ISSUER DIRECT CORPORATION Except for the historical information contained herein, the matters discussed in
this Form 10-K include certain forward-looking statements that involve risks and
uncertainties, which are intended to be covered by safe harbors. Those
statements include, but are not limited to, all statements regarding our and
management's intent, belief and expectations, such as statements concerning our
future and our operating and growth strategy. We generally use words such as
"believe," "may," "could," "will," "intend," "expect," "anticipate," "plan," and
similar expressions to identify forward-looking statements. You should not place
undue reliance on these forward-looking statements. Our actual results could
differ materially from those anticipated in the forward-looking statements for
many reasons including our ability to implement our business plan, our ability
to raise additional funds and manage consumer acceptance of our products, our
ability to broaden our customer base, our ability to maintain a satisfactory
relationship with our suppliers and other risks described in our reports filed
with the
Results of Operations
The following table presents certain amounts included in our consolidated
statements of income, the relative percentage that those amounts represent to
revenue, and the change in those amounts from fiscal year 2022 compared to
2021. This information should be read together with the consolidated financial
statements and accompanying notes. The financial results presented below for
2022 have been affected by the acquisition of Newswire in
Comparison of results of operations for the years endedDecember 31, 2022 and 2021 (in 000's): Percentage of Revenue(1) 2022 2021 2022 2021 Revenue: Communications revenue$ 16,115 $ 14,058 69 % 64 % Compliance revenue 7,399 7,825 31 % 36 % Total revenue 23,514 21,883 100 % 100 % Cost of revenue: Communications cost of revenue 3,735 3,401 23 % 24 % Compliance cost of revenue 1,949 2,347 26 % 30 % Total cost of revenue 5,684 5,748 24 % 26 % Gross Margin: Communications gross margin 12,380 10,657 77 % 76 % Compliance gross margin 5,450 5,478 74 % 70 % Total gross margin 17,830 16,135 76 % 74 % Operating Expenses: General and administrative 6,963 5,821 30 % 27 % Sales and marketing 5,922 4,893 25 % 22 % Product development 1,306 1,075 6 % 5 % Depreciation and amortization 970 603 4 % 3 % Total expenses 15,161 12,392 64 % 57 % Operating income 2,669 3,743 11 % 17 % Interest income (expense), net (11 ) 3 0 % 0 % Other income - 366 0 % 2 % Income before income taxes 2,658 4,112 11 % 19 % Income tax provision 724 821 3 % 4 % Net income$ 1,934 $ 3,291 8 % 15 % (1) Percentage of revenue is calculated as the relevant revenue, expense, income amount divided by total revenue, except for communications and compliance cost of revenue and communications and compliance gross margin, which are divided by the related component of revenue. 23 Table of Contents Revenues
Total revenue increased by
Communications revenue increased
Compliance revenue decreased
Revenue Backlog
As of
Cost of Revenues
Communications cost of revenues consists primarily of direct labor costs,
newswire distribution costs, teleconferencing costs and third-party licensing
costs. Compliance cost of revenue consists primarily of direct labor costs,
warehousing, logistics, print production materials, postage, and amortization of
capitalized software costs related to our disclosure software. Cost of revenues
decreased by
Cost of revenues associated with Communications revenues increased
Cost of revenues associated with our Compliance revenues decreased
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries, stock-based
compensation, insurance, fees for professional services, general corporate
expenses (including bad debt expense) and facility and equipment expenses.
General and administrative expenses were
As a percentage of revenue, General and administrative expenses were 30% for the
year ended
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, stock-based
compensation, sales commissions, advertising expenses and other marketing
expenses. Sales and marketing expenses were
As a percentage of revenue, sales and marketing expenses were 25% for the year
ended
Product Development Expenses
Product development expenses consist primarily of salaries, stock-based
compensation, bonuses and licenses to develop new products and technology to
complement and/or enhance tour platform. Product development expenses increased
As a percentage of revenue, product development expenses increased to 6% for the
year ended
Depreciation and Amortization Expenses
During the year ended
Interest Income (Expense), net
Interest income (expense), net, represents accrued interest of
Other Income
For the year ended
Income Taxes
We recorded income tax expense of
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For the year ended
Liquidity and Capital Resources
As of
As of
Effective
Disclosure about Off-Balance Sheet Arrangements
We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.
