Blueprint
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, 2019
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)
———————
Delaware
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1-10185
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26-1331503
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(State or Other Jurisdiction
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(Commission
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(I.R.S. Employer
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of Incorporation)
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File Number)
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Identification No.)
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500 Perimeter Park Drive, Suite D, Morrisville NC
27560
(Address of Principal Executive Office) (Zip Code)
(919) 481-4000
(Registrant’s telephone number, including area
code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
———————
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes ☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and "emerging
growth company" in Rule 12b-2 of the Exchange Act. (Check
one):
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)
|
Smaller
reporting company
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☒
|
|
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Emerging
growth company
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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
3,854,568 shares of common stock were issued and outstanding as of
May 2, 2019.
Securities registered pursuant to Section 12(b) of the
Act:
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
PART II – OTHER INFORMATION
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PART I – FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISSUER DIRECT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$14,961
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$17,222
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Accounts
receivable (net of allowance for doubtful accounts of $731 and
$534, respectively)
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2,237
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1,593
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Income
tax receivable
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122
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90
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Other
current assets
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238
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89
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Total
current assets
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17,558
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18,994
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Capitalized
software (net of accumulated amortization of $1,514 and $1,310,
respectively)
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1,753
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1,957
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Fixed
assets (net of accumulated amortization of $468 and $452,
respectively)
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122
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132
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Other
long-term assets
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264
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35
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Goodwill
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6,051
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5,032
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Intangible
assets (net of accumulated amortization of $4,410 and $4,219,
respectively)
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4,367
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2,802
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Total assets
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$30,115
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$28,952
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$625
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$371
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Accrued
expenses
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889
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577
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Current
portion of note payable
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320
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320
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Income
taxes payable
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40
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83
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Deferred
revenue
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1,464
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1,249
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Total
current liabilities
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3,338
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2,600
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Note
payable – long-term (net of discount of $38 and $45,
respectively)
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282
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276
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Deferred
income tax liability
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419
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413
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Other
long-term liabilities
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74
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—
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Total liabilities
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4,113
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3,289
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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, 2019 and December 31, 2018,
respectively.
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—
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—
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Common stock $0.001 par value, 20,000,000 shares
authorized, 3,854,568 and 3,829,572 shares issued and outstanding as of March 31, 2019
and December 31, 2018, respectively.
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4
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4
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Additional
paid-in capital
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22,662
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22,525
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Other
accumulated comprehensive income
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(20)
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(17)
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Retained
earnings
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3,356
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3,151
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Total stockholders' equity
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26,002
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25,663
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Total liabilities and stockholders’ equity
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30,115
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$28,952
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The
accompanying notes are an integral part of these unaudited
financial statements.
ISSUER DIRECT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in
thousands, except share and per share amounts)
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For the Three
Months Ended
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Revenues
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$4,179
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$3,530
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Cost of
revenues
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1,302
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1,021
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Gross
profit
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2,877
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2,509
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Operating costs and
expenses:
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General and
administrative
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1,361
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1,004
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Sales and marketing
expenses
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820
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750
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Product
development
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337
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298
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Depreciation and
amortization
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212
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142
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Total operating
costs and expenses
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2,730
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2,194
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Operating
income
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147
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315
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Interest income
(expense), net
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71
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(5)
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Net income before
income taxes
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218
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310
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Income tax
(benefit) expense
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13
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(10)
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Net
income
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$205
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$320
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Income per share
– basic
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$0.05
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$0.11
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Income per share
– fully diluted
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$0.05
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$0.10
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Weighted average
number of common shares outstanding – basic
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3,850
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3,036
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Weighted average
number of common shares outstanding – fully
diluted
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3,869
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3,111
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The
accompanying notes are an integral part of these unaudited
financial statements.
ISSUER DIRECT CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in
thousands)
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For the Three
Months Ended
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Net
income
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$205
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$320
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Foreign
currency translation adjustment
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(3)
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43
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Comprehensive
income
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$202
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$363
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The
accompanying notes are an integral part of these unaudited
financial statements.
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in
thousands, except share and per share amounts)
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Accumulated Other
Comprehensive
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Balance
at December 31, 2017
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3,014,494
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$3
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$10,400
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$34
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$2,774
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$13,211
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Stock-based
compensation expense
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—
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—
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142
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—
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—
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142
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Exercise of stock
awards, net of tax
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47,626
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—
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161
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—
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—
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161
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Foreign currency
translation
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—
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—
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—
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43
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—
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43
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Dividends
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—
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—
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—
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—
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(152)
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(152)
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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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320
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320
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Balance
at March 31, 2018
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3,062,120
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$3
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$10,703
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$77
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$2,942
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$13,725
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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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The
accompanying notes are an integral part of these consolidated
financial statements.
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
(in
thousands)
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For the Three Months Ended
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Cash flows from operating activities:
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Net
income
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$205
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$320
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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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412
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340
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Bad
debt expense
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224
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43
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Deferred
income taxes
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6
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(8)
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Non-cash
interest expense
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7
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6
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Stock-based
compensation expense
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137
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142
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Changes
in operating assets and liabilities:
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Decrease
(increase) in accounts receivable
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(869)
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(253)
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Decrease
(increase) in deposits and prepaid assets
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(273)
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(70)
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Increase
(decrease) in accounts payable
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254
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(154)
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Increase
(decrease) in accrued expenses
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218
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(66)
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Increase
(decrease) in deferred revenue
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215
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237
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Net
cash provided by operating activities
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536
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537
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Cash flows from investing activities:
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Purchase
of VisualWebcaster Platform
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(2,788)
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—
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Purchase
of fixed assets
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(6)
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(25)
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Net
cash used in investing activities
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(2,794)
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(25)
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Cash flows from financing activities:
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Proceeds
from exercise of stock options, net of income taxes
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—
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160
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Payment
of dividends
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—
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(152)
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Net
cash provided by financing activities
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—
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8
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Net
change in cash
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(2,258)
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520
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Cash
– beginning
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17,222
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4,917
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Currency
translation adjustment
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(3)
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46
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Cash
– ending
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$14,961
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$5,483
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Supplemental disclosures:
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Cash
paid for income taxes
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$37
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$12
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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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$260
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$—
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The
accompanying notes are an integral part of these unaudited
financial statements.
