-----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, TkP0f12gtcRxvW1m/h6lCNTyViD7Q173AAx/wbPAc0AonIv9jJ2uQdSdKkG2LWen J0auJis9UGwUCE9N0zYrbA== 0001201800-06-000091.txt : 20060522 0001201800-06-000091.hdr.sgml : 20060522 20060522165854 ACCESSION NUMBER: 0001201800-06-000091 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060522 DATE AS OF CHANGE: 20060522 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: 06859187 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 diri10qsb-march2006.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, 2006 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 --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- The number of shares of $.0001 par value stock outstanding as of May 10, 2006 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 Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005 ................................................................................. 3 Condensed Consolidated Statements of Operations For the Three Months Ended March 31, 2006 and 2005 (Unaudited)..................................... 4 Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2006 and 2005 (Unaudited)..................................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited) .................................... 6 Item 2 Management's Discussion and Analysis or Plan of Operations .......................................... 15 Item 3 Controls and Procedures.............................................................................. 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings ........................................................................... 22 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................. 22 Item 3. Defaults Upon Senior Securities ............................................................. 22 Item 4. Submission of Matters to a Vote of Security Holders ........................................ 22 Item 5. Other Information ........................................................................... 22 Item 6. Exhibits..................................................................................... 22 Signatures .......................................................................................... 23 CERTIFICATIONS ........................................................................................... 24
DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2006 AND DECEMBER 31, 2005 (In thousands, except share data)
March 31, December 31, 2006 2005 --------------------- ------------------ (Unaudited) (Audited) ASSETS Current assets Cash and cash equivalents $ 73 $ 364 Accounts receivable, net of allowance for doubtful accounts of $0 in 2006 and 2005 1,361 1,858 Prepaid expenses and other current assets 134 195 ---------------- ------------------ Total current assets 1,568 2,417 Property and equipment, net 385 446 Other assets 314 318 ---------------- ------------------ TOTAL ASSETS $ 2,267 $ 3,181 ================ =================== LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities Short-term revolving loans $ 247 $ 695 Current portion of capital lease obligations 94 99 Notes payable, net of discount 1,110 995 Accounts payable and accrued expenses 2,120 1,962 Dividends payable, current 1,947 1,775 Deferred revenue 546 796 Warrant liability 489 459 Liabilities from discontinued operations 53 61 ---------------- ------------------ Total current liabilities 6,606 6,842 Capital lease obligations, net of current portion 50 73 ---------------- ------------------ Total liabilities 6,656 6,915 ---------------- ------------------ 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 2006 and 2005; liquidation preference of $2,750,000 in 2006 and 2005 - - Series B Redeemable Preferred, 974 shares issued and outstanding in 2006 and 2005; liquidation preference of $974,075 in 2006 and 2005 - - Series C Redeemable Preferred, 2,000 shares issued and outstanding in 2006 and 2005; liquidation preference of $2,000,000 in 2006 and 2005 Series D Redeemable Preferred, 100 shares issued and outstanding in 2006 and 2005; liquidation preference of $100,000 in 2006 and 2005 - - Common stock, $0.0001 par value; 50,000,000 shares authorized; 4,972,955 shares issued in 2006 and 2005; and 4,933,028 shares outstanding in 2006 and 2005 - - Additional paid-in capital 113,177 113,039 Unearned compensation (222) (134) Accumulated deficit (117,016) (116,311) ---------------- ------------------ (4,061) (3,406) Common stock in treasury, at cost - 24,371 shares (328) (328) ---------------- ------------------ Total shareholders' deficiency (4,389) (3,734) ---------------- ------------------ TOTAL LIABILITIES AND SHAREHODERS' DEFICIENCY $ 2,267 $ 3,181 ================= ===================
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, 2006 and 2005 (in thousands, except per share data)
Three Months Ended ------------------ March 31, --------- 2006 2005 ---------------- ---------------- Revenue $ 2,015 $ 2,080 ---------------- ---------------- Costs and expenses Operations, research and development 1,063 1,013 Sales and marketing 463 472 General and administrative 694 692 87 113 ---------------- ---------------- 2,307 2,290 ---------------- ---------------- Operating loss (292) (210) Other expenses Other expense, net 60 -- Interest expense, net 181 75 ---------------- ---------------- Net loss (533) (285) Preferred stock dividends (172) (154) ---------------- ---------------- Net loss attributable to common shareholders $ (705) $ (439) ================ ================ Basic and diluted loss per share $ (0.14) $ (0.10) ================ ================ Basic weighted average common shares outstanding 4,933 4,510 ================ ================
