ACCESS NEWSWIRE INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
———————
FORM
10-Q
———————
☑
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly
period ended: September 30, 2016
or
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition
period from: _____________ to _____________
ISSUER
DIRECT CORPORATION
(Exact name of
registrant as specified 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
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(Commission
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(I.R.S. Employer
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of Incorporation)
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File Number)
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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)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
———————
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 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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
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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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☐
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Smaller reporting
company
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☑
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act) Yes
☐
No
☑
Indicate the number
of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date 2,859,944 shares of
common stock were issued and outstanding as of November 3,
2016.
TABLE
OF CONTENTS
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1
FINANCIAL
STATEMENTS
ISSUER
DIRECT CORPORATION
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September
30,
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December 31,
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2016
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2015
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ASSETS
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(unaudited)
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Current
assets:
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Cash and cash
equivalents
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$
5,135,430
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$
4,215,145
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Accounts receivable
(net of allowance for doubtful accounts of $474,806 and $396,884,
respectively)
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1,323,109
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1,253,628
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Other current
assets
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386,110
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252,468
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Total current
assets
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6,844,649
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5,721,241
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Capitalized
software (net of accumulated amortization of $155,406 and $25,133,
respectively)
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1,696,871
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723,962
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Fixed assets (net
of accumulated depreciation of $302,214 and $262,797,
respectively)
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170,995
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175,497
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Deferred income tax
asset - noncurrent
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-
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97,974
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Other long-term
assets
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18,253
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18,301
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Goodwill
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2,241,872
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2,241,872
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Intangible assets
(net of accumulated amortization of $3,219,125 and $2,512,704,
respectively)
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1,484,875
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2,191,296
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Total
assets
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$
12,457,515
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$
11,170,143
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$
288,488
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$
385,285
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Accrued
expenses
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687,835
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995,999
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Income taxes
payable
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195,164
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199,613
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Deferred
revenue
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940,065
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822,481
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Total current
liabilities
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2,111,552
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2,403,378
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Deferred income tax
liability
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211,124
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94,566
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Other long-term
liabilities
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120,438
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113,222
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Total
liabilities
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2,443,114
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2,611,166
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Commitments and
contingencies
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Stockholders'
equity:
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Preferred stock,
$0.001 par value, 30,000,000 shares authorized, no shares issued
and outstanding as of September 30, 2016 and December 31,
2015.
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-
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-
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Common stock $0.001
par value, 100,000,000 shares authorized, 2,847,444 and 2,785,044
shares issued and outstanding as of September 30, 2016 and December
31, 2015, respectively.
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2,847
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2,785
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Additional paid-in
capital
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8,912,428
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8,202,605
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Other accumulated
comprehensive loss
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(24,693
)
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(35,154
)
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Retained
earnings
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1,123,819
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388,741
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Total stockholders' equity
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10,014,401
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8,558,977
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Total
liabilities and stockholders’ equity
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$
12,457,515
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$
11,170,143
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The accompanying notes are an integral part of these unaudited
financial statements.
2
ISSUER
DIRECT CORPORATION
(UNAUDITED)
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For the three
months ended
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For the nine months
ended
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September
30,
2016
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September
30,
2015
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September
30,
2016
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September
30,
2015
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Revenues
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$
2,872,983
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$
2,787,105
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$
9,284,346
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$
8,937,276
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Cost of
services
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739,431
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843,007
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2,333,234
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2,655,425
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Gross
profit
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2,133,552
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1,944,098
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6,951,112
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6,281,851
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Operating costs and
expenses:
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General and
administrative
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839,364
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759,843
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2,481,620
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2,546,966
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Sales and
marketing
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651,606
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519,826
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1,947,305
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1,730,446
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Product
development
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132,627
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63,297
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291,519
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256,393
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Depreciation and
amortization
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215,666
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268,775
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779,813
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800,515
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Total operating
costs and expenses
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1,839,263
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1,611,741
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5,500,257
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5,334,320
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Operating
income
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294,289
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332,357
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1,450,855
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947,531
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Other income
(expense):
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Other income
(expense), net
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(7,418
)
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-
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74,634
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-
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Interest income
(expense), net
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1,036
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(137,150
)
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2,993
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(623,025
)
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Total other income
(expense)
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(6,382
)
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(137,150
)
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77,627
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(623,025
)
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Income before
taxes
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287,907
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195,207
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1,528,482
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324,506
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Income
tax benefit (expense)
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(93,029
)
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(58,477
)
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(483,677
)
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113,917
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Net
income
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$
194,878
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$
136,730
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$
1,044,805
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$
438,423
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Income per share
– basic
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$
0.07
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$
0.05
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$
0.37
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$
0.18
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Income per share -
fully diluted
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$
0.07
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$
0.05
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$
0.36
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$
0.18
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Weighted average
number of common shares outstanding - basic
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2,836,066
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2,515,767
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2,806,566
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2,390,524
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Weighted average
number of common shares outstanding - fully
diluted
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2,936,149
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2,552,586
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2,898,973
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2,427,886
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The accompanying notes are an integral part of these unaudited
financial statements.
3
ISSUER
DIRECT CORPORATION
(UNAUDITED)
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For the three
months ended
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For the nine months
ended
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September
30,
2016
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September
30,
2015
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September
30,
2016
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September
30,
2015
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Net
income
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$
194,878
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$
136,730
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$
1,044,805
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$
438,423
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Foreign
currency translation adjustment
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(2,146
)
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5,709
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10,461
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7,087
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Comprehensive
income
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$
192,732
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$
142,439
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$
1,055,266
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$
445,510
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The accompanying notes are an integral part of these unaudited
financial statements.
4
ISSUER
DIRECT CORPORATION
(UNAUDITED)
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Nine months
ended
September
30,
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2016
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2015
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Cash
flows from operating activities:
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Net
income
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$
1,044,805
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$
438,423
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Adjustments to
reconcile net income to net cash
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provided
by operating activities:
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Depreciation
and amortization
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899,928
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800,515
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Bad
debt expense
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190,690
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136,339
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Deferred
income taxes
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72,564
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(106,571
)
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Stock-based
compensation expense
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460,148
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418,865
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Non-cash
interest expense
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-
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535,397
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Changes in
operating assets and liabilities:
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Decrease
(increase) in accounts receivable
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(273,557
)
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421,412
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Decrease
(increase) in other assets
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(134,564
)
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(295,643
)
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Increase
(decrease) in accounts payable
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(94,946
)
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122,481
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Increase
(decrease) in accrued expenses
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(281,322
)
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(168,497
)
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Increase
(decrease) in deferred revenue
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136,103
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8,474
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Net cash provided
by operating activities
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2,019,849
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2,311,195
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Cash flows from investing activities:
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Capitalized
software
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(750,938
)
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(337,401
)
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Purchase of fixed
assets
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(58,732
)
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(45,306
)
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Net cash used in
investing activities
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(809,670
)
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(382,707
)
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Cash flows from financing activities:
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Proceeds from
exercise of stock options, net of income taxes
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33,294
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21,075
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Tax benefit on
stock-based compensation awards
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-
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18,709
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Payment of
dividend
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(309,727
)
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-
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Net cash provided
by (used in) financing activities
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(276,433
)
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39,784
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Net change in Cash
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933,746
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1,968,272
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Cash –
beginning
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4,215,145
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1,721,343
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Currency
translation adjustment
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(13,461
)
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1,965
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Cash –
ending
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$
5,135,430
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$
3,691,580
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Supplemental
disclosure for non-cash investing and financing
activities
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Cash
paid for interest
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$
-
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$
85,870
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Cash
paid for income taxes
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$
434,595
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$
265,851
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Non cash
activities
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Stock-based
compensation - capitalized software
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$
352,244
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$
188,144
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Conversion of note payable to common stock
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$
-
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$
1,666,673
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The accompanying notes are an integral part of these unaudited
financial statements.
