ISSUER DIRECT CORP - Quarter Report: 2017 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM 10-Q
———————
☑ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended: June 30, 2017
or
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from: _____________ to _____________
ISSUER DIRECT CORPORATION
(Exact
name of registrant as specified in its charter)
———————
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Delaware
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1-10185
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26-1331503
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(State or Other Jurisdiction
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(Commission
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(I.R.S. Employer
|
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of Incorporation)
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File Number)
|
Identification No.)
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500 Perimeter Park Drive, Suite D, Morrisville NC
27560
(Address of Principal Executive Office) (Zip Code)
(919) 481-4000
(Registrant’s telephone number, including area
code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
———————
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes ☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and "emerging
growth company" in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer
|
☐
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Accelerated
filer
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☐
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Non-accelerated
filer
|
☐ (Do not check if a smaller reporting
company)
|
Smaller
reporting company
|
☒
|
|
|
|
Emerging
growth company
|
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act) Yes ☐ No
☑
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock as of the latest practicable date.
2,954,092 shares of common stock were issued and outstanding as of
August 3, 2017.
TABLE OF CONTENTS
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PART I – FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
ISSUER DIRECT
CORPORATION
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
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June 30,
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December 31,
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|
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2017
|
2016
|
|
ASSETS
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(unaudited)
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Current
assets:
|
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Cash and cash
equivalents
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$6,125
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$5,339
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Accounts receivable
(net of allowance for doubtful accounts of $432 and $429,
respectively)
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1,334
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1,300
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Other current
assets
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358
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189
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Total current
assets
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7,817
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6,828
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Capitalized
software (net of accumulated amortization of $353 and $207,
respectively)
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2,582
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2,048
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Fixed assets (net
of accumulated amortization of $355 and $318,
respectively)
|
173
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204
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Deferred income tax
asset
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137
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141
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Other long-term
assets
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20
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18
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Goodwill
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2,242
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2,242
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Intangible assets
(net of accumulated amortization of $3,490 and $3,324,
respectively)
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1,214
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1,380
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Total
assets
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$14,185
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$12,861
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
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Current
liabilities:
|
|
|
|
Accounts
payable
|
$643
|
$344
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Accrued
expenses
|
601
|
806
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|
Income taxes
payable
|
84
|
112
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|
Deferred
revenue
|
1,040
|
843
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|
Total current
liabilities
|
2,368
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2,105
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Deferred income tax
liability
|
54
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66
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Other long-term
liabilities
|
95
|
112
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Total
liabilities
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2,517
|
2,283
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Commitments and
contingencies
|
|
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Stockholders'
equity:
|
|
|
|
Preferred stock,
$0.001 par value, 1,000,000 and 30,000,000 shares authorized, no
shares issued and outstanding as of June 30, 2017 and December 31,
2016, respectively.
|
-
|
-
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Common stock $0.001
par value, 20,000,000 and 100,000,000 shares authorized, 2,954,092
and 2,860,944 shares issued and outstanding as of June 30, 2017 and
December 31, 2016, respectively.
|
3
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3
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Additional paid-in
capital
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9,650
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9,120
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Other accumulated
comprehensive loss
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(2)
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(36)
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Retained
earnings
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2,017
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1,491
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Total
stockholders' equity
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11,668
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10,578
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Total
liabilities and stockholders’ equity
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$14,185
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$12,861
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The
accompanying notes are an integral part of these unaudited
financial statements.
2
ISSUER DIRECT
CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in
thousands, except per share amounts)
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For the Three
Months Ended
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For the Six
Months Ended
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June
30,
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June
30,
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June
30,
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June
30,
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|
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2017
|
2016
|
2017
|
2016
|
|
|
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Revenues
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$3,443
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$3,134
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$6,298
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$6,411
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Cost of
revenues
|
909
|
824
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1,655
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1,594
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Gross
profit
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2,534
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2,310
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4,643
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4,817
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Operating costs and
expenses:
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General and
administrative
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855
|
800
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1,767
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1,642
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Sales and marketing
expenses
|
714
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672
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1,307
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1,296
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Product
development
|
129
|
90
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254
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159
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Depreciation and
amortization
|
103
|
282
|
208
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564
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Total operating
costs and expenses
|
1,801
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1,844
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3,536
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3,661
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Operating
income
|
733
|
466
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1,107
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1,156
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Other income
(expense)
|
(16)
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83
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(26)
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84
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Income before
taxes
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717
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549
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1,081
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1,240
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Income tax
expense
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224
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192
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264
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390
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Net
income
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$493
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$357
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$817
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$850
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Income per share
– basic
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$0.17
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$0.13
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$0.28
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$0.30
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Income per share
– fully diluted
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$0.16
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$0.12
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$0.27
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$0.29
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Weighted average
number of common shares outstanding – basic
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2,940
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2,795
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2,920
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2,792
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Weighted average
number of common shares outstanding – fully
diluted
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3,021
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2,918
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3,002
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2,888
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The
accompanying notes are an integral part of these unaudited
financial statements.
3
ISSUER DIRECT
CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in
thousands)
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For the Three
Months Ended
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For the Six
Months Ended
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June
30,
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June
30,
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June
30,
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June
30,
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2017
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2016
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2017
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2016
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Net
income
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$493
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$357
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$817
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$850
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Foreign
currency translation adjustment
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27
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2
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34
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13
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Comprehensive
income
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$520
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$359
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$851
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$863
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The
accompanying notes are an integral part of these unaudited
financial statements.
4
ISSUER DIRECT
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
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For the Six Months Ended
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June 30,
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June 30,
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2017
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2016
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Cash flows from operating activities:
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Net
income
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$817
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$850
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization
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350
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637
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Bad
debt expense
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87
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88
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Deferred
income taxes
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(5)
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75
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Stock-based
compensation expense
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260
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337
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Changes
in operating assets and liabilities:
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Decrease
(increase) in accounts receivable
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(116)
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(133)
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Decrease
(increase) in deposits and prepaid assets
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(171)
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(151)
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Increase
(decrease) in accounts payable
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293
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(80)
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Increase
(decrease) in accrued expenses
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(255)
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(343)
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Increase
(decrease) in deferred revenue
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197
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206
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Net
cash provided by operating activities
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1,457
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1,486
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Cash flows from investing activities:
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Capitalized
software
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(624)
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(518)
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Purchase
of fixed assets
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(6)
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(45)
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Net
cash used in investing activities
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(630)
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(563)
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Cash flows from financing activities:
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Proceeds
from exercise of stock options, net of income taxes
|
214
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32
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Payment
of dividend
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(291)
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(167)
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Net
cash used in financing activities
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(77)
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(135)
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Net
change in cash
|
750
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788
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Cash
– beginning
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5,339
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4,215
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Currency
translation adjustment
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36
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(13)
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Cash
– ending
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$6,125
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$4,990
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Supplemental disclosures:
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Cash
paid for income taxes
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$437
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$263
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Non-cash
activities:
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Stock-based
compensation - capitalized software
|
$56
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$268
|
The
accompanying notes are an integral part of these unaudited
financial statements.
