Attached files
| file | filename |
|---|---|
| EX-32 - CERTIFICATION - Paybox Corp. | diri10q-march2011ex32.htm |
| EX-31 - CERTIFICATION - Paybox Corp. | diri10q-march2011ex31.htm |
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 March 31, 2011
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)
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Delaware
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11-2895590
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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13450 West Sunrise Blvd., Suite 510, Sunrise, FL
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33323
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code (631) 873-2900
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
The number of shares of $.0001 par value stock outstanding as of May 12, 2011 was: 11,697,683
| Page | |
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CERTIFICATIONS
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Exhibits
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DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2011 AND DECEMBER 31, 2010
(In thousands, except share data)
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December 31,
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|||||||
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2011
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2010
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||||||
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(Unaudited)
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|||||||
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ASSETS
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|||||||
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Current assets
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|||||||
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Cash and cash equivalents
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$ | 1,338 | $ | 1,707 | |||
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Accounts receivable, net of allowance for doubtful accounts of
$0 in 2011 and 2010
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1,653 | 1,325 | |||||
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Deferred tax asset – current
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750 | 750 | |||||
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Prepaid expenses and other current assets
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140 | 159 | |||||
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Total current assets
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3,881 | 3,941 | |||||
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Property and equipment, net
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387 | 421 | |||||
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Deferred tax asset
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2,117 | 2,117 | |||||
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Other assets
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229 | 226 | |||||
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TOTAL ASSETS
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$ | 6,614 | $ | 6,705 | |||
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|||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities
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Accounts payable and accrued expenses
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$ | 1,273 | $ | 1,425 | |||
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Current portion of capital lease obligations
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14 | -- | |||||
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Current portion of notes payable
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127 | 157 | |||||
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Deferred revenue
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45 | 69 | |||||
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Total current liabilities
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1,459 | 1,651 | |||||
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Capital lease obligations, net of current portion
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28 | -- | |||||
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Notes payable, net of current portion
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79 | 104 | |||||
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Total liabilities
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1,566 | 1,755 | |||||
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Commitments and contingencies
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|||||||
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Shareholders’ equity
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|||||||
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Preferred stock, $0.0001 par value; 2,000,000 shares authorized; 0
issued and outstanding in 2011 and 1010.
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|||||||
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Common stock, $0.0001 par value; 50,000,000 shares authorized;
11,737,610 and 11,717,310 shares issued in 2011 and 2010,
respectively; and 11,697,683 and 11,677,383 shares outstanding in 2011
and 2010, respectively
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1 | 1 | |||||
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Additional paid-in capital
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115,004 | 114,990 | |||||
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Accumulated deficit
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(109,629 | ) | (109,713 | ) | |||
| 5,376 | 5,278 | ||||||
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Common stock in treasury, at cost - 24,371 shares
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(328 | ) | (328 | ) | |||
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Total shareholders’ equity
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5,048 | 4,950 | |||||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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$ | 6,614 | $ | 6,705 | |||
See notes to condensed consolidated financial statements.