ISSUER DIRECT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The
unaudited interim consolidated balance sheet as of March 31, 2019
and statements of income, comprehensive income, stockholders’
equity, and cash flows for the three-month periods ended March 31,
2019 and 2018 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 2018 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 and restricted
stock units totaling 110,000 and 1,000 were excluded in the
computation of diluted earnings per common share during the
three-month periods ended March 31, 2019 and 2018, 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 Service contracts include obligations to deliver compliance
services and annual report printing and distribution on either a
stand ready obligation or on a per project or event basis. Set up
fees for compliance services are considered a separate performance
obligation and are satisfied upfront. Set up fees for our transfer
agent module and investor relations content management module are
immaterial. The Company’s subscription and service contracts
are generally for one year, with automatic renewal clauses included
in the contract until the contract is cancelled. The contracts do
not contain any rights of returns, guarantees or warranties. Since
contracts are generally for one year, all of the revenue is
expected to be recognized within one year from the contract start
date. As such, the Company has elected the optional exemption that
allows the Company not to disclose the transaction price allocated
to performance obligations that are unsatisfied or partially
satisfied at the end of each reporting period.
The
Company recognizes revenue for subscriptions evenly over the
contract period, upon distribution for per release contracts and
upon event completion for webcasting events. For service contracts
that include stand ready obligations, revenue is recognized evenly
over the contract period. For all other services delivered on a per
project or event basis, the revenue is recognized at the completion
of the event. The Company believes recognizing revenue for
subscriptions and stand ready obligations using a time-based
measure of progress, best reflects the Company’s performance
in satisfying the obligations.
For
bundled contracts, revenue is allocated to each performance
obligation based on its relative standalone selling price.
Standalone selling prices are based on observable prices at which
the Company separately sells the subscription or services. If a
standalone selling price is not directly observable, the Company
uses the residual method to allocate any remaining costs to that
subscription or service. The Company regularly reviews standalone
selling prices and updates these estimates if
necessary.
The
Company invoices its customers based on the billing schedules
designated in its contracts, typically upfront on either a monthly,
quarterly or annual basis or per transaction at the completion of
the performance obligation. Deferred revenue for the periods
presented was primarily related to subscription and service
contracts, which are billed upfront, quarterly or annually, however
the revenue has not yet been recognized. The associated deferred
revenue is generally recognized ratably over the billing period.
Deferred revenue as of March 31, 2019 and December 31, 2018 was
$1,464,000 and $1,249,000, respectively, and is expected to be
recognized within one year. Revenue recognized for the three months
ended March 31, 2019 and 2018, that was included in the deferred
revenue balance at the beginning of each reporting period, was
approximately $690,000 and $488,000, respectively. Accounts
receivable related to contracts with customers was $2,237,000 and
$1,593,000 as of March 31, 2019 and December 31, 2018,
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, 2019 and December 31, 2018, the
Company has capitalized $20,000 and $18,000 of costs to obtain
contracts that are expected to be amortized over more than one
year. For contract costs expected to be amortized in less than one
year, the Company has elected to use the practical expedient
allowing the recognition of incremental costs of obtaining a
contract as an expense when incurred. The Company has considered
historical renewal rates, expectations of future renewals and
economic factors in making these determinations.
Allowance for Doubtful Accounts
We
provide an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection
information. Credit is granted on an unsecured basis. In
determining the amount of the allowance, management is required to
make certain estimates and assumptions. The allowance is made up of
specific reserves, as deemed necessary, on customer account
balances, and a reserve based on our historical
experience.
Use of Estimates
The
preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include the allowance
for doubtful accounts and the valuation of goodwill, intangible
assets, deferred tax assets, and stock-based compensation. Actual
results could differ from those estimates.
Income Taxes
Deferred income tax
assets and liabilities are computed for differences between the
financial statement and tax bases of assets and liabilities that
will result in future taxable or deductible amounts based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred
income tax assets to the amounts expected to be realized. For any
uncertain tax positions, we recognize the impact of a tax position,
only if it is more likely than not of being sustained upon
examination, based on the technical merits of the position. Our
policy regarding the classification of interest and penalties is to
classify them as income tax expense in our financial statements, if
applicable. At the end of each interim period, we estimate the
effective tax rate we expect to be applicable for the full year and
this rate is applied to our results for the interim year-to-date
period and then adjusted for any discrete period
items.
Capitalized Software
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, 2019 and 2018. The Company recorded
amortization expense of $204,000 and $201,000 during the
three-month periods ended March 31, 2019 and 2018, respectively.
All of the amortization is included in Cost of revenues on the
Consolidated Statements of Income, with the exception of $4,000 and
$2,000, which is included in Depreciation and amortization for each
of the three-month periods ended March 31, 2019 and 2018,
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. 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, 2019 and December 31, 2018, 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.
