertical would be negatively impacted.

D) Prescription drug price legislation. One of the very few things the GOP and Democrats agree on these days is that new drug prices are too high. The President announced recently that new bipartisan legislation on this would be released soon. Any reduction in drug prices, or lower prices for newly released medicines would be a negative for PAYS new pharmaceutical marketing business.

E) Execution risk: In the last six months the company has named a new CFO, Chief Legal Counsel, Chief Information Officer and Chief Marketing Officer. It is growing quickly and entering new verticals. Its guidance calls for very rapid top and bottom-line growth – small companies often are unable to scale up as quickly as promised.

F) Emergent competitors. GDOT, TSS, and others may decide that if TPNL is going to get into the GPR business, perhaps they may want to get into the plasma card business. Blackhawk and Incomm also might be interested.

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			2019	2020
Price:	8.04	EPS	0.13	0.28
Shares Out. (in M):	47	P/E	61.8	28.7
Market Cap (in $M):	380	P/FCF	0	0
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT	0	0