Non-GAAP Measures
Management believes that certain non-GAAP measures, such as non-GAAP
free cash flow, non-GAAP adjusted free cash flow, non-GAAP adjusted EBITDA
("adjusted EBITDA"), and non-GAAP adjusted net income ("adjusted net income")
provide useful information about our operating results and enhance the overall
ability to assess our financial performance. We use these measures, together
with other measures of performance prepared in accordance with accounting
principles generally accepted in
Management uses free cash flow, which is defined as net cash flows provided by operating activities less payments for purchases of fixed assets and capitalized software, in reviewing the financial performance and cash generation by our various business groups and evaluating cash levels. We believe free cash flow is a useful measure for investors because it portrays our ability to grow organically and generate cash from our businesses for purposes such as paying interest on our indebtedness, repaying debt, funding business acquisitions, investing in product development, re-purchasing our common stock, and paying dividends, if it is determined we do so in the future. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. Adjusted free cash flow represents a further non-GAAP adjustment to free cash flow to exclude the effect of cash paid for acquisition and integration related activities and unusual or non-recurring transactions. Management believes that by excluding these infrequent or unusual items from free cash flow, it better portrays our ability to generate cash, as such items are not indicative of the Company's operating performance for the period.
The uses of these non-GAAP financial measures are not intended to be considered in isolation of, or as substitute for, the financial information prepared and presented in accordance with US GAAP. Free cash flow and adjusted free cash flow do not necessarily represent funds available for discretionary use and are not necessarily a measure of our ability to fund our cash needs. Our calculation of free cash flow and adjusted free cash flow may differ from similarly titled measures used by other companies, limiting their usefulness as a comparative measure.
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For the years ended December 31, 2022 and 2021, free cash flow and adjusted free
cash flow were as follows:
Year Ended December 31,
2022 2021
Net cash provided by operating activities (US GAAP)
(66 ) (277 )
Free cash flow (Non-GAAP) 3,953 4,454
Cash paid for acquisition and integration related
items(1) 1,060 248
Cash paid for other unusual items(2) 109 30
Adjusted free cash flow (Non-GAAP) $ 5,122 $ 4,732
(1) For the year ended December 31, 2022 , this adjustment relates to payments
for representation and warranty insurance of $500,000 , payments of
$325,000 related to Newswire opening balance sheet costs that were not
recouped until Q1 2023 and payments for one-time corporate projects,
including acquisition and integration expenses, of $235,000 . For the year
ended December 31, 2021 , this adjustment gives effect to one-time
corporate projects, including acquisition and integration related expenses
incurred during the period.
(2) For the year ended December 31, 2022 , this adjustment relates to $49,000
of termination benefits and $60,000 paid for executive recruiting expenses
during the period. For the three months and full year ended December 31,
2021 , this amount represents executive recruiting expenses paid during the
period.
The decrease in free cash flow for fiscal year 2022 compared to the prior fiscal year was primarily due to an increase in cash paid attributed to acquisition and integration items, partially offset by less payments made related to capitalized software in 2022 compared to 2021. Free cash flow and adjusted free cash flow are non-GAAP financial measures.
Adjusted EBITDA and adjusted net income are non-GAAP financial measures and should not be considered as a substitute for analysis of our results as reported under US GAAP. These measures are defined differently by different companies, and accordingly, such measures may not be comparable to similarly titled measures of other companies, and have important limitations as an analytical tool.
A reconciliation of net income to adjusted EBITDA for the years ended
Year Ended December 31,
2022 2021
Amount Amount
Net income: $ 1,934 $ 3,291
Adjustments:
Acquisition and/or integration costs(1) 263 248
Other non-recurring expenses(2) 139 (366 )
Stock-based compensation expense(3) 763 333
Depreciation and amortization 1,033 1,143
Interest expense (income), net 11 (3 )
Income tax expense, net 724 821
Adjusted EBITDA: $ 4,867 $ 5,467
(1) This adjustment gives effect to one-time corporate projects, including
acquisition and integration related expenses, incurred during the periods.
