10QSB 1 di10q-sept03.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File No. 0 - 20660 DIRECT INSITE CORP. (Exact name of Small Business Issuer as specified in its Charter) Delaware 11-2895590 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 80 Orville Drive, Bohemia, N.Y. 11716 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 244-1500 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of $.0001 par value stock outstanding as of December 9, 2003 was: 4,069,953. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] DIRECT INSITE CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page Item 1 Condensed Consolidated Balance Sheets as of September 30, 2003 (Unaudited) and December 31, 2002 3 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss For the Three and Nine Months Ended September 30, 2003 and 2002 4 Unaudited Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2003 and 2002 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 - 14 Item 2 Management's Discussion and Analysis or Plan of Operations 15 - 18 Item 3 Controls and Procedures 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 CERTIFICATIONS 21 - 24 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002 (In thousands, except share data)
September 30, December 31, 2003 2002 ----------------- ----------------- (Unaudited) (Audited) ASSETS Current assets Cash and cash equivalents $ 71 $ 700 Accounts receivable, net of allowance for doubtful accounts of $38 and $42 in 2003 and 2002, respectively 1,367 1,350 Stock subscription receivable - 500 Prepaid expenses and other current assets 199 239 ---------------- ----------------- Total current assets 1,637 2,789 Software costs, net 344 444 Property and equipment, net 955 1,166 Other assets 418 492 ---------------- ----------------- $ 3,354 $ 4,891 ================ ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 2,000 $ 1,669 Due to bank 798 690 Deferred revenue 180 252 Current portion of long-term debt 759 396 ---------------- ----------------- Total current liabilities 3,737 3,007 Long term debt, net of current portion 70 616 Dividends payable 287 56 ---------------- ----------------- Total liabilities 4,094 3,679 ---------------- ----------------- Commitments and contingencies Shareholders' equity Preferred stock, $0.0001 par value; 2,000,000 shares authorized; Series A Convertible Preferred, 134,680 and 116,823 issued and outstanding in 2003 and 2002, respectively; liquidation preference of $2,750,000 and $2,500,000 in 2003 and 2002, respectively; - - Series B Redeemable Preferred, 974 issued and outstanding in 2003; liquidation preference of $974,075 in 2003 - - Common stock, $0.0001 par value; 50,000,000 and 150,000,000 shares authorized in 2003 and 2002 respectively; 4,099,880 and 3,966,055 shares issued in 2003 and 2002, respectively; and 4,059,953 and 3,926,128 shares outstanding in 2003 and 2002, respectively - - Additional paid-in capital 110,092 108,708 Accumulated deficit (110,463) (107,081) Subscriptions receivable (41) (62) Accumulated other comprehensive loss - (25) ---------------- ----------------- (412) 1,540 Common stock in treasury, at cost - 24,371 shares (328) (328) ---------------- ----------------- Total shareholders' equity (740) 1,212 ---------------- ----------------- $ 3,354 $ 4,891 ================ =================
See notes to condensed consolidated financial statements. 3 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 and 2002 (in thousands, except per share data)
Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, ------------- ------------- 2003 2002 2003 2002 --------------- -------------- --------------- -------------- Revenue $ 2,085 $ 1,851 $ 6,354 $ 5,348 ------------- ------------- ------------- ------------- Costs and expenses Operations, research and development 1,189 3,335 1,191 3,756 Sales and marketing 2,255 1,793 676 643 General and administrative 841 987 2,645 2,929 Amortization and depreciation 219 212 660 699 ------------- ------------- ------------- ------------- 2,927 3,031 9,316 8,756 ------------- ------------- ------------- ------------- Operating loss (842) (1,180) (2,962) (3,408) Other expenses Loss on sales of NetWolves common stock - (14) - (264) Other-than-temporary decline in Investment in NetWolves - - - (457) Equity in Loss of Voyant and Valuation Adjustment - (281) - (603) Interest expense, net (70) (52) (231) (140) (25) 40 (66) 40 ------------- ------------- ------------- ------------- Loss before benefit from income taxes (937) (1,487) (3,260) (4,832) Benefit from income taxes 109 - 109 - ------------- ------------- ------------- ------------- Net loss (828) (1,487) (3,151) (4,832) Preferred stock dividends (102) - (231) - ------------- ------------- ------------- ------------- Net loss attributable to common shareholders $ (930) $ (1,487) $ (3,382) $ (4,832) ============ ============= ============= ============= Other comprehensive income Reclassification adjustment and unrealized gain on marketable securities - (54) - (54) ------------- ------------- ------------- ------------- Comprehensive loss $ (930) $ (1,541) $ (3,382) $ (4,886) ============ ============= ============= ============= Basic and diluted net loss attributable to common shareholders per share $ (0.23) $ (0.39) $ (0.85) $ (1.37) ============ ============= ============= ============= Basic and diluted weighted average common shares outstanding 4,029 3,847 3,979 3,532 ============ ============= ============= =============
