Paysign, Inc. (PAYS) FY 2021 MD&A

ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION and RESULTS OF OPERATIONS.

The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related
notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include,
but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this Form 10-K.

Disclosure Regarding Forward-Looking Statements

This Annual Report on Form 10-K includes forward
looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (“Forward-Looking Statements”). All statements other than statements of historical fact included in
this report are Forward-Looking Statements. In the normal course of our business, we, in an effort to help keep our shareholders and the
public informed about our operations, may from time to time issue certain statements, either in writing or orally, that contains or may
contain Forward-Looking Statements. Although we believe that the expectations reflected in such Forward-Looking Statements are reasonable,
we can give no assurance that such expectations will prove to have been correct. Generally, these statements relate to business plans
or strategies, projected or anticipated benefits or other consequences of such plans or strategies, past and possible future, of acquisitions
and projected or anticipated benefits from acquisitions made by or to be made by us, or projections involving anticipated revenues, earnings,
levels of capital expenditures or other aspects of operating results. All phases of our operations are subject to a number of uncertainties,
risks and other influences, many of which are outside of our control and any one of which, or a combination of which, could materially
affect the results of our proposed operations and whether Forward-Looking Statements made by us ultimately prove to be accurate. Such
important factors (“Important Factors”) and other factors could cause actual results to differ materially from our expectations
are disclosed in this report, including those factors discussed in “Item 1A. Risk Factors.” All prior and subsequent
written and oral Forward-Looking Statements attributable to us or persons acting on our behalf are expressly qualified in their entirety
by the Important Factors described below that could cause actual results to differ materially from our expectations as set forth in any
Forward-Looking Statement made by or on behalf of us.

Overview

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 has allowed us to significantly
expand its operational capabilities by facilitating our entry into new markets within the payments space through its flexibility and ease
of customization. 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.

We have two categories for our prepaid cards:
(1) corporate and consumer reloadable, and (2) non-reloadable cards.

Reloadable Cards: These types of cards are generally
classified as payroll or considered general purpose reloadable (“GPR”) cards. Payroll cards are issued by an employer to an
employee in order to allow the employee to access payroll amounts that are deposited into an account linked to their card. GPR cards can
also be issued to a consumer at a retail location or mailed to a consumer after completing an on-line application. GPR cards can be reloaded
multiple times with a consumer’s payroll, government benefit, a federal or state tax refund, or through cash reload networks located
at retail locations. Reloadable cards are generally open-loop cards as described below.

Non-Reloadable Cards: These are generally one-time
use cards that are only active until the funds initially loaded to the card are spent. These types of cards are generally used as gift
or incentive cards. Normally these types of cards are used for purchase of goods or services at retail locations and cannot be used to
receive cash.

Both reloadable and non-reloadable cards may be
open-loop, closed-loop, or restricted-loop. Open-loop cards can be used to receive cash at ATM locations by PIN; or purchase goods or
services by PIN or signature at retail locations virtually anywhere that the network brand (Visa, Interlink, Plus, MasterCard, Maestro,
Cirrus, Discover and Pulse, etc.) is accepted. Closed-loop cards can only be used at a specific merchant. Restricted-loop cards can be
used at several merchants, or a defined group of merchants, such as all merchants at a specific shopping mall.

The prepaid card market
is one of the fastest growing segments of the payments industry in the U.S. This market has experienced significant growth in recent years
due to consumers and merchants 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.

We manage all aspects of the prepaid card lifecycle,
from managing the card design and approval processes with partners and networks, to production, packaging, distribution, and personalization.
We also oversee inventory and security controls, renewals, lost and stolen card management, and replacement. We deploy a fully staffed,
in-house customer service department which utilizes bilingual customer service representatives, Interactive Voice Response (“IVR”),
and two-way short message service (“SMS”) messaging and text alerts.

Currently, we are focusing our marketing efforts
on corporate incentive and expense prepaid card products in various market verticals including but not limited to general corporate expense,
healthcare related markets including co-pay assistance, clinical trials and donor compensation, loyalty rewards, and incentive cards.

