ISSUER DIRECT CORP - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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☑  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Year Ended: December 31, 2016

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ISSUER DIRECT CORPORATION

(Name of small business issuer in its charter)

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Delaware		1-10185		26-1331503
(State or Other Jurisdiction of Incorporation)		(Commission File Number)		(I.R.S. Employer Identification No.)

 

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)

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Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.001 per share		NYSE MKTS.

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer ☐    Accelerated filer ☐    Non-accelerated filer ☐    Smaller reporting company ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☑

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2016, the last business day of the registrant's second fiscal quarter, was approximately $18,172,473 based on the closing price reported on the NYSE MKT as of such date.

 

As of March 14, 2017, the number of outstanding shares of the registrant's common stock was 2,904,114.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement relating to its 2017 annual meeting of stockholders (the “2017 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2017 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the year to which this report relates.

Table of Contents

 

PART I
Item 1.	Description of Business		4
Item 1A.	Risk Factors		10
Item 1B.	Unresolved Staff Comments		13
Item 2.	Property		13
Item 3.	Legal Proceedings		13
Item 4.	Mine Safety Disclosures		13
PART II
Item 5.	Market for Common Equity and Related Stockholder Matters		14
Item 6.	Select Financial Data		14
Item 7.	Management’s Discussion and Analysis and Results of Operations		15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 8.	Financial Statements and Supplementary Data		24
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		24
Item 9A.	Controls and Procedures		24
Item 9B.	Other Information		25
PART III
Item 10.	Directors, Executive Officers, and Corporate Governance		26
Item 11.	Executive Compensation		26
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		26
Item 13.	Certain Relationships and Related Transactions, and Director Independence		26
Item 14.	Principal Accountant Fees and Services		26
PART IV
Item 15.	Exhibits		27
	Signature		28
EX-21.1	Subsidiaries of the Registrant
EX-23.1	Consent of Independent Registered Public Accounting Firm
EX-31.1	Chief Financial Officer Certification Pursuant to Section 302
EX-31.2	Chief Financial Officer Certification Pursuant to Section 302
EX-32.1	Chief Executive Officer Certification Pursuant to Section 906
EX-32.2	Chief Financial Officer Certification Pursuant to Section 906
EX-101.INS	XBRL INSTANCE DOCUMENT
EX-101.SCH	XBRL TAXONOMY EXTENSION SCHEMA
EX-101.CAL	XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EX-101.DEF	XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
EX-101.LAB	XBRL TAXONOMY EXTENSION LABEL LINKBASE
EX-101.PRE	XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

 

CAUTIONARY STATEMENT

 

All statements, other than statements of historical fact, included in this Form 10-K, including without limitation the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” are, or may be deemed to be, forward-looking statements. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Issuer Direct Corporation, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements contained in this Form 10-K.

 

In our capacity as Company management, we may from time to time make written or oral forward-looking statements with respect to our long-term objectives or expectations which may be included in our filings with the Securities and Exchange Commission (the “SEC”), reports to stockholders and information provided in our web site.

 

The words or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,” “forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar expressions identify “forward-looking statements.” Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We are calling to your attention important factors that could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

 

The following list of important risk factors is not all-inclusive, and we specifically decline to undertake an obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Among the factors that could have an impact on our ability to achieve expected operating results and growth plan goals and/or affect the market price of our stock are:

 

 

Available Information

 

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Financial Data in XBRL, Current Reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, in the corporate section of our website at www.issuerdirect.com.

 

The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

 

PART I

 

ITEM 1. DESCRIPTION OF BUSINESS.

 

Company Overview

 

Issuer Direct Corporation (Issuer Direct Corporation and its subsidiaries are hereinafter collectively referred to as “Issuer Direct”, the “Company”, “We” or “Our” unless otherwise noted). We are a Delaware corporation formed in October 1988 under the name Docucon Incorporated. In December 2007, we changed our name to Issuer Direct Corporation. Our corporate offices are located at 500 Perimeter Park Drive, Suite D, Morrisville, North Carolina, 27560.

 

Businesses

 

Issuer Direct is a market leader and innovator of disclosure management solutions, shareholder communications tools and cloud–based compliance technologies. We alleviate the complexity of maintaining compliance with our integrated portfolio of products and services that enhance companies' ability to efficiently produce and distribute their financial and business communications both online and in print.  The Company’s core technology, Platform id (formerly our Disclosure Management System, or DMS) – is a secure cloud-based communications and compliance system for corporate issuers, mutual funds, and compliance professionals.

 

 

Additionally, our product roadmap includes further development of both our Investor Network and Classify products that we will continue to commercialize and bring to market during the first half of 2017. These two new cloud-based products will be a key component of our communications technology business. We expect the proprietary data-set to generate revenues from the corporate issuers initially then to the investment community thereafter. The Investor Network has replaced the ARS and Company Spotlight brands as we continue to transition this business from hard copy to digital delivery and real-time engagement. This transition continued during 2016, and will continue for the beginning part of 2017, as further clients transition from our legacy ARS to our new digital platforms.

 

 

Our Strategy

 

We strive to improve the way businesses collect, manage, communicate, report and analyze their data. Our overall strategy includes:

 

Expansion of Current Customers

 

We expect to continue to see demand for our products within our client base. Migrating client contracts over to our subscription-based platforms will naturally help align the Company’s recurring revenues and long-term strategies. Additionally, as part of our client expansion efforts, we are committed to working beyond the single point of contact and into the entire C suite (CEO, CFO, IRO, Corporate Secretary, etc.).

 

Focus on Organic Growth

 

Our primary growth strategy continues to be selling our subscription-based platforms via Platform id to new clients under our cloud-based arrangement, whereas in the past we were inclined to sell single solutions and not subscriptions, in highly commoditized businesses, that resulted in significant pricing pressures.

  

 New Offerings

 

During 2017 and going forward, we will continue to innovate, improve and build new applications into and with our platform; with the ultimate objective of developing applications in combination, that are not offered by our competitors. As a company focused on technology offerings, we understand the importance of advancements and fully appreciate the risks and consequences of losing our position as a market leader- a very common mistake many technology companies have made. The pursuit of technological innovation is and has been a part of our overall strategy as an organization over the last several years.

 

During 2017 we will bring to market several new products and platforms targeted at both our current install base as well as new clients. Many of these will be evident in our Investor Network brands and platforms – where we are reinventing the destination for both the professional and retail investors.

 

For example, we are seeing significant opportunities as a result of the Securities and Exchange Commission's new rule, Regulation A+. Regulation A+ offers us the opportunity to build, market and solidify our platform as a viable option to private companies seeking to raise capital under this rule and/or go public via this new regulation compared to a traditional initial public offering. Specifically, we believe our current technology and platforms as well as enhancements currently being made to our platforms may allow us to establish relationships much earlier in the life cycle of a business as it contemplates going public.  A typical Regulation A+ offering will require substantial support in terms of processing subscription agreements and other offering coordination.   We believe these increased needs of issuers will fit well with our Blueprint, Classify, Accesswire and stock transfer product bundles and potentially create higher revenues per issuer than we achieved in 2016. We intend to create and release certain platform API's during the first half of 2017 that will hopefully give us a competitive advantage in the Regulations A+ space.

 

Acquisition Strategy

 

We will continue to evaluate complimentary verticals and systems that we can integrate well into our current platforms. These opportunities need to be accretive and consistent with what the Company has done in the past. We will continue to maintain our product and technology focus, so it is highly likely we will look for acquisitions in areas we currently have revenues, that we refer to as "bolt on". In these transactions we will tend to look for key people, technologies, and long-term clients that will further enhance our overall market position.

 

 

Sales and Marketing

 

During 2017, we will continue to strengthen our brands in the market, by working aggressively to expand our new client footprint and continue to cross sell to increase average revenue per user. Our platform, systems and operations are built to handle growth – so with little capital or operational expense we can leverage this growth to produce further bottom line profits and cash flows.

