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Edited Transcript of TPNL.OB earnings conference call or presentation 5-Nov-19 9:30pm GMT

Q3 2019 Paysign Inc Earnings Call

HENDERSON Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Paysign Inc earnings conference call or presentation Tuesday, November 5, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Kenneth Attinger

PaySign, Inc. - CFO

* Mark R. Newcomer

PaySign, Inc. - Co-Founder, Vice-Chairman, President & CEO

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Conference Call Participants

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* Austin William Moldow

Canaccord Genuity Corp., Research Division - Associate

* Jeffrey Louis Feinberg

Feinberg Investments, LLC - Co-Owner

* Jon Robert Hickman

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst

* Mark Anthony Palmer

BTIG, LLC, Research Division - MD & Financials Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the PaySign's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

This presentation may include forward-looking statements. To the extent that the information presented in this presentation discusses financial projections, information and expectations about the company's business plans, results of operations, returns on equity, markets or otherwise make statements about future events, such statements are forward-looking. Such forward-looking statements can be identified by the use of the 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 cause actual results to differ materially from such forward-looking statements.

You are urged to carefully review and consider any cautionary statements and other disclosures, including the statements made under the heading Risk Factors and elsewhere in our 2018 Form 10-K. Forward-looking statements speak only as of 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 introduce your host, CEO of PaySign, Mr. Mark Newcomer. Please go ahead, sir.

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Mark R. Newcomer, PaySign, Inc. - Co-Founder, Vice-Chairman, President & CEO [2]

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Thank you, Kevin, and good afternoon, everyone. On behalf of PaySign, I'd like to welcome you to our third quarter 2019 earnings call.

I'm Mark Newcomer, Chief Executive Officer here at PaySign. I will provide a brief review of the highlights for the third quarter and will reinforce our strategic direction. Following my remarks, I'll turn it over to our Chief Financial Officer, Mark Attinger, to take us through the third quarter results. Following Mark's review, we will then field your questions.

PaySign is both a vertically integrated processor and a prepaid card program manager. We develop customized and innovative payment solutions in support of corporate, consumer and government programs. To learn more about our history and the services we provide and to review a copy of our most recent investor presentation, you may want to visit the Investors section of our website at www.paysign.com.

I'm very excited to share the results for an outstanding quarter. We experienced record revenue and earnings. We continued to execute on our growth strategy and have gone live with our premier card, rolling this out to our cardholders at one of our plasma clients. Year-to-date, we have added 54 new card programs, 45 in plasma, 7 in pharma and 2 other corporate incentive programs. As expected, all scheduled plasma centers were onboarded at the end of September, increasing the total number of centers we service by 13%. As of September 30, there were 2.86 million cardholders on our platform.

In summary, revenues were a record $9 million, an increase of 40% compared to the prior year. Net income was $3 million, also a record and up 270%, and adjusted EBITDA was $3.3 million, an increase of 124%. We've continued to experience excellent growth and expect to see higher revenue in the fourth quarter, benefiting from recently onboarded new card programs. Guidance remains $35 million to $37 million and adjusted EBITDA of $10 million to $12 million.

Strategically and consistent with our prior communications, we will continue to broaden and diversify our market focus for our prepaid card programs, and we'll seek to introduce new products. We are evaluating the expansion of our premier card offering to other corporate incentive industry verticals.

Lastly, we are making considerable progress in evaluating several opportunities on the M&A front. However, there is nothing definitive to share at this time. As I've previously shared -- as I've shared previously, we will selectively pursue acquisition candidates that have long-standing reputations, corporate culture of innovation and that have demonstrated growth and profitability.

At this time, I'd like to turn it over to Mark to take us through the numbers in a little more detail.

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Mark Kenneth Attinger, PaySign, Inc. - CFO [3]

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Excellent. Thanks, Mark. So I'm going to take us through the third quarter and the year-to-date top line numbers and provide some variance commentary. Any references to year-on-year improvements or percentage changes, unless stated otherwise, refers to the third quarter ending September 30, 2019, as compared to third quarter of 2018.

Revenue for the quarter ended September 30, 2019, was $9,008,117, an increase of 40.3% compared to the analyst consensus estimate of $8.98 million and the prior year of $6,421,396. This increase in revenue was attributable to continued growth in plasma programs and our new pharma business, which represents approximately 22% of the revenue for the current quarter. Revenue for the 9 months was $24,901,678, an increase of 50.4% year-on-year compared to $16,558,438.

Gross profit increased 76.3% to $5.4 million or 59.6% of revenues compared to $3.0 million and 47.4% of revenue in 2018. The 1,216 basis point improvement was primarily driven by a favorable mix towards higher-margin card programs.