5
ISSUER
DIRECT CORPORATION
(UNAUDITED)
The unaudited
interim consolidated balance sheet as of September 30, 2016 and
statements of operations, comprehensive income, and cash flows for
the three and nine-month periods ended September 30, 2016 and 2015
included herein, have been prepared in accordance with the
instructions for Form 10-Q under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and Article
10 of Regulation S-X under the Exchange Act. In the opinion of
management, they include all normal recurring adjustments necessary
for a fair presentation of the financial statements. Results of
operations reported for the interim periods are not necessarily
indicative of results for the entire year. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States ("US GAAP") have been condensed or
omitted pursuant to such rules and regulations relating to interim
financial statements. The interim financial information should be
read in conjunction with the 2015 audited financial statements of
Issuer Direct Corporation (referred to herein as the
“Company”, “We”, or “Our”)
filed on our Form 10-K.
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.
Earnings
Per Share (EPS)
We calculate
earnings per share in accordance with Financial Accounting
Standards Board (FASB) ASC No. 260 – EPS, which requires that
basic net income per common share be computed by dividing net
income for the period by the weighted average number of common
shares outstanding during the period. Diluted net income per share
is computed by dividing the net income for the period by the
weighted average number of common and dilutive common equivalent
shares outstanding during the period. Shares issuable
upon the exercise of stock options totaling 184,417 were excluded
in the computation of diluted earnings per common share during both
the three and nine-month periods ended September 30, 2016, because
their impact was anti-dilutive. Shares issuable upon the
exercise of stock options and restricted stock units totaling
192,750 and 290,250 were excluded in the computation of diluted
earnings per common share during the three and nine-month periods
ended September 30, 2015, respectively, because their impact was
anti-dilutive.
Revenue
Recognition
We recognize
revenue in accordance with SEC Staff Accounting
Bulletin No. 104, “Revenue Recognition,”
which requires that: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been
rendered, (iii) the sales price is fixed or determinable, and
(iv) collectability is reasonably assured. We recognize
revenue when services are rendered and/or delivered, where
collectability is probable. Deferred revenue primarily consists of
advanced billings for annual service contracts, and is recognized
throughout the year as the services are performed.
Allowance
for Doubtful Accounts
We provide an
allowance for doubtful accounts, which is based upon a review of
outstanding receivables as well as historical collection
information. Credit is granted on an unsecured basis. In
determining the amount of the allowance, management is required to
make certain estimates and assumptions. The allowance is made up of
specific reserves, as deemed necessary, on client account balances,
and a reserve based on our historical
experience.
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, the valuation of goodwill and intangible assets, deferred
tax assets, and stock-based compensation. Actual results
could differ from those estimates.
6
Income
Taxes
We comply with FASB
ASC No. 740 – Income Taxes which requires an asset and
liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets
and liabilities that will result in future taxable or deductible
amounts based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amounts expected to be
realized. For any uncertain tax positions, we recognize
the impact of a tax position, only if it is more likely than not of
being sustained upon examination, based on the technical merits of
the position. Our policy regarding the classification of interest
and penalties is to classify them as income tax expense in our
financial statements, if applicable. At the end of each
interim period, we estimate the effective tax rate we expect to be
applicable for the full year and this rate is applied to our
results for the interim year-to-date period and then adjusted for
any discrete period items.
Capitalized Software
In accordance with
FASB ASC No. 350 – Intangibles – Goodwill and Other,
costs incurred to develop our cloud-based platform products and
disclosure management system components are capitalized when the
preliminary project phase is complete, management commits to fund
the project and it is probable the project will be completed and
used for its intended purposes. Once the software is substantially
complete and ready for its intended use, the software is amortized
over its estimated useful life. Costs related to design
or maintenance of the software are expensed as
incurred. During the three and nine-month periods
ended September 30, 2016, the Company capitalized software
development costs of $317,113 and $1,103,182, respectively,
compared to $242,292 and $525,545 during the three and nine month
periods ended September 30, 2015, respectively. Included in
these amounts during the three and nine-month periods ended
September 30, 2016, were $84,556 and $352,244, respectively,
related to stock-based compensation, compared to $107,299 and
$188,144 during the three and nine-month periods ended September
30, 2015. During the three and nine-month periods ended September
30, 2016, the Company recorded amortization expense of $50,753 and
$130,273, respectively, on software placed in service, a majority
of which is included in Cost of services on the Consolidated
Statements of Operations. There was no amortization during
the three and nine-month periods ended September 30,
2015.
Fair
Value Measurements
As of September 30,
2016 and December 31, 2015, we do not have any financial assets or
liabilities that are required to be, or that we elected to measure,
at fair value. We believe that the fair value of our
financial instruments, which consist of cash and cash equivalents,
accounts receivable, 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 loss until the entity is sold or
substantially liquidated.
Business Combinations, Goodwill and Intangible
Assets
We account for
business combinations under FASB ASC No. 805 – Business
Combinations and the related acquired intangible assets and
goodwill under FASB ASC No. 350 – Intangibles –
Goodwill and Other. The authoritative guidance for business
combinations specifies the criteria for recognizing and reporting
intangible assets apart from goodwill. We record the assets
acquired and liabilities assumed in business combinations at their
respective fair values at the date of acquisition, with any excess
purchase price recorded as goodwill. Goodwill is an asset
representing the future economic benefits arising from other assets
acquired in a business combination that are not individually
identified and separately recognized. Intangible assets consist of
client relationships, customer lists, software, technology and
trademarks that are initially measured at fair value. At
the time of the business combination, the trademarks were
considered an indefinite-lived asset and, as such, were not
amortized as there was no foreseeable limit to cash flows generated
from them, however, in the prior year, management determined
certain trademarks associated with PrecisionIR (PIR) to be definite
lived assets, and as such, are amortized over their estimated
useful life. The goodwill and intangible assets are assessed
annually for impairment, or whenever conditions indicate the asset
may be impaired, and any such impairment will be recognized in the
period identified. The client relationships, customer lists,
software and technology are amortized over their estimated useful
lives.
Comprehensive
Income
Comprehensive income consists of net income and other comprehensive
income (loss) related to changes in the cumulative foreign currency
translation adjustment.
Advertising
The Company
expenses advertising costs as incurred, except for direct-response
advertising, which is capitalized and amortized over its expected
period of future benefits.
7
Stock-based
compensation
We account for
stock-based compensation under FASB ASC No. 718 –
Compensation – Stock Compensation. The authoritative guidance
for stock compensation requires that companies estimate the fair
value of share-based payment awards on the date of the grant using
an option-pricing model. The cost is to be recognized over the
period during which an employee is required to provide service in
exchange for the award. The authoritative guidance for stock
compensation also requires the benefit of tax deductions in excess
of recognized compensation expense to be reported as a financing
cash flow, rather than as an operating cash flow as prescribed
under previous accounting rules. This requirement reduces net
operating cash flows and increases net financing cash flows in
periods subsequent to adoption, only if excess tax benefits
exist.
Newly Adopted Pronouncements
The FASB has issued Accounting Standards Update
("ASU") No. 2015-16, Business Combinations (Topic 805): Simplifying
the Accounting for Measurement-Period
Adjustments
.
The amendments in ASU 2015-16 require
that an acquirer recognize adjustments to estimated amounts that
are identified during the measurement period in the reporting
period in which the adjustment amounts are determined. The
amendments require that the acquirer record, in the same
period’s financial statements, the effect on earnings of
changes in depreciation, amortization, or other income effects, if
any, as a result of the change to the estimated amounts, calculated
as if the accounting had been completed at the acquisition date.