(2) For the year ended December 31, 2022 , this adjustment gives effect to a
one-time executive recruiting fee of $90,000 and termination benefits of
$49,000 . For the year ended December 31, 2021 , this adjustment gives
effect to a benefit of $366,000 associated with employee retention credits
related to the CARES Act.
(3) The adjustments represent stock-based compensation expense related to
awards of stock options, restricted stock units, or common stock in
exchange for services. Although we expect to continue to award stock in
exchange for services, the amount of stock-based compensation is excluded
as it is subject to change as a result of one-time or non-recurring
projects.
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A reconciliation of net income to adjusted net income for the years ended
Year Ended December 31,
2022 2021
Per diluted Per diluted
Amount share Amount share
Net income: $ 1,934 $ 0.52 $ 3,291 $ 0.86
Adjustments:
Amortization of intangible
assets(1) 816 0.22 459 0.12
Stock-based compensation
expense(2) 763 0.20 333 0.09
Other unusual items(3) 402 0.11 (118 ) (0.03 )
Tax impact of adjustments(4) (416 ) (0.11 ) (142 ) (0.04 )
Impact of discrete items
impacting income tax expense(5) 49 0.01 (152 ) (0.04 )
Non-GAAP net income: $ 3,548 $ 0.95 $ 3,671 $ 0.96
Weighted average number of
common shares outstanding -
diluted 3,740 3,820
(1) The adjustments represent the amortization of intangible assets related to
acquired assets and companies.
(2) The adjustments represent stock-based compensation expense related to
awards of stock options, restricted stock units, or common stock in
exchange for services. Although we expect to continue to award stock in
exchange for services, the amount of stock-based compensation is excluded
as it is subject to change as a result of one-time or non-recurring
projects.
(3) For the year ended December 31, 2022 , this adjustment gives effect to
one-time corporate projects, including acquisition and integration related
expenses, incurred during the period of $263,000 , one-time executive
recruiting fee of $90,000 and termination benefits paid of $49,000 . For
the year ended December 31, 2021 , this adjustment gives effect to a
benefit of $366,000 , associated with employee retention credits related to
the CARES Act, partially offset by one-time corporate projects, including
merger and acquisition expenses, incurred during the period.
(4) This adjustment gives effect to the tax impact of all non-GAAP adjustments
at the current Federal tax rate of 21%.
(5) This adjustment eliminates discrete items impacting income tax expense.
For the year ended December 31, 2022 , the discrete items relate to a
return to provision adjustment as well as additional tax expense resulting
from stock-based compensation recorded in income tax for the period. For
the year ended December 31, 2021 , the discrete items relate to a return to
provision adjustment arising from a SEC . 986 loss from previously taxed
earnings and profits resulting from the liquidation of a foreign
subsidiary and an excess stock-based compensation benefit recognized in
income tax during the period.
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.
Market factors like COVID-19, the current military conflict in
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The transition to a platform subscription model has been and will continue to be key for our long-term sustainable growth. The successful integration of the Newswire business with our ACCESSWIRE business is also a key initiative for 2023. We will also continue to focus on the following key strategic initiatives during 2023:
? Expanding our Communications products and adapting to this changing industry,
? Evaluating and completing acquisitions in areas of strategic focus,
? Expanding our Communications sales and marketing teams and digital
marketing strategy,
? Expanding customer base,
? Expanding our newswire distribution,
? Investing in technology advancements and upgrades,
? Generating profitable sustainable growth
? Generating cash flows from operations.
We believe there is demand for our products around the world, led by our ACCESSWIRE newswire brand, as companies seek to find better platforms and tools to disseminate and communicate their messages in a more efficient and collaborative way.
We have invested and will continue to invest in our product sets, platforms and intellectual property development via internal development and acquisitions. Acquisitions remain a core part of our strategy and we believe acquisitions are key to enhancing our overall offerings in the market and are necessary to keep our competitive advantages and facilitate the next round of growth that management believes it can achieve. If we are successful in this effort, we believe we can further increase our market share as we move forward.
Critical Accounting Policies and Estimates
The consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. Significant intercompany accounts and transactions are eliminated in consolidation.
