ACCESS NEWSWIRE INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM 10-K
———————
☑
ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
The Year Ended: December 31, 2016
———————
ISSUER DIRECT
CORPORATION
(Name of small business issuer in its charter)
———————
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Delaware
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1-10185
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26-1331503
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(State or Other Jurisdiction of Incorporation)
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(Commission File Number)
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(I.R.S. Employer Identification No.)
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500 Perimeter Park Drive, Suite D, Morrisville, NC
27560
(Address of Principal Executive Office) (Zip
Code)
(919) 481-4000
(Registrant’s telephone number, including area
code)
———————
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common
Stock, par value $0.001 per share
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NYSE
MKTS.
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
———————
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes ☑ No ☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. ☑
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer ☐ Accelerated
filer ☐ Non-accelerated filer
☐ Smaller reporting
company ☑
Indicate by check
mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes ☐
No ☑
The
aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 30, 2016, the last business day of the
registrant's second fiscal quarter, was approximately $18,172,473
based on the closing price reported on the NYSE MKT as of such
date.
As of
March 14, 2017, the number of outstanding shares of the
registrant's common stock was 2,904,114.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
registrant’s definitive proxy statement relating to its 2017
annual meeting of stockholders (the “2017 Proxy
Statement”) are incorporated by reference into Part III of
this Annual Report on Form 10-K where indicated. The 2017 Proxy
Statement will be filed with the U.S. Securities and Exchange
Commission within 120 days after the end of the year to which this
report relates.
T
able of
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Subsidiaries of the
Registrant
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Consent of Independent Registered Public
Accounting Firm
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Chief Financial Officer Certification Pursuant
to Section 302
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Chief Financial Officer Certification Pursuant
to Section 302
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Chief Executive Officer Certification Pursuant
to Section 906
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Chief Financial Officer Certification Pursuant
to Section 906
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EX-101.INS
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XBRL
INSTANCE DOCUMENT
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EX-101.SCH
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XBRL
TAXONOMY EXTENSION SCHEMA
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EX-101.CAL
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XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE
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EX-101.DEF
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XBRL
TAXONOMY EXTENSION DEFINITION LINKBASE
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EX-101.LAB
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XBRL
TAXONOMY EXTENSION LABEL LINKBASE
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EX-101.PRE
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XBRL
TAXONOMY EXTENSION PRESENTATION LINKBASE
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CAUTIONARY STATEMENT
All
statements, other than statements of historical fact, included in
this Form 10-K, including without limitation the statements
under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and
“Description of Business,” are, or may be deemed to be,
forward-looking statements. Such forward-looking statements involve
assumptions, known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or
achievements of Issuer Direct Corporation, to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking statements contained
in this Form 10-K.
In our
capacity as Company management, we may from time to time make
written or oral forward-looking statements with respect to our
long-term objectives or expectations which may be included in our
filings with the Securities and Exchange Commission (the
“SEC”), reports to stockholders and information
provided in our web site.
The
words or phrases “will likely,” “are expected
to,” “is anticipated,” “is
predicted,” “forecast,” “estimate,”
“project,” “plans to continue,”
“believes,” or similar expressions identify
“forward-looking statements.” Such forward-looking
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. We wish to
caution you not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. We are calling to
your attention important factors that could affect our financial
performance and could cause actual results for future periods to
differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
The
following list of important risk factors is not all-inclusive, and
we specifically decline to undertake an obligation to publicly
revise any forward-looking statements that have been made to
reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated
events. Among the factors that could have an impact on our ability
to achieve expected operating results and growth plan goals and/or
affect the market price of our stock are:
●
Dependence on key
personnel.
●
Fluctuation in
quarterly operating results and seasonality in certain of our
markets.
●
Our ability to
raise capital to fund potential acquisitions or other growth
initiatives.
●
Our ability to
successfully integrate and operate acquired or newly formed
entities, ventures and or subsidiaries.
●
Changes in laws
and regulations that affect our operations and demand for our
products and services.
Available Information
Our
Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Financial Data in XBRL, Current Reports on
Form 8-K, proxy statements and amendments to those reports
filed or furnished pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended, are available, free of
charge, in the corporate section of our website at
www.issuerdirect.com.
The
SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that
file electronically with the SEC at www.sec.gov. The public may
read and copy any materials we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.
The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.
Company Overview
Issuer
Direct Corporation (Issuer Direct Corporation and its subsidiaries
are hereinafter collectively referred to as “Issuer
Direct”, the “Company”, “We” or
“Our” unless otherwise noted). We are a Delaware
corporation formed in October 1988 under the name Docucon
Incorporated. In December 2007, we changed our name to Issuer
Direct Corporation. Our corporate offices are located at 500
Perimeter Park Drive, Suite D, Morrisville, North Carolina,
27560.
Businesses
Issuer Direct is a market leader and innovator of
disclosure
management solutions, shareholder communications tools and
cloud–based compliance technologies.
W
e alleviate the
complexity of maintaining compliance with our integrated portfolio
of products and services that enhance companies' ability to
efficiently produce and distribute their financial and business
communications both online and in print.
The
Company’s core technology, Platform id (formerly our
Disclosure Management System, or DMS) – is a secure
cloud-based communications and compliance system for corporate
issuers, mutual funds, and compliance professionals.
We work with a
diverse client base in the financial services industry, including
brokerage firms, banks and mutual funds. We also sell
products and services to corporate issuers, professional firms,
such as investor relations and public relations, and the accounting
and the legal communities. Corporate issuers and their constituents
utilize our cloud-based platforms and related services from
document creation all the way to dissemination to regulatory
bodies, platforms and shareholders.
We report
our product and service revenue in three revenue
streams:
●
Disclosure
management,
●
Shareholder
communications and,
●
Platform and
technology
Our current brands
and products include the following:
●
Issuer
Direct
™
●
Accesswire™
●
Investor
Network™
●
Blueprint™
●
Classify™
●
iProxy
Direct
●
iR
Direct
●
Annual
Report Service (ARS)
We announce
material financial information to our investors using our investor
relations website, Securities and Exchange Commission ("SEC")
filings, investor events, news and earnings releases, public
conference calls and webcasts. We use these channels as well
as social media to communicate with our investors and the public
about our company, our products and services, and other issues. It
is possible that the information we post on social media could be
deemed to be material information. Therefore, we encourage
investors, the media, and others interested in our company to
review the information we post on the social media channels listed
below. This list may be updated from time to time on our
investor relations website:
www.issuerdirect.com/about-us
www.facebook.com/issuerdirectcorporation
www.twitter.com/issuerdirect
www.linkedin.com/company/issuer-direct-corporation
www.issuerdirect.com/blog/
The contents of the
above websites are not intended to be incorporated by reference
into this annual report on Form 10-K or in any other report or
document we file, and any reference to these websites are intended
to be inactive textual references only.
4
Disclosure
Management
Our disclosure
business consists of our traditional document conversion,
typesetting and pre-press design services, XBRL tagging services,
and the issuance of securities as it relates to our stock transfer
business. These services represent our disclosure offerings that
are regulated by the Securities and Exchange
Commission.
A portion of our
disclosure business also comes from strategic relationships, where
we manage the compliance functions for our partners’ clients.
Since we do not have the relationship with the end client, it is
difficult to predict the growth from this business. We have seen
some partner client attrition in the smaller cap space, due to
significant pricing pressure.
Shareholder
Communications
Our shareholder
communications offerings are centered around annual and quarterly
earnings events of a public company, which includes our press
release distribution, investor outreach and engagement services,
webcast teleconference services, investor hotline and our legacy
proxy and printing services. Many of these services are marketed
and bundled under annual agreements. Like our disclosure business,
our communications offerings help make up our proprietary
cloud-based platform. This platform has become a significant
competitive advantage when competing in the corporate issuer
marketplace.
Press Release Distribution
Our press release
platform, Accesswire, is a cost-effective FD (
Fair Disclosure
) news dissemination
service. We acquired the business on October 29,
2014. Accesswire is dependent upon several key partners
for news distribution, some of which are also partners that we rely
on for other shareholder communications services. A disruption in
any of these partnerships could have an adverse impact on our
business.
The Accesswire
business focuses on press release distribution for both private and
publicly held companies. We anticipate the press release business
to be an area where we will continue to add new clients throughout
2017 and beyond, and as such, we will continue to brand our press
release offerings under the name Accesswire, which we believe will
solidify our market position in the newswire
business.
Investor Outreach and Engagement
Our investor
outreach and engagement offering, formerly known as the Annual
Report Service ("ARS"), now known as the Investor Network, was
acquired from PrecisionIR ("PIR"). The ARS business has existed for
over 20 years primarily as a physical hard copy delivery service of
annual reports and prospectuses globally for tens of thousands of
customers. As part of our integration with PrecisionIR during 2014,
we updated these legacy systems and integrated them into our
platform. We continue to operate a portion of this legacy system
and continue to migrate the install base over to Investor Network,
which is a digital platform and outreach engagement dataset.
Portions of this legacy system are still operational, specifically
for those who opt to take advantage of physical delivery of
material.
Webcasting – Teleconference
There are over
5,000 companies in North America conducting earnings events that
include teleconference, webcast or both as part of their events.
Our platform incorporates each element of the earnings event
including earnings announcement, earnings press release, and SEC
Form 8-K filings. There are a handful of our competitors that can
offer this today, however, we believe our real-time event setup and
integrated approach offers a more effective way to manage the
process as well as attract an audience of investors. Additionally,
all webcasts and teleconferences are broadcast live on our Investor
Network properties, which allows our clients to reach a broader
audience.
We currently market
and sell our webcasting platforms and teleconference systems in
North America, United Kingdom, Sweden and Germany, the current
markets in which we have clients subscribing to our
platforms.
Investor Hotline
Our Investor
Hotline platform is an add-on product within our shareholder
communications business. A good percentage of our clients using
this service are Fortune 500 companies, which utilize our platform
to extend their corporate investor relations systems to and with
our shareholder delivery platform. This system delivers
notifications and documents to shareholders, institutions and to
industry partners, such as annual and quarterly reports, earnings
data, transcripts and other unique content from our issuer
clients.
Proxy – Printing and
Voting
Our proxy business
is marketed as a fully integrated, real-time voting platform for
our corporate issuers and their shareholders of record. This
platform
is utilized
for every annual meeting and or special meeting we manage for our
client base and offers both full-set mailing and notice of internet
availability options.
5
Platform and Technology
As the Company
continues its transition to a cloud-based subscription business, we
expect the platform and technology portion of our business to
continue to expand over the next several years. Leading this
transition are product subscriptions from each of our core
businesses, disclosure management and shareholder
communications.
In disclosure
management, Blueprint is our cloud-based document conversion,
editing and filing platform for corporate issuers seeking to
insource the document drafting, editing and filing processes.
Blueprint is available in both a secure public cloud within the
Company’s disclosure management system, as well as in a
private cloud for corporations, mutual funds and the legal
community looking to further enhance their internal document
process. Our belief is that once fully marketed and as Blueprint
sales begin to ramp, we will see a negative impact on our legacy
disclosure services business in the future. However, the margins
associated with our subscription business compared to our services
business are higher and align with our long-term strategy, as such
we believe Blueprint will have a positive impact on our net income
in the future.
In our shareholder
communications business we have Classify – our buy-side,
sell-side and media targeting database and intelligence platform.
This new subscription-based platform is centered around both our
shareholder communications and news distribution businesses. We
believe our data-set will be an attractive option for both investor
relations and public relations firms and for corporate issuers
looking for an alternative to current products in the market, based
on price and flexibility, as well as data quality and quantity.
Because this is a new offering for Issuer Direct, which will
complement other products and services, we anticipate Classify will
increase our average revenue per user based on its competitive
cloud licensing options.
Additionally, our
product roadmap includes further development of both our Investor
Network and Classify products that we will continue to
commercialize and bring to market during the first half of 2017.
These two new cloud-based products will be a key component of our
communications technology business. We expect the proprietary
data-set to generate revenues from the corporate issuers initially
then to the investment community thereafter. The Investor Network
has replaced the ARS and Company Spotlight brands as we continue to
transition this business from hard copy to digital delivery and
real-time engagement. This transition continued during 2016, and
will continue for the beginning part of 2017, as further clients
transition from our legacy ARS to our new digital platforms.
In the
teleconference and webcasting space we are continuing to spend time
developing and integrating our current systems and processes with
our platform and partners. The earnings event business is a highly
competitive space with the majority of the business being driven
from practitioners in the investor and communications firms. During
the end of 2016, we created an application protocol interface (API)
for the webcast marketplace, and will begin partnering with
publishers, and other platforms to license our datasets, which we
believe will further increase our brand awareness. This API license
will allow publishers to query single or multiple companies'
current and past earnings calls and present those on their
platforms. We believe this will increase the demand for our
webcasting services.
6
Our Strategy
We
strive to improve the way businesses collect, manage, communicate,
report and analyze their data. Our overall strategy
includes:
Expansion of Current Customers
We
expect to continue to see demand for our products within our client
base. Migrating client contracts over to our subscription-based
platforms will naturally help align the Company’s recurring
revenues and long-term strategies. Additionally, as part of our
client expansion efforts, we are committed to working beyond the
single point of contact and into the entire C suite (CEO, CFO, IRO,
Corporate Secretary, etc.).
Focus on Organic Growth
Our
primary growth strategy continues to be selling our
subscription-based platforms via Platform id to new clients under
our cloud-based arrangement, whereas in the past we were inclined
to sell single solutions and not subscriptions, in highly
commoditized businesses, that resulted in significant pricing
pressures.
New Offerings
During
2017 and going forward, we will continue to innovate, improve and
build new applications into and with our platform; with the
ultimate objective of developing applications in combination, that
are not offered by our competitors. As a company focused on
technology offerings, we understand the importance of advancements
and fully appreciate the risks and consequences of losing our
position as a market leader- a very common mistake many technology
companies have made. The pursuit of technological innovation is and
has been a part of our overall strategy as an organization over the
last several years.
During
2017 we will bring to market several new products and platforms
targeted at both our current install base as well as new clients.
Many of these will be evident in our Investor Network brands and
platforms – where we are reinventing the destination for both
the professional and retail investors.
For
example, we are seeing significant opportunities as a result of the
Securities and Exchange Commission's new rule, Regulation A+.
Regulation A+ offers us the opportunity to build, market and
solidify our platform as a viable option to private companies
seeking to raise capital under this rule and/or go public via this
new regulation compared to a traditional initial public offering.
Specifically, we believe our current technology and platforms as
well as enhancements currently being made to our platforms may
allow us to establish relationships much earlier in the life cycle
of a business as it contemplates going public. A typical
Regulation A+ offering will require substantial support in terms of
processing subscription agreements and other offering
coordination. We believe these increased needs of
issuers will fit well with our Blueprint, Classify, Accesswire and
stock transfer
product
bundles and potentially
create higher revenues per issuer than we achieved in 2016. We
intend to create and release certain platform API's during the
first half of 2017 that will hopefully give us a competitive
advantage in the Regulations A+ space.
Acquisition Strategy
We
will continue to evaluate complimentary verticals and systems that
we can integrate well into our current platforms. These
opportunities need to be accretive and consistent with what the
Company has done in the past. We will continue to maintain our
product and technology focus, so it is highly likely we will look
for acquisitions in areas we currently have revenues, that we refer
to
as
"bolt on". In these
transactions we will tend to look for key people, technologies, and
long-term clients that will further enhance our overall market
position.
7
Sales and Marketing
During
2017, we will continue to strengthen our brands in the market, by
working aggressively to expand our new client footprint and
continue to cross sell to increase average revenue per user. Our
platform, systems and operations are built to handle growth –
so with little capital or operational expense we can leverage this
growth to produce further bottom line profits and cash
flows.
Sales
Our
global sales organization is responsible for generating new
customer opportunities and expanding our current customers. We
ended 2016 with a multi-tier organization, made up of Strategic
Account Managers and Account Executives. We believe this structured
approach is the most efficient and highly impactful way to reach
new clients and also grow our current install base. The total
compensation packages for these teams are heavily weighted with
commission compensation and base salary to incent sales. All
members of the team have sales quotas. At the end of December 31,
2016, we employed 14 full-time equivalent sales
personnel.
We are
on track to continue to expand our sales headcount during 2017 both
in our current markets and also in verticals or countries where we
have not typically had a sales presence. However, we expect a
majority of the increase to be in our Accesswire business as well
as in our cloud-based subscription products.
Additionally, our
executive team plays a critical role in our sales process,
assisting the organization and clients with new offerings, cross
selling opportunities and channel development; because our
organization is still relatively small, we benefit from this
approach and believe this is key to our future
success.
Marketing
Our
marketing organization has also undergone reorganization between
our businesses; our newly created marketing and business
development team now manages both business-to-business and
business-to-consumer marketing efforts. This alignment was
necessary, as we get ready to release the rebranded Annual Report
Service and Company Spotlight products into and with the new
Investor Network. This organization is also responsible for
collaborating with our sales teams on product marketing, outbound
digital marketing and all social media efforts of our entire
brand.
Technology
We
will continue to make investments in our technology, as we
transition our business from a historically service-oriented
business to a cloud-based subscription organization. In all of our
offerings, quality, support, and scalability as well as the need to
preserve the confidential content of our clients is of utmost
importance and part of our core values.
