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, 2018
———————
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
American.
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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, smaller reporting
company, or an emerging growth company. See the definition of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
(Do not check if a smaller reporting
company)
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
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, 2018, the last business day of the
registrant's second fiscal quarter, was approximately $61,726,026
based on the closing price reported on the NYSE American as of such
date.
As of
February 28, 2019, the number of outstanding shares of the
registrant's common stock was 3,830,738.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement relating to
its 2019 annual meeting of stockholders (the “2019 Proxy
Statement”) are incorporated by reference into Part III of
this Annual Report on Form 10-K where indicated. The 2019 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 Contents
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EX-21.1
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Subsidiaries
of the Registrant
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EX-23.1
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Consent of Independent Registered Public Accounting
Firm
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EX-31.1
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Chief Financial Officer Certification Pursuant to Section
302
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EX-31.2
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Chief Financial Officer Certification Pursuant to Section
302
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EX-32.1
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Chief Executive Officer Certification Pursuant to Section
906
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EX-32.2
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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 related to transaction-based
revenue.
●
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 investor
relations 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.
I
TEM 1. DESCRIPTION OF
BUSINESS.
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). Our corporate offices
are located at 500 Perimeter Park Drive, Suite D, Morrisville,
North Carolina, 27560.
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, webcasts and social media. We use these
channels to communicate with our investors and the public about our
company, our products and services and other related matters. It is
possible that information we post on some of these channels 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 to all of our channels, including our
social media accounts.
Issuer Direct is an industry-leading global
communications and compliance company focusing on the needs of
corporate issuers. Issuer Direct's principal platform,
Platform
id.
™, empowers users by thoughtfully
integrating the most relevant tools, technologies and products,
thus eliminating the complexity associated with producing and
distributing their business communications and financial
information.
We work with a diverse customer base, which not
only includes corporate issuers and private companies, but also
banks, professional firms, such as investor relations and public
relations firms, as well as the accounting and legal communities.
We also sell products and services to others in the financial
services industry, including brokerage firms, investment banks and
mutual funds. Corporate issuers and their service providers utilize
Platform
id
.
and related services from document
creation all the way to dissemination to regulatory bodies,
platforms and shareholders. Private companies primarily use our
news distribution and webcasting products and services to
disseminate their message globally.
In order to provide a good representation of our
business and reflect our
platform first
engagement strategy, we report revenue
in two revenue streams: (i) Platform and Technology and (ii)
Services. Due to the adoption of Accounting Standards Codification
(“ASC”) 606
Revenue from Contracts with
Customers
effective
as of
January 1, 2018, we reclassified
revenue associated with the
Company’s shareholder outreach offering that included both
electronic dissemination and physical delivery of a
customer’s annual report. Historically, revenue from these
bundled contracts was reported in the Services revenue stream
because an allocation between electronic and physical hardcopy
distribution was not made, however, under ASC 606, a portion of the
revenue from these contracts is required to be allocated to the
Platform and Technology revenue stream in accordance with
stand-alone contracts for the shareholder outreach subscription. As
a result, revenue of $683,000 for the year ended December 31, 2017,
was reclassified from Services revenue to Platform and Technology
revenue.
Set forth below is an infographic depicting the
modules included in Platform
id.
and the services we
provide:
Platform and Technology
As we continue our transition to a cloud-based
subscription business, we expect the Platform and Technology
portion of our business to continue to increase over the next
several years, both in terms of overall revenue and as compared to
the Services portion of our business. Platform and Technology
revenue grew to 60% of total revenue for 2018, compared to 56% of
our revenue for 2017 and approximately 44% of our revenue in 2016.
Our ACCESSWIRE® news distribution offering represented a
majority of the year over year growth in our Platform and
Technology revenue during 2017 and 2018 and continues to lead our
transition to a full platform solution. Also contributing to the
growth in the percentage of Platform and Technology revenue is our
focus on our
platform first
engagement strategy and converting
customers which historically relied on us for services work to
utilizing Platform
id.
As part of our Platform and Technology strategy,
we have been working with several select stock exchanges, whereby
we make available certain parts of Platform
id
. under agreement, to integrate our offerings.
Such partnerships should yield increased exposure to a targeted
customer base that could impact our revenue and overall brand in
the market.
Additionally, we plan to continue to invest in
both our current Platform
id.
offering as well as additional
offerings that we plan to incorporate into Platform
id
., which we believe provide long term
opportunities for our platform business. We believe understanding
the shareholder composition of a company is an opportunity that is
underserved by the market today. We believe we have addressed that
gap by releasing a new module during the fourth quarter of 2018
centered around the professional conference organizer (PCO)
.
This subscription is being licensed to investor conference
organizers which together hold an estimated 1,000 plus events a
year. This product is integrated with and enhances our
communications module subscription offerings of newswire,
newsrooms, webcasting and shareholder targeting.
In addition, we have developed
an insight
and analytics subscription add-on module to Platform
id.
, which enables our
customers to better understand their shareholder and investor
engagement profile. This module is targeted to be initially rolled
out in the first quarter of 2019. Both modules are expected to
broaden our presence in the market by providing our customers the
ability to monitor the shareholder from when they first meet an
investor to when they become an actual shareholder.
These advancements leverage our current
application technology framework and give us an opportunity to
further expand our customer and user base.
Platform
id.
Platform
id.
is our primary cloud-based
subscription platform that efficiently and effectively helps manage
the events of our customers seeking to distribute their messaging
to key constituents, investors, markets and regulatory systems
around the globe. Currently, Platform
id.
consists of several related but
distinct shareholder communications and compliance modules. Certain
of these capabilities were historically part of our disclosure
management and shareholder communications offerings, but are now
included into our fully integrated platform.
Within most of our target markets, customers
require several individual services and/or software providers to
meet their investor relations, communications and compliance needs.
We believe Platform
id.
can address all those needs in a
single, secure, cloud-based platform - one that offers a company
control, increases efficiencies, demonstrates clear value and, most
importantly, delivers consistent and compliant messaging from one
centralized platform.
While
the complete platform is available for a single subscription fee,
companies also have the flexibility to choose one or more of the
specific modules that fit their needs.
Communications Modules
Our press release offering, which is marketed
under the brand,
ACCESSWIRE
,
is a cost-effective, Regulation Fair Disclosure
(“FD”), news dissemination and media outreach service.
The ACCESSWIRE product offering focuses on press release
distribution for both private and publicly held companies globally.
ACCESSWIRE is fast becoming a competitive alternative to the
traditional newswires because we have been able to integrate
customer editing features and improve our targeting and growing
analytics reporting systems, which we believe will enable us to add
new customers for 2019 and beyond. We have also been able to
maintain flexible pricing by offering our customers the option to
pay per release or enter into longer-term subscriptions. Currently,
approximately 55% of our ACCESSWIRE revenue is on a subscription
basis.
On July 3, 2018, we completed the acquisition of
Filing Services Canada Inc. (“FSCwire”), which not only
increased our customer base, but more importantly increased our
global footprint, distribution capabilities and editorial team. We
recently completed the integration of FSCwire and rebranded it as
ACCESSWIRE Canada, and will now begin to focus on offering those
customers the full suite of products included in Platform
id.
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. Our ACCESSWIRE news
editing offering is available within our core Platform
id.
subscription or as a stand-alone
module.
ACCESSWIRE
is dependent upon several key partners for news distribution, some
of which are also partners that we rely on for other investor
outreach offerings. A disruption in any of these partnerships could
have a materially adverse impact on our business.
Platform
id.
also
includes
our targeting and outreach
database and intelligence analytics module. This module is centered
around both our shareholder communications and news distribution
offerings. We anticipate the analytics component will become a
focal point for Platform
id.
in the future, as customers become
increasingly interested in shareholder interest and real-time
alerts to vital data points throughout the day.
Over the past two years, we have been focused on
refining the model of digital distribution of our customers’
message to the investment community and beyond. This has been
accomplished by integrating our shareholder outreach module,
formerly known as Investor Network, into and with Platform
id.
Most of the customers subscribing to
this module today are historical PrecisionIR (“PIR”)
– Annual Report Service (“ARS”) users, as well as
new customers purchasing the entire Platform
id.
subscription. We have migrated some of
the customers from the traditional ARS business into this new
digital subscription business. However, there can be no assurances
these customers will continue using this digital platform in the
long term if market conditions or shareholder interest is not
present.
We estimate there are over 5,000 companies in
North America conducting earnings events each quarter that include
teleconference, webcast or both as part of their events.
Platform
id.
also
incorporates other elements of the
earnings event, including earnings date/call announcement, earnings
press release and SEC Form 8-K filings. There are a handful of our
competitors that can offer this integrated full service solution
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.
The earnings event industry is a highly
competitive space with the majority of the business being driven
from practitioners in investor relations and communications firms.
We have invested time and financial resources developing and
integrating systems and processes within Platform
id.
by creating an application programming
interface (“API”). This API will allow publishers to
query an industry or a single company’s current and past
earnings calls and present those webcasts on their platforms, under
a subscription to Platform
id.
Initially, this has been broadly
distributed via our Investor Network platform, with expectations
that partners and publishers will license this dataset for their
platforms in the future. We believe this offering will further
increase our brand awareness. Additionally, as a commitment to
broadening the reach of our webcast platform, all events will be
broadcast live within our shareholder outreach module, which will
drive new audiences and give companies the ability to view their
analytics and engagement of each event. We believe these analytics
will increase the demand for our webcasting platform among the
corporate issuer community.
On
January 3, 2019, we acquired the VisualWebcaster Platform
(“VWP”) from Onstream Media Corporation. VWP is a
leading cloud-based earnings webcast, webinar and training platform
that delivers live and on-demand streaming of events to audiences
of all sizes. VWP allows customers to create, produce and deliver
events, which will integrate perfectly into Platform
id.
We believe by acquiring
VWP, we have significantly strengthened our webcasting product and
Platform
id.
offering as well as acquired over 120 customers, some of which are
Fortune 500 companies.
Our investor relations content network is another
component of Platform
id.
, which is used to create the investor
relations’ tab of a public company’s website. This
investor relations content network is a robust series of data feeds
including news feeds, stock feeds, fundamentals, regulatory
filings, corporate governance and many other components that are
aggregated from a majority of the major exchanges and news
distribution outlets around the world. Customers can subscribe to
one or more of these data feeds from us or as a component of a
fully designed and hosted website for pre-IPO, reporting companies
and partners seeking to display our content on their corporate
sites. The clear benefit to our investor relations module is its
integration into and with the rest of Platform
id.
, meaning companies can produce content for public
distribution and it is automatically linked to their corporate
site, distributed to targeted groups and placed into and with our
data feed partners.
Compliance Modules
Platform
id.
’s disclosure reporting module is a document
conversion, editing and filing offering, which is designed for
reporting companies and professionals seeking to insource the
document drafting, editing and filing processes to the SEC’s
EDGAR system and SEDAR, which is the Canadian equivalent of EDGAR.
This module is available in both a secure public cloud within our
Platform
id.
subscription, as well as in a private
cloud option for corporations, mutual funds and the legal community
looking to further enhance their internal document process. As this
module has begun to be adopted by our customers, we have seen a
negative impact on our legacy disclosure conversion services
business. However, the margins associated with our Platform and
Technology business compared to our Services business are higher
and align with our long-term strategy, and as such, we believe this
module will have a positive impact on our compliance business going
forward.
Toward the end of 2017, we completed upgrades to
our disclosure reporting product to include tagging functionality
that meets newly mandated SEC requirements. On June 28, 2018, the
SEC voted to adopt rules mandating the use of Inline XBRL (Inline
Extensible Business Reporting Language or “iXBRL”) for
the submission of financial statement information to the SEC. The
new requirements for iXBRL will have a three-year phase in
beginning for large accelerated filers that use U.S. GAAP to be
compliant for fiscal periods ending on or after June 15, 2019, for
accelerated filers to begin reporting for fiscal periods ending on
or after June 15, 2020 and for all other filers to begin reporting
for fiscal periods ending on or after June 15, 2021. These upgrades
also include meeting new SEC mandates for foreign filers that
compile financial statements using International Financial
Reporting Standards (“IFRS”) to be able to utilize our
cloud-based platform. Foreign filers with fiscal year’s
ending on or after December 15, 2017, are now required to begin
reporting their financial statements in XBRL with the SEC in 2018.
Platform
id.
has adopted the new IFRS taxonomy into
and with its new disclosure upgrade for iXBRL to ensure our
customers are able to meet these new mandates.
Our whistleblower module is an add-on product
within Platform
id.
This system delivers secure
notifications and basic incident workflow management processes that
align with a company’s corporate governance whistleblower
policy. As a supported and subsidized bundle product of the New
York Stock Exchange (“NYSE”) offerings, we hope we will
gain relationships with new IPO customers and other larger cap
customers listed on the NYSE.
A valued subscription add-on in our
Platform
id.
offering is the ability for our
customers to gain access to real-time information of their
shareholders, stock ledgers, reports, and issue new shares from our
cloud-based stock transfer module. Managing the capitalization
table of a public company or pre-IPO company is the cornerstone of
corporate governance and transparency, and as such companies and
community banks have chosen us to assist with their stock transfer
needs, including bond offerings and dividend management. This is an
industry which has experienced declining overall revenues as it was
affected by the replacement of paper certificates with digital
certificates. However, we have recently been focused on selling
subscriptions of the stock transfer component of our platform,
allowing customers to gain access to our cloud-based system in
order to move shares or query shareholders, which has resulted in a
more efficient process for both our customers and
us.
Our
proxy module is marketed as a fully integrated, real-time voting
platform for our customers and their shareholders of record. This
module is utilized for every annual meeting and/or special meeting
we manage for our customer base and offers both full-set mailing
and notice of internet availability options.
Services
As we focus on expanding our cloud-based
subscription business, we expect to see a decrease in the overall
revenues associated with our Services business. Typically, Services
revenues relate to activities where substantial resources are
required to perform the work for our customers and/or hard goods
are utilized as part of the engagement. To date, most of our
Services have been related to converting and editing SEC documents
and XBRL tagging, which has been our core disclosure business over
the last 12 years. Services also include telecommunications
services and print, fulfillment and delivery of stock certificates,
proxy materials or annual reports depending on each
customer’s engagement. Services are not required, but are
optional for customers that utilize our Platform
id.
Our investor outreach and engagement offering,
formerly known as the ARS, was acquired from PIR in 2013. The ARS
business has existed for over 20 years primarily as a physical hard
copy delivery service of annual reports and prospectuses. We
continue to operate a portion of this legacy system for those who
opt to take advantage of physical delivery of material.
Additionally, we continue to attempt to migrate the install base
over to subscriptions of our digital outreach engagement module
within Platform
id.
We believe we will continue to see
further attrition of both customers and revenues in this category
as we focus our efforts on our Platform and Technology
business.
Our vision -
To be the trusted platform that brings the
issuer and investor together.
Our overall strategy includes
:
Expansion of Current Customers
We
expect to continue to see demand for our products within our
customer base. As we transition from a services oriented business,
our focus is to migrate customer contracts over to
subscription-based contracts for our entire Platform
id.
offering. This will
naturally help us move from a transaction based revenue model to a
recurring subscription-based revenue model, which gives us more
consistent, predictable revenue patterns and hopefully creates
longer lasting customer relationships. Additionally, as part of our
customer 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.) of an organization which
will help us further drive user subscription
revenues on top of Platform
id.
subscriptions.
Focus on Organic Growth
Our
primary growth strategy continues to be selling our cloud-based
offerings via
Platform
id.
to new customers under a subscription arrangement, whereas in the
past we were inclined to sell a single point solution. Selling a
single subscription to our entire platform allows us to provide our
customers with a competitively priced, complete solution for their
communications and compliance needs. Our strategy of selling our
cloud-based offerings via Platform
id.
to all customers under a
subscription agreement should benefit us by moving away from
selling individual solutions within highly commoditized markets
that are experiencing pricing pressures.
New Offerings
During
2019 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
market position - 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.
This
year we plan to bring to market several new enhancements and
platform upgrades targeted at both our current install base as well
as new customers. The first of our new offerings is our
Professional Conference Organizer (PCO), which was released in the
fourth quarter of 2018. It is an investor conference marketing,
planning and event scheduling cloud-based module integrated within
Platform
id.
