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: June 30, 2018
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,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer”, “smaller reporting
company” and "emerging growth company" in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
(Do not check if a smaller reporting
company)
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act) Yes
☐
No
☑
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date
3,106,772 shares of common stock were issued and outstanding as of
August 2, 2018.
TABLE OF CONTENTS
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2
I
SSUER DIRECT
CORPORATION
(in
thousands, except share and per share amounts)
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June 30,
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December 31,
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2018
|
2017
|
|
ASSETS
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(unaudited)
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Current
assets:
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|
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Cash
and cash equivalents
|
$
6,834
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$
4,917
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|
Accounts
receivable (net of allowance for doubtful accounts of $428 and
$425, respectively)
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1,642
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1,275
|
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Income
tax receivable
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534
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725
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Other
current assets
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189
|
193
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Total
current assets
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9,199
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7,110
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Capitalized
software (net of accumulated amortization of $898 and $497,
respectively)
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2,348
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2,749
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Fixed
assets (net of accumulated amortization of $417 and $388,
respectively)
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155
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145
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Other
long-term assets
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17
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18
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Goodwill
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4,070
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4,070
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Intangible
assets (net of accumulated amortization of $3,949 and $3,699,
respectively)
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2,608
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2,858
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Total assets
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$
18,397
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$
16,950
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$
356
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$
666
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Accrued
expenses
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653
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613
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Current
portion of note payable (See Note 3)
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288
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288
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Income
taxes payable
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68
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65
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Deferred
revenue
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1,273
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887
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Total
current liabilities
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2,638
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2,519
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Note
payable – long-term (net of discount of $57 and $70,
respectively) (See Note 3)
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583
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570
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Deferred
income tax liability
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565
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573
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Other
long-term liabilities
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56
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77
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Total liabilities
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3,842
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3,739
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Commitments
and contingencies
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Stockholders'
equity:
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Preferred
stock, $0.001 par value, 1,000,000 shares authorized, no shares
issued and outstanding as of June 30, 2018 and December 31, 2017,
respectively.
|
—
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—
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Common
stock $0.001 par value, 20,000,000 shares authorized, 3,103,370 and
3,014,494 shares issued and outstanding as of June 30, 2018 and
December 31, 2017, respectively.
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3
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3
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Additional
paid-in capital
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11,396
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10,400
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Other
accumulated comprehensive income
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1
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34
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Retained
earnings
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3,155
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2,774
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Total stockholders' equity
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14,555
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13,211
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Total liabilities and stockholders’ equity
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$
18,397
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$
16,950
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The
accompanying notes are an integral part of these unaudited
financial statements.
3
I
SSUER DIRECT
CORPORATION
(UNAUDITED)
(in
thousands, except share and per share amounts)
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For the Three
Months Ended
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For the Six
Months Ended
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||
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June
30,
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June
30,
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June
30,
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June
30,
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2018
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2017
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2018
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2017
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Revenues
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$
3,799
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$
3,443
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$
7,329
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$
6,298
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Cost of
revenues
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1,030
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909
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2,051
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1,655
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Gross
profit
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2,769
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2,534
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5,278
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4,643
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Operating costs and
expenses:
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General and
administrative
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948
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855
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1,952
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1,767
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Sales and marketing
expenses
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799
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714
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1,549
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1,307
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Product
development
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285
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129
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583
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254
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Depreciation and
amortization
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142
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103
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284
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208
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Total operating
costs and expenses
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2,174
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1,801
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4,368
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3,536
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Operating
income
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595
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733
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910
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1,107
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Other income
(expense):
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Other
expense
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—
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(17
)
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—
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(28
)
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Interest income
(expense), net
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(5
)
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1
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(10
)
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2
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Total other
expense
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(5
)
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(16
)
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(10
)
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(26
)
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Net income before
income taxes
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590
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717
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900
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1,081
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Income tax
expense
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224
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224
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214
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264
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Net
income
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$
366
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$
493
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$
686
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$
817
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Income per share
– basic
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$
0.12
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$
0.17
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$
0.22
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$
0.28
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Income per share
– fully diluted
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$
0.12
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$
0.16
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$
0.22
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$
0.27
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Weighted average
number of common shares outstanding – basic
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3,074
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2,940
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3,055
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2,920
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Weighted average
number of common shares outstanding – fully
diluted
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3,137
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3,021
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3,123
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3,002
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The
accompanying notes are an integral part of these unaudited
financial statements.
4
I
SSUER DIRECT
CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in
thousands)
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For the Three
Months Ended
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For the Six
Months Ended
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||
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|
June 30,
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June 30,
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June 30,
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June 30,
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2018
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2017
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2018
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2017
|
|
Net
income
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$
366
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$
493
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$
686
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$
817
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Foreign
currency translation adjustment
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(76
)
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27
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(33
)
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34
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Comprehensive
income
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$
290
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$
520
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$
653
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$
851
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The
accompanying notes are an integral part of these unaudited
financial statements.
5
I
SSUER DIRECT
CORPORATION
(UNAUDITED)
(in
thousands)
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|
For the Six Months Ended
|
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|
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June 30,
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June 30,
|
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2018
|
2017
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|
Cash flows from operating activities:
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|
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Net
income
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$
686
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$
817
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Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
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Depreciation
and amortization
|
680
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350
|
|
Bad
debt expense
|
93
|
87
|
|
Deferred
income taxes
|
(17
)
|
(5
)
|
|
Non-cash
interest expense (See Note 3)
|
13
|
—
|
|
Stock-based
compensation expense
|
286
|
260
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Decrease
(increase) in accounts receivable
|
(467
)
|
(116
)
|
|
Decrease
(increase) in deposits and prepaid assets
|
194
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(171
)
|
|
Increase
(decrease) in accounts payable
|
(304
)
|
293
|
|
Increase
(decrease) in accrued expenses
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31
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(255
)
|
|
Increase
(decrease) in deferred revenue
|
394
|
197
|
|
Net
cash provided by operating activities
|
1,589
|
1,457
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Capitalized
software
|
—
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(624
)
|
|
Purchase
of fixed assets
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(39
)
|
(6
)
|
|
Net
cash used in investing activities
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(39
)
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(630
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from exercise of stock options, net of income taxes
|
709
|
214
|
|
Payment
of dividends
|
(305
)
|
(291
)
|
|
Net
cash provided by (used in) financing activities
|
404
|
(77
)
|
|
|
|
|
|
Net
change in cash
|
1,954
|
750
|
|
Cash
– beginning
|
4,917
|
5,339
|
|
Currency
translation adjustment
|
(37
)
|
36
|
|
Cash
– ending
|
$
6,834
|
$
6,125
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
Cash
paid for income taxes
|
$
31
|
$
437
|
|
Non-cash
activities:
|
|
|
|
Stock-based
compensation - capitalized software
|
$
—
|
$
56
|
The
accompanying notes are an integral part of these unaudited
financial statements.
6
I
SSUER DIRECT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
unaudited interim consolidated balance sheet as of June 30, 2018
and statements of operations, comprehensive income, and cash flows
for the three and six-month periods ended June 30, 2018 and 2017
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 2017 audited financial statements of
Issuer Direct Corporation (the “Company”,
“We”, or “Our”) filed on Form
10-K/A.