Industry Overview
Our
industry benefits from increased regulatory requirements and the
need for platforms and systems to manage these new regulations.
Additionally, the industry along with cloud-based technologies have
matured considerably over the past several years, whereby corporate
issuers and communication professionals are seeking platforms and
systems to do some, if not all the work themselves. We are uniquely
positioned in this new environment to benefit from software
licensing and further advancements of Platform
id.
The
business services industry as it relates to compliance and
communications is highly fragmented, with hundreds of independent
service companies that provide a range of financial reporting,
document management services and with a wide range of printing and
technology software providers. The demands for many of our services
historically have been cyclical and reliant on capital market
activity. During 2016, we spent a considerable amount of time
growing several new service offerings beyond our traditional
compliance reporting and transaction services business. These new
offerings will afford us the ability to reduce our revenue
seasonality and provide a new baseline of recurring annualized
contracts under our new subscription-based business.
Competition
Despite some
consolidation in recent years, the industry remains both highly
fragmented and extremely competitive. The success of our products
and services are generally based on price, quality and the ability
to service client demands. Management has been focused on
offsetting these risks relating to competition as well as the
seasonality by introducing its cloud-based subscription platforms,
with significantly higher margins, clear competitive advantages and
scalability to withstand market and pricing pressures.
We
also review our operations on a regular basis to balance growth
with opportunities to maximize efficiencies and support our
long-term strategic goals. We believe by blending our workflow
technologies with our legacy service offerings we are able to offer
a comprehensive set of products and solutions to each of our
clients that most competitors cannot offer today.
8
We
believe we are positioned to be the public company platform of
choice as a cost-effective alternative to both small regional
providers and global providers. We also believe we benefit from our
location in North Carolina, as we do not experience significant
competition for sales, customer service, or production
personnel.
Customers
Our
customers include a wide variety of issuers, mutual funds, law
firms, brokerage firms, banks, individuals, and other institutions.
For the year ended December 31, 2016, we did work for approximately
2900 clients on our Accesswire platform and 1200 clients through
our other products and services. We did not have any
customers during the year ended December 31, 2016 that accounted
for more than 10% of our revenue and no customer represented more
than 10% of our year end accounts receivable balance.
Employees
As of
December 31, 2016, we employed sixty full-time employees as
compared to fifty-three full-time employees at December 31,
2015, none of which are represented by a union. Our employees work
in our corporate offices in North Carolina, and in satellite
locations throughout North America and the United Kingdom.
Facilities
Our
headquarters are located in Morrisville, North Carolina. In October
2015, we agreed to an extension on our current lease to extend the
maturity through October 2019. Our current office includes 16,059
square feet of office space. We believe we have sufficient space to
sustain our growth through 2019. Additionally, we also have a
shared office facility in London,
England.
Insurance
We
maintain both a general business liability policy and an errors and
omissions policy in excess of $5,000,000 specific to our industry
and operations. We believe that our insurance policies provide
adequate coverage for all reasonable risks associated with
operating our business. Additionally, we maintain a Directors and
Officers insurance policy, which is standard for our industry and
size. We also maintain key man life insurance on our Chief
Executive Officer, our Chief Financial Officer, and one other key
individual.
Regulations
The
securities and financial services industries generally are subject
to regulation in the United States and elsewhere. Regulatory
policies in the United States and the rest of the world are tasked
with safeguarding the integrity of the securities and financial
markets with protecting the interests of both issuers and
shareholders.
In the
United States, corporate issuers are subject to regulation under
both federal and state laws, which often require public disclosure
and regulatory filings. At the federal level, the Securities and
Exchange Commission (“SEC”) regulates the securities
industry, along with the Financial Industry Regulatory Authority,
or FINRA, formally known as NASD, and NYSE market regulations,
various stock exchanges, and other self-regulatory organizations
(“SRO”).
In the
European Union (EU), the securities and reporting authorities tend
to be based on exchanges as well as individual country disclosure
requirements. We currently work with our stock exchange partners to
deliver our solutions. We believe this is the best approach as this
market is highly complex and divided in comparison to our North
American markets.
We
operate our filing agent business and transfer agent business under
the direct supervision and regulations of the SEC.
Our
transfer agency business, Direct Transfer, LLC, is subject to
certain regulations, which are governed, without limitation by the
SEC, with respect to registration with the SEC, annual reporting,
examination, internal controls, tax reporting and escheatment
services. Our transfer agency is approved to handle the securities
of NYSE, NASDAQ and the Over the Counter listed securities; as well
we select issuers traded on TSX.
Our
mission is to assist corporate issuers with these regulations,
communication and compliance of rules imposed by regulatory bodies.
The majority of our business involves the distribution of content,
either electronically or paper, to governing bodies and
shareholders alike. We are licensed under these regulations to
disseminate, communicate and or solicit on behalf of our clients,
the issuers.
9
Forward-Looking and Cautionary Statements
Investing in our
common stock involves a high degree of risk. Prospective investors
should carefully consider the following risks and uncertainties and
all other information contained or referred to in this Annual
Report on Form 10-K before investing in our common stock. The
risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties that we are unaware
of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occur, our
business, financial condition or results of operations could be
materially and adversely affected. In that case, the trading price
of our common stock could decline, and you could lose all of your
investment.
Risks related to our business
Revenue related to disclosure documents is subject to regulatory
changes and volatility in demand, which could adversely affect our
operating results.
We
anticipate that our disclosure management services business will
continue to contribute to our operating results going forward. The
market for these services depends in part on the demand for
investor documents, which is driven largely by capital markets
activity and the requirements of the SEC and other regulatory
bodies. Any rulemaking substantially affecting the content of
documents to be filed and the method of their delivery could have
an adverse effect on our business. Our disclosure management
revenues will be adversely affected as clients implement
technologies enabling them to produce and disseminate documents on
their own.
The environment in which we compete is highly competitive, which
creates adverse pricing pressures and may harm our business and
operating results if we cannot compete effectively.
Competition in our
businesses is intense. The speed and accuracy with which we can
meet client needs, the price of our services and the quality of our
products and supporting services are factors in this competition.
In our disclosure management business, we compete directly with
several other service providers having similar degrees of
specialization.
Our print
and financial communications business faces diverse competition
from a variety of companies including commercial printers, in-house
print operations, direct marketing agencies, facilities management
companies, software providers and other consultants. In commercial
printing services, we compete with general commercial printers,
which are far more numerous than those in the financial printing
market.
These
competitive pressures could reduce our revenue and
earnings.
Approximately 13% of our revenue is generated overseas and the
unstable global financial markets may adversely impact our
revenue.
Approximately 13%
of our annual revenue is generated in Europe. Global
financial markets have experienced extreme disruptions, including
severely diminished liquidity and credit availability, declines in
consumer confidence, declines in economic growth, increases in
unemployment rates, and uncertainty about economic stability. We
are unable to predict the likely duration and severity of the
effects of these disruptions in the financial markets and the
adverse global economic conditions, and if the current uncertainty
continues or economic conditions further deteriorate, our business
and results of operations could be materially and adversely
affected. The consequences of such adverse effects could include
interruptions or delays in our ability to perform services or to
get paid for services rendered.
If we are unable to retain our key employees and attract and retain
other qualified personnel, our business could suffer.
Our
ability to grow and our future success will depend to a significant
extent on the continued contributions of our key executives,
managers and employees. In addition, many of our individual
technical and sales personnel have extensive experience in our
business operations and/or have valuable client relationships that
would be difficult to replace. Their departure, if unexpected and
unplanned for, could cause a disruption to our business. Our
competition for these individuals is intense, especially in the
markets in which we operate. We may not succeed in identifying,
attracting and retaining these personnel. Further, competitors and
other entities have in the past recruited and may in the future
attempt to recruit our employees, particularly our sales personnel.
The loss of the services of our key personnel, the inability to
identify, attract and retain qualified personnel in the future or
delays in hiring qualified personnel, particularly technical and
sales personnel, could make it difficult for us to manage our
business and meet key objectives, such as the timely introduction
of new technology-based products and services, which could harm our
business, financial condition and operating results.
If we fail to keep our clients’ information confidential or
if we handle their information improperly, our business and
reputation could be significantly and adversely
affected.
We
manage private and confidential information and documentation
related to our clients’ finances and transactions, often
prior to public dissemination. The use of insider information is
highly regulated in the United States and abroad, and violations of
securities laws and regulations may result in civil and criminal
penalties. If we fail to keep our clients’ proprietary
information and documentation confidential, we may lose existing
clients and potential new clients and may expose them to
significant loss of revenue based on the premature release of
confidential information. We may also become subject to civil
claims by our clients or other third parties or criminal
investigations by appropriate authorities.
10
We must adapt to rapid changes in technology and client
requirements to remain competitive.
The
market and demand for our products and services, to a varying
extent, have been characterized by:
●
Technological
change;
●
Frequent product
and service introductions; and
●
Evolving client
requirements.
We
believe that these trends will continue into the foreseeable
future. Our success will depend, in part, upon our ability
to:
●
Enhance our
existing products and services;
●
Successfully
develop new products and services that meet increasing client
requirements; and
●
Gain market
acceptance.
To
achieve these goals, we will need to continue to make substantial
investments in sales and marketing. We may not:
●
Have sufficient
resources to make these investments;
●
Be successful in
developing product and service enhancements or new products and
services on a timely basis, if at all; or
●
Be able to market
successfully these enhancements and new products once
developed.
Further, our
products and services may be rendered obsolete or uncompetitive by
new industry standards or changing technology.
Our business could be harmed if we do not successfully manage the
integration of any business that we have or may acquire in the
future.
On
August 22, 2013, the Company, and PrecisionIR Group Inc.
(“PIR” or “PrecisionIR”) consummated an
Agreement and Plan of Merger (the “Acquisition
Agreement”). On October 29, 2014, the
Company purchased Accesswire. Accesswire is dependent
upon a few key partners for news distribution, some of which are
also partners that we rely-on for other shareholder communications
services. A disruption in any of these partnership
relationships could have an adverse impact on our
business. Furthermore, we acquired software with the
acquisition of Accesswire. Performance issues with this
technology could also have an adverse impact on our ability to
serve our customers.
Furthermore, as
part of our continued business strategy, we will continue to
evaluate and acquire as practical other businesses that complement
our core capabilities. Certain other areas which may expose the
Company to increased risk include:
●
the
difficulty of integrating the operations and personnel of the
acquired businesses into our ongoing operations;
●
the
potential disruption of our ongoing business and distraction of
management;
●
the
difficulty in incorporating acquired technology and rights into our
products and technology;
●
unanticipated
expenses and delays relating to completing acquired development
projects and technology integration;
●
a
potential increase in our indebtedness and contingent liabilities,
which could restrict our ability to access additional capital when
needed or to pursue other important elements of our business
strategy;
●
the
management of geographically remote units;
●
the
establishment and maintenance of uniform standards, controls,
procedures and policies;
●
the
impairment of relationships with employees and clients as a result
of any integration of new management personnel;
●
risks
of entering markets or types of businesses in which we have either
limited or no direct experience;
●
the
potential loss of key employees or clients of the acquired
businesses; and
●
potential unknown
liabilities, such as liability for hazardous substances, or other
difficulties associated with acquired businesses.
New issuers seeking to raise capital and become SEC registrants may
choose to utilize Regulation A+ and we may see a significant
decline in the number of filings as part of our current disclosure
management business.
On
March 25, 2015, the Securities and Exchange Commission released its
final rules relating to Regulation A+ implemented as part of Title
IV of the Jumpstart Our Business Startups
Acts. Regulation A+ will allow issuers to raise capital
based on reduced filings requirements as compared to those required
under the Securities Act of 1934, as amended. On June
12, 2015, the OTC Markets Group Inc. announced new rules and
standards for issuers seeking to list their securities on the OTCQX
and OTCQB pursuant to Regulation A+. As issuers begin to
utilize theses new rules and standards, we expect there to be a
decline in the number of filings made by our existing client
base. However, we also expect a number of additional
equity and debt offerings to occur as a function of the new
rules. In the event we are unable to adapt our
disclosure management business to address the changes being
implemented by Regulation A+ and the OTC Market Group, our
disclosure management business may potentially see a material
reduction in revenue.
11
We have incurred operating losses in the past and may do so again
in the future
The
Company has incurred operating losses in the past and may do so
again in the future. At December 31, 2016, the Company had
$1,491,225 of retained earnings. Although we have generated
positive cash flows from operations for the past nine years, there
can be no assurances that we will be able to do so in the
future. As we continue to invest in our cloud-based
technologies and sales and marketing teams, we could experience
fluctuations in our cash flows from operations and retained
earnings and there are no guarantees that our business can continue
to generate the current revenue levels.
Our business may be affected by factors outside of our
control.
Our
ability to increase sales and deliver and sell our service
offerings profitably is subject to a number of risks, including
changes to corporate disclosure requirements, regulatory filings
and distribution of proxy materials, competitive risks such as the
entrance of additional competitors into our market, pricing and
competition and risks associated with the marketing of new services
in order to remain competitive.
If potential customers take a long time to evaluate the use of our
services, we could incur additional selling expenses and require
additional working capital.
The
acceptance of our services depends on a number of factors,
including the nature and size of the potential customer base, the
effectiveness of our system, and the extent of the commitment
being made by the potential customer, and is difficult to
predict. Currently, our sales and marketing expenses per
customer are fairly low. If potential customers take longer
than we expect to decide whether to use our services and require
that we travel to their sites, present more marketing material, or
spend more time in completing the sales process, our selling
expenses could increase, and we may need to raise additional
capital sooner than we would otherwise need to.
The seasonality of business makes it difficult to predict future
results based on specific quarters.
A
greater portion of our printing, distribution and solicitation of
proxy materials business will be processed during our second
quarter. Therefore, the seasonality of our revenue makes it
difficult to estimate future operating results based on the results
of any specific quarter and could affect an investor’s
ability to compare our financial condition and results of
operations on a quarter-by-quarter basis. To balance the seasonal
activity of print, distribution and solicitation of proxy
materials, we will attempt to continue to grow our other
revenue streams since they are linked to predictable periodic
activity that is cyclical in nature.
If we are unable to successfully develop and timely introduce new
technology-based products or enhance existing technology-based
products, our business may be adversely affected.
In the
past few years, we have expended significant resources to develop
and introduce new technology-based products and improve and enhance
our existing technology-based products in an attempt to maintain or
increase our sales. The long-term success of new or enhanced
technology-based products may depend on a number of
factors including, but
not limited to, the following: anticipating and effectively
addressing customer preferences and demand, the success of our
sales and marketing efforts, timely and successful development,
changes in governmental regulations and the quality of or defects
in our products.
The
development of our technology-based products is complex and costly,
and we typically have multiple technology-based products in
development at the same time. Given the complexity, we occasionally
have experienced, and could experience in the future, delays in
completing the development and introduction of new and enhanced
technology-based products. Problems in the design or quality of our
products or services may also have an adverse effect on our brand,
business, financial condition, and operating results. Unanticipated
problems in developing technology-based products could also divert
substantial development resources, which may impair our ability to
develop new technology-based products and enhancements of such
products, and could substantially increase our costs. If new or
enhanced product and service introductions are delayed or not
successful, we may not be able to achieve an acceptable return, if
any, on our development efforts, and our business may be adversely
affected.
Risks Related to Our common stock; Liquidity Risks
The price of our common stock may fluctuate significantly, which
could lead to losses for stockholders.
The stock prices of smaller public companies can experience
extreme price and volume fluctuations. These fluctuations often
have been unrelated or out of proportion to the operating
performance of such companies. We expect our stock price to be
similarly volatile. These broad market fluctuations may continue
and could harm our stock price. Any negative change in the
public’s perception of our prospects or companies in our
market could also depress our stock price, regardless of our actual
results. Factors affecting the trading price of our common stock
may include:
●
variations in
operating results;
●
announcements of
strategic alliances or significant agreements by the Company or by
competitors;
●
recruitment or
departure of key personnel;
●
litigation,
legislation, regulation of all or part of our business;
and
●
changes in the
estimates of operating results or changes in recommendations by any
securities analyst that elect to follow our common
stock.
12
You may lose your investment in the shares.
An
investment in the shares involves a high degree of risk. An
investment in shares of our common stock is suitable only for
investors who can bear a loss of their entire
investment. We paid dividends in 2012, and in part of
2013, and every quarter since the fourth quarter of 2015, but there
can be no assurances that dividends will be paid in the future in
the form of either cash or stock.
We
currently have authorized but unissued “blank check”
preferred stock. Without the vote of our shareholders,
the Board of Directors, may issue such preferred stock with both
economic and voting rights and preferences senior to those of the
holders of our common stock. Any such issuances may
negatively impact the ultimate benefits to the holders of our
common stock in the event of a liquidation event and may have the
effect of preventing a change of control and could dilute the
voting power of our common stock and reduce the market price of our
common stock.
None.
Our
headquarters are located in Morrisville, North Carolina. In October
2015, we agreed to an extension on our current lease to extend the
maturity through October 2019. Our current office includes 16,059
square feet of office space. We believe we have sufficient space to
sustain our growth through 2019. Additionally, we also have a
shared office facility in London,
England.
