U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 30, 2003
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3645702
(State of incorporation) (I.R.S. Employer Identification Number)
805 Third Avenue, 9th Floor
(212) 271-7640
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of June 18, 2003 the registrant had outstanding 13,757,109 shares of Class A
Common Stock.
INTERNET COMERCE CORPORATION
INDEX TO FORM 10-Q
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of April 30, 2003 (unaudited)
and July 31, 2002................................................... 3
Consolidated statements of operations and comprehensive loss
for the three and nine months ended April 30, 2003
(unaudited) and April 30, 2002 (unaudited).......................... 4
Consolidated statements of cash flows for the nine months
ended April 30, 2003 (unaudited) and April 30, 2002
(unaudited)......................................................... 5
Notes to consolidated financial statements (unaudited)................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 36
Item 4. Controls and Procedures........................................... 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 37
Item 2. Changes in Securities and Use of Proceeds........................ 37
Item 3. Defaults Upon Senior Securities.................................. 37
Item 4. Other Information................................................ 37
Item 5. Exhibits and Reports on Form 8-K ................................ 37
SIGNATURES................................................................ 38
CERTIFICATIONS ........................................................... 39
2
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
April 30, July 31,
2003 2002
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,277,542 $ 2,087,915
Marketable securities 76,462 130,691
Accounts receivable, net of allowance for doubtful
accounts of $233,611 and $241,684, respectively 1,742,578 2,976,472
Prepaid expenses and other current assets 264,255 478,070
------------ ------------
Total current assets 4,360,837 5,673,148
Restricted cash 157,103 157,103
Property and equipment, net 707,043 1,151,864
Software development costs, net 162,826 326,588
Goodwill 2,194,067 2,194,067
Other intangible assets, net 2,390,000 3,107,000
Other assets 15,301 15,166
------------ ------------
Total assets $ 9,987,177 $ 12,624,936
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 600,715 $ 862,090
Accrued expenses 1,141,820 1,407,848
Accrued dividends - preferred stock 131,165 231,695
Deferred revenue 107,955 164,451
Capital lease obligation 145,733 181,870
Other liabilities 332,084 203,454
------------ ------------
Total current liabilities 2,459,472 3,051,408
Capital lease obligation - less current portion 78,977 192,298
------------ ------------
Total liabilities 2,538,449 3,243,706
------------ ------------
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock - 5,000,000 shares authorized, including 10,000
shares of series A, 10,000 shares of series C, 250 shares of
series D and 175 shares of series S:
Series C preferred stock - par value $.01 per share, 44.76
votes per share; 10,000 shares issued and outstanding
(liquidation value of $10,131,165) 100 100
Series D preferred stock - par value $.01 per share, 769
votes per share; 250 shares issued and outstanding (liquidation
value of $250,000) in 2003 3 --
Common stock:
Class A - par value $.01 per share, 40,000,000 shares
authorized, one vote per share; 13,424,601 and 11,679,964
shares issued and outstanding, respectively 134,246 116,801
Additional paid-in capital 87,054,984 85,401,277
Accumulated deficit (79,750,791) (75,808,873)
Accumulated other comprehensive income (loss) 10,186 (328,075)
------------ ------------
Total stockholders' equity 7,448,728 9,381,230
------------ ------------
Total liabilities and stockholders' equity $ 9,987,177 $ 12,624,936
============ ============
See notes to consolidated financial statements.
3
INTERNET COMMERCE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------ ------------ ------------
Revenue:
Services $ 3,094,232 $ 2,724,582 $ 8,981,414 $ 8,460,108
------------ ------------ ------------ ------------
Expenses:
Cost of services (excluding non-cash compensation of
$133,429 for the nine months ended April 30, 2002) 1,920,077 1,863,741 5,727,615 6,492,832
Impairment of software inventory -- -- 248,077 --
Impairment of capitalized software 133,960 -- 133,960 --
Product development and enhancement 273,365 230,456 829,153 729,786
Selling and marketing (excluding non-cash compensation of
$23,109 for the nine months ended April 30, 2002) 734,414 922,900 2,320,031 2,823,173
General and administrative (excluding non-cash
compensation of $71,819 for the three months ended
April 30, 2003 and $82,235 and $33,481 for the nine
months ended April 30, 2003 and 2002, respectively) 1,028,297 1,510,986 3,233,785 4,165,266
Non-cash charges for stock-based compensation and
services 71,819 -- 82,235 190,019
------------ ------------ ------------ ------------
4,161,932 4,528,083 12,574,856 14,401,076
------------ ------------ ------------ ------------
Operating loss (1,067,700) (1,803,501) (3,593,442) (5,940,968)
------------ ------------ ------------ ------------
Other income and (expense):
Interest and investment income 429 11,821 9,618 24,113
Investment gain (loss) -- 41,761 (19,072) 106,399
Interest expense (6,811) (6,906) (21,098) (61,885)
Impairment of marketable securities -- -- (317,924) --
Other income (loss) -- 18,651 -- 7,131
------------ ------------ ------------ ------------
(6,382) 65,327 (348,476) 75,758
------------ ------------ ------------ ------------
Net loss $ (1,074,082) $ (1,738,174) $ (3,941,918) $ (5,865,210)
Dividends on preferred stock (97,285) (98,299) (299,475) (263,837)
Beneficial conversion feature for repricing and issuance
of warrants in warrant exchange offer -- (461,084) -- (461,084)
Beneficial conversion feature related to series D
preferred stock (106,730) -- (106,730) --
------------ ------------ ------------ ------------
Loss attributable to common stockholders $ (1,278,097) $ (2,297,557) $ (4,348,123) $ (6,590,131)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.11) $ (0.21) $ (0.37) $ (0.62)
============ ============ ============ ============
Weighted average number of common shares outstanding -
basic and diluted 11,998,516 11,163,575 11,818,148 10,655,905
============ ============ ============ ============
COMPREHENSIVE LOSS:
Net loss $ (1,074,082) $ (1,738,174) $ (3,941,918) $ (5,865,210)
Other comprehensive loss:
Unrealized gain (loss) - marketable securities 7,372 (38,027) (20,337) (75,165)
Reclassification for impairment of marketable securities -- -- 317,924 --
------------ ------------ ------------ ------------
Comprehensive loss $ (1,066,710) $ (1,776,201) $ (3,603,657) $ (5,940,375)
============ ============ ============ ============
See notes to consolidated financial statements.
4
INTERNET COMMERCE CORPORATION
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended April 30,
------------------------------------
2003 2002
------------- --------------
Cash flows from operating activities:
Net loss $ (3,941,918) $ (5,865,210)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,263,595 1,635,615
Bad debt expense 4,794 161,600
Realized loss (gain) on sale of marketable securities 19,072 (106,399)
Impairment of marketable securities 317,924 --
Impairment of software inventory 248,077 --
Impairment of capitalized software 133,960 --
Gain on sale of property and equipment -- (8,591)
Non-cash charges for equity instruments issued for compensation
and services 82,235 190,019
Changes in:
Accounts receivable 1,229,100 (78,214)
Prepaid expenses and other assets (34,397) (120,066)
Accounts payable (236,220) (6,348)
Accrued expenses (507,142) (516,830)
Deferred revenue (56,496) (129,284)
Other liabilities (66,867) (36,228)
----------- -----------
Net cash used in operating activities (1,544,283) (4,879,936)
----------- -----------
Cash flows from investing activities:
Capitalization of software development costs (16,333) (164,256)
Purchases of property and equipment (55,639) (46,948)
Proceeds from sales of property and equipment -- 31,251
Proceeds from maturity of certificates of deposit -- 62,929
Proceeds from sales of marketable securities 55,494 456,157
----------- -----------
Net cash (used in) provided by investing activities (16,478) 339,133
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net 1,454,348 3,107,269
Proceeds from issuance of preferred stock and warrants, net 250,000 --
Proceeds from exercise of employee stock options -- 223,882
Proceeds from exercise of warrants -- 602,022
Subscription received for common stock and warrants 195,497 --
Payments of capital lease obligations (149,457) (249,993)
----------- -----------
Net cash provided by financing activities 1,750,388 3,683,180
----------- -----------
Net increase (decrease) in cash and cash equivalents 189,627 (857,623)
Cash and cash equivalents, beginning of period 2,087,915 2,223,487
----------- -----------
Cash and cash equivalents, end of period $ 2,277,542 $ 1,365,864
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 21,098 $ 61,885
Issuance of common stock and warrants in exchange for
services 45,675 --
Non-cash investing and financing activities:
Issuance of common stock for dividends on preferred stock 400,000 400,000
Issuance of common stock and warrants in exchange for
private placement fees 71,504 --
See notes to consolidated financial statements.
5
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Internet
Commerce Corporation (the "Company" or "ICC") have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information. In the
opinion of management, such statements include all adjustments (consisting
only of normal recurring adjustments) necessary for the fair presentation
of the Company's financial position, results of operations and cash flows
at the dates and for the periods indicated. Pursuant to the requirements
of the Securities and Exchange Commission applicable to Quarterly Reports
on Form 10-Q, the accompanying financial statements do not include all the
disclosures required by GAAP for annual financial statements. While the
Company believes that the disclosures presented are adequate to make the
information not misleading, these unaudited interim consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended July 31, 2002. Operating results
for the three and nine-month periods ended April 30, 2003 are not
necessarily indicative of the results that may be expected for the fiscal
year ending July 31, 2003.
Certain 2002 items have been reclassified to conform to their 2003
presentation.
2. ORGANIZATION AND NATURE OF BUSINESS
ICC provides Internet-based services for the e-commerce
business-to-business communication services market. ICC.NET, our global
Internet-based value added network, or VAN, provides supply chain
connectivity solutions for electronic data interchange, or EDI, and
e-commerce and offers users a vehicle to securely send and receive files
of any format and size.
The ICC.NET system uses the Internet and proprietary technology to deliver
the Company's customers' documents and data files to members of their
trading communities, many of which have incompatible systems, by
translating the documents and data files into any format required by the
receiver. The system can be accessed using a standard Web browser or
virtually any other communications protocol.
Through the acquisition of Intercoastal Data Corporation ("IDC") on August
3, 2000, ICC expanded its capabilities to include an EDI service bureau,
which provides EDI services to small and mid-sized companies. IDC's
services include the conversion of electronic forms into hard copies and
the conversion of hard copies to an EDI format. IDC also provides
Universal Product Code ("UPC") services and maintains UPC catalogs for its
customers.
The acquisition of Research Triangle Commerce, Inc. ("RTCI") on November
6, 2000, provided the Company with the capability to facilitate the
development and operation of comprehensive business-to-business electronic
commerce solutions. RTCI specializes in electronic commerce solutions
involving EDI and EAI (Enterprise Application Integration) by providing
mission critical electronic commerce consulting, electronic commerce
software, outsourced electronic commerce services and technical resource
management
As of April 30, 2003, ICC had cash and cash equivalents and marketable
securities of approximately $2,354,000. These resources, together with the
Company's accounts receivable financing agreement (Note 12) will provide
the Company with sufficient liquidity to continue in operation through
July 31, 2003.
6
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Stock-based Compensation:
The Company accounts for stock-based compensation with its employees using
the intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123
establishes a fair-value method of accounting for stock-based compensation
plans. Stock-based awards to non-employees are accounted for at fair value
in accordance with the provisions of SFAS No. 123. Had the compensation
cost for the Company's stock options grants to employees been determined
based on the fair value at the grant dates for awards consistent with the
method of SFAS 123, the Company's net loss attributable to common
stockholders and basic and diluted loss per common share would have
changed to the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- ------------------------------
2003 2002 2003 2002
----------- ------------- ------------- -------------
Net loss, as reported $ (1,074,082) $ (1,738,174) $ (3,941,918) $ (5,865,210)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1,149,483) (2,309,090) (4,577,565) (5,792,417)
------------ ------------- ------------- -------------
Pro forma net loss $ (2,223,565) $ (4,047,264) $ (8,519,483) $ (11,657,627)
============ ============= ============= =============
Basic and diluted loss per common share:
As reported $ (0.11) $ (0.21) $ (0.37) $ (0.62)
Pro forma $ (0.20) $ (0.41) $ (0.76) $ (1.16)
Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany transactions
have been eliminated in consolidation.
Revenue recognition:
The Company derives revenue from subscriptions to its ICC.NET service,
which includes transaction, mailbox and fax transmission fees. The
subscription fees are comprised of both fixed and usage-based fees. Fixed
subscription fees are recognized on a pro-rata basis over the subscription
period, generally one year. Usage fees are recognized in the period the
services are rendered. The Company also derives revenue through
implementation fees, interconnection fees and by providing data mapping
services to its customers. Implementation fees are recognized over the
life of the subscription period. Interconnection fees are fees charged to
connect to another VAN service and are recognized when the data is
transmitted to the connected service. Revenue from data mapping services
is recognized when the map has been completed and delivered to the
customer.
The Company also derives revenue from its Service Bureau. Service Bureau
revenue is comprised of EDI services, including data translation services,
purchase order and invoice processing from EDI-to-print and print-to-EDI,
UPC services, including UPC number generation, UPC catalog maintenance and
UPC label printing. The Service Bureau also derives revenue from software
licensing and provides software maintenance and support. Revenue from the
EDI services and UPC services is recognized when the services are
provided. The Company accounts for its EDI software license sales in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 97-2, "Software Revenue Recognition," as amended.
Revenue from software licenses is recognized when all of the following
7
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
conditions are met: (1) a non-cancelable, non-contingent license agreement
has been signed; (2) the software product has been delivered; (3) there
are no material uncertainties regarding customer acceptance; and (4)
collection of the resulting receivable is probable. Revenue from software
maintenance and support contracts is recognized ratably over the life of
the contract. The Service Bureau's software license revenue was not
significant in any of the periods presented.
In addition, SOP 97-2 generally requires that revenue from software
arrangements involving multiple elements be allocated among each element
of the arrangement based on the relative fair values of the elements, such
as software licenses, post contract customer support, installation or
training. Furthermore, SOP 97-2 requires that revenue be recognized as
each element is delivered and the Company has no significant performance
obligations remaining. The Company's multiple element arrangements
generally consist of a software license and post contract support. The
Company allocates the aggregate revenue from multiple element arrangements
to each element based on vendor specific objective evidence. The Company
has established vendor specific objective evidence for each of the
elements as it sells both the software and post contract customer support
independent of multiple element agreements. Customers are charged standard
prices for the software and post contract customer support and these
prices do not vary from customer to customer.
If the Company enters into a multiple element agreement where vendor
specific objective evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred
until all elements of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
The Company also provides a broad range of professional services
consisting primarily of EDI and electronic commerce consulting, EDI
education and training at seminars throughout the United States. Revenue
from EDI and electronic commerce consulting and education and training are
recognized when the services are provided. Revenue from fixed fee
professional service contracts is recognized using the
percentage-of-completion method of accounting, as prescribed by SOP 81-1
"Accounting for Performance of Construction-Type and Certain
Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in
the estimated profitability of a fixed-price contract. In such
circumstances, adjustments to cost and profitability estimates are made in
the period in which the underlying factors requiring such revisions become
known. If such revisions indicate a loss on a contract, the entire loss is
recorded at such time. Amounts billed in advance of services being
performed are recorded as deferred revenue. Certain fixed-fee contracts
may have substantive customer acceptance provisions. The acceptance terms
generally include a single review and revision cycle for each deliverable
to incorporate the customer's suggested or required modifications.
Deliverables are considered accepted upon completion of the review and
revision cycle and revenue is recognized upon that acceptance.
Deferred revenue:
Deferred revenue is comprised of deferrals for subscription fees,
professional services, license fees and maintenance associated with
contracts for which amounts have been received in advance of services to
be performed or prior to the shipment of software.
8
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenue
and expense during the reporting period. Actual results could differ from
those estimates. Significant accounting estimates used in the preparation
of the Company's consolidated financial statements include the fair value
of acquired assets, purchase price allocations, the fair value of equity
securities underlying stock based compensation, the realizability of
deferred tax assets, the carrying value of goodwill and intangible assets,
and depreciation and amortization.
Recent Accounting Pronouncements:
In July 2001, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which
requires the recognition of a liability for an asset retirement obligation
in the period in which it is incurred. When the liability is initially
recorded, the carrying amount of the related long-lived asset is
correspondingly increased. Over time, the liability is accreted to its
present value and the related capitalized charge is depreciated over the
useful life of the asset. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. Management adopted this standard on August 1, 2002.
The adoption of this standard did not have a significant impact on the
Company's consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 144
retains the requirements of SFAS 121 to recognize an impairment loss if
the carrying value of a long-lived asset is not recoverable from its
estimated undiscounted cash flows and to measure an impairment loss as the
difference between the carrying value and fair value of the asset, but it
establishes new standards for long-lived assets to be disposed of. The
provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS 144 on August 1, 2002. The
adoption of this standard did not have a significant impact on the
Company's consolidated financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
SFAS 146 requires that costs associated with an exit or disposal plan be
recognized when incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company adopted
SFAS 146 on January 1, 2003. The adoption of this standard did not have a
significant impact on the Company's consolidated financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" which elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions
of Interpretation No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company
has provided information regarding commitments and contingencies relating
to guarantees in Note 10. The adoption of this standard did not have a
significant impact on the consolidated financial position or results of
operations.
9
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which
the vendor will perform multiple revenue generating activities. The EITF
will be effective for revenue arrangements entered into in fiscal years
and interim periods beginning after June 15, 2003. Management believes
that the adoption of this consensus will not have a significant impact on
the Company's consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123" ( "SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods
to account for the transition from the intrinsic value method of
recognition of stock-based employee compensation in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" to the fair
value recognition provisions under SFAS No. 123. SFAS No. 148 provides two
additional methods of transition and will no longer permit the SFAS No.
123 prospective method to be used for fiscal years beginning after
December 15, 2003. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the pro-forma effects had the fair
value recognition provisions of SFAS No. 123 been used for all periods
presented. The adoption of SFAS No. 148 did not have a significant impact
on the Company's consolidated financial position and results of
operations.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities". Interpretation No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
Company adopted Interpretation No. 46 on January 31, 2003. The adoption of
this standard did not have a material impact on the Company's consolidated
financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which
amends and clarifies accounting for derivative instruments, and for
hedging activities under SFAS No. 133. Specifically, SFAS No. 149 requires
that contracts with comparable characteristics be accounted for similarly.
Additionally, SFAS No. 149 clarifies the circumstances in which a contract
with an initial net investment meets the characteristics of a derivative
and when a derivative contains a financing component that requires special
reporting in the statement of cash flows. This Statement is generally
effective for contracts entered into or modified after June 30, 2003 and
is not expected to have a material impact on the Company's consolidated
financial position or results of operations..
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset
in some circumstances). Many of those instruments were previously
classified as equity. This Statement will become effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the beginning of the first interim period beginning
after June 15, 2003. For financial instruments created before the issuance
date of this Statement and still existing at the beginning of the interim
period of adoption, transition shall be achieved by reporting the
cumulative effect of a change in an accounting principle by initially
measuring the financial instruments at fair value or other measurement
attribute required by this Statement. The adoption of this Statement is
not expected to have a material impact on the Company's consolidated
financial position or results of operations.
10
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
4. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash and accounts
receivable. The Company places its excess cash in money-market instruments
with institutions of high credit-quality. All accounts receivable are
unsecured. The Company believes that any credit risk associated with
receivables is minimal due to the number and credit worthiness of its
customers. Receivables are stated at estimated net realizable value, which
approximates fair value.
For the three and nine-month periods ended April 30, 2003 and 2002, no
single customer accounted for more than 10% of revenue.
The Company had one customer that accounted for approximately 52% of
accounts receivable at July 31, 2002. During October 2002, the full amount
of this receivable was collected. No single customer accounted for more
than 10% of accounts receivable at April 30, 2003.
5. BUSINESS SEGMENT INFORMATION
The Company's three operating segments are:
o ICC.NET service - the Company's global Internet-based value added
network, or VAN, uses the Internet and proprietary technology to
deliver customers' documents and data files to members of their
trading communities, many of which may have incompatible systems, by
translating the documents and data files into any format required by
the receiver.
o Service Bureau - the Service Bureau manages and translates the data
of small and mid-sized companies that exchange EDI data with large
companies and provides various EDI and UPC (universal product code)
services. The service bureau also licenses EDI software.
o Professional Services - this segment facilitates the development and
operation of comprehensive business-to-business e-commerce
solutions. This segment also conducts a series of
product-independent, one-day EDI seminars for e-commerce users
During the fourth quarter of fiscal 2002, the Company integrated its data
mapping and XML services into the ICC.NET business segment. These products
and services had previously been part of the Company's Professional
Services segment. These products and services are primarily utilized to
support customers of the ICC.NET VAN service. The reorganization was
undertaken to more closely align these data transfer services with the
customers they serve. The segment information for the three and nine-month
periods ended April 30, 2002 has been restated to reflect this
reorganization as if it had occurred on August 1, 2001.
11
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
5. BUSINESS SEGMENT INFORMATION (CONTINUED)
The table below summarizes information about operations and long-lived
assets as of and for the three and nine-month periods ended April 30, 2003
and 2002:
Service Professional
ICC.NET Bureau Services Total
------- ------- ------------ -----
Three Months - April 30, 2003
Revenues from external customers $ 2,297,582 $ 340,754 $ 455,896 $ 3,094,232
=========== =========== =========== ===========
Operating loss (1) $ (776,558) $ (142,624) $ (148,518) $(1,067,700)
Other income (expense), net (1,276) -- (5,106) (6,382)
----------- ----------- ----------- -----------
Net income (loss) $ (777,834) $ (142,624) $ (153,624) $(1,074,082)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 349,402 $ 10,835 $ 29,296 $ 389,533
Non-cash charges for stock-based
compensation and services $ 71,819 $ -- $ -- $ 71,819
Impairment of capitalized software $ -- $ 133,960 $ -- $ 133,960
Nine Months - April 30, 2003
Revenues from external customers $ 6,460,491 $ 1,196,649 $ 1,324,274 $ 8,981,414
=========== =========== =========== ===========
Operating loss (1) $(2,862,877) $ (98,142) $ (632,423) $(3,593,442)
Other income (expense), net (335,182) -- (13,294) (348,476)
----------- ----------- ----------- -----------
Net income (loss) $(3,198,059) $ (98,142) $ (645,717) $(3,941,918)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 1,100,661 $ 72,125 $ 90,809 $ 1,263,595
Non-cash charges for stock-based
compensation and services $ 82,235 $ -- $ -- $ 82,235
Impairment of software inventory $ -- $ -- $ 248,077 248,077
Impairment of capitalized software $ -- $ 133,960 $ -- $ 133,960
Impairment of marketable securities $ 317,924 $ -- $ -- $ 317,924
As of April 30, 2003
Property and Equipment, net $ 351,545 $ 50,380 $ 305,118 $ 707,043
Capitalized software, net -- 162,826 -- 162,826
Acquired identified intangibles, net 2,390,000 -- -- 2,390,000
Goodwill 26,132 2,167,935 -- 2,194,067
----------- ----------- ----------- -----------
Long lived assets, net $ 2,767,677 $ 2,381,141 $ 305,118 $ 5,453,936
=========== =========== =========== ===========
(1) Commencing in the second fiscal quarter of 2003, certain costs for executive
management, human resources, selling and marketing, accounting and finance have
been allocated to the Company's operating segments based on the level of
services performed for each segment. For cost reduction purposes, these
functions were centralized and are now performed by ICC.NET personnel. For the
three months ended April 30, 2003, ICC.NET allocated $111,000 of these costs to
the Service Bureau and Professional Services segments in the amounts of $45,000
and $66,000, respectively, and for the Nine Months ended April 30, 2003, ICC.NET
allocated $222,000 of these costs to the Service Bureau and Professional
Services segments in the amounts of $90,000 and $132,000, respectively.
