The unaudited interim consolidated balance sheet as of March 31,June 30, 2019 and statements of income, comprehensive income, stockholders’ equity, and cash flows for the three-monththree and six-month periods ended March 31,June 30, 2019 and 2018 included herein, have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Article 10 of Regulation S-X under the Exchange Act. In the opinion of management, they include all normal recurring adjustments necessary for a fair presentation of the financial statements. Results of operations reported for the interim periods are not necessarily indicative of results for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("US GAAP") have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The interim financial information should be read in conjunction with the 2018 audited financial statements of Issuer Direct Corporation (the “Company”, “We”, or “Our”) filed on Form 10-K.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions are eliminated in consolidation.

Earnings per share guidance requires that basic net income per common share be computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Shares issuable upon the exercise of stock options and restricted stock units totaling 110,000115,000 and 1,00041,000 were excluded in the computation of diluted earnings per common share during the three-monththree and six-month periods ended March 31,June 30, 2019 and 2018, respectively, because their impact was anti-dilutive.

Substantially all of the Company’s revenue comes from contracts with customers for subscriptions to its cloud-based products or contracts to perform compliance or other services. Customers consist primarily of corporate issuers and professional firms, such as investor relations and public relations firms. In the case of our news distribution and webcasting offerings, our 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 recognizes revenue for subscriptions evenly over the contract period, upon distribution for per releaseper-release contracts and upon event completion for webcasting 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 services. If a standalone selling price is not directly observable, the Company uses the residual method to allocate any remaining costs to that subscription or service. The Company regularly reviews standalone selling prices and updates these estimates if necessary.

The Company invoices its customers based on the billing schedules designated in its contracts, typically upfront on either a monthly, quarterly or annual basis or per transaction at the completion of the performance obligation. Deferred revenue for the periods presented was primarily related to subscription and service contracts, which are billed upfront, quarterly or annually, however the revenue has not yet been recognized. The associated deferred revenue is generally recognized ratably over the billing period. Deferred revenue as of March 31,June 30, 2019 and December 31, 2018 was $1,464,000$1,624,000 and $1,249,000, respectively, and is expected to be recognized within one year. Revenue recognized for the threesix months ended March 31,June 30, 2019 and 2018, that was included in the deferred revenue balance at the beginning of each reporting period, was approximately $690,000$785,000 and $488,000,$714,000, respectively. Accounts receivable related to contracts with customers was $2,237,000$2,422,000 and $1,593,000 as of March 31,June 30, 2019 and December 31, 2018, respectively. Since substantially all of the contracts have terms of one year or less, the Company has elected to use the practical expedient regarding the existence of a significant financing.

Costs to obtain contracts with customers consist primarily of sales commissions. As of March 31,June 30, 2019 and December 31, 2018, the Company has capitalized $20,000$21,000 and $18,000 of costs to obtain contracts that are expected to be amortized over more than one year. For contract costs expected to be amortized in less than one year, the Company has elected to use the practical expedient allowing the recognition of incremental costs of obtaining a contract as an expense when incurred. The Company has considered historical renewal rates, expectations of future renewals and economic factors in making these determinations.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for doubtful accounts and the valuation of goodwill, intangible assets, deferred tax assets, and stock-based compensation. Actual results could differ from those estimates.

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, we recognize 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. Our policy regarding the classification of interest and penalties is to classify them as income tax expense in our financial statements, if applicable. At the end of each interim period, we estimate the effective tax rate we expect to be applicable for the full year and this rate is applied to our results for the interim year-to-date period and then adjusted for any discrete period items.

Costs incurred to develop our 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. Costs related to design or maintenance of the software are expensed as incurred. NoCapitalized costs were capitalized duringand amortization for the three-monththree and six-month periods ended March 31, 2019 and 2018. The Company recorded amortization expense of $204,000 and $201,000 during the three-month periods ended March 31,June 30, 2019 and 2018, respectively. All of the amortization is included in Cost of revenues on the Consolidated Statements of Income, with the exception of $4,000 and $2,000, which is included in Depreciation and amortization for each of the three-month periods ended March 31, 2019 and 2018, respectively,are as it relates to back-office supporting systems.follows (in thousands):

We determine if an arrangement is a lease at inception. Our operating lease agreements are primarily for office space and are included within operating lease right-of-use (“ROU”) assets and operating lease liabilities on the consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our 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. Our variable lease payments consist of non-lease services related to the lease. 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 our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets also include any lease payments made and exclude lease incentives. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.

ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities recorded at fair value in the financial statements are categorized based upon the hierarchy of levels of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

  

As of March 31,June 30, 2019 and December 31, 2018, we believe that the fair value of our financial instruments other than cash and cash equivalents, such as, accounts receivable, our line of credit, notes payable, and accounts payable approximate their carrying amounts.

The financial statements of the foreign subsidiaries of the Company have been translated into U.S. dollars. All assets and liabilities have been translated at current rates of exchange in effect at the end of the period. Income and expense items have been translated at the average exchange rates for the year or the applicable interim period. The gains or losses that result from this process are recorded as a separate component of other accumulated comprehensive income until the entity is sold or substantially liquidated.

We account for business combinations under FASB ASC No. 805 – Business Combinations and the related acquired intangible assets and goodwill under FASB ASC No. 350 – Intangibles – Goodwill and Other. The authoritative guidance for business combinations specifies the criteria for recognizing and reporting intangible assets apart from goodwill. We record 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. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Intangible assets consist of client relationships, customer lists, distribution partner relationships, software, technology, non-compete agreements and trademarks that are initially measured at fair value. At the time of the business combination, trademarks are considered an indefinite-lived asset and, as such, are not amortized as there is no foreseeable limit to cash flows generated from them. The goodwill and intangible assets are assessed annually for impairment, or whenever conditions indicate the asset may be impaired, and any such impairment will be recognized in the period identified. The client relationships (7-10 years), customer lists (3 years), distribution partner relationships (10 years), non-compete agreements (5 years) and software and technology (3-6 years) are amortized over their estimated useful lives.

The Company expenses advertising costs as incurred, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits.

We account for stock-based compensation under FASB ASC No. 718 – Compensation – Stock Compensation. The authoritative guidance for stock compensation requires that companies estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The associated cost is recognized over the period during which an employee is required to provide service in exchange for the award.

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model that requires a lessee to recognize aan ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard is effective for the Company on January 1, 2019, which is also the day we elected to adopt the new standard. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. We chose the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification of those leases in place as of January 1, 2019. See the table below for the impact of adoption of the lease standard on our balance sheet accounts as of the day of adoption, January 1, 2019 ($ in 000’s):

On January 3, 2019 (the “Closing Date”), the Company entered into an Asset Purchase Agreement (the “VWP Agreement”) with Onstream Media Corporation, a Florida corporation (the “Seller”), whereby the Company purchased certain assets related primarily to customer accounts, intellectual property, lease deposits and assumed certain existing contractual obligations related primarily to data processing and storage, bandwidth and facility leases relating to the Seller’s VisualWebcaster Platform ("VWP”). for a purchase price of $2,788,000 paid as of the Closing Date. The accounts receivable and the accounts payable related to VWP and existing as of the Closing Date were not included as part of the VWP Agreement.

The acquisition was accounted for under the acquisition method of accounting for business combinations, in accordance with FASB ASC 805, Business Combinations, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Acquisition-related costs, which totaled approximately $155,000, are not included as a component of the acquisition accounting, but are recognized as expenses in the periods in which the costs are incurred. Any changes within the measurement period resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recorded at the acquisition date. During the quarter ended March 31, 2019, theThe Company employed a third party valuation firm to assist in determining the preliminary purchase price allocation of assets and liabilities acquired from Seller. The valuation resulted in the tangible and intangible assets and liabilities disclosed below. The income approach was used to determine the value of the customer relationships and non-compete agreement. The income approach determines the fair value for the asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate of return that reflects the relative risk of achieving the cash flow and the time value of money. Projected cash flows considered multiple factors, including current revenue from existing customers; analysis of expected revenue and attrition trends; reasonable contract renewal assumptions from the perspective of a marketplace participant; probability of executives competing, expected profit margins giving consideration to marketplace synergies; and required returns to contributory assets. The relief from royalty method was used to value the technology. The relief from royalty method determines the fair value by calculating what a typical license fee would be in order to obtain the same or similar license of the technology from market participants. Projected cash flows consider revenue assumptions allocated to the technology.

