Paybox Corp. - FORM 10-Q - August 11, 2016

Attached files

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EX-32.2 - CERTIFICATION - Paybox Corp.	diri_ex322.htm
EX-32.1 - CERTIFICATION - Paybox Corp.	diri_ex321.htm
EX-31.2 - CERTIFICATION - Paybox Corp.	diri_ex312.htm
EX-31.1 - CERTIFICATION - Paybox Corp.	diri_ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016

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

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 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

As of August 11, 2016, there were 13,040,752 shares of the registrant’s Common Stock outstanding.

DIRECT INSITE CORP.

TABLE OF CONTENTS

PART I.FINANCIAL INFORMATION	2-18

ITEM 1.FINANCIAL STATEMENTS	2

CONDENSED BALANCE SHEETS AS OF JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31 2015	2

CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015 (UNAUDITED)	3

CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015 (UNAUDITED)	4

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)	5

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	13

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	18

ITEM 4.CONTROLS AND PROCEDURES	18

PART II.OTHER INFORMATION	19–20

ITEM 1.LEGAL PROCEEDINGS	19

ITEM 1A.RISK FACTORS	19

ITEM 2.UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS	19

ITEM 3.DEFAULTS IN SENIOR SECURITIES	19

ITEM 4.MINE SAFETY DISCLOSURES	19

ITEM 5.OTHER INFORMATION	19

ITEM 6.EXHIBITS	20

SIGNATURES	21

PART I – FINANCIAL INFORMATION

Item 1. Financial Information

DIRECT INSITE CORP.

CONDENSED BALANCE SHEETS

(in thousands, except share data)

	June 30, 2016			December 31, 2015
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	2,503		$	2,375
Accounts receivable		1,182			1,444
Prepaid expenses and other current assets		349			405
Total current assets		4,034			4,224
Property and equipment, net		1,127			934
Deferred tax assets		1,195			1,195
Other assets		224			247
Total assets	$	6,580		$	6,600

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	1,251		$	1,468
Capital lease obligations		--			11
Deferred rent		31			37
Total current liabilities		1,282			1,516

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; 13,063,769 and 12,979,536 shares issued and 13,023,842 and 12,939,609 shares outstanding in 2016 and 2015, respectively		1			1
Additional paid-in capital		116,555			116,478
Accumulated deficit		(110,930	)		(111,067	)
Common stock in treasury, at cost; 24,371 shares in 2016 and 2015		(328	)		(328	)
Total stockholders’ equity		5,298			5,084
Total liabilities and stockholders’ equity	$	6,580		$	6,600

See notes to condensed financial statements.

DIRECT INSITE CORP.

CONDENSED STATEMENTS OF OPERATIONS – UNAUDITED

(in thousands, except share data)

	For the three months ended				For the six months ended
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Revenues:
Recurring	$	1,307	$	1,696	$	2,807	$	3,403
Non-recurring		356		369		631		722
Total revenues		1,663		2,065		3,438		4,125
Operating costs and expenses:
Operations, research and development		611		918		1,347		1,811
General and administrative		569		565		1,159		1,186
Sales and marketing		398		395		674		780
Amortization and depreciation		59		76		120		156
Total operating costs and expenses		1,637		1,954		3,300		3,933
Operating income		26		111		138		192
Other expense, net		1		1		1		2
Income before provision for income taxes		25		110		137		190
Provision for income taxes		–		–		–		–
Net income	$	25	$	110	$	137	$	190

Basic income per share attributable to common stockholders	$	0.00	$	0.01	$	0.01	$	0.01

Diluted income per share attributable to common stockholders	$	0.00	$	0.01	$	0.01	$	0.01

Basic weighted average common stock outstanding		12,971		12,837		12,950		12,814

Diluted weighted average common stock outstanding		12,980		12,862		12,955		12,832

See notes to condensed financial statements.

DIRECT INSITE CORP.

CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED

(in thousands)

	For the six months ended
	June 30, 2016			June 30, 2015
Cash flows from operating activities
Net income	$	137		$	190
Adjustments to reconcile net income to net cash provided by operations:
Amortization and depreciation		120			156
Stock-based compensation expense		77			104
Deferred rent expense		(6	)		(3	)

Changes in operating assets and liabilities:
Accounts receivable		262			796
Prepaid expenses and other current assets		79			26
Accounts payable and accrued expenses		(217	)		(289	)
Deferred revenue		--			(52	)
Total adjustments		315			738
Net cash provided by operating activities		452			928

Cash flows from investing activities:
Expenditures for property and equipment		(52	)		(3	)
Capitalization of internally developed software		(261	)		(89	)

Net cash used in investing activities		(313	)		(92	)

Cash flows from financing activities:
Repayment of capital lease obligations		(11	)		(13	)

Net cash used in financing activities		(11	)		(13	)

Net increase in cash and cash equivalents		128			823
Cash and cash equivalents – beginning		2,375			871
Cash and cash equivalents – ending	$	2,503		$	1,694

Supplemental disclosure of cash flow information:
Cash paid for interest	$	1		$	2
Cash paid for income taxes	$	--		$	--

Issuance of common stock in settlement of accrued directors’ fees	$	--		$	103

See notes to condensed financial statements.

DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Nature of Business

Direct Insite Corp. (“Direct Insite” or the “Company”) operates as a Software as a Service (“SaaS”) provider, 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 that accounted for 75.8% and 81.3% of the Company’s revenue for the three months ended June 30, 2016 and 2015, respectively, and 79.1% and 80.9% of the Company’s revenue for the six months ended June 30, 2016 and 2015, respectively. Loss of any of these customers would have a material effect on the Company.

In November 2015, we were notified by HP Enterprise Services (“HPE”) that one of its clients, representing approximately 5.7% and 14.2% of our revenue for the six months ended June 30, 2016 and 2015, respectively, was terminating its contract with HPE effective 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 has not recorded revenue from this client after February 2016.

Note 2 - Summary of Significant Accounting Policies

Interim Financial Information

The accompanying unaudited condensed interim financial statements include the accounts of Direct Insite. The condensed balance sheet as of June 30, 2016, and the statements of operations and cash flows for the three and six months ended June 30, 2016 and 2015 have not been audited. These unaudited condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to quarterly report on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The December 31, 2015 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. These interim condensed financial statements include all adjustments which management considers necessary for a fair presentation of the financial statements and consist of normal recurring items. The results of operations for the three and six months ended June 30, 2016, are not necessarily indicative of results that may be expected for any other interim period or for the full year.

These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 22, 2016.

DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 2 - Summary of Significant Accounting Policies (continued)

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed financial statements, as well as the reported amounts of revenue and expenses during the reporting period.

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates are used in the accounting related to stock based compensation, the valuation allowance on deferred tax assets and capitalized internally developed software. Actual results could differ from those estimates.

Revenue Recognition

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

● 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.

Internally Developed Software

The Company released the first phase of PAYBOX®, a new 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. Precontract software development costs are generally charged to operating costs and expenses as incurred, however, in accordance with professional standards the Company defers precontract costs when such costs are directly associated with specific anticipated contracts for which recovery is probable.

DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 2 - Summary of Significant Accounting Policies (continued)

Income Taxes

The Company accounts for income taxes using the asset and liability method. This method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax basis of assets and liabilities, using enacted tax rates. Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. In addition, the Company expects to provide a valuation allowance on the remaining future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize the remaining assets, or other significant positive evidence arises that suggests its ability to utilize the remaining assets. The future realization of a portion of 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) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The computation of diluted weighted average shares outstanding used in the calculation of diluted earnings per share for the three and six months ended June 30, 2016 is as follows (in thousands):

	For the three months ended June 30,				For the six months ended June 30,
	2016		2015		2016		2015
Basic weighted average shares outstanding		12,971		12,837		12,950		12,814
Restricted stock grants		9		25		5		18
Diluted weighted average shares outstanding.		12,980		12,862		12,955		12,832

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):

	For the three months ended June 30,				For the six months ended June 30,
	2016		2015		2016		2015
Options to purchase common stock		498		629		531		629
Unvested stock grants		48		10		137		12
Potential anti-dilutive common shares		546		639		668		641

DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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 cash equivalents, and accounts receivable. The Company has cash deposits in excess of the maximum amounts insured by the Federal Depository Insurance Corporation at June 30, 2016 and 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 March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company has elected to adopt this standard early and applied it as of January 1, 2016, with no significant impact on its financial statements.