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, except for
direct-response advertising, which is capitalized and amortized
over its expected period of future benefits.
Stock-based compensation
We
account for stock-based compensation under FASB ASC No. 718 –
Compensation – Stock Compensation. The authoritative guidance
for stock compensation requires that companies estimate the fair
value of share-based payment awards on the date of the grant using
an option-pricing model. The associated cost is recognized over the
period during which an employee is required to provide service in
exchange for the award.
Recently adopted accounting pronouncements
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (ASU) No. 2016-02, which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. Topic 842 was subsequently
amended by ASU No. 2018-01, Land Easement Practical Expedient for
Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.
The new standard establishes a right-of-use model that requires a
lessee to recognize a ROU asset and lease liability on the balance
sheet for all leases with a term longer than 12 months. Leases will
be classified as finance or operating, with classification
affecting the pattern and classification of expense recognition in
the income statement.
The new
standard is effective for the Company on January 1, 2019, which is
also the day we elected to adopt the new standard. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
We chose the effective date as our date of initial application.
Consequently, financial information will not be updated and the
disclosures required under the new standard will not be provided
for dates and periods before January 1, 2019. We elected the
package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allowed
us to carry forward the historical lease classification of those
leases in place as of January 1, 2019. See the table below for the
impact of adoption of the lease standard on our balance sheet
accounts as of the day of adoption, January 1, 2019 ($ in
000’s):
|
|
New Lease
Standard Adjustment
|
|
ROU
asset
|
$-
|
$102
|
$102
|
Lease
liability
|
-
|
135
|
135
|
Deferred
rent
|
33
|
(33)
|
-
|
|
|
|
|
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 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. Any
changes within the measurement period resulting from facts and
circumstances that existed as of the acquisition date may result in
retrospective adjustments to the provisional amounts recorded at
the acquisition date. During the quarter ended March 31, 2019, the
Company employed a third party valuation firm to assist in
determining the preliminary 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.
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
|
$1,190
|
Technology
|
497
|
Non-compete
agreement
|
69
|
Goodwill
|
1,019
|
|
$2,775
|
Select Pro-Forma Financial Information (Unaudited)
The
following represents our unaudited condensed pro-forma financial
results as if the VWP acquisition had occurred as of January 1,
2018. Unaudited condensed pro-forma results are based upon
accounting estimates and judgments that we believe are reasonable.
The condensed pro-forma results are not necessarily indicative of
the actual results of our operations had the acquisitions occurred
at the beginning of the period presented, nor does it purport to
represent the results of operations for future
periods.
$ in
000’s
|
Three months
ended
March 31,
2018
|
|
|
Revenues
|
$4,124
|
Net
Income
|
$327
|
Basic earnings per
share
|
$0.11
|
Diluted earnings
per share
|
$0.11
|
Acquisition of Filing Services Canada Inc.
(“FSCwire”)
On July
3, 2018, the Company entered into a Stock Purchase Agreement (the
“FSCwire Agreement”) with the sole shareholder of
FSCwire, a company incorporated under the Business Corporations Act
(Alberta), whereby the Company purchased all of the outstanding
equity securities of FSCwire. Under the terms of the FSCwire
Agreement, the Company paid $1,140,000 at closing ($180,000 of
which was paid into an escrow account to cover standard
representations and warranties included within the FSCwire
Agreement) and issued 3,402 shares of restricted common stock of
the Company.
The
acquisition was accounted for under the acquisition method of
accounting for business combinations in accordance with FASB ASC
805, Business Combinations, which requires, among other things,
that the assets acquired and liabilities assumed be recognized at
their fair values as of the acquisition date. Acquisition-related
costs, which totaled approximately $52,000, are not included as a
component of the acquisition accounting, but are recognized as
expenses in the periods in which the costs are incurred. Any
changes within the measurement period resulting from facts and
circumstances that existed as of the acquisition date may result in
retrospective adjustments to the provisional amounts recorded at
the acquisition date. During the year ended December 31, 2018, the
Company employed a third party valuation firm to assist in
determining the purchase price allocation of assets and liabilities
acquired from FSCwire. The valuation resulted in the tangible and
intangible assets and liabilities disclosed below. The income
approach was used to determine the value of FSCwire’s
customer relationships and the relief from royalty method was used
to value the distribution partner relationships.
The
transaction resulted in recording intangible assets and goodwill at
a fair value of $1,426,000 as follows (in
000’s):
Initial cash
payment
|
$1,140
|
Fair value of
restricted common stock issued
|
62
|
Total
Consideration
|
1,202
|
Plus: excess of
liabilities assumed over assets acquired
|
224
|
Total fair value of
FSCwire intangible assets and goodwill
|
$1,426
|
The
tangible assets and liabilities acquired were as follows (in
000’s):
Cash
|
$17
|
Accounts
receivable, net
|
42
|
Total
assets
|
59
|
|
|
Accounts payable
and accrued expenses
|
35
|
Deferred
revenue
|
78
|
Deferred tax
liability
|
170
|
Total
liabilities
|
283
|
Excess of
liabilities assumed over assets acquired
|
$(224)
|
The
identified intangible assets as a result of the acquisition are as
follows (in 000’s):
Customer
relationships
|
$311
|
Distribution
partner relationships
|
153
|
Goodwill
|
962
|
|
$1,426
|
The
Company has elected not to provide unaudited pro forma financial
information for the FSCwire acquisition, because the acquisition
was not considered a significant acquisition in accordance with
Rule 3-05 of the SEC's Regulation S-X.
