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: March 31, 2020
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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1 Glenwood
Avenue, Suite 1001, Raleigh NC 27603
(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
3,772,700 shares of common stock were issued and outstanding as of
April 30, 2020.
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which
registered
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Common Stock,
par value $0.001
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ISDR
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NYSE
American
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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3
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3
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4
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5
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6
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7
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8
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16
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23
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23
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PART
II – OTHER INFORMATION
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24
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24
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24
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24
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24
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24
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24
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25
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2
PART I – FINANCIAL INFORMATION
ITEM 1.
F
INANCIAL
STATEMENTS
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
B
ALANCE SHEETS
(in
thousands, except share and per share amounts)
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March 31,
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December 31,
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2020
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2019
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ASSETS
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(unaudited)
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Current
assets:
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Cash
and cash equivalents
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$
16,197
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$
15,766
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Accounts
receivable (net of allowance for doubtful accounts of $534 and
$700, respectively)
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2,172
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2,051
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Income
tax receivable
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—
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48
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Other
current assets
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241
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141
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Total
current assets
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18,610
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18,006
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Capitalized
software (net of accumulated amortization of $2,323 and $2,153,
respectively)
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964
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1,134
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Fixed
assets (net of accumulated amortization of $213 and $181,
respectively)
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867
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899
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Right-of-use asset
– leases
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2,053
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2,127
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Deferred tax
asset
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294
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256
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Other
long-term assets
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67
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77
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Goodwill
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6,376
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6,376
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Intangible
assets (net of accumulated amortization of $5,109 and $4,937,
respectively)
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3,343
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3,515
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Total assets
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$
32,574
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$
32,390
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$
383
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$
266
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Accrued
expenses
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1,060
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1,151
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Note payable
– short-term (net of discount of $13 and $19,
respectively)
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307
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301
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Income
taxes payable
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374
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310
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Deferred
revenue
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1,879
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1,812
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Total
current liabilities
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4,003
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3,840
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Deferred
income tax liability
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137
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141
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Lease liabilities
– long-term
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2,226
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2,309
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Total liabilities
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6,366
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6,290
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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 March 31, 2020 and December 31, 2019,
respectively.
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—
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—
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Common stock $0.001 par value,
20,000,000 shares authorized, 3,772,700 and
3,786,398
shares issued and outstanding as
of March 31, 2020 and December 31, 2019,
respectively.
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4
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4
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Additional
paid-in capital
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22,117
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22,275
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Other
accumulated comprehensive income (loss)
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24
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(16
)
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Retained
earnings
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4,063
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3,837
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Total stockholders' equity
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26,208
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26,100
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Total liabilities and stockholders’ equity
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$
32,574
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$
32,390
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The
accompanying notes are an integral part of these unaudited
financial statements.
3
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
O
PERATIONS
(UNAUDITED)
(in
thousands, except share and per share amounts)
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For the Three
Months Ended
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March
31,
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March
31,
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2020
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2019
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Revenues
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$
4,016
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$
4,179
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Cost of
revenues
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1,253
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1,302
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Gross
profit
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2,763
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2,877
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Operating costs and
expenses:
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General and
administrative
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1,216
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1,361
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Sales and marketing
expenses
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896
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820
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Product
development
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194
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337
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Depreciation and
amortization
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209
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212
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Total operating
costs and expenses
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2,515
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2,730
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Operating
income
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248
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147
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Interest income,
net
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58
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71
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Income before
income taxes
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306
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218
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Income tax
expense
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80
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13
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Net
income
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$
226
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$
205
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Income per share
– basic
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$
0.06
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$
0.05
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Income per share
– fully diluted
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$
0.06
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$
0.05
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Weighted average
number of common shares outstanding – basic
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3,788
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3,850
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Weighted average
number of common shares outstanding – fully
diluted
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3,824
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3,869
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The
accompanying notes are an integral part of these unaudited
financial statements.
4
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
C
OMPREHENSIVE INCOME
(UNAUDITED)
(in
thousands)
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For the Three
Months Ended
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March 31,
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March 31,
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2020
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2019
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Net
income
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$
226
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$
205
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Foreign
currency translation adjustment
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40
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(3
)
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Comprehensive
income
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$
266
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$
202
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The
accompanying notes are an integral part of these unaudited
financial statements.
5
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
E
QUITY
(UNAUDITED)
(in
thousands, except share and per share amounts)
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Common
Stock
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Additional
Paid-in
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Accumulated
Other Comprehensive
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Retained
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Total
Stockholders’
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Shares
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Amount
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Capital
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Income
(Loss)
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Earnings
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Equity
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Balance
at December 31, 2018
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3,829,572
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$
4
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$
22,525
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$
(17
)
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$
3,151
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$
25,663
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Stock-based
compensation expense
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—
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—
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137
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—
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—
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137
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Exercise of stock
awards, net of tax
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24,996
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—
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—
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—
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—
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—
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Foreign currency
translation
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—
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—
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—
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(3
)
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—
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(3
)
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Net
income
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—
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—
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—
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—
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205
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205
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Balance
at March 31, 2019
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3,854,568
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$
4
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$
22,662
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$
(20
)
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$
3,356
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$
26,002
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Balance
at December 31, 2019
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3,786,398
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$
4
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$
22,275
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$
(16
)
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$
3,837
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$
26,100
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Stock-based
compensation expense
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—
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—
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45
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—
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—
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45
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Exercise of stock
awards, net of tax
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8,002
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—
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—
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—
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—
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—
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Stock repurchase
and retirement
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(21,700
)
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—
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(203
)
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—
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—
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(203
)
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Foreign currency
translation
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—
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—
|
—
|
40
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—
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40
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|
Net
income
|
—
|
—
|
—
|
—
|
226
|
226
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Balance
at March 31, 2020
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3,772,700
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$
4
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$
22,117
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$
24
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$
4,063
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$
26,208
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The
accompanying notes are an integral part of these consolidated
financial statements.
6
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
C
ASH
FLOWS
(UNAUDITED)
(in
thousands)
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For the Three Months Ended
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March 31,
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March 31,
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2020
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2019
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Cash flows from operating activities:
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Net
income
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$
226
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$
205
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Adjustments
to reconcile net income to net cash provided by operating
activities:
|
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Depreciation
and amortization
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374
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412
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Bad
debt expense
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93
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224
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Deferred
income taxes
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(42
)
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6
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Non-cash
interest expense
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6
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7
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Stock-based
compensation expense
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45
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137
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Changes
in operating assets and liabilities:
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|
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Decrease
(increase) in accounts receivable
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(219
)
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(869
)
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Decrease
(increase) in other assets
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32
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(273
)
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Increase
(decrease) in accounts payable
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118
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254
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Increase
(decrease) in accrued expenses
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(105
)
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218
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Increase
(decrease) in deferred revenue
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74
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215
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Net
cash provided by operating activities
|
602
|
536
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|
|
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Cash flows from investing activities:
|
|
|
|
Purchase
of VisualWebcaster Platform
|
—
|
(2,788
)
|
|
Purchase
of fixed assets
|
—
|
(6
)
|
|
Net
cash used in investing activities
|
—
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(2,794
)
|
|
|
|
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Cash flows from financing activities:
|
|
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Payment
for stock repurchase and retirement
|
(203
)
|
—
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Net
cash used in financing activities
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(203
)
|
—
|
|
|
|
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Net
change in cash
|
399
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(2,258
)
|
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Cash
– beginning
|
15,766
|
17,222
|
|
Currency
translation adjustment
|
32
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(3
)
|
|
Cash
– ending
|
$
16,197
|
$
14,961
|
|
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Supplemental disclosures:
|
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Cash
paid for income taxes
|
$
10
|
$
37
|
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Non-cash activities:
|
|
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Right-of-use
assets obtained in exchange for lease liabilities
|
$
—
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$
260
|
The
accompanying notes are an integral part of these unaudited
financial statements.