3
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(In thousands, except share data)
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||||||||
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March 31,
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||||||||
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2011
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2010
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|||||||
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Revenue
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$ | 2,128 | $ | 2,381 | ||||
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Costs and expenses
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||||||||
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Operations, research and development
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848 | 893 | ||||||
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Sales and marketing
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468 | 471 | ||||||
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General and administrative
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647 | 730 | ||||||
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Amortization and depreciation
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77 | 76 | ||||||
| 2,040 | 2,170 | |||||||
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Operating income
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88 | 211 | ||||||
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Other expense (income)
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||||||||
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Change in fair value of warrant liability
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--- | (195 | ) | |||||
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Other income
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--- | (26 | ) | |||||
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Interest expense, net
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4 | 7 | ||||||
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Income before income taxes
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84 | 425 | ||||||
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Provision for income tax
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-- | 10 | ||||||
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Net income
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84 | 415 | ||||||
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Preferred stock dividends
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-- | (26 | ) | |||||
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Net income attributable to common shareholders
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$ | 84 | $ | 389 | ||||
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Basic income per share attributable to common shareholders
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$ | 0.01 | $ | 0.03 | ||||
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Diluted income per share attributable to common shareholders
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$ | 0.01 | $ | 0.03 | ||||
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Basic weighted average common shares outstanding
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11,693 | 11,282 | ||||||
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Diluted weighted average common shares outstanding
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11,784 | 11,553 | ||||||
See notes to condensed consolidated financial statements
4
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(In thousands, except share data)
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ended March 31,
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||||||
| 2011 |
2010
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|||||
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Cash flows from operating activities
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||||||
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Net income
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$ | 84 | $ | 415 | ||
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Adjustments to reconcile net income
to net cash (used in ) provided by operations:
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||||||
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Amortization and depreciation
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77 | 76 | ||||
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Stock based compensation expense
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14 | 134 | ||||
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Change in fair value of warrant liability
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-- | (195 | ) | |||
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Changes in operating assets and liabilities:
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||||||
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Accounts receivable
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(328 | ) | (444 | ) | ||
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Prepaid expenses and other current assets
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14 | 17 | ||||
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Accounts payable and accrued expenses
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(152 | ) | -- | |||
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Deferred revenue
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(24 | ) | -- | |||
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Net cash (used in) provided by operations
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(315 | ) | 3 | |||
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Cash flows used in investing activities:
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||||||
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Expenditures for property and equipment
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-- | (2 | ) | |||
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Cash flows from financing activities:
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||||||
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Payment of dividends on preferred stock
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-- | (26 | ) | |||
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Principal payments on capital lease obligations
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-- | (2 | ) | |||
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Repayments of long-term debt
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(54 | ) | (47 | ) | ||
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Net cash used in financing activities
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(54 | ) | (75 | ) | ||
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Net decrease in cash and cash equivalents
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(369 | ) | (74 | ) | ||
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Cash and cash equivalents – beginning of period
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1,707 | 1,758 | ||||
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Cash and cash equivalents – end of period
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$ | 1,338 | $ | 1,684 | ||
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Supplemental Disclosures:
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||||||
| Cash paid for interest | $ | $ | 8 | |||
| Cash paid for income taxes | $ | 45 | $ | 10 | ||
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Non-cash investing and financing activities:
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| Dividends accrued and unpaid | $ | -- | $ | 26 | ||
| Equipment acquired from capital lease | $ | 42 | $ | -- | ||
See notes to condensed consolidated financial statements
5
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The accompanying unaudited condensed consolidated interim financial statements include the accounts of Direct Insite Corp. and its subsidiaries (“Direct Insite” or the “Company”). All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of March 31, 2011, and the condensed consolidated statements of income and cash flows for the three months ended March 31, 2011 and 2010, have been prepared by the Company and are not audited. These unaudited, condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In addition, the December 31, 2010 balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. These interim condensed consolidated financial statements include all adjustments which management considers necessary for a fair presentation of the financial statements and consist of normal recurring items. The results of operations for the three months ended March 31, 2011, are not necessarily indicative of results that may be expected for any other interim period or for the full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2010 included in the Company’s Form-10K. The accounting policies used in preparing these unaudited condensed consolidated financial statements are consistent with those described in the audited December 31, 2010 consolidated financial statements.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Disclosures that are particularly sensitive to estimation include stock based compensation and the valuation allowance on deferred tax assets. Actual results could differ from those estimates.
2. The Company
Direct Insite Corp. was organized as a public company, under the laws of the State of Delaware on August 27, 1987. Direct Insite operates as a Software as a Service provider (“SaaS”), providing best practice financial supply chain automation and workflow efficiencies within the Procure-to-Pay (PTP) and Order-to-Cash (OTC) processes. The Company’s global Electronic Invoice Presentment and Payment (“EIP&P”) services automate manual business processes such as complex billing, invoice validation, invoice-to-order matching, consolidation, dispute handling, and payment processing.
As described in Note 6, the Company has three customers that accounted for approximately 91.5% and 95.3% of the Company's revenue for the three months ended March 31, 2011 and 2010, respectively. Loss of International Business Machines Corp. (“IBM”) or Hewlett Packard (”HP”) would have a material adverse effect on the Company.