12
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
5. BUSINESS SEGMENT INFORMATION (CONTINUED)
Service Professional
ICC.NET Bureau Services Total
------- ------ -------- -----
Three Months - April 30, 2002
Revenues from external customers $ 1,827,659 $ 419,567 $ 477,356 $ 2,724,582
=========== =========== =========== ===========
Operating loss $(1,525,642) $ 29,455 $ (307,314) $(1,803,501)
Other income (expense) , net 53,166 -- 12,161 65,327
----------- ----------- ----------- -----------
Net loss $(1,472,476) $ 29,455 $ (295,153) $(1,738,174)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 168,827 $ 32,611 $ 320,753 $ 522,191
Non-cash charges for stock-based
compensation and services $ -- $ -- $ -- $ --
Nine Months - April 30, 2002
Revenues from external customers $ 5,556,550 $ 1,217,959 $ 1,685,599 $ 8,460,108
=========== =========== =========== ===========
Operating loss $(4,748,165) $ (32,119) $(1,160,684) $(5,940,968)
Other income (expense), net 106,095 -- (30,337) 75,758
----------- ----------- ----------- -----------
Net loss $(4,642,070) $ (32,119) $(1,191,021) $(5,865,210)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 574,602 $ 72,953 $ 988,060 $ 1,635,615
Non-cash charges for stock-based
compensation and services $ -- $ -- $ 190,019 $ 190,019
As of April 30, 2002
Property and Equipment, net $ 668,841 $ 65,211 $ 548,940 $ 1,282,992
Capitalized software, net 59,324 330,105 -- 389,429
Acquired identified intangibles, net 3,346,000 -- -- 3,346,000
Goodwill 26,132 2,167,935 1,710,617 3,904,684
----------- ----------- ----------- -----------
Long lived assets, net $ 4,100,297 $ 2,563,251 $ 2,259,557 $ 8,923,105
=========== =========== =========== ===========
6. STOCKHOLDERS' EQUITY
2003 Private Placement of Common Stock and Preferred Stock:
During April and May 2003, the Company completed a private placement of
common stock, convertible preferred stock and warrants to purchase shares
of common stock for aggregate gross proceeds of $2,000,000.
On April 30, 2003, the Company sold 1,398,412 shares of class A common
stock and warrants to purchase 1,118,723 shares of class A common stock
for gross proceeds of $1,454,348 and sold 250 shares of series D
convertible redeemable preferred stock ("series D preferred") and warrants
to purchase 153,845 shares of class A common stock for gross proceeds of
$250,000. The 250 shares of series D preferred stock are convertible into
192,307 shares of class A common stock. The warrants are immediately
exercisable and have an exercise price of $1.47 per share. The warrants
issued to the purchasers of class A common stock and series D preferred
are exercisable for a five-year period from the date of issuance. The
Company may redeem the warrants, at its option, if the closing bid price
of the class A common stock exceeds 200% of the exercise price for a
period of 30 consecutive trading days. The redemption price is ten cents
per warrant.
13
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The allocation of the proceeds from the sale of the series D preferred
between the fair value of the series D preferred and the fair value of the
detachable warrants resulted in a beneficial conversion feature in the
amount of $106,730. The discount was immediately accreted and treated as a
deemed dividend to the holder of the series D preferred as all of the
series D preferred stock was eligible for conversion upon issuance.
In connection with the April 30, 2003 private placement, the Company
incurred fees of $176,347, of which $104,843 is payable in cash and
$71,504 was paid by issuing 90,135 warrants to purchase class A common
stock at $1.47 per share. The warrants have substantially the same terms
and conditions as the warrants issued in the 2003 private placement.
Additionally, as settlement of certain outstanding payables, the Company
issued 43,879 shares of class A common stock and warrants to purchase
35,103 shares of class A common stock. The common stock and warrants were
valued at $45,635, which was the invoiced amount of the services provided.
Approximately 24%, or $416,000, of the gross proceeds were received from
directors and officers and entities with which the Company's directors are
affiliated.
On May 1, 2003, the Company sold 284,271 shares of class A common stock
and warrants to purchase 227,417 shares of class A common stock for gross
proceeds of $295,652. The warrants are immediately exercisable and have an
exercise price of $1.47 per share. The warrants are exercisable for a
five-year period. The Company may redeem the warrants, at its option, if
the closing bid price of the class A common stock exceeds 200% of the
exercise price for a period of 30 consecutive trading days. The redemption
price is ten cents per warrant.
In connection with the May 1, 2003 private placement, the Company incurred
fees of $29,820, of which $13,522 is payable in cash and $16,298 was paid
by issuing 20,545 warrants, to purchase class A common stock at $1.47 per
share. The warrants have substantially the same terms and conditions as
the warrants issued in the 2003 private placement.
Subsequent to the completion of the Company's private placement described
above, the Company determined that in order to comply with NASD
Marketplace Rule 4350(i)(1)(A), the purchase price per share for the
shares of class A common stock purchased by directors and officers in the
private placement should be increased to market value, and on June 17,
2003 the directors and officers agreed to do so. As a result, two
directors and three officers agreed to pay an additional $0.58 per share,
or an aggregate of $85,502.02, for the shares of class A common stock they
purchased in the private placement.
Additionally, as settlement of certain outstanding payables, the Company
issued 4,197 shares of class A common stock and warrants to purchase 3,357
shares of class A common stock. The common stock and warrants were valued
at $4,365, which was the invoiced amount of the services provided.
Approximately 5%, or $16,000, of the gross proceeds were received from
directors and officers and entities with which the Company's directors are
affiliated.
2001 Private Placement of Common Stock:
On October 29, 2001, the Company sold 1,159,716 shares of class A common
stock and warrants to purchase 347,915 shares of class A common stock for
gross proceeds of $3,189,219. The warrants are immediately exercisable and
have an exercise price of $3.58 per share. The warrants are exercisable
for a five-year period. The Company may redeem the warrants, at its
option, if the closing bid price of the class A common stock exceeds 200%
of the exercise price for a period of 30 consecutive trading days. The
redemption price is ten cents per warrant.
In connection with the private placement, the Company incurred fees of
$152,511, of which $35,000 was paid in cash and $117,511 was paid by
issuing warrants to purchase 50,000 shares of class A common stock. The
warrants have substantially the same terms and conditions as the warrants
issued in the private placement.
Approximately 20%, or $635,000, of the gross proceeds were received from
directors and officers and entities with which the Company's directors are
affiliated.
14
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Warrant Exchange Offer:
On April 23, 2002, the Company commenced a warrant exchange offer. The
offer was made to investors who participated in the Company's private
placement on October 29, 2001 and to holders of warrants issued as fees in
connection with that private placement. The warrant exchange offer reduced
the exercise price of the warrants issued in the private placement from
$3.58 per share to $2.50 per share of class A common stock for investors
that agreed to exercise those warrants by the expiration date of the
warrant exchange offer.
In addition, for each share of class A common stock purchased pursuant to
a warrant exercise, a new warrant (the "New Warrants") to purchase an
equivalent number of shares of class A common stock was issued. The New
Warrants have an exercise price of $3.50 per share and are exercisable for
five years. The Company may redeem the warrants, at its option, if the
closing bid price of the class A common stock exceeds 200% of the exercise
price for a period of thirty consecutive days. The redemption price is ten
cents per warrant. The warrant exchange offer had an initial expiration
date of April 30, 2002, but was extended until May 31, 2002. The Company
received $659,288 in gross proceeds and issued a total of 263,715 shares
of class A common stock and warrants to purchase an equivalent number of
shares of class A common stock as a result of the warrant exchange offer.
The Company recorded a deemed dividend in the amount of $461,084 during
the third quarter of fiscal 2002 in connection with the warrant exchange
offer, representing the aggregate fair value of the repriced warrants
exercised in the warrant exchange offer and the fair value of the New
Warrants.
In connection with the Warrant Exchange Offer, the Company incurred fees
of approximately $19,000 which were paid in cash.
Rights and Preferences of Series D Preferred Stock:
Series D preferred stock is convertible at the option of the holder into
192,307 shares of class A common stock.
Series D preferred stock is redeemable, in whole or in part, by the
Company at the option of the Company, at any time after April 30, 2005 if
the price of class A common stock is greater than or equal to $2.60 per
share for thirty consecutive trading days. The redemption price for each
share of series D preferred stock is $1,000 plus any accrued and unpaid
dividends. Series D preferred shall have preference as to assets over all
other classes or series of common and preferred stock of the Company,
except for series C preferred, in the event of any liquidation,
dissolution, or winding up of the Company. The holders of series D
preferred are entitled to receive an amount in cash equal to $1,000 per
share plus any accrued and unpaid dividends before any distribution is
made to holders of common and preferred stock, except for series C
preferred stock.
The holders of the outstanding shares of series D preferred stock are
entitled to receive dividends at the discretion of the Board of Directors.
Series D preferred stock is entitled to the number of votes per share
equal to the number of whole shares of class A common stock into which
each share of series D preferred stock is convertible on the record date.
Stock Based Compensation:
On March 10, 2003 options and stock were awarded to a non-employee member
of the board of directors as compensation for consulting services. This
individual was awarded 20,000 shares of class A common stock, valued at
$18,000, which was recorded as a non-cash charge for stock-based
compensation during the three and nine months ended April 30, 2003. This
individual was also granted options to purchase 100,000 shares of class A
common stock. Options to purchase 60,000 shares at an exercise price of
$1.00 per share vest six months from the date of issuance, and options to
purchase 40,000 shares at an exercise price of $1.25 per share vest one
year from the date of issuance. The options have a fair value of $67,000
of which $15,000 has been recorded as a stock-based non-cash charge for
services for the three and nine months ended April 30, 2003.
15
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
7. JOINT SERVICES AGREEMENT AND TECHNOLOGY LICENSE
In July 2002, the Company and Triaton GmbH ("Triaton") terminated the
joint services agreement previously entered into by the parties in July
2000, and amended in July of 2001. The Company and Triaton entered into a
new agreement that provides Triaton a non-exclusive five-year license to
use the Company's electronic data interchange system in Europe. The
agreement also provides that Triaton may purchase sales support and
customer support services based on ICC's standard terms and conditions.
Triaton may also purchase software maintenance and support on an annual
basis. The sale price for the license was $3,000,000 which was recognized
as revenue in the period ended July 31, 2002. Under the terms of the
agreement, Triaton paid $1,500,000 in July 2002 and $1,500,000 in October
2002.
8. IMPAIRMENT OF SOFTWARE DEVELOPMENT COSTS, INVESTMENTS AND SOFTWARE
INVENTORY
In April 2003, the Company recorded an impairment charge of approximately
$134,000 for previously capitalized software development costs related to
an in-process software development project of its Service Bureau. The
Company decided during the quarter ended April 30, 2003 not to complete
this project due to unfavorable market conditions now and in the
foreseeable future. In January 2003, the Company recorded an impairment
charge of approximately $318,000 to write down available-for-sale
marketable securities due to an other than temporary decline in value.
Additionally, in January 2003, the Company recorded an impairment charge
of approximately $248,000 for software inventory held by the Professional
Services segment based on historical and projected sales, which indicated
that its net carrying value was not recoverable. The Company had
previously recorded an impairment charge of $100,000 for software
inventory in July 2002. Such software inventory was classified as other
current assets in the consolidated balance sheet. The Company's carrying
value of inventory at April 30, 2003 is not significant.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
On August 1, 2001, the Company adopted the provisions of SFAS No. 141,
"Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires that the fair value of
an assembled workforce acquired be included in the amount initially
recorded as goodwill. Upon adoption of SFAS 141, the Company reclassified
$1,710,617 into goodwill which was initially recorded as other intangible
assets related to the value of the assembled workforce of RTCI as required
by this statement. SFAS 142 requires that intangible assets with
indefinite useful lives no longer be amortized, but rather be tested at
least annually for impairment. The Company evaluated goodwill for
impairment at August 1, 2001 and determined no impairment existed at that
date. The Company's reporting units utilized for evaluating the
recoverability of goodwill are the same as its operating segments.
At April 30, 2003 and July 31, 2002, Other Intangible assets included the
proprietary data mapping technology acquired in the acquisition of RTCI.
The gross carrying value of the mapping technology was $4,780,000 at April
30, 2003 and July 31, 2002, respectively. Accumulated amortization
relating to mapping technology was $2,390,000 and $1,673,000 at April 30,
2003 and July 31, 2002, respectively. The data mapping technology is being
amortized over five years and amortization expense has been recorded in
cost of services.
The Company did not have any indefinite lived intangible assets that were
not subject to amortization as of April 30, 2003 and July 31, 2002. The
aggregate amortization expense for other intangible assets was $239,000
16
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
9. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
during each of the three month periods ended April 30, 2003 and 2002 and
$717,000 during each of the nine month periods ended April 30, 2003 and
2002.
At April 30, 2003, estimated amortization expense for other intangible
assets is as follows:
Year Estimated Amortization Expense
---- ------------------------------
2003 $956,000
2004 $956,000
2005 $956,000
2006 $239,000
There was no change in the carrying amount of goodwill for the three and
nine-month periods ended April 30, 2003.