Several ASUs were issued during March through May 2016 that modified ASU 2014-09, Revenue from Contracts with Customers. The Company is currently evaluating the effect of the new accounting guidance, including these modifications, on its financial statements or notes thereto.

Note 3 – Property and Equipment

Property and equipment consist of the following at June 30, 2016 and December 31, 2015:

	2016			2015
	(in thousands)
Computer equipment and purchased software (3 years)	$	1,427		$	1,378
Internally developed software either placed or not yet placed in service (5 years)		1,363			1,101
Furniture and fixtures and leasehold improvements (5 – 7 years)		161			159
		2,951			2,638
Less: accumulated depreciation and amortization		(1,824	)		(1,704	)
Property and equipment, net	$	1,127		$	934

Depreciation and amortization expense related to property and equipment for the three months ended June 30, 2016 and 2015 was approximately $59,000 and $76,000, respectively. Depreciation and amortization expense related to property and equipment for the six months ended June 30, 2016 and 2015 was approximately $120,000 and $156,000, respectively.

DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 4 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following at June 30, 2016 and December 31, 2015:

	2016		2015
	(in thousands)
Trade accounts payable	$	153	$	262
Sales taxes payable		539		539
Accrued directors’ fees		392		377
Other accrued expenses		167		290
Total accounts payable and accrued expenses	$	1,251	$	1,468

Note 5 – Capital Lease Obligations

The Company had equipment under two capital lease obligations that expired at various times through June 2016. As of June 30, 2016, there are no remaining future payments. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair values of the assets.

The implied interest rates related to these capital leases ranged from 7.4% to 8.9%. The gross book value and the net book value of the related assets are approximately $77,000 and $0, respectively, as of June 30, 2016, and $77,000 and $21,000, respectively, as of December 31, 2015.

Note 6 – Stockholders’ Equity

Preferred Stock

The Company is authorized to issue 2,000,000 shares of preferred stock, of which none were issued or outstanding as of June 30, 2016 and December 31, 2015.

Common Stock, Options and Stock Grants

Six Months Ended June 30, 2016

During the six months ended June 30, 2016, 161,812 restricted common shares were granted with an aggregate grant date fair value of approximately $100,000. During the six months ended June 30, 2016, 84,233 restricted common shares with an aggregate grant date fair value of approximately $57,000 vested. During the six months ended June 30, 2016, the Company recognized approximately $21,000 of stock based compensation expense related to the expected vesting of stock options.

Six Months Ended June 30, 2015

During the six months ended June 30, 2015, 135,000 restricted common shares were granted with an aggregate grant date fair value of approximately $100,000. During this time, approximately 54,000 restricted common shares with an aggregate grant date fair value of approximately $44,000 vested. During the six months ended June 30, 2015, the Company issued 111,602 shares of restricted common stock pursuant to the Company’s Directors’ Deferred Compensation Plan dated January 1, 2008 (the “Directors’ Deferred Compensation Plan”). These shares were issued to settle approximately $103,175 of accrued directors’ fees to two former directors for past services. During the six months ended June 30, 2015, the Company recognized $60,466 of stock based compensation expense related to the expected vesting of 83,670 options. Outstanding options vest over a four-year period, with 25% vesting on the first anniversary of the grant date and the remaining 75% vesting in equal monthly amounts through the fourth anniversary of the grant date. In March 2015, 90,000 options were awarded to employees. These options vest over three years with 33% vesting at the end of each of the three years. These options expire after a five-year term.

DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 6 – Stockholders’ Equity (continued)

Common Stock, Options and Stock Grants (continued)

The Company estimates the grant date fair value of the stock option 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.

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. As of June 30, 2016, 640,169 shares were available for issuance 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 six months ended June 30, 2016, relating to all of the Company’s common stock plans:

						Weighted Average
				Weighted		Remaining
	Shares			Average Exercise		Contractual Term		Aggregate Intrinsic Value
	(in thousands)			Price		(in years)		(in thousands)
Outstanding at January 1, 2016		600		$	1.24		2.10	$	--
Expired		(20	)	$	1.20		--	$	--
Forfeited		(100	)	$	1.65
Outstanding at June 30, 2016		480		$	1.16		1.52	$	--
Exercisable at June 30, 2016		390		$	1.18		0.82	$	--

The following table summarizes stock option information as of June 30, 2016:

Outstanding Options
				Weighted Average
		Number Outstanding		Remaining	Options Exercisable
Exercise Prices		(in thousands)		Contractual Life	(in thousands)
$	0.90		90	3.75 Years		30
$	1.15		310	0.63 years		310
$	1.50		80	2.47 years		50
Total			480	1.52 years		390

As of June 30, 2016, there was approximately $45,000 of unrecognized compensation costs related to stock options outstanding.

DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 6 – Stockholders’ Equity (continued)

Restricted Stock Grants

A summary of the status of the Company’s non-vested stock grants as of June 30, 2016 and changes during the six months then ended is presented below:

Non-Vested Shares	Shares (in thousands)			Weighted-Average Grant Date Fair Value
Non-Vested at January 1, 2016		78		$	0.66
Granted		161		$	0.62
Vested		(84	)	$	0.68
Non-Vested at June 30, 2016		155		$	0.65

The future expected expense as of June 30, 2016 for non-vested shares is approximately $100,000 and will be recognized as expense through December 31, 2017.

Note 7 – Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim period, disclosure and transition. There were no unrecognized tax benefits as of June 30, 2016 and December 31, 2015.

The Company has identified its federal tax return and its state tax return in Florida as “major” tax jurisdictions, as defined in ASC 740. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The Company’s evaluation was performed for tax years ended 2012 through 2015, the only periods subject to examination. The Company believes that its income tax positions and deductions would be sustained upon audit and does not anticipate any adjustments that would result in a material change to its financial position. The Company has elected to classify interest and penalties incurred on income taxes, if any, as income tax expense. No interest or penalties on income taxes have been recorded during the three months ended June 30, 2016 and 2015. The Company does not expect its unrecognized tax benefit position to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.

As of June 30, 2016, the Company has federal and state net operating loss carryforwards (“NOLs”) remaining of approximately $25 million and $20 million, respectively, which may be available to reduce taxable income, if any. Remaining federal and state net operating loss carry forwards expire from 2019 through 2035. However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company. During 2015, the Company performed an evaluation as to whether a change in control had taken place. Management believes that there has been no change in control in accordance with Section 382. However, if it is determined that an ownership change has taken place, either historically or in the future, utilization of its NOLs could be subject to severe limitations, which could eliminate a substantial portion of the future income tax benefits of the NOLs. The NOL carryforward as of June 30, 2016 included approximately $1,195,000 related to windfall tax benefits for which a benefit would be recorded in additional paid-in capital if and when realized.

DIRECT INSITE CORP.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 8 –Commitment and Contingencies

The Company had an employment agreement with Matthew E. Oakes, Chief Executive Officer and Chairman of the Board of Directors, for a term effective June 1, 2013 through December 31, 2015. On February 20, 2015, Mr. Oakes’ employment agreement was superseded by a new employment agreement extending the term through December 31, 2017. The agreement provides for a base salary of $24,583 per month, discretionary and annual incentive bonuses based on the Company’s performance in achieving prescribed revenue and earnings before interest and taxes (“EBIT”) targets. The agreement also provides for reimbursement of all out-of-pocket expenses reasonably incurred by him in the performance of his duties hereunder 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 Mr. Oakes’ employment agreement), he would receive one year of base salary and COBRA coverage at the Company’s expense. The Company shall continue to provide corporate lodging to Mr. Oakes through the term of his agreement.

