PAYS - PaySign: Don't Overlook The Warning Signs

2023-09-18 08:50:04 ET

Summary

• PaySign, Inc. has shown impressive growth but its stock price has fallen by 35.56% and there are red flags surrounding the company.
• The company's major revenue driver is its plasma business and it plans to open additional plasma centers in 2023.
• PaySign reiterates its guidance for revenue and adjusted EBITDA for the full year 2023, however cautious of insider selling and ongoing investigations into potential misconduct.

Earlier this year, I came across PaySign, Inc. ( PAYS ), a fintech microcap stock that offers an attractive payment solution for plasma donations in the USA. The company has been showing impressive growth in revenue and profits, reiterated its FY2023 guidance and holds a significant market share in the industry. However, since my first article , the stock price has fallen by 35.56%.

Moreover, some red flags cannot be ignored. Several insiders have sold off shares in the past three months, and the company is currently under investigation for allegations of false and misleading statements made by certain officers regarding FY 2019 annual report. A class action has been permitted to proceed based on these allegations. Given the suspicious behaviour and increased uncertainty surrounding the stock, I recommend holding off on any investment decision until the situation becomes more evident.

Financials and 2023 outlook

PaySign's primary source of revenue comes from its plasma business. The company plans to expand by opening additional plasma centres in the year 2023, aiming to have approximately 480 centres by the end of the year. The year-on-year increase in plasma revenues was 28.3%. On a financial front, PaySign is showing positive signs of continuing to deliver excellent results for FY 2023. In Q2 2023, PaySign reported solid revenue growth, reaching $11.04 million, a 28% YoY. The company plans to continue to add new programs in various business segments, contributing to further revenue growth.

PaySign's financials are stable, with no debt and $7.67 million in cash over the past year. It has also turned around its levered free cash flow, from a negative $2.1 million to a positive $171,000 YoY. However, while its current ratio is 1.09, indicating it can cover short-term obligations, its quick ratio is lower at 0.19, suggesting potential challenges in meeting immediate liquidity needs. For its FY 2023 outlook, PaySign maintains its previous guidance, expecting revenues between $44 million and $46 million, with adjusted EBITDA ranging from $6 million to $7.5 million for the full year. On a financial front, PaySign remains attractive due to its expected future growth. However, we should consider actions surrounding the stock that could negatively impact its future performance.

Potential red flag: Active investigation

Allegations of misconduct by cert ain PaySign officers ha ve surfaced after an investigation . These allegations include the use of misinformation, a suspended accountant, and insider trading. If proven true, they could harm the company's reputation and financial stability. PaySign has also been accused of delaying its 2019 annual report, resulting in a significant drop in its stock price after the disclosure. Investors should be cautious as adverse news and developments related to the company may cause stock price fluctuations. The approval of a class action lawsuit by federal court suggests that legal action is underway concerning these allegations. It is advisable for investors to closely monitor the lawsuit's progress and its potential impact on the company's financial health. If proven true, the allegations could result in corporate reforms, financial penalties, and consequences for both the company and its officers, which could have a negative effect on the business.

Potential red flag: Insider trading

While insider selling isn't necessarily always a cause for concern, it's prudent to exercise caution when a substantial number of insiders engage in selling over a short timeframe, especially if the total value of shares traded is significant. In the case of PaySign, we observe precisely such a scenario. Directors and managers within the company have been actively involved in selling, with no corresponding buying activity. Although the exact reasons for this trend are unclear, it may suggest a decreased level of confidence among insiders regarding the company's future prospects.

Despite the substantial volume of sales, it's important to highlight that insiders retain a significant ownership stake of 38.48% in the company. While the selling activity does raise concerns, this substantial ownership continues to align the interests of management with those of shareholders in their mutual pursuit of improving profitability and enhancing shareholder value.

Valuation

The stock is currently trading well below the average price target of $4.60 set by Wall Street. Its historical fluctuations are typical of microcap stocks. Although short interest is limited, it is highly sensitive to investor sentiment rather than financial performance, which poses a significant risk to investors. With a high forward price-to-earnings ratio of 75.37, the stock may be considered overvalued. Additionally, the prevalence of insider trading and an ongoing investigation cast a negative sentiment and heightened uncertainty over the company, further increasing the risk for investors.

Final thoughts

Despite PaySign's promising position in the fintech market and the anticipated improvement in its FY 2023 financial performance, the growing volume of insider selling and the lingering cloud of an ongoing investigation introduce heightened risks that diminish the company's attractiveness as an investment opportunity. Consequently, I recommend adopting a "wait and see hold" approach, allowing for greater clarity regarding the company's actions and their potential impact on its future prospects.

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