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 October 31, 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
New York, New York 10022
(Address of principal executive offices, including zip code)
(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 December 11, 2003, the registrant had outstanding 13,797,567 shares of
Class A Common Stock.
INTERNET COMMERCE CORPORATION
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of October 31, 2003 (unaudited)
and July 31, 2003................................................... 3
Consolidated statements of operations and comprehensive loss
for the three months ended October 31, 2003 (unaudited)
and October 31, 2002 (unaudited).................................... 4
Consolidated statements of cash flows for the three months
ended October 31, 2003 (unaudited) and October 31, 2002
(unaudited)......................................................... 5
Notes to consolidated financial statements (unaudited)................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 30
Item 4. Controls and Procedures......................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 31
Item 2. Changes in Securities and Use of Proceeds....................... 31
Item 3. Defaults Upon Senior Securities................................. 31
Item 4. Other Information............................................... 31
Item 5. Exhibits and Reports on Form 8-K ............................... 31
SIGNATURES
CERTIFICATIONS
2
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
October 31, July 31,
2003 2003
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,097,516 $ 2,283,339
Marketable securities 100,963 91,941
Accounts receivable, net of allowance for doubtful
accounts of $235,921 and $220,281, respectively 1,930,737 1,732,890
Prepaid expenses and other current assets 247,828 295,474
------------ ------------
Total current assets 3,377,044 4,403,644
Restricted cash 129,028 128,607
Property and equipment, net 475,300 556,812
Software development costs, net 108,738 127,841
Goodwill 1,211,925 1,211,925
Other intangible assets, net 1,912,000 2,151,000
Other assets 14,831 18,507
------------ ------------
Total assets $ 7,228,866 $ 8,598,336
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 653,565 $ 918,337
Accrued expenses 970,474 1,178,880
Accrued dividends - preferred stock 332,287 231,726
Deferred revenue 69,601 96,952
Capital lease obligation 136,197 148,189
Other liabilities 98,476 129,985
------------ ------------
Total current liabilities 2,260,600 2,704,069
Capital lease obligation - less current portion 21,976 46,120
Other non-current liabilities -- 8,011
------------ ------------
Total liabilities 2,282,576 2,758,200
------------ ------------
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 A preferred stock - par value $.01 per
share, none issued and outstanding -- --
Series C preferred stock - par value $.01 per
share, 44.76 votes per share; 10,000 shares
issued and outstanding (liquidation value of
$10,332,287) 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) 3 3
Common stock:
Class A - par value $.01 per share, 40,000,000
shares authorized, one vote per share;
13,797,567 and 13,797,567 shares issued and
outstanding, respectively 137,976 137,976
Additional paid-in capital 87,404,461 87,489,583
Accumulated deficit (82,630,938) (81,813,191)
Accumulated other comprehensive income 34,688 25,665
------------ ------------
Total stockholders' equity 4,946,290 5,840,136
------------ ------------
Total liabilities and stockholders' equity $ 7,228,866 $ 8,598,336
============ ============
See notes to consolidated financial statements
3
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three Months Ended
October 31,
-------------------------------
2003 2002
------------ ------------
Revenue:
Services $ 3,103,352 $ 3,049,776
------------ ------------
Expenses:
Cost of services 1,860,309 1,878,525
Product development and enhancement 225,214 260,400
Selling and marketing 825,681 763,529
General and administrative (excluding non-cash
compensation of $52,943 for the three months
ended October 31, 2003) 945,385 1,110,141
Non-cash charges for stock-based compensation and services 52,943 --
------------ ------------
3,909,532 4,012,595
------------ ------------
Operating loss (806,180) (962,819)
------------ ------------
Other income and (expense):
Interest and investment income 858 5,294
Investment loss -- (19,072)
Interest expense (12,425) (4,669)
------------ ------------
(11,567) (18,447)
------------ ------------
Net loss $ (817,747) $ (981,266)
Dividends on preferred stock (100,561) (100,543)
------------ ------------
Loss attributable to common stockholders $ (918,308) $ (1,081,809)
============ ============
Basic and diluted loss per common share $ (0.07) $ (0.09)
============ ============
Weighted average number of common shares outstanding -
basic and diluted 13,797,567 11,679,964
============ ============
COMPREHENSIVE LOSS:
- -------------------
Net loss $ (817,747) $ (981,266)
Other comprehensive income:
Unrealized gain - marketable securities 9,023 13,484
------------ ------------
Comprehensive loss $ (808,724) $ (967,782)
============ ============
See notes to consolidated financial statements
4
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended October 31,
-----------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (817,747) $ (981,266)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 385,804 439,784
Bad debt expense 15,517 34,756
Non-cash interest expense 8,605 --
Realized loss on sale of marketable securities -- 19,072
Non-cash charges for equity instruments
issued for compensation and services 52,943 --
Changes in:
Accounts receivable (213,365) 1,321,361
Prepaid expenses and other assets 42,717 11,845
Accounts payable (264,772) 74,643
Accrued expenses (245,909) (397,215)
Deferred revenue (27,351) 1,795
Other liabilities (39,520) (74,392)
----------- -----------
Net cash (used in) provided by operating
activities (1,103,078) 450,383
----------- -----------
Cash flows from investing activities:
Capitalization of software development costs -- (16,333)
Purchases of property and equipment (46,188) (4,700)
Purchases of certificates of deposit (421) --
Proceeds from sales of marketable securities -- 55,494
----------- -----------
Net cash (used in) provided by investing
activities (46,609) 34,461
----------- -----------
Cash flows from financing activities:
Payments of capital lease obligations (36,136) (59,985)
----------- -----------
Net cash used in financing activities (36,136) (59,985)
----------- -----------
Net (decrease) increase in cash and cash
equivalents (1,185,823) 424,859
Cash and cash equivalents, beginning of period 2,283,339 2,087,915
----------- -----------
Cash and cash equivalents, end of period $ 1,097,516 $ 2,512,774
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest during the period $ 3,820 $ 4,669
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 consolidated financial
statements and related notes included in the Company's Annual Report on
Form 10-K for the year ended July 31, 2003. Operating results for the
three month period ended October 31, 2003 are not necessarily indicative
of the results that may be expected for the fiscal year ending July 31,
2004.