 

Sales

 

Our global sales organization is responsible for generating new customer opportunities and expanding our current customers. We ended 2016 with a multi-tier organization, made up of Strategic Account Managers and Account Executives. We believe this structured approach is the most efficient and highly impactful way to reach new clients and also grow our current install base. The total compensation packages for these teams are heavily weighted with commission compensation and base salary to incent sales.  All members of the team have sales quotas. At the end of December 31, 2016, we employed 14 full-time equivalent sales personnel.

 

We are on track to continue to expand our sales headcount during 2017 both in our current markets and also in verticals or countries where we have not typically had a sales presence. However, we expect a majority of the increase to be in our Accesswire business as well as in our cloud-based subscription products.

 

Additionally, our executive team plays a critical role in our sales process, assisting the organization and clients with new offerings, cross selling opportunities and channel development; because our organization is still relatively small, we benefit from this approach and believe this is key to our future success.

 

Marketing

 

Our marketing organization has also undergone reorganization between our businesses; our newly created marketing and business development team now manages both business-to-business and business-to-consumer marketing efforts. This alignment was necessary, as we get ready to release the rebranded Annual Report Service and Company Spotlight products into and with the new Investor Network. This organization is also responsible for collaborating with our sales teams on product marketing, outbound digital marketing and all social media efforts of our entire brand. 

 

Technology

 

We will continue to make investments in our technology, as we transition our business from a historically service-oriented business to a cloud-based subscription organization. In all of our offerings, quality, support, and scalability as well as the need to preserve the confidential content of our clients is of utmost importance and part of our core values.

 

Industry Overview

 

Our industry benefits from increased regulatory requirements and the need for platforms and systems to manage these new regulations. Additionally, the industry along with cloud-based technologies have matured considerably over the past several years, whereby corporate issuers and communication professionals are seeking platforms and systems to do some, if not all the work themselves. We are uniquely positioned in this new environment to benefit from software licensing and further advancements of Platform id.

  

The business services industry as it relates to compliance and communications is highly fragmented, with hundreds of independent service companies that provide a range of financial reporting, document management services and with a wide range of printing and technology software providers. The demands for many of our services historically have been cyclical and reliant on capital market activity. During 2016, we spent a considerable amount of time growing several new service offerings beyond our traditional compliance reporting and transaction services business. These new offerings will afford us the ability to reduce our revenue seasonality and provide a new baseline of recurring annualized contracts under our new subscription-based business.

  

Competition

 

Despite some consolidation in recent years, the industry remains both highly fragmented and extremely competitive. The success of our products and services are generally based on price, quality and the ability to service client demands. Management has been focused on offsetting these risks relating to competition as well as the seasonality by introducing its cloud-based subscription platforms, with significantly higher margins, clear competitive advantages and scalability to withstand market and pricing pressures.

 

We also review our operations on a regular basis to balance growth with opportunities to maximize efficiencies and support our long-term strategic goals. We believe by blending our workflow technologies with our legacy service offerings we are able to offer a comprehensive set of products and solutions to each of our clients that most competitors cannot offer today.

 

 

We believe we are positioned to be the public company platform of choice as a cost-effective alternative to both small regional providers and global providers. We also believe we benefit from our location in North Carolina, as we do not experience significant competition for sales, customer service, or production personnel.

 

Customers

 

Our customers include a wide variety of issuers, mutual funds, law firms, brokerage firms, banks, individuals, and other institutions. For the year ended December 31, 2016, we did work for approximately 2900 clients on our Accesswire platform and 1200 clients through our other products and services.  We did not have any customers during the year ended December 31, 2016 that accounted for more than 10% of our revenue and no customer represented more than 10% of our year end accounts receivable balance.

 

Employees

 

As of December 31, 2016, we employed sixty full-time employees as compared to fifty-three full-time employees at December 31, 2015, none of which are represented by a union. Our employees work in our corporate offices in North Carolina, and in satellite locations throughout North America and the United Kingdom.

 

Facilities

 

Our headquarters are located in Morrisville, North Carolina. In October 2015, we agreed to an extension on our current lease to extend the maturity through October 2019. Our current office includes 16,059 square feet of office space. We believe we have sufficient space to sustain our growth through 2019. Additionally, we also have a shared office facility in London, England.   

 

Insurance

 

We maintain both a general business liability policy and an errors and omissions policy in excess of $5,000,000 specific to our industry and operations. We believe that our insurance policies provide adequate coverage for all reasonable risks associated with operating our business. Additionally, we maintain a Directors and Officers insurance policy, which is standard for our industry and size. We also maintain key man life insurance on our Chief Executive Officer, our Chief Financial Officer, and one other key individual.

 

Regulations

 

The securities and financial services industries generally are subject to regulation in the United States and elsewhere. Regulatory policies in the United States and the rest of the world are tasked with safeguarding the integrity of the securities and financial markets with protecting the interests of both issuers and shareholders.

 

In the United States, corporate issuers are subject to regulation under both federal and state laws, which often require public disclosure and regulatory filings. At the federal level, the Securities and Exchange Commission (“SEC”) regulates the securities industry, along with the Financial Industry Regulatory Authority, or FINRA, formally known as NASD, and NYSE market regulations, various stock exchanges, and other self-regulatory organizations (“SRO”).

 

In the European Union (EU), the securities and reporting authorities tend to be based on exchanges as well as individual country disclosure requirements. We currently work with our stock exchange partners to deliver our solutions. We believe this is the best approach as this market is highly complex and divided in comparison to our North American markets.

 

We operate our filing agent business and transfer agent business under the direct supervision and regulations of the SEC.

 

Our transfer agency business, Direct Transfer, LLC, is subject to certain regulations, which are governed, without limitation by the SEC, with respect to registration with the SEC, annual reporting, examination, internal controls, tax reporting and escheatment services. Our transfer agency is approved to handle the securities of NYSE, NASDAQ and the Over the Counter listed securities; as well we select issuers traded on TSX.

 

Our mission is to assist corporate issuers with these regulations, communication and compliance of rules imposed by regulatory bodies. The majority of our business involves the distribution of content, either electronically or paper, to governing bodies and shareholders alike. We are licensed under these regulations to disseminate, communicate and or solicit on behalf of our clients, the issuers.

 

ITEM 1A. RISK FACTORS.

 

Forward-Looking and Cautionary Statements

 

Investing in our common stock involves a high degree of risk. Prospective investors should carefully consider the following risks and uncertainties and all other information contained or referred to in this Annual Report on Form 10-K before investing in our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you could lose all of your investment.

 

Risks related to our business

 

Revenue related to disclosure documents is subject to regulatory changes and volatility in demand, which could adversely affect our operating results.

 

We anticipate that our disclosure management services business will continue to contribute to our operating results going forward. The market for these services depends in part on the demand for investor documents, which is driven largely by capital markets activity and the requirements of the SEC and other regulatory bodies. Any rulemaking substantially affecting the content of documents to be filed and the method of their delivery could have an adverse effect on our business. Our disclosure management revenues will be adversely affected as clients implement technologies enabling them to produce and disseminate documents on their own.

 

The environment in which we compete is highly competitive, which creates adverse pricing pressures and may harm our business and operating results if we cannot compete effectively.

 

Competition in our businesses is intense. The speed and accuracy with which we can meet client needs, the price of our services and the quality of our products and supporting services are factors in this competition. In our disclosure management business, we compete directly with several other service providers having similar degrees of specialization.

 

 Our print and financial communications business faces diverse competition from a variety of companies including commercial printers, in-house print operations, direct marketing agencies, facilities management companies, software providers and other consultants. In commercial printing services, we compete with general commercial printers, which are far more numerous than those in the financial printing market.

 

These competitive pressures could reduce our revenue and earnings. 

  

Approximately 13% of our revenue is generated overseas and the unstable global financial markets may adversely impact our revenue.

 

Approximately 13% of our annual revenue is generated in Europe.  Global financial markets have experienced extreme disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. We are unable to predict the likely duration and severity of the effects of these disruptions in the financial markets and the adverse global economic conditions, and if the current uncertainty continues or economic conditions further deteriorate, our business and results of operations could be materially and adversely affected. The consequences of such adverse effects could include interruptions or delays in our ability to perform services or to get paid for services rendered. 