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, 2006 AND 2005 (In thousands, except share data)
For the three months ended March 31, 2006 2005 (Restated) ----------------- ------------------ Cash flows from operating activities Loss from continuing operations $ (533) $ (285) Adjustments to reconcile loss from continuing operations to net cash used in continuing operations: Amortization and depreciation: Property and equipment 87 113 Discount on debt 125 -- Common stock and options issued for services -- 18 Amortization of deferred stock based compensation 50 22 Change in fair value of warrant liability 30 -- Changes in operating assets and liabilities: Accounts receivable 496 573 Prepaid expenses and other current assets 61 29 Other assets 4 (28) Accounts payable and accrued expenses 158 (42) Deferred revenue (250) (447) -------------- ---------------- Net cash provided by (used in) continuing operations 228 (47) -------------- ---------------- Change in: Assets and liabilities from discontinued operations (8) (9) -------------- ---------------- Net cash used in discontinued operations (8) (9) -------------- ---------------- Net cash provided by (used in) operating activities 220 (56) -------------- ---------------- Cash flows used in investing activities Expenditures for property and equipment (24) (66) -------------- ---------------- Cash flows from financing activities Repayments of revolving loans, net (448) (298) Proceeds from short-term notes -- 750 Repayments of long-term debt (39) (42) -------------- ---------------- Net cash (used in) provided by financing activities (487) 410 -------------- ---------------- Net (decrease) increase in cash and cash equivalents (291) 288 Cash and cash equivalents - beginning of period 364 306 -------------- ---------------- Cash and cash equivalents - end of period $ 73 $ 594 ============== =============== Cash paid for interest $ 47 $ 78 ============== =============== Non-cash investing and financing activities: Debt discount on loans $ -- $ 394 ============== =============== Issuance of common shares and options to purchase common shares for services and fees $ -- $ 12 ============== ===============
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, 2006 AND 2005 1. Interim Financial Information The condensed consolidated balance sheet as of March 31, 2006, and the condensed consolidated statements of operations and cash flows for the three month periods ended March 31, 2006 and 2005, 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, 2006, 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, 2005 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, 2005 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 Custom Engineering Services which are single contractual agreements involving modification or customization of the Company's proprietary ASP software solution. Additionally the Company provides 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 fully redundant 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 11. Also, as described in Note 10, the Company has two customers that accounted for approximately 71.5% and 26.5% of the Company's revenue for the three month period ended March 31, 2006 and 74.0% and 24.5% of revenue for the three month period ended March 31,2005. Loss of either of these customers would have a material adverse effect on the Company. 3. Stock Based Compensation Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No, 123(Revised 2004), "Share-Based Payment", ("SFAS 123(R)"), using the modified-prospective-transition method. As a result, for the three months ended March 31, 2006, the Company recorded $28,000 in compensation expense for the fair value of options. 6 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 3. Stock Based Compensation (continued) Prior to January 1, 2006, the Company's stock-based employee compensation plans were accounted for under the recognition and measurement provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related Interpretations, as permitted by Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"). The Company did not recognize stock-based compensation cost in its statements of operations for periods prior to January 1, 2006 as options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant. However, compensation expense was recognized under APB No. 25 for certain options granted to an employee and certain non employees of the Company based upon the intrinsic value (the difference between the exercise price at the date of the grant and the deemed fair value of the common stock). Three Months Ended March 31, 2005 --------------------------------- As was permitted under SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure", which amended SFAS No. 123, the Company elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by APB No. 25, and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share data):
------------------ Three Months Ended March 31, 2005 ----------------- Net (loss) income attributable to common shareholders As reported $ (439) Less: Stock-based employee compensation expense determined under fair value-based method for all awards (156) ------------ Pro forma $ (595) ============ Basic and diluted net loss per share As reported $ (0.10) ============ Pro forma $ (0.13) ============