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.
ICC's capabilities also include an EDI service bureau, which provides EDI
services to small and mid-sized companies. The service bureau'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 Company has the capability to facilitate the development and operation
of comprehensive business-to-business electronic commerce solutions. The
Company's professional services segment 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 October 31, 2003, ICC had cash and cash equivalents and marketable
securities of approximately $1,198,000. These resources, together with the
Company's accounts receivable financing agreement (Note 11) are expected
to provide the Company with sufficient liquidity to continue in operation
through July 31, 2004. However, if expenses increase more than
anticipated, or revenue does not increase as anticipated because of
competitive or other reasons, cash resources may not be sufficient and the
Company will require additional financing. There can be no assurances that
any financing will be available or that the terms will be acceptable to
the Company.
6
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
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 three to six months. 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 has a limited number of fixed fee data mapping
services contracts. Under these arrangements the Company is required to
provide a specified number of maps for a fixed fee. Revenue from such
arrangements is recognized using the percentage-of-completion method of
accounting (see below).
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
("SOP 97-2"). 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 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.
7
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
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 data mapping and professional service contracts are
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, deposits for EDI education and
training seminars 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.
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 Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 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 123. Had the compensation cost for the Company's stock
option grants to employees been determined based on the fair value at the
grant dates for awards consistent with the method described in SFAS 123,
the Company's net loss and basic and diluted loss per common share would
have changed to the pro forma amounts indicated below:
Three Months Ended
October 31,
-------------------------
2003 2002
----------- ------------
Net loss, as reported $ (817,747) $ (981,266)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (189,820) (1,771,473)
---------- ------------
Pro forma net loss $(1,007,567) $ (2,752,739)
========== ============
Basic and diluted loss per
common share:
As reported $ (0.07) $ (0.09)
Pro forma $ (0.07) $ (0.24)
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 equity securities underlying stock based compensation, the
realizability of deferred tax assets, the carrying value of goodwill,
intangible assets and long-lived assets, and depreciation and
amortization.
Recent Accounting Pronouncements:
In July 2002, the FASB issued SFAS 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.
In November 2002, the Emerging Issues Task Force of the FASB ("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 was effective for
revenue arrangements entered into in fiscal years and interim periods
beginning after June 15, 2003. The adoption of this consensus, effective
August 1, 2003, did not have a significant impact on the Company's
consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No.
123" ("SFAS 148"). SFAS 148 amends SFAS 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
123. SFAS 148 provides two additional methods of transition and will no
longer permit the
9
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
SFAS 123 prospective method to be used for fiscal years beginning after
December 15, 2003. In addition, SFAS 148 amends the disclosure
requirements of SFAS 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 123 been used for all periods
presented. The adoption of SFAS 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 significant impact on the Company's
consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends
and clarifies accounting for derivative instruments, and for hedging
activities under SFAS 133. Specifically, SFAS 149 requires that contracts
with comparable characteristics be accounted for similarly. Additionally,
SFAS 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 did not have a
significant impact on the Company's consolidated financial position or
results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS
150"). SFAS 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 is 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, effective August 1, 2003, did
not have a material impact on the Company's consolidated financial
position or results of operations.
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 month period ended October 31, 2003 and 2002, no single
customer accounted for more than 10% of revenue. No single customer
accounted for more than 10% of accounts receivable at July 31, 2003 and
October 31, 2003.
10
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
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.
11
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
5. BUSINESS SEGMENT INFORMATION (CONTINUED)
The tables below summarizes information about operations and long-lived
assets as of and for the three months ended October 31, 2003 and 2002:
Service Professional
ICC.NET Bureau Services Total
------- ------ -------- -----
Three Months - October 31, 2003
Revenues from external customers $ 2,440,538 $ 307,651 $ 355,163 $ 3,103,352
=========== =========== =========== ===========
Operating loss (1) $ (678,818) $ (30,934) $ (96,428) $ (806,180)
Other income (expense), net (8,973) -- (2,594) (11,567)
----------- ----------- ----------- -----------
Net income (loss) $ (687,791) $ (30,934) $ (99,022) $ (817,747)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 354,347 $ 13,288 $ 18,169 $ 385,804
Non-cash charges for stock-based
compensation and services $ 52,943 $ -- $ -- $ 52,943
As of October 31, 2003
Property and Equipment, net $ 260,455 $ 35,221 $ 179,624 $ 475,300
Capitalized software, net -- 108,738 -- 108,738
Acquired identified intangibles, net 1,912,000 -- -- 1,912,000
Goodwill 26,132 1,185,793 -- 1,211,925
----------- ----------- ----------- -----------
Long lived assets, net $ 2,198,587 $ 1,329,752 $ 179,624 $ 3,707,963
=========== =========== =========== ===========
(1) Commencing in the second quarter of fiscal 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 October 31, 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.
