Business Context and Reporting Period
The filing is Issuer Direct Corporation’s Form 10-K for the year ended December 31, 2018; the supplied metadata identifies ACCESS Newswire Inc., but the filing names Issuer Direct Corporation as the registrant. Issuer Direct provides corporate communications and compliance products through its cloud-based Platform id. platform, including ACCESSWIRE news distribution, webcasting, investor relations, disclosure management, proxy, stock transfer and related services.
The company is transitioning from transaction-based services to higher-margin, recurring cloud subscriptions. Platform and Technology revenue represented 60.4% of total revenue in 2018, compared with 56.1% in 2017. The company served approximately 3,700 ACCESSWIRE customers and 1,200 customers through other products and services.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $14.232 million | $12.628 million | +12.7% |
| Platform and Technology revenue | $8.593 million | $7.081 million | +21.4% |
| Services revenue | $5.639 million | $5.547 million | +1.7% |
| Gross profit | $10.129 million | $9.233 million | +9.7% |
| Gross margin | 71% | 73% | Down 2 percentage points |
| Operating income | $1.163 million | $2.028 million | Down 42.7% |
| Net income | $837,000 | $1.871 million | Down 55.3% |
| Diluted earnings per share | $0.24 | $0.62 | Down $0.38 |
| Cash flow from operations | $2.869 million | $2.512 million | +14.2% |
Platform and Technology gross margin was 79%, versus 84% in 2017; Services gross margin was unchanged at 59%. The decline in consolidated margin primarily reflected higher amortization of capitalized software and increased investment in news distribution capabilities.
At December 31, 2018, cash and cash equivalents were $17.222 million, accounts receivable was $1.593 million, current liabilities were $2.600 million and working capital was $16.394 million. The company had no balance outstanding on its $3.0 million line of credit, which carried an interest rate of 4.25% at year-end. Notes payable totaled $596,000, including current and long-term portions.
Deferred revenue increased to $1.249 million from $887,000, primarily due to new Platform id. subscriptions. The company added 109 Platform id. subscriptions during 2018 with annualized contract value of $1.134 million. Retained earnings were $3.151 million.
Material Changes Versus the Prior Comparable Period
- Revenue grew 13%, led by a 21% increase in Platform and Technology revenue. ACCESSWIRE revenue increased $865,000 year over year.
- Services revenue was essentially flat as customers continued moving from printed and legacy services to digital fulfillment.
- Operating expenses increased $1.761 million, including higher general and administrative, sales and marketing, product development, and depreciation and amortization costs.
- Product development expense increased 67% to $1.276 million, while capitalized development costs declined to $21,000 from $991,000.
- Net income declined despite higher revenue and gross profit, primarily because of increased growth investments, acquisition-related costs, amortization and higher income taxes.
- Income tax expense increased to $373,000 from $131,000. The 2017 comparison benefited from a $351,000 tax benefit related to the Tax Cuts and Jobs Act; 2018 included a $76,000 adjustment related to the Act and GILTI.
- The company completed the $1.202 million acquisition of Filing Services Canada Inc. in July 2018, including $1.140 million of cash and $62,000 of stock consideration.
- In August 2018, the company raised $13.323 million of net proceeds through a public stock offering. In December, it repurchased and retired 215,118 shares for $2.635 million.
- Dividends declined to $460,000, or $0.15 per share, from $588,000, or $0.20 per share. No fourth-quarter 2018 dividend was paid, and management stated dividends would not be declared for the foreseeable future.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. It expects demand for cloud platforms to remain stable in most served markets, while Services revenue continues to decline as customers shift toward subscriptions and digital distribution. 2019 priorities include expanding sales, growing the customer base, migrating acquired businesses, expanding newswire distribution, investing in technology, and generating profitable growth and operating cash flow.
The company released its Professional Conference Organizer module in the fourth quarter of 2018 and expected to roll out its shareholder insights and analytics module in the first quarter of 2019. On January 3, 2019, it acquired the VisualWebcaster Platform for $2.788 million in cash, adding webcast, webinar and training capabilities and more than 120 customers.
- Key risks include intense competition and pricing pressure, dependence on ACCESSWIRE technology and distribution partners, customer renewal and subscription expansion rates, seasonality, regulatory changes and the ability to manage growth.
- Cybersecurity, data privacy, service reliability and protection of confidential customer information are material operating risks. The company engaged a national security consulting firm in 2018 to improve cybersecurity policies and controls.
- The company depends on key personnel and may require additional investment in sales, infrastructure and product development. Management noted that future operating losses or reduced operating cash flow remain possible.
- At year-end, one customer represented approximately 12% of accounts receivable, although no customer represented more than 10% of annual revenue.
- The company reported no material pending litigation and no off-balance-sheet arrangements. The independent auditor issued an unqualified opinion on the financial statements; the auditor did not opine on internal control over financial reporting because the company qualified as a smaller reporting company.
- Adoption of ASC 606 reclassified $683,000 of 2017 revenue from Services to Platform and Technology without changing total revenue or liquidity. The company expected adoption of the lease standard in 2019 to add approximately $135,000 of operating lease liabilities and corresponding right-of-use assets, before the VWP lease.
Investor Verification Items
- Reconcile the issuer identity: the filing is for Issuer Direct Corporation, while the request metadata names ACCESS Newswire Inc.
- Verify whether Platform and Technology growth, subscription additions, deferred revenue and ACCESSWIRE performance continue after the 2018 acquisition and investment cycle.
- Assess the effect of declining Services revenue and lower Platform and Technology gross margins on future profitability.
- Review cash conversion, acquisition spending, the VWP integration and the remaining Interwest payment obligations.
- Confirm the sustainability of the $17.222 million cash balance after the VWP acquisition, share repurchase, operating investments and discontinued dividends.
- Monitor customer retention, concentration of receivables, bad debt expense and dependence on key distribution partners.
- Evaluate dilution from the 2018 equity offering, stock compensation and outstanding options and restricted stock units.