The amendments also require an entity to present separately on the
face of the income statement or disclose in the notes the portion
of the amount recorded in current-period earnings by line item that
would have been recorded in previous reporting periods if the
adjustment to the estimated amounts had been recognized as of the
acquisition date. The amendments in this ASU were effective for
public business entities for fiscal years beginning after December
15, 2015, including interim periods within those fiscal years. The
amendments should be applied prospectively to adjustments to
provisional amounts that occur after the effective date with
earlier application permitted for financial statements that have
not been issued. ASU 2015-16 did not have a significant impact on
our financial statements.
The FASB has issued
ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Fees
Paid in a Cloud Computing Arrangement. The amendments in ASU
2015-05 provide guidance to customers about whether a cloud
computing arrangement includes a software license. If a cloud
computing arrangement includes a software license, then the
customer should account for the software license element of the
arrangement consistent with the acquisition of other software
licenses. If a cloud computing arrangement does not include a
software license, the customer should account for the arrangement
as a service contract. The amendments do not change the accounting
for a customer’s accounting for service contracts. As a
result of the amendments, all software licenses within the scope of
Subtopic 350-40 will be accounted for consistent with other
licenses of intangible assets. ASU 2015-05 is effective for
public entities for annual periods, including interim periods
within those annual periods, beginning after December 15, 2015. ASU
2015-05 did not have a significant impact on our financial
statements.
The FASB has issued
ASU 2015-01, Income Statement - Extraordinary and Unusual Items
(Subtopic 225-20): Simplifying Income Statement Presentation by
Eliminating the Concept of Extraordinary Items. The FASB
issued this ASU as part of its initiative to reduce complexity in
accounting standards. The objective of the simplification
initiative is to identify, evaluate, and improve areas of US GAAP
for which cost and complexity can be reduced while maintaining or
improving the usefulness of the information provided to the users
of financial statements. The amendments in ASU 2015-01
are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2015. ASU 2015-01
did not have a significant impact on our financial
statements.
The FASB has issued
ASU 2014-16, Derivatives and Hedging (Topic 815): Determining
Whether the Host Contract in a Hybrid Financial Instrument Issued
in the Form of a Share Is More Akin to Debt or to
Equity. The amendments in this ASU do not change the
current criteria in US GAAP for determining when separation of
certain embedded derivative features in a hybrid financial
instrument is required. The amendments clarify how current US GAAP
should be interpreted in evaluating the economic characteristics
and risks of a host contract in a hybrid financial instrument that
is issued in the form of a share. Specifically, the amendments
clarify that an entity should consider all relevant terms and
features, including the embedded derivative feature being evaluated
for bifurcation, in evaluating the nature of the host contract.
Furthermore, the amendments clarify that no single term or feature
would necessarily determine the economic characteristics and risks
of the host contract. Rather, the nature of the host contract
depends upon the economic characteristics and risks of the entire
hybrid financial instrument. The amendments in this ASU
are effective for public business entities for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2015. ASU 2014-16 did not have a significant impact on our
financial statements.
8
The FASB has
issued ASU 2014-12, Compensation – Stock Compensation (Topic
718): Accounting for Share-Based Payments When the Terms of an
Award Provide That a Performance Target Could Be Achieved after the
Requisite Service Period. The issue is the result of a
consensus of the FASB Emerging Issues Task Force
(EITF). The amendments in the ASU require that a
performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance
condition. A reporting entity should apply existing guidance in
Topic 718, Compensation – Stock Compensation, as it relates
to awards with performance conditions that affect vesting to
account for such awards. The performance target should not be
reflected in estimating the grant-date fair value of the
award. Compensation cost should be recognized in the
period in which it becomes probable that the performance target
will be achieved and should represent the compensation cost
attributable to the period(s) for which the requisite service has
already been rendered. If the performance target becomes probable
of being achieved before the end of the requisite service period,
the remaining unrecognized compensation cost should be recognized
prospectively over the remaining requisite service period. The
total amount of compensation cost recognized during and after the
requisite service period should reflect the number of awards that
are expected to vest and should be adjusted to reflect those awards
that ultimately vest. The requisite service period ends when the
employee can cease rendering service and still be eligible to vest
in the award if the performance target is achieved. The
amendments in this ASU are effective for annual periods and interim
periods within those annual periods beginning after December 15,
2015. ASU 2014-12 did not have a significant impact on our
financial statements.
Recent
Accounting Pronouncements
The FASB issued
ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments, which
provides cash flow statement classification guidance for: 1)
Debt prepayment or debt extinguishment costs; 2) Settlement of
zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective
interest rate of the borrowing; 3) Contingent consideration
payments made after a business combination; 4) Proceeds from the
settlement of insurance claims; 5) Proceeds from the settlement of
corporate-owned life insurance policies, including bank-owned life
insurance policies; 6) Distributions received from equity method
investees; 7) beneficial interests in securitization transactions;
and 8) Separately identifiable cash flows and application of the
Predominance Principle. This is effective for public business
entities for fiscal years beginning after December 15, 2017, and
interim periods within those years. Early application is
permitted, including adoption in an interim period. The
company does not expect this pronouncement to have a significant
impact on its financial statements.
The FASB issued
ASU 2016-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments,
which, among other things, requires the measurement of all expected
credit losses for financial assets held at the reporting date to be
based on historical experience, current conditions, and reasonable
and supportable forecasts. Many of the loss estimation techniques
applied today will still be permitted, although the inputs to those
techniques will change to reflect the full amount of expected
credit losses. This is effective for SEC filers for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2019. The company does not expect this
pronouncement to have a significant impact on its financial
statements.
The FASB issued ASU
2016-09, Improvements to Employee Share-Based Payment Accounting,
which simplifies several aspects of the accounting for share-based
payment award transactions including (a) income tax consequences;
(b) classification of awards as either debt or equity liabilities;
and (c) classification on the statement of cash flows. The
amendments are effective for public business entities for annual
periods beginning after December 15, 2016, and interim periods
within those annual periods. Early adoption is permitted for
any entity in any interim or annual period. If an entity
early adopts the amendments in an interim period, any adjustment
should be reflected as of the beginning of the fiscal year that
includes the interim period. Additionally, as a reminder, an
entity that elects to early adopt the new guidance must adopt all
of the amendments in the same period. The Company is currently in
the process of evaluating the impact that this new ASU will have on
its financial statements.
The FASB's new
leases standard ASU 2016-02 Leases (Topic 842) was issued on
February 25, 2016. ASU 2016-02 is intended to improve financial
reporting about leasing transactions. The ASU affects all companies
and other organizations that lease assets such as real estate,
airplanes, and manufacturing equipment. The ASU will require
organizations that lease assets referred to as
“Lessees” to recognize on the balance sheet the assets
and liabilities for the rights and obligations created by those
leases. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial statements. Under the new guidance, a lessee will be
required to recognize assets and liabilities for leases with lease
terms of more than 12 months. Consistent with current US GAAP, the
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike
current US GAAP which requires only capital leases to be recognized
on the balance sheet the new ASU will require both types of leases
(i.e. operating and capital) to be recognized on the balance sheet.
The FASB lessee accounting model will continue to account for both
types of leases. The capital lease will be accounted for in
substantially the same manner as capital leases are accounted for
under existing US GAAP. The operating lease will be accounted for
in a manner similar to operating leases under existing US GAAP,
except that lessees will recognize a lease liability and a lease
asset for all of those leases. Public companies will be
required to adopt the new leasing standard for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2018. For calendar year-end public companies, this means
an adoption date of January 1, 2019 and retrospective application
to previously issued annual and interim financial statements for
2018, however, early adoption is permitted. Lessees with a large
portfolio of leases are likely to see a significant increase in
balance sheet assets and liabilities. The Company currently has one
lease on its corporate facilities which ends October 31,
2019. Absent any renewal of the lease or new leases entered
into before January 1, 2019, the Company will be required to record
a right-to-use asset and corresponding lease liability associated
with the remaining lease payments beginning with the first interim
period of 2019. This will increase both balance sheet assets
and liabilities, however will not have a significant impact
on the income statement or affect any covenant
calculations.