The PCO
subscription module includes the following:
–
Front end website,
event promotion and email marketing
–
Real-time
dashboards
–
Limitless Agenda
and tracks for virtually any event
–
Custom questions
and survey tools
–
Customizable 1x1
meetings
–
Mobile
App
–
Badge
printing
–
Lodging
API’s
We are
also looking for opportunities to add to this module as we gain
market traction with conference organizers, corporate access
professionals and investment banks. Moving our customers closer to
their investors is a part of our core business strategy, so it is
critical we have a platform that puts our customers in the best
position to tell their story.
Additionally, part
of our continued strategy from 2018 is to bring to market our
insight and analytics engine for our Platform
id.
product offering, which we
tested with a close group of professionals and customers in late
2018. The insights and analytics component of Platform
id.
will give our customers the
ability to see shareholder and investor engagement from the source,
(i.e. at a conference, road show, earnings event, corporate
website, Investor Network, affiliate networks and thousands of
distribution points from our already robust news distribution
network.), which we believe will enable them to better assess the
effectiveness of investor outreach programs and target potential
investors more effectively.
Acquisition Strategy
We will
continue to evaluate complimentary verticals and systems that we
can integrate well into our current platforms. These opportunities
typically need to be accretive and consistent with what we have
done in the past. We will continue to maintain our product and
technology focus, so it is likely we will look for acquisitions in
areas we currently generate revenues and/or see clear opportunities
to leverage our strengths to disrupt existing markets. In these
potential transactions, we will look for key people, technologies
and long-term customers that will further enhance our overall
market position.
Sales and Marketing
During
2019, we will continue to strengthen our brands in the market by
working aggressively to expand our new customer footprint and
continue to cross sell to increase average revenue per user. Since
our platform, systems and operations are built to handle growth, we
can leverage them to produce consistently high margins and
increased cash flows without a proportional increase in our capital
or operating expenses.
Our
global sales organization is responsible for generating new
customer opportunities and expanding our current customers. We
ended 2018 with a multi-tier organization of sales personnel, made
up of Strategic Account Managers and Business Development Managers.
We believe this structured approach is the most efficient and
effective way to reach new customers and also grow our current
install base. The total compensation packages for these teams are
heavily weighted with commission compensation to incent sales. All
members of the team have sales quotas. As of December 31, 2018, we
employed 16 full-time equivalent sales personnel and are on track
to add more Business Development Managers in 2019 to focus on
selling new subscriptions of Platform
id.
Our
marketing organization has been focused on both new customer
acquisition as well as campaigns to educate current customers on
the advantages of our entire Platform
id.
Additionally, our marketing
team has expanded their focus on investor conferences, strategic
exchange partnerships and private company marketing activities in
order to continue to scale our business long term.
Additionally, our
executive team plays a critical role in our sales process,
assisting the organization and customers with new offerings, cross
selling opportunities and channel development; because our overall
organization is small, we benefit from this approach and believe
this is key to our future success.
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 customers are of utmost importance
and part of our core values.
During
2018, we engaged a national security consulting firm to identify,
address and create policies and plans which enable us to mitigate
our cybersecurity and information vulnerabilities on both a
short-term and long-term basis. We believe having a strong cyber
and information security policy is not only necessary to maintain
our current business model but also important to attract new
customers. We plan to continue to work closely with this firm and
others to ensure our security policies meet our customers’
needs and requirements.
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 well 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 2018, we invested heavily in growing several new
product offerings beyond our traditional compliance reporting and
transaction services business. We believe 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.
According to
Burton-Taylor Media Intelligence and 2017 Frost & Sullivan
reports, the global communications services market is $4.2+ billion
in annual spend. This total consists of spending on earnings
events, press releases, engagement and targeting and investor
relations platforms globally. The key drivers of growth in our
industry relate to changing regulatory requirements, new innovated
platform technologies and typical industry consolidations. We
believe we have a significant competitive advantage by innovating
our technology and workflow automation solutions.
Competition
Despite
some significant consolidation in recent years, our 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 customer demands. Management has
been focused on offsetting these risks relating to competition as
well as the seasonality by introducing our 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
customers that most competitors cannot offer today.
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 public and private companies,
mutual funds, law firms, brokerage firms, investment banks,
individuals, and other institutions. For the year ended December
31, 2018, we did work for approximately 3,700 customers on our
ACCESSWIRE platform and 1,200 customers through our other products
and services. We did not have any customers during the year ended
December 31, 2018 that accounted for more than 10% of our revenue
and one customer which represented approximately 12% of our year
end accounts receivable balance as of December 31,
2018.
Employees
As of
December 31, 2018, we employed seventy full-time employees as
compared to sixty-six full-time employees at December 31, 2017,
none of which are represented by a union. Our employees work in our
corporate offices in North Carolina, and in other offices
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. Additionally, we have an office in
Salt Lake City, Utah and a shared office facility in London,
England, both of which are on a short term lease. As part of our
acquisition of VWP, we assumed a three-year lease for an office in
Ft. Lauderdale, Florida and two short term leases for locations in
New York City, New York.
Insurance
We
maintain both a general business liability policy and an errors and
omissions policy 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 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 currently approved to handle the
securities of NYSE, NASDAQ and OTC securities.
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 on paper, to governing bodies and
shareholders alike. We are licensed under these regulations to
disseminate, communicate and or solicit on behalf of our customers,
the issuers.
I
TEM 1A. RISK FACTORS.
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 some or all of your
investment.
Risks related to our business
Legislative and regulatory changes can influence demand for our
solutions and could adversely affect our business.
The
market for our solutions depends in part on the requirements of the
SEC and other regulatory bodies. Any legislation or rulemaking
substantially affecting the content or method of delivery of
documents to be filed with these regulatory bodies could have an
adverse effect on our business. In addition, evolving market
practices in light of regulatory developments could adversely
affect the demand for our solutions. Uncertainty caused by
political change in the United States and European Union
(particularly Brexit) heightens regulatory uncertainty in these
areas. For example, the White House and Congressional leadership
have publicly announced a goal of repealing or amending parts of
the Dodd Frank Act, as well as certain regulations affecting the
financial services industry. New legislation, or a significant
change in rules, regulations, directives or standards could reduce
demand for our products and services. Regulatory changes could also
increase expenses as we modify our products and services to comply
with new requirements and retain relevancy, impose limitations on
our operations, and increase compliance or litigation expense, each
of which could have a material adverse effect on our business,
financial condition and results of operations.
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 across
all of our businesses is intense. The speed and accuracy with which
we can meet customers’ needs, the price of our services and
the quality of our products and supporting services are factors in
this competition.
Some
of our competitors have longer operating histories, greater name
recognition, more established customer bases and significantly
greater financial, technical, marketing and other resources than we
do. As a result, they may be able to respond more quickly and
effectively than we can to new or changing market demands and
requirements. We could also be negatively impacted if our
competitors reduce prices, add new features, form strategic
alliances with other companies, or are acquired by other companies
with greater available resources.
These
competitive pressures to any aspect of our business could reduce
our revenue and earnings.
Our revenue growth rate in the recent period relating to our
Platform and Technology business may not be indicative of this
business segment’s future performance.
We
experienced a revenue growth rate of 21% from 2017 to 2018 and 49%
from 2016 to 2017 with respect to our Platform and Technology
revenue stream. Much of this increase was due to the success of our
ACCESSWIRE business. Our historical revenue growth rate of the
Platform and Technology revenue stream is not indicative of future
growth, and we may not achieve similar revenue growth rates in
future periods. You should not rely on our revenue or revenue
growth for any prior quarterly or annual periods as any indication
of our future revenue or revenue growth. If we are unable to
maintain consistent revenue or revenue growth, our stock price
could be volatile, and it may be difficult to achieve and maintain
profitability.
The success of our cloud-based software largely depends on our
ability to provide reliable solutions to our customers. If a
customer were to experience a product defect, a disruption in its
ability to use our solutions or a security flaw, demand for our
solutions could be diminished, we could be subject to substantial
liability and our business could suffer.
Our
Platform and Technology solutions are complex and we often release
new features. As such, our solutions could have errors, defects,
viruses or security flaws that could result in unanticipated
downtime for our customers and harm our reputation and our
business. Internet-based software frequently contains undetected
errors or security flaws when first introduced or when new versions
or enhancements are released. We might from time to time find such
defects in our solutions, the detection and correction of which
could be time consuming and costly. Since our customers use our
solutions for important aspects of their business, any errors,
defects, disruptions in access, security flaws, viruses, data
corruption or other performance problems with our solutions could
hurt our reputation and may damage our customers’ businesses.
If that occurs, customers could elect not to renew, could delay or
withhold payment to us or may make warranty or other claims against
us, which could result in an increase in our provision for doubtful
accounts, an increase in collection cycles for accounts receivable
or the expense and risk of litigation. We could also lose future
sales. In addition, a security breach of our solutions could result
in our future business prospects being materially adversely
impacted.
A substantial portion of our business is derived from our
ACCESSWIRE brand, which is dependent on technology and key
partners.
As
noted, our ACCESSWIRE brand has been vital to the increase in
revenue associated with our Platform and Technology revenue stream.
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 a material adverse
impact on our business and financial results and the inability to
procure new key partners could impact the growth of the ACCESSWIRE
brand, particularly with respect to public company news
distribution. Furthermore, we acquired software with the
acquisition of ACCESSWIRE. Any performance issues with this
technology could also have a material adverse impact on our ability
to serve our customers and thus our ability to generate
revenue.
Failure to manage our growth may adversely affect our business or
operations.
Since
2013, we have experienced overall growth in our business, customer
base, employee headcount and operations, and we expect to continue
to grow our business over the next several years. This growth
places a significant strain on our executive management team and
employees and on our operating and financial systems. To manage our
future growth, we must continue to scale our business functions,
improve our financial and management controls and our reporting
systems and procedures and expand and train our work force. In
particular, we grew from 24 employees as of December 31, 2012 to 70
employees as of December 31, 2018. We anticipate that additional
investments in sales personnel, infrastructure and research and
development spending will be required to:
●
scale our
operations and increase productivity;
●
address the needs
of our customers;
●
further develop and
enhance our existing solutions and offerings; and
●
develop new
technology.
We
cannot assure you that our controls, systems and procedures will be
adequate to support our future operations or that we will be able
to manage our growth effectively. We also cannot assure you that we
will be able to continue to expand our market presence in the
United States and other current markets or successfully establish
our presence in other markets. Failure to effectively manage growth
could result in difficulty or delays in deploying customers,
declines in quality or customer satisfaction, increases in costs,
difficulties in introducing new features or other operational
difficulties, and any of these difficulties could adversely impact
our business performance and results of operations.
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 customer 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 customers’ information confidential or
if we handle their information improperly, our business and
reputation could be significantly and adversely
affected.
If we
fail to keep customers’ proprietary information and
documentation confidential, we may lose existing customers and
potential new customers and may expose them to significant loss of
revenue based on the premature release of confidential information.
While we have security measures in place to protect customer
information and prevent data loss and other security breaches,
these measures may be breached as a result of third-party action,
employee error, malfeasance or otherwise. Because the techniques
used to obtain unauthorized access or sabotage systems change
frequently and generally are not identified until they are launched
against a target, we may be unable to anticipate these techniques
or to implement adequate preventative measures.
In
addition, our service providers (including, without limitation,
hosting facilities, disaster recovery providers and software
providers) may have access to our customers’ data and could
suffer security breaches or data losses that affect our
customers’ information.
If an
actual or perceived security breach or premature release occurs,
our reputation could be damaged and we may lose future sales and
customers. We may also become subject to civil claims, including
indemnity or damage claims in certain customer contracts, or
criminal investigations by appropriate authorities, any of which
could harm our business and operating results. Furthermore, while
our errors and omissions insurance policies include liability
coverage for these matters, if we experienced a widespread security
breach that impacted a significant number of our customers for whom
we have these indemnity obligations, we could be subject to
indemnity claims that exceed such coverage.
We must adapt to rapid changes in technology and customer
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 customer
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 customer
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 acquired or may acquire in
the future. These risks 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 customers 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 customers 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 filing 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 customer
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. On December 19, 2018, the SEC
adopted new rules to allow issuers currently reporting under the
Exchange Act to utilize Regulation A+ for offerings up to $50
million during a twelve-month period. Prior to the new rules,
issuers reporting under the Exchange Act were not able to utilize
Regulation A+. If issuers reporting under the Exchange Act elect to
utilize the new rules, we expect this to mitigate any reduction in
revenue from our disclosure management business.
Revenue from Platform
id.
subscriptions and many of
our service contracts is recognized ratably over the term of the
contract or subscription period. As a result, downturns or upturns
in sales may not be immediately reflected in our operating
results.
We
generally recognize subscription and support revenue from customers
ratably over the terms of their subscription agreements, which are
typically on a quarterly or annual cycle and automatically renew
for additional periods. As a result, a substantial portion of the
revenue we report in each quarter will be derived from the
recognition of deferred revenue relating to subscription agreements
entered into during previous quarters. Consequently, a decline in
new or renewed subscriptions in any one quarter may not be
immediately reflected in our revenue results for that quarter. This
decline, however, will negatively affect our revenue in future
quarters. Accordingly, the effect of significant downturns in sales
and market acceptance of our solutions and potential changes in our
rate of renewals may not be fully reflected in our results of
operations until future periods. Our subscription model also makes
it difficult for us to rapidly increase our subscription revenue
through additional sales in any period, as revenue from new
customers must be recognized over the applicable subscription term.
In addition, we may be unable to adjust our cost structure to
reflect the changes in revenue, which could adversely affect our
operating results.
We cannot accurately predict subscription renewal or upgrade rates
and the impact these rates may have on our future revenue and
operating results.
Our
business depends substantially on customers renewing their
subscriptions with us, specifically Platform
id.
, and expanding their use of
our products. Our customers have no obligation to renew their
subscriptions for our products after the expiration of their
initial subscription period. Given our limited operating history
with respect to our Platform and Technology revenue stream, we may
be unable to accurately predict our subscription and support
revenue retention rate. In addition, our customers may renew for
shorter contract lengths, lower prices or fewer users. We cannot
accurately predict new subscription or expansion rates and the
impact these rates may have on our future revenue and operating
results. Our renewal rates may decline or fluctuate as a result of
a number of factors, including customer dissatisfaction with our
service, customers’ ability to continue their operations and
spending levels and deteriorating general economic conditions. If
our customers do not renew their subscriptions for our products,
purchase fewer solutions at the time of renewal, or negotiate a
lower price upon renewal, our revenue will decline and our business
will suffer. Our future success also depends in part on our ability
to sell additional solutions and products, more subscriptions or
enhanced editions of our products to our current customers. If our
efforts to sell additional solutions and products to our customers
are not successful, our growth and operations may be impeded. In
addition, any decline in our customer renewals or failure to
convince our customers to broaden their use of our products would
harm our future operating results.
Although we have generated positive cash flows for the past 11
years, 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, 2018, the Company had
$3,151,000 of retained earnings. Although we have generated
positive cash flows from operations for the past eleven 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.
We continue to transition our business from a services company to a
software as a service company, which makes it difficult to predict
our future operating results.
In
2015, we began our transition from a services company to a software
as a service company. As a result of this transition, our ability
to forecast our future operating results is limited and subject to
a number of uncertainties, including our ability to plan for and
model future growth. We have encountered and will encounter risks
and uncertainties frequently experienced by growing companies in
rapidly changing industries, such as the risks and uncertainties
described herein. If our assumptions regarding these risks and
uncertainties (which we use to plan our business) are incorrect or
change due to changes in our markets, or if we do not address these
risks successfully, our operating and financial results could
differ materially from our expectations and our business could
suffer.
We are subject to general litigation and regulatory requirements
that may materially adversely affect us.
From
time to time, we may be involved in disputes or regulatory
inquiries that arise in the ordinary course of business. We expect
that the number and significance of these potential disputes may
increase as our business expands and we grow larger. While most of
our agreements with customers limit our liability for damages
arising from our solutions, we cannot assure you that these
contractual provisions will protect us from liability for damages
in the event we are sued. Although we carry general liability
insurance coverage, our insurance may not cover all potential
claims to which we are exposed or may not be adequate to indemnify
us for all liability that may be imposed. Any claims against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management time,
and result in the diversion of significant operational resources.