The operating expenses were $3.1 million, down from $3.4 million the prior quarter and compared to $2.3 million in 2018. The quarter 3 year-on-year increase consisted primarily of $0.3 million in incremental salaries and benefits, $0.3 million in increased stock-based compensation and a $0.1 million increase in outside professional services.

Benefiting from higher cash balances, interest income was $114,000 compared to $37,000 the prior year. Net income for the third quarter ended September 30, 2019, was $2,960,078 or $0.06 per basic share, an increase of 269.6% compared to $800,862 or $0.02 per basic share the prior year. Fully diluted was $0.05 versus $0.02.

For the first 9 months, net income was $5,570,540 or $0.12 per share -- per basic share, excuse me, an increase of 186.3% compared to $1,945,425 or $0.04 per basic share the prior year. For the 9-month period, fully diluted earnings per share was $0.10 versus $0.04 the prior year.

Non-GAAP adjusted EBITDA was $3,252,332 or $0.07 per basic share, an increase of 123.6% compared to $1,454,224 or $0.03 per basic share the prior year. Furthermore, the adjusted EBITDA margin improved to 36.1%, up 1,346 basis points from 22.6% in the third quarter of 2018. For the 9-month period, adjusted EBITDA was $7,563,486 or $0.16 per basic share, an increase of 123.1% compared to $3,390,833 or $0.07 per basic share the prior year.

We loaded $210 million to the card for the quarter versus $172 million in the prior quarter -- excuse me, compared to $172 million same quarter the prior year, and our revenue conversion rate of gross dollar volume loaded on cards was 4.29% or 429 bps compared to 3.72% or 372 bps the prior year. Worth noting and reflecting, of the new business onboarded in the third quarter in October, $88 million were loaded to the card compared to an average per month in Q3 of just $70 million loaded to cards.

From a balance sheet perspective, consolidated cash, including restricted cash, has increased 30.2% or $9.6 million to $41.2 million compared to $31.7 million at year-end 2018. As a comparison, consolidated cash at October month end was $49.8 million, up $8.6 million from September.

Working capital increased to $13.1 million compared to $9.5 million at June 30, 2019, and compared to $5.9 million at year-end. The $7.2 million improvement compared to last year was due primarily to increased consolidated cash but also due to increased AR from higher client billings and decreases in accounts payable, partially offset by an increase in the card funding liability.

Our liquidity, as measured by adjusting the current ratio, excluding restricted cash and cardholder funds from both sides of the balance sheet, respectively, was 7.5, up from 5.4 at year-end. As we look to the fourth quarter, we do expect to benefit from revenue contributed from the recently onboarded and signed new business. Also considering the mix, we expect slightly lower gross margins.

And I believe that concludes my remarks. At this time, I'll turn it back over to our moderator to begin a question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Mark Palmer from BTIG.

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Mark Anthony Palmer, BTIG, LLC, Research Division - MD & Financials Analyst [2]

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Yes. Question on the restricted cash balance, which declined sequentially from the second quarter. It had been, I guess, $42.6 million. It was $33.2 million at September 30. I know that from our conversations after the second quarter, investors are not supposed to look at this as indicative of the health of the pharma co-pay business. But if you could just give some commentary on what happened sequentially and what investors should take from that, please.

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Mark Kenneth Attinger, PaySign, Inc. - CFO [3]

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Yes. Thanks, Mark. I appreciate the question. Good to hear your voice. So one of the things we did point to is an increase in restricted cash and consolidated cash as of October month end. It increased by $9.6 million -- excuse me, by $8.6 million back up to $49.8 million from the quarter end. I know you like to look at that number. It is a good number on trend over time.

The other thing I would point to is that we did sign new clients in the pharma space. And as we've talked about before, this particular product provides funds to assist patients and consumers with their out-of-pocket expense on their prescriptions. And early in the year, for any given program, typically, these programs load more. So there is a seasonality to it. Once their deductible is met, the loads start to subside. And then you'll see those loads go right back up in the first quarter. So part of this is normal seasonality, part of this is timing, which is why we wanted to point to the October month-end restricted cash, and part of this, we have actually new clients coming onboard in the pharma space. That's probably the best way to answer it, is timing and new clients and seasonality.

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Mark Anthony Palmer, BTIG, LLC, Research Division - MD & Financials Analyst [4]

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Okay. So just to confirm, in terms of the $49.8 million, that's a consolidated cash number at the end of October? As -- and just wanted to see what the restricted cash number was at the end of October.

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Mark Kenneth Attinger, PaySign, Inc. - CFO [5]

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Yes. I don't have the -- actually, I can -- before we get to the end, I'll see if I can pull it up. I don't have it handy this very moment. But the restricted cash is roughly -- of that $49 million, it's going to be roughly $42 million of that is restricted. But I'll check that number to confirm it.

