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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2015
   
OR
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from ________________ to ________________

Commission file number: 0-20660
 
 
DIRECT INSITE CORP.
 
 
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
11-2895590
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
500 East Broward Boulevard, Suite 1550
Fort Lauderdale, Florida
 
33394
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:  (954) 510-3750

Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock, par value $.0001
 
OTC – QB

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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 þ No o
 
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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,  and will not be contained, to the best of Registrant's knowledge, in definitive  proxy or information statements  incorporated  by  reference  in Part III of this Form 10-K or any amendment to this Form 10-K. o

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.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $4,931,412

As of March 15, 2016, there were 12,656,329 shares of the registrant’s Common Stock outstanding.
 


 
 
 
 
 
DIRECT INSITE CORP.

 
TABLE OF CONTENTS
 
PART I.
1-7
       
  ITEM 1.
BUSINESS
1
       
  ITEM 1A.
RISK FACTORS
7
       
  ITEM 1B.
UNRESOLVED STAFF COMMENTS
7
       
  ITEM 2.
PROPERTIES
7
       
  ITEM 3.
LEGAL PROCEEDINGS
7
       
  ITEM 4.
MINE SAFETY DISCLOSURES
7
       
PART II.
8-16
       
  ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
8
       
  ITEM 6.
SELECTED FINANCIAL DATA
8
       
  ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
8
       
  ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
15
       
  ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
15
       
  ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
15
       
  ITEM 9A.
CONTROLS AND PROCEDURES
16
       
  ITEM 9B.
OTHER INFORMATION
16
       
PART III.
17-26
       
  ITEM 10
.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
17
       
  ITEM 11.
EXECUTIVE COMPENSATION
20
       
  ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
24
       
  ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
25
       
  ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
25
       
PART IV.
27-31
       
  ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
27
       
  EXHIBIT INDEX
27
       
  SIGNATURES
31
 
 
 

 
 
PART I

Item 1.
BUSINESS

FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact included in this Form 10-K 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-K, 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, fluctuations in future operating results, technological changes or difficulties, management of future growth, expansion of international operations, current economic conditions, the risk of errors or failures in our software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel, and dependence on key personnel. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity.  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

Direct Insite Corp., originally named Unique Ventures, Inc., (hereinafter referred to at times as “Direct Insite”, “our”, “we”, or 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.

Our Business

Direct Insite® operates as a software as a service provider (“SaaS”) that provides a powerful unified working capital management platform for Order-to-Cash and Procure-to-Pay processes that facilitate over $160 billion worth of transactions annually between more than 375,000 companies worldwide.

The flagship component of Direct Insite’s unified working capital management platform is PAYBOX®, an Order-to-Cash process that provides an innovative receivables automation solution which combines electronic invoicing, online approvals and adjustments, Payment Card Industry (“PCI”)-compliant electronic payments, and integration with any legacy accounting, enterprise resource planning (“ERP”) or lockbox system.  PAYBOX is sold both through banks to corporate users of their treasury management and lockbox services, and directly to corporations.  Banks and corporations use PAYBOX to reduce Days Sales Outstanding, lower costs, and improve straight-through accounts receivables (“AR”) posting.

Direct Insite’s unified working capital management platform also provides a powerful component that transforms Procure-to-Pay processes.  The component delivers end-to-end capabilities for supplier registration, invoice capture, electronic invoicing, workflow, electronic payments, discount management, spend management, and business intelligence.  The platform is uniquely suited for financial shared services environments.
 
 
1

 
 
Direct Insite’s clients include IBM, Siemens, Hewlett Packard Enterprise Services, Saint Gobain, Carlson Wagonlit Travel, and one of the world’s largest financial institutions.

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 (“HPE”) accounted for approximately 33%, 38% and 45% of our revenue for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015, we had three principal contracts with HPE providing e-invoice services.  These contracts have terms ranging from one to five years.  The contracts may be terminated by either party on ninety days advance written notice.  In February 2013, we were notified by HPE that one of its clients (which represented a fourth contract), representing approximately 9% of our revenue for the year ended December 31, 2013, was terminating its contract with HPE effective March 31, 2013. As disclosed in our Current Report on Form 8-K filed with the 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 our services.  As such, we did not record revenue from this client after June 30, 2013.  Additionally, as disclosed in our Current Reports on Form 8-K filed with the SEC on November 23, 2015 and February 19, 2016, we were notified by HPE that another one of its clients, representing approximately 14.7% of our revenue for the year ended December 31, 2015, was terminating its contract with HPE effective February 23, 2016.  Despite efforts to negotiate a direct contractual agreement with this client, the client ultimately decided to terminate its use of our services, and accordingly, the Company does not expect to record revenue from this customer beyond that date.

International Business Machines, Inc. (“IBM”), representing approximately 37%, 38% and 32% of our revenue for the years ended December 31, 2015, 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.  One of these contracts was extended for a three-year period, through December 31, 2016, and is renewable annually thereafter.  The other contract was also renewed, for a one-year period through December 31, 2016, and is renewable annually thereafter.  The contracts may be terminated by either party with ninety days advance written notice.

We have one other customer, representing approximately 10.3%, 9.9%, and 2.1% of our revenue for the years ended December 31, 2015, 2014 and 2013, respectively.  This customer utilizes our accounts payable automation solution and is contracted with us through December 2019.
 
PRODUCTS AND SERVICES

Direct Insite provides a unified working capital management platform for Order-to-Cash and Procure-to-Pay processes.

Order-to-Cash: PAYBOX®

Direct Insite’s flagship solution is a working capital management platform, called PAYBOX.  PAYBOX combines capabilities for: e-invoicing, online approvals and adjustments, electronic payments, and integration with ERP, AR, and lockbox systems.

In November 2014, Direct Insite successfully launched PAYBOX for a global bank client.  The bank is using PAYBOX to provide white-label accounts receivable automation to a leading consumer goods provider.  The bank is now marketing PAYBOX to its treasury management client base.
 
 
2

 
 
PAYBOX’s end-to-end approach to order-to-cash helps businesses accelerate Days Sales Outstanding (“DSO”), reduce receivables costs, improve straight-through AR posting, and increase visibility into financial information.

Direct Insite’s PAYBOX is a modular, “Reverse Lockbox” solution that integrates with legacy ERP, AR, lockbox (including remote deposit capture and mobile capture solutions) or treasury systems to provide a building block for an integrated receivables strategy.
 
PAYBOX streamlines receivables processes end-to-end by combining:

●  
Invoice Presentment: Enables billers to present invoices in any format required by payers, including electronic invoicing, invoice network integration, and print. Payers access electronic invoices via a password-protected mailbox on the PAYBOX portal.

●  
Online Adjustments & Approvals: Replicates a payer’s workflow to allow for online review, adjustment, and approval of invoices. Payers also can attach supplemental information (such as images of damaged items) for disputes, and manage credits.  Billers receive real-time updates on adjusted invoices.

●  
Electronic Payments: Enables payers to control the amount they pay, the payment type, and the settlement date. Payers can upload discount schedules and set rules for how payments are made.  PAYBOX is PCI-compliant and supports most payment types.

●  
Integration: Provides a remittance file for reconciliation and posting. PAYBOX is ERP-agnostic, and Direct Insite is an SAP-Certified Business Partner. Additionally, the PAYBOX platform was developed to coexist with legacy lockbox processing platforms.

●  
Downstream Financing: Facilitates dynamic discount and supply chain financing.

Direct Insite rounds out its PAYBOX offering with a third-party print/mail partnership to manage the paper-to-electronic transition all firms face.

PAYBOX is delivered exclusively as a SaaS offering.

Although corporations can purchase PAYBOX directly from Direct Insite, we also sell PAYBOX through banks as a white-labeled solution.  The flexibility of PAYBOX helps banks accelerate their integrated receivables strategy.  A bank could, for example, use PAYBOX as an e-invoicing and electronic payments solution for commercial clients, while interfacing with wholesale lockbox to offer an integrated receivables solution later on.


Procure-to Pay: e-invoice Automation for Accounts Payable

Direct Insite’s e-invoice Management for Accounts Payable increases accounts payable productivity by streamlining and automating manual supplier invoice validation, inquiry and approval processes.

Direct Insite’s Procure-to-Pay service is focused on providing the following significant business benefits:

●  
Eliminate manual invoice validation processes
 
 
3

 
 
●  
Improve on-time payments and the ability to capture early payment discounts
 
●  
Increase supplier e-invoice submission
 
●  
Reduce Accounts Payable call center traffic
 
●  
Enhance supplier relationships and overall ease of business

Supplier Self-Service Portal

Direct Insite’s Procure-to-Pay service offering includes a supplier self-service portal and e-invoice presentment capability that is able to reduce call center traffic by resolving inquiries without human intervention.  Direct Insite’s online portal allows suppliers to access their invoice status, invoice line items, attachments, payment status, and other relevant billing information on their own time, at any time and without having to call or wait for support.

Supplier Electronic Invoice Submission

Suppliers are able to submit their invoices via electronic formats and/or adapters, including web form entry, supplier networks, spreadsheet upload, and ERP adapters such as Oracle, SAP, Great Plains, or legacy billing systems.  Suppliers can also perform a purchase order ‘flip’ function where customer orders can be used to automatically generate preliminary bills for review and release for payment.

Invoice Matching and Workflow Exception Handling

Direct Insite’s Procure-to-Pay service allows Accounts Payable administrators the ability to configure robust invoice validation business rules where inbound supplier invoices can be automatically matched against orders, variable consumption reports, or other business documents.  Noncompliant invoices and line items are flagged and routed for exception workflow handling.

Vendor Boarding and Supplier Services

A key component of deploying Procure-to-Pay services is to assure that suppliers register with such services and are properly ‘boarded’ into the Procure-to-Pay environment.  Direct Insite provides a complete set of suppliers’ services such as webinars, training materials, and help services embedded within the service offering.  Additionally, Direct Insite provides vendor boarding campaigns which include statistical analysis of vendor invoice submission, and calling and email programs that effectively communicate the buyer’s strategic direction to the suppliers requiring their participation.

Invoice Approval & Payment

Once invoices have been validated they can be routed to the Accounts Payable financial system for disbursement or paid within the Direct Insite self-service portal.  The service fully integrates with all of the major ERP systems, ensuring seamless system interoperability.