The fair value of Company common stock options granted to employees was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 71.9% in 2005, (2) risk-free interest rates of 4.50% in 2005 and (3) expected lives of 4.75 years in 2005. 7 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 4. Restatement of Prior Periods The Company has restated its condensed consolidated financial statements for the quarter ended March 31, 2005 to correct the accounting for warrants issued in connection with its March 29, 2005 sale of Senior Subordinated Notes (See Note 8). The corrected accounting reflects the warrants as a derivative liability under the guidance of SFAS 133 and EITF 00-19 and the resultant debt discount on the notes determined on the residual value basis. The Company previously accounted for the warrants as equity and the resultant debt discount on the notes was determined on a relative fair value basis. The effects of the restatement on the condensed consolidated financial statements for the quarter ended March 31, 2005 were: Condensed Consolidated Balance Sheet:
March 31, 2005 ---------------------------------------- --------------------------- ----------------------- As previously reported As Restated ---------------------------------------- --------------------------- ----------------------- Note payable, net of discount $ 492 $ 356 ---------------------------------------- --------------------------- ----------------------- Warrant liability $ -- $ 394 ---------------------------------------- --------------------------- ----------------------- Total liabilities $ 5,646 $ 5,904 ---------------------------------------- --------------------------- ----------------------- Additional paid-in-capital $ 112,760 $ 112,502 ---------------------------------------- --------------------------- ----------------------- Total stockholders' deficiency $ (2,678) $ (2,936) ---------------------------------------- --------------------------- -----------------------
5. 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. 6. 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 assets and liabilities of Platinum are presented as discontinued operations for both the current and prior period. At March 31, 2006, liabilities of the discontinued operation consist of loans and accounts payable of $53,000. 7. 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 March 31, 2006, the Company had no accounts receivable assigned to the Bank. 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). 8 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 7. Accounts Receivable and Revolving Loans (continued) 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 March 31, 2006 the Rec Fund had a total principal available for assignment of $250,000 and the Company had outstanding advances from the Rec Fund of $247,000 resulting in an unused availability under the agreement of $3,000. 8. Debt Notes payable ------------- At March 31, 2006 notes payable consist of the notes as described below of $750,000 less debt discount of $250,000 and lines of credit of $610,000 as further described below. 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 ("JPMC") is made. In connection with the note purchase the Buyers were issued warrants to purchase 750,000 common shares of the Company. The initial exercise price of the warrants was $0.90 per share of common stock. 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 occurred 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 was reduced to $0.01 per common share. 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. The Company is required to pay liquidating damages in the amount of 1% per month of the purchase price paid for the first two months and 2% for the remaining months to the buyers upon the occurrence of the following events: 1. Failure to file a registration statement by August 30, 2005 2. Failure to have the registration statement declared effective by December 31, 2005 3. Failure to maintain the effectiveness of the registration statement until the earlier of (a) March 29, 2008, (b) the date whereby all the securities may be sold pursuant to Rule 144 (c) the date on which the Buyers no longer hold the securities 4. Failure to be listed on the OTC Bulletin Board, American Stock Exchange, NASDAQ NASDAQ SmallCap or New York Stock Exchange 9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 8. Debt (continued) 6. Failure to timely deliver warrant or interest shares. The Company has accrued $30,000 of liquidated damages as of March 31, 2006. As such under the provisions of EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" the Company was required to record the warrants issued as a derivative liability at fair value on the date of issuance. (See Note 18) In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging Activities", at each reporting this liability will be adjusted for changes in its fair value. The fair value of the warrants is determined using the Black Scholes valuation model. Actual period close common stock price ($0.66), applicable volatility rates (70.6%), remaining contractual life (six years), and the period close risk free interest rate (4.8%) for the warrants expected remaining useful life are the key assumptions used in the valuation calculation. Period to period changes in fair value will be recorded as either an addition or charge to earnings. These additions or charges have no cash effect over the life of the instrument. The change in the fair value of the warrants for the three months ended March 31, 2006 was $30,000 and is included in Other Expense, net in the condensed consolidated financial