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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

 

 

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ

 

As of May 6, 2014, there were 12,757,560 shares of the registrant’s Common Stock outstanding.

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DIRECT INSITE CORP.

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION	2-16
ITEM 1.	FINANCIAL STATEMENTS	2
CONDENSED BALANCE SHEETS AS OF MARCH 31, 2014 (UNAUDITED) AND DECEMEBER 31 2013		2
CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (UNAUDITED)		3
CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (UNAUDITED)		4
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)		5
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	13
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	16
ITEM 4.	CONTROLS AND PROCEDURES	16
PART II.	OTHER INFORMATION	17–18
ITEM 1.	LEGAL PROCEEDINGS	17
ITEM 1A.	RISK FACTORS	17
ITEM 2.	UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS	17
ITEM 3.	DEFAULTS IN SENIOR SECURITIES	17
ITEM 4.	MINE SAFETY DISCLOSURES	17
ITEM 5.	OTHER INFORMATION	17
ITEM 6.	EXHIBITS	17
SIGNATURES		18

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PART I – FINANCIAL INFORMATION

Item 1.

Financial Information

DIRECT INSITE CORP.

CONDENSED BALANCE SHEETS

(in thousands, except share data)

See notes to condensed financial statements.

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DIRECT INSITE CORP.

CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED

(in thousands, except per share data)

See notes to condensed financial statements.

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DIRECT INSITE CORP.

CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED

(in thousands)

See notes to condensed financial statements.

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DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

Note 1 – Nature of Business

Direct Insite Corp. (“Direct Insite” or the “Company”) operates as a Software as a Service provider (“SaaS”), providing financial supply chain automation and workflow efficiencies within the Procure-to-Pay and Order-to-Cash processes. Specifically, Direct Insite’s global electronic invoice (“e-invoice”) management services automate complex manual business processes such as invoice validation, order matching, consolidation, dispute handling, and e-payment processing in a business-to-business transaction based “fee for services” business model.

The Company’s revenue comes from (i) recurring, on-going services that are billed monthly; and (ii) non-recurring, professional services derived from the configuration of the Company’s software platform.

Throughout the year, the Company operated redundant data centers in Miami, Florida, and Santa Clara, California.

As described in Note 9, the Company has two major customers that accounted for 72.2% and 79.2% of the Company’s revenue for the three months ended March 31, 2014 and 2013, respectively.  Loss of any of these customers would have a material effect on the Company.

In February 2013, the Company was notified by one of these two major customers, that one of its customers, comprising 12.8% of the Company’s revenues for the three months ended March 31, 2013, terminated its contract effective March 31, 2013.

Note 2 - Summary of Significant Accounting Policies

Interim Financial Information

The accompanying unaudited condensed interim financial statements include the accounts of Direct Insite. The condensed balance sheet as of March 31, 2014, and the statements of operations and cash flows for the three months ended March 31, 2014 and 2013 have not been audited.  These unaudited condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to quarterly report on Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  The December 31, 2013 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.  These interim condensed 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, 2014, are not necessarily indicative of results that may be expected for any other interim period or for the full year.

These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2013 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 26, 2014.

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Note 2 - Summary of Significant Accounting Policies (continued)

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 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.  The most significant estimates are used in the accounting related to stock based compensation and the valuation allowance on deferred tax assets and capitalized internally developed software.  Actual results could differ from those estimates.

Revenue Recognition

The Company records revenue in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”), and SEC Staff Accounting Bulletin Topic 13, Revenue Recognition in Financial Statements.  Revenue is recognized when it is both earned and realizable, that is, when the following criteria are met:

The following are the specific revenue recognition policies for each major category of revenue.

Recurring (Ongoing Services)

The Company provides transactional data processing services through its SaaS software solutions to its 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 provided.

Non-Recurring (Professional Services)

The Company provides non-recurring engineering services to its customers, which may include initial or additional development, modification, and customization services to the Company’s software platform.  Such services are billed based on: (i) hourly rates; or (ii) milestone billings.  For hourly billed services, revenue is recognized when work is performed.  For milestone billed services, revenue is recognized when the project milestone has been accepted by the customer.  We do not sell software licenses, upgrades or enhancements, or post-contract customer services.