Audit and Traceability

Direct Insite’s Procure-to-Pay and Order-to-Cash service offerings support a complete audit log whereby all internal and external user actions are logged, tracked and presented in views of user activity history.  At any time, authorized administrators can review online user activity and monitor user adoption.
 
 
4

 
 
SALES AND MARKETING

Channels to Market

Direct Insite has two primary marketing channels: (i) direct: through our sales representatives; and (ii) indirect: through strategic partners, like HP.  These channels are supported by a technical sales support group.

Direct

Our direct sales organization consists of senior sales associates complemented by sales support resources.  The sales associates and support resources are primarily responsible for qualifying direct opportunities.  Sales associates engage in direct sales activities that include business value analysis and alignment, capabilities demonstrations, procurement and contract management.  Direct Insite’s executive management team is actively involved with and complements Direct Insite’s direct sales organization.

Indirect

Direct Insite continues to pursue and utilize both reseller agreements and strategic partnerships as tools in our effort to acquire new customers and revenue streams and in certain instances enhance our current offerings to existing accounts.  Direct Insite has executed reseller agreements with several business partners, such as HP, who provide Business Process Outsourcing/Financial Services and offer our Accounts Payable/Accounts Receivable Automation and Payment services to their existing clients, or in certain cases we develop and deploy a dual go-to-market strategy to new clients.  Direct Insite has formed strategic partnerships with several business partners who provide inbound mail drop boxes, paper scanning services, image capture, image and document routing and reporting services and in certain other cases, both software and financial certification and verification services.  The utilization of both these reseller agreements and strategic partnerships is a critical and cost effective way to be introduced to new customers and potential revenue streams.  Further, Direct Insite is able to leverage the investment of our partners to combine and enhance the Direct Insite suite of products that can be introduced and sold to the market.

The successful launch of PAYBOX in 2014 created a solid partnership with Direct Insite’s global bank client.  As a result of such partnership, we expect PAYBOX will be introduced to the global bank’s existing and potential customers in the future.
 
Technical Sales Support and Post-Sales Account Management

Direct Insite has a pre-sales support staff and adds post-sales support to the existing client services management group as it secures new business.  This group is responsible for technical sales presentations, developing proposals and pricing, contract administration and post-implementation account relationship management.

Certified Partnerships

In 2010, Direct Insite achieved SAP partner certification.  As a result of the certified integration, Invoices On-Line (“IOL”) now provides seamless interoperability with more than twenty different business objects supported by SAP ERP systems.  This allows Direct Insite SAP customers the ability to automate and extend their Procure-to-Pay or Order-to-Cash processes to the cloud, including purchase order distribution, invoice receipt and validation, workflow, and electronic payments.
 
 
5

 
 
RESEARCH AND DEVELOPMENT

The computer software industry is characterized by rapid technological change, which requires ongoing development and maintenance of software products.  It is customary for modifications to be made to a software product as experience with its use grows or changes in manufacturers’ hardware and software so require.

We believe that our research and development staff, many with extensive experience in the industry, represents a significant competitive advantage.  As of December 31, 2015, our research and development group consisted of 14 employees.  Further, when needed, we retain the services of independent professional consultants.  We seek to recruit highly qualified employees, and our ability to attract and retain such employees is expected to be a principal factor in our success in maintaining a leading technological position.  For the years ended December 31, 2015, 2014 and 2013, research and development expenses were approximately $1,560,000, $1,738,000 and $2,283,000, respectively.  An additional $194,000 and $474,000 were accounted for as capitalized software in 2015 and 2014, respectively.  We believe that continued investments in research and development are required in order to remain competitive.

COMPETITION

We believe our competitors may provide some or all of the services we provide to the marketplace.  Our competitors offer some of the various components or functions in Accounts Receivable Automation, Accounts Payable Automation and Payments Processing.  Our primary competitors include Ariba, Inc., Basware Corporation, Billtrust, Bottomline Technologies, Corcentric Cloud Solutions, LLC, Direct Commerce Inc., Genpact Limited, Taulia Inc., and Tradeshift Inc., among others.

Many of our current and potential competitors have greater name recognition, larger installed customer bases, longer operating histories, and substantially greater financial, technical and marketing resources than Direct Insite.  We cannot assume that current and potential competitors will not develop products that may be or may be perceived to be more effective or responsive to technological change than are our current or future products or that our technologies and products will not be rendered obsolete by such developments.  Increased competition could result in price reductions, reduced margins or loss of market share.

EMPLOYEES

We have 33 employees, of whom 30 are full-time, all in the United States, including 24 in production, development and technical support (21 full-time), 2 in sales and marketing, 2 in technical sales support and post-sales management, and 5 in corporate finance and administration.  Our future success will depend in part upon our continued ability to attract and retain highly skilled and qualified personnel.  We believe that our relations with our employees are good, and we have no collective bargaining agreements with any labor unions.

INTELLECTUAL PROPERTY

We rely on proprietary knowledge and employ various methods, including confidentiality agreements, to protect our software code, concepts, ideas and documentation of our proprietary technology. We own a copyright for Invoices on-Line (IOL), and trademarks for Direct Insite® and PAYBOX®.

Despite our efforts, unauthorized parties may attempt to copy aspects of our products, obtain and use information that we regard as proprietary or misappropriate our copyrights, trademarks, trade dress and similar proprietary rights.  In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States.  Our means of protecting our proprietary rights may not be adequate.  In addition, our competitors might independently develop similar technology or duplicate our products or circumvent any patents or our other intellectual property rights.
 
 
6

 
 
AVAILABLE INFORMATION

We make available free of charge our filings with the Securities and Exchange Commission (the “SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  Copies of our filings with the SEC are also available on the SEC’s website at www.sec.gov.

Our principal executive office is located at 500 East Broward Boulevard, Suite 1550, Fort Lauderdale, Florida 33394.  Our telephone number is (631) 873-2900.  Our website is www.directinsite.com.  The information on, or that can be accessed through, our website is not incorporated by reference into this annual report and should not be considered to be a part of this annual report.

Item 1A.
RISK FACTORS

Not Applicable.

Item 1B.
UNRESOLVED STAFF COMMENTS

Not Applicable.

Item 2.
DESCRIPTION OF PROPERTIES

As of December 31, 2015, we maintained leased facilities in the locations listed below:

               
Annual
Description 
 
Location 
 
Square Footage 
 
Lease Term 
 
Rental Cost 
Corporate office
 
Ft. Lauderdale, FL
 
5,806
 
   02/08/13 – 07/31/18
 
$     191,000
Co-location facility
 
Miami, FL
 
Note 1
 
   8/18/15 – 08/17/16
 
$     151,000
Co-location facility…...
 
Amsterdam, Netherlands
 
Note 2
 
  11/1/14 – 10/31/18
 
$     141,000

Note 1.  The co-location facility in Miami, Florida provides rack space for our computer equipment and the rental is not based on square footage used.

Note 2.  The Amsterdam data center is utilized for enterprise cloud services and no physical property is allocated.


Item 3.
LEGAL PROCEEDINGS

We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on our business, and no such proceedings are contemplated.
 
Item 4.
MINE SAFETY DISCLOSURES

Not Applicable.
 
 
7

 
 
PART II

Item 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Market Information

Our common stock is traded on the OTC QB under the symbol “DIRI”.  The following table sets forth the high and low closing prices for our common stock by the quarters indicated:

   
Closing Stock Price
 
   
High
   
Low
 
 Year ended December 31, 2015:
           
1st Quarter 
  $ 0.90     $ 0.72  
2nd Quarter 
  $ 1.18     $ 0.74  
3rd Quarter 
  $ 1.09     $ 0.86  
4th Quarter 
  $ 0.97     $ 0.54  
                 
Year ended December 31, 2014:
               
1st Quarter 
  $ 1.50     $ 1.15  
2nd Quarter 
  $ 1.25     $ 0.53  
3rd Quarter 
  $ 0.70     $ 0.49  
4th Quarter 
  $ 0.86     $ 0.47  

(b)           As of March 15, 2016 there were 2,512 stockholders of record of our common stock.
(c)           In 2015 and 2014, the Company paid no dividends to stockholders.  Further dividend policy will be determined by our Board of Directors based on our earnings, financial condition, capital requirements and other then existing conditions.  It is anticipated that cash dividends will not be paid to the holders of our common stock in the foreseeable future.
 
Item 6.
SELECTED FINANCIAL DATA

Not Applicable.
 
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 from Unique Ventures, Inc. to Computer Concepts, Inc., and in August 2000, we changed our name to Direct Insite Corp.

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

 
8

 
 
Through the automation and workflow of Order-to-Cash and Procure-to-Pay 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, reduce days’ sales outstanding, 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 currencies and 17 languages. Direct Insite processes more than $160 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.  For more than ten years, Direct Insite has built a track record in automating some of the most demanding financial environments, including the global shared services environments for some of the world's largest companies.

HPE accounted for approximately 33% and 38% of our revenue for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, we had three principal contracts with HPE providing e-invoice services.  These contracts have terms ranging from one to five years.  The contracts may be terminated by either party with ninety days advance written notice.   In November 2015, we were notified by HPE that one of its clients, representing approximately 14.7% of our revenue for the year ended December 31, 2015, was terminating its contract with HPE effective as of February 23, 2016.  As disclosed in our Current Report on Form 8-K filed with the SEC on February 19, 2016, despite efforts to negotiate a direct contractual agreement with this client, the client ultimately decided to terminate its use of our services, and accordingly, the Company does not expect to record revenue after February 23, 2016.

IBM, representing approximately 37% and 38% of our revenue for the years ended December 31, 2015 and 2014, 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, 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 also renewed, for a one-year period through December 31, 2016, and is renewable annually thereafter.  These contracts may be terminated on ninety days advance written notice.

We have one other customer, representing approximately 10.3% and 9.9% of our revenue for the years ended December 31, 2015 and 2014, respectively.  This customer utilizes our accounts payable automation solution and is contracted with us through December 2019.
 
