-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BTW6EYOSxQZq+kxqikWWjMx9/39+NkIurf30BfG84+QGtVXUjwsupixI/l8BgUd6 3SP7jRvjVJSV24XMfYUFCQ== 0001201800-04-000076.txt : 20040513 0001201800-04-000076.hdr.sgml : 20040513 20040513101132 ACCESSION NUMBER: 0001201800-04-000076 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIRECT INSITE CORP CENTRAL INDEX KEY: 0000879703 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 112895590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20660 FILM NUMBER: 04801235 BUSINESS ADDRESS: STREET 1: 80 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5162441500 MAIL ADDRESS: STREET 1: 80 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER CONCEPTS CORP /DE DATE OF NAME CHANGE: 19930328 10QSB 1 diri10qsbmarch2004.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 March 31, 2004 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 office (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 April 30, 2004 was: 4,227,984. 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 March 31, 2004 (Unaudited) and December 31, 2003 ......................................................3 Condensed Consolidated Statements of Operations For the Three Months Ended March 31, 2004 and 2003 (Unaudited)..........4 Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2004 and 2003 (Unaudited)..........5 Notes to Condensed Consolidated Financial Statements (Unaudited) .........6 Item 2 Management's Discussion and Analysis or Plan of Operations ..............13 Item 3 Controls and Procedures..................................................16 PART II - OTHER INFORMATION Item 1. Legal Proceedings ...............................................17 Item 2. Changes in Securities ...........................................17 Item 3. Defaults Upon Senior Securities .................................17 Item 4. Submission of Matters to a Vote of Security Holders ............17 Item 5. Other Information ...............................................17 Item 6. Exhibits and Reports on Form 8-K ................................17 Signatures ..............................................................18 CERTIFICATIONS ...............................................................19 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004 AND DECEMBER 31, 2003 (In thousands, except share data)
March 31, December 31, 2004 2003 --------------------- -------------------- (Unaudited) (Audited) ASSETS Current assets Cash and cash equivalents $ 135 $ 75 Accounts receivable, net of allowance for doubtful accounts of $2 in 2004 and 2003 1,406 1,068 Prepaid expenses and other current assets 226 215 Assets from discontinued operations 70 47 --------------------- -------------------- Total current assets 1,837 1,405 Property and equipment, net 642 771 Other assets 316 335 --------------------- -------------------- TOTAL ASSETS $ 2,795 $ 2,511 --------------------- -------------------- LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities Accounts payable and accrued expenses $ 1,818 $ 2,248 Due to bank 609 585 Deferred revenue 70 96 Current portion of long-term debt 836 880 Liabilities from discontinued operations, current portion 294 581 --------------------- -------------------- Total current liabilities 3,627 4,390 Long term debt, net of current portion 49 42 Dividends payable 510 382 Liabilities from discontinued operations, long-term 71 87 --------------------- -------------------- Total liabilities 4,257 4,901 --------------------- -------------------- Commitments and contingencies Shareholders' deficiency Preferred stock, $0.0001 par value; 2,000,000 shares authorized; - - Series A Convertible Preferred, 134,680 issued and outstanding in 2004 and 2003; liquidation preference of $2,750,000 in 2004 and 2003 Series B Redeemable Preferred, 974 issued and outstanding in 2004 and 2003; liquidation preference of $974,075 in 2004 and 2003 Series C Redeemable Preferred, 1,350 and 590 issued and outstanding in 2004 and 2003, respectively; liquidation preference of $1,350,000 and $590,000, in 2004 and 2003, respectively Common stock, $0.0001 par value; 150,000,000 - - shares authorized in 2004 and 2003; 4,267,911 and 4,080,402 shares issued in 2004 and 2003, respectively; and 4,227,984 and 4,040,475 shares outstanding in 2004 and 2003, respectively Additional paid-in capital 111,496 110,582 Accumulated deficit (112,630) (112,644) --------------------- -------------------- (1,134) (2,062) Common stock in treasury, at cost - 24,371 shares (328) (328) --------------------- -------------------- Total shareholders' deficiency (1,462) (2,390) --------------------- -------------------- TOTAL LIABILITIES AND SHAREHODERS' DEFICIENCY $ 2,795 $ 2,511 ===================== ====================
See notes to condensed consolidated financial statements. 3 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2004 and 2003 (in thousands, except per share data)