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”) Accounting
Standards Codification (“ASC”) No. 260 – EPS,
which requires that basic net income per common share be computed
by dividing net income for the period by the weighted average
number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the net income for the
period by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Shares issuable
upon the exercise of stock options and restricted stock units
totaling 41,000 were excluded in the computation of diluted
earnings per common share during the three and six-month periods
ended June 30, 2018, because their impact was anti-dilutive. Shares
issuable upon the exercise of stock options and restricted stock
units totaling 49,500 and 55,167 were excluded in the computation
of diluted earnings per common share during the three and six-month
periods ended June 30, 2017, respectively, because their impact was
anti-dilutive.
Revenue Recognition
The
Company adopted ASC Topic 606, Revenue from Contracts with
Customers, on January 1, 2018, using the modified retrospective
approach.
Substantially all
of the Company’s revenue comes from contracts with customers
for subscriptions to its cloud-based products or contracts to
perform compliance or other services. Customers consist primarily
of
corporate issuers and professional
firms, such as investor relations and public relations firms and in
the case of our news distribution offering, our customers also
include private companies.
The Company accounts for a
contract with a customer when there is an enforceable contract
between the Company and the customer, the rights of the parties are
identified, the contract has economic substance, and collectability
of the contract consideration is probable. The Company's revenues
are measured based on consideration specified in the contract with
each customer.
The
Company's contracts include either a subscription to our entire
platform or certain modules within our platform, or an agreement to
perform services or any combination thereof, and often contain
multiple subscriptions and services. For these bundled contracts,
the Company accounts for individual subscriptions and services as
separate performance obligations if they are distinct, which is
when a product or service is separately identifiable from other
items in the bundled package, and a customer can benefit from it on
its own or with other resources that are readily available to the
customer. The Company separates revenue from its contracts into two
revenue streams: i) Platform and Technology and ii) Services.
Performance obligations of Platform and Technology contracts
include providing subscriptions to certain modules or the entire
Platform
id.
system, distributing press releases on a per release basis or
conducting webcasts on a per event basis. Performance obligations
of Service contracts include obligations to deliver compliance
services and annual report printing and distribution on either a
stand ready obligation or on a per project or event basis. Set up
fees for compliance services are considered a separate performance
obligation and are satisfied upfront. Set up fees for our transfer
agent module and investor relations content management module are
immaterial. The Company’s subscription and service contracts
are generally for one year, with automatic renewal clauses included
in the contract until the contract is cancelled. The contracts do
not contain any rights of returns, guarantees or warranties. Since
contracts are generally for one year, all of the revenue is
expected to be recognized within one year from the contract start
date. As such, the Company has elected the optional exemption that
allows the Company not to disclose the transaction price allocated
to performance obligations that are unsatisfied or partially
satisfied at the end of each reporting period.
7
The
Company recognizes revenue for subscriptions evenly over the
contract period, upon distribution for per release contracts and
upon event completion for webcasting events. For service contracts
that include stand ready obligations, revenue is recognized evenly
over the contract period. For all other services delivered on a per
project or event basis, the revenue is recognized at the completion
of the event. The Company believes recognizing revenue for
subscriptions and stand ready obligations using a time-based
measure of progress, best reflects the Company’s performance
in satisfying the obligations.
For
bundled contracts, revenue is allocated to each performance
obligation based on its relative standalone selling price.
Standalone selling prices are based on observable prices at which
the Company separately sells the subscription or services. If a
standalone selling price is not directly observable, the Company
uses the residual method to allocate any remaining costs to that
subscription or service. The Company regularly reviews standalone
selling prices and updates these estimates if
necessary.
The
Company invoices its customers based on the billing schedules
designated in its contracts, typically upfront on either a monthly,
quarterly or annual basis or per transaction at the completion of
the performance obligation. Deferred revenue for the periods
presented was primarily related to subscription and service
contracts, which are billed upfront, quarterly or annually, however
the revenue has not yet been recognized. The associated deferred
revenue is generally recognized ratably over the billing period.
Deferred revenue as of June 30, 2018 and December 31, 2017 was
$1,273,000 and $887,000, respectively, and is expected to be
recognized within one year. Revenue recognized for the six months
ended June 30, 2018 and 2017, that was included in the deferred
revenue balance at the beginning of each reporting period, was
$714,000 and $706,000, respectively. Accounts receivable related to
contracts with customers was $1,642,000 and $1,275,000 as of June
30, 2018 and December 31, 2017, respectively. Since substantially
all of the contracts have terms of one year or less, the Company
has elected to use the practical expedient regarding the existence
of a significant financing.
The
Company has determined that costs to obtain contracts with
customers are immaterial or would be amortized over 1 year due to
the short nature of most of the contracts. Therefore, the Company
has elected to use the practical expedient allowing the recognition
of incremental costs of obtaining a contract as an expense when
incurred. The Company has considered historical renewal rates,
expectations of future renewals and economic factors in making this
determination.
Allowance for Doubtful Accounts
We
provide an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection
information. Credit is granted on an unsecured basis. In
determining the amount of the allowance, management is required to
make certain estimates and assumptions. The allowance is made up of
specific reserves, as deemed necessary, on customer account
balances, and a reserve based on our historical
experience.
Use of Estimates
The
preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include the allowance
for doubtful accounts and the valuation of goodwill, intangible
assets, deferred tax assets, and stock-based compensation. Actual
results could differ from those estimates.
Income Taxes
We
comply with the FASB ASC No. 740 – Income Taxes which
requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and
liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result
in future taxable or deductible amounts based on enacted tax laws
and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred income tax assets
to the amounts expected to be realized. For any uncertain tax
positions, we recognize the impact of a tax position, only if it is
more likely than not of being sustained upon examination, based on
the technical merits of the position. Our policy regarding the
classification of interest and penalties is to classify them as
income tax expense in our financial statements, if applicable. At
the end of each interim period, we estimate the effective tax rate
we expect to be applicable for the full year and this rate is
applied to our results for the interim year-to-date period and then
adjusted for any discrete period items.
8
Capitalized Software
In
accordance with FASB ASC No. 350 – Intangibles –
Goodwill and Other, costs incurred to develop our cloud-based
platform products 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. Capitalized costs and amortization for
the three and six-month periods ended June 30, 2018 and 2017, are
as follows (in thousands)
|
|
For the Three
Months Ended
|
For the Six
Months Ended
|
||
|
|
June 30,
|
June 30,
|
June 30,
|
June 30,
|
|
|
2018
|
2017
|
2018
|
2017
|
|
Capitalized
software development costs
|
$
—
|
$
314
|
$
—
|
$
680
|
|
Capitalized
costs related to stock-based compensation
|
—
|
(20
)
|
—
|
56
|
|
Amortization
included in cost of revenues
|
198
|
82
|
396
|
141
|
|
Amortization
included in depreciation and amortization
|
2
|
2
|
5
|
5
|
Fair Value Measurements
As of
June 30, 2018 and December 31, 2017, 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, accounts payable, our line of credit and notes
payable approximate their carrying amounts.
Translation of Foreign Financial Statements
The
financial statements of the foreign subsidiary of the Company have
been translated into U.S. dollars. All assets and liabilities have
been translated at current rates of exchange in effect at the end
of the period. Income and expense items have been translated at the
average exchange rates for the year or the applicable interim
period. The gains or losses that result from this process are
recorded as a separate component of other accumulated comprehensive
income 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 trademarks are considered an
indefinite-lived asset and, as such, are not amortized as there is
no foreseeable limit to cash flows generated from them. The
goodwill and intangible assets are assessed annually for
impairment, or whenever conditions indicate the asset may be
impaired, and any such impairment will be recognized in the period
identified. The client relationships (7-10 years), customer lists
(3 years) and software and technology (3-5 years) are amortized
over their estimated useful lives. In 2015, it was determined that
the trademarks associated with the PIR acquisition were no longer
indefinite-lived, and as such began to be amortized over 3-5
years.
