UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] 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. 0 - 20660
DIRECT INSITE CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 244-1500
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 [ ]
The number of shares of $.0001 par value stock outstanding as of August 02, 2002
was: 3,805,512.
DIRECT INSITE CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss)
For the Three and Six Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6 - 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 16
Quantitative and Qualitative Disclosure About Market
Risk -------- Not Applicable
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
(In thousands, except share data)
June 30, December 31,
2002 2001
-------- ------------
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents $ 595 $ 1,359
Accounts receivable, net of allowance for
doubtful accounts of $76 and $53 in 2002
and 2001, respectively 1,071 1,098
Prepaid expenses and other current assets 857 1,096
Investment in NetWolves Corporation 266 1,209
--------- ---------
Total current assets 2,789 4,762
Software costs, net 470 508
Property and equipment, net 1,059 1,278
Investment in non-marketable securities 555 656
Other assets 576 586
--------- ---------
$ 5,449 $ 7,790
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,593 $ 2,057
Restructuring costs payable, current portion 218 294
Due to bank 704 448
Current portion of long-term debt 251 290
--------- ---------
Total current liabilities 2,766 3,089
Long term debt, net of current portion 326 103
Restructuring costs payable, long-term 237 492
--------- ---------
Total liabilities 3,329 3,684
--------- ---------
Commitments and contingencies
Shareholders' equity
Common stock, $.0001 par value; 150,000,000
shares authorized; 3,800,994 and 2,472,866
shares issued in 2002 and 2001, respectively;
and 3,745,512 and 2,401,828 shares outstanding
in 2002 and 2001, respectively - -
Additional paid-in capital 106,111 104,573
Accumulated deficit (103,459) (100,114)
Subscriptions receivable (89) -
Unearned compensation (90) -
Accumulated other comprehensive loss (25) (25)
--------- ---------
2,448 4,434
Common stock in treasury, at cost-24,371 shares (328) (328)
--------- ---------
Total shareholders' equity 2,120 4,106
--------- ---------
$ 5,449 $ 7,790
========= =========
See notes to condensed consolidated financial statements
3
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
FOR THE THREE AND SIX MNTHS ENDED JUNE 30, 2002 AND 2001
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue $ 1,982 $ 677 $ 3,496 $ 1,194
--------- --------- --------- ---------
Costs and expenses
Operations, research and development 1,088 937 2,146 1,582
Sales and marketing 615 617 1,150 1,122
General and administrative 996 1,149 1,941 1,979
Amortization and depreciation 233 241 487 479
--------- --------- --------- ---------
2,932 2,944 5,724 5,162
--------- --------- --------- ---------
Operating loss (950) (2,267) (2,228) (3,968)
Other income (expenses)
Loss on sales of NetWolves common stock - (98) (250) (98)
Other-than-temporary decline in
Investment in NetWolves (457) - (457) -
Equity in Loss of Voyant and Valuation
Adjustment (259) - (322) -
Interest income (expense), net (51) 10 (88) (307)
--------- --------- --------- ---------
Loss before provision for income taxes (1,717) (2,355) (3,345) (4,373)
Provision for income taxes - (13) - (46)
--------- --------- --------- ---------
Net loss $ (1,717) $ (2,368) $ (3,345) $ (4,419)
========= ========= ========= =========
Other comprehensive income
Reclassification adjustment and
unrealized gain on marketable securities 303 616 - 1,319
--------- --------- --------- ---------
Comprehensive loss $ (1,414) $ (1,752) $ (3,345) $ (3,100)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.46) $ (1.44) $ (0.99) $ (2.87)
========= ========= ========= =========
Basic and diluted weighted average
common shares outstanding 3,701 1,650 3,395 1,538
========= ========= ========= =========
See notes to condensed consolidated financial statements
4
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended
June 30,
-------------------------
2002 2001
---- ----
(In thousands)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net loss $ (3,345) $ (4,419)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization
Property and equipment 427 477
Software costs 58 10
Other - 1
Non-cash interest charge pertaining to the discount on
convertible debentures and loss on prepayment - 346
Provision for doubtful accounts 35 36
Loss on sales of NetWolves common stock 250 98
Other-than-temporary decline in Investment in NetWolves 457 -
Equity in Loss of Voyant and Valuation Adjustment 322 -
Common stock and options issued for services 464 481
Changes in operating assets and liabilities
Accounts receivable (8) (203)
Prepaid expenses and other current assets 239 327
Other assets 10 76
Accounts payable and accrued expenses (226) 2