Internally Developed Software

The Company is in the process of developing a next generation version of its accounts receivable platform. It is being designed for one of the Company’s clients and will be available to all order-to-cash process customers. According to ASC 350-40, Intangibles-Goodwill and Other-Internal-Use Software, the Company capitalizes the costs associated with the application development stage of a project. The Company will start amortizing capitalized costs when the software is ready for use and placed in service. The capitalized costs will be amortized on a straight-line basis over the estimated three year useful life of the software.

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Note 2 - Summary of Significant Accounting Policies (continued)

Income Taxes

The Company accounts for income taxes using the asset and liability method.  This method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax basis of assets and liabilities, using enacted tax rates.  Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized.  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 future realization of a portion of its 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 statement of operations, but rather will result in an increase in additional paid-in capital. The Company will continue to re-assess its reserves on deferred income tax assets in future periods on a quarterly basis.

Earnings Per Share

The Company displays earnings per share in accordance with ASC 260, Earnings Per Share (“ASC 260”).  ASC 260 requires dual presentation of basic and diluted earnings per share (“EPS”).  Basic earnings per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

For the three months ended March 31, 2014, all potentially dilutive securities were excluded from the computation of diluted earnings per share because their impact was anti-dilutive.

The computation of basic and diluted earnings per share for the three months ended March 31, 2013 is as follows (in thousands, except per share amounts):

Securities that could potentially dilute basic EPS in the future, that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented, consist of the following (in thousands):

 

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Note 2 – Summary of Significant Accounting Policies (continued)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.  The Company has cash deposits in excess of the maximum amounts insured by Federal Depository Insurance Corporation at March 31, 2014 and December 31, 2013.

The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers.  Concentrations of credit risk with respect to accounts receivable and revenue are disclosed in Note 9.

Recently Issued and Adopted Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the financial statements.

Note 3 – Property and Equipment

Property and equipment consist of the following at March 31, 2014 and December 31, 2013:

Depreciation and amortization expense related to property and equipment for the three months ended March 31, 2014 and 2013 was approximately $83,000 and $98,000, respectively.

Note 4 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following at March 31, 2014 and December 31, 2013 as follows:

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DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 

Note 5 – Debt

Capital Lease Obligations

The Company has equipment under six capital lease obligations expiring at various times through June 2016.  The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair values of the assets.

The implied interest rates related to these capital leases range from 0.0% to 9.0%. The gross book value and the net book value of the related assets are approximately $646,000 and $181,000, respectively, as of March 31, 2014, and $646,000 and $241,000, respectively, as of December 31, 2013.

Note 6 – Stockholders’ Equity

 

Preferred Stock

The Company is authorized to issue 2,000,000 shares of preferred stock, of which none were issued or outstanding as of March 31, 2014 and December 31, 2013.

Common Stock, Options and Stock Grants

Three Months Ended March 31, 2014

During the three months ended March 31, 2014, 66,000 restricted common shares were granted with an aggregate grant date fair value of approximately $80,000.  During the three months ended March 31, 2014, approximately 20,000 restricted common shares with an aggregate grant date fair value of approximately $20,000 vested.

During the three months ended March 31, 2014, 29,511 stock options with an aggregate grant date fair value of approximately $24,000 vested. During this same period no options were awarded to employees. Outstanding options vest over a four year period, with 25% vesting on the first anniversary of the grant date and the remaining 75% vesting in equal monthly amounts through the fourth anniversary of the grant date. The Company estimates the grant date fair value of the stock option using the Black-Scholes-Merton option model.

Three Months Ended March 31, 2013

During the three months ended March 31, 2013, 27,277 restricted common shares with an aggregate grant date fair value of approximately $20,000 vested. During the three months ended March 31, 2013, approximately 98,000 restricted common shares were granted with an aggregate grant date value of approximately $80,000.  During the three months ended March 31, 2013, the Company issued 55,181 shares of commons stock with a grant date fair value of approximately $42,000 to a member of its board of directors for past services.  During the three months ended March 31, 2013, the Company granted, to an employee of the Company, an option to acquire 15,000 shares of common stock for an exercise price of $1.15 per share, exercisable over a term of five years from the date of grant.  The option vests over a four year period, with 25% vesting on the first anniversary of the grant date and the remaining 75% vesting in equal monthly amounts through the fourth anniversary of the grant date. The Company estimated the grant date fair value of the stock option using the Black-Scholes-Merton option model and the following assumptions: volatility of 150%, risk free rate of 0.4%, dividend rate of zero, and expected term of 3.75 years.  The grant date fair value of the stock options was determined to be approximately $10,000.  During the three months ended March 31, 2013, the Company recognized approximately $29,000 of expense related to the vesting of stock options.