 

If we are unable to retain our key employees and attract and retain other qualified personnel, our business could suffer.

 

Our ability to grow and our future success will depend to a significant extent on the continued contributions of our key executives, managers and employees. In addition, many of our individual technical and sales personnel have extensive experience in our business operations and/or have valuable client relationships that would be difficult to replace. Their departure, if unexpected and unplanned for, could cause a disruption to our business. Our competition for these individuals is intense, especially in the markets in which we operate. We may not succeed in identifying, attracting and retaining these personnel. Further, competitors and other entities have in the past recruited and may in the future attempt to recruit our employees, particularly our sales personnel. The loss of the services of our key personnel, the inability to identify, attract and retain qualified personnel in the future or delays in hiring qualified personnel, particularly technical and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as the timely introduction of new technology-based products and services, which could harm our business, financial condition and operating results.

 

If we fail to keep our clients’ information confidential or if we handle their information improperly, our business and reputation could be significantly and adversely affected.

 

We manage private and confidential information and documentation related to our clients’ finances and transactions, often prior to public dissemination. The use of insider information is highly regulated in the United States and abroad, and violations of securities laws and regulations may result in civil and criminal penalties. If we fail to keep our clients’ proprietary information and documentation confidential, we may lose existing clients and potential new clients and may expose them to significant loss of revenue based on the premature release of confidential information. We may also become subject to civil claims by our clients or other third parties or criminal investigations by appropriate authorities.

 

 

We must adapt to rapid changes in technology and client requirements to remain competitive.

 

The market and demand for our products and services, to a varying extent, have been characterized by:

 

 

We believe that these trends will continue into the foreseeable future. Our success will depend, in part, upon our ability to:

 

 

To achieve these goals, we will need to continue to make substantial investments in sales and marketing. We may not:

 

  

Further, our products and services may be rendered obsolete or uncompetitive by new industry standards or changing technology.

 

Our business could be harmed if we do not successfully manage the integration of any business that we have or may acquire in the future.

 

On August 22, 2013, the Company, and PrecisionIR Group Inc. (“PIR” or “PrecisionIR”) consummated an Agreement and Plan of Merger (the “Acquisition Agreement”).   On October 29, 2014, the Company purchased Accesswire.  Accesswire is dependent upon a few key partners for news distribution, some of which are also partners that we rely-on for other shareholder communications services.  A disruption in any of these partnership relationships could have an adverse impact on our business.  Furthermore, we acquired software with the acquisition of Accesswire.  Performance issues with this technology could also have an adverse impact on our ability to serve our customers.

 

Furthermore, as part of our continued business strategy, we will continue to evaluate and acquire as practical other businesses that complement our core capabilities. Certain other areas which may expose the Company to increased risk include:

 

 

 

 

 

We have incurred operating losses in the past and may do so again in the future

 

The Company has incurred operating losses in the past and may do so again in the future. At December 31, 2016, the Company had $1,491,225 of retained earnings. Although we have generated positive cash flows from operations for the past nine years, there can be no assurances that we will be able to do so in the future.  As we continue to invest in our cloud-based technologies and sales and marketing teams, we could experience fluctuations in our cash flows from operations and retained earnings and there are no guarantees that our business can continue to generate the current revenue levels.

 

Our business may be affected by factors outside of our control.

 

Our ability to increase sales and deliver and sell our service offerings profitably is subject to a number of risks, including changes to corporate disclosure requirements, regulatory filings and distribution of proxy materials, competitive risks such as the entrance of additional competitors into our market, pricing and competition and risks associated with the marketing of new services in order to remain competitive.

 

If potential customers take a long time to evaluate the use of our services, we could incur additional selling expenses and require additional working capital.

 

The acceptance of our services depends on a number of factors, including the nature and size of the potential customer base, the effectiveness of our system, and the extent of the commitment being made by the potential customer, and is difficult to predict.  Currently, our sales and marketing expenses per customer are fairly low. If potential customers take longer than we expect to decide whether to use our services and require that we travel to their sites, present more marketing material, or spend more time in completing the sales process, our selling expenses could increase, and we may need to raise additional capital sooner than we would otherwise need to.

  

The seasonality of business makes it difficult to predict future results based on specific quarters.

 

A greater portion of our printing, distribution and solicitation of proxy materials business will be processed during our second quarter. Therefore, the seasonality of our revenue makes it difficult to estimate future operating results based on the results of any specific quarter and could affect an investor’s ability to compare our financial condition and results of operations on a quarter-by-quarter basis. To balance the seasonal activity of print, distribution and solicitation of proxy materials, we will attempt to continue to grow our other revenue streams since they are linked to predictable periodic activity that is cyclical in nature.

 

If we are unable to successfully develop and timely introduce new technology-based products or enhance existing technology-based products, our business may be adversely affected.

 

In the past few years, we have expended significant resources to develop and introduce new technology-based products and improve and enhance our existing technology-based products in an attempt to maintain or increase our sales. The long-term success of new or enhanced technology-based products may depend on a number of factors including, but not limited to, the following: anticipating and effectively addressing customer preferences and demand, the success of our sales and marketing efforts, timely and successful development, changes in governmental regulations and the quality of or defects in our products.

 

The development of our technology-based products is complex and costly, and we typically have multiple technology-based products in development at the same time. Given the complexity, we occasionally have experienced, and could experience in the future, delays in completing the development and introduction of new and enhanced technology-based products. Problems in the design or quality of our products or services may also have an adverse effect on our brand, business, financial condition, and operating results. Unanticipated problems in developing technology-based products could also divert substantial development resources, which may impair our ability to develop new technology-based products and enhancements of such products, and could substantially increase our costs. If new or enhanced product and service introductions are delayed or not successful, we may not be able to achieve an acceptable return, if any, on our development efforts, and our business may be adversely affected.

 

Risks Related to Our common stock; Liquidity Risks

 

The price of our common stock may fluctuate significantly, which could lead to losses for stockholders.

 

               The stock prices of smaller public companies can experience extreme price and volume fluctuations. These fluctuations often have been unrelated or out of proportion to the operating performance of such companies. We expect our stock price to be similarly volatile. These broad market fluctuations may continue and could harm our stock price. Any negative change in the public’s perception of our prospects or companies in our market could also depress our stock price, regardless of our actual results. Factors affecting the trading price of our common stock may include:

 

You may lose your investment in the shares.

 

An investment in the shares involves a high degree of risk. An investment in shares of our common stock is suitable only for investors who can bear a loss of their entire investment.  We paid dividends in 2012, and in part of 2013, and every quarter since the fourth quarter of 2015, but there can be no assurances that dividends will be paid in the future in the form of either cash or stock.

 

We currently have authorized but unissued “blank check” preferred stock.  Without the vote of our shareholders, the Board of Directors, may issue such preferred stock with both economic and voting rights and preferences senior to those of the holders of our common stock.  Any such issuances may negatively impact the ultimate benefits to the holders of our common stock in the event of a liquidation event and may have the effect of preventing a change of control and could dilute the voting power of our common stock and reduce the market price of our common stock.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTY.

 

Our headquarters are located in Morrisville, North Carolina. In October 2015, we agreed to an extension on our current lease to extend the maturity through October 2019. Our current office includes 16,059 square feet of office space. We believe we have sufficient space to sustain our growth through 2019. Additionally, we also have a shared office facility in London, England.   

 

ITEM 3. LEGAL PROCEEDINGS.

 

From time to time, we may be involved in litigation that arises through the normal course of business.  As of the date of this filing, we are neither a party to any litigation nor are we aware of any such threatened or pending litigation that might result in a material adverse effect to our business.

 

ITEM 4. MINE SAFETY DISCOLSURES

 

Not applicable.

 

 

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

  

Market for common stock

 

Our common stock has been quoted on the NYSE MKTS under the symbol "ISDR" since March 11, 2014. Prior to that time, the Company was quoted on the Over the Counter Bulletin Board (“OTCBB”) under the same symbol.

 

The following table sets forth for the periods indicated the high and low closing prices of our common stock.