Comprehensive Income
Comprehensive
income consists of net income and other comprehensive income or
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.
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 associated cost is recognized over the
period during which an employee is required to provide service in
exchange for the award.
9
Recently adopted accounting pronouncements
In June
2018, the FASB announced Accounting Standards Update
(“ASU”) 2018-07 Compensation-Stock Compensation (Topic
718): Improvements to Nonemployee Share-Based Payment Accounting.
ASU 2018-07 expands the scope of Topic 718,
Compensation—Stock Compensation (which currently only
includes share-based payments to employees) to include share-based
payments issued to nonemployees for goods or services.
Consequently, the accounting for share-based payments to
nonemployees and employees will be substantially aligned. The ASU
supersedes Subtopic 505-50, Equity—Equity-Based Payments to
Non-Employees. ASU 2018-07 is effective for public companies for
fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. Early adoption is permitted, but
no earlier than a company’s adoption date of Topic 606,
Revenue from Contracts with Customers. The Company elected to adopt
ASU 2018-07 as of January 1, 2018. The adoption did not require the
Company to restate any previously reported periods of the Statement
of Operations or Balance Sheet. The Company has one contract with a
non-employee to perform services for share-based payments, the
compensation of which is properly accounted for in the Statement of
Operations for the three and six month periods ended June 30, 2018
as well as the Balance Sheet as of June 30, 2018.
In May
2014, the FASB issued ASU 2014-09 Revenue from Contracts with
Customers, which supersedes previous revenue recognition guidance.
The new standard requires that a company recognize revenue when it
transfers promised goods or services to customers in an amount that
reflects the consideration the company expects to receive in
exchange for those goods or services. In-depth reviews of customer
contracts were completed and analyzed to meet the standard’s
reporting and disclosure requirements. Disclosures related to the
nature, amount and timing of revenue and cash flows arising from
contracts with customers are included in this Note under the
subheading Revenue Recognition as well as Note 6,
Revenues.
The
adoption did not require the Company to restate any previously
reported periods of the Statement of Operations or Balance Sheet
related to a change in the timing of revenue recognition, nor did
the adoption affect liquidity. However, the adoption did impact the
allocation of revenue associated with the Company’s
shareholder outreach offering that included both electronic
dissemination and physical delivery of a customer’s annual
reports. Historically, revenue from these bundled contracts was
reported in the Services revenue stream because an allocation
between electronic and physical hardcopy distribution was not made,
however, under ASC 606, a portion of the revenue from these
contracts is required to be allocated to the Platform and
Technology revenue stream in accordance with stand-alone contracts
for the shareholder outreach subscription. A comparison of revenue
under previously reported legacy GAAP and revenue under current
GAAP is provide below for comparability purposes (in
000’s):
|
|
For the Three
Months Ended June 30, 2018
|
For the Six
Months Ended June 30, 2018
|
||||
|
|
Legacy
|
|
Current
|
Legacy
|
|
Current
|
|
Revenue:
|
GAAP
|
Adjustments
|
GAAP
|
GAAP
|
Adjustments
|
GAAP
|
|
Platform
and Technology
|
$
2,126
|
$
120
|
$
2,246
|
$
4,023
|
$
254
|
$
4,277
|
|
Services
|
1,673
|
(120
)
|
1,553
|
3,306
|
(254
)
|
3,052
|
|
Total
Revenue
|
$
3,799
|
$
—
|
$
3,799
|
$
7,329
|
$
—
|
$
7,329
|
|
|
For the Three
Months Ended June 30, 2017
|
For the Six
Months Ended June 30, 2017
|
||||
|
|
Legacy
|
|
Current
|
Legacy
|
|
Current
|
|
Revenue:
|
GAAP
|
Adjustments
|
GAAP
|
GAAP
|
Adjustments
|
GAAP
|
|
Platform
and Technology
|
$
1,704
|
$
186
|
$
1,890
|
$
3,117
|
$
393
|
$
3,510
|
|
Services
|
1,739
|
(186
)
|
1,553
|
3,181
|
(393
)
|
2,788
|
|
Total
Revenue
|
$
3,443
|
$
—
|
$
3,443
|
$
6,298
|
$
—
|
$
6,298
|
In
analyzing the impact of adoption, the Company used the practical
expedient that allows the Company to only apply the new revenue
standard to contracts that are not completed as of the date of
initial application, January 1, 2018. A completed contract is
defined as a contract for which all (or substantially all) of the
revenue was recognized in accordance with revenue guidance that was
in effect before the date of initial application.
Recently issued accounting pronouncements not yet
adopted
In
March 2018, the FASB announced ASU 2018-05 Income Taxes (Topic
740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No.118 (“SAB 118”). ASU 2018-05 adds guidance
indicated in Questions 1 and 2 from SAB 118 to the codification.
SAB 118 addresses the application of US GAAP in situations when a
registrant does not have all of the necessary information
available, prepared and analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax
effects of the Tax Cuts and Jobs Act of 2017 (the “2017
Act”), which was signed into law on December 22, 2017. The
Company has calculated its best estimate of the impact of the 2017
Act in its quarterly provision in accordance with its understanding
of the 2017 Act and guidance available as of the date of this
filing and does not believe it will have a material impact to its
results of operations to date. Additional work is necessary to do a
more detailed analysis of historical foreign earnings as well as
potential correlative adjustments. Any subsequent adjustment to
these amounts will be recorded to current tax expense in the
quarter of 2018 when the analysis is complete. ASU 2018-05 is
effective immediately upon addition to the FASB
codification.
10
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
long-term lease on its corporate facilities which ends October 31,
2019. Absent any renewal of the lease or new leases entered into
before January 1, 2019, the Company will be required to record a
right-to-use asset and corresponding lease liability associated
with the remaining lease payments beginning with the first interim
period of 2019. This will increase both balance sheet assets and
liabilities by insignificant amounts and will not have a
significant impact on the income statement or affect any covenant
calculations.
On
October 2, 2017, the Company entered into a Stock Purchase
Agreement (the “Purchase Agreement’) with Kurtis D.
Hughes whereby the Company purchased all of the outstanding equity
securities of Interwest Transfer Company, Inc., a Utah corporation
(“Interwest”) a transfer agent business located in Salt
Lake City, Utah. Under the terms of the Purchase Agreement, the
Company paid $1,935,000 at closing and will pay $320,000 on each of
the first, second and third anniversary dates of the closing and
issued 25,235 shares of restricted common stock of the Company to
Mr. Hughes at closing.
The
acquisition was accounted for under the acquisition method of
accounting for business combinations in accordance with FASB ASC
805, Business Combinations, which requires, among other things,
that the assets acquired and liabilities assumed be recognized at
their fair values as of the acquisition date. Acquisition-related
costs, which totaled approximately $20,000, are not included as a
component of the acquisition accounting, but are recognized as
expenses in the periods in which the costs are incurred. Any
changes within the measurement period resulting from facts and
circumstances that existed as of the acquisition date may result in
retrospective adjustments to the provisional amounts recorded at
the acquisition date. During the year ended December 31, 2017, the
Company employed a third party valuation firm to assist in
determining the purchase price allocation of assets and liabilities
acquired from Interwest. The income approach was used to determine
the value of Interwest’s trademarks and client relationships.
