Business Context and Reporting Period
The filing is Issuer Direct Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013, filed November 14, 2013. The filing text identifies the registrant as Issuer Direct Corporation, not ACCESS Newswire Inc. The company provides disclosure management, shareholder communications and software licensing services through a cloud-based platform.
On August 22, 2013, the company acquired PrecisionIR Group, Inc. (“PrecisionIR”) for $3.45 million. PrecisionIR’s results are included from the acquisition date through September 30, 2013.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $2.103 million, versus $1.216 million | $5.238 million, versus $3.121 million |
| Gross profit | $1.475 million, versus $0.875 million | $3.699 million, versus $2.014 million |
| Gross margin | 70%, versus 72% | 71%, versus 65% |
| Operating income | $0.344 million, versus $0.351 million | $1.325 million, versus $0.313 million |
| Net income | $0.117 million, versus $0.214 million | $0.698 million, versus $0.193 million |
| Diluted EPS | $0.05, versus $0.11 | $0.34, versus $0.10 |
For the third quarter, revenue increased 73% year over year, while net income declined because of acquisition-related amortization and interest expense. For the nine-month period, revenue increased 68% and net income increased substantially.
- Disclosure management revenue was $0.858 million for the quarter and $3.134 million year to date. Nine-month revenue increased 49%, partly due to XBRL detail-footnote tagging activity.
- Shareholder communications revenue was $1.151 million for the quarter and $1.842 million year to date, with approximately $0.932 million attributable to PrecisionIR after the acquisition.
- Software licensing revenue was $0.094 million for the quarter and $0.262 million year to date.
- Operating costs included general and administrative expense of $1.405 million year to date, sales and marketing expense of $0.757 million, and depreciation and amortization expense of $0.211 million.
- Accounts receivable, net, was $1.688 million at September 30, 2013, after an allowance for doubtful accounts of $0.408 million.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $1.927 million at September 30, 2013, compared with $1.251 million at December 31, 2012.
- Net cash provided by operating activities was $1.151 million for the nine months, compared with $0.357 million in the prior-year period.
- Investing cash use was $3.219 million, including $3.178 million for the PrecisionIR acquisition.
- Financing cash provided was $2.783 million, including $2.5 million of long-term borrowings and $0.350 million of net line-of-credit advances.
- The company had $0.500 million outstanding under its revolving line of credit and approximately $0.355 million of additional availability based on eligible receivables. The facility permits borrowings up to 75% of eligible accounts receivable, subject to a $2.0 million maximum, at LIBOR plus 3.5%.
- The company issued a $2.5 million, 8% convertible secured note due August 22, 2015. The note is convertible at $3.99 per share, secured by company assets and subordinated to the primary financial institution’s obligations. The rate increases to 18% upon an event of default.
- Non-cash interest expense related to the note was $0.134 million for the quarter and nine months. The note’s $2.5 million debt discount is being amortized over its two-year term.
- Current assets exceeded current liabilities by approximately $0.529 million at September 30, 2013.
Material Changes Versus the Prior Comparable Period
- The PrecisionIR acquisition materially increased revenue, intangible assets, goodwill, deferred revenue, accrued expenses and deferred tax liabilities.
- Total assets increased to $10.572 million from $2.541 million at December 31, 2012. Total liabilities increased to $6.412 million from $0.695 million.
- Intangible assets increased to $4.243 million and goodwill to $1.503 million, compared with $0.388 million and $0.043 million, respectively, at December 31, 2012.
- Nine-month gross margin improved to 71% from 65%, although third-quarter gross margin declined to 70% from 72%.
- Third-quarter operating income was broadly flat despite higher revenue because general and administrative, sales and marketing, and amortization expenses increased.
- Interest expense increased materially because of the new convertible note and its non-cash debt-discount amortization.
- Revenue mix shifted toward shareholder communications. For the quarter, shareholder communications represented 54.7% of revenue versus 20.6% in the prior-year quarter, while disclosure management represented 40.8% versus 75.4%.
- The company recorded a $39,247 foreign-currency translation loss in other comprehensive income.
Guidance, Outlook, Risks and Unusual Items
Management described the outlook for the remainder of 2013 as strong and expects growth in revenue and earnings before interest, taxes, depreciation and amortization over the next several quarters. Priorities include integrating PrecisionIR, increasing average revenue per issuer, expanding the customer base, maintaining margins, and generating operating cash flow. Management also expects to license portions of its data business and APIs during fiscal 2014.
- The company cautions that cash generated from operations may not be sufficient to fund expenses, dividends and debt obligations, and that additional equity or debt financing may be required.
- Conversion of the note could result in approximately 626,566 additional shares, or about 24% of the then-current shares outstanding after conversion, according to the risk-factor discussion. The filing contains a minor inconsistency elsewhere, referring to up to 625,566 shares.
- Red Oak received registration rights for resale of conversion shares. Failure to meet specified filing or effectiveness deadlines could require cash payments equal to 0.75% of the relevant note amount every 30 days until cured.
- European operations and greater international exposure increase sensitivity to global financial-market conditions and foreign-exchange movements.
- Revenue remains exposed to competition, changing demand for printed versus digital materials, client retention, market conditions and the success of PrecisionIR integration.
- Advance postage fees of $0.823 million were included in accrued expenses at September 30, 2013.
- No legal proceedings or off-balance-sheet arrangements were reported. Management stated that disclosure controls and procedures were effective.
Facts Investors Should Verify
- Confirm the issuer identity because the supplied metadata names ACCESS Newswire Inc., while the filing identifies Issuer Direct Corporation.
- Verify the final purchase-price allocation, valuation assumptions, useful lives and impairment risk for PrecisionIR’s $3.3 million of amortizable intangibles and $1.46 million of goodwill.
- Review the convertible note’s conversion, registration-rights, collateral, default and dilution provisions, including the share-count inconsistency in the filing.
- Assess liquidity after considering the $0.5 million line-of-credit balance, limited remaining borrowing availability, note maturity and continuing dividend payments.
- Evaluate whether PrecisionIR’s annual-contract revenue, integration benefits and anticipated cross-selling support management’s growth and margin expectations.
- Reconcile the substantial increase in accounts receivable and the $0.408 million doubtful-account allowance, as well as the $0.823 million advance-postage obligation.