CoreCard(CCRD) - 2019 Q3 - Quarterly Report

Part I Financial Information Financial Statements The company's financial statements for the period ended September 30, 2019, show significant growth in revenue and net income compared to the prior year, driven by both services and product sales, with total assets and stockholders' equity increasing, reflecting strong operational performance and cash generation, and including the adoption of a new lease accounting standard Consolidated Balance Sheets As of September 30, 2019, the company's total assets grew to $39.5 million from $29.3 million at year-end 2018, primarily due to an increase in cash and accounts receivable, while total liabilities rose to $6.1 million and stockholders' equity increased to $33.5 million, up from $25.9 million Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 (Unaudited) | Dec 31, 2018 (Audited) | | :--- | :--- | :--- | | Total Assets | $39,530 | $29,304 | | Cash | $23,676 | $18,919 | | Accounts receivable, net | $6,059 | $3,731 | | Total Liabilities | $6,077 | $3,383 | | Total current liabilities | $5,527 | $3,272 | | Total Stockholders' Equity | $33,453 | $25,921 | Consolidated Statements of Operations For the third quarter of 2019, total net revenue increased 76% year-over-year to $9.5 million, and net income grew 66% to $3.1 million, while for the nine-month period, revenue rose 71% to $24.0 million, with net income nearly doubling to $7.3 million Q3 2019 vs Q3 2018 Performance (in thousands, except EPS) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | YoY Change | | :--- | :--- | :--- | :--- | | Total Net Revenue | $9,522 | $5,415 | +75.8% | | Income from Operations | $4,200 | $1,736 | +142.0% | | Net Income | $3,092 | $1,866 | +65.7% | | Diluted EPS | $0.34 | $0.21 | +61.9% | Nine Months 2019 vs 2018 Performance (in thousands, except EPS) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | YoY Change | | :--- | :--- | :--- | :--- | | Total Net Revenue | $24,000 | $14,046 | +70.9% | | Income from Operations | $9,403 | $3,874 | +142.7% | | Net Income | $7,272 | $3,817 | +90.5% | | Diluted EPS | $0.81 | $0.43 | +88.4% | Consolidated Statements of Cash Flows For the nine months ended September 30, 2019, net cash provided by operating activities increased to $7.7 million from $5.0 million in the prior-year period, driven by higher net income, while net cash used in investing activities increased to $3.1 million due to higher purchases of property and equipment and advances of notes receivable Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,679 | $4,986 | | Net cash used for investing activities | ($3,053) | ($1,698) | | Net cash provided by financing activities | $163 | $34 | | Net increase in cash | $4,757 | $3,326 | Notes to Consolidated Financial Statements Key notes to the financial statements detail the adoption of a new lease accounting standard (ASU 2016-02), a breakdown of revenue by type and geography, significant customer concentration, investments in FinTech companies, and a pending securities class action lawsuit - The company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, which resulted in the recognition of a lease obligation and a right-of-use asset of approximately $1,258,000[25] Revenue Disaggregation for Nine Months Ended Sep 30 (in thousands) | Revenue Type | 2019 | 2018 | | :--- | :--- | :--- | | License | $3,725 | $289 | | Professional services | $13,206 | $8,050 | | Processing and maintenance | $5,770 | $4,762 | | Third party | $1,299 | $945 | | Total | $24,000 | $14,046 | Customer Concentration (% of Consolidated Revenue) | Customer | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Customer A | 69.8% | 37.5% | 58.1% | 35.3% | | Customer B | 4.3% | 17.0% | 11.7% | 17.4% | - In June 2019, the company converted a loan agreement and promissory notes into a 40% equity ownership in a privately-held FinTech company, which is now accounted for using the equity method[31][33] - The company is facing a securities class action lawsuit filed in July 2019, alleging misleading statements in press releases and SEC filings. The company disputes the claims and intends to defend the matter vigorously[50] Management's Discussion and Analysis (MD&A) Management attributes the significant revenue growth in 2019 to the expansion of its processing services business and, most notably, to a large new license customer added in 2018, which accounted for 58% of revenue in the first nine months of 2019, leading to improved margins from economies of scale in its processing business, while operating expenses increased due to higher R&D and G&A costs to support growth, and the company maintains a strong liquidity position with a cash balance of $23.7 million Overview The company's operations, primarily through its CoreCard Software subsidiary, provide technology solutions and processing services to the FinTech industry, with growth driven by both processing services and software licensing, and results significantly impacted by a single large customer added in 2018 that represented 58% of consolidated revenues for the first nine months of 2019 - The company's business is focused on providing technology solutions and processing services to the FinTech industry through its CoreCard Software subsidiary[59][60] - A single large new customer added in 2018 accounted for 58% of consolidated revenues for the first nine months of 2019, highlighting significant customer concentration[61] Results of Operations Total revenue for Q3 and the first nine months of 2019 increased by 76% and 71% respectively, driven by a large new license customer and growth in processing, maintenance, and professional services, while cost of revenue as a percentage of total revenue decreased due to high-margin product sales, and operating expenses rose from increased R&D personnel costs and higher G&A expenses related to legal and advisory fees - Total revenue increased 76% in Q3 2019 and 71% in the first nine months of 2019 compared to the same periods in 2018[67] - Services revenue grew 38% in Q3 and 47% in the nine-month period, while product (license) revenue saw a substantial increase, primarily due to the new large customer[68][69] - Cost of revenue as a percentage of total revenue decreased from 43% in 2018 to 32% (Q3) and 35% (nine months) in 2019, driven by increased high-margin product sales and economies of scale in processing[70] - Operating expenses increased due to higher R&D payroll for offshore technical personnel and increased G&A expenses from legal, advisory, and personnel costs[72] Liquidity and Capital Resources The company's cash balance increased to $23.7 million at September 30, 2019, from $18.9 million at year-end 2018, with cash from operations at $7.7 million for the nine-month period, and management expects existing cash and customer payments to be sufficient for future operations and capital needs despite using $1.55 million for computer equipment and advancing $1.5 million on a promissory note and loan agreement - Cash balance increased by $4.8 million to $23.7 million as of September 30, 2019[75] - Cash provided by operations for the first nine months of 2019 was $7.7 million, up from $5.0 million in the prior year period[75] - The company invested $1.55 million in computer equipment and advanced $1.5 million via a promissory note and loan agreement during the first nine months of 2019[75][76] Controls and Procedures Based on an evaluation conducted by management, including the CEO and CFO, the company concluded that its disclosure controls and procedures were effective as of the end of the period covered by the report, with no significant changes to internal controls identified during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures are effective as of September 30, 2019[83] Part II Other Information Legal Proceedings The company is defending a securities class action lawsuit filed on July 9, 2019, where the complaint alleges that certain press releases and SEC filings were misleading due to failure to disclose alleged related party transactions and other matters, but the company disputes these claims and intends to defend itself vigorously - A securities class action complaint was filed against the company, its executive officers, and board members on July 9, 2019[85] - The lawsuit alleges misleading statements in public filings related to revenue recognition from alleged related party transactions and other disclosures concerning a former director[85] - The company disputes the claims and intends to defend the matter vigorously. No liability has been recorded as of September 30, 2019[50][85] Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, certifications by the CEO and CFO as required by the Sarbanes-Oxley Act, and XBRL data files - Exhibits filed with the report include the Amended and Restated Articles of Incorporation, Bylaws, CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906, and XBRL interactive data files[86]