See notes to condensed consolidated financial statements. 4 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine months ended September 30, ------------------------------------- 2003 2002 ----------------- ------------------- (In thousands) Cash flows from operating activities Net loss $ (3,151) $ (4,832) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization Property and equipment Software costs 559 610 Other 100 87 2 - Provision for doubtful accounts 88 56 Loss on sales of NetWolves common stock - 264 Other-than-temporary decline in Investment in NetWolves - 457 Equity in loss of Voyant and Valuation Adjustment - 603 Common stock and options issued for services 175 671 Common stock issued for settlement of restructuring charges - 50 Other 25 - Changes in operating assets and liabilities Accounts receivable (117) (336) Prepaid expenses and other current assets 40 733 Other assets 72 40 Accounts payable and accrued expenses 338 (41) Restructuring costs payable - (386) Deferred revenue (60) 763 ----------------- ------------------- Net cash used in operating activities (1,929) (1,261) ----------------- ------------------- Cash flows used in investing activities Proceeds from the sale of NetWolves common stock - 282 Advances to Voyant - (465) Capital expenditures (309) (351) ----------------- ------------------- (309) (534) ----------------- ------------------- Cash flows from financing activities Proceeds from Bank advances, net 108 299 Proceeds from the sale of preferred stock, net of fees 727 - Proceeds from line of credit 500 - Proceeds from common stock and subscription receivable 21 573 Consideration paid in connection with the sale of common stock - (3) Proceeds from long term debt, net of fees 496 250 Repayments of long-term debt (243) (119) ----------------- ------------------- Net cash provided by financing activities 1,609 1,000 ----------------- ------------------- Net decrease in cash and cash equivalents (629) (795) Cash and cash equivalents, beginning of period 700 1,359 ----------------- ------------------- Cash and cash equivalents, end of period $ 71 $ 564 ================= =================== Non-cash investing and financing activities: Conversion of long-term debt into 974 shares of Series B Redeemable Preferred Stock $ 974 $ - ================= ===================
See notes to condensed consolidated financial statements. 5 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 1. Interim Financial Information The condensed consolidated balance sheet as of September 30, 2003, and the condensed consolidated statements of operations and comprehensive loss and cash flows for the periods ended September 30, 2003 and 2002, have been prepared by the Company without audit. These interim financial statements include all adjustments, consisting only of normal recurring accruals, which management considers necessary for a fair presentation of the financial statements. The results of operations for the quarterly period ended September 30, 2003, are not necessarily indicative of results that may be expected for any other interim period or for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002. The accounting policies used in preparing these unaudited condensed consolidated financial statements are consistent with those described in the December 31, 2002 consolidated financial statements. 2. The Company Direct Insite Corp. and subsidiaries (the "Company") primarily operates as an application service provider ("ASP") and markets an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic invoice presentation and payment ("EIP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. The Company's core technology is d.b.Express?, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. In 2001 the Company acquired Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which markets its integrated proprietary back office software solutions, Account Management Systems ("AMS" or sometimes referred to as "TAMS") to the telecommunications industry either as a license or as an ASP. Further, as an added source of revenue, the Company began in 2001 to provide custom engineering services to its customers. This suite of services enables the Company to provide a comprehensive Internet delivered service from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. This comprehensive service offering provides back office operations, cuts costs and provides for improved customer service by providing the end customer with easy access to all of the detailed information about their bill. The Company operates fully redundant data centers located at its main office in Bohemia, N.Y. and in Newark, N.J. The facility in New Jersey is leased at an International Business Machines ("IBM"), e- business Hosting Center. Management's liquidity plans are discussed in Note 8. As described in Note 7, the Company has one major customer that accounted for more than 91% of the Company's revenue for the nine- month period ended September 30, 2003. Loss of this customer would have a material adverse effect on the Company. In August, 2003, the Company executed an employment agreement with its president. The terms of the agreement indicate he shall serve as president until August 15, 2004 and thereafter as a consultant to the Company until February 15, 2007. Compensation while serving as president will be $240,000 per annum. Additionally, he was granted options to purchase 200,000 shares of the Company's common stock, 150,000 vesting upon execution of the agreement with the balance fully vesting by January 1, 2004. These options have an exercise price of $1.16 per share. Further, in addition to reimbursement of reasonable out of pocket business expenses, during his term as president he will be entitled to living and travel expenses not to exceed $3,100 per month. During the consulting period ( August 16, 2004 6 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 through February 15, 2007) he will be required to consult with the Company and its senior executive officers regarding its respective businesses and operations. Such consulting services shall not require more than 48 days in any calendar year, or more than four days in any month. The Company will pay $12,000 per month Compensation during the consulting period. New Accounting Pronouncements ----------------------------- Statement of Financial Accounting Standards ("SFAS") No.146, "Accounting for Costs Associated with Exit or Disposal Activities", provides guidance on the recognition and measurement of liabilities for cost associated with exit or disposal activities. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No.146 did not have a material effect on the Company's consolidated financial statements. In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after September 15, 2003. The adoption of FIN 46 did not have a material effect on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for how an entity that issues financial instruments (or may be required under the terms of a financial instrument to issue its equity shares) classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. The adoption of SFAS No. 150 did not have a material effect on the Company's consolidated financial statements. Stock Options and Similar Equity Instruments -------------------------------------------- As permitted under SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure", which amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------- 2003 2002 2003 2002 ------------ -------------- ------------- ----------- Net loss attributable to common shareholders As reported $(930) $(1,487) $(3,382) $(4,832) Less: Stock-based employee compensation expense determined under fair value-based method for all awards (278) (1,033) (859) (1,437) ------- ------- ------- ------- Pro forma $(1,208) $(2,520) $(4,241) $(6,269) ======= ======= ======= ======= Basic and diluted net loss per share As reported $(0.23) $(0.39) $(0.85) $(1.37) ======= ======= ======= ======= Pro forma $(0.30) $(0.66) $(1.07) $(1.77) ======= ======= ======= =======
7 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 The fair value of Company common stock options granted to employees are estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility ranging from 63.4% to 71.5% in 2003 and from 67.7% to 68.9% in 2002, (2) risk-free interest rates of 4.25% in 2003 and 4.80% in 2002 and (3) expected lives of 2.0 years to 5.2 years in 2003 and 3.0 years to 5.0 years in 2002. 3. Accounts Receivable and Due To Bank In 2001, the Company entered into an Accounts Receivable Purchase Agreement with a Bank, whereby the Company from time to time may assign some of their accounts receivable to the Bank on a full recourse basis. Upon specific invoice approval, an advance of 80% of the underlying receivable is provided to the Company. The remaining balance (20%), less an administrative fee of approximately 0.5% plus interest at the rate of 1-1/2% per month, is paid to the Company once the customer has paid. The maximum amount of all assigned receivables outstanding at any time shall not exceed $1.5 million. The primary term of the agreement was for one year, and continues until due notice of termination is given at any time by either party to the agreement. At September 30, 2003, the Company had assigned approximately $997,000 of accounts receivable to the Bank and received advances of $798,000 from the Bank. 4. Software costs During the third quarter of 2003 the Company's management determined that the software acquired in the Platinum acquisition, valued at $344,000 as at September 30, 2003, might be greater than its fair value. The Company is currently negotiating a new sales agreement related to this software. In order to finalize the determination of the fair value of the software the Company must complete its sales negotiation. The Company anticipates completing the negotiation and fair value analysis during the fourth quarter of 2003. The carrying value of the software may be significantly reduced in the near term depending upon the results of the negotiation. 5. Long Term Debt Long-term debt consists of the following (in thousands):
September 30, December 31, 2003 2002 ------------------- ---------------- Lines of credit (a) $ 605 $ 133 Capitalized lease obligations (b) 224 319 Term Loan - Chief Executive Officer (c) - 250 Installment Note - Markus & Associates (d) - 250 ------- ------- 829 952 Less current portion (759) (396) ------- ------- Long-term debt, net of current portion $ 70 $ 556 ======= =======
(a) The Company has four lines of credit with various expiration dates. In June 2003, the Company obtained a discretionary Line of Credit ("LoC") in the amount of $500,000 from JP Morgan Private Bank ("JPMC"). The LoC is guaranteed by Tall Oaks Group, LLC, and is repayable the earlier of demand 8 or June 30, 2005. The LoC permitted two forms of draw down; one based upon prime rate, the second based upon LIBOR. In July 2003, the Company elected to draw down $500,000 applying the terms and conditions set forth for LIBOR. The interest rate is the JPMC reserve adjusted LIBOR plus 2.30%. This obligation matures six months from date borrowed. The second line has an expiration date of July 30, 2006, bears an interest rate of 10%, is collateralized by substantially all the assets of Platinum and is personally guaranteed by one of the former officers of Platinum. The third line is payable on demand, bears an interest rate of 10% and has no available balance. The fourth line contains no expiration date, bears an interest rate of 16.25% and has no available balance. (b) The Company has equipment under capital lease obligations expiring at various times through 2006. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The assets are included in property and equipment. (c) In January 2002, the Company's Chairman and current Chief Executive Officer loaned the Company $250,000. The loan had a term of three years with interest at 5%, payable quarterly in arrears. In June 2003, the loan plus accrued interest, aggregating $266,000, was converted into 266 shares of the Company's Series B Redeemable Preferred Stock, ("Series B Preferred"). See Note 6. (d) In December 2002, the Company executed a $250,000 note payable to Markus & Associates (an affiliate of S.J. & Associates, Inc.). This note was payable in 28 equal monthly installments of principal plus interest at 9-1/2%. In June 2003, the loan balance of $208,000 was converted into 208 shares of the Company's Series B Preferred stock. See Note 5. 6. Shareholders' equity Preferred Stock --------------- In September 2002, the Company sold 93,458 shares of its Series A Convertible Preferred Stock, ("Preferred Stock") in consideration for $2,000,000 less fees and expenses of $178,000 to Metropolitan Venture Partners II, L.P. ("Metropolitan"), a private equity investment firm. In December 2002, the Company sold 23,365 shares of its Preferred Stock in consideration for $500,000 less fees and expenses of $61,000, to Metropolitan. The proceeds from this transaction were received January 3, 2003, and, as of December 31, 2002, the principal sum was reflected as stock subscription receivable. In June 2003, the Company sold 17,857 shares of its Series A Convertible Preferred Stock in consideration for $250,000 less fees and expenses of $5,000 to Metropolitan. The holders of Preferred Stock ("the Holders") are entitled to dividends, on a cumulative basis, at the rate of 9-1/2 per annum, compounded quarterly and payable on February 1, 2005 and September 25, 2005.The payment of first dividend was originally scheduled for September 25, 2003, however, the Company and the Holders agreed to defer this payment until February 1, 2005. As consideration for the deferral of the dividend payment, the Company agreed to pay the Holders a premium of 7.5% of the dividend. Dividends are payable, at the option of the holders, in cash or in the Company's common stock. Each share of Preferred Stock is convertible into 10 shares of common stock, at the option of the holder. The holders have certain demand and piggyback registration rights, have preference in the event of liquidation, and are entitled to ten votes for each share of Preferred Stock on all matters as to which holders of common stock are entitled to vote. As of September 30, 2003, $287,000 in dividends are payable to the holders The managing partner of Metropolitan was appointed as a member of the Company's Board of Directors in September 2002. In June 2003, the Company's Board of Directors approved the exchange of the then outstanding obligations to its Chairman and current Chief Executive Officer, Markus & Associates and Tall Oaks Group, LLC for 974 shares of Series B Preferred Stock at an exchange ratio of $1,000 of debt per share ("Price Per Share"). The Series B Preferred was issued as follows: 9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 -- 266 shares were exchanged for $266,000 of debt obligation to the Company's Chairman and current Chief Executive Officer; -- 208 shares were exchanged for $208,000 of debt obligation to Markus & Associates; and -- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks Group, LLC. Each of the Series B Preferred shares is entitled to mandatory dividends, payable quarterly, commencing on the first day of the calendar quarter after the date of issuance, at the rate of 12% per annum. Additionally, the Series B Preferred shares are redeemable, at the sole option of the Company, on or after March 31, 2005 (or prior to March 31, 2005 with the consent of majority-in-interest holders of Series B Preferred shares). Upon redemption, the holders of the Series B Redeemable Preferred shall be entitled to receive, for each share of Series B Redeemable Preferred outstanding, an amount equal to the Price Per Share plus accrued and unpaid dividends. Earnings Per share ------------------ The Company displays earnings per share in accordance with SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires dual presentation of basic and diluted earnings per share ("EPS"). Basic EPS includes no dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options, warrants and other potential stock issuances have not been considered in the computation of diluted EPS amounts since the effect of their inclusion would be antidilutive. Securities that could potentially dilute basic EPS in the future, that were not included in the computation of the diluted EPS because to do so would have been antidilutive for the periods presented, consist of the following (in thousands): Options to purchase common stock 3,352 Convertible preferred stock 1,347 ----- Total potential common shares as of September 30, 2003 4,699 ===== Issuances after September 30, 2003 through December 9, 2003 Common stock issued 10 Options to purchase common stock granted 400 ----- Total Common shares and options issued October 1, 2003 through December 9, 2003 410 =====