5
ISSUER DIRECT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The
unaudited interim consolidated balance sheet as of June 30, 2017
and statements of operations, comprehensive income, and cash flows
for the three and six-month periods ended June 30, 2017 and 2016
included herein, have been prepared in accordance with the
instructions for Form 10-Q under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), and Article 10
of Regulation S-X under the Exchange Act. In the opinion of
management, they include all normal recurring adjustments necessary
for a fair presentation of the financial statements. Results of
operations reported for the interim periods are not necessarily
indicative of results for the entire year. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States ("US GAAP") have been condensed or
omitted pursuant to such rules and regulations relating to interim
financial statements. The interim financial information should be
read in conjunction with the 2016 audited financial statements of
Issuer Direct Corporation (the “Company”,
“We”, or “Our”) filed on Form 10-K and Form
10-K/A.
Note 2. Summary of Significant Accounting Policies
The
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Significant intercompany
accounts and transactions are eliminated in
consolidation.
Earnings Per Share (EPS)
We
calculate earnings per share in accordance with Financial
Accounting Standards Board (“FASB”) 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 49,500 and 201,250 were excluded in the computation of
diluted earnings per common share during the three-month period
ended June 30, 2017 and 2016, respectively, because their impact
was anti-dilutive. Shares issuable upon the exercise of stock
options and restricted stock units totaling 55,167 and 201,250 were
excluded in the computation of diluted earnings per common share
during the six-month period ended June 30, 2017 and 2016,
respectively, because their impact was anti-dilutive.
Revenue Recognition
We
recognize revenue in accordance with 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 and where collectability is
probable. Deferred revenue primarily consists of advance billings
for licenses of our cloud-based platforms and annual contracts for
our legacy annual report service.
Allowance for Doubtful Accounts
We
provide an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection
information. Credit is granted on an unsecured basis. In
determining the amount of the allowance, management is required to
make certain estimates and assumptions. The allowance is made up of
specific reserves, as deemed necessary, on client account balances,
and a reserve based on our historical experience.
Use of Estimates
The
preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include the allowance
for doubtful accounts and the valuation of capitalized software,
goodwill, intangible assets, deferred tax assets, and stock-based
compensation. Actual results could differ from those
estimates.
6
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. A
majority of the amortization expense is recorded in cost of
revenues on the Consolidated Statements of Operations, however,
amortization related to back-office supporting systems is included
in depreciation and amortization. Costs related to design or
maintenance of the software are expensed as incurred. Capitalized
costs and amortization for the three and six-month periods ended
June 30, 2017 and 2016, are as follows (in thousands):
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Three Months
Ended
|
Six Months
Ended
|
||
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
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Capitalized
software development costs
|
$314
|
$260
|
$680
|
$786
|
|
Capitalized
costs related to stock-based compensation
|
(20)
|
88
|
56
|
268
|
|
Amortization
included in cost of revenues
|
82
|
48
|
141
|
74
|
|
Amortization
included in depreciation and amortization
|
2
|
3
|
5
|
6
|
Fair Value Measurements
As of
June 30, 2017 and December 31, 2016, we do not have any financial
assets or liabilities that are required to be, or that we elected
to measure, at fair value. We believe that the fair value of our
financial instruments, which consist of cash and cash equivalents,
accounts receivable, and accounts payable approximate their
carrying amounts.
Translation of Foreign Financial Statements
The
financial statements of the foreign subsidiaries of the Company
have been translated into U.S. dollars. All assets and liabilities
have been translated at current rates of exchange in effect at the
end of the period. Income and expense items have been translated at
the average exchange rates for the year or the applicable interim
period. The gains or losses that result from this process are
recorded as a separate component of other accumulated comprehensive
loss until the entity is sold or substantially
liquidated.
Business Combinations, Goodwill and Intangible Assets
We
account for business combinations under FASB ASC No. 805 –
Business Combinations and the related acquired intangible assets
and goodwill under FASB ASC No. 350 – Intangibles –
Goodwill and Other. The authoritative guidance for business
combinations specifies the criteria for recognizing and reporting
intangible assets apart from goodwill. We record the assets
acquired and liabilities assumed in business combinations at their
respective fair values at the date of acquisition, with any excess
purchase price recorded as goodwill. Goodwill is an asset
representing the future economic benefits arising from other assets
acquired in a business combination that are not individually
identified and separately recognized. Intangible assets consist of
client relationships, customer lists, software, technology and
trademarks that are initially measured at fair value. At the time
of the business combination 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.
7
Comprehensive Income
Comprehensive
income consists of net income and other comprehensive income
related to changes in the cumulative foreign currency translation
adjustment.
Advertising
The
Company expenses advertising costs as incurred, except for
direct-response advertising, which is capitalized and amortized
over its expected period of future benefits.
Stock-based compensation
We
account for stock-based compensation under FASB ASC No. 718 –
Compensation – Stock Compensation. The authoritative guidance
for stock compensation requires that companies estimate the fair
value of share-based payment awards on the date of the grant using
an option-pricing model. The associated cost is recognized over the
period during which an employee is required to provide service in
exchange for the award.