6
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. Stock Based Compensation
Stock Options
The Company accounts for stock options using the fair value recognition provisions of ASC 718, “Compensation-Stock Compensation”. There was no compensation expense for options during the three months ended March 31, 2011 and March 31, 2010. At March 31, 2011, there was no unrecognized compensation costs related to stock options granted.
Nonqualified and incentive stock options have been granted to directors, officers and employees of the Company under our Stock Option Plans. Options generally vest over 3 years and expire five years from the date of the grant. At March 31, 2011, 3,061,954 shares were authorized for issuance under the stock option plans. Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans. The Company issues new shares to satisfy stock option exercises. There were no options granted during the three months ended March 31, 2011 and 2010.
A summary of option activity under the plans for the three months ended March 31, 2011 is as follows:
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Shares
(in thousands)
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Weighted
Average
Exercise
Price
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Weighted
Average
Remaining
Contractual
Term
(in years)
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Aggregate
Intrinsic
Value
(in thousands)
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Balance, January 1, 2011
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425 | $ | 0.78 | 2.0 | $ | 60 | ||||||
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Granted
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-- | -- | ||||||||||
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Exercised
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-- | -- | ||||||||||
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Canceled
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-- | -- | ||||||||||
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Forfeited
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-- | -- | ||||||||||
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Balance, March 31, 2011
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425 | $ | 0.78 | 1.8 | $ | 116 | ||||||
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Exercisable, March 31, 2011
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425 | $ | 0.78 | 1.8 | $ | 116 | ||||||
There were no options that vested during the three months ended March 31, 2011 and 2010.
Restricted Stock Grants
During the three months ended March 31, 2011 the Company granted 80,645 shares to directors as part of their compensation. The stock grants had a fair value of approximately $64,000 based on the closing price of the stock on the date of the grant. The stock grants vest over the two year period January 1, 2011 through December 31, 2012.
A summary of the status of the Company’s restricted non-vested shares issued pursuant to service agreements as of March 31, 2011 and changes during the three months ended March 31, 2011 is presented below:
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Shares
(in thousands)
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Weighted-
average
Grant Date
Fair Value
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|||||
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Non-vested at January 1, 2011
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26 | $ | 0.95 | |||
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Granted
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81 | $ | 0.79 | |||
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Vested
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(17 | ) | $ | 0.85 | ||
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Forfeited
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-- | -- | ||||
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Non-vested at March 31, 2011
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90 | $ | 0.83 | |||
7
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. Stock Based Compensation (continued)
For the three months ended March 31, 2011 and 2010 stock compensation expense for stock grants was approximately $14,000 and $134,000, respectively. At March 31, 2011, the future expected expense for non-vested shares is $75,000 and will be recognized on a straight-line basis over the period April 1, 2011 through December 31, 2012.
4. Debt
Notes payable
At March 31, 2011 and December 31, 2010, notes payable consist of $206,000 and $261,000, respectively, of borrowings for the purchase of equipment. These notes bear interest at rates ranging from 8.0% to 9.5% per year and mature through August 2013. The notes are collateralized by the equipment purchased with net book values of $196,000 and $237,000, at March 31, 2011 and December 31, 2010, respectively.
Capitalized lease obligations
The Company has equipment under a capital lease obligation expiring in 2014. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The interest rate pertaining to this capital leases is 3.3%. At March 31, 2011, the gross and net book value of the related assets is approximately $42,000 and $38,000 respectively.
5. Shareholders' Equity
The following table summarizes the changes in shareholders’ equity for the three months ended March 31, 2011:
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In thousands
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||||
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Balance, January 1, 2011
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$ | 4,950 | ||
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Stock based compensation
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14 | |||
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Net income
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84 | |||
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Balance – March 31, 2011
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$ | 5,048 | ||
Common Stock and Option Issuances
During the three months ended March 31, 2010 the Company issued 56,680 common shares on the exercise of options on a cashless basis.