 

	High	Low
Year ended December 31, 2016
Quarter Ended March 31, 2016	$5.80	$4.88
Quarter Ended June 30, 2016	6.50	5.32
Quarter Ended September 30, 2016	7.67	6.40
Quarter Ended December 31, 2016	$9.05	$7.20
Year ended December 31, 2015
Quarter Ended March 31, 2015	$11.79	$8.54
Quarter Ended June 30, 2015	8.48	6.77
Quarter Ended September 30, 2015	10.50	5.49
Quarter Ended December 31, 2015	$8.15	$5.77

 

The quotations provided herein may reflect inter-dealer prices without retail mark-up, markdown, or commissions, and may not represent actual transactions.

 

As such, it may be difficult to trade the stock because compliance with the regulations can delay and/or preclude certain trading transactions. Broker-dealers may be discouraged from effecting transactions in our stock because of the sales practice and disclosure requirements for penny stock. This could adversely affect the liquidity and/or price of our common stock, and impede the sale of the stock.

 

Holders of Record

 

As of December 31, 2016, there were approximately 150 registered holders of record of our common stock and 2,860,944 shares outstanding.

 

Issuer Purchases of Equity Securities

 

The Company has not repurchased any shares of common stock during the years ended December 31, 2016 or 2015.

 

Dividends

 

During the year ended December 31, 2016, we paid dividends totaling $452,724 or $0.16 per share.  During the year ended December 31, 2015, we paid dividends totaling $83,101 or $0.03 per share.  There can be no assurances that dividends will be paid in the future. The declaration and payment of dividends in the future will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements and other factors.

 

ITEM 6. SELECT FINANCIAL DATA.

 

Summary of Operations for the periods ended December 31, 2016 and 2015.

 

	Year Ended December 31,
	2016	2015
Statement of Operations
Revenue	$12,058,866	$11,619,883
Cost of revenues	3,024,339	3,447,992
Gross profit	9,034,527	8,171,891
Operating costs	7,099,214	7,537,655
Operating income	1,935,313	634,236
Other income	80,165	—
Interest income (expense), net	4,080	(622,139)
Income before taxes	2,019,558	12,097
Income tax expense (benefit)	464,350	(132,487)
Net income	$1,555,208	$144,584

 

 

Concentrations:

 

For the years ended December 31, 2016 and December 31, 2015, we generated revenues from the following revenue streams as a percentage of total revenue:

 

	2016	2015
Revenue Streams
Disclosure management	19.6%	22.1%
Shareholder communications	62.5%	68.4%
Platform and technology	17.9%	9.5%
Total	100.0%	100.0%

 

Percentages:

 

Change expressed as a percentage increase or decrease for the years ended December 31, 2016 and December 31, 2015:

 

	Year ended December 31,
	2016	2015	% change
Revenue Streams
Disclosure management	$2,367,504	$2,569,415	(7.9)%
Shareholder communications	7,539,098	7,942,421	(5.1)%
Platform and technology	2,152,264	1,108,047	94.2%
Total	$12,058,866	$11,619,883	3.8%

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Except for the historical information contained herein, the matters discussed in this Form 10-K include certain forward-looking statements that involve risks and uncertainties, which are intended to be covered by safe harbors. Those statements include, but are not limited to, all statements regarding our and management’s intent, belief and expectations, such as statements concerning our future and our operating and growth strategy. We generally use words such as "believe," "may," "could," "will," "intend," "expect," "anticipate," "plan," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons including our ability to implement our business plan, our ability to raise additional funds and manage consumer acceptance of our products, our ability to broaden our customer base, our ability to maintain a satisfactory relationship with our suppliers and other risks described in our reports filed with the Securities and Exchange Commission, including Item 1A of this Report on Form 10-K. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, the factors set forth under the Risk Factors section of this report. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. All forward-looking statements made in this Form 10-K are based on information presently available to our management. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

 

For the year ended December 31, 2016, total revenue increased 4% to $12,058,866 from $11,619,883 in 2015, an increase of $438,983. Approximately $316,040 of the increase is related to the one-time reversal of an accrual of unused postage credits related to ARS clients acquired from PIR. Revenue from our platform and technology revenue stream increased $1,044,217, or 94%, primarily as a result of a shift of ARS customers to our Investor Network platform as well as an increase in the licensing of our transfer agent, IRDirect, iProxy, whistleblower, Blueprint and Classify platforms. Revenue from our disclosure management revenue stream decreased $201,911, or 8%, primarily as a result of competition in the marketplace for our Edgar and XBRL services, partiallyoffset by an increase in transfer agent services due to corporate transactions. Excluding the benefit of the one-time reversal of the accrual for unused postage credits noted earlier, revenue from our shareholder communications revenue stream decreased $719,363, as we continue to experience a decline in revenue associated with our hardcopy ARS service offerings as issuers shift from hardcopy fulfillment to digital fulfillment or elect not to continue with the service. However, this was partially offset by increases in revenue from our Accesswire press release platform and our proxy printing and distribution services.

 

Overall, gross margin increased to 75% for the year ended December 31, 2016, compared to 70% for 2015. Excluding the benefit associated with the release of the accrual related to unused postage credits, gross margin for the year ended December 31, 2016, would have been 74%. The increase in gross margin is attributable to our continued transition to a cloud-based subscription model as well as from increased revenue in our high margin press release business.

For the year ended December 31, 2016, operating expenses decreased to $7,099,214, as compared to $7,537,655 in 2015. The decrease is primarily due to an impairment loss on intangible assets of $547,000, recognized during the year ended December 31, 2015, as well as a decrease in depreciation and amortization during the year ended December 31, 2016, due to certain intangible assets acquired in the PIR acquisition, which became fully amortized during the year. These decreases were partially offset by an increase in sales and marketing expenses due to increased headcount and new marketing initiatives, primarily at investor conferences and tradeshows.

 

  

In 2016, we had income before taxes of $2,019,558 compared to $12,097 in 2015. We recorded income tax expense of $464,350 during the year ended December 31, 2016, compared to a benefit of $(132,487) during the year ended December 31, 2015. The increase in income tax expense is primarily related to the increase in taxable income for the year ended December 31, 2016, compared to 2015.  During the years ended December 31, 2016 and 2015, the Company released a portion of its valuation allowance related to federal and state net operating losses, which resulted in a net benefit of $211,245 and $179,426, respectively, and resulted in the income tax benefit recorded in 2015.  Net income was $1,555,208 in 2016 compared to $144,584 in 2015.

 

In 2017, we expect to achieve growth in our Accesswire press release business as well as in our platform and technology revenue stream due to our continued investment in our cloud-based platforms.  However, we may continue to see declines in shareholder communications revenue stream, as customers transition from the traditional print fulfillment of annual reports to both Classify and Investor Network.  Additionally, we may experience declines in disclosure management revenue as customers transition to Blueprint and we continue to face pricing pressure in the market.

 

Results of Operations

 

Comparison of results of operations for the years ended December 31, 2016 and 2015

 

	Year ended
	December 31,
Revenue Streams	2016	2015
Disclosure management
Revenue	$2,367,504	$2,569,415
Gross margin	$1,647,430	$1,806,531
Gross margin %	70%	70%
Shareholder communications
Revenue	7,539,098	7,942,421
Gross margin	5,591,249	5,440,349
Gross margin %	74%	68%
Platform and technology
Revenue	2,152,264	1,108,047
Gross margin	1,795,848	925,011
Gross margin %	83%	83%
Total
Revenue	$12,058,866	$11,619,883
Gross margin	$9,034,527	$8,171,891
Gross margin %	75%	70%

 

Revenues

 

Total revenue increased by $438,983, or 4%, to $12,058,866 during the year ended December 31, 2016, as compared to $11,619,883 in 2015.  It is important to note, included in our revenue for the year ended December 31, 2016, is the one-time benefit of $316,040 related to the reversal of an accrual of unused postage credits related to ARS clients acquired from PIR. 

