CoreCard(CCRD) - 2020 Q4 - Annual Report

Part I Business Intelligent Systems Corporation, through CoreCard Software, Inc., provides FinTech solutions and processing services for card and loan management, operating globally with customer concentration - The company's primary business is providing technology solutions and processing services to the FinTech industry via CoreCard Software, Inc.[14] - CoreCard's software manages diverse financial products including credit/debit, prepaid, private label, fleet cards, and loyalty programs[16][17] - Solutions are offered via software licensing for in-house use and outsourced processing services, with a de-emphasis on the licensing option[22][23] - A single new license customer from 2018 accounted for 69% of consolidated revenues in 2020, indicating significant customer concentration[25] - Over 500 employees in offshore operations in India and Romania support software development, testing, and operations[35] Products and Services CoreCard's CoreENGINE™ platform offers scalable software for diverse card and loan accounts, supporting a unique outsourced-to-in-house licensing model with certified infrastructure - CoreCard's software platform includes modules such as CoreENGINE™, CoreISSUE™, CoreFraud™, and CoreCOLLECT™ for comprehensive card and loan account management[19][29] - A unique transition path allows customers to migrate from CoreCard's processing services to an in-house licensed software model[22][28] - CoreCard invested in Processing Services infrastructure, achieving PCI compliance and certifications from Discover, MasterCard, Visa, Star, and Pulse across multiple secure data centers[24] Revenue and Market Revenue is generated from licenses, services, maintenance, and processing fees, with unpredictable timing due to long sales cycles and third-party dependencies, primarily targeting the US market - Revenue streams encompass software license fees, implementation and customization services, annual maintenance, and monthly processing fees[31] - Revenue recognition is unpredictable due to long implementation cycles and third-party dependency delays beyond CoreCard's control[31] - The business is not seasonal, though a minor revenue increase may occur from higher end-of-year spending patterns[33] Unresolved Staff Comments The company reports no unresolved staff comments - No unresolved staff comments are reported[39] Properties The company operates from leased offices in Norcross, GA, and Romania, owns a facility in Bhopal, India, and leases additional Indian spaces, with plans for further expansion - The company leases its primary US office in Norcross, GA, owns a facility in Bhopal, India, and leases additional spaces in India and Romania[40] Legal Proceedings Information regarding legal contingencies is referenced in Note 7 of the Consolidated Financial Statements - Details on legal proceedings are available in Note 7 of the Consolidated Financial Statements[41] Mine Safety Disclosures This item is not applicable to the company - Not applicable[42] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE American under 'INS', with no foreseeable dividends, and repurchased $1.6 million of shares in Q4 2020 under its $5 million program - The company's common stock is listed on the NYSE American under the symbol 'INS'[46] - The company does not currently pay dividends and has no plans for future payments[46] Common Stock Repurchases (Q4 2020) | Period | Total Shares Purchased | Average Price Paid per Share ($) | Approx. Dollar Value Remaining in Program ($) | | :--- | :--- | :--- | :--- | | Oct 2020 | - | - | $5,000,000 | | Nov 2020 | 42,961 | $37.63 | $3,384,000 | | Dec 2020 | 610 | $38.47 | $3,361,000 | | Total Q4 | 43,571 | $37.62 | $3,361,000 | - The $5 million stock repurchase program, initiated in November 2018, has utilized $1.64 million, leaving approximately $3.36 million available[49] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, revenue grew 5% to $35.9 million, net income decreased to $8.2 million due to impairment, cash increased to $38.0 million, and Customer A accounted for 69% of revenue Results of Operations In 2020, total revenue grew 5% to $35.9 million (services up 13%), but cost of revenue rose to 43% due to infrastructure investments, and an impairment charge led to lower income before taxes Revenue Performance (2020 vs. 2019) | Revenue Type | 2020 (in thousands) | 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Services | $32,273 | $28,578 | +13% | | Products | $3,600 | $5,725 | -37% | | Total Revenue | $35,873 | $34,303 | +5% | - Cost of revenue as a percentage of total revenue increased from 34% in 2019 to 43% in 2020, primarily due to investments