7
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
N
OTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The
unaudited interim consolidated balance sheet as of March 31, 2020
and consolidated statements of operations, comprehensive income,
stockholders’ equity, and cash flows for the three-month
periods ended March 31, 2020 and 2019 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 2019
audited financial statements of Issuer Direct Corporation (the
“Company”, “We”, or “Our”)
filed on Form 10-K.
Note 2. Summary of Significant Accounting Policies
The
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Significant intercompany
accounts and transactions are eliminated in
consolidation.
Earnings Per Share (EPS)
Earnings per share
guidance requires that basic net income per common share be
computed by dividing net income for the period by the weighted
average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing the net income
for the period by the weighted average number of common and
dilutive common equivalent shares outstanding during the period.
Shares issuable upon the exercise of stock options totaling 93,000
and 92,000 were excluded in the computation of diluted earnings per
common share during the three-month periods ended March 31, 2020
and 2019, respectively, because their impact was
anti-dilutive.
Revenue Recognition
Substantially all
of the Company’s revenue comes from contracts with customers
for subscriptions to its cloud-based products or contracts to
perform compliance or other services. Customers consist primarily
of corporate issuers and professional firms, such as investor
relations and public relations firms. In the case of our news
distribution and webcasting offerings, 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 Services contracts include obligations to deliver compliance
services and annual report printing and distribution on either a
stand ready obligation or on a per project or event basis. Set up
fees for compliance services are considered a separate performance
obligation and are satisfied upfront. Set up fees for our transfer
agent module and investor relations content management module are
immaterial. The Company’s subscription and service contracts
are generally for one year, with automatic renewal clauses included
in the contract until the contract is cancelled. The contracts do
not contain any rights of returns, guarantees or warranties. Since
contracts are generally for one year, all of the revenue is
expected to be recognized within one year from the contract start
date. As such, the Company has elected the optional exemption that
allows the Company not to disclose the transaction price allocated
to performance obligations that are unsatisfied or partially
satisfied at the end of each reporting period.
The
Company recognizes revenue for subscriptions evenly over the
contract period, upon distribution for per release contracts and
upon event completion for webcasting events. For service contracts
that include stand ready obligations, revenue is recognized evenly
over the contract period. For all other services delivered on a per
project or event basis, the revenue is recognized at the completion
of the event. The Company believes recognizing revenue for
subscriptions and stand ready obligations using a time-based
measure of progress, best reflects the Company’s performance
in satisfying the obligations.
8
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.
Additionally, deferred revenue is related to pre-paid packages of
press releases for which the releases have not yet been
disseminated. Deferred revenue as of March 31, 2020 and December
31, 2019 was $1,879,000 and $1,812,000, respectively, and is
expected to be recognized within one year. Revenue recognized for
the three months ended March 31, 2020 and 2019, that was included
in the deferred revenue balance at the beginning of each reporting
period, was approximately $877,000 and $690,000, respectively.
Accounts receivable, net of allowance for doubtful accounts,
related to contracts with customers was $2,172,000 and $2,051,000
as of March 31, 2020 and December 31, 2019, respectively. Since
substantially all of the contracts have terms of one year or less,
the Company has elected to use the practical expedient regarding
the existence of a significant financing.
Costs
to obtain contracts with customers consist primarily of sales
commissions. As of March 31, 2020 and December 31, 2019, the
Company has capitalized $21,000 of costs to obtain contracts that
are expected to be amortized over more than one year. For contract
costs expected to be amortized in less than one year, the Company
has elected to use the practical expedient allowing the recognition
of incremental costs of obtaining a contract as an expense when
incurred. The Company has considered historical renewal rates,
expectations of future renewals and economic factors in making
these determinations.
Cash Equivalents
For
purposes of the Company’s financial statements, the Company
considers all highly liquid investments purchased with an original
maturity date of three months or less to be cash
equivalents.
Accounts Receivable and Allowance for Doubtful
Accounts
The
Company monitors outstanding receivables based on factors
surrounding the credit risk of specific customers, historical
trends, and other information. Credit is granted on an unsecured
basis. The allowance for doubtful accounts is estimated based on an
assessment of the Company’s ability to collect on customer
accounts receivable. There is judgment involved with estimating the
allowance for doubtful accounts and if the financial condition of
the Company’s customers were to deteriorate, resulting in
their inability to make the required payments, the Company may be
required to record additional allowances or charges against
revenues. The Company generally writes-off accounts receivable
against the allowance when it determines a balance is uncollectible
and no longer actively pursues its collection.
Concentration of Credit Risk
Financial
instruments and related items which potentially subject the Company
to concentrations of credit risk consist primarily of cash, cash
equivalents and accounts receivables. The Company places its cash
and temporary cash investments with credit quality institutions.
Such cash balances are typically in excess of the FDIC insurance
limit of $250,000. To reduce its risk associated with the failure
of such financial institutions, the Company evaluates at least
annually the rating of the financial institution in which it holds
deposits. As of March 31, 2020, the total amount exceeding such
limit was $14,905,000. The Company also had cash-on-hand of
$358,000 in Europe and $254,000 in Canada as of March 31,
2020.
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.
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 Financial Aaccounting Standards Board
(“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.
9
Capitalized Software
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. No costs were capitalized during the three month
periods ended March 31, 2020 and 2019. The Company recorded
amortization expense of $170,000 and $204,000 during the three
months ended March 31, 2020 and 2019, respectively. All of the
amortization is included in Cost of revenues on the Consolidated
Statements of Operations, with the exception of $5,000 and $4,000,
which is included in Depreciation and amortization during the three
months ended March 31, 2020 and 2019, respectively, as it relates
to back-office supporting systems.
Lease Accounting
We
determine if an arrangement is a lease at inception. Our operating
lease agreements are primarily for office space and are included
within operating lease right-of-use (“ROU”) assets and
operating lease liabilities on the consolidated balance
sheets.
ROU
assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our obligation to make lease
payments arising from the lease. ROU assets and lease liabilities
are recognized at the commencement date based on the present value
of lease payments over the lease term. Our variable lease payments
consist of non-lease services related to the lease and payments
under operating leases classified as short-term. Variable lease
payments are excluded from the ROU assets and lease liabilities and
are recognized in the period in which the obligation for those
payments is incurred. As most of our leases do not provide an
implicit rate, we use our incremental borrowing rate based on the
information available at commencement date in determining the
present value of lease payments. ROU assets also include any lease
payments made and exclude lease incentives. Rental expense for
lease payments related to operating leases is recognized on a
straight-line basis over the lease term.