 

Disclosure management revenue decreased $201,911, or 8%, during the year ended December 31, 2016, as compared to 2015. The decrease was mostly due to a decline in revenue from our Edgar and XBRL services, which declined $369,121 during the year ended December 31, 2016, compared to the same period of 2015, as the Company continued to experience pricing pressure on these services as well as client attrition.  Additionally, we transitioned some of our clients to our Blueprint platform, allowing them to self-file with our new cloud-based product.  This has resulted in a shift in some revenue to our platform and technology revenue stream, a trend which we expect to continue.  However, this decrease was partially offset by an increase in revenue from our transfer agent business due to an increase in clients as well as an increase in corporate directives and actions compared to the same period of the prior year.  The timing of these corporate directives and actions are difficult to predict as they are controlled by our clients and the conditions of the market and therefore fluctuate from year to year.

 

 

Shareholder communications revenue decreased $403,323 or 5% during the year ended December 31, 2016, as compared to 2015. The decrease in shareholder communications revenue is due to a decline in revenue associated with our hardcopy ARS service offerings as issuers shift from hardcopy fulfillment to digital fulfillment or elect not to continue with the service.  Additionally, customers have migrated from ARS to our Investor Network product, resulting in a shift of approximately $413,000 of revenue during the year ended December 31, 2016, from shareholder communications to our platform and technology revenue stream.  These decreases were offset by an increase in revenue from Accesswire, our press release platform, which increased $807,172 during the year ended December 31, 2016, compared to the same period of 2015.  The increase is due to successful penetration into the newswire market and the addition of both new public and private customers.  We expect to continue to invest in this platform, by increasing distribution, sales staff and marketing in order to continue our growth trends.  Additionally, revenue increased in our proxy printing and distribution services for the year ended December 31, 2016, compared to the prior year due to an increase in the number of projects, resulting from successful cross selling of new transfer agent clients. Included in revenue for year ended December 31, 2016, is the one-time benefit of $316,040 related to the reversal of an accrual of unused postage credits related to ARS clients acquired from PIR.

 

Platform and technology revenue increased $1,044,217, or 94% during the year ended December 31, 2016, as compared to 2015. The increase is primarily due to the shift of ARS customers to our Investor Network platform noted above as well as increases in licensing of a majority of our other products, including our transfer agent, iRDirect, iProxy, whistleblower, Blueprint and Classify platforms, as we continue our transition to a subscription model.  Revenue from this stream increased to 17.9% of total revenue during the year ended December 31, 2016, compared to 9.5% during the prior year.  Along with our press release platform, the Company plans to continue to invest in these platforms in order to further drive an increase in licenses and revenue growth.

 

2016 Revenue Backlog

 

At December 31, 2016, we have deferred revenue of $842,642 that we expect to recognize throughout 2017, compared to $822,481 at December 31, 2015. Deferred revenue primarily consists of advance billings for annual contracts for our legacy annual report service and licenses of our cloud-based platforms.

 

Cost of Revenues

 

Cost of revenues consists primarily of direct labor costs, third party licensing, warehousing, logistics, print production materials, postage and outside services directly related to the delivery of services to our customers as well as depreciation of capitalized software related to our platforms licensed to customers. Cost of revenues decreased by $423,653, or 12% during the year ended December 31, 2016, as compared to 2015. Overall gross margin increased to 75% for the year ended December 31, 2016, as compared to 70% for the year ended December 31, 2015.  Excluding the benefit associated with the release of the accrual related to unused postage credits, gross margin for the year ended December 31, 2016, would have been 74%.

 

We achieved margins of 70% from our disclosure management services during both the years ended December 31, 2016 and 2015.  As previously discussed we continued to experience pricing pressure from our Edgar and XBRL services, however we were able to offset this by reducing costs through the use of less outside vendors and reducing internal headcount.  Additionally, the increase in transfer agent revenue resulted in higher margins as the cost for these services is relatively fixed.

 

Gross margins from our shareholder communications services increased to 74% for the year ended December 31, 2016, compared to 68% for the year ended December 31, 2015.  Excluding the one-time benefit associated with the release of the unused postage credits, gross margins for the year ended December 31, 2016, would have been 73%. The increase in gross margin percentage is due to our continued transition to a cloud-based subscription model resulting in stream-lined costs as well as from additional revenue from our high-margin press release business.

 

Gross margins from platform and technology revenue remained consistent at 83% for the year ended December 31, 2016, as well as 2015. Additional revenue through our platform licenses and new cloud-based products was offset by additional depreciation of capitalized software.

 

General and Administrative Expense

 

General and administrative expenses consist primarily of salaries, stock based compensation, bonuses, insurance, fees for professional services, general corporate expenses and facility and equipment expenses.  General and administrative expenses were $3,185,308 during the year ended December 31, 2016, a decrease of $56,096, or 2%, compared to 2015.  The decrease is due to reductions in consulting expenses partially offset by an increase in personnel expenses due to an increase in headcount, bonuses and stock compensation.

 

Sales and Marketing Expenses

 

Sales and marketing expenses consist primarily of salaries, stock based compensation, sales commissions, advertising expenses, and marketing expenses. Sales and marketing expenses were $2,600,851 for the year ended December 31, 2016, an increase of $257,521, or 11%, as compared to 2015. This increase is due to an increase in sales personnel costs due to an increase in headcount in our sales department as well as an increase in new marketing efforts as it relates to investor conferences and tradeshow activities.

 

As a percentage of revenue, sales and marketing expenses increased to 22% during the year ended December 31, 2016, compared to 20% during the year ended December 31, 2015.

 

Product Development

 

Product development expenses consist primarily of salaries, stock based compensation, bonuses and licenses to develop new products and technology to complement and/or enhance Platform id. Product development costs increased $77,039, or 24%, during the year ended December 31, 2016, compared to2015. The increase is the result of the Company increasing personnel resources toward the development of its cloud-based platforms. During the year ended December 31, 2016, the Company capitalized $1,506,616 of software development costs, compared to $749,095 during the year ended December 31, 2015.

 

Depreciation and Amortization

 

Depreciation and amortization expenses during the year ended December 31, 2016, decreased by $169,905, or 16%, to $909,432, as compared to $1,079,337 during 2015. The decrease is primarily due to lower amortization of certain intangible assets acquired in the PIR acquisition, which became fully amortized during the year ended December 31, 2016.

 

Impairment Loss on Intangible Assets

 

During the fourth quarter of 2015, the Company elected not to renew certain trademarks purchased in conjunction with the acquisition of PIR. These trademarks had an allocated value of $148,680, and the write-off of this value is included in Impairment loss on intangible assets on the Consolidated Statements of Net Income for the year ended December 31, 2015. Additionally, as part of the Company’s annual review of impairment of goodwill and intangible assets, the Company determined the remaining trademarks purchased as part of the acquisition of PIR were no longer indefinite-lived assets, as the Company plans to integrate and re-brand the associated trademarks with Issuer Direct. As a result of this determination, the Company was required to perform a goodwill impairment assessment. Due to lower futureprojections of revenue associated with our ARS service and a shortened useful life of the trademarks, this assessment resulted in an impairment loss of $398,320, which is also included in Impairment loss on intangible assets in the Consolidated Statements of Income for the year ended December 31, 2015. No impairment was recorded as a result of the Company's annual review of impairment of goodwill and intangible assets for the year ended December 31, 2016.

 

Other income (expense)

 

Other income, net

 

Other income, net for the year ended December 31, 2016, is the result of a gain recorded on the excess of the fair value of stock received, in lieu of cash, to settle an outstanding receivable.

 

Interest income (expense), net

 

Interest income (expense), net decreased $626,219 during the year ended December 31, 2016, compared to the same period of 2015. The decrease is due to the final conversion of $1,666,673 of principal payable on the 8% Note (See Note 6 of the Consolidated Financial Statements) into 417,712 shares of the Company's common stock at the conversion price of $3.99 on August 22, 2015. As a result of the final conversion, the Company no longer has any non-cash or cash interest expense associated with the 8% Note.

