-----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, RhaBWDOWL1GMd6YyP7HdyHI20kD0hhJGOWWV3F9UWRLwkVh2IkWJPSV2eUS6Mcq/ NKPKLQ2TydWtjkVhDZ1Ajw== 0001201800-05-000312.txt : 20051115 0001201800-05-000312.hdr.sgml : 20051115 20051115163039 ACCESSION NUMBER: 0001201800-05-000312 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051115 DATE AS OF CHANGE: 20051115 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: 051206985 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 diri10qsept05.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, 2005 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 October 31, 2005 was: 4,933,028 Transitional Small Business Disclosure Format (check one): Yes No X --- --- DIRECT INSITE CORP. AND SUBSIDIARIES INDEX
PART I - FINANCIAL INFORMATION Page Item 1 Condnsed Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004 ................................................................................. 3 Condensed Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2005 and 2004 (Unaudited)........................ 4 Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2005 and 2004 (Unaudited).................................. 5 Notes to Condensed Consolidated Financial Statements (Unaudited) .................................... 6 Item 2 Management's Discussion and Analysis or Plan of Operations .......................................... 16 Item 3 Controls and Procedures.............................................................................. 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings ........................................................................... 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................. 23 Item 3. Defaults Upon Senior Securities ............................................................. 23 Item 4. Submission of Matters to a Vote of Security Holders ........................................ 23 Item 5. Other Information ........................................................................... 23 Item 6. Exhibits..................................................................................... 23 Signatures .......................................................................................... 24 CERTIFICATIONS ........................................................................................... 25
DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2005 AND December 31, 2004 (In thousands, except share data)
September 30, December 31, 2005 2004 --------------------- -------------------- (Unaudited) (Audited) ASSETS Current assets Cash and cash equivalents $ 65 $ 306 Accounts receivable, net of allowance for doubtful accounts of $2 in 2005 and 2004 1,647 1,871 Prepaid expenses and other current assets 160 262 Assets from discontinued operations 1 -- ------------------ ----------------- Total current assets 1,873 2,439 Property and equipment, net 494 577 Deposits 272 265 Other assets 17 20 ------------------ ----------------- TOTAL ASSETS $ 2,656 $ 3,301 ================== ================= LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities Accounts payable and accrued expenses $ 1,384 $ 1,526 Taxes payable 602 560 Short-term revolving loans 523 1,012 Notes payable, net of discount 527 -- Dividends payable, current 1,578 376 Current portion of long-term debt 734 782 Deferred revenue 115 623 Liabilities from discontinued operations 68 112 ------------------ ----------------- Total current liabilities 5,531 4,991 Long term debt, net of current portion 85 125 Dividends payable, net of current portion 9 722 ------------------ ----------------- Total liabilities 5,625 5,838 ------------------ ----------------- 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 2005 and 2004; liquidation preference of $2,750,000 in 2005 and 2004 -- -- Series B Redeemable Preferred, 974 shares issued and outstanding in 2005 and 2004; liquidation preference of $974,075 in 2005 and 2004 -- -- Series C Redeemable Preferred, 2,000 shares issued and outstanding in 2005 and 2004; liquidation preference of $2,000,000 in 2005 and 2004 Series D Redeemable Preferred, 100 shares issued and outstanding in 2005 and 2004; liquidation preference of $100,000 in 2005 and 2004 Common stock, $0.0001 par value; 50,000,000 shares authorized in 2005 and 2004; 4,972,955 and 4,547,013 shares issued in 2005 and 2004, respectively; and 4,933,028 and 4,507,086 shares outstanding in 2005 and 2004, respectively -- -- Additional paid-in capital 113,314 112,484 Unearned compensation (157) (50) Accumulated deficit (115,798) (114,643) (2,209) (2,641) ------------------ ----------------- Common stock in treasury, at cost - 24,371 shares (328) (328) ------------------ ----------------- Total shareholders deficiency (2,969) (2,537) ------------------ ----------------- TOTAL LIABILITIES AND SHAREHODERS' DEFICIENCY $ 2,656 $ 3,301 ================== =================
See notes to condensed consolidated financial statements. 3 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004 (in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 --------------- -------------- --------------- -------------- Revenue from continuing operations $ 2,512 $ 1,598 $ 6,910 $ 5,421 --------------- -------------- --------------- -------------- Costs and expenses Operations, research and development 1,032 868 3,079 2,632 Sales and marketing 516 386 1,547 1,201 General and administrative 794 694 2,266 2,098 Amortization and depreciation 95 131 324 415 --------------- -------------- --------------- -------------- 2,437 2,079 7,216 6,346 --------------- -------------- --------------- -------------- Operating income (loss) 75 (481) (306) (925) Other expenses Interest expense, net 148 77 348 223 Other expense -- ---- -- 33 --------------- -------------- --------------- -------------- Loss before provision for income taxes (73) (558) (654) (1,181) Provision for income taxes 1 1 2 5 --------------- -------------- --------------- -------------- Loss from continuing operations (74) (559) (656) (1,186) (Loss) income from discontinued operations (2) (2) (10) 260 --------------- -------------- --------------- -------------- Net loss (76) (561) (666) (926) Preferred stock dividends (164) (161) (489) (459) --------------- -------------- --------------- -------------- Net loss attributable to common shareholders $ (240) $ (722) (1,155) (1,385) =============== ============== =============== ============== Basic and diluted loss per share: Basic and diluted loss from continuing operations $ (0.05)$ (0.17) $ (0.25) $ (0.39) Basic and diluted income from discontinued operations -- -- -- 0.06 --------------- -------------- --------------- -------------- Basic and diluted loss per share $ (0.05) $ (0.17) $ (0.25) $ (0.33) =============== ============== =============== ============== Basic and diluted weighted average common shares outstanding 4,679 4,356 4,600 4,243 =============== ============== =============== ==============