statement of operations. The Company recorded a debt discount of $565,000 based on the residual value of the proceeds received and the fair value of the warrants. This discount is being amortized over the life of the loan using the effective interest rate method. Amortization of $125,000 was recorded as interest expense during the three months ended March 31, 2006. Lines of credit --------------- On June 30, 2005, the Company obtained a new line of credit in the principal amount of $500,000 with JPMC evidenced by a Grid Demand Promissory Note (the "Credit Facility) replacing a prior credit facility dated June 27, 2003, under substantially similar terms, but extending the original Maturity Date to June 30, 2007. As a condition precedent to providing the Credit Facility, the JPMC required guarantees of our obligations from Tall Oaks Group L.L.C. ("Tall Oaks") and Lawrence Hite (managing member of Tall Oaks) and a collateral agreement from Tall Oaks. In consideration of the issuance of such guarantee and delivery of the collateral agreement, on July 12, 2005, the Company issued and delivered to Tall Oaks warrants with an initial exercise price of $1.00 per share to purchase an aggregate of 500,000 shares of the common stock of Company. The LoC permits two forms of draw down; one based upon prime rate, the second based upon LIBOR. 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, 2006, the balance outstanding was $500,000 and the applied interest rate was 7.05%. 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 a variable interest rate equal to Sterling's base rate plus 2.0% (10.5% at March 31, 2006). 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, 2006, the Company had an outstanding balance of approximately $110,000 under the line of credit. 10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 8. Debt (continued) Capitalized lease obligations ----------------------------- 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. The interest rates pertaining to these capital leases range from 6.9% to 19.2%, and the net book value of the related assets is approximately $159,000 as of March 31, 2006. 9. Shareholders' Deficiency Common Stock and Option Issuances --------------------------------- During the quarter ended March 31, 2006, the Company did not issue any shares of common stock or options. 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 4,854 Warrants to purchase common stock 3,332 Series A Convertible preferred stock 1,347 ----- Total potential common shares as of March 31, 2006 9,533 =====
10. 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, 2006 2005 ----------------- ---------------- ASP IOL fees $1,550 $1,149 Other ASP services 8 14 Custom engineering fees 457 917 ------- -------- Total Revenue $2,015 $2,080 ====== ======
11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 10. Products and Services (continued) Major Customers --------------- For the three months ended March 31, 2006 the Company had two major customers that accounted for 71.5% and 26.5% of the Company's total revenue. For the three months ended March 31, 2005 these customers accounted for 74.0% and 24.5% of total revenue. Accounts receivable from these customers amounted to $1,354,000 and $1,833,000 at March 31, 2006 and December 31, 2005, respectively. 11. Management's Liquidity Plans In order to meet cash requirements and to achieve positive operating cash flows the Company has and will continue to take various actions and steps that the management believes will enable it to attain these goals. These actions include: o 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 8). o 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. Management believes the Company is precluded from paying these dividends at this time pursuant to Delaware General Corporate Law. o 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. 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 scheduled to mature on June 30, 2005 and the guarantors of this loan have consented to this extension (see Note 8). 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. o 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 we entered into a new agreement to provide IOL services to a Fortune 500 company. Revenue from this new customer accounted for 26.5% of total revenue for the year three months ended March 31, 2006. Management anticipates that revenue from this new customer will continue to increase in 2006 and beyond and expects to further broaden our customer base in 2006, although there is no assurance that the Company will be able to broaden this customer base. o In 2006 the Company initiated a cost reduction plan that management believes will significantly reduce operating costs 12 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 11. Management's Liquidity Plans (continued) while still enabling the Company to meet its commitments to its customers. o The Company continues to expand its 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 third quarter 2005 we 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 the Company also believes that its ability to raise additional capital through equity and debt placements will provide sufficient cash to meet cash requirements at least through March 31, 2007. There can be no assurance, however, that the Company will achieve the cash flow and profitability goals, or that it will be able to raise additional capital sufficient to meet operating expenses or implement its plans. 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. 