Three Months Ended ------------------ March 31, --------- 2004 2003 ---------------- ---------------- Revenue from continuing operations $ 2,106 $ 1,936 ---------------- ---------------- Costs and expenses Operations, research and development 918 1,046 Sales and marketing 392 573 General and administrative 649 862 Amortization and depreciation 143 185 ---------------- ---------------- 2,102 2,666 ---------------- ---------------- Operating income (loss) 4 (730) Other expenses Interest expense, net (65) (67) ---------------- ---------------- Loss before provision for income taxes (61) (797) Provision for income taxes (1) - ---------------- ---------------- Loss from continuing operations (62) (797) Income (loss) from discontinued operations 204 (273) ---------------- ---------------- Net income (loss) 142 (1,070) Preferred stock dividends (128) (63) ---------------- ---------------- Net income (loss) attributable to common shareholders $ 14 $ (1,133) ================ ================ Basic and diluted income (loss) per share: Basic and diluted loss from continuing operations $ (0.05) $ (0.22) Basic and diluted income (loss) from discontinued operations 0.05 (0.07) ---------------- ---------------- Basic and diluted income (loss) per share $ 0.00 $ (0.29) ================ ================ Basic weighted average common shares outstanding 4,085 3,935 ================ ================
See notes to condensed consolidated financial statements. 4 DIRECT INSITE CORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (In thousands, except share data)
For the three months ended -------------------------- March 31, --------- 2004 2003 ----------------- ------------------ Cash flows from operating activities Loss from continuing operations $ (62) $ (797) Adjustments to reconcile loss from continuing operations to net cash used in continuing operations: Amortization and depreciation: Property and equipment 143 184 Other 1 18 Provision for doubtful accounts -- 2 Common stock and options issued for services 4 33 Changes in operating assets and liabilities: Accounts receivable (338) (578) Prepaid expenses and other current assets (11) (36) Other assets 18 22 Accounts payable and accrued expenses (280) 187 Deferred revenue (26) -- ----------------- ------------------ Net cash used in continuing operations (551) (965) ----------------- ------------------ Income (loss) from discontinued operations 204 (273) Change in: Assets and liabilities from discontinued operations (326) 68 ----------------- ------------------ Net cash used in discontinued operations (122) (205) ----------------- ------------------ Net cash used in operating activities (673) (1,170) ----------------- ------------------ Cash flows from investing activities Expenditures for property and equipment (14) (112) ----------------- ------------------ Net cash used in investing activities (14) (112) ----------------- ------------------ Cash flows from financing activities Proceeds from common stock and subscription receivable -- 13 Proceeds from sales of preferred stock 760 500 Costs related to the sale of preferred stock -- (8) Advances (repayments) from Bank, net 24 (169) Proceeds from long-term debt, net of fees -- 496 Repayments of long-term debt - discontinued operations -- (20) Repayments of long-term debt (37) (59) ----------------- ------------------ Net cash provided by financing activities 747 753 ----------------- ------------------ Net increase (decrease) in cash and cash equivalents 60 (529) Cash and cash equivalents - beginning of period 75 620 ----------------- ------------------ Cash and cash equivalents - end of period $ 135 $ 91 ================ ================== Non-cash investing and financing activities: Issuance of 182,509 common shares in 2004 for services and fees incurred in 2003 (Note 6) $ 150 ================
See notes to condensed consolidated financial statements. 5 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 1. Interim Financial Information The condensed consolidated balance sheet as of March 31, 2004, and the condensed consolidated statements of operations and cash flows for the three months ended March 31, 2004 and 2003, have been prepared by the Company and are not audited. These interim 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 quarterly period ended March 31, 2004, 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, 2003 included in the Company's Form-10KSB. The accounting policies used in preparing these unaudited condensed consolidated financial statements are consistent with those described in the December 31, 2003 consolidated financial statements. 2. The Company Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as an application service provider ("ASP"), which markets an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic bill presentation and payment as well as visual data analysis and reporting tools delivered via the Internet for its customers. The Company's core technology is dbExpress TM, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. During 2001, the Company began providing custom engineering services to its customers. These product offerings enable the Company to provide comprehensive services from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. The Company operates fully redundant data centers located at its main office in Bohemia, N.Y. and in Newark, NJ. Management's liquidity plans are discussed in Note 9. Also, as described in Note 8, the Company has one major customer that accounted for approximately 98% of the Company's revenue for the three months ended March 31, 2004. Loss of this customer would have a material adverse effect on the Company. Stock Options and Similar Equity Instruments -------------------------------------------- As permitted under SFAS No. 148, "Accounting for Stock-Based CompensationTransition 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): 6 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Three Months Ended March 31, -------------------------- 2004 2003 -------------- ------------- Net income (loss) attributable to common shareholders As reported $ 14 $ (1,133) Less: Stock-based employee compensation expense determined under fair value-based method for all awards (45) ( 321) -------------- ------------- Pro forma $ (31) $ (1,454) ============== ============= Basic and diluted net loss per share As reported $ 0.00 $ (0.29) ============== ============= Pro forma ($ 0.01) $ (0.37) ============== =============