 

 

Income Taxes

 

We recorded income tax expense of $464,350 during the year ended December 31, 2016, compared to a benefit of $(132,487) during the year ended December 31, 2015.  The primary reason for the increase in income tax expense is due to an increase in taxable income for the year ended December 31, 2016, compared to 2015.  During the years ended December 31, 2016 and 2015, the Company released a portion of its valuation allowance related to federal and state net operating losses, which resulted in a net benefit of $211,245 and $179,426, respectively.  The release during the year ended December 31, 2016 comprised a full valuation release of  the previously reserved tax benefits from US net operating losses that were acquired as part of the acquisition of PIR.  At the date of acquisition, management believed it was more likely than not that the benefits would not be used due to the uncertainty of future profitability and also due to statutory limitations on the amount of net operating losses that can be carried forward in an acquisition. During the year ended December 31, 2015, the Company released portions of the reserve related to tax years through 2015 based on current best estimates of profitability at that time.

 

Net Income

 

Net income for the year ended December 31, 2016 was $1,555,208 as compared to $144,584 in 2015. The increase in net income is primarily attributable to higher gross margins, resulting from increased revenue and lower cost of revenues as a result of our transition to a cloud-based, subscription model with a focus on revenue from our platforms. Additionally, the year ended December 31, 2015, was negatively impacted by the impairment loss on intangible assets of $547,000.  Finally, the decrease in interest expense for the year ended December 31, 2016, was partially offset by an increase in tax expense.

 

Liquidity and Capital Resources

 

As of December 31, 2016, we had $5,338,978 in cash and cash equivalents and $1,299,698 in net accounts receivable. Current liabilities at December 31, 2016, totaled $2,104,420 including our accounts payable, deferred revenue, accrued payroll liabilities, income taxes payable and other accrued expenses. At December 31, 2016, our current assets exceeded our current liabilities by $4,722,840.

 

Effective September 2, 2016, the Company renewed its Line of Credit, which reduced the interest rate to LIBOR plus 2.50%.  The amount of funds available for future borrowings remained at $2,000,000. As of December 31, 2016, the interest rate was 3.26% and the Company did not owe any amounts on the Line of Credit.

 

We manage our cash flow carefully with the intent to meet our obligations from cash generated from operations. However, it is possible that we will have to raise additional funds through the issuance of equity in order to meet any future obligations. There can be no assurance that cash generated from operations will be sufficient to fund our operating expenses, to allow us to pay dividends, or meet our other obligations, and there is no assurance that debt or equity financing will be available, or if available, that such financing will be upon terms acceptable to us.

 

Disclosure about Off-Balance Sheet Arrangements

 

We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

 

Outlook

 

 

These statements are forward looking and are subject to factors that could cause actual results to differ materially from those suggested here, including, without limitation, demand for and acceptance of our services, new developments, competition and general economic or market conditions, particularly in the domestic and international capital markets. Refer also to the Cautionary Statement Concerning Forward Looking Statements and Risk Factors included in this report.

 

Critical Accounting Policies and Estimates

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  Significant intercompany accounts and transactions are eliminated in consolidation.

 

Revenue Recognition

 

We recognize revenue in accordance with accounting principles generally accepted in the United States (“US GAAP”), including SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” which requires that: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. We recognize revenue when services are rendered and/or delivered, where collectability is probable. Deferred revenue primarily consists of advance billings for annual contracts for our legacy annual report service and licenses of our cloud-based platforms.

 

Allowance for Doubtful Accounts

 

We provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables as well as historical collection information. Credit is granted on an unsecured basis. In determining the amount of the allowance, management is required to make certain estimates and assumptions. The allowance is made up of specific reserves, as deemed necessary, on client account balances, and a reserve based on our historical experience.

 

Income Taxes

 

We comply with the FASB ASC No. 740 – Income Taxes which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized.  For any uncertain tax positions, we recognize the impact of a tax position, only if it is more likely than not of being sustained upon examination, based on the technical merits of the position. Our policy regarding the classification of interest and penalties is to classify them as income tax expense in our financial statements, if applicable.  At the end of each interim period, we estimate the effective tax rate we expect to be applicable for the full year and this rate is applied to our results for the interim year-to-date period and then adjusted for any discrete period items.

 

 

Capitalized Software

 

In accordance with FASB ASC No. 350 – Intangibles – Goodwill and Other, costs incurred to develop our cloud-based platform products and disclosure management system components are capitalized when the preliminary project phase is complete, management commits to fund the project and it is probable the project will be completed and used for its intended purposes. Once the software is substantially complete and ready for its intended use, the software is amortized over its estimated useful life.  Costs related to design or maintenance of the software are expensed as incurred.  

 

Impairment of Long-lived Assets

 

In accordance with the authoritative guidance for accounting for long-lived assets, assets such as property and equipment, trademarks, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset group exceeds fair value of the asset group.

 

Fair Value Measurements

 

As of December 31, 2016 and 2015, we do not have any financial assets or liabilities that are required to be, or that we elected to measure, at fair value.  We believe that the fair value of our financial instruments, which consist of cash and cash equivalents, accounts receivable, our line of credit, notes payable, and accounts payable approximate their carrying amounts.

 

 

Business Combinations, Goodwill and Intangible Assets

 

We account for business combinations under FASB ASC No. 805 – Business Combinations and the related acquired intangible assets and goodwill under FASB ASC No. 350 – Intangibles – Goodwill and Other. The authoritative guidance for business combinations specifies the criteria for recognizing and reporting intangible assets apart from goodwill. We record the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of acquisition, with any excess purchase price recorded as goodwill. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Intangible assets consist of client relationships, customer lists, software, technology and trademarks that are initially measured at fair value.  At the time of the business combination the trademarks 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, customer lists, software and technology are amortized over their estimated useful lives.

  

Newly Adopted Accounting Pronouncements

 

On November 20, 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-17 ("ASU 2015-17”), Balance Sheet Classification of Deferred Taxes, which requires that all deferred tax assets and liabilities, along with any related valuation allowance, in each jurisdiction be classified as noncurrent on the balance sheet. For public business entities, ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods but may be early adopted. ASU 2015-17 may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheets). The Company elected to early adopt ASU 2015-17, on a prospective basis, as of December 31, 2015.

 

 

 

 

                The FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.  The issue is the result of a consensus of the FASB Emerging Issues Task Force (EITF).  The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award.  Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.  The amendments in this ASU were effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.  ASU 2014-12 did not have a significant impact on our financial statements.

 

 

The FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods.  The company does not expect this pronouncement to have a significant impact on its financial statements, unless an acquisition or disposal of assets is completed.

 

 

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation under the supervision and with the participation of our management, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") were effective as of December 31, 2016, to ensure that information required to be disclosed in reports that are filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Inherent Limitations over Internal Controls

 

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.

 

             Management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

   

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The information required by this Item is set forth under the headings “Directors, Executive Officers and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 2017 Proxy Statement to be filed with the U.S. Securities and Exchange Commission ("SEC") within 120 days after December 31, 2016 in connection with the solicitation of proxies for the Company’s 2017 annual meeting of shareholders and is incorporated herein by reference.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

The information required by this Item is set forth under the heading “Executive Compensation” and under the subheadings “Board Oversight of Risk Management,” “Compensation of Directors,” “Director Compensation-2016” and “Compensation Committee Interlocks and Insider Participation” under the heading “Directors, Executive Officers and Corporate Governance” in the Company’s 2017 Proxy Statement to be filed with the SEC within 120 days after December 31, 2016 and is incorporated herein by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The information required by this Item is set forth under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Company’s 2017 Proxy Statement to be filed with the SEC within 120 days after December 31, 2016 and is incorporated herein by reference.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

The information required by this Item is set forth under the heading “Review, Approval or Ratification of Transactions with Related Persons” and under the subheading “Board Committees” under the heading “Directors, Executive Officers and Corporate Governance” in the Company’s 2017 Proxy Statement to be filed with the SEC within 120 days after December 31, 2016 and is incorporated herein by reference.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

The information required by this Item is set forth under the subheadings “Fees Paid to Auditors” and “Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the Independent Registered Public Accounting Firm” under the proposal “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s 2017 Proxy Statement to be filed with the SEC within 120 days after December 31, 2016 and is incorporated herein by reference.

