-----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, O+hupbj5fHxQOJkl0TirAOIJJQMcU6EupWq5maUszuU03ggg+Hppfqm6OYBo759s l68dzSOSJnsy+UMoBxExlg== 0001201800-08-000166.txt : 20081113 0001201800-08-000166.hdr.sgml : 20081113 20081113160539 ACCESSION NUMBER: 0001201800-08-000166 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081113 DATE AS OF CHANGE: 20081113 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20660 FILM NUMBER: 081185050 BUSINESS ADDRESS: STREET 1: 80 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 631-873-2900 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 10-Q 1 diri10q-sept2008.txt DIRECT INSITE CORP. AND SUBSIDIARIES INDEX UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2008 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 registrant 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 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 large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] 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 November 10, 2008 was: 9,359,264. PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements. Condensed Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007 .................................. 3 Condensed Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited)................................................ 4 Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2008 and 2007 (Unaudited).................................................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited) ........................................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................... 14 Item 3. Quantitative and Qualitative Disclosure About Market Risk............................................................... 19 Item 4T. Controls and Procedures.................................... 19 PART II - OTHER INFORMATION Item 6. Exhibits..................................................... 21 Signatures .......................................................... 22 CERTIFICATIONS Exhibits DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007 (In thousands, except share data)
September 30, December 31, 2008 2007 --------------------- -------------------- (Unaudited) ASSETS Current assets Cash and cash equivalents $ 1,054 $ 2,184 Accounts receivable, net of allowance for doubtful accounts of $0 in 2008 and 2007 1,578 1,486 Prepaid expenses and other current assets 86 135 --------------------- -------------------- Total current assets 2,718 3,805 Property and equipment, net 712 443 Deferred tax asset 2,867 - Other assets 272 274 --------------------- -------------------- TOTAL ASSETS $ 6,569 $ 4,522 ===================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities Accounts payable and accrued expenses $ 1,629 $ 1,839 Current portion of capital lease obligations 8 36 Current portion of notes payable 168 84 Dividends payable 950 3,336 Deferred revenue 180 123 --------------------- -------------------- Total current liabilities 2,935 5,418 Capital lease obligations, net of current portion 8 14 Notes payable, net of current portion 320 135 --------------------- -------------------- Total liabilities 3,263 5,567 --------------------- -------------------- Commitments and contingencies Shareholders' equity (deficiency) Preferred stock, $0.0001 par value; 2,000,000 shares authorized; Series A Convertible Preferred, 0 issued and outstanding in 2008 and134,680 issued and outstanding in 2007; Series B Redeemable Preferred, 974 shares issued and outstanding in - - 2008 and 2007; liquidation preference of $974,075; Series C Redeemable Preferred, 2,000 shares issued and outstanding - - in 2008 and 2007; liquidation preference of $2,000,000; Series D Redeemable Preferred, 100 shares issued and outstanding in 2008 and 2007; liquidation preference of $100,000. Common stock, $0.0001 par value; 50,000,000 shares authorized; 9,399,191 and 7,115,216 shares issued in 2008 and 2007, respectively; and 9,359,264 and 7,075,289 shares outstanding in 2008 and 2007, 1 1 respectively Additional paid-in capital 116,128 114,961 Accumulated deficit (112,495) (115,679) --------------------- -------------------- 3,634 (717) Common stock in treasury, at cost - 24,371 shares (328) (328) --------------------- -------------------- Total shareholders' equity (deficiency) 3,306 (1,045) --------------------- -------------------- TOTAL LIABILITIES AND SHAREHODERS' EQUITY (DEFICIENCY) $ 6,569 $ 4,522 ===================== ====================
See notes to condensed consolidated financial statements. 3 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2007 (in thousands, except per share data)
Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, ------------- ------------- 2008 2007 2008 2007 --------------- --------------- ----------------- ---------------- Revenue $ 2,509 $ 2,582 $ 6,810 $ 7,416 --------------- --------------- ----------------- ---------------- Costs and expenses Operations, research and development 984 844 2,816 2,706 Sales and marketing 273 245 692 873 General and administrative 747 871 2,197 1,931 Depreciation and amortization 74 78 227 259 --------------- --------------- ----------------- ---------------- 2,078 2,038 5,932 5,769 --------------- --------------- ----------------- ---------------- Operating income 431 544 878 1,647 Other (income) expense Other income, net (1) -- (1) (8) Interest expense, net 0 20 11 86 --------------- --------------- ----------------- ---------------- Income before provision for income tax 432 524 868 1,569 Provision for (benefit from) income taxes 14 -- (2,853) 27 --------------- --------------- ----------------- ---------------- Net income 418 524 3,721 1,542 Preferred stock dividends (161) (227) (536) (658) --------------- --------------- ----------------- ---------------- Net income attributable to common shareholders $ 257 $ 297 $ 3,185 $ 884 =============== =============== ================= ================ Basic income per share attributable to common shareholders $ 0.03 $ 0.05 $ 0.43 $ 0.16 =============== =============== ================= ================ Fully diluted income per share attributable to common shareholders $ 0.03 $ 0.03 $ 0.31 $ 0.11 =============== =============== ================= ================ Basic weighted average common shares outstanding 7,903 6,082 7,482 5,650 =============== =============== ================= ================ Fully diluted weighted average common shares outstanding 9,553 9,014 10,871 8,136 =============== =============== ================= ================