Restructuring costs payable (281) (1,296)
Income taxes payable - (802)
---------- ----------
Net cash used in operating activities (1,598) (4,866)
---------- ----------
Cash flows from investing activities
Proceeds from the sale of NetWolves common stock 236 -
Advances to Voyant (194) -
Increase in cash resulting from the acquisition of
Platinum Communications - 15
Consideration paid in Platinum Communications acquisition - (142)
Investment in non-marketable securities - (500)
Capital expenditures (188) (620)
---------- ----------
Net cash used in investing activities (146) (1,247)
---------- ----------
Cash flows from financing activities
Proceeds from bank advances, net 256 -
Proceeds from the sale of common stock 560 -
Proceeds from long term debt 250 -
Repayments of long-term debt (86) (22)
Repayments of convertible debentures - (3,751)
---------- ----------
Net cash provided by (used in) financing activities 980 (3,773)
---------- ----------
Net decrease in cash and cash equivalents (764) (9,886)
Cash and cash equivalents, beginning of period 1,359 10,851
---------- ----------
Cash and cash equivalents, end of period $ 595 $ 965
========== ==========
See notes to condensed consolidated financial statements
5
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
1 Interim financial information
The condensed consolidated balance sheet as of June 30, 2002, and the
condensed consolidated statements of operations and comprehensive income
(loss) and cash flows for the periods ended June 30, 2002 and 2001, have
been prepared by the Company without audit. These interim financial
statements include all adjustments, consisting only of normal recurring
accruals, which management considers necessary for a fair presentation of
the financial statements. The results of operations for the six months
ended June 30, 2002, are not necessarily indicative of results that may be
expected for any other interim periods or for the full year.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 2001. The accounting policies used in
preparing the condensed consolidated financial statements are consistent
with those described in the December 31, 2001 consolidated financial
statements.
2 The Company
Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as
an application service provider ("ASP"), which markets an integrated "fee
for services" offering providing high volume processing of transactional
data for billing purposes, electronic bill presentation as well as visual
data analysis and reporting tools delivered via the Internet for its
customers. The Company's core technology is d.b.Express?, the proprietary
and patented management information tool, which provides targeted access
through the mining of large volumes of transactional data via the Internet.
In May 2001, the Company acquired Platinum Communications, Inc.
("Platinum"), a Dallas, Texas based company which markets integrated
business and operational support systems to the telecommunications industry
primarily as an ASP, marketed as Account Management Systems ("AMS"). The
Company and Platinum completed a merger under an Agreement and Plan of
Merger ("Merger Agreement"). Under the Merger Agreement, a newly formed
wholly owned subsidiary of the Company acquired all of the outstanding
common stock of Platinum. Further, as an added source of revenue, the
Company, during 2001, began providing custom engineering services for its
customers.
New Accounting Pronouncements
-----------------------------
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets" became effective for the Company during 2002. The
provisions of these interpretations that are applicable to the Company were
implemented on a prospective basis as of January 1, 2002, which had no
material effect on the Company's financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" became effective for the Company during 2002. The provisions of the
interpretations that are applicable to the Company were implemented on a
prospective basis as of January 1, 2002, which had no material effect on
the Company's financial statements.
On April 30, 2002 the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 eliminates the
requirement that gains and losses from the extinguishment of debt be
aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect and eliminates an inconsistency between the
accounting for sale- leaseback transactions and certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
Generally, SFAS No. 145 is effective for transactions occurring after May
15, 2002. The adoption of this standard is expected to have no impact to
the Company.
6
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), provides
guidance on the recognition and measurement of liabilities for cost
associated with exit or disposal activities. The provisions of this
Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company is currently reviewing SFAS 146 to
determine the impact upon adoption.