Fair Value Measurements
ASC
Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial statements are
categorized based upon the hierarchy of levels of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
●
Level 1 –
Quoted prices are available in active markets for identical assets
or liabilities at the reporting date. Generally, this includes debt
and equity securities that are traded in an active market. Our cash
and cash equivalents are quoted at Level 1.
●
Level 2 –
Observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities. Generally, this includes debt
and equity securities that are not traded in an active
market.
●
Level 3 –
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models,
discounted cash flow methodologies, or other valuation techniques,
as well as instruments for which the determination of fair value
requires significant management judgment or
estimation.
As of
March 31, 2020 and December 31, 2019, we believe that the fair
value of our financial instruments other than cash and cash
equivalents, such as, accounts receivable, our line of credit,
notes payable, and accounts payable approximate their carrying
amounts.
Translation of Foreign Financial Statements
The
financial statements of the foreign subsidiaries of the Company
have been translated into U.S. dollars. All assets and liabilities
have been translated at current rates of exchange in effect at the
end of the period. Income and expense items have been translated at
the average exchange rates for the year or the applicable interim
period. The gains or losses that result from this process are
recorded as a separate component of other accumulated comprehensive
income until the entity is sold or substantially
liquidated.
10
Business Combinations, Goodwill and Intangible Assets
We
account for business combinations under FASB ASC No. 805 –
Business Combinations and the related acquired intangible assets
and goodwill under FASB ASC No. 350 – Intangibles –
Goodwill and Other. The authoritative guidance for business
combinations specifies the criteria for recognizing and reporting
intangible assets apart from goodwill. We record the assets
acquired and liabilities assumed in business combinations at their
respective fair values at the date of acquisition, with any excess
purchase price recorded as goodwill. Goodwill is an asset
representing the future economic benefits arising from other assets
acquired in a business combination that are not individually
identified and separately recognized. Intangible assets consist of
client relationships, customer lists, distribution partner
relationships, software, technology, non-compete agreements and
trademarks that are initially measured at fair value. At the time
of the business combination, trademarks are considered an
indefinite-lived asset and, as such, are not amortized as there is
no foreseeable limit to cash flows generated from them. The
goodwill and intangible assets are assessed annually for
impairment, or whenever conditions indicate the asset may be
impaired, and any such impairment will be recognized in the period
identified. The client relationships (7-10 years), customer lists
(3 years), distribution partner relationships (10 years),
non-compete agreements (5 years) and software and technology (3-6
years) are amortized over their estimated useful
lives.
Comprehensive Income
Comprehensive
income consists of net income and other comprehensive income
related to changes in the cumulative foreign currency translation
adjustment.
Advertising
The
Company expenses advertising costs as incurred.
Stock-based 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.
Recently adopted accounting pronouncements
On
January 1, 2020, the Company adopted ASU 2017-04
Intangibles – Goodwill and Other (Topic
350): Simplifying the Test for Goodwill
Impairment
. These amendments
eliminate Step 2 from the goodwill impairment test. The annual, or
interim, goodwill impairment test is performed by comparing the
fair value of a reporting unit with its carrying amount. An
impairment charge should be recognized for the amount by which the
carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. In addition, income tax
effects from any tax deductible goodwill on the carrying amount of
the reporting unit should be considered when measuring the goodwill
impairment loss, if applicable. The amendments also eliminate the
requirements for any reporting unit with a zero or negative
carrying amount to perform a qualitative assessment and, if it
fails that qualitative test, to perform Step 2 of the goodwill
impairment test. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the
quantitative impairment test is necessary. This amendment is
effective for public business entities that are a SEC filer for
annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. The Company does not expect the
adoption of this pronouncement to have a significant impact to the
financial statements.
Note 3: Recent Acquisitions
Acquisition of the VisualWebcaster Platform
(“VWP”)
On
January 3, 2019 (the “Closing Date”), the Company
entered into an Asset Purchase Agreement (the “VWP
Agreement”) with Onstream Media Corporation, a Florida
corporation (the “Seller”), whereby the Company
purchased certain assets related primarily to customer accounts,
intellectual property, lease deposits and assumed certain existing
contractual obligations related primarily to data processing and
storage, bandwidth and facility leases relating to the
Seller’s VisualWebcaster Platform ("VWP”). The accounts
receivable and the accounts payable related to VWP and existing as
of the Closing Date were not included as part of the VWP
Agreement.
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 $155,000, are not included as a
component of the acquisition accounting, but are recognized as
expenses in the periods in which the costs are incurred. The
Company employed a third party valuation firm to assist in
determining the purchase price allocation of assets and liabilities
acquired from Seller. The valuation resulted in the tangible and
intangible assets and liabilities disclosed below. The income
approach was used to determine the value of the customer
relationships and non-compete agreement. The income approach
determines the fair value for the asset based on the present value
of cash flows projected to be generated by the asset. Projected
cash flows are discounted at a rate of return that reflects the
relative risk of achieving the cash flow and the time value of
money. Projected cash flows considered multiple factors, including
current revenue from existing customers; analysis of expected
revenue and attrition trends; reasonable contract renewal
assumptions from the perspective of a marketplace participant;
probability of executives competing, expected profit margins giving
consideration to marketplace synergies; and required returns to
contributory assets. The relief from royalty method was used to
value the technology. The relief from royalty method determines the
fair value by calculating what a typical license fee would be in
order to obtain the same or similar license of the technology from
market participants. Projected cash flows consider revenue
assumptions allocated to the technology.
11
The
transaction consisted of a single cash payment to the Seller in the
amount of $2,788,000. In connection with the acquisition, the
Company assumed two short-term leases associated with an office and
co-location for certain computer equipment in New York City, New
York as well as entered into a three-year office lease in Florida.
In addition to the intangible assets listed below, the purchase
price included lease deposits of $13,000 and a right of use asset
and corresponding lease liability for the office lease in Florida
in the amount of $125,000.
The
preliminary identified intangible assets as a result of the
acquisition are as follows (in 000’s):
|
Customer
relationships
|
$
865
|
|
Technology
|
497
|
|
Non-compete
agreement
|
69
|
|
Goodwill
|
1,344
|
|
|
$
2,775
|
Note 4: Equity
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 March 31, 2020, there are 38,583 shares which
remain to be granted under the 2014 Plan.
The
following table summarizes information about stock options
outstanding and exercisable at March 31, 2020:
|
|
Options
Outstanding
|
Options
Exercisable
|
||
|
Exercise Price
Range
|
Number
|
Weighted
Average
Remaining
Contractual
Life (in
Years)
|
Weighted
Average
Exercise
Price
|
Number
|
|
$
0.01 - 7.00
|
10,000
|
5.64
|
$
6.80
|
10,000
|
|
$
7.01 - 8.00
|
20,313
|
3.49
|
$
7.76
|
20,313
|
|
$
8.01 - 12.00
|
8,167
|
6.95
|
$
9.99
|
4,167
|
|
$
12.01 - 15.00
|
57,000
|
8.12
|
$
13.09
|
44,500
|
|
$
15.01 - 17.40
|
32,000
|
8.17
|
$
17.40
|
32,000
|
|
Total
|
127,480
|
7.12
|
$
12.63
|
110,980
|
As of
March 31, 2020, the Company had unrecognized stock compensation
related to the options of $75,000, which will be recognized through
2021.
