Executive Summary
Our consolidated operations consist of our
We provide technology solutions and processing services to the financial services market, commonly referred to as the FinTech industry. We derive our product revenue from licensing our comprehensive suite of financial transaction management software to accounts receivable businesses, financial institutions, retailers and processors to manage their credit and debit cards, prepaid cards, private label cards, fleet cards, loyalty programs, and accounts receivable and loan transactions. Our service revenue consists of fees for software maintenance and support for licensed software products, fees for processing services that we provide to companies that outsource their financial transaction processing functions to us, and professional services primarily for software customizations provided to both license and processing customers.
Our results vary in part depending on the size and number of software licenses recognized as well as the value and number of professional services contracts recognized in a particular period. As we continue to grow our Processing Services business, we continue to gain economies of scale on the investment we have made in the infrastructure, resources, processes and software features developed over the past number of years to support this growing side of our business. We are adding new processing customers at a faster pace than we are adding new license customers, resulting in steady growth in the processing revenue stream. However, we are also experiencing growth in revenue from license customers due to the addition of a large new customer in 2018, referred to as "Customer A" in the Notes to Consolidated Financial Statements. In total, this customer represented 69 percent and 60 percent of our consolidated revenues for 2020 and 2019, respectively. We expect future professional services, maintenance and license revenue from this customer in 2021 and future years; however, the amount and timing will be dependent on various factors not in our control such as the number of accounts on file and the level of customization needed by the customer. License revenue from this customer, similar to other license arrangements, is tiered based on the number of active accounts on the system. Once the customer achieves each tier level, they receive a perpetual license up to that number of accounts; inactive accounts do not count toward the license tier. The customer receives an unlimited perpetual license at a maximum tier level that allows them to utilize the software for any number of active accounts. They currently use the software for a single institution and additional license fees apply if multiple institutions are added. Support and maintenance fees are charged based on the tier level achieved and increase at new tier levels.
During 2020, we experienced the loss of a large customer due to insolvency,
referred to as "Customer B" in the Notes to Consolidated Financial Statements.
We recognized revenue of
We typically receive revenue based on the number of active accounts on file
rather than transaction volume and therefore the COVID-19 pandemic and related
economic slowdown has had a muted impact on our results. Most of our employees
in
The infrastructure of our multi customer environment is scalable for the future.
A significant portion of our expense is related to personnel, including more
than 500 employees located in
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Our revenue fluctuates from period to period and our results are not necessarily indicative of the results to be expected in future periods. It is difficult to predict the level of consolidated revenue on a quarterly basis for various reasons, including the following:
? Software license revenue in a given period may consist of a relatively small
number of contracts, and contract values can vary considerably depending on the
software product and scope of the license sold. Consequently, even minor delays
in delivery under a software contract, which may be out of our control, could
have a significant and unpredictable impact on the consolidated revenue that we
recognize in a given quarterly or annual period.
? Customers may decide to postpone or cancel a planned implementation of our
software for any number of reasons, which may be unrelated to our software or
contract performance, that may affect the amount, timing and characterization
of our deferred and/or recognized revenue.
? Customers typically require our professional services to modify or enhance
their CoreCard software implementation based on their specific business
strategy and operational requirements, which vary from customer to customer and
period to period.
? The timing of new processing customer implementations is often dependent on
third party approvals or processes which are typically not under our direct
control.
We continue to maintain a strong cash position. We intend to use cash balances
to support the domestic and international operations associated with our
CoreCard business and to expand our operations in the FinTech industry through
financing the growth of CoreCard and, if appropriate opportunities become
available, through acquisitions of businesses in this industry. Additionally, in
Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this Annual Report.
Revenue - Total revenue for the year ended
? Revenue from services was
increase from 2019 revenue of
services, software maintenance and support services, and professional services
were greater in 2020 as compared to 2019 due to an increase in the number of
customers and accounts on file and an increase in the number and value of
professional services contracts completed in 2020. We expect that processing
services will continue to grow as our customer base increases; however, the
time required to implement new customer programs could be delayed due to third
party integration and approval processes and other factors. It is difficult to
predict with accuracy the number and value of professional services contracts
that our customers will require in a given period. Customers typically request
our professional services to modify or enhance their CoreCard software
implementation based on their specific business strategy and operational
requirements, which vary from customer to customer and period to period.
? Revenue from products, which includes software license fees was
2020, compared to
achieving new license tiers in 2020 than in 2019.