Common Stock and Options Issuances ---------------------------------- During the quarter ended September 30, 2003, the Company issued 37,281 shares of its common stock and options to purchase 535,000 shares of its common stock as detailed below: -- Pursuant to an employment agreement with its Chief Executive Officer dated January 25, 2003, the Company issued 15,000 shares of its common stock valued at $16,000. -- In lieu of cash, for the three month period ended September 30, 2003, the Company issued 22,281 shares of its common stock valued at $26,000 to the Company's Board of Directors for Board fees. -- The Company granted 225,000 options to purchase shares of its common stock to certain employees and a Board member of the Company. The options were fully vested upon issuance, can only be exercised during the period March 31, 2005 to April 1, 2006 and have an exercise price of $1.26 per share. 10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 -- The Company granted 45,000 options to purchase shares of its common stock to a certain employee of the Company. The options vest 9,000 upon issuance and 3,000 per month for the months of January through December 2004, and have an exercise price of $0.75 per share. -- The Company granted 15,000 options to purchase shares of its common stock to a certain employee of the Company. The options vest 3,000 upon issuance and 1,000 per month for the months of January through December 2004, and have an exercise price of $0.75 per share. -- The Company, pursuant to an employment agreement executed in August, 2003, granted 200,000 options to purchase shares of its common stock to the president of the Company. The options will be fully vested by December 31, 2003, and have an exercise price of $1.16 per share. -- The Company granted 25,000 options to purchase shares of its common stock to a certain employee of the Company. The options vest 20% upon issuance, 20% December 31, 2003, 20% June 30, 2004, 40% December 31, 2004 and have an exercise price of $0.75 per share. -- The Company granted 25,000 options to purchase shares of its common stock to a certain employee of the Company. The options vest 20% upon issuance, 20% December 31, 2003, 20% June 30, 2004, 40% December 31, 2004 and have an exercise price of $0.95 per share. Subsequent to September 30, 2003: -- The Company, pursuant to an extended employment agreement with its Chief Executive Officer, granted 360,000 options. See Note 10. -- The Company granted 25,000 options to an employee, vesting 5,000 vested on issuance, 5,000 12/31/03, 5,000 3/31/2004, 5,000 6/31/2004, 5,000 10/31/2004, with an exercise price of $1.10 per share -- The Company granted 15,000 to an employee, all options are vested but can be exercised during the period July 1, 2005 and July 1, 2007. The exercise price is $1.10 per share. During the quarter ended June 30, 2003, the Company issued 76,851 shares of its common stock and options to purchase 389,000 shares of its common stock as detailed below: -- Issued 17,654 net shares of its common stock as payment of certain consulting expenses, valued at $15,000. -- Pursuant to an employment agreement with its Chief Executive Officer dated January 25, 2003, the Company issued 15,000 shares of its common stock valued at $20,000. -- In lieu of cash, for the six month period ended June 30, 2003, the Company issued 44,197 shares of its common stock valued at $57,000 to the Company's Board of Directors for Board fees. -- The Company granted 180,000 options to purchase shares of its common stock to certain employees of the Company. The options vest in one-third increments on April 30, 2004, April 30, 2005 and April 30, 2006 and have an exercise price of $1.20 per share. -- The Company granted 200,000 options to purchase shares of its common stock to an employee of the Company. The options, having an exercise price of $1.40, vested upon issuance, but may only be exercised during the period March 31, 2005 to April 01, 2006. The employee is also the Managing Partner and principal owner of Tall Oaks. -- The Company granted 9,000 options to purchase shares of its common stock to three employees of the Company. The options vest in one-third 11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 increments: on the date of issuance, December 31, 2003 and June 30, 2004. The options have an exercise price of $1.30 per share. During the quarter ended March 31, 2003, the Company issued 19,693 shares of its common stock and options to purchase 272,500 shares of its common stock as detailed below: -- Issued 9,693 shares of its common stock as payment of certain consulting expenses, valued at $20,000. -- In December 2002, the Company's Chairman became the Company's Chief Executive Officer. In January 2003, the Company entered into an employment agreement with its Chief Executive Officer, which expires in January 2005. As part of the compensation, the Chief Executive Officer will receive 60,000 shares of the Company's common stock which vest ratably over the first twelve months of the agreement. Accordingly, during the quarter ended March 31, 2003, the Company issued 10,000 shares of its common stock valued at $18,000. Additionally, as part of his compensation he was granted 240,000 options to purchase common stock of the Company at $2.02 per share, which was above the market price on the date of issuance. 50% of the options vested upon execution of the agreement; the balance will vest ratably during the term of the agreement. -- The Company granted 30,000 options to purchase shares of its common stock to certain members of its Board of Directors for services rendered in their capacity as Board members. The options vest on December 31, 2003 and have an exercise price of $2.00 per share. -- The Company granted 2,500 options to purchase shares of its common stock to an employee of the Company. The options, having an exercise price of $1.85, vest in one-third increments on February 28, 2003, June 30, 2003 and June 30, 2004. 7. Reclassifications Certain reclassifications have been made to the condensed consolidated financial statements shown for the prior period in order to have it conform to the current period's classifications. 8. Products and Services The Company and its subsidiaries currently operate in one business segment and provide three separate products: ASP services, custom engineering services and AMS services.