Earnings Per Share
The Company displays earnings per share in accordance with ASC 260, “Earnings Per Share”. ASC 260 requires dual presentation of basic and diluted earnings per share (“EPS”). Basic EPS includes no dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options, warrants and other potential stock issuances are not included in the computation when their effect would be anti-dilutive. The following table presents the shares used in the computation of diluted earnings per share for the three months ended March 31, 2011 and 2010:
8
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. Shareholders' Equity (continued)
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Three Months Ended
March 31, 2011
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Three Months Ended
March 31, 2010
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(in thousands)
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(in thousands)
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|||||||
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Weighted Average Common shares outstanding
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11,693 | 11,282 | ||||||
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Options to purchase common stock
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88 | 265 | ||||||
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Restricted stock grants
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3 | 6 | ||||||
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Total diluted shares
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11,784 | 11,553 | ||||||
Securities that could potentially dilute basic EPS in the future, that were not included in the computation of the diluted EPS because to do so would have been anti-dilutive for the periods presented, consist of the following:
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Three Months Ended
March 31, 2011
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Three Months Ended
March 31, 2010
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|||||||
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(in thousands)
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(in thousands)
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|||||||
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Options to purchase common stock
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75 | 75 | ||||||
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Warrants to purchase common stock
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-- | 500 | ||||||
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Restricted stock grants
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16 | 197 | ||||||
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Total potential common shares
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91 | 772 | ||||||
6. Products and Services
The Company and its subsidiaries currently operate in one business segment and provide two separate products: SaaS services and custom engineering services. The following table displays revenue by product (in thousands):
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Three Months Ended
March 31,
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||||||||
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2011
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2010
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|||||||
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SaaS fees
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$ | 1,896 | $ | 2,172 | ||||
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Custom engineering fees
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232 | 209 | ||||||
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Total Revenue
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$ | 2,128 | $ | 2,381 | ||||
Major Customers
For the three months ended March 31, 2011 and 2010, HP accounted for 48.0% and 52.7% of revenue, respectively. For the three months ended March 31, 2011 and 2010, IBM accounted for 33.1% and 32.5% of revenue, respectively. For the three months ended March 31, 2011 and 2010 Siemens Shared Services LLC (“Siemens”) accounted for 10.4% and 10.1% of revenue, respectively. Accounts receivable from these customers amounted to $1,518,000 and $1,243,000 at March 31, 2011 and December 31, 2010, respectively.
9
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. Income Taxes
In its interim financial statements the Company follows the guidance in ASC 270, “Interim Reporting” (“ASC 270”) and ASC 740, “Income Taxes” (“ASC740”) whereby the Company utilizes the expected annual effective tax rate in determining its income tax provisions for the interim period’s income or loss. The current period provision of approximately $30,000 was offset by a reduction in the valuation allowance of approximately $30,000 on the deferred tax asset that was established in prior years. During the three months ended March 31, 2011, the Company reviewed previous positive and negative evidence and also reviewed its expected taxable income for future periods and concluded that it is more likely than not that approximately $2,867,000 of tax benefits related to net operating loss carry-forwards will be utilized in future tax years. In addition, the Company expects to provide a valuation allowance on the remaining future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize the remaining assets, or other significant positive evidence arises that suggests its ability to utilize the remaining assets. The Company will continue to re-assess its reserves on deferred income tax assets in future periods on a quarterly basis. At December 31, 2010, the Company had federal and state net operating loss carry forwards (“NOLs”) remaining of approximately $52 million and $8 million, respectively, which may be available to reduce taxable income, if any. Approximately $18 million and $9 million of Federal NOLs will expire in 2011 and 2012, respectively, with the remaining $25 million expiring in 2019 through 2026.
8. New Accounting Pronouncements
The Company does not believe any recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, results of operations and cash flows.
9. Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Except as noted below, based upon the evaluation, the Company did not identify any recognized or unrecognized subsequent events that would have required adjustments to or disclosure in the condensed consolidated financial statements.
Subsequent to March 31, 2011 the Company executed a new employment agreement with its Executive Vice President of Sales and Marketing (“EVP Sales”) and Chief Technology Officer (“CTO”) and amended the employment agreement with the Chief Executive Officer (“CEO”).
