-----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, R5doaTAhH8GWLbP6jZp1AajLKlMezjF/gUXSFBgnau9FmJPxVzHI5DeIUflL1TkD NCYmtGtizUnurh6qQiEaOQ== 0001201800-07-000080.txt : 20070514 0001201800-07-000080.hdr.sgml : 20070514 20070514163238 ACCESSION NUMBER: 0001201800-07-000080 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070514 DATE AS OF CHANGE: 20070514 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: 07846860 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 diri10qsb3-07.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, 2007 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) 873-2900 Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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, 2007 was: 5,253,384. 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, 2007 (Unaudited) and December 31, 2006 ................................................................................. 3 Condensed Consolidated Statements of Operations For the Three Months Ended March 31, 2007 and 2006 (Unaudited)..................................... 4 Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2007 and 2006 (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 ........................................................................... 24 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................. 24 Item 3. Defaults Upon Senior Securities ............................................................. 24 Item 4. Submission of Matters to a Vote of Security Holders ........................................ 24 Item 5. Other Information ........................................................................... 24 Item 6. Exhibits..................................................................................... 24 Signatures .......................................................................................... 25 CERTIFICATIONS ........................................................................................... 26
DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2007 AND DECEMBER 31, 2006 (In thousands, except share data)
March 31, December 31, --------- ------------ 2007 2006 --------------------- -------------------- (Unaudited) (Audited) ASSETS Current assets Cash and cash equivalents $ 517 $ 295 Accounts receivable, net of allowance for doubtful accounts of $0 in 2007 and 2006 1,764 1,999 Prepaid expenses and other current assets 98 139 --------------------- -------------------- Total current assets 2,379 2,433 Property and equipment, net 518 450 Other assets 279 280 --------------------- -------------------- TOTAL ASSETS $ 3,176 $ 3,163 ===================== ==================== LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities Short-term revolving loans $ 249 $ 481 Lines of credit 500 586 Current portion of capital lease obligations 45 58 Current portion of notes payable 78 53 Accounts payable and accrued expenses 2,026 2,028 Dividends payable 2,701 2,489 Deferred revenue 380 564 Warrant liability 0 602 Liabilities from discontinued operations 31 37 --------------------- -------------------- Total current liabilities 6,010 6,898 Capital lease obligations, net of current portion 24 34 Notes payable, net of current portion 197 130 --------------------- -------------------- Total liabilities 6,231 7,062 --------------------- -------------------- 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 2007 and 2006; liquidation preference of $2,750,000; Series B Redeemable Preferred, 974 shares issued and outstanding in - - 2007 and 2006; liquidation preference of $974,075; Series C Redeemable Preferred, 2,000 shares issued and outstanding - - in 2007 and 2006; liquidation preference of $2,000,000; Series D Redeemable Preferred, 100 shares issued and outstanding in 2007 and 2006; liquidation preference of $100,000. Common stock, $0.0001 par value; 50,000,000 shares authorized; 5,293,311 shares issued in 2007 and 2006; and 5,253,384 shares outstanding in 2007 and 2006 - - Additional paid-in capital 113,803 113,185 Accumulated deficit (116,530) (116,756) --------------------- -------------------- (2,727) (3,571) Common stock in treasury, at cost - 24,371 shares (328) (328) --------------------- -------------------- Total shareholders' deficiency (3,055) (3,899) --------------------- -------------------- TOTAL LIABILITIES AND SHAREHODERS' DEFICIENCY $ 3,176 $ 3,163 ==================== ====================
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, 2007 and 2006 (in thousands, except per share data)
Three Months Ended ------------------ March 31, --------- 2007 2006 ---------------- ---------------- Revenue $ 2,254 $ 2,015 ---------------- ---------------- Costs and expenses Operations, research and development 875 1,063 Sales and marketing 337 463 General and administrative 493 694 Amortization and depreciation 86 87 ---------------- ---------------- 1,791 2,307 ---------------- ---------------- Operating income (loss) 463 (292) Other expenses Other expense, net -- 60 Interest expense, net 34 181 ---------------- ---------------- Income (loss) before provision for income tax 429 (533) Provision for income tax (27) -- ---------------- ---------------- Net income (loss) 402 (533) Preferred stock dividends (212) (172) ---------------- ---------------- Net income (loss) attributable to common shareholders $ 190 $ (705) ================ ================ Basic income (loss) per share attributable to common shareholders $ 0.04 $ (0.14) ================ ================ Fully diluted income (loss) per share attributable to common shareholders $ 0.03 $ (0.14) ================ ================ Basic weighted average common shares outstanding 5,253 4,933 ================ ================ Fully diluted weighted average common shares outstanding 7,112 4,933 ================ ================
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, 2007 AND 2006 (In thousands, except share data)