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 --------------- --------------- --------------- ---------------- ASP fees $ 1,477 $ 1,195 $ 4,149 $ 3,128 Custom engineering fees 557 458 1,779 1,682 AMS fees 51 198 426 538 --------- --------- -------- --------- Total Revenue $ 2,085 $ 1,851 $ 6,354 $ 5,348 ========= ========= ======== =========
Major customer -------------- For the three months ended September 30, 2003 and 2002, the Company had one major customer that accounted for 96.3% and 88.1% of the Company's total 12 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 revenue, respectively. For the nine months ended September 30, 2003 and 2002, this major customer accounted for 91.6% and 88.4% of the Company's total revenue, respectively. Accounts receivable from this customer amounted to $1,344,000 at September 30, 2003. 9. Management's Liquidity Plans The Company's management has and will continue to take numerous steps that it believes will create positive operating cash flow for the Company. Key measures are as follows: -- In July 2003, management commenced a major cost reduction plan involving among other things, staff reductions, executive pay rate reductions, reduced spending on non essential expense items, settle accounts payable with restricted Company common stock, as well as arrange wherever possible, deferred payment on some of its obligations. -- Raise sufficient capital through private placements and or the incurrence of long term debt; -- Actively pursue channel partner opportunities. The Company recently became a business partner with IBM; -- Continue to market its custom engineering fees. The Company generated in excess of $2,500,000 in custom engineering fees for the year 2002, and has generated $1,779,000 in custom engineering fees for the nine months ended September 30, 2003. Management believes this revenue should continue throughout 2003 and into 2004. This form of revenue has generally led to recurring revenue; -- Increase revenue as a result of the agreement entered into in 2002 between the Company and IBM, which allows IBM the ability to electronically attach supporting documentation to an electronic invoice, all submitted via the Internet to their customers; -- Continue to develop new products and services; -- Capitalize on the growing trend for outsource services within the communications sector. The acquisition of Platinum broadened the Company's product offerings in this market sector. -- Lastly, the Company is presently in the process of raising additional capital of an amount it believes will be sufficient to meet it short term requirements. To date the Company has received commitments aggregating $1,650,000 (of which $120,000 has been received) primarily from its Chairman/CEO and Metropolitan. Management believes that its plan will ultimately enable the Company to generate positive cash flows from operations. Until such time, the Company believes that its short and long term plans as well as its ability to raise capital through the issuance of additional debt and/or equity financing should provide adequate funding through at least September 30, 2004. However, there can be no assurances that the Company will have sufficient funds to implement its current plan. In such an event, the Company could be forced to significantly alter its plan and further reduce its operating expenses, which could have an adverse effect on revenue generation and operations in the near term. 10. Subsequent Events On April 16, 2003, the Company received notification from Nasdaq that it did not comply with Marketplace Rule 4310(c)(2)(B), to the extent that the Company did not have a minimum of $2,500,000 in shareholders' equity. On May 1, 2003 the Company submitted a plan which specifically outlined how it believed it would achieve and sustain compliance with this requirement. Nasdaq reviewed the plan submitted and determined that the Company's plan did not adequately address the issue. The Company appealed the decision to the Nasdaq Listing Qualification Panel (the "Panel"). On July 24, 2003, the Company presented its business case to the Panel during which time it requested and was granted until October 10, 2003 to comply with the original requirement. The Company has been engaged in certain actions to substantially increase its shareholder's equity, however, it has been 13 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 unable to accomplish this objective within the required timeframe. Accordingly, effective October 24, 2003 the Company's common stock trades on the Over-The-Counter Bulletin Board exchange, maintaining its ticker symbol of "DIRI". In October 2003, the Company obtained and fully drew on a $250,000 Line of Credit from Sterling National Bank. The Line of Credit is collateralized by various assets of the Company and is personally guaranteed by the Company's CEO and Chairman of the Board of Directors. The debt is repayable over a period of thirty six months and accrues finance charges, which are calculated based on an annual percentage rate of 7% applied against any outstanding balance. The Company extended its services agreement with its Chief Executive Officer on December 5, 2003. The agreement now expires August 24, 2007. The extended agreement calls for compensation of $15,000 per month and 360,000 options, vesting 7,500 per month for the term of the agreement (48 months), to purchase the Company's common stock at an exercise price of $1.16, the closing price of the Company's common stock on the date the agreement was effective. The agreement provides for reimbursement of reasonable out of pocket business expenses and further provides for living and travel expenses not to exceed $11,000 per month. 14 DIRECT INSITE CORP. AND SUBSIDIARIES Item 2 - Managements Discussion and Analysis or Plan of Operations Forward looking statements All statements other than statements of historical fact included in this Form 10-QSB including, without limitation, statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-QSB, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, the risk of errors or failures in the Company's software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel and the dependence on key personnel. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. All subsequent written and oral forward- looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph. Overview We primarily operate as an application service provider ("ASP") and, market an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic invoice presentation and payment ("EIP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. Our core technology is d.b.Express?, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. In 2001 we acquired, Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which markets its integrated proprietary back office software solutions, Account Management Systems ("AMS" or sometimes referred to as "TAMS") to the telecommunications industry either as a license or as an ASP. We completed a merger with Platinum under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, our newly formed wholly owned subsidiary acquired all of the outstanding common stock of Platinum. Further, as an added source of revenue, we began in 2001 to provide custom engineering services for our customers. This suite of services enables us to provide a comprehensive Internet delivered service from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. This comprehensive service offering provides back office operations, cuts costs and provides for improved customer service by providing the end customer with easy access to all of the detailed information about their bill. We operate fully redundant data centers located at our main office in Bohemia, N.Y. and in Newark, N.J. Our facility in New Jersey is leased at an IBM,e-business Hosting Center. This co-location / redundancy feature enables us to offer virtually down time free service. Results of operations IBM continues to be our largest customer accounting for 96% of total revenue for the three-month period ended September 30, 2003, as compared to 88% for the three-month period ended September 30, 2002. We derive revenue from IBM from the sale of managed services (ASP) as well as custom engineering. During the second half of 2001, we entered into an agreement with IBM wherein for a per transaction fee, we enable IBM to present invoices to a portion of its customers via the Internet. This EIP&P offering has since been expanded to include additional functionality. In March 2002, the parties signed a new agreement, which allows IBM to expand this EIP&P offering to more of its customers, both domestic and international. In addition, the Company continues to provide data analysis and reporting services for IBM's telecommunications customers. We are actively pursuing new sales opportunities to reduce sales concentration. 15 DIRECT INSITE CORP. AND SUBSIDIARIES For the three months ended September 30, 2003, total revenue increased $234,000 from $1,851,000 for the three months ended September 30, 2002 to $2,085,000 for the three months ended September 30, 2003. An analysis of the increase is as follows: ASP revenue increased $282,000, or 24%, to $1,477,000 in 2003 from $1,195,000 in 2002, and custom engineering fees increased $99,000, or 22%, to $557,000 in 2003 from $458,000 in 2002. These increases were offset by a decrease in AMS fees of $147,000. Total revenue for the nine month period ended September 30, 2003 aggregated to $6,354,000. When compared to $5,348,000, the total revenue earned during the same time period total in 2002, the Company achieved an increase in overall revenue of $1,006,000 or 19%. During the nine month time- frame, ASP revenue increased $1,021,000 to $4,149,000, representing a 33% increase in revenue from this service compared to the nine month total in 2002 of $3,128,000. The most significant factor contributing to the increase in ASP revenue has been the expansion of the EIP&P services. As of September 30, 2003 this service is offered in the U.S., Canada, Brazil, and eight nations in Europe, enabling our customers to deliver their invoices in all local languages. The Company believes that this service will continue to expand into additional countries in Europe, Middle East and into the Pacific Rim within the next three to six months. Engineering revenue increased by $97,000, or 6%, when comparing 2003 and 2002 amounts of $1,779,000 and $1,682,000, respectively. During the nine-month period ended September 30, 2003, AMS revenue decreased $112,000 to $426,000, when compared to $538,000 in the 2002 period. Operations, research and development expenses consist primarily of salaries and related costs (benefits, travel and training) for developers, programmers, custom engineers, network services, quality control / quality assurance and documentation personnel, applicable overhead allocations, as well as co-location facilities expenses and all costs directly associated with the production and or development of the Company's services. -- When comparing the three months ended September 30, 2003 and 2002, operations, research and development expenses remained virtually the same, increasing by $2,000. The Company continues to upgrade, improve and enhance its current products and services, while maintaining an approach to cost effectiveness. -- When comparing the nine months ended September 30, 2003 and 2002, the Company increased its operations, research and development expenses by $421,000 or 42% of incremental revenue growth of $1,006,000. The most significant item contributing to this increase was additional staffing costs and professional fees totaling $412,000. Additional operations, research and development expenses incurred associated with Platinum amounted to $17,000. All other expenses decreased by $8,000. Management believes that it is critical to maintain a qualified personnel staff and, further, to continue to enhance as well as develop new and innovative services and products. It is expected that operations, research and development costs will increase in future periods as a result of anticipated increases in future revenue as well as costs associated with its product/service enhancement and development activities. Sales and marketing expenses include salaries and related costs, commissions, travel, facilities, communications costs and promotional expenses for the Company's direct sales organization and marketing staff. -- Sales and marketing expenses increased $33,000 to $676,000 for the three months ended September 30, 2003, when compared to $643,000 for the three months ended September 30, 2002. Wages and consulting fees increased $71,000 and costs associated with Platinum increased $81,000. However, rent and travel expenses decreased $46,000 and $34,000, respectively. All other items in the aggregate decreased $39,000. -- Sales and marketing expenses increased $462,000 to $2,255,000 for the nine months ended September 30, 2003 when compared to $1,793,000 for the nine months ended September 30, 2002. Costs associated with Platinum increased expenses by $298,000. Further, wages and consulting 16 fees increased $246,000. Offsetting these increases were rent and travel expenses which decreased $17,000 and $63,000, respectively. General and administrative expenses include administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead. -- Expenses decreased $146,000 to $841,000 for three months ended September 30, 2003, when compared to $987,000 reported for the three months ended September 30, 