3 Restructuring
The Company implemented a restructuring plan and recorded a non-recurring
charge during the year ended December 31, 2000. The activity in the
restructuring accrual for the six months ended June 30, 2002 is summarized
below:
Officer/director
Employee retirement Consulting Operating
terminations packages contracts leases Total
------------ ---------------- ---------- --------- -----
Restructuring accrual,
as of December 31, 2001 $ 2,000 $ 10,000 $686,000 $ 88,000 $786,000
Company stock
Issuances - - (50,000) - (50,000)
Cash expenditures,
six months ended
June 30, 2002 (2,000) (9,000) (209,000) (61,000) (281,000)
----------- ----------- ----------- ----------- -----------
Restructuring accrual,
June 30, 2002 $ - $ 1,000 $ 427,000 $ 27,000 $455,000
=========== =========== =========== =========== ===========
4 Shareholders' equity
In January 2002, the Company's Board of Directors authorized and adopted
the 2002 Stock / Stock Option Plan whereby 625,000 shares of its common
stock were reserved. The 2002 Plan is divided into two separate equity
programs: an option grant program and a stock issuance program. Under the
stock issuance program, the purchase price per share is fixed by the Board
of Directors or committee but cannot be less than the fair market value of
the common stock on the issuance date.
During the quarter ended June 30, 2002, the Company issued 470,074 shares
of its common stock and granted 50,000 options to purchase its common stock
as detailed below:
-- During April 2002 the Company sold, at market, an aggregate of 71,000
shares to four key employees. The Company accepted full recourse
notes, aggregating $88,750, which bear interest at a rate of 6% and
will be repaid to the Company over twelve months. Additionally, the
shares further collateralize the obligation to the Company.
-- During April 2002 the Company also sold 160,000 shares of its common
stock at an aggregate price of $200,000, or $1.25 per share, the
market price on such date, to unrelated third parties in a private
transaction.
-- In lieu of cash, the Company issued 40,000 shares of its common stock
valued at $50,000 in partial settlement of certain restructure
liabilities.
7
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
-- Issued 169,074 shares of its common stock as payment of certain
consultant liabilities, valued at $216,000.
-- Granted 50,000 options to purchase its common stock as payment of
certain consultant liabilities, valued at $31,000 using the
Black-Scholes option-pricing model.
-- As per the terms of an agreement entered into in January 2002 (see
below), the Company issued 30,000 shares of its common stock, valued
at $30,000.
During the quarter ended March 31, 2002, the Company issued 858,054 shares of
its common stock and granted 645,000 options to purchase its common stock as
detailed below:
-- The Company raised approximately $359,000 through the sale of 344,524
shares of the Company's common stock to members of the Company's Board
of Directors, senior executives and other non-related parties.
-- In lieu of cash, the Company issued 213,580 shares of its common stock
valued at $224,000 ($1.05) to its employees in settlement of bonus
awards granted in 2001.
-- Issued 89,950 shares of its common stock as payment of certain
consultant liabilities, valued at $111,000.
-- The Company granted 405,000 stock options to several of its employees.
The options vest in one-third increments on April 30, 2002, December
31, 2002 and June 30, 2003, with an exercise price of $1.05 per share.
-- In January 2002, the Company entered into a two-year services
agreement with its Chairman. During the first year of the agreement,
compensation will consist of 180,000 restricted shares of the
Company's common stock, valued at $180,000, which will be expensed
over the first twelve months of the agreement. During the second year
of the agreement, compensation will consist of a monthly fee of
$15,000. Further, the Chairman received 240,000 stock options, which
vest which vest ratably during the two- year term of the agreement.
The stock options have an exercise price equal to the closing price of
the Company's common stock on the date of the agreement.
-- In January 2002, the Company retained a financial advisor to provide
general financial advisory services. The term of the agreement is for
12 months, with a fee of $10,000 per month. The parties subsequently
agreed that the fee would be paid with 120,000 shares of the Company's
common stock in lieu of cash issued ratably over the period.
Accordingly, through March 31, 2002, 30,000 shares of common stock
valued at $30,000 had been issued.
5 Long Term Debt
In January 2002, the Company's Chairman loaned the Company $250,000. The
term of the loan is three years and bears interest at 5%, payable quarterly
in arrears.
6 Reclassifications
Certain reclassifications have been made to the condensed consolidated
financial statements shown for the prior period in order to have it conform
to the current period's classifications.
