Business Context and Reporting Period
This Form 10-Q was filed by Issuer Direct Corporation, whose Platform id. communications and compliance business includes ACCESSWIRE news distribution, cloud-based subscriptions, webcasting, shareholder communications, transfer-agent services and compliance services. The reporting period ended September 30, 2018; results cover the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The request metadata identifies ACCESS Newswire Inc., but the filing registrant is Issuer Direct Corporation.
The company remained a smaller reporting company and reported 4,044,690 common shares outstanding as of November 1, 2018.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $3.255 million, up 11% | $10.584 million, up 15% |
| Gross profit | $2.274 million | $7.552 million |
| Gross margin | 70%, versus 72% | 71%, versus 73% |
| Operating income | $0.119 million, versus $0.481 million | $1.029 million, versus $1.588 million |
| Net income | $0.086 million, versus $0.308 million | $0.772 million, versus $1.126 million |
| Diluted earnings per share | $0.02, versus $0.10 | $0.23, versus $0.37 |
| Cash flow from operations | Not separately provided | $2.153 million, versus $2.095 million |
- Platform and Technology revenue increased 17% in the quarter and 20% year to date, representing 64.1% and 60.1% of total revenue, respectively.
- Services revenue increased 1% in the quarter and 7% year to date, but management expects continued pressure from migration toward digital and subscription offerings.
- Cash and cash equivalents were $19.444 million at September 30, 2018, compared with $4.917 million at December 31, 2017.
- Current assets were $21.761 million and current liabilities were $2.599 million, producing working capital of $19.162 million.
- Total debt consisted of a $0.288 million current note payable and a $0.589 million long-term note payable. The $2.5 million line of credit was undrawn at September 30, 2018.
- Deferred revenue increased to $1.389 million from $0.887 million at December 31, 2017, primarily from new Platform id. subscriptions.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by ACCESSWIRE, subscription sales, additional transfer-agent revenue from Interwest customers, webcasting and the July 2018 acquisition of Filing Services Canada Inc. Revenue from acquired customers was $0.526 million in the quarter and $1.325 million year to date.
- Gross margin declined because of higher amortization of capitalized software and increased press-release distribution costs. Platform and Technology gross margin fell to 77% from 83% in the quarter and to 79% from 84% year to date.
- Operating expenses increased substantially: general and administrative expense rose 25% in the quarter and 15% year to date; sales and marketing expense rose 18% in both periods; and product development expense rose 113% and 123%, respectively.
- Lower operating income and net income reflected investments in sales, marketing, product development and acquired operations despite higher revenue and gross profit.
- Cash increased primarily from the August 2018 secondary offering, which generated $13.323 million of net proceeds. The company also paid $1.123 million, net of cash acquired, for FSCwire and paid $0.460 million of dividends.
- On July 3, 2018, the company acquired FSCwire for $1.202 million of total consideration, including $1.140 million of cash and restricted stock valued at $0.062 million. The preliminary purchase accounting recorded $1.256 million of goodwill and intangible assets.
- Adoption of ASC 606 on January 1, 2018 did not change total revenue, liquidity or previously reported total-period results, but reclassified certain bundled-contract revenue from Services to Platform and Technology.
Guidance, Outlook, Risks and Unusual Items
- Management stated that platform demand remained stable in most served markets and expected continued migration from printed and service-based offerings to cloud subscriptions and digital distribution.
- For the remainder of 2018, priorities included expanding the Platform and Technology sales team, growing the customer base, migrating acquired customers, expanding newswire distribution, investing in technology, and generating sustainable profits and operating cash flow.
- Management planned to release two insight and analytics-related modules during the fourth quarter, including a cloud-based professional conference organizer product and a shareholder-engagement analytics add-on.
- The company identified continued attrition in legacy annual-report and shareholder-outreach services, pricing pressure in compliance services, competition, general economic conditions and capital-market activity as risks.
- ACCESSWIRE depends on several distribution partners; disruption of those relationships could materially affect the business.
- The company had no material litigation or material off-balance-sheet arrangements reported. Management stated that there were no material changes to the risk factors in the latest Form 10-K/A.
- The company recorded a $35,000 tax expense in the quarter and year to date related to finalizing the impact of the 2017 Tax Cuts and Jobs Act, after previously recognizing a provisional $351,000 benefit in 2017.
- Effective October 4, 2018, after the reporting date, the line of credit was increased to $3.0 million and the interest spread was reduced from LIBOR plus 2.50% to LIBOR plus 1.75%.
- The company expected the new lease standard to require recognition of a right-of-use asset and lease liability beginning in 2019, with an insignificant balance-sheet impact based on its remaining corporate-facility lease.
Most Important Facts to Verify
- Verify the registrant identity: the filing is for Issuer Direct Corporation, not ACCESS Newswire Inc., although ACCESSWIRE is a principal business offering.
- Verify whether revenue growth and deferred-revenue expansion continue after the FSCwire acquisition and the 2018 secondary offering.
- Monitor whether investments in sales, marketing and product development translate into higher operating income, given the decline in operating margin and net income.
- Assess the effect of software amortization and distribution costs on Platform and Technology gross margins.
- Review the final purchase-price allocation and performance of FSCwire, as the acquisition accounting was still provisional.
- Track legacy Services and shareholder-outreach attrition against management’s expected transition to subscription revenue.
- Confirm execution and monetization of the planned fourth-quarter analytics and conference-organizer modules.
- Review the company’s reliance on distribution partners, customer retention, acquisition integration and future capital-market demand.