Service Professional
ICC.NET Bureau Services Total
------- ------ -------- -----
Three Months - October 31, 2002
Revenues from external customers $ 2,119,080 $ 466,037 $ 464,659 $ 3,049,776
=========== =========== =========== ===========
Operating loss $ (969,124) $ 83,271 $ (76,966) $ (962,819)
Other income (expense), net (14,589) -- (3,858) (18,447)
----------- ----------- ----------- -----------
Net income (loss) $ (983,713) $ 83,271 $ (80,824) $ (981,266)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 346,761 $ 30,646 $ 62,377 $ 439,784
As of October 31, 2002
Property and Equipment, net $ 493,300 $ 72,424 $ 404,798 $ 970,522
Capitalized software, net -- 328,179 -- 328,179
Acquired identified intangibles,
net 2,868,000 -- -- 2,868,000
Goodwill 26,132 2,167,935 -- 2,194,067
----------- ----------- ----------- -----------
Long lived assets, net $ 3,387,432 $ 2,568,538 $ 404,798 $ 6,360,768
=========== =========== =========== ===========
12
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
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 (the "2003 Private Placement") for aggregate gross
proceeds of approximately $2,085,000.
In the 2003 Private Placement the Company sold 1,682, 683 shares of class
A common stock and warrants to purchase 1,346,140 of class A common stock
providing gross proceeds of approximately $1,835,000 and 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 $250,000.
All warrants are immediately exercisable and have an exercise price of
$1.47 per share. The warrants are exercisable until the fifth anniversary
of the date of issuance. In addition, the warrants are redeemable at the
Company's option, if the closing bid price of the Company's class A common
exceeds 200% of the exercise price of the warrants for 30 consecutive
trading days. The redemption price is $0.10 per share for each share
issuable under the warrants.
The 250 shares of series D preferred are convertible into 192,307 shares
of class A common stock. The allocation of the proceeds from the sale of
the series D preferred between the fair value of the series D 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 2003 Private Placement, the Company incurred fees
of $325,750 of which $237,938 was payable in cash and $87,802 was paid by
issuing warrants to purchase 110,680 shares of class A common stock. These
warrants have substantially the same terms as the warrants issued in the
2003 Private Placement.
In connection with the 2003 Private Placement, the Company issued 48,076
shares of class A common stock and warrants to purchase 38,460 shares of
class A common stock in settlement of certain outstanding payables. The
common stock and warrants were valued at $50,000, the invoice amount of
the services provided to the Company.
Approximately 21%, or $432,000, of the gross proceeds from the 2003
Private Placement were received from directors and officers and entities
with which the Company's directors are affiliated.
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
13
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
6. STOCKHOLDERS' EQUITY (CONTINUED)
directors and three officers agreed to pay an additional $0.58 per share,
or an aggregate of $85,502, for the shares of class A common stock they
purchased in the private placement. In August of 2003 the Company paid
bonuses of approximately $40,000 to reimburse the officers for their
additional $0.58 per share payment.
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 in the quarter 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 $15,440 has
been recorded as a non-cash stock-based compensation charge for services
during the three months ended October 31, 2003.
Each non-employee member of the board of directors receives annual
compensation of $25,000 for his current term of office, payable quarterly,
in class A common stock of the Company. The Company has recorded a
compensation charge of $37,503 for the three months ended October 31,
2003. As of October 31, 2003 the Company had not issued the shares due to
the directors for the quarter and accordingly has recorded an accrued
liability for the compensation owed to the directors.
14
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 for 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 October 31, 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 142 requires that intangible assets
with indefinite useful lives no longer be amortized, but rather be tested
at least annually for impairment. The Company's reporting units utilized
for evaluating the recoverability of goodwill are the same as its
operating segments.
9. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
At October 31, and July 31, 2003, Other Intangible assets included the
proprietary data mapping technology acquired in the acquisition of
Research Triangle Commerce, Inc. in November 2000. The gross carrying
value of the mapping technology was $4,780,000 at October 31, and July 31,
2003. Accumulated amortization relating to mapping technology was
$2,868,000 and $2,629,000 at October 31, 2003 and July 31, 2003,
respectively. The data mapping technology is being amortized over five
years and amortization expense is recorded in cost of services.
The Company did not have any indefinite lived intangible assets that were
not subject to amortization as of October 31, and July 31, 2003. The
aggregate amortization expense for other intangible assets was $239,000
during each of the three months ended October 31, 2003 and 2002.
At October 31, 2003, estimated amortization expense for other intangible
assets for the remaining life of those assets are as follows:
Year Estimated Amortization Expense
---- ------------------------------
2004 $956,000
2005 $956,000
2006 $239,000
There was no change in the carrying amount of goodwill for the three
months ended October 31, 2003.
15
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
During the fourth quarter of fiscal 2003 the goodwill of the Service
Bureau was tested for impairment due to a significant decline in revenues
and operating income resulting primarily from the bankruptcy of its
largest customer. An impairment loss of $982,142 was recognized as a
result of this evaluation. The fair value of the Service Bureau reporting
unit was estimated using the net present value of expected future cash
flows.