Newly Adopted Pronouncements
The
FASB issued ASU 2016-09, Improvements to Employee Share-Based
Payment Accounting, which simplifies several aspects of the
accounting for share-based payment award transactions including (a)
income tax consequences; (b) classification of awards as either
debt or equity liabilities; and (c) classification on the statement
of cash flows. The amendments are effective for public business
entities for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. The Company has
adopted this ASU as of January 1, 2017. The primary amendment
impacting the Company's financial statements is the requirement for
excess tax benefits or shortfalls on the exercise of stock-based
compensation awards to be presented in income tax expense in the
Consolidated Statements of Operations during the period the award
is exercised as opposed to being recorded in Additional paid-in
capital on the Consolidated Balance Sheets. The excess tax benefit
or shortfall is calculated as the difference between the fair value
of the award on the date of exercise and the fair value of the
award used to measure the expense to be recognized over the service
period. Changes are required to be applied prospectively to all
excess tax benefits and deficiencies resulting from the exercise of
awards after the date of adoption. The ASU requires a "modified
retrospective" approach application for excess tax benefits that
were not previously recognized in situations where the tax
deduction did not reduce current taxes payable. For the three and
six-month periods ended June 30, 2017, the Company recorded an
income tax benefit of $45,000 and $122,000 related to the excess
tax benefit of exercised awards during the period, that would have
been recorded in Additional paid-in capital during prior years. As
the end result is dependent on the future value of the Company's
stock as well as the timing of employee exercises, the amount of
future impact cannot be quantified at this time.
Recent Accounting Pronouncements
The
FASB issued ASU 2017-09, Compensation Stock Compensation (Topic
718): Scope of Modification Accounting on May 10, 2017. The
amendments of this ASU provide guidance on determining which
changes to the terms and conditions of share-based payment awards
require an entity to apply modification accounting under Topic 718.
The amendments are effective for public companies for fiscal years
beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption is permitted. This amendment may
impact the Company if a modification is made to one of its
share-based payments awards, however, the impact cannot be
determined at this time until such modification is
known.
The
FASB's new leases standard ASU 2016-02 Leases (Topic 842) was
issued on February 25, 2016. ASU 2016-02 is intended to improve
financial reporting about leasing transactions. The ASU affects all
companies and other organizations that lease assets such as real
estate, airplanes, and manufacturing equipment. The ASU will
require organizations that lease assets referred to as
“Lessees” to recognize on the balance sheet the assets
and liabilities for the rights and obligations created by those
leases. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial statements. Under the new guidance, a lessee will be
required to recognize assets and liabilities for leases with lease
terms of more than 12 months. Consistent with current US GAAP, the
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike
current US GAAP which requires only capital leases to be recognized
on the balance sheet, the new ASU will require both types of leases
(i.e. operating and capital) to be recognized on the balance sheet.
The FASB lessee accounting model will continue to account for both
types of leases. The capital lease will be accounted for in
substantially the same manner as capital leases are accounted for
under existing US GAAP. The operating lease will be accounted for
in a manner similar to operating leases under existing US GAAP,
except that lessees will recognize a lease liability and a lease
asset for all of those leases. Public companies will be required to
adopt the new leasing standard for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2018. For calendar year-end public companies, this means an
adoption date of January 1, 2019 and retrospective application to
previously issued annual and interim financial statements for 2018,
however, early adoption is permitted. Lessees with a large
portfolio of leases are likely to see a significant increase in
balance sheet assets and liabilities. The Company currently has one
lease on its corporate facilities which ends October 31, 2019.
Absent any renewal of the lease or new leases entered into before
January 1, 2019, the Company will be required to record a
right-to-use asset and corresponding lease liability associated
with the remaining lease payments beginning with the first interim
period of 2019. This will increase both balance sheet assets and
liabilities by insignificant amounts but will not have a
significant impact on the statement of operations or affect any
covenant calculations.
8
The
FASB has issued ASU 2014-09, Revenue from Contracts with Customers
(Topic 606) and several updates to the ASU. ASU 2014-09 requires
revenue recognition to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services. ASU 2014-09 sets forth a new revenue recognition model
that requires identifying the contract, identifying the performance
obligations, determining the transaction price, allocating the
transaction price to performance obligations and recognizing the
revenue upon satisfaction of performance obligations. The
amendments in the ASU can be applied either retrospectively to each
prior reporting period presented or retrospectively with the
cumulative effect of initially applying the update recognized at
the date of the initial application along with additional
disclosures. The Company is currently evaluating the impact of ASU
2014-09 as well as the additional updates, however, does not
believe it will have a significant impact on the Company's
financial statements as the Company believes the current manner in
which revenue is recognized will result in the same or similar
timing and amount of revenue recognition as required by ASU 2014-09
and the additional amendments. These ASU's are currently effective
for the Company in our year beginning on January 1,
2018.
Note 3: Stock Options and Restricted Stock Units
2014 Equity Incentive Plan
On May
23, 2014, the shareholders of the Company approved the 2014 Equity
Incentive Plan (the “2014 Plan”). Under the terms of
the 2014 Plan, the Company is authorized to issue incentive awards
for common stock up to 200,000 shares to employees and other
personnel. On June 10, 2016, the shareholders of the Company
approved an additional 200,000 awards to be issued under the 2014
Plan, bringing the total number of shares to be awarded to 400,000.
The awards may be in the form of incentive stock options,
nonqualified stock options, restricted stock, restricted stock
units and performance awards. The 2014 Plan is effective through
March 31, 2024. As of June 30, 2017, 258,000 awards had been
granted under the 2014 Plan.
The
following table summarizes information about stock options
outstanding and exercisable at June 30, 2017:
|
|
Options
Outstanding
|
Options
Exercisable
|
||
|
Exercise Price
Range
|
Number
|
Weighted Average
Remaining Contractual Life (in Years)
|
Weighted Average
Exercise Price
|
Number
|
|
$0.01 - $1.00
|
7,850
|
4.55
|
$0.01
|
7,850
|
|
$1.01 - $7.00
|
10,000
|
8.39
|
$6.80
|
4,167
|
|
$7.01 - $8.00
|
62,188
|
3.04
|
$7.76
|
57,189
|
|
$8.01 - $10.00
|
5,667
|
7.49
|
$9.26
|
4,167
|
|
$10.01 - $13.49
|
40,000
|
1.69
|
$13.49
|
32,500
|
|
Total
|
125,705
|
3.33
|
$9.09
|
105,873
|
As of
June 30, 2017, the Company had unrecognized stock compensation
related to the options of $145,000, which will be recognized
through 2019.
On
January 24, 2017, the Company granted 9,500 restricted stock units
with an intrinsic value of $8.85 to certain employees of the
Company. The restricted stock units vest one-third annually over
three years. For the three and six-month periods ended June 30,
2017, 5,000 and 43,170 restricted stock units with an intrinsic
value of $8.48 and $6.16 vested, respectively. As of June 30, 2017,
there was $284,000 of unrecognized compensation cost related to our
unvested restricted stock units, which will be recognized through
2020.
Note 4: Income taxes
We
recognized income tax expense of $224,000 and $264,000 for the
three and six-month periods ended June 30, 2017, respectively,
compared to income tax expense of $192,000 and $390,000 during the
same periods of 2016. At the end of each interim period, we
estimate the effective tax rate we expect to be applicable for the
full fiscal year and this rate is applied to our results for the
year-to-date period, and then adjusted for any discrete period
items. For the three and six-month periods ended June 30, 2017, the
variance between the Company’s effective tax rate and the
U.S. statutory rate of 34% is primarily attributable to the excess
stock-based compensation tax benefit of $45,000 and $122,000,
respectively, recognized in income tax expense during the period,
in connection with the Company’s adoption of ASU 2016-09, as
well as, foreign statutory tax rate differentials and tax
credits.
During
the six-month period ended June 30, 2016, the Company released
$78,000 of its valuation allowance related to federal and state net
operating losses, which resulted in a net benefit of $59,000. No
valuation allowance was released during the three-month period
ended June 30, 2016. The tax benefits from US net operating losses
that were previously reserved were acquired as part of the
acquisition of PrecisionIR (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. The
remaining valuation allowance on the federal and state net
operating losses related to PIR was released during the fourth
quarter of 2016, as such no valuation allowance remains on those
federal and state net operating losses as June 30, 2017, which is
consistent with projections of future taxable domestic
income.
9
Note 5: Operations and Concentrations
For the
three and six-month periods ended June 30, 2017 and 2016, we earned
revenues (as a percentage of total revenues) in the following
categories:
|
|
Three months ended
|
Six months ended
|
||
|
|
June 30,
|
June 30,
|
||
|
Revenue Streams
|
2017
|
2016
|
2017
|
2016
|
|
Platform
and Technology
|
49.50%
|
35.96%
|
49.50%
|
32.32%
|
|
Services
|
50.50%
|
64.04%
|
50.50%
|
67.68%
|
|
Total
|
100.00%
|
100.00%
|
100.00%
|
100.00%
|
No
customers accounted for more than 10% of the operating revenues
during the three and six-month periods ended June 30, 2017 or 2016.
We did not have any customers that comprised more than 10% of our
total accounts receivable balance at June 30, 2017 or December 31,
2016.
We
believe we did not have any financial instruments that could have
potentially subjected us to significant concentrations of credit
risk. Since a portion of the revenues are paid at the beginning of
the month via credit card or advance by check, the remaining
accounts receivable amounts are generally due within 30 days, none
of which is collateralized.
Note 6: Line of Credit
Effective September
2, 2016, the Company renewed its Line of Credit, which reduced the
interest rate to LIBOR plus 2.50% from LIBOR plus 3.00%. The amount
of funds available for future borrowings remained at $2,000,000. As
of June 30, 2017, the interest rate was 3.72% and the Company did
not owe any amounts on the Line of Credit.
Note 7: Geographical Information
We
consider ourselves to be in a single reportable segment under the
authoritative guidance for segment reporting, specifically a
shareholder communications and compliance company for publicly
traded companies. Revenue is attributed to a particular geographic
region based on where the services are performed. The following
tables set forth revenues by domestic and international regions (in
thousands):
|
|
Three months ended
|
Six months ended
|
||
|
|
June 30,
|
June 30,
|
||
|
|
2017
|
2016
|
2017
|
2016
|
|
Geographic region
|
|
|
|
|
|
North
America
|
$3,127
|
$2,713
|
$5,666
|
$5,548
|
|
Europe
|
316
|
421
|
632
|
863
|
|
Total
revenues
|
$3,443
|
$3,134
|
$6,298
|
$6,411
|
Note 8: Authorized Shares
On
March 21, 2017, the Company filed a Certificate of Amendment to its
Certificate of Incorporation reducing the number of authorized
shares of preferred stock from 30,000,000 to 1,000,000 shares and
the number of common stock from 100,000,000 to 20,000,000
shares.
Note 9: Subsequent Events
On July
7, 2017, the Company's Board of Directors approved and declared a
quarterly cash dividend of $0.05 per share. The dividend is payable
on August 11, 2017, to stockholders of record as of the close of
business on July 24, 2017.
10
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The discussion of the financial condition and results of operations
of the Company set forth below should be read in conjunction with
the consolidated financial statements and related notes thereto
included elsewhere in this Form10-Q. This Form10-Q contains
forward-looking statements that involve risks and uncertainties.
The statements contained in this Form10-Q that are not purely
historical are forward-looking statements within the meaning of
Section 27a of the Securities Act and Section 21e of the Exchange
Act. When used in this Form10-Q, or in the documents incorporated
by reference into this Form10-Q, the words
“anticipate,” “believe,”
“estimate,” “intend” and
“expect” and similar expressions are intended to
identify such forward-looking statements. Such forward-looking
statements include, without limitation, the statements regarding
the Company’s strategy, future sales, future expenses, future
liquidity and capital resources. All forward-looking statements in
this Form10-Q are based upon information available to the Company
on the date of this Form 10-Q, and the Company assumes no
obligation to update any such forward-looking statements. The
Company’s actual results could differ materially from those
discussed in this Form10-Q. Factors that could cause or contribute
to such differences (“Cautionary Statements”) include,
but are not limited to, those discussed in Item 1. Business —
“Risk Factors” and elsewhere in the Company’s
Annual Report on Form10-K for the year ended December 31, 2016,
which are incorporated by reference herein and in this report. All
subsequent written and oral forward-looking statements attributable
to the Company, or persons acting on the Company’s behalf,
are expressly qualified in their entirety by the Cautionary
Statements.
Overview
Issuer
Direct™ Corporation (Issuer Direct Corporation and its
subsidiaries are hereinafter collectively referred to as
“Issuer Direct”, the “Company”,
“We” or “Our” unless otherwise noted). We
are a Delaware corporation formed in October 1988 under the name
Docucon Incorporated. In December 2007, we changed our name to
Issuer Direct Corporation. Our corporate offices are located at 500
Perimeter Park Drive, Suite D, Morrisville, North Carolina,
27560.
Issuer Direct is an industry-leading
communications and compliance company focusing on the needs of
corporate issuers. Issuer Direct's principal platform,
Platform id.™, empowers users by thoughtfully
integrating the most relevant tools, technologies and services,
thus eliminating the complexity associated with producing and
distributing financial and business
communications.
We
work with a diverse client base in the financial services industry,
including brokerage firms, banks and mutual funds. We also sell
products and services to corporate issuers, professional firms,
such as investor relations and public relations, and the accounting
and the legal communities. Corporate issuers and their constituents
utilize our cloud-based platforms and related services from
document creation all the way to dissemination to regulatory
bodies, platforms and shareholders.
In
the past, we have reported our revenues in three different streams:
disclosure management, shareholder communications and platform and
technology. To more accurately reflect our business and our focus
on our platform first engagement strategy, we have consolidated our
reporting into the two revenue streams: (i) Platform and Technology
and (ii) Services. For presentation purposes, all revenues for the
three and six-month periods ended June 30, 2016, have been
reclassified to accurately illustrate year over year
comparisons.
We
announce material financial information to our investors using our
investor relations website, Securities and Exchange Commission
("SEC") filings, investor events, news and earnings releases,
public conference calls, webcasts and social media. We use these
channels to communicate with our investors and the public about our
company, our products and services and other issues. It is possible
that information we post on some of these channels could be deemed
to be material information. Therefore, we encourage investors, the
media, and others interested in our company to review the
information we post to all of our channels, including our social
media accounts.
Platform and Technology
As
the Company continues its transition to a cloud-based subscription
business, we expect the Platform and Technology portion of our
business to continue to expand over the next several years and
become the majority of the company’s revenues. Leading this
transition are the technology offerings from our ACCESSWIRE news
business and our core historical tools for disclosure management
and shareholder communications.
Additionally, our product road map includes
planned advancements in both our current Platform
id. offering as well as additional offerings in
which we see long term opportunity. These advancements will
leverage our current application technology framework and give us
an opportunity to further expand our customer and user
base.
11
Platform id.
Platform id. is a cloud-based subscription platform that
efficiently and effectively manages the events of a company that
seeks to distribute its messaging to key constituents, investors,
markets and regulatory systems around the globe. Currently,
Platform id. consists of nine related but distinct
shareholder communications and disclosure reporting modules. Part
of these capabilities were historically part of our disclosure
management and shareholder communications offerings, but are now
included into our fully integrated platform.
Within most of our target markets, customers
require several individual services or software providers to meet
their investor relations, communications and compliance needs. We
believe Platform id. breaks down those barriers and combines all
those needs into a single sign-on platform — one that offers
a company control, increases efficiencies, demonstrates a clear ROI
and, most importantly, delivers consistent and compliant messaging
from one centralized platform.
While the complete platform is available for a
single subscription fee, companies also have the flexibility to
choose one or more of the specific modules that fit their needs
based on the stage of the company’s development.
Set forth below are the nine modules
currently included in Platform id.:
ACCESSWIRE™
Our press release platform is a cost-effective FD
(Fair
Disclosure) news dissemination
and media outreach service. The ACCESSWIRE business focuses on
press release distribution for both private and publicly held
companies globally. ACCESSWIRE is fast becoming a competitive
alternative to the traditional, major newswires because we have
been able to expand upon our distribution with key partners,
increase our analytics reporting and maintain the simple flat rate
licensing and per release options. As a result, we anticipate we
will continue to add new clients throughout 2017 and beyond. We
will continue to brand our press release offerings under the name
ACCESSWIRE, which we believe will solidify our market position in
the newswire business.
ACCESSWIRE
is dependent upon several key partners for news distribution, some
of which are also partners that we rely on for other investor
outreach offerings. A disruption in any of these partnerships could
have a materially adverse impact on our business.
Classify™
Classify is our buy-side, sell-side and media
targeting database and intelligence analytics platform that
customers can add on to their Platform id. subscription. This subscription-based platform
is centered around both our shareholder communications and news
distribution offerings. We hope the Classify analytics and peer
review application will become the focal point for our
Platform id. dashboard, as customers become increasingly
interested in peer performance and real-time alerts to vital data
points throughout the day. To ensure the adoption of this
subscription feature, we have begun providing select clients with
this dashboard on a trial basis and intend to broaden this offering
to all customers this fiscal year.
We
believe our data-set will be an attractive option for both investor
relations and public relations firms and for customers looking for
an alternative to current products in the market, based on price
and flexibility, as well as data quality and quantity. Further to
our strategy, the Classify dataset will be fully integrated into
our ACCESSWIRE offering this year as a way to expand distribution
via highly focused targeted lists of professionals from our
dataset. We expect this to further drive revenues per release as
well as subscriptions over the year.
Investor Network™
Over
the past year, we have been focused on refining the model of
digital distribution of our customer’s message to the
investment community. This has been accomplished by integrating
Investor Networks analytics into and with our Classify dashboard.
Most of the customers subscribing to this platform today, are
historical Precision IR (“PIR”) – Annual Report
Service (“ARS”) users. We have migrated many of those
customers from the traditional ARS business into this new digital
subscription business. However, there can be no assurances these
customers will continue using this digital platform in the long
term if market conditions for shareholder interest is not
present.
Earnings Events
There
are over 5,000 companies in North America conducting earnings
events each quarter that include teleconference, webcast or both as
part of their events. Along with webcasting and teleconference, our
platform incorporates each element of the earnings event including
earnings announcement, earnings press release and SEC Form 8-K
filings. There are a handful of our competitors that can offer this
today. However, we believe our real-time event setup and integrated
approach offers a more effective way to manage the process as well
as attract an audience of investors.
12
In
the teleconference and webcasting space, we invested time, in the
latter part of 2016, developing and integrating systems and
processes with our platform and partners. The earnings event
business is a highly competitive space with the majority of the
business being driven from practitioners in the investor and
communications firms. Toward the end of 2016, we created an
application protocol interface (“API”) for the webcast
marketplace, and will begin partnering with publishers and other
platforms to license our datasets, which we believe will further
increase our brand awareness. This API license will allow
publishers to query single or multiple companies' current and past
earnings calls and present those webcasts on their platforms.
Additionally, as a commitment to broadening the reach of our
webcast platform, all events will be broadcast live on our Investor
Network platform, which will drive new audiences and give companies
the ability to view their analytics and engagement of each event.
We believe these competitive advantages will increase the demand
for our webcasting platform among the corporate issuer
community.
Investor Relations (“IR”) Websites & Data
Feeds
Inside of Platform id. is our investor relations content network, which
is used to create the IR tab of a public company’s website.
This investor relations content network is a robust market data
cloud of news, stock, fundamentals, regulatory filings, corporate
governance, hotlines and many other components that are aggregated
from a majority of the major exchanges and news distribution
outlets around the world. These data feeds are licensed
individually and as a complete platform to pre-IPO reporting
companies and partners seeking to display our content on their
platforms. The clear benefits to our IR platform is its integration
into and with the entire cloud-based system, meaning companies can
produce content for public distribution and it is automatically
linked to their corporate site, distributed to targeted groups and
placed into and with our data feed partners.
Whistleblower Hotline
Our whistleblower platform is an add-on product
within Platform id. This system delivers secure notifications and
basic incident workflow management processes that align with a
company’s corporate governance whistleblower policy. As a
supported and subsidy bundle product of the New York Stock Exchange
(“NYSE”) offerings, it is our hope we will gain
relationship with new IPO clients and other larger cap clients
listed on the NYSE.
Blueprint™
Blueprint is our cloud-based document conversion,
editing and filing platform. Blueprint is designed for reporting
companies and professionals seeking to insource the document
drafting, editing and filing processes to the SEC and SEDAR (System
for Electronic Document Analysis and Retrieval), which is the
Canadian equivalent of EDGAR. Blueprint is available in both a
secure public cloud within our Platform id. subscription, as well as in a private cloud for
corporations, mutual funds and the legal community looking to
further enhance their internal document process. Our belief is that
once Blueprint is fully developed and marketed, we will see a
negative impact on our legacy disclosure conversion services
business in the future. However, the margins associated with our
subscription business compared to our services business are higher
and align with our long-term strategy, and as such, we hope
Blueprint will have a positive impact on our net income in the
future.
Stock Transfer
A valued subscription in our Platform
id. ecosystem is the ability for our customers to
gain access to real-time information of their shareholders, stock
ledgers, reports, and issue new shares from our cloud-based
platform. Managing the capitalization table of a public company or
pre-IPO company is the cornerstone of corporate governance and
transparency, and as such companies, bond offerings, and community
banks have chosen our transfer agent subsidiary, Direct Transfer,
LLC, to assist with their stock transfer needs. This is an industry
which has experienced declining revenues as it was affected by the
convergence of paper certificates to digital form. However, we have
recently been focused on licensing opportunities of our stock
transfer platform, allowing customers to gain access to our
cloud-based system in order to move shares or query shareholders,
which has significantly changed the long term dynamics for both our
customers and us.
During the fourth quarter of 2016, we completed a
strategic upgrade to our platform that reaches private companies
seeking to raise capital under Regulation A+, and Regulation D.
This cloud-based system was released during the first quarter of
2017 under the brand Transferly™. Transferly is a subscription platform that gives
companies and broker dealers the ability to assist in the process
of identifying, managing and completing the investment process of
an offering. Once an offering is completed, companies can utilize
our stock transfer system to continue the communication and
compliance issuance work a company is required to
manage.
Proxy – Annual General Meeting (AGM)
Our proxy platform is marketed as a fully
integrated, real-time voting platform for our customers and their
shareholders of record. This platform is utilized for every annual meeting and or
special meeting we manage for our client base and offers both
full-set mailing and notice of internet availability
options.
13
Services
As we focus on expanding our cloud-based
subscription business, we expect to see a decrease in the overall
revenues associated with our Services business. Typically, Services
revenues relate to where resources are required to perform the work
for our clients and or hard goods are utilized as part of the
engagement. To date, most of our Services have been related to
converting and editing SEC documents and XBRL tagging, which has
been our core disclosure business over the last 11 years. Services
also include telecommunications services and print, fulfillment and
delivery of stock certificates, proxy materials or annual reports
depending on each customer’s engagement. Services are not
required, but are optional for customers that utilize our
Platform id.
Our
investor outreach and engagement offering, formerly known as the
ARS, now known as the Investor Network, was acquired from PIR. The
ARS business has existed for over 20 years primarily as a physical
hard copy delivery service of annual reports and prospectuses
globally for tens of thousands of customers. We continue to operate
a portion of this legacy system and continue to migrate the install
base over to our subscriptions business of Investor Network, which
is our digital platform and outreach engagement dataset. Portions
of this legacy system are still operational, specifically for those
who opt to take advantage of physical delivery of material. We
believe we will continue to see further attrition of both customers
and revenues in this category as we focus our efforts on our
digital platforms and subscription business.
Results of Operations
Comparison of results of operations for the three and six months
ended June 30, 2017 and 2016 (in thousands):
|
|
Three months ended
|
Six months ended
|
||
|
|
June 30,
|
June 30,
|
||
|
Revenue Streams
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
|
|
Platform and Technology
|
|
|
|
|
|
Revenue
|
$1,704
|
$1,127
|
$3,117
|
$2,072
|
|
Gross
margin
|
$1,424
|
$934
|
$2,592
|
1,709
|
|
Gross
margin %
|
84%
|
83%
|
83%
|
82%
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
Revenue
|
$1,739
|
$2,007
|
$3,181
|
$4,339
|
|
Gross
margin
|
$1,110
|
$1,376
|
$2,051
|
$3,108
|
|
Gross
margin %
|
64%
|
69%
|
64%
|
72%
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Revenue
|
$3,443
|
$3,134
|
$6,298
|
$6,411
|
|
Gross
margin
|
$2,534
|
$2,310
|
$4,643
|
4,817
|
|
Gross
margin %
|
74%
|
74%
|
74%
|
75%
|
Revenues
Total
revenue increased by $309,000, or 10%, to $3,443,000 during the
three-month period ended June 30, 2017, as compared to $3,134,000
during the same period of 2016. Total revenue decreased by
$113,000, or 2%, to $6,298,000 during the six-month period ended
June 30, 2017, as compared to $6,411,000 during the same period of
2016. Included in revenue during the six-month period ended June
30, 2016 is the benefit of $316,000 related to the reversal of an
accrual of unused postage credits related to ARS clients acquired
from PIR. Absent this one-time benefit, revenues for the six-month
period ended June 30, 2017 would have increased 3% compared to the
same period in the prior year.