Revenue Recognition
Substantially all the Company's revenue comes from contracts with customers for subscriptions to its cloud-based products or contracts for Communications and Compliance products and services. Customers consist of public corporate issuers and professional firms, such as investor and public relations firms. In the case of news distribution and webcasting offerings, customers also include private companies. The Company accounts for a contract with a customer when there is an enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has economic substance, and collectability of the contract consideration is probable. The Company's revenues are measured based on consideration specified in the contract with each customer.
The Company's contracts include either a subscription to its entire platform, certain modules within the platform or to its Media Advantage Plan (MAP), or an agreement to perform services, or any combination thereof, and often contain multiple subscriptions and services. For these bundled contracts, the Company accounts for individual subscriptions and services as separate performance obligations if they are distinct, which is when a product or service is separately identifiable from other items in the bundled package, and a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company separates revenue from its contracts into two revenue streams: i) Communications and ii) Compliance. Performance obligations of Communications contracts include providing subscriptions to certain modules or the entire Platform id. Communications module, distributing press releases on a per release basis or conducting webcasts, virtual annual meetings, or other events on a per event basis. MAP subscription contracts contain two performance obligations of which the first is a series of distinct services that include, but are not limited to, developing specific media plans and creating content to be distributed and the second performance obligation being access to the MAP platform along with distribution of press releases, ongoing support and assessment of performance as a stand-ready obligation. Performance obligations of Compliance contracts include providing subscriptions to its cloud-based Platform id. Compliance module, Whistleblower module or other stand-ready obligations to deliver services and annual report printing and distribution. Additionally, services are provided on a per project basis. Set up fees for disclosure services are considered a separate performance obligation and are satisfied upfront. Set up fees for the transfer agent module and investor relations content management module are immaterial. The Company's subscription and service contracts are generally for one year, with automatic renewal clauses included in the contract until the contract is cancelled. The contracts do not contain any rights of returns, guarantees, or warranties. Since contracts are generally for one year, all the revenue is expected to be recognized within one year from the contract start date. As such, the Company has elected the optional exemption that allows the Company not to disclose the transaction price allocated to performance obligations that are unsatisfied or partially satisfied at the end of each reporting period.
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The Company recognizes revenue for subscriptions evenly over the contract period, upon distribution for per release contracts and upon event completion for webcasting and virtual annual meeting events. For service contracts that include stand ready obligations, revenue is recognized evenly over the contract period. For all other services delivered on a per project or event basis, the revenue is recognized at the completion of the event. The Company believes recognizing revenue for subscriptions and stand ready obligations using a time-based measure of progress, best reflects the Company's performance in satisfying the obligations.
For bundled contracts, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the subscription or service. If a standalone selling price is not directly observable, the Company uses the residual method to allocate any remaining price to that subscription or service. The Company reviews standalone selling prices, at least annually, and updates these estimates if necessary.
Accounts Receivable and Allowance for Doubtful Accounts
The Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. Credit is granted on an unsecured basis. The allowance for doubtful accounts is estimated based on an assessment of the Company's ability to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts and if the financial condition of the Company's customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against revenues. Given the economic consequences of the COVID-19 pandemic and recent economic downturn, additional attention has been paid to the financial viability of its customers. The Company generally writes-off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection.
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, the Company recognizes 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. The Company's policy regarding the classification of interest and penalties is to classify them as income tax expense in the financial statements, if applicable.
Capitalized Software
Costs incurred to develop the Company's cloud-based platform products 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, which is typically four years. Costs related to design or maintenance of the software are expensed as incurred.
Impairment of Long-lived Assets
In accordance with the authoritative guidance for accounting for long-lived assets, assets such as property and equipment, trademarks, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset group exceeds fair value of the asset group.
Business Combinations,
The authoritative guidance for business combinations specifies the criteria for
recognizing and reporting intangible assets apart from goodwill. The Company
records 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.
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Lease Accounting
The Company determines if an arrangement is a lease at inception. Operating lease agreements are primarily for office space and are included within lease right-of-use ("ROU") assets and lease liabilities on the consolidated balance sheet.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments consist of non-lease services related to the lease and payments under operating leases classified as short-term. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets include any lease payments due and exclude lease incentives. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
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