As part of our continuing platform expansion process,
we evaluate current and emerging technologies for applicability to our existing and future technology platform. To this end, we engage
with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate, we use third-party technology
components in the development of our software applications and service offerings. Third-party software may be used for highly specialized
business functions, which we may not be able to develop internally within time and budget constraints. Our principal target markets for
processing services include prepaid card issuers, retail and private-label issuers, small third-party processors, and small and mid-size
financial institutions in the United States and Mexico.

We have devoted more extensive resources to sales
and marketing activities as we have added essential personnel to our marketing and sales team. We sell our products directly to customers
in the U.S. but may work with a small number of resellers and third parties in international markets to identify, sell and support targeted
opportunities. We have also identified opportunities in the European Union and are pursuing those opportunities.

In 2022, we plan to continue to invest additional
funds in technology improvements, sales and marketing, customer service, and regulatory compliance. From time to time we evaluate raising
capital to enable us to diversify into new market verticals. If we do not raise new capital, we believe that we will still be able to
expand into new markets using internally generated funds.

2021 Year Milestones

Results of Operations

Fiscal Years Ended December 31, 2021 and 2020

The following table summarizes our consolidated financial results:

The increase in total revenues of $5,344,415 for
the year ended December 31, 2021 compared to the same period in the prior year consisted of a $2,517,082 increase in Plasma revenue,
a $3,035,170 increase in Pharma revenue, and a reduction of $207,837 in Other revenue. The increase in Plasma revenue was primarily due
to an increase in plasma donations and dollars loaded to card as COVID-19 related government stimulus payments were phased out, donation
centers reopened, and mobility restrictions were lifted during the year. The increase in Pharma revenue was primarily due to the anniversary
of a $6,293,203 adjustment that reduced Pharma revenue for a change in accounting estimate in recognizing settlement income for all Pharma
programs in the third quarter of 2020 in accordance with applicable accounting guidance, as well as the recognition of settlement income
for Pharma programs that ended throughout 2021, the launch of new Pharma programs during 2021, and the lifting of mobility restrictions
allowing individuals to return to visiting doctor offices and pharmacies to receive pharmaceutical medicines.

Cost of revenues for the year ended December 31,
2021 decreased $63,986 compared to the same period in the prior year. Cost of revenues is comprised of transaction processing fees, data
connectivity and data center expenses, network fees, bank fees, card production costs, customer service, program management, application
integration setup, and sales and commission expense. Cost of revenues decreased primarily due to operating leverage inherent in our Plasma
business as many of the Plasma fees deliver a greater revenue contribution versus the costs that are provided by third-parties who charge
us based on the number of transactions that occur during the period. In addition, there was a greater contribution of higher margin Pharma
settlement income for the year ended December 31, 2021.

Gross profit for the year ended December 31,
2021 increased $5,408,401 compared to the prior year resulting primarily from the increase in revenue described above, coupled with the
slight year-over-year decrease in cost of sales. The increase in gross margin resulted from a higher revenue conversion rate generated
from revenues with a larger portion of fixed costs versus those that have a variable cost component.

Selling, general and administrative expenses for
the year ended December 31, 2021 decreased $138,110 or 0.9% compared to the prior year and consisted primarily of an increase in
staffing and compensation of $1,260,000, insurance of $250,000, and travel and entertainment of $170,000; offset by a decrease in stock-based
compensation of $690,000, technologies and telecom of $265,000, and professional services for legal, accounting, tax, and consultants
of $260,000.

During the year ended December 31, 2021 there
was no intangible asset impairment charge or loss on the abandonment of assets. The impairment of intangible asset of $382,414 in December
31, 2020 was related to a write down of the carrying value of acquisition costs related to a business license that had been suspended.

Depreciation and amortization expense for the
year ended December 31, 2021 increased $373,156 compared to the prior year. The increase in depreciation and amortization expense was
primarily due to continued capitalization of new technologies and enhancements to our processing platform and infrastructure.

For the year ended December 31, 2021, we recorded
a loss from operations of $2,739,433, an increase of $5,598,667 from the period ending December 31, 2020, related to the aforementioned
factors.

Other income for the year ended December 31, 2021
decreased $62,423 related to a decrease in interest income resulting primarily from the reduction in the federal funds rate to near 0%
beginning in the first quarter of 2020.