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Mark Anthony Palmer, BTIG, LLC, Research Division - MD & Financials Analyst [6]

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Okay. Very good. And also, just wanted to see, with regard to the PaySign premier program, if there's any initial indication of traction being gained and -- on the go-live that you have with the one client.

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Mark R. Newcomer, PaySign, Inc. - Co-Founder, Vice-Chairman, President & CEO [7]

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Yes. So we've been certainly signing up new customers, but it's too early. And we do point to and have continued to reiterate that the material benefit from that program we expect to be in 2020, but we are making good progress.

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Operator [8]

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Our next question is coming from Austin Moldow from Canaccord Genuity.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [9]

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First, a quick housekeeping question. I'm not sure if I missed it or not, but what was the pharma revenue contribution in the quarter? And then the follow-up would be, can you give some color or context to the -- your pharma pipeline in terms of customers and campaigns and how you feel about those relationships yielding revenue next year?

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Mark Kenneth Attinger, PaySign, Inc. - CFO [10]

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Yes. Good question. Thanks, Austin. So pharma represented approximately 22% of the revenue for the quarter, and that was up from approximately 20% in the second quarter as you may recall, and so -- and picking up a little bit on Mark's question, pharma continues to be a strength for us and continues to grow nicely. And Austin, to that latter part of your question, yes, we have signed new business in the third quarter. I think Mark mentioned that we signed 4 new programs on the pharma business this year, in the actual third quarter. And those -- 3 of those are regular prepaid as we see in the revenue. The other is actually a co-pay pharma program. In terms of the pipeline, yes, there's several new opportunities that we're evaluating and in discussions with our clients on. And as you know, we work through channel partners who have introduced us to a number of programs.

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Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [11]

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Great. And then my last question is, can you talk about what you're seeing in the plasma space in terms of competition? I know -- the batch that you just brought on, was that something you won from a competitor? And as you expand your market share, are you able to tap into any new relationships or is it mostly expanding within larger networks where you already have a small footprint or something?

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Mark R. Newcomer, PaySign, Inc. - Co-Founder, Vice-Chairman, President & CEO [12]

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No. Our expansion in the plasma space is due to several factors. But primarily, there's always the new center build. We're expanding by that method. And then there is winning business from our competitors. And yes, we were successful on the -- what was it, Mark, 33, 34 centers? Those were directly across from the customers.

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Mark Kenneth Attinger, PaySign, Inc. - CFO [13]

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Yes. 30 -- 32 centers that we brought across on September 30 basically from -- with an existing client, something that we had been hoping to secure earlier in the year as you probably know.

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Mark R. Newcomer, PaySign, Inc. - Co-Founder, Vice-Chairman, President & CEO [14]

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But yes, that was a win from another customer -- I mean another competitor. That's correct. It's -- so one of the things that we've shared with you is a couple of our larger clients actually split our volume between us and our largest competitor. And so we continue to look to differentiating our performance to win new business and increase our share of those 2 clients. And to Mark's point, that's -- this is exactly that example.

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Operator [15]

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(Operator Instructions) Our next question today is coming from Jon Hickman from Ladenburg Thalmann.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [16]

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Could you -- maybe I missed it but could you tell me what the cash flow from operations was this quarter?

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Mark Kenneth Attinger, PaySign, Inc. - CFO [17]

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Yes. Jon, I'll have to get back with you on that. I don't have that handy.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [18]

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Okay. So I didn't miss it. So then, could you talk a little bit more about why the revenue conversion was up some -- I mean it's almost 50 basis points?

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Mark Kenneth Attinger, PaySign, Inc. - CFO [19]

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Yes. So the -- typically, the revenue conversion rate on the pharma business is higher. And so that higher mix towards pharma results in a higher composite in the quarter.

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Operator [20]

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Our next question is coming from [Erik Wright] from [BW Investments].

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Unidentified Analyst, [21]

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First off, congratulations on the record quarter and consistent results and then also the launch of the new premier card. And a lot of the questions have been covered, but I know, obviously, margins have been increasing substantially these days. And then a large portion of that is attributed to the product mix. But is there any other factors that is causing the margins to increase this much? And I see also that, I mean, operating expenses in Q2 2019 versus to Q3 2019 actually decreased. So can you also comment on that?

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Mark Kenneth Attinger, PaySign, Inc. - CFO [22]

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Yes. Good question. On the margins, we will see that taper a little bit on the gross margin in the fourth quarter as you see those new plasma centers come onboard and run at that rate that we kind of saw last year on that gross margin for the plasma business. So that will bring it down on a consolidated basis a little bit, not too much of a move. But just keep that in mind.