As of August 1, 2003, the Company performed its annual test for impairment
on the carrying value of goodwill of its ICC.NET and Service Bureau
reporting units. The Company concluded that no impairment existed at that
date.
10. GUARANTEES AND INDEMNIFICATIONS
As part of its standard license agreements, the Company agrees to
indemnify its customers against liability if the Company's products
infringe a third party's intellectual property rights. Historically, the
Company has not incurred any significant costs related to performance
under these indemnities. As of October 31, 2003, the Company was not
subject to any litigation alleging that the Company's products infringe
the intellectual property rights of any third parties.
11. ACCOUNTS RECEIVABLE FINANCING AGREEMENT
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. Interest accrues at 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 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 is being
amortized to interest expense over the term of the Financing Agreement.
During the three months ended October 31, 2003 the Company recorded
interest expense in the amount of approximately $8,600 for the
amortization of the fair value of the warrants. On October 22, 2003, the
Company and Silicon Valley Bank amended the Financing Agreement to extend
the term of the agreement to August 31, 2004. At October 31, 2003, there
were no amounts outstanding under the financing arrangement.
16
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 and Section
21E of 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 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 described below the heading "Overview" and in our registration
statements and periodic reports filed with 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. 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 in the e-commerce ("EC") business-to-business communication
services market providing complete EC 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, email-based and other
Internet-based software systems, because our service is provided at a low cost,
with greater transmission speed in nearly real-time 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. The Service Bureau
17
INTERNET COMMERCE CORPORATION
delivers business-to-business EDI standards-based documents for companies that
do not have EDI departments. Our Professional Services segment facilitates the
development and operations of comprehensive business-to-business e-commerce
solutions. Professional Services assists its clients to conduct business
electronically through a continuum of services including eConsulting, data
transformation mapping (EDI, EAI, XML) and internetworking.
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.
During the fourth quarter of fiscal 2003 the goodwill of the Service
Bureau was tested for impairment due to a significant decline in revenues and
operating income resulting primarily from the bankruptcy of its largest
customer. An impairment loss of $982,142 was recognized as a result of this
evaluation. The fair value of the Service Bureau reporting unit was estimated
using the net present value of expected future cash flows.
We rely on many of our competitors to interconnect, at reasonable cost,
with our service. We have interconnection arrangements with more than 65
business-to-business networks for the benefit of our customers. Two of the
largest networks, Global eXchange Services ("GXS") and Sterling Commerce, which
we believe to account for approximately 60% of the estimated EDI users,
discontinued 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 have 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 interconnection arrangements, we will continue to 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.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
Critical accounting policies are those policies 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, 2003. 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 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 three to six months. 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
18
INTERNET COMMERCE CORPORATION
Company has a limited number of fixed fee data mapping services contracts. Under
these arrangements the Company is required to provide a specified number of maps
for a fixed fee. Revenue from such arrangements is recognized using the
percentage-of-completion method of accounting (see below).
Service Bureau revenue is comprised of EDI services including data
translation services, EDI-to-print and print-to-EDI purchase order and invoice
processing, UPC services including UPC number generation, UPC catalog
maintenance and UPC label printing. The Service Bureau also derives revenue from
licensing software and providing software maintenance and support. Revenue from
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 ("SOP 97-2"). 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 data mapping and 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.
19
INTERNET COMMERCE CORPORATION
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.
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 other
than goodwill that were not subject to amortization.
Impairment of long-lived assets: Long-lived assets of the Company,
including amortizable intangibles, 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. When such events or changes in circumstances occur,
the Company tests for impairment by comparing the carrying value of the
long-lived asset to the estimated undiscounted future cash flows expected to
result from use of the asset and its eventual disposition. If the sum of the
expected undiscounted future cash flows is less than the carrying amount of the
asset, the Company would recognize an impairment loss. The amount of the
impairment loss will be determined by comparing the carrying value of the
long-lived asset to the present value of the net future operating cash flows to
be generated by the asset.
Stock-based compensation: The Company accounts for stock-based
compensation with its employees using the intrinsic value method in accordance
with the provisions of Account 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 established 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 SFAS No. 123.
Income Taxes: Deferred income taxes are determined by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements. A valuation allowance is provided based on
the weight of available evidence, if it is considered more likely than not that
some portion, or all, of the deferred tax assets will not be realized.
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 month periods ended October 31, 2003 and 2002 or as of October
31, 2003 and July 31, 2003 that required the use of significant management
estimates.
The Company has entered into several transactions involving the issuance
of warrants and options to purchase shares of the Company's class A common stock
to consultants, lenders, warrant holders, placement agents and other business
associates and vendors. The issuance of these securities required management to
estimate their value using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model requires management to make certain estimates
for values of variables used by the model. Management estimated the values for
stock price volatility, the expected life of the equity instruments and the risk
free rate based on information that was available to management at the time the
Black-Scholes option-pricing calculations were performed. Changes in such
estimates could have a significant impact on the estimated fair value of those
equity instruments.
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. On October 22, 2003, the Company and
20
INTERNET COMMERCE CORPORATION
Silicon Valley Bank amended the Financing Agreement to extend the term of the
agreement to August 31, 2004. 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 per share, equal to the fair market value of the Company's class
A common stock on the date of closing of the Financing Agreement. The warrants
are exercisable for a seven-year period. The value of the warrants in the amount
of $34,000 is being amortized over the life of the Financing Agreement.