From
time to time, we may be involved in litigation that arises through
the normal course of business. As of the date of this
filing, we are neither a party to any litigation nor are we aware
of any such threatened or pending litigation that might result in a
material adverse effect to our business.
Not
applicable.
13
Market for common stock
Our
common stock has been quoted on the NYSE MKTS under the symbol
"ISDR" since March 11, 2014. Prior to that time, the Company was
quoted on the Over the Counter Bulletin Board (“OTCBB”)
under the same symbol.
The
following table sets forth for the periods indicated the high and
low closing prices of our common stock.
|
|
High
|
Low
|
|
Year ended December 31, 2016
|
|
|
|
Quarter Ended
March 31, 2016
|
$
5.80
|
$
4.88
|
|
Quarter Ended
June 30, 2016
|
6.50
|
5.32
|
|
Quarter Ended
September 30, 2016
|
7.67
|
6.40
|
|
Quarter Ended
December 31, 2016
|
$
9.05
|
$
7.20
|
|
Year ended December 31, 2015
|
|
|
|
Quarter Ended
March 31, 2015
|
$
11.79
|
$
8.54
|
|
Quarter Ended
June 30, 2015
|
8.48
|
6.77
|
|
Quarter Ended
September 30, 2015
|
10.50
|
5.49
|
|
Quarter Ended
December 31, 2015
|
$
8.15
|
$
5.77
|
The
quotations provided herein may reflect inter-dealer prices without
retail mark-up, markdown, or commissions, and may not represent
actual transactions.
As
such, it may be difficult to trade the stock because compliance
with the regulations can delay and/or preclude certain trading
transactions. Broker-dealers may be discouraged from effecting
transactions in our stock because of the sales practice and
disclosure requirements for penny stock. This could adversely
affect the liquidity and/or price of our common stock, and impede
the sale of the stock.
Holders of Record
As of
December 31, 2016, there were approximately 150 registered
holders of record of our common stock and 2,860,944 shares
outstanding.
Issuer Purchases of Equity Securities
The
Company has not repurchased any shares of common stock during the
years ended December 31, 2016 or 2015.
Dividends
During
the year ended December 31, 2016, we paid dividends totaling
$452,724 or $0.16 per share.
During the year
ended December 31, 2015, we paid dividends totaling $83,101 or
$0.03 per share.
There can be no assurances that
dividends will be paid in the future. The declaration and
payment of dividends in the future will be determined by our Board
of Directors in light of conditions then existing, including our
earnings, financial condition, capital requirements and other
factors.
Summary of Operations for the periods ended December 31, 2016 and
2015.
|
|
Year Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Statement of
Operations
|
|
|
|
Revenue
|
$
12,058,866
|
$
11,619,883
|
|
Cost of
revenues
|
3,024,339
|
3,447,992
|
|
Gross
profit
|
9,034,527
|
8,171,891
|
|
Operating
costs
|
7,099,214
|
7,537,655
|
|
Operating
income
|
1,935,313
|
634,236
|
|
Other
income
|
80,165
|
—
|
|
Interest income
(expense), net
|
4,080
|
(622,139
)
|
|
Income before
taxes
|
2,019,558
|
12,097
|
|
Income tax expense
(benefit)
|
464,350
|
(132,487
)
|
|
Net
income
|
$
1,555,208
|
$
144,584
|
14
Concentrations:
For
the years ended December 31, 2016 and December 31, 2015,
we generated revenues from the following revenue streams as
a percentage of total revenue:
|
|
2016
|
2015
|
|
Revenue
Streams
|
|
|
|
Disclosure
management
|
19.6
%
|
22.1
%
|
|
Shareholder
communications
|
62.5
%
|
68.4
%
|
|
Platform and
technology
|
17.9
%
|
9.5
%
|
|
Total
|
100.0
%
|
100.0
%
|
Percentages:
Change
expressed as a percentage increase or decrease for the years ended
December 31, 2016 and December 31, 2015:
|
|
Year ended
December 31,
|
|
|
|
|
2016
|
2015
|
%
change
|
|
Revenue
Streams
|
|
|
|
|
Disclosure
management
|
$
2,367,504
|
$
2,569,415
|
(7.9
)%
|
|
Shareholder
communications
|
7,539,098
|
7,942,421
|
(5.1
)%
|
|
Platform and
technology
|
2,152,264
|
1,108,047
|
94.2
%
|
|
Total
|
$
12,058,866
|
$
11,619,883
|
3.8
%
|
Except
for the historical information contained herein, the matters
discussed in this Form 10-K include certain forward-looking
statements that involve risks and uncertainties, which are intended
to be covered by safe harbors. Those statements include, but are
not limited to, all statements regarding our and management’s
intent, belief and expectations, such as statements concerning our
future and our operating and growth strategy. We generally use
words such as "believe," "may," "could," "will," "intend,"
"expect," "anticipate," "plan," and similar expressions to identify
forward-looking statements. You should not place undue reliance on
these forward-looking statements. Our actual results could differ
materially from those anticipated in the forward-looking statements
for many reasons including our ability to implement our business
plan, our ability to raise additional funds and manage consumer
acceptance of our products, our ability to broaden our customer
base, our ability to maintain a satisfactory relationship with our
suppliers and other risks described in our reports filed with the
Securities and Exchange Commission, including Item 1A of this
Report on Form 10-K. Although we believe the expectations reflected
in the forward-looking statements are reasonable, they relate only
to events as of the date on which the statements are made, and our
future results, levels of activity, performance or achievements may
not meet these expectations. Investors are cautioned that all
forward-looking statements involve risks and uncertainties
including, without limitation, the factors set forth under the Risk
Factors section of this report. In light of the significant
uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as
a representation by us or any other person that our objectives and
plans will be achieved. All forward-looking statements made in this
Form 10-K are based on information presently available to our
management. We do not intend to update any of the forward-looking
statements after the date of this document to conform these
statements to actual results or to changes in our expectations,
except as required by law.
For the
year ended December 31, 2016, total revenue increased 4% to
$12,058,866 from $11,619,883 in 2015, an increase of $438,983.
Approximately $316,040 of the increase is related to the one-time
reversal of an accrual of unused postage credits related to ARS
clients acquired from PIR. Revenue from our platform and technology
revenue stream increased $1,044,217, or 94%, primarily as a result
of a shift of ARS customers to our Investor Network platform as
well as an increase in the licensing of our transfer agent,
IRDirect, iProxy, whistleblower, Blueprint and Classify platforms.
Revenue from our disclosure management revenue stream decreased
$201,911, or 8%, primarily as a result of competition in the
marketplace for our Edgar and XBRL services, partiallyoffset by an
increase in transfer agent services due to corporate transactions.
Excluding the benefit of the one-time reversal of the accrual for
unused postage credits noted earlier, revenue from our shareholder
communications revenue stream decreased $719,363, as we continue to
experience a decline in revenue associated with our hardcopy ARS
service offerings as issuers shift from hardcopy fulfillment to
digital fulfillment or elect not to continue with the service.
However, this was partially offset by increases in revenue from our
Accesswire press release platform and our proxy printing and
distribution services.
Overall, gross
margin increased to 75% for the year ended December 31, 2016,
compared to 70% for 2015. Excluding the benefit associated with the
release of the accrual related to unused postage credits, gross
margin for the year ended December 31, 2016, would have been 74%.
The increase in gross margin is attributable to our continued
transition to a cloud-based subscription model as well as from
increased revenue in our high margin press release
business.
For the
year ended December 31, 2016, operating expenses decreased to
$7,099,214, as compared to $7,537,655 in 2015. The decrease is
primarily due to an impairment loss on intangible assets of
$547,000, recognized during the year ended December 31, 2015, as
well as a decrease in depreciation and amortization during the year
ended December 31, 2016, due to certain intangible assets acquired
in the PIR acquisition, which became fully amortized during the
year. These decreases were partially offset by an increase in sales
and marketing expenses due to increased headcount and new marketing
initiatives, primarily at investor conferences and
tradeshows.
15
Other income for
the year ended December 31, 2016, is due to a gain recorded on the
excess of the fair value of stock received, in lieu of cash, to
settle an outstanding receivable. The decrease in interest
expense is the result of the final conversion of a note payable
into 417,712 shares of the Company's common stock during the year
ended December 31, 2015, and thus, no interest expense was recorded
during the year ended December 31, 2016.
In
2016, we had income before taxes of $2,019,558 compared to $12,097
in 2015. We recorded income tax expense of $464,350 during the year
ended December 31, 2016, compared to a benefit of $(132,487) during
the year ended December 31, 2015. The increase in income tax
expense is primarily related to the increase in taxable income for
the year ended December 31, 2016, compared to 2015. During
the years ended December 31, 2016 and 2015, the Company released a
portion of its valuation allowance related to federal and state net
operating losses, which resulted in a net benefit of $211,245 and
$179,426, respectively, and resulted in the income tax benefit
recorded in 2015. Net income was $1,555,208 in 2016 compared
to $144,584 in 2015.
In
2017, we expect to achieve growth in our Accesswire
press release business as well as in our platform and technology
revenue stream due to our continued investment in our cloud-based
platforms. However, we may continue to see declines in
shareholder communications revenue stream, as customers transition
from the traditional print fulfillment of annual reports to both
Classify and Investor Network. Additionally, we may
experience declines in disclosure management revenue as customers
transition to Blueprint and we continue to face pricing pressure in
the market.
Results of Operations
Comparison of results of operations for the years ended
December 31, 2016 and 2015
|
|
Year
ended
|
|
|
|
December
31,
|
|
|
Revenue
Streams
|
2016
|
2015
|
|
Disclosure
management
|
|
|
|
Revenue
|
$
2,367,504
|
$
2,569,415
|
|
Gross
margin
|
$
1,647,430
|
$
1,806,531
|
|
Gross margin
%
|
70
%
|
70
%
|
|
|
|
|
|
Shareholder
communications
|
|
|
|
Revenue
|
7,539,098
|
7,942,421
|
|
Gross
margin
|
5,591,249
|
5,440,349
|
|
Gross margin
%
|
74
%
|
68
%
|
|
|
|
|
|
Platform
and technology
|
|
|
|
Revenue
|
2,152,264
|
1,108,047
|
|
Gross
margin
|
1,795,848
|
925,011
|
|
Gross margin
%
|
83
%
|
83
%
|
|
|
|
|
|
Total
|
|
|
|
Revenue
|
$
12,058,866
|
$
11,619,883
|
|
Gross
margin
|
$
9,034,527
|
$
8,171,891
|
|
Gross margin
%
|
75
%
|
70
%
|
Revenues
Total revenue increased by $438,983, or 4%, to
$12,058,866 during the year ended December 31, 2016, as compared to
$11,619,883 in 2015.
It
is important to note, included in our revenue for the year ended
December 31, 2016, is the one-time benefit of $316,040 related to
the reversal of an accrual of unused postage credits related to ARS
clients acquired from PIR.
Disclosure management revenue decreased $201,911,
or 8%, during the year ended December 31, 2016, as compared to
2015. The decrease was mostly due to a decline in revenue from our
Edgar and XBRL services, which declined $369,121 during the year
ended December 31, 2016, compared to the same period of
2015,
as the Company continued
to experience pricing pressure on these services as well as client
attrition. Additionally, we transitioned some of our clients
to our Blueprint platform, allowing them to self-file with our new
cloud-based product. This has resulted in a shift in some
revenue to our platform and technology revenue stream, a trend
which we expect to continue. However, this decrease was
partially offset by an increase in
revenue from our
transfer agent business due to an increase in
clients as well as an increase in corporate directives and actions
compared to the same period of the prior year. The timing of
these corporate directives and actions are difficult to predict as
they are controlled by our clients and the conditions of the market
and therefore fluctuate from year to year.
16
Shareholder
communications revenue decreased $403,323 or 5% during the year
ended December 31, 2016, as compared to 2015.
The decrease in
shareholder communications revenue is due to a decline in revenue
associated with our hardcopy ARS service offerings as issuers shift
from hardcopy fulfillment to digital fulfillment or elect not to
continue with the service. Additionally, customers have
migrated from ARS to our Investor Network product, resulting in a
shift of approximately $413,000 of revenue during the year ended
December 31, 2016, from shareholder communications to our platform
and technology revenue stream. These decreases were offset by
an increase in revenue from Accesswire, our press release platform,
which increased $807,172 during the year ended December 31, 2016,
compared to the same period of 2015. The increase is due to
successful penetration into the newswire market and the addition of
both new public and private customers. We expect to continue
to invest in this platform, by increasing distribution, sales staff
and marketing in order to continue our growth trends.
Additionally, revenue increased in our proxy printing and
distribution services for the year ended December 31, 2016,
compared to the prior year due to an increase in the number of
projects, resulting from successful cross selling of new transfer
agent clients. Included in revenue for year ended December 31,
2016, is the one-time benefit of $316,040 related to the reversal
of an accrual of unused postage credits related to ARS clients
acquired from PIR.
Platform and
technology revenue increased $1,044,217, or 94% during the year
ended December 31, 2016, as compared to 2015.
The increase is
primarily due to the shift of ARS customers to our Investor Network
platform noted above as well as increases in licensing of a
majority of our other products, including our transfer agent,
iRDirect, iProxy, whistleblower, Blueprint and Classify
platforms,
as we continue our
transition to a subscription model. Revenue from this stream
increased to 17.9% of total revenue during the year ended December
31, 2016, compared to 9.5% during the prior year. Along with
our press release platform, the Company plans to continue to invest
in these platforms in order to further drive an increase in
licenses and revenue growth.
2016 Revenue Backlog
At
December 31, 2016, we have deferred revenue of $842,642 that we
expect to recognize throughout 2017,
compared to
$822,481 at December 31, 2015
. Deferred revenue primarily
consists of advance billings for annual contracts for our legacy
annual report service and licenses of our cloud-based
platforms.
Cost of Revenues
Cost
of revenues consists primarily of direct labor costs, third
party licensing, warehousing, logistics, print production
materials, postage and outside services directly related to the
delivery of services to our customers as well as depreciation of
capitalized software related to our platforms licensed to
customers. Cost of revenues decreased by $423,653, or 12% during
the year ended December 31, 2016, as compared to 2015. Overall
gross margin increased to 75% for the year ended December 31, 2016,
as compared to 70% for the year ended December 31,
2015.
Excluding the
benefit associated with the release of the accrual related to
unused postage credits, gross margin for the year ended December
31, 2016, would have been 74%.
We
achieved margins of 70% from our disclosure management services
during both the years ended December 31, 2016 and 2015. As
previously discussed we continued to experience pricing pressure
from our Edgar and XBRL services, however we were able to offset
this by reducing costs through the use of less outside vendors and
reducing internal headcount. Additionally, the increase in
transfer agent revenue resulted in higher margins as the cost for
these services is relatively fixed.
Gross
margins from our shareholder communications services increased to
74% for the year ended December 31, 2016, compared to 68% for the
year ended December 31, 2015.
Excluding the
one-time benefit associated with the release of the unused postage
credits, gross margins for the year ended December 31, 2016, would
have been 73%. The increase in gross margin percentage is due to
our continued transition to a cloud-based subscription model
resulting in stream-lined costs as well as from additional revenue
from our high-margin press release business.
Gross
margins from platform and technology revenue remained consistent at
83% for the year ended December 31, 2016, as well as 2015.
Additional revenue through our platform licenses and new
cloud-based products was offset by additional depreciation of
capitalized software.
General and Administrative Expense
General and
administrative expenses consist primarily of salaries, stock based
compensation, bonuses, insurance, fees for professional services,
general corporate expenses and facility and equipment
expenses. General and administrative expenses
were
$3,185,308
during the year
ended December 31, 2016, a
decrease of $56,096, or
2%, compared to 2015. The decrease is due to reductions in
consulting expenses partially offset by an increase in personnel
expenses due to an increase in headcount, bonuses and stock
compensation.
As a
percentage of revenue, general and administrative expenses
decreased to 26% during the year ended December 31, 2016, compared
to 28% during the year ended December 31, 2015.
17
Sales and Marketing Expenses
Sales
and marketing expenses consist primarily of salaries, stock based
compensation, sales commissions, advertising expenses, and
marketing expenses. Sales and marketing expenses were $2,600,851
for the year ended December 31, 2016, an increase of $257,521, or
11%, as compared to 2015. This increase is due to an increase in
sales personnel costs due to an increase in headcount in our sales
department as well as an increase in new marketing efforts as it
relates to investor conferences and tradeshow
activities.
As a
percentage of revenue, sales and marketing expenses increased to
22% during the year ended December 31, 2016, compared to 20% during
the year ended December 31, 2015.
Product Development
Product
development expenses consist primarily of salaries, stock based
compensation, bonuses and licenses to develop new products and
technology to complement and/or enhance Platform id. Product
development costs increased $77,039, or 24%, during the year ended
December 31, 2016, compared to2015. The increase is the result of
the Company increasing personnel resources toward the development
of its cloud-based platforms. During the year ended December 31,
2016, the Company capitalized $1,506,616 of software development
costs, compared to $749,095 during the year ended December 31,
2015.