 

 

PART IV

 

ITEM 15. EXHIBITS.

 

(a)           Financial Statements

 

The financial statements listed in the accompanying index (page F-1) to the financial statements are filed as part of this Annual Report on Form 10-K.

 

(b)           Exhibits

 

Exhibit Number		Exhibit Description
21.1		Subsidiaries of the Registrant.*
23.1		Consent of Independent Registered Public Accounting Firm.*
31.1		Rule 13a-14(a) Certification of Principal Executive Officer.*
31.2		Rule 13a-14(a) Certification of Principal Financial Officer.*
32.1		Section 1350 Certification of Principal Executive Officer.*
32.2		Section 1350 Certification of Principal Financial Officer.*

———————

* Filed herewith

 

(c)           Financial Statement Schedules omitted

 

None. 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	ISSUER DIRECT CORPORATION
Date: March 14, 2017	By:	/s/ Brian R. Balbirnie
		Brian R. Balbirnie
		Chief Executive Officer, Director

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of the dates set forth below.

 

 

Signature		Date		Title
/s/ Brian R. Balbirnie		March 14, 2017		Director, Chief Executive Officer
Brian R. Balbirnie				(Principal Executive Officer)
/s/ Steven Knerr		March 14, 2017		Chief Financial Officer
Steven Knerr				(Principal Accounting Officer)
/s/ Andre Boisvert		March 14, 2017		Director, Chairman of the Board and Compensation Committee and Audit Committee Member
Andre Boisvert
/s/ William Everett		March 14, 2017		Director, Chairman of the Audit Committee and Member of the Compensation Committee, and Strategic Advisory Committee
William Everett
/s/ J. Patrick Galleher		March 14, 2017		Director, Chairman of the Strategic Advisory Committee
J. Patrick Galleher

 

 

INDEX TO FINANCIAL STATEMENTS

 

		Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2016 and 2015		F-3
Consolidated Statements of Income for the years ended December 31, 2016 and 2015		F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015		F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016 and 2015		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015		F-7
Notes to Consolidated Financial Statements		F-8

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders

Issuer Direct Corporation

Morrisville, North Carolina

 

We have audited the accompanying consolidated balance sheets of Issuer Direct Corporation and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2016. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Issuer Direct Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ CHERRY BEKAERT LLP

 

Raleigh, North Carolina

March 14, 2017

 

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2016 AND 2015

 

	December 31,
	2016	2015
ASSETS
Current assets:
Cash and cash equivalents	$5,338,978	$4,215,145
Accounts receivable (net of allowance for doubtful accounts of $429,192 and $396,884, respectively)	1,299,698	1,253,628
Other current assets	188,584	252,468
Total current assets	6,827,260	5,721,241
Capitalized software (net of accumulated amortization of $207,438 and $25,133, respectively)	2,048,273	723,962
Fixed assets (net of accumulated depreciation of $318,077 and $262,797, respectively)	204,316	175,497
Deferred income tax asset - noncurrent	140,974	97,974
Other long-term assets	17,891	18,301
Goodwill	2,241,872	2,241,872
Intangible assets (net of accumulated amortization of $3,323,782 and $2,512,704, respectively)	1,380,218	2,191,296
Total assets	$12,860,804	$11,170,143
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$343,418	$385,285
Accrued expenses	806,399	995,999
Income taxes payable	111,961	199,613
Deferred revenue	842,642	822,481
Total current liabilities	2,104,420	2,403,378
Deferred income tax liability	66,332	94,566
Other long-term liabilities	112,154	113,222
Total liabilities	2,282,906	2,611,166
Commitments and contingencies (see Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value, 30,000,000 shares authorized, no shares issued and outstanding as of December 31, 2016 and 2015.	-	-
Common stock $0.001 par value, 100,000,000 shares authorized, 2,860,944 and 2,785,044 shares issued and outstanding as of December 31, 2016 and 2015, respectively.	2,861	2,785
Additional paid-in capital	9,119,610	8,202,605
Other accumulated comprehensive loss	(35,798)	(35,154)
Retained earnings	1,491,225	388,741
Total stockholders' equity	10,577,898	8,558,977
Total liabilities and stockholders’ equity	$12,860,804	$11,170,143

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

	Years Ended December 31,
	2016	2015
Revenues	$12,058,866	$11,619,883
Cost of revenues	3,024,339	3,447,992
Gross profit	9,034,527	8,171,891
Operating costs and expenses:
General and administrative	3,185,308	3,241,404
Sales and marketing	2,600,851	2,343,330
Product development	403,623	326,584
Depreciation and amortization	909,432	1,079,337
Impairment loss on intangible assets	—	547,000
Total operating costs and expenses	7,099,214	7,537,655
Operating income	1,935,313	634,236
Other income (expense):
Other income, net	80,165	—
Interest income (expense), net	4,080	(622,139)
Total other income (expense)	84,245	(622,139)
Income before taxes	2,019,558	12,097
Income tax expense (benefit)	464,350	(132,487)
Net income	$1,555,208	$144,584
Income per share – basic	$0.55	$0.06
Income per share – diluted	$0.54	$0.06
Weighted average number of common shares outstanding – basic	2,819,720	2,486,684
Weighted average number of common shares outstanding – diluted	2,903,255	2,575,952

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ISSUER DIRECT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

	Years Ended December 31,
	2016	2015
Net income	$1,555,208	$144,584
Foreign currency translation adjustment	(644)	12,129
Comprehensive income	$1,554,564	$156,713

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2016 AND 2015

 

	Common Stock		Additional Paid-in	Accumulated Other Comprehensive	Retained	Total Stockholders’
	Shares	Amount	Capital	Loss	Earnings	Equity
Balance at December 31, 2014	2,316,743	$2,317	$5,725,470	$(47,283)	$327,258	$6,007,762
Stock-based compensation expense	8,000	8	744,587	—	—	744,595
Exercise of stock awards, net of tax	42,589	42	66,293	—	—	66,335
Shares issued upon partial conversion of note payable (see Note 6)	417,712	418	1,666,255	—	—	1,666,673
Dividends	—	—	—	—	(83,101)	(83,101)
Foreign currency translation	—	—	—	12,129	—	12,129
Net income	—	—	—	—	144,584	144,584
Balance at December 31, 2015	2,785,044	$2,785	$8,202,605	$(35,154)	$388,741	$8,558,977
Stock-based compensation expense	—	—	882,087	—	—	882,087
Exercise of stock awards, net of tax	75,900	76	34,918	—	—	34,994
Dividends	—	—	—	—	(452,724)	(452,724)
Foreign currency translation	—	—	—	(644)	—	(644)
Net income	—	—	—	—	1,555,208	1,555,208
Balance at December 31, 2016	2,860,944	$2,861	$9,119,610	$(35,798)	$1,491,225	$10,577,898

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

	Years Ended December 31,
	2016	2015
Cash flows from operating activities
Net income	$1,555,208	$144,584
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense	195,327	169,020
Depreciation and amortization	1,076,808	1,099,870
Impairment loss on intangible assets	—	547,000
Deferred income taxes	(210,406)	(631,938)
Non-cash interest expense	—	535,397
Stock-based compensation expense	592,025	549,184
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable	(259,132)	586,518
Decrease (increase) in deposits and prepaid assets	63,171	68,813
Increase (decrease) in accounts payable	(38,602)	132,168
Increase (decrease) in deferred revenue	42,748	(44,680)
Increase (decrease) in accrued expenses	(255,821)	20,630
Net cash provided by operating activities	2,761,326	3,176,566
Cash flows from investing activities
Capitalized software	(1,077,382)	(553,684)
Purchase of fixed assets	(112,244)	(109,512)
Net cash used in investing activities	(1,189,626)	(663,196)
Cash flows from financing activities
Proceeds from exercise of stock options, net of income taxes	34,994	28,100
Excess tax benefit from share based compensation	—	38,235
Payment of dividend	(452,724)	(83,101)
Net cash (used in)/provided by financing activities	(417,730)	(16,766)
Net change in cash	1,153,970	2,496,604
Cash- beginning	4,215,145	1,721,343
Currency translation adjustment	(30,137)	(2,802)
Cash- ending	$5,338,978	$4,215,145
Supplemental disclosures:
Cash paid for interest	$—	$85,870
Cash paid for income taxes	$715,614	$282,951
Non-cash activities:
Stock-based compensation - capitalized software	$429,234	$195,411
Conversion of note payable to common stock	$—	$1,666,673