The income approach determines the fair value for the asset based
on the present value of cash flows projected to be generated by the
asset. Projected cash flows are discounted at a rate of return that
reflects the relative risk of achieving the cash flow and the time
value of money. Projected cash flows for each asset considered
multiple factors, including current revenue from existing
customers; analysis of expected revenue and attrition trends;
reasonable contract renewal assumptions from the perspective of a
marketplace participant; expected profit margins giving
consideration to marketplace synergies; and required returns to
contributory assets.
The
transaction resulted in recording intangible assets and goodwill at
a fair value of $3,680,000 as follows (in
000’s):
|
Initial
payment
|
$
1,935
|
|
Fair value of
restricted common stock issued
|
318
|
|
Fair value of
anniversary payments
|
851
|
|
Total
Consideration
|
3,104
|
|
Plus: excess of
liabilities assumed over assets acquired
|
576
|
|
Total fair value of
Interwest intangible assets and goodwill
|
$
3,680
|
11
The
tangible assets and liabilities acquired were as follows (in
000’s):
|
Cash
|
$
63
|
|
Accounts
receivable, net
|
84
|
|
Prepaid
expenses
|
17
|
|
Total
assets
|
164
|
|
Accounts payable
and accrued expenses
|
12
|
|
Deferred
revenue
|
21
|
|
Deferred tax
liability
|
707
|
|
Total
liabilities
|
740
|
|
Excess of
liabilities assumed over assets acquired
|
$
(576
)
|
The
identified intangible assets as a result of the acquisition are as
follows (in 000’s):
|
Customer
relationships
|
$
1,677
|
|
Tradename
|
176
|
|
Goodwill
|
1,827
|
|
|
$
3,680
|
Select Pro-Forma Financial Information (Unaudited)
The
following represents our unaudited condensed pro-forma financial
results as if the acquisition with Interwest and the Company had
occurred as of January 1, 2017. Unaudited condensed pro-forma
results are based upon accounting estimates and judgments that we
believe are reasonable. The condensed pro-forma results are not
necessarily indicative of the actual results of our operations had
the acquisitions occurred at the beginning of the period presented,
nor does it purport to represent the results of operations for
future periods.
|
$ in
000’s
|
Three months
ended
June
30,
2017
|
Six months
ended
June
30,
2017
|
|
|
|
|
|
Revenues
|
$
3,898
|
$
7,105
|
|
Net
Income
|
$
644
|
$
1,099
|
|
Basic earnings per
share
|
$
0.21
|
$
0.37
|
|
Diluted earnings
per share
|
$
0.21
|
$
0.36
|
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 June 30, 2018, 339,000 awards had been
granted under the 2014 Plan.
The
following table summarizes information about stock options
outstanding and exercisable at June 30, 2018:
|
|
Options
Outstanding
|
Options
Exercisable
|
||
|
Exercise Price
Range
|
Number
|
Weighted
Average
Remaining
Contractual
Life (in
Years)
|
Weighted
Average
Exercise
Price
|
Number
|
|
$
0.01
- $1.00
|
7,850
|
3.56
|
$
0.01
|
7,850
|
|
$
1.01
- $7.00
|
10,000
|
7.39
|
$
6.80
|
7.500
|
|
$
7.01
- $8.00
|
20,313
|
5.24
|
$
7.76
|
20,313
|
|
$
8.01
- $13.00
|
36,250
|
8.92
|
$
12.66
|
4,250
|
|
$
13.01
- $17.40
|
32,000
|
9.92
|
$
17.40
|
—
|
|
Total
|
106,413
|
7.98
|
11.63
|
39,913
|
12
As of
June 30, 2018, the Company had unrecognized stock compensation
related to the options of $278,000, which will be recognized
through 2019.
On
January 29, 2018, the Company granted 1,000 restricted stock units
with an intrinsic value of $17.65 to a certain employee of the
Company. The restricted stock units vest one-half annually over two
years.
On June 1, 2018, the Company
granted 8,000 restricted stock units with an intrinsic value of
$17.40 to each of the four non-employee members of the
Company’s board of directors. The restricted stock units vest
upon the earlier of (i) the date of the Company’s 2019 annual
meeting of stockholders (but only if the director ceases to be a
member of the board of directors at such annual meeting as a result
of not standing for re-election or not being re-elected) or (ii)
June 1, 2019.
During the six-month period ended June 30,
2018, 27,001 restricted stock units with an intrinsic value of
$5.59 vested. No restricted stock units vested during the
three-month period ended June 30, 2018. As of June 30, 2018, there
was $273,000 of unrecognized compensation cost related to our
unvested restricted stock units, which will be recognized through
2020.
We
recognized income tax expense of $224,000 and $214,000 during the
three and six-month periods ended June 30, 2018, respectively,
compared to $224,000 and $264,000 during the same periods of 2017.
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. For the three-month
period ended June 30, 2018, the variance between the
Company’s effective tax rate and the U.S. statutory rate of
21% is primarily attributable to additional expense as a result of
a tax shortfall associated with stock-based compensation in the
amount of $68,000, offset by foreign statutory tax rate
differentials and tax credits. For the six-month period ended June
30, 2018, the impact of stock-based compensation resulted in a tax
benefit of $4,000. For the three and six-month periods ended June
30, 2017, the variance between the Company’s effective tax
rate and the U.S. statutory rate at the time of 34% is primarily
attributable to the excess stock-based compensation tax benefit of
$45,000 and $122,000, respectively, as well as foreign statutory
tax rate differentials and tax credits.
The
recently signed 2017 Act included a reduction in the federal
corporate tax rate to 21% and other key provisions which were
effective beginning January 1, 2018. The company has included these
effects, as relevant, in the calculation of tax expense for the
three and six-month periods ended June 30, 2018.
We
consider ourselves to be in a single reportable segment under the
authoritative guidance for segment reporting, specifically a
shareholder communications and compliance company for publicly
traded and private companies. Revenue is attributed to a particular
geographic region based on where subscriptions are sold or the
services are performed. The following tables present revenue
disaggregated by revenue stream and geography in
(000’s):
|
|
Three months ended
June
30,
|
|||
|
Revenue Streams
|
2018
|
2017
|
||
|
Platform
and Technology
|
$
2,246
|
59.1
%
|
$
1,890
|
54.9
%
|
|
Services
|
1,553
|
40.0
%
|
1,553
|
45.1
%
|
|
Total
|
$
3,799
|
100.0
%
|
$
3,443
|
100.0
%
|
|
|
Six months ended
June
30,
|
|||
|
Revenue Streams
|
2018
|
2017
|
||
|
Platform
and Technology
|
$
4,277
|
58.4
%
|
$
3,117
|
49.5
%
|
|
Services
|
3,052
|
41.6
%
|
3,181
|
50.5
%
|
|
Total
|
$
7,329
|
100.0
%
|
$
6,298
|
100.0
%
|
|
|
Three months
ended
|
Six months
ended
|
||
|
|
June
30,
|
June
30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Geographic region
|
|
|
|
|
|
North
America
|
$
3,599
|
$
3,127
|
$
6,922
|
$
5,666
|
|
Europe
|
200
|
316
|
407
|
632
|
|
Total
revenues
|
$
3,799
|
$
3,443
|
$
7,329
|
$
6,298
|
13
No
customers accounted for more than 10% of the operating revenues
during the three and six-month periods ended June 30, 2018 or 2017.