During
the three months ended March 31, 2020, the
Company did not grant any restricted stock
units.
During the three months ended March 31, 2020, 8,002
restricted stock units with an intrinsic value of $12.61 vested. As
of March 31, 2020, there was $66,000 of unrecognized compensation
cost related to our unvested restricted stock units, which will be
recognized through 2021.
Stock repurchase and retirement
On
August 7, 2019, the Company publicly announced a share repurchase
program under which the Company is authorized to repurchase up to
$1,000,000 of its common shares. On March 16, 2020, the Company
publicly announced that the Company increased the share repurchase
program to repurchase up to $2,000,000 of its common shares. As of
March 31, 2020, the Company repurchased a total of 97,870 shares at
an aggregate cost of $972,000 (not including commissions of $4,000)
as shown in the table below ($ in 000’s, except share or per
share amounts):
12
|
Shares
Repurchased
|
||||
|
Period
|
Total Number of
Shares Repurchased
|
Average Price
Paid Per Share
|
Total Number of
Shares Purchased as Part of Publicly Announced Program
|
Maximum Dollar
Value of Shares that May Yet Be Purchased Under the
Program
|
|
August 7 -31,
2019
|
22,150
|
$
9.34
|
22,150
|
$
793
|
|
September 1-30,
2019
|
2,830
|
$
10.00
|
2,830
|
$
765
|
|
October 1-31,
2019
|
39,363
|
$
10.44
|
39,363
|
$
354
|
|
November 1-30,
2019
|
11,827
|
$
10.43
|
11,827
|
$
231
|
|
December 1-31,
2019
|
—
|
—
|
—
|
$
231
|
|
January 1-31,
2020
|
—
|
—
|
—
|
$
231
|
|
February 1-29,
2020
|
—
|
—
|
—
|
$
231
|
|
March 1-31,
2020
|
21,700
|
$
9.33
|
21,700
|
$
1,028
|
|
Total
|
97,870
|
$
9.93
|
97,870
|
$
1,028
|
Note 5: Income taxes
We
recognized income tax expense of $80,000 for the three-month period
ended March 31, 2020, compared to income tax expense of $13,000
during the same period of 2019. 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 March 31, 2020, the
variance between the Company’s effective tax rate and the
U.S. statutory rate of 21% is primarily attributable to state
income tax. For the three-month periods ended March 31, 2019, the
variance between our effective tax rate and the U.S. statutory
rate, is primarily attributable to excess stock-based compensation
tax benefits of $35,000, recognized in income tax expense during
the period, as well as, tax credits offset by state income
taxes.
Note 6: Leases
Generally, our
leasing activity consists of office leases. In March 2019, we
signed a new lease to move our corporate headquarters to Raleigh,
North Carolina. As we continue our transition from a services-based
company to a cloud-based platform company, the new lease affords us
the ability to separate our warehouse from our corporate office.
The new lease, which had a lease commencement date of October 2,
2019, is for 9,766 square feet and expires December 31, 2027.
Minimum lease payments are $2,997,000, not including a tenant
improvement allowance of $488,000, which is included in fixed
assets as of March 31, 2020. We recognized a ROU asset and
corresponding lease liability of $2,596,000, which represents the
present value of minimum lease payments discounted at 3.77%, the
Company’s incremental borrowing rate at lease
inception.
Additionally, we
have an office in Salt Lake City, Utah, which is on a short-term
lease that is less than twelve months. As a result, we have elected
the short-term lease recognition exemption for our Utah office
lease, which means, for those leases we do not expect to extend
beyond twelve months, we will not recognize ROU assets or lease
liabilities.
In
connection with the Company’s acquisition of VWP (See Note
4), the Company assumed two short term leases in New York City, NY
and entered into a three-year office lease in Florida. We have
elected the short term lease exemption for the two New York leases
because we do not expect them to extend beyond twelve months. For
the Florida lease, which was signed on January 4, 2019, we
recognized a ROU asset and corresponding lease liability of
$125,000, which represents the present value of minimum lease
payments discounted at 4.25%, the Company’s incremental
borrowing rate at lease inception.
13
Lease
liabilities totaled $2,610,000 as of March 31, 2020. The current
portion of this liability of $384,000 is included in Accrued
expenses on the Consolidated balance sheets and the long-term
portion of $2,226,000 is included in Lease liabilities on the
Consolidated Balance Sheets. Rent expense consists of both
operating lease expense from amortization of our ROU assets as well
as variable lease expense which consists of non-lease components of
office leases (i.e. common area maintenance) or rent expense
associated with short term leases. The components of lease expense
were as follows (in 000’s):
|
|
Three months
ended
|
|
|
|
March
31,
|
|
|
|
2020
|
2019
|
|
Lease expense
|
|
|
|
Operating lease
expense
|
$
87
|
$
41
|
|
Variable lease
expense
|
32
|
42
|
|
Rent
expense
|
$
119
|
$
83
|
The
weighted-average remaining non-cancelable lease term for our
operating leases was 4.8 years as of March 31, 2020. As of March
31, 2020, the weighted-average discount rate used to determine the
lease liability was 3.8%. The future minimum lease payments to be
made under non-cancelable operating leases at March 31, 2020, are
as follows (in 000’s):
|
Year
Ended December 31:
|
|
|
2020
|
$
288
|
|
2021
|
394
|
|
2022
|
359
|
|
2023
|
369
|
|
2024
|
379
|
|
Thereafter
|
1,201
|
|
Total lease
payments
|
$
2,990
|
|
Present value
adjustment
|
(380
)
|
|
Lease
liability
|
2,610
|
We have
performed an evaluation of our other contracts with customers and
suppliers in accordance with Topic 842 and have determined that,
except for the leases described above, none of our contracts
contain a lease.
Note 7: Revenue
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. The following tables present revenue
disaggregated by revenue stream in (000’s):
|
|
Three months ended March 31,
|
|||
|
Revenue Streams
|
2020
|
2019
|
||
|
Platform
and Technology
|
$
2,685
|
66.9
%
|
$
2,665
|
63.8
%
|
|
Services
|
1,331
|
33.1
%
|
1,514
|
36.2
%
|
|
Total
|
$
4,016
|
100.0
%
|
$
4,179
|
100.0
%
|
No
customers accounted for more than 10% of the operating revenues
during the three-month periods ended March 31, 2020 or
2019.
Note 8: Line of Credit
Effective October
3, 2019, the Company renewed its Line of Credit, which increased
the term to two years, with all other provisions remaining the
same. The amount of funds available for borrowing are $3,000,000
and the interest rate is LIBOR plus 1.75%. As of March 31, 2020,
the interest rate was 2.74% and the Company did not owe any amounts
on the Line of Credit.