The agreement with the EVP Sales and CTO is for a two year term effective January 1, 2011 through December 31, 2012. The agreement provides for an annual salary of $200,000, allocated as $80,000 for his role as CTO and $120,000 as EVP Sales. The agreement provides for an annual incentive bonus with a target equal to 20% of the base annual salary allocated to the role of CTO, subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for commissions of 4% to 8% in the first year of an agreement and 2% to 4% in the second year of an agreement for certain new named accounts. The agreement further provides for: use of an automobile and related expenses; reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The employment agreement with the CEO was amended to eliminate the termination for cause clause and provides that the CEO has the right to resign or terminate the agreement for any reason at his sole discretion.
10
DIRECT INSITE CORP. AND SUBSIDIARIES
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, the dependence on key personnel, and such other risk factors which may arise from time to time including, but not limited to, the risk factors as set forth in the Company’s Reports on Form 10K as filed with the Securities Exchange Commission. 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 its subsidiaries (hereinafter referred to at times as “Direct Insite” or the “Company”), was organized as a public company, under the laws of the State of Delaware on August 27, 1987. Direct Insite operates as a Software as a Service provider (“SaaS”), providing best practice financial supply chain automation and workflow efficiencies within the Procure-to-Pay (PTP) and Order-to-Cash (OTC) processes. The Company’s global Electronic Invoice Presentment and Payment (“EIP&P”) services automate manual business processes such as complex billing, invoice validation, invoice-to-order matching, consolidation, dispute handling, and payment processing.
Direct Insite is currently delivering service and business value across the Americas, Europe, and Asia, including 110 countries, 35 languages and multiple currencies. Direct Insite processes, hosts and distributes millions of invoices, purchase orders, and attachment documents making them accessible on-line within an internet self service portal. Suppliers, customers, and internal departments such as Finance and Accounting or Customer Service users can access their business documents 24 hours per day, seven days per week, 365 days per year.
For the three months ended March 31, 2011 and 2010, HP accounted for 48.0% and 52.7% of revenue, respectively. For the three months ended March 31, 2011 and 2010, IBM accounted for 33.1% and 32.5% of revenue, respectively. Siemens Shared Services LLC accounted for 10.4% and 10.1% of revenue for the three months ended March 31, 2011 and 2010, respectively.
Critical accounting policies
Our condensed consolidated financial statements and the notes thereto contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continuing basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Management considers an accounting estimate to be critical if:
11
DIRECT INSITE CORP. AND SUBSIDIARES
|
·
|
it requires assumptions to be made that were uncertain at the time the estimate was made; and
|
|
·
|
changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on the Company's condensed consolidated results of operations or financial condition.
|
The following critical accounting policies have been identified that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. We have discussed the application of these critical accounting policies with our Audit Committee. The following critical accounting policies are not intended to be a comprehensive list of all of the Company's accounting policies or estimates.
Revenue Recognition
We record revenue in accordance with ASC 605 “Revenue Recognition” (“ASC 605”) and SEC Staff Accounting Bulletin Topic 13 "Revenue Recognition in Financial Statements." In some circumstances, we enter into arrangements whereby the Company is obligated to deliver to its customer multiple products and/or services (multiple deliverables). In these transactions, the Company allocates the total revenue to be earned among the various elements based on their relative fair values. The Company recognizes revenue related to the delivered products or services only if:
§ Any undelivered products or services are not essential to the functionality of the delivered products or services;
§ Payment for the delivered products or services is not contingent upon delivery of the remaining products or services;
§ We have an enforceable claim to receive the amount due in the event we do not deliver the undelivered products or services and it is probable that such amount is collectible;
§ There is evidence of the fair value for all deliverables in the arrangement;
§ Delivery of the delivered element represents the culmination of the earnings process.
The following are the specific revenue recognition policies for each major category of revenue.
SaaS Services
We provide transactional data processing services through our SaaS software solutions to our customers. The customer is charged a monthly fixed rate on a per transaction basis or a fixed fee based on monthly transaction volumes. Revenue is recognized as the services are performed.