Note 4: Stock Options and Restricted Stock Units
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, 2019, there are 47,000 shares which
remain to be granted under the 2014 Plan.
The
following table summarizes information about stock options
outstanding and exercisable at March 31, 2019:
|
|
|
|
|
Weighted
Average
Remaining
Contractual
Life (in
Years)
|
Weighted
Average
Exercise
Price
|
|
$0.01 - 7.00
|
10,000
|
6.64
|
$6.80
|
10,000
|
$7.01 - 8.00
|
20,313
|
4.49
|
$7.76
|
20,313
|
$8.01 - 12.00
|
4,250
|
5.74
|
$9.26
|
4,250
|
$12.01 - 15.00
|
59,500
|
9.15
|
$13.10
|
32,000
|
$15.01 - 17.40
|
32,000
|
9.17
|
$17.40
|
—
|
Total
|
126,063
|
8.09
|
$12.70
|
66,563
|
As of
March 31, 2019, the Company had unrecognized stock compensation
related to the options of $189,000, which will be recognized
through 2021.
During
the three months ended March 31, 2019, the Company granted 22,000
restricted stock units with an intrinsic value of $11.90 to certain
employees of the Company. The vesting period for the restricted
stock units varies between one and three years. During the three
months ended March 31, 2019, 24,996 restricted stock units with an
intrinsic value of $5.81 vested. As of March 31, 2019, there was
$295,000 of unrecognized compensation cost related to our unvested
restricted stock units, which will be recognized through
2021.
Note 5: Income taxes
We
recognized an income tax expense of $13,000 and a benefit of
$10,000 for the three-month periods ended March 31, 2019 and 2018,
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, 2019 and 2018, the variance
between the Company’s effective tax rate and the U.S.
statutory rate of 21% is primarily attributable to excess
stock-based compensation tax benefits of $35,000 and $73,000,
respectively, recognized in income tax expense (benefit) during the
periods, as well as, tax credits offset by state income
taxes.
Note 6: Leases
As
described further in "Note 2. Summary of Significant Accounting
Policies", we adopted Topic 842 as of January 1, 2019. Prior period
amounts have not been adjusted and continue to be reported in
accordance with our historic accounting under Topic
840.
Generally, our
leasing activity consists of office leases. As of January 1, 2019,
we had three existing leases for office space. In October 2015, we
signed a three-year lease extension for our 16,059 square-foot
corporate headquarters in Morrisville, NC. This lease expires on
October 31, 2019 and as of January 1, 2019, we had remaining
minimum lease payments of $135,000. An ROU asset and corresponding
lease liability was recorded for this amount on January 1,
2019.
Additionally, we
have an office in Salt Lake City, Utah and a shared office facility
in London, England, both of which are on short-term leases that are
less than twelve months. As a result, we have elected the
short-term lease recognition exemption for our Utah and London
office leases, which means, for those leases that qualify, we will
not recognize ROU assets or lease liabilities.
In
connection with the Company’s acquisition of VWP (See Note
3), 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.
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.
ROU
assets totaled $186,000 as of March 31, 2019 and are included in
Other long-term assets on the Consolidated balance sheets. Lease
liabilities totaled $209,000 as of March 31, 2019. The current
portion of this liability of $135,000 is included in accrued
expenses on the Consolidated balance sheets and the long-term
portion of $74,000 is included in other long-term 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):
|
|
|
|
|
|
|
Lease expense
|
|
|
Operating
lease expense
|
$41
|
$29
|
Variable
lease expense
|
24
|
20
|
Rent
expense
|
$65
|
$49
|
The
weighted-average remaining non-cancelable lease term for our
operating leases was 1.7 years as of March 31, 2019. As of March
31, 2019, the weighted-average discount rate used to determine the
lease liability was 4.25%. The future minimum lease payments to be
made under noncancelable operating leases at March 31, 2019, are as
follows (in 000’s):
Year Ended December 31:
|
|
2019
|
$126
|
2020
|
43
|
2021
|
45
|
Total lease
payments
|
$214
|
Present
value adjustment
|
(5)
|
Lease
liability
|
209
|
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 is
scheduled to commence at the later of the date tenant improvements
are completed (as defined in the lease) or August 1, 2019, is for
9,766 square feet and has a term of eight years and four months.
Minimum lease payments are $2,997,000, not including a tenant
improvement allowance up to $488,000, which will be reflected in
the balance sheet upon lease commencement date.
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. Revenue is attributed to a particular
geographic region based on where subscriptions are sold or the
services are performed. The following tables present revenue
disaggregated by revenue stream and geography in
(000’s):
|
Three months ended
March
31,
|
Revenue Streams
|
|
|
Platform
and Technology
|
$2,665
|
63.8%
|
$2,032
|
57.6%
|
Services
|
1,514
|
36.2%
|
1,498
|
42.4%
|
Total
|
$4,179
|
100.0%
|
$3,530
|
100.0%
|
|
|
|
|
|
|
|
Geographic region
|
|
|
North
America
|
$4,027
|
$3,323
|
Europe
|
152
|
207
|
Total
revenues
|
$4,179
|
$3,530
|
No
customers accounted for more than 10% of the operating revenues
during the three-month periods ended March 31, 2019 or
2018.
We
believe we did not have any financial instruments that could have
potentially subjected us to significant concentrations of credit
risk for any relevant period. Since a portion of the revenues are
paid at the beginning of the month via credit card or advance by
check, the remaining accounts receivable amounts are generally due
within 30 days, none of which is collateralized.