Because litigation is inherently unpredictable, we cannot assure
you that the results of any of these actions will not have a
material adverse effect on our business, financial condition,
results of operations and prospects.
New and existing laws make determining our income tax rate complex
and subject to uncertainty.
The
computation of our provision for income tax is complex, as it is
based on the laws of multiple taxing jurisdictions and requires
significant judgment on the application of complicated rules
governing accounting for tax provisions under U.S. generally
accepted accounting principles. Additionally, provisions for income
tax for interim quarters are based on forecasts of our U.S. and
non-U.S. effective tax rates for the year and contain numerous
assumptions. Various items cannot be accurately forecasted and
future events may be treated as discrete to the period in which
they occur. Our provision for income tax can be materially impacted
by things such as changes in our business, such as internal
restructuring and acquisitions, changes in tax laws and accounting
guidance and other regulatory, legislative developments, tax audit
determinations, changes in uncertain tax positions, tax deductions
attributed to equity compensation and changes in our determination
for a valuation allowance for deferred tax assets. For all of these
reasons, our actual income taxes may be materially different than
our provision for income tax.
We are subject to U.S. and foreign data privacy and protection laws
and regulations as well as contractual privacy obligations, and our
failure to comply could subject us to fines and damages and would
harm our reputation and business.
We
manage private and confidential information and documentation
related to our customers’ 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. In addition, we are subject to the data privacy and
protection laws and regulations adopted by federal, state and
foreign legislatures and governmental agencies. Data privacy and
protection is highly regulated and may become the subject of
additional regulation in the future. Privacy laws restrict our
storage, use, processing, disclosure, transfer and protection of
non-public personal information by our customers or collected from
visitors of our website. We strive to comply with all applicable
laws, regulations, policies and legal obligations relating to
privacy and data protection. However, it is possible that these
requirements may be interpreted and applied in a manner that is
inconsistent from one jurisdiction to another and may conflict with
other rules or our practices. Any failure, or perceived failure, by
us to comply with federal, state or international laws, including
laws and regulations regulating privacy, payment card information,
personal health information, data or consumer protection, could
result in proceedings or actions against us by governmental
entities or others.
The
regulatory framework for privacy and data protection issues
worldwide is evolving, and various government and consumer agencies
and public advocacy groups have called for new regulation and
changes in industry practices, including some directed at providers
of mobile and online resources in particular. Our obligations with
respect to privacy and data protection may become broader or more
stringent. If we are required to change our business activities or
revise or eliminate services, or to implement costly compliance
measures, our business and results of operations could be
harmed.
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
products, 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 the second
quarter of our fiscal year. 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 other revenues 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.
If securities or industry analysts issue an adverse opinion
regarding our stock, our stock price and trading volume could
decline.
The
trading market for our common stock is influenced by the research
and reports that securities or industry analysts may publish about
us, our business, our market or our competitors. If any of the
analysts who may cover us adversely change their recommendation
regarding our common stock, or provide more favorable relative
recommendations about our competitors, the trading price of our
common stock could decline. If any analyst who may cover us were to
cease coverage of our company or fail to regularly publish reports
on us, we could lose visibility in the financial markets, which in
turn could cause the trading price of our common stock or trading
volume to decline.
The market price of our common stock may be adversely affected by
market conditions affecting the stock markets in general, including
price and trading fluctuations on the NYSE American.
Market
conditions may result in volatility in the level of, and
fluctuations in, market prices of stocks generally and, in turn,
our common stock and sales of substantial amounts of our common
stock in the market, in each case being unrelated or
disproportionate to changes in our operating performance. A weak
global economy could also contribute to extreme volatility of the
markets, which may have an effect on the market price of our common
stock.
You may lose your investment in the shares.
An
investment in shares of our stock involves a high degree of risk
and is suitable only for investors who can bear a loss of their
entire investment. We paid dividends in 2012, part of 2013 and from
the fourth quarter of 2015 through the third quarter of 2018. In
the fourth quarter of 2018, we announced that we would no longer be
declaring quarterly dividends for the foreseeable future in order
to invest such money in our business. 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.
Future sales and issuances of our capital stock or rights to
purchase capital stock could result in additional dilution of the
percentage ownership of our stockholders and could cause our stock
price to decline.
Our
certificate of incorporation authorizes us to issue up to
20,000,000 shares of common stock. Future sales and issuances of
our capital stock or rights to purchase our capital stock could
result in substantial dilution to our existing stockholders. We may
sell common stock, convertible securities and other equity
securities in one or more transactions at prices and in a manner as
we may determine from time to time. If we sell any such securities
in subsequent transactions, investors may be materially diluted,
which could result in downward pressure on the price of our common
stock. New investors in subsequent transactions could gain rights,
preferences and privileges senior to those of holders of our common
stock. In addition, if outstanding stock options are exercised or
when outstanding restricted stock units are settled in shares,
current shareholders will experience dilution.
We will continue to incur significantly increased costs and devote
substantial management time as a result of operating as a public
company.
As a
public company, we incur significant legal, accounting and other
expenses that would not be incurred as a private company. For
example, we are subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (Exchange Act), and are
required to comply with the applicable requirements of the
Sarbanes-Oxley Act and the Dodd-Frank Act, as well as rules and
regulations subsequently implemented by the SEC and the New York
Stock Exchange, including the establishment and maintenance of
effective disclosure and financial controls and changes in
corporate governance practices. Compliance with these requirements
has increased our legal and financial compliance costs and made
some activities more time consuming and costly. Many of these costs
recur annually. We expect to incur significant expenses and devote
substantial management effort toward ensuring compliance with the
auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act. As a result, management’s attention may
be diverted from other business concerns, which could adversely
affect our business and operating results.
A failure to maintain adequate internal controls over our financial
and management systems could cause errors in our financial
reporting, which could cause a loss of investor confidence and
result in a decline in the price of our common stock.
The
Sarbanes-Oxley Act requires, among other things, that we maintain
effective disclosure controls and procedures and internal control
over financial reporting. In order to maintain and, if required,
improve our disclosure controls and procedures and internal control
over financial reporting to meet this standard, significant
resources and management oversight may be required. If we have a
material weaknesses or significant deficiency in our internal
control over financial reporting, we may not detect errors on a
timely basis and our financial statements may be materially
misstated. Effective internal controls are necessary for us to
produce reliable financial reports and are important to prevent
fraud. As a result, our failure to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act on a timely basis could
result in us being subject to regulatory action and a loss of
investor confidence in the reliability of our financial statements,
both of which in turn could cause the market value of our common
stock to decline and affect our ability to raise
capital.
Because
we are a smaller reporting company, our independent registered
public accounting firm did not perform an audit of our internal
control over financial reporting for the fiscal year ended December
31, 2018.
I
TEM 1B. UNRESOLVED STAFF
COMMENTS.
None.
I
TEM 2. PROPERTY.
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. Additionally, we have an office in
Salt Lake City, Utah and a shared office facility in London,
England, both of which are on short term leases. As part of our
acquisition of VWP, we assumed a three-year lease for an office in
Ft. Lauderdale, Florida and two short-term leases for locations in
New York City, New York.
I
TEM 3. LEGAL PROCEEDINGS.
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.
I
TEM 4. MINE SAFETY
DISCOLSURES.
Not
applicable.
P
ART II
I
TEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Market for common stock
Our
common stock is listed on the NYSE American under the symbol
"ISDR". The following table sets forth for the periods indicated
the high and low closing prices of our common stock for the
following periods.
|
|
High
|
Low
|
|
Year ended December 31, 2018
|
|
|
|
Quarter Ended March
31, 2018
|
$
18.50
|
$
15.75
|
|
Quarter Ended June
30, 2018
|
20.45
|
15.85
|
|
Quarter Ended
September 30, 2018
|
20.65
|
13.75
|
|
Quarter Ended
December 31, 2018
|
$
15.60
|
$
10.00
|
|
Year ended December 31, 2017
|
|
|
|
Quarter Ended March
31, 2017
|
$
11.20
|
$
8.85
|
|
Quarter Ended June
30, 2017
|
13.25
|
11.05
|
|
Quarter Ended
September 30, 2017
|
13.33
|
12.32
|
|
Quarter Ended
December 31, 2017
|
$
18.95
|
$
12.95
|
Holders of Record
As of
December 31, 2018, there were approximately 150 registered holders
of record of our common stock and 3,829,572 shares
outstanding.
Issuer Purchases of Equity Securities
On
November 28, 2018, the Company entered into a Stock Repurchase
Agreement with EQS Group AG (the “Stockholder”) whereby
the Company agreed to purchase 215,118 shares (the
“Repurchased Shares”) of the Company’s common
stock from the Stockholder for a per share purchase price of
$12.25, or an aggregate purchase price of $2,635,000. On December
5, 2018, the transaction closed and the Company acquired the
Repurchased Shares and subsequently retired all of the Repurchased
Shares.
Dividends
During
the year ended December 31, 2018, we paid dividends totaling
$460,000 or $0.15 per share. During the year ended December 31,
2017, we paid dividends totaling $588,000 or $0.20 per share. No
dividend was paid during the fourth quarter of 2018 and 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.
COMPARISON OF CUMULATIVE TOTAL RETURN
Performance Comparison Graph
This
chart compares the five-year cumulative total return on our common
stock with that of the Russel MicroCap index and a custom peer
group, which was selected by the Company. The chart assumes $100
was invested on January 31, 2014, in our common stock, the Russel
MicroCap index and the peer group, and that any dividends were
reinvested. The Peer Group is composed of: Broadridge Financial
Solutions Inc., Cision, Ltd., and Workiva, Inc. The peer group
index utilizes the same method of presentation and assumptions for
the total return calculation as does Issuer Direct Corporation
(ISDR) and the Russel MicroCap index. All companies in the peer
group index are weighted in accordance with their market
capitalizations.
The Company makes no representation to the peer group market caps
being similar to that of Issuer Direct, however these peers do
represent a fair and accurate list of the companies that Issuer
Direct competes with that are in fact public.
|
|
|
1/14
|
1/15
|
1/16
|
1/17
|
1/18
|
1/19
|
|
|
|
|
|
|
|
|
|
|
Issuer Direct Corporation
|
|
100.00
|
111.67
|
55.53
|
102.95
|
207.08
|
146.88
|
|
Russell MicroCap
|
|
100.00
|
99.93
|
88.63
|
117.19
|
137.96
|
129.32
|
|
Peer Group
|
|
100.00
|
135.33
|
154.92
|
190.67
|
281.03
|
309.80
|
The stock price performance included in this graph is not
necessarily indicative of future stock price
performance.
I
TEM 6. SELECT FINANCIAL
DATA.
Our
selected consolidated financial data shown below should be read
together with Item7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and our consolidated financial statements and respective notes
included in Item 8. “Financial Statements and Supplementary
Data.” The data shown below are not necessarily indicative of
results to be expected for any future period.
Summary of Operations for the periods ended December 31, 2018 and
2017 (in 000’s).
|
|
Year Ended
December 31,
|
|
|
|
2018
|
2017
|
|
Statement of Operations
|
|
|
|
Revenue
|
$
14,232
|
$
12,628
|
|
Cost of
revenues
|
4,103
|
3,395
|
|
Gross
profit
|
10,129
|
9,233
|
|
Operating
costs
|
8,966
|
7,205
|
|
Operating
income
|
1,163
|
2,028
|
|
Other
expense
|
—
|
(24
)
|
|
Interest income
(expense), net
|
47
|
(2
)
|
|
Income before
taxes
|
1,210
|
2,002
|
|
Income tax
expense
|
373
|
131
|
|
Net
income
|
$
837
|
$
1,871
|
Concentrations:
For the
years ended December 31, 2018 and 2017, we generated revenues from
the following revenue streams as a percentage of total
revenue:
|
|
2018
|
2017
|
|
Revenue Streams
|
|
|
|
Platform and
Technology
|
60.4
%
|
56.1
%
|
|
Services
|
39.6
%
|
43.9
%
|
|
Total
|
100.0
%
|
100.0
%
|
Percentages:
Change
expressed as a percentage increase for the years ended December 31,
2018 and 2017 ($ in 000’s):
|
|
2018
|
2017
|
%
change
|
|
Revenue Streams
|
|
|
|
|
Platform and
Technology
|
$
8,593
|
$
7,081
|
21.4
%
|
|
Services
|
5,639
|
5,547
|
1.7
%
|
|
Total
|
$
14,232
|
$
12,628
|
12.7
%
|
I
TEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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.
Results of Operations
Comparison of results of operations for the years ended December
31, 2018 and 2017 (in 000’s):
|
Revenue Streams
|
2018
|
2017
|
|
Platform
and Technology
|
|
|
|
Revenue
|
$
8,593
|
$
7,081
|
|
Gross
margin
|
$
6,780
|
$
5,956
|
|
Gross margin
%
|
79
%
|
84
%
|
|
|
|
|
|
Services
|
|
|
|
Revenue
|
5,639
|
5,547
|
|
Gross
margin
|
3,349
|
3,277
|
|
Gross margin
%
|
59
%
|
59
%
|
|
|
|
|
|
Total
|
|
|
|
Revenue
|
$
14,232
|
$
12,628
|
|
Gross
margin
|
$
10,129
|
$
9,233
|
|
Gross margin
%
|
71
%
|
73
%
|
Revenues
Total
revenue increased by $1,604,000, or 13%, to $14,232,000 during the
year ended December 31, 2018, as compared to $12,628,000 in 2017.
Customers obtained from our acquisitions of Interwest and FSCwire
contributed an additional $1,497,000 of revenue during the year
ended December 31, 2018 compared to 2017. Of this additional
revenue, $243,000 was generated from additional subscriptions to
our platform or services that we cross sold to these acquired
customers.
Platform and
Technology revenue increased $1,512,000, or 21%, to $8,593,000 for
the year ended December 31, 2018, as compared to $7,081,000 during
2017. A significant portion of the increase is due to our
ACCESSWIRE news distribution platform, which increased $865,000
compared to the same period of the prior year. The increase is
attributable in part to our continued investment in increased sales
staff and distribution during the latter part of 2017 and
throughout 2018 as well as additional revenue due to the
acquisition of FSCwire. Additionally, we generated increased
revenue over the prior year from our transfer agent module, due
primarily to the inclusion of customers acquired from Interwest for
a full year in 2018 compared to a partial year in 2017. Lastly,
Platform and Technology revenue increased due to our focus on
selling bundled subscriptions of our cloud-based offerings included
in Platform
id.
, as opposed to individual modules.
These
increases were offset by a decline in revenue from our shareholder
outreach offering due to continued client attrition as revenue of
this offering is typically tied-in with contracts of our annual
report distribution services.
Platform and Technology revenue
increased to 60% of total revenue during the year ended December
31, 2018, as compared to 56% in the prior year.
Services revenue
increased $92,000, or 2%, during the year ended December 31, 2018,
as compared to 2017. The increase is primarily associated with
increases in transfer agent services due to the addition of
Interwest customers as well as an increase in the timing of
corporate actions and directives for our legacy Issuer Direct
customers. These increases were partially offset by continued
decline in revenue from our ARS services, as a result of continued
client attrition as customers elect to leave the service or
transition to digital fulfillment. We also experienced a decline in
our compliance services due to continued pricing pressure in those
markets and a shift of some of this revenue to the Platform and
Technology revenue stream.
2018 Revenue Backlog
At
December 31, 2018, our deferred revenue balance was $1,249,000,
which is a 41% increase over the balance of $887,000 at December
31, 2017. Deferred revenue, which we expect to recognize over the
next twelve months, primarily consists of advance billings for
subscriptions of our news distribution and cloud-based products, as
well as, annual contracts for legacy ARS services. The increase
since December 31, 2018 is primarily due to an increase of 109
subscriptions of Platform
id.
, with annualized contract
value of $1,134,000, to new or existing customers during
2018.
Cost of Revenues
Platform and
Technology cost of revenues consists primarily of direct labor
costs, third party licensing and amortization of capitalized
software costs related to our platforms licensed to customers.