See notes to condensed consolidated financial statements. 4 DIRECT INSITE CORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (In thousands, except share data)
For the nine months ended September 30, 2008 2007 ----------------- ------------------ Cash flows from operating activities Net income $ 3,721 $ 1,542 Adjustments to reconcile net income to net cash provided by operations: Amortization and depreciation: Property and equipment 226 259 Deferred taxes (2,867) -- Stock based compensation expense 481 458 Gain on sale of investment -- (8) Changes in operating assets and liabilities: Accounts receivable (92) 320 Prepaid expenses and other current assets 50 14 Other assets -- 3 Accounts payable and accrued expenses (81) (60) Deferred revenue 57 (221) ----------------- ------------------ Net cash provided by operations 1,495 2,307 ----------------- ------------------ Cash flows used in investing activities: Proceeds from sale of investment -- 8 Expenditures for property and equipment (198) (130) ----------------- ------------------ Net cash used in investing activities (198) (122) ----------------- ------------------ Cash flows used in financing activities: Proceeds from issuance of shares on exercise of options and warrants 618 28 Payment of dividends on preferred stock (2,922) -- Proceeds from revolving loans, net -- 110 Repayment of lines of credit -- (586) Principal payments on capital lease obligations (34) (50) Repayments of long-term debt (89) (49) ----------------- ------------------ Net cash used in financing activities (2,427) (547) ----------------- ------------------ Net (decrease) increase in cash and cash equivalents (1,130) 1,638 Cash and cash equivalents - beginning of period 2,184 295 ----------------- ------------------ Cash and cash equivalents - end of period $ 1,054 $ 1,933 ================= ================== Supplemental Disclosures: Cash paid for interest $ 38 $ 90 ================= ================== Cash paid for income taxes $ 30 $ 14 ================= ================== Non-cash investing and financing activities: Reduction in accrued liabilities through issuance of debt $ 62 $ - ================= ================== Acquisition of equipment through issuance of debt $ 295 $ 104 ================= ================== Dividends accrued and unpaid $ 536 $ 658 ================= ================== Reclassification of warrant liability $ -- 602 ================= ================== Common stock issued for settlement of liability $ 67 $ 360 ================= ==================
See notes to condensed consolidated financial statements 5 DIRECT INSITE CORP. AND SUBSIDIARIES 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 September 30, 2008, and the condensed consolidated statements of operations and cash flows for the three and nine month periods ended September 30, 2008 and 2007, 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 accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. 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, 2007 balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. These interim condensed consolidated financial statements include all adjustments which management considers necessary for a fair presentation of the financial statements and consist of normal recurring items. The results of operations for the three and nine month periods ended September 30, 2008, 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, 2007 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, 2007 consolidated financial statements. Use of Estimates ---------------- In preparing 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, stock based compensation, valuation allowance on deferred tax assets, and management's plans, as disclosed in Note 9. Actual results could differ from those estimates. 2. The Company Direct Insite Corp. was organized as a public company, under the laws of the State of Delaware on August 27, 1987. 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. The Company's global Electronic Invoice Presentment and Payment ("EIP&P") services automate manual business processes such as complex billing, invoice validation, invoice-to-order matching, consolidation, dispute handling, and payment processing. Management's liquidity plans are discussed in Note 9. Also, as described in Note 7, the Company has two customers that accounted for approximately 91.3% and 96.7% of the Company's revenue for the nine month periods ended September 30, 2008 and 2007, respectively. Loss of either of these customers would have a material adverse effect on the Company. 6 DIRECT INSITE CORP. AND SUBSIDIARIES 3. Stock Based Compensation Stock Options ------------- The Company accounts for stock options using the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No, 123 (Revised 2004), "Share-Based Payment", ("SFAS 123(R)"). As a result, for the three and nine month periods ended September 30, 2008, the Company recorded $14,000 and $78,000, respectively, in compensation expense for the fair value of options. For the three and nine month periods ended September 30, 2007, the Company recorded $11,000 and $70,000, respectively, in compensation expense for the fair value of options. At September 30, 2008, there was $17,000 of total unrecognized compensation costs related to stock options granted which is expected to be recognized over a weighted average period of 6 months. 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 September 30, 2008, 5,754,000 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. During the nine months ended September 30, 2008 the Company issued 75,000 options with a weighted average grant date fair value of $69,000. There were 80,000 options issued during the nine months ended September 30, 2007, which had a weighted average grant date fair value of $29,000. 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 6). A summary of option activity under the plans for the nine months ended September 30, 2008 is as follows:
------------------------------------ ----------------- --------------------- -------------------- -------------------------- Weighted Average Weighted Average Remaining Contractual Aggregate Intrinsic Value Shares Exercise Price Term (in years) (in thousands) (in thousands) ------------------------------------ ----------------- --------------------- -------------------- -------------------------- Balance, December 31, 2007 2,592 $0.77 ------------------------------------ ----------------- --------------------- -------------------- -------------------------- Granted 75 $1.50 ------------------------------------ ----------------- --------------------- -------------------- -------------------------- Exercised (800) $1.09 ------------------------------------ ----------------- --------------------- -------------------- -------------------------- Canceled -- -- ------------------------------------ ----------------- --------------------- -------------------- -------------------------- Forfeited -- -- ------------------------------------ ----------------- --------------------- -------------------- -------------------------- Balance, September 30, 2008 1,867 $0.66 2.0 $1,401 ------------------------------------ ----------------- --------------------- -------------------- -------------------------- Exercisable, September 30, 2008 1,830 $0.64 2.0 $1,401 ------------------------------------ ----------------- --------------------- -------------------- --------------------------
The total fair value of options vested during the nine months ended September 30, 2008 was $63,000. During the nine months ended September 30, 2008, the Company's Chief Executive Officer exercised 360,000 options with an exercise price of $1.16 per share. Restricted Stock Grants ----------------------- During the nine months ended September 30, 2008 the Company granted 21,856 shares to directors as part of their compensation. The stock grants had a fair value of $33,000 based on the closing price of the stock on the date of the grant. The stock grants vest over the two year period January 1, 2008 through December 31, 2009. 7 DIRECT INSITE CORP. AND SUBSIDIARIES A summary of the status of the Company's restricted non-vested shares issued pursuant to employment and service agreements as of September 30, 2008 and changes during the nine months ended September 30, 2008 is presented below:
- ------------------------------------------ ---------------------------------- ------------------------------------------------ Non-vested Shares Shares (in thousands) Weighted-average Grant Date Fair Value - ------------------------------------------ ---------------------------------- ------------------------------------------------ Non-vested at January 1, 2008 710 $2.22 - ------------------------------------------ ---------------------------------- ------------------------------------------------ Granted 22 $1.50 - ------------------------------------------ ---------------------------------- ------------------------------------------------ Vested (140) $2.14 - ------------------------------------------ ---------------------------------- ------------------------------------------------ Forfeited -- -- ===================================== - ------------------------------------------ ---------------------------------- ------------------------------------------------ Non-vested at September 30, 2008 592 $2.21 ===================================== - ------------------------------------------ ---------------------------------- ------------------------------------------------
For the three and nine months ended September 30, 2008 stock compensation expense for stock grants was $134,000 and $403,000, respectively. For the three and nine months ended September 30, 2007 stock compensation expense for stock grants was $333,000 and $373,000, respectively. The future expected expense for non-vested shares is $1,138,000 and will be recognized on a straight-line basis over the period October 1, 2008 through December 31, 2010. 4. Accounts Receivable and Revolving Loans On May 31, 2007, the Company renewed an Accounts Receivable Line of Credit with a Bank, whereby the Company from time to time may assign some of its accounts receivable to the Bank on a full recourse basis. The agreement expired on May 30, 2008. At September 30, 2008 and December 31, 2007, the Company had no accounts receivable assigned to the Bank and had no advances from the Bank. 5. Debt Notes payable ------------- At September 30, 2008 and December 31, 2007, notes payable consist of $488,000 and $219,000, respectively, of borrowings for the purchase of equipment. These notes bear interest at rates ranging from 8.8% to 10.3% per year and mature through January 2012. The notes are collateralized by the equipment purchased with net book values of $447,000 and $187,000, at September 30, 2008 and December 31, 2007, respectively. 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 12.3% to 15.3%. At September 30, 2008, the gross and net book value of the related assets is approximately $38,000 and $18,000, