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:

1

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,

2

purchase of additional licenses for new modules or for tier upgrades for a 
higher volume of licensed accounts after the initial contract,

3

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, and

4

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. 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. 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.



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 difficult to determine 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. In the second quarter of 2017, we 
recorded an impairment charge of $90,000 to reduce the carrying value of an 
investee company, a privately-held technology company in the FinTech industry. 
The investee closed on a Series A preferred stock financing resulting in 
substantial dilution to our investment. Subsequently, in the fourth quarter of 
2017, the investee sold its intellectual property and is in process of winding 
down its operations. As a result, we recorded an additional impairment charge 
of $10,000 to fully write-down our minority ownership in the investee company. 
In the third quarter of 2017, we recorded a gain of $372,000, as funds held in 
escrow from a prior investee company sale were released. In the same quarter we 
sold shares in a tender offer for stock of one of our investee companies, a 
privately-held technology company in the Fintech industry, resulting in a gain 
of $1,466,000. In the second quarter of 2018, we recorded an impairment charge 
of $250,000 to reduce the carrying value of an investee company.



Executive Summary



Our consolidated operations consist of our CoreCard Software subsidiary and its 
affiliate companies in Romania and India, 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, 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 our license revenue 
and associated professional services due to the addition of a large new 
customer in 2018. In total, this customer represented 40% of our consolidated 
revenues in 2018. We expect future professional services, maintenance, and 
license revenue from this customer in 2019 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. The infrastructure of our multi customer environment is scalable for 
the future. A significant portion of our expense is related to personnel, 
including approximately 400 employees located in India and Romania. In the 
fourth quarter of 2017, we opened a second office in India, located near 
Mumbai, to enable us to attract the level of talent required for our software 
development and testing. 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 
control.



We continue to maintain a strong cash position. In the latter part of December 
2017, we purchased additional hardware and software for our processing 
environment in anticipation of a contract then being negotiated with a 
potential customer, as noted above, that was signed in October 2018 and we 
believe will result in increased revenue over the next few years. We made 
additional related equipment purchases in early 2018. 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 November 2018, our Board of Directors authorized a share 
repurchase program of $5 million. We did not make any share repurchases in 
2018.



Results of Operations



Revenue – Total revenue for the year ended December 31, 2018 was $20,100,000 
which represents a 119 percent increase over 2017.



?


Revenue from products, which includes software license fees was $1,349,000 in 
2018, compared to $90,000 in 2017, primarily due to revenues recognized in the 
fourth quarter related to a large new license customer, as discussed above.



?


Revenue from services was $18,751,000 in 2018, which represents a 106 percent 
increase from 2017 revenue of $9,089,000. The increase is primarily due to 
higher professional services revenue from a large new customer in 2018, as 
discussed above, and higher professional services revenue from existing 
customers. Additionally, revenue from transaction processing services and 
maintenance support services were higher in 2018 as compared to 2017. 
Processing services benefited from an increase in the number of customers and 
accounts on file while maintenance revenue increased due to additional revenue 
associated with an increase in our license customer base. 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. It is not possible to 
accurately predict the number and value of professional services contracts that 
CoreCard’s 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.





Cost of Revenue – Total cost of revenue was 42 percent of total revenue for the 
twelve months ended December 31, 2018, compared to 49 percent for the twelve 
months ended December 31, 2017. The decrease in cost of revenue as a percentage 
of revenue is primarily driven by increased product sales with low associated 
costs, increased professional services rates for some customers and decreased 
reliance on higher cost third party contractors to supplement our own 
development team. 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. However, we are continuing to 
experience economies of scale in our processing environment and did experience 
a decrease year over year for our cost of financial transaction processing 
services as a percentage of transaction processing services revenue. This may 
be subject to change in the future if new regulations or processing standards 
are implemented causing us to incur additional costs to comply.



Operating Expenses – For the twelve months ended December 31, 2018, total 
operating expenses from consolidated operations were lower than in the 
corresponding period in 2017 primarily as the result of decreased research and 
development expenses. Research and development expenses were $3,353,000 in 2018 
compared to $4,367,000 in 2017, primarily due to re-allocating R&D resources 
from our base product offering development efforts to customizations reflected 
in cost of revenue. In addition, we expanded our hiring capabilities of 
technical resources by opening a second office located near Mumbai, India. 
General and administrative expenses were higher in 2018 than in 2017, due to 
higher legal professional fees associated with the review of a new customer 
contract executed in October. Marketing expenses remain relatively consistent, 
from a total cost standpoint, compared to the prior year. Our client base 
increased in 2018 and 2017 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 2018, we recorded $363,000 of investment losses, 
which was comprised of a $250,000 impairment loss on our minority equity 
ownership in one of our investee companies, a privately held technology company 
and program manager in the FinTech industry, and $113,000 of unrealized losses 
on marketable securities. In 2017, we recorded $1,738,000 of investment income, 
which was comprised of a gain of $1,466,000 on the sale of our investment in a 
privately-held technology company in the third quarter of 2017, and the gain of 
$372,000 on a final payment after the escrow period on a prior minority 
investment sale, as described in more detail in Note 4 to the Consolidated 
Financial Statements. This was offset in part by an impairment charge of 
$100,000 in 2017 to write down the carrying value of another investee company, 
as explained in more detail in Note 4 to the Consolidated Financial Statements.



Other Income, net – Other income, net was $469,000 in 2018 and $166,000 in 
2017. The increase results from one-time interest income of $171,000 related to 
finance charges on the sale of equipment purchased for a new license customer 
as well as higher interest rates on higher cash balances.



Income Taxes – We recorded $284,000 in 2018 for state income tax expense, 
offset by a deferred tax benefit of $280,000 for net tax expense of $4,000. The 
deferred tax benefit primarily relates to the release of a valuation allowance 
on our deferred tax assets due to utilization of operating loss carryforwards 
and expected future profitability. We expect our future effective tax rate to 
be within the range of 25-27%.



Liquidity and Capital Resources



Our cash balance at December 31, 2018 was $18,919,000 compared to $14,024,000 
at December 31, 2017. During the year ended December 31, 2018, cash provided by 
operations was $6,656,000 compared to cash used in operations of $2,467,000 for 
the year ended December 31, 2017. The increase is primarily due to higher 
operating income and the receipt, net of equipment purchases, of approximately 
$1,745,000, plus associated finance carrying charges, for processing equipment, 
software and related licenses purchased in 2018 and 2017 on behalf of a new 
license customer. These increases were partially offset by higher net working 
capital balances, primarily higher accounts receivable.



We advanced $1,035,000 on various Promissory Notes, as described in more detail 
in Note 6 to the Consolidated Financial Statements. We used $865,000 of cash to 
acquire computer equipment and related software primarily to enhance our 
existing processing environment in the U.S. as well for computer equipment for 
the technical resources added in our India office during 2018.



Although we paid a special cash dividend to shareholders in 2016, 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 4 and 
6, although there can be no assurance that appropriate opportunities will 
arise. Additionally, in November 2018, our Board of Directors authorized a 
share repurchase program of $5 million. We did not make any share repurchases 
in 2018.



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.



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.

?


In 2018, we added a large new license customer that represented 40% of our 
consolidated revenues for the twelve months ended December 31, 2018. 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 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.

?


Other general economic and political conditions could cause customers to delay 
or cancel purchases.