For the three months ended -------------------------- March 31, --------- 2007 2006 ----------------- ------------------ Cash flows from operating activities Net income (loss) from continuing operations $ 402 $ (533) Adjustments to reconcile net income (loss) from continuing operations to net cash provided by continuing operations: Amortization and depreciation: Property and equipment 86 87 Discount on debt -- 125 Amortization of deferred stock based compensation expense 53 50 Change in fair value of warrant liability -- 30 Changes in operating assets and liabilities: Accounts receivable 235 496 Prepaid expenses and other current assets 41 61 Other assets -- 4 Accounts payable and accrued expenses (2) 158 Deferred revenue (184) (250) ----------------- ------------------ Net cash provided by continuing operations 631 228 ----------------- ------------------ Change in: Lliabilities from discontinued operations (6) (8) ----------------- ------------------ Net cash used in discontinued operations (6) (8) ----------------- ------------------ Net cash provided by operating activities 625 220 ----------------- ------------------ Cash flows used in investing activities Expenditures for property and equipment (49) (24) ----------------- ------------------ Cash flows used in financing activities Repayments of revolving loans, net (232) (448) Repayment of lines of credit (86) (10) Principal payments on capital lease obligations (23) (29) Repayments of long-term debt (13) -- ----------------- ------------------ Net cash used in financing activities (354) (487) ----------------- ------------------ Net increase (decrease) in cash and cash equivalents 222 (291) Cash and cash equivalents - beginning of period 295 364 ----------------- ------------------ Cash and cash equivalents - end of period $ 517 $ 73 ================= ================== Cash paid for interest $ 37 $ 47 ================= ================== Cash paid for income taxes $ 14 $ -- ================= ================== Non-cash investing and financing activities: Acquisition of equipment through issuance of debt $ 104 $ -- ================= ================== Dividends accrued and unpaid $ 212 $ 172 ================= ==================
See notes to condensed consolidated financial statements. 5 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 1. Interim Financial Information The accompanying unaudited condensed consolidated interim financial statements include the accounts of Direct Insite Corp. and its subsidiaries ("Direct Insite" or the "Company"). All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of March 31, 2007, and the condensed consolidated statements of operations and cash flows for the three month periods ended March 31, 2007 and 2006, have been prepared by the Company and are not audited. These unaudited, condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepting in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. In addition, the December 31, 2006 balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. 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, 2007, 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 audited consolidated financial statements and notes thereto for the year ended December 31, 2006 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 audited December 31, 2006 consolidated financial statements except for the adoption of EITF 00-19-2 and FIN 48, which is discussed in Notes 3 and 4 below. Use of Estimates ---------------- In preparing condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Disclosures that are particularly sensitive to estimation include revenue recognition, fair value of derivative warrants, stock based compensation, valuation allowance on deferred tax assets, and management's plans, as disclosed in Note 10. Actual results could differ from those estimates. 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 6 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 processes high volumes of transactional data for invoice presentment purposes delivered via the Internet on a global basis. A complete Internet Customer Care tool set integrated with the EIP&P product set is also available. In 2007, the Company operated fully redundant data centers located at its main office in Bohemia, N.Y. and a co-location facility in Hauppauge, NY. Management's liquidity plans are discussed in Note 11. Also, as described in Note 10, the Company has two customers that accounted for approximately 50.2% and 45.9% of the Company's revenue for the three month period ended March 31, 2007 and 71.5% and 26.5% of revenue for the three month period ended March 31, 2006. Loss of either of these customers would have a material adverse effect on the Company. 3. Change in Accounting Principle Prior to January 1, 2007 the Company, under the provisions of EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", was required to record the warrants issued in conjunction with a bridge loan as a derivative liability at fair value on the date of issuance due to the registration payment arrangements included in the financing and warrant agreements. At December 31, 2006 the fair value of the warrant liability was $602,000. In January 2007, the Company changed the method of accounting following the guidance of the Financial Accounting Standards Board Staff Position EITF 00-19-2 ("FSP EITF 00-19-2") which provides that the contingent obligation to make future payments under a registration payment arrangement should be accounted for as a separate agreement in accordance with FASB Statement No. 5, Accounting for Contingencies. As a result the warrant liability of $575,000 was reclassified to Additional Paid In Capital based on its original fair value and the cumulative effect of the change in accounting principle of $37,000 was recorded as a credit to accumulated deficit. The cumulative effect upon adoption of FSP EITF 00-19-2 is summarized below: Accumulated deficit - December 31, 2006 $(116,756) Cumulative effect of the change in accounting principle 37 ---------- Accumulated deficit - January 1, 2007 $(116,719) ==========