Due to a continued decline in revenue throughout the course of fiscal
2002, continued operating losses and a significant reduction in forecasted
future operating profits, the Professional Services segment was tested for
impairment during the fourth quarter of fiscal 2002. An impairment loss of
$1,710,617 was recognized as a result of this evaluation. The fair value
of the Professional Services segment unit was estimated using the net
present value of expected future cash flows.
As of August 1, 2002, the Company performed its annual test for impairment
on the carrying value of goodwill of its ICC.NET and Service Bureau
reporting units, and the Company concluded that no impairment existed at
that date.
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into contracts in
which it make representations and warranties regarding the performance of
IDC software. Historically, there have been no significant losses related
to such representations and warranties.
11. FUNDING COMMITMENTS
In October 2002, the Company obtained commitments from certain existing
investors to provide an aggregate of up to $1,000,000 of additional
capital, if required, for the Company to continue as a going concern. Such
additional capital may be in the form of long-term debt, common stock,
preferred stock or other equity instruments or a combination of the
foregoing and shall be on arms length terms negotiated by the parties. The
commitments expire upon the earliest to occur of (a) July 31, 2003, (b)
the sale, transfer or other disposition of all or substantially all the
assets of the Company, (c) a change in control, or (d) the date the
Company raises debt or equity capital, or a combination of debt and equity
capital, in an amount equal to or greater than $1,000,000 subsequent to
the date of the commitment.
This funding commitment expired on April 30, 2003 as the result of the
Company's 2003 private placement.
17
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements (unaudited)
12. SUBSEQUENT EVENT
On May 30, 2003, the Company executed an Accounts Receivable Financing
Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a
term of 1 year. Under the Financing Agreement, the Company may borrow,
subject to certain conditions, up to 80% of its outstanding accounts
receivable up to a maximum of $2,000,000. The applicable interest rate is
the prime rate plus .35% plus a collateral handling fee equal to .20% on
the average daily outstanding financed receivable balance. Interest is
payable monthly. The Bank has been granted a security interest in
substanially all of the Company's assets. In connection with the Financing
Agreement, the Company issued the Bank warrants to purchase 40,000 shares
of the Company's class A common stock. The warrants are immediately
exercisable at an exercise price of $1.39, equal to the fair market value
of the Company's class A common stock at the date of closing of the
Financing Agreement. The warrants are exercisable for a seven-year period.
The fair value of the warrants in the amount of approximately $34,000 will
be amortized to interest expense over the term of the Financing Agreement.
Subsequent to the completion of the Company's private placement described
in Note 6, the Company determined that in order to comply with NASD
Marketplace Rule 4350(i)(1)(A), the purchase price per share for the
shares of class A common stock purchased by directors and officers in the
private placement should be increased to market value, and on June 17,
2003 the directors and officers agreed to do so. As a result, two
directors and three officers agreed to pay an additional $0.58 per share,
or an aggregate of $85,502.02, for the shares of class A common stock they
purchased in the private placement.
18
INTERNET COMMERCE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in this Quarterly Report regarding
our financial position, business strategy and plans and objectives of management
for future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of management, as well as assumptions made
by and information currently available to management. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "may," "will,"
"continue" and "intend," and words or phrases of similar import, as they relate
to our financial position, business strategy and plans, or objectives of
management, are intended to identify forward-looking statements. These
"cautionary statements" reflect our current view with respect to future events
and are subject to risks, uncertainties and assumptions related to various
factors including, without limitation, those listed below the heading "Overview"
and in our registration statements and periodic reports filed with the
Securities and Exchange Commission (the "SEC") under the Securities Act and the
Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure
you that our expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this Quarterly Report as anticipated,
believed, estimated, expected or intended.
In this Item 2, references to the "Company," "we," or "us" means Internet
Commerce Corporation.
Overview
We are a leader in the e-commerce, business-to-business communication
services market that provides complete e-commerce infrastructure solutions. Our
business operates in three segments: namely, our ICC.NET service, our service
bureau and our professional services.
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. We believe that our ICC.NET
service has significant advantages over traditional VANs, and email-based and
other Internet-based systems, because our service is provided at lower cost,
with greater transmission speed and offers more features. Our service bureau
manages and translates the data of small and mid-sized companies that exchange
EDI data with large companies. Our professional services segment facilitates the
development and operations of comprehensive business-to-business e-commerce
solutions.
Until July 2000, our business was entirely focused on our ICC.NET service.
During fiscal 2001, we made two acquisitions that enable us to offer a more
complete range of services to allow our customers to expand their e-commerce
trading communities and bridge their legacy systems to the Internet.
In August 2000, we acquired IDC, an EDI service bureau. IDC delivers
business-to-business EDI standards-based documents for companies that do not
have EDI departments.
In November 2000, we acquired RTCI, expanding our professional services
capability. RTCI was an e-commerce infrastructure solutions company serving the
business-to-business e-commerce market. RTCI assists its clients to conduct
business electronically through a continuum of services, including eConsulting
and data transformation mapping (EDI, EAI, XML). RTCI developed a business model
that offered remote service delivery, fixed and value-based pricing and reusable
solutions. Subsequent to the acquisition in fiscal 2001, due to a reduction of
the workforce of RTCI, a steep decline in value of companies similar to RTCI,
continued operating losses and a significant reduction in the forecasted future
operating profits of our professional services segment, management determined
that triggering events had occurred related to certain intangible assets.
Projected cash flow analysis related to those assets determined that the assets
had been impaired. These intangible assets were written down to fair value
during the fourth quarter of fiscal 2001 based on the related discounted
expected future cash flows.
19
INTERNET COMMERCE CORPORATION
Due to a continued decline in revenue throughout the course of fiscal
2002, continued operating losses and a significant reduction in forecasted
future operating profits, the Professional Services segment was tested for
impairment during the fourth quarter of fiscal 2002. An impairment loss of
$1,710,617 was recognized as a result of this evaluation. The fair value of the
Professional Services segment unit was estimated using the net present value of
expected future cash flows. During the fourth quarter of fiscal 2002, the
Company integrated its data mapping and XML services and personnel into the
ICC.NET business segment. These products and services had previously been part
of the Company's Professional Services segment. These products and services are
primarily utilized to support customers of the ICC.NET VAN service. The
reorganization was undertaken to more closely align these data transfer services
with the customers they serve.
We rely on many of our competitors to interconnect, at reasonable cost,
with our service. We have interconnection arrangements with more than 50
business-to-business networks for the benefit of our customers. Two of the
largest, Global Exchange Services ("GXS") and Sterling Commerce, networks which
we believe are connected to approximately 60% of the estimated EDI users, chose
to discontinue their interconnect arrangements with the Company. GXS
discontinued its interconnection with our service in September 2001 and Sterling
Commerce discontinued its interconnection with our service in April 2002. We
entered into arrangements with Inovis, Inc. (formerly a division of Peregrine
Systems, Inc., and now an independent company) and IBM Corporation so our
customers can continue to communicate through us with their trading communities.
As a result of these new interconnection arrangements, we will incur additional
costs and may lose existing customers if the arrangements we have provided are
inadequate for their business purposes. We believe, however, that the
arrangements we have made satisfy our existing customers and that our business
and financial condition will not be materially or adversely affected as a result
of these new arrangements.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
In December 2001, the SEC issued disclosure guidance for "critical
accounting policies." The SEC defines "critical accounting policies" as those
that require application of management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain and may change in subsequent periods.
The following list of critical accounting policies is not intended to be a
comprehensive list of all of our accounting policies. Our significant accounting
policies are more fully described in note 2 of the notes to the consolidated
financial statements included in our annual report on Form 10-K for the year
ended July 31, 2002. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting principles
with no need for management's judgment in their application. There are also
areas in which management's judgment in selecting any available alternative
would not produce a materially different result. We have identified the
following to be critical accounting policies of the Company:
Revenue Recognition: The Company derives revenue from subscriptions to its
ICC.NET service, which include transaction, mailbox and fax transmission fees.
The subscription fees are comprised of both fixed and usage-based fees. Fixed
subscription fees are recognized on a pro-rata basis over the subscription
period, generally one year. Usage fees are recognized in the period the services
are rendered. The Company also derives revenue through implementation fees,
interconnection fees and by providing data mapping services to its customers.
Implementation fees are recognized over the life of the subscription period.
Interconnection fees are fees charged to connect to another VAN service and are
recognized when the data is transmitted to the connected service. Revenue from
data mapping services is recognized when the map has been completed and
delivered to the customer.
20
INTERNET COMMERCE CORPORATION
The Company also derives revenue from its Service Bureau. Service Bureau
revenue is comprised of EDI services, including data translation services,
purchase order and invoice processing from EDI-to-print and print-to-EDI, UPC
services, including UPC number generation, UPC catalog maintenance and UPC label
printing. The Service Bureau also derives revenue from software licensing and
provides software maintenance and support. Revenue from the EDI services and UPC
services is recognized when the services are provided. The Company accounts for
its EDI software license sales in accordance with the American Institute of
Certified Public Accountants' Statement of Position 97-2, "Software Revenue
Recognition," as amended. Revenue from software licenses is recognized when all
of the following conditions are met: (1) a non-cancelable non-contingent license
agreement has been signed; (2) the software product has been delivered; (3)
there are no material uncertainties regarding customer acceptance; and (4)
collection of the resulting receivable is probable. Revenue from software
maintenance and support contracts is recognized ratably over the life of the
contract. The Service Bureau's software license revenue was not significant in
any of the periods presented.
In addition, SOP 97-2 generally requires that revenue from software
arrangements involving multiple elements be allocated among each element of the
arrangement based on the relative fair values of the elements, such as software
licenses, post contract customer support, installation or training. Furthermore,
SOP 97-2 requires that revenue be recognized as each element is delivered with
no significant performance obligation remaining on the part of the Company. The
Company's multiple element arrangements generally consist of a software license
and post contract support. The Company allocates the aggregate revenue from
multiple element arrangements to each element based on vendor specific objective
evidence. The Company has established vendor specific objective evidence for
each of the elements as it sells both the software and post contract customer
support independent of multiple element agreements. Customers are charged
standard prices for the software and post contract customer support and these
prices do not vary from customer to customer.
If the Company enters into a multiple element agreement for which vendor
specific objective evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until all elements
of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
The Company also provides a broad range of professional services
consisting primarily of EDI, electronic commerce consulting, EDI education and
training at seminars throughout the United States. Revenue from EDI and
electronic commerce consulting and education and training are recognized when
the services are provided. Revenue from fixed fee professional service contracts
is recognized using the percentage-of-completion method of accounting, as
prescribed by SOP 81-1 "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in the
estimated profitability of a fixed-price contract. In such circumstances,
adjustments to cost and profitability estimates are made in the period in which
the underlying factors requiring such revisions become known. If such revisions
indicate a loss on a contract, the entire loss is recorded at such time. Amounts
billed in advance of services being performed are recorded as deferred revenue.
Certain fixed-fee contracts may have substantive customer acceptance provisions.
The acceptance terms generally include a single review and revision cycle for
each deliverable to incorporate the customer's suggested or required
modifications. Deliverables are considered accepted upon completion of the
review and revision and revenue cycle is recognized upon acceptance.
Goodwill: Goodwill consists of the excess purchase price over the fair
value of identifiable net assets of acquired businesses. The carrying value of
goodwill is evaluated for impairment on an annual basis. Management also reviews
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of goodwill may be impaired. If it is determined that
an impairment in value has occurred, goodwill is written down to its implied
fair value. The Company's reporting units utilized for evaluating the
recoverability of goodwill are the same as its operating segments.
21
INTERNET COMMERCE CORPORATION
Other Intangible Assets: Other Intangible assets are carried at cost less
accumulated amortization. Other intangible assets are amortized on a
straight-line basis over their expected lives, which are estimated to be five
years. The Company did not have any indefinite lived intangible assets that were
not subject to amortization
Impairment of long-lived assets: Long-lived assets of the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Management also
reevaluates the periods of amortization of long-lived assets to determine
whether events and circumstances warrant revised estimates of useful lives. The
Company evaluates the carrying value of its long-lived assets in relation to the
future undiscounted cash flows of the asset when indications of impairment are
present. If it is determined that an impairment in value has occurred, the
excess of the carrying value of the asset will be written down to the present
value of the future operating cash flows expected to be generated by the asset.
Stock-based compensation: The Company accounts for stock-based
compensation arrangements with its employees using the intrinsic value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of SFAS 123, "Accounting for Stock-based Compensation." SFAS 123
established a fair-value-based method of accounting for stock-based compensation
plans. Stock-based awards to non-employees are accounted for at fair value in
accordance with the provisions of SFAS 123.