Platform and
Technology revenue increased $577,000, or 51%, and $1,045,000, or
50%, during the three and six-month periods ended June 30, 2017,
respectively, as compared to the same periods of 2016. A majority
of the increase is due to the continued success of our ACCESSWIRE
news distribution platform, which increased $527,000 and $944,000
during the three and six-month periods ended June 30, 2017,
respectively, as compared to the same periods of the prior year.
The increase is attributable to our investment in increased sales
staff and distribution during the latter part of 2016 as the
Company was able to continue to penetrate the newswire market.
Additionally, we earned increased revenue from the same period of
the prior year from other platforms including our Blueprint,
whistleblower, webcasting, Classify, stock transfer and proxy
platforms. These increases were offset by a decline in revenue from
our Investor Network platform.
14
Services revenue
decreased $268,000, or 13%, and $1,158,000, or 27% during the three
and six-month periods ended June 30, 2017, as compared to the same
periods of 2016. The decrease is primarily associated with a
decrease in revenue from our ARS services as we continued to
experience client attrition as customers elect to leave the service
or transition to digital fulfillment. Additionally, as noted above,
included in revenue for the six-month period ended June 30, 2016,
is the benefit of $316,000 related to the reversal of an accrual of
unused postage credits. We also experienced a decline in our
traditional Edgar and XBRL services due to continued pricing
pressure in those markets as well as decline in our print and proxy
and distribution services due to the timing of certain
projects.
No
customers accounted for more than 10% of the operating revenues
during the three and six-month periods ended June 30, 2017 or
2016.
Revenue Backlog
At June
30, 2017, we have recorded deferred revenue of $1,040,000 that we
expect to recognize over the next twelve months, compared to
$843,000 at December 31, 2016. Deferred revenue primarily consists
of advance billings for licenses of our cloud-based platforms and
annual contracts for legacy ARS services.
Cost of Revenues and Gross Margin
Cost of
revenues consists primarily of direct labor costs, third party
licensing and amortization of capitalized software costs related to
our platforms licensed to customers in our Platform and Technology
stream and direct labor costs, warehousing, logistics, print
production materials, postage, and outside services directly
related to the delivery of services to our customers in our
Services stream. Cost of revenues increased by $85,000, or 10%, and
$61,000, or 4%, during the three and six-month periods ended June
30, 2017, as compared to the same period of 2016. Overall gross
margin percentage remained the same at 74%, for the three-month
period ended June 30, 2017, as compared to the same period of 2016
and decreased to 74% from 75% for the six-month period ended June
30, 2017, compared to the same period of the prior year. Excluding
the benefit associated with the release of the accrual related to
unused postage credits, gross margin percentage for the six-month
period ended June 30, 2016, would have been 74%.
Gross
margin percentages from Platform and Technology were 84% and 83%
during the three and six-month periods ended June 30, 2017,
respectively, as compared to 83% and 82% in the same periods of
2016, respectively. The increase in gross margin percentage is
primarily due to increased revenue from our ACCESSWIRE platform
partially offset by increased amortization of capitalized software
related to our platforms.
Gross
margin percentage from our Services revenue decreased to 64% in the
three and six-month periods ended June 30, 2017, as compared to 69%
and 72% during the same periods of 2016, respectively. Excluding
the benefit associated with the release of the unused postage
credits, gross margins for the six-month period ended June 30, 2016
would have been 69%. The decrease in gross margin percentage is
primarily due to lower revenue associated with fixed costs of
delivering ARS, print and proxy, Edgar and XBRL
services.
Operating Expenses
General and Administrative Expense
General
and administrative expenses consist primarily of salaries,
stock-based compensation, insurance, fees for professional
services, general corporate expenses and facility and equipment
expenses. General and administrative expenses increased $55,000, or
7%, and $125,000, or 8%, during the three and six-month periods
ended June 30, 2017, respectively, as compared to the same periods
of 2016. The increase is primarily due to an increase in
professional fees for legal and consulting services and bonus
expense partially offset by a decrease in stock compensation and
facility and equipment expenses.
As a
percentage of revenue, General and Administrative expenses were 25%
and 28% for the three and six-month periods ended June 30, 2017,
respectively, compared to 26% for both periods of
2016.
Sales and Marketing Expenses
Sales
and marketing expenses consist primarily of salaries, stock-based
compensation, sales commissions, advertising expenses, tradeshow
expenses and other marketing expenses. Sales and marketing expenses
increased $42,000, or 6%, and $11,000, or 1%, for the three and
six-month periods ended June 30, 2017, respectively, as compared to
the same periods of 2016. These increases are primarily due to an
increase in tradeshow expenses.
15
As a
percentage of revenue, sales and marketing expense were 21% during
both the three and six-month period ended June 30, 2017, compared
to 21% and 20% during the same periods of 2016,
respectively.
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 $39,000, or 43%, and $95,000, or 60%, during the three
and six-month periods ended June 30, 2017, respectively, compared
to the same periods in 2016. The increase is the result of higher
salaries and less capitalization of costs as certain projects are
completed and have been pushed into production. During the three
and six-month periods ended June 30, 2017, the Company capitalized
$314,000 and $680,000, respectively, of software development costs
compared to $260,000 and $786,000 during the same periods of
2016.
As a
percentage of revenue, Product Development expenses were 4% for
both the three and six-month periods ended June 30, 2017,
respectively, compared to 3% and 2% for the same periods of 2016,
respectively.
Depreciation and Amortization
Depreciation and
amortization expenses decreased by $179,000, or 63%, and $356,000,
or 63%, during the three and six-month periods ended June 30, 2017,
respectively, as compared to the same periods of 2016. The decrease
is due to lower amortization of certain intangible assets acquired
in the PIR acquisition that became fully amortized during the year
ended December 31, 2016.
Other income (expense)
Other
income (expense) is primarily the result of the change in fair
value of stock received, in lieu of cash, to settle an outstanding
receivable. As of June 30, 2017, all stock has been
sold.