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 to be $42,000.
The allocation of the proceeds from the sale of the series D preferred
stock and warrants issued in the Company's April 30, 2003 private placement
between the fair value of the series D preferred stock and the fair value of the
detachable warrants required management to estimate the fair value of the
warrants. Management's estimate 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 private placement that closed during April and May
of 2003, the Company incurred fees which were paid by issuing warrants to
purchase 110,680 shares of class A common stock at an exercise price of $1.47
per share. The fair value of the warrants was determined by management to be
$87,800.
In connection with the acquisition of RTCI on November 6, 2000, issued and
outstanding options and warrants to purchase RTCI common stock were exchanged
for options and warrants of ICC, providing the holders the right to receive,
upon exercise, an aggregate of 394,905 shares of ICC class A common stock and
$343,456 of cash. The options and warrants were valued using the Black-Scholes
option-pricing model. The fair value of the vested portion of the options was
included in the purchase price for RTCI.
Goodwill is evaluated for impairment at least annually and whenever events
or circumstances indicate impairment may have occurred. The assessment requires
the comparison of the fair value of each of the Company's reporting units to the
carrying value of its respective net assets, including allocated goodwill. If
the carrying value of the reporting unit exceeds its fair value, the Company
must perform a second test to measure the amount of impairment. The second step
of the goodwill impairment test compares the implied fair value of reporting
unit goodwill with the carrying amount of that goodwill. The Company allocates
the fair value of a reporting unit to all of the assets and liabilities of that
unit as if the reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the price paid to acquire the reporting
unit. The excess of the fair value of a reporting unit over the amounts assigned
to its assets and liabilities is the implied fair value of goodwill. If the
carrying amount of reporting unit goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized by the Company in an amount
equal to that excess.
The Company estimates the fair value of its reporting units based on the
net present value of expected future cash flows. The use of this method requires
management to make estimates of the expected future cash flows of the reporting
unit and the Company's weighted average cost of capital. Estimating the
Company's weighted average cost of capital requires management to make estimates
for long-term interest rates, risk premiums, and beta coefficients. Management
estimated these items based on information that was available to management at
the time the Company prepared its estimate of the fair value of the reporting
unit. Changes in either the expected cash flows or the weighted average cost of
capital could have a significant impact on the estimated fair value of the
Company's reporting units.
21
INTERNET COMMERCE CORPORATION
An impairment of goodwill in the amount of approximately $982,000 was
recorded during the year ended July 31 2003. During the fourth quarter of fiscal
2003 the goodwill of the Service Bureau was tested for impairment due to a
significant decline in revenues and operating income resulting primarily from
the bankruptcy of its largest customer. An impairment loss of approximately
$982,000 was recognized as a result of this evaluation. The fair value of the
Service Bureau reporting unit was estimated using the net present value of
expected future cash flows.
Three Months Ended October 31, 2003 Compared with Three Months Ended October 31,
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
October 31,
------------------------
Consolidated net loss: 2003 2002
---------- ---------
ICC.NET $ (687,791) $ (983,713)
Service Bureau (30,934) 83,271
Professional Services (99,022) (80,824)
---------- ----------
Consolidated loss $ (817,747) $ (981,266)
========== ==========
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
October 31, 2003 and 2002:
Three Months Ended
October 31,
-------------------------------
2003 2002
--------------- -------------
Revenue:
VAN Services $ 2,355,730 $ 1,948,959
Mapping Services 84,808 170,121
-------------- ------------
2,440,538 2,119,080
Expenses:
Cost of services 1,302,666 1,256,407
Product development and enhancement 190,965 230,219
Selling and marketing 774,231 684,313
General and administrative 798,552 917,267
Non-cash charges for stock based
compensation 52,942 -
--------------- -------------
3,119,356 3,088,206
--------------- -------------
Operating loss (678,818) (969,126)
--------------- -------------
Other income (expense), net (8,973) (14,589)
--------------- -------------
Net loss $ (687,791) $ (983,713)
============= ===========
22
INTERNET COMMERCE CORPORATION
Revenue - ICC.NET - Revenue related to our ICC.NET service was 79% of
consolidated revenue for the quarter ended October 31, 2003 ("2004 Quarter")
compared to 69% for the quarter ended October 31, 2002 ("2003" Quarter). Total
ICC.NET revenue increased $321,000 in the 2004 Quarter from the 2003 Quarter, or
approximately 15%. VAN services revenue increased $407,000, or approximately
21%, in the 2004 Quarter from the 2003 Quarter. The increase in VAN services
revenue is primarily attributable to an increase in the number of customers to
approximately 1,100 in October 2003 from approximately 600 in October 2002.