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 of 68.1% in 2004 and 70.9% in 2003, (2) risk-free interest rates of 4.00% in 2004 and 4.25% in 2003 and (3) expected lives of 5.75 years in 2004 and ranging from 1.90 years to 4.5 years in 2003. 3. Discontinued Operations Platinum Communications, Inc. ----------------------------- In 2001, the Company and Platinum Communications, Inc. ("Platinum") completed a merger under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, a newly formed wholly owned subsidiary of the Company acquired all of the outstanding common stock of Platinum. As a result of the lack of development of the Platinum business and to focus the Company's resources on its core business, in December 2003, the Company decided to close the operations of Platinum. Accordingly, the results of operations and the assets and liabilities of Platinum are presented as discontinued operations for both the current and prior period. The income and losses are reflected as income (loss) from discontinued operations in the accompanying condensed consolidated statements of operations. The following table reflects the results of the discontinued operations of Platinum for the three months ended March 31, 2004 and 2003, respectively:
2004 2003 ---- ---- (In thousands) Revenue $ 0 $ 263 ------------ ------- Costs and Expenses ------------------ Operations, research and development -- (192) Sales and marketing -- (259) General and administrative -- (31) Amortization and depreciation -- (47) Other income - net 207 -- Interest expense, net (3) (7) ------------ ------- Total other income and (expenses) 204 (536) ------------ ------- Income (loss) from discontinued operations $ 204 $ (273) ============ =======
7 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 At March 31, 2004, assets of the discontinued operation consist of cash of $8,000 and a security deposit of $62,000 for a leased office facility. The Company is attempting to sub-lease this facility. The liabilities of the discontinued operation include the balance of loans totaling $91,000, an accrual for closing costs of $182,000 including the remaining office lease obligation net of anticipated sub- lease income, and accounts payable and accrued liabilities of $92,000. 4. Accounts Receivable and Due To Bank The Company has 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 % 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 initial 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 March 31, 2004, the Company had assigned approximately $761,000 of accounts receivable to the Bank and received advances of $609,000. 5. Long Term Debt Long-term debt consists of the following (in thousands):
March 31, December 31, 2004 2003 ------------------- -------------------- Lines of credit (a) $ 717 $ 736 Capitalized lease obligations (b) 168 186 ------- --------- 885 922 Less current portion (836) (880) ------- --------- Long-term debt, net of current portion $ 49 $ 42 ======= =========
(a) In 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 on the earlier of demand or June 30, 2005. The LoC permitted two forms of draw down; one based upon prime rate, the second based upon LIBOR. In 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%. As of March 31, 2004, the applied interest rate was 3.60%. Also in 2003, the Company obtained, and fully drew upon, a second line of credit from Sterling National Bank ("Sterling") in the amount of $250,000. The line is guaranteed by the Company's chairman, secured by the assets of the Company, and carries an interest rate of 7%. Repayments are calculated monthly at 2.778% of the outstanding balance, plus finance charges, and continue until the line is fully paid. At March 31, 2004, the Company had an outstanding balance of approximately $217,000 under the line of credit. 8 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 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. 6. Shareholders' Deficiency Preferred Stock --------------- In December 2003, the Company's Board of Directors authorized the sale of up to 1,500 shares of its non-voting Series C Redeemable Preferred Stock ("Preferred Stock - C"). During December 2003, the Company sold 590 shares of the Preferred Stock - C in consideration for $590,000 less fees and expenses of $60,000 to Metropolitan Venture Partners II, L.P. and certain board members and an executive officer of the Company. The holders of Preferred Stock - C are entitled to dividends at the rate of 9-% per annum, payable quarterly in arrears beginning October 1, 2005. The Company has the option to redeem issued shares of Preferred Stock - C, in whole or in part, at any time, with the redemption price equal to the purchase price plus accrued and unpaid dividends. For each share of Preferred Stock - C purchased, each investor