12. New Accounting Pronouncements In June 2005, the EITF reached consensus on Issue No. 05-2, "The Meaning of `Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, `Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.'" Issue 00-19 is used to evaluate whether embedded derivatives should be bifurcated under SFAS No. 133, "Accounting For Derivative Instruments And Hedging Activities", as amended. Specifically, SFAS 133 provides guidance as to when an issuer is required to bifurcate a conversion option that is embedded in convertible debt. However, Issue 00-19 does not define "conventional convertible debt instrument." Given the development of numerous contractual terms that may be included in a convertible debt instrument, it is not clear when a convertible debt instrument is "conventional." The company does not believe that certain warrants meet the definition of conventional convertible debt and as a result Issue No. 00-19 applies to the liability treatment of these instruments (see Note8). As such the adoption of the Issue had an effect on the Company's financial position and results of operations (see Note 8). In September 2005, the FASB ratified the 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 effects 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). The adoption of the Issue may have a material effect on our consolidated financial position or results of operations in future periods. In September 2005, the FASB 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 the stockholder'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 SFAS No. 109, "Accounting for 13 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 12. New Accounting Pronouncements (continued) Income Taxes." The adoption of the Issue is not expected to have a material effect on our consolidated financial position or results of operations in future periods. In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140" ("SFAS 155"). SFAS 155 clarifies certain issues relating to embedded derivatives and beneficial interests in securitized financial assets. The provisions of SFAS 155 are effective for all financial instruments acquired or issued after fiscal years beginning after September 15, 2006. The Company is currently assessing the impact that the adoption of SFAS 155 will have on its results of operations and financial position. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 permits the choice of the amortization method or the fair value measurement method, with changes in fair value recorded in income, for the subsequent measurement for each class of separately recognized servicing assets and servicing liabilities. The statement is effective for years beginning after September 15, 2006, with earlier adoption permitted. The Company is currently evaluating the effect that adopting this statement will have on the Company's financial position and results of operations. 14 DIRECT INSITE CORP. AND SUBSIDIARIES Item 2 - Managements Discussion and Analysis or Plan of Operations Forward looking statements All statements other than statements of historical fact included in this Form 10-QSB including, without limitation, statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-QSB, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, the risk of errors or failures in the Company's software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel and the dependence on key personnel. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph. Overview We primarily operate as an application service provider ("ASP"), 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 Custom Engineering Services which are single contractual agreements involving modification or customization of the Company's proprietary ASP software solution. Additionally, we provide 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 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. 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 15 DIRECT INSITE CORP. AND SUBSIDIARIES 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 71.5% and 74.0% of our revenue for the three month periods ended March 31, 2006 and 2005, 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. Our second Fortune 500 company, Electronic Data Systems Corp. ("EDS"), accounted for approximately 26.5% and 24.5% of revenue for the three months ended March 31, 2006 and 2005, respectively. 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: o Any undelivered products or services are not essential to the functionality of the delivered products or services; o Payment for the delivered products or services is not contingent upon delivery of the remaining products or services; o 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; o There is evidence of the fair value for each of the undelivered products or services; o 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 - ------------ The Company provides transactional data processing services through its ASP software solutions to its customers. The customer is charged a monthly fixed rate on a per transaction basis or a fixed fee based on monthly transaction volumes. Revenue is recognized as the services are performed. 