4. Accounting for Uncertainty in Income Taxes The Company adopted Financial Accounting Standards Board's Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48"), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. FIN 48 is effective for fiscal years beginning after December 31, 2006, and is to be applied to all open tax years as of the date of effectiveness. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There were no unrecognized tax benefits as of January 1, 2007. The Company has identified its federal tax return and its state tax return in New York as "major" tax jurisdictions, as defined in FIN 48. Based on 7 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 the Company's evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements. The Company's evaluation was performed for tax years ended 2003 through 2006, the only periods subject to examination. The Company believes that its income tax positions and deductions will be sustained upon audit and does not anticipate any adjustments that will result in a material change to its financial position. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48. The Company has elected to classify interest and penalties incurred on income taxes, if any, as income tax expense. No interest or penalties on income taxes have been recorded during the three months ended March 31, 2007. The Company does not expect its unrecognized tax benefit position to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position. The adoption of FIN 48 did not have a material effect on our consolidated financial position , results of operations or cash flows. 5. Stock Based Compensation Stock Options ------------- 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, 2007 and 2006, the Company recorded $33,000 and $28,000, respectively, in compensation expense for the fair value of options. At March 31, 2007, there was $103,000 of total unrecognized compensation costs related to stock options granted which is expected to be recognized over a weighted average period of 1.1 years. Nonqualified and incentive stock options have been granted to directors, officers and employees of the Company under our Stock Option Plans. Options generally vest over 3 years and expire five years from the date of the grant. At March 31, 2007, 5,820,000 shares were authorized for issuance under the stock option plans. Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans. The Company issues new shares to satisfy stock option exercises. There were 65,000 options issued during the three months ended March 31, 2007. The weighted average grant date fair value of these options was $11,000. No options were issued during the three months ended March 31, 2006. The fair value of the stock options granted was estimated on the date of the grant using the Black-Scholes option pricing model (see Note 9). A summary of option activity under the plans for the three months ended March 31, 2007 is as follows:
------------------------------------ ----------------- --------------------- -------------------- ---------------------- Weighted Average Shares Weighted Average Remaining Contractual Aggregate Intrinsic Value (in thousands) Exercise Price Term (in years) (in thousands) ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Balance, December 31, 2006 4,604 $1.15 ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Granted 65 $0.64 ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Exercised -- ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Canceled (837) $1.28 ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Forfeited -- ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Balance, March 31, 2007 3,832 $1.12 2.2 $ 374 ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Exercisable, March 31, 2007 3,478 $1.19 2.0 $ 233 ------------------------------------ ----------------- --------------------- -------------------- ----------------------
8 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 A summary of the status of the Company's non-vested shares as of March 31, 2007 and changes during the three months ended March 31, 2007 is presented below:
- ------------------------------------------- ----------------------------------- ---------------------------------------------- Non-vested Shares Shares (in thousands) Weighted-average Grant Date Fair Value - ------------------------------------------- ----------------------------------- ---------------------------------------------- Non-vested at January 1, 2007 385 $0.24 - ------------------------------------------- ----------------------------------- ---------------------------------------------- Granted 65 $0.33 - ------------------------------------------- ----------------------------------- ---------------------------------------------- Vested (85) $0.24 - ------------------------------------------- ----------------------------------- ---------------------------------------------- Forfeited (11) $1.08 ----------------------------------- - ------------------------------------------- ----------------------------------- ---------------------------------------------- Non-vested at March 31, 2007 354 $0.23 ===================================== - ------------------------------------------- ----------------------------------- ----------------------------------------------
The total fair value of shares vested during the three months ended March 31, 2007 was $20,000. 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, 2007 and December 31, 2006, liabilities of the discontinued operation consist of loans and accounts payable of $31,000 and $37,000, respectively. 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, 2007, the Company had no accounts receivable assigned to the Bank. At December 31, 2006, the Company had assigned approximately $290,000 of accounts receivable to the Bank and received advances of $232,000 from 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). 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 former 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, 2007 and December 31, 2006, the Rec Fund had a total principal available for advances of $250,000 and the Company had outstanding advances at those dates from the Rec Fund of $249,000 resulting in an unused availability under the agreement of $1,000 at such dates. 