SEASONALITY/QUANTITY FLUCTUATIONS

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

 
9

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

OUR CRITICAL ACCOUNTING POLICIES

Our financial statements and the notes to our financial statements contain information that is pertinent to management’s discussion and analysis and use of estimates.  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 continual 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:
 
●  
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 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 our financial statements.  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 Accounting Standards Codification (“ASC”) 605, Revenue Recognition, 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:

●  
persuasive evidence of arrangements exist;
 
●  
delivery has occurred or services have been rendered;
 
●  
the seller’s price is fixed and determinable; and
 
●  
collectability is reasonably assured.

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

Recurring (Ongoing 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 provided.

Non-Recurring (Professional Services)

We provide non-recurring engineering services to our customers, which may include initial or additional development, modification, and customization services to our 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.
 
 
10

 
 
Income Taxes

We account 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.  We review positive and negative evidence in conjunction with our expected taxable income for future periods to determine if it is more likely than not that it will be able to utilize the tax benefits related to net operating loss carry-forwards in future tax years.

In addition, we expect to provide a valuation allowance on the remaining future tax benefits until we can sustain a level of profitability that demonstrates our ability to utilize the remaining assets, or other significant positive evidence arises that suggests our ability to utilize the remaining assets.

The future realization of a portion of the 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 income, but rather will result in an increase in additional paid-in capital. We will continue to re-assess its reserves on deferred income tax assets in future periods on a quarterly basis.

Stock-Based Compensation

We account for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”).  ASC 718 establishes accounting for stock-based awards exchanged for employee services.  Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the equity grant) using the straight-line method.

The fair value of the Company’s common stock options are estimated using the Black Scholes-Merton option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate, and the expected life.  We calculate the expected volatility using the historical volatility over the most recent period equal to the expected term and evaluates the extent to which available information indicate that future volatility may differ from historical volatility.  The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on common stock.  The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant.

We have not experienced significant exercise activity on stock options. We determine the expected term of its stock option awards issued using the simplified method.  The simplified method assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires.

 
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In accordance with ASC 718, excess tax benefits realized from the exercise of stock-based awards are classified in cash flows from financing activities.  The future realization of the reserved deferred tax assets related to these tax benefits associated with the exercise of stock options will result in a credit to additional paid-in capital if the related tax deduction reduces taxes payable.  We have elected the “with and without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year.  Under this approach, the windfall tax benefit would be recognized in additional paid-in-capital only if an incremental tax benefit is realized after considering all other benefits presently available.
 
Impairment of Long-Lived Assets

ASC 360, Plant, Property, and Equipment, 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.  We account for our long-lived assets in accordance with ASC 360 for purposes of determining and measuring impairment.  It is our policy to review the value assigned to the Company’s long lived assets, to determine if they have been permanently impaired by adverse conditions whenever events or circumstances indicate the related carrying amount may not be recoverable.  If required, an impairment charge would be recorded based on an estimate of future discounted cash flows.

In order to test for recoverability, we would compare 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.
 
Capitalization of Internally Developed Software

In November 2014, we released the first phase of PAYBOX®, a next generation version of our accounts receivable platform.  It was designed for a global bank client and will be available to all Order-to-Cash process customers. According to ASC 350-40, Intangibles-Goodwill and Other-Internal-Use Software, we are able to capitalize the costs associated with the application development stage of a project. We started amortizing capitalized costs of this first phase when the software was ready for use and placed in service in November 2014. The capitalized costs are being amortized on a straight-line basis over the estimated five year useful life of the software.  As additional functionality is added, costs incurred are capitalized in accordance with ASC 350-40.

 
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RESULTS OF OPERATIONS

The following is a summary of our operating results for the years ended December 31, 2015 and 2014 (in thousands):

   
2015
   
2014
   
Increase (Decrease)
 
Revenues:
                       
Recurring
  $ 6,745     $ 6,515     $ 230       3.5 %
Non-recurring
    1,266       1,780       (514 )     (28.9 )%
Total revenues
    8,011       8,295       (284 )     (3.4 )%
                                 
Operating costs and expenses:
                               
Operations, research and development
    3,389       3,456       (67 )     (1.9 )%
Sales and marketing
    1,417       1,889       (472 )     (25.0 )%
General and administrative
    2,321       2,499       (178 )     (7.1 )%
Amortization and depreciation
    289       327       (38 )     (11.6 )%
Total operating costs and expenses
    7,416       8,171       (755 )     (9.2 )%
                                 
Operating income
    595       124       471       100 %+
Other expense, net
    (4 )     (10 )     6       (60.0 )%
                                 
Income before provision for income taxes
    591       114       477       100 %+
Provision for income taxes
    23       8       15       100 %+
                                 
Net income
  $ 568     $ 106     $ 462       100 %+

Revenues

For the year ended December 31, 2015, revenue decreased $284,000, or 3.4%, to $8,011,000 compared to $8,295,000 in 2014.  Recurring revenue increased $230,000, or 3.5%, to $6,745,000 in 2015 from $6,515,000 in 2014.  This was due to the November 2014 launch of the PAYBOX® integrated receivables solution and increased usage from certain other customers.  Non-recurring revenue decreased by $514,000, or 28.9%, to $1,266,000 in 2015 from $1,780,000 in 2014 primarily due to the non-recurrence of certain large prior year customer-requested modifications, partially offset by higher scanning fees.

Operating Costs and Expenses

Costs of operations, research and development decreased by $67,000, or 1.9%, to $3,389,000 for the year ended December 31, 2015 compared to $3,456,000 in 2014.  These costs consist principally of salaries and related expenses for software development, programming, custom engineering, network services, and quality control and assurance.  Also included are costs for purchased services, network costs, costs of the production co-location facilities and other expenses directly related to our custom engineering and SaaS services.  The decrease was primarily due to reduced salary expense resulting from lower headcount and a decrease in subcontractor usage, partially offset by higher cloud license and service costs and scanning charges.

Sales and marketing costs decreased by approximately $472,000, or 25.0%, to $1,417,000 for the year ended December 31, 2015 from $1,889,000 for the comparable prior year period, primarily due to a headcount-related decrease in compensation expense of $335,000 and decreases in trade show and consulting expense, resulting from a more targeted marketing approach.

 
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General and administrative costs decreased by $178,000, or 7.1%, to $2,321,000 for the year ended December 31, 2015, compared to $2,499,000 in 2014, primarily due to the non-recurrence of last year’s legal and other professional fees related to the Company’s proxy and Stock Incentive Plan, and intellectual property.

Amortization and depreciation expense decreased by $38,000, or 11.6%, to $289,000 for the year ended December 31, 2015 compared to $327,000 in 2014, as the amortization of internally developed software costs were offset by existing assets that became fully depreciated during the year.

Operating Income

For the year ended December 31, 2015, we had operating income of $595,000, compared to operating income of $124,000 for the year ended December 31, 2014, an increase of $471,000.  The increase reflects the savings in operating expenses, partially offset by the decrease in revenue.

Other Expense, net

Other expense, net for the year ended December 31, 2015, was $4,000 compared to $10,000 in 2014, a decrease of $6,000.
 
Net Income

For the year ended December 31, 2015, we had net income of $568,000 compared to net income of $106,000 for the year ended December 31, 2014, an increase of $462,000.  The increase in net income resulted from the higher year-over-year operating income.

Financial Condition and Liquidity

As of December 31, 2015, the Company had total stockholders’ equity of $5,084,000, working capital of $2,708,000 and an accumulated deficit of $111,067,000. The Company’s cash increased by $1,504,000 during the year ended December 31, 2015, to $2,375,000 on hand as of December 31, 2015, while accounts receivable decreased by $963,000 to $1,444,000.

Cash provided by operating activities for the year ended December 31, 2015 was $1,732,000, and primarily consisted of: (i) net income of $568,000; (ii) non-cash charges for amortization and depreciation of $289,000; (iii) non-cash stock-based compensation expense of $213,000; and (iv) a decrease in accounts receivable of $963,000, partially offset by decreases in accounts payable and accrued liabilities of $217,000 and in deferred revenue of $52,000 and an increase in prepaid expenses and other current assets of $25,000.

Cash provided by operating activities for the year ended December 31, 2014 was $182,000, and primarily consisted of: (i) net income of $106,000; (ii) non-cash charges for amortization and depreciation of $327,000; (iii) non-cash stock-based compensation expense of $179,000; and (iv) an increase in accounts payable and accrued liabilities of $389,000, partially offset by an increase in accounts receivable of $885,000 and increases in deferred revenue of $52,000 and in deferred rent expense of $21,000.

Cash used in investing activities was $203,000 and $495,000 for the years ended December 31, 2015 and 2014, respectively, due primarily to capitalization of internally developed software in both years.

 
14

 

Cash used in financing activities was $25,000 and $187,000 for the years ended December 31, 2015 and 2014, respectively, reflecting payments on capital leases.

As a result of these operating, investing and financing activities, cash increased by $1,504,000 to $2,375,000 at December 31, 2015, compared to a cash decrease of $500,000 to $871,000 at December 31, 2014.

The Company’s primary source of liquidity is cash generated from operations.  We believe that our current cash balance along with cash generated from operations, will meet our liquidity needs for the next twelve months.  No assurances can be given, however, that this will be the case.  Should we require more liquidity than our current cash balances and cash generated from operations will provide, we believe we could obtain additional liquidity through debt or equity financing.

The Company does not have any material commitments for capital expenditures.

Net Operating Loss Carry Forwards

At December 31, 2015, the Company had federal and state net operating loss carry-forwards (“NOLs”) remaining of approximately $25 million and $20 million, respectively, which may be available to reduce federal and state taxable income, if any.  These NOLs will expire through 2035.  However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon an ownership change of a company.  During 2015, we performed an evaluation as to whether an ownership change had taken place.  We believe that there has been no ownership change as such term is defined in Section 382.  If it is determined that an ownership change has taken place, utilization of the NOLs will be subject to limitations in future periods, which could eliminate a substantial portion of the future income tax benefits of the NOLs.

During 2015, the Company reviewed previous positive and negative evidence and also reviewed its expected taxable income for future periods and concluded it is more likely than not that approximately $1,195,000 of tax benefits relating to NOLs will be utilized.
 
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 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not Applicable.

Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are included beginning on page F-1.

Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.
 