The FASB has issued
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and
several updates to the ASU. ASU 2014-09 requires revenue
recognition to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services. ASU 2014-09 sets forth a new revenue recognition model
that requires identifying the contract, identifying the performance
obligations, determining the transaction price, allocating the
transaction price to performance obligations and recognizing the
revenue upon satisfaction of performance obligations. The
amendments in the ASU can be applied either retrospectively to each
prior reporting period presented or retrospectively with the
cumulative effect of initially applying the update recognized at
the date of the initial application along with additional
disclosures. The Company is currently evaluating the impact of ASU
2014-09 as well as the additional updates, which are currently
effective for the Company in our year beginning on January 1,
2018.
9
2014 Equity Incentive Plan
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 September 30,
2016, 248,500 awards had been granted under the 2014
Plan.
The following table
summarizes information about stock options outstanding and
exercisable at September 30, 2016:
|
|
Options
Outstanding
|
Options
Exercisable
|
||
|
Exercise Price
Range
|
Number
|
Weighted Average
Remaining Contractual Life (in Years)
|
Weighted Average
Exercise Price
|
Number
|
|
$
0.01 - $1.00
|
12,850
|
5.31
|
$
0.01
|
12,850
|
|
$
1.01 - $3.00
|
1,000
|
4.65
|
$
1.70
|
1,000
|
|
$
3.01 - $4.00
|
11,000
|
5.50
|
$
3.33
|
11,000
|
|
$
4.01 - $8.00
|
102,500
|
4.86
|
$
7.67
|
72,500
|
|
$
8.01 - $9.00
|
30,000
|
1.89
|
$
8.25
|
30,000
|
|
$
9.01 - $10.00
|
11,917
|
8.24
|
$
9.26
|
6,167
|
|
$
10.01 - $13.49
|
40,000
|
2.44
|
$
13.49
|
25,000
|
|
Total
|
209,267
|
4.23
|
$
8.23
|
158,517
|
As of September 30,
2016, the Company had unrecognized stock compensation related to
the options of $377,974.
On January 1, 2016,
the Company granted 38,500
restricted stock
units with an intrinsic value of $5.80 to certain employees of the
Company and on January 21, 2016, the Company granted 50,000
restricted stock units with an intrinsic value of $4.88 to certain
members of the Board of Directors for serving on the Strategic
Advisory Committee. The restricted stock units vest one-third
annually over three years. As of September 30, 2016, 7,000
restricted stock units granted on January 1, 2016, were
forfeited.
During the three
and nine-month periods ended September 30, 2016, 12,500 and 55,000
restricted stock units, respectively, with an average intrinsic
value of $7.35 per share, vested upon the achievement of certain
milestones, a majority of which, related to the development of the
Company’s cloud-based disclosure reporting software. During
the three and nine-month periods ended September 30, 2016, the
Company capitalized a total of $73,350 and $315,450, respectively,
related to these restricted stock units, which are included in
capitalized software on the Consolidated Balance Sheet. As of
September 30, 2016, there was $423,930 of unrecognized compensation
cost related to our unvested restricted stock units, which will be
recognized through 2019. A portion of this is expected to be
capitalized as capitalized software.
We recognized
income tax expense of ($93,029) and ($483,677) for the three and
nine-month periods ended September 30, 2016, respectively, compared
to income tax expense of ($58,477) and income tax benefit of
$113,917 during the same periods of 2015. At the end of each
interim period, we estimate the effective tax rate we expect to be
applicable for the full fiscal year and this rate is applied to our
results for the year-to-date period, and then adjusted for any
discrete period items. The variation between the Company’s
estimated annual effective tax rate and the US Statutory rate of
34% is due primarily to a partial release of the valuation
allowance, foreign rate differentials, state income taxes and
non-cash interest.
During the
nine-month period ended September 30, 2016 and 2015, the Company
released $78,400 and $210,370 of its valuation allowance related to
federal and state net operating losses, which resulted in a
year-to-date net benefit of $72,016 and $210,370,
respectively. The tax benefits from US net operating
losses that were previously reserved were acquired as part of the
acquisition of PIR. At the date of acquisition, management
believed it was more likely than not that the benefits would not be
used due to the uncertainty of future profitability and also due to
statutory limitations on the amount of net operating losses that
can be carried forward in an acquisition. Each quarter, the Company
performs a detailed analysis to determine its ability to utilize
the tax benefits and determined that portions of the tax benefits
could be used. Therefore, as of September 30, 2016, the Company has
released portions of the reserve related to tax years through 2016
based on current best estimates of future taxable income. As
of September 30, 2016, the balance of the deferred tax asset
related to the federal and state net operating losses is
$236,837.
For the three and
nine-month periods ended September 30, 2016 and 2015, we earned
revenues (as a percentage of total revenues) in the following
categories:
|
|
Three months
ended
|
Nine months
ended
|
||
|
|
September
30,
|
September
30,
|
||
|
Revenue Streams
|
2016
|
2015
|
2016
|
2015
|
|
Disclosure
management
|
20.5
%
|
20.8
%
|
19.6
%
|
22.3
%
|
|
Shareholder
communications
|
62.1
%
|
69.7
%
|
63.6
%
|
68.6
%
|
|
Platform &
technology
|
17.4
%
|
9.5
%
|
16.8
%
|
9.1
%
|
|
Total
|
100.0
%
|
100.0
%
|
100.0
%
|
100.0
%
|
10
No customers
accounted for more than 10% of the operating revenues or accounts
receivable during the three and nine-month periods ended September
30, 2016 or 2015. We did not have any customers that
comprised more than 10% of our total accounts receivable balance at
September 30, 2016 or December 31, 2015.
We do not believe
we had any financial instruments that could have potentially
subjected us to significant concentrations of credit risk. A
portion of our revenues are paid at the beginning of the month via
credit card or in advance by check, the remaining accounts
receivable amounts are generally due within 30 days.
Effective September
2, 2016, the Company renewed its Line of Credit, which reduced the
interest rate to LIBOR plus 2.50%. The amount of funds
available for future borrowings remained at $2,000,000. As of
September 30, 2016, the interest rate was 3.03% and the Company did
not owe any amounts on the Line of Credit.
On August 22, 2013,
in connection with and to partially fund the acquisition and
simultaneously with the acquisition of PIR, the Company entered
into a Securities Purchase Agreement (the “8%
Note Purchase Agreement”) relating to the sale of $2,500,000
aggregate principal amount of the Company’s 8% convertible
secured promissory note (“8% Note”) with Red Oak
Partners LP (“Red Oak”). The 8% Note paid interest on
each of March 31, June 30, September 30, and December 31, beginning
on September 30, 2013, at a rate of 8% per year. The maturity date
of the 8% Note was August 22, 2015. The 8% Note was secured by all
of the assets of the Company and was subordinated to the
Company’s obligations to its primary financial institution.
Furthermore, in connection with the 8% Note Purchase Agreement, a
partner of Red Oak was appointed to the Company’s Board of
Directors but subsequently resigned as a member of our Board of
Directors due to personal reasons and not as a result of a
disagreement with the Company on August 18, 2016, as disclosed in
the Current Report on Form 8-K filed with the SEC the same day. On
November 10, 2014, Red Oak assigned the 8% Note between the Red Oak
Fund, LP; Pinnacle Opportunities, LP; and the Red Oak Long Fund,
LP; all of which are under management by Red
Oak.