9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 8. Debt Notes payable ------------- At March 31, 2007 and December 31, 2006, notes payable consist of $275,000 and $184,000, respectively, of borrowings for the purchase of equipment. These notes bear interest at rates ranging from 8.8% to 9.3% per year and mature through April 2011. The notes are collateralized by the equipment purchased with net book values of $264,000 and $178,000, at March 31, 2007 and December 31, 2006, respectively. Lines of credit --------------- On June 30, 2005, the Company obtained a 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 the Company's 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 credit facility 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, 2007 and December 31, 2006, the balance outstanding was $500,000 and the applied interest rate was 7.675% and 7.93%, respectively. 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. At December 31, 2006 the balance outstanding under this line of credit was $86,000. The line was repaid in full on February 21, 2007 and the credit line was terminated. 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%. At March 31, 2007, the gross and net book value of the related assets is approximately $218,000 and $46,000, respectively. At December 31, 2006, the gross and net book value of the related assets was approximately $414,000 and $66,000, respectively. 9. Shareholders' Deficiency Common Stock and Option Issuances --------------------------------- 10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 During the quarter ended March 31, 2007, the Company issued 65,000 options to employees to purchase common stock. The options have exercise prices of $0.61 and $0.70 (the trading prices of the shares at the date of the grant) and a fair value at the grant date of $19,500. The valuation was determined using the Black-Scholes method. The key assumptions used were a volatility of 69.0% to 74.3%, dividend rate of 0%, a risk free rate of 4.9% and an expected life of 3.25 years. 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 included in the computation where the effect would be antidilutive. The following table presents the shares used in the computation of fully diluted earnings per share for the period ended March 31, 2007:
-------------------------------------------------------- ----------------------------------------- (in thousands) -------------------------------------------------------- ----------------------------------------- Common shares outstanding 5,253 -------------------------------------------------------- ----------------------------------------- Warrants to purchase common stock 1,047 -------------------------------------------------------- ----------------------------------------- Options to purchase common stock 812 ---------------------------- -------------------------------------------------------- ----------------------------------------- Total fully diluted shares 7,112 =========================== -------------------------------------------------------- -----------------------------------------
There were no dilutive securities for the quarter ended March 31, 2006 as the period had a net loss and the effect of any dilutive securities would have been anti-dilutive. 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):
Three Months Ended March 31, ---------------------------- 2007 2006 ---- ---- Options to purchase common stock 2,058 4,854 Warrants to purchase common stock 643 3,332 Series A Convertible preferred stock 1,347 1,347 ----- ----- Total potential common shares as of March 31 4,048 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, ---------------------------- 2007 2006 ------------------- -------------------- ASP IOL fees $1,663 $ 1,558 Custom engineering fees 591 457 ------- -------- Total Revenue $2,254 $2,015 ====== ======
11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 Major Customers --------------- For the three months ended March 31, 2007, IBM and Electronic Data Systems ("EDS") accounted for 50.2% and 45.9% of the Company's total revenue, respectively. For the three months ended March 31, 2006, IBM and EDS accounted for 71.5% and 26.5% of total revenue, respectively. Accounts receivable from these customers amounted to $1,674,000 and $1,937,000 at March 31, 2007 and December 31, 2006, respectively. 11. Management's Liquidity Plans In order to meet the Company's cash needs and to maintain positive operating cash flows the Company has and will continue to take various actions and steps that the Company believes will enable it to attain these goals. These actions include: o For the three months ended March 31, 2007 and the year ended December 31, 2006 the Company had net cash provided by continuing operations of $631,000 and $1,176,000, respectively. The Company will continue to monitor and control expenses and anticipates that it will continue to achieve positive cash flows from operations. 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. Management believes that, based on advice of counsel, 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 to the Company. 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 the Company entered into a new agreement to provide IOL services to EDS. Revenue from EDS accounted for 45.9% of total revenue for the three months ended March 31, 2007. Management anticipates that revenue from this customer will continue to increase in 2007 and beyond and expects to further broaden our customer base in 2007, although there is no assurance that the Company will be able to further broaden its customer base. o In 2006 the Company initiated a cost reduction plan that has significantly reduced operating costs while still enabling the Company to meet its commitments to its customers. For the three months ended March 31, 2007, operating costs decreased $516,000, or 22.4% compared to operating costs for the three months ended March 31, 2006. The Company will continue to seek ways to control and reduce costs. o The Company continues to expand its marketing efforts in order to increase the customer base. In this regard, 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. 12 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 Management believes that these plans and new initiatives as discussed above will lead to continued positive cash flows and profitability. While the Company pursues these goals the Company also believes that its ability to generate positive cash flows from operations will provide sufficient cash to meet cash requirements at least through March 31, 2008. 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 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 adoption of SFAS 155 did not have a material effect on the consolidated financial position, results of operations or cash flows of the Company. 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 adoption of SFAS 156 did not have a material effect on the consolidated financial position, results of operations or cash flows of the Company. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material effect on the consolidated financial position, results of operations or cash flows of the Company (see Note 4). In June 2006, the EITF reached a consensus on Issue No. 06-3 ("EITF 06-3"), " Disclosure Requirements for Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions ." The consensus allows companies to choose between two acceptable alternatives based on their accounting policies for transactions in which the company collects taxes on behalf of a governmental authority, such as sales taxes. Under the gross method, taxes collected are accounted for as a component of sales revenue with an offsetting expense. Conversely, the net method allows a reduction to sales revenue. If such taxes are reported gross and are significant, companies should disclose the amount of those taxes. The guidance should be applied to financial reports through retrospective application for all periods presented, if amounts are significant, for interim and annual reporting beginning after December 15, 2006 with early adoption is permitted. We do not expect the adoption of EITF 06-3 to have a material effect on the consolidated financial position, results of operations or cash flows of the Company. 13 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 requires fair value measurements to be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS 157 on its future consolidated financial position, results of operations and cash flows and has not yet determined such effects. In November 2006, the EITF reached a final consensus in EITF Issue 06-6 "Debtor's Accounting for a Modification (or Exchange) of Convertible Debt Instruments" ("EITF 06-6"). EITF 06-6 addresses the modification of a convertible debt instrument that changes the fair value of an embedded conversion option and the subsequent recognition of interest expense for the associated debt instrument when the modification does not result in a debt extinguishment pursuant to EITF 96-19 , "Debtor's Accounting for a Modification or Exchange of Debt Instruments,". The consensus should be applied to modifications or exchanges of debt instruments occurring in interim or annual periods beginning after November 29, 2006. The adoption of EITF 06-6 did not have a material impact on our consolidated financial position, results of operations or cash flows. In November 2006, the FASB ratified EITF Issue No. 06-7, Issuer's Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("EITF 06-7"). At the time of issuance, an embedded conversion option in a convertible debt instrument may be required to be bifurcated from the debt instrument and accounted for separately by the issuer as a derivative under FAS 133, based on the application of EITF 00-19. Subsequent to the issuance of the convertible debt, facts may change and cause the embedded conversion option to no longer meet the conditions for separate accounting as a derivative instrument, such as when the bifurcated instrument meets the conditions of Issue 00-19 to be classified in stockholders' equity. Under EITF 06-7, when an embedded conversion option previously accounted for as a derivative under FAS 133 no longer meets the bifurcation criteria under that standard, an issuer shall disclose a description of the principal changes causing the embedded conversion option to no longer require bifurcation under FAS 133 and the amount of the liability for the conversion option reclassified to stockholders' equity. EITF 06-7 should be applied to all previously bifurcated conversion options in convertible debt instruments that no longer meet the bifurcation criteria in FAS 133 in interim or annual periods beginning after December 15, 2006, regardless of whether the debt instrument was entered into prior or subsequent to the effective date of EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which financial statements have not yet been issued. The adoption of EITF 06-7 did not have a material impact on our consolidated financial position, results of operations or cash flows. In December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2 "Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2") which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with SFAS No. 5, "Accounting for Contingencies." Adoption of FSP EITF 00-19-02 is required for fiscal years beginning after December 15, 2006. The affect of adopting FSP EITF 00-19-2 are disclosed in Note 3. 14 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" ("SFAS No. 159"), which permits entities to choose to measure many financial instruments and certain other items at fair value. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Adoption is required for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 159. The Company is currently evaluating the expected effect of SFAS 159 on its consolidated financial statements and is currently not yet in a position to determine such effects. 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 Direct Insite Corp. and its subsidiaries (hereinafter referred to at times as "Direct Insite" or the "Company"), was organized under the name Unique Ventures, Inc. as a public company, under the laws of the State of Delaware on August 27, 1987. In August, 2000, we changed our name to Direct Insite Corp. which the Board of Directors believed was more in line with our new direction. Direct Insite operates as an application service provider ("ASP"), providing best practice financial supply chain automation and workflow efficiencies within the Procure-to-Pay (PTP) and Order-to-Cash (OTC) processes. Specifically, Direct Insite's global eInvoice Management services automate complex manual business processes such as invoice validation, order matching, consolidation, dispute handling, and e-payment processing in a B2B transaction based "fee for service" business model. Through the automation and workflow of Procure-to-Pay and Order-to-Cash processes and the presentation of invoices, orders, and attachment data via a self service portal, Direct Insite is helping our customers reduce manual invoice-to-order reconciliation costs, reduce the frequency of inquiries and disputes, improve cash flow, increase competitiveness and improve customer satisfaction. Direct Insite is currently delivering service and business value across the Americas, Europe, and Asia, including 62 countries, 15 languages and multiple currencies. Direct Insite processes, hosts and distributes millions of invoices, purchase orders, and attachment documents making them accessible on-line within an internet self service portal. Suppliers, customers, and internal departments such as Finance and Accounting or Customer Service users can access their business documents 24 hours per day, seven days per week, 365 days per year. Currently, IBM, our largest customer, representing approximately 50.2% and 71.5% of our revenue for the three month periods ended March 31, 2007 and 2006, 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, seven days a week, 365 days a year. Electronic 16 DIRECT INSITE CORP. AND SUBSIDIARIES Data Systems Corp. ("EDS"), accounted for approximately 45.9% and 26.5% of revenue for the three months ended March 31, 2007 and 2006, respectively. Critical accounting policies Our condensed consolidated financial statements and the notes thereto contain information that is pertinent to management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Management considers an accounting estimate to be critical if: o it requires assumptions to be made that were uncertain at the time the estimate was made; and o changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on the Company's condensed consolidated results of operations or financial condition. The following critical accounting policies have been identified that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. We have discussed the application of these critical accounting policies with our Audit Committee. The following critical accounting policies are not intended to be a comprehensive list of all of the Company's accounting policies or estimates. Revenue Recognition - ------------------- We record revenue in accordance with Statement of Position 81-1, issued by the American Institute of Certified Public Accountants and SEC Staff Accounting Bulletin Topic 13 "Revenue Recognition in Financial Statements." In some circumstances, we enter into arrangements whereby the Company is obligated to deliver to its customer multiple products and/or services (multiple deliverables). In these transactions, in accordance with the Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", the Company allocates the total revenue to be earned among the various elements based on their relative fair values. The Company recognizes 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; 17 DIRECT INSITE CORP. AND SUBSIDIARIES 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 - ------------ We provide transactional data processing services through our ASP software solutions to our 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. Custom Engineering Services - --------------------------- We perform 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 lesser 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 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. Allowance For Doubtful Accounts - ------------------------------- The allowance for doubtful accounts reflects management's best estimate of probable losses inherent in the account receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. At March 31, 2007 and December 31, 2006, an allowance for doubtful accounts is not provided since, in the opinion of management, all accounts are deemed collectible. Impairment of Long-Lived Assets - ------------------------------- Statement of Financial Accounting Standards ("SFAS"), No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144") requires management judgments regarding the future operating and disposition plans for marginally performing assets, and estimates of expected realizable values for assets to be sold. The Company accounts for its long-lived assets in accordance with FAS 144 for purposes of determining and measuring impairment of its other intangible assets. It is the Company's policy to periodically review the value assigned to its long lived assets, including capitalized software costs, to determine if they have been permanently impaired by adverse conditions. If required, an impairment charge would be recorded based on an estimate of future discounted cash flows. In order to test for recoverability, the Company compared the sum of an undiscounted cash flow projection from the related long-lived assets to the net carrying amount of such assets. Considerable management judgment is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly, actual results could vary significantly from such estimates. No impairment charges were recognized during the three months ended March 31, 2007 and 2006, respectively. 