7 Products and Services
The Company and its subsidiaries currently operate in one business segment
and have, during the years 2002 and 2001, provided three separate products:
ASP Services, custom engineering fees and AMS Services.
8
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
ASP fees $ 1,111 $ 515 $ 1,933 $ 995
Custom engineering fees 646 73 1,224 110
AMS fees 225 89 339 89
------- ------- ------- -------
Total Revenue $ 1,982 $ 677 $ 3,496 $ 1,194
======= ======= ======= =======
Major customer
--------------
For the three months ended June 30, 2002 and 2001, the Company has one
major customer that accounted for 80.0% and 81.4% of the Company's total
revenue, respectively. For the three months ended March 31, 2002 this major
customer accounted for 90.9% of total revenue. For the six months ended
June 30, 2002 and 2001, this major customer accounted for 88.7% and 85.3%
of the Company's total revenue, respectively. Accounts receivable from this
customer amounted to $954,000 and $401,000, at June 30, 2002 and 2001,
respectively.
8 Investments In Securities
The Company periodically reviews the carrying value of the investments in
securities as well as other assets to determine if impairment has occurred.
When required, the Company has adjusted the carrying value of an investment
in a security to reflect such impairment. Further adjustments in the
carrying values of these investments may be required in the near term.
Non-Marketable
--------------
In February 2001, the Company acquired 2,000,000 shares of Voyant
Corporation ("Voyant") through an equity investment of $500,000.
Additionally, in November 2001, the Company acquired 15,680,167 shares in
exchange for 60,000 shares of NetWolves common stock, with a value of
$156,000. Further, as part of an anti-dilution protection clause in the
initial investment agreement, the Company is entitled to approximately
46,000,000 additional shares, which will increase the Company's ownership
in Voyant to approximately 10.5%. Voyant is a privately held company, and
accordingly, through December 31, 2001, the investment had been reflected
on the Company's balance sheet as a non-marketable security, at cost. The
Company's Chairman is also the Chairman of Voyant.
The Company has achieved a level of influence such that the Company began
to account for its investment in Voyant utilizing the equity method of
accounting commencing January 1, 2002. As a result, the Company recorded a
$38,000 and $101,000 non-operating loss for its pro rata share of Voyant's
operations for the three and six month periods ended June 30, 2002,
respectively.
The Company recently began providing administrative services to Voyant, the
value of which are not readily determinable. Further, during the three
months ended June 30, 2002, the Company directly and indirectly advanced
approximately $221,000 to Voyant, for which it is to receive approximately
22,000,000 shares of Voyant common stock in settlement thereof, increasing
the Company's ownership in Voyant to approximately 15%. With respect to
these additional shares, the Company did not increase the carrying value of
its investment in Voyant and has therefore recognized an additional loss in
Voyant of $221,000. As a result, the Company recorded an "Equity in Loss of
Voyant and Valuation Adjustment" aggregating $259,000 and $322,000 for the
three and six months ended June 30, 2002.
9
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Marketable - Available for sale
-------------------------------
The Company, as of December 31, 2001, held 298,500 shares of NetWolves
Corporation common stock. During the three month period ended March 31,
2002, the Company sold 120,000 shares in the open market at prices ranging
from $2.00 to $2.06 aggregating proceeds of approximately $236,000 and
resulting in a realized loss of $250,000. No shares of NetWolves were sold
during the three months ended June 30, 2002; accordingly, at June 30, 2002,
the Company owned 178,500 shares of NetWolves common stock with a quoted
market value of $266,000 ($1.49 per share). Further, at June 30, 2002, the
Company wrote down its investment in NetWolves to the current market value.
The loss of $457,000 has been included in "Other-than- temporary decline in
Investment in NetWolves."
9 Management's Plans
For the six months ended June 30, 2002, the Company incurred net operating
losses thereby requiring cash from sources other than normal operations to
fund its operating activities. In order to fund its operating losses, the
Company:
A. continues to make use of the financing arrangement with an asset based
lending institution;
B. as described in Note 4, received approximately $560,000 from the sale
of its common stock;
C. as described in Note 5, the Company's chairman loaned the Company
$250,000;
D. as described in Note 8, the Company partially liquidated its holdings
of NetWolves common stock by selling 120,000 shares in the open market
for aggregate proceeds of approximately $236,000.