Income Taxes: We have a history of unprofitable operations, which
generated significant state and federal tax net operating losses, or NOL
carryforward. Generally accepted accounting principles in the United States
require that we record a valuation allowance against the deferred tax asset
associated with this NOL if it is "more likely than not" that we will not be
able to utilize it to offset future taxes. Due to our history of unprofitable
operations, we have recorded a valuation allowance equal to 100% of these
deferred tax assets.
If we are sufficiently profitable in the future, management may conclude
that it is more likely than not that we will realize all or a portion of the NOL
carryforward. Upon reaching such a conclusion, we would immediately record the
estimated net realizable value of the deferred tax asset at that time and would
then provide for income taxes at a rate equal to our combined federal and state
effective rates. Subsequent revisions to the estimated net realizable value of
the deferred tax asset could cause our provision for income taxes to vary
significantly from period to period, although our cash tax payments would remain
unaffected until the benefit of the NOL is utilized.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates.
The following discussion reviews items incorporated in our financial statements
during the three and nine month periods ended April 30, 2003 and 2002 or as of
April 30, 2003 and July 31, 2002 that required the use of significant management
estimates.
Impairment of goodwill and acquired intangibles in the amount of
$1,711,000 was recorded during the year ended July 31, 2002. During fiscal 2002,
due to a continued decline in revenue throughout the course of 2002, continued
operating losses and a significant reduction in forecasted future operating
profits, the Professional Services segment was tested for impairment during the
fourth quarter of fiscal 2002. An impairment loss of $1,711,000 was recognized
as a result of this evaluation. The fair value of the Professional Services
segment unit was estimated using the net present value of expected future cash
flows.
On March 10, 2003 the Company issued options to purchase 100,000 shares of
class A common stock to a non-employee member of the board of directors as
compensation for consulting services. The estimated fair value of the options
was determined by management using the Black-Scholes options pricing model,
which required management to make certain estimates for variables used in the
model. Management estimated the values for stock price volatility, the expected
life of options and the risk-free rate of return based on information that was
available to management at the time the Black-Scholes options pricing
calculations were performed. Non-cash charges of $15,000 related to these
options were recorded in the quarter ended April 30, 2003.
22
INTERNET COMMERCE CORPORATION
The allocation of the proceeds from the sale of the series D preferred
stock issued in the April 30, 2003 private placement between the fair value of
the series D preferred stock and the fair value of the detachable warrants,
which was calculated using the Black-Scholes options pricing model, resulted in
a beneficial conversion feature in the amount of $106,730. The discount was
immediately accreted and treated as a deemed dividend to the holder of the
series D preferred as all of the series D preferred stock was eligible for
conversion upon issuance.
In connection with the April 30, 2003 private placement, the Company
incurred fees of $176,347, of which $104,843 is payable in cash and $71,504 was
paid by issuing 90,135 warrants to purchase class A common stock at $1.47 per
share. The value of the warrants was determined by using the Black-Scholes
options pricing model.
In connection with a warrant exchange offer in April 2002, the Company
valued the repriced and newly issued warrants at $461,084 using the
Black-Scholes option-pricing model. This amount has been added to the Company's
net loss to increase the net loss attributable to common stockholders during
fiscal 2002.
Three Months Ended April 30, 2003 Compared with Three Months Ended April 30,
2002.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported
segments. All significant intersegment activity has been eliminated.
Accordingly, the segment results below exclude the effect of transactions with
our subsidiary.
Three Months Ended
April 30,
-------------------------------
Consolidated net loss: 2003 2002
------------- -------------
ICC.NET $ (777,834) $ (1,472,476)
Service Bureau (142,624) 29,455
Professional Services (153,624) (295,153)
------------- -------------
Consolidated loss $ (1,074,082) $ (1,738,174)
============= =============
Results of Operations - ICC.NET
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. The following table
summarizes operating results for our ICC.NET service for the three months ended
April 30, 2003 and 2002:
23
INTERNET COMMERCE CORPORATION
Three Months Ended
April 30,
----------------------------
2003 2002 (1)
----------- -----------
Revenue:
VAN Services $ 2,204,631 $ 1,660,461
Mapping Services 92,951 167,198
----------- -----------
2,297,582 1,827,659
Expenses:
Cost of services 1,298,071 1,302,716
Product development and enhancement 238,826 198,292
Selling and marketing 675,690 781,381
General and administrative 789,735 1,070,912
Non-cash charges 71,818 --
----------- -----------
3,074,140 3,353,301
----------- -----------
Operating loss (776,558) (1,525,642)
----------- -----------
Other income (expense), net (1,276) 53,166
----------- -----------
Net loss $ (777,834) $(1,472,476)
=========== ===========
(1) - Restated to reflect the integration of data mapping into the ICC.NET
segment.
Revenue - ICC.NET - Revenue related to our ICC.NET service was 74% of
consolidated revenue for the quarter ended April 30, 2003 ("2003 Quarter")
compared to 67% for the quarter ended April 30, 2002 ("2002" Quarter). Total
ICC.NET revenue increased $470,000 in the 2003 Quarter from the 2002 Quarter, or
approximately 26%. VAN services revenue increased $544,000, or approximately
33%, in the 2003 Quarter from the 2002 Quarter. The increase in revenue was
attributable to an increase in the number of customers to over 1,025 at April
2003, from approximately 535 at April 2002. Approximately 300 of these new
customers signed up for our service during the last month of the 2003 Quarter.
Mapping revenue decreased $74,000, or approximately 44%, in the 2003 Quarter
from the 2002 Quarter primarily due to the continued slowdown in the economy.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 56% of revenue derived from the ICC.NET service in the 2003 Quarter,
compared to 71% in the 2002 Quarter. Cost of services related to our ICC.NET
service consists primarily of salaries and employee benefits, connectivity fees,
amortization and rent. Total cost of services decreased $5,000 in the 2003
Quarter from the 2002 Quarter. Amortization and depreciation decreased $70,000
in the 2003 Quarter primarily due to capitalized software costs becoming fully
amortized as of July 31, 2002. Product development personnel who were
temporarily assigned to cost of services in the 2002 Quarter decreased $24,000.
These employees were used to implement alternative connectivity solutions for
the ICC.NET service in the months prior to April 2002, when Sterling
disconnected our service from its network. In addition, consulting costs
decreased $7,000 in the 2003 Quarter from the 2002 Quarter. However, these
savings were partially offset by an increase in connectivity and communications
fees of $67,000 in the 2003 Quarter from the 2002 Quarter. The increase in
connectivity fees was primarily due to additional fees incurred to offer our
customers and their trading partners alternative connectivity after GXS
disconnected our service from its network in April 2002. Salaries and benefits
increased $35,000 in the 2003 Quarter from the 2002 Quarter, primarily due to a
one person increase in headcount. Cost of services relating to VAN services
increased to $960,000 in the 2003 Quarter from $924,000 in the 2002 Quarter.
Cost of services relating to the Mapping Services decreased to $339,000 in the
2003 Quarter from $378,000 in the 2002 Quarter.
Product development and enhancement - ICC.NET - Product development and
enhancement costs relating to our ICC.NET service consist primarily of salaries
and employee benefits. The increase of $41,000 in the 2003 Quarter over the 2002
Quarter was primarily attributable to an increase of $24,000 in salary and
benefits and an increase of $24,000 in costs attributable to the temporary
assignment of product development personnel to cost of services in the 2002
Quarter. In the 2002 Quarter, product development personnel were temporarily
assigned to cost of services to implement alternative connectivity solutions for
the ICC.NET service when Sterling disconnected our service from its network
during fiscal 2002.
24
INTERNET COMMERCE CORPORATION
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consist primarily of salaries and employee benefits,
advertising, trade show costs and travel-related costs. Selling and marketing
expenses related to our ICC.NET service decreased $106,000 in the 2003 Quarter
from the 2002 Quarter. Advertising and trade show costs were reduced $37,000
because we attended fewer trade shows and placed fewer print advertisements in
the 2003 Quarter compared to the 2002 Quarter. Salary and benefits decreased
$63,000 in the 2003 Quarter from the 2002 Quarter, partially due to the transfer
of an employee to cost of services. For cost reduction purposes, the sales
function was centralized and is now performed by ICC.NET personnel. Commencing
in the second fiscal quarter of 2003, a portion of the cost of our sales force
was allocated to the Professional Services segment based on the level of effort
utilized in selling Professional Services products.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, facility costs, legal and professional fees and depreciation. General
and administrative costs supporting our ICC.NET service decreased $281,000 in
the 2003 Quarter. Legal and professional fees decreased $195,000 due to
non-recurring legal expenses. For cost reduction purposes, the Company's
executive management, human resources, accounting and finance functions for all
segments of the Company were centralized and are now performed by ICC.NET
personnel. Commencing in the second fiscal quarter of 2003, ICC.NET began
allocating executive management, human resources, accounting and finance tasks
to the segments based on the level of services provided to each segment. These
corporate allocations to the segments were $78,000 in the 2003 Quarter.
Non-Cash charges - ICC.NET - Non-cash charges of approximately $72,000 in
the 2003 Quarter relate primarily to common stock to be issued to non-employee
members of our board of directors as compensation for 2003 directors' fees in
the amount of $31,000. In addition, $33,000 of expense was recognized during the
2003 Quarter for common stock and options issued to a non-employee member of our
board of directors as compensation for consulting services.
Results of Operations - Service Bureau
Our service bureau manages and translates the data of small and mid-sized
companies that exchange EDI data with large companies and provides various EDI
and UPC (universal product code) services. Our service bureau also licenses EDI
software. The following table summarizes operating results for our service
bureau for the three months ended April 30, 2003 and 2002:
Three Months Ended
April 30,
--------------------------
2003 2002
--------- ---------
Revenue:
Services $ 340,754 $ 419,567
--------- ---------
Expenses:
Cost of services 175,134 208,685
Impairment of capitalized software 133,960 --
--------- ---------
Total cost of services 309,094 208,685
Product development and enhancement 34,539 32,164
Selling and marketing 25,725 34,501
General and administrative 114,020 114,762
--------- ---------
483,378 390,112
--------- ---------
Operating income (loss) (142,624) 29,455
--------- ---------
Other income, net -- --
--------- ---------
Net loss $(142,624) $ 29,455
========= =========
Revenue - Service Bureau - Revenue related to our service bureau was 11%
of our consolidated revenue in the 2003 Quarter compared to 15% of our
consolidated revenue for the 2002 Quarter. The service bureau's revenue was
primarily generated from services performed, customer support and licensing
fees. The decrease in revenue in 2003 from 2002 of $79,000 or 19% was primarily
the result of a decrease in core business sales.
25
INTERNET COMMERCE CORPORATION
Cost of services - Service Bureau - Total cost of services relating to our
service bureau was 91% of revenue derived from the service bureau in the 2003
Quarter compared to 50% in the 2002 Quarter. Excluding the impairment of
capitalized software, total cost of services was 51% of revenue derived from the
service bureau in the 2003 Quarter compared to 50% in the 2002 Quarter. Cost of
services related to our service bureau consists primarily of salaries and
employee benefits and rent. Excluding the impairment of capitalized software,
cost of services relating to our service bureau decreased $34,000 in the 2003
Quarter from the 2002 Quarter. This decrease consists primarily of a decrease in
salaries and employee benefits of $15,000 due to a reduction in personnel to 14
at the end of the 2003 Quarter from 16 at the end of the 2002 Quarter, and a
decrease of $10,000 in consulting fees relating to a reduction in the use of
consultants for customer service and support and data entry services in the 2003
Quarter compared to the 2002 Quarter. Additionally, salaries and benefits of
product development personnel who had been temporarily assigned to cost of
services during the 2002 Quarter decreased $6,000 in the 2003 Quarter. Cost of
services - impairment of capitalized software of $134,000 in the 2003 Quarter
represents an impairment of capitalized software for an in-process project that
management decided, due to unfavorable market conditions now and in the
foreseeable future, not to complete.
Product development and enhancement - Service Bureau - Product development
and enhancement costs consist primarily of salaries and employee benefits.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits. The decrease of $9,000 in the 2003 Quarter from the 2002 Quarter was
primarily due to a decrease in staffing of one person and a reduction in sales
commissions.