See notes to condensed consolidated financial statements. 4 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004 (in thousands, except per share data)
For the nine months ended September 30, 2005 2004 ----------------- ------------------ Cash flows from operating activities Loss from continuing operations $ (656) $ (1,186) Adjustments to reconcile loss from continuing operations to net cash used in continuing operations: Amortization and depreciation: Property and equipment 324 413 Discount on debt 99 -- Other -- 2 Common stock, warrants and options issued for services 342 4 Amortization of unearned compensation 58 -- Changes in operating assets and liabilities: Accounts receivable 224 (74) Prepaid expenses and other current assets 102 31 Deposits and other assets (6) 14 Accounts payable, accrued expenses and other current liabilities (99) (87) Deferred revenue (508) (96) -------------- -------------- Net cash used in continuing operations (120) (979) -------------- -------------- Cash flows from discontinued operations (Loss) income from discontinued operations (10) 260 Change in: Assets and liabilities from discontinued operations (45) (468) -------------- -------------- Net cash used in discontinued operations (55) (208) -------------- -------------- Net cash used in operating activities (175) (1,187) -------------- -------------- Cash flows from investing activities Expenditures for property and equipment (196) (90) -------------- -------------- Net cash used in investing activities (196) (90) -------------- -------------- Cash flows from financing activities Proceeds from sales of preferred stock -- 1,410 (Repayments) advances from short-term revolving loans, net (489) 130 Proceeds from short-term notes 750 -- Repayments of long-term debt (131) (198) -------------- -------------- Net cash provided by financing activities 130 1,342 -------------- -------------- Net (decrease) increase in cash and cash equivalents (241) 65 Cash and cash equivalents - beginning of period 306 75 -------------- -------------- Cash and cash equivalents - end of period $ 65 $ 140 ============== ============== Cash paid during the periods for: Interest $ 248 $ 219 ============== ============== Non-cash investing and financing activities: Debt discount on notes payable $ 322 $ - ============== ============== Equipment acquired with lease financing $ 43 $ 226 ============== ==============
See notes to condensed consolidated financial statements. 5 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 1. Interim Financial Information The condensed consolidated balance sheet as of September 30, 2005, and the condensed consolidated statements of operations and cash flows for the three and nine month periods ended September 30, 2005 and 2004, 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 three and nine month periods ended September 30, 2005, 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, 2004 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, 2004 consolidated financial statements. 2. The Company Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as an application service provider ("ASP"), that markets an integrated transaction based "fee for service" offering called Invoices On-Line (IOL), an electronic invoice presentment and payment (EIP&P) service that processes high volumes of transactional data for invoice presentment purposes delivered via the Internet on a global basis. The Company also provides additional service offerings in the form of its patented dbExpress TM technology, a management information tool that allows users to visually data mine large volumes of transactional data via the Internet. A complete Internet Customer Care tool set integrated with the EIP&P product set is also available. The Company operates data centers located at its main office in Bohemia, N.Y. and in an IBM co-location facility in Newark, NJ. Management's liquidity plans are discussed in Note 9. Also, as described in Note 8, the Company has two customers that accounted for approximately 67.7% and 29.8%, respectively, of the Company's revenue for the nine month period ended September 30, 2005. Loss of either of these customers would have a material adverse effect on the Company. Stock Options and Similar Equity Instruments -------------------------------------------- As permitted under Statement of Financial Accounting Standards ("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 ("FIN") 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 NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 2. The Company (continued)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------- 2005 2004 2005 2004 ------------ -------------- ------------- ----------- Net loss attributable to common shareholders As reported $ (240) $ (722) $ (1,155) $ (1,385) Add: Stock-based compensation expense included in net loss attributable to common shareholders 1 7 ------------ -------------- ------------- ----------- Less: Stock-based employee compensation expense determined under fair value-based method for all awards (238) (48) (685) (493) ------------ -------------- ------------- ----------- Pro forma $ (477) $ (770) $ (1,833 $ (1,878) ============ ============== ============= =========== Basic and diluted net loss per share As reported $ (0.05) $ (0.17) $ (0.25) $ (0.33) ============ ============== ============= =========== Pro forma $ (0.10) $ (0.18) $ (0.40) $ (0.44) ============ ============== ============= ===========
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 71.4% to 72.6% in 2005 and 68.1% to 69.5% in 2004, (2) risk-free interest rates ranging from 4.00% to 4.50% in 2005 and 4.00% in 2004 and (3) expected lives of 4.50 years in 2005 and ranging from 4.80 to 5.25 years in 2004. 3. 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. 4. Discontinued Operations 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 is reflected as income 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 and nine month periods ended September 30, 2005 and 2004, respectively: 7 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 4. Discontinued Operations (continued)
Three Months Ended Nine Months Ended September 30 September 30 2005 2004 2005 2004 ---------- ---------- ---------- ----------- Costs and Expenses General and administrative $ -- $ -- $ (4) $ -- Other income - net -- -- -- 267 Interest expense, net (2) (2) (6) (7) ---------- ---------- ---------- ----------- (Loss) income from discontinued operations $ (2) $ (2) $ (10) $ 260 ========== ========== ========== ===========