The Company's management has and will continue to take numerous steps that
it believes will create positive operating cash flow for the Company. Key
measures are as follows:
-- Expanding the Company's products and services:
-- The Company is continually expanding its suite of products and
services. The current ASP offering includes, among other things,
electronic bill presentation. Later in the year, the Company
expects to release an enhanced ASP offering, which will provide
electronic payment capability.
-- The Company acquired Platinum, which broadened the Company's
product offerings. During the three months ended June 30, 2002,
revenue increased to $225,000 up from $89,000 recorded during the
same period in 2001. However, during the 2001 period, the Company
only reported revenue from Platinum operations for the two-month
period May and June 2001. Management believes this acquisition
significantly enhances the Company's current market strategy by
allowing it to capitalize on the growing trend for outsource
services within the communications sector. It should be noted
that with respect to products and services offered through
Platinum, during the three months ended June 30, 2002, the
Company entered into a three year services agreement with a
Fortune 100 company. Further, in July 2002 the Company
consummated another services agreement with a Fortune 1000
company.
10
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
-- Expanding custom engineering / development services:
-- The Company generated custom engineering fees of $646,000 during
the second quarter of 2002 and believes that this revenue should
continue for the remainder of 2002;
-- The Company believes that revenue generated from engineering
services is the precursor to added recurring revenue sources.
In 2002, the Company entered into a new ASP agreement with International
Business Machines Corporation ("IBM"), which will enable IBM to provide an
electronic invoice to their customers.
-- Additionally, the Company has obtained a commitment from its Chairman,
other members of the Board of Directors as well as its executive
officers in which they will provide, under certain circumstances, up
to an aggregate of $750,000 for working capital purposes, if needed,
through June 30, 2003.
Management believes that its plan will ultimately enable the Company to
generate positive cash flows from operations. Until such time, the Company
believes that its present cash on hand, the sale of the remainder of its
NetWolves common stock, as well as obtaining additional debt and/or equity
financing should provide adequate funding through at least June 30, 2003.
However, there can be no assurances that the Company will have sufficient
funds to implement its current plan. In such an event, the Company could be
forced to significantly alter its plan and reduce its operating expenses,
which could have an adverse effect on revenue generation and operations in
the near term.
10 Subsequent Events
The Company held its annual meeting of shareholders on August 5, 2002 and
approved the following significant matters:
-- Amended the Certificate of Incorporation eliminating the requirement
to annually elect directors and substituting in its stead, creation of
a classified Board of Directors;
-- Amended the Certificate of Incorporation to authorize 2,000,000 shares
of preferred stock;
-- Amended the By-Laws of the Company by requiring a 66-2/3% vote of
shareholders to call a special meeting of shareholders;
-- Approved the Company's 2002-A Stock Option / Stock Issuance Plan
granting the Board of Directors authority to grant up to 875,000
shares of stock or stock options.
In July 2002, the Board of Directors granted 60,000 shares of common stock
and 787,000 stock options as follows:
o 60,000 shares of common stock were granted to the Company's Board of
Directors as compensation for Board services in 2002;
o 169,000 stock options were granted to the Company's Board of
Directors;
o 167,500 stock options were granted to the Company's named executive
officers;
o 400,500 stock options were granted to employees; and
o 50,000 options were granted to a consultant.
All options have an exercise price of $2.05, the fair market value on the
date of grant, and vest in 1/3 increments on each anniversary date.
11
DIRECT INSITE CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Forward looking statements
All statements other than statements of historical fact included in this Form
10-Q including, without limitation, statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy and the plans and objectives of
management for future operations, are forward-looking statements. When used in
this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of management, as well as assumptions made by, and
information currently available to, the Company's management. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, the risk of errors or failures in the Company's
software products, dependence on proprietary technology, competitive factors,
risks associated with potential acquisitions, the ability to recruit personnel
and the dependence on key personnel. Such statements reflect the current views
of management with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of the Company. All subsequent written
and oral forward- looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by this
paragraph.