Services costs of revenues consists primarily of direct labor
costs, warehousing, logistics, print production materials, postage,
and outside services directly related to the delivery of services
to our customers. Cost of revenues increased by $708,000, or 21%,
during the year ended December 31, 2018, as compared to the same
period of 2017. Overall gross margin increased $896,000, or 10%
during the year ended December 31, 2018, compared to 2017. However,
overall gross margin percentage decreased to 71% during the year
ended December 31, 2018, as compared to 73% during the prior year.
The largest single component of the increase in cost of sales and
resulting decrease in gross margin percentage was due to an
increase in amortization of capitalized software costs of $514,000
during 2018 compared to 2017, related to our platforms licensed to
customers. The increase in amortization represents 4% of total
revenue for 2018.
Gross
margin percentage from Platform and Technology was 79% for the year
ended December 31, 2018, as compared to 84% for 2017. The decrease
in gross margin percentage is primarily due to the increase in
amortization of capitalized software costs of $499,000 during 2018,
related to our platforms licensed to customers, as well as
increased costs as the Company continues to invest in expanding its
distribution network for press releases. The increases in
amortization expense represents 6% of Platform and Technology
revenue.
Gross
margin percentage from our Services revenue was flat at 59% for
both the years ended December 31, 2018 and 2017.
General and Administrative Expense
General
and administrative expenses consist primarily of salaries,
stock-based compensation, insurance, fees for professional
services, general corporate expenses and facility and equipment
expenses. General and administrative expenses were $4,085,000 for
the year ended December 31, 2018, an increase of $701,000, or 21%,
as compared to the prior year. This increase is primarily due to
our continued investment as we position the Company for growth by
increasing corporate headcount and incurring additional
professional fees associated with acquisition related expenses, as
well as, an increase in stock compensation expense as a result of
the increase in our cost of equity at the time of grant.
Additionally, we experienced an increase in bad debt
expense.
As a
percentage of revenue, General and Administrative expenses were 29%
for the year ended December 31, 2018, as compared to 27% for
2017.
Sales and Marketing Expenses
Sales
and marketing expenses consist primarily of salaries, stock based
compensation, sales commissions, advertising expenses, tradeshow
expenses and other marketing expenses. Sales and marketing expenses
were $3,002,000 for the year ended December 31, 2018, an increase
of $398,000, or 15%, as compared to the prior year. The increase
resulted from an investment which is directly attributable to
increasing headcount in our sales and marketing organization, as
well as, expanding our news distribution capabilities.
As a
percentage of revenue, sales and marketing expenses remained at 21%
for the years ended December 31, 2018 and 2017.
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 $513,000, or 67%, to $1,276,000 during the year ended
December 31, 2018, as compared to 2017. The increase is the result
of less capitalization of internal development costs as certain
projects were completed and placed into production during 2017. The
Company capitalized $21,000 of development costs during the year
ended December 31, 2018, compared to $991,000 during
2017.
As a
percentage of revenue, Product Development expenses were 9% for the
year ended December 31, 2018, as compared to 6% for
2017.
Depreciation and Amortization
During
the year ended December 31, 2018, Depreciation and amortization
expenses increased by $149,000, or 33%, to $603,000, as compared to
$454,000 during 2017. The increase is due to amortization of
intangible assets acquired in the Interwest and FSCwire
acquisitions.
Other income (expense)
Other expense
For the
year ended December 31, 2017, other expense is primarily the result
of the loss on the sale of stock received, in lieu of cash, to
settle an outstanding receivable.
Interest income (expense), net
Interest income
(expense), net, represents interest income on deposit and money
market accounts, partially offset by the non-cash interest
associated with the present value of the remaining anniversary
payments of the Interwest acquisition.
Income Taxes
We
recorded income tax expense of $373,000 during the year ended
December 31, 2018, compared to $131,000 during the year ended
December 31, 2017. During the year ended December 31, 2018, the
Company’s effective tax rate was negatively affected by
additional tax expense of $76,000 which consisted of an adjustment
to the Company’s original provisional charges recorded in
connection with the one-time transition tax and the current year
impact of taxes associated with the Tax Cuts and Jobs Act of 2017
(the “2017 Act”).
During
the year ended December 31, 2017, the Company recognized an income
tax benefit of $351,000 related to the re-measurement of certain
deferred tax assets and liabilities based on the rates at which
they are expected to reverse in the future as a result of the
passage of the 2017 Act. The Company also recorded an income tax
benefit of $182,000 attributable to equity-based
compensation.
The
aforementioned reasons, as well as state taxes, foreign statutory
tax rate differentials and tax credits are the reasons for the
variance between the Company’s effective tax rate and the
statutory rate of 21%.
Net Income
Net
income for the year ended December 31, 2018 was $837,000 as
compared to $1,871,000 in 2017. Although the Company achieved
increases in revenue and gross margin, the decrease in net income
is primarily attributable to higher operating expenses due to
investments made to position ourselves for growth by increasing
headcount and acquisition related expenses as well as continuing to
invest in our cloud-based products. Depreciation and amortization
expense increased as well, due to amortization associated with
acquired intangible assets. Lastly, income tax expense increased
primarily as the result of benefits recorded in 2017 associated
with the adoption of the 2017 Act.
Liquidity and Capital Resources
As of
December 31, 2018, we had $17,222,000 in cash and cash equivalents
and $1,593,000 in net accounts receivable. Current liabilities at
December 31, 2018, totaled $2,600,000 including our accounts
payable, deferred revenue, accrued payroll liabilities, income
taxes payable, current portion of remaining payments for Interwest
and other accrued expenses. At December 31, 2018, our current
assets exceeded our current liabilities by
$16,394,000.
Effective October
4, 2018, the Company renewed its Line of Credit, which increased
the amount of funds available for borrowing from $2,500,000 to
$3,000,000. The interest rate was reduced from LIBOR plus 2.50% to
LIBOR plus 1.75%. As of December 31, 2018, the interest rate was
4.25% and the Company did not owe any amounts on the Line of
Credit.
On
August 17, 2018, the Company completed a secondary public offering
of 806,451 shares of its common stock at a price to the public of
$15.50 per share. In addition, the Company granted the underwriter
a 30-day option to purchase an additional 120,967 shares of its
common stock to cover over-allotments, which were sold on August
24, 2018. The aggregate gross proceeds of the offering were
$14,375,000. Closing costs of $1,052,000, which consisted of
underwriting commissions, legal and accounting fees and other
offering expenses were netted against the proceeds, which resulted
in net proceeds to the Company of $13,323,000, The net proceeds of
the offering are included in Additional paid-in capital on the
Balance Sheet as of December 31, 2018. The Company intends to use
the net proceeds from the offering for working capital and general
corporate purposes and may also use a portion of the net proceeds
to in-license, acquire or invest in complementary businesses,
products, technologies or assets.
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 believe we are
positioned well in this space to be both competitive and agile to
deliver these solutions to the market. As we have seen over the
last several quarters, the transition to digital platforms has had
a negative effect on our revenue in the Services portion of our
business and this is a trend we expect will continue over the next
few quarters.
One
of our competitive strengths is that we embraced cloud computing
early on in our strategy. The transition to a subscription model
has been and will continue to be key for the long-term sustainable
growth management expects from our new platforms.
We
will continue to focus on the following key strategic initiatives
during 2019:
●
Expand
our Platform and Technology business development and sales
team,
●
Expand
customer base,
●
Continue
to migrate acquired businesses to our current
platform,
●
Continue
to expand our newswire distribution,
●
Invest
in technology advancements and upgrades,
●
Generate
profitable, sustainable growth,
●
Generate
cash flows from operations
We
believe there is significant demand for our products among the
middle, small and micro-cap markets globally, as they seek to find
better platforms and tools to disseminate and communicate their
respective messages. We believe we have the product sets, platforms
and capacity to meet their requirements.
We
have invested and will continue to invest in our product sets,
platforms and intellectual property development via internal
development and acquisitions. These developments are key to our
overall offerings in the market and 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 as we move through 2019 and beyond.
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
The
Company adopted ASC Topic 606, Revenue from Contracts with
Customers, on January 1, 2018, using the modified retrospective
approach.
Substantially all
of the Company’s revenue comes from contracts with customers
for subscriptions to its cloud-based products or contracts to
perform compliance or other services. Customers consist primarily
of
corporate issuers and professional
firms, such as investor relations and public relations firms. In
the case of our news distribution offering, our customers also
include private companies.
The Company accounts for a
contract with a customer when there is an enforceable contract
between the Company and the customer, the rights of the parties are
identified, the contract has economic substance, and collectability
of the contract consideration is probable. The Company's revenues
are measured based on consideration specified in the contract with
each customer.
The
Company's contracts include either a subscription to our entire
platform or certain modules within our platform, or an agreement to
perform services or any combination thereof, and often contain
multiple subscriptions and services. For these bundled contracts,
the Company accounts for individual subscriptions and services as
separate performance obligations if they are distinct, which is
when a product or service is separately identifiable from other
items in the bundled package, and a customer can benefit from it on
its own or with other resources that are readily available to the
customer. The Company separates revenue from its contracts into two
revenue streams: i) Platform and Technology and ii) Services.
Performance obligations of Platform and Technology contracts
include providing subscriptions to certain modules or the entire
Platform
id.
system, distributing press releases on a per release basis or
conducting webcasts on a per event basis. Performance obligations
of Service contracts include obligations to deliver compliance
services and annual report printing and distribution on either a
stand ready obligation or on a per project or event basis. Set up
fees for compliance services are considered a separate performance
obligation and are satisfied upfront. Set up fees for our transfer
agent module and investor relations content management module are
immaterial. The Company’s subscription and service contracts
are generally for one year, with automatic renewal clauses included
in the contract until the contract is cancelled. The contracts do
not contain any rights of returns, guarantees or warranties. Since
contracts are generally for one year, all of the revenue is
expected to be recognized within one year from the contract start
date. As such, the Company has elected the optional exemption that
allows the Company not to disclose the transaction price allocated
to performance obligations that are unsatisfied or partially
satisfied at the end of each reporting period.
The
Company recognizes revenue for subscriptions evenly over the
contract period, upon distribution for per release contracts and
upon event completion for webcasting events. For service contracts
that include stand ready obligations, revenue is recognized evenly
over the contract period. For all other services delivered on a per
project or event basis, the revenue is recognized at the completion
of the event. The Company believes recognizing revenue for
subscriptions and stand ready obligations using a time-based
measure of progress, best reflects the Company’s performance
in satisfying the obligations.
For
bundled contracts, revenue is allocated to each performance
obligation based on its relative standalone selling price.
Standalone selling prices are based on observable prices at which
the Company separately sells the subscription or services. If a
standalone selling price is not directly observable, the Company
uses the residual method to allocate any remaining costs to that
subscription or service. The Company regularly reviews standalone
selling prices and updates these estimates if
necessary.
The
Company invoices its customers based on the billing schedules
designated in its contracts, typically upfront on either a monthly,
quarterly or annual basis or per transaction at the completion of
the performance obligation. Deferred revenue for the periods
presented was primarily related to subscription and service
contracts, which are billed upfront, quarterly or annually, however
the revenue has not yet been recognized. The associated deferred
revenue is generally recognized ratably over the billing period.
Deferred revenue as of December 31, 2018 and 2017 was $1,249,000
and $887,000, respectively, and is expected to be recognized within
one year. Revenue recognized for the year ended December 31, 2018
and 2017, that was included in the deferred revenue balance at the
beginning of each reporting period, was approximately $887,000 and
$843,000, respectively. Accounts receivable related to contracts
with customers was $1,593,000 and $1,275,000 as of December 31,
2018 and 2017, respectively. Since substantially all of the
contracts have terms of one year or less, the Company has elected
to use the practical expedient regarding the existence of a
significant financing.
Costs
to obtain contracts with customers consist primarily of sales
commissions. As of December 31, 2018, the Company capitalized
$18,000 of costs to obtain contracts that are expected to be
amortized over more than one year. For contract costs expected to
be amortized in less than one year, the Company has elected to use
the practical expedient allowing the recognition of incremental
costs of obtaining a contract as an expense when incurred. The
Company has considered historical renewal rates, expectations of
future renewals and economic factors in making these
determinations.
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 customer account
balances, and a reserve based on our historical
experience.
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
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 $21,000 and $991,000 during the years ended December
31, 2018 and 2017, respectively. Included in the amount capitalized
for the years ended December 31, 2018 and 2017 was $0 and $57,000
related to stock-based compensation. The Company recorded
amortization expense of $813,000 and $290,000 during the years
ended December 31, 2018 and 2017, respectively, $795,000 and
$280,000 of which is included in Cost of revenues on the
Consolidated Statements of Income. For the years ended December 31,
2018 and 2017, the remaining amount of $18,000 and $10,000 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
ASC
Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial statements are
categorized based upon the hierarchy of levels of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
●
Level 1 –
Quoted prices are available in active markets for identical assets
or liabilities at the reporting date. Generally, this includes debt
and equity securities that are traded in an active market. Our cash
and cash equivalents are quoted at Level 1.
●
Level 2 –
Observable inputs other than Level 1 prices such as quote
prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities. Generally, this includes debt
and equity securities that are not traded in an active
market.
●
Level 3 –
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models,
discounted cash flow methodologies, or other valuation techniques,
as well as instruments for which the determination of fair value
requires significant management judgment or
estimation.
As of
December 31, 2018 and 2017, we believe that the fair value of our
financial instruments other than cash and cash equivalents, such
as, 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, distribution partner
relationships, software, technology and trademarks that are
initially measured at fair value. At the time of the business
combination, 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 (7-10
years), customer lists (3 years), distribution partner
relationships (10 years), trademarks related to PIR (3-5 years) and
software and technology (3-5 years) are amortized over their
estimated useful lives.
Recently adopted accounting pronouncements
In
August 2018, the FASB announced Accounting Standards Update
(“ASU”) 2018-15 Intangibles—Goodwill and
Other—Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a
Cloud Computing Arrangement That Is a Service Contract. The
amendments in this pronouncement align the requirements for
capitalizing implementation costs incurred in a hosting arrangement
that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use
software (and hosting arrangements that include an internal use
software license). The accounting for the service element of a
hosting arrangement that is a service contract is not affected by
these amendments. This pronouncement is effective for public
business entities for annual periods, including interim periods
within those annual periods, beginning after December 15, 2019.
Early adoption is permitted, including adoption in any interim
period. The amendments should be applied either retrospectively, or
prospectively, to all implementation costs incurred after the date
of adoption. The Company elected to adopt ASU 2018-05 as of July 1,
2018, on a prospective basis. As a result, the Company capitalized
$21,000 of costs related to the implementation of a cloud-based
component of Platform
id.
, which will be licensed to
customers. Capitalized costs are amortized as Cost of revenues on
the Statement of Operations over an estimated life of four
years.
In June
2018, the FASB announced ASU 2018-07 Compensation-Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting. ASU 2018-07 expands the scope of Topic 718,
Compensation—Stock Compensation (which currently only
includes share-based payments to employees) to include share-based
payments issued to nonemployees for goods or services.
Consequently, the accounting for share-based payments to
nonemployees and employees will be substantially aligned. The ASU
supersedes Subtopic 505-50, Equity—Equity-Based Payments to
Non-Employees. ASU 2018-07 is effective for public companies for
fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. Early adoption is permitted, but
no earlier than a company’s adoption date of Topic 606,
Revenue from Contracts with Customers. The Company elected to adopt
ASU 2018-07 as of January 1, 2018. The adoption did not require the
Company to restate any previously reported periods of the Statement
of Operations or Balance Sheet. The Company has one contract with a
non-employee to perform services for share-based payments, the
compensation of which is properly accounted for in the Consolidated
Financial Statements as of and for the year ended December 31,
2018.
In
March 2018, the FASB announced ASU 2018-05 Income Taxes (Topic
740): Amendments to Securities and Exchange Commission
(“SEC”) Paragraphs Pursuant to SEC Staff Accounting
Bulletin No.118 (“SAB 118”). ASU 2018-05 adds guidance
indicated in Questions 1 and 2 from SAB 118 to the codification.