Note 9 – Major Customers

Three customers, HP Enterprise Services (“HPE”), inclusive of its underlying customers, International Business Machines Corp. (“IBM”) and one other customer, accounted for a significant portion of the Company’s revenues for the respective three and six month periods ended June 30, 2016 and 2015 as follows:

	For the three months ended						For the six months ended
	2016			2015			2016			2015
HPE Customer A		--	%		14.2	%		5.7	%		14.2	%
HPE Customer B		13.5			12.6			13.3			11.9
HPE Customer C		6.3			6.0			7.1			6.1
Total HP		19.8	%		32.8	%		26.1	%		32.2	%
IBM		41.9			37.2			40.1			38.5
Other Major Customer		14.1			11.3			12.9			10.2
Total Major Customers		75.8	%		81.3	%		79.1	%		80.9	%
Others		24.2			18.7			20.9			19.1
Total		100.0	%		100.0	%		100.0	%		100.0	%

Three customers accounted for a significant portion of the Company’s accounts receivable as follows as of the following dates (in thousands):

	June 30, 2016		December 31, 2015
HPE	$	261	$	389
IBM		455		467
One Other Major Customer		232		224
Total	$	948	$	1,080

Note 10 – Subsequent Events

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements under, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-Q, words such as “anticipate”, “believe”, “estimate”, “expect”, “intend” and similar expressions, as such words or expressions relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, 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

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

Direct Insite operates as a SaaS 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 invoice validation, order matching, consolidation, dispute handling, and e-payment processing in a business-to-business transaction based “fee for services” business model.

Through the automation and workflow of 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, 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 17 languages and multiple currencies. 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.

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 19.8% and 32.8% of revenue for the three months ended June 30, 2016 and 2015, respectively, and approximately 26.1% and 32.2% of revenue for the six months ended June 30, 2016 and 2015, 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 5.7% and 14.2% of our revenue for the six months ended June 30, 2016 and 2015, respectively was terminating its contract with HPE effective 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 has not recorded revenue from this client after February 2016.

International Business Machines, Inc. (“IBM”), representing approximately 41.9% and 37.2%, of revenue for the three months ended June 30, 2016 and 2015, respectively, and approximately 40.1% and 38.5%, of revenue for the six months ended June 30, 2016 and 2015, 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 renewed through December 31, 2015, 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 14.1% and 11.3% of our revenue for the three months ended June 30, 2016 and 2015, respectively, and approximately 12.9% and 10.2%, of revenue for the six months ended June 30, 2016 and 2015. 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, we believe that revenue derived from custom engineering services will have a significant tendency to fluctuate based on customer demand.

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

RESULTS OF OPERATIONS

Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015

The following is a summary of our operating results for the three months ended June 30, 2016 and 2015 (dollars in thousands):

	2016		2015		Increase (Decrease)
Revenues:
Recurring	$	1,307	$	1,696	$	(389	)	(22.9	) %
Non-recurring		356		369		(13	)	(3.5	) %
Total revenues		1,663		2,065		(402	)	(19.5	) %

Operating costs and expenses:
Operations, research and development……		611		918		(307	)	(33.4	) %
General and administrative		569		565		4		0.7	%
Sales and marketing		398		395		3		0.8	%
Amortization and depreciation		59		76		(17	)	(22.4	) %
Total operating costs and expenses		1,637		1,954		(317	)	(16.2	) %

Operating income		26		111		(85	)	(76.6	) %


Other expense, net		1		1		--		--

Net income	$	25	$	110	$	(85	)	(77.3	) %

Revenues

For the three months ended June 30, 2016, total revenue decreased by $402,000, or 19.5%, to $1,663,000 from $2,065,000 for the comparable prior year period. Recurring revenue decreased by $389,000, or 22.9%, to $1,307,000 for the three months ended June 30, 2016, from $1,696,000 for the comparable prior year period, primarily due to the previously noted loss of the HPE client in February 2016, and lower usage at certain other customers. Non-recurring revenue decreased by $13,000, or 3.5%, to $356,000 for the three months ended June 30, 2016.