Depreciation and Amortization
Depreciation and
amortization expenses during the year ended December 31, 2016,
decreased by $169,905, or 16%, to $909,432, as compared to
$1,079,337 during 2015. The decrease is primarily due to lower
amortization of certain intangible assets acquired in the PIR
acquisition, which became fully amortized during the year ended
December 31, 2016.
Impairment Loss on Intangible Assets
During
the fourth quarter of 2015, the Company elected not to renew
certain trademarks purchased in conjunction with the acquisition of
PIR. These trademarks had an allocated value of $148,680, and the
write-off of this value is included in Impairment loss on
intangible assets on the Consolidated Statements of Net Income for
the year ended December 31, 2015. Additionally, as part of the
Company’s annual review of impairment of goodwill and
intangible assets, the Company determined the remaining trademarks
purchased as part of the acquisition of PIR were no longer
indefinite-lived assets, as the Company plans to integrate and
re-brand the associated trademarks with Issuer Direct. As a result
of this determination, the Company was required to perform a
goodwill impairment assessment. Due to lower futureprojections of
revenue associated with our ARS service and a shortened useful life
of the trademarks, this assessment resulted in an impairment loss
of $398,320, which is also included in Impairment loss on
intangible assets in the Consolidated Statements of Income for the
year ended December 31, 2015. No impairment was recorded as a
result of the Company's annual review of impairment of goodwill and
intangible assets for the year ended December 31,
2016.
Other income (expense)
Other income, net
Other
income, net for the year ended December 31, 2016, is the result of
a gain recorded on the excess of the fair value of stock received,
in lieu of cash, to settle an outstanding receivable.
Interest income (expense), net
Interest income
(expense), net decreased $626,219 during the year ended December
31, 2016, compared to the same period of 2015. The decrease is due
to the final conversion of $1,666,673 of principal payable on the
8% Note (See Note 6 of the Consolidated Financial Statements) into
417,712 shares of the Company's common stock at the conversion
price of $3.99 on August 22, 2015. As a result of the final
conversion, the Company no longer has any non-cash or cash interest
expense associated with the 8% Note.
18
Income Taxes
We
recorded income tax expense of $464,350 during the year ended
December 31, 2016, compared to a benefit of $(132,487) during the
year ended December 31, 2015. The primary reason for the
increase in income tax expense is due to an increase in taxable
income for the year ended December 31, 2016, compared to
2015. During the years ended December 31, 2016 and 2015, the
Company released a portion of its valuation allowance related to
federal and state net operating losses, which resulted in a net
benefit of $211,245 and $179,426, respectively. The release
during the year ended December 31, 2016 comprised a full valuation
release of the previously reserved tax benefits from US net
operating losses that were acquired as part of the acquisition
of PIR. At the date of acquisition, management
believed it was more likely than not that the benefits would not be
used due to the uncertainty of future profitability and also due to
statutory limitations on the amount of net operating losses that
can be carried forward in an acquisition. During the year ended
December 31, 2015, the Company released portions of the reserve
related to tax years through 2015 based on current best estimates
of profitability at that time.
Net
Income
Net
income for the year ended December 31, 2016 was $1,555,208 as
compared to $144,584 in 2015. The increase in net income is
primarily attributable to higher gross margins, resulting from
increased revenue and lower cost of revenues as a result of our
transition to a cloud-based, subscription model with a focus on
revenue from our platforms. Additionally, the year ended December
31, 2015, was negatively impacted by the impairment loss on
intangible assets of $547,000. Finally, the decrease in
interest expense for the year ended December 31, 2016, was
partially offset by an increase in tax expense.
Liquidity and Capital Resources
As of
December 31, 2016, we had $5,338,978 in cash and cash equivalents
and $1,299,698 in net accounts receivable. Current liabilities at
December 31, 2016, totaled $2,104,420 including our accounts
payable, deferred revenue, accrued payroll liabilities, income
taxes payable and other accrued expenses. At December 31, 2016, our
current assets exceeded our current liabilities by
$4,722,840.
Effective September
2, 2016, the Company renewed its Line of Credit, which reduced the
interest rate to LIBOR plus 2.50%. The amount of funds
available for future borrowings remained at $2,000,000. As of
December 31, 2016, the interest rate was 3.26% and the Company did
not owe any amounts on the Line of Credit.
We
manage our cash flow carefully with the intent to meet our
obligations from cash generated from operations. However, it is
possible that we will have to raise additional funds through the
issuance of equity in order to meet any future obligations. There
can be no assurance that cash generated from operations will be
sufficient to fund our operating expenses, to allow us to pay
dividends, or meet our other obligations, and there is no assurance
that debt or equity financing will be available, or if available,
that such financing will be upon terms acceptable to
us.
Disclosure about Off-Balance Sheet Arrangements
We do
not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet
arrangements.
Outlook
Overall, the demand
for our platforms continues to be stable in the majority of the
segments we serve. In a portion of our business, we will continue
to see demand shift from traditional printed and service-based
engagements to a cloud-based subscription model, as well as digital
distribution offerings. We are positioned well in this space to be
both competitive and agile to deliver these platforms to the market
at the same or higher gross margins than the previous
periods.
One of the
Company’s competitive strengths is that it has embraced
cloud-based technology early on in its strategy. Making the pivot
to a subscription model has been and will be key for the long-term
sustainable growth management expects from its new
platforms.
We will continue
to focus on the following key strategic initiatives during
2017:
●
Continued expansion of our sales
and marketing teams,
●
Significant technology advancements
and upgrades,
●
Profitable sustainable
growth,
●
Positive
cash flow from
operations,
●
Increased average revenue per
user,
●
Expanded customer
base,
●
Growth in our newswire
business
We believe there
is significant demand for our products among the large, middle and
small cap markets that are seeking to find better platforms and
tools to disseminate and communicate their respective messages, and
that we have the capacity to meet the demand.
We have spent and
will continue to spend a considerable amount of time and money
focused on our product sets, platforms and intellectual property
development through 2017. These developments are key to our overall
offerings in the market and are necessary to keep our competitive
advantages and sustain the next round of growth that management
believes it can achieve. If we are successful in this development
effort, we believe we can achieve increases in revenues per
user, additional issuers and users, as
well as higher gross margins as we move beyond 2017.
19
These
statements are forward looking and are subject to factors that
could cause actual results to differ materially from those
suggested here, including, without limitation, demand for and
acceptance of our services, new developments, competition and
general economic or market conditions, particularly in the domestic
and international capital markets. Refer also to the Cautionary
Statement Concerning Forward Looking Statements and Risk Factors
included in this report.
Critical Accounting Policies and Estimates
The
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Significant
intercompany accounts and transactions are eliminated in
consolidation.
Revenue Recognition
We
recognize revenue in accordance with accounting principles
generally accepted in the United States (“US GAAP”),
including SEC Staff Accounting Bulletin No. 104, “Revenue
Recognition,” which requires that: (i) persuasive evidence of
an arrangement exists, (ii) delivery has occurred or services
have been rendered, (iii) the sales price is fixed or
determinable, and (iv) collectability is reasonably assured. We
recognize revenue when services are rendered and/or delivered,
where collectability is probable.
Deferred revenue primarily consists of advance
billings for annual contracts for our legacy annual report service
and licenses of our cloud-based
platforms.
Allowance for Doubtful Accounts
We
provide an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection
information. Credit is granted on an unsecured basis. In
determining the amount of the allowance, management is required to
make certain estimates and assumptions. The allowance is made up of
specific reserves, as deemed necessary, on client account balances,
and a reserve based on our historical experience.
Income Taxes
We
comply with the FASB ASC No. 740 – Income Taxes which
requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and
liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result
in future taxable or deductible amounts based on enacted tax laws
and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred income tax assets
to the amounts expected to be realized. For any
uncertain tax positions, we recognize the impact of a tax position,
only if it is more likely than not of being sustained upon
examination, based on the technical merits of the position. Our
policy regarding the classification of interest and penalties is to
classify them as income tax expense in our financial statements, if
applicable. At the end of each interim period, we
estimate the effective tax rate we expect to be applicable for the
full year and this rate is applied to our results for the interim
year-to-date period and then adjusted for any discrete period
items.
20
Capitalized Software
In
accordance with FASB ASC No. 350 – Intangibles –
Goodwill and Other, costs incurred to develop our cloud-based
platform products and disclosure management system components are
capitalized when the preliminary project phase is complete,
management commits to fund the project and it is probable the
project will be completed and used for its intended purposes. Once
the software is substantially complete and ready for its intended
use, the software is amortized over its estimated useful
life. Costs related to design or maintenance of the
software are expensed as incurred.
Impairment of Long-lived Assets
In
accordance with the authoritative guidance for accounting for
long-lived assets, assets such as property and equipment,
trademarks, and intangible assets subject to amortization, are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset group may not be
recoverable. Recoverability of asset groups to be held and used is
measured by a comparison of the carrying amount of an asset group
to estimated undiscounted future cash flows expected to be
generated by the asset group. If the carrying amount of an asset
group exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of an
asset group exceeds fair value of the asset group.
Fair Value Measurements
As of
December 31, 2016 and 2015, we do not have any financial assets or
liabilities that are required to be, or that we elected to measure,
at fair value. We believe that the fair value of our
financial instruments, which consist of cash and cash equivalents,
accounts receivable, our line of credit, notes payable, and
accounts payable approximate their carrying amounts.
Translation of Foreign Financial
Statements
The
financial statements of the foreign subsidiaries of the Company
have been translated into U.S. dollars. All assets and
liabilities have been translated at current rates of exchange in
effect at the end of the period. Income and expense
items have been translated at the average exchange rates for the
year or the applicable interim period. The gains or
losses that result from this process are recorded as a separate
component of other accumulated comprehensive income (loss) until
the entity is sold or substantially liquidated.
Business Combinations, Goodwill and Intangible Assets
We
account for business combinations under FASB ASC No. 805 –
Business Combinations and the related acquired intangible assets
and goodwill under FASB ASC No. 350 – Intangibles –
Goodwill and Other. The authoritative guidance for business
combinations specifies the criteria for recognizing and reporting
intangible assets apart from goodwill. We record the assets
acquired and liabilities assumed in business combinations at their
respective fair values at the date of acquisition, with any excess
purchase price recorded as goodwill. Goodwill is an asset
representing the future economic benefits arising from other assets
acquired in a business combination that are not individually
identified and separately recognized. Intangible assets consist of
client relationships, customer lists, software, technology and
trademarks that are initially measured at fair value. At
the time of the business combination the trademarks are considered
an indefinite-lived asset and, as such, are not amortized as there
is no foreseeable limit to cash flows generated from them. The
goodwill and intangible assets are assessed annually for
impairment, or whenever conditions indicate the asset may be
impaired, and any such impairment will be recognized in the period
identified. The client relationships, customer lists, software and
technology are amortized over their estimated useful
lives.
Newly Adopted Accounting Pronouncements
On
November 20, 2015, the FASB issued Accounting Standards Update
(“ASU”) 2015-17 ("ASU 2015-17”), Balance Sheet
Classification of Deferred Taxes, which requires that all deferred
tax assets and liabilities, along with any related valuation
allowance, in each jurisdiction be classified as noncurrent on the
balance sheet. For public business entities, ASU 2015-17 is
effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within those
annual periods but may be early adopted. ASU 2015-17 may be applied
either prospectively, for all deferred tax assets and liabilities,
or retrospectively (i.e., by reclassifying the comparative balance
sheets). The Company elected to early adopt ASU 2015-17, on a
prospective basis, as of December 31, 2015.
The FASB issued ASU No. 2015-16, Business
Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments
.
The amendments in ASU 2015-16 require that an
acquirer recognize adjustments to estimated amounts that are
identified during the measurement period in the reporting period in
which the adjustment amounts are determined. The amendments require
that the acquirer record, in the same period’s financial
statements, the effect on earnings of changes in depreciation,
amortization, or other income effects, if any, as a result of the
change to the estimated amounts, calculated as if the accounting
had been completed at the acquisition date. The amendments also
require an entity to present separately on the face of the income
statement or disclose in the notes the portion of the amount
recorded in current-period earnings by line item that would have
been recorded in previous reporting periods if the adjustment to
the estimated amounts had been recognized as of the acquisition
date. The amendments in this ASU were effective for public business
entities for fiscal years beginning after December 15, 2015,
including interim periods within those fiscal years. The amendments
should be applied prospectively to adjustments to provisional
amounts that occur after the effective date with earlier
application permitted for financial statements that have not been
issued. ASU 2015-16 did not have a significant impact on our
financial statements.
21
The FASB issued ASU
2015-05, Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Fees Paid in a
Cloud Computing Arrangement. The amendments in ASU 2015-05
provide guidance to customers about whether a cloud computing
arrangement includes a software license. If a cloud computing
arrangement includes a software license, then the customer should
account for the software license element of the arrangement
consistent with the acquisition of other software licenses. If a
cloud computing arrangement does not include a software license,
the customer should account for the arrangement as a service
contract. The amendments do not change the accounting for a
customer’s accounting for service contracts. As a result of
the amendments, all software licenses within the scope of Subtopic
350-40 will be accounted for consistent with other licenses of
intangible assets. ASU 2015-05 is effective for public
entities for annual periods, including interim periods within those
annual periods, beginning after December 15, 2015. ASU 2015-05 did
not have a significant impact on our financial
statements.
The FASB issued ASU
2015-01, Income Statement - Extraordinary and Unusual Items
(Subtopic 225-20): Simplifying Income Statement Presentation by
Eliminating the Concept of Extraordinary Items. The FASB
issued this ASU as part of its initiative to reduce complexity in
accounting standards. The objective of the simplification
initiative is to identify, evaluate, and improve areas of US GAAP
for which cost and complexity can be reduced while maintaining or
improving the usefulness of the information provided to the users
of financial statements. The amendments in ASU 2015-01
were effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2015. ASU 2015-01
did not have a significant impact on our financial
statements.
The FASB issued ASU
2014-16, Derivatives and Hedging (Topic 815): Determining Whether
the Host Contract in a Hybrid Financial Instrument Issued in the
Form of a Share Is More Akin to Debt or to Equity. The
amendments in this ASU do not change the current criteria in US
GAAP for determining when separation of certain embedded derivative
features in a hybrid financial instrument is required. The
amendments clarify how current US GAAP should be interpreted in
evaluating the economic characteristics and risks of a host
contract in a hybrid financial instrument that is issued in the
form of a share. Specifically, the amendments clarify that an
entity should consider all relevant terms and features, including
the embedded derivative feature being evaluated for bifurcation, in
evaluating the nature of the host contract. Furthermore, the
amendments clarify that no single term or feature would necessarily
determine the economic characteristics and risks of the host
contract. Rather, the nature of the host contract depends upon the
economic characteristics and risks of the entire hybrid financial
instrument. The amendments in this ASU were effective
for public business entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. ASU
2014-16 did not have a significant impact on our financial
statements.
The FASB
issued ASU 2014-12, Compensation – Stock Compensation (Topic
718): Accounting for Share-Based Payments When the Terms of an
Award Provide That a Performance Target Could Be Achieved after the
Requisite Service Period. The issue is the result of a
consensus of the FASB Emerging Issues Task Force
(EITF). The amendments in the ASU require that a
performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance
condition. A reporting entity should apply existing guidance in
Topic 718, Compensation – Stock Compensation, as it relates
to awards with performance conditions that affect vesting to
account for such awards. The performance target should not be
reflected in estimating the grant-date fair value of the
award. Compensation cost should be recognized in the
period in which it becomes probable that the performance target
will be achieved and should represent the compensation cost
attributable to the period(s) for which the requisite service has
already been rendered. If the performance target becomes probable
of being achieved before the end of the requisite service period,
the remaining unrecognized compensation cost should be recognized
prospectively over the remaining requisite service period. The
total amount of compensation cost recognized during and after the
requisite service period should reflect the number of awards that
are expected to vest and should be adjusted to reflect those awards
that ultimately vest. The requisite service period ends when the
employee can cease rendering service and still be eligible to vest
in the award if the performance target is achieved. The
amendments in this ASU were effective for annual periods and
interim periods within those annual periods beginning after
December 15, 2015. ASU 2014-12 did not have a significant
impact on our financial statements.
Recent Accounting Pronouncements
The FASB issued ASU 2017-04, Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, which eliminates Step 2 from the goodwill impairment
test. The annual, or interim, goodwill impairment test is performed
by comparing the fair value of a reporting unit with its carrying
amount. An impairment charge should be recognized for the amount by
which the carrying amount exceeds the reporting unit’s fair
value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. In addition,
income tax effects from any tax deductible goodwill on the carrying
amount of the reporting unit should be considered when measuring
the goodwill impairment loss, if applicable.
The amendments also eliminate the requirements
for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. An entity
still has the option to perform the qualitative assessment for a
reporting unit to determine if the quantitative impairment test is
necessary. The amendments are effective for public business
entities that are SEC filers for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15,
2019.
The company does not
expect this pronouncement to have a significant impact on its
financial statements.
22
The FASB issued
ASU 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business, which clarifies the definition of a
business. The amendments affect all companies and other reporting
organizations that must determine whether they have acquired or
sold a business. The definition of a business affects many areas of
accounting including acquisitions, disposals, goodwill, and
consolidation. The amendments are intended to help companies and
other organizations evaluate whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses. The amendments are effective for public companies for
annual periods beginning after December 15, 2017, including interim
periods within those periods.