14
Note 9: Subsequent Events
On
January 30, 2020, the World Health Organization declared the
coronavirus outbreak a "Public Health Emergency of International
Concern" and on March 11, 2020, declared it to be a pandemic.
Actions taken around the world to help mitigate the spread of the
coronavirus include restrictions on travel, and quarantines in
certain areas, and forced closures for certain types of public
places and businesses. The coronavirus and actions taken to
mitigate it have had and are expected to continue to have an
adverse impact on the economies and financial markets of many
countries, including the geographical areas in which we operate.
Our offices have been ordered temporarily closed for the safety of
our employees, their families and our community. While it is
unknown how long these conditions will last and what the complete
financial effect will be to the Company, we could experience a
material disruption of our employees and operations, a decline in
revenue, a decline in value of our assets, deterioration of our
customer base and the inability of our customers to pay for
subscriptions or services provided. We have performed a qualitative
and quantitative review of our goodwill and intangible assets as of
March 31, 2020 and have determined that there has been no
impairment as a result of the impact of coronavirus or other
factors, however, due to the uncertainty surrounding the pandemic,
we will re-evaluate its impact on goodwill and intangible assets at
the end of the second quarter of 2020.
On
April 16, 2020, we entered into a $1,025,000 loan under the Small
Business Administration’s (“SBA”) Paycheck
Protection Program ("the PPP"). The loan proceeds were intended to
be used for payroll, rent and utilities over the eight- week period
following the date of the loan. At the time we applied for the PPP
loan, we believed in good faith that the Company met all of the
certification requirements for a PPP loan. However, on April 23,
2020, the SBA issued additional guidance with respect to PPP loans.
We immediately evaluated this new guidance and concluded that
currently we may not be able to meet all of the certification
requirements. As such, the Company immediately decided to return
all of the funds received under the PPP loan (including interest
accrued on such funds) to the SBA as soon as possible and the funds
were returned on April 28, 2020.
15
ITEM 2.
M
ANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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 Form 10-Q, the words
“anticipate,” “believe,”
“estimate,” “intend” and
“expect” and similar expressions are intended to
identify such forward-looking statements. Such forward-looking
statements include, without limitation, the statements regarding
the Company’s strategy, future sales, future expenses, future
liquidity and capital resources. All forward-looking statements in
this 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 for many reasons, including the impact of the coronavirus
pandemic. 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 for the year ended December 31, 2019,
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 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 One Glenwood
Ave., Suite 1001, Raleigh, North Carolina, 27603.
We
announce material financial information to our investors using our
investor relations website, 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 a premier provider of
communications and compliance technology solutions that are
designed to help organizations tell their stories globally. Issuer
Direct's principal platform, Platform
id.
, empowers users by thoughtfully integrating the
most relevant tools, technologies and products, thus eliminating
the complexity associated with producing and distributing their
business communications and financial
information.
We work with a diverse customer base, which
includes not only corporate issuers and private companies, but also
investment banks, professional firms, such as investor relations
and public relations firms, as well as the accounting and legal
communities. We also sell products and services to others in the
financial services industry, including brokerage firms and mutual
funds. Our customers and their service providers utilize
Platform
id
.
and related solutions from document
creation all the way to dissemination to regulatory bodies, news
outlets, financial platforms and their shareholders. Private
companies primarily use our news distribution and webcasting
products and services to disseminate their message globally.
Platform
id.
’s subscription platform guides thousands of
customers through the process of communicating their message to a
large audience.
We
also work with several select stock exchanges by making available
certain parts of our platform under agreements to integrate our
offerings within their products. We believe such partnerships will
yield increased exposure to a targeted customer base that could
impact our revenue and overall brand in the market.
On
January 30, 2020, the World Health Organization declared the
coronavirus outbreak a "Public Health Emergency of International
Concern" and on March 11, 2020, declared it to be a pandemic.
Actions taken around the world to help mitigate the spread of the
coronavirus include restrictions on travel, and quarantines in
certain areas, and forced closures for certain types of public
places and businesses. The coronavirus and actions taken to
mitigate it have had and are expected to continue to have an
adverse impact on the economies and financial markets of many
countries, including the geographical areas in which we operate.
Our offices have been ordered temporarily closed for the safety of
our employees their families and our community. While it is unknown
how long these conditions will last and what the complete financial
effect will be to the Company, we could experience a material
disruption of our employees and operations, a decline in revenue, a
decline in value of our assets, deterioration of our customer base
and the inability of our customers to pay for subscriptions or
services provided. To date, we have not seen a material impact to
our business other than causing our employees to work remotely,
however, the concentrations of our customer base with middle, small
and micro-cap public customers make it reasonably possible that we
are vulnerable to the risk of a near-term negative impact of the
coronavirus. Additionally, the long-term financial impact from the
coronavirus cannot be reasonably estimated at this
time.
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. Set
forth below is an infographic depicting the modules included in
Platform
id.
and
the services we provide:
16
Platform and Technology
As we continue to focus on our 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 67% of total revenue during the first quarter of
2020 compared to 64% during the first quarter of 2019. In 2020, the
growth was attributed primarily to increased subscriptions of
Platform
id.
as a result of our focus on a platform
first
engagement strategy and
converting customers which historically relied on us for services
work to utilizing Platform
id.
In 2019, growth in our Platform &
Technology revenue stream was led by the acquisition of the
VisualWebcaster Platform (“VWP”) in our webcasting
business as well as increased subscriptions of Platform
id.
We continue to invest in both our current
Platform
id.
offerings as well as additional
capabilities that we intend to incorporate into our Platform and
Technology offerings to further advance our strategy of bringing
the issuer and investor closer together. During the first quarter,
we were able to pivot portions of our platform to specifically
address the coronavirus business limitations. This resulted in a
new Virtual Annual Meeting product, which combines our webcasting
and proxy voting technology together. This new enhancement provides
companies a digital alternative to in-person meetings regarding
their annual general meeting. Additionally, we also upgraded the
technology of our conference software product to allow conferences
to go fully virtual and hold
one-on-one meetings
with audio, video and share features.
We believe both these developments will assist us in delivering
best of breed solutions to the market, but also lead us into new
opportunities
during this changing environment.
Platform
id.
Platform
id.
is our cloud-based subscription
platform that efficiently and effectively helps our customers
manage their events when seeking to distribute their messaging to
key constituents, investors, markets and regulatory systems around
the globe. Platform
id.
consists of several related but
distinct shareholder communications and compliance modules that
public companies utilize every quarter when they have requirements
to meet reporting obligations as well as fair disclosure to the
markets.
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 of these needs in a
single, secure, cloud-based platform - one that offers a customer
control, increases efficiencies, demonstrates clear value and, most
importantly, delivers consistent and compliant messaging from one
centralized platform.
17
Communications Modules
ACCESSWIRE
Our press release offering, which is marketed
under the brand
ACCESSWIRE
,
is a cost-effective, Regulation Fair Disclosure
(“FD”) news dissemination and media outreach service.