We did not have any customers that comprised more than 10% of our
total accounts receivable balance at June 30, 2018 or December 31,
2017.
We
believe we did not have any financial instruments that could have
potentially subjected us to significant concentrations of credit
risk for any relevant period. Since a portion of the revenues are
paid at the beginning of the month via credit card or advance by
check, the remaining accounts receivable amounts are generally due
within 30 days, none of which is collateralized.
Effective September
1, 2017, the Company renewed its Line of Credit, which increased
the amount of funds available for borrowing from $2,000,000 to
$2,500,000. The interest rate remained at LIBOR plus 2.50%. As of
June 30, 2018, the interest rate was 4.57% and the Company did not
owe any amounts on the Line of Credit.
On July
3, 2018, the Company entered into a Stock Purchase Agreement with
Fred Gautreau whereby the Company acquired all of the outstanding
stock of Filing Services Canada Inc. (“FSCwire”) for
$1,140,000 in cash and 3,402 shares of common stock (equivalent
value of $68,000 at closing) paid at closing to Mr. Gautreau (with
$180,000 of cash purchase price remaining in escrow for no more
than eighteen months), resulting in a total purchase price of
$1,208,000, subject to a closing working capital adjustment as
outlined in the stock purchase agreement. FSCwire is located in
Calgary, Canada and is focused on the Canadian press release
distribution market. Subsequent to the closing date, FSCwire will
be a wholly-owned subsidiary of ACCESSWIRE Canada, which was formed
as a wholly-owned subsidiary of the Company for the purposes of the
acquisition.
On July
10, 2018, the Company's Board of Directors approved and declared a
quarterly cash dividend of $0.05 per share. The dividend is payable
on August 13, 2018, to stockholders of record as of the close of
business on July 24, 2018.
14
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 Form10-Q. This Form10-Q contains
forward-looking statements that involve risks and uncertainties.
The statements contained in this Form10-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 Form10-Q, or in the documents incorporated
by reference into this Form10-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 Form10-Q are based upon information available to the Company
on the date of this Form10-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
Form10-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 Form10-K/A for the year ended December 31, 2017,
which are incorporated by reference into this Form 10-Q. 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 (Issuer Direct Corporation and its subsidiaries
are hereinafter collectively referred to as “Issuer
Direct”, the “Company”, “We” or
“Our” unless otherwise noted). Our corporate offices
are located at 500 Perimeter Park Drive, Suite D, Morrisville,
North Carolina, 27560.
We
announce material financial information to our investors using our
investor relations website, Securities and Exchange Commission
("SEC") filings, investor events, news and earnings releases,
public conference calls, webcasts and social media. We use these
channels to communicate with our investors and the public about our
company, our products and services and other related matters. It is
possible that information we post on some of these channels could
be deemed to be material information. Therefore, we encourage
investors, the media and others interested in our company to review
the information we post to all of our channels, including our
social media accounts.
Issuer Direct is an industry-leading global
communications and compliance company focusing on the needs of
corporate issuers. Issuer Direct's principal platform,
Platform
id.
™, empowers users by
thoughtfully integrating the most relevant tools, technologies and
products, thus eliminating the complexity associated with producing
and distributing their business communications and financial
information.
We work with a diverse customer base 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 firms, and the accounting and the legal communities.
Corporate issuers and their service providers utilize
Platform
id
.
and related services from document
creation all the way to dissemination to regulatory bodies,
platforms and shareholders.
In order to provide a good representation of our
business and reflect our
platform first
engagement strategy, we report revenue
in two revenue streams: (i) Platform and Technology and (ii)
Services. Due to the adoption of Accounting Standards Codification
(“ASC”) 606
Revenue from Contracts with
Customers
as of January 1,
2018, we reclassified
revenue associated with the
Company’s shareholder outreach offering that included both
electronic dissemination and physical delivery of a
customer’s annual report. Historically, revenue from these
bundled contracts was reported in the Services revenue stream
because an allocation between electronic and physical hardcopy
distribution was not made, however, under ASC 606, a portion of the
revenue from these contracts is required to be allocated to the
Platform and Technology revenue stream in accordance with
stand-alone contracts for the shareholder outreach subscription.
Revenue of $186,000 and $393,000 for the three and six months ended
June 30, 2017, respectively, which was previously reported as
Services revenue was reclassified as Platform and Technology
revenue.
15
Set forth below is an infographic depicting the
modules included in Platform
id.
and the services we
provide:
Platform and Technology
As
we continue our transition to a cloud-based subscription business,
we expect the Platform and Technology portion of our business to
continue to increase over the next several years, both in terms of
overall revenue and as compared to the Services portion of our
business. Platform and Technology revenue grew to 59% of total
revenue for the second quarter of 2018, compared to 55% of our
revenue for 2017 and approximately 44% of our revenue in 2016. Our
ACCESSWIRE® news business offering represented a majority of
the year over year growth in our Platform and Technology revenue
during 2017 and continues to lead our transition to a full platform
solution.
As
part of our Platform and Technology strategy, we have been working
with several select stock exchanges, whereby we make available
certain parts of our platform, under agreement, to integrate our
offerings. Such partnerships should yield increased exposure to a
targeted customer base that could impact our revenue and overall
brand in the market.
Additionally, we plan to continue to invest in
both our current Platform
id.
offering as well as
additional offerings, which we believe provide long term
opportunity. These advancements will leverage our current
application technology framework and give us an opportunity to
further expand our customer and user base.
16
Platform
id
.
Platform
id.
is our primary cloud-based
subscription platform that efficiently and effectively helps manage
the events of our customers seeking to distribute their messaging
to key constituents, investors, markets and regulatory systems
around the globe. Currently, Platform
id.
consists of several related
but distinct shareholder communications and compliance modules.
Certain of these capabilities were historically part of our
disclosure management and shareholder communications offerings, but
are now included into our fully integrated
platform.
Within most of our target markets, customers
require several individual services and/or software providers to
meet their investor relations, communications and compliance needs.
We believe Platform
id.
can address all those needs
in a single, secure, cloud-based platform - one that offers a
company control, increases efficiencies, demonstrates a clear value
and, most importantly, delivers consistent and compliant messaging
from one centralized platform.
While
the complete platform is available for a single subscription fee,
companies also have the flexibility to choose one or more of the
specific modules that fit their needs.
Communications Modules
Our press release offering, which is marketed
under the brand,
ACCESSWIRE
,
is a cost-effective Fair Disclosure, Regulation
FD, news dissemination and media outreach service. The ACCESSWIRE
product offering focuses on press release distribution for both
private and publicly held companies globally. ACCESSWIRE is fast
becoming a competitive alternative to the traditional newswires
because we have been able to integrate customer editing features
and improve our targeting and growing analytics reporting systems,
which we believe will enable us to add new customers for the
remainder of 2018 and beyond. We have also been able to maintain
flexible pricing by offering our customers the option to pay per
release or enter into longer-term subscriptions. Currently,
approximately 60% of our ACCESSWIRE revenue is on a subscription
basis.