Overview
Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as an
application service provider ("ASP"), which markets an integrated "fee for
services" offering providing high volume processing of transactional data for
billing purposes, electronic bill presentation as well as visual data analysis
and reporting tools delivered via the Internet for its customers. The Company's
core technology is d.b.Express?, the proprietary and patented management
information tool, which provides targeted access through the mining of large
volumes of transactional data via the Internet. In May 2001, the Company
acquired Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based
company which markets integrated business and operational support systems to the
telecommunications industry primarily as an ASP, marketed as Account Management
Systems ("AMS"). The Company and Platinum completed a merger under an Agreement
and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, a newly
formed wholly owned subsidiary of the Company acquired all of the outstanding
common stock of Platinum. Further, as an added source of revenue, the Company,
during 2001, began providing custom engineering services for its customers.
During the year 2001, due to negligible revenue and as part of its continuing
effort to reduce costs and strive towards achieving operating profitability, the
Company halted all marketing efforts of its Global Telecommunications Services
offering.
12
DIRECT INSITE CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Results of operations
For the three months ended June 30, 2002, total revenue increased $1,305,000 or
193% when compared to the three-month period ended June 30, 2001. This was the
fifth consecutive quarter in which the Company reported revenue growth. An
analysis of the revenue for the current quarter reflects growth in all three
product offerings: ASP increased $596,000 when compared to the second quarter of
2001; engineering fees increased to $646,000 compared to $73,000 recognized in
the three months ended June 30, 2001 resulting in a $573,000 increase; and AMS
also experienced revenue growth from $89,000 in the second quarter of 2001 to
$225,000 for the three months ended June 30, 2002. On a year to date basis, the
Company's revenue increased $2,302,000 over the six months ended June 30, 2001,
or 193%, as follows: ASP revenue increased $938,000, representing a 94% increase
in revenue from this service. Significant factors contributing to the overall
growth include expansion of product offerings and increases in the customer
base. Engineering revenue grew by $1,114,000, a ten-fold growth impact. During
2001, the Company began providing custom integration / engineering services. The
Company believes that revenue generated from engineering services is the
precursor to added recurring revenue sources. In an effort to better serve its
customers, in 2001, the Company built a fully redundant facility within an IBM
co- location center, the purpose of which is to ensure virtual zero down time.
During the six-month period ended June 30, 2002, AMS witnessed an increase of
$250,000 in revenue, or 279%, when compared to $89,000 in the 2001 period.
However, during the 2001 period, the Company only reported revenue from AMS
operations for the two-month period May and June 2001. While there can be no
assurances, management believes that total revenue should continue to increase
for the remainder of 2002.
International Business Machines Corporation ("IBM") continues to be the
Company's largest customer accounting for 80% of total revenue for the
three-month period ended June 30, 2002. However, as a result of the continued
growth realized during the quarter ended June 30, 2002, IBM's percentage of
total revenue began to decrease, down from 91% of total revenue for the
three-month period ended March 31, 2002. For the six-month periods ended June
30, 2002 and 2001, IBM accounted for 88% and 85% of total revenue, respectively.
In 2001, the Company entered into an agreement with IBM wherein for a per
transaction fee, the Company enables IBM to present invoices to a portion of its
customers via the Internet. This Electronic Bill Presentment & Payment ("EBP&P")
offering has since been expanded to include additional functionality. In March
2002, the parties signed a new agreement, which allows IBM to expand this EBP&P
offering to more of its customers, both domestic and international. In addition,
the Company continues to provide data analysis and reporting services for IBM's
telecommunications customers. Further, in an effort to reduce this sales
concentration, the Company is actively pursuing new sales opportunities.
Operations, research and development expenses consist primarily of salaries and
related costs (benefits, travel, training) for developers, programmers, custom
engineers, network services, quality control / quality assurance and
documentation personnel, applicable overhead allocations, as well as co-location
facilities expenses and all costs directly associated with the production and or
development of the Company's services.
-- When comparing the three months ended June 30, 2002 and 2001, the
Company increased its operations, research and development expenses by
$151,000. The most significant item contributing to this increase was
additional operations, research and development expenses incurred as a
result of the acquisition of Platinum of $87,000. The Company
continues to upgrade, improve and enhance its current products and
services. As a result, expenses unrelated to Platinum increased
$64,000.