 
15

 
 
Item 9A.
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). The term disclosure controls and procedures means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2015, our disclosure controls and procedures were effective.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.  Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, and effected by the Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have assessed the effectiveness of our internal control over financial reporting as of December 31, 2015.  In making this assessment, our management used the criteria described in Internal Control — Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment and those criteria, our management concluded that the Company did maintain effective internal control over financial reporting as of December 31, 2015.


Changes in Internal Control Over Financial Reporting

There were no changes in internal controls during the quarter ended December 31, 2015 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
 
Item 9B.
OTHER INFORMATION

None.

 
16

 
 
PART III

Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

As of March 15, 2016, the names, ages and positions of the directors, executive officers and key employees of the Company are as follows:

           
Director
Name
 
Age
 
Position  
 
Since
Matthew E. Oakes
 
53
 
Chairman of the Board of Directors, Chief Executive Officer and President
 
2011
James A. Cannavino(1) 
 
71
 
Director
 
2000
Paul Lisiak(1)(2) 
 
42
 
Director
 
2012
Thomas C. Lund(3) 
 
72
 
Director
 
2011
John J. Murabito(1) 
 
60
 
Director
 
2011
Lowell Rush
 
59
 
Chief Financial Officer, Secretary and Treasurer
   
 
(1) Member of the Audit Committee
(2) Member of the Governance and Nominating Committee
(3) Member of the Compensation Committee
 
Matthew E. Oakes was appointed Chairman of the Board of Directors on June 3, 2014.  He has held the position of Chief Executive Officer since May 25, 2011 and has served as President since March 2009.  He previously held the position of Executive Vice President and Chief Operating Officer from August 2006, and Executive Vice President – Client Services since November of 2002.  Prior to joining the Company, Mr. Oakes served for three years as the Chief Operating Officer for Direct Media Networks a New York based e-commerce and technology company.  He held executive positions in Westinghouse Communities Inc. including Managing Director of Operations.  Mr. Oakes received a Juris Doctorate of Law from Nova Southeastern University and a Bachelor’s Degree in Business from Cornell University.  Prior to attending Cornell University, he served with the United States Marine Corps in the Special Operations Group of the 3rd Marine Division and as a Marine Drill Instructor at the Marine Corp Recruit Depot, Paris Island, South Carolina.  As President and Chief Executive Officer, Mr. Oakes brings to the Board an intimate knowledge of the Company’s business and a management perspective.  Mr. Oakes has shaped the corporate vision of Direct Insite and is focused on driving strategic business growth for the Company. He leads the organization in the development and execution of all business processes and operations, and drives constant improvement initiatives to ensure complete client satisfaction. 

 
17

 
 
James A. Cannavino has been a director since March 2000, served as Chairman of the Board from March 2000 to May 2011, and served as Chief Executive Officer from December 2002 to May 2011.  From September 1997 to April 2000 he was the non-executive Chairman of Softworks, Inc. (a then wholly owned subsidiary of the Company), which went public and was later sold to EMC.  Mr. Cannavino was also the Chief Executive Officer and Chairman of the Board of Directors of CyberSafe, Inc., a corporation specializing in network security, from April 1998 to July 2001.  In August 1995, he was appointed as President and Chief Operating Officer of Perot Systems Corporation and in 1996 was elected to serve as Chief Executive Officer through July 1997.  Prior to that, he served as a Senior Vice President at IBM, responsible for strategy and development.  Mr. Cannavino held various positions at IBM for over thirty years beginning in 1963. He also served on the IBM Corporate Executive Committee and Worldwide Management Council, and on the Board of IBM’s integrated services and solutions company.  Mr. Cannavino presently serves on the Boards of 1-800 Flowers, Facilities Maintenance, and the National Center for Missing and Exploited Children and is the Chairman of the Board of the International Center for Missing and Exploited Children.  He recently was the Chairman of the Board of Marist College in Poughkeepsie, New York and continues to serve on the Board.  Mr. Cannavino brings to our Board knowledge and experience regarding our history and operations and, generally, the computer software industry, finance and capital markets.

Paul Lisiak has been a director since May 2012 and is the Managing Partner of Metropolitan Equity Partners, which employs a special situation investment strategy with a particular focus on financial services.  Prior thereto, he was a member of the Global High Yield team at Lazard Asset Management.  Mr. Lisiak graduated with a BA in Economics from the University of Pennsylvania and was an English Speaking Union Fellow. He is currently a board member of CreditMax, Direct Insite Corp (DIRI.QB), New Credit America and Next Level Finance Partners.  He is also an observer at BizFi.com and is an Advisor to GreenOwl Capital Management.  Mr. Lisiak brings to our Board experience in finance and management oversight, as well as the perspective of the Company’s largest outside stockholder, whom he represents.

Thomas C. Lund has been a director since May 2011 and is the founder and Chief Executive Officer of Lund Capital Group, a private commercial real estate company that has holdings in various regions across the U.S.  Prior to founding Lund Capital Group in 2000, Mr. Lund, in 1981, founded Customer Development Corporation (“CDC”), a company specializing in database management and marketing for financial institutions and other various companies around the world and that he sold in 1998.  Mr. Lund is widely known as a pioneer of database marketing.  In 1987, CDC was honored by Inc. Magazine as the 8th fastest growing privately held company in the country.  Mr. Lund, who is credited worldwide with many technical and creative innovations in the database marketing industry, also received the coveted “High-Tech Entrepreneur of the Year” award by Entrepreneur Magazine.  In addition to Mr. Lund’s business interests, he and his wife are active philanthropists. Mr. Lund brings to the Board extensive experience in marketing and business growth, which is especially important as the Company seeks to expand its customer base.

 
18

 
 
John J. Murabito has been a director since May 2011 and served as Chairman of the Board from May 2011 to May 2012.  From November 2001 through February 2011, Mr. Murabito was Chief Executive Officer of Hapoalim Securities USA, Inc. and its predecessor companies, including Investec (US) Inc., an affiliate of the Investec Group, an international banking group.  In his role as Chief Executive Officer of Investec (US) Inc., Mr. Murabito oversaw a firm with approximately 1,000 employees and $1 billion of assets.  Mr. Murabito successfully restructured the company’s US operations, including the acquisition and disposition of businesses, to enhance stockholder value.  Mr. Murabito was a Managing Director in Information Technology at the National Securities Clearing Corporation and served as deputy Chief Information Officer for this essential US securities industry clearing utility.  Previously, Mr. Murabito was a general partner in the investment advisor Weiss Peck & Greer responsible for information technology and portfolio administration.  Mr. Murabito spent ten years with the investment bank Dillon Read & Company, including as Chief Information Officer.  Mr. Murabito earned a Masters of Business Administration from the Wharton School at the University of Pennsylvania.  Mr. Murabito’s nearly thirty years of experience with investment banking and operations bring to the Board strong and effective knowledge of corporate governance, executive management and finance.
 
Lowell Rush joined Direct Insite as acting Chief Financial Officer in October 2013, and was appointed its Chief Financial Officer, Secretary and Treasurer in December 2013.   Prior to joining the Company, Mr. Rush held positions as Chief Operating Officer of Cosmetic Dermatology, Inc. from 2011 to 2013, Vice President / Chief Financial Officer of Bijoux Terner from 2008 to 2010, and Chief Financial Officer of Little Switzerland, Inc. from 2006 to 2008, in addition to various financial management roles at Sunglass Hut International, Burger King Corp. and Knight-Ridder.   He began his career with Big Four firms Ernst & Young and Deloitte & Touche. Mr. Rush is a Certified Public Accountant with a Bachelor of Science degree in Accounting from the State University of New York at Buffalo, and holds an Executive Masters of Business Administration degree in International Business from the University of Miami. Mr. Rush has more than 35 years of experience, primarily in financial management and operational development.  He is experienced in strategic planning and implementation, SEC compliance and reporting, cost reduction and avoidance, and corporate development.  He plays a key role in leading Direct Insite's financial organization as the Company continues to execute upon its growth strategy and explore new strategic opportunities.
 
Term of Office and Family Relationships

All directors hold office until the next annual meeting of shareholders or until their respective successors are elected or until their earlier death, resignation or removal.  Executive officers are appointed by and serve at the discretion of our Board of Directors.  There are no family relationships between any of our directors or executive officers.
 
Section 16(a) Beneficial Ownership Reporting Compliance

Pursuant to Section 16(a) of the Exchange Act and the rules thereunder, the Company’s executive officers and directors and persons who own more than 10% of a registered class of the Company’s equity securities are required to file with the SEC reports of their ownership of, and transactions in, the Company's common stock. 

 
19

 
 
Code of Ethics

Direct Insite adopted a Corporate Code of Business Ethics in 2004 that applies to all employees, officers and directors.  It is broad in scope and is intended to foster honest and ethical conduct, including accurate financial reporting, compliance with laws and the like.  In addition, in 2005 the Company adopted an additional “Code of Ethics – Chief Executive and Chief Financial Officers” to comply with the Sarbanes-Oxley Act and the regulations of the SEC.  This code is posted on our internet website at http://www.directinsite.com/code-of-ethics/.

Audit Committee and Audit Committee Financial Expert

The Board has a standing Audit Committee.  The Board has determined that each Director who serves on the Audit Committee is independent, as that term is defined by NASDAQ Listing Rule 5605(a)(2).  From January 1, 2015 to December 31, 2015, the Audit Committee consisted of John Murabito, Paul Lisiak, and James Cannavino.  The Board has determined that Messrs. Murabito, who currently serves as Chairman of the Audit Committee, Lisiak and Cannavino each qualify as an Audit Committee financial expert, as that term is defined in applicable regulations of the SEC.



Item 11.
EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation with respect to the Principal Executive Officer (“PEO”) and Chief Financial Officer for the years ended December 31, 2015 and 2014.
 