The ACCESSWIRE product offering focuses on press release
distribution for both private and public companies globally. We
believe ACCESSWIRE is becoming a competitive alternative to the
traditional newswires because we have been able to integrate
customer editing features and improve the targeting and growing
analytics reporting systems as well as increase its dissemination
distribution footprint. We believe this strategy will enable us to
add new customers for 2020 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, flat-fee subscriptions.
Currently, ACCESSWIRE is available within Platform
id.
as part of a 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. During the second quarter of 2019, one of our
key partners made an industry-wide decision to no longer accept
investor commentary content. A significant portion of our
historical ACCESSWIRE revenue was generated from this type of
content, as further discussed in the Results of Operations below.
As part of our efforts to expand our customer base during the
second half of 2018, we began to market ACCESSWIRE more heavily
towards public and private company news issuers, which we believe
will mitigate the impact of the loss of the investment commentary
content long-term. Absent of the investment commentary business,
our ACCESSWIRE news business grew 36% during the first quarter of
2020 compared to the prior year. Further disruption in any of our
partnerships could have a materially adverse impact on our
ACCESSWIRE and overall business.
Professional Conference Organizer (PCO) Module
At the end of 2018, we released a new module to
Platform
id.
, centered around the professional conference
organizer (“PCO”)
. This subscription is being
licensed to investor conference organizers, which in the aggregate
we believe hold an estimated 1,000 plus events a year, although
this number has been and is expected to be reduced in the near
future as a result of the coronavirus. This cloud-based product is
integrated within Platform
id.
and enhances our
communications module subscription offerings of newswire,
newsrooms, webcasting and shareholder targeting.
This
cloud-based platform, also available as a mobile app, offers
organizers, issuers and investors the ability to register, request
and approve one-on-one meetings, manage schedules, perform event
promotion and sponsorship, print attendee badges and manage
lodging. By combining this module with the other components of
Platform
id.
(particularly webcasting and newswire modules), we believe it gives
us a unique offering for PCOs that is not available elsewhere in
the market.
We
believe entering this business expands our current Platform and
Technology revenue base, and as an adjacency, should assist in
making Platform
id.
a platform of choice for investment banks, issuers and
investors.
As noted, the coronavirus has caused
restrictions on travel, quarantines in certain areas, and forced
closures of most all types of public places and businesses, which
includes investor conferences. As a result, a significant portion
of the conferences scheduled to use our software during the first
and second quarter of 2020 have cancelled or delayed their
conferences to the second half of the year. There can be no
assurance at this time that these events will occur in-person
anytime in 2020. To address these short and long-term impacts, we
upgraded our
conference software product to allow conferences to go fully
virtual and hold
one-on-one
meetings
with
audio, video and share features. We believe this development can
assist in delivering best of breed solutions to the market, but
also lead us into new opportunities
during this environment.
Investor Network
Over the past few years, we have been focused on
refining the model of digital distribution of our customers’
message to the investment community and beyond. This is being
accomplished by integrating our shareholder outreach module,
Investor Network, into and with Platform
id.
Most of the customers subscribing to
this module today are historical PrecisionIR (“PIR”)
– Annual Report Service (“ARS”) users, as well as
new customers purchasing the entire Platform
id.
subscription. We have migrated some of
the customers from the traditional ARS business into this new
digital subscription business. However, there can be no assurances
these customers will continue using this digital platform in the
long term if market conditions or shareholder interest is not
present.
Webcasting
The earnings event industry is a highly
competitive space with the majority of the business being driven
from practitioners in investor relations and communications firms.
We estimate there are over 5,000 companies in North America
conducting earnings events each quarter that include a
teleconference, webcast, or both as part of their events.
Platform
id.
also
incorporates other elements of the
earnings event, including earnings date/call announcement, earnings
press release and SEC Form 8-K filings. There are a handful of our
competitors that can offer this integrated full service solution
today. However, we believe our real-time event setup and integrated
approach offers a more effective way to manage the process as well
as attract an audience of investors.
Additionally,
as a commitment to broadening the reach of our webcast platform,
all events are broadcast live within our shareholder outreach
module, which helps drive new audiences and give companies the
ability to view their analytics and engagement of each event. We
believe these analytics, which will be a component of our Insight
and Analytics module, will increase the demand for our webcasting
platform among the corporate issuer community.
18
Our VWP
product is a leading cloud-based webcast, webinar and training
platform that delivers live and on-demand streaming of events to
audiences of all sizes. VWP allows customers to create, produce and
deliver events, which we feel integrates well into Platform
id.
VWP enables us
the ability to host thousands of additional webcasts each year,
expanding and diversifying our webcast business from our historical
earnings based events to include corporate meetings, training
sessions and town hall type events. As we expand our platform, it
is vital for us to have solutions that service both our core public
companies but also a growing segment of private customers. As a
result of the coronavirus outbreak, many companies have been
holding meetings virtually, which has increased demand for this
product.
Investor Relations Content
Our investor relations content network is another
component of Platform
id.
, which is used to create the investor
relations’ tab of a 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 which 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 or as a component of a fully
designed and hosted website for pre-IPO companies, SEC 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 Platform
id.
As such, companies can produce content
for public distribution and it is automatically linked to their
corporate website, distributed to targeted groups and placed into
our data feed partners.
Compliance Modules
Platform
id.
’s disclosure reporting module is a document
conversion, editing and filing offering which is designed for
reporting companies and professionals seeking to insource the
document drafting, editing and filing processes to the SEC’s
EDGAR system. This module is available in both a secure public
cloud within our Platform
id.
subscription as well as in a private
cloud option for corporations, mutual funds and the legal community
looking to further enhance their internal document process. As this
module has begun to be adopted by our customers, we have seen a
negative impact on our legacy disclosure conversion services
business. However, the margins associated with our Platform and
Technology business compared to our Services business are higher
and align with our long-term strategy, and as such, we believe this
module will have a positive impact on our compliance business going
forward.
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 are able to
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 about their
shareholders, stock ledgers and reports and to issue new shares
from our cloud-based stock transfer module. Managing the
capitalization table of a public company or pre-IPO company is a
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 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 we
believe has resulted in a more efficient process for both our
customers and us.
Our
proxy module is marketed as a fully integrated, real-time voting
platform for our customers and their shareholders of record. This
module is utilized for every annual meeting or special meeting we
manage for our customers and offers both full-set mailing and
notice of internet availability options. We have also upgraded this
offering to now offer the ability for our customers to hold their
annual general meeting virtually. This product will utilize our
webcasting technology to allow all shareholders of our customers to
participate in the meeting regardless of location. Shareholders can
utilize our voting platform prior to the meeting or vote in person
at the virtual meeting by going to the meeting’s dedicated
URL and entering their specific unique identifying number supplied
to them on either their proxy card or electronically.
Services
Given our focus on cloud-based subscription
business, we expect to see continued decreases 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 14 years, and completing SEDAR (the Canadian equivalent of
EDGAR) filings. 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.
and are invoiced as
used.
Our investor outreach and engagement offering,
formerly known as ARS, was acquired from PIR in 2013. The ARS
business has existed for over 20 years primarily as a physical hard
copy delivery service of annual reports and prospectuses. We
continue to operate a portion of this legacy system for customers
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.