-- When comparing the six months ended June 30, 2002 and 2001, the
Company increased its operations, research and development expenses by
$564,000. Here again, the most significant item contributing to this
increase was additional operations, research and development expenses
incurred as a result of the acquisition of Platinum of $246,000. The
Company continues to upgrade, improve and enhance its current products
13
DIRECT INSITE CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
and services. As a result, expenses unrelated to Platinum increased
$318,000. As described above the Company has increased revenue
$2,302,000 when comparing the six month periods ended June 30 2002 and
2001, yet have only increased expenses in the category unrelated to
the Platinum acquisition by $318,000. Management believes that it is
critical to maintain a qualified personnel staff and, further, to
continue to enhance as well as develop new and innovative services and
products. It is expected that operations, research and development
costs will increase in future periods as a result of anticipated
increases in future revenue as well as costs associated with its
product/service enhancement and development activities.
Sales and marketing expenses include salaries and related costs, commissions,
travel, facilities, communications costs and promotional expenses for the
Company's direct sales organization and marketing staff.
-- Sales and marketing expenses decreased $2,000 to $615,000 for the
three months ended June 30, 2002, when compared to $617,000 for the
three months ended June 30, 2001. The acquisition of Platinum,
contributed approximately $31,000 of additional expenses. Further,
wages and consulting fees increased $42,000 and $87,000, respectively.
Offsetting these additions, among other things, was the elimination of
the Global Technology Services product offering which totaled $159,000
for the 2001 period. Additionally, the Company paid $50,000 for a
commission earned by a sales consulting firm, which is wholly owned by
the Company's president.
-- Sales and marketing expenses increased $28,000 to $1,150,000 for the
six months ended June 30, 2002 when compared to $1,122,000 for the six
months ended June 30, 2001. The acquisition of Platinum increased
expenses by $138,000. Further, consulting fees increased $196,000.
Offsetting these additions, among other things, was a reduction in
advertising expense of $34,000 and the elimination of the Global
Technology Services product offering which totaled $241,000 for the
2001 period.
General and administrative expenses include administrative and executive
salaries and related benefits, legal, accounting and other professional fees as
well as general corporate overhead.
-- Expenses decreased $153,000 to $996,000 for three months ended June
30, 2002, when compared to $1,149,000 reported for the three months
ended June 30, 2001. Major factors contributing to this decrease
include, among other things, decreases in wages and bad debts of
$83,000 and $28,000, respectively. General and administrative expenses
related to Platinum decreased by $12,000 when compared to the same
period in 2001. Additionally, the Company further reduced expenses by
approximately $40,000, as a result of the elimination of the Global
Technology Services offering.
-- Expenses decreased $38,000 to $1,941,000 for the six months ended June
30, 2002 when compared to the six months ended June 30, 2001. Major
factors contributing to this decrease include, among other things,
decreases in wages and bad debts of $125,000 and $35,000,
respectively, and the elimination of the Global Technology Services
product offering which totaled $72,000, offset by increases in
consulting fees of $139,000 as well as $54,000 of expenses
attributable to the Company's newly acquired subsidiary, Platinum.
Amortization and depreciation expenses varied slightly.
14
DIRECT INSITE CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
As discussed in Note 8, for the six months ended June 30, 2002, the Company sold
120,000 shares of NetWolves common stock, resulting in a net loss of $250,000.
Further, as discussed in Note 8, the Company determined to adjust the carrying
value on its remaining shares of NetWolves and recorded an other-than-temporary
decline in its Investment in NetWolves, resulting in a loss of $457,000.
As discussed in Note 8, for the three and six months ended June 30, 2002, the
Company recorded losses pertaining to its equity investment in Voyant of $38,000
and $101,000, respectively. Additionally, during the three months ended June 30,
2002, the Company directly and indirectly advanced approximately $221,000 to
Voyant, for which it is to receive approximately 22,000,000 shares of Voyant
common stock in settlement thereof. The Company did not increase the carrying
value of its investment in Voyant and has therefore recognized an additional
loss in Voyant of $221,000. As a result, the Company recorded an "Equity in Loss
of Voyant and Valuation Adjustment" aggregating to $259,000 and $322,000 for the
three and six months ended June 30, 2002, respectively.