Summary Compensation Table
 
                         
All
       
                   
Options
   
Other
       
       
Salary
   
Bonus
   
Awards
   
Compensation
   
TOTAL
 
Name   Years   ($)     ($)     ($)(1)     ($)(2)     ($)  
Matthew E. Oakes
 
2015
  $ 295,000     $ 102,500     $     $ 33,875     $ 431,375  
President, Chief Executive Officer, Chairman of the Board (PEO)(3)  
2014
  $ 295,000     $ 75,000     $     $ 31,750     $ 401,750  
                                             
Lowell M. Rush
 
2015
  $ 202,500     $ 45,000     $ 44,100     $     $ 291,600  
Chief Financial Officer(4)  
2014
  $ 196,000     $ 40,000     $     $ --     $ 236,000  
 
1. This represents the fair value of the award as of the grant date in accordance with FASB ASC Topic 718. See assumptions used in determining the fair value in Note 6 to the financial statements.
2. All other compensation includes the following for each of the executives:
- Mr. Oakes: In 2015, the amount was for a corporate apartment valued at $33,875. In 2014, the amount was for a corporate apartment valued at $31,750.
3. Mr. Oakes was appointed Chairman of the Board on June 3, 2014, Chief Executive Officer on May 25, 2011 and President on March 18, 2009. Mr. Oakes does not receive compensation for his service as a Director of the Company.
4. Mr. Rush was appointed Chief Financial Officer, Secretary and Treasurer on December 19, 2013.
 
 
20

 
 
Employment Agreements

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 superseded Mr. Oakes’ previous employment agreement with the Company and extended Mr. Oakes’ term as President and Chief Executive Officer of the Company to December 31, 2015. On February 20, 2015, the Employment Agreement was superseded by a new employment agreement (the “New Employment Agreement”) with Mr. Oakes, which has a term through December 31, 2017.  The New Employment Agreement provides for a base salary of $24,583 per month and annual incentive bonuses based on the Company’s performance in achieving prescribed revenue and EBIT targets.  The New Employment Agreement also provides for reimbursement of all out-of-pocket expenses reasonably incurred by him in the performance of his duties thereunder and certain severance benefits in the event of termination prior to the expiration date.  If Mr. Oakes is terminated without cause or resigns from employment for “good reason” (as defined within the New Employment Agreement), he would receive one-year of base salary and COBRA coverage at our expense for the number of months he receives severance payments.  Also included is that the Company will continue to make lease payments on the corporate apartment located in Ft. Lauderdale, Florida and utilized by Mr. Oakes, through December 31, 2017.
 
Outstanding Equity Awards at Fiscal Year End

The following table provides information concerning outstanding options, unvested stock and equity incentive plan awards for the named executives as of December 31, 2015:

   
Option Awards
Name
 
Number of Securities Underlying Unexercised Options - Exercisable
   
Number of Securities Underlying Unexercised Options - Unexercisable
   
Equity Incentive Plan Awards: Number of Underlying Unexercised Unearned Options
   
Option Exercise Price
 
Option Expiration Date
Matthew E. Oakes                                        
    210,000       --       --     $ 1.15  
01/01/2017
Lowell Rush
    40,000       40,000 (1)     --     $ 1.50  
12/19/2018
      --       90,000 (2)     --     $ 0.90  
03/31/2020
 
(1)  
These options vest over a four-year period: (i) 20,000 vesting on December 19, 2014, and (ii) 1,667 vesting each month over 36 months beginning on January 19, 2015.
(2)  
These options vest over a three-year period:  30,000 vesting on each of March 31, 2016, 2017, and 2018.

Equity Compensation Plan Information

We maintain various stock plans under which options vest and shares are awarded at the discretion of our Board of Directors or its Compensation Committee.  The purchase price of the shares under the plans and the shares subject to each option granted is not less than the fair market value on the date of the grant.  The term of each option is generally five years and is determined at the time of the grant by our Board of Directors or the Compensation Committee.  The participants in these plans are officers, directors, employees and consultants of the Company and its affiliates.

 
21

 
 
The Company has three plans under which stock options are currently outstanding: the 2003-A Stock Option/Stock Issuance Plan, the 2004 Stock Option/Stock Issuance Plan (both of which have expired and no future grants may be issued), and the 2014 Option/Stock Issuance Plan. On June 3, 2014, the stockholders approved the 2014 Option/Stock Issuance Plan for 1,200,000 shares.  This plan expires in ten years.  Both options and stock may be granted under this plan.  The 2014 Plan continues the general purpose of the 2004 Plan.

Options granted under each plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code or non-qualified stock options.  Under the terms of the plan, the exercise price of options granted under the plan will be the fair market value at the date of the grant.  Prices for incentive stock options granted to employees who own 10% or more of our stock are at least 110% of the market value at the date of the grant.  The nature and terms of the options to be granted are determined at the date of the grant by the Compensation Committee of the Board of Directors.  Stock options granted under the plans may become exercisable in one or more installments in the manner and at the time or times specified by the committee.  Options granted under the plans expire not later than five years from the date of grant.

The following table summarizes certain information concerning each of the plans.

Plan
 
Expiration
 
Original Number of Shares
   
Options Granted, Net of Forfeitures During 2015
   
Options Outstanding at December 31, 2015
   
Restricted Stock Granted and Unissued
   
Shares Available for Grant at December 31, 2015
 
2003-A Plan
 
April 1, 2013
    975,000             210,000              
2004 Plan
 
August 20, 2014
    1,200,000       (8,020 )     299,999              
2014 Plan   June 3, 2024     1,200,000       90,000       90,000       261,260       848,740  
 
Directors Compensation


The following table provides the compensation earned by our non-employee Directors for the year ended December 31, 2015.

Name
 
Fees Earned or Paid in Cash
($)
   
Stock Awards
($)
   
Nonqualified Deferred Compensation Earnings
($)
   
Total
($)
 
James A. Cannavino (1)                                           
    --     $ 21,874     $ 10,000     $ 31,874  
Paul Lisiak (2)                                           
  $ 10,000     $ 21,874     $ --     $ 31,874  
Thomas C. Lund (3)                                           
    --     $ 21,874     $ 10,000     $ 31,874  
John J. Murabito (4)                                           
    --     $ 21,874     $ 10,000     $ 31,874  

 
22

 

Footnotes
 
(1)  
Mr. Cannavino has been a Director since 2000 and a member of the Audit Committee from since May 25, 2011.  As of December 31, 2015, Mr. Cannavino had 210,207 shares of deferred and non-issued stock.
(2)  
Mr. Lisiak has been a Director, member of the Audit Committee, and Chairman of the Governance and Nominating Committee since May 21, 2012.  As of December 31, 2015, Mr. Lisiak had 131,372 shares of deferred and non-issued stock.
(3)  
Mr. Lund was a Director and member of the Compensation Committee since May 25, 2011.  As of December 31, 2015, Mr. Lund had 178,695 shares of deferred and non-issued stock.
(4)  
Mr. Murabito has been a Director since May 25, 2011, and has been Chairman of the Audit Committee since May 21, 2012.  As of December 31, 2015, Mr. Murabito had 227,623 shares of deferred and non-issued stock.
 
Narrative Disclosure to Director Compensation Table

Effective June 3, 2014, the compensation of the Directors, other than the Chairman of the Board, includes an annual fee of $10,000 payable in cash.  In lieu of cash, a Director may elect to receive stock, distributed quarterly in arrears, with the number of shares distributed each quarter determined by dividing $2,500 by the average closing price in the last five trading days of each respective quarter.  At the beginning of each calendar year, Directors additionally receive $25,000 in restricted stock vesting daily over two years, with the number of shares equal to $25,000 divided by the average closing price of the stock in the five prior trading days to year-end.  The Chairman of the Board is not compensated.

In January 2008, the Company adopted a Deferred Compensation Plan for Directors whereby the Directors may elect to defer their compensation until January 15th of the year following such director’s termination of services as director.  The Company also reimburses Directors for reasonable expenses incurred in attending Board and Committee meetings.
 
 
23

 
 
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth the beneficial ownership of shares of voting stock of the Company, as of February 29, 2016, (i) each person known by the Company to beneficially own more than 5% of the shares of outstanding common stock, based solely on filings with the SEC, (ii) each of the Company’s executive officers and directors and (iii) all of the Company’s executive officers and directors as a group.  Except as otherwise indicated, all shares are beneficially owned, and the persons named as owners hold investment and voting power:

Name of Beneficial Owner (1)
 
Amount of Common Stock Beneficially Owned
   
Rights to Acquire Beneficial Ownership Through Exercise of Options and Warrants Within 60 Days
   
Total Beneficially Owned as % of Outstanding Shares
 
Metropolitan Equity Partners, LLC (2)
    1,782,703             13.3 %
James Cannavino (3)
    2,592,651       6,816       19.4 %
Thomas C. Lund (4)
    2,444,925       6,816       18.3 %
Paul Lisiak (5)
    1,910,136       6,816       14.3 %
Matthew E. Oakes
    404,993       210,000       4.6 %
John J. Murabito (6)
    363,355       6,816       2.8 %
Lowell M. Rush
    -       46,667       *  
All Officers and Directors as a Group (7 persons)
    7,716,060       281,411       59.8 %
 
* = Less than 1%
 
Footnotes
 
(1)  
Unless otherwise indicated, the address of all Beneficial Owners is c/o Direct Insite, Inc., 500 East Broward Boulevard, Suite 1550, Fort Lauderdale, FL 33394.
(2)  
The address of Metropolitan Equity Partners, LLC is 70 East 55th Street, 15th Floor, New York, NY 10022.  Amount includes 214,211 shares owned by Metropolitan MEIH19, LP.
(3)  
Includes 205,939 shares of restricted stock that have fully vested but not been issued and 6,186 shares of restricted stock that are expected to vest within 60 days.
(4)  
Includes 157,353 shares of restricted stock that have fully vested but not been issued, and 6,186 shares of restricted stock that are expected to vest within 60 days.
(5)  
Includes 1,782,703 shares of common stock held by Metropolitan Equity Partners, LLC, 127,433 shares of restricted stock that have fully vested but not been issued and 6,186 shares of restricted stock that are expected to vest within 60 days.  Mr. Lisiak serves as Managing Partner of Metropolitan Equity Partners, LLC, which is the Manager of Metropolitan GP Holdings, LLC, Series METVP II ("MetGP II") and Metropolitan GP Holdings, LLC, Series MEIH19 ("MetGP"). MetGP II is the general partner of Metropolitan Venture Partners II, L.P. ("MetVP II") and MetGP is the general partner of Metropolitan MEIH19, LP ("MEIH19"). In addition, Mr. Lisiak is one the members of the board of directors of the general partner of Metropolitan Venture Partners, L.P.
(6)  
Includes 226,733 shares of restricted stock that have fully vested but not been issued and 6,186 shares of restricted stock that are expected to vest within 60 days.
 