received a Warrant to purchase the number of shares of the Company's common stock equal to the Price Per Share divided by 123% of the closing price per share of the Company's common stock on the trading day immediately prior to the date of issuance of the Warrant. During the quarter ended March 31, 2004 the Company sold an additional 760 shares for proceeds of $760,000, and issued 807,325 warrants in connection with the issuance. As of March 31, 2004, approximately $24,000 in dividends are accrued for the Preferred Stock - C holders. As of March 31, 2004, 1,438,476 warrants are outstanding in connection with the issuances of Preferred Stock C. The warrants expire in 2008 and 2009 and have exercise prices ranging from $0.93 to $1.11 per common share. The proceeds were used for working capital purposes. Subsequent to March 31, 2004, the Company's Board of Directors authorized the sale of an additional 500 shares of the Preferred Stock C. Common Stock and Option Issuances --------------------------------- During the quarter ended March 31, 2004, the Company issued 187,509 unregistered shares of common stock and options to purchase 50,000 shares of its common stock as follows: -- 15,000 shares of common stock valued at $12,000 pursuant to an employment agreement with the Company's Chief Executive Officer as follows: 5,000 shares valued at $4,000 for services for the quarter ended March 31, 2004, and 10,000 shares valued at $8,000 for services rendered and costs recorded in the year 2003. -- 82,509 shares valued at $75,000 to directors for service on the Board of Directors and Committees of the Board for the year 2003, the costs were recorded in 2003; -- 35,000 shares valued at $26,000 to an employee for services in 2003, the costs were recorded in 2003; -- 55,000 shares valued at $41,000 to consultants for services rendered in 2003, the costs were recorded in 2003. -- 50,000 options to purchase shares of common stock to a new member of the Board of Directors. The options vest ratably from February 2004 through February 2007 and have an exercise price of $0.77 per share. 9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 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 4,411 Convertible preferred stock and warrants to acquire common stock 2,785 ----- Total potential common shares as of March 31, 2004 7,196 =====
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 two separate products: ASP services and custom engineering services.
Three Months Ended March 31, 2004 2003 ------------------- -------------------- ASP fees $1,132 $1,126 Custom engineering fees 974 810 ------ ------ Total Revenue $2,106 $1,936 ====== ======
Major Customer -------------- For the three months ended March 31, 2004 and 2003, the Company had one major customer that accounted for 98.5% and 99.0% of the Company's total revenue, respectively. Accounts receivable from this customer amounted to $1,402,000 at March 31, 2004. 10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 9. Management's Liquidity Plans In order to meet the Company's cash needs and to achieve positive operating cash flows the Company has and will continue to take various actions and steps that it believes will enable the Company to attain these goals. These actions include: -- In the second half of 2003 the Company embarked on a cost reduction program, including among other things, staff reductions, pay rate reductions, and elimination of non-essential expenses. As demonstrated by the improved operating performance in the first quarter 2004, the Company believes these cost reductions have begun to have a positive impact on its operating performance. The Company notes that its intention is to reinstate the pay rate reductions as soon as practical and as soon as its operating results and cash flows permit. -- As discussed in Note 3, in December 2003 the Company closed the Dallas, Texas based operations of Platinum. Platinum had experienced losses and had significant cash needs. In 2003, Platinum utilized $1,012,000 of cash. During the quarter ended March 31, 2004, the discontinued operations of Platinum used $122,000 of cash. -- The Company intends to raise additional capital through private equity offerings and borrowing. In this regard in December 2003, as discussed in Note 6, the Company initiated the sale of Series C Preferred stock and as of March 31, 2004 had net proceeds from these sales of $1,290,000. -- The Company continues to strive to increase revenue through offering custom engineering services, expanding and enhancing its existing product offerings, and introducing new product offerings. In 2003 the Company's revenue from continuing operations increased $827,000 or 12.5% over revenue in 2002. For the first quarter 2004 our revenue from continuing operations exceeded revenue for the same period in 2003 by more than 8%. -- The Company continues to expand its marketing efforts in order to increase its customer base. In this regard, in 2003, the Company became a business partner with IBM and through this relationship will work with IBM in an effort to achieve sales to new customers. The Company will continue to pursue similar channel partner opportunities. The Company believes that the plan and initiatives discussed above will ultimately lead to positive cash flows and profitability. While the Company pursues these goals the Company also believes that the ability to raise additional capital through equity and debt placements will provide sufficient cash to meet our requirements at least through March 31, 2005. There can be no assurance, however, that the Company will achieve its cash flow and profitability goals, or that the Company will be able to raise additional capital sufficient to meet operating expenses or implement the plan. In such event, the Company may have to revise the plans and significantly reduce operating expenses, which could have an adverse effect on revenue and operations in the short term. 10. New Accounting Pronouncements In January 2003 and amended in December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of 11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research Bulletin No. 51. FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is any legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. However, in December 2003, FASB deferred the latest date by which all public entities, which meet the definition of small business issuer under SEC Regulation S-B, must apply FIN 46 to the first interim or annual reporting period ended after December 15, 2004. The effect of the adoption of this new accounting pronouncement is not expected to have a significant impact on the Company's consolidated financial statements. 11. Subsequent Events Between September 2002 and June 2003, the Company sold a total of 134,680 shares of Series A Convertible Preferred Stock, ("Series A Preferred ") in consideration for the gross amount of $2,750,000 to Metropolitan Venture Partners II, L.P. The holders of the Series A Preferred ("the Holders") are entitled to dividends, on a cumulative basis, at the rate of 9-% per annum, compounded quarterly and payable on February 1, 2005 and September 25, 2005. The payment of the first dividend was originally scheduled for September 25, 2004, 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. Subsequent to March 31, 2004 the Company and the Holders further agreed to grant the Company the right, in its sole discretion, to defer the payment of the dividend scheduled to be paid on February 1, 2005 until February 1, 2006. In the event the Company elects to pay the dividend on February 1, 2006 the Holders would receive a premium of $157,000. In the event the Company does not elect to defer the payment of the dividend the Company agreed to pay the Holders a premium of $35,000. Also, the Company and the Holders further agreed to grant the Company the right, in its sole discretion, to defer the payment of the dividend scheduled to be paid on September 25, 2005 until February 1, 2006. In the event the Company elects to pay this dividend on February 1, 2006 the Holders would receive a premium of $17,000. In the event the Company does not elect to defer the payment of the dividend the Company agreed to pay the Holders a premium of $8,000. In April 2004, the Company modified its employment agreement with the Company's Chairman and Chief Executive Officer. The terms of the agreement remain substantially unchanged except for the compensation being reduced by $10,000 per month for the period January 2004 through June 2004. Also, in April 2004, the Company modified its employment agreement with the Company's President. The terms of the agreement remain substantially unchanged except for the compensation being reduced by $4,000 per month for the period January 2004 through August 2004. In addition, in April 2004, the Company modified the consulting agreement dated December 1, 1999 with Mountain Meadow Farm, an affiliate of S.J. & Associates, Inc., to provide for a reduction in compensation of $10,000 per month for the period January through June 2004. 12 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 Direct Insite Corp. and its subsidiaries (hereinafter referred to at times as "Direct Insite" or the "Company"), was organized under the name Unique Ventures, Inc. as a public company, under the laws of the State of Delaware on August 27, 1987. In August, 2000, we changed our name to Direct Insite Corp. which the Board of Directors believed was more in line with our new direction. 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 bill presentation and payment ("EBP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. Our core technology is dbExpress TM, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. Further, in 2001, we began to provide custom engineering services for our customers. These services have increasingly become a significant source of revenue for us and we believe will continue to increase. Additionally, we believe that this type of service leads to recurring revenue streams similar to our ASP products. 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, reduces our customers' 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, NJ. Our facility in New Jersey is space leased at an International Business Machines ("IBM"), e-business Hosting Center. This co-location / redundancy feature enables us to offer virtually down time free service. Currently, IBM, our largest customer, representing approximately 98% of our revenue for the three months ended March 31, 2004 and 2003, utilizes our products and services to allow their large enterprise customers to mine their respective high volume telecommunications data to determine cost allocation by usage, provide for network planning, budgeting and the identification of significant trends in calling patterns. In addition, we added electronic invoice presentment, payment and analysis capabilities to our services offering all based on our dbExpress TM platform. 13 DIRECT INSITE CORP. AND SUBSIDIARIES As disclosed in Note 6 to the accompanying Condensed Consolidated Financial Statements, during the three months ended March 31, 2004, we received proceeds from the sale of Redeemable Preferred Series C Stock totaling $760,000. Results of operations For the three months ended March 31, 2004 we had net loss from continuing operations of $62,000 compared to a net loss from continuing operations of $797,000 in the same period in 2003. This significant improvement of a 92% reduction in the loss is the result of continued revenue growth combined with significant efforts to streamline our operations and reduce our operating costs as discussed below. Net income for the three months ended March 31, 2004 was $142,000 compared to a net loss of $1,070,000 in 2003. This includes income from discontinued operations of $204,000 in the three months ended March 31, 2004. This income is principally the result of recognizing income related to deferred revenue of $180,000 included in other income of the discontinued operation. The results for the first quarter 2004 may not be indicative of results for subsequent quarters or for the year. For the three months ended March 31, 2004 revenue from continuing operations increased $170,000 or 8.8% to $2,106,000 compared to revenue of $1,936,000 for the same period in 2003. This increase is primarily attributable to an increase in custom engineering fees, while revenue from ASP services increased slightly. The increase in engineering fees is principally due to the further international deployment of our ASP services and is expected to result in further increases in revenue from our ongoing ASP services. In 2003, the Company embarked on a major cost reduction program, including among other things, staff reductions, pay rate reductions and elimination of non-essential expenses. These efforts are reflected in the cost reductions discussed below. Certain of these reductions, particularly the pay rate reductions, are temporary in nature, as it is the Company's intent to reinstate the pay rate reductions at such time as the Company's operating results and cash flow permit. Costs of operations, research and development decreased by $128,000 (12.2%) to $918,000 for the three months ended March 31, 2004 compared to the costs of $1,046,000 for the three months ended March 31, 2003. These costs consist principally of salaries and related expenses for software developers, programmers, custom engineers, network services, and quality control and assurance. Also included are network costs, costs of the production co-location facility and other expenses directly related to our custom engineering and ASP production services. The decrease in costs is principally due to decreases in personnel wages and benefit costs, a decrease in costs for software, and a decrease in professional fees, offset by an increase in rental costs for our co-location production facility. All other operating expenses remained relatively flat. Sales and marketing costs were $392,000 for the three months ended March 31, 2004, a decrease of $181,000 or 31.6% compared to costs for the same period in 2003. Salaries and related costs decreased by $69,000 primarily due to a decrease in personnel and salary reductions. Also, consulting fees were reduced by $81,000, while all other costs were reduced by $31,000. General and administrative costs decreased $213,000 or 24.7% to $649,000 for the three months ended March 31, 2004 compared to costs of $862,000 for the same period in 2003. Salaries and related costs decreased $174,000 principally due a decrease in personnel and salary reductions, while other costs decreased in a net amount of $39,000. Depreciation and amortization expense decreased by $42,000 (22.7%) primarily due to fully amortizing certain software costs and other computer equipment and a lower rate of investment in new software and equipment. 14 DIRECT INSITE CORP. AND SUBSIDIARIES Financial Condition and Liquidity For the three months ended March 31, 2004, we had net income of $142,000 compared to a net loss of $1,070,000 for the same period in 2003. We used $551,000 in cash for continuing operations in the first three months of 2004 compared to $965,000 for the same period in 2003, an improvement of $414,000 or 42.9%. Cash used in discontinued operations was $122,000 for the three months ended March 31, 2004. We funded the shortfall in cash from operations primarily through the sale of redeemable preferred stock totaling $760,000. Cash used in operations, including cash used for discontinued operations, for the three months ended March 31, 2004 was $673,000, consisting of the net income of $142,000, non-cash expenses of $148,000, including depreciation and amortization of $143,000. This is offset by an increase in accounts receivable and other current assets of $331,000, a decrease in accounts payable and accrued expenses of $280,000 and a decrease in deferred revenue of $26,000. Additionally, cash used in operations was reduced by the decrease in net assets attributable to discontinued operations of $326,000. Cash used in investing activities was $14,000 for the three months ended March 31, 2004, compared to $112,000 for same period in 2003. This was principally expenditures for property and equipment. Cash from financing activities totaled $747,000 for the three months ended March 31, 2004, compared to $753,000 for the three months ended March 31, 2003. As noted above, we received net proceeds from the sale of Series C Preferred stock of $760,000. We also repaid $37,000 of long-term debt and capital lease obligations in the first quarter of 2004. Advances from a bank for receivables financing increased by $24,000 in 2004. Management's Liquidity and Financing Plans In order to meet our cash needs and to achieve positive operating cash flows we have and will continue to take various actions and steps that we believe will enable us to attain these goals. -- In the second half of 2003 we embarked on a major cost reduction program, including among other things, staff reductions, pay rate reductions, and elimination of non-essential expenses. We believe that this will reduce our operating costs in excess of $1.6 million on an annual basis. We believe these cost reductions have begun to have a positive impact on our operating performance. We note that it is our intent to reinstate the pay rate reductions as soon as practical and our operating results and cash flows permit -- In December 2003 we closed the operations of our Platinum subsidiary. Platinum had experienced losses and had significant cash needs. We estimate that this action will reduce our operating costs in excess of $1,200,000 annually. During the quarter ended March 31, 2004, the discontinued operations of Platinum used $122,000 of cash. -- We intend to raise additional capital through private equity offerings and borrowing. In this regard in December 2003, as discussed above, we initiated the sale of Series C Preferred stock and as of March 31, 2004 had net proceeds from these sales of $1,290,000. There can be no assurance, however, that we will be able to raise additional capital through equity sales and/or borrowing. -- We continue to strive to increase our revenue through offering custom engineering services, expanding and enhancing our existing product offerings such as IOL, and introducing new product offerings. In 2003 our revenues from continuing operations increased $827,000 or 12.5% over revenues in 2002. For the first quarter 2004 our revenue from continuing operations exceeded revenue for the same period in 2003 by more than 8%. 15 DIRECT INSITE CORP. AND SUBSIDIARIES -- We continue to expand our marketing efforts in order to increase our customer base. In this regard, in 2003, we became a business partner with IBM and through this relationship will work with IBM to achieve sales to new customers. We will continue to pursue similar channel partner opportunities. We believe that our plans and new initiatives as discussed above will lead to positive cash flows and profitability. While we pursue these goals we also believe that our ability to raise additional capital through equity and debt placements will provide sufficient cash to meet our requirements at least through March 31, 2005. There can be no assurance, however, that we will achieve our cash flow and profitability goals, or that we will be able to raise additional capital sufficient to meet our operating expenses or implement our plan. In such event, we may have to revise our plans and significantly reduce our operating expenses, which could have an adverse effect on revenue and operations in the short 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. 16 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 None 17 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 A. Cannavino - ------------------------------------------- James A. Cannavino, Chief Executive Officer May 12, 2004 /s/ Michael J. Beecher - ------------------------------------------- Michael J. Beecher, Chief Financial Officer May 12, 2004 18 EX-31 2 diri10qsbmarch2004ex31.txt EXHIBIT 31.0 DIRECT INSITE CORP. AND SUBSIDIARIES CERTIFICATIONS I, James Cannavino certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Direct Insite Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 12, 2004 /s/ James A. Cannavino ----------------------------- James A. Cannavino, Chief Executive Officer DIRECT INSITE CORP. AND SUBSIDIARIES CERTIFICATIONS I, Michael J. Beecher, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Direct Insite Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 12, 2004 /s/ Michael J. Beecher --------------------------------- Michael J. Beecher Chief Financial Officer EX-32 3 diri10qsbmarch2004ex32.txt EXIBIT 32.0 DIRECT INSITE CORP. AND SUBSIDIARIES CERTIFICATIONS Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Direct Insite Corp., (the "Company") on Form 10-QSB for the quarter ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James A. Cannavino, Chief Executive Officer, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: May 12, 2004 /s/ James A. Cannavino ---------------------------- James A. Cannavino Chief Executive Officer DIRECT INSITE CORP. AND SUBSIDIARIES Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Direct Insite Corp., (the "Company") on Form 10-QSB for the quarter ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael J. Beecher, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: May 12, 2004 /s/ Michael J. Beecher ---------------------------- Michael J. Beecher Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----