Mapping revenue decreased $85,000, or approximately 50%, in the 2004 Quarter
from the 2003 Quarter primarily due to a decrease in the number of customers and
smaller mapping projects resulting from the slow economy.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 53% of revenue derived from the ICC.NET service in the 2004 Quarter,
compared to 59% in the 2003 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 increased $46,000 in the 2004
Quarter from the 2003 Quarter. Data lines increased $72,000 in the 2004 Quarter
from the 2003 Quarter due to higher interconnect fees resulting from an increase
in volume. In addition, amortization expense increased $13,000 in the 2004
Quarter from the 2003 Quarter due to software that was placed in service
subsequent to the 2003 Quarter. Additionally, allocation of equipment and
software expense increased $11,000 in the 2004 Quarter compared to the 2003
Quarter to reflect costs incurred by ICC.NET personnel working in professional
services facilities. These increases were offset by a decrease of $28,000 in
salaries and benefits in the 2004 Quarter compared to the 2003 Quarter due to a
decrease in the number of employees to 26 at the end of the 2004 Quarter from 30
at the end of the 2003 Quarter. In addition, consulting expense decreased
$22,000 in the 2004 Quarter from the 2003 Quarter. Cost of services relating to
VAN services decreased slightly to $907,000 in the 2004 Quarter from $915,000 in
the 2003 Quarter. Cost of services relating to the Mapping Services increased to
$395,000 in the 2004 Quarter from $341,000 in the 2003 Quarter due primarily to
less time spent by mapping personnel working on non-mapping projects.
Product development and enhancement - ICC.NET - Product development and
enhancement costs relating to our ICC.NET service consist primarily of salaries
and employee benefits. Product development and enhancement costs decreased
$39,000 in the 2004 Quarter from the 2003 Quarter. Salaries and benefits
decreased $21,000 in the 2004 Quarter compared to the 2003 Quarter primarily due
to a decrease in the number of employees to 10 at the end of the 2004 Quarter
from 11 at the end of the 2003 Quarter. In addition, allocation of salaries and
benefits from product development and enhancement to general & administrative
departments increased $9,000 in the 2004 Quarter compared to the 2003 Quarter,
and consulting expenses decreased $6,000 in the 2004 Quarter from the 2003
Quarter.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consist primarily of salaries and employee benefits,
travel-related costs, rent, depreciation, advertising and trade-show costs.
Selling and marketing expenses related to our ICC.NET service increased $90,000
in the 2004 Quarter from the 2003 Quarter. Salaries and benefits increased
$52,000 in the 2004 Quarter from the 2003 Quarter due to an increase in
commissions of $17,000 and due to an increase in the number of employees to 21
at the end of the 2004 Quarter from 20 at the end of the 2003 Quarter. Rent
increased $30,000 in the 2004 Quarter over the 2003 Quarter due primarily due an
allocation of rent to selling and marketing departments in the 2004 Quarter.
Travel and entertainment increased $17,000 in the 2004 Quarter from the 2003
Quarter due to increased selling activity.
23
INTERNET COMMERCE CORPORATION
Advertising decreased $19,000 in the 2004 Quarter compared to the 2003 Quarter
due to lower printing charges and trade show fees. 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. This
corporate allocation to the professional services segment was $33,000 in the
2004 Quarter.
General and administrative - ICC.NET - General and administrative
expenses supporting our ICC.NET service consist primarily of salaries and
employee benefits, legal and professional fees, facility costs, and
depreciation. General and administrative costs supporting our ICC.NET service
decreased $119,000 in the 2004 Quarter from the 2003 Quarter. Salaries and
benefits decreased $58,000 in the 2004 Quarter from the 2003 Quarter primarily
due to a decrease in the number of employees to 12 at the end of the 2004
Quarter from 14 at the end of the 2003 Quarter. Also depreciation and
amortization decreased $41,000 in the 2004 Quarter from the 2003 Quarter
primarily as a result of fewer assets being acquired and more assets becoming
fully depreciated resulting in a lower depreciable asset base. State corporation
taxes decreased $48,000 in the 2004 Quarter from the 2003 Quarter. Rent
decreased $34,000 in the 2004 Quarter from the 2003 Quarter due to increased
allocation to ICC.NET departments outside the general and administrative
category in the 2004 Quarter. These decreases were offset by an increase of
$71,000 in legal and professional fees in the 2004 Quarter from the 2003
Quarter. 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 functions to the segments based on the level
of services provided to each segment. These corporate allocations to the
segments were $78,000 in the 2004 Quarter.
Non-Cash charges - ICC.NET - Non-cash charges of approximately $53,000 in
the 2004 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 $38,000. In addition, $15,000 of expense was recognized during the
2004 Quarter for stock 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 October 31, 2003 and 2002:
Three Months Ended
October 31,
--------------------------
2003 2002
--------- ---------
Revenue:
Services $ 307,651 $ 466,037
--------- ---------
Expenses:
Cost of services 203,901 202,074
Product development and enhancement 34,249 30,181
Selling and marketing 18,450 35,194
General and administrative 81,985 115,317
--------- ---------
338,585 382,766
--------- ---------
Operating income (loss) (30,934) 83,271
--------- ---------
Other income, net -- --
--------- ---------
Net loss $ (30,934) $ 83,271
========= =========
Revenue - Service Bureau - Revenue related to our service bureau was 10%
of our consolidated revenue in the 2004 Quarter compared to 15% of our
consolidated revenue for the 2003 Quarter. The service bureau's revenue was
primarily generated from services performed, customer support and licensing
fees. The decrease in revenue in 2004 Quarter from the 2003 Quarter of $158,000
or 34% was primarily the result of a decrease its EDI service business
attributable to a slow economy.
24
INTERNET COMMERCE CORPORATION
Cost of services - Service Bureau - Total cost of services relating to
our service bureau was 66% of revenue derived from the service bureau in the
2004 Quarter compared to 43% in the 2003 Quarter. Cost of services related to
our service bureau consists primarily of salaries and employee benefits and
rent. Cost of services relating to our service bureau were essentially the same
in the 2004 Quarter as in the 2003 Quarter due to maintaining the same level of
employees and due to fixed costs.