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits, depreciation, rent, telephone and office expenses. The
decrease of $1,000 in the 2003 Quarter from the 2002 Quarter is primarily
attributable to a decrease in service bureau salaries and employee benefits of
$38,000 due to a reduction in personnel to 2 at the end of the 2003 Quarter from
5 at the end of the 2002 Quarter. Additionally, office expenses decreased $8,000
in the 2003 Quarter from the 2002 Quarter primarily due to our ongoing cost
reduction efforts. This was offset by an increase of $45,000 in general and
administrative support staff salary and benefits allocated by ICC.NET to the
Service Bureau segment in the 2003 Quarter. See "General and administrative -
ICC.NET" above for a discussion of the allocation of general and administrative
expenses among segments.
Results of Operations - Professional Services
Our Professional Services segment provides comprehensive
business-to-business electronic commerce solutions including electronic commerce
infrastructure solutions. Our Professional Services segment also conducts a
series of product-independent one-day EDI seminars for electronic commerce
users. The following table summarizes operating results for our professional
services for the three months ended April 30, 2003 and 2002:
Three Months Ended
April 30,
----------------------------
2003 2002 (1)
--------- ---------
Revenue:
Services $ 455,896 $ 477,356
--------- ---------
Expenses:
Cost of services 446,872 352,339
Selling and marketing 33,000 107,017
General and administrative 124,542 325,314
--------- ---------
604,414 784,670
--------- ---------
Operating loss (148,518) (307,314)
Other income (expense), net (5,106) 12,161
--------- ---------
Net loss $(153,624) $(295,153)
========= =========
26
INTERNET COMMERCE CORPORATION
(1) Restated to reflect the integration of data mapping into the ICC.NET
segment.
Revenue - Professional Services - Revenue related to professional services
was 15% of consolidated revenue in the 2003 Quarter compared to 18% in the 2002
Quarter. Revenue generated from professional services consists of consulting and
educational services. As a result of the continued slowdown in the economy,
which has resulted in a decrease in capital expenditures for information
technology and related services, revenue from all of our professional services
decreased $21,000 in 2003 from 2002.
Cost of services - Professional Services - Cost of services relating to
professional services was 98% of revenue derived from professional services in
the 2003 Quarter, compared to 74% of revenue in the 2002 Quarter. Cost of
services related to our professional services consists primarily of salaries and
employee benefits and contract labor. Cost of services related to professional
services increased $95,000 in 2003. Contract labor relating to our professional
services increased $65,000 in the 2003 Quarter from the 2002 Quarter. Due to a
reduction of staff the Company relied more heavily of the use of consultants.
Severance costs increased $24,000 in the 2003 Quarter from the 2002 Quarter.
Selling and marketing - Professional Services - Selling and marketing
expenses relating to our professional services have historically consisted
primarily of salaries and employee benefits. Selling and marketing expenses
related to our professional services were reduced $74,000 in the 2003 Quarter
from the 2002 Quarter. The allocation of selling and marketing expense in the
2003 Quarter was $33,000. See "Selling and marketing - ICC.NET" above for a
discussion of the allocation of selling and marketing expenses among segments.
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, rent, depreciation, amortization and
telephone charges. General and administrative costs supporting our professional
services decreased $201,000 in the 2003 Quarter from the 2002 Quarter. The
decrease was partially attributable to a decrease in salary and benefits of
$50,000 primarily due to a reduction of personnel to 4 at the end of the 2003
Quarter from 7 at the end of the 2002 Quarter. See "General and administrative -
ICC.NET" above for a discussion of the allocation of general and administrative
expenses among segments. Additionally, legal and professional fees decreased
$97,000 in the 2003 Quarter compared to the 2002 Quarter due to legal and
settlement fees relating to a lawsuit involving EDIP educational services. Rent
expense decreased $36,000 as a result of the renegotiation of our lease and a
reduction in office space in our existing facility. In addition, office expense
decreased $14,000 due to cost reduction efforts.
Nine Months Ended April 30, 2003 Compared with Nine Months Ended April 30,
2002.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported
segments. All significant intersegment activity has been eliminated.
Accordingly, the segment results below exclude the effect of transactions with
our subsidiary.
Nine Months Ended
April 30,
--------------------------------
2003 2002
----------- -----------
Consolidated Net Loss:
ICC.NET $(3,198,059) $(4,642,070)
Service Bureau (98,142) (32,119)
Professional Services (645,717) (1,191,021)
----------- -----------
Net loss $(3,941,918) $(5,865,210)
=========== ===========
27
INTERNET COMMERCE CORPORATION
Results of Operations - ICC.NET
The following table summarizes operating results for our ICC.NET service
for the nine months ended April 30, 2003 and 2002:
Nine Months Ended
April 30,
------------------------------
2003 2002 (1)
------------ ------------
Revenue:
VAN Services $ 6,039,148 $ 4,589,076
Mapping Services 421,343 875,349
Services to Triaton -- 92,125
------------ ------------
6,460,491 5,556,550
Expenses:
Cost of services 3,871,612 4,231,514
Product development and enhancement 717,647 610,459
Selling and marketing 2,093,156 2,403,287
General and administrative 2,558,718 3,059,455
Non-cash charges 82,235 --
------------ ------------
9,323,368 10,304,715
------------ ------------
Operating loss (2,862,877) (4,748,165)
------------ ------------
Other income (expense), net (335,182) 106,095
------------ ------------
Net loss $ (3,198,059) $ (4,642,070)
============ ============
(1) - Restated to reflect the integration of data mapping into the ICC.NET
segment.
Revenue - ICC.NET - Revenue related to our ICC.NET service was 72% of
consolidated revenue for the nine months ended April 30, 2003 ("2003 Nine
Months") compared to 66% for the nine months ended April 30, 2002 ("2002 Nine
Months"). Total ICC.NET revenue increased $904,000 in the 2003 Nine Months from
the 2002 Nine Months, or approximately 16%. VAN services revenue increased
$1,450,000, or approximately 32%, in the 2003 Nine Months from the 2002 Nine
Months. The increase in revenue is attributable to an increase in the number of
customers to over 1,025 at April 2003 from approximately 535 at April 2002.
Approximately 300 of these new customers signed up for our service during the
last month of the 2003 Nine Months. Mapping revenue decreased $454,000, or
approximately 52%, in the 2003 Nine Months from the 2002 Nine Months primarily
due to the continued slowdown in the economy. The 2002 Nine Months included
$92,000 of fees from Triaton GmbH, a subsidiary of ThyssenKrupp Information
Services GmbH, under an agreement dated July 25, 2001. No such fees were
recognized in the 2003 Nine Months.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 60% of revenue derived from the ICC.NET service in the 2003 Nine
Months, compared to 76% of revenue in the 2002 Nine Months. Cost of services
related to our ICC.NET service consists primarily of salaries and employee
benefits, connectivity fees, amortization and rent. Total cost of services
decreased $360,000 in the 2003 Nine Months from the 2002 Nine Months. Product
development personnel who were temporarily assigned to cost of services during
the 2002 Nine Months represented $288,000 of this decrease. These employees were
used to implement alternative connectivity solutions for the ICC.NET service
when GXS and Sterling disconnected our service from their networks during the
2002 Nine Months. Amortization decreased $186,000 in the 2003 Nine Months
compared to the 2002 Nine Months primarily due to capitalized software costs
becoming fully amortized as of July 31, 2002. Salaries and employee benefits
decreased $134,000 due to a reduction of personnel to 28 at the end of the 2003
Nine Months from 32 at the end of the 2002 Nine Months. However, these savings
were partially offset by an increased cost for connectivity fees of $281,000 in
the 2003 Nine Months from the 2002 Nine Months. The increase in connectivity
fees was primarily due to additional fees incurred to offer our customers and
their trading partners alternative connectivity when GXS and Sterling
disconnected our service from their networks during the 2002 Nine Months. In
addition, consulting cost increased $10,000 due to a reduction in personnel in
the 2003 Nine Months from the 2002 Nine Months. Cost of services relating to VAN
services decreased to $2,778,000 in the 2003 Nine Months from $2,898,000 in the
2002 Nine Months. Cost of services relating to mapping services decreased to
$1,048,000 in the 2003 Nine Months from $1,334,000 in the 2002 Nine Months.
28
INTERNET COMMERCE CORPORATION
Cost of services relating to Triaton was $46,000 in the 2002 Nine Months
compared to no costs in the 2003 Nine Months. We anticipate that our ICC.NET
cost of services will decline as a percentage of revenue in future periods due
to increased utilization of our existing communications infrastructure as we
expect the use of our ICC.NET service to increase.
Product development and enhancement - ICC.NET - Product development and
enhancement costs relating to our ICC.NET service consist primarily of salaries
and employee benefits. The increase of $107,000 in the 2003 Nine Months over the
2002 Nine Months was primarily attributable to an increase of $274,000 of costs
relating to product development personnel who had been temporarily assigned to
cost of services during the 2002 Nine Months. The personnel were utilized to
implement alternative connectivity solutions for the ICC.NET service when GXS
and Sterling disconnected our service from their networks during the 2002 Nine
Months. The prior year allocation was partially offset by a decrease of $142,000
in salaries and employee benefits as a result of reducing staffing to 8
employees at the end of the 2003 Nine Months from 11 employees at the end of the
2002 Nine Months. Additionally, severance decreased $21,000 in the 2003 Nine
Months compared to the 2002 Nine Months.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consist primarily of salaries and employee benefits,
advertising and trade show costs and travel-related costs. Selling and marketing
expenses related to our ICC.NET service were reduced $310,000 in the 2003 Nine
Months from the 2002 Nine Months. Advertising and trade show costs were reduced
$155,000 because we attended fewer trade shows and placed fewer print
advertisements. In addition, salary and benefits decreased $130,000 in the 2003
Nine Months, partially offset by an increase in travel related costs of $48,000.
For cost reduction purposes, the sales function was centralized and is now
performed by ICC.NET personnel. Commencing in the second fiscal quarter of 2003,
a portion of the cost of our sales force was allocated to the Professional
Services segment based on the level of effort utilized in selling Professional
Services products. In the 2003 Nine Months, these allocations totaled $66,000.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, facility costs, legal and professional fees and depreciation. General
and administrative costs supporting our ICC.NET service decreased $501,000 in
the 2003 Nine Months. Legal and professional fees decreased $325,000 in the 2003
Nine Months primarily due to higher fees for legal advice and services in the
2002 Nine Months relating to our disconnection from other VAN's, partially
offset by the reimbursement of legal fees pursuant to our success in a certain
arbitration proceeding. Also, depreciation and amortization decreased $73,000 in
the 2003 Nine Months primarily as a result of fewer assets being acquired and
more assets becoming fully depreciated. These decreases were partially offset by
increases in salary and employee benefits of $44,000. For cost reduction
purposes, the Company's executive management, human resources, accounting and
finance functions for all segments of the Company were centralized and are now
performed by ICC.NET personnel. Commencing in the second fiscal quarter of 2003,
ICC.NET began allocating the costs of executive management, human resources,
accounting and finance tasks to the segments based on the level of services
provided to each segment. In the 2003 Nine Months, these allocations totaled
$156,000.
Non-Cash charges - ICC.NET - Non-cash charges of $82,000 in the 2003 Nine
Months relate in part to common stock to be issued to non-employee members of
our board of directors as compensation for 2003 directors' fees in the amount of
$41,000. In addition, $33,000 of expense was recognized during the 2003 Nine
Months for common stock and options issued to a non-employee member of our board
of directors as compensation for consulting services.
Other income (expenses) - ICC.NET - Other expenses increased $441,000 in
the 2003 Nine Months compared the 2002 Nine Months. We recorded an impairment
charge of $318,000 in the 2003 Nine Months for the write down of
available-for-sale marketable securities due to an other than temporary decline
in value.
29
INTERNET COMMERCE CORPORATION
Results of Operations - Service Bureau
The following table summarizes operating results for our Service Bureau
for the nine months ended April 30, 2003 and 2002:
Nine Months Ended
April 30,
----------------------------
2003 2002
----------- -----------
Revenue:
Services $ 1,196,649 $ 1,217,959
----------- -----------
Expenses:
Cost of services 560,701 663,729
Impairment of capitalized software 133,960 --
----------- -----------
Total cost of services 694,661 663,729
Product development and enhancement 111,506 119,328
Selling and marketing 118,049 95,767
General and administrative 370,575 371,254
----------- -----------
1,294,791 1,250,078
----------- -----------
Operating income (loss) (98,142) (32,119)
----------- -----------
Other income, net -- --
----------- -----------
Net loss $ (98,142) $ (32,119)
=========== ===========
Revenue - Service Bureau - Revenue related to our service bureau was 13%
of our consolidated revenue in the 2003 Nine Months compared to 14% of
consolidated revenue in the 2002 Nine Months. The service bureau's revenue was
primarily generated from services performed, customer support and licensing
fees. The decrease in revenue of $21,000 in the 2003 Nine Months compared to the
2002 Nine Months was primarily the result of a decrease in software maintenance.
Cost of services - Service Bureau - Total cost of services relating to our
service bureau was 58% of revenue derived from the service bureau in the 2003
Nine Months compared to 54% in the 2002 Nine Months. Excluding the impairment of
the capitalized software, costs of services was 47% of revenue derived from the
Service Bureau in the 2003 Nine Months, compared to 54% of revenue derived from
the service bureau in the 2002 Nine Months. Cost of services related to our
service bureau consists primarily of salaries and employee benefits and rent.
Cost of services, excluding the capitalized software impairment charge,
decreased $103,000 in the 2003 Nine Months. This decrease in cost of services
was primarily the result of an $83,000 decrease in the use of consultants for
customer service and support and data entry services, and a decrease in salary
and benefits of $20,000. Cost of services - impairment of capitalized software
of $134,000 in the 2003 Nine Months, represents an impairment of capitalized
software for an in-process project that management decided, due to unfavorable
market conditions now and in the foreseeable future, not to complete.
Product development and enhancement - Service Bureau - Product development
and enhancement costs consist primarily of salaries and employee benefits.
Product development and enhancement costs incurred by our service bureau
decreased $8,000 in the 2003 Nine Months from the 2002 Nine Months. This
decrease was primarily attributable to a decrease in salaries and employee
benefits of $14,000 as a result of reduced staffing, partially offset by a
$16,000 decrease in allocations to the cost of services department in the 2003
Nine Months as compared to the 2002 Nine Months resulting from the temporary
assignment of certain individuals. Additionally, facility allocation decreased
$8,000 in the 2003 Nine Months due to reduced staffing.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits and rent. Selling and marketing increased $22,000 in the 2003 Nine
Months primarily due to an increase in salaries and employee benefits of
$16,000, and a $5,000 severance payment in the 2003 Nine Months.
30
INTERNET COMMERCE CORPORATION
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits, depreciation, rent, telephone and office expenses. General
and Administrative costs decreased $1,000 in the 2003 Nine Months from the 2002
Nine Months. Salaries decreased $91,000 in the 2003 Nine Months from the 2002
Nine Months as a result of a staff reduction to 2 employees at the end of the
2003 Nine Months from 5 employees at the end of the 2002 Nine Months. This was
offset by an increase of $90,000 in general and administrative support staff
salary and benefits allocated by ICC.NET to the Service Bureau in the 2003 Nine
Months. See "General and administrative - ICC.NET" above for a discussion of the
allocation of general and administrative expenses among segments.
Results of Operations - Professional Services
The following table summarizes operating results for our professional
services for the nine months ended April 30, 2003 and 2002:
Nine Months Ended
April 30,
-----------------------------
2003 2002 (1)
----------- -----------
Revenue:
Services $ 1,324,274 $ 1,685,599
----------- -----------
Expenses:
Cost of services 1,295,301 1,597,587
Impairment of software inventory 248,077 --
----------- -----------
Total cost of services 1,543,378 1,597,587
Selling and marketing 108,826 324,119
General and administrative 304,493 734,558
Non-cash charges for stock-based
compensation and services -- 190,019
----------- -----------
1,956,697 2,846,283
----------- -----------
Operating loss (632,423) (1,160,684)
Other expense, net (13,294) (30,337)
----------- -----------
Net loss $ (645,717) $(1,191,021)
=========== ===========
(1) Restated to reflect the integration of data mapping into the ICC.NET
segment.
Revenue - Professional services - Revenue related to professional services
was 15% of our consolidated revenue in the 2003 Nine Months compared to 20% of
consolidated revenue in the 2002 Nine Months. Revenue generated from
professional services consists of consulting and educational services. As a
result of the continued slowdown in the economy, which has resulted in a
decrease in capital expenditures for information technology and related
services, revenue from our professional services decreased $361,000 in the 2003
Nine Months from the 2002 Nine Months.
Cost of services - Professional Services - Total cost of services relating
to professional services was 117% of revenue derived from professional services
in the 2003 Nine Months. Excluding the impairment of software inventory the
total cost of services was 98% of revenue from professional services in the 2003
Nine Months compared to 95% of revenue in the 2002 Nine Months. Cost of services
related to our professional services consists primarily of salaries and employee
benefits, and contract labor. Costs of services, excluding the impairment
charge, related to professional services decreased $302,000 in the 2003 Nine
Months. This was primarily attributable to a decrease in salaries and employee
benefits of $283,000 partially due to a reduction in workforce to 9 in the 2003
Nine Months from 14 in the 2002 Nine Months. Costs for rental of space for
educational seminars decreased $63,000 in the 2003 Nine Months compared to the
2002 Nine Months. Impairment of software inventory of $248,000 in the 2003 Nine
Months represents an impairment for software inventory held by Professional
Services resulting from insufficient historical and projected revenue from these
products to support the recoverability of that carrying value.
Selling and marketing - Professional Services - Selling and marketing
expenses relating to our professional services consist primarily of salaries and
employee benefits. Selling and marketing expenses related to our professional
services were reduced $215,000 in the 2003 Nine Months from the 2002 Nine
Months. The decrease in selling and marketing expenses was primarily
31
INTERNET COMMERCE CORPORATION
attributable to a decrease in salaries and benefits of $202,000 in the 2003 Nine
Months. See "Selling and marketing - ICC.NET" above for a discussion of the
allocation of selling and marketing expenses among segments. Additionally,
severance payments decreased $21,000 in the 2003 Nine Months from the 2002 Nine
Months.
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, rent, depreciation, amortization and
telephone charges. General and administrative costs supporting our professional
services decreased $430,000 in the 2003 Nine Months from the 2002 Nine Months.
The decrease was partially attributable to decreased rent expense of $171,000 as
a result of the renegotiation of our lease to reduce office space in our
existing facility. In addition, salary and benefits decreased $203,000 primarily
due to a reduction in personnel to 4 at the end of the 2003 Nine Months from 10
at the end of the 2002 Nine Months. See "General and administrative - ICC.NET"
above for a discussion of the allocation of general and administrative expenses
among segments. Additionally, depreciation and amortization decreased $70,000 in
the 2003 Nine Months from the 2002 Nine Months.
Non-cash charges - Professional Services - Non-cash charges in the 2002
Nine Months consisted of stock-based compensation expense related to assumed
unvested restricted shares issued to RTCI employees in connection with our
acquisition of RTCI.
Liquidity and Capital Resources
Our principal sources of liquidity, which consist of cash and cash
equivalents and marketable securities, increased to $2,354,000 as of April 30,
2003 from $2,219,000 as of July 31, 2002. We believe these resources, combined
with an accounts receivable financing agreement executed on May 30, 2003 with
Silicon Valley Bank, will provide us with sufficient liquidity to continue in
operation through July 31, 2003.
We anticipate that we will achieve positive cash flow from operations in
our fiscal quarter ending July 31, 2003. However, if our revenues do not
increase as anticipated or if our expenses increase more than anticipated due to
competitive or other factors described under the heading "Risk Factors" in our
annual report on Form 10-K for the year ended July 31, 2002, we may not achieve
positive cash flow from operations as anticipated. Thus, we may need to
undertake additional cost reduction activities or raise additional capital.
We have financed our operations through private placements during fiscal
1994, our initial public offering during fiscal 1995 (the "IPO"), a private
placement in March 1997, a private placement of bridge note units during fiscal
1998 and 1999, a private placement of series A preferred stock in April 1999,
private placements of our class A common stock, series C preferred stock and
warrants in November 1999, a private placement of our class A common stock and
warrants in October 2001, a warrant exchange offer in May 2002 and a private
placement of our class A common stock and warrants and series D preferred stock
and warrants in April 2003.
In the October 2001 private placement, we sold 1,159,716 shares of class A
common stock and warrants to purchase 347,915 additional shares of class A
common stock for gross proceeds of $3,189,219. The warrants expire in October
2006 and are exercisable at $3.58 per share, subject to adjustment pursuant to
customary antidilution adjustments for stock splits, dividends and combinations.
The warrants are redeemable at our option for $0.10 per warrant if the closing
bid price of our class A common stock is at least 200% of the exercise price of
the warrants for 30 consecutive trading days. In connection with the private
placement, the Company incurred fees of $152,511, of which $35,000 has been paid
in cash and $117,511 was paid by issuing warrants to purchase 50,000 shares of
class A common stock. The warrants have substantially the same terms and
conditions as the warrants issued in the October 2001 private placement.
32
INTERNET COMMERCE CORPORATION
We commenced a warrant exchange offer on April 23, 2002. The offer was
extended to investors who participated in the private placement in October 2001
and to holders of warrants issued as fees in connection with this private
placement. The offer lowered the exercise price of the warrants issued in the
private placement to $2.50 per class A common share for those investors that
agreed to exercise those warrants. In addition, for each class A common share
purchased pursuant to the warrant exercise, a new warrant (the "New Warrants")
to purchase an equivalent number of class A common shares was issued. The New
Warrants have an exercise price of $3.50 per share and are exercisable for a
five-year period. The New Warrants have the same redemption terms as the
warrants issued in the October 2001 private placement. The warrant exchange
offer was originally set to expire on April 30, 2002, but was extended by the
Company's board of directors until May 31, 2002. The Company received $659,288
in gross proceeds and issued a total of 263,715 shares of class A common stock
and New Warrants to purchase 263,715 shares of class A common stock.
On April 30, 2003, the Company sold 1,398,412 shares of class A common
stock and warrants to purchase 1,118,723 shares of class A common stock for
gross proceeds of $1,454,349 and sold 250 shares of series D convertible
redeemable preferred stock (series D preferred) and warrants to purchase 153,845
shares of class A common stock for gross proceeds of $250,000. The 250 shares of
series D preferred stock is convertible into 192,307 shares of class A common
stock. The warrants are immediately exercisable and have an exercise price of
$1.47 per share. The warrants issued to the purchasers of common and series D
preferred stock are exercisable for a five-year period after the date of
issuance. The Company may redeem the warrants, at its option, if the closing bid
price of the class A common stock exceeds 200% of the exercise price for a
period of 30 consecutive trading days. The redemption price is ten cents per
warrant.
In connection with the April 30, 2003 private placement, the Company
incurred fees of $176,347 of which $104,843 is payable in cash and $71,504 was
paid by issuing 90,135 warrants to purchase class A common stock at $1.47 per
share. The warrants have substantially the same terms and conditions as the
warrants issued in the private placement.
Additionally, on May 1, 2003, the Company sold 284,271 shares of class A
common stock and warrants to purchase 227,417 shares of class A common stock for
the gross proceeds of $295,642. The warrants are immediately exercisable and
have an exercise price of $1.47 per share. The warrants are exercisable for a
five-year period. The Company may redeem the warrants, at its option, if the
closing bid price of the class A common stock exceeds 200% of the exercise price
for a period of 30 consecutive trading days. The redemption price is ten cents
per warrant. In connection with the May 1, 2003 private placement, the Company
incurred fees of $29,820, of which $13,522 is payable in cash and $16,298 was
paid by issuing 20,545 warrants to purchase class A common stock at $1.47 per
share. The warrants have substantially the same terms and conditions as the
warrants issued in the private placement.
Subsequent to the completion of the Company's private placement described
above, the Company determined that in order to comply with NASD Marketplace Rule
4350(i)(1)(A), the purchase price per share for the shares of class A common
stock purchased by directors and officers in the private placement should be
increased to market value, and on June 17, 2003 the directors and officers
agreed to do so. As a result, two directors and three officers agreed to pay an
additional $0.58 per share, or an aggregate of $85,502.02, for the shares of
class A common stock they purchased in the private placement.
In October 2002, we obtained commitments from certain existing investors
to provide an aggregate of up to $1,000,000 of additional capital, if required,
for us to continue as a going concern. Such additional capital may be in the
form of long term debt, common stock, preferred stock or other equity
instruments or a combination of the foregoing and shall be on arms length terms
negotiated by the parties. The commitments expire upon the earliest to occur of
(a) July 31, 2003, (b) the sale, transfer or other disposition of all or
substantially all the assets of the Company, (c) a change in control, or (d) the
date the Company raises debt or equity capital, or a combination of debt and
equity capital, in an amount equal to or greater than $1,000,000 subsequent to
the date of the commitment. This funding commitment expired on April 30, 2003 as
the result of the Company completing the private placement.