The transaction consisted of a single cash payment to the Seller in the amount of $2,788,000. In connection with the acquisition, the Company assumed two short-term leases associated with an office and co-location for certain computer equipment in New York City, New York as well as entered into a three-year office lease in Florida. In addition to the intangible assets listed below, the purchase price included lease deposits of $13,000 and a right of use asset and corresponding lease liability for the office lease in Florida in the amount of $125,000.

The preliminary identified intangible assets as a result of the acquisition are as follows (in 000’s):

The following represents our unaudited condensed pro-forma financial results as if the VWP acquisition had occurred as of January 1, 2018. Unaudited condensed pro-forma results are based upon accounting estimates and judgments that we believe are reasonable. The condensed pro-forma results are not necessarily indicative of the actual results of our operations had the acquisitions occurred at the beginning of the period presented, nor does it purport to represent the results of operations for future periods.

On July 3, 2018, the Company entered into a Stock Purchase Agreement (the “FSCwire Agreement”) with the sole shareholder of FSCwire, a company incorporated under the Business Corporations Act (Alberta), whereby the Company purchased all of the outstanding equity securities of FSCwire. Under the terms of the FSCwire Agreement, the Company paid $1,140,000 at closing ($180,000 of which was paid into an escrow account to cover standard representations and warranties included within the FSCwire Agreement) and issued 3,402 shares of restricted common stock of the Company. 

The acquisition was accounted for under the acquisition method of accounting for business combinations, in accordance with FASB ASC 805, Business Combinations, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Acquisition-related costs, which totaled approximately $52,000, are not included as a component of the acquisition accounting, but are recognized as expenses in the periods in which the costs are incurred. Any changes within the measurement period resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recorded at the acquisition date. During the year ended December 31, 2018, the Company employed a third party valuation firm to assist in determining the purchase price allocation of assets and liabilities acquired from FSCwire. The valuation resulted in the tangible and intangible assets and liabilities disclosed below. The income approach was used to determine the value of FSCwire’s customer relationships and the relief from royalty method was used to value the distribution partner relationships.

The transaction resulted in recording intangible assets and goodwill at a fair value of $1,426,000 as follows (in 000’s):

The tangible assets and liabilities acquired were as follows (in 000’s):

The identified intangible assets as a result of the acquisition are as follows (in 000’s):

The Company has elected not to provide unaudited pro forma financial information for the FSCwire acquisition, because the acquisition was not considered a significant acquisition in accordance with Rule 3-05 of the SEC's Regulation S-X.

On May 23, 2014, the shareholders of the Company approved the 2014 Equity Incentive Plan (the “2014 Plan”). Under the terms of the 2014 Plan, the Company is authorized to issue incentive awards for common stock up to 200,000 shares to employees and other personnel. On June 10, 2016, the shareholders of the Company approved an additional 200,000 awards to be issued under the 2014 Plan, bringing the total number of shares to be awarded to 400,000. The awards may be in the form of incentive stock options, nonqualified stock options, restricted stock, restricted stock units and performance awards. The 2014 Plan is effective through March 31, 2024. As of March 31,June 30, 2019, there are 47,00027,500 shares which remain to be granted under the 2014 Plan.

The following table summarizes information about stock options outstanding and exercisable at March 31,June 30, 2019:

 

As of March 31,June 30, 2019, the Company had unrecognized stock compensation related to the options of $189,000,$117,000, which will be recognized through 2021.

During the three and six months ended March 31,June 30, 2019, the Company granted 22,00024,000 and 46,000 restricted stock units with an intrinsic value of $11.90$11.27 and $11.57, respectively, to certain employees and board members of the Company. The vesting period for the restricted stock units varies between one and three years. During the three and six months ended March 31,June 30, 2019, 24,9968,000 and 33,000 restricted stock units with an intrinsic value of $5.81$17.40 and $8.62 vested. As of March 31,June 30, 2019, there was $295,000$478,000 of unrecognized compensation cost related to our unvested restricted stock units, which will be recognized through 2021.

