Business Context and Reporting Period
Issuer Direct Corporation, the registrant identified in the filing, provides disclosure management, shareholder communications, press-release distribution and cloud-based compliance technologies, including Accesswire. The unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The filing was signed November 3, 2016. Note that the request identifies ACCESS Newswire Inc., while the filing names Issuer Direct Corporation.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $2.873 million | $2.787 million | $9.284 million | $8.937 million |
| Gross profit | $2.134 million | $1.944 million | $6.951 million | $6.282 million |
| Gross margin | 74% | 70% | 75% | 70% |
| Operating income | $294,289 | $332,357 | $1.451 million | $947,531 |
| Net income | $194,878 | $136,730 | $1.045 million | $438,423 |
| Diluted EPS | $0.07 | $0.05 | $0.36 | $0.18 |
| Operating cash flow | Not separately provided | Not separately provided | $2.020 million | $2.311 million |
- Cash and cash equivalents were $5.135 million at September 30, 2016, compared with $4.215 million at December 31, 2015.
- Net accounts receivable was $1.323 million; deferred revenue was $940,065, primarily representing advance billings expected to be recognized over the following 12 months.
- Current assets exceeded current liabilities by $4.733 million. Current liabilities were $2.112 million and total liabilities were $2.443 million.
- The company had no borrowings outstanding under its $2.0 million line of credit at quarter-end. The renewed facility bears interest at LIBOR plus 2.50%; the stated rate at September 30, 2016 was 3.03%.
- Nine-month investing cash outflows were $809,670, including $750,938 for capitalized software. Nine-month financing cash outflows were $276,433, including a $309,727 dividend payment.
- Capitalized software development costs were $1.103 million for the nine months, compared with $525,545 in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3% in the quarter and 4% for the first nine months. Platform and technology revenue increased 89% in the quarter and 92% year to date, driven by Investor Network and other cloud-platform licenses.
- Disclosure management revenue increased 2% in the quarter but decreased 9% year to date, reflecting pricing pressure and attrition in traditional Edgar and XBRL services.
- Shareholder communications revenue declined 8% in the quarter and 4% year to date as customers moved from hardcopy ARS services to digital offerings. Accesswire revenue increased $233,218 in the quarter and $626,032 year to date.
- Approximately $90,000 of quarterly revenue and $330,000 of year-to-date revenue shifted from shareholder communications to platform and technology as customers migrated to Investor Network.
- Year-to-date revenue included an approximately $316,000 pretax benefit from reversing an accrual for unused postage credits related to acquired ARS clients. Excluding this item, nine-month gross margin would have been 74% rather than 75%.
- Cost of services decreased 12% in both the quarter and nine-month period, supporting the improvement in gross margin.
- Sales and marketing expense increased 25% in the quarter and 13% year to date, primarily due to higher personnel and tradeshow costs. Product development expense increased 110% in the quarter and 14% year to date.
- Operating income declined 11% in the quarter despite higher gross profit, as operating expenses increased. Year-to-date operating income increased 53%.
- Net income increased 43% in the quarter and 138% year to date. Results benefited from the absence of interest expense associated with the 8% convertible note, which was fully converted into common stock in August 2015.
- The company recorded income tax expense of $93,029 in the quarter and $483,677 year to date, compared with a $113,917 tax benefit in the 2015 nine-month period. The company released $78,400 of valuation allowance during the 2016 nine-month period.
Guidance, Outlook, Risks and Unusual Items
- Management described demand as stable in most markets and expects continued migration from printed and service-based offerings to cloud-based subscriptions and digital distribution.
- 2016 priorities include expanding sales and marketing, advancing technology, achieving profitable growth and positive operating cash flow, increasing average revenue per user, expanding the customer base and growing the newswire business.
- Management expects continued investment in Investor Network, Classify, Blueprint and related platforms, with the objective of increasing revenue per user and maintaining or improving gross margins.
- Key risks include competition, pricing pressure and customer attrition in legacy services, dependence on distribution partners for Accesswire, unpredictable timing of transfer-agent and corporate-action activity, market conditions, execution of the subscription transition and the ability to fund operations, dividends and investments.
- Management stated that additional equity financing might be required, although there was no assurance that debt or equity financing would be available on acceptable terms.
- The company reported no material litigation, no material changes to previously disclosed risk factors, no defaults on senior securities and no material off-balance-sheet arrangements.
- A $0.05 per-share quarterly dividend was declared on October 5, 2016, payable November 11, 2016, to holders of record on October 24, 2016.
- New accounting standards discussed include revenue recognition, leases, expected credit losses and share-based payment accounting. The company was evaluating certain impacts; no significant effect was expected for several standards, while the new lease standard is expected to add a right-of-use asset and lease liability beginning in 2019 for the corporate facility lease.
Facts an Investor Should Verify
- Confirm the registrant identity and whether the requested ACCESS Newswire Inc. reference corresponds to Issuer Direct Corporation and its Accesswire business.
- Separate the underlying operating performance from the approximately $316,000 one-time postage-accrual reversal included in nine-month 2016 results.
- Assess whether growth in platform and technology revenue can offset continuing declines in legacy disclosure and hardcopy shareholder-communications services.
- Review the sustainability of the improved gross margins alongside increased sales, marketing, product-development and software-capitalization spending.
- Monitor cash generation after software investment, dividends and potential future financing needs.
- Evaluate tax-rate volatility, utilization of acquired net operating losses and the remaining deferred tax asset of $236,837.
- Review dilution from outstanding options, restricted stock units and other equity compensation; 2,847,444 common shares were outstanding at September 30, 2016 and 2,859,944 were outstanding as of November 3, 2016.