SAB 118 addresses the application of US GAAP in situations when a
registrant does not have all of the necessary information
available, prepared and analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax
effects of the Tax Cuts and Jobs Act of 2017 (the “2017
Act”), which was signed into law on December 22, 2017. In
previous quarters the Company included a best estimate of the
effects of the 2017 Act, and has now completed the calculation as
of the most recent provision. The Company has determined the impact
of the adoption of the 2017 Act to be a benefit of $316,000. The
Company recognized a provisional tax benefit of $351,000 during the
year ended December 31, 2017 and recorded an expense of $35,000
during the year ended December 31, 2018. ASU 2018-05 is effective
immediately upon addition to the FASB codification.
In May
2014, the FASB issued ASU 2014-09 Revenue from Contracts with
Customers, which supersedes previous revenue recognition guidance.
The new standard requires that a company recognize revenue when it
transfers promised goods or services to customers in an amount that
reflects the consideration the company expects to receive in
exchange for those goods or services. In-depth reviews of customer
contracts were completed and analyzed to meet the standard’s
reporting and disclosure requirements. Disclosures related to the
nature, amount and timing of revenue and cash flows arising from
contracts with customers are included in this Note under the
subheading Revenue Recognition as well as Note 7,
Revenues.
The
adoption of ASU 2014-09 did not require the Company to restate any
previously reported periods of the Statement of Operations or
Balance Sheet related to a change in the timing of revenue
recognition. The adoption also did not affect liquidity. However,
the adoption did impact the allocation of revenue associated with
the Company’s shareholder outreach offering that included
both electronic dissemination and physical delivery of a
customer’s annual reports. Historically, revenue from these
bundled contracts was reported in the Services revenue stream
because an allocation between electronic and physical hardcopy
distribution was not made, however, under ASC 606, a portion of the
revenue from these contracts is required to be allocated to the
Platform and Technology revenue stream in accordance with
stand-alone contracts for the shareholder outreach subscription. A
comparison of revenue under previously reported legacy GAAP and
revenue under current GAAP is provide below for comparability
purposes (in 000’s):
|
|
For the Year
Ended
December 31,
2018
|
For the Year
Ended
December 31,
2017
|
||||
|
|
Legacy
|
|
Current
|
Legacy
|
|
Current
|
|
Revenue:
|
GAAP
|
Adjustments
|
GAAP
|
GAAP
|
Adjustments
|
GAAP
|
|
Platform
and Technology
|
$
8,136
|
$
457
|
$
8,593
|
$
6,398
|
$
683
|
$
7,081
|
|
Services
|
6,096
|
(457
)
|
5,639
|
6,230
|
(683
)
|
5,547
|
|
Total
Revenue
|
$
14,232
|
$
—
|
$
14,232
|
$
12,628
|
$
—
|
$
12,628
|
In
analyzing the impact of adoption, the Company used the practical
expedient that allows the Company to only apply the new revenue
standard to contracts that are not completed as of the date of
initial application, January 1, 2018. A completed contract is
defined as a contract for which all (or substantially all) of the
revenue was recognized in accordance with revenue guidance that was
in effect before the date of initial application.
The SEC
released SEC Final Rule Release No. 33-10532 Disclosure Update and
Simplification, which adopts amendments to certain disclosure
requirements that have become redundant, duplicative, overlapping,
outdated, or superseded, in light of other SEC disclosure
requirements, U.S. GAAP, or changes in the information environment.
The amendments also refer certain SEC disclosure requirements that
overlap with, but require information incremental to U.S. GAAP to
the FASB for potential incorporation into U.S. GAAP. The amendments
are intended to facilitate the disclosure of information to
investors and simplify compliance without significantly altering
the total mix of information provided to investors. These
amendments are part of an initiative by the Division of Corporation
Finance to review disclosure requirements applicable to issuers to
consider ways to improve the requirements for the benefit of
investors and issuers. The amendments were effective November 5,
2018 and have not had a material impact to the
Company.
Recently issued accounting pronouncements not yet
adopted
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (ASU) No. 2016-02, which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. Topic 842 was subsequently
amended by ASU No. 2018-01, Land Easement Practical Expedient for
Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.
The new standard establishes a right-of-use model (ROU) that
requires a lessee to recognize a ROU asset and lease liability on
the balance sheet for all leases with a term longer than 12 months.
Leases will be classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the income statement.
The new
standard is effective for us on January 1, 2019, with early
adoption permitted. A modified retrospective transition approach is
required, applying the new standard to all leases existing at the
date of initial application. An entity may choose to use either (1)
its effective date or (2) the beginning of the earliest comparative
period presented in the financial statements as its date of initial
application. If an entity chooses the second option, the transition
requirements for existing leases also apply to leases entered into
between the date of initial application and the effective date. The
entity must also recast its comparative period financial statements
and provide the disclosures required by the new standard for the
comparative periods. We expect to adopt the new standard on January
1, 2019 and use the effective date as our date of initial
application. Consequently, financial information will not be
updated and the disclosures required under the new standard will
not be provided for dates and periods before January 1,
2019.
The new
standard provides a number of optional practical expedients in
transition. We expect to elect the ‘package of practical
expedients’, which permits us not to reassess under the new
standard our prior conclusions about lease identification, lease
classification and initial direct costs. We do not expect to elect
the use-of-hindsight or the practical expedient pertaining to land
easements; the latter not being applicable to us.
We
expect the adoption of this standard will not have a material
effect on our financial statements. While we continue to assess all
of the effects of adoption, we currently believe the most
significant effects relate to the recognition of new ROU assets and
lease liabilities on our balance sheet for our office operating
leases and providing significant new disclosures about our leasing
activities. We do not expect a significant change in our leasing
activities between now and adoption.
On
adoption, we currently expect to recognize additional operating
liabilities of approximately $135,000, with corresponding ROU
assets of the same amount based on the present value of the
remaining minimum rental payments under current leasing standards
for existing operating leases.
The new
standard also provides practical expedients for an entity’s
ongoing accounting. We currently expect to elect the short-term
lease recognition exemption for our Utah and London office leases
that qualify. This means, for those leases that qualify, we will
not recognize ROU assets or lease liabilities. We also currently
expect to elect the practical expedient to not separate lease and
non-lease components for all of our leases.
I
TEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
We do
not believe that we face material market risk with respect to our
cash or cash equivalents, which totaled $17,222,000 and $4,917,000
at December 31, 2018 and 2017, respectively. We did not hold any
marketable securities as of December 31, 2018 or 2017.
I
TEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.
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, 2018 and 2017, and the related
statements of income, comprehensive income, stockholders’
equity and cash flows for the two years ended December 31, 2018,
and 2017, together with the independent registered public
accountants’ reports thereon appear beginning on Page
F-1.
I
TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
I
TEM 9A. CONTROLS AND
PROCEDURES.
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, 2018, 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.
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,
2018.
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.
I
TEM 9B. OTHER
INFORMATION.
None.
P
ART III
I
TEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE.
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 2019 Proxy
Statement to be filed with the U.S. Securities and Exchange
Commission ("SEC") within 120 days after December 31, 2018 in
connection with the solicitation of proxies for the Company’s
2019 annual meeting of shareholders and is incorporated herein by
reference.
I
TEM 11. EXECUTIVE
COMPENSATION.
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-2018” and “Compensation Committee
Interlocks and Insider Participation” under the heading
“Directors, Executive Officers and Corporate
Governance” in the Company’s 2019 Proxy Statement to be
filed with the SEC within 120 days after December 31, 2018 and is
incorporated herein by reference.
I
TEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
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 2019 Proxy Statement to
be filed with the SEC within 120 days after December 31, 2018 and
is incorporated herein by reference.
I
TEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
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
2019 Proxy Statement to be filed with the SEC within 120 days after
December 31, 2018 and is incorporated herein by
reference.
I
TEM 14. PRINCIPAL ACCOUNTING FEES
AND SERVICES.
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 2019 Proxy Statement to be filed with the SEC
within 120 days after December 31, 2018 and is incorporated herein
by reference.
P
ART IV
I
TEM 15. EXHIBITS. To Be
Updated
(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
|
|
|
|
|
|
|
Certificate
of Incorporation, as amended (incorporated by reference to Exhibit
3.1 to the Form S-3 filed on May 10, 2017)
|
|
|
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.1 to
the Form 8-K filed on February 12, 2014)
|
|
|
|
2014
Equity Incentive Plan (incorporated by reference to Annex A to the
Schedule 14A filed on April 2, 2014)
|
|
|
|
Executive
Employment Agreement dated April 30, 2015 with Brian R. Balbirnie
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed on
May 5, 2014)
|
|
|
|
Executive
Employment Agreement dated November 19, 2015 with Steven Knerr
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed on
November 19, 2015)
|
|
|
|
Incentive
Stock Option Grant and Agreement dated November 19, 2015 with
Steven Knerr (incorporated by reference to Exhibit 10.2 to the Form
8-K filed on November 19, 2015)
|
|
|
|
Indemnification
Agreement dated November 19, 2015 with Steven Knerr (incorporated
by reference to Exhibit 10.3 to the Form 8-K filed on November 19,
2015)
|
|
|
|
First
Amendment to 2014 Equity Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Form 8-K filed on June 13,
2016)
|
|
|
|
First
Amendment to Executive Employment Agreement dated May 4, 2017 with
Brian R. Balbirnie (incorporated by reference to Exhibit 10.1 to
the Form 8-K filed on May 5, 2017)
|
|
|
|
First
Amendment to Executive Employment Agreement dated May 4, 2017 with
Steven Knerr (incorporated by reference to Exhibit 10.1 to the Form
8-K filed on May 5, 2017)
|
|
|
|
Stock
Purchase Agreement dated October 2, 2017 with Kurtis D. Hughes
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed on
October 3, 2017)
|
|
|
|
Stock
Purchase Agreement dated July 3, 2018 with ACCESSWIRE Canada Ltd.
and Fred Gautreau (incorporated by reference to Exhibit 10.1 to the
Form 8-K filed on July 5, 2018)
|
|
|
|
Stock
Repurchase Agreement dated November 28, 2018 with
EQS Group AG
(incorporated by reference to
Exhibit 10.1 to the Form 8-K filed on December 4,
2018)
|
|
|
|
Asset
Purchase Agreement dated January 3, 2019 with Onstream Media
Corporation (incorporated by reference to Exhibit 10.1 to the Form
8-K filed on January 3, 2019)
|
|
|
|
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.
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:
February 28, 2019
|
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
|
|
February
28, 2019
|
|
Director,
Chief Executive Officer
|
|
Brian
R. Balbirnie
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Steven Knerr
|
|
February
28, 2019
|
|
Chief
Financial Officer
|
|
Steven
Knerr
|
|
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
William Everett
|
|
February
28, 2019
|
|
Director,
Chairman of the Board and Member of the Audit
Committee
|
|
William
Everett
|
|
|
|
and Strategic
Advisory Committee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ J.
Patrick Galleher
|
|
February
28, 2019
|
|
Director,
Chairman of the Compensation Committee
|
|
J.
Patrick Galleher
|
|
|
|
and Strategic
Advisory Committee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael Nowlan
|
|
February
28, 2019
|
|
Director,
Chairman of the Audit Committee
|
|
Michael
Nowlan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Eric Frank
|
|
February 28,
2019
|
|
Director, Chairman
of the Technology Oversight Committee
|
|
Eric Frank
|
|
|
|
and Member of the
Compensation Committee
|
INDEX TO FINANCIAL STATEMENTS
|
|
|
Page
|
|
|
|
|
|
|
F-2
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-7
|
|
|
|
F-8
|
R
eport of Independent Registered
Public Accounting Firm
Board
of Directors and Stockholders
Issuer
Direct Corporation
Morrisville,
North Carolina
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Issuer
Direct Corporation and subsidiaries (the “Company”) as
of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively
referred to as the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2018 and 2017,
and the results of its operations and its cash flows for each of
the years in the two-year period ended December 31, 2018, in
conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, 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.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
We have
served as the Company’s auditor since 2010.
/s/
CHERRY BEKAERT LLP
Raleigh,
North Carolina
February
28, 2019
I
SSUER DIRECT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND 2017
(in
thousands, except share and per share amounts)
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
17,222
|
$
4,917
|
|
Accounts receivable
(net of allowance for doubtful accounts of $534 and $425,
respectively)
|
1,593
|
1,275
|
|
Income tax
receivable
|
90
|
725
|
|
Other current
assets
|
89
|
193
|
|
Total current
assets
|
18,994
|
7,110
|
|
Capitalized
software (net of accumulated amortization of $1,310 and $497,
respectively)
|
1,957
|
2,749
|
|
Fixed assets (net
of accumulated depreciation of $452 and $388,
respectively)
|
132
|
145
|
|
Other long-term
assets
|
35
|
18
|
|
Goodwill
|
5,032
|
4,070
|
|
Intangible assets
(net of accumulated amortization of $4,219 and $3,699,
respectively)
|
2,802
|
2,858
|
|
Total
assets
|
$
28,952
|
$
16,950
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
371
|
$
666
|
|
Accrued
expenses
|
577
|
613
|
|
Current portion of
note payable (See Note 4)
|
320
|
288
|
|
Income taxes
payable
|
83
|
65
|
|
Deferred
revenue
|
1,249
|
887
|
|
Total current
liabilities
|
2,600
|
2,519
|
|
Note payable
– long-term (net of discount of $45 and $70, respectively)
(See Note 4)
|
276
|
570
|
|
Deferred income tax
liability
|
413
|
573
|
|
Other long-term
liabilities
|
—
|
77
|
|
Total
liabilities
|
3,289
|
3,739
|
|
Commitments and
contingencies (see Note 9)
|
|
|
|
Stockholders'
equity:
|
|
|
|
Preferred stock,
$0.001 par value, 1,000,000 shares authorized, no shares issued and
outstanding as of December 31, 2018 and 2017,
respectively.
|
—
|
—
|
|
Common stock $0.001
par value, 20,000,000 shares authorized, 3,829,572 and 3,014,494
shares issued and outstanding as of December 31, 2018 and 2017,
respectively.
|
4
|
3
|
|
Additional paid-in
capital
|
22,525
|
10,400
|
|
Other accumulated
comprehensive income (loss)
|
(17
)
|
34
|
|
Retained
earnings
|
3,151
|
2,774
|
|
Total stockholders'
equity
|
25,663
|
13,211
|
|
Total
liabilities and stockholders’ equity
|
$
28,952
|
$
16,950
|
The
accompanying notes are an integral part of these consolidated
financial statements.
I
SSUER DIRECT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in
thousands, except per share amounts)
|
|
Years Ended
December 31,
|
|
|
|
2018
|
2017
|
|
Revenues
|
$
14,232
|
$
12,628
|
|
Cost of
revenues
|
4,103
|
3,395
|
|
Gross
profit
|
10,129
|
9,233
|
|
Operating costs and
expenses:
|
|
|
|
General and
administrative
|
4,085
|
3,384
|
|
Sales and
marketing
|
3,002
|
2,604
|
|
Product
development
|
1,276
|
763
|
|
Depreciation and
amortization
|
603
|
454
|
|
Total operating
costs and expenses
|
8,966
|
7,205
|
|
Operating
income
|
1,163
|
2,028
|
|
Other income
(expense):
|
|
|
|
Other
expense
|
—
|
(24
)
|
|
Interest income
(expense), net
|
47
|
(2
)
|
|
Total other income
(expense)
|
47
|
(26
)
|
|
Income before
taxes
|
1,210
|
2,002
|
|
Income tax
expense
|
373
|
131
|
|
Net
income
|
$
837
|
$
1,871
|
|
Income per share
– basic
|
$
0.25
|
$
0.63
|
|
Income per share
– diluted
|
$
0.24
|
$
0.62
|
|
Weighted average
number of common shares outstanding – basic
|
3,415
|
2,947
|
|
Weighted average
number of common shares outstanding – diluted
|
3,463
|
3,033
|
The
accompanying notes are an integral part of these consolidated
financial statements.
I
SSUER DIRECT
CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in
thousands)
|
|
Years Ended
December 31,
|
|
|
|
2018
|
2017
|
|
Net
income
|
$
837
|
$
1,871
|
|
Foreign currency
translation adjustment
|
(51
)
|
70
|
|
Comprehensive
income
|
$
786
|
$
1,941
|
The
accompanying notes are an integral part of these consolidated
financial statements.