16 DIRECT INSITE CORP. AND SUBSIDIARIES Custom Engineering Services - --------------------------- The Company performs custom engineering services which are single contractual agreements involving modification or customization of the Company's proprietary ASP software solution. Progress is measured using the relative fair value of specifically identifiable output measures (milestones). Revenue is recognized at the lessor of the milestone amount when the customer accepts such milestones or the percentage of completion of the contract following the guidance of SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production Type Contracts". Cost of Revenue - --------------- Cost of revenue in the condensed consolidated statements of operations is presented along with operations, research and development costs and exclusive of amortization and depreciation shown separately. Custom Engineering Services costs related to uncompleted milestones are deferred and included in other current assets, when applicable. 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 - ------------------------------- In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal 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. Derivative Liabilities - ---------------------- On March 29, 2005, the Company entered into a Securities Purchase Agreement with investors for secured notes and warrants. (See Note 8). The warrants shares are subject to registration rights penalties with provisions that are outside the control of the Company. As such the detachable warrants are required to be recorded as liabilities at their fair value on the date of issuance under the guidance on EITF 00-19. In accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", at each reporting period these liabilities will be adjusted for changes in their fair value. The detachable warrants are valued using the Black Scholes valuation model. Actual period close common stock prices, applicable volatility rates, remaining contractual life and the period close risk free interest rate for the instruments expected remaining life are the key assumptions used in the Black Scholes valuation calculation. The period-to-period changes in fair value will be recorded as either an addition or charge to earnings. There is no cash effect to these additions or charges over the life of these instruments. For the three months ended March 31, 2006 and 2005 the Company recorded a charge of $30,000 and $0, respectively, as a result of the change in fair value of these derivative instruments. 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 17 DIRECT INSITE CORP. AND SUBSIDIARIES 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. 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 months ended March 31, 2006 we had a loss from operations of $292,000 compared to a loss from operations of $210,000 in the same period in 2005. The increase in the loss is principally due to a small decrease in revenue and an increase in operating costs as discussed below. Net loss for the three months ended March 31, 2006 was $533,000 compared to a loss of $285,000 in 2005. For the three months ended March 31, 2006 revenue decreased $65,000 (3.1%) to $2,015,000 compared to revenue of $2,080,000 for the same period in 2005. This decrease is primarily the result of an increase in our core business, the ASP IOL services, of $401,000 (34.9%) offset by a decrease of $460,000 (50.2%) in revenue from engineering services and a small decrease of $6,000 in other services. Engineering services revenue decreased principally as the result of substantially completing deployment of our IOL service in all major geographies for our largest customer, IBM, and completion of the initial phases of our IOL service for EDS. We anticipate that revenue from engineering services will increase as we begin new initiatives at both IBM and EDS and as we expand our customer base. Costs of operations, research and development increased by $50,000 (4.9%) to $1,063,000 for the three months ended March 31, 2006 compared to costs of $1,013,000 for the three months ended March 31, 2005. 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 is principally due to increases in personnel wages and benefit costs of $17,000, an increase in software costs of $9,000 and an increase in office rent of $20,000, offset by a decrease in professional fees of $21,000. All other operating expenses increased $25,000, net. Sales and marketing costs were $463,000 for the three months ended March 31, 2006, a decrease of $9,000 or 1.9% compared to costs of $472,000 for the same period in 2005. Professional fees, including personnel recruiting costs, decreased $26,000, while personnel and related benefits costs increased $21,000, while all other costs decreased by $4,000. General and administrative costs increased $2,000, less than 1%, to $694,000 for the three months ended March 31, 2006 compared to costs of $692,000 for the same period in 2005. Legal and accounting fees increased $43,000 principally due to costs incurred for a registration statement, while personnel costs including recruitment costs decreased $12,000. Insurance costs decreased $13,000 primarily due to rate decreases. All other administrative costs decreased $16,000. 