Custom Engineering Services
We perform custom engineering services which are single contractual agreements involving modification or customization of the Company’s proprietary SaaS software solution. Progress is measured using the relative fair value of specifically identifiable output measures (milestones). Revenue is recognized at the lesser of the milestone amount when the customer accepts such milestones or the percentage of completion of the contract following the guidance of ASC 605.
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DIRECT INSITE CORP. AND SUBSIDIARES
Cost of Revenue
Cost of revenue in the condensed consolidated statements of operations is presented along with operations, research and development costs and exclusive of amortization and depreciation shown separately. Custom Engineering Services costs related to uncompleted milestones are deferred and included in other current assets, when applicable.
Allowance For Doubtful Accounts
The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the account receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. At March 31, 2011 and December 31, 2010, an allowance for doubtful accounts is not provided since, in the opinion of management, all accounts are deemed collectible.
Impairment of Long-Lived Assets
ASC 360 requires management judgments regarding the future operating and disposition plans for marginally performing assets, and estimates of expected realizable values for assets to be sold. The Company accounts for its long-lived assets in accordance with ASC 360 “Property, Plant and Equipment”, for purposes of determining and measuring impairment of its other intangible assets. It is the Company’s policy to periodically review the value assigned to its long lived assets, including capitalized software costs, to determine if they have been permanently impaired by adverse conditions. If required, an impairment charge would be recorded based on an estimate of future discounted cash flows. In order to test for recoverability, the Company compared the sum of an undiscounted cash flow projection from the related long-lived assets to the net carrying amount of such assets. Considerable management judgment is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly, actual results could vary significantly from such estimates. No impairment charges were recognized during the three month periods ended March 31, 2011 and 2010, respectively.
Income Taxes
We currently have significant deferred tax assets. ASC 740 “Income Taxes”, requires a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Furthermore, accounting standards provide that it is difficult to conclude that a valuation allowance is not needed when there is negative evidence such as cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. The future realization of a portion of our reserved deferred tax assets related to tax benefits associated with the exercise of stock options, if and when realized, will not result in a tax benefit in the consolidated statement of operations, but rather will result in an increase in additional paid in capital. We will continue to re-assess our reserves on deferred income tax assets in future periods on a quarterly basis (see note 7 to the Condensed Consolidated Financial Statements).
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Certain items, among others, that are particularly sensitive to estimates are stock based compensation, and the valuation allowance on deferred tax assets. Actual results could differ from those estimates.
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DIRECT INSITE CORP. AND SUBSIDIARES
Results of operations
For the three months ended March 31, 2011 revenue decreased $253,000 (10.6%) to $2,128,000, compared to revenue of $2,381,000 for the three months ended March 31, 2010. This decrease is primarily the result of a decrease in recurring SaaS IOL services revenue of $276,000 principally due to contractual price decreases, offset by an increase of $23,000 in engineering services revenue. Included in revenue for the three months ended March 31, 2011 is $49,000 of revenue from work performed in 2010 but recognized in 2011 because certain revenue recognition requirements including customer acceptance had not been met until 2011. Costs for such work was also deferred at December 31, 2010 and expensed in 2011.
For the three months ended March 31, 2011 we had income from operations of $88,000 compared to income from operations of $211,000 for the three months ended March 31, 2010. We had net income of $84,000 for the three months ended March 31, 2011, compared to net income of $415,000 for the three months ended March 31, 2010. Net income includes non-operating income of $0 and $195,000 for the three months ended March 31, 2011 and 2010, respectively, resulting from the change in the fair value of the warrant liability.
Costs of operations, research and development decreased by $45,000 (5.0%) to $848,000 for the three months ended March 31, 2011, compared to costs of $893,000 for the three months ended March 31, 2010. These costs consist principally of salaries and related expenses for software developers, programmers, custom engineers, network services, and quality control and assurance. Also included are cost for purchased services, network costs, costs of the production co-location facility and other expenses directly related to our custom engineering and SaaS production services. The decrease in 2011 is principally due to a decrease of $26,000 in the cost of purchased services, resulting from a decrease in outsourcing certain services in support of a product offering to one customer, a decrease in Professional fees of $14,000 and other costs of operations by $5,000.