19
In our
Services business, we expect demand will continue to shift from
traditional printed, service based engagements to digital
distribution offerings. This was true before the coronavirus
outbreak and we believe the coronavirus outbreak will only increase
the demand for digital offerings in the future. Specifically, this
may cause transition in the areas of print and proxy fulfillment
and paper processing of stock-records and certificates to digital
distribution, voting and transfer of records. Additionally, the
Depository Trust Company, as well as, banks and brokers have seen
temporary delays in processing and the Depository Trust Company is
now only processing electronic transfers. The ultimate impact of
how this transition will impact our business is still undetermined
at this time.
Results of Operations
Comparison of results of operations for the three months ended
March 31, 2020 and 2019:
|
|
Three months ended
|
|
|
Revenue Streams
|
March 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Platform and Technology
|
|
|
|
Revenue
|
$
2,685
|
$
2,665
|
|
Gross
margin
|
$
1,999
|
$
1,992
|
|
Gross
margin %
|
74
%
|
75
%
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
Revenue
|
$
1,331
|
1,514
|
|
Gross
margin
|
$
764
|
885
|
|
Gross
margin %
|
57
%
|
58
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Revenue
|
$
4,016
|
$
4,179
|
|
Gross
margin
|
$
2,763
|
$
2,877
|
|
Gross
margin %
|
69
%
|
69
%
|
Revenues
Total
revenue decreased by $163,000, or 4%, to $4,016,000 during the
three-month period ended March 31, 2020, as compared to $4,179,000
during the same period of 2019. The decrease is attributable to a
decrease in our Services revenue.
Platform and
Technology revenue increased $20,000, or 1%, to $2,685,000 during
the three-month period ended March 31, 2020, as compared to
$2,665,000 during the same period of 2019. The increase was
attributable to an increase in revenue from subscriptions of
Platform
id.
, over
the last year. During the first quarter of 2020, we signed 30 new
licenses of Platform
id.
with total annual contract
value of $181,000, bringing our total subscriptions of Platform
id.
to 273, with a
total annual contract value of $2,098,000, compared to 255
subscriptions with a total annual contract value of $2,033,000 as
of December 31, 2019. ACCESSWIRE revenue increased 1% during the
first quarter of 2020 compared to the same quarter of 2019, despite
being negatively impacted by the industry-wide loss of the
investment commentary business. The investment commentary business
accounted for approximately $335,000 of revenue during the first
quarter of 2019. Removing the investment commentary revenue,
ACCESSWIRE revenue grew 36% during the first quarter of 2020
compared to the first quarter of 2019. These increases in revenue
were partially offset by a decrease in revenue from our webcasting
business due to a decline in volume over the first two months of
the quarter. Revenue from our conference management software also
declined during the quarter due to the cancellation and/or delay of
in-person conferences as a result of the coronavirus pandemic.
Additionally, revenue from our shareholder outreach offering
continued to decline due to customer attrition as revenue of this
offering is typically tied-in with contracts of our annual report
distribution services. Platform and Technology revenue increased to
67% of total revenue during the three months ended March 31, 2020,
as compared to 64% during the same period of the prior
year.
Services revenue
decreased $183,000, or 12%, to $1,331,000 during the three-month
period ended March 31, 2020, as compared to $1,514,000 during the
same period of 2019. The decrease is primarily due to a decrease in
revenue from our transfer agent services due to a decline in
corporate transactions, directives and actions. A portion of this
work was also delayed due to the impact of the coronavirus pandemic
and is expected to be performed in future quarters. Revenue from
our print and proxy distribution services also declined due to a
one-time project completed during the first quarter of 2019 that
was not completed during the first quarter of 2020. Revenue from
our ARS services continued to decline as a result of continued
customer attrition as customers elect to leave the service or
transition to digital fulfillment. These declines were partially
offset by an increase in webcasting services revenue due to
additional teleconferencing events primarily resulting from the
coronavirus pandemic.
No
customers accounted for more than 10% of the revenues during the
three-month periods ended March 31, 2020 or 2019.
20
Revenue Backlog
At
March 31, 2020, our deferred revenue balance was $1,879,000, a
majority of which we expect to recognize over the next twelve
months, compared to $1,812,000 at December 31, 2019. Deferred
revenue primarily consists of advance billings for subscriptions of
our cloud-based products and pre-paid packages of our news
distribution product, as well as, advanced billings of annual
contracts for legacy ARS services.
Cost of Revenues and Gross Margin
Platform and
Technology cost of revenues consist primarily of direct labor
costs, newswire distribution costs, third party licensing and
amortization of capitalized software costs related to platforms
licensed to customers. Services costs of revenue consists primarily
of direct labor costs, warehousing, logistics, print production
materials, postage, and outside services directly related to the
delivery of services to our customers. Cost of revenues decreased
by $49,000, or 4%, during the three-month period ended March 31,
2020, as compared to the same period of 2019. Overall gross margin
decreased $114,000, or 4%, to $2,763,000, during the three-month
period ended March 31, 2020, as compared to $2,877,000 in the same
period of 2019, however, during this period, overall gross margin
percentage remained at 69%.
Gross
margin percentage from Platform and Technology revenue was 74% in
the three-month period ended March 31, 2020, as compared to 75% in
the same period of 2019. The decrease in gross margin percentage is
primarily attributable to an increase in newswire distribution
costs.
Gross
margins from our Services revenue decreased to 57% in the
three-month period ended March 31, 2020, as compared to 58% in the
same period of 2019. The decrease is primarily due to lower
transfer agent revenue on relatively fixed costs.
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 (including bad debt expense)
and facility and equipment expenses. General and administrative
expenses decreased $145,000, or 11%, to $1,216,000 during the
three-month period ended March 31, 2020, as compared to $1,361,000
during the same period of 2019. This decrease is primarily due to a
decrease in our bad debt provision of $131,000 compared to the
prior year. Additionally, we incurred additional professional fees
of $112,000 associated with the VWP acquisition during the first
quarter of 2019 that were not incurred during the first quarter of
2020. These decreases in general and administrative expenses were
offset by an increase in corporate office expenses.
As a
percentage of revenue, general and administrative expenses were 30%
for the three-month period ended March 31, 2020, a decrease from
33% for the same period of 2019.
Sales and Marketing Expenses
Sales
and marketing expenses consist primarily of salaries, stock-based
compensation, sales commissions, advertising expenses, tradeshow
expenses and other marketing expenses. Sales and marketing expenses
for the three-month period ended March 31, 2020, increased $76,000,
or 9%, to $896,000 as compared to $820,000 during the same period
of 2019. This increase is directly related to our investment in our
sales and marketing initiatives throughout 2019 with an increase in
personnel costs and digital marketing offset by a decrease in
tradeshow expenses due to the cancellation or delay of conferences
as a result of the coronavirus outbreak.
As a
percentage of revenue, sales and marketing expense were 22% during
the three-month period ended March 31, 2020, compared to 20% for
the same period of the prior year.