We recognized an income tax expense of $13,000$33,000 and a benefit of $10,000$46,000 for the three-monththree and six-month periods ended March 31,June 30, 2019, compared to $224,000 and $214,000 during the same periods of 2018, respectively. At the end of each interim period, we estimate the effective tax rate we expect to be applicable for the full fiscal year and this rate is applied to our results for the year-to-date period, and then adjusted for any discrete period items. For the three-monththree and six-month periods ended March 31,June 30, 2019 and 2018, the variance between the Company’s effective tax rate and the U.S. statutory rate of 21% is primarily attributable to excess stock-based compensation tax benefits(shortfall)/benefit of $35,000($11,000) and $73,000,$24,000, respectively, recognized in income tax expense (benefit) during the periods, as well as, tax credits offset by state income taxes. For the three- month period ended June 30, 2018, the variance between the U.S. statutory rate and the Company’s effective rate is primarily attributable to additional expense as a result of a tax shortfall associated with stock-based compensation in the amount of $68,000, offset by foreign statutory rate differentials and tax credits. For the six-month period ended June 30, 2018, the Company’s effective tax rate was in-line with the statutory rate plus additional state taxes.

As described further in "Note 2. Summary of Significant Accounting Policies", we adopted Topic 842 as of January 1, 2019. Prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under Topic 840.

Generally, our leasing activity consists of office leases. As of January 1, 2019, we had three existing leases for office space. In October 2015, we signed a three-year lease extension for our 16,059 square-foot corporate headquarters in Morrisville, NC. This lease expires on October 31, 2019 and as of January 1, 2019, we had remaining minimum lease payments of $135,000. An ROU asset and corresponding lease liability was recorded for this amount on January 1, 2019.

Additionally, we have an office in Salt Lake City, Utah and a shared office facility in London, England, both of which are on short-term leases that are less than twelve months. As a result, we have elected the short-term lease recognition exemption for our Utah and London office leases, which means, for those leases that qualify, we will not recognize ROU assets or lease liabilities.

In connection with the Company’s acquisition of VWP (See Note 3), the Company assumed two short term leases in New York City, NY and entered into a three-year office lease in Florida. We have elected the short term lease exemption for the two New York leases. For the Florida lease, which was signed on January 4, 2019, we recognized a ROU asset and corresponding lease liability of $125,000, which represents the present value of minimum lease payments discounted at 4.25%, the Company’s incremental borrowing rate at lease inception.

In March 2019, we signed a new lease to move our corporate headquarters to Raleigh, North Carolina. As we continue our transition from a services based company to a cloud-based platform company, the new lease affords us the ability to separate our warehouse from our corporate office. The new lease, which is scheduled to commence at the later of the date tenant improvements are completed (as defined in the lease) or August 1, 2019, is for 9,766 square feet and has a term of eight years and four months. Minimum lease payments are $2,997,000, not including a tenant improvement allowance up to $488,000, which will be reflected in the balance sheet upon lease commencement date.

We have performed an evaluation of our other contracts with customers and suppliers in accordance with Topic 842 and have determined that, except for the leases described above, none of our contracts contain a lease.

We consider ourselves to be in a single reportable segment under the authoritative guidance for segment reporting, specifically a shareholder communications and compliance company for publicly traded and private companies. Revenue is attributed to a particular geographic region based on where subscriptions are sold or the services are performed. The following tables present revenue disaggregated by revenue stream and geography in (000’s):

No customers accounted for more than 10% of the operating revenues during the three-month periods ended March 31,June 30, 2019 or 2018.

We believe we did not have any financial instruments that could have potentially subjected us to significant concentrations of credit risk for any relevant period. Since a portion of the revenues are paid at the beginning of the month via credit card or advance by check, the remaining accounts receivable amounts are generally due within 30 days, none of which is collateralized.

Effective October 4, 2018, the Company renewed its Line of Credit, which increased the amount of funds available for borrowing from $2,500,000 to $3,000,000. The interest rate was reduced from LIBOR plus 2.50% to LIBOR plus 1.75%. As of March 31,June 30, 2019, the interest rate was 4.22%4.14% and the Company did not owe any amounts on the Line of Credit.

Issuer Direct Corporation (Issuer Direct Corporation and its subsidiaries are hereinafter collectively referred to as “Issuer Direct”, the “Company”, “We” or “Our” unless otherwise noted). Our corporate offices are located at 500 Perimeter Park Drive, Suite D, Morrisville, North Carolina, 27560.