On May 30, 2003, the Company executed an Accounts Receivable Financing
Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term
of 1 year. Under the Financing Agreement, the Company may borrow, subject to
certain conditions, up to 80% of its outstanding accounts receivable up to a
maximum of $2,000,000. The applicable interest rate is the prime rate plus .35%
plus a collateral handling fee equal to .20% on the average daily outstanding
financed receivable balance, and interest is payable monthly. The Bank has been
granted a security interest in substantially all of the Company's assets. In
connection with the Financing Agreement, the Company issued the bank warrants to
purchase 40,000 shares of the Company's class A common stock. The warrants are
immediately exercisable at an exercise price of $1.39, equal to the fair market
value of the Company's class A common stock at the date of closing of the
Financing Agreement. The warrants are exercisable for a seven-year period. The
fair value of the warrants in the amount of approximately $34,000 will be
amortized to interest expense over the term of the Financing Agreement.
33
INTERNET COMMERCE CORPORATION
We have a net operating loss carryforward of approximately $71 million to
offset future taxable income for federal income tax purposes. The utilization of
the loss carryforward to reduce any such future income taxes will depend on our
ability to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The carryforward expires from 2007 to 2021. The
Internal Revenue Code of 1986, as amended, and the regulations promulgated there
under contain provisions which limit the use of available net operating loss
carryforwards in any given year should significant changes (greater than 50%) in
ownership interests occur. Due to the IPO, the net operating loss carryover of
approximately $1.9 million incurred prior to the IPO is subject to an annual
limitation of approximately $400,000 until that portion of the net operating
loss is utilized or expires. Due to the private placement of series A preferred
stock in April 1999, the net operating loss carryover of approximately $18
million incurred prior to the private placement is subject to an annual
limitation of approximately $1 million until that portion of the net operating
loss is utilized or expires. Also, due to the 100% ownership change when we
acquired RTCI, RTCI's net operating loss of approximately $6.5 million incurred
prior to the ownership change is subject to an annual limitation of
approximately $1.4 million until that portion of the net operating loss is
utilized or expires.
Consolidated Working Capital
Consolidated working capital decreased to $1,901,000 at April 30, 2003
from $2,622,000 at July 31, 2002. This decrease is due to a $1,234,000 decrease
in accounts receivable, primarily attributable to the collection of $1,500,000
from Triaton during the quarter ended October 31, 2002, and to a decrease in
prepaid and other current assets of $214,000 mainly attributable to an
impairment of software inventory of $248,000, offset by a decrease of $527,000
in accounts payable and accrued expenses as well as continued operating losses
during the 2003 Nine Months. Our cash and marketable securities increased
$135,000 at April 30, 2003 compared to July 31, 2002.
Analysis of Cash Flows
Cash used in operating activities decreased to ($1,544,000) in the 2003
Nine Months compared to ($4,880,000) used in operations in the 2002 Nine Months.
The decrease in 2003 is primarily the result of a decrease in accounts
receivable due to collection of $1,500,000 from Triaton in October 2002 and a
decrease in operating expenses resulting from cost reduction measures. The
Company believes that it will achieve positive cash flow from operations in the
quarter ending July 31, 2003. See "Liquidity and Capital Resources."
Cash used in investing activities increased to ($16,000) in the 2003 Nine
Months from $339,000 provided by investing activities in the 2002 Nine Months.
The 2003 Nine Months was primarily the result of $55,000 of proceeds from the
sales of marketable securities offset by purchases of property and equipment of
$56,000 and capitalized software of $16,000. Cash provided by investing
activities in the 2002 Nine Months was primarily the result of $456,000 of
proceeds from the sale of marketable securities offset by investments in
capitalized software in the amount of $164,000.
Cash provided by financing activities was $1,750,000 in the 2003 Nine
Months compared to cash provided by financing activities of $3,683,000 in the
2002 Nine Months. Cash provided by financing activities in 2003 was primarily
due to the net proceeds of approximately $1,704,000 from the April 2003 private
placement and subscription received in advance for common stock and warrants of
$195,000, offset by payments on capital leases of $149,000. Cash provided by
financing activities in 2002 was primarily due to the net proceeds of $3,107,000
from the October 2001 private placement and proceeds form the exercise of
warrants of $602,000.
34
INTERNET COMMERCE CORPORATION
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which
requires the recognition of a liability for an asset retirement obligation in
the period in which it is incurred. When the liability is initially recorded,
the carrying amount of the related long-lived asset is correspondingly
increased. Over time, the liability is accreted to its present value and the
related capitalized charge is depreciated over the useful life of the asset.
SFAS 143 is effective for fiscal years beginning after June 15, 2002. Management
adopted this standard on August 1, 2002. The adoption of this standard did not
have a significant impact on the Company's consolidated financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss if the carrying value
of a long-lived asset is not recoverable from its estimated undiscounted cash
flows and to measure an impairment loss as the difference between the carrying
value and fair value of the asset, but it establishes new standards for
long-lived assets to be disposed of. The provisions of SFAS 144 are effective
for fiscal years beginning after December 15, 2001. The Company adopted SFAS 144
on August 1, 2002. The adoption of this standard did not have a significant
impact on the Company's consolidated financial position or results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 supersedes
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 requires that costs
associated with an exit or disposal plan be recognized when incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company adopted SFAS 146 on January 1, 2003. The adoption of this
standard did not have a significant impact on the Company's consolidated
financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of Interpretation
No. 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements in this Interpretation are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company has provided information regarding commitments
and contingencies relating to guarantees in Note 10 of the financial statements.
The adoption of this standard did not have a significant impact on the
consolidated financial position or results of operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which the vendor
will perform multiple revenue generating activities. The EITF will be effective
for revenue arrangements entered into in fiscal years and interim periods
beginning after June 15, 2003. Management believes that the adoption of this
consensus will not have a significant impact on the Company's consolidated
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123" ( "SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods to
account for the transition from the intrinsic value method of recognition of
stock-based employee compensation in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" to the fair value recognition
provisions under SFAS No. 123. SFAS No. 148 provides two additional methods of
transition and will no longer permit the SFAS No. 123 prospective method to be
used for fiscal years beginning after December 15, 2003. In addition, SFAS No.
148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the pro-forma effects had
the fair value recognition provisions of SFAS No. 123 been used for all periods
presented. The adoption of SFAS No. 148 did not have a significant impact on the
Company's consolidated financial position and results of operations.
35
INTERNET COMMERCE CORPORATION
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities". Interpretation No. 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
to certain entities in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties. The Company adopted Interpretation No.
46 on January 31, 2003. The adoption of this standard did not have a material
impact on the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No.149"), which amends and
clarifies accounting for derivative instruments, and for hedging activities
under SFAS No. 133. Specifically, SFAS No. 149 requires that contracts with
comparable characteristics be accounted for similarly. Additionally, SFAS No.
149 clarifies the circumstances in which a contract with an initial net
investment meets the characteristics of a derivative and when a derivative
contains a financing component that requires special reporting in the statement
of cash flows. This Statement is generally effective for contracts entered into
or modified after June 30, 2003 and is not expected to have a material impact on
the Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
This Statement will become effective for financial instruments entered into or
modified after May 31, 2003, and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003. For financial
instruments created before the issuance date of this Statement and still
existing at the beginning of the interim period of adoption, transition shall be
achieved by reporting the cumulative effect of a change in an accounting
principle by initially measuring the financial instruments at fair value or
other measurement attribute required by this Statement. The adoption of this
Statement is not expected to have a material impact on the Company's
consolidated results of operations or financial position.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash and accounts receivable.
The Company places its excess cash in money-market instruments with institutions
of high credit-quality. All accounts receivable are unsecured. The Company
believes that any credit risk associated with receivables is minimal due to the
number and credit worthiness of its customers. Under the Company's current
policies, the Company does not use interest rate derivatives instruments to
manage exposure to interest rate changes.
Item 4: Controls and Procedures
(a) Based on their evaluation of our disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange
Act) as of a date within 90 days prior to the filing of this Quarterly Report on
Form 10-Q (the "Evaluation Date"), the Chief Executive Officer and Chief
Financial Officer have concluded that such disclosure controls and procedures
are effective and ensure that all material information relating to the Company
required to be included in the Company's reports filed or submitted under the
Exchange Act is made known to them on a timely basis.
(b) Since the Evaluation Date, there were no significant changes in our
internal controls or in other factors that could significantly affect such
controls.
36
INTERNET COMMERCE CORPORATION
PART II. OTHER INFORMATION
- ---------------------------
Item 1: Legal Proceedings
None.
Item 2: Changes in Securities and Use of Proceeds
On April 30 and May 1, 2003, the Company completed a private placement of
its class A common stock, convertible preferred stock and warrants to purchase
shares of class A common stock in exchange for aggregate gross proceeds of
$2,000,000.
On April 30, 2003, the Company sold 1,398,412 shares of its class A common
stock and warrants to purchase 1,118,723 shares of class A common stock for
gross proceeds of $1,454,348 and sold 250 shares of series D convertible
redeemable preferred stock ("series D preferred") and warrants to purchase
153,845 shares of class A common stock for gross proceeds of $250,000. The 250
shares of series D preferred stock are convertible into 192,307 shares of class
A common stock. The warrants are immediately exercisable and have an exercise
price of $1.47 per share. The warrants issued to the purchasers of class A
common stock and series D preferred are exercisable for a five-year period from
the date of issuance. The Company may redeem the warrants, at its option, if the
closing bid price of the class A common stock exceeds 200% of the exercise price
for a period of 30 consecutive trading days. The redemption price is ten cents
per warrant.
Additionally, as settlement of certain outstanding payables, the Company
issued 43,879 shares of its class A common stock and warrants to purchase 35,103
shares of its class A common stock. The class A common stock and warrants were
valued at $45,635, the invoice amount of the services provided.
On May 1, 2003, the Company sold an additional 284,271 shares of its class
A common stock and warrants to purchase 227,417 shares of class A common stock
for gross proceeds of $295,652. The warrants are immediately exercisable and
have an exercise price of $1.47 per share. The warrants are exercisable for a
five-year period. The Company may redeem the warrants, at its option, if the
closing bid price of the class A common stock exceeds 200% of the exercise price
for a period of 30 consecutive trading days. The redemption price is ten cents
per warrant.
Subsequent to the completion of the Company's private placement described
above, the Company determined that in order to comply with NASD Marketplace Rule
4350(i)(1)(A), the purchase price per share for the shares of class A common
stock purchased by directors and officers in the private placement should be
increased to market value, and on June 17, 2003 the directors and officers
agreed to do so. As a result, two directors and three officers agreed to pay an
additional $0.58 per share, or an aggregate of $85,502.02, for the shares of
class A common stock they purchased in the private placement.
Additionally, as settlement of certain outstanding payables, the Company
issued 4,197 shares of its class A common stock and warrants to purchase 3,357
shares of its class A common stock. The common stock and warrants were valued at
$4,365, the invoiced amount of the services provided.
The Company intends to use the proceeds from the private placement to fund
its operations.
The securities described in this section were issued in accordance with an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended.
Item 3: Defaults Upon Senior Securities
None.
Item 4: Other Information
None.
Item 5: Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
99.1 Certification of G. Michael Cassidy, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Walter M. Psztur, Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
None.
37
INTERNET COMMERCE CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 18, 2003
INTERNET COMMERCE CORPORATION
by: /s/ G. Michael Cassidy
------------------------------------
G. Michael Cassidy
President and Chief Executive Officer
by: /s/ Walter M. Psztur
------------------------------------
Walter M. Psztur
Chief Financial Officer
38
INTERNET COMMERCE CORPORATION
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, G. Michael Cassidy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Internet Commerce
Corporation (the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within that entity,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: June 18, 2003
By: /s/ G. Michael Cassidy
---------------------------------
G. Michael Cassidy
President and Chief Executive Officer
39
INTERNET COMMERCE CORPORATION
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Walter M. Psztur, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Internet Commerce
Corporation (the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within that entity,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: June 18, 2003
By: /s/ Walter M. Psztur
----------------------------
Walter M. Psztur
Chief Financial Officer
40