On
July 3, 2018, we completed the acquisition of Filing Services
Canada Inc. (“FSCwire”), which not only increased our
customer base, but more importantly increased our global footprint,
distribution capabilities and editorial team. Once the integration
of FSCwire is complete it will be rebranded ACCESSWIRE Canada,
which should be completed by the end of the third quarter of this
year.
We will continue to brand our press release
offerings under the name ACCESSWIRE, which we believe will solidify
our market position in the newswire business. Our ACCESSWIRE news
editing offering is available within our core Platform
id.
subscription or as a stand-alone
module.
ACCESSWIRE
is dependent upon several key partners for news distribution, some
of which are also partners that we rely on for other investor
outreach offerings. A disruption in any of these partnerships could
have a materially adverse impact on our business.
Also included in Platform
id.
is our targeting and outreach database
and intelligence analytics module. This module is centered around
both our shareholder communications and news distribution
offerings. We anticipate the analytics and peer review components
will become a focal point for Platform
id.
in the future, as customers
become increasingly interested in peer performance and real-time
alerts to vital data points throughout the day.
We
believe our data-set is an attractive option for both investor
relations and public relations firms and for customers looking for
an alternative to current products in the market, based on price,
as well as data quality and quantity. During the fourth quarter of
2017, our dataset and analytics were integrated into our ACCESSWIRE
offering as a way to add value and expand distribution via highly
targeted lists of professionals from the dataset. We expect this to
increase future ACCESSWIRE revenues per press release as well as
ACCESSWIRE subscriptions throughout 2018.
Over the past year, we have been focused on
refining the model of digital distribution of our customers’
message to the investment community and beyond. This has been
accomplished by integrating our shareholder outreach module,
formerly known as Investor Network, into and with Platform
id.
Most of the customers subscribing to
this module today are historical PrecisionIR (“PIR”)
– Annual Report Service (“ARS”) users, as well as
new customers purchasing the entire Platform
id.
subscription. We have
migrated many of the customers from the traditional ARS business
into this new digital subscription business. However, there can be
no assurances these customers will continue using this digital
platform in the long term if market conditions or shareholder
interest is not present.
There are over 5,000 companies in North America
conducting earnings events each quarter that include
teleconference, webcast or both as part of their events.
Platform
id.
incorporates each element of the
earnings event including earnings date/call announcement, earnings
press release and SEC Form 8-K filings. There are a handful of our
competitors that can offer this 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.
17
The earnings event industry is a highly
competitive space with the majority of the business being driven
from practitioners in the investor relations and communications
firms. In the past, we invested time and financial resources
developing and integrating systems and processes within
Platform
id.
by creating an application
programming interface (“API”) for the webcast
marketplace, that we will begin offering to partners and publishers
for their platforms under license. We believe this offering will
further increase our brand awareness. This API license will allow
publishers to query single or multiple companies' current and past
earnings calls and present those webcasts on their platforms, under
a subscription to Platform
id.
Additionally, as a
commitment to broadening the reach of our webcast platform, all
events will be broadcast live within our shareholder outreach
module, which will drive new audiences and give companies the
ability to view their analytics and engagement of each event. We
believe these analytics will increase the demand for our webcasting
platform among the corporate issuer community.
Our investor relations content network is another
component of Platform
id.
,
which is used to create the investor relations’ tab of a
public company’s website. This investor relations content
network is a robust series of data feeds including news feeds,
stock feeds, fundamentals, regulatory filings, corporate governance
and many other components that are aggregated from a majority of
the major exchanges and news distribution outlets around the world.
Customers can subscribe to one or more of these data feeds from us
or as a component of a fully designed and hosted website for
pre-IPO, reporting companies and partners seeking to display our
content on their corporate sites. The clear benefit to our investor
relations module is its integration into and with the rest of
Platform
id.
,
meaning companies can produce content for public distribution and
it is automatically linked to their corporate site, distributed to
targeted groups and placed into and with our data feed
partners.
Compliance Modules
Platform
id.
’s
disclosure reporting module is a document conversion, editing and
filing offering, which is designed for reporting companies and
professionals seeking to insource the document drafting, editing
and filing processes to the SEC and SEDAR, which is the Canadian
equivalent of EDGAR. This module is available in both a secure
public cloud within our Platform
id.
subscription, as well as in a private
cloud option for corporations, mutual funds and the legal community
looking to further enhance their internal document process. We
believe that once this module is fully marketed and adopted by our
customers, we will see a negative impact on our legacy disclosure
conversion services business in the future. However, the margins
associated with our Platform and Technology business compared to
our Services business are higher and align with our long-term
strategy, and as such, we believe this module will have a positive
impact on our compliance business.
Toward the latter part of 2017, we completed
upgrades to our disclosure reporting product to include tagging
functionality that meets newly mandated SEC requirements. On June
28, 2018, the SEC voted to adopt rules mandating the use of Inline
XBRL (Inline Extensible Business Reporting Language or
“iXBRL”) for the submission of financial statement
information to the SEC. The new requirements for iXBRL will have a
three-year phase in beginning for large accelerated filers that use
U.S. GAAP to be compliant for fiscal periods ending on or after
June 15, 2019, for accelerated filers to begin reporting for fiscal
periods ending on or after June 15, 2020 and for all other filers
to begin reporting for fiscal periods ending on or after June 15,
2021. These upgrades also include meeting new SEC mandates for
foreign filers that compile financial statements using
International Financial Reporting Standards (“IFRS”) to
be able to utilize our cloud-based platform. Foreign filers with
fiscal year’s ending on or after December 15, 2017, are now
required to begin reporting their financial statements in XBRL with
the SEC in 2018. Issuer Direct's Platform
id.
has adopted the new IFRS taxonomy into
and with its new disclosure upgrade for iXBRL to ensure our
customers are able to meet these new mandates.
Our whistleblower module is an add-on product
within Platform
id.
This system delivers secure
notifications and basic incident workflow management processes that
align with a company’s corporate governance whistleblower
policy. As a supported and subsidized bundle product of the New
York Stock Exchange (“NYSE”) offerings, we hope we will
gain relationships with new IPO customers and other larger cap
customers listed on the NYSE.
A valued subscription add-on in our
Platform
id.
offering is the ability for our
customers to gain access to real-time information of their
shareholders, stock ledgers, reports, and issue new shares from our
cloud-based stock transfer module. Managing the capitalization
table of a public company or pre-IPO company is the cornerstone of
corporate governance and transparency, and as such companies and
community banks have chosen us to assist with their stock transfer
needs, including bond offerings and dividend management. This is an
industry which has experienced declining overall revenues as it was
affected by the replacement of paper certificates with digital
certificates. However, we have recently been focused on selling
subscriptions of the stock transfer component of our platform,
allowing customers to gain access to our cloud-based system in
order to move shares or query shareholders, which has significantly
changed the long term dynamics for both our customers and
us.
On October 2, 2017, we completed the acquisition
of Interwest Transfer Company, Inc. (“Interwest”), a
company specializing in stock registrar and transfer agent
services. During the fourth quarter of 2017 and first half of 2018,
we have been
combining the stock information of both the
legacy Issuer Direct customers and the acquired customers from
Interwest.
We have also begun and will
continue to market the other modules of Platform
id.
and
services to these new customers to help them meet all of their
shareholder communication and compliance needs.
18
Our proxy module is marketed as a fully
integrated, real-time voting platform for our customers and their
shareholders of record. This module
is utilized for every annual meeting and or
special meeting we manage for our customer base and offers both
full-set mailing and notice of internet availability
options.