 
24

 
 
The following table sets forth certain information as of December 31, 2015, for all compensation plans (a description of which can be found under Item 11 of this report), including individual compensation arrangements under which equity securities of the Company are authorized for issuance.

Securities Authorized for Issuance Under Equity Compensation Plans
 
   
Number of Securities to be Issued Upon Exercise of Outstanding
Options
   
Weighted Average Exercise Price Per Share of Outstanding
Options
   
Number of Securities Available for Future Issuance Under Equity Compensation
Plans
 
Equity compensation plans approved by security holders
    599,999     $ 1.24       848,740  
 
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Director Independence

The Board has affirmatively determined that each Director other than Mr. Oakes, is independent under the independence standards set forth in NASDAQ Listing Rule 5605(a)(2).  The Board has standing Audit, Compensation, and Governance and Nominating Committees, each of whose members is also independent under the independence standards set forth in NASDAQ Listing Rule 5605(a)(2).
 
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following is a summary of the aggregate fees for professional services rendered to us by Marcum LLP, our independent auditors, for the fiscal years ended December 31, 2015 and 2014:

   
2015
   
2014
 
Audit Fees (1)
  $ 132,000     $ 139,000  
Tax Fees (2)
  $ 7,000     $ 12,000  
All Other Fees (3)
  $ 23,000     $ 35,000  

(1)  
Audit Fees in 2015 and 2014 consisted of aggregate fees billed and to be billed for professional services rendered for the audit of our annual financial statements, review of the interim financial statements included in quarterly reports, and consents issued in connection with registration statements or services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements.
(2)  
Tax Fees in 2015 and 2014 consisted of the aggregate fees billed for professional services rendered for tax compliance, tax advice, and tax planning, including fees related to the preparation of federal and state income tax returns.
(3)  
Other Fees in 2015 and 2014 consisted of the aggregate fees billed for professional services rendered for the examination of controls and issuance of an SSAE 16 Type II report related to the Company’s global electronic invoice management system.

 
25

 
 
The Audit Committee has responsibility for the appointment, compensation and oversight of the work of the independent auditor. As part of this responsibility, the Audit Committee must pre-approve all permissible services to be performed by the independent auditor.

The Audit Committee has adopted an auditor pre-approval policy which sets forth the procedures and conditions pursuant to which pre-approval may be given for services performed by the independent auditor.  Under the policy, the Audit Committee must give prior approval for any amount or type of service within four categories: audit, audit-related, tax services or, to the extent permitted by law, other services that the independent auditor provides. Prior to the annual engagement, the Audit Committee may grant general pre-approval for independent auditor services within these four categories at maximum pre-approved fee levels.  During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not contemplated in the original pre-approval and, in those instances, such service will require separate pre-approval by the Audit Committee if it is to be provided by the independent auditor.  For any pre-approval, the Audit Committee will consider whether such services are consistent with the SEC’s rules on auditor independence, whether the auditor is best positioned to provide the most cost effective and efficient service and whether the service might enhance the Company’s ability to manage or control risk or improve audit quality.  The Audit Committee may delegate to one or more of its members authority to approve a request for pre-approval provided the member reports any approval so given to the Audit Committee at its next scheduled meeting.

 
 
 
26

 
 
PART IV

Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

1.  
The financial statements listed in the index to the Financial Statements.

 
2.  
  Exhibits:
 
Exhibit No.   Description
       
3.1    
(a)  
Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) of Form S‑1 Registration Statement). (1)
       
  (b)  
Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S‑1 Registration Statement). (1)
       
  (c)  
Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S‑1 Registration Statement). (1)
       
  (d)  
Certificate of Amendment (Authorizing Increase in Shares of Common Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K for the year ended 1995).
       
  (e)  
Certificate of Amendment (Authorizing one for ten reverse-stock split as of March 30, 1998) (Incorporated by reference to Form S-1 Registration Statement). (1)
       
  (f)  
Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed October 3, 2002 (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated October 17, 2002).
       
  (g)  
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed December 20, 2002 (Incorporated by reference to Exhibit 3.2 of Company's Current Report on Form 8-K filed January 7, 2003).
       
  (h)  
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed January 2, 2003 (Incorporated by reference to Exhibit 3.3 to the Company's Current Report on Form 8-K filed January 17, 2003).
       
  (i)  
Certificate of Designation, Preferences and Rights of Series B Redeemable Preferred Stock filed December 10, 2003 (Incorporated by reference to Exhibit 3(i) to the Company’s Annual Report on Form 10-KSB filed April 14, 2004).
       
  (j)  
Certificate of Designation, Preferences and Rights of Series C redeemable Preferred Stock filed December 16, 2003 (Incorporated by reference to Exhibit 3(j) to the Company’s Annual Report on Form 10-KSB filed April 14, 2004).
       
  (k)  
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series C Preferred Stock filed March 29, 2005.
       
3.2
    By‑Laws. (Incorporated by reference to Exhibit 3(d) to the Company’s Form S‑1 Registration Statement). (1)
       
4.1
   
Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4 to the Company’s Form S‑1 Registration Statement). (1)
       
4.2
    Securities Purchase Agreement between the Company, Sigma Opportunity Fund, LLC and Metropolitan Venture Partners II, LP (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed March 31, 2005).
 
 
27

 
 
Exhibit No.   Description
10.1
   
2003 Stock Option /Stock Issuance Plan (Incorporated by reference to Exhibit 10.8 to the Company’s Form 10-K filed on April 15, 2003).
       
10.2
   
2003A Stock Option /Stock Issuance Plan (Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed May 6, 2003).
       
10.3
    2004 Stock Option /Stock Issuance Plan (Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed November 20, 2006).
       
10.4
    2014 Stock Incentive Plan (Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed May 5, 2014).
       
10.5
    2008 Directors’ Deferred Compensation Plan (Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-K filed on March 26, 2013).
       
10.6
   
Stock Purchase and Registration Rights Agreement between the Company and Metropolitan Venture Partners II, L.P. dated as of September 25, 2002 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated September 25, 2002).
       
10.7
   
Stock Purchase and Registration Rights Agreement between the Company and Metropolitan Venture Partners II, L.P. dated as of December 24, 2002 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated December 24, 2002).
       
10.8
   
Amendment letter dated January 29, 2004 to the Statement of Work between IBM Corporation and the Company, portions of the Exhibit have been omitted pursuant to a request for confidential treatment. (Incorporated by reference to Exhibit 10.28 to the Company’s S-1 registration statement filed on February 19, 2009).
       
10.9
   
Worldwide Invoices On-Line (IOL) Appendix A Payments and Fees for Ongoing Support (OCS)-Invoice Processing, Archiving, and Attachment Processing and Non-Recurring Engineering (NRE) between International Business Machines Corporation and the Company dated December 1, 2008; portions of the Exhibit have been omitted pursuant to a request for confidential treatment. (Incorporated by reference to Exhibit 10.29 to the Company’s S-1 registration statement filed on February 19, 2009).
       
10.1
   
Master Services Agreement #EDS-2004-01-2005 dated May 7, 2004 between Electronic Data Systems Corporation and the Company, portions of the Exhibit have been omitted pursuant to a request for confidential treatment. (Incorporated by reference to Exhibit 10.30 to the Company’s S-1 registration statement filed on February 19, 2009).
       
10.11
   
Statement of Work #EDS-2007-05-01 dated May 8, 2007 between Electronic Data Systems Corporation and the Company, portions of the Exhibit have been omitted pursuant to a request for confidential treatment. (Incorporated by reference to Exhibit 10.31 to the Company’s S-1 registration statement filed on February 19, 2009).
       
10.12
   
Master Services Agreement EIAP (OGS) Amendment (#8) dated June 27, 2007 between Electronic Data Systems Corporation and the Company, portions of the Exhibit have been omitted pursuant to a request for confidential treatment. (Incorporated by reference to Exhibit 10.32 to the Company’s S-1 registration statement filed on February 19, 2009).
 
 
28

 
 
Exhibit No.   Description
10.13
   
Statement of Work #EDS-2008-05-07 dated May 7, 2008 between Electronic Data Systems Corporation and the Company, portions of the Exhibit have been omitted pursuant to a request for confidential treatment. (Incorporated by reference to Exhibit 10.33 to the Company’s S-1 filed registration statement filed on February 19, 2009).
       
10.14
   
Master Services Agreement MIAP (OGS) Amendment (#10) dated August 21, 2008 between Electronic Data Systems Corporation and the Company, portions of the Exhibit have been omitted pursuant to a request for confidential treatment. (Incorporated by reference to Exhibit 10.34 to the Company’s S-1 registration statement filed on February 19, 2009).
       
10.15
   
Agreement dated as of April 28, 2011 by and among Metropolitan Venture Partners II, L.P., Metropolitan Venture Partners (Advisors), L.P., Metropolitan Venture Partners Corp., Michael Levin, Tall Oaks Group LLC, Lawrence D. Hite, Thomas C. Lund, Carol A. Lund, Craig W. Thomas, Bradley M. Tirpak, John J. Murabito, Philip Summe and S.A.V.E. Partners III, LLC, James A. Cannavino and the Company, (Incorporated by reference to Exhibit 10 to the Company’s Form 8-K filed on April 29, 2011).
       
10.16
   
Employment Agreement effective January 1, 2015 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 24, 2015).
       
10.17
   
Office Lease Agreement between the Company and CTA Partners, L.P., dated October 24, 2012 (Incorporated by reference to Exhibit 10.17 to the Company’s Form 10-K filed on March 26, 2013).
       
10.18
   
Agreement, dated October 28, 2013, by and between the Company and International Business Machines Corporation (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 20, 2013).
       
      Consent of Marcum LLP.
       
   
Certification pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer.
       
   
Certification pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.
       
   
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer.
       
   
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.
 