I
SSUER DIRECT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2018 AND 2017
(in
thousands, except share and per share amounts)
|
|
Common
Stock
|
Additional
Paid-in
|
Accumulated
Other Comprehensive
|
Retained
|
Total
Stockholders’
|
|
|
|
Shares
|
Amount
|
Capital
|
Loss
|
Earnings
|
Equity
|
|
Balance at
December 31, 2016
|
2,860,944
|
$
3
|
$
9,120
|
$
(36
)
|
$
1,491
|
$
10,578
|
|
Stock-based compensation
expense
|
—
|
—
|
573
|
—
|
—
|
573
|
|
Exercise of stock awards, net of
tax
|
128,315
|
—
|
389
|
—
|
—
|
389
|
|
Shares issued upon acquisition of
Interwest (see Note 4)
|
25,235
|
—
|
318
|
—
|
—
|
318
|
|
Dividends
|
—
|
—
|
—
|
—
|
(588
)
|
(588
)
|
|
Foreign currency
translation
|
—
|
—
|
—
|
70
|
—
|
70
|
|
Net income
|
—
|
—
|
—
|
—
|
1,871
|
1,871
|
|
Balance at
December 31, 2017
|
3,014,494
|
$
3
|
$
10,400
|
$
34
|
$
2,774
|
$
13,211
|
|
Stock-based compensation
expense
|
—
|
—
|
629
|
—
|
—
|
629
|
|
Exercise of stock awards, net of
tax
|
99,376
|
—
|
747
|
—
|
—
|
747
|
|
Shares issued upon acquisition of
FSCwire (see Note 4)
|
3,402
|
—
|
62
|
—
|
—
|
62
|
|
Secondary stock offering (see Note
7)
|
927,418
|
1
|
13,322
|
—
|
—
|
13,323
|
|
Stock repurchase and retirement
(see Note 7)
|
(215,118
)
|
—
|
(2,635
)
|
—
|
—
|
(2,635
)
|
|
Dividends
|
—
|
—
|
—
|
—
|
(460
)
|
(460
)
|
|
Foreign currency
translation
|
—
|
—
|
—
|
(51
)
|
—
|
(51
)
|
|
Net income
|
—
|
—
|
—
|
—
|
837
|
837
|
|
Balance at
December 31, 2018
|
3,829,572
|
$
4
|
$
22,525
|
$
(17
)
|
$
3,151
|
$
25,663
|
The
accompanying notes are an integral part of these consolidated
financial statements.
I
SSUER DIRECT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands, except share and per share amounts)
|
|
Years Ended
December 31,
|
|
|
|
2018
|
2017
|
|
Cash
flows from operating activities
|
|
|
|
Net
income
|
$
837
|
$
1,871
|
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
|
Bad debt
expense
|
359
|
181
|
|
Depreciation and
amortization
|
1,397
|
735
|
|
Deferred income
taxes
|
(336
)
|
(50
)
|
|
Non-cash interest
expense
|
25
|
6
|
|
Stock-based
compensation expense
|
629
|
516
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Decrease (increase)
in accounts receivable
|
(645
)
|
(66
)
|
|
Decrease (increase)
in deposits and prepaid assets
|
743
|
(711
)
|
|
Increase (decrease)
in accounts payable
|
(322
)
|
309
|
|
Increase (decrease)
in deferred revenue
|
296
|
12
|
|
Increase (decrease)
in accrued expenses
|
(114
)
|
(291
)
|
|
Net cash provided
by operating activities
|
2,869
|
2,512
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
Purchase of
acquired businesses, net of cash received (See Note 4)
|
(1,123
)
|
(1,872
)
|
|
Capitalized
software
|
(21
)
|
(934
)
|
|
Purchase of fixed
assets
|
(51
)
|
(11
)
|
|
Net cash used in
investing activities
|
(1,195
)
|
(2,817
)
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
Proceeds from
secondary stock offering (see Note 7)
|
13,323
|
—
|
|
Proceeds from
exercise of stock options, net of income taxes
|
747
|
389
|
|
Payment for stock
repurchase and retirement (see Note 7)
|
(2,635
)
|
—
|
|
Payment on notes
payable (See Note 4)
|
(288
)
|
—
|
|
Payment of
dividend
|
(460
)
|
(588
)
|
|
Net cash provided
by (used in) financing activities
|
10,687
|
(199
)
|
|
|
|
|
|
Net change in
cash
|
12,361
|
(504
)
|
|
Cash-
beginning
|
4,917
|
5,339
|
|
Currency
translation adjustment
|
(56
)
|
82
|
|
Cash-
ending
|
$
17,222
|
$
4,917
|
|
|
|
|
|
Supplemental disclosures
:
|
|
|
|
Cash paid for
income taxes
|
$
66
|
$
943
|
|
Non-cash
activities:
|
|
|
|
Stock-based
compensation - capitalized software
|
$
—
|
$
57
|
|
Purchase of
Interwest in exchange of note payable
|
$
—
|
$
851
|
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, 2018 AND 2017
Note 1: Description, Background and Basis of
Operations
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. Today,
Issuer Direct is an industry-leading global
communications and compliance company focusing on the needs of
corporate issuers. Issuer Direct's principal platform,
Platform
id.
™, empowers users by thoughtfully
integrating the most relevant tools, technologies and products,
thus eliminating the complexity associated with producing and
distributing their business communications and financial
information.
The Company operates under several brands in
the market, including Direct Transfer, PrecisionIR (PIR),
Blueprint, Classify, Investor Network, iProxy Direct, iR Direct, QX
Interactive, Interwest, ACCESSWIRE and FSCwire. The Company
leverages its securities compliance and regulatory expertise to
provide a comprehensive set of services that enhance a
customer’s ability to communicate effectively with its
shareholder base while meeting all reporting regulations
required.
Note 2: Summary of Significant Accounting Policies
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’s financial instruments that are exposed to
concentrations of credit risk primarily consist of its cash and
cash equivalents. The Company places its cash and cash equivalents
with financial institutions of high credit worthiness. The
Company’s management plans to assess the financial strength
and credit worthiness of any parties to which it extends funds, and
as such, it believes that any associated credit risk exposures are
limited.
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, 2018, the Company had $16,500,000 which exceeds the
insured amounts in the United States. The Company also had cash of
$226,000 in Europe, and $165,000 in Canada on hand at December 31,
2018.
Revenue Recognition
The
Company adopted ASC Topic 606, Revenue from Contracts with
Customers, on January 1, 2018, using the modified retrospective
approach.
Substantially all
of the Company’s revenue comes from contracts with customers
for subscriptions to its cloud-based products or contracts to
perform compliance or other services. Customers consist primarily
of
corporate issuers and professional
firms, such as investor relations and public relations firms. In
the case of our news distribution offering, our customers also
include private companies.
The Company accounts for a
contract with a customer when there is an enforceable contract
between the Company and the customer, the rights of the parties are
identified, the contract has economic substance, and collectability
of the contract consideration is probable. The Company's revenues
are measured based on consideration specified in the contract with
each customer.
F-8
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
The Company's
contracts include either a subscription to our entire platform or
certain modules within our platform, or an agreement to perform
services or any combination thereof, and often contain multiple
subscriptions and services. For these bundled contracts, the
Company accounts for individual subscriptions and services as
separate performance obligations if they are distinct, which is
when a product or service is separately identifiable from other
items in the bundled package, and a customer can benefit from it on
its own or with other resources that are readily available to the
customer. The Company separates revenue from its contracts into two
revenue streams: i) Platform and Technology and ii) Services.
Performance obligations of Platform and Technology contracts
include providing subscriptions to certain modules or the entire
Platform
id.
system, distributing press releases on a per release basis or
conducting webcasts on a per event basis. Performance obligations
of Service contracts include obligations to deliver compliance
services and annual report printing and distribution on either a
stand ready obligation or on a per project or event basis. Set up
fees for compliance services are considered a separate performance
obligation and are satisfied upfront. Set up fees for our transfer
agent module and investor relations content management module are
immaterial. The Company’s subscription and service contracts
are generally for one year, with automatic renewal clauses included
in the contract until the contract is cancelled. The contracts do
not contain any rights of returns, guarantees or warranties. Since
contracts are generally for one year, all of the revenue is
expected to be recognized within one year from the contract start
date. As such, the Company has elected the optional exemption that
allows the Company not to disclose the transaction price allocated
to performance obligations that are unsatisfied or partially
satisfied at the end of each reporting period.
The
Company recognizes revenue for subscriptions evenly over the
contract period, upon distribution for per release contracts and
upon event completion for webcasting events. For service contracts
that include stand ready obligations, revenue is recognized evenly
over the contract period. For all other services delivered on a per
project or event basis, the revenue is recognized at the completion
of the event. The Company believes recognizing revenue for
subscriptions and stand ready obligations using a time-based
measure of progress, best reflects the Company’s performance
in satisfying the obligations.
For
bundled contracts, revenue is allocated to each performance
obligation based on its relative standalone selling price.
Standalone selling prices are based on observable prices at which
the Company separately sells the subscription or services. If a
standalone selling price is not directly observable, the Company
uses the residual method to allocate any remaining costs to that
subscription or service. The Company regularly reviews standalone
selling prices and updates these estimates if
necessary.
The
Company invoices its customers based on the billing schedules
designated in its contracts, typically upfront on either a monthly,
quarterly or annual basis or per transaction at the completion of
the performance obligation. Deferred revenue for the periods
presented was primarily related to subscription and service
contracts, which are billed upfront, quarterly or annually, however
the revenue has not yet been recognized. The associated deferred
revenue is generally recognized ratably over the billing period.
Deferred revenue as of December 31, 2018 and 2017 was $1,249,000
and $887,000, respectively, and is expected to be recognized within
one year. Revenue recognized for the year ended December 31, 2018
and 2017, that was included in the deferred revenue balance at the
beginning of each reporting period, was approximately $887,000 and
$843,000, respectively. Accounts receivable related to contracts
with customers was $1,593,000 and $1,275,000 as of December 31,
2018 and 2017, respectively. Since substantially all of the
contracts have terms of one year or less, the Company has elected
to use the practical expedient regarding the existence of a
significant financing.
Costs
to obtain contracts with customers consist primarily of sales
commissions. As of December 31, 2018, the Company capitalized
$18,000 of costs to obtain contracts that are expected to be
amortized over more than one year. For contract costs expected to
be amortized in less than one year, the Company has elected to use
the practical expedient allowing the recognition of incremental
costs of obtaining a contract as an expense when incurred. The
Company has considered historical renewal rates, expectations of
future renewals and economic factors in making these
determinations.
F-9
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
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
|
Earnings per Share
Earnings per share
accounting guidance 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 41,000 and 89,500 were excluded in the
computation of diluted earnings per common share during the years
ended December 31, 2018 and 2017, 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 customer 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, 2018 and 2017 (in
000’s):
|
|
Year
Ended
December
31,
2018
|
Year
Ended
December
31,
2017
|
|
Beginning
balance
|
$
425
|
$
429
|
|
Bad debt
expense
|
359
|
181
|
|
Write-offs
|
(250
)
|
(185
)
|
|
Ending
balance
|
$
534
|
$
425
|
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.
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.
F-10
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Capitalized
Software
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 $21,000 and $991,000 during the years ended December
31, 2018 and 2017, respectively. Included in the amount capitalized
for the years ended December 31, 2018 and 2017 was $0 and $57,000
related to stock-based compensation. The Company recorded
amortization expense of $813,000 and $290,000 during the years
ended December 31, 2018 and 2017, respectively, $795,000 and
$280,000 of which is included in Cost of revenues on the
Consolidated Statements of Income. For the years ended December 31,
2018 and 2017, the remaining amount of $18,000 and $10,000 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
ASC
Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial statements are
categorized based upon the hierarchy of levels of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
●
Level 1 –
Quoted prices are available in active markets for identical assets
or liabilities at the reporting date. Generally, this includes debt
and equity securities that are traded in an active market. Our cash
and cash equivalents are quoted at Level 1.
●
Level 2 –
Observable inputs other than Level 1 prices such as
quote prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the
full term of the assets or liabilities. Generally, this includes
debt and equity securities that are not traded in an active
market.
●
Level 3 –
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models,
discounted cash flow methodologies, or other valuation techniques,
as well as instruments for which the determination of fair value
requires significant management judgment or
estimation.
As of
December 31, 2018 and 2017, we believe that the fair value of our
financial instruments other than cash and cash equivalents, such
as, 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.
F-11
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
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.
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, distribution partner
relationships, software, technology and trademarks that are
initially measured at fair value. At the time of the business
combination, 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 (7-10
years), customer lists (3 years), distribution partner
relationships (10 years), trademarks related to PIR (3-5 years) and
software and technology (3-5 years) 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 $115,000 and $104,000, during the years ended December 31,
2018 and 2017, respectively.
Recently adopted accounting pronouncements
In
August 2018, the FASB announced Accounting Standards Update
(“ASU”) 2018-15 Intangibles—Goodwill and
Other—Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a
Cloud Computing Arrangement That Is a Service Contract. The
amendments in this pronouncement align the requirements for
capitalizing implementation costs incurred in a hosting arrangement
that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use
software (and hosting arrangements that include an internal use
software license). The accounting for the service element of a
hosting arrangement that is a service contract is not affected by
these amendments. This pronouncement is effective for public
business entities for annual periods, including interim periods
within those annual periods, beginning after December 15, 2019.
Early adoption is permitted, including adoption in any interim
period. The amendments should be applied either retrospectively, or
prospectively, to all implementation costs incurred after the date
of adoption. The Company elected to adopt ASU 2018-05 as of July 1,
2018, on a prospective basis. As a result, the Company capitalized
$21,000 of costs related to the implementation of a cloud-based
component of Platform
id.
, which will be licensed to
customers. Capitalized costs are amortized as Cost of revenues on
the Statement of Operations over an estimated life of four
years.
F-12
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
In June
2018, the FASB announced ASU 2018-07 Compensation-Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting. ASU 2018-07 expands the scope of Topic 718,
Compensation—Stock Compensation (which currently only
includes share-based payments to employees) to include share-based
payments issued to nonemployees for goods or services.
Consequently, the accounting for share-based payments to
nonemployees and employees will be substantially aligned. The ASU
supersedes Subtopic 505-50, Equity—Equity-Based Payments to
Non-Employees. ASU 2018-07 is effective for public companies for
fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. Early adoption is permitted, but
no earlier than a company’s adoption date of Topic 606,
Revenue from Contracts with Customers. The Company elected to adopt
ASU 2018-07 as of January 1, 2018. The adoption did not require the
Company to restate any previously reported periods of the Statement
of Operations or Balance Sheet. The Company has one contract with a
non-employee to perform services for share-based payments, the
compensation of which is properly accounted for in the Consolidated
Financial Statements as of and for the year ended December 31,
2018.
In
March 2018, the FASB announced ASU 2018-05 Income Taxes (Topic
740): Amendments to Securities and Exchange Commission
(“SEC”) Paragraphs Pursuant to SEC Staff Accounting
Bulletin No.118 (“SAB 118”). ASU 2018-05 adds guidance
indicated in Questions 1 and 2 from SAB 118 to the codification.
SAB 118 addresses the application of US GAAP in situations when a
registrant does not have all of the necessary information
available, prepared and analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax
effects of the Tax Cuts and Jobs Act of 2017 (the “2017
Act”), which was signed into law on December 22, 2017. In
previous quarters the Company included a best estimate of the
effects of the 2017 Act, and has now completed the calculation as
of the most recent provision. The Company has determined the impact
of the adoption of the 2017 Act to be a benefit of $316,000. The
Company recognized a provisional tax benefit of $351,000 during the
year ended December 31, 2017 and recorded an expense of $35,000
during the year ended December 31, 2018. ASU 2018-05 is effective
immediately upon addition to the FASB codification.
In May
2014, the FASB issued ASU 2014-09 Revenue from Contracts with
Customers, which supersedes previous revenue recognition guidance.
The new standard requires that a company recognize revenue when it
transfers promised goods or services to customers in an amount that
reflects the consideration the company expects to receive in
exchange for those goods or services. In-depth reviews of customer
contracts were completed and analyzed to meet the standard’s
reporting and disclosure requirements. Disclosures related to the
nature, amount and timing of revenue and cash flows arising from
contracts with customers are included in this Note under the
subheading Revenue Recognition as well as Note 10,
Revenues.