The
company does not
expect this pronouncement to have a significant impact on its
financial statements, unless an acquisition or disposal of assets
is completed.
The
FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments, which
provides cash flow statement classification guidance for: 1)
Debt prepayment or debt extinguishment costs; 2) Settlement of
zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective
interest rate of the borrowing; 3) Contingent consideration
payments made after a business combination; 4) Proceeds from the
settlement of insurance claims; 5) Proceeds from the settlement of
corporate-owned life insurance policies, including bank-owned life
insurance policies; 6) Distributions received from equity method
investees; 7) beneficial interests in securitization transactions;
and 8) Separately identifiable cash flows and application of the
Predominance Principle. This is effective for public business
entities for fiscal years beginning after December 15, 2017, and
interim periods within those years. Early application is
permitted, including adoption in an interim period. The
company does not expect this pronouncement to have a significant
impact on its financial statements.
The FASB issued
ASU 2016-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments,
which, among other things, requires the measurement of all expected
credit losses for financial assets held at the reporting date to be
based on historical experience, current conditions, and reasonable
and supportable forecasts. Many of the loss estimation techniques
applied today will still be permitted, although the inputs to those
techniques will change to reflect the full amount of expected
credit losses. This is effective for SEC filers for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2019. The company does not expect this
pronouncement to have a significant impact on its financial
statements.
The FASB issued ASU
2016-09, Improvements to Employee Share-Based Payment Accounting,
which simplifies several aspects of the accounting for share-based
payment award transactions including (a) income tax consequences;
(b) classification of awards as either debt or equity liabilities;
and (c) classification on the statement of cash flows. The
amendments are effective for public business entities for annual
periods beginning after December 15, 2016, and interim periods
within those annual periods. Early adoption is permitted for
any entity in any interim or annual period. If an entity
early adopts the amendments in an interim period, any adjustment
should be reflected as of the beginning of the fiscal year that
includes the interim period. Additionally, as a reminder, an
entity that elects to early adopt the new guidance must adopt all
of the amendments in the same period. The primary amendment that is
expected to impact the Company's financial statements is the
requirement for excess tax benefits or shortfalls on the exercise
of stock-based compensation awards to be presented in income tax
expense in the Consolidated Statements of Income during the period
the award is exercised as opposed to being recorded in Additional
paid-in capital on the Consolidated Balance Sheets. The
excess tax benefit or shortfall is calculated as the difference
between the fair value of the award on the date of exercise and the
fair value of the award used to measure the expense to be
recognized over the service period. As the result is
dependent on the future value of the Company's stock as well as the
timing of employee exercises, the amount of the impact cannot be
quantified at this time.
The FASB's new leases standard ASU 2016-02 Leases
(Topic 842) was issued on February 25, 2016. ASU 2016-02 is
intended to improve financial reporting about leasing transactions.
The ASU affects all companies and other organizations that lease
assets such as real estate, airplanes, and manufacturing equipment.
The ASU will require organizations that lease assets referred to as
“Lessees” to recognize on the balance sheet the assets
and liabilities for the rights and obligations created by those
leases. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial statements. Under the new guidance, a lessee will be
required to recognize assets and liabilities for leases with lease
terms of more than 12 months. Consistent with current US GAAP, the
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike
current US GAAP which requires only capital leases to be recognized
on the balance sheet the new ASU will require both types of leases
(i.e. operating and capital) to be recognized on the balance sheet.
The FASB lessee accounting model will continue to account for both
types of leases. The capital lease will be accounted for in
substantially the same manner as capital leases are accounted for
under existing US GAAP. The operating lease will be accounted for
in a manner similar to operating leases under existing US GAAP,
except that lessees will recognize a lease liability and a lease
asset for all of those leases. Public companies will be
required to adopt the new leasing standard for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2018. For calendar year-end public companies, this means
an adoption date of January 1, 2019 and retrospective application
to previously issued annual and interim financial statements for
2018, however, early adoption is permitted. Lessees with a large
portfolio of leases are likely to see a significant increase in
balance sheet assets and liabilities. The Company currently has one
lease on its corporate facilities which ends October 31,
2019. Absent any renewal of the lease or new leases entered
into before January 1, 2019, the Company will be required to record
a right-to-use asset and corresponding lease liability associated
with the remaining lease payments beginning with the first interim
period of 2019.
This
will increase both balance sheet assets and liabilities by
insignificant amounts and will not have a significant impact
on the income statement or affect any covenant
calculations.
The FASB has issued ASU 2014-09, Revenue from
Contracts with Customers (Topic 606) and several updates to the
ASU. ASU 2014-09 requires revenue recognition to depict the
transfer of goods or services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. ASU 2014-09 sets
forth a new revenue recognition model that requires identifying the
contract, identifying the performance obligations, determining the
transaction price, allocating the transaction price to performance
obligations and recognizing the revenueupon satisfaction of
performance obligations. The amendments in the ASU can be applied
either retrospectively to each prior reporting period presented or
retrospectively with the cumulative effect of initially applying
the update recognized at the date of the initial application along
with additional disclosures.
The Company is currently evaluating the impact of
ASU 2014-09 as well as the additional updates, however, does not
believe it will have a significant impact on the Company's
financial statements as the Company believes the current manner in
which revenue is recognized will result in the same or similar
timing and amount of revenue recognition as required by ASU 2014-09
and the additional amendments. These ASU's are currently effective
for the Company in our year beginning on January 1,
2018.
23
We do
not believe that we face material market risk with respect to our
cash or cash equivalents, which totaled $5,338,978 and $4,215,145
at December 31, 2016 and 2015, respectively. We held
marketable securities of $28,188 and $0 as of December 31,
2016 or 2015, respectively.
The
financial statements required by this Item 8 are set forth in
Item 15 of this Annual Report. All information which has been
omitted is either inapplicable or not required.
Our
balance sheets as of December 31, 2016 and 2015, and the
related statements of income, comprehensive income,
stockholders’ equity and cash flows for the two years ended
December 31, 2016, and 2015, together with the independent
registered public accountants’ reports thereon appear
beginning on Page F-1.
None.
Management’s Annual Report Regarding
Internal Disclosure Controls and
Procedures
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation and fair presentation of financial statements for
external purposes, in accordance with generally accepted accounting
principles. The effectiveness of any system of internal control
over financial reporting is subject to inherent limitations and
therefore, may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness of future periods
are subject to the risk that the controls may become inadequate due
to change in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
This
annual report does not include an attestation report of the
Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s
registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that permit the Company to
provide only management’s report in this annual
report.
Evaluation of Disclosure Controls and Procedures
Based
on an evaluation under the supervision and with the participation
of our management, our principal executive officer and principal
financial officer have concluded that our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act") were
effective as of December 31, 2016, to ensure that information
required to be disclosed in reports that are filed or submitted
under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission rules and forms and (ii) accumulated and
communicated to our management, including our principal executive
officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Inherent Limitations over Internal Controls
Our
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes
those policies and procedures that: (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and disposition of our assets; (ii)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures are being made only in accordance with
authorizations of management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of assets that could
have a material effect on the financial statements.
Management,
including our Chief Executive Officer and Chief Financial Officer,
do not expect that our internal controls will prevent or detect all
errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of internal
controls can provide absolute assurance that all control issues and
instances of fraud, if any, have been detected. Also, any
evaluation of the effectiveness of controls in future periods are
subject to the risk that those internal controls may become
inadequate because of changes in business conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
24
Report of Management's Annual Report on Internal Control over
Financial Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as
amended). Management conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the
criteria set forth by the Committee of Sponsoring Organizations
("COSO") updated Internal Control—Integrated Framework
(2013). Based on this evaluation, management has concluded that our
internal control over financial reporting was effective as of
December 31, 2016.
There
were no changes in our internal controls that could materially
affect the disclosure controls and procedures subsequent to the
date of their evaluation, nor were there any material deficiencies
or material weaknesses in our internal controls. As a result, no
corrective actions were required or undertaken.
None.
25
The
information required by this Item is set forth under the headings
“Directors, Executive Officers and Corporate
Governance” and “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Company’s 2017 Proxy
Statement to be filed with the U.S. Securities and Exchange
Commission ("SEC") within 120 days after December 31, 2016 in
connection with the solicitation of proxies for the Company’s
2017 annual meeting of shareholders and is incorporated herein by
reference.
The
information required by this Item is set forth under the heading
“Executive Compensation” and under the subheadings
“Board Oversight of Risk Management,”
“Compensation of Directors,” “Director
Compensation-2016” and “Compensation Committee
Interlocks and Insider Participation” under the heading
“Directors, Executive Officers and Corporate
Governance” in the Company’s 2017 Proxy Statement to be
filed with the SEC within 120 days after December 31, 2016 and is
incorporated herein by reference.
The
information required by this Item is set forth under the headings
“Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan
Information” in the Company’s 2017 Proxy Statement to
be filed with the SEC within 120 days after December 31, 2016 and
is incorporated herein by reference.
The
information required by this Item is set forth under the heading
“Review, Approval or Ratification of Transactions with
Related Persons” and under the subheading “Board
Committees” under the heading “Directors, Executive
Officers and Corporate Governance” in the Company’s
2017 Proxy Statement to be filed with the SEC within 120 days after
December 31, 2016 and is incorporated herein by
reference.
The
information required by this Item is set forth under the
subheadings “Fees Paid to Auditors” and “Policy
on Audit Committee Pre-Approval of Audit and Non-Audit Services
Performed by the Independent Registered Public Accounting
Firm” under the proposal “Ratification of Appointment
of Independent Registered Public Accounting Firm” in the
Company’s 2017 Proxy Statement to be filed with the SEC
within 120 days after December 31, 2016 and is incorporated herein
by reference.
26
(a) Financial
Statements
The
financial statements listed in the accompanying index (page F-1) to
the financial statements are filed as part of this Annual Report on
Form 10-K.
(b) Exhibits
|
Exhibit Number
|
|
Exhibit Description
|
|
|
|
|
|
|
Subsidiaries of
the Registrant.*
|
|
|
|
Consent of
Independent Registered Public Accounting Firm.*
|
|
|
|
Rule 13a-14(a)
Certification of Principal Executive Officer.*
|
|
|
|
Rule 13a-14(a)
Certification of Principal Financial Officer.*
|
|
|
|
Section 1350
Certification of Principal Executive Officer.*
|
|
|
|
Section 1350
Certification of Principal Financial Officer.*
|
———————
*
Filed herewith
(c) Financial
Statement Schedules omitted
None.
27
S
IGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
ISSUER DIRECT CORPORATION
|
|
|
|
|
|
|
|
|
Date:
March 14, 2017
|
By:
|
/s/
Brian R. Balbirnie
|
|
|
|
|
Brian
R. Balbirnie
|
|
|
|
|
Chief
Executive Officer, Director
|
|
|
|
|
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of the dates set
forth below.
|
Signature
|
|
Date
|
|
Title
|
|
|
|
|
|
|
|
/s/
Brian R. Balbirnie
|
|
March
14, 2017
|
|
Director, Chief
Executive Officer
|
|
Brian
R. Balbirnie
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Steven Knerr
|
|
March
14, 2017
|
|
Chief
Financial Officer
|
|
Steven
Knerr
|
|
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Andre Boisvert
|
|
March
14, 2017
|
|
Director, Chairman
of the Board and Compensation Committee and Audit Committee
Member
|
|
Andre
Boisvert
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
William Everett
|
|
March
14, 2017
|
|
Director, Chairman
of the Audit Committee and Member of the Compensation Committee,
and Strategic Advisory Committee
|
|
William
Everett
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ J.
Patrick Galleher
|
|
March
14, 2017
|
|
Director, Chairman
of the Strategic Advisory Committee
|
|
J.
Patrick Galleher
|
|
|
|
|
|
|
|
|
|
|
28
INDEX TO FINANCIAL STATEMENTS
|
|
|
Page
|
|
|
|
|
|
|
F-2
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-7
|
|
|
|
F-8
|
F-1
R
EPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Issuer
Direct Corporation
Morrisville, North
Carolina
We
have audited the accompanying consolidated balance sheets of Issuer
Direct Corporation and subsidiaries (the “Company”) as
of December 31, 2016 and 2015, and the related consolidated
statements of income, comprehensive income, stockholders’
equity, and cash flows for each of the years in the two-year period
ended December 31, 2016. The Company’s management is
responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Issuer Direct Corporation and subsidiaries as of December 31, 2016
and 2015, and the results of their operations and their cash flows
for each of the years in the two-year period ended December 31,
2016, in conformity with accounting principles generally accepted
in the United States of America.
/s/
CHERRY BEKAERT LLP
Raleigh, North
Carolina
March
14, 2017
F-2
I
SSUER DIRECT
CORPORATION AND SUBSIDIARIES
AS OF DECEMBER 31, 2016 AND 2015
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
5,338,978
|
$
4,215,145
|
|
Accounts receivable
(net of allowance for doubtful accounts of $429,192 and $396,884,
respectively)
|
1,299,698
|
1,253,628
|
|
Other current
assets
|
188,584
|
252,468
|
|
Total current
assets
|
6,827,260
|
5,721,241
|
|
Capitalized
software
(net of accumulated
amortization of $207,438 and $25,133, respectively)
|
2,048,273
|
723,962
|
|
Fixed assets
(net of accumulated
depreciation of $318,077 and $262,797,
respectively)
|
204,316
|
175,497
|
|
Deferred income tax
asset - noncurrent
|
140,974
|
97,974
|
|
Other long-term
assets
|
17,891
|
18,301
|
|
Goodwill
|
2,241,872
|
2,241,872
|
|
Intangible assets
(net of accumulated amortization of $3,323,782 and $2,512,704,
respectively)
|
1,380,218
|
2,191,296
|
|
Total
assets
|
$
12,860,804
|
$
11,170,143
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
343,418
|
$
385,285
|
|
Accrued
expenses
|
806,399
|
995,999
|
|
Income taxes
payable
|
111,961
|
199,613
|
|
Deferred
revenue
|
842,642
|
822,481
|
|
Total current
liabilities
|
2,104,420
|
2,403,378
|
|
Deferred income tax
liability
|
66,332
|
94,566
|
|
Other long-term
liabilities
|
112,154
|
113,222
|
|
Total
liabilities
|
2,282,906
|
2,611,166
|
|
Commitments and
contingencies (see Note 9)
|
|
|
|
Stockholders'
equity:
|
|
|
|
Preferred stock,
$0.001 par value, 30,000,000 shares authorized, no shares issued
and outstanding as of December 31, 2016 and 2015.
|
-
|
-
|
|
Common stock $0.001
par value, 100,000,000 shares authorized, 2,860,944 and 2,785,044
shares issued and outstanding as of December 31, 2016 and 2015,
respectively.