Note 8: Line of Credit
Effective October
4, 2018, the Company renewed its Line of Credit, which increased
the amount of funds available for borrowing from $2,500,000 to
$3,000,000. The interest rate was reduced from LIBOR plus 2.50% to
LIBOR plus 1.75%. As of March 31, 2019, the interest rate was 4.22%
and the Company did not owe any amounts on the Line of
Credit.
ITEM 2. MANAGEMENT’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 Form10-Q, the words
“anticipate,” “believe,”
“estimate,” “intend” and
“expect” and similar expressions are intended to
identify such forward-looking statements. Such forward-looking
statements include, without limitation, the statements regarding
the Company’s strategy, future sales, future expenses, future
liquidity and capital resources. All forward-looking statements in
this Form10-Q are based upon information available to the Company
on the date of this Form10-Q, and the Company assumes no obligation
to update any such forward-looking statements. The Company’s
actual results could differ materially from those discussed in this
Form10-Q. Factors that could cause or contribute to such
differences (“Cautionary Statements”) include, but are
not limited to, those discussed in Item 1. Business —
“Risk Factors” and elsewhere in the Company’s
Annual Report on Form10-K for the year ended December 31, 2018,
which are incorporated by reference into this Form 10-Q. All
subsequent written and oral forward-looking statements attributable
to the Company, or persons acting on the Company’s behalf,
are expressly qualified in their entirety by the Cautionary
Statements.
Overview
Issuer
Direct Corporation (Issuer Direct Corporation and its subsidiaries
are hereinafter collectively referred to as “Issuer
Direct”, the “Company”, “We” or
“Our” unless otherwise noted). Our corporate offices
are located at 500 Perimeter Park Drive, Suite D, Morrisville,
North Carolina, 27560.
We
announce material financial information to our investors using our
investor relations website, Securities and Exchange Commission
("SEC") filings, investor events, news and earnings releases,
public conference calls, webcasts and social media. We use these
channels to communicate with our investors and the public about our
company, our products and services and other related matters. It is
possible that information we post on some of these channels could
be deemed to be material information. Therefore, we encourage
investors, the media and others interested in our company to review
the information we post to all of our channels, including our
social media accounts.
Issuer Direct® is 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 services from document creation all the way to
dissemination to regulatory bodies, platforms and shareholders.
Private companies primarily use our news distribution and
webcasting products and services to disseminate their message
globally. Regardless of the message, Platform id.’s intelligent subscription platform guides
thousands of customers through the process to communicate their
message to a large audience.
We also work with several select stock exchanges,
whereby we make available certain parts of our platform
under agreement, 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.
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:
Platform and Technology
As we continue our transition to a cloud-based
subscription business, we expect the Platform and Technology
portion of our business to continue to increase over the next
several years, both in terms of overall revenue and as compared to
the Services portion of our business. Platform and Technology
revenue grew to 64% of total revenue during the first quarter of
2019, compared to 60 %, 56% and approximately 44% of our revenue
for the years ending December 31, 2018, 2017 and 2016,
respectively. Our ACCESSWIRE® news distribution offering
represented a majority of the year over year growth in our Platform
and Technology revenue and continues to lead our transition to a
full platform solution. Also contributing to the growth in the
percentage of Platform and Technology revenue is our focus on
our platform first
engagement strategy and converting
customers which historically relied on us for services work to
utilizing Platform id.
We plan to continue to invest in both our current
Platform id.
offerings as well as additional
offerings that we plan to incorporate into our Platform. These new
offerings will further help establish our ecosystem and strategy of
bringing the issuer and investor closer together. One of these
opportunities is helping public issuers better understand the
shareholder composition of their company, which we believe is an
area that is underserved by the market today.
Platform id.
Platform id.
is our primary cloud-based
subscription platform that efficiently and effectively helps manage
the events of our customers seeking to distribute their messaging
to key constituents, investors, markets and regulatory systems
around the globe. Currently, Platform id.
consists of several related but
distinct shareholder communications and compliance modules. Certain
of these capabilities were historically part of our disclosure
management and shareholder communications offerings, but are now
included in our fully integrated platform.
Within most of our target markets, customers
require several individual services and/or software providers to
meet their investor relations, communications and compliance needs.
We believe Platform id.
can address all 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.
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 publicly held companies globally.
ACCESSWIRE is fast becoming a competitive alternative to the
traditional newswires because we have been able to integrate
customer editing features and improve our targeting and growing
analytics reporting systems, which we believe will enable us to add
new customers for 2019 and beyond. We have also been able to
maintain flexible pricing by offering our customers the option to
pay per release or enter into longer-term, flat-fee subscriptions.
Currently, ACCESSWIRE is available within Platform
id.
as part of a subscription, or as a
stand-alone module. Currently approximately 55% of our ACCESSWIRE
revenue is on a subscription basis, something we believe will
continue to grow.
On July 3, 2018, we completed the acquisition of
Filing Services Canada Inc. (“FSCwire”), which not only
increased our customer base, but more importantly increased our
global footprint, distribution capabilities and editorial team of
our press release business. During the latter part of 2018, we
completed the integration of FSCwire and rebranded it as ACCESSWIRE
Canada, and have now begun to focus on offering those customers the
full suite of products included in Platform id.
ACCESSWIRE
is dependent upon several key partners for news distribution, some
of which are also partners that we rely on for other investor
outreach offerings. A disruption in any of these partnerships could
have a materially adverse impact on our business.