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Note 6 – Stockholders’ Equity (continued)

Stock Option Plans

The Company grants options under multiple stock-based compensation plans that do not differ substantially in the characteristics of the awards.  Nonqualified and incentive stock options have been granted to directors, officers and employees of the Company under the Company’s Stock Option Plans.  Options generally vest over three to four years and expire five years from the date of the grant.  As of March 31, 2014, 109,428 shares were available for issuance under the stock option plans. These shares will no longer be available due to their respective option plan expiration on August 20, 2014.  Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans.

The following is a summary of stock option activity for three months ended March 31, 2014, relating to all of the Company’s common stock plans:

The following table summarizes stock option information as of March 31, 2014:

As of March 31, 2014, there was approximately $286,000 of unrecognized compensation costs related to stock options outstanding.

Restricted Stock Grants

A summary of the status of the Company’s non-vested stock grants as of March 31, 2014 and changes during the three months ended March 31, 2014 is presented below:

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Restricted Stock Grants (CONTINUED)

A summary of the status of the Company’s non-vested stock grants as of March 31, 2013 and changes during the three months ended March 31, 2013 is presented below:

The future expected expense for non-vested shares is approximately $100,000 and will be recognized as expense through December 31, 2015.

Note 7 – Income Taxes

The Company accounts for income taxes in accordance with ASC 740 which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim period, disclosure and transition.  There were no unrecognized tax benefits as of March 31, 2014 and December 31, 2013.

The Company has identified its federal tax return and its state tax return in Florida as “major” tax jurisdictions, as defined in ASC 740.  Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.  The Company’s evaluation was performed for tax years ended 2010 through 2013, the only periods subject to examination.  The Company believes that its income tax positions and deductions will be sustained upon audit and does not anticipate any adjustments that will result in a material change to its financial position.  The Company has elected to classify interest and penalties incurred on income taxes, if any, as income tax expense.  No interest or penalties on income taxes have been recorded during the three months ended March 31, 2014 and 2013.  The Company does not expect its unrecognized tax benefit position to change during the next twelve months.  Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.

 As of March 31, 2014, the Company has federal and state net operating loss carryforwards (“NOLs”) remaining of approximately $26 million and $20 million, respectively, which may be available to reduce taxable income, if any. Remaining federal and state net operating loss carry forwards expire from 2019 through 2033. However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company.  During 2013, the Company performed an evaluation as to whether a change in control had taken place.  Management believes that there has been no change in control as such applies to Section 382.  However, if it is determined that an ownership change has taken place, either historically or in the future, utilization of its NOLs could be subject to severe limitations, which could eliminate a substantial portion of the future income tax benefits of the NOLs.  The NOL carryforward as of March 31, 2014 included approximately $1,193,000 related to windfall tax benefits for which a benefit would be recorded in additional paid-in capital if and when realized.

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Note 8 –Commitment and Contingencies

On May 29, 2013, the Company entered into an Employment Agreement (the “Employment Agreement”), with Matthew E. Oakes, the Company’s President and Chief Executive Officer.  The Employment Agreement supersedes Mr. Oakes’ previous employment agreement with the Company and extends Mr. Oakes’ term as President and Chief Executive Officer of the Company to December 31, 2015.

Pursuant to the terms of the Employment Agreement, the Company agreed to pay Mr. Oakes his current annual base salary of $275,000 for the remainder of 2013 and an annual base salary of $295,000 for each of the years 2014 and 2015.  Mr. Oakes is entitled to receive an annual bonus based on the Company’s yearly EBIT and revenue growth.  Mr. Oakes is also eligible to receive a bonus, subject to the discretion of the Company’s Board of Directors.  The options to purchase 360,000 shares of common stock of the Company, of which 150,000 were exercised on September 5, 2013 in a cashless transaction, granted to Mr. Oakes under his previous employment agreement will continue to vest as set forth in the Employment Agreement.  The Company will also continue to make lease payments on the corporate apartment, which is located in Fort Lauderdale, Florida and is utilized by Mr. Oakes, through the expiration of the lease on December 31, 2015.