Services
As we focus on expanding our cloud-based
subscription business, we expect to see a decrease in the overall
revenues associated with our Services business. Typically, Services
revenues relate to activities where substantial resources are
required to perform the work for our customers and or hard goods
are utilized as part of the engagement. To date, most of our
Services have been related to converting and editing SEC documents
and XBRL tagging, which has been our core disclosure business over
the last 11 years. Services also include telecommunications
services and print, fulfillment and delivery of stock certificates,
proxy materials or annual reports depending on each
customer’s engagement. Services are not required, but are
optional for customers that utilize our Platform
id.
Our investor outreach and engagement offering,
formerly known as the ARS, was acquired from PIR. The ARS business
has existed for over 20 years primarily as a physical hard copy
delivery service of annual reports and prospectuses. We continue to
operate a portion of this legacy system for those who opt to take
advantage of physical delivery of material. Additionally, we
continue to attempt to migrate the install base over to
subscriptions of our digital outreach engagement module within
Platform
id.
We believe we will continue to see
further attrition of both customers and revenues in this category
as we focus our efforts on our Platform and Technology
business.
Results of Operations
Comparison of results of operations for the three and six months
ended June 30, 2018 and 2017:
|
|
Three months ended
|
Six months ended
|
||
|
|
June 30,
|
June 30,
|
||
|
Revenue Streams
|
2018
|
2017
|
2018
|
2017
|
|
|
|
|
|
|
|
Platform and Technology
|
|
|
|
|
|
Revenue
|
$
2,246
|
$
1,890
|
$
4,277
|
$
3,510
|
|
Gross
margin
|
$
1,825
|
$
1,610
|
$
3,432
|
2,985
|
|
Gross
margin %
|
81
%
|
85
%
|
80
%
|
85
%
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
Revenue
|
$
1,553
|
$
1,553
|
$
3,052
|
$
2,788
|
|
Gross
margin
|
$
944
|
$
924
|
$
1,846
|
$
1,658
|
|
Gross
margin %
|
61
%
|
59
%
|
60
%
|
59
%
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Revenue
|
$
3,799
|
$
3,443
|
$
7,329
|
$
6,298
|
|
Gross
margin
|
$
2,769
|
$
2,534
|
$
5,278
|
4,643
|
|
Gross
margin %
|
73
%
|
74
%
|
72
%
|
74
%
|
Revenues
Total
revenue increased by $356,000, or 10%, to $3,799,000 during the
three-month period ended June 30, 2018, as compared to $3,443,000
during the same period of 2017. Total revenue increased by
$1,031,000, or 16%, to $7,329,000 during the six-month period ended
June 30, 2018, as compared to $6,298,000 during the same period of
2017. Revenue from customers obtained from the acquisition of
Interwest was $381,000 and $799,000 during the three and six months
ended June 30, 2018, respectively, of which $51,000 and $95,000
came from additional subscriptions to our platfom or services cross
sold to those customers.
Platform and
Technology revenue increased $356,000, or 19%, and $767,000, or
22%, during the three and six-month periods ended June 30, 2018,
respectively, as compared to the same periods of 2017. A majority
of the increase is due to the continued success of our ACCESSWIRE
news distribution platform, which increased $195,000 and $465,000
during the three and six-month periods ended June 30, 2018,
respectively, as compared to the same periods of the prior year.
The increase is attributable to our investment in increased sales
staff and distribution during the latter part of 2017. During the
quarter we continued to focus our selling efforts on bundled
subscriptions of our cloud-based offerings included in Platform
id.
, which
also lead to higher overall revenue during both the three and
six-month periods ended June 30, 2018. Additional revenue
associated with Interwest customers also contributed to the
increase as well as additional webcasting revenue as a result of
offering our webcasting product to investor relations conferences.
These increases were offset by a decline in revenue from our
shareholder outreach offering due to continued client attrition as
revenue of this offering is typically tied-in with contracts of our
annual report distribution services.
19
Services revenue
was unchanged at $1,553,000 during the three months ended June 30,
2018, as compared to the same period of the prior year and
increased $264,000, or 9%, to $3,052,000 during the six-month
period ended June 30, 2018, as compared to $2,788,000 during the
same period of 2017. The increase during the six-month period is
primarily associated with increases in transfer agent services due
to the addition of Interwest customers as well an increase in the
timing of corporate actions and directives for our legacy Issuer
Direct customers. These increases were partially offset by
continued decline in revenue from our ARS services, as a result of
continued client attrition as customers elect to leave the service
or transition to digital fulfillment. We also experienced a decline
in our compliance services due to continued pricing pressure in
those markets and a shift of some of this revenue to the Platform
and Technology revenue stream.
No
customers accounted for more than 10% of revenue during the three
and six-month periods ended June 30, 2018 or 2017.
Revenue Backlog
At June
30, 2018, our deferred revenue balance was $1,273,000, which is a
64% increase over the balance of $887,000 at December 31, 2017.
Deferred revenue, which we expect to recognize over the next twelve
months, primarily consists of advance billings for subscriptions of
our cloud-based products and annual contracts for legacy ARS
services. The increase since December 31, 2017 is primarily due to
the sale of new subscriptions of Platform
id.
, with annualized contract
value of $564,000, to 56 new or existing customers during the six
months ended June 30, 2018.
Cost of Revenues and Gross Margin
Cost of
revenues consists primarily of direct labor costs, third party
licensing and amortization of capitalized software costs related to
our platform subscriptions in our Platform and Technology stream
and direct labor costs, warehousing, logistics, print production
materials, postage, and outside services directly related to the
delivery of services to our customers in our Services stream. Cost
of revenues increased by $121,000, or 13%, and $396,000, or 24%,
during the three and six-month periods ended June 30, 2018,
respectively, as compared to the same periods of 2017. Overall
gross margin increased $235,000, or 9%, and $635,000, or 14%,
during the three and six-month periods ended June 30, 2018,
respectively, as compared to the same periods of 2017. However,
during this period, gross margin percentage decreased to 73% and
72% for the three and six-month periods ended June 30, 2018,
respectively, from 74% for the same periods of the prior year. The
largest single component of the increase in cost of sales and
resulting decrease in gross margin percentage was due to an
increase in amortization of capitalized software costs of $116,000
and $255,000, during the three and six-month periods ended June 30,
2018, respectively, related to our platforms licensed to
customers.
Gross
margin percentage from Platform and Technology was 81% and 80% for
the three and six-month periods ended June 30, 2018, respectively,
as compared to 85% for the same periods of 2017. The decrease in
gross margin percentage is primarily due to an increase in
amortization of capitalized software costs of $116,000 and
$255,000, during the three and six-month periods ended June 30,
2018, respectively, related to our platforms licensed to
customers.
Gross
margins from our Services revenue increased to 61% and 60% during
the three and six-month periods ended June 30, 2018, respectively,
as compared to 59% in the same periods of 2017. The increase is
primarily the result of the additional transfer agent revenue
resulting from the addition of Interwest customers and an increase
in corporate actions and directives.
Operating Expenses
General and Administrative Expense
General
and administrative expenses consist primarily of salaries,
stock-based compensation, insurance, fees for professional
services, general corporate expenses and facility and equipment
expenses. General and administrative expenses increased $93,000, or
11%, and $185,000, or 10%, during the three and six-month periods
ended June 30, 2018, respectively, as compared to the same period
of 2017. The increase is primarily due to an increase in personnel
related expenses and acquisitions costs associated with the
acquisition of FSCwire.