The effective tax rate was (0.4%) and (10.8%)
for the years ended December 31, 2021 and 2020. The effective tax rates vary, primarily due
to the Company establishing a full valuation allowance against its deferred tax assets during the year ended December 31, 2020. The Company
continues to have a full valuation allowance against its deferred tax assets as of December 31, 2021.

The net loss for the year ended December 31,
2021 decreased $6,420,228. The overall change in net loss relates to the aforementioned factors.

Key Metrics, Performance Indicators and Non-GAAP
Measures

Management reviews a number of metrics to help
us monitor the performance of and identify trends affecting our business. We believe the following measures are the primary indicators
of our quarterly and annual revenues:

Gross Dollar Volume Loaded on Cards – Represents
the total dollar volume of funds loaded to all of our card programs. Our gross dollar volume was $1,066 million and $968 million for the
years ended December 31, 2021 and 2020, respectively. We use this metric to analyze the total amount of money moving into our card
programs.

Conversion Rate on Gross Dollar Volume Loaded
on Cards – Represents the percent of total gross dollar load volume onto our card programs that is converted into revenue, gross
profit and net profit dollars. Our revenue conversion rate for the years ended December 31, 2021 and 2020 were 2.76% or 276 basis
points (“bps”), and 2.49% or 249 bps, respectively, of gross dollar volume loaded on cards. Our gross profit conversion rate
for the years ended December 31, 2021 and 2020 were 1.38% or 138 bps, and 0.96% or 96 bps, respectively, of gross dollar volume loaded
on cards. Our net profit conversion rate for the years ended December 31, 2021 and 2020 were (0.25%) or (25) bps, and (0.95%) or
(95) bps, respectively, of gross dollar volume loaded on cards. The increase in conversion rates was primarily attributable to improving
revenue and operating results throughout 2021 and the change in accounting estimate for Pharma settlement income in 2020.

Management also reviews key performance indicators,
such as revenues, gross profits, operational expenses as a percent of revenues, and cardholder participation. In addition, we consider
certain non-GAAP (or "adjusted") measures to be useful to management and investors evaluating our operating performance for
the periods presented, and provide a tool for evaluating our ongoing operations, liquidity, and management of assets. This information
can assist investors in assessing our financial performance and measures our ability to generate capital for deployment and investment
in new card programs. These adjusted metrics are consistent with how management views our business and are used to make financial, operating
and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute
for revenues, operating income, net income (loss), earnings (loss) per share (basic and diluted) or net cash from operating activities
as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures
reported by other companies, to be key performance indicators:

“EBITDA” is defined as earnings before
interest, income taxes, depreciation and amortization expense and "Adjusted EBITDA" reflects the adjustment to EBITDA to exclude
stock-based compensation expense, impairment of intangible asset and loss on abandonment of assets. A reconciliation of net loss to Adjusted
EBITDA is provided in the table below.

Liquidity and Capital Resources

The following table sets forth the major sources
and uses of cash for our last two fiscal years ended December 31, 2021 and 2020:

Comparison of Fiscal 2021 and 2020

In fiscal 2021 and 2020, we financed our operations
through internally generated funds.

Operating activities provided $15,228,189 of cash
in 2021, an increase of $1,452,370 compared to 2020. The increase is primarily due to the decrease in the net loss, offset by a decrease
in cash flows from changes in operating assets and liabilities, and decreases in stock-based compensation expense, impairment of intangible
asset, loss on abandonment of assets, and deferred income taxes. The large year-over-year
changes in operating assets and liabilities related to accounts receivable and accounts payable and accrued liabilities was primarily
due to the launch of new Pharma programs and the timing of collections and payments whereby we collect money from pharmaceutical and HUB
service companies and reimburse the pharmacy claims processor, healthcare providers and patients for their out-of-pocket drug costs. The
decrease in the customer card funding liability is partially related to the recognition of settlement income on Pharma programs that terminated
or switched to a new business model during the year.

Investing activities used $2,679,664 of cash in
2021, as compared to $3,344,855 of cash in 2020. The decrease is primarily attributable to a decrease in fixed assets purchased relative
to the prior year when we moved into a new office location, offset by increases in the capitalization of internally developed software
related to ongoing enhancements to our processing platform and infrastructure.