Cost of Revenue - Total cost of revenue was 43 percent of total revenue for the
twelve months ended
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Operating Expenses - For the twelve months ended
Investment Income (Loss) - Investment Income (Loss) was a loss of
Other Income, net - Other Income, net was
Income Taxes - We recorded
Liquidity and Capital Resources
Our cash balance at
We used
We do not expect to pay any regular or special dividends in the foreseeable
future. We expect to have sufficient liquidity from cash on hand as well as
projected customer payments to support our operations and capital equipment
purchases in the foreseeable future. Currently we expect to use cash in excess
of what is required for our current operations for opportunities we believe will
expand our FinTech business, as exemplified in transactions described in Notes 3
and 5, although there can be no assurance that appropriate opportunities will
arise. Additionally, in
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our Consolidated Financial Statements which have been prepared in
accordance with accounting principles generally accepted in
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Revenue Recognition - Product revenue consists of fees from software licenses. Service revenue consists of fees for processing services; professional services for software customization, consulting, and training; reimbursable expenses; and software maintenance and customer support.
Our software license arrangements generally fall into one of the following four categories:
? an initial contract with the customer to license certain software modules, to
provide services to get the customer live on the software (such as training and
customization) and to provide post contract support ("PCS") for a specified
period of time thereafter,
? purchase of additional licenses for new modules or for tier upgrades for a
higher volume of licensed accounts after the initial contract,
? other optional standalone contracts, usually performed after the customer is
live on the software, for services such as new interfaces or custom features
requested by the customer, additional training and problem resolution not
covered in annual maintenance contracts, or
? contracts for certain licensed software products that involve an initial fee
plus recurring monthly fees during the contract life.
At contract inception, we assess the products and services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a product or service (or bundle of products or services) that is distinct. A performance obligation is distinct if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. To identify our performance obligations, we consider all of the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. We recognize revenue when or as we satisfy a performance obligation by transferring control of a product or service to a customer. Our revenue recognition policies for each of the situations described above are discussed below.
Our software licenses generally have significant stand-alone functionality to the customer upon delivery and are considered to be functional intellectual property. Additionally, the purpose in granting these software licenses to a customer is typically to provide the customer a right to use our intellectual property. Our software licenses are generally considered distinct performance obligations, and revenue allocated to the software license is typically recognized at a point in time upon delivery of the license. Initial implementation fees do not meet the criteria for separate accounting because the software usually requires significant modification or customization that is essential to its functionality. We recognize revenue related to implementations over the life of the customer once the implementation is complete.
We account for the PCS element contained in the initial contract based on relative standalone selling price, which is annual renewal fees for such services, and PCS is recognized ratably on a straight-line basis over the period specified in the contract as we generally satisfy these performance obligations evenly using a time-elapsed output method over the contract term given there is no discernible pattern of performance. Upon renewal of the PCS contract by the customer, we recognize revenues ratably on a straight-line basis over the period specified in the PCS contract. All of our software customers purchase software maintenance and support contracts and renew such contracts annually.
Certain initial software contracts contain specified future service elements for scheduled completion following the implementation, and related recognition, of the initial license. In these instances, after the initial license recognition, where distinct future performance obligations are identified in the contract and we could reliably measure the completion of each identified performance obligation, we have recognized revenue at the time the individual performance obligation was completed.
Purchases of additional licenses for tier upgrades or additional modules are generally recognized as license revenue in the period in which the purchase is made for perpetual licenses or ratably over the remaining contract term for non-perpetual licenses.
Services provided under standalone contracts that are optional to the customer and are outside of the scope of the initial contract are single element services contracts. These standalone services contracts are not essential to the functionality of the software contained in the initial contract and generally do not include acceptance clauses or refund rights as may be included in the initial software contracts, as described above. Revenues from these services contracts, which are generally performed within a relatively short period of time, are recognized when the services are complete or in some cases as the services are provided. These revenues generally re-occur as contracts are renewed. Payment terms for professional services may be based on an upfront fixed fee with the remainder due upon completion or on a time and materials basis.
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For contracts for licensed software which include an initial fee plus recurring monthly fees for software usage, maintenance and support, we recognize the total fees ratably on a straight-line basis over the estimated life of the contract as services revenue.
Revenues from processing services are typically volume- or activity-based depending on factors such as the number of accounts processed, number of accounts on the system, number of hours of services or computer resources used. For processing services which include an initial fee plus recurring monthly fees for services, we recognize the initial fees ratably on a straight-line basis over the estimated life of the contract as services revenue. The payment terms may include tiered pricing structures with the base tier representing a minimum monthly usage fee. For processing services revenues, we stand ready to provide continuous access to our processing platforms and perform an unspecified quantity of outsourced and transaction-processing services for a specified term or terms. Accordingly, processing services are generally viewed as a stand-ready performance obligation comprised of a series of distinct daily services. We typically satisfy our processing services performance obligations over time as the services are provided.