Note 9 – Major Customers

 

Two customers, HP Enterprise Services (“HP”) and International Business Machines Corp. (“IBM”) accounted for a significant portion of the Company’s revenues as follows:

As of March 31, 2014, two customers accounted for a significant portion of the Company’s accounts receivable as follows (in thousands):

Note 10 – Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed financial statements.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 our 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 such words or expressions relate to us or our 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, our 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: general economic conditions; customer concentration; the risk of errors or failures in our software products; technological changes or difficulties; dependence on proprietary technology; the dependence on key personnel; the ability to recruit personnel; and the management of future growth both organically and through potential acquisitions.  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.  All subsequent written and oral forward‑looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph.

OVERVIEW

The Company was incorporated under the laws of the State of Delaware on August 27, 1987.  We consummated our initial public offering in 1992.  In May 1990, we changed our name to Computer Concepts, Inc. and in August 2000, we changed our name to Direct Insite Corp.

Direct Insite operates as a SaaS, providing best practice financial supply chain automation and workflow efficiencies within the Procure-to-Pay and Order-to-Cash processes. Specifically, Direct Insite’s global e-invoice management services automate complex manual business processes such as invoice validation, order matching, consolidation, dispute handling, and e-payment processing in a business-to-business transaction based “fee for services” business model.

Through the automation and workflow of Procure-to-Pay and Order-to-Cash processes and the presentation of invoices, orders, and attachment data via a self-service portal, Direct Insite is helping our customers reduce manual invoice-to-order reconciliation costs, reduce the frequency of inquiries and disputes, improve cash flow, increase competitiveness and improve customer satisfaction.

Direct Insite is currently delivering service and business value across the Americas, Europe, and Asia, including more than 100 countries, in 35 languages and multiple currencies.  Direct Insite processes more than $125 billion in invoice value annually on behalf of our clients.  Direct Insite processes, distributes and hosts millions of invoices, purchase orders, and supporting attachment documents, making them accessible on-line with an internet self-service portal.  Suppliers, customers, and internal departments, such as Finance and Accounting or Customer Service users, can easily access their business documents.

Our revenue comes from (i) recurring, on-going services that are billed monthly; and (ii) non-recurring, professional services derived from the configuration of our software platform.

HP Enterprise Services (“HP”) accounted for approximately 36.5% and 49.5% of revenue for the three months ended March 31, 2014 and 2013, respectively. We have three principal contracts with HP providing e-invoice services.  These contracts have terms ranging from one to five years.  The contracts may be terminated on ninety days advance written notice.  In February 2013, we were notified by HP that one of its customers, representing approximately 12.8% of our revenue for the three months ended March 31, 2013, was terminating its contract with HP, thus HP terminated this individual contract with us effective March 31, 2013.  As disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on July 24, 2013, despite efforts to negotiate a direct contractual agreement with this client, the client ultimately decided to sunset its use of the application. As such, we did not record revenue from this client after June 30, 2013.

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International Business Machines, Inc. (“IBM”), representing approximately 35.7% and 29.7% ,  of revenue for the three months ended March 31, 2014 and 2013, respectively, utilizes our suite of services to allow its customers from around the globe to receive, analyze, dispute and cost allocate all of their invoice data in their local language and currency via the internet.  We have two principal contracts with IBM to provide e-invoice services for substantially all of IBM’s operating units. On October 28^th 2013 one of these contracts was extended for a three year period, through December 31, 2016, and is renewable annually thereafter. The other contract was renewed for a one-year period and is renewable annually.  The contracts may be terminated by either party with ninety days advance written notice.

SEASONALITY / QUANTITY FLUCTUATIONS

Revenue from SaaS ongoing services generally is not subject to fluctuations or seasonal flows.  However, we believe that revenue derived from custom engineering services will have a significant tendency to fluctuate based on customer demand.