|
2,861
|
2,785
|
|
Additional paid-in
capital
|
9,119,610
|
8,202,605
|
|
Other accumulated
comprehensive loss
|
(35,798
)
|
(35,154
)
|
|
Retained
earnings
|
1,491,225
|
388,741
|
|
Total stockholders'
equity
|
10,577,898
|
8,558,977
|
|
Total
liabilities and stockholders’ equity
|
$
12,860,804
|
$
11,170,143
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-3
I
SSUER
DIRECT CORPORATION AND SUBSIDIARIES
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Revenues
|
$
12,058,866
|
$
11,619,883
|
|
Cost of
revenues
|
3,024,339
|
3,447,992
|
|
Gross
profit
|
9,034,527
|
8,171,891
|
|
Operating costs and
expenses:
|
|
|
|
General and
administrative
|
3,185,308
|
3,241,404
|
|
Sales and
marketing
|
2,600,851
|
2,343,330
|
|
Product
development
|
403,623
|
326,584
|
|
Depreciation and
amortization
|
909,432
|
1,079,337
|
|
Impairment loss on
intangible assets
|
—
|
547,000
|
|
Total operating
costs and expenses
|
7,099,214
|
7,537,655
|
|
Operating
income
|
1,935,313
|
634,236
|
|
Other income
(expense):
|
|
|
|
Other income,
net
|
80,165
|
—
|
|
Interest income
(expense), net
|
4,080
|
(622,139
)
|
|
Total other income (expense)
|
84,245
|
(622,139
)
|
|
Income before
taxes
|
2,019,558
|
12,097
|
|
Income tax expense
(benefit)
|
464,350
|
(132,487
)
|
|
Net
income
|
$
1,555,208
|
$
144,584
|
|
Income per share
– basic
|
$
0.55
|
$
0.06
|
|
Income per share
– diluted
|
$
0.54
|
$
0.06
|
|
Weighted average
number of common shares outstanding – basic
|
2,819,720
|
2,486,684
|
|
Weighted average
number of common shares outstanding – diluted
|
2,903,255
|
2,575,952
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
I
SSUER
DIRECT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Net
income
|
$
1,555,208
|
$
144,584
|
|
Foreign currency
translation adjustment
|
(644
)
|
12,129
|
|
Comprehensive
income
|
$
1,554,564
|
$
156,713
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-5
I
SSUER
DIRECT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
Common
Stock
|
Additional
Paid-in
|
Accumulated
Other Comprehensive
|
Retained
|
Total
Stockholders’
|
|
|
|
Shares
|
Amount
|
Capital
|
Loss
|
Earnings
|
Equity
|
|
Balance
at December 31, 2014
|
2,316,743
|
$
2,317
|
$
5,725,470
|
$
(47,283
)
|
$
327,258
|
$
6,007,762
|
|
Stock-based
compensation expense
|
8,000
|
8
|
744,587
|
—
|
—
|
744,595
|
|
Exercise of stock
awards, net of tax
|
42,589
|
42
|
66,293
|
—
|
—
|
66,335
|
|
Shares issued upon
partial conversion of note payable (see Note 6)
|
417,712
|
418
|
1,666,255
|
—
|
—
|
1,666,673
|
|
Dividends
|
—
|
—
|
—
|
—
|
(83,101
)
|
(83,101
)
|
|
Foreign currency
translation
|
—
|
—
|
—
|
12,129
|
—
|
12,129
|
|
Net
income
|
—
|
—
|
—
|
—
|
144,584
|
144,584
|
|
Balance
at December 31, 2015
|
2,785,044
|
$
2,785
|
$
8,202,605
|
$
(35,154
)
|
$
388,741
|
$
8,558,977
|
|
Stock-based
compensation expense
|
—
|
—
|
882,087
|
—
|
—
|
882,087
|
|
Exercise of stock
awards, net of tax
|
75,900
|
76
|
34,918
|
—
|
—
|
34,994
|
|
Dividends
|
—
|
—
|
—
|
—
|
(452,724
)
|
(452,724
)
|
|
Foreign currency
translation
|
—
|
—
|
—
|
(644
)
|
—
|
(644
)
|
|
Net
income
|
—
|
—
|
—
|
—
|
1,555,208
|
1,555,208
|
|
Balance
at December 31, 2016
|
2,860,944
|
$
2,861
|
$
9,119,610
|
$
(35,798
)
|
$
1,491,225
|
$
10,577,898
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-6
I
SSUER DIRECT CORPORATION AND
SUBSIDIARIES
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Cash
flows from operating activities
|
|
|
|
Net
income
|
$
1,555,208
|
$
144,584
|
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
|
Bad debt
expense
|
195,327
|
169,020
|
|
Depreciation and
amortization
|
1,076,808
|
1,099,870
|
|
Impairment loss on
intangible assets
|
—
|
547,000
|
|
Deferred income
taxes
|
(210,406
)
|
(631,938
)
|
|
Non-cash interest
expense
|
—
|
535,397
|
|
Stock-based
compensation expense
|
592,025
|
549,184
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Decrease (increase)
in accounts receivable
|
(259,132
)
|
586,518
|
|
Decrease (increase)
in deposits and prepaid assets
|
63,171
|
68,813
|
|
Increase (decrease)
in accounts payable
|
(38,602
)
|
132,168
|
|
Increase (decrease)
in deferred revenue
|
42,748
|
(44,680
)
|
|
Increase (decrease)
in accrued expenses
|
(255,821
)
|
20,630
|
|
Net cash provided
by operating activities
|
2,761,326
|
3,176,566
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
Capitalized
software
|
(1,077,382
)
|
(553,684
)
|
|
Purchase of fixed
assets
|
(112,244
)
|
(109,512
)
|
|
Net cash used in
investing activities
|
(1,189,626
)
|
(663,196
)
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
Proceeds from
exercise of stock options, net of income taxes
|
34,994
|
28,100
|
|
Excess tax benefit
from share based compensation
|
—
|
38,235
|
|
Payment of
dividend
|
(452,724
)
|
(83,101
)
|
|
Net cash (used
in)/provided by financing activities
|
(417,730
)
|
(16,766
)
|
|
|
|
|
|
Net change in
cash
|
1,153,970
|
2,496,604
|
|
Cash-
beginning
|
4,215,145
|
1,721,343
|
|
Currency
translation adjustment
|
(30,137
)
|
(2,802
)
|
|
Cash-
ending
|
$
5,338,978
|
$
4,215,145
|
|
|
|
|
|
Supplemental disclosures
:
|
|
|
|
Cash paid for
interest
|
$
—
|
$
85,870
|
|
Cash paid for
income taxes
|
$
715,614
|
$
282,951
|
|
Non-cash
activities:
|
|
|
|
Stock-based
compensation - capitalized software
|
$
429,234
|
$
195,411
|
|
Conversion of note
payable to common stock
|
$
—
|
$
1,666,673
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-7
I
SSUER
DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Nature of Operations
Issuer
Direct Corporation (the “Company” or “Issuer
Direct”) was incorporated in the state of Delaware in
October 1988 under the name Docucon Inc. Subsequent to the
December 13, 2007 merger with My EDGAR, Inc., the Company
changed its name to Issuer Direct Corporation. The surviving
company was formed for the purposes of helping companies produce
and distribute their financial and business communications both
online and in print. As a technology and issuer services focused
company, Issuer Direct Corporation operates under several brands in
the market, including Direct Transfer, PrecisionIR (PIR),
Blueprint, Classify, Investor Network, iProxy Direct, iR Direct, QX
Interactive and Accesswire. The Company leverages its securities
compliance and regulatory expertise to provide a comprehensive set
of services that enhance a client's ability to communicate
effectively with its shareholder base while meeting all reporting
regulations required.
The
consolidated financial statements include the accounts of the
Company and its wholly-owned
subsidiaries. Significant intercompany accounts and
transactions are eliminated in consolidation.
Cash and Cash Equivalents
We
consider all highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents are carried at cost, which
approximates fair value.
The
Company places its cash and cash equivalents on deposit with
financial institutions in the United States, Canada, and Europe.
The Federal Deposit Insurance Corporation (FDIC) covers $250,000
for substantially all depository accounts in the United
States. As of December 31, 2016, the Company had $4,127,107
which exceeds the insured amounts in the United
States. The Company also had cash of $625,785 in Europe,
and $52,106 in Canada on hand at December 31, 2016.
Revenue Recognition
We recognize revenue in accordance with
accounting principles generally accepted in the United States
(“US GAAP”), including SEC Staff Accounting
Bulletin No. 104, “Revenue Recognition,”
which requires that: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been
rendered, (iii) the sales price is fixed or determinable, and
(iv) collectability is reasonably assured. We recognize
revenue when services are rendered and/or delivered, where
collectability is probable.
Deferred revenue primarily consists of advance
billings for annual contracts for our legacy annual report service
and licenses of our cloud-based
platforms.
Fixed Assets
Fixed
assets are recorded at cost and depreciated over the estimated
useful lives of the assets using principally the straight-line
method. When items are retired or otherwise disposed of, income is
charged or credited for the difference between net book value and
proceeds realized thereon. Ordinary maintenance and repairs are
charged to expense as incurred, and replacements and betterments
are capitalized. The range of estimated useful lives used to
calculate depreciation for principal items of property and
equipment are as follow:
|
Asset
Category
|
|
Depreciation /
Amortization Period
|
|
Computer
equipment
|
|
3
years
|
|
Furniture &
equipment
|
|
3 to 7
years
|
|
Leasehold
improvements
|
|
7
years or lesser of the lease term
|
F-8
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Earnings per Share
We
calculate earnings per share in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) No. 260 – EPS, which requires that basic net income per
common share be computed by dividing net income for the period by
the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the
net income for the period by the weighted average number of common
and dilutive common equivalent shares outstanding during the
period. Shares issuable upon the exercise of stock
options and restricted stock units totaling 140,000 and 211,250
were excluded in the computation of diluted earnings per common
share during the years ended December 31, 2016 and 2015,
respectively, because their impact was
anti-dilutive.
Allowance for Doubtful Accounts
We
provide an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection
information. Credit is granted on an unsecured basis. In
determining the amount of the allowance, management is required to
make certain estimates and assumptions. The allowance is made up of
specific reserves, as deemed necessary, on client account balances,
and a reserve based on our historical experience. The
following is a summary of our allowance for doubtful accounts
during the years ended December 31, 2016 and 2015:
|
|
Year
Ended
December
31,
2016
|
Year
Ended
December
31,
2015
|
|
Beginning
balance
|
$
396,884
|
$
460,564
|
|
Bad debt
expense
|
195,327
|
169,020
|
|
Write-offs
|
(163,019
)
|
(232,700
)
|
|
Ending
balance
|
$
429,192
|
$
396,884
|
Use of Estimates
The
preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include the allowance
for doubtful accounts and the valuation of goodwill, intangible
assets, deferred tax assets, and stock-based
compensation. Actual results could differ from those
estimates.
F-9
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Income Taxes
We
comply with the FASB ASC No. 740 – Income Taxes which
requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and
liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result
in future taxable or deductible amounts based on enacted tax laws
and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred income tax assets
to the amounts expected to be realized. For any
uncertain tax positions, we recognize the impact of a tax position,
only if it is more likely than not of being sustained upon
examination, based on the technical merits of the position. Our
policy regarding the classification of interest and penalties is to
classify them as income tax expense in our financial statements, if
applicable.
Capitalized Software
In
accordance with FASB ASC No. 350 – Intangibles –
Goodwill and Other, costs incurred to develop our cloud-based
platform products and disclosure management system components are
capitalized when the preliminary project phase is complete,
management commits to fund the project and it is probable the
project will be completed and used for its intended purposes. Once
the software is substantially complete and ready for its intended
use, the software is amortized over its estimated useful
life. Costs related to design or maintenance of the
software are expensed as incurred. The Company
capitalized $1,506,616 and $749,095 during the years ended December
31, 2016 and 2015, respectively. Included in these amounts
were $429,234 and $195,411 related to stock-based compensation
during the years ended December 31, 2016 and 2015,
respectively. The Company recorded amortization expense of
$182,305 and $25,133 during the years ended December 31, 2016 and
2015, respectively, $168,914 and $20,532 of which is included in
Cost of revenues on the Consolidated Statements of Income.
For the years ended December 31, 2016 and 2015, the remaining
amount of $13,391 and $4,601 is included in Depreciation and
amortization, as it relates to back-office supporting
systems.
Impairment of Long-lived Assets
In
accordance with the authoritative guidance for accounting for
long-lived assets, assets such as property and equipment,
trademarks, and intangible assets subject to amortization, are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset group may not be
recoverable. Recoverability of asset groups to be held and used is
measured by a comparison of the carrying amount of an asset group
to estimated undiscounted future cash flows expected to be
generated by the asset group. If the carrying amount of an asset
group exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of an
asset group exceeds fair value of the asset group.
Fair Value Measurements
As of
December 31, 2016 and 2015, we do not have any financial assets or
liabilities that are required to be, or that we elected to measure,
at fair value. We believe that the fair value of our
financial instruments, which consist of cash and cash equivalents,
accounts receivable, our line of credit, notes payable, and
accounts payable approximate their carrying amounts.
Stock-based Compensation
We
account for stock-based compensation under FASB ASC No. 718 –
Compensation – Stock Compensation. The authoritative guidance
for stock compensation requires that companies estimate the fair
value of share-based payment awards on the date of the grant using
an option-pricing model. The cost is to be recognized over the
period during which an employee is required to provide service in
exchange for the award. The authoritative guidance for stock
compensation also requires the benefit of tax deductions in excess
of recognized compensation expense to be reported as a financing
cash flow, rather than as an operating cash flow as prescribed
under previous accounting rules. This requirement reduces net
operating cash flows and increases net financing cash flows in
periods subsequent to adoption, only if excess tax benefits
exist.
Translation of Foreign Financial
Statements
The
financial statements of the foreign subsidiaries of the Company
have been translated into U.S. dollars. All assets and
liabilities have been translated at current rates of exchange in
effect at the end of the period. Income and expense
items have been translated at the average exchange rates for the
year or the applicable interim period. The gains or
losses that result from this process are recorded as a separate
component of other accumulated comprehensive income (loss) until
the entity is sold or substantially liquidated.
F-10
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Comprehensive Income
Comprehensive
income consists of net income and other comprehensive income
related to changes in the cumulative foreign currency translation
adjustment.
Business Combinations, Goodwill and Intangible Assets
We
account for business combinations under FASB ASC No. 805 –
Business Combinations and the related acquired intangible assets
and goodwill under FASB ASC No. 350 – Intangibles –
Goodwill and Other. The authoritative guidance for business
combinations specifies the criteria for recognizing and reporting
intangible assets apart from goodwill. We record the assets
acquired and liabilities assumed in business combinations at their
respective fair values at the date of acquisition, with any excess
purchase price recorded as goodwill. Goodwill is an asset
representing the future economic benefits arising from other assets
acquired in a business combination that are not individually
identified and separately recognized. Intangible assets consist of
client relationships, customer lists, software, technology and
trademarks that are initially measured at fair value. At
the time of the business combination the trademarks are considered
an indefinite-lived asset and, as such, are not amortized as there
is no foreseeable limit to cash flows generated from them. The
goodwill and intangible assets are assessed annually for
impairment, or whenever conditions indicate the asset may be
impaired, and any such impairment will be recognized in the period
identified. The client relationships, customer lists, software and
technology are amortized over their estimated useful
lives.
Advertising
The
Company expenses advertising as incurred, except for
direct-response advertising, which is capitalized and amortized
over its expected period of future benefits. Advertising
expense totaled $77,623 and $174,094, during the years ended
December 31, 2016 and 2015, respectively.
Newly Adopted Accounting Pronouncements
On
November 20, 2015, the FASB issued Accounting Standards Update
(“ASU”) 2015-17 ("ASU 2015-17”), Balance Sheet
Classification of Deferred Taxes, which requires that all deferred
tax assets and liabilities, along with any related valuation
allowance, in each jurisdiction be classified as noncurrent on the
balance sheet. For public business entities, ASU 2015-17 is
effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within those
annual periods but may be early adopted. ASU 2015-17 may be applied
either prospectively, for all deferred tax assets and liabilities,
or retrospectively (i.e., by reclassifying the comparative balance
sheets). The Company elected to early adopt ASU 2015-17, on a
prospective basis, as of December 31, 2015.
The FASB issued ASU No. 2015-16, Business
Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments
.
The amendments in ASU 2015-16 require that an
acquirer recognize adjustments to estimated amounts that are
identified during the measurement period in the reporting period in
which the adjustment amounts are determined. The amendments require
that the acquirer record, in the same period’s financial
statements, the effect on earnings of changes in depreciation,
amortization, or other income effects, if any, as a result of the
change to the estimated amounts, calculated as if the accounting
had been completed at the acquisition date. The amendments also
require an entity to present separately on the face of the income
statement or disclose in the notes the portion of the amount
recorded in current-period earnings by line item that would have
been recorded in previous reporting periods if the adjustment to
the estimated amounts had been recognized as of the acquisition
date. The amendments in this ASU were effective for public business
entities for fiscal years beginning after December 15, 2015,
including interim periods within those fiscal years. The amendments
should be applied prospectively to adjustments to provisional
amounts that occur after the effective date with earlier
application permitted for financial statements that have not been
issued. ASU 2015-16 did not have a significant impact on our
financial statements.
The FASB issued ASU
2015-05, Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Fees Paid in a
Cloud Computing Arrangement. The amendments in ASU 2015-05
provide guidance to customers about whether a cloud computing
arrangement includes a software license. If a cloud computing
arrangement includes a software license, then the customer should
account for the software license element of the arrangement
consistent with the acquisition of other software licenses. If a
cloud computing arrangement does not include a software license,
the customer should account for the arrangement as a service
contract. The amendments do not change the accounting for a
customer’s accounting for service contracts. As a result of
the amendments, all software licenses within the scope of Subtopic
350-40 will be accounted for consistent with other licenses of
intangible assets. ASU 2015-05 is effective for public
entities for annual periods, including interim periods within those
annual periods, beginning after December 15, 2015. ASU 2015-05 did
not have a significant impact on our financial
statements.
The FASB issued ASU
2015-01, Income Statement - Extraordinary and Unusual Items
(Subtopic 225-20): Simplifying Income Statement Presentation by
Eliminating the Concept of Extraordinary Items. The FASB
issued this ASU as part of its initiative to reduce complexity in
accounting standards. The objective of the simplification
initiative is to identify, evaluate, and improve areas of US GAAP
for which cost and complexity can be reduced while maintaining or
improving the usefulness of the information provided to the users
of financial statements. The amendments in ASU 2015-01
were effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2015. ASU 2015-01
did not have a significant impact on our financial
statements.
F-11
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
The FASB issued ASU
2014-16, Derivatives and Hedging (Topic 815): Determining Whether
the Host Contract in a Hybrid Financial Instrument Issued in the
Form of a Share Is More Akin to Debt or to Equity. The
amendments in this ASU do not change the current criteria in US
GAAP for determining when separation of certain embedded derivative
features in a hybrid financial instrument is required. The
amendments clarify how current US GAAP should be interpreted in
evaluating the economic characteristics and risks of a host
contract in a hybrid financial instrument that is issued in the
form of a share. Specifically, the amendments clarify that an
entity should consider all relevant terms and features, including
the embedded derivative feature being evaluated for bifurcation, in
evaluating the nature of the host contract. Furthermore, the
amendments clarify that no single term or feature would necessarily
determine the economic characteristics and risks of the host
contract. Rather, the nature of the host contract depends upon the
economic characteristics and risks of the entire hybrid financial
instrument. The amendments in this ASU were effective
for public business entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. ASU
2014-16 did not have a significant impact on our financial
statements.