18 DIRECT INSITE CORP. AND SUBSIDIARIES Income Taxes - ------------ We currently have significant deferred tax assets. SFAS No. 109, "Accounting for Income Taxes"("FAS 109"), requires a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Furthermore, FAS 109 provides that it is difficult to conclude that a valuation allowance is not needed when there is negative evidence such as cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. Accordingly, we recorded a full valuation allowance. In addition, we expect to provide a full valuation allowance on future tax benefits until we can sustain a level of profitability that demonstrates our ability to utilize the assets, or other significant positive evidence arises that suggests our ability to utilize such assets. The future realization of a portion of our reserved deferred tax assets related to tax benefits associated with the exercise of stock options, if and when realized, will not result in a tax benefit in the consolidated statement of operations, but rather will result in an increase in additional paid in capital. We will continue to re-assess our reserves on deferred income tax assets in future periods on a quarterly basis. We adopted the Financial Accounting Standards Board's Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48"), effective January 1, 2007 and we also changed the method of accounting for registration rights agreements following the guidance of the FASB Staff Position EITF 00-19-2 ("FSP EITF 00-19-2") as further described in Notes 2 and 4 to our condensed consolidated financial statements. 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. Certain items, among others, that are particularly sensitive to estimates are revenue recognition, the fair value of derivative warrants, stock based compensation and the valuation allowance on deferred tax assets. Actual results could differ from those estimates. Results of operations - --------------------- For the three months ended March 31, 2007 we had income from operations of $463,000 compared to a loss from operations of $292,000 in the same period in 2006. We had net income of $402,000 for the three months ended March 31, 2007 compared to a net loss of $533,000 for the three months ended March 31, 2006. The significant improvement in operating results is due to an increase in revenue and cost reductions as further discussed below. For the three months ended March 31, 2007 revenue increased $239,000 (11.9%) to $2,254,000 compared to revenue of $2,015,000 for the same period in 2006. This increase is primarily the result of an increase in our core business, the ASP IOL services, of $105,000 (6.7%) and an increase of $134,000 (29.3%) in revenue from engineering services. The increase in the ASP services and the engineering services revenue is the result of further expansion of our services to existing accounts. 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 decreased by $188,000 (17.7%) to $875,000 for the three months ended March 31, 2007 compared to costs of $1,063,000 for the three months ended March 31, 2006. These costs consist principally of salaries and related expenses for software developers, programmers, custom engineers, network services, and quality control and assurance. Also included are network costs, costs of the production co-location facility and other expenses directly related to our custom engineering and ASP production services. The decrease in costs is principally due to decreases in 19 DIRECT INSITE CORP. AND SUBSIDIARIES personnel wages and benefit costs of $148,000 from staff reductions, a decrease in rents of $69,000, offset by an increase in professional fees of $37,000. All other operating expenses decreased $8,000, net. Sales and marketing costs were $337,000 for the three months ended March 31, 2007, a decrease of $126,000 or 27.2% compared to costs of $463,000 for the same period in 2006. Personnel and related benefit costs decreased $145,000 as a result of staff reductions, and rent decreased $25,000. This was offset by an increase in travel costs of $20,000 and professional fees of $21,000 while other sales and marketing costs increased by $3,000. General and administrative costs decreased $201,000 (29.0%) to $493,000 for the three months ended March 31, 2007 compared to costs of $694,000 for the same period in 2006. Salaries and related benefits decreased $42,000, rent decreased $38,000 and legal and accounting fees decreased $44,000 principally due to costs incurred for a registration statement in 2006. Directors' fees and meeting expenses decreased $30,000 resulting from fewer meetings in the first quarter of 2007 compared to 2006. Travel expenses decreased $11,000 and professional fees decreased by $10,000. All other administrative costs decreased $26,000. Interest expense, net decreased $147,000 (81.2%) principally due to the amortization of debt discount of $125,000 in the first quarter of 2006 which was fully amortized in 2006, and a decrease in interest due to lower rate of borrowing under our receivables financing agreements. Other expense decreased $60,000 in the first quarter of 2007 compared to the same period in 2006. In 2006 the Company incurred penalties in connection with the Sigma Capital bridge financing and the marked to market adjustment for the fair value of the warrant liability recorded in connections with the bridge financing. The bridge financing was repaid in 2006. Financial Condition and Liquidity For the three months ended March 31, 2007, we had net income of $402,000 compared to a net loss of $533,000 for the same period in 2006. Cash provided by operations was $625,000 in the first three months of 2007 compared to cash provided by operations of $220,000 for the same period in 2006, an improvement of $405,000. Cash provided by operations for the three months ended March 31, 2007 consisted of the net income of $402,000, increased by non-cash expenses of $139,000, including depreciation and amortization of property and equipment of $86,000, and stock-based compensation expense of $53,000. In addition accounts receivable decreased by $235,000 and prepaid expenses decreased $41,000. This was offset by a decrease in deferred revenue of $184,000 and a decrease in accounts payable and other current liabilities of $8,000. Cash used in investing activities was $49,000 for the three months ended March 31, 2007, compared to $24,000 for same period in 2006. This was principally expenditures for equipment. Cash used in financing activities totaled $354,000 for the three months ended March 31, 2007, compared to cash used in financing activities of $487,000 for the three months ended March 31, 2006. We repaid $36,000 of long-term debt and capital lease obligations in the first quarter of 2007 and the balance outstanding under short term revolving loans for receivables financing decreased by $232,000 in 2007. We also repaid the Sterling Bank line of credit of $86,000 during the first quarter of 2007. 