At September 30, 2005, the discontinued operation had $1,000 in assets. The liabilities of the discontinued operation at September 30, 2005 include loans payable totaling $49,000, and accounts payable and accrued liabilities of $19,000. 5. Accounts Receivable and Revolving Loans 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 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 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 September 30, 2005, the Company had assigned approximately $654,000 of accounts receivable to the Bank and received advances of $523,000. In May 2004, the Company entered into an Agreement with DIRI Rec Fund LLC (the "Rec Fund") whereby the Company may assign certain accounts receivable on a full recourse basis to the Rec Fund as security for advances (loans). The Rec Fund was established solely to advance funds to the Company upon the assignment of receivables. The Rec Fund is administered by a third party trustee. Certain shareholders of the Company and a Director of the Company are the principal investors in the Rec Fund. Under the Agreement, the Company pays interest at the rate of one (1) percent per month on the maximum purchase amount (as defined in the agreement) of the Rec Fund and pays the administrative costs of the Rec Fund which approximate $12,000 per year. At September 30, 2005 the Rec Fund had a total principal available for assignment of $250,000 and the Company had no outstanding advances from the Rec Fund, resulting in $250,000 available under the agreement. 8 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 6. Debt Notes payable ------------- At September 30, 2005 notes payable consist of the notes as described below of $750,000 less debt discount of $223,000. In March 2005, the Company entered into a Securities Purchase Agreement (the "Agreement") with Sigma Opportunity Fund LLC ("Sigma") and Metropolitan Venture Partners II, L.P. ("MetVP"), collectively the "Buyers", whereby the Buyers purchased Senior Subordinated Secured Notes (the "Note Purchase") in the aggregate amount of $750,000. The notes bear interest at the rate of five percent (5%) per year beginning June 28, 2005, and are payable quarterly in cash or common stock at the option of the Buyers. The Notes mature on the earlier to occur of (i) September 29, 2006, or (ii) the date on which demand for payment of the loan payable to JPMorgan Chase Bank is made. In connection with the note purchase the Buyers were issued warrants to purchase 750,000 common shares of the Company. The exercise price of the warrants is $0.01 per share of common stock. The Company recorded a debt discount of $322,000 (as adjusted for the change in the exercise price) which is being amortized over the life of the loan. Amortization for the nine months ended September 30, 2005 was $99,000 and is recorded as interest expense. Under the terms of the agreement, on September 1, 2005 the Company filed with the Securities and Exchange Commission a Registration Statement to register a number of common shares equal to the maximum number of shares that would be issuable to the Buyers in payment of interest on the notes through the maturity date plus a number of common shares issuable upon exercise of the warrants. Sigma had an exclusive right to lead a "Follow-on-Financing" for 45 days following the closing and the Company had granted Sigma additional time. In the event that the Follow-on-Financing had occured the exercise price of the warrants issued in conjunction with the Note Purchase would have been adjusted as agreed between the Company and the buyers. The Follow-on- Financing was not consummated; as such, the exercise price of the warrants is $0.01 per common share which resulted in an increase in the debt discount from $258,000 to $322,000. Long-term debt -------------- Long-term debt consists of the following (in thousands):
September 30, December 31, 2005 2004 -------------------- -------------------- Lines of credit (a) $ 631 $ 668 Capitalized lease obligations (b) 188 239 -------- -------- 819 907 Less current portion (734) (782) -------- -------- Long-term debt, net of current portion $ 85 $ 125 ======== ========
(a) In June 2003, the Company obtained a discretionary Line of Credit ("LoC") in the amount of $500,000 from JP Morgan Private Bank ("JPMC") and this LoC was renewed in June 2005. The LoC is guaranteed by Tall Oaks Group, LLC, an affiliate of MetVP, and is repayable on the earlier of demand or June 30, 2007. In July, 2005, the guarantors were issued 500,000 warrants, with a fair value of approximately $142,000, to purchase common shares of the Company at an exercise price of $1.00 per share (see NOte 7). The fair value of the warrants is recorded as unearned compensation and is being amortized to 9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 6. Debt (continued) Long-term debt, continued -------------- compensation expense over the life of the loan. Amortization of $18,000 was recorded as compensation expense for the nine months ended September 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%. As of September 30, 2005, the applicable interest rate was 5.74%. 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 CEO, 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 interest, and continue until the line is fully paid. At September 30, 2005, the Company had an outstanding balance of approximately $131,000 under the line of credit. (b) The Company has equipment under capital lease obligations expiring at various times through 2008. 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. 7. Shareholders' Deficiency Common Stock, Warrants and Option Issuances ------------------------------------------- During the nine months ended September 30, 2005, the Company issued 425,942 unregistered shares of common stock and options to purchase 480,000 shares of its common stock as follows: -- The Company issued 311,002 shares, with a fair value of $244,000, to employees and consultants for services which was recorded as compensation expense during the nine months ended September 30, 2005; -- The Company issued 114,940 shares, with a fair value of $98,000, to its Directors for their services which was recorded as directors' fees during the nine months ended September 30, 2005; -- The Company issued 500,000 warrants with a fair value of $142,000 as compensation for the guarantee of a line of credit (see Note 6). For the nine month period ended September 30, 2005, the expense related to the guarantee was approximately $18,000. -- The Company issued 5,000 options to purchase common stock to an employee. The options vested upon issuance and have an exercise price of $1.65 per share. The options had a fair value of approximately $5,000 at the date of grant. -- The Company issued 100,000 options to purchase common stock to an 10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 7, Shareholders' Deficiency (continued) Common Stock, Warrants and Option Issuances, continued ------------------------------------------- employee. The options vest ratably over 3 years and have an exercise price of $0.65 per share. The options had a fair value of approximately $41,000 at the date of grant. -- The Company issued 175,000 options to purchase common stock to an employee. The options vested 20% upon issuance and the balance vest ratably over 3 years and have an exercise price of $0.65 per share. The options had a fair value of approximately $71,000 at the date of grant. The Company also granted 25,000 shares of common stock which vest over two years. The stock had a fair value of $18,000 at the date of grant which was recorded as unearned compensation and is being amortized to compensation expense over two years. For the nine months ended September 30, 2005, $750 was recorded as compensation expense. -- Under the terms of an employment agreement, the Company issued to its president 100,000 options to purchase common shares at an exercise price of $0.50 per share. These options have an intrinsic value of $20,000 which was recorded as unearned compensation and will be amortized over 26 months. During the nine months ended September 30, 2005, $7,000 was amortized as compensation expense. In addition, the Company issued to its president 100,000 options to purchase common shares at the market price on the date of the grant. The options had a fair value of $43,000 at the date of grant. 