Beginning
immediately upon the date of issuance, Red Oak or its assignees had
the right to convert the 8% Note into shares of the Company’s
common stock at a conversion price of $3.99 per
share. On the date the Company entered into the 8% Note
Purchase Agreement, the Company’s stock price was $8.20 per
share, and therefore the Company assigned a value of $2,500,000 to
the common stock conversion feature and recorded this as debt
discount and additional paid-in capital. This instrument
also created a deferred tax liability of $1,000,000 that reduced
the value recorded as additional paid in capital, and therefore the
net amount recorded to stockholders' equity was
$1,500,000. The debt discount of $2,500,000 was
amortized over the two-year life of the loan as non-cash interest
expense.
On November 12,
2014, Red Oak converted $833,327 of principal and $23,369 of
accrued interest payable on the 8% Note into 214,710 shares of the
Company’s common stock at the conversion price of
$3.99. Following this transaction, the principal balance
of the note was $1,666,673. As a result of this
transaction, the company recorded $323,250 of non-cash interest
expense due to the acceleration of debt discount on the portion of
the 8% Note that was converted.
Effective August
22, 2015, upon the maturity of the 8% Note, Red Oak converted the
remaining $1,666,673 of principal into 417,712 shares of the
Company’s common stock at the conversion price of
$3.99. As a result of the final conversion, the Company no
longer has non-cash or cash interest expense associated with the 8%
Note.
During the three
and nine-month periods ended September 30, 2015, the Company
recorded non-cash interest expense of $118,728 and $535,397,
respectively. During the three and nine-month periods ended
September 30, 2015, the Company recorded cash interest expense of
$19,203 and $85,870, respectively.
We consider
ourselves to be in a single reportable segment under the
authoritative guidance for segment reporting, specifically a
disclosure management and targeted communications company for
publicly traded companies. Revenue is attributed to a particular
geographic region based on where the services are performed. The
following tables set forth revenues by domestic versus
international regions:
|
|
Three
months ended
|
Nine
months ended
|
||
|
|
September
30,
|
September
30,
|
||
|
Geographic Region
|
2016
|
2015
|
2016
|
2015
|
|
North
America
|
$
2,508,532
|
$
2,293,272
|
$
8,057,020
|
$
7,331,427
|
|
Europe
|
364,451
|
493,833
|
1,227,326
|
1,605,849
|
|
Total
|
$
2,872,983
|
$
2,787,105
|
9,284,346
|
$
8,937,276
|
On October 5, 2016, the Company's Board of Directors approved and
declared a quarterly cash dividend of $0.05 per share. The dividend
is payable on November 11, 2016, to stockholders of record as of
the close of business on October 24, 2016.
Effective October 1, 2016, the cash compensation for each of the
three outside members of the Company's Board of Directors was
increased to $3,000 per month due to the increased responsibilities
as a result of David Sandberg's resignation as an outside member of
the Board of Directors on August 18, 2016. The structure of
the compensation changed from a flat rate of $2,000 per month plus
additional compensation for serving on a committee to a flat rate
of $3,000 per month. Total monthly compensation to the Board did
not change.
11
The discussion of the financial condition and results of operations
of the Company set forth below should be read in conjunction with
the consolidated financial statements and related notes thereto
included elsewhere in this Form 10-Q. This Form 10-Q
contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Form 10-Q that
are not purely historical are forward-looking statements within the
meaning of Section 27a of the Securities Act and Section 21e of the
Exchange Act. When used in this Form 10-Q, or in the documents
incorporated by reference into this Form 10-Q, the words
“anticipate,”“believe,”“estimate,”“intend”
and “expect” and similar expressions are intended to
identify such forward-looking statements. Such forward-looking
statements include, without limitation, the statements regarding
the Company’s strategy, future sales, future expenses, future
liquidity and capital resources. All forward-looking statements in
this Form 10-Q are based upon information available to the
Company on the date of this Form 10-Q, and the Company assumes
no obligation to update any such forward-looking statements. The
Company’s actual results could differ materially from those
discussed in this Form 10-Q. Factors that could cause or
contribute to such differences (“Cautionary
Statements”) include, but are not limited to, those discussed
in Item 1. Business — “Risk Factors” and
elsewhere in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2015, which are incorporated by
reference herein and in this report. All subsequent written and
oral forward-looking statements attributable to the Company, or
persons acting on the Company’s behalf, are expressly
qualified in their entirety by the Cautionary
Statements.
Overview
Issuer Direct
Corporation and its subsidiaries are hereinafter collectively
referred to as “Issuer Direct”, the
“Company”, “We” or “Our” unless
otherwise noted. We are a Delaware corporation formed in
October 1988 under the name Docucon Incorporated. In
December 2007, we changed our name to Issuer Direct
Corporation. Our corporate offices are located at 500 Perimeter
Park Drive, Suite D, Morrisville, North Carolina,
27560.
Issuer Direct is a market leader and innovator of
disclosure
management solutions, shareholder communications tools and
cloud–based compliance technologies.
W
e
alleviate the complexity of maintaining compliance with our
integrated portfolio of products and services that enhance
companies' ability to efficiently produce and distribute their
financial and business communications both online and in
print.
The Company’s core technology platform
– the Disclosure Management System (DMS) – is a secure
cloud-based workflow compliance and communications system for
corporate issuers, mutual funds, and compliance
professionals.
We work with a
diverse client base in the financial services industry, including
brokerage firms, banks and mutual funds. We also sell
products and services to corporate issuers, professional firms,
such as investor relations and public relations, and the accounting
and the legal community. Corporate issuers and their constituents
utilize our cloud-based platform and related services from
document creation all the way to dissemination to regulatory
bodies, platforms and shareholders.
We report
our product and service revenue in three revenue
streams:
●
Disclosure
management,
●
Shareholder
communications and,
●
Platform and
technology
Our current brands
and products include the following:
●
Issuer
Direct
™
●
Investor
Network™
●
Accesswire™
●
Blueprint™
●
Classify™
●
iProxy
Direct
●
iR
Direct
●
Annual
Report Service (ARS)
●
Company
Spotlight
We announce
material financial information to our investors using our investor
relations website, Securities and Exchange Commission ("SEC")
filings, investor events, news and earnings releases, public
conference calls and webcasts. We use these channels as well
as social media to communicate with our investors and the public
about our company, our products and services, and other issues. It
is possible that the information we post on social media could be
deemed to be material information. Therefore, we encourage
investors, the media, and others interested in our company to
review the information we post on the social media channels listed
below. This list may be updated from time to time on our
investor relations website:
www.issuerdirect.com/about-us
www.facebook.com/issuerdirectcorporation
www.twitter.com/issuerdirect
www.linkedin.com/company/issuer-direct-corporation
www.issuerdirect.com/blog/
The contents of the
above websites are not intended to be incorporated by reference
into this quarterly report on Form 10-Q or in any other report or
document we file, and any reference to these websites are intended
to be inactive textual references only.
12
Disclosure
Management
Our disclosure
business consists of our traditional document conversion,
typesetting and pre-press design services, XBRL tagging services,
and the issuance of securities as it relates to our stock transfer
business. These services represent our disclosure offerings that
are regulated by the Securities and Exchange
Commission.
A portion of our
disclosure business also comes from strategic relationships, where
we manage the compliance functions for our partners’ clients.
Since we do not have the relationship with the end client, it is
difficult to predict the growth from this business. We have seen
some partner client attrition in the smaller cap space, due to
significant pricing pressure.
Shareholder
Communications
Our shareholder
communications offerings are centered around annual and quarterly
earnings events of a public company, which includes our press
release distribution, investor outreach and engagement services,
webcast teleconference services, investor hotline and our legacy
proxy and printing services. Many of these services are marketed
and bundled under annual agreements. Like our disclosure business,
our communications offerings help make up our proprietary
cloud-based platform. This platform has become a significant
competitive advantage when competing in the corporate issuer
marketplace.