Sales and marketing costs decreased $3,000 to $468,000 for the three months ended March 31, 2011, compared to costs of $471,000 for the same period in 2010. The decrease is primarily due to a decrease in stock compensation costs of $24,000, and a decrease in consulting and professional fees of $21,000. This was offset by an increase in salaries and related costs of $38,000, resulting from employing an additional sales agent. All other sales and marketing costs increased $4,000.
General and administrative costs decreased $83,000 (11.4%) to $647,000 for the three months ended March 31, 2011, compared to costs of $730,000 for the same period in 2010. The decrease was principally the result of a decrease in stock compensation costs of $98,000, as certain stock grants were fully amortized in 2010. Rent expense decreased $25,000 as a result of the reduction in the costs of office rents. Accounting and audit fees decreased by $14,000. These decreases were offset by an increase in legal fees of $29,000 as we incurred additional costs related to renewal of employment agreements, and an increase in costs for directors’ fees of $16,000. All other administrative costs increased $9,000, net.
Amortization and depreciation expense was $77,000 for the three months ended March 31, 2011, an increase of $1,000 (1.3%) from the cost of $76,000 for the same period in 2010. The increase is due to new equipment acquisitions.
Other income for the three months ended March 31, 2011 and 2010 was $0 and $26,000, respectively. In 2010 we received a refund from a supplier as a result of billing errors.
Interest expense, net was $4,000 for the three months ended March 31, 2011 compared to interest expense, net of $7,000 for the same period in 2010. This decrease is due to the lower amount of outstanding debt during the quarter ended March 31, 2011 compared to the same period in 2010.
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DIRECT INSITE CORP. AND SUBSIDIARES
Financial Condition and Liquidity
Cash used in operating activities for the three months ended March 31, 2011 was $315,000 compared to cash provided by operating activities of $3,000 for the three months ended March 31, 2010. This consisted of net income of $84,000, increased by non-cash income and expenses of $91,000, including depreciation and amortization of property and equipment of $77,000, and stock-based compensation expense of $14,000. In addition accounts receivable increased by $328,000, principally due to a delay in cash receipts from one customer in the first quarter of 2011 compared to the fourth quarter of 2010. This was offset by a decrease in prepaid expenses of $14,000.
Accounts payable and accrued expenses decreased by $152,000 at March 31, 2011 as compared to March 31, 2010. Deferred revenue also decreased by $24,000 at March 31, 2011.
No cash was used in investing activities for the three months ended March 31, 2011, compared to $2,000 for same period in 2010. In 2010 the expenditure was principally for equipment.
Cash used in financing activities totaled $54,000 for the three months ended March 31, 2011, compared to cash used in financing activities of $75,000 for the three months ended March 31, 2010. We paid no dividends on preferred stock and repaid $54,000 of long-term debt in the first three months of 2011.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Not applicable
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports it files with the SEC is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure, and such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as such term is defined by the rules established under the Securities Exchange Act of 1934.
Based on our evaluation of our disclosure controls and procedures which took place as of March 31, 2011 (the “Evaluation Date”), we believe that these controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
The Company maintains a system of internal controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to (1) permit preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, and (2) maintain accountability for assets. Access to assets is permitted only in accordance with management's general or specific authorization. In 2007 the Company adopted and implemented the control requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”).
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DIRECT INSITE CORP. AND SUBSIDIARES
There was no change in the Company’s internal control over financial reporting during the Company’s fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
It is the responsibility of the Company’s management to establish and maintain adequate internal control over financial reporting.
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DIRECT INSITE CORP. AND SUBSIDIARIES
PART II – OTHER INFORMATION
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31
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Certifications pursuant to Rules 13a-14(a) as adopted pursuant to
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Section 302 of the Sarbanes-Oxley Act of 2002.
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32
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Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant
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to Section 906 of the Sarbanes-Oxley Act of 2002.
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DIRECT INSITE CORP. AND SUBSIDIARIES
SIGNATURES
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.
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DIRECT INSITE CORP.
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/s/ James A. Cannavino
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James A. Cannavino, Chief Executive Officer
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May 16, 2011
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/s/ Michael J. Beecher
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Michael J. Beecher, Chief Financial Officer
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May 16, 2011
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