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 5,114 Convertible preferred stock and warrants to acquire common stock 4,678 ----- Total potential common shares as of September 30, 2005 9,792 =====
11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 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. Revenue for these services was as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---------------- -------------- ------------- -------------- ASP IOL fees $1,695 $ 1,004 $4,284 $ 2,965 ASP telecommunications fees 8 136 33 432 Custom engineering fees 809 458 2,593 2,024 ---------------- -------------- ------------- -------------- Total Revenue $2,512 $1,598 $6,910 $5,421 ================ ============== ============= ==============
Major Customers --------------- For the three months ended September 30, 2005 the Company had two major customers that accounted for 63.8% and 33.5% of the Company's total revenue. These two customers accounted for 67.7% and 29.8% of revenue for the nine months ended September 30, 2005. In 2004 the 8. Products and Services (continued) Company had one major customer that accounted for 90.9% and 95.7% of revenue for the three and nine months ended September 30, 2004, respectively. Accounts receivable from these customers amounted to $1,604,000 at September 30, 2005. 9. Management's Liquidity Plans In order to meet cash needs and to achieve positive operating cash flows the Company has and will continue to take various actions and steps that we believe will enable us to attain these goals. These actions include: -- In March 2005 the Company closed a Bridge Loan financing with Sigma Capital Partners LLC and Metropolitan Venture Partners II, L.P. and received proceeds of $750,000 less legal fees of $55,000 (see Note 6). -- The Company and the holders of the Series A and Series B Preferred stock have previously agreed to defer payment of dividends until February 1, 2006 and April 15, 2006, respectively. The Company may seek to defer these dividends further. -- The Company may raise additional capital through private equity offerings and borrowing. There is no assurance however that such capital would be available to the Company, or if available, on terms and conditions that would be acceptable to the Company In 2004, the Company received net proceeds from the sale of Preferred Stock of $1,430,000. Also in 2004 the Company entered into an agreement with DIRI Rec Fund LLC, a corporation formed and funded to loan funds to the Company against accounts receivable, and may receive advances up to $250,000 from Diri Rec Fund (see note 5). Further, in June 2005 the Company renewed for a period of two years the $500,000 loan previously 12 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 9. Management's Liquidity Plans scheduled to mature on June 30, 2005 and the guarantors of this loan have consented to this extension (see Note 6). As noted above the guarantors were issued warrants and the Company could receive proceeds of $500,000 from the exercise of such warrants which expire on July 11, 2010, although there is no assurance that these warrants will be exercised. -- The Company continues to strive to increase revenue through offering custom engineering services, expanding and enhancing existing product offerings such as IOL, and introducing new product offerings. In 2004 the Company entered into a new agreement to provide IOL services to a Fortune 100 company. Revenue from this new customer accounted for 29.8% of total revenue for the nine months ended September 30, 2005. Management anticipates that revenue from this new customer will continue to increase in 2005 and beyond and expects to further broaden the Company's customer base in 2005. -- The Company continues to expand its marketing efforts in order to increase the customer base. In this regard, in 2003, the Company became a business partner with IBM and through this relationship will work with IBM to achieve sales to new customers. The Company will continue to pursue similar channel partner opportunities. Also, in the fourth quarter 2004 the Company employed a new sales and marketing executive to further expand our sales efforts. Management believes that these plans and new initiatives as discussed above will lead to positive cash flows and profitability. While the Company pursues these goals management also believes that the Company's ability to raise additional capital through equity and debt placements will provide sufficient cash to meet cash requirements at least through September 30, 2006. There can be no assurance, however, that the Company will achieve the cash flow and profitability goals, or that the Company will be able to raise additional capital sufficient to meet its operating expenses or implement its plan. In such event, the Company may have to revise its plans and significantly reduce its operating expenses, which could have an adverse effect on revenue and operations in the short term. 10. New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R, "Share-Based Payment." SFAS No. 123R eliminates the alternative to use APB No. 25's intrinsic value method of accounting that was provided in SFAS No 123 as originally issued. SFAS No. 123R requires entities to recognize the cost of employee services in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). That cost will be recognized over the period during which the employee is required to provide the service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS No. 123R requires entities to initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of the award will be re-measured at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123R is effective as of the beginning of the Company's fiscal year following December 15, 2005 (January 1, 2006). The adoption of SFAS No. 123R will 13 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 10. New Accounting Pronouncements (continued) have no effect on the Company's consolidated cash flows or financial position but will have an adverse effect on the Company's consolidated results of operations. In December 2004, the FASB issued FAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29." This Statement eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did not have a material impact on the Company's consolidated financial position, liquidity, or results of operations. In September 2004, the EITF issued statement EITF Issue No. 04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF 04-08"). Contingently convertible debt instruments are generally convertible into common shares of an issuer after the common stock price has exceeded a predetermined threshold for a specified period of time (the "market price contingency"). EITF 04-08 requires that shares issuable upon conversion of contingently convertible debt be included in diluted earnings per share computations regardless of whether the market price contingency contained in the debt instrument has been met. EITF 04-08 is effective for reporting periods ending after December 15, 2004 and requires restatement of prior periods to the extent applicable. The adoption of this statement did not have an effect on the Company's calculation of EPS. In March 2005, the FASB issued FIN 47, which is effective for the company on December 31, 2005. FIN 47 clarifies that the phrase "conditional asset retirement obligation," as used in FASB Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.143"), refers to a legal obligation to perform an asset retirement activity for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the company. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. SFAS No. 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an 14 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 10. New Accounting Pronouncements (continued) asset retirement obligation. The company does not expect that adoption of FIN 47 will have a significant effect on its financial position or results of operations. In May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"). SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle. It also requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement. The statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS No. 154 to have a material effect on our financial position or results of operations. In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. The guidance in EITF 05-6 will be applied prospectively and is effective for periods beginning after June 29, 2005. EITF 05-6 did not have a material effect on the Company's financial position or results of operations. In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF") Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues.", which addresses whether a modification to a conversion option that changes its fair value affects the recognition of interest expense for the associated debt instrument after the modification, and whether a borrower should recognize a beneficial conversion feature, not a debt extinguishment, if a debt modification increases the intrinsic value of the debt (for example, the modification reduces the conversion price of the debt). In September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature.", which discusses whether the issuance of convertible debt with a beneficial conversion feature results in a basis difference arising from the intrinsic value of the beneficial conversion feature on the commitment date (which is recorded in shareholder's equity for book purposes, but as a liability for income tax purposes) and, if so, whether that basis difference is a temporary difference under FASB Statement No. 109, Accounting for Income Taxes. The adoption of these Issues may have a material effect on our consolidated financial position or results of operations in future periods. 15 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"), providing an integrated transaction based "fee for service" offering called Invoices On-Line ("IOL"), an electronic invoice presentment and payment ("EIP&P") service that processes high volumes of transactional data for invoice presentment purposes delivered via the Internet on a global basis on behalf of our customers. IOL is our primary offering and it is a globally delivered service that provides electronic invoice presentation in the Americas, Europe and Asia, including 28 different countries around the globe and in more than 13 languages and currencies. We currently host several million invoices that are accessible "on-line" via the Internet 24 hours per day, seven days per week, 365 days per year. IOL is a uniquely positioned service offering in the industry, the service is designed to handle the complex invoicing found in today's global business environment. The solution allows Global 1000 companies to receive, route, approve and pay invoices on- line in the local language and currency. By automating the traditional paper-based invoicing process, customers now have easy and quick access to line-item billing information, reporting and analytics. With the enhanced level of accuracy provided by IOL, invoice disputes are greatly reduced and overall customer satisfaction is substantially increased. We also provide additional service offerings in the form of our patented dbExpressTM technology, a management information tool that allows users to visually data mine large volumes of transactional data via the Internet. A complete Internet Customer Care tool set integrated with the EIP&P product set is also available. We operate 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. 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. 16 DIRECT INSITE CORP. AND SUBSIDIARIES Item 2 - Managements Discussion and Analysis or Plan of Operations (continued) Currently, IBM, our largest customer, representing approximately 68% and 96% of our revenue for the nine month periods ended September 30, 2005 and 2004, respectively, utilizes our suite of IOL products and services to allow their customers from around the globe to receive, analyze, dispute and cost allocate all of their invoice related information in their local language and currency via the Internet 24 hours a day, 7 days a week, 365 days a year. A second Fortune 100 customer accounted for 30% of total revenue for the first nine months of 2005. As disclosed in Note 6 to the accompanying Condensed Consolidated Financial Statements, during the nine months ended September 30, 2005, we received proceeds from the issuance of Senior Subordinated Secured Notes of $750,000 less expenses of $55,000. Critical accounting policies Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of our company and our subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition - ------------------- We record revenue in accordance with Statement of Position 97-2 "Software Revenue Recognition", issued by the American Institute of Certified Public Accountants (as modified by Statement of Position 98- 9) and SEC Staff Accounting Bulletin Topic 13 "Revenue Recognition in Financial Statements." In some circumstances, we enter into arrangements whereby we are obligated to deliver to our customer multiple products