2002. Major factors contributing to this decrease include reductions in general and administrative expenses related to Platinum of $40,000, expenses related to the Company's Board of Directors of $35,000, as well as a reduction in expenses related to salaries and benefits totaling $47,000. -- Expenses decreased $284,000 to $2,645,000 for the nine months ended September 30, 2003 when compared to the nine months ended September 30, 2002. Major factors contributing to this decrease include, among other things, a decrease in professional fees and business insurance of $210,000 and $21,000, respectively, general and administrative expenses related to Platinum of $29,000, expenses related to the Company's Board of Directors of $62,000, as well as a reduction in expenses related to salaries and benefits totaling $7,000. Offsetting these reductions were increases in auto expense of $34,000. Other expenses showed a net increase of $11,000. Amortization and depreciation expenses increased $7,000 for the three months ended September 30, 2003 when compared to the three months ended September 30, 2002 and decreased $39,000 for the nine months ended September 30, 2003 when compared to the nine months ended September 30, 2002. Financial Condition and Liquidity For the nine months ended September 30, 2003, the Company incurred net operating losses thereby requiring cash from sources other than normal operations to fund its operating activities. In order to fund its operating losses, the Company: -- in January 2003, received an unsecured $500,000 loan from Tall Oaks. See Note 5; -- as described in Note 6, in December 2002, sold 23,365 shares of its Preferred Stock in consideration for $500,000 less fees and expenses of $61,000, to Metropolitan. The proceeds from this transaction were received January 3, 2003; -- as described in Note 6, in June 2003, sold 17,857 shares of its Preferred Stock in consideration for $250,000, less fees and expenses of $5,000, to Metropolitan; -- as further described in Note 6, reduced future cash outflows by exchanging $974,000 of Company obligations for 974 shares of its Series A-1 Preferred stock; -- continues to make use of its financing arrangement with an asset based lending institution; -- as described in Note 5, in July 2003, the Company drew the full $500,000 amount of a line of credit obtained from JP Morgan Private Bank; -- in October 2003, the Company obtained a $250,000 line of credit from Sterling National Bank. See Note 10. As detailed in the Condensed Consolidated Statement of Cash Flows, during the nine month period ended September 30, 2003, the Company utilized $1,929,000 in operating activities, which includes, among other items, a net loss of $3,151,000, an increase in accounts receivable of $117,000, and a decrease in deferred revenue of $60,000, partially offset by non-cash expenses totaling $949,000, an increase in accounts payable and accrued expenses of $338,000 and a decrease in prepaid expenses and other current assets of $40,000. Further, during the nine months ended September 30, 2003, the Company expended approximately $309,000 for capital expenditures. In order to address the Company's cash requirements, management has and will continue to take numerous steps that it believes will create positive operating cash flow. Key measures are as follows: -- In July 2003, management commenced a major cost reduction plan involving among other things, staff reductions, executive pay rate reductions, reduced spending on non essential expense items, settle accounts payable with restricted Company common stock, as well as arrange wherever possible, deferred payment on some of its obligations. 17 DIRECT INSITE CORP. AND SUBSIDIARIES -- Raise capital through private placements and or the incurrence of long term debt; -- Actively pursue channel partner opportunities. The Company recently became a business partner with IBM; -- Continue to market its custom engineering fees. The Company generated in excess of $2,500,000 in custom engineering fees for the year 2002, and has generated $1,779,000 in custom engineering fees for the nine months ended September 30, 2003. Management believes this revenue should continue throughout 2003 and into 2004. This form of revenue has generally led to recurring revenue; -- Increase revenue as a result of the agreement entered into in 2002 between the Company and IBM, which allows IBM the ability to electronically attach supporting documentation to an electronic invoice, all submitted via the Internet to their customers; -- Continue to develop new products and services; -- Capitalize on the growing trend for outsource services within the communications sector. The acquisition of Platinum broadened the Company's product offerings in this market sector; -- Lastly, the Company is presently in the process of raising additional capital of an amount it believes will be sufficient to meet it short term requirements. To date the Company has received commitments aggregating $1,650,000 (of which $120,000 has been received) primarily from its Chairman/CEO and Metropolitan. Management believes that its plan will ultimately enable the Company to generate positive cash flows from operations. Until such time, the Company believes that its short and long term plans as well as its ability to raise capital through the issuance of additional debt and/or equity financing should provide adequate funding through at least September 30, 2004. However, there can be no assurances that the Company will have sufficient funds to implement its current plan. In such an event, the Company could be forced to significantly alter its plan and further reduce its operating expenses, which could have an adverse effect on revenue generation and operations in the near term. Item 3 - Controls and Procedures Our chief executive officer and chief financial officer have supervised and participated in an evaluation of the effectiveness of our disclosure controls and procedures as of a date within 90 days of the date of this report, and, based on their evaluations, they believe that our disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. As a result of the evaluation, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 18 DIRECT INSITE CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31 Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K Current Report on Form 8-K dated August 21, 2003. 19 DIRECT INSITE CORP. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIRECT INSITE CORP. /s/ James Cannavino 12/9/03 ---------------------------------------- ---------------- James Cannavino, Chief Executive Officer December 9, 2003 /s/ George Aronson 12/9/03 ---------------------------------------- ---------------- George Aronson, Chief Financial Officer December 9, 2003 20