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 together hold an estimated
1,000 plus events a year. This cloud-based product is integrated
within, and enhances our communications module subscription
offerings of newswire, newsrooms, webcasting and shareholder
targeting.
This
cloud-based platform offers organizers, issuers and investors the
ability to register, request and approve 1x1 meetings, manage
schedules, event promotion and sponsorship, badge printing, lodging
management and mobile apps. We believe, by combining this module
with the other components of Platform id., that it gives us a unique
offering for PCOs that is not available elsewhere in the
market.
Entering this
business expands our current Platform and Technology revenue base,
and as an adjacency, should assist in making Platform id. the core ecosystem of
choice for investment banks, issuers and investors.
Investor Network
Over the past two years, we have been focused on
refining the model of digital distribution of our customers’
message to the investment community and beyond. This has been
accomplished by integrating our shareholder outreach module,
formerly known as Investor Network, into and with Platform
id.
Most of the customers subscribing to
this module today are historical PrecisionIR (“PIR”)
– Annual Report Service (“ARS”) users, as well as
new customers purchasing the entire Platform id.
subscription. We have migrated some of
the customers from the traditional ARS business into this new
digital subscription business. However, there can be no assurances
these customers will continue using this digital platform in the
long term if market conditions or shareholder interest is not
present.
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
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.
We have also attempted to differentiate our
offering by investing time and financial resources developing and
integrating systems and processes within Platform
id.
and creating an application
programming interface (“API”). This API allows
customers, such as financial content sites and investment banks to
query an industry or a single company’s current and past
earnings calls and present those webcasts on their platforms, under
a subscription to Platform id.
Initially, this has been broadly
distributed via our Investor Network platform, with expectations
that customers will license this dataset for their platforms in the
future. We believe this offering will further increase our brand
awareness. Additionally, as a commitment to broadening the reach of
our webcast platform, all events 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 feeds into our
Insight and Analytics module, will increase the demand for our
webcasting platform among the corporate issuer
community.
On
January 3, 2019, we acquired the VisualWebcaster Platform
(“VWP”) from Onstream Media Corporation. VWP is a
leading cloud-based webcast, webinar and training platform that
delivers live and on-demand streaming of events to audiences of all
sizes. VWP allows customers to create, produce and deliver events,
which we believe will integrate well into Platform id. We believe by acquiring
VWP, we have significantly strengthened our webcasting product and
Platform id.
offering as well as acquired over 120 customers, ranging from small
private companies to Fortune 500 companies. The VWP technology
enables us the ability to host thousands of additional webcasts
each year, expanding our webcast business from our historical
earnings based events to now be able to host corporate meetings,
trainings and town hall types of events. As we expand our platform
it is vital for us to have solutions that can be consumed both to
our core public companies but also a growing segment of private
customers.
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 public company’s website. This
investor relations content network is a robust series of data feeds
including news feeds, stock feeds, fundamentals, regulatory
filings, corporate governance and many other components that are
aggregated from a majority of the major exchanges and news
distribution outlets around the world. Customers can subscribe to
one or more of these data feeds from us or as a component of a
fully designed and hosted website for pre-IPO, reporting companies
and partners seeking to display our content on their corporate
sites. The clear benefit to our investor relations module is its
integration into and with the rest of Platform id., meaning companies can produce content for public
distribution and it is automatically linked to their corporate
site, distributed to targeted groups and placed into and with our
data feed partners.
Compliance Modules
Platform id.’s disclosure reporting module is a document
conversion, editing and filing offering, which is designed for
reporting companies and professionals seeking to insource the
document drafting, editing and filing processes to the SEC’s
EDGAR system and SEDAR, which is the Canadian equivalent of EDGAR.
This module is available in both a secure public cloud within our
Platform id.
subscription, as well as in a private
cloud option for corporations, mutual funds and the legal community
looking to further enhance their internal document process. As this
module has begun to be adopted by our customers, we have seen a
negative impact on our legacy disclosure conversion services
business. However, the margins associated with our Platform and
Technology business compared to our Services business are higher
and align with our long-term strategy, and as such, we believe this
module will have a positive impact on our compliance business going
forward.
Toward the end of 2017, we completed upgrades to
our disclosure reporting product to include tagging functionality
that meets newly mandated SEC requirements. On June 28, 2018, the
SEC voted to adopt rules mandating the use of Inline XBRL (Inline
Extensible Business Reporting Language or “iXBRL”) for
the submission of financial statement information to the SEC. The
new requirements for iXBRL will have a three-year phase in
beginning for large accelerated filers that use U.S. GAAP to be
compliant for fiscal periods ending on or after June 15, 2019, for
accelerated filers to begin reporting for fiscal periods ending on
or after June 15, 2020 and for all other filers to begin reporting
for fiscal periods ending on or after June 15, 2021. These upgrades
also include meeting new SEC mandates for foreign filers that
compile financial statements using International Financial
Reporting Standards (“IFRS”) to be able to utilize our
cloud-based platform. Foreign filers with fiscal year’s
ending on or after December 15, 2017, are now required to begin
reporting their financial statements in XBRL with the SEC in 2018.
Platform id.
has adopted the new IFRS taxonomy into
and with its new disclosure upgrade for iXBRL to ensure our
customers are able to meet these new mandates.
Our whistleblower module is an add-on product
within Platform id.
This system delivers secure
notifications and basic incident workflow management processes that
align with a company’s corporate governance whistleblower
policy. As a supported and subsidized bundle product of the New
York Stock Exchange (“NYSE”) offerings, we hope we will
gain relationships with new IPO customers and other larger cap
customers listed on the NYSE.