and/or services (multiple deliverables). In these transactions, in accordance with the Emerging Issues Task Force Issue No. 00-21, we allocate the total revenue to be earned among the various elements based on their relative fair values. We recognize revenue related to the delivered products or services only if: - -- Any undelivered products or services are not essential to the functionality of the delivered products or services; - -- Payment for the delivered products or services is not contingent upon delivery of the remaining products or services; - -- We have an enforceable claim to receive the amount due in the event it does not deliver the undelivered products or services and it is probable that such amount is collectible; - -- There is evidence of the fair value for each of the undelivered products or services; - -- Delivery of the delivered element represents the culmination of the earnings process. The following are the specific revenue recognition policies for each major category of revenue. ASP Services - ------------ We provide transactional data processing services to its customers. Revenue is recognized as the services are performed. Custom Engineering Services - --------------------------- We recognize revenue for custom engineering services using the percentage of completion method. Progress is measured using the relative fair value of 17 DIRECT INSITE CORP. AND SUBSIDIARIES Item 2 - Managements Discussion and Analysis or Plan of Operations (continued) specifically identifiable output measures (milestones). Revenue is recognized when the customer accepts such milestones. Costs related to uncompleted milestones are deferred and included in other current assets, when applicable. Cost of Revenue - --------------- Cost of revenue in the consolidated statements of operations is presented along with operations, research and development costs and exclusive of amortization and depreciation shown separately. Property and Equipment - ---------------------- Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the terms of the respective leases or the service lives of the related assets, whichever is shorter. Capitalized lease assets are amortized over the shorter of the lease term or the service life of the related assets. Impairment of Long-Lived Assets - ------------------------------- We review our long-lived assets, including capitalized software costs and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine if impairment exists, we compare the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that impairment exists, the carrying value of the asset is adjusted to fair value. Factors considered in the determination of fair value include current operating results, trends and the present value of estimated expected future cash flows. Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" became effective for the Company during 2002. Income Taxes - ------------ We account for income taxes using the liability method. The liability method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates. Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Earnings per Share - ------------------ We display 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. Basic earnings per share 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 earnings per share include 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 earnings per share amounts since the effect of their inclusion would be anti-dilutive. Concentrations and Fair Value of Financial Instruments - ------------------------------------------------------ Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. We perform ongoing credit evaluations of our customers' financial condition and, generally, require no collateral from our customers. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded value. 18 DIRECT INSITE CORP. AND SUBSIDIARIES Item 2 - Managements Discussion and Analysis or Plan of Operations (continued) Use of Estimates - ---------------- In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Results of operations For the three and nine month periods ended September 30, 2005 we had losses from continuing operations of $74,000 and $656,000, respectively, compared to losses from continuing operations of $559,000 and $1,186,000, in the same periods in 2004, respectively. The decrease in the losses is principally due to an increase in revenue for the three and nine months ended September 30, 2005, partially offset by an increase in operating costs as discussed below. Net loss for the three and nine month periods ended September 30, 2005 was $76,000 and $666,000, respectively, compared to net losses of $561,000 and $926,000 for the same periods in 2004, respectively. This includes losses from discontinued operations of $2,000 and $10,000 in the three and nine month periods ended September 30, 2005, respectively, and a loss of $2,000 and income from discontinued operations of $260,000 for the three and nine months ended September 30, 2004, respectively, that was principally the result of recognizing income related to deferred revenue of $180,000 included in other income of the discontinued operation in the first nine months of 2004. For the three months ended September 30, 2005 revenue from continuing operations increased $914,000 (57.2%) to $2,512,000 compared to revenue of $1,598,000 for the same period in 2004. For the nine months ended September 30, 2005, revenue from continuing operations increased $1,489,000 (27.5%) to $6,910,000 compared to revenue from continuing operations of $5,421,000 for the same period in 2004. The increase is primarily the result of an increase in revenue from our core business, the ASP IOL services, of $691,000 (68.8%) and $1,319,000 (44.5%) for the three and nine month periods ended September 30, 2005, respectively. Additionally, revenue from engineering services increased $351,000 and $569,000 for the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. These increases are principally due to expanded services to a second major customer added in 2004, and further deployment of our IOL services to IBM.. These increases were offset by a decrease of $128,000 and $399,000 in revenue from telecommunications services for the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004 . The decrease in the telecommunications services, which accounted for less than 1% of total revenue for the first nine months of 2005 compared to 8.0% for the same period in 2004, is the result of decreased demand for such services. Costs of operations, research and development increased by $164,000 (18.9%) and $447,000 (17.0%) to $1,032,000 and $3,079,000 for the three and nine month periods ended September 30, 2005, respectively, compared to costs of $868,000 and $2,632,000 for the same periods in 2004. 