Other factors, including, but not limited to, new service introductions, domestic and global economic conditions, customer budgetary considerations, and the timing of service upgrades may create fluctuations.  As a result of the foregoing factors, our operating results for any quarter are not necessarily indicative of results for any future period.

RESULTS OF OPERATIONS

The following is a summary of our operating results for the three months ended March 31, 2014 and 2013 (dollars in thousands):

Revenues

For the three months ended March 31, 2014, total revenue decreased by $390,000, or 16.5%, to $1,970,000 from $2,360,000 for the comparable prior year period.  Recurring revenue decreased by $343,000, or 17.5%, to $1,618,000 for the three months ended March 31, 2014, from $1,961,000 for the comparable prior year period, primarily due to the aforementioned HP customer that terminated its contract effective July 1, 2013.  Non-recurring revenue decreased by $47,000, or 11.8%, to $352,000 for the three months ended March 31, 2014 from $399,000 for the comparable prior year period, primarily due to the non-recurrence of a large prior year customer-requested modification.

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Operating Cost and Expenses

General and administrative costs decreased by approximately $21,000, or 3.4%, to $592,000 for the three months ended March 31, 2014 from $613,000 for the comparable prior year period, as lower payroll costs, consulting and recruitment fees were mostly offset by legal and other expenses of $41,000 related to the exploration of strategic opportunities.

Sales and marketing costs decreased by approximately $131,000, or 21.7%, to $474,000 for the three months ended March 31, 2014 from $605,000 for the comparable prior year period, primarily due to a headcount-related decrease in compensation expense of $124,000, travel and related expenses of $19,000, and marketing related expenses of $6,000, partially offset by an increase in consulting expenses of $18,000.

Amortization and depreciation decreased by approximately $15,000, or 15.3%, to $83,000 for the three months ended March 31, 2014 from $98,000 for the comparable prior year period as the depreciable fixed assets remained virtually the same as last year, while some of the older assets became fully depreciated during that time.

Operating Income (Loss)

We had a net operating loss of $79,000, for the three months ended March 31, 2014, compared to net operating income of $88,000 for the comparable prior year period, due to the aforementioned decrease in revenue, partially offset by the aforementioned decrease in operating costs and expenses.

Other Expense

There was no change in other expense for the three months ended March 31, 2014 compared to the comparable prior year period.

Net Income (Loss)

We had a net loss of $86,000 for the three months ended March 31, 2014, a decrease of approximately $170,000 from net income of $84,000 for the comparable prior year period, due to the aforementioned decrease in operating income.

FINANCIAL CONDITION AND LIQUIDITY

As of March 31, 2014, we had total stockholders’ equity of approximately $3,871,000, working capital of $1,830,000 and an accumulated deficit of $111,827,000.  Our cash decreased by $387,000 during the three months ended March 31, 2014, to $984,000 on hand as of March 31, 2014.

Our primary sources for liquidity come from existing cash on hand and cash generated from operations.  We believe we have sufficient liquidity available to fund our operations for the next twelve months.

During the three months ended March 31, 2014, cash used by operations was $162,000, compared to cash provided by operations of $463,000 for the three months ended March 31, 2013.  The decrease in cash provided by operations is primarily due to the timing of collections from our customers and the timing of payments to our vendors.

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Cash used in investing activities for the three months ended March 31, 2014 was $170,000 due to capitalization of internally developed software. Cash used in investing activities for the three months ended March 31, 2013 was due to net expenditures for new equipment of $71,000.

Cash used in financing activities totaled $55,000 and $62,000 for the three months ended March 31, 2014 and 2013, respectively, with both periods reflecting payments on equipment notes and capital leases, primarily using cash provided by operations.

OUR CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are described in the audited financial statements and notes thereto for the year ended December 31, 2013, included in the Company’s Annual Reported on Form 10-K filed with the SEC on March 26, 2014.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4.

Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act).  Based upon this evaluation our Chief Executive Officer and Chief Financial Officer concluded that, at March 31, 2014, our disclosure controls and procedures were effective.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

Item 3.

Defaults upon Senior Securities

 

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

 

Item 6.

Exhibits

 

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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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