From an operating expense standpoint, most of that was timing of expenses that we were getting taken care of on the -- getting through our audits, getting through our outside professional services and recognizing the expense for some 401(k) expenses, things that hit in the second quarter that we didn't have in the third quarter. So I just want to -- I would expect the fourth quarter for our operating expenses to come back up a little bit, be a little bit closer to what they were in the second quarter.

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Unidentified Analyst, [23]

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Okay. That's great. And as we're trying to gauge in terms of sort of operating leverage, I mean, do you guys have the capabilities that you guys need to continue to execute on this growth trajectory that you guys are doing? And sort of how variable is that operating expense line?

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Mark Kenneth Attinger, PaySign, Inc. - CFO [24]

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Yes. It's a great question. And one of the things we've continued to talk about with all of you analysts and on these calls is that we are seeing improvements in our operating leverage. If you look at last year, year-on-year, the growth in OpEx was about 80%. This year, we're in about the mid-30 percentile range on a year-to-date basis. And so we do not expect that to grow at the same rate that we have our revenues growing. So we should get better and better margins.

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Operator [25]

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(Operator Instructions) Our next question today is coming from Jeff Feinberg from Feinberg Investments.

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Jeffrey Louis Feinberg, Feinberg Investments, LLC - Co-Owner [26]

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I just want to make sure. It looked to me like you did meet the consensus revenue, I think you mentioned in the prepared call. What was that coming in? I know we did a little over $9 million.

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Mark Kenneth Attinger, PaySign, Inc. - CFO [27]

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Looks like it was $8.98 million, is what we saw on a couple of sites that took the composite of the 4 analysts that cover us.

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Jeffrey Louis Feinberg, Feinberg Investments, LLC - Co-Owner [28]

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Yes. That's what I got, too. Okay. Great. With regard to the margin profile, a couple of people have asked about it. I'd like to look at it this way. The incremental EBITDA margin this particular quarter was 70%, $0.70 every dollar drop-through, and for the 9 months, it's 50%. Can you provide a little perspective, with the mix shifting towards the higher-margin businesses over time, PaySign premier and the other opportunities, how we can think about incremental margins for next year?

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Mark Kenneth Attinger, PaySign, Inc. - CFO [29]

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Yes. It's a good question. Let me just kind of glance over at the models and take a quick look at it. I mean I think that we will see probably things settle in that 60% range on a gross margin basis. We got to get a better read on exactly how well we're seeing conversion on the premier card. And there's a number of factors in the premier card that affect the gross margin on that product. So we're going to get some learnings on that.

We have a number of new pharma programs that just went live that we'll want to see how those perform. We have a really good read, obviously, on plasma, and then we're also looking at some other corporate incentives programs that we'll need to factor in as well. So there's a number of dynamics here. But I think probably on a go-forward basis, at least into 2020 as premier card comes on, kind of a tweener, between the pharma gross margin and the plasma gross margin, I think you'll see it at around 60%. I don't think you'll see that level in the fourth quarter. And again, I don't believe we'll be at 59.6% or whatever it was this quarter.

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Jeffrey Louis Feinberg, Feinberg Investments, LLC - Co-Owner [30]

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Yes. I'm referring to the incremental EBITDA margins. I understand completely on the gross margin, but for every $1 of revenue, this particular quarter, $0.70 flew -- flowed through to the EBITDA. For the 9 months, it's $0.50. It sounds like the way to think about it next year is that the incremental EBITDA should probably be somewhere in between, maybe 60% or so. So hypothetically, the analysts are right and you go to $60 million in revenue up from $35 million, $25 million of incremental revenue, $15 million or so of that would flow through. Is that the way to think about it?

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Mark Kenneth Attinger, PaySign, Inc. - CFO [31]

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Yes. I think that's fair. I mean if you look at our full year EBITDA margins this year, right, we're looking at -- on adjusted EBITDA, we're looking at a full year that's -- at least through the third quarter, we did 36%. We'll see that taper in the fourth quarter and finish probably closer to 30% on a full year basis. So when you look to next year, that still looks like a reasonably good composite on a full year basis.

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Jeffrey Louis Feinberg, Feinberg Investments, LLC - Co-Owner [32]

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Pretty exciting. If I do the math, it gets us to mid-20s in EBITDA next year.

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Operator [33]

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

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Mark R. Newcomer, PaySign, Inc. - Co-Founder, Vice-Chairman, President & CEO [34]

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Thanks, Kevin. Again, we're very pleased with this quarter and with our progress overall. And we continue to focus on building a world-class payments company. We appreciate you listening and for participating in this update, and have yourselves an outstanding week.

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Operator [35]

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Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.