18 DIRECT INSITE CORP. AND SUBSIDIARIES Depreciation and amortization expense decreased by $26,000 (23.0%), primarily due to fully amortizing certain software costs and other computer equipment. Interest expense increased $106,000, principally due to the amortization of debt discount of $125,000, offset by a decrease in interest due to lower rate of borrowing under our receivables financing agreements. Other expense increased $60,000 due to penalties incurred in connection with the Sigma and MetVP financing (see Note 8 to the Condensed Consolidated Financial Statements) and the marked to market adjustment for the fair value of the warrant liability. Financial Condition and Liquidity For the three months ended March 31, 2006, we had an operating loss of $292,000 compared to an operating loss of $210,000 for the same period in 2005. Cash provided by continuing operations was $228,000 in the first three months of 2006 compared to cash used in continuing operations of $47,000 for the same period in 2005, an improvement of $275,000. Cash used in discontinued operations was $8,000 for the three months ended March 31, 2006, compared to $9,000 for the same period in 2005. Cash provided by operations, including cash used for discontinued operations, for the three months ended March 31, 2006 was $220,000, consisting of the net loss of $533,000, reduced by non-cash expenses of $292,000, including depreciation and amortization of property and equipment of $87,000, amortization of debt discount of $125,000, amortization of deferred stock-based compensation of $50,000 and the change in the fair value of the warrant liability of $30,000. In addition accounts receivable were reduced by $496,000, while accounts payable and accrued expenses increased $158,000. This was offset by a decrease in deferred revenue of $250,000. Cash used in investing activities was $24,000 for the three months ended March 31, 2006, compared to $66,000 for same period in 2004. This was principally expenditures for equipment. Cash used in financing activities totaled $487,000 for the three months ended March 31, 2006, compared to cash provided by financing activities of $410,000 for the three months ended March 31, 2005. As noted above, we received proceeds from a new loan financing of $750,000 in the first quarter of 2005. We repaid $39,000 of long-term debt and capital lease obligations in the first quarter of 2006 and the balance outstanding under short term revolving loans for receivables financing decreased by $448,000 in 2006. Management's Liquidity and Financing Plans In order to meet our cash requirements 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: o In March 2005 the we 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 8). o 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. Management believes that we are precluded from paying these dividends at this time pursuant to Delaware General Corporate Law. o 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 19 DIRECT INSITE CORP. AND SUBSIDIARIES be acceptable. 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 7). 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 8). As noted above the guarantors were issued warrants and the 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. o 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 500 company. Revenue from this new customer accounted for 26.5% of total revenue for the year three months ended March 31, 2006. We anticipate that revenue from this new customer will continue to increase in 2006 and beyond and expect to further broaden our customer base in 2006, although there is no assurance that we will be able to broaden this customer base. o In 2006 we initiated a cost reduction plan that we believe will significantly reduce our operating costs while still enabling us to meet our commitments to our customers. o 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. As a result of this relationship, in the first quarter of 2006 we began deployment of our IOL service to a new outsourcing customer of IBM. We will continue to pursue similar channel partner opportunities. Also, in the third quarter 2005 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 placements will provide sufficient cash to meet cash requirements at least through March 31, 2007. 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 operating expenses or implement its plans. 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 Evaluation of Disclosure 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 March 31, 2006, the Chief Executive Officer and the Chief 20 DIRECT INSITE CORP. AND SUBSIDIARIES 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. Changes in Internal 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 materially affected, or is reasonably likely to materially affect, those controls. 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. 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 three months ended March 31, 2006. 21 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 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 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. 22 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 22, 2006 /s/ Michael J. Beecher - ------------------------------------------------------ Michael J. Beecher, Chief Financial Officer May 22, 2006 EX-31 2 diri10qsb-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. May 22, 2006 /s/ James A. Cannavino ------------------------ James A. Cannavino, Chief Executive Officer DIRECT INSITE CORP. AND SUBSIDIARIES CERTIFICATION OF CHIEF FINANCIAL 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. May 22, 2006 /s/ Michael J. Beecher ----------------------------- Michael J. Beecher Chief Financial Officer EX-32 3 diri10qsb-ex32.txt CERTIFICATIONS EXHIBIT 32.0 DIRECT INSITE CORP. AND SUBSIDIARIES 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 months ended March 31, 2006 (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 22, 2006 /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 months ended March 31, 2006 (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 22, 2006 /s/ Michael J. Beecher ----------------------- Michael J. Beecher Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----