Operating Cost and Expenses

Costs of operations, research and development decreased by approximately $307,000, or 33.4%, to $611,000 for the three months ended June 30, 2016 from $918,000 for the comparable prior year period. 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 decreased cost was due to higher costs capitalized for internally developed software, a headcount-related reduction in labor costs and lower scanning charges.

General and administrative costs increased by approximately $4,000, or 0.7%, to $569,000 for the three months ended June 30, 2016 from $565,000 for the comparable prior year period.

Sales and marketing costs increased by approximately $3,000, or 0.8%, to $398,000 for the three months ended June 30, 2016 from $395,000 for the comparable prior year period.

Amortization and depreciation decreased by approximately $17,000, or 22.4%, to $59,000 for the three months ended June 30, 2016 from $76,000 for the comparable prior year period, as the amortization of internally developed software costs were offset by existing assets that became fully depreciated during the interim period.

Operating Income

We had net operating income of $26,000 for the three months ended June 30, 2016, compared to net operating income of $111,000 for the comparable prior year period, due to the aforementioned decrease in recurring revenue.

Other Expense

Other expense of $1,000 for the three months ended June 30, 2016 were unchanged from the comparable prior year period.

Net Income

We had net income of $25,000 for the three months ended June 30, 2016, a decrease of $85,000 from the net income of $110,000 for the comparable prior year period, due to the aforementioned decrease in operating income.

Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

The following is a summary of operating results for the six months ended June 30, 2016 and 2015 (dollars in thousands):

	2016		2015		Increase (Decrease)
Revenues:
Recurring	$	2,807	$	3,403	$	(596	)	(17.5	) %
Non-recurring		631		722		(91	)	(12.6	) %
Total revenues		3,438		4,125		(687	)	(16.7	) %

Operating costs and expenses:
Operations, research and development		1,347		1,811		(464	)	(25.6	) %
General and administrative		1,159		1,186		(27	)	(2.3	) %
Sales and marketing		674		780		(106	)	(13.6	) %
Amortization and depreciation		120		156		(36	)	(23.1	) %
Total operating costs and expenses		3,300		3,933		(633	)	(16.1	) %

Operating income		138		192		(54	)	(28.1	) %

Other expense, net		1		2		(1	)	(50.0	) %
Provision for Income Taxes		--		--		--		--

Net income	$	137	$	190	$	(53	)	(27.9	) %

Revenues

For the six months ended June 30, 2016, total revenue decreased by $687,000, or 16.7%, to $3,438,000 from $4,125,000 for the comparable prior year period. Recurring revenue decreased by $596,000, or 17.5%, to $2,807,000 for the six months ended June 30, 2016, from $3,403,000 for the comparable prior year period. This was primarily due to the aforementioned loss of the HPE client in February 2016, and less usage by certain other customers. Non-recurring revenue decreased by $91,000, or 12.6%, to $631,000 for the six months ended June 30, 2016 from $722,000 for the comparable prior year period primarily due to the non-recurrence of certain large prior year customer requested modifications.

Operating Costs and Expenses

Costs of operations, research, and development decreased by approximately $464,000, or 25.6%, to $1,347,000 for the six months ended June 30, 2016 from $1,811,000 for the comparable prior year period. 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 decreased cost was due to higher costs capitalized for internally developed software, a headcount-related reduction in labor costs and lower scanning charges.

General and administrative costs decreased by approximately $27,000, or 2.3%, to $1,159,000 for the six months ended June 30, 2016 from $1,186,000 for the comparable prior year period, as higher payroll costs and professional fees were partially offset by the non-recurrence of the prior period’s legal and other expenses.

Sales and marketing costs decreased by approximately $106,000, or 13.6%, to $674,000 for the six months ended June 30, 2016 from $780,000 for the comparable prior year period, primarily due to a decrease in trade show (timing-related) and sales compensation expense.