A valued subscription add-on in our
Platform id.
offering is the ability for our
customers to gain access to real-time information of their
shareholders, stock ledgers 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 has
resulted in a more efficient process for both our customers and
us.
Our
proxy module is marketed as a fully integrated, real-time voting
platform for our customers and their shareholders of record. This
module is utilized for every annual meeting and/or special meeting
we manage for our customer base and offers both full-set mailing
and notice of internet availability options.
Services
As we focus on expanding our cloud-based
subscription business, we expect to see decreases in the overall
revenues associated with our Services business, absent additional
acquisitions which may occur in the future. 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 13 years. Services also include telecommunications
services and print, fulfillment and delivery of stock certificates,
proxy materials or annual reports depending on each
customer’s engagement. Services are not required, but are
optional for customers that utilize our Platform
id.
Our investor outreach and engagement offering,
formerly known as ARS, was acquired from PIR in 2013. The ARS
business has existed for over 20 years primarily as a physical hard
copy delivery service of annual reports and prospectuses. We
continue to operate a portion of this legacy system for those who
opt to take advantage of physical delivery of material.
Additionally, we continue to attempt to migrate the install base
over to subscriptions of our digital outreach engagement module
within Platform id.
We believe we will continue to see
further attrition of both customers and revenues in this category
as we focus our efforts on our Platform and Technology
business.
Results of Operations
Comparison of results of operations for the three months ended
March 31, 2019 and 2018:
|
|
Revenue Streams
|
|
|
|
|
|
|
|
Platform and Technology
|
|
|
Revenue
|
$2,665
|
$2,032
|
Gross
margin
|
$1,992
|
$1,607
|
Gross
margin %
|
75%
|
79%
|
|
|
|
|
|
|
Services
|
|
|
Revenue
|
$1,514
|
1,498
|
Gross
margin
|
$885
|
902
|
Gross
margin %
|
58%
|
60%
|
|
|
|
|
|
|
Total
|
|
|
Revenue
|
$4,179
|
$3,530
|
Gross
margin
|
$2,877
|
$2,509
|
Gross
margin %
|
69%
|
71%
|
Revenues
Total
revenue increased by $649,000, or 18%, to $4,179,000 during the
three-month period ended March 31, 2019, as compared to $3,530,000
during the same period of 2018. Revenue from customers obtained
from our acquisitions of VWP and FSCwire totaled $627,000 during
the three months ended March 31, 2019. A portion of this revenue is
included in both the Platform and Technology and Services revenue
streams.
Platform and
Technology revenue increased $633,000, or 31%, to $2,665,000 during
the three-month period ended March 31, 2019, as compared to
$2,032,000 during the same period of 2018. A majority of the
increase is due to the acquisitions of VWP and FSCwire, which
accounted for a combined $509,000 of Platform and Technology
revenue during the three months ended March 31, 2019. Additionally,
we generated increased revenue from additional subscriptions of
Platform id. These
increases were offset by a decline in revenue from our shareholder
outreach offering 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
64% of total revenue during the three months ended March 31, 2019,
as compared to 58% during the same period of the prior
year.
Services revenue
increased $16,000, or 1%, to $1,514,000 during the three-month
period ended March 31, 2019, as compared to $1,498,000 during the
same period of 2018. The increase is primarily due to the
acquisitions of VWP and FSCwire, which accounted for $118,000 of
Services revenue, as well as, from our print and proxy distribution
services due to one-time projects during the quarter. 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. We also experienced a decline in
our compliance services due to continued pricing pressure in those
markets and a shift of some of this revenue to the Platform and
Technology revenue stream.
No
customers accounted for more than 10% of the revenues during the
three-month periods ended March 31, 2019 or 2018.
Revenue Backlog
At
March 31, 2019, our deferred revenue balance was $1,464,000, which
we expect to recognize over the next twelve months, compared to
$1,249,000 at December 31, 2018. Deferred revenue primarily
consists of advance billings for subscriptions of our news
distribution and cloud-based products, as well as, annual contracts
for legacy ARS services. The increase is primarily due to an
increase in subscriptions of Platform id., with annualized contract
value of $189,000, to 20 net new or existing customers during the
three months ended March 31,2019.
Cost of Revenues and Gross Margin
Platform ad
Technology cost of revenues consists primarily of direct labor
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 increased by $281,000, or 28%,
during the three-month period ended March 31, 2019, as compared to
the same period of 2018. Overall gross margin increased $368,000,
or 15%, to $2,877,000, during the three-month period ended March
31, 2019, as compared to $2,509,000 in the same period of 2018.
However, during this period, gross margin percentage decreased to
69% from 71%.
Gross
margin percentage from Platform and Technology revenue was 75% in
the three-month period ended March 31, 2019, as compared to 79% in
the same period of 2018. The decrease in gross margin percentage is
primarily attributable to the addition of revenue and costs
associated with the acquisition of VWP.
Gross
margins from our Services revenue decreased to 58% in the
three-month period ended March 31, 2019, as compared to 60% in the
same period of 2018. The decrease is due in part to the acquisition
of VWP as well as higher print and distribution 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 and facility and equipment
expenses. General and administrative expenses increased $357,000,
or 36%, to $1,361,000 during the three-month period ended March 31,
2019, as compared to $1,004,000 during the same period of 2018.
This increase is primarily due to an increase in our bad debt
provision of $181,000 compared to the prior year. Additionally, we
incurred additional professional fees of $112,000 associated with
our recent acquisitions, as well as, an increase in personnel
expenses associated with an increase in corporate headcount as we
position ourselves for growth.