The
adoption of ASU 2014-09 did not require the Company to restate any
previously reported periods of the Statement of Operations or
Balance Sheet related to a change in the timing of revenue
recognition. The adoption also did not affect liquidity. However,
the adoption did impact the allocation of revenue associated with
the Company’s shareholder outreach offering that included
both electronic dissemination and physical delivery of a
customer’s annual reports. Historically, revenue from these
bundled contracts was reported in the Services revenue stream
because an allocation between electronic and physical hardcopy
distribution was not made, however, under ASC 606, a portion of the
revenue from these contracts is required to be allocated to the
Platform and Technology revenue stream in accordance with
stand-alone contracts for the shareholder outreach subscription. A
comparison of revenue under previously reported legacy GAAP and
revenue under current GAAP is provide below for comparability
purposes (in 000’s):
|
|
For the Year
Ended
December 31,
2018
|
For the Year
Ended
December 31,
2017
|
||||
|
|
Legacy
|
|
Current
|
Legacy
|
|
Current
|
|
Revenue:
|
GAAP
|
Adjustments
|
GAAP
|
GAAP
|
Adjustments
|
GAAP
|
|
Platform
and Technology
|
$
8,136
|
$
457
|
$
8,593
|
$
6,398
|
$
683
|
$
7,081
|
|
Services
|
6,096
|
(457
)
|
5,639
|
6,230
|
(683
)
|
5,547
|
|
Total
Revenue
|
$
14,232
|
$
—
|
$
14,232
|
$
12,628
|
$
—
|
$
12,628
|
In
analyzing the impact of adoption, the Company used the practical
expedient that allows the Company to only apply the new revenue
standard to contracts that are not completed as of the date of
initial application, January 1, 2018. A completed contract is
defined as a contract for which all (or substantially all) of the
revenue was recognized in accordance with revenue guidance that was
in effect before the date of initial application.
The SEC
released SEC Final Rule Release No. 33-10532 Disclosure Update and
Simplification, which adopts amendments to certain disclosure
requirements that have become redundant, duplicative, overlapping,
outdated, or superseded, in light of other SEC disclosure
requirements, U.S. GAAP, or changes in the information environment.
The amendments also refer certain SEC disclosure requirements that
overlap with, but require information incremental to U.S. GAAP to
the FASB for potential incorporation into U.S. GAAP. The amendments
are intended to facilitate the disclosure of information to
investors and simplify compliance without significantly altering
the total mix of information provided to investors. These
amendments are part of an initiative by the Division of Corporation
Finance to review disclosure requirements applicable to issuers to
consider ways to improve the requirements for the benefit of
investors and issuers. The amendments were effective November 5,
2018 and have not had a material impact to the
Company.
F-13
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Recently issued accounting pronouncements not yet
adopted
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (ASU) No. 2016-02, which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. Topic 842 was subsequently
amended by ASU No. 2018-01, Land Easement Practical Expedient for
Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.
The new standard establishes a right-of-use model (ROU) that
requires a lessee to recognize a ROU asset and lease liability on
the balance sheet for all leases with a term longer than 12 months.
Leases will be classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the income statement.
The new
standard is effective for us on January 1, 2019, with early
adoption permitted. A modified retrospective transition approach is
required, applying the new standard to all leases existing at the
date of initial application. An entity may choose to use either (1)
its effective date or (2) the beginning of the earliest comparative
period presented in the financial statements as its date of initial
application. If an entity chooses the second option, the transition
requirements for existing leases also apply to leases entered into
between the date of initial application and the effective date. The
entity must also recast its comparative period financial statements
and provide the disclosures required by the new standard for the
comparative periods. We expect to adopt the new standard on January
1, 2019 and use the effective date as our date of initial
application. Consequently, financial information will not be
updated and the disclosures required under the new standard will
not be provided for dates and periods before January 1,
2019.
The new
standard provides a number of optional practical expedients in
transition. We expect to elect the ‘package of practical
expedients’, which permits us not to reassess under the new
standard our prior conclusions about lease identification, lease
classification and initial direct costs. We do not expect to elect
the use-of-hindsight or the practical expedient pertaining to land
easements; the latter not being applicable to us.
We
expect the adoption of this standard will not have a material
effect on our financial statements. While we continue to assess all
of the effects of adoption, we currently believe the most
significant effects relate to the recognition of new ROU assets and
lease liabilities on our balance sheet for our office operating
leases and providing significant new disclosures about our leasing
activities. We do not expect a significant change in our leasing
activities between now and adoption.
On
adoption, we currently expect to recognize additional operating
liabilities of approximately $135,000, with corresponding ROU
assets of the same amount based on the present value of the
remaining minimum rental payments under current leasing standards
for existing operating leases.
The new
standard also provides practical expedients for an entity’s
ongoing accounting. We currently expect to elect the short-term
lease recognition exemption for our Utah and London office leases
that qualify. This means, for those leases that qualify, we will
not recognize ROU assets or lease liabilities. We also currently
expect to elect the practical expedient to not separate lease and
non-lease components for all of our leases.
In
connection with the Company’s acquisition of the
VisualWebcaster Platform (“VWP”) from Onstream Media
Corporation (See Note 13), the Company assumed two short term
leases in New York City, NY and entered into a three-year office
lease in Florida for which the Company expects to recognize a ROU
asset and lease liability of approximately $125,000.
Note 3: Fixed Assets
|
in
$000’s
|
December
31,
|
|
|
|
2018
|
2017
|
|
Computers
equipment
|
$
134
|
$
125
|
|
Furniture &
equipment
|
320
|
301
|
|
Leasehold
improvements
|
130
|
107
|
|
Total fixed assets,
gross
|
584
|
533
|
|
Less: Accumulated
depreciation
|
(452
)
|
(388
)
|
|
Total fixed assets,
net
|
$
132
|
$
145
|
Depreciation
expense on fixed assets for the years ended December 31, 2018 and
2017 totaled $64,000 and $70,000, respectively.
F-14
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Note 4:
Recent Acquisitions
Acquisition of Filing Services Canada Inc.
(“FSCwire”)
On July
3, 2018, the Company entered into a Stock Purchase Agreement (the
“FSCwire Agreement”) with the sole shareholder of
FSCwire, a company incorporated under the Business Corporations Act
(Alberta), whereby the Company purchased all of the outstanding
equity securities. Under the terms of the FSCwire Agreement, the
Company paid $1,140,000 at closing ($180,000 of which was paid into
an escrow account to cover standard representations and warranties
included within the Purchase agreement) and issued 3,402 shares of
restricted common stock of the Company.
The
acquisition was accounted for under the acquisition method of
accounting for business combinations in accordance with FASB ASC
805, Business Combinations, which requires, among other things,
that the assets acquired and liabilities assumed be recognized at
their fair values as of the acquisition date. Acquisition-related
costs, which totaled approximately $52,000, are not included as a
component of the acquisition accounting, but are recognized as
expenses in the periods in which the costs are incurred. Any
changes within the measurement period resulting from facts and
circumstances that existed as of the acquisition date may result in
retrospective adjustments to the provisional amounts recorded at
the acquisition date. During the year ended December 31, 2018, the
Company employed a third party valuation firm to assist in
determining the purchase price allocation of assets and liabilities
acquired from FSCwire. The valuation was finalized during the
fourth quarter of 2018 and resulted in the tangible and intangible
assets and liabilities disclosed below, including the addition of
the deferred tax liability which was not included in previous
disclosures. The income approach was used to determine the value of
FSCwire’s customer relationships. The income approach
determines the fair value for the asset based on the present value
of cash flows projected to be generated by the asset. Projected
cash flows are discounted at a rate of return that reflects the
relative risk of achieving the cash flow and the time value of
money. Projected cash flows considered multiple factors, including
current revenue from existing customers; analysis of expected
revenue and attrition trends; reasonable contract renewal
assumptions from the perspective of a marketplace participant;
expected profit margins giving consideration to marketplace
synergies; and required returns to contributory assets. The relief
from royalty method was used to value the distribution partner
relationships. The relief from royalty method determines the fair
value by calculating what a typical license fee would be in order
to obtain the same or similar distribution rights from market
participants. Projected cash flows consider revenue assumptions
allocated to certain distribution partners and royalty rates of
willing market participants.
The
transaction resulted in recording intangible assets and goodwill at
a fair value of $1,426,000 as follows (in
000’s):
|
Initial cash
payment
|
$
1,140
|
|
Fair value of
restricted common stock issued
|
62
|
|
Total
Consideration
|
1,202
|
|
Plus: excess of
liabilities assumed over assets acquired
|
224
|
|
Total fair value of
FSCwire intangible assets and goodwill
|
$
1,426
|
The
tangible assets and liabilities acquired were as follows (in
000’s):
|
Cash
|
$
17
|
|
Accounts
receivable, net
|
42
|
|
Total
assets
|
59
|
|
|
|
|
Accounts payable
and accrued expenses
|
35
|
|
Deferred
revenue
|
78
|
|
Deferred tax
liability
|
170
|
|
Total
liabilities
|
283
|
|
Excess of
liabilities assumed over assets acquired
|
$
(224
)
|
F-15
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
The
identified intangible assets as a result of the acquisition are as
follows (in 000’s):
|
Customer
relationships
|
$
311
|
|
Distribution
partner relationships
|
153
|
|
Goodwill
|
962
|
|
|
$
1,426
|
The
Company has elected not to provide unaudited pro forma financial
information for the FSCwire acquisition, because the acquisition
was not considered a significant acquisition in accordance with
Rule 3-05 of the SEC's Regulation S-X.
Acquisition of Interwest Transfer Company, Inc.
On
October 2, 2017, the Company entered into a Stock Purchase
Agreement (the “Interwest Agreement’) with the sole
shareholder of Interwest, a Utah corporation and transfer agent
business located in Salt Lake City, Utah, whereby the Company
purchased all of the outstanding equity securities. Under the terms
of the Interwest Agreement, the Company paid $1,935,000 at closing,
$288,000 upon the first anniversary of the closing and will pay
$320,000 on each of the second and third anniversary dates of the
closing and issued 25,235 shares of restricted common stock of the
Company to the sole shareholder at closing.
The
acquisition was accounted for under the acquisition method of
accounting for business combinations in accordance with FASB ASC
805, Business Combinations, which requires, among other things,
that the assets acquired and liabilities assumed be recognized at
their fair values as of the acquisition date. Acquisition-related
costs, which totaled approximately $20,000, are not included as a
component of the acquisition accounting, but are recognized as
expenses in the periods in which the costs are incurred. Any
changes within the measurement period resulting from facts and
circumstances that existed as of the acquisition date may result in
retrospective adjustments to the provisional amounts recorded at
the acquisition date. During the year ended December 31, 2017, the
Company employed a third party valuation firm to assist in
determining the purchase price allocation of assets and liabilities
acquired from Interwest. The income approach was used to determine
the value of Interwest’s trademarks and customer
relationships.
The
transaction resulted in recording intangible assets and goodwill at
a fair value of $3,680,000 as follows (in
000’s):
|
Initial cash
payment
|
$
1,935
|
|
Fair value of
restricted common stock issued
|
318
|
|
Fair value of
anniversary payments
|
851
|
|
Total
Consideration
|
3,104
|
|
Plus: excess of
liabilities assumed over assets acquired
|
576
|
|
Total fair value of
Interwest intangible assets and goodwill
|
$
3,680
|
The
tangible assets and liabilities acquired were as follows (in
000’s):
|
Cash
|
$
63
|
|
Accounts
receivable, net
|
84
|
|
Prepaid
expenses
|
17
|
|
Total
assets
|
164
|
|
Accounts payable
and accrued expenses
|
12
|
|
Deferred
revenue
|
21
|
|
Deferred tax
liability
|
707
|
|
Total
liabilities
|
740
|
|
Excess of
liabilities assumed over assets acquired
|
$
(576
)
|
F-16
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
The
identified intangible assets as a result of the acquisition are as
follows (in 000’s):
|
Customer
relationships
|
$
1,677
|
|
Tradename
|
176
|
|
Goodwill
|
1,827
|
|
|
$
3,680
|
Select Pro-Forma Financial Information (Unaudited)
The
following represents our unaudited condensed pro-forma financial
results as if the acquisition with Interwest and the Company had
occurred as of January 1, 2017. Unaudited condensed pro-forma
results are based upon accounting estimates and judgments that we
believe are reasonable. The condensed pro-forma results are not
necessarily indicative of the actual results of our operations had
the acquisitions occurred at the beginning of the periods
presented, nor does it purport to represent the results of
operations for future periods.
|
$ in
000’s
|
Year Ended
December 31, 2017
|
|
|
|
|
Revenues
|
$
13,851
|
|
Net
Income
|
$
2,336
|
|
Basic earnings per
share
|
$
0.79
|
|
Diluted earnings
per share
|
$
0.77
|
Note 5:
Goodwill and Other Intangible
Assets
The
components of intangible assets are as follows (in
000’s):
|
|
December 31,
2018
|
||
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|
Customer
lists
|
$
1,770
|
$
(1,770
)
|
$
—
|
|
Customer
relationships
|
3,735
|
(1,534
)
|
2,201
|
|
Proprietary
software
|
782
|
(753
)
|
29
|
|
Distribution
partner relationships
|
153
|
(8
)
|
145
|
|
Trademarks –
definite-lived
|
173
|
(154
)
|
19
|
|
Trademarks –
indefinite-lived
|
408
|
—
|
408
|
|
Total intangible
assets
|
$
7,021
|
$
(4,219
)
|
$
2,802
|
|
|
December 31,
2017
|
||
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|
Customer
lists
|
$
1,770
|
$
(1,770
)
|
$
—
|
|
Customer
relationships
|
3,424
|
(1,099
)
|
2,325
|
|
Proprietary
software
|
782
|
(717
)
|
65
|
|
Trademarks –
definite-lived
|
173
|
(113
)
|
60
|
|
Trademarks –
indefinite-lived
|
408
|
—
|
408
|
|
Total intangible
assets
|
$
6,557
|
$
(3,699
)
|
$
2,858
|
The
Company performed its annual assessment for impairment of goodwill
and intangible assets and determined there was no impairment as of
and for the years ended December 31, 2018 and 2017.
The
amortization of intangible assets is a charge to operating expenses
and totaled $520,000 and $375,000 in the years ended 2018 and 2017,
respectively.
F-17
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
The
future amortization of the identifiable intangible assets is as
follows (in 000’s):
|
Years
Ending December 31:
|
|
|
2019
|
$
513
|
|
2020
|
406
|
|
2021
|
255
|
|
2022
|
227
|
|
2023
|
227
|
|
Thereafter
|
766
|
|
Total
|
$
2,394
|
Our
goodwill balance of $5,032,000 at December 31, 2018, was related to
our acquisition of Basset Press in July 2007, PIR in 2013,
ACCESSWIRE in 2014, Interwest in 2017 and FSCwire in 2018. We
conducted our annual impairment analyses as of October 1, of 2018
and 2017 and determined that no goodwill was impaired.
Note 6: Line of Credit
Effective October
4, 2018, the Company renewed its Line of Credit, which increased
the amount of funds available for borrowing from $2,500,000 to
$3,000,000. The interest rate was reduced from LIBOR plus 2.50% to
LIBOR plus 1.75%. As of December 31, 2018, the interest rate was
4.25% and the Company did not owe any amounts on the Line of
Credit.
Note 7: Equity
Dividends
During
the years ended December 31, 2018 and 2017, we paid dividends
totaling $460,000, or $0.15 per share, and $588,000 or $0.20 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, 2018 and 2017. During the years ended December 31,
2018 and 2017, the Company had the following issuances of common
stock in addition to stock issued pursuant to vesting of restricted
stock units and exercise of options to purchase common
stock:
●
The Company issued
2,500 shares of common stock to consultants in exchange for
services during the years ended December 31, 2018 and 2017, and
recognized expense of $38,000 and $31,000, respectively, for the
value of those shares.
●
On July 3, 2018,
the Company issued 3,402 shares as part of the acquisition of
FSCwire and on October 2, 2017, the Company issued 25,235 shares as
part of the acquisition of Interwest (see Note 4).