The FASB issued ASU
2014-12, Compensation – Stock Compensation (Topic 718):
Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the
Requisite Service Period. The issue is the result of a
consensus of the FASB Emerging Issues Task Force
(EITF). The amendments in the ASU require that a
performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance
condition. A reporting entity should apply existing guidance in
Topic 718, Compensation – Stock Compensation, as it relates
to awards with performance conditions that affect vesting to
account for such awards. The performance target should not be
reflected in estimating the grant-date fair value of the
award. Compensation cost should be recognized in the
period in which it becomes probable that the performance target
will be achieved and should represent the compensation cost
attributable to the period(s) for which the requisite service has
already been rendered. If the performance target becomes probable
of being achieved before the end of the requisite service period,
the remaining unrecognized compensation cost should be recognized
prospectively over the remaining requisite service period. The
total amount of compensation cost recognized during and after the
requisite service period should reflect the number of awards that
are expected to vest and should be adjusted to reflect those awards
that ultimately vest. The requisite service period ends when the
employee can cease rendering service and still be eligible to vest
in the award if the performance target is achieved. The
amendments in this ASU were effective for annual periods and
interim periods within those annual periods beginning after
December 15, 2015. ASU 2014-12 did not have a significant
impact on our financial statements.
Recent Accounting Pronouncement
The FASB issued ASU 2017-04, Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, which eliminates Step 2 from the goodwill impairment
test. The annual, or interim, goodwill impairment test is performed
by comparing the fair value of a reporting unit with its carrying
amount. An impairment charge should be recognized for the amount by
which the carrying amount exceeds the reporting unit’s fair
value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. In addition,
income tax effects from any tax deductible goodwill on the carrying
amount of the reporting unit should be considered when measuring
the goodwill impairment loss, if applicable.
The amendments also eliminate the requirements
for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. An entity
still has the option to perform the qualitative assessment for a
reporting unit to determine if the quantitative impairment test is
necessary. The amendments are effective for public business
entities that are SEC filers for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15,
2019.
The company does not
expect this pronouncement to have a significant impact on its
financial statements.
The FASB issued ASU 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a Business,
which clarify the definition of a business. The amendments affect
all companies and other reporting organizations that must determine
whether they have acquired or sold a business. The definition of a
business affects many areas of accounting including acquisitions,
disposals, goodwill, and consolidation. The amendments are intended
to help companies and other organizations evaluate whether
transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. The amendments are effective for public
companies for annual periods beginning after December 15, 2017,
including interim periods within those periods.
The
company
does not expect this pronouncement to have a significant impact on
its financial statements, unless an acquisition or disposal of
assets is completed.
The
FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments, which
provides cash flow statement classification guidance for: 1)
Debt prepayment or debt extinguishment costs; 2) Settlement of
zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective
interest rate of the borrowing; 3) Contingent consideration
payments made after a business combination; 4) Proceeds from the
settlement of insurance claims; 5) Proceeds from the settlement of
corporate-owned life insurance policies, including bank-owned life
insurance policies; 6) Distributions received from equity method
investees; 7) beneficial interests in securitization transactions;
and 8) Separately identifiable cash flows and application of the
Predominance Principle. This is effective for public business
entities for fiscal years beginning after December 15, 2017, and
interim periods within those years. Early application is
permitted, including adoption in an interim period. The
company does not expect this pronouncement to have a significant
impact on its financial statements.
The
FASB issued ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial
Instruments, which, among other things, requires the measurement of
all expected credit losses for financial assets held at the
reporting date to be based on historical experience, current
conditions, and reasonable and supportable forecasts. Many of the
loss estimation techniques applied today will still be permitted,
although the inputs to those techniques will change to reflect the
full amount of expected credit losses. This is effective for SEC
filers for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. The company does
not expect this pronouncement to have a significant impact on its
financial statements.
F-12
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
The FASB issued ASU
2016-09, Improvements to Employee Share-Based Payment Accounting,
which simplifies several aspects of the accounting for share-based
payment award transactions including (a) income tax consequences;
(b) classification of awards as either debt or equity liabilities;
and (c) classification on the statement of cash flows. The
amendments are effective for public business entities for annual
periods beginning after December 15, 2016, and interim periods
within those annual periods. Early adoption is permitted for
any entity in any interim or annual period. If an entity
early adopts the amendments in an interim period, any adjustment
should be reflected as of the beginning of the fiscal year that
includes the interim period. Additionally, as a reminder, an
entity that elects to early adopt the new guidance must adopt all
of the amendments in the same period. The primary amendment that is
expected to impact the Company's financial statements is the
requirement for excess tax benefits or shortfalls on the exercise
of stock-based compensation awards to be presented in income tax
expense in the Consolidated Statements of Income during the period
the award is exercised as opposed to being recorded in Additional
paid-in capital on the Consolidated Balance Sheets. The excess tax
benefit or shortfall is calculated as the difference between the
fair value of the award on the date of exercise and the fair value
of the award used to measure the expense to be recognized over the
service period. As the result is dependent on the future
value of the Company's stock as well as the timing of employee
exercises, the amount of the impact cannot be quantified at this
time.
The FASB's new
leases standard ASU 2016-02 Leases (Topic 842) was issued on
February 25, 2016. ASU 2016-02 is intended to improve financial
reporting about leasing transactions. The ASU affects all companies
and other organizations that lease assets such as real estate,
airplanes, and manufacturing equipment. The ASU will require
organizations that lease assets referred to as
“Lessees” to recognize on the balance sheet the assets
and liabilities for the rights and obligations created by those
leases. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial statements. Under the new guidance, a lessee will be
required to recognize assets and liabilities for leases with lease
terms of more than 12 months. Consistent with current US GAAP, the
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike
current US GAAP which requires only capital leases to be recognized
on the balance sheet the new ASU will require both types of leases
(i.e. operating and capital) to be recognized on the balance sheet.
The FASB lessee accounting model will continue to account for both
types of leases. The capital lease will be accounted for in
substantially the same manner as capital leases are accounted for
under existing US GAAP. The operating lease will be accounted for
in a manner similar to operating leases under existing US GAAP,
except that lessees will recognize a lease liability and a lease
asset for all of those leases. Public companies will be
required to adopt the new leasing standard for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2018. For calendar year-end public companies, this means
an adoption date of January 1, 2019 and retrospective application
to previously issued annual and interim financial statements for
2018, however, early adoption is permitted. Lessees with a large
portfolio of leases are likely to see a significant increase in
balance sheet assets and liabilities. The Company currently has one
lease on its corporate facilities which ends October 31,
2019. Absent any renewal of the lease or new leases entered
into before January 1, 2019, the Company will be required to record
a right-to-use asset and corresponding lease liability associated
with the remaining lease payments beginning with the first interim
period of 2019. This will increase both balance sheet assets
and liabilities by insignificant amounts and will not have a
significant impact on the income statement or affect any
covenant calculations.
The FASB has issued
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and
several updates to the ASU. ASU 2014-09 requires revenue
recognition to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services. ASU 2014-09 sets forth a new revenue recognition model
that requires identifying the contract, identifying the performance
obligations, determining the transaction price, allocating the
transaction price to performance obligations and recognizing the
revenue upon satisfaction of performance obligations. The
amendments in the ASU can be applied either retrospectively to each
prior reporting period presented or retrospectively with the
cumulative effect of initially applying the update recognized at
the date of the initial application along with additional
disclosures. The Company is currently evaluating the impact of ASU
2014-09 as well as the additional updates, however, does not
believe it will have a significant impact on the Company's
financial statements as the Company believes the current manner in
which revenue is recognized will result in the same or similar
timing and amount of revenue recognition as required by ASU 2014-09
and the additional amendments. These ASU's are currently
effective for the Company in our year beginning on January 1,
2018.
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Computers
equipment
|
$
118,593
|
$
95,814
|
|
Furniture &
equipment
|
296,039
|
248,699
|
|
Leasehold
improvements
|
107,761
|
93,781
|
|
Total fixed assets,
gross
|
522,393
|
438,294
|
|
Less: Accumulated
depreciation
|
(318,077
)
|
(262,797
)
|
|
Total fixed assets,
net
|
$
204,316
|
$
175,497
|
Depreciation
expense on fixed assets for the years ended December 31, 2016
and 2015 totaled $83,425 and $79,399, respectively.
F-13
ISSUER DIRECT CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
The
components of intangible assets are as follows:
|
|
December 31,
2016
|
||
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|
Customer
lists
|
$
1,770,000
|
$
(1,769,666
)
|
$
334
|
|
Customer
relationships
|
1,747,000
|
(810,810
)
|
936,190
|
|
Proprietary
software
|
782,000
|
(680,414
)
|
101,586
|
|
Trademarks –
definite-lived
|
173,000
|
(62,892
)
|
110,108
|
|
Trademarks –
indefinite-lived
|
232,000
|
—
|
232,000
|
|
Total intangible
assets
|
$
4,704,000
|
$
(3,323,782
)
|
$
1,380,218
|
|
|
December 31,
2015
|
||
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|
Customer
lists
|
$
1,770,000
|
$
(1,408,920
)
|
$
361,080
|
|
Customer
relationships
|
1,747,000
|
(564,810
)
|
1,182,190
|
|
Proprietary
software
|
782,000
|
(526,508
)
|
255,492
|
|
Trademarks -
definite-lived
|
173,000
|
(12,466
)
|
160,534
|
|
Trademarks –
indefinite-lived
|
232,000
|
—
|
232,000
|
|
Total intangible
assets
|
$
4,704,000
|
$
(2,512,704
)
|
$
2,191,296
|
The
Company performed its annual assessment for impairment of goodwill
and intangible assets and determined there was no impairment as of
and for the year ended December 31, 2016. During the fourth
quarter of 2015, the Company elected not to renew certain
trademarks purchased in conjunction with the acquisition of PIR.
These trademarks had an allocated value of $148,680 and the
write-off of this value is included in Impairment loss on
intangible assets on the Consolidated Statements of Net Income for
the year ended December 31, 2015. Additionally, as part of the
Company’s annual review of impairment of goodwill and
intangible assets, the Company determined the remaining trademarks
purchased as part of the acquisition of PIR were no longer
indefinite-lived assets as the Company plans to integrate and
rebrand the associated trademarks with Issuer Direct. As a result
of this determination, the Company was required to perform a
goodwill impairment assessment. Due to lower future projections of
revenue associated with our ARS service and a shortened useful life
of the trademarks, this assessment resulted in an impairment loss
of $398,320, which is also included in Impairment loss on
intangible assets in the Consolidated Statements of Income for the
year ended December 31, 2015.
The
amortization of intangible assets is a charge to operating expenses
and totaled $811,078 and $995,338 in the years ended 2016 and 2015,
respectively.
The
future amortization of the identifiable intangible assets is as
follows:
|
Years
Ending December 31:
|
|
|
2017
|
$
332,964
|
|
2018
|
322,733
|
|
2019
|
286,042
|
|
2020
|
178,600
|
|
2021
|
27,879
|
|
Total
|
$
1,148,218
|
Our
goodwill balance of $2,241,872 at December 31, 2016 and 2015,
was related to our acquisition of Basset Press in July 2007,
the acquisition of PIR in 2013 and the acquisition of Accesswire in
2014. We conducted our annual impairment analyses as of October 1,
of 2016 and 2015 and determined that no goodwill was
impaired.
Effective September
2, 2016, the Company renewed its Line of Credit, which reduced the
interest rate to LIBOR plus 2.50%. The amount of funds
available for future borrowings remained at $2,000,000. As of
December 31, 2016, the interest rate was 3.26% and the Company did
not owe any amounts on the Line of Credit.
F-14
ISSUER
DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
On August 22, 2013,
in connection with and to partially fund the acquisition and
simultaneously with the acquisition of PIR, the Company entered
into a Securities Purchase Agreement (the “8%
Note Purchase Agreement”) relating to the sale of $2,500,000
aggregate principal amount of the Company’s 8% convertible
secured promissory note (“8% Note”) with Red Oak
Partners LP (“Red Oak”). The 8% Note paid interest on
each of March 31, June 30, September 30, and December 31, beginning
on September 30, 2013, at a rate of 8% per year. The maturity date
of the 8% Note was August 22, 2015. The 8% Note was secured by all
of the assets of the Company and was subordinated to the
Company’s obligations to its primary financial institution.
Furthermore, in connection with the 8% Note Purchase Agreement, a
partner of Red Oak was appointed to the Company’s Board of
Directors but subsequently resigned on August 18, 2016, as a member
of our Board of Directors due to personal reasons and not as a
result of a disagreement with the Company, as disclosed in the
Current Report on Form 8-K filed with the SEC the same day. On
November 10, 2014, Red Oak assigned the 8% Note between the Red Oak
Fund, LP; Pinnacle Opportunities, LP; and the Red Oak Long Fund,
LP; all of which are under management by Red
Oak.
Beginning
immediately upon the date of issuance, Red Oak or its assignees had
the right to convert the 8% Note into shares of the Company’s
common stock at a conversion price of $3.99 per
share. On the date the Company entered into the 8% Note
Purchase Agreement, the Company’s stock price was $8.20 per
share, and therefore the Company assigned a value of $2,500,000 to
the common stock conversion feature and recorded this as debt
discount and additional paid-in capital. This instrument
also created a deferred tax liability of $1,000,000 that reduced
the value recorded as additional paid in capital, and therefore the
net amount recorded to stockholders' equity was
$1,500,000. The debt discount of $2,500,000 was
amortized over the two-year life of the loan as non-cash interest
expense.
On November 12,
2014, Red Oak converted $833,327 of principal and $23,369 of
accrued interest payable on the 8% Note into 214,710 shares of the
Company’s common stock at the conversion price of
$3.99. Following this transaction, the principal balance
of the note was $1,666,673. As a result of this
transaction, the company recorded $323,250 of non-cash interest
expense due to the acceleration of debt discount on the portion of
the 8% Note that was converted.
Effective August
22, 2015, upon the maturity of the 8% Note, Red Oak converted the
remaining $1,666,673 of principal into 417,712 shares of the
Company’s common stock at the conversion price of
$3.99. As a result of the final conversion, the Company no
longer has non-cash or cash interest expense associated with the 8%
Note.
During
the year ended December 31, 2015, the Company recorded non-cash
interest expense of $535,397 and cash interest expense of $85,870
related to the 8% Note.
Dividends
During the years
ended December 31, 2016 and 2015, we paid dividends totaling
$452,724, or $0.16 per share, and $83,101, or $0.03 per share,
respectively, to holders of shares of common
stock.
Preferred stock and common stock
There
were no issuances of preferred stock during the years ended
December 31, 2016 and 2015. During the year ended
December 31, 2015, the Company had the following issuances of
common stock in addition to stock issued pursuant to exercises of
restricted stock units and options to purchase common
stock:
●
The Company issued
8,000 shares of common stock to consultants in exchange for
services during the year ended December 31, 2015, and recognized
expense of $63,686 for the value of those shares. No shares
were issued in exchange for services during the year ended December
31, 2016.
●
On November 12, 2014, the Company
issued 214,710 shares upon the partial conversion of a note payable
and on August 22, 2015 issued another 417,712 shares on upon the
final conversion of the note payable (see Note
6).
On May
23, 2014, the shareholders of the Company approved the 2014 Equity
Incentive Plan (the “2014 Plan”). Under the
terms of the 2014 Plan, the Company is authorized to issue
incentive awards for common stock up to 200,000 shares to employees
and other personnel. On June 10, 2016, the shareholders
of the Company approved an additional 200,000 awards to be issued
under the 2014 Plan, bringing the total number of shares to be
awarded to 400,000. The awards may be in the form of
incentive stock options, nonqualified stock options, restricted
stock, restricted stock units and performance awards. The
2014 Plan is effective through March 31, 2024. As of
December 31, 2016, 248,500 awards had been granted under the 2014
Plan.
F-15
ISSUER
DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
On
August 9, 2010, the shareholders of the Company approved the 2010
Equity Incentive Plan (the “2010 Plan”). Under the
terms of the 2010 Plan, 150,000 shares of the Company’s
common stock were authorized for the issuance of stock options and
restricted stock. The 2010 Plan also provides for an automatic
annual increase in the number of authorized shares of common stock
issuable beginning in 2011 equal to the lesser of (a) 2% of shares
outstanding on the last day of the immediate preceding year, (b)
50,000 shares, or (c) such lesser number of shares as the
Company’s board of directors shall determine, provided,
however, in no event shall the maximum number of shares that may be
issued under the Plan pursuant to stock awards be greater than 15%
of the aggregate shares outstanding on the last day of the
immediately preceding year. With the automatic
increases, there were 220,416 authorized shares of common stock on
January 1, 2012. On January 20, 2012, the Company’s Board of
Directors approved an increase in the number of shares authorized
under the 2010 Plan from 220,416 to 420,416. This increase was
ratified by the shareholders of the Company on June 29, 2012. On
December 31, 2016, there were no shares remaining for awards to be
issued under the 2010 Plan.