As a
percentage of revenue, general and administrative expenses were 33%
for the three-month period ended March 31, 2019, an increase from
28% for the same period of 2018.
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, 2019, increased $70,000,
or 9%, to $820,000 as compared to $750,000 during the same period
of 2018. This increase is directly related to our investment in our
sales and marketing initiatives with an increase in personnel costs
and digital marketing.
As a
percentage of revenue, sales and marketing expense were 20% during
the three-month period ended March 31, 2019, compared to 21% 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 increased $39,000, or 13%, to $337,000 during the
three-month period ended March 31, 2019, compared to $298,000 for
the same period in 2018. The increase is due to an increase in
headcount within the development team.
As a
percentage of revenue, product development expenses were 8% for
both the three-month periods ended March 31, 2019 and
2018.
Depreciation and Amortization
Depreciation and
amortization expenses increased $70,000, or 49%, during the
three-month period ended March 31, 2019, as compared to the same
period of 2018. The increase is due to amortization of intangible
assets acquired in both the VWP and FSCwire
acquisitions.
Interest income (expense), net
Interest income
(expense), net, represents interest income on deposit and money
market accounts, partially offset by the non-cash interest
associated with the present value of the remaining anniversary
payments of the Interwest acquisition.
Income tax (benefit) expense
We
recognized an income tax expense of $13,000 and a benefit of
$10,000 for the three-month periods ended March 31, 2019 and 2018,
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, 2019 and 2018, the variance
between our effective tax rate and the U.S. statutory rate of 21%,
is primarily attributable to excess stock-based compensation tax
benefits of $35,000 and $73,000, respectively, recognized in income
tax expense (benefit) during the periods, as well as, tax credits
offset by state income taxes.
Net Income
Net
income for the three-month period ended March 31, 2019, was
$205,000, compared to $320,000 for the same period of
2018.
Although we
achieved increases in revenue and gross margin, these increases
were offset by higher operating expenses due to investments made to
position ourselves for growth by increasing headcount, incurring
costs related to acquisitions as well as continuing to invest in
our cloud-based products. Depreciation and amortization expense
increased as well, due to amortization associated with acquired
intangible assets.
Liquidity and Capital Resources
As of
March 31, 2019, we had $14,961,000 in cash and cash equivalents and
$2,237,000 in net accounts receivable. Current liabilities at March
31, 2019, totaled $3,338,000 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. At March 31, 2019, our
current assets exceeded our current liabilities by
$14,220,000.
Effective October
4, 2018, the Company renewed its Line of Credit, which increased
the amount of funds available for borrowing from $2,500,000 to
$3,000,000. The interest rate was reduced from LIBOR plus 2.50% to
LIBOR plus 1.75%. As of March 31, 2019, the interest rate was 4.22%
and the Company did not owe any amounts on the Line of
Credit.
2019 Outlook
The following statements and certain statements made elsewhere in
this document are based upon current expectations. These statements
are forward looking and are subject to factors that could cause
actual results to differ materially from those suggested here,
including, without limitation, demand for and acceptance of our
services, new developments, competition and general economic or
market conditions, particularly in the domestic and international
capital markets. Refer also to the Cautionary Statement Concerning
Forward Looking Statements included in this report.
Overall,
the demand for our platforms continues to be stable in the majority
of the segments we serve. In a portion of our business, we will
continue to see demand shift from traditional printed and
service-based engagements to a cloud-based subscription model, as
well as digital distribution offerings. We believe we are
positioned well in this space to be both competitive and agile to
deliver these solutions to the market. As we have seen over the
last several quarters, the transition to digital platforms has had
a negative effect on our revenue in some areas and this is a trend
we expect will continue over the next few quarters.
One
of our competitive strengths is that we have embraced cloud
computing early on in our strategy. The transition to a
subscription model has been and will continue to be key for the
long-term sustainable growth management expects from our new
platforms.
We will continue to focus on the following key strategic
initiatives during the remainder of 2019:
●
Expand our Platform
and Technology business development and sales team,
●
Continue to grow
through acquisitions in areas of strategic focus
●
Continue to migrate
acquired businesses to our current platform,
●
Continue to expand
our newswire distribution,
●
Invest in
technology advancements and upgrades,
●
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
respective messages. We believe we have the product sets, platforms
and capacity to meet their requirements.
We
have invested and will continue to invest in our product sets,
platforms and intellectual property development via internal
development and acquisitions. These developments are key to our
overall offerings in the market and necessary to keep our
competitive advantages and sustain the next round of growth that
management believes it can achieve. If we are successful in this
development effort, we believe we can achieve increases in revenues
per user as we move through 2019 and beyond.
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. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Not
applicable
ITEM 4. CONTROLS 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.
PART II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
From
time to time, we may be involved in litigation that arises through
the normal course of business. As of the date of this filing, we
are neither a party to any litigation nor are we aware of any such
threatened or pending litigation that might result in a material
adverse effect to our business.
There
have been no material changes to our risk factors as previously
disclosed in our most recent 10-K filing.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURE.
Not
applicable.
ITEM 5. OTHER INFORMATION.
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
|
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:
May 2, 2019
|
ISSUER DIRECT CORPORATION
|
|
|
|
|
|
|
By:
|
/s/
Brian R. Balbirnie
|
|
|
|
Brian
R. Balbirnie
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Steven Knerr
|
|
|
|
Steven
Knerr
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|