Technology or service components from third parties are frequently embedded in or combined with our products or service offerings. We are often responsible for billing the client in these arrangements and transmitting the applicable fees to the third party. We determine whether we are responsible for providing the actual product or service as a principal, or for arranging for the solution or service to be provided by the third party as an agent. Judgment is applied to determine whether we are the principal or the agent by evaluating whether we have control of the product or service prior to it being transferred to the customer. The principal versus agent assessment is performed at the performance obligation level. Indicators that we consider in determining if we have control include whether we are primarily responsible for fulfilling the promise to provide the specified product or service to the customer, whether we have inventory risk and discretion in establishing the price the customer ultimately pays for the product or service. Depending upon the level of our contractual responsibilities and obligations for delivering solutions to end customers, we have arrangements where we are the principal and recognize the gross amount billed to the customer and other arrangements where we are the agent and recognize the net amount retained.
Revenue is recorded net of applicable sales tax.
Deferred revenue consists of advance payments by software customers for annual or quarterly PCS, advance payments from customers for software licenses and professional services not yet delivered, and initial implementation payments for processing services or bundled license and support services in multi-year contracts. Deferred revenue is classified as long-term until such time that it becomes likely that the services or products will be provided within 12 months of the balance sheet date.
Valuation of Investments - We hold minority interests in non-publicly traded companies whose values are not readily determinable and are based on management's estimate of realizability of the value of the investment. Future adverse changes in market conditions, poor operating results, lack of progress of the investee company or its inability to raise capital to support its business plan could result in investment losses or an inability to recover the current carrying value of the investment. Our policy with respect to minority interests is to record an impairment charge when we conclude an investment has experienced a decline in value that is other than temporary. At least quarterly, we review our investments to determine any impairment in their carrying value and we write-down any impaired asset at quarter-end to our best estimate of its current realizable value.
We have an equity investment and various loans with a privately held identity
and professional services company with ties to the FinTech industry. A portion
of the company's business has been negatively impacted by the pandemic while
other portions of its business have improved. We evaluate on a continuing basis
whether any impairment indicators are present that would require additional
analysis or write-downs of the investment. While we have not recorded an
impairment related to this investment or determined that an impairment trigger
existed at
We also have an investment with a privately held technology company and program
manager in the FinTech industry. In the first quarter of 2020, due to the
economic downturn resulting from the recent pandemic, we recorded an impairment
charge of
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that are reasonably likely to have a current or future material adverse effect on our financial condition, liquidity or results of operations.
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Factors That May Affect Future Operations
Future operations are subject to risks and uncertainties that may negatively impact our future results of operations or projected cash requirements. It is difficult to predict future quarterly and annual results with certainty.
Among the numerous factors that may affect our consolidated results of operations or financial condition are the following:
? Weakness or instability in the global financial markets could have a negative impact due to potential customers (most of whom perform some type of financial services) delaying decisions to purchase software or initiate processing services. ? Increased federal and state regulations and reluctance by financial institutions to act as sponsor banks for prospective customers could result in losses and additional cash requirements. ? Our largest customer represented 69% of our consolidated revenues for the twelve months endedDecember 31, 2020 . Failure to meet our responsibilities under the related contract could result in breach of contract and loss of the customer and related future revenues. ? Delays in software development projects could cause our customers to postpone implementations or delay payments, which would increase our costs and reduce our revenue and cash. ? We could fail to deliver software products which meet the business and technology requirements of our target markets within a reasonable time frame and at a price point that supports a profitable, sustainable business model. ? Our processing business is impacted, directly or indirectly, by more regulations than our licensed software business. If we fail to provide services that comply with (or allow our customers to comply with) applicable regulations or processing standards, we could be subject to financial or other penalties that could negatively impact our business. ? Software errors or poor quality control may delay product releases, increase our costs, result in non-acceptance of our software by customers or delay revenue recognition. ? We could fail to expand our base of customers as quickly as anticipated, resulting in lower revenue and profits and increased cash needs. ? We could fail to retain key software developers and managers who have accumulated years of know-how in our target markets and company products or fail to attract and train a sufficient number of new software developers and testers to support our product development plans and customer requirements at projected cost levels. ? Increasing and changing government regulations inthe United States and foreign countries related to such issues as data privacy, financial and credit transactions could require changes to our products and services which could increase our costs and could affect our existing customer relationships or prevent us from getting new customers. ? Delays in anticipated customer payments for any reason would increase our cash requirements and could adversely impact our profits. ? Competitive pressures (including pricing, changes in customer requirements and preferences, and competitor product offerings) may cause prospective customers to choose an alternative product solution, resulting in lower revenue and profits (or losses). ? Our future capital needs are uncertain and depend on a number of factors; additional capital may not be available on acceptable terms, if at all. ? Volatility in the markets, including as a result of political instability, civil unrest, war or terrorism, or pandemics or other natural disasters, such as the recent outbreak of coronavirus, could adversely affect future results of operations and could negatively impact the valuation of our investments. ? Other general economic and political conditions could cause customers to delay or cancel purchases.
Recent Accounting Pronouncements - Refer to Note 1 of the Notes to Consolidated Financial Statements.
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