Financing activities provided $192,141 of cash
in 2021 as compared to the use of $72,865 of cash in 2020. Our cash provided in financing activities for 2021 related entirely to cash
received from the exercise of stock options. Our cash used in financing activities for 2020 related to cash received from the exercise
of stock options totaling $172,560 offset by $245,425 for the repurchase of stock for taxes withheld.

Liquidity and Sources of Financing

Unrestricted cash declined $442,297 to $7,387,156,
due to the negative impact of COVID-19 on our operating results, particularly in March and April of 2021 when government stimulus checks
were widely distributed to individuals throughout the United States. Our operating results did improve throughout 2021 whereby we were
able to generate positive cash flow from operations in the second half of the year to help offset our unrestricted cash balance decline
that we experienced in the first half of the year. Restricted cash of $61,283,914 are funds used for customer card funding with a corresponding
offset under current liabilities. The increase in 2021 versus 2020 was predominately related to increases in funds on card, increased
Plasma deposits, and new Plasma and Pharma customers, offset by declines from Pharma customers whose contracts terminated during the year.
We experienced large increases in accounts receivable and accounts payable primarily due to the launch of six new Pharma programs during
the year whereby Paysign invoices its customers for reimbursement to pharmacy networks, pharmacies, or individuals for their out-of-pocket
costs and remits those funds to cover the accounts payable liability. We believe that our unrestricted cash on hand at December 31,
2021 of $7,387,156, along with anticipated revenues and operating profits anticipated for 2022, and our account receivable and account
payable process, will be sufficient to sustain our operations for the next twelve months.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements
that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Our estimates will be based on our experience
and our interpretation of economic, political, regulatory, and other factors that affect our business prospects.

Fixed Assets – Fixed assets are stated
at cost less accumulated depreciation. Depreciation is principally recorded on the straight-line method over the estimated useful lives
of the assets, which are generally 3 to 10 years. The cost of repairs and maintenance is charged to expense as incurred. Leasehold improvements
are capitalized and depreciated over the shorter of the remaining lease term or the estimated useful life of the improvements. Expenditures
for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation
are removed from the accounts and any gain or loss is reflected in other income (expense).

The Company periodically evaluates whether events
and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance
of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over
the remaining life of the fixed assets in measuring their recoverability.

Intangible Assets – For intangible
assets, Paysign recognizes an impairment loss if the carrying amount of the intangible asset is not recoverable and exceeds fair value.
The carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use of the asset.

Intangible assets with finite lives are amortized
on a straight-line basis over their estimated useful lives ranging from periods of 3 to 15 years.

Internally Developed Software Costs –
Computer software development costs are expensed as incurred, except for internal use software or website development costs that qualify
for capitalization as described below, and include compensation and related expenses, costs of hardware and software, and costs incurred
in developing features and functionality.

For computer software developed or obtained for
internal use, costs that are incurred in the preliminary project and post implementation stages of software development are expensed as
incurred. Costs incurred during the application and development stage are capitalized, as the Platform asset.
Capitalized costs are amortized using the straight-line method over a three to five year estimated useful life, beginning in the period
in which the software is available for use.

Income Taxes – Income tax expense
is comprised of current and deferred income tax expense. Current income tax expense approximates taxes to be paid or refunded for the
current period. Deferred income tax expense results from the changes in deferred tax assets and liabilities during the periods. These
gross deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future
reversals of temporary differences between the basis of assets and liabilities as measured by tax laws and their basis as reported in
our consolidated financial statements. We also recognize deferred tax assets for tax attributes such as net operating loss carryforwards
and tax credit carryforwards. We record valuation allowances to reduce deferred tax assets to the amounts we conclude are more likely-than-not
to be realized in the foreseeable future. While the Company has considered future taxable income and ongoing prudent and feasible tax
strategies in assessing the need for the valuation allowance, if these estimates and assumptions change in the future, the Company may
be required to adjust its valuation allowance.

Income tax benefits are recognized and measured
based upon a two-step model: 1) a tax position must be more likely-than-not to be sustained based solely on its technical merits in order
to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely-than-not to be sustained
upon settlement. The difference between the benefit recognized for a position and the tax benefit claimed on a tax return is referred
to as an unrecognized tax benefit. Income tax related interest and penalties, if applicable, are accrued within income tax expense.