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 were
essentially the same in the 2004 Quarter compared to the 2003 Quarter.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits. The decrease of $17,000 in the 2004 Quarter from the 2003 Quarter was
primarily due to a decrease in salaries and benefits of $14,000 in the 2004
Quarter from the 2003 Quarter due to a reduction of 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 in general and administrative expenses of $33,000 in the 2004 Quarter
from the 2003 Quarter is primarily attributable to a decrease in Service Bureau
salaries and employee benefits of $67,000 due to a reduction in personnel to 1
at the end of the 2004 Quarter from 4 at the end of the 2003 Quarter.
Additionally, depreciation expense decreased $12,000 in the 2004 Quarter from
the 2003 Quarter primarily as a result of fewer assets being acquired and more
assets becoming fully depreciated resulting in a lower depreciable base. These
decreases were 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 2004 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 October 31, 2003 and 2002:
Three Months Ended
October 31,
---------------------------
2003 2002
--------- ---------
Revenue:
Services $ 355,162 $ 464,658
--------- ---------
Expenses:
Cost of services 353,741 420,045
Selling and marketing 33,000 44,022
General and administrative 64,849 77,557
--------- ---------
451,590 541,624
--------- ---------
Operating loss (96,428) (79,966)
Other income (expense), net (2,594) (3,858)
--------- ---------
Net loss $ (99,022) $ (80,824)
========= =========
Revenue - Professional Services - Revenue related to professional services
was 11% of our consolidated revenue in the 2004 Quarter compared to 15% in the
2003 Quarter. Revenue generated from professional services consists of
consulting and educational services. As a result of the slow economy, which has
resulted in a decrease in capital expenditures for information technology and
related services, revenue from all of our professional services decreased
$109,000 or 23% in the 2004 Quarter from the 2003 Quarter. This decrease is
primarily due to a decrease in EDI educational services of $100,000 in the 2004
Quarter from the 2003 Quarter.
25
INTERNET COMMERCE CORPORATION
Cost of services - Professional Services - Cost of services relating to
professional services was 100% of revenue derived from professional services in
the 2004 Quarter, compared to 90% of revenue in the 2003 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 decreased $66,000 in the 2004 Quarter from the 2003 Quarter. Salaries
and benefits and contract labor decreased $51,000 in the 2004 Quarter from the
2003 Quarter due primarily to a decrease in the number of employees to 8 at the
end of the 2004 Quarter from 12 at the end of the 2003 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 decreased by $11,000 in the 2004 Quarter
from the 2003 Quarter. The allocation of selling and marketing expense in the
2004 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 $13,000 in the 2004 Quarter from the 2003 Quarter. Allocation
of expenses to ICC.NET from professional services increased $58,000 in the 2004
Quarter from the 2003 Quarter to reflect costs incurred relating to ICC.NET
personnel working in the professional services facilities. Depreciation expense
decreased $21,000 in the 2004 Quarter from the 2003 Quarter due to allocation of
depreciation expenses to departments not in the general and administrative
category in the 2004 Quarter. These decreases were offset by allocation of
$33,000 of general and administrative expenses from ICC.NET in the 2004 Quarter
compared to none in the 2003 Quarter. See "General and administrative - ICC.NET"
above for a discussion of the allocation of general and administrative expenses
among segments. In addition, salaries and benefits increased by $28,000 in the
2004 Quarter from the 2003 Quarter due to an increase in the number of employees
to 6 at the end of the 2004 Quarter from 5 at the end of the 2003 Quarter.
Liquidity and Capital Resources
Our principal sources of liquidity, which consist of cash and cash
equivalents and marketable securities, decreased to $1,198,000 as of October 31,
2003 from $2,375,000 as of July 31, 2003. 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, 2004.
Competitive or other factors described under the heading "Risk Factors"
included in our annual report on Form 10-K for the year ended July 31, 2003 may
prevent us from achieving positive cash flow from operations, and, therefore, we
may need to undertake additional cost reduction activities or raise additional
capital. There can be no assurance that additional capital, if required, will be
available to us on reasonable terms or at all.
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 and May 2003.
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 (the "2003 Private Placement") for aggregate gross proceeds of
approximately $2,085,000.
26
INTERNET COMMERCE CORPORATION
In the 2003 Private Placement the Company sold 1,682, 683 shares of class
A common stock and warrants to purchase 1,346,140 of class A common stock
providing gross proceeds of approximately $1,835,000 and 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 $250,000. All warrants are
immediately exercisable and have an exercise price of $1.47 per share. The
warrants are exercisable until the fifth anniversary of the date of issuance. In
addition, the warrants are redeemable at the Company's option, if the closing
bid price of the Company's class A common exceeds 200% of the exercise price of
the warrants for 30 consecutive trading days. The redemption price is $0.10 per
share for each share issuable under the warrants.
The 250 shares of series D preferred are convertible into 192,307 shares
of class A common stock. The allocation of the proceeds from the sale of the
series D preferred between the fair value of the series D 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 was eligible for conversion upon issuance.
In connection with the 2003 Private Placement, the Company incurred fees
of $325,750, of which $237,938 was payable in cash and $87,802 was paid by
issuing warrants to purchase 110,680 shares of class A common stock. These
warrants have substantially the same terms as the warrants issued in the 2003
Private Placement.