The Company made no provision for taxes during the three and six months ended
June 30, 2002. The tax provision for the three and six months ended June 30,
2001 was $13,000 and $46,000, respectively, which consisted entirely of current
tax expense.
Financial Condition and Liquidity
For the six months ended June 30, 2002, the Company incurred net operating
losses thereby requiring cash from sources other than normal operations to fund
its operating activities. In order to fund its operating losses, the Company:
1. continues to make use of the financing arrangement with an asset based
lending institution;
2. as described in Note 4, received approximately $560,000 from the sale
of its common stock;
3. as described in Note 5, the Company's chairman loaned the Company
$250,000;
4. as described in Note 8, the Company partially liquidated its holdings
of NetWolves common stock by selling 120,000 shares in the open market
for aggregate proceeds of approximately $236,000.
As detailed in the Condensed Consolidated Statement of Cash Flows, during the
six month period ended June 30, 2002, the Company utilized $1,598,000 in
operating activities, which includes, among other items, a net loss of
$3,345,000, an increase in accounts payable and accrued expenses of $226,000 and
$281,000 paid toward the restructuring, partially offset by non-cash expenses
totaling $2,013,000 and decreases in prepaid expenses and other current assets
of $239,000. Further, during the six months ended June 30, 2002, the Company
expended approximately $188,000 for capital expenditures, which included $84,000
of additional data processing and Internet connectivity equipment for its
co-location facility. In addition, the Company advanced $194,000 to Voyant.
The Company's management has and will continue to take numerous steps that it
believes will create positive operating cash flow for the Company. Key measures
are as follows:
-- Expanding the Company's products and services:
-- The Company is continually expanding its suite of products and
services. The current ASP offering includes, among other things,
electronic bill presentation. Later in the year, the Company
expects to release an enhanced ASP offering, which will provide
electronic payment capability.
-- The Company acquired Platinum, which broadened the Company's
product offerings. During the three months ended June 30, 2002,
revenue increased to $225,000 up from $89,000 recorded during the
same period in 2001. However, during the 2001 period, the Company
only reported revenue from Platinum operations for the two-month
period May and June 2001. Management believes this acquisition
15
DIRECT INSITE CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
significantly enhances the Company's current market strategy by
allowing it to capitalize on the growing trend for outsource
services within the communications sector. It should be noted
that with respect to products and services offered through
Platinum, during the three months ended June 30, 2002, the
Company entered into a three year services agreement with a
Fortune 100 company. Further, in July 2002 the Company
consummated another services agreement with a Fortune 1000
company.
-- Expanding custom engineering / development services:
-- The Company generated custom engineering fees of $646,000
during the second quarter of 2002 and believes that this
revenue should continue for the remainder of 2002;
-- The Company believes that revenue generated from engineering
services is the precursor to added recurring revenue
sources.
In 2002, the Company entered into a new ASP agreement with International
Business Machines Corporation ("IBM"), which will enable IBM to provide an
electronic invoice to their customers.
-- Additionally, the Company has obtained a commitment from its Chairman,
other members of the Board of Directors as well as its executive
officers in which they will provide, under certain circumstances, up
to an aggregate of $750,000 for working capital purposes, if needed,
through June 30, 2003.
Management believes that its plan will ultimately enable the Company to
generate positive cash flows from operations. Until such time, the Company
believes that its present cash on hand, the sale of the remainder of its
NetWolves common stock, as well as obtaining additional debt and/or equity
financing should provide adequate funding through at least June 30, 2003.
However, there can be no assurances that the Company will have sufficient
funds to implement its current plan. In such an event, the Company could be
forced to significantly alter its plan and reduce its operating expenses,
which could have an adverse effect on revenue generation and operations in
the near term.
16
DIRECT INSITE CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 99 - Certifications pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17
Pursuant to the requirements 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.
DIRECT INSITE CORP.
/s/ Warren Wright
- --------------------------
Warren Wright
Chief Executive Officer August 14, 2002
/s/ George Aronson
- --------------------------
George Aronson
Chief Financial Officer August 14, 2002
18