in processing infrastructure[64] - Operating expenses were slightly lower in 2020 due to decreased R&D and marketing expenses, partially offset by higher G&A costs[66] - The company recorded an investment loss of $1.04 million in 2020, primarily from a $1.01 million impairment charge on investments due to economic downturn, compared to $34 thousand income in 2019[67] - The effective tax rate was 23.2% in 2020, up from 18.8% in 2019, with the prior year's lower rate attributed to an excess tax benefit from stock option exercises[68] Liquidity and Capital Resources Cash balance increased to $38.0 million in 2020, driven by $21.0 million in operating cash flow, with $6.9 million used for capital expenditures and $1.6 million for share repurchases, ensuring sufficient liquidity Cash and Cash Flow Summary (in thousands) | Metric | Dec 31, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | Cash Balance | $37,956 | $26,415 | | Cash Provided by Operations | $20,966 | $10,585 | - The company invested $6.88 million in computer equipment and software to enhance its processing environment in the US and support its India office[70] - The company repurchased $1.6 million of its shares in 2020 under its $5 million share repurchase program[71] Critical Accounting Policies and Estimates Critical accounting policies include revenue recognition for software licenses, implementation services, and processing services, along with quarterly impairment evaluations for investments in non-publicly traded companies - Revenue from software licenses is generally recognized at a point in time upon delivery, as it is considered functional intellectual property[77] - Processing services are considered a stand-ready performance obligation, with revenue recognized over time as services are provided[84] - Minority interests in non-publicly traded companies are evaluated quarterly for impairment, with charges recorded if a decline in value is deemed other-than-temporary[87] - In Q1 2020, a $750 thousand impairment charge was recorded on an investment in a privately held FinTech company, reducing its carrying value to $0 due to the economic downturn[89] Factors That May Affect Future Operations Future operations face risks including high customer concentration (69%), software project delays, regulatory non-compliance, competition, inability to retain key personnel, and broader economic instability like COVID-19 - High customer concentration risk exists, with the largest customer representing 69% of consolidated revenues for the twelve months ended December 31, 2020[93] - Operational risks include software development delays, regulatory non-compliance, software errors, and inability to retain key personnel[93] - Market and economic risks include global financial market weakness, competitive pressures, and volatility from events like the coronavirus pandemic[93] Financial Statements Audited consolidated financial statements for 2020 and 2019 show total assets at $57.0 million and equity at $44.2 million in 2020, with net income decreasing to $8.2 million ($0.91 diluted EPS), and accompanying notes detailing policies and disclosures Consolidated Balance Sheets As of December 31, 2020, total assets increased to $57.0 million (from $44.2 million in 2019), driven by higher cash and property, while total liabilities rose to $12.9 million, and stockholders' equity grew to $44.2 million Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $42,489 | $36,079 | | Cash | $37,956 | $26,415 | | Accounts receivable, net | $3,270 | $8,759 | | Total Assets | $57,025 | $44,240 | | Total Current Liabilities | $10,062 | $6,193 | | Total Liabilities | $12,874 | $6,951 | | Total Stockholders' Equity | $44,151 | $37,289 | Consolidated Statements of Operations In 2020, total net revenue increased 5% to $35.9 million, but income from operations decreased to $11.3 million, and a $1.0 million investment loss led to lower net income of $8.2 million ($0.91 diluted EPS) Consolidated Statement of Operations Summary (in thousands, except per share data) | Account | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Total net revenue | $35,873 | $34,303 | | Total cost of revenue | $15,427 | $11,759 | | Income from operations | $11,295 | $13,382 | | Investment income (loss) | $(1,044) | $34 | | Net income | $8,161 | $10,969 | | Diluted EPS | $0.91 | $1.22 | Consolidated Statements of Cash Flows In 2020, net cash from operations significantly increased to $21.0 million, while $7.7 million was used in investing activities and $1.6 million in financing, resulting in an $11.5 million increase in cash, ending at $38.0 million Consolidated Statement of Cash Flows Summary (in thousands) | Activity | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $20,966 | $10,585 | | Net cash used in investing activities | $(7,740) | $(3,297) | | Net cash (used in) provided by financing activities | $(1,639) | $210 | | Net increase in cash | $11,541 | $7,496 | | Cash at end of year | $37,956 | $26,415 | Notes to Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation (professional services largest), investment impairment (including $750 thousand charge), significant customer concentration (Customer A at 69%), and legal proceedings, including a pending securities class action lawsuit Disaggregation of Revenue (in thousands) | Revenue Type | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | License | $3,600 | $5,725 | | Professional services | $20,610 | $19,203 | | Processing and maintenance | $10,228 | $7,650 | | Third party | $1,435 | $1,725 | | Total | $35,873 | $34,303 | Customer Concentrations (% of Revenue) | Customer | 2020 Revenue % | 2019 Revenue % | | :--- | :--- | :--- | | Customer A | 69% | 60% | | Customer B | 2% | 11% | | Customer C | 10% | 6% | - A securities class action complaint filed in July 2019 alleges misleading statements, with the company's motion to dismiss currently pending[233] - The company leases its Norcross, GA headquarters from ISC Properties, LLC, an entity controlled by Chairman and CEO J. Leland Strange, with $214 thousand rent paid in 2020[236] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None reported[98] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective at a reasonable assurance level as of December 31, 2020, with no significant changes - The CEO and CFO concluded that disclosure controls and procedures are effective at a reasonable assurance level as of the period end[100] - Management asserts that internal control over financial reporting is effective as of December 31, 2020, based on the COSO 2013 framework[106] Other Information On March 2, 2021, the Board amended bylaws to implement majority voting for uncontested director elections - The company amended its bylaws to implement a majority voting standard for uncontested director elections, effective March 2, 2021[109] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement, and the company maintains a Code of Ethics for all personnel - Detailed information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement[111] - The company maintains a Code of Ethics for all directors, officers, and employees, available on its website[112] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement - Details on executive compensation are incorporated by reference from the 2021 Proxy Statement[113] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 31, 2020, 126,500 securities were issuable from outstanding options (weighted-average exercise price $8.94), with 885,620 securities available for future issuance under approved equity plans Equity Compensation Plan Information as of December 31, 2020 | Plan category | Number of securities to be issued upon exercise | Weighted-average exercise price ($) | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 126,500 | $8.94 | 885,620 | | Equity compensation plans not approved by security holders | -- | -- | -- | | Total | 126,500 | $8.94 | 885,620 | - In August 2020, shareholders approved the 2020 Non-Employee Directors' Stock Incentive Plan, authorizing 200,000 shares, with 4,380 shares totaling $150 thousand granted to three independent directors in 2020[120] Certain Relationships and Related Transactions, and Director Independence The company leases its Norcross, GA headquarters from ISC Properties, LLC, an entity owned by its Chairman and CEO, paying $214 thousand in rent in 2020, with director independence details incorporated from the 2021 Proxy Statement - The company leases its headquarters from ISC Properties, LLC, an entity 100% owned by Chairman and CEO J. Leland Strange[122] - Lease payments to the related party totaled $214 thousand in 2020 and $210 thousand in 2019[122] Principal Accountant Fees and Services Information regarding fees paid to and services performed by the independent public accountants is incorporated by reference from the 2021 Proxy Statement - Details on principal accountant fees and services are incorporated by reference from the 2021 Proxy Statement[124] Part IV Exhibits and Financial Statement Schedules This section lists exhibits filed with the Form 10-K, including articles of incorporation, bylaws, material contracts, subsidiary lists, expert consents, Sarbanes-Oxley Act certifications, and XBRL data files - Filed exhibits include the Amended and Restated Bylaws dated March 2, 2021[126] - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[129][130]