Communications Modules

Total revenue increased by $649,000,$339,000, or 18%9%, to $4,179,000$4,138,000 during the three-month period ended March 31,June 30, 2019, as compared to $3,530,000$3,799,000 during the same period of 2018. Total revenue increased by $988,000, or 13%, to $8,317,000 during the six-month period ended June 30, 2019, compared to $7,329,000 during the same period of 2018. Revenue from customers obtained from our acquisitions of VWP and FSCwire totaled $627,000$649,000 and $1,275,000 during the three and six months ended March 31, 2019.June 30, 2019, respectively. A portion of this revenue is included in both the Platform and Technology and Services revenue streams.

Services revenue increased $16,000,decreased $76,000, or 1%5%, to $1,514,000and $61,000, or 2%, during the three-month periodthree and six-month periods ended March 31,June 30, 2019, respectively, as compared to $1,498,000 during the same periodperiods of 2018. The increasedecrease is primarily due to the acquisitionsresult of VWP and FSCwire, which accounted for $118,000 of Servicesa decline in revenue as well as, from our print and proxy distributiontransfer agent services due to one-time projects duringa decline in corporate transactions, directives or actions. The timing of these corporate directives and actions are difficult to predict as they are controlled by our customers and the conditions of the market, and therefore fluctuate from quarter to quarter. Revenue from ourAdditionally, ARS services continued to decline as a result of continued customer attrition as customers elect to leave the service or transition to digital fulfillment. We also experienced a decline in our compliance services due to continued pricing pressure in those marketsThese decreases were offset by the acquisitions of VWP and a shiftFSCwire, which accounted for $181,000 and $298,000 of some of thisServices revenue toduring the Platformthree and Technology revenue stream.six months ended June 30, 2019, respectively.

No customers accounted for more than 10% of the revenues during the three-monththree and six-month periods ended March 31,June 30, 2019 or 2018.

Platform adand Technology cost of revenues consists primarily of direct labor costs, newswire distribution costs, third party licensing and amortization of capitalized software costs related to platforms licensed to customers. Services costs of revenue consists primarily of direct labor costs, warehousing, logistics, print production materials, postage, and outside services directly related to the delivery of services to our customers. Cost of revenues increased by $281,000,$220,000, or 28%21%, and $501,000, or 24% during the three-month periodthree and six-month periods ended March 31,June 30, 2019, respectively, as compared to the same periodperiods of 2018. Overall gross margin increased $368,000,$119,000, or 15%4%, to $2,877,000,and $487,000, or 9%, during the three-month periodthree and six-month periods ended March 31,June 30, 2019, respectively, as compared to $2,509,000 in the same periodperiods of 2018.the prior year. However, during this period,these periods, gross margin percentage decreased to 70% and 69% from 71%.

Gross margin percentage from Platform and Technology revenue was 75% in73% and 74% during the three-month periodthree and six-month periods ended March 31,June 30, 2019, respectively, as compared to 79% in81% and 80% during the same periodperiods of 2018. The decrease in gross margin percentage is primarily attributable to the addition of revenue and costs associated with the acquisition of VWP.VWP as well as increased distribution costs associated with our newswire business.

Gross margins from our Services revenue decreasedincreased to 58% in63% and 61% during the three-month periodthree and six-month periods ended March 31,June 30, 2019, respectively, as compared to 61% and 60% induring the same periodperiods of 2018. The decreaseincrease is due in part to the acquisition of VWP as well as higherlower print and distribution costs.fulfillment costs and headcount among our operations department.

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 increased $357,000,$374,000, or 36%39%, to $1,361,000and $731,000 or 37%, during the three-month periodthree and six-month periods ended March 31,June 30, 2019, respectively, as compared to $1,004,000 during the same periodperiods of 2018. This increase is primarily due to an increase in our bad debt provision of $181,000$282,000 and $463,000 during the three and six months ended June 30, 2019, respectively, compared to the prior year. Additionally, we incurredA majority of this increase is related to additional professional fees of $112,000reserve for accounts receivable balances related to two significant investment commentary newswire customers, which are now fully reserved. Also contributing to the increase in general and administrative expenses are additional expenses associated with our recent acquisitions, as well as, an increase in personnelincluding additional one-time acquisition-related expenses, associated with an increase in corporate headcount as we position ourselves for growth.which were $112,000 during the six-month period ended June 30, 2019 compared to $41,000 during three and six months ended June 30, 2018. There were no one-time acquisition-related expenses during the three months ended June 30, 2019.

As a percentage of revenue, general and administrative expenses were 33%32% for both the three-month periodthree and six-month periods ended March 31,June 30, 2019, respectively, an increase from 28%25% and 27% for the same periodperiods of 2018.