The
following is a summary of stock options issued during the year
ended December 31, 2016 and 2015:
|
|
Number of
Options
Outstanding
|
Range
of
Exercise
Price
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|
Balance at December
31, 2014
|
258,171
|
$
0.01 - 13.49
|
$
7.32
|
$
608,750
|
|
Options
granted
|
10,000
|
$
6.80
|
$
6.80
|
-
|
|
Options
exercised
|
(20,671
)
|
$
0.01 - 2.81
|
$
2.55
|
$
106,868
|
|
Options forfeited/cancelled
|
(1,500
)
|
9.26
|
$
9.26
|
-
|
|
Balance at December
31, 2015
|
246,000
|
$
0.01 - 13.49
|
$
7.69
|
$
187,798
|
|
Options
granted
|
—
|
$
—
|
$
—
|
—
|
|
Options
exercised
|
(20,900
)
|
$
0.01 - 3.33
|
$
1.67
|
$
89,180
|
|
Options
forfeited/cancelled
|
(61,250
)
|
$
7.76 - 9.26
|
$
8.11
|
—
|
|
Balance at December
31, 2016
|
163,850
|
$
0.01 - 13.49
|
$
8.30
|
$
297,542
|
The
aggregate intrinsic value in the table above represents the total
pretax intrinsic value (i.e. the aggregate difference between the
closing price of our common stock on December 31, 2016 and 2015 of
$9.00 and $5.77, respectively, and the exercise price for
in-the-money options) that would have been received by the holders
if all instruments had been exercised on December 31, 2016 and
2015. As of December 31, 2016, there was $303,099 of unrecognized
compensation cost related to our unvested stock options, which will
be recognized through 2019.
The
following table summarizes information about stock options
outstanding and exercisable at December 31, 2016:
|
|
Options
Outstanding
|
Options
Exercisable
|
||
|
Exercise
Price
|
Number
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Life
(in
Years)
|
Number
|
|
$
0.01
- $1.00
|
12,850
|
$
0.01
|
5.05
|
12,850
|
|
$
1.01
- $4.00
|
11,000
|
$
3.33
|
5.25
|
11,000
|
|
$4
.01
- $7.00
|
10,000
|
$
6.80
|
8.88
|
2,500
|
|
$
7.01
- $9.00
|
78,750
|
$
7.76
|
3.70
|
63,751
|
|
$9
.01
- $10.00
|
11,250
|
$
9.26
|
7.99
|
6,670
|
|
$
10.01
- $13.49
|
40,000
|
$
13.49
|
2.19
|
27,500
|
|
Total
|
163,850
|
$
8.30
|
4.15
|
124,271
|
Of the 163,850 stock options
outstanding, 92,850 are non-qualified stock options. All
options have been registered with the SEC.
F-16
ISSUER
DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
No
stock options were granted during the year ended December 31,
2016. The fair value of common stock options issued during
the year ended December 31, 2015 were estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions used:
|
|
Year
ended
December
31, 2015
|
|
Expected dividend
yield
|
1.76
%
|
|
Expected stock
price volatility
|
158
%
|
|
Weighted-average
risk-free interest rate
|
1.84
%
|
|
Weighted-average
expected life of options (in years)
|
5.97
|
The
following is a summary of restricted stock units issued during the
year ended December 31, 2016 and 2015:
|
|
Number of Options
Outstanding
|
Weighted
Average
Fair
Value
|
Aggregate
Intrinsic
Value
|
|
Balance at December
31, 2014
|
26,000
|
$
9.26
|
$
232,960
|
|
Units granted
|
110,000
|
$
7.32
|
804,800
|
|
Units vested/issued
|
(25,000
)
|
$
7.20
|
$
201,500
|
|
Units forfeited
|
(3,000
)
|
$
9.26
|
26,880
|
|
Balance at December
31, 2015
|
108,000
|
$
7.76
|
$
626,400
|
|
Units granted
|
88,500
|
$
5.28
|
467,300
|
|
Units vested/issued
|
(55,000
)
|
$
7.32
|
$
379,588
|
|
Units forfeited
|
(15,000
)
|
$
6.61
|
111,941
|
|
Balance at December
31, 2016
|
126,500
|
$
6.35
|
$
1,138,500
|
As of December 31,
2016, there was $339,287 of unrecognized compensation cost related
to our unvested restricted stock units, which will be recognized
through 2018. All restricted stock units have been registered
with the SEC.
During the year ended December 31, 2016 and
2015, we recorded compensation expense of $592,025 and $485,498,
respectively, related to stock options and restricted stock units.
Additionally, during the years ended December 31, 2016 and 2015,
$429,234 and $195,411, respectively of additional cost was included
as capitalized software on the Consolidated Balance Sheet as of
December 31, 2016 and 2015.
Office Lease
In
October 2015, we signed a three year lease extension for our 16,059
square-foot corporate headquarters in Morrisville,
NC. At our option, we may terminate the lease any time
in exchange for an early termination fee of $135,000. If we
do not terminate the lease in Morrisville, NC early, our required
minimum lease payments are as follows:
|
Year
Ended December 31:
|
|
|
2017
|
$
153,337
|
|
2018
|
$
157,994
|
|
2019
|
$
134,896
|
|
Total
|
$
446,227
|
Additionally, we
have a shared office facility in London, England, that is on a
short term lease.
Rent expense associated with our office
leases totaled $207,104 and $203,953 for the years ended
December 31, 2016 and 2015, respectively.
Litigation
From
time to time, the Company may be involved in litigation that arises
through the normal course of business. The Company is
neither a party to any litigation nor are we aware of any such
threatened or pending litigation that might result in a material
adverse effect to our business.
F-17
ISSUER
DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
For
the years ended December 31, 2016 and December 31, 2015,
we generated revenues from the following revenue streams as
a percentage of total revenue:
|
|
2016
|
2015
|
||
|
|
Amount
|
Percentage
|
Amount
|
Percentage
|
|
Revenue
Streams
|
|
|
|
|
|
Disclosure
management
|
$
2,367,504
|
19.6
%
|
$
2,569,415
|
22.1
%
|
|
Shareholder
communications
|
7,539,098
|
62.5
%
|
7,942,421
|
68.4
%
|
|
Platform and
technology
|
2,152,264
|
17.9
%
|
1,108,047
|
9.5
%
|
|
Total
|
$
12,058,866
|
100.0
%
|
$
11,619,883
|
100.0
%
|
We did
not have any customers during the years ended December 31, 2016 or
2015 that accounted for more than 10% of our revenue. We did not
have any customers that comprised more than 10% of our total
accounts receivable balances at December 31, 2016 or
2015.
We
believe we do not have any financial instruments that could have
potentially subjected us to significant concentrations of credit
risk. Since a portion of the revenues are paid at the beginning of
the month via credit card or advance by check, the remaining
accounts receivable amounts are generally due within 30 days, none
of which is collateralized.
We
consider ourselves to be in a single reportable segment under the
authoritative guidance for segment reporting, specifically a
disclosure management and targeted communications company for
publically traded companies. Revenue is attributed to a
particular geographic region based on where the services are
earned. The following tables set forth revenues by domestic versus
international regions:
|
|
Year
Ended
|
|
|
|
2016
|
2015
|
|
Geographic region
|
|
|
|
North
America
|
$
10,492,799
|
$
9,520,523
|
|
Europe
|
1,566,067
|
2,099,360
|
|
Total
revenues
|
$
12,058,866
|
$
11,619,883
|
The
provision (benefit) for income taxes consisted of the following
components for the years ended December 31:
|
|
2016
|
2015
|
|
Current:
|
|
|
|
Federal
|
$
500,181
|
$
257,098
|
|
State
|
95,518
|
47,256
|
|
Foreign
|
55,874
|
193,055
|
|
Total
Current
|
651,573
|
497,409
|
|
Deferred:
|
|
|
|
Federal
|
(129,822
)
|
(468,887
)
|
|
State
|
(17,554
)
|
(67,423
)
|
|
Foreign
|
(39,847
)
|
(93,586
)
|
|
Total
Deferred
|
(187,223
)
|
(629,896
)
|
|
Total expense
(benefit) for income taxes
|
$
464,350
|
$
(132,487
)
|
F-18
ISSUER
DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Reconciliation
between the statutory rate and the effective tax rate is as follows
at December 31:
|
|
2016
|
2015
|
||
|
|
Amount
|
Percentage
|
Amount
|
Percentage
|
|
|
|
|
|
|
|
Federal statutory
tax rate
|
$
686,597
|
34.0
%
|
$
4,113
|
34.0
%
|
|
State tax
rate
|
65,660
|
3.3
%
|
(1,042
)
|
(8.6
)%
|
|
Permanent
difference - stock-based compensation
|
32,562
|
1.6
%
|
27,410
|
226.6
%
|
|
Permanent
difference – other
|
67,269
|
3.3
%
|
8,888
|
73.4
%
|
|
Permanent items
– disallowed interest
|
—
|
—
|
30,433
|
251.6
%
|
|
Provision to
return
|
(7,796
)
|
(0.4
)%
|
(30,797
)
|
(254.6
)%
|
|
Change in
unrecognized tax benefits
|
(57,749
)
|
(2.8
)%
|
57,749
|
477.4
% |
|
Write-off of net
operating losses
|
—
|
—
|
176,034
|
1,455.2
%
|
|
Foreign rate
differential
|
(52,502
)
|
(2.6
)%
|
(33,032
)
|
(273.1
)%
|
|
Research and
development credit
|
(55,726
)
|
(2.8
)%
|
(27,623
)
|
(228.3
)%
|
|
UK Rate
Change
|
—
|
—
|
(3,898
)
|
(32.2
)%
|
|
Other
|
—
|
—
|
14,738
|
121.8
%
|
|
Sub-total
|
678,315
|
33.6
%
|
222,973
|
1,843.2
%
|
|
Change in valuation
allowance
|
(213,965
)
|
(10.6
)%
|
(355,460
)
|
(2,938.4
)%
|
|
Total
|
$
464,350
|
23.0
%
|
$
(132,487
)
|
(1,095.2
)%
|
Components of net
deferred income tax assets, including a valuation allowance, are as
follows at December 31:
|
|
2016
|
2015
|
Change
|
|
Assets:
|
|
|
|
|
Net operating
loss
|
$
178,699
|
$
254,123
|
$
(75,424
)
|
|
Deferred
revenue
|
138,009
|
51,914
|
86,095
|
|
Allowance for
doubtful accounts
|
142,181
|
135,663
|
6,518
|
|
Stock
options
|
297,861
|
345,779
|
(47,918
)
|
|
Basis difference in
intangible assets
|
80,074
|
118,257
|
(38,183
)
|
|
Prepaid D&O
Insurance
|
6,452
|
10,341
|
(3,889
)
|
|
Foreign tax credits
carryforward
|
1,180,833
|
1,180,833
|
—
|
|
Other
|
37,765
|
26,916
|
10,849
|
|
Total deferred tax
asset
|
2,061,874
|
2,123,826
|
(61,952
)
|
|
Less: Valuation
allowance
|
(1,193,990
)
|
(1,407,955
)
|
213,965
|
|
Total net deferred
tax asset
|
867,884
|
715,871
|
152,013
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Prepaid
expenses
|
(38,484
)
|
(30,460
)
|
(8,024
)
|
|
Basis difference in
fixed assets
|
—
|
(4,833
)
|
4,833
|
|
Capitalized
software
|
(491,894
)
|
(171,584
)
|
(320,310
)
|
|
Purchase of
intangibles
|
(262,864
)
|
(505,586
)
|
242,722
|
|
Total deferred tax
liability
|
(793,242
)
|
(712,463
)
|
(80,779
)
|
|
|
|
|
|
|
Total net deferred
tax asset / (liability)
|
$
74,642
|
$
3,408
|
$
71,234
|
A valuation
allowance of $1,193,990 and $1,407,955 was recorded against
deferred tax assets as of December 31, 2016 and 2015,
respectively. The valuation allowance as of December 31,
2016, relates to foreign tax credit carryforwards and foreign net
operating losses. For the year ended December 31, 2016, the
Company released a portion of the valuation allowance in the amount
of $213,965. The release comprised a full valuation release
of $191,072 and $20,173 related to federal and state net operating
losses, respectively, on the basis of management’s
reassessment of the amount of its deferred tax assets that are more
likely than not to be realized. Additionally, the Company released
a portion of the valuation allowance of $2,720 related to the
utilization of foreign net operating losses; however, the Company
maintains a full valuation allowance on the remaining foreign net
operating losses.
As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. As of December 31, 2016, in part because during the current year, the Company achieved three years of cumulative pre-tax income in the U.S. federal tax jurisdiction, management determined that sufficient positive evidence exists as of December 31, 2016, to conclude that it is more likely than not that additional deferred taxes of $213,965 are realizable, and therefore, reduced the valuation allowance accordingly.
As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. As of December 31, 2016, in part because during the current year, the Company achieved three years of cumulative pre-tax income in the U.S. federal tax jurisdiction, management determined that sufficient positive evidence exists as of December 31, 2016, to conclude that it is more likely than not that additional deferred taxes of $213,965 are realizable, and therefore, reduced the valuation allowance accordingly.
F-19
ISSUER
DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
In assessing the
recovery of the deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income in the periods in which those temporary differences
become deductible. Management considers the scheduled reversals of
future deferred tax assets, projected future taxable income, and
tax planning strategies in making this assessment. It has
been determined that it is more likely than not that the deferred
tax assets attributable to foreign net operating losses and foreign
tax credit carryforwards will not be realized, as it has been
deemed unlikely that there will be generation of taxable income for
the subsidiaries that carry these losses or that sufficient foreign
source income would be generated to use the foreign tax
credits.
As of December 31,
2016, the Company had no unrecognized tax benefits.
As
of December 31, 2015, the Company had $57,749 of unrecognized tax
benefits which is recorded in Income taxes payable on the
Consolidated Balance Sheets. The Company's reserves for
uncertain tax positions decreased as a result of expired statute of
limitations for a prior tax year and management's conclusion that
the uncertain tax positions related to the statute lapse were
effectively settled. The Company released $57,749 of its uncertain
tax positions during the year ended December 31, 2016, inclusive of
interest and penalties. The aggregate changes in the balance of
unrecognized tax benefits were as follows:
|
|
2016
|
2015
|
|
|
|
|
|
Balance as of January 1:
|
$
57,749
|
$
—
|
|
Change related to
current year positions
|
—
|
57,749
|
|
Change related to
statute expirations
|
(57,749
)
|
—
|
|
Balance as of December 31:
|
$
—
|
$
57,749
|
The
Company has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries that are
indefinitely reinvested in foreign operations. Generally, such
earnings become subject to U.S. tax upon the remittance of
dividends and under certain other circumstances. It is not
practical to estimate the amount of deferred tax liabilities on
such undistributed earnings. Undistributed earnings are
insignificant as of December 31, 2016 and 2015. The
Company is subject to income taxation by both federal and state
taxing authorities. Income tax returns for the years ended December
31, 2015, 2014 and 2013 are open to audit by federal and state
taxing authorities.
The
Company sponsors a defined contribution 401(k) Profit Sharing Plan
and allows all employees in the United States to participate.
Matching and profit sharing contributions to the plan are at the
discretion of management, but are limited to the amount deductible
for federal income tax purposes. The Company made contributions to
the plan of $21,011 and $16,932 during the years ended December 31,
2016 and 2015, respectively.
The
Company also sponsors a defined contribution plan which covers
substantially all employees in the United
Kingdom. Employer contributions to the plan are at the
discretion of management. The Company's contribution
expense for discretionary contributions were $3,645 and $3,566 for
the year ended December 31, 2016 and 2015,
respectively.
On
January 10, 2017, the Company’s Board of Directors approved
and declared a quarterly cash dividend of $0.05 per share. The
dividend was paid on February 10, 2017 to shareholders of record as
of January 23, 2017.
On
February 28, 2017,
the Company filed a Definitive Schedule 14C to decrease the
Company's authorized shares of common stock from 100,000,000 shares
to 20,000,000 shares and its authorized shares of preferred stock
from 30,000,000 shares to 1,000,000 shares (the "Decrease
Amendment"). The Company expects to file its Certificate of
Amendment to Certificate of Incorporation to finalize the Decrease
Amendment with the Delaware Secretary of State in mid to late March
and will file a Current Report on Form 8-K at such
time.
F-20
TABLE OF CONTENTS
Part IItem 1. Description Of BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertyItem 3. Legal ProceedingsItem 4. Mine Safety DiscolsuresPart IIItem 5. Market For Common Equity and Related Stockholder MattersItem 6. Select Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. ExhibitsNote 1: Description, Background and Basis Of OperationsNote 2: Summary Of Significant Accounting PoliciesNote 3: Fixed AssetsNote 4: Goodwill and Other Intangible AssetsNote 5: Line Of CreditNote 6: Note Payable (related Party)Note 7: EquityNote 8: Stock Options and Restricted Stock UnitsNote 9: Commitments and ContingenciesNote 10: ConcentrationsNote 11: Geographic Operating InformationNote 12: Income TaxesNote 13: Employee Benefit PlansNote 14: Subsequent Events