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",
and "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
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 December 31, 2020 as filed with the Securities and
Our consolidated operations consist of our CoreCard Software subsidiary and its
affiliate companies in Romania, India and the United Arab Emirates as well as
the corporate office which provides significant administrative, human resources
and executive management support to CoreCard.
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
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
65% of our consolidated revenues in the first six months of 2021 and 2020,
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, which we
expect to occur in the second half of 2021. 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
October 2020, we opened offices in Dubai and Chennai and hired some of the
insolvent customer's employees. In April 2021, we completed an agreement to
purchase computer hardware and customer intangible assets and collected
previously unrecognized accounts receivable resulting in revenue of $0.6 million
for the quarter ended June 30, 2021. We have collected and settled all
outstanding receivables from this customer, and we do not anticipate receiving
additional revenue from them in the future. In the second quarter of 2021, we
converted one of their customers to our processing platform. We expect revenue
for the remainder of 2021 and future years from servicing this new customer and
adding other new customers in the region.
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 India have been working remotely throughout the pandemic which has primarily
impacted our ability to hire and train new employees. We have been able to
maintain key functions and business continuity while delivering growth in our
professional services revenue; however, the hiring and training constraints
could impact future growth in our professional services revenue. Additionally,
with the recent increase in severity of the pandemic in India, we could
experience operational disruptions or service delays which could impact the
amount and timing of revenues for the remainder of the year.
The infrastructure of our multi customer environment is scalable for the future.
A significant portion of our expense is related to personnel, including
approximately 610 employees located in India, Romania and Dubai. In October
2020, we added new locations in Dubai, United Arab Emirates and Chennai, India
to expand our international capabilities. Our ability to hire and train
employees on our processes and software impacts our ability to onboard new
customers and deliver professional services for software customizations. In
addition, we have certain corporate office expenses associated with being a
public company that impact our operating results.
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
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 November
2018, our Board of Directors authorized a share repurchase program of $5
million, all of which has been utilized. In April 2021, the Board authorized an
additional $10 million for our share repurchase program, of which $4.4 million
has been utilized. We made share repurchases of $7.8 million for the six months
ended 2021, and no share repurchases in the six month period ended June 30,
2020. We have $5.6 million of authorized share repurchases remaining at June 30,
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 quarterly report.
Revenue - Total revenue in the three and six month periods ended June 30, 2021
was $13,355,000 and $22,267,000, respectively, which represents increases of 66
percent and 40 percent compared to the respective periods in 2020.
? Revenue from services was $11,055,000 and $19,967,000 in the three and six
month periods ended June 30, 2021, respectively, which represents increases of
37 percent and 25 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 second quarter and
first six months of 2021 as compared to the second quarter and first six 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 second quarter and first six months of 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 or due to disruptions in
India caused by the recent pandemic. 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 is primarily software license fees, was $2,300,000
in both the three and six month periods, ended June 30, 2021, compared to $0 in
both the respective comparable periods of 2020. The increase results from our
largest customer achieving a new license tier in the second quarter of 2021.
Cost of Revenue - Total cost of revenue was 42 percent and 45 percent of total
revenue in the three and six month periods ended June 30, 2021, respectively,
compared to 46 percent and 45 percent in the corresponding periods of 2020. Cost
of revenue includes costs to provide annual maintenance and support services to
our installed base of licensed customers, costs to provide professional
services, and costs to provide our financial transaction processing services.