As a
percentage of revenue, general and administrative expenses were 25%
for both the three-month periods ended June 30, 2018 and 2017 and
27% and 28% for the six-month periods ended June 30, 2018 and 2017,
respectively.
Sales and Marketing Expenses
Sales
and marketing expenses consist primarily of salaries, stock-based
compensation, sales commissions, advertising expenses, tradeshow
expenses and marketing expenses. Sales and marketing expenses
increased $85,000, or 12%, and $242,000, or 19%, for the three and
six-month periods ended June 30, 2018, respectively, as compared to
the same period of 2017. This increase is due to an increase in
average sales personnel of approximately 20% over the prior year in
an effort to increase our revenue growth in 2018 and beyond, offset
by a decrease in tradeshow expenses for the three-month period
ended June 30, 2018.
As a
percentage of revenue, sales and marketing expenses were 21% during
each of the three and six-month periods ended June 30, 2018 and
2017.
20
Product Development Expenses
Product
Development expenses consist primarily of salaries, stock-based
compensation, bonuses and licenses to develop new products and
technology to complement and/or enhance Platform
id.
Product development expenses increased $156,000, or 121%, and
$329,000, or 130%, during the three and six-month periods ended
June 30, 2018, respectively, compared to the same periods in 2017.
The increase is the result of less capitalization and increased
maintenance costs as certain projects were completed and placed
into production during 2017. The Company did not capitalize any
additional development costs during the three and six-month periods
ended June 30, 2018, compared to $314,000 and $680,000 during the
three and six-month periods ended June 30, 2017,
respectively.
As a
percentage of revenue, product development expenses were 8% for
both the three and six-month periods ended June 30, 2018, an
increase compared to 4% for the same periods of 2017.
Depreciation and Amortization
Depreciation and
amortization expenses increased $39,000, or 38%, and $72,000, or
35%, during the three and six-month periods ended June 30, 2018, as
compared to the same periods of 2017. The increase is due to
amortization of intangible assets acquired in the Interwest
acquisition.
Other expense
For the
three and six months ended June 30, 2017, other expense is
primarily the result of the change in fair value of stock received,
in lieu of cash, to settle an outstanding receivable.
Interest income (expense), net
Interest income
(expense), net, represents the non-cash interest associated with
the present value of the remaining anniversary payments of the
Interwest acquisition, partially offset by interest income on
deposit accounts.
Income tax (benefit) expense
We
recognized income tax expense of $224,000 and $214,000 during the
three and six-month periods ended June 30, 2018, respectively,
compared to $224,000 and $264,000 during the same periods of 2017.
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. For the three-month
period ended June 30, 2018, the variance between the
Company’s effective tax rate and the U.S. statutory rate of
21% is primarily attributable to additional expense as a result of
a tax shortfall associated with stock-based compensation in the
amount of $68,000, partially offset by foreign statutory tax rate
differentials and tax credits. For the six-month period ended June
30, 2018, the impact of stock-based compensation resulted in a tax
benefit of $4,000. For the three and six-month periods ended June
30, 2017, the variance between the Company’s effective tax
rate and the U.S. statutory rate at the time of 34% is primarily
attributable to the excess stock-based compensation tax benefit of
$45,000 and $122,000, respectively, as well as foreign statutory
tax rate differentials and tax credits.
Net Income
Net
income for the three and six-month periods ended June 30, 2018, was
$366,000 and $686,000, respectively, compared to $493,000 and
$817,000 for the same periods of 2017.
Although we
achieved increases in revenue and gross margin, these increases
were offset by higher operating expenses, primarily due to further
investment in our cloud-based products and increased headcount of
the sales team. Additionally, during the three-month period ended
June 30, 2018, we recorded a higher effective tax rate and income
tax expense as a result of a shortfall associated with stock-based
compensation.
Liquidity and Capital Resources
As of
June 30, 2018, we had $6,834,000 in cash and cash equivalents and
$1,642,000 in net accounts receivable. Current liabilities at June
30, 2018, totaled $2,638,000 including our accounts payable,
deferred revenue, accrued payroll liabilities, income taxes
payable, current portion of remaining payments for Interwest and
other accrued expenses. At June 30, 2018, our current assets
exceeded our current liabilities by $6,561,000.
21
Effective September
1, 2017, we renewed our Line of Credit, which increased the amount
of funds available for borrowing from $2,000,000 to $2,500,000. The
interest rate remained at LIBOR plus 2.50%. As of June 30, 2018,
the interest rate was 4.57% and we did not owe any amounts on the
Line of Credit.
We
manage our cash flow carefully with the intent to meet our
obligations from cash generated from operations. However, it is
possible that we will have to raise additional funds through the
issuance of equity in order to fund any future acquisitions or meet
future obligations. There can be no assurance that cash generated
from operations will be sufficient to fund our operating expenses,
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.
2018 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 believe we are
positioned well in this space to be both competitive and agile to
deliver these solutions to the market. As we have seen over the
last several quarters, the transition to digital platforms has had
a negative effect on our revenue in the Service portion of our
business and this is a trend we expect will continue over the next
few quarters.
One
of our competitive strengths is that we have embraced cloud
computing early on in our strategy. The transition to a
subscription model has been and will continue to be key for the
long-term sustainable growth management expects from our new
platforms.
We
will continue to focus on the following key strategic initiatives
during the remainder of 2018:
●
Expand our Platform
and Technology business development and sales team,
●
Expand customer
base,
●
Continue to migrate
acquired customers to our current platform,
●
Continue to expand
our newswire distribution,
●
Invest in
technology advancements and upgrades,
●
Generate profitable
sustainable growth,
●
Generate cash flows
from operations
We
believe there is significant demand for our products among the
middle, small and micro-cap markets globally, as they seek to find
better platforms and tools to disseminate and communicate their
respective messages. We believe we have the product sets, platforms
and capacity to meet their requirements.
We
have invested and will continue to invest in our product sets,
platforms and intellectual property development via internal
development and acquisitions. These developments are key to our
overall offerings in the market and necessary to keep our
competitive advantages and sustain the next round of growth that
management believes it can achieve. If we are successful in this
development effort, we believe we can achieve increases in revenues
per user as we move through 2018 and beyond.
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 is material to stockholders.
22
Not
applicable
As of
the end of the period covered by this quarterly report on Form10-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 Securities Exchange Act of 1934). 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.
23
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.
There
have been no material changes to our risk factors as previously
disclosed in our most recent 10-K/A filing.
None,
except as previously disclosed on the Current Report on Form 8-K
filed with the Securities and Exchange Commission on July 5,
2018.
None
.
Not
applicable
.
None.
(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
24
S
IGNATURES
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:
August 2, 2018
|
|
ISSUER DIRECT CORPORATION
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Brian R. Balbirnie
|
|
|
|
|
Brian
R. Balbirnie
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
By:
|
/s/
Steven Knerr
|
|
|
|
|
Steven
Knerr
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
25
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1. Basis Of PresentationNote 2. Summary Of Significant Accounting PoliciesNote 3: Acquisition Of Interwest Transfer Company, IncNote 4: Stock Options and Restricted Stock UnitsNote 5: Income TaxesNote 6: RevenueNote 7: Line Of CreditNote 8: 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