Amortization and depreciation decreased by approximately $36,000, or 23.1%, to $120,000 for the six months ended June 30, 2016 from $156,000 for the comparable prior year period due to existing assets that became fully depreciated during the interim period.

Operating Income

We had operating income of $138,000 for the six months ended June 30, 2016, compared to operating income of $192,000 for the comparable prior year period, a decrease of $54,000 or 28.1%, due to the aforementioned decrease in revenue, partially offset by cost savings in all areas.

Other Expense, net

Other expense decreased by approximately $1,000 to $1,000 for the six months ended June 30, 2016 from $2,000 for the comparable prior year period.

Net Income

We had net income of $137,000 for the six months ended June 30, 2016, a decrease of approximately $53,000, or 27.9%, from the comparable prior year period, due to the aforementioned decrease in operating income.

FINANCIAL CONDITION AND LIQUIDITY

As of June 30, 2016, we had total stockholders’ equity of approximately $5,298,000, working capital of $2,752,000 and an accumulated deficit of $110,930,000. Our cash increased by $128,000 during the six months ended June 30, 2016, to $2,503,000 on hand, with a corresponding decrease in trade accounts receivable.

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

During the six months ended June 30, 2016, cash provided by operations was $452,000, compared to cash provided by operations of $928,000 for the six months ended June 30, 2015. The decrease in cash provided by operations is primarily due to the timing of collections from our customers and the timing of payments to our vendors.

Cash used in investing activities totaled $313,000 and $92,000 for the six months ended June 30, 2016 and 2015, respectively, with both periods primarily reflecting the capitalization of internally developed software.

Cash used in financing activities totaled $11,000 and $13,000 for the six months ended June 30, 2016 and 2015, respectively, with both periods reflecting payments on capital leases, using cash provided by operations.

OUR CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are described in the audited financial statements and notes thereto for the year ended December 31, 2015, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2016.

OFF-BALANCE SHEET ARRANGEMENTS

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation our Chief Executive Officer and Chief Financial Officer concluded that, at June 30, 2016, our disclosure controls and procedures were effective.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II Other Information

Item 1. 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 known to be contemplated.

Item 1A. Risk Factors

Not required.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

Pursuant to the terms of the Company’s director compensation plan, each non-officer director of the Company was entitled to receive an award on January 1, 2016 of restricted shares of common stock vesting daily over two years, as follows: James A. Cannavino, Paul Lisiak, Thomas C. Lund, and John J. Murabito, each 40,453 shares. These directors elected to defer receipt of the shares until January 15th of the year following such director’s termination of services as director.

On March 31, 2016, pursuant to the terms of the director compensation plan, each of Mr. Cannavino, Mr. Lund, and Mr. Murabito were granted 3,731 shares. These directors elected to defer receipt of the shares until January 15th of the year following such director’s termination of services as director.

On June 30, 2016, pursuant to the terms of the director compensation plan, each of Mr. Cannavino, Mr. Lund and Mr. Murabito were granted 3,765 shares of restricted stock. The directors who received grants elected to defer receipt of shares until January 15th of the year following such director’s termination of services as a director.

These awards were made in reliance on Section 4(a)(2) under the Securities Act of 1933, as amended and/or the “no-sale” theory.

For additional information, reference is made to Note 6 of the Condensed Financial Statements.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description

10.1		Employment Agreement, effective January 1, 2015 by and between Direct Insite Corp. and Matthew E. Oakes (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 24, 2015).

31.1		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.

31.2		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.

32.1		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.

32.2		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.

101		The following materials from Direct Insite’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015, (ii) Condensed Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited), (iii) Condensed Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited), (iv) and Notes to Condensed Financial Statements (Unaudited).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DIRECT INSITE CORP.

/s/ Matthew E. Oakes

Matthew E. Oakes, Chief Executive Officer August 11, 2016

/s/ Lowell M. Rush

Lowell M. Rush, Chief Financial Officer August 11, 2016

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