Sales and marketing expenses consist primarily of salaries, stock-based compensation, sales commissions, advertising expenses, tradeshow expenses and other marketing expenses. Sales and marketing expenses for the three-month periodthree and six-month periods ended March 31,June 30, 2019, increased $70,000,$76,000, or 10%, and $146,000, or 9%, to $820,000 asrespectively, compared to $750,000 during the same periodperiods of 2018. This increase is directly related to our investment in our sales and marketing initiatives with an increase in personnel costs and digital marketing.

As a percentage of revenue, sales and marketing expense were 21% and 20% during the three-month periodthree and six-month periods ended March 31,June 30, 2019, respectively, compared to 21% for the same periodperiods of the prior year.

As a percentage of revenue, product development expenses were 8% for botheach of the three-monththree and six-month periods ended March 31,June 30, 2019 and 2018.

Depreciation and amortization expenses increased $70,000,$76,000, or 49%54%, and $146,000, or 51%, during the three-month periodthree and six-month periods ended March 31,June 30, 2019, respectively, as compared to the same periodperiods of 2018. The increase is due to amortization of intangible assets acquired in both the VWP and FSCwire acquisitions.

Interest income (expense), net, represents interest income on deposit and money market accounts, partially offset by the non-cash interest associated with the present value of the remaining anniversary payments of the Interwest acquisition.

We recognized an income tax expense of $13,000$33,000 and a benefit of $10,000$46,000 for the three-monththree and six-month periods ended March 31,June 30, 2019, compared to $224,000 and $214,000 during the same periods of 2018, respectively. At the end of each interim period, we estimate the effective tax rate we expect to be applicable for the full fiscal year and this rate is applied to our results for the year-to-date period, and then adjusted for any discrete period items. For the three-monththree and six-month periods ended March 31,June 30, 2019, and 2018, the variance between ourthe Company’s effective tax rate and the U.S. statutory rate of 21%, is primarily attributable to excesstax credits and stock-based compensation tax benefits(shortfall)/benefit of $35,000($11,000) and $73,000,$24,000, respectively, recognized in income tax expense (benefit) during the periods, as well as, tax credits offset by state income taxes. For the three-month period ended June 30, 2018, the variance between the U.S. statutory rate and the Company’s effective rate is primarily attributable to additional expense as a result of a tax shortfall associated with stock-based compensation in the amount of $68,000, offset by foreign statutory rate differentials and tax credits. For the six-month period ended June 30, 2018, the Company’s effective tax rate was in-line with the statutory rate plus additional state taxes.

Net income for the three-month periodthree and six-month periods ended March 31,June 30, 2019 was $205,000,$212,000 and $417,000, respectively, compared to $320,000$366,000 and $686,000 for the same periodperiods of 2018.

Although we achieved increases in revenue and gross margin, these increases were offset by higher operating expenses due to an increase in bad debt expense and investments made to position ourselves for growth by increasing headcount, incurring costs related to acquisitions as well as continuing to invest in our cloud-based products. Depreciation and amortization expense increased as well, due to amortization associated with acquired intangible assets. The increase in operating expense was partially offset by an increase in interest income on deposit and money market accounts.

As of March 31,June 30, 2019, we had $14,961,000$15,196,000 in cash and cash equivalents and $2,237,000$2,422,000 in net accounts receivable. Current liabilities at March 31,June 30, 2019, totaled $3,338,000$3,025,000 including our accounts payable, deferred revenue, accrued payroll liabilities, income taxes payable, current portion of remaining payments for Interwest, lease liabilities and other accrued expenses. At March 31,June 30, 2019, our current assets exceeded our current liabilities by $14,220,000.$15,006,000.

Effective October 4, 2018, the Company renewed its Line of Credit, which increased the amount of funds available for borrowing from $2,500,000 to $3,000,000. The interest rate was reduced from LIBOR plus 2.50% to LIBOR plus 1.75%. As of March 31,June 30, 2019, the interest rate was 4.22%4.14% and the Company did not owe any amounts on the Line of Credit.

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Not applicable

As of the end of the period covered by this quarterly report on Form10-Q, the Company’s Chief Executive Officer and Chief Financial Officer conducted an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective and have not changed since its most recent annual report.

We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.