Press Release Distribution
Our press release
platform, Accesswire, is a cost-effective FD (
Fair Disclosure
) news dissemination
service. We acquired the business on October 29,
2014. Accesswire is dependent upon several key partners
for news distribution, some of which are also partners that we rely
on for other shareholder communications services. A disruption in
any of these partnership relationships could have an adverse impact
on our business.
The Accesswire
business focuses on press release distribution for both private and
publicly held companies. We anticipate the press release business
to be an area where we will continue to add new clients throughout
2016 and beyond, and as such, we will continue to brand our press
release offerings under the name Accesswire, which we believe will
solidify our market position in the newswire
business.
Investor Outreach and Engagement
Our investor
outreach and engagement offering, known as the Annual Report
Service ("ARS"), was acquired from
PrecisionIR. The ARS business has existed for over 20 years
primarily as a physical hard copy delivery service of annual
reports and prospectuses globally for tens of thousands of
customers. As part of our integration with PrecisionIR during 2014,
we updated these legacy systems and integrated them into our
disclosure management platform. We intend to continue to operate a
portion of this legacy system as well as migrate the remaining
install base over to our new outreach and engagement offering we
now call Investor Network, which is a digital platform and outreach
engagement dataset. Portions of this legacy system are still
operational, specifically for those who opt to take advantage of
physical delivery of material.
Webcasting – Teleconference
There are over
5,000 companies in North America conducting earnings events that
include teleconference, webcast or both as part of their events.
Our platform incorporates each element of the earnings event
including earnings announcement, earnings press release, and SEC
Form 8-K filings. There are a handful of our competitors that can
offer this today, however, we believe our real-time event setup and
integrated approach offers a more effective way to manage the
process as well as attract an audience of investors.
Additionally, all webcasts and teleconferences are broadcast live
on our Investor Network properties, which allows our clients to
reach a broader audience.
We currently market
and sell our webcasting platforms and teleconference systems in
North America, United Kingdom, Sweden and Germany, the current
markets in which we have clients subscribing to our
platforms.
Investor Hotline
Our Investor
Hotline platform is an add-on product within our shareholder
communications business. A good percentage of our clients using
this service are Fortune 500 companies, which utilize our platform
to extend their corporate investor relations systems to and with
our shareholder delivery platform. This system delivers
notifications and documents to shareholders, institutions and to
industry partners, such as annual and quarterly reports, earnings
data, transcripts and other unique content from our issuer
clients.
Proxy – Printing and
Voting
Our proxy business
is marketed as a fully integrated, real-time voting platform for
our corporate issuers and their shareholders of record. This
platform
is utilized
for every annual meeting and or special meeting we manage for our
client base and offers both full-set mailing and notice of internet
availability options.
13
Platform and Technology
As the Company
continues its transition to a cloud-based subscription business, we
expect the platform and technology portion of our business to
continue to expand over the next several years. Leading this
transition are product subscriptions from each of our core
businesses, disclosure management and shareholder
communications.
In disclosure
management, Blueprint is our cloud-based document conversion,
editing and filing platform for corporate issuers seeking to
insource the document drafting, editing and filing processes.
Blueprint is available in both a secure public cloud within the
Company’s disclosure management system, as well as in a
private cloud for corporations and the legal community looking to
further enhance their internal document process. Blueprint includes
both the Edgar and XBRL process for corporate issuers, which leads
us to market this solution directly to public companies, mutual
funds and the compliance and legal community that serves the
industry.
Our belief is that
once fully marketed and as Blueprint sales begin to ramp, we will
see a negative impact on our legacy disclosure services business in
the future. However, the margins associated with our subscription
business compared to our services business are higher and align
with our long-term strategy, as such we believe Blueprint will have
a positive impact on our net income in the future.
In our shareholder
communications business, we expect to see the biggest change,
resulting from Classify – our buy-side, sell-side and media
targeting database and intelligence platform. This new
subscription-based platform is centered around both our shareholder
communications and news distribution businesses. We believe our
data-set will be an attractive option for both investor relations
and public relations firms and for corporate issuers looking for an
alternative to current products in the market, based on price and
flexibility, as well as data quality and quantity. Because this is
a new offering for Issuer Direct, which will complement other
products and services, we anticipate Classify will increase our
average revenue per user based on its competitive cloud licensing
options.
Additionally, our product roadmap includes further development of
both our Investor Network and Classify products that we will
continue to commercialize and bring to market during the last part
of 2016. These two new cloud-based products will be a key component
of our communications technology business. We expect the
proprietary data-set to generate revenues from the corporate
issuers initially then to the investment community thereafter. The
Investor Network is replacing the ARS and Company Spotlight brands
as we continue to transition this business from hard copy to
digital delivery and real-time engagement. This transition
continued during the first nine months of 2016, and will continue
for the remaining part of 2016, as further clients transition from
our legacy ARS to our new digital platforms.
In the
teleconference and webcasting space we are continuing to spend time
developing and integrating our current systems and processes with
our disclosure management system. The earnings event business is a
highly competitive space with the majority of the business being
driven from practitioners in the investor and communications firms.
We have performed well and expanded this business in 2015 and the
first nine months of 2016 by increasing the number of customers
licensing our webcasting software and believe that will continue
throughout the remainder of 2016.
14
Results of
Operations
Comparison of results of operations for the three and nine months
ended September 30, 2016 and 2015:
|
|
Three months
ended
|
Nine months
ended
|
||
|
|
September
30,
|
September
30,
|
||
|
Revenue Streams
|
2016
|
2015
|
2016
|
2015
|
|
Disclosure
management
|
|
|
|
|
|
Revenue
|
$
588,964
|
$
579,845
|
$
1,820,106
|
$
1,993,258
|
|
Gross
Margin
|
$
390,212
|
$
405,035
|
$
1,259,929
|
$
1,413,793
|
|
Gross
Margin %
|
66
%
|
70
%
|
69
%
|
71
%
|
|
|
|
|
|
|
|
Shareholder
communications
|
|
|
|
|
|
Revenue
|
$
1,782,963
|
$
1,941,792
|
$
5,902,042
|
$
6,131,529
|
|
Gross
Margin
|
$
1,334,023
|
$
1,318,173
|
$
4,390,147
|
$
4,196,560
|
|
Gross
Margin %
|
75
%
|
68
%
|
74
%
|
68
%
|
|
|
|
|
|
|
|
Platform
& technology
|
|
|
|
|
|
Revenue
|
$
501,056
|
$
265,468
|
$
1,562,198
|
$
812,489
|
|
Gross
Margin
|
$
409,317
|
$
220,890
|
$
1,301,036
|
$
671,498
|
|
Gross
Margin %
|
82
%
|
83
%
|
83
%
|
83
%
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Revenue
|
$
2,872,983
|
$
2,787,105
|
$
9,284,346
|
$
8,937,276
|
|
Gross
Margin
|
$
2,133,552
|
$
1,944,098
|
$
6,951,112
|
$
6,281,851
|
|
Gross
Margin %
|
74
%
|
70
%
|
75
%
|
70
%
|
Revenues
Total revenue
increased by $85,878, or 3%, to $2,872,983 during the three-month
period ended September 30, 2016, as compared to $2,787,105 during
the same period of 2015. Total revenue increased by $347,070,
or 4%, to $9,284,346 during the nine-month period ended September
30, 2016, as compared to $8,937,276 during the same period of
2015. It is important to note, included in our revenue for
the nine-month period ended September 30, 2016, is the benefit of
approximately $316,000 related to the reversal of an accrual of
unused postage credits related to ARS clients acquired from PIR,
which we recorded in the first quarter of 2016. However, this
reversal does not impact the results for the three-month period
ended September 30, 2016.