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

Note 1: Description, Background and Basis of Operations

 

Nature of Operations

 

Issuer Direct Corporation (the “Company” or “Issuer Direct”) was incorporated in the state of Delaware in October 1988 under the name Docucon Inc. Subsequent to the December 13, 2007 merger with My EDGAR, Inc., the Company changed its name to Issuer Direct Corporation. The surviving company was formed for the purposes of helping companies produce and distribute their financial and business communications both online and in print. As a technology and issuer services focused company, Issuer Direct Corporation operates under several brands in the market, including Direct Transfer, PrecisionIR (PIR), Blueprint, Classify, Investor Network, iProxy Direct, iR Direct, QX Interactive and Accesswire. The Company leverages its securities compliance and regulatory expertise to provide a comprehensive set of services that enhance a client's ability to communicate effectively with its shareholder base while meeting all reporting regulations required.

 

Note 2: Summary of Significant Accounting Policies

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  Significant intercompany accounts and transactions are eliminated in consolidation.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.

 

The Company places its cash and cash equivalents on deposit with financial institutions in the United States, Canada, and Europe. The Federal Deposit Insurance Corporation (FDIC) covers $250,000 for substantially all depository accounts in the United States.  As of December 31, 2016, the Company had $4,127,107 which exceeds the insured amounts in the United States.  The Company also had cash of $625,785 in Europe, and $52,106 in Canada on hand at December 31, 2016.

 

Revenue Recognition

 

We recognize revenue in accordance with accounting principles generally accepted in the United States (“US GAAP”), including SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” which requires that: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. We recognize revenue when services are rendered and/or delivered, where collectability is probable. Deferred revenue primarily consists of advance billings for annual contracts for our legacy annual report service and licenses of our cloud-based platforms.

 

Fixed Assets

 

              Fixed assets are recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized. The range of estimated useful lives used to calculate depreciation for principal items of property and equipment are as follow:

 

Asset Category		Depreciation / Amortization Period
Computer equipment		3 years
Furniture & equipment		3 to 7 years
Leasehold improvements		7 years or lesser of the lease term

 

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

Earnings per Share

 

We calculate earnings per share in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 260 – EPS, which requires that basic net income per common share be computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period.  Shares issuable upon the exercise of stock options and restricted stock units totaling 140,000 and 211,250 were excluded in the computation of diluted earnings per common share during the years ended December 31, 2016 and 2015, respectively, because their impact was anti-dilutive. 

 

Allowance for Doubtful Accounts

 

We provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables as well as historical collection information. Credit is granted on an unsecured basis. In determining the amount of the allowance, management is required to make certain estimates and assumptions. The allowance is made up of specific reserves, as deemed necessary, on client account balances, and a reserve based on our historical experience.  The following is a summary of our allowance for doubtful accounts during the years ended December 31, 2016 and 2015:

 

	Year Ended December 31, 2016	Year Ended December 31, 2015
Beginning balance	$396,884	$460,564
Bad debt expense	195,327	169,020
Write-offs	(163,019)	(232,700)
Ending balance	$429,192	$396,884

 

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.

 

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

Income Taxes

 

We comply with the FASB ASC No. 740 – Income Taxes which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized.  For any uncertain tax positions, we recognize the impact of a tax position, only if it is more likely than not of being sustained upon examination, based on the technical merits of the position. Our policy regarding the classification of interest and penalties is to classify them as income tax expense in our financial statements, if applicable.   

 

Capitalized Software

 

In accordance with FASB ASC No. 350 – Intangibles – Goodwill and Other, costs incurred to develop our cloud-based platform products and disclosure management system components are capitalized when the preliminary project phase is complete, management commits to fund the project and it is probable the project will be completed and used for its intended purposes. Once the software is substantially complete and ready for its intended use, the software is amortized over its estimated useful life.  Costs related to design or maintenance of the software are expensed as incurred.   The Company capitalized $1,506,616 and $749,095 during the years ended December 31, 2016 and 2015, respectively.  Included in these amounts were $429,234 and $195,411 related to stock-based compensation during the years ended December 31, 2016 and 2015, respectively.  The Company recorded amortization expense of $182,305 and $25,133 during the years ended December 31, 2016 and 2015, respectively, $168,914 and $20,532 of which is included in Cost of revenues on the Consolidated Statements of Income.  For the years ended December 31, 2016 and 2015, the remaining amount of $13,391 and $4,601 is included in Depreciation and amortization, as it relates to back-office supporting systems.

 

Impairment of Long-lived Assets

 

In accordance with the authoritative guidance for accounting for long-lived assets, assets such as property and equipment, trademarks, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset group exceeds fair value of the asset group.

 

Fair Value Measurements

 

As of December 31, 2016 and 2015, we do not have any financial assets or liabilities that are required to be, or that we elected to measure, at fair value.  We believe that the fair value of our financial instruments, which consist of cash and cash equivalents, accounts receivable, our line of credit, notes payable, and accounts payable approximate their carrying amounts.

 

Stock-based Compensation

 

We account for stock-based compensation under FASB ASC No. 718 – Compensation – Stock Compensation. The authoritative guidance for stock compensation requires that companies estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The cost is to be recognized over the period during which an employee is required to provide service in exchange for the award. The authoritative guidance for stock compensation also requires the benefit of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under previous accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods subsequent to adoption, only if excess tax benefits exist.

 

 Translation of Foreign Financial Statements

 

The financial statements of the foreign subsidiaries of the Company have been translated into U.S. dollars.  All assets and liabilities have been translated at current rates of exchange in effect at the end of the period.  Income and expense items have been translated at the average exchange rates for the year or the applicable interim period.  The gains or losses that result from this process are recorded as a separate component of other accumulated comprehensive income (loss) until the entity is sold or substantially liquidated.

 

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

Comprehensive Income

 

Comprehensive income consists of net income and other comprehensive income related to changes in the cumulative foreign currency translation adjustment.

 

Business Combinations, Goodwill and Intangible Assets

 

We account for business combinations under FASB ASC No. 805 – Business Combinations and the related acquired intangible assets and goodwill under FASB ASC No. 350 – Intangibles – Goodwill and Other. The authoritative guidance for business combinations specifies the criteria for recognizing and reporting intangible assets apart from goodwill. We record the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of acquisition, with any excess purchase price recorded as goodwill. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Intangible assets consist of client relationships, customer lists, software, technology and trademarks that are initially measured at fair value.  At the time of the business combination the 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, customer lists, software and technology are amortized over their estimated useful lives.

 

Advertising

 

The Company expenses advertising as incurred, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits.  Advertising expense totaled $77,623 and $174,094, during the years ended December 31, 2016 and 2015, respectively.

 

Newly Adopted Accounting Pronouncements

 

On November 20, 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-17 ("ASU 2015-17”), Balance Sheet Classification of Deferred Taxes, which requires that all deferred tax assets and liabilities, along with any related valuation allowance, in each jurisdiction be classified as noncurrent on the balance sheet. For public business entities, ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods but may be early adopted. ASU 2015-17 may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheets). The Company elected to early adopt ASU 2015-17, on a prospective basis, as of December 31, 2015.

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

 

ISSUER DIRECT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

 

Note 3: Fixed Assets

 

	December 31,
	2016	2015
Computers equipment	$118,593	$95,814
Furniture & equipment	296,039	248,699
Leasehold improvements	107,761	93,781
Total fixed assets, gross	522,393	438,294
Less: Accumulated depreciation	(318,077)	(262,797)
Total fixed assets, net	$204,316	$175,497

 

Depreciation expense on fixed assets for the years ended December 31, 2016 and 2015 totaled $83,425 and $79,399, respectively.