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 decreased $143,000, or 42%, to $194,000 during the
three-month period ended March 31, 2020, compared to $337,000 for
the same period in 2019. The decrease is due to a decrease in
headcount within the development team.
As a
percentage of revenue, product development expenses were 5% for the
three-month period ended March 31, 2020, compared to 8% for the
same period of the prior year.
Depreciation and Amortization
Depreciation and
amortization expenses decreased $3,000, or 1%, during the
three-month period ended March 31, 2020, as compared to the same
period of 2019.
21
Interest income, net
Interest income,
net, represents interest income on deposit and money market
accounts, partially offset by the non-cash interest associated with
the present value of the remaining anniversary payments of the
Interwest acquisition.
Income tax (benefit) expense
We
recognized an income tax expense of $80,000 and $13,000 for the
three-month periods ended March 31, 2020 and 2019, respectively. 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 periods
ended March 31, 2020, the variance between our effective tax rate
and the U.S. statutory rate of 21%, is primarily attributable to
state income taxes. For the three-month periods ended March 31,
2019, the variance between our effective tax rate and the U.S.
statutory rate, is primarily attributable to excess stock-based
compensation tax benefits of $35,000, recognized in income tax
expense during the period, as well as, tax credits offset by state
income taxes.
Net Income
Net
income for the three-month period ended March 31, 2020, was
$226,000, compared to $205,000 for the same period of
2019.
Due to
the timing of services revenue and the impact of the industry-wide
loss of the investment commentary business, revenue decreased
during the three months ended March 31, 2020 compared to the same
period of the prior year. However, net income remained consistent
as gross margin percentage was maintained and operating expenses
decreased due to a decrease in bad debt expense, one-time
acquisition related expenses and lower development
headcount.
Liquidity and Capital Resources
As of
March 31, 2020, we had $16,197,000 in cash and cash equivalents and
$2,172,000 in net accounts receivable. Current liabilities at March
31, 2020, totaled $4,003,000 including our accounts payable,
deferred revenue, accrued payroll liabilities, income taxes
payable, current portion of remaining payments for Interwest, lease
liabilities and other accrued expenses. As of March 31, 2020, our
current assets exceeded our current liabilities by
$14,607,000.
Effective October
3, 2019, the Company renewed its Line of Credit, which increased
the term to two years, with all other provisions remaining the
same. The amount of funds available for borrowing are $3,000,000
and the interest rate is LIBOR plus 1.75%. As of March 31, 2020,
the interest rate was 2.74% and the Company did not owe any amounts
on the Line of Credit.
2020 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.
On
January 30, 2020, the World Health Organization declared the
coronavirus outbreak a "Public Health Emergency of International
Concern" and on March 11, 2020, declared it to be a pandemic.
Changing economic conditions and other
effects of such changes caused by the coronavirus outbreak has had
and is expected to impact our business.
We have undertaken
measures to protect our employees, partners and customers by
requiring almost all employees to work remotely for the foreseeable
future. The ultimate disruption which may be caused by the outbreak
is uncertain, however, it may result in a material adverse impact
on our financial position, operations and cash flows. Possible
areas that may be affected include, but are not limited to, a
material disruption of our employees and operations, decline in
revenue, decline in value of our assets, deterioration of our
customer base and the inability of our customers to pay for
subscriptions or services provided.
Overall,
the demand for our platforms continues to be stable in the majority
of the segments we serve, with the exception of our physical
conference software business due to the cancellation or delay of
several onsite investor conferences and our transfer agent services
due to a decline in corporate transactions, directives and actions
and delays in bank and broker processing as a result of the
coronavirus.
Conversely, we are seeing increased demand in our
webcasting business, as customers are opting to hold virtual
meetings. During the first quarter, we were able to pivot portions
of our platform to specifically address the coronavirus business
limitations. This resulted in a new Virtual Annual Meeting product,
which combines our webcasting and proxy voting technology together.
Additionally, we also upgraded technology of our conference
software product to allow conferences to go fully virtual and
hold
one-on-one meetings
with
audio, video and share features.
22
We believe both these developments will assist us
in delivering best of breed solutions to the market, but also lead
us into new opportunities
during this changing environment.
The extent to how long these shifts in demands will occur is
uncertain at this time, and could be longer than just the first
half of 2020. However, we cannot make any assurances at this time
that our product upgrade will be accepted by customers and revenue
will be significant enough to offset losses in other aspects of our
business.
The
transition to a platform subscription model has been and will
continue to be key for our long-term sustainable growth. We will
also continue to focus on the following key strategic initiatives
during 2020:
●
Continue to expand
our Platform and Technology products and adapt to this changing
environment,
●
Continue to grow
through acquisitions in areas of strategic focus,
●
Expand customer
base,
●
Continue to expand
our newswire distribution,
●
Continue
development of our Insight and Analytics module,
●
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
messages, although this demand may decrease or shift in the near
term as a result of the coronavirus. We believe we have the product
sets, platforms, capacity and ability to adapt during these
changing times 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. Currently, the acquisition
environment is very difficult due to the coronavirus, however,
acquisitions remain a core part of our strategy. This investment
strategy is key to increasing 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 when
the pandemic has passed. If we are successful in this development
effort, we believe we can increase our revenues per user as we move
forward once we return to a more traditional business
environment.
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.
ITEM 3.
Q
UANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Not
applicable
ITEM 4.
C
ONTROLS AND
PROCEDURES.
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
PART II – OTHER
I
NFORMATION
ITEM 1.
L
EGAL PROCEEDINGS.
From
time to time, we may be involved in litigation that arises through
the normal course of business. As of the date of this filing, we
are neither a party to any litigation nor are we aware of any such
threatened or pending litigation that might result in a material
adverse effect to our business.
ITEM 1A.
R
ISK FACTORS.
There
have been no material changes to our risk factors as previously
disclosed in our most recent Form 10-K filing, except as set forth
below.
The recent coronavirus outbreak could harm our business and results
of operations.
On January 30, 2020, the World Health
Organization declared the coronavirus outbreak a "Public Health
Emergency of International Concern" and on March 11, 2020, declared
it to be a pandemic. We have undertaken measures to protect our
employees, partners and customers by requiring almost all employees
to work remotely for the foreseeable future. There can be no
assurance that these measures will be effective, however, or that
we can adopt them without adversely affecting our business
operations. In addition, the coronavirus outbreak has created and
may continue to create significant uncertainty in global financial
markets, which may materially decrease spending, demand for our
solutions, the viability of our customers, the value of our assets
and harm our business and results of operations
. The ultimate extent of the impact of any
epidemic, pandemic or other health crisis in our business,
financial condition and results of operations will depend on future
developments, which are highly uncertain and cannot be
predicted.
ITEM 2.
U
NREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
None.
ITEM 3.
D
EFAULTS UPON SENIOR SECURITIES.
None
.
ITEM 4.
M
INE SAFETY DISCLOSURE.
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:
April 30, 2020
|
|
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: Recent AcquisitionsNote 4: EquityNote 5: Income TaxesNote 6: LeasesNote 7: RevenueNote 8: Line Of CreditNote 9: Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About 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