CORECARD CORPORATION

(CCRD)
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CORECARD CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/05/2022 | 07:33am EDT

In addition to historical information, this Form 10-Q may contain forward-looking statements relating to CoreCard. 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. CoreCard 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 December 31, 2021 as filed with the Securities and Exchange Commission.



Overview


CoreCard Corporation, a Georgia corporation, and its predecessor companies have operated since 1973 and its securities have been publicly traded since 1980. In this report, sometimes we use the terms "Company", "us", "ours", "we", "Registrant" and similar words to refer to CoreCard Corporation and subsidiaries. Our executive offices are located in Norcross, Georgia and our website is www.corecard.com.




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On December 15, 2021, we changed our name to CoreCard Corporation from Intelligent Systems Corporation. Our corporate structure did not change nor did our financial reporting. See our 8-K dated December 15, 2021, for more information. We are primarily engaged in the business of providing technology solutions and processing services to the financial technology and services market, commonly referred to as the FinTech industry. Our operations are conducted through our affiliate companies located in Romania, India, United Arab Emirates and Colombia, as well as the corporate office in Norcross, Georgia which provides significant administrative, human resources and executive management support. Corecard's foreign subsidiaries are CoreCard SRL in Romania, CoreCard Software in India, CoreCard Colombia SAS in Colombia and Corecard Software DMCC in United Arab Emirates, that perform software development and testing as well as processing operations support.

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 84% and 71% of our consolidated revenues in the first quarters of 2022 and 2021, respectively. We expect future professional services, maintenance, and license revenue from this customer for the remainder of 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 previously used the software for a single institution. In the first quarter of 2022 they added an additional customer, resulting in additional one-time license fees. Support and maintenance fees are charged based on the tier level achieved and increase at new tier levels.

The infrastructure of our multi customer environment is scalable for the future. A significant portion of our expense is related to personnel, including approximately 850 employees located in India, Romania, United Arab Emirates and Colombia. In October 2020, we opened a new office in Dubai, United Arab Emirates to support CoreCard's expansion of processing services into new markets in the Asia Pacific, Middle East, Africa and European regions. In October 2021, we opened a new location in Bogotá, Colombia where we expect to hire technical personnel to support existing customers and continued growth. 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. 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 April 2021, the Board authorized $10 million for our share repurchase program, of which $8.7 million has been utilized. We made share repurchases of $2.3 million for the three months ended 2022, and $2.7 million in share repurchases in the three month period ended March 31, 2021. We have $1.3 million of authorized share repurchases remaining at March 31, 2022. In May 2022, the Board authorized an additional $20 million for our share repurchase program.




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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-month period ended March 31, 2022 was $24,284,000 which represents a 172% percent increase over the first quarter of 2021.

? Revenue from services was $11,795,000 in the first quarter of 2022 compared to

$8,912,000 in the first quarter of 2021. Revenue from transaction processing

services, software maintenance and support services, and professional services

were greater in the first quarter of 2022 as compared to the first quarter of

2021 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 first quarter of 2022. 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 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

$12,489,000 in the three-month period ended March 31, 2022, compared to $0 in

the comparable period in 2021. The increase results from our largest customer

adding a new institution to our platform in the first quarter of 2022,

resulting in one-time license fees, as discussed above, and multiple new tiers

due to the additional active accounts added from a conversion completed in the

first quarter of 2022 and account growth from existing customers.

Cost of Revenue - Total cost of revenue was 31 percent and 50 percent of total revenue in the three-month periods ended March 31, 2022 and 2021, respectively. The decrease in cost of revenue as a percentage of revenue is primarily driven by the increase in license revenue, partially offset by higher costs for professional services, continued infrastructure investments and higher costs related to new customer implementations. Total cost of revenue was $7,456,000 and $4,429,000 in the periods ended March 31, 2022 and 2021, respectively. 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 2021 and 2022 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 comply.

Operating Expenses - In the three-month period ended March 31, 2022, total operating expenses from consolidated operations were greater than in the corresponding period in 2021 primarily due to increased research and development expenses and general and administrative expenses. Research and development expenses were 58% percent higher in 2022 as compared to 2021, mainly due to increased payroll related to hiring of additional offshore technical personnel and higher bonus accruals. Additionally, we hired onshore technical personnel to work on the development of an updated platform. General and administrative expenses were higher in 2022 than in 2021, primarily due to bonus accruals in the current period. Marketing expenses increased 78% in 2022 as compared to 2021. 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 quarter ended March 31, 2022, we recorded $103,000 of investment losses compared to investment losses of $133,000 for the quarter ended March 31, 2021. We did not record any impairments in 2022 or 2021.

Other Income, net - In the quarter ended March 31, 2022, we recorded $37,000 in other income compared to $75,000 for the quarter ended March 31, 2021. The decrease results from lower interest income due to lower interest rates and lower cash balances.

Income Taxes - Our effective tax rate for the quarter ended March 31, 2022, was 25.8% compared to an effective tax rate of 26.1% for the quarter ended March 31, 2021.




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Liquidity and Capital Resources

Our cash balance at March 31, 2022 was $24,544,000 compared to $29,244,000 at December 31, 2021. During the quarter ended March 31, 2022, cash provided by operations was $185,000 compared to cash used for operations of $2,326,000 for the quarter ended March 31, 2021. The increase is primarily due to higher net income, higher income taxes payable, higher accounts payable and accrued payroll balances, partially offset by higher accounts receivable and prepaid expense balances. In addition, we advanced $550,000 on Promissory Notes for the three months ended March 31, 2021, which is described in more detail in Note 3 to the Consolidated Financial Statements.

During the quarter ended March 31, 2022, we used $2,737,000 of cash to acquire computer equipment primarily for the technical resources added in our India office and continued investments in our existing processing environment in the U.S.

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 4, although there can be no assurance that appropriate opportunities will arise. In April 2021, the Board authorized $10 million for our share repurchase program, of which $8.7 million has been utilized. We made share repurchases of $2.3 million in the first quarter of 2022, and we made $2.7 million in share repurchases in the first quarter of 2021. At March 31, 2022, approximately $1,341,000 was authorized for future repurchases of our common stock. In May 2022, the Board authorized an additional $20 million for our share repurchase program.

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, 2021. 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 2021. During the three-month period ended March 31, 2022, 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:

? Our largest customer represented 84% of our consolidated revenues for the three

months ended March 31, 2022. 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 or a reduction in revenues

could result if they or their customers choose an alternative service provider,

build an in-house solution, or decide to exit the business or service line that

falls under the services that we provide for them.

? 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.
? 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.





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? 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. ? 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 Glimpses

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