The cost and gross margins on such revenues can vary considerably from period to
period depending on the customer mix, customer requirements and project
complexity as well as the mix of our U.S. and offshore employees working on the
various aspects of services provided. In addition, we continue to devote the
resources necessary to support our growing processing business, including direct
costs for regulatory compliance, infrastructure, network certifications, and
customer support. Investments in our infrastructure in 2020 and 2021 are in
anticipation of adding customers in future periods. As such, we will not
experience economies of scale unless we add additional customers, as
anticipated. This may be subject to change in the future if new regulations or
processing standards are implemented causing us to incur additional costs to
Operating Expenses - In the three and six month periods ended June 30, 2021,
total operating expenses from consolidated operations were higher than in the
corresponding period in 2020 primarily due to higher research and development
costs and higher general and administrative expenses. Research and development
expenses were 188 percent and 159 percent higher in three and six month periods
in 2021, respectively, as compared to the same periods in 2020. In the three and
six month periods ended June 30, 2021, research and development expenses were
higher mainly due to payroll for additional offshore technical personnel and
hardship bonus payments related to the pandemic's impact on our offshore
employees. Additionally, we hired onshore technical personnel to work on the
development of an updated platform. General and administrative expenses were 76
percent and 20 percent higher in the three and six month periods ended June 30,
2021, respectively, due to bonus accruals in the current period as well as a
stock grant to the board in the second quarter of 2021 that was similarly
granted in the third quarter in 2020. Marketing expenses increased 48 percent
and 32 percent for the three and six month periods in 2021, respectively, as
compared to the same periods in 2020. Our client base continues to increase with
minimal marketing efforts as we continue to have prospects contact us via online
searches; however, we will continue to re-evaluate our marketing expenditures as
needed to competitively position the Processing Services business.
Investment Income (Loss) - In the three and six months ended June 30, 2021, we
recorded $134,000 and $267,000 of investment losses, respectively, compared to
investment losses of $95,000 and $1,145,000 for the three and six months ended
June 30, 2020, respectively. The 2020 investment losses primarily relate to
first quarter 2020 impairment charges on investments resulting from the economic
downturn caused by the recent pandemic and losses on equity method investments.
We did not record any impairments in 2021.
Other Income (Loss) - In the three and six months ended June 30, 2021, we
recorded income of $81,000 and $156,000, respectively, compared to income of
$117,000 and $253,000 for the comparable 2020 periods. The decrease results from
lower interest rates and lower cash balances in the 2021 period.
Income Taxes - Our effective tax rates for the three and six months ended June
30, 2021 were 26.3 percent and 26.2 percent compared to effective tax rates of
19.3 percent and 22.5 percent for the respective periods in 2020.
Liquidity and Capital Resources
Our cash balance at June 30, 2021, was $26,210,000 compared to $37,956,000 at
December 31, 2020. During the six months ended June 30, 2021, cash provided by
operations was $405,000 compared to cash provided by operations of $9,714,000
for the six months ended June 30, 2020. The decrease is primarily due to lower
deferred revenue balances, higher accounts receivable balances and a decrease in
cash held for program management funding, partially offset by higher net income
and higher depreciation. In addition, during the second quarter of 2021, we
invested $1,000,000 in a privately held supply chain financing company which is
described in more detail in Note 4 to the Consolidated Financial Statements. We
used $2,612,000 of cash to acquire computer equipment primarily for continued
investments in our existing processing environment in the U.S and technical
resources added in our India office.
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 November 2018, our Board of Directors authorized a
share repurchase program of $5 million, all of which has been utilized. In April
2021, the Board authorized an additional $10 million for our share repurchase
program, of which $4.4 million has been utilized. We made share repurchases of
$7.8 million for the six months ended 2021, and no share repurchases in the six
month period ended June 30, 2020. We have $5.6 million of authorized share
repurchases remaining at June 30, 2021.
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 the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets, liabilities, revenues and
expenses. We consider certain accounting policies related to revenue recognition
and valuation of investments to be critical policies due to the estimation
processes involved in each. Management discusses its estimates and judgments
with the Audit Committee of the Board of Directors. For a detailed description
on the application of these and other accounting policies, see Note 1 to the
Consolidated Financial Statements contained in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2020. Reference is also made to the
discussion of the application of these critical accounting policies and
estimates contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for 2020.
During the six month period ended June 30, 2021, there were no significant or
material changes in the application of critical accounting policies.
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
? 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 six
months ended June 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
? 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 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.
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