20 DIRECT INSITE CORP. AND SUBSIDIARIES Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. 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 For the three months ended March 31, 2007 and the year ended December 31, 2006 we had net cash provided by continuing operations of $631,000 and $1,176,000, respectively. We will continue to monitor and control expenses and we anticipate that we will continue to achieve positive cash flows from operations. 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. We may seek to defer these dividends further. Management believes that, based on advice of counsel, 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 be acceptable to us. 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 EDS. Revenue from EDS accounted for 45.9% of total revenue for the three months ended March 31, 2007. Management anticipates that revenue from this customer will continue to increase in 2007 and beyond and expects to further broaden our customer base in 2007, although there is no assurance that we will be able to further broaden our customer base. o In 2006 we initiated a cost reduction plan that has significantly reduced operating costs while still enabling us to meet our commitments to our customers. For the three months ended March 31, 2007, operating costs decreased $516,000, or 22.4% compared to operating costs for the first quarter of 2006. We will continue to seek ways to control and reduce costs. o We continue to expand our marketing efforts in order to increase the customer base. In this regard, 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. We believe that these plans and new initiatives as discussed above will lead to continued positive cash flows and profitability. While we pursue these goals we also believe that our ability to generate positive cash flows from operations will provide sufficient cash to meet our cash requirements at least through March 31, 2008. There can be no assurance, however, 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 operating expenses, which could have an adverse effect on revenue and operations in the short term. 21 DIRECT INSITE CORP. AND SUBSIDIARIES Item 3 - Controls and Procedures Evaluation of Disclosure Controls and Procedures - ------------------------------------------------- The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports it files with the SEC is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure, and such information 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, 2007, 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. The Company has a limited number of personnel in the finance and accounting area and therefore one person performs various accounting functions where a greater segregation of duties would permit checks and balances and reviews that would improve internal control. The Company has been aware of this weakness since January 2004 at which time the staff of the accounting department was reduced. As a result the Chief Financial Officer devotes substantive time to reviewing the accounting records and financial reports and the Company expects that this will continue until financial resources permit engaging additional accounting staff. The Company has not determined at this time when such additional staff will be employed. Changes in Internal Control Over Financial Reporting - ---------------------------------------------------- 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. The Company is a small business issuer and therefore is not yet subject to the evaluation of internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") and therefore is not yet subject to the reporting requirements of Regulation S-B, Items 308(a) and (b), and, therefore, has not fully complied with these requirements. The Company is required to be in compliance with Section 404 of the Act and report thereon for the fiscal year ended December 31, 2007 and in this regard has begun to develop a plan for compliance and expects to engage outside consultants to design and implement this plan. Since the date of the most recent evaluation of the Company's internal controls over financial reporting 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, including any corrective actions with regard to significant deficiencies and material weaknesses. 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. 22 DIRECT INSITE CORP. AND SUBSIDIARIES 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 of transactions and accounting entries. Given these reportable conditions and material weaknesses, as described above, the Chief Financial Officer devoted additional time to closing, preparing and reviewing the report for the three months ended March 31, 2007. 23 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. 24 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 14, 2007 /s/ Michael J. Beecher - ------------------------------------------------------ Michael J. Beecher, Chief Financial Officer May 14, 2007 25 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 14, 2007 /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 14, 2007 /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, 2007 (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 14, 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, 2007 (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 14, 2007 /s/ Michael J. Beecher ------------------------------- Michael J. Beecher Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----