CORECARD CORPORATION In addition to historical information, this Form 10-Q may contain forward-looking statements relating to ISC. All statements, trend analyses and other information relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend", and other similar expressions, constitute forward-looking statements. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties including those factors described below under "Factors That May Affect Future Operations", and that actual results may differ materially from those contemplated by such forward-looking statements. ISC undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.
For purposes of this discussion and analysis, we are assuming and relying upon
the reader's familiarity with the information contained in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations, in the
Form 10- K for the year ended
Overview
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, buy now pay later programs, 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 also receive license revenue and are experiencing growth in our professional services revenue due to the addition of Goldman Sachs Group, Inc. as a customer in 2018, referred to as "Customer A" in the Notes to Consolidated Financial Statements. In total, this customer represented 71% and 67% of our consolidated revenues in the first nine months of 2021 and 2020, respectively. We expect future professional services, maintenance, and license revenue from this customer in 2022 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, which we expect to occur in the fourth quarter of 2021, or possibly the first quarter of 2022. Support and maintenance fees are charged based on the tier level achieved and increase at new tier levels.
In 2020, we experienced the loss of a large customer due to insolvency. In
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
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The infrastructure of our multi customer environment is scalable for the future.
A significant portion of our expense is related to personnel, including
approximately 700 employees located in
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 or annual basis for a number of 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, but which 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. In
Results of Operations
The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this quarterly report.
Revenue - Total revenue in the three and nine month periods ended
? Revenue from services was
month periods ended
increases of 28 percent and 26 percent compared to the respective periods in
2020. Revenue from transaction processing services, software maintenance and
support services, and professional services were greater in the third quarter
and first nine months of 2021 as compared to the third quarter and first nine
months of 2020 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 during the three and nine months ended 2021. 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.
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? Revenue from products, which is primarily software license fees, was
and
2020, respectively, compared to
of 2020. The increase results from more customers achieving new license tiers
in the third quarter and first nine months of 2021.
Cost of Revenue - Total cost of revenue was 47 percent and 46 percent of total
revenue in the three and nine month periods ended
Operating Expenses - In the three month period ended
Investment Income (Loss) - In the three and nine months ended
Other Income (Loss) - In the three and nine months ended
Income Taxes - Our effective tax rates for the three and nine months ended
Liquidity and Capital Resources
Our cash balance at
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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 share repurchases and opportunities we
believe will expand our FinTech business, as exemplified in transactions
described in Notes 3 and 4, although there can be no assurance that appropriate
opportunities will arise. In
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 effect on our financial condition, liquidity or results of operations.
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
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 71% of our consolidated revenues for the nine
months ended September 30, 2021 . In the event of material failures to meet
contract obligations related to the services provided, there is risk of breach
of contract and loss of the customer and related future revenues.
Additionally, loss of the customer and related future revenues could result if
they choose an alternative service provider or decide to exit the business or
service line that falls under the services that we provide for them.
? 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.
? A security breach in our platform could expose confidential information of our
customers' account holders, hackers could seize our digital infrastructure and
hold it for ransom or other cyber risk events could occur and create material
losses in excess of our insurance coverage.
? 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.
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? 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 in the 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.© Edgar Online, source