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 increase in costs for the three months ended September 30, 2005 is primarily due to increases in personnel wages and benefit costs of $78,000 from wage increases and staff additions, an increase in professional fees of $35,000 resulting from engaging temporary technical staff, and an increase in software purchases of $28,000. Other operating expenses increased by a net of $23,000. The increase in costs for the nine months ended September 30, 2005 is principally due to increases in personnel wages and benefit costs of $251,000 from wage increases and staff additions, an increase in professional fees of $84,000 resulting from engaging temporary technical staff, and an increase in software purchases of $50,000. All other operating expenses increased $62,000, net. 19 DIRECT INSITE CORP. AND SUBSIDIARIES Item 2 - Managements Discussion and Analysis or Plan of Operations (continued) Sales and marketing costs were $516,000 and $1,547,000 for the three and nine month periods ended September 30, 2005, respectively, an increase of $130,000 (33.7%) and $346,000 (28.8%) compared to costs of $386,000 and $1,201,000 for the same periods in 2004. For the nine months ended September 30, 2005, professional fees, including personnel recruiting costs, increased $97,000, consulting fees increased $147,000 due to engaging an independent sales representative and promotional costs increased $41,000, while all other costs increased by $61,000, net compared to the same period in 2004. For the three months ended September 30, 2005, professional fees, including personnel recruiting costs, increased $15,000, consulting fees increased $38,000 due to engaging an independent sales representative, travel and entertainment fees increased $24,000 and promotional costs increased $10,000 while all other costs increased by $43,000, net compared to the same period in 2004. We intend to continue increasing our sales and marketing efforts to achieve further growth in our IOL services. General and administrative costs increased $100,000 (14.4%) and $168,000 (8.0%) to $794,000 and $2,266,000 for the three and nine month periods ended September 30, 2005, respectively, compared to costs of $694,000 and $2,098,000 for the same periods in 2004. For the three and nine month periods ended September 30, 2005, salaries and related costs increased $72,000 and $216,000 compared to the same periods in 2004, principally due to the restoration of salary reductions taken in 2004. Costs for directors meetings decreased $15,000 and increased by $27,000 for the three and nine month periods ended September 30, 2005, respectively, compared to costs for the same periods in 2004. For the three and nine month periods ended September 30, 2005 costs for legal and accounting fees increased $69,000 and $157,000, respectively, compared to the same periods in 2004, principally due to costs incurred for the issuance of the Senior Subordinated Notes and the related registration statement. Insurance costs decreased $19,000 and $67,000 for the three and nine month periods ended September 30, 2005, respectively, compared to the same periods in 2004, primarily due to rate decreases. Professional fees increased $6,000 and decreased $34,000 for the three and nine month periods ended September 30, 2005, respectively, compared to costs for the same periods in 2004. Travel and entertainment costs decreased $27,000 and $94,000 for the three and nine month periods ended September 30, 2005, respectively, compared to the same periods in 2004. All other administrative costs increased $14,000 and decreased $37,000 for the three and nine month periods ended September 30, 2005, respectively, compared to the same periods in 2004. Depreciation and amortization expense decreased by $36,000 (27.5%) and $91,000 (21.9%) for the three and nine month periods ended September 30, 2005, respectively, compared to the same periods in 2004, primarily due to fully amortizing certain software costs and other computer equipment. Financial Condition and Liquidity For the nine months September 30, 2005, we had a loss from continuing operations of $656,000 compared to a loss from continuing operations of $1,186,000 for the same period in 2004. We used $120,000 in cash for continuing operations in the first nine months of 2005 compared to $979,000 for the same period in 2004, an improvement of $859,000 or 87.7%. Cash used in discontinued operations was $55,000 for the nine months ended September 30, 2005, compared to $208,000 for the nine months ended September 30, 2004. We funded the shortfall in cash from operations primarily through the new borrowing noted above. Cash used in operations, including cash used for discontinued operations, for the nine months ended September 30, 2005 was $175,000, consisting of the net loss of $666,000, reduced by non-cash expenses of $823,000, including depreciation and amortization of $324,000 and stock, warrants and options issued for services of $342,000. In addition, accounts receivable decreased by $224,000 and prepaid expenses and other assets decreased $96,000. Accounts payable, accrued expenses and other current liabilities decreased $99,000 and deferred revenue decreased $508,000. 20 DIRECT INSITE CORP. AND SUBSIDIARIES Item 2 - Managements Discussion and Analysis or Plan of Operations (continued) Cash used in investing activities was $196,000 for the nine months ended September 30, 2005, compared to $90,000 for same period in 2004. This was principally expenditures for equipment. Cash provided by financing activities totaled $130,000 for the nine months ended September 30, 2005, compared to $1,342,000 for the nine months ended September 30, 2004. As noted above, we received proceeds from a new loan financing of $750,000. We also repaid $131,000 of long-term debt and capital lease obligations in the first nine months of 2005. The balance outstanding under short term revolving loans for receivables financing decreased by $489,000 in 2005. 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. These actions include: -- In March 2005 we closed a Bridge Loan financing with Sigma Capital PartnersLLC and Metropolitan Venture Partners II, L.P. and received proceeds of $750,000 less legal fees of $55,000 (see Note 6). -- We and the holders of the Series A and Series B Preferred stock have previously agreed to defer payment of dividends until February 1, 2006 and April 15, 2006, respectively. We may seek to defer these dividends further. -- We may raise additional capital through private equity offerings and borrowing. There is no assurance however that such capital would be available to us, or if available, on terms and conditions that would be acceptable to us. In 2004, we received net proceeds from the sale of Preferred Stock of $1,430,000. Also in 2004 we entered into an agreement with DIRI Rec Fund LLC, a corporation formed and funded to loan funds to the Company against accounts receivable, and may receive advances up to $250,000 from Diri Rec Fund (see Note 5). Further, in June 2005 we renewed for a period of two years the $500,000 loan previously scheduled to mature on June 30, 2005 and the guarantors of this loan have consented to this extension (see Note 6). ). As noted above the guarantors were issued warrants and we could receive proceeds of $500,000 from the exercise of such warrants which expire on July 11, 2010, although there is no assurance that these warrants will be exercised. -- We continue to strive to increase revenue through offering custom engineering services, expanding and enhancing existing product offerings such as IOL, and introducing new product offerings. In 2004 we entered into a new agreement to provide IOL services to a Fortune 100 company. Revenue from this new customer accounted for 29.8% of total revenue for the nine months ended September 30, 2005. Management anticipates that revenue from this new customer will continue to increase in 2005 and beyond and expects to further broaden our customer base in 2005. -- We continue to expand our marketing efforts in order to increase the 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. Also, in the fourth quarter 2004 we employed a new sales and marketing executive to further expand our sales efforts. We believe that these 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 21 DIRECT INSITE CORP. AND SUBSIDIARIES Item 2 Managements Discussion and Analysis or Plan of Operations (continued) placements will provide sufficient cash to meet cash requirements at least through September 30, 2006. There can be no assurance, however, that we will achieve the 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 Disclosures Controls and Procedures - ----------------------------------- The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports it files with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's Chief Executive and Chief Financial Officers are responsible for establishing, maintaining and enhancing these procedures. They are also responsible, as required by the rules established by the SEC, for the evaluation of the effectiveness of these procedures. Based on their evaluation of the Company's disclosure controls and procedures which took place as of September 30, 2005, the Chief Executive Officer and the Chief Financial Officer believe that these procedures were not effective as a result of limited resources and a limited segregation of duties in accounting and financial reporting. Internal Financial Controls The Company maintains a system of internal controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to (1) permit preparation of financial statements in conformity with accepted accounting principles generally accepted in the United States of America, and (2) maintain accountability for assets. Access to assets is permitted only in accordance with management's general or specific authorization. Since the date of the most recent evaluation of the Company's internal controls by the Chief Executive and Chief Financial Officers, there have been no changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Internal Controls over Financial Reporting - ------------------------------------------ It is the responsibility of the Company's management to establish and maintain adequate internal control over financial reporting. However, due to its limited financial resources, there is only limited segregation of duties within the accounting function, leaving most significant aspects of financial reporting in the hands of the CFO. We have engaged a consultant to assist with the financial closing process and the preparation of our financial statements. Our Chief Financial Officer thoroughly reviews the work of the consultant and the consultant reviews the work of the Chief Financial Officer. Based on these reviews we have confidence that there have been no irregularities in the Company's financial reporting or in the protection of its assets. Our independent auditors have reported to our Board of Directors certain matters involving internal controls that our independent auditors considered to be a reportable condition and a material weakness, under standards established by the American Institute of Certified Public Accountants. The reportable conditions and material weakness relate to limited segregation of duties and the absence of reviews and approvals beyond that performed by the Chief Financial Officer and the consultant as mentioned above, of transactions and accounting entries. Given these reportable conditions and material weaknesses, management devoted additional resources to closing and preparing the report for the quarter ended September 30, 2005. As a result, we are confident that our financial statements for the quarter ended September 30, 2005 fairly present, in all material respects, our financial condition and results of operations. 22 DIRECT INSITE CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This information has been previously provided on Form 8-K dated March 29, 2005. 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 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. 23 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 November 14, 2005 /s/ Michael J. Beecher - ------------------------------------------- Michael J. Beecher, Chief Financial Officer November 14, 2005 And Principal Accounting Officer 24 EX-31 2 diri10qsept05-ex31.txt CERTIFICATIONS EXHIBIT 31.0 DIRECT INSITE CORP. AND SUBSIDIARIES CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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-15(e) and 15d-15(e) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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. November 14, 2005 /s/ James A. Cannavino ---------------------- James A. Cannavino, Chief Executive Officer DIRECT INSITE CORP. AND SUBSIDIARIES CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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-15(e) and 15d-15(e) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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. November 14, 2005 /s/ Michael J. Beecher ---------------------- Michael J. Beecher Chief Financial Officer EX-32 3 diri10qsept05-ex32.txt CERTIFICATIONS EXHIBIT 32.0 DIRECT INSITE CORP. AND SUBSIDIARIES CERTIFICATIONS CERTIFICATION OF PERIODIC REPORT I, James A. Cannavino, Chief Executive Officer of Direct Insite Corp. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:: (1) The Quarterly Report on Form 10-QSB of the Company for the three and nine months ended September 30, 2005 (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: November 14, 2005 /s/ James A. Cannavino ---------------------- James A. Cannavino Chief Executive Officer DIRECT INSITE CORP. AND SUBSIDIARIES CERTIFICATION OF PERIODIC REPORT I, Michael J. Beecher, Chief Financial Officer of Direct Insite Corp. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:: (1) The Quarterly Report on Form 10-QSB of the Company for the three and nine months ended September 30, 2005 (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: November 14, 2005 /s/ Michael J. Beecher ---------------------- Michael J. Beecher Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----