Disclosure
management revenue increased $9,119, or 2%, during the three-month
period ended September 30, 2016, as compared to the same period of
2015. The increase was a result of an increase in revenue
from our
transfer agent
business
due to an increase in corporate directives and
actions compared to the same period of the prior year. The
timing of these corporate directives and actions are difficult to
predict as they are controlled by our clients and the conditions of
the market and therefore fluctuate from quarter to quarter.
This increase was offset by continued declines in our traditional
Edgar and XBRL services as we continue to face pricing pressure and
experience client attrition in these markets. Disclosure
management revenue decreased $173,152, or 9%, during the nine-month
period ended September 30, 2016, compared to the same period of
2015 due to the aforementioned pricing pressure offset by an
increase in revenue from our transfer agent
business.
Shareholder
communications revenue decreased $158,829, or 8% and $229,487, or
4%, during the three and nine-month periods ended September 30,
2016, respectively, as compared to the same periods of 2015. The
decrease in shareholder communications revenue is due to a decline
in revenue associated with our hardcopy ARS service offerings as
issuers shift from hardcopy fulfillment to digital fulfillment or
elect not to continue with the service. Additionally,
customers have migrated from ARS to our Investor Network product,
resulting in a shift of approximately $90,000 and $330,000 of
revenue during the three and nine-month periods ended September 30,
2016, respectively, from shareholder communications to our platform
and technology revenue stream. These decreases were offset by
an increase in revenue from Accesswire, our press release platform,
which increased $233,218 and $626,032 during the three and
nine-month periods ended September 30, 2016, respectively, compared
to the same periods of 2015. Additionally, we experienced an
increase in revenue from our proxy printing and distribution
services for both the three and nine-month periods ended September
30, 2016, compared to the same periods of the prior year due to an
increase in the number of projects. Included in revenue for the
nine-month period ended September 30, 2016, is the benefit of
approximately $316,000 related to the reversal of an accrual of
unused postage credits related to ARS clients acquired from PIR,
which we recorded in the first quarter of 2016. However, this
reversal does not impact the results for the three-month period
ended September 30, 2016.
15
Platform and
technology revenue increased $235,588, or 89%, and $749,709, or
92%, during the three and nine-month periods ended September
30
, 2016,
respectively, as compared to the same periods of
2015. The increase is primarily due to the shift of ARS
customers to our Investor Network platform noted above as well as
increases in licensing of a majority of our other products,
including our transfer agent, IRDirect, iProxy, whistleblower,
Blueprint and Classify platforms
as we continue our
transition to a subscription model.
No customers
accounted for more than 10% of the operating revenues or accounts
receivable during the three and nine-month periods ended September
30, 2016 or 2015.
Revenue Backlog
At September 30,
2016, we have recorded deferred revenue of $940,065 that we expect
to recognize over the next twelve months, compared to $822,481 at
December 31, 2015. Deferred revenue primarily consists of advance
billings for annual service contracts for legacy ARS and our
cloud-based platforms.
Cost of services and gross profit
Cost of services
consists primarily of direct labor costs, third party
licensing, warehousing, logistics, print production materials,
postage, and outside services directly related to the delivery of
services to our customers. Cost of services decreased by
$103,576, or 12%, and $322,191, or 12%, during the three and
nine-month periods ended September 30, 2016, respectively, as
compared to the same periods of 2015. Overall gross margin
increased to 74%, or $2,133,552, during the three-month period
ended September 30, 2016, as compared to 70%, or $1,944,098 in the
same period of 2015.
Overall gross
margin increased to 75%, or $6,951,112, during the nine-month
period ended September 30, 2016, as compared to 70%, or $6,281,851
in the same period of 2015
. Excluding the benefit
associated with the release of the accrual related to unused
postage credits, gross margin for the nine-month period ended
September 30, 2016 would have been 74%.
We achieved margins
of 66% and 69% from our disclosure management services during the
three and nine-month periods ended September 30, 2016,
respectively, compared to margins of 70% and 71% during the same
periods of 2015. As previously discussed, we continued
to experience pricing pressure from our Edgar and XBRL services,
however, this was partially offset by incremental margin associated
with our transfer agent business.
Gross margins from
our shareholder communications services increased to 75% and 74%
during the three and nine-month periods ended September 30, 2016,
respectively, as compared to 68% during the same periods of
2015. Excluding the benefit associated with the release of
the unused postage credits, gross margins for the nine-month period
ended September 30, 2016 would have been 73%. The increase in gross
margin percentage is due to restructuring certain channel partner
agreements at the end of 2015 as well as from additional revenue
from our high-margin press release
business.
Gross margins from
platform and technology were 82% and 83% during the three and
nine-month periods ended September 30, 2016, respectively, as
compared to 83% in the same periods of 2015. Gross margins remained
consistent with the prior year as additional revenue was offset by
additional depreciation of capitalized software.
Operating expenses
General and administrative
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 increased
$79,521, or 10%, during the three-month period ended September 30,
2016, compared to the same period of the prior year. The
increase is primarily related to an increase in personnel expenses
and bad debt expense offset by a decrease in consulting
expenses. General and administrative expenses decreased
$65,346, or 3%, during the nine-month period ended September 30,
2016, respectively, as compared to the same period of 2015.
The
decrease was primarily due to decreases in consulting expenses and
professional fees, partially offset by increases in personnel
expenses, bad debt expense and franchise taxes.
As a percentage of
revenue, General and Administrative expenses were 29% and 27%
for the three and nine-month periods ended September 30, 2016,
respectively, compared to 27% and 28% for the same periods of
2015.
Sales and marketing
Sales and marketing
expenses consist primarily of salaries, stock-based compensation,
sales commissions, advertising expenses, and marketing expenses.
Sales and marketing expenses for the three and nine-month periods
ended September 30, 2016, increased by $131,780, or 25%, and
$216,859, or 13%, respectively, as compared to the same periods of
2015. This increase is due to an increase in sales
personnel costs due to an increase in headcount as well as an
increase in tradeshow expenses.
As a percentage of
revenue, sales and marketing expense increased to 23% and 21%
during the three and nine-month periods ended September 30, 2016,
respectively, compared to 19% during the same periods of the prior
year.
16
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 our DMS platform. Product
development costs increased $69,330, or 110%, and $35,126, or 14%,
during the three and nine-month periods ended September 30, 2016,
respectively, compared to the same periods in 2015. The
increase is the result of the Company increasing personnel
resources toward the development of its cloud-based platforms.
During the three and nine-month periods ended September 30, 2016,
the Company capitalized software development costs of $317,113 and
$1,103,182, respectively, compared to $242,292 and $525,545 during
the three and nine month periods ended September 30, 2015,
respectively.
Depreciation and amortization
Depreciation and
amortization expenses during the three and nine-month periods ended
September 30, 2016, decreased by $53,109, or 20%, and $20,702, or
3%, respectively, as compared to the same periods of 2015. The
decrease is primarily due to lower amortization of certain
intangible assets acquired in the PIR acquisition, which became
fully amortized during the three-month period ended September 30,
2016.
Other income (expense)
Other income
(expense)
Other income (expense) for the three and nine-month periods ended
September 30, 2016, is the result of a gain (loss) recorded on the
excess of the fair value of stock received, in lieu of cash, to
settle an outstanding receivable.
Interest income (expense), net
Interest income
(expense), net decreased $138,186 and $626,018 during the three and
nine-month periods ended September 30, 2016, respectively, compared
to the same period of 2015. The decrease is due to the final
conversion of $1,666,673 of principal payable on the 8% Note (See
Note 7 of the Consolidated Financial Statements) into 417,712
shares of the Company's common stock at the conversion price of
$3.99 on August 22, 2015. During the three and nine-month
periods ended September 30, 2015, the Company recorded non-cash
interest expense of $188,728 and $535,397, respectively.
During the three and nine-month periods ended September 30, 2015,
the Company recorded cash interest expense of $19,203, and $85,870,
respectively. As a result of the final conversion in 2015,
the Company no longer has any non-cash or cash interest expense
associated with the 8% Note.