Revenue and Expense Recognition –
The Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which
it expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers,
the Company performs the following five-step analysis: (i) identification of contracts with customers; (ii) determination of performance
obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and
(v) recognition of revenue when (or as) the Company satisfies each performance obligation.

The Company generates revenues from Plasma card
programs through fees generated from cardholder fees and interchange fees. Revenues from Pharma card programs are generated through card
program management fees, interchange fees, and settlement income.

Plasma and Pharma card program revenues include
both fixed and variable components. Cardholder fees represent an obligation to the cardholder based on a per transaction basis and recognized
at a point in time when the performance obligation is fulfilled. Card program management fees include an obligation to our card program
sponsors and are generally recognized when earned on a monthly basis and paid typically due with 30 days pursuant to the contract terms
which are generally multi-year contracts. The Company uses the output method to recognize card program management fee revenue at the amount
of consideration to which an entity has a right to invoice. The services are transferred to the customer when the performance obligation
is completed which the Company determined to be monthly, as the customers simultaneously receives and consumes the consumes the benefit
from the Company’s performance. Interchange fees are earned when customer-issued cards are processed through card payment networks
as the nature of our promise to the customer is that we stand ready to process transactions at the customer’s requests on a daily
basis over the contract term. Since the timing and quantity of transactions to be processed by us is not determinable, we view interchange
fees to comprise an obligation to stand ready to process as many transactions as the customer requests. Accordingly, the promise to stand
ready is accounted for as a single series performance obligation. The Company uses the right to invoice practical expedient and recognizes
interchange fee revenue concurrent with the processing of card transactions. Interchange fees are settled in accordance with the card
payment network terms and conditions, which is typically within a few days.

Prior to September 30, 2020, settlement income
from Pharma programs was recognized and recorded, after giving consideration to any revenue constraints, ratably throughout the program
lifecycle based on the Company’s estimate of the unspent balances to be remaining on the card at program expiration. During 2020,
the Company observed substantially different performance indicators, current trends in the industry regarding program management by third
parties, and new information available in dollar loads and spending patterns compared to historical experience. As a result, the Company
changed its estimate of breakage for recognizing settlement income for Pharma programs resulting in the Company constraining revenue on
all Pharma programs in accordance with applicable accounting guidance. Based on the change in facts and circumstances during 2020, the
Company now utilizes the remote method of revenue recognition for settlement income whereby the unspent balances will be recognized as
revenue at the expiration of the cards and the respective program. The Company records all revenue on a gross basis since it is the primary
obligor and establishes the price in the contract arrangement with its customers. The Company is currently under no obligation for refunding
any fees, and the Company does not currently have any obligations for disputed claim settlements. Given the nature of the Company’s
services and contracts, it has no contract assets.

Cost of revenues is comprised of transaction processing
fees, data connectivity and data center expenses, network fees, bank fees, card production and postage costs, customer service, program
management, application integration setup, and sales and commission expense.

Operating Leases – The Company determines
if a contract is or contains a leasing element at contract inception or the date in which a modification of an existing contract occurs.
In order for a contract to be considered a lease, the contract must transfer the right to control the use of an identified asset for a
period of time in exchange for consideration. Control is determined to have occurred if the lessee has the right to (i) obtain substantially
all of the economic benefits from the use of the identified asset throughout the period of use and (ii) direct the use of the identified
asset.

In determining the present value of lease payments
at lease commencement date, the Company utilizes its incremental borrowing rate based on the information available, unless the rate implicit
in the lease is readily determinable. The liability for operating leases is based on the present value of future lease payments. Operating
lease expenses are recorded as rent expense, which is included within selling, general and administrative expenses, within the consolidated
statements of operations and presented as operating cash outflows within the consolidated statements of cash flows.

Leases with an initial term of 12 months or less
are not recorded on the balance sheet, with lease expense for these leases recognized on a straight-line basis over the lease term.

Stock-Based Compensation – The Company
recognizes compensation expense for all restricted stock awards and stock options. The fair value of restricted stock awards is measured
using the grant date trading price of our stock. The fair value of stock options is estimated at the grant date using the Black-Scholes
option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service
period. The Company has elected to recognize compensation expense for all options with graded vesting on a straight-line basis over the
vesting period of the entire option. The determination of fair value using the Black-Scholes pricing model is affected by the Company’s
stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility and
the risk-free interest rate.