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CORECARD CORPORATION

(CCRD)
  Report
Delayed Nyse  -  04:00 2022-09-30 pm EDT
21.77 USD   -1.54%
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CORECARD CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/03/2022 | 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.

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 India Pvt. Ltd. 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 79% and 71% of our consolidated revenues in the first six months 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 922 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 are hiring 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.




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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 an additional $10 million for our share repurchase program, all of which has been utilized. We made share repurchases of $1.3 million for the six months ended 2022, and $7.8 million in share repurchases in the six month period ended June 30, 2021. In May 2022, the Board authorized an additional $20 million for our share repurchase program. We have approximately $20 million of authorized share repurchases remaining at June 30, 2022.



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, 2022 was $15,206,000 and $39,490,000, respectively, which represents increases of 14 percent and 77 percent compared to the respective periods in 2021.

? Revenue from services was $13,412,000 and $25,207,000 in the three and six

month periods ended June 30, 2022, respectively, which represents increases of

21 percent and 26 percent compared to the respective periods in 2021. Revenue

from transaction processing services, software maintenance and support

services, and professional services were greater in the second quarter and

first six months of 2022 as compared to the second quarter and first six months

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 second quarter and first six months 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 $1,794,000

and $14,283,000 in the three and six month periods ended June 30, 2022,

respectively, compared to $2,300,000 in both the respective comparable periods

of 2021. For the six month period ended 2022, 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. License revenue decreased in the second quarter of 2022 as compared

to the first quarter due to lower per account fees at higher tiers.





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Cost of Revenue - Total cost of revenue was 52 percent and 39 percent of total revenue in the three and six month periods ended June 30, 2022, respectively, compared to 42 percent and 45 percent in the corresponding periods of 2021. For the three month period ended June 30, 2022, the increase in cost of revenue as a percentage of revenue is primarily driven by lower license revenue and investments made in our processing infrastructure in 2021 and 2022 including hardware and software purchases and additional space in our data centers. For the six month period ended June 30, 2022, the decrease as a percentage of revenue is primarily driven by an increase in license revenue, partially offset by investments in our infrastructure. 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 and six month periods ended June 30, 2022, total operating expenses from consolidated operations decreased 3 percent and increased 28 percent compared to the corresponding periods in 2021, respectively. Research and development expenses were 7 percent lower and 22 percent higher in three and six month periods in 2022, respectively, as compared to the same periods in 2021. In the three month period ended June 30, 2022, research and development expenses were lower mainly due to lower bonus accruals partially offset by an increase in headcount. In the six month period ended June 30, 2022, research and development expenses were higher mainly due to hiring of additional offshore technical personnel and higher bonus accruals. Additionally, we hired onshore and offshore technical personnel to work on the development of an updated platform. General and administrative expenses were 1 percent and 39 percent higher in the three and six month periods ended June 30, 2022. The increase for the six month period primarily relates to higher bonus accruals in 2022. Marketing expenses increased 85 percent and 82 percent for the three and six month periods in 2022, respectively, as compared to the same periods in 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 three and six months ended June 30, 2022, we recorded $260,000 and $157,000 of investment income, respectively, compared to investment losses of $134,000 and $267,000 for the three and six months ended June 30, 2021, respectively, related to our equity method investments discussed further in Note 4.

Other Income (Loss) - In the three and six months ended June 30, 2022, we recorded income of $29,000 and $66,000, respectively, compared to income of $81,000 and $156,000 for the comparable 2021 periods. The decrease results from lower interest rates and lower cash balances in the 2022 period.

Income Taxes - Our effective tax rates for the three and six months ended June 30, 2022 were 23.9 percent and 25.4 percent compared to effective tax rates of 26.3 percent and 26.2 percent for the respective periods in 2021.

Liquidity and Capital Resources

Our cash balance at June 30, 2022, was $21,516,000 compared to $29,244,000 at December 31, 2021. During the six months ended June 30, 2022, cash provided by operations was $1,358,000 compared to cash provided by operations of $405,000 for the six months ended June 30, 2021. The increase is primarily due to higher net income, decrease in cash held for program management funding, higher depreciation, and higher accounts payable, partially offset by higher accounts receivable and deferred revenue balances. The increase in accounts receivable relates to timing of invoices and payments primarily from our largest customer. There are no material disputes related to the outstanding balances, some of which is past due at June 30, 2022, however we have concluded the entire balance is collectible.

During the six months ended June 30, 2022, we used $5,760,000 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 an additional $10 million for our share repurchase program, all of which million has been utilized. In May 2022, the Board authorized an additional $20 million for share repurchases. We made share repurchases of $3.7 million for the six months ended 2022, and $7.8 million of share repurchases in the six month period ended June 30, 2021. We have approximately $20 million of authorized share repurchases remaining at June 30, 2022.




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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 six month period ended June 30, 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 79% of our consolidated revenues for the six
    months ended June 30, 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.


  ? 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.




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  ? 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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