 
29

 
 
Exhibit No.   Description
101
   
Financial Statements from the Annual Report on Form 10-K of the Company for the year ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Balance Sheets as of December 31, 2015 and 2014; (ii) Statements of Operations for the years ended December 31, 2015 and 2014; (iii) Statements of Stockholders’ Equity for the years ended December 31, 2015 and 2014; and (iv) Statements of Cash Flows for the years ended December 31, 2015 and 2014.*
 
Footnotes
 
(1)  
Filed with Form S-1, Registration Statement of the Company Reg. No 3-47322 and incorporated herein by reference.
 
*
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act, except as shall be expressly set forth by specific reference in such filing or document.
 

 
 
30

 
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 22 day of March, 2016.
 
 
DIRECT INSITE CORP.
 
       
 
By:
/s/ Matthew E. Oakes  
    Matthew E. Oakes, Chief Executive Officer  
       
       
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 22, 2016:

Signature
 
Title
     
/s/ Matthew E. Oakes
 
President, Chief Executive Officer and Chairman of the Board of Directors
Matthew E. Oakes
   
     
/s/ Lowell Rush
 
Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)
Lowell Rush
   
     
/s/ James A. Cannavino
 
Director
James A. Cannavino
   
     
/s/Paul Lisiak   Director
Paul Lisiak    
     
/s/Thomas C. Lund   Director
Thomas C. Lund    
     
/s/John J. Murabito   Director
John J. Murabito    
     

 
 
31

 
 
DIRECT INSITE CORP.

FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

TABLE OF CONTENTS
 
Report of Independent Registered Public Accounting Firm
F-1
   
Financial Statements
   
Balance Sheets as of December 31, 2015 and 2014
F-2
 
Statements of Income for the years ended December 31, 2015 and 2014
F-3
 
Statements of Stockholders’ Equity for the years ended December 31, 2015 and 2014
F-4
   
Statements of Cash Flows for the years ended December 31, 2015 and 2014
F-5
   
Notes to Financial Statements
F-6 through F-21

 
 
 

 

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM


To the Audit Committee of the Board of Directors and Stockholders of
Direct Insite Corp.


We have audited the accompanying balance sheets of Direct Insite Corp. (the “Company”) as of December 31, 2015 and 2014 and the related statements of income, stockholders’ equity, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.   We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Direct Insite Corp. as of December 31, 2015 and 2014 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ Marcum LLP
Marcum LLP
Fort Lauderdale, FL
March 22, 2016


 
F-1

 
 
DIRECT INSITE CORP.
BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, 2015 AND 2014

   
2015
   
2014
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 2,375     $ 871  
Accounts receivable
    1,444       2,407  
Prepaid expenses and other current assets
    405       383  
                 
Total current assets
    4,224       3,661  
Property and equipment, net
    934       1,020  
Deferred tax assets
    1,195       1,195  
Other assets
    247       244  
Total assets
  $ 6,600     $ 6,120  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 1,468     $ 1,789  
Current portion of capital lease obligations
    11       27  
Deferred rent
    37       44  
Deferred revenue
    --       52  
Total current liabilities
    1,516       1,912  
Capital lease obligations, net of current portion
    --       9  
Total liabilities
    1,516       1,921  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, $0.0001 par value; 2,000,000 shares authorized; none issued or outstanding
           
Common stock, $0.0001 par value; 50,000,000 shares authorized; 12,979,536 and 12,759,870 shares issued and 12,939,609 and 12,719,943 shares outstanding in 2015 and 2014, respectively
    1       1  
Additional paid-in capital
    116,478       116,161  
Accumulated deficit
    (111,067 )     (111,635 )
Common stock in treasury, at cost; 24,371 shares in 2015 and 2014
    (328 )     (328 )
Total stockholders’ equity
    5,084       4,199  
Total liabilities and stockholders’ equity
  $ 6,600     $ 6,120  
 
See notes to financial statements.

 
F-2

 
 
DIRECT INSITE CORP.
STATEMENTS OF INCOME
(in thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

   
2015
   
2014
 
Revenues:
           
Recurring
  $ 6,745     $ 6,515  
Non-recurring
    1,266       1,780  
Total revenues
    8,011       8,295  
Operating costs and expenses:
               
Operations, research and development
    3,389       3,456  
Sales and marketing
    1,417       1,889  
General and administrative
    2,321       2,499  
Amortization and depreciation
    289       327  
Total operating costs and expenses
    7,416       8,171  
Operating income
    595       124  
Other (expense)
    (4 )     (10 )
Income before provision for income taxes
    591       114  
Provision for  income taxes
    23       8  
Net income
  $ 568     $ 106  
                 
Basic income per share
  $ 0.04     $ 0.01  
                 
Diluted income per share
  $ 0.04     $ 0.01  
                 
Basic weighted average common shares outstanding
    12,846       12,649  
                 
Diluted weighted average common shares outstanding
    12,865       12,670  
 
See notes to financial statements.
 
F-3

 

 DIRECT INSITE CORP.
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands)

         
Additional
                   
   
Common Stock
   
Paid-In
   
Accumulated
   
Treasury
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Stock
   
Total
 
Balance January 1, 2014
    12,648     $ 1     $ 115,982     $ (111,741 )   $ (328 )   $ 3,914  
                                                 
Employee stock based compensation expense
                112                   112  
Common stock issued or issuable for directors’ fees
    72             67                   67  
Net income
                      106             106  
Balance December 31, 2014
    12,720       1       116,161       (111,635 )     (328 )     4,199  
                                                 
Issuance of common stock in settlement of accrued directors’ fees
    112             104                   104  
Employee stock based compensation expense
                126                   126  
Common stock issued or issuable for directors’ fees 
    108             87                   87  
Net income
                      568             568  
                                                 
Balance December 31, 2015
    12,940     $ 1     $ 116,478     $ (111,067 )   $ (328 )   $ 5,084  

See notes to financial statements.
 
 
F-4

 
 
DIRECT INSITE CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands)

   
2015
   
2014
 
Cash flows from operating activities:
           
Net income
  $ 568     $ 106  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization and depreciation
    289       327  
Deferred taxes
    -       (3 )
Stock-based compensation expense
    213       179  
Deferred rent expense
    (7 )     21  
                 
Changes in operating assets and liabilities:
               
Accounts receivable
    963       (885 )
Prepaid expenses and other current assets
    (25 )     (4 )
Accounts payable and accrued expenses
    (217 )     389  
Deferred revenue
    (52 )     52  
Total adjustments
    1,164       76  
Net cash provided by operating activities
    1,732       182  
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (9 )     (21 )
Capitalization of internally developed software
    (194 )     (474 )
Net cash used in investing activities
    (203 )     (495 )
                 
Cash flows from financing activities:
               
Repayment of capital lease obligations
    (25 )     (187 )
Net cash used in financing activities
    (25 )     (187 )
                 
Net increase (decrease) in cash and cash equivalents
    1,504       (500 )
Cash and cash equivalents – beginning
    871       1,371  
Cash and cash equivalents – ending
  $ 2,375     $ 871  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 5     $ 9  
Cash paid for income taxes
  $ 23     $ 3  
                 
Schedule of non-cash investing and financing activities:
               
Issuance of common stock in settlement of accrued directors’ fees
  $ 104     $ -  
 
See notes to financial statements.
 
F-5

 
 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
 
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 Amsterdam, Netherlands.

As described in Note 9, the Company has three major customers (one of which has separate contracts with multiple companies) that accounted for 80.5% and 85.7% of the Company’s revenue for the years ended December 31, 2015 and 2014, respectively.  Loss of any of these customers, or any of the separate contracts under a main customer, could have a material effect on the Company (see Note 10).
 
Note 2 – Summary of Significant Accounting Policies

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 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, the valuation allowance on deferred tax assets and capitalized internally developed software.  Actual results could differ from those estimates.
 
 
F-6

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
Note 2 – Summary of Significant Accounting Policies (continued)

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:

 persuasive evidence of arrangements exist;
 delivery has occurred or services have been rendered;
 the seller’s price is fixed and determinable; and
 collectability is reasonably assured.

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.  The Company does not sell software licenses, upgrades or enhancements, or post-contract customer services.

 
F-7

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
 
Note 2 – Summary of Significant Accounting Policies (continued)

Cost of Revenue

Cost of revenue in the statements of income is included in operations, research and development costs and exclusive of amortization and depreciation which is shown separately.  Professional Service costs related to uncompleted milestones are deferred and included in other current assets, when applicable.  The Company expenses research and development costs as incurred except for costs in connection with the internally developed software, which are capitalized during the application development stage.  For the years ended December 31, 2015 and 2014, research and development expenses were approximately $1,560,000 and $1,738,000, respectively.

Property and Equipment

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets.  Leasehold improvements are amortized over the terms of the respective leases or the service lives of the related assets, whichever is shorter.

Capital lease assets are amortized over the shorter of the lease term or the service life of the related assets.

Internally Developed Software

The Company released the first phase of PAYBOX®, a next generation version of its accounts receivable platform in November 2014.  It was designed for a global bank and is available to all Order-to-Cash process customers.  According to ASC 350-40, Intangibles-Goodwill and Other-Internal-Use Software, the Company is able to capitalize the costs associated with the application development stage of a project.  The Company started amortizing capitalized costs when the software was ready for use and placed in service in November 2014.  The capitalized costs are being amortized on a straight-line basis over the estimated five year useful life of the software.  As additional functionality is added, costs incurred are capitalized in accordance with ASC 350-40.

Impairment of Long-Lived Assets

ASC 360, Property, Plant and Equipment (“ASC 360”) requires management judgment 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 for purposes of determining and measuring impairment.  It is the Company’s policy to review the value assigned to its long lived assets, to determine if they have been permanently impaired by adverse conditions whenever events or circumstances indicate the related carrying amount may not be recoverable.  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 would compare the sum of an undiscounted cash flow projection from the related long-lived assets to the net carrying amount of such assets.
 
 
F-8

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
 
Note 2 – Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets (continued)

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 years ended December 31, 2015 and 2014.

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 income, 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) 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.
 