In connection with the 2003 Private Placement, the Company issued 48,076
shares of class A common stock and warrants to purchase 38,460 shares of class A
common stock in settlement of certain outstanding payables. The common stock and
warrants were valued at $50,000, the invoice amount of the services provided to
the Company.
Approximately 21%, or $432,000, of the gross proceeds from the 2003
Private Placement was received from directors and officers and entities with
which the Company's directors are affiliated.
On May 30, 2003, the Company executed an Accounts Receivable Financing
Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term
of one 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
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 on 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. During
the quarter ended October 31, 2003 the Company recorded interest expense in the
amount of approximately $8,600 for the amortization of the fair value of the
warrants. On October 22, 2003, the Company and Silicon Valley Bank amended the
Financing Agreement to extend the term of the agreement to August 31, 2004. At
October 31, 2003, there were no amounts outstanding under the financing
arrangement.
We have a net operating loss carryforward of approximately $75 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
27
INTERNET COMMERCE CORPORATION
carryforwards. The carryforward expires from 2007 to 2021. The Internal Revenue
Code of 1986, as amended, and the regulations promulgated thereunder 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 $1,116,000 at October 31, 2003
from $1,700,000 at July 31, 2003. This decrease is due to a $473,000 decrease in
accounts payable and accrued expense coupled with a $198,000 increase in
accounts receivable primarily attributable to slower collections, as well as
continued operating losses during the 2004 Quarter. Our cash and marketable
securities decreased $1,177,000 at October 31, 2003 compared to July 31, 2003.
Analysis of Cash Flows
Cash used in operating activities was $1,103,000 in the 2004 Quarter
compared to $450,000 provided by operating activities in the 2003 Quarter. The
decrease in the 2004 Quarter is primarily the result of a decrease in accounts
payable and accrued expense of $511,000 coupled with an increase in accounts
receivable of $213,000 and operating losses. The cost provided by operating
activities during the 2003 Quarter was primarily the result of a decrease in
accounts receivable due to the collection of $1,500,000 from Triaton in October
2002, partially offset by a decrease in accrued expense of $397,000
Cash used in investing activities increased to $47,000 in the 2004
Quarter from $34,000 provided by investing activities in the 2003 Quarter.
Expenditures of $46,000 in the 2004 Quarter were primarily the result of
purchases of property and equipment. Cash provided by investing activities in
the 2003 Quarter was primarily the result of $55,000 of proceeds from the sale
of marketable securities, partially offset by investments in capitalized
software in the amount of $16,000.
Cash used in financing activities was $36,000 in the 2004 Quarter compared
to $60,000 in the 2003 Quarter. Cash used in financing activities in the both
the 2004 and 2003 Quarters represent payments of capital leases obligations.
28
INTERNET COMMERCE CORPORATION
Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS 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.
In November 2002, the Emerging Issues Task Force of the FASB ("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 was effective for revenue arrangements
entered into in fiscal years and interim periods beginning after June 15,
2003. The adoption of this consensus, effective August 1, 2003, did not have
a significant impact on the Company's consolidated financial position or
results of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No.
123" ("SFAS 148"). SFAS 148 amends SFAS 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 123.
SFAS 148 provides two additional methods of transition and will no longer
permit the SFAS 123 prospective method to be used for fiscal years beginning
after December 15, 2003. In addition, SFAS 148 amends the disclosure
requirements of SFAS 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 123 been used for all periods presented. The
adoption of SFAS 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
significant impact on the Company's consolidated financial position or
results of operations.
In April 2003, the FASB issued SFAS 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and
clarifies accounting for derivative instruments, and for hedging activities
under SFAS 133. Specifically, SFAS 149 requires that contracts with
comparable characteristics be accounted for similarly. Additionally, SFAS 149
clarifies the circumstances in which a
29
INTERNET COMMERCE CORPORATION
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 did
not have a significant impact on the Company's consolidated financial
position or results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS
150"). SFAS 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.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is primarily exposed to interest rate risk, equity risk and
credit risk.
Interest Rate Risk - Interest rate risk refers to fluctuations in the
value of a security resulting from changes in the general level of interest
rates. Investments that are classified as cash and cash equivalents have
original maturities of three months or less. Changes in interest rates may
affect the value of these investments.
Equity Risk - Refers to the change in the value of investments in common
stock. The Company has investments in marketable common stocks that are subject
to price fluctuation risk.
Credit Risk - Our accounts receivables are subject, in the normal course
of business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result we do not anticipate any material
losses in this area.
Item 4: Controls and Procedures
Our management, including our chief executive officer and chief financial
officer, have carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of October 31, 2003, pursuant to Exchange Act Rules
13a-15(e) and 15(d)-15(e). Based upon that evaluation, our chief executive
officer and chief financial officer have concluded that as of such date, our
disclosure controls and procedures in place are adequate to ensure material
information and other information requiring disclosure is identified and
communicated on a timely basis.
30
INTERNET COMMERCE CORPORATION
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
None.
Item 2: Changes in Securities and Use of Proceeds
None.
Item 3: Defaults Upon Senior Securities
None.
Item 4: Other Information
None.
Item 5: Exhibits and Reports on Form 8-K
(a) Exhibits.
31.1 Certificate of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certificate of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated October 29, 2003 (Item 5 and 9).
31
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: December 15, 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
32