Income tax benefit (expense)
We recognized
income tax expense of ($93,029) and ($483,677) for the three and
nine-month periods ended September 30, 2016, respectively, compared
to an income tax expense of ($58,477) and income tax benefit
of $113,917 during the same periods of 2015. At the end of each
interim period, we estimate the effective tax rate we expect to be
applicable for the full fiscal year and this rate is applied to our
results for the year-to-date period, and then adjusted for any
discrete period items. The variation between the
Company’s estimated annual effective tax rate and the US
Statutory rate of 34% is due primarily to a partial release of the
valuation allowance, foreign rate differentials, state income taxes
and non-cash interest.
During the
nine-month period ended September 30, 2016 and 2015, the Company
released $78,400 and $210,370 of its valuation allowance related to
federal and state net operating losses, which resulted in a
year-to-date net benefit of $72,016 and $210,370,
respectively. The tax benefits from US net operating
losses that were previously reserved were acquired as part of the
acquisition of PIR. At the date of acquisition, management
believed it was more likely than not that the benefits would not be
used due to the uncertainty of future profitability and also due to
statutory limitations on the amount of net operating losses that
can be carried forward in an acquisition. Each quarter, the Company
performs a detailed analysis to determine its ability to utilize
the tax benefits and determined that portions of the tax benefits
could be used. Therefore, as of September 30, 2016, the Company has
released portions of the reserve related to tax years through 2016
based on current best estimates of future taxable
income.
17
Net income
Net income was
$194,878 and $1,044,805 during the three and nine-month periods
ended September 30, 2016, respectively, compared to $136,730 and
$438,423 during the same periods of 2015.
During the three
and nine-month periods ended September 30, 2016, the Company
continued its transition to a cloud-based subscription model and
achieved higher gross margins by
lowering cost of
services and increasing revenue in high margin products.
Operating expenses increased as the Company increased headcount and
invested more on sales and marketing initiatives to drive revenue
from our cloud-based subscription model. Additionally,
interest expense
decreased as a result of the final conversion of the 8% Note during
2015, offset by an increase in income tax expense as the result of
the release of less valuation allowance compared to the prior
year. Additionally, the nine-month period ended September 30,
2016, included the benefit of approximately $316,000, before taxes,
related to the reversal of an accrual related to unused postage
credits related to ARS clients acquired from
PIR.
Liquidity
and Capital Resources
As of September 30,
2016, we had $5,135,430 in cash and cash equivalents and $1,323,109
in net accounts receivable. Current liabilities at September 30,
2016, totaled $2,111,552 including our accounts payable, deferred
revenue, accrued liabilities, income taxes payable and other
accrued expenses. At September 30, 2016, our current assets
exceeded our current liabilities by
$4,733,097.
Effective September
2, 2016, the Company renewed its Line of Credit, which reduced the
interest rate to LIBOR plus 2.50%. The amount of funds
available for future borrowings remained at $2,000,000.
The
Company did not owe any amounts on the Line of Credit at September
30, 2016.
We manage our cash
flow carefully with the intent to meet our obligations from cash
generated from operations, however, it is possible that we will
have to raise additional funds through the issuance of equity.
There can be no assurance that cash generated from operations will
be sufficient to fund our operating expenses, to allow us to pay
dividends, or meet our other obligations, and there is no assurance
that debt or equity financing will be available, or if available,
that such financing will be upon terms acceptable to
us.
2016
Outlook
The following statements and certain statements made elsewhere in
this document are based upon current expectations. 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 included in this report.
Overall, the demand
for our platforms continues to be stable in the majority of the
segments we serve. In a portion of our business, we will continue
to see demand shift from traditional printed and service-based
engagements to a cloud-based subscription model, as well as digital
distribution offerings. We are positioned well in this space to be
both competitive and agile to deliver these platforms to the market
at the same or higher gross margins than the previous
periods.
One of the
Company’s competitive strengths is that it has embraced cloud
computing early on in its strategy. Making the pivot to a
subscription model has been and will be key for the long-term
sustainable growth management expects from its new
platforms.
We will continue to
focus on the following key strategic initiatives during
2016:
●
Continued expansion of our sales
and marketing teams,
●
Significant technology advancements
and upgrades,
●
Profitable sustainable
growth,
●
Positive
cash flow from
operations,
●
Increased average revenue per
user,
●
Expanded customer
base,
●
Growth in our newswire
business
We believe there is
significant demand for our products among the large, middle and
small cap markets that are seeking to find better platforms and
tools to disseminate and communicate their respective messages, and
that we have the capacity to meet the demand.
We have spent and
will continue to spend a considerable amount of time and money
focused on our product sets, platforms and intellectual property
development through 2016. These developments are key to our overall
offerings in the market and are necessary to keep our competitive
advantages and sustain the next round of growth that management
believes it can achieve. If we are successful in this development
effort, we believe we can achieve increases in revenues per user as
well as higher gross margins as we move beyond 2016.
18
Off-Balance
Sheet Arrangements
We have no
off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources
that are material to stockholders.
QUANTITATIVE
AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.
Not
applicable
CONTROLS
AND PROCEDURES.
As of the end of
the period covered by this quarterly report on Form 10-Q, the
Company’s Chief Executive Officer and Chief Financial Officer
conducted an evaluation of the Company’s disclosure controls
and procedures (as defined in Rules 13a-15 and 15d-15 of the
Exchange Act). Based upon this evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer concluded that
the Company’s disclosure controls and procedures are
effective and have not changed since its most recent annual
report.
Changes
in Internal Control over Financial Reporting
We regularly review
our system of internal control over financial reporting to ensure
we maintain an effective internal control
environment. There were no changes in our internal
control over financial reporting that occurred during the period
covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
19
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.
ITEM
1A.
RISK FACTORS.
There have been no
material changes to our risk factors as previously disclosed in our
most recent 10-K filing.
None.
ITEM
3.
DEFAULTS UPON SENIOR
SECURITIES
.
None
.
ITEM
4.
MINE SAFETY DISCLOSURE.
Not
applicable
.
ITEM
5.
OTHER INFORMATION.
None.
ITEM
6.
EXHIBITS
.
(a) Exhibits.
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
|
|
|
Certification of
Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
Certification of
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
Certification of
Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
Certification of
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
|
|
|
|
101.INS
|
|
XBRL Instance
Document.**
|
|
|
101.SCH
|
|
XBRL Taxonomy
Extension Schema Document.**
|
|
|
101.CAL
|
|
XBRL Taxonomy
Calculation Linkbase Document.**
|
|
|
101.LAB
|
|
XBRL Taxonomy Label
Linkbase Document.**
|
|
|
101.PRE
|
|
XBRL Taxonomy
Presentation Linkbase Document.**
|
|
|
101.DEF
|
|
XBRL Taxonomy
Extension Definition Linkbase Document. **
|
_______________________________
|
*
|
filed or furnished
herewith
|
|
**
|
submitted
electronically herewith
|
20
Pursuant to the
requirements 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.
Date: November 3,
2016
|
|
ISSUER
DIRECT CORPORATION
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Brian R.
Balbirnie
|
|
|
|
|
Brian R.
Balbirnie
|
|
|
|
|
Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Steven
Knerr
|
|
|
|
|
Steven
Knerr
|
|
|
|
|
Chief Financial
Officer
|
|
|
|
|
|
|
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TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1. Basis Of PresentationNote 2. Summary Of Significant Accounting PoliciesNote 3: Stock Options and Restricted Stock UnitsNote 4: Income TaxesNote 5: Operations and ConcentrationsNote 6: Line Of CreditNote 7: Note Payable Related PartyNote 8: Geographical InformationNote 9: Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosuresabout Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosureItem 5. Other InformationItem 6. Exhibits