Income tax expense
We
recognized income tax expense of $224,000 and $264,000 for the
three and six-month periods ended June 30, 2017, respectively,
compared to income tax expense of $192,000 and $390,000 during the
same periods of 2016. At the end of each interim period, we
estimate the effective tax rate we expect to be applicable for the
full fiscal year and this rate is applied to our results for the
year-to-date period, and then adjusted for any discrete period
items. For the three and six-month periods ended June 30, 2017, the
variance between the Company’s effective tax rate and the
U.S. statutory rate of 34% is primarily attributable to the excess
stock-based compensation tax benefit of $45,000 and $122,000,
respectively, recognized in income tax expense during the period,
in connection with the Company’s adoption of ASU 2016-09, as
well as, foreign statutory tax rate differentials and tax
credits.
During
the six-month period ended June 30, 2016, the Company released
$78,000 of its valuation allowance related to federal and state net
operating losses, which resulted in a net benefit of $59,000. No
valuation allowance was released during the three-month period
ended June 30, 2016.
Net Income
Net
income was $493,000 and $817,000 during the three and six-month
periods ended June 30, 2017, respectively, compared to $357,000 and
$850,000 for the same periods of 2016.
As
noted earlier, included in net income for the six-month period
ended June 30, 2016 is the benefit of $316,000 before taxes related
to the reversal of an accrual related to unused postage credits
related to ARS clients acquired from PIR. Excluding the benefit of
this reversal, the Company was able to increase net income by
increasing revenue, maintaining gross margin percentages and
lowering operating costs.
Liquidity and Capital Resources
As of
June 30, 2017, we had $6,125,000 in cash and cash equivalents and
$1,334,000 in net accounts receivable. Current liabilities at June
30, 2017, totaled $2,368,000 including our accounts payable,
deferred revenue, accrued liabilities, income taxes payable and
other accrued expenses. At June 30, 2017, our current assets
exceeded our current liabilities by $5,449,000.
Effective September
2, 2016, the Company renewed its Line of Credit, which reduced the
interest rate to LIBOR plus 2.50% from LIBOR plus 3.00%. The amount
of funds available for future borrowings remained at $2,000,000. As
of June 30, 2017, the interest rate was 3.72% and the Company did
not owe any amounts on the Line of Credit.
16
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.
2017 Outlook
The following statements and certain statements made elsewhere in
this document are based upon current expectations. These statements
are forward looking and are subject to factors that could cause
actual results to differ materially from those suggested here,
including, without limitation, demand for and acceptance of our
services, new developments, competition and general economic or
market conditions, particularly in the domestic and international
capital markets. Refer also to the Cautionary Statement Concerning
Forward Looking Statements included in this report.
Overall,
the demand for our platforms continues to be stable in the majority
of the segments we serve. In a portion of our business, we will
continue to see demand shift from traditional printed and
service-based engagements to a cloud-based subscription model, as
well as digital distribution offerings. We are positioned well in
this space to be both competitive and agile to deliver these
platforms to the market at the same or higher gross margins than
previous periods. As we have seen over the last several quarters,
the transition to digital platforms has had a negative effect on
our revenue in some areas and this is a trend we expect will
continue over the next few quarters.
One
of our competitive strengths is that we have embraced cloud
computing early on in our strategy. Making the pivot to a
subscription model has and will be key for the long-term
sustainable growth management expects from our new
platforms.
We
will continue to focus on the following key strategic initiatives
during the remainder of 2017:
●
Strategic
re-alignment of our Platform and Technology sales
team,
●
Expand customer
base,
●
Further expand our
newswire distribution and clients,
●
Significant
technology advancements and upgrades,
●
Profitable
sustainable growth,
●
Generate cash flows
from operations
We
believe there is significant demand for our products among the
middle, small-cap and micro-cap markets that are seeking to find
better platforms and tools to disseminate and communicate their
respective messages and that we have the capacity to meet the
demand.
We
have invested and will continue to invest in our product sets,
platforms and intellectual property development through the second
half of 2017. These developments are key to our overall offerings
in the market and necessary to keep our competitive advantages and
sustain the next round of growth that management believes it can
achieve. If we are successful in this development effort, we
believe we can achieve increases in revenues per user as well as
higher gross margins as we move through 2017 and
beyond.
Off-Balance Sheet Arrangements
We have
no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources that is material to stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURESABOUT MARKET RISK.
Not
applicable
ITEM 4. CONTROLS AND
PROCEDURES.
As of
the end of the period covered by this quarterly report on Form10-Q,
the Company’s Chief Executive Officer and Chief Financial
Officer conducted an evaluation of the Company’s disclosure
controls and procedures (as defined in Rules 13a-15 and 15d-15 of
the Securities Exchange Act of 1934). Based upon this evaluation,
the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and
procedures are effective and have not changed since its most recent
annual report.
We
regularly review our system of internal control over financial
reporting to ensure we maintain an effective internal control
environment. There were no changes in our internal control over
financial reporting that occurred during the period covered by this
Quarterly Report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
17
PART II – OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS.
From
time to time, we may be involved in litigation that arises through
the normal course of business. As of the date of this filing, we
are neither a party to any litigation nor are we aware of any such
threatened or pending litigation that might result in a material
adverse effect to our business.
ITEM 1A. RISK FACTORS.
There
have been no material changes to our risk factors as previously
disclosed in our most recent 10-K filing.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURE.
Not
applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(a)
Exhibits.
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
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Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
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|
|
|
|
|
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101.INS
|
|
XBRL
Instance Document.**
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document.**
|
|
|
101.CAL
|
|
XBRL
Taxonomy Calculation Linkbase Document.**
|
|
|
101.LAB
|
|
XBRL
Taxonomy Label Linkbase Document.**
|
|
|
101.PRE
|
|
XBRL
Taxonomy Presentation Linkbase Document.**
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document. **
|
_______________________________
|
*
|
filed
or furnished herewith
|
|
**
|
submitted
electronically herewith
|
18
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
August 3, 2017
|
|
ISSUER DIRECT CORPORATION
|
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|
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By:
|
/s/ Brian R.
Balbirnie
|
|
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Brian
R. Balbirnie
|
|
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Chief
Executive Officer
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By:
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/s/ Steven
Knerr
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Steven
Knerr
|
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Chief
Financial Officer
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19