Secondary public offering
On
August 17, 2018, the Company completed a secondary public offering
of 806,451 shares of its common stock at a price to the public of
$15.50 per share. In addition, the Company granted the underwriter
a 30-day option to purchase an additional 120,967 shares of its
common stock to cover over-allotments, which were sold on August
24, 2018. The aggregate gross proceeds of the offering were
$14,375,000. Closing costs of $1,052,000, which consisted of
underwriting commissions, legal and accounting fees and other
offering expenses, were netted against the proceeds, which resulted
in net proceeds to the Company of $13,323,000. The net proceeds of
the offering are included in Additional paid-in capital on the
Balance Sheet as of December 31, 2018.
Stock repurchase and retirement
On
November 28, 2018, the Company entered into a Stock Repurchase
Agreement with EQS Group AG (the “Stockholder”) whereby
the Company agreed to purchase 215,118 shares (the
“Repurchased Shares”) of the Company’s common
stock, par value $0.001, from the Stockholder for a per share
purchase price of $12.25, or an aggregate purchase price of
$2,635,000. On December 5, 2018, the transaction closed and the
Company acquired the Repurchased Shares and subsequently retired
all of the Repurchased Shares.
F-18
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Note 8: Stock Options and Restricted Stock Units
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, 2018, 339,000 awards had been
granted under the 2014 Plan.
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 immediately 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,
2018, 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, 2018 and 2017:
|
|
Number of
Options
Outstanding
|
Range
of
Exercise
Price
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|
Balance at December
31, 2016
|
163,850
|
$
0.01 - 13.49
|
$
8.30
|
$
297,542
|
|
Options
granted
|
32,000
|
13.00
|
13.00
|
—
|
|
Options
exercised
|
(56,645
)
|
0.01 - 9.26
|
6.32
|
393,729
|
|
Options
forfeited/cancelled
|
(1,917
)
|
9.26
|
9.26
|
3,984
|
|
Balance at December
31, 2017
|
137,288
|
$
0.01 - 13.49
|
$
10.20
|
$
1,119,562
|
|
Options
granted
|
32,000
|
17.40
|
17.40
|
—
|
|
Options
exercised
|
(61,875
)
|
7.76 - 13.49
|
11.46
|
346,284
|
|
Options
forfeited/cancelled
|
(8,850
)
|
0.01 – 9.26
|
2.76
|
134,099
|
|
Balance at December
31, 2018
|
98,563
|
$
6.80 - 17.40
|
$
12.56
|
$
127,306
|
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, 2018 and 2017 of
$11.35 and $18.35, 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, 2018 and
2017. As of December 31, 2018, there was $103,000 of unrecognized
compensation cost related to our unvested stock options, which will
be recognized through 2019.
F-19
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
The
following table summarizes information about stock options
outstanding and exercisable at December 31, 2018:
|
|
Options
Outstanding
|
Options
Exercisable
|
||
|
Exercise
Price
|
Number
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(in
Years)
|
Number
|
|
$
0.01 - $7.00
|
10,000
|
$
6.80
|
6.89
|
9,167
|
|
$
7.01 - $8.00
|
20,313
|
7.76
|
4.74
|
20,313
|
|
$
8.01 - $10.00
|
4,250
|
9.26
|
5.99
|
4,250
|
|
$
10.01 - $15.00
|
32,000
|
13.00
|
8.74
|
32,000
|
|
$
15.01 - $17.40
|
32,000
|
17.40
|
9.42
|
—
|
|
Total
|
98,563
|
$
12.56
|
7.83
|
65,730
|
Of the
98,563 stock options outstanding, 64,000 are non-qualified stock
options. All options have been registered with the
SEC.
The
fair value of common stock options issued during the year ended
December 31, 2018 and 2017 were estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used:
|
|
Year
ended
December
31,
2018
|
Year
ended
December
31,
2017
|
|
Expected dividend
yield
|
1.15
%
|
1.54
%
|
|
Expected stock
price volatility
|
50
%
|
54
%
|
|
Weighted-average
risk-free interest rate
|
2.75
%
|
1.91
%
|
|
Weighted-average
expected life of options (in years)
|
5.50
|
5.27
|
The
following is a summary of restricted stock units issued during the
year ended December 31, 2018 and 2017:
|
|
Number of
Options Outstanding
|
Weighted
Average
Fair
Value
|
Aggregate
Intrinsic Value
|
|
Balance at December
31, 2016
|
126,500
|
$
6.35
|
$
1,138,500
|
|
Units
granted
|
17,500
|
10.75
|
104,000
|
|
Units
vested/issued
|
(69,170
)
|
6.95
|
799,563
|
|
Units
forfeited
|
(9,665
)
|
7.88
|
106,330
|
|
Balance at December
31, 2017
|
65,165
|
$
6.66
|
$
1,131,703
|
|
Units
granted
|
9,000
|
17.43
|
156,850
|
|
Units
vested/issued
|
(34,996
)
|
7.28
|
850,984
|
|
Units
forfeited
|
(2,500
)
|
5.80
|
43,329
|
|
Balance at December
31, 2018
|
36,669
|
$
8.76
|
$
257,987
|
As of
December 31, 2018, there was $255,000 of unrecognized compensation
cost related to our unvested restricted stock units, which will be
recognized through 2019. All restricted stock units have been
registered with the SEC.
During
the year ended December 31, 2018 and 2017, we recorded compensation
expense of $629,000 and $516,000, respectively, related to stock
options and restricted stock units. Additionally, during the year
ended December 31, 2017, $57,000 of additional cost was capitalized
as Capitalized software on the Consolidated Balance Sheet as of
December 31, 2017. No additional costs were capitalized during the
year ended December 31, 2018.
F-20
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Note 9: Commitments and Contingencies
Office Lease
In
October 2015, we signed a three-year lease extension for our 16,059
square-foot corporate headquarters in Morrisville, NC. Our required
remaining minimum lease payments are $135,000.
Additionally, we
have an office in Salt Lake City, Utah and a shared office facility
in London, England, both of which are on a short term lease. Rent
expense associated with our office leases totaled $255,000 and
$205,000 for the years ended December 31, 2018 and 2017,
respectively.
In
connection with the Company’s acquisition of the
VisualWebcaster Platform (“VWP”) from Onstream Media
Corporation (See Note 13), the Company assumed two short term
leases in New York City, New York and entered into a three-year
office lease in Florida for which the Company expects to recognize
a ROU asset and lease liability of approximately
$125,000.
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.
Note 10: Revenues
We
consider ourselves to be in a single reportable segment under the
authoritative guidance for segment reporting, specifically a
shareholder communications and compliance company for publicly
traded and private companies. Revenue is attributed to a particular
geographic region based on where subscriptions are sold or the
services are performed. The following tables present revenue
disaggregated by revenue stream and geography in
(000’s):
For the
years ended December 31, 2018 and 2017, we generated revenues from
the following revenue streams as a percentage of total revenue (in
000’s):
|
|
Year Ended
December 31, 2018
|
Year Ended
December 31, 2017
|
||
|
|
Amount
|
Percentage
|
Amount
|
Percentage
|
|
Revenue Streams
|
|
|
|
|
|
Platform and
Technology
|
$
8,593
|
60.4
%
|
$
7,081
|
56.1
%
|
|
Services
|
5,639
|
39.6
%
|
5,547
|
43.9
%
|
|
Total
|
$
14,232
|
100.0
%
|
$
12,628
|
100.0
%
|
|
|
Year Ended
December 31
|
|
|
|
2018
|
2017
|
|
Geographic region
|
|
|
|
North
America
|
$
13,488
|
$
11,461
|
|
Europe
|
744
|
1,167
|
|
Total
revenues
|
$
14,232
|
$
12,628
|
We did
not have any customers during the years ended December 31, 2018 or
2017 that accounted for more than 10% of our revenue. We had one
customer that comprised approximately 12% of our total accounts
receivable balance at December 31, 2018 and there were no customers
representing more than 10% of our total accounts receivable as of
December 31, 2017.
F-21
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
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.
Note 11: Income Taxes
The
provision for income taxes consisted of the following components
for the years ended December 31 (in 000’s):
|
|
2018
|
2017
|
|
Current:
|
|
|
|
Federal
|
$
499
|
$
116
|
|
State
|
145
|
13
|
|
Foreign
|
73
|
62
|
|
Total
Current
|
717
|
191
|
|
Deferred:
|
|
|
|
Federal
|
(259
)
|
(59
)
|
|
State
|
(59
)
|
23
|
|
Foreign
|
(26
)
|
(24
)
|
|
Total
Deferred
|
(344
)
|
(60
)
|
|
Total expense for
income taxes
|
$
373
|
$
131
|
Reconciliation
between the statutory rate and the effective tax rate is as follows
at December 31 (in 000's, except percentages):
|
|
2018
|
2017
|
||
|
|
Amount
|
Percentage
|
Amount
|
Percentage
|
|
Federal statutory
tax rate
|
$
254
|
21.0
%
|
$
681
|
34.0
%
|
|
State tax
rate
|
55
|
4.6
%
|
21
|
1.0
%
|
|
Permanent
difference – stock-based compensation
|
(2
)
|
(0.1
)%
|
(156
)
|
(7.8
)%
|
|
Permanent
difference – other
|
4
|
0.1
%
|
63
|
3.1
%
|
|
Tax reform deferred
re-measurement
|
—
|
—
|
(351
)
|
(17.5
)%
|
|
Provision to
return
|
96
|
7.9
%
|
(3
)
|
(0.1
)%
|
|
Tax on foreign
earnings – tax reform
|
41
|
3.5
%
|
—
|
—
%
|
|
Foreign rate
differential
|
2
|
0.1
%
|
(41
)
|
(2.0
)%
|
|
Research and
development credit
|
(77
)
|
(6.3
)%
|
(70
)
|
(3.5
)%
|
|
Sub-total
|
373
|
30.8
%
|
144
|
7.2
%
|
|
Change in valuation
allowance
|
—
|
—
|
(13
)
|
(0.7
)%
|
|
Total
|
$
373
|
30.8
%
|
$
131
|
6.5
%
|
The
effective income tax rate for 2018 was favorably impacted by the
Tax Cuts and Jobs Act of 2017 (the “2017 Act”), which
was signed into law on December 22, 2017. The 2017 Act included a
reduction in the federal corporate tax rate to 21%. The favorable
impact of the reduction in the federal corporate tax rate was
partially offset by certain international tax provisions during
2018, including the Global Intangible Low-taxed Income
(“GILTI”) provisions and the mandatory repatriation of
undistributed foreign earnings, that negatively impacted the
effective income tax rate. In addition, the effective income tax
rate for 2018 was favorably impacted by the research and
development tax credit.
F-22
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
In
response to the 2017 Act, the SEC issued Staff Accounting Bulletin
No. 118 ("SAB 118") which allowed issuers to recognize provisional
estimates of the impact of the 2017 Act in their financial
statements and adjust in the period in which the estimate becomes
finalized, or in circumstances where estimates cannot be made, to
disclose and recognize within a one-year measurement period. At
December 31, 2017 and throughout 2018, the Company applied the
guidance described under SAB 118 and recorded provisional estimates
for the effects of the 2017 Act in connection with the following:
one-time transition tax, re-measurement of deferred tax assets and
liabilities, tax on GILTI and the impact of the 2017 Act on the
Company’s permanent reinvestment assertions with respect to
its undistributed earnings. As of December 31, 2018, the Company
has now completed the accounting for the income tax effects of the
2017 Act. As a result, the Company recognized additional tax
expense of $76,000 which consisted of additional income tax expense
associated with the adjustment to the Company’s original
provisional charges recorded in connection with the one-time
transition tax and the current year impact of the GILTI
provisions.
The
2017 Act subjects a US shareholder to tax on GILTI earned by
certain foreign subsidiaries. The FASB Staff Q&A, Topic 740,
No. 5, Accounting for Global Intangible Low-Taxed Income, states
that an entity can make an accounting policy election to either
recognize deferred taxes for temporary basis differences expected
to reverse as GILTI in future years or to provide for the tax
expense related to GILTI in the year the tax is incurred as a
period expense only. The Company has elected to account for GILTI
as a period cost in the year the tax is incurred.
Components of net
deferred income tax assets, including a valuation allowance, are as
follows at December 31 (in 000's):
|
|
2018
|
2017
|
Change
|
|
Assets:
|
|
|
|
|
Net operating
loss
|
$
25
|
$
69
|
$
(44
)
|
|
Deferred
revenue
|
256
|
122
|
134
|
|
Allowance for
doubtful accounts
|
109
|
88
|
21
|
|
Stock
options
|
116
|
184
|
(68
)
|
|
Basis difference in
intangible assets
|
16
|
9
|
5
|
|
Prepaid D&O
Insurance
|
—
|
2
|
(2
)
|
|
Foreign tax credits
carryforward
|
1,181
|
1,181
|
—
|
|
Total deferred tax
asset
|
1,703
|
1,655
|
32
|
|
Less: Valuation
allowance
|
(1,181
)
|
(1,181
)
|
—
|
|
Total net deferred
tax asset
|
522
|
474
|
32
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Prepaid
expenses
|
(11
)
|
(35
)
|
24
|
|
Capitalized
software
|
(285
)
|
(475
)
|
162
|
|
Purchase of
intangibles
|
(630
)
|
(534
)
|
216
|
|
Other
|
(9
)
|
(3
)
|
(5
)
|
|
Total deferred tax
liability
|
(935
)
|
(1,047
)
|
128
|
|
|
|
|
|
|
Total net deferred
tax asset / (liability)
|
$
(413
)
|
$
(573
)
|
$
160
|
A
valuation allowance of $1,181,000 was recorded against deferred tax
assets as of December 31, 2018 and 2017. The valuation allowance
relates to a full valuation allowance on the remaining foreign tax
credit carryforwards. For the year ended December 31, 2017, the
Company released a portion of the valuation allowance in the amount
of $13,000 attributable to the utilization of foreign net operating
losses, which constituted a final utilization and release of the
valuation allowance for foreign net operating losses.
F-23
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
As of
each reporting date, the Company’s management considers new
evidence, both positive and negative, that could impact
management’s view with regard to future realization of
deferred tax assets. In assessing the recoverability 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 is more likely than not that the deferred
tax assets attributable to 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
in the appropriate basket to use the foreign tax
credits.
The
Company had no unrecognized tax benefits as of December 31, 2018 or
December 31, 2017. Interest and, if applicable, penalties are
recognized related to unrecognized tax benefits in income tax
expense. There are no accruals for interest and penalties at
December 31, 2018.
Undistributed
earnings of the Company’s foreign subsidiaries are
insignificant as of December 31, 2018. With the enactment of the
2017 Act, the Company does not consider any of its foreign earnings
as indefinitely reinvested.
The
Company is subject to income taxation by both federal and state
taxing authorities. Income tax returns for the years ended December
31, 2017, 2016 and 2015 are open to audit by federal and state
taxing authorities.
Note 12: Employee Benefit Plans
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 $25,000 and $20,000 during the years ended December 31,
2018 and 2017, 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
$4,000 and $5,000 for the year ended December 31, 2018 and 2017,
respectively.
Note 13: Subsequent Events
On
January 3, 2019, we acquired the VisualWebcaster Platform
(“VWP”) from Onstream Media Corporation for $2,788,000
cash paid at closing. VWP is a leading cloud-based earnings
webcast, webinar and training platform that delivers live and
on-demand streaming of events to audiences of all sizes. VWP allows
customers to create, produce and deliver events, which we believe
will integrate nicely into Platform
id.
Although the transaction
was structured as an asset purchase, the initial purchase
accounting analysis has determined the acquisition should be
accounted for under the acquisition method of accounting for
business combinations in accordance with FASB ASC 805, Business
Combinations, which requires, among other things, that the assets
acquired and liabilities assumed be recognized at their fair values
as of the acquisition date.
F-24
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. Exhibits. To Be UpdatedNote 1: Description, Background and Basis Of OperationsNote 2: Summary Of Significant Accounting PoliciesNote 3: Fixed AssetsNote 4: Recent AcquisitionsNote 5: Goodwill and Other Intangible AssetsNote 6: Line Of CreditNote 7: EquityNote 8: Stock Options and Restricted Stock UnitsNote 9: Commitments and ContingenciesNote 10: RevenuesNote 11: Income TaxesNote 12: Employee Benefit PlansNote 13: Subsequent Events