The computation of basic and diluted earnings per share is as follows for the year ended December 31, 2015 (in thousands, except per share amounts):
 
   
Net Income
   
Shares
   
Per Share
 
   
Numerator
   
Denominator
   
Amount
 
Basic Earnings Per Share
                 
  Net income
  $ 568       12,846     $ 0.04  
Effect of Dilutive Securities
                       
  Options                                                                             
          2          
  Restricted stock                                                                             
          17          
Diluted Earnings Per Share                                                                             
  $ 568       12,865     $ 0.04  
 
 
F-9

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
 
Note 2 – Summary of Significant Accounting Policies (continued)

Earnings Per Share (continued)
 
For the year ended December 31, 2014 (in thousands, except per share amounts)
 
   
Net Income
   
Shares
   
Per Share
 
   
Numerator
   
Denominator
   
Amount
 
Basic Earnings Per Share
                 
  Net income
  $ 106       12,649     $ 0.01  
Effect of Dilutive Securities
                       
  Options                                                                             
          14          
  Restricted stock                                                                             
          7          
Diluted Earnings Per Share                                                                             
  $ 106       12,670     $ 0.01  

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):

   
Year Ended December 31,
 
Anti-Dilutive Potential Common Shares
 
2015
   
2014
 
Options
    575       487  
Restricted stock
    8       36  
                 
Total Anti-Dilutive Potential Common Shares
    583       523  

Cash and Cash Equivalents

The Company considers all investments with original maturities of three months or less to be cash equivalents.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance.  Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence.  Management performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by the review of their current credit information.  Collections and payments from customers are continuously monitored.  While such bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.  At December 31, 2015 and 2014, an allowance for doubtful accounts is not provided since, in the opinion of management, all accounts are deemed collectible.  If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, allowances may be required.
 
 
F-10

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
 
Note 2 – Summary of Significant Accounting Policies (continued)

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”).  ASC 718 establishes accounting for stock-based awards exchanged for employee services.  Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the equity grant) using the straight-line method.

The fair value of the Company’s common stock options are estimated using the Black Scholes-Merton option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate; and the expected life.  The Company calculates the expected volatility using the historical volatility over the most recent period equal to the expected term and evaluates the extent to which available information indicates that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant.

The Company has not experienced significant exercise activity on stock options. The Company determines the expected term of its stock option awards issued using the simplified method.  The simplified method assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires.

In accordance with ASC 718, excess tax benefits realized from the exercise of stock-based awards are classified in cash flows from financing activities.  The future realization of the reserved deferred tax assets related to these tax benefits associated with the exercise of stock options will result in a credit to additional paid-in capital if the related tax deduction reduces taxes payable.  The Company has elected the “with and without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year.  Under this approach, the windfall tax benefit would be recognized in additional paid-in-capital only if an incremental tax benefit is realized after considering all other benefits presently available.

Fair Value of Financial Instruments

The carrying value of the Company’s accounts receivable and accounts payable approximates their fair value due to the short-term maturity of such instruments.  The carrying value of capital lease obligations approximate their fair value because the terms of these instruments approximate prevailing market rates.
 
 
F-11

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
 
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 FDIC at December 31, 2015.

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

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Per ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, issued in August 2015, the amendments in ASU 2014-09 are effective for a public entity for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard allows for either a full retrospective or a modified retrospective transition method. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its financial statements or notes thereto, as well as, which transition method it intends to use.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740).  The new standard requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on an entity’s balance sheet.  The guidance provides that each jurisdiction will now only have one net noncurrent deferred tax asset or liability.  For public companies, the guidance will be effective for fiscal years beginning after December 15, 2016, but early adoption is permitted for all entities.  Management has decided to adopt the guidance for the year ended December 31, 2015 and the guidance was also retrospectively applied to the balance sheet for the year ended December 31, 2014.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For public companies, the ASU will be effective for fiscal years beginning after December 15, 2018.  The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.

Management does not believe that any other recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the financial statements.
 
 
F-12

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
Note 3 – Property and Equipment

Property and equipment consist of the following as of December 31, 2015 and 2014:

   
2015
   
2014
 
    (in thousands)  
Computer equipment and purchased software (3 years)
  $ 1,378     $ 1,372  
Internally developed software either placed or not yet placed in service  (5 years)
    1,101       907  
Furniture and fixtures and leasehold improvements (5 – 7 years)
    159       156  
      2,638       2,435  
Less: accumulated depreciation and amortization
    (1,704 )     (1,415 )
Property and equipment, net
  $ 934     $ 1,020  

Depreciation and amortization expense related to property and equipment for the years ended December 31, 2015 and 2014 was approximately $289,000 and $327,000, respectively.

Note 4 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of December 31, 2015 and 2014:

   
2015
   
2014
 
   
(in thousands)
 
Trade accounts payable                                                                               
  $ 262     $ 355  
Sales taxes payable                                                                               
    539       539  
Accrued directors’ fees                                                                               
    377       453  
Other payables and accrued expenses                                                                               
    290       442  
Total Accounts Payable and Accrued Expenses                                                                               
  $ 1,468     $ 1,789  

Note 5 – Capital Lease Obligations

The Company has equipment under two capital lease obligations expiring at various times through June 2016.  At December 31, 2015, the Company has outstanding future minimum payments of approximately $11,000 due in 2016.  The implied annual interest rates related to these capital leases range from 7.4% to 8.9%. As of December 31, 2015, the gross book value and the net book value of the related assets included in property and equipment is approximately $77,000 and $21,000, respectively.    Amortization of assets under capital leases is included in depreciation expense.
 
 
F-13

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
 
Note 6 – Stockholders’ Equity

Preferred Stock

The Company has 2,000,000 authorized preferred shares of which none were issued and outstanding at December 31, 2015 and 2014.

Common Stock, Options and Stock Grants

Year Ended December 31, 2015

During the year ended December 31, 2015, 135,136 restricted common shares were granted to Directors with an aggregate grant date fair value of approximately $100,000.  During the year ended December 31, 2015, approximately 108,064 restricted common shares with an aggregate grant date fair value of approximately $87,000 vested.
 
During the year ended December 31, 2015, the Company issued 111,602 shares of restricted common stock pursuant to the Company’s Directors’ Deferred Compensation Plan dated January 1, 2008.  These shares were issued to settle approximately $103,175 of accrued directors’ fees to two former directors for past services.

During the year ended December 31, 2015, 90,000 options were awarded to an officer. These options vest over three years with one-third vesting at the end of each of the three years. These options expire after a five year term.  The Company estimated the grant date fair value of the stock options using the Black-Scholes-Merton option model and the following assumptions:  volatility of 90%, risk free rate of 0.89%, dividend rate of zero, and expected term of 3.75 years.  The grant date fair value of the stock options issued was determined to be approximately $44,100.  During the year ended December 31, 2015, the Company recognized approximately $126,000 of expense related to the vesting of outstanding stock options.  For the year ended December 31, 2015, options to acquire 20,980 shares of common stock with a weighted average exercise price of $1.16 expired unexercised, and options to acquire 18,020 shares of common stock with a weighted average exercise price of $1.34 were forfeited.

Year Ended December 31, 2014

During the year ended December 31, 2014, 114,058 restricted common shares were granted to Directors with an aggregate grant date fair value of approximately $115,000.  During the year ended December 31, 2014, approximately 71,950 restricted common shares with an aggregate grant date fair value of approximately $66,872 vested and 40,398 restricted common shares with an aggregate grant date fair value of approximately $43,332 were forfeited.
 
During the year ended December 31, 2014, the Company granted, to an employee of the Company, an option to acquire 10,000 shares of common stock with an exercise price of $1.50, exercisable over a term of five years from the date of grant. The 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 grant date fair value of the stock options issued was determined to be approximately $7,500. During the year ended December 31, 2014, the Company recognized approximately $112,000 of expense related to the vesting of outstanding stock options. For the year ended December 31, 2014, options to acquire 97,157 shares of common stock with a weighted average exercise price of $1.18 expired unexercised, and options to acquire 163,878 shares of common stock with a weighted average exercise price of $1.43 were forfeited.
 
 
F-14

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
 
Note 6 – Stockholders’ Equity (continued)
 
Stock Option Plans

The Company has granted 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.  On June 3, 2014, the Company’s stockholders approved the adoption of the 2014 Stock Incentive Plan (the “2014 Plan”).  The 2014 Plan replaces the 2004 Stock Option/Stock Issuance Plan which expired on August 20, 2014.  The 2014 Plan provides for the grant of non-qualified stock options, incentive stock options, and stock appreciation rights, shares of restricted stock, stock units and shares of unrestricted stock.  Eligible participants include officers, employees and directors.  The aggregate number of shares authorized for issuance under the 2014 Plan is 1,200,000, and is subject to adjustment as described in the 2014 Plan.  There are 848,740 shares available for issue under the 2014 plan.  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 the year ended December 31, 2015, relating to all of the Company’s common stock option plans (share amounts are in thousands):
 
   
Shares
(in thousands)
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Term
(in years)
   
Aggregate Intrinsic Value (in thousands)
 
Outstanding at January 1, 2015
    549     $ 1.30       2.72     $ --  
  Granted
    90     $ 0.90       --     $ --  
  Expired
    (21 )   $ 1.16       --     $ --  
  Forfeited
    (18 )   $ 1.34       --     $ --  
Outstanding at December 31, 2015
    600     $ 1.24       2.10     $ --  
Exercisable at December 31, 2015
    414     $ 1.25       1.49     $ --  
 
 
F-15

 
DIRECT INSITE CORP.
NOTES TO FINANCIAL STATEMENTS
 
Note 6 – Stockholders’ Equity (continued)

Stock Option plans (continued)

The fair values of the stock options granted were estimated on the date of grant using the Black-Scholes-Merton option-pricing model that uses the following weighted-average assumptions for the years ended December 31, 2015 and 2014:

   
2015
 
2014
Expected term                                                                         
 
3.75 years
 
3.75 years
Expected volatility                                                                         
 
90%
 
95%
Expected dividend yield                                                                         
 
--
 
--
Risk-free interest rate                                                                         
 
0.9%
 
0.8%

The following table summarizes stock option information as of December 31, 2015:

         
Weighted Average
     
     
Number Outstanding
 
Remaining
 
Options Exercisable
 
Exercise Prices
   
(in thousands)
 
Contractual Life
 
(in thousands)
 
$ 0.90       90  
4.25 years
    --  
$ 1.15       310  
1.13 years
    300  
$ 1.20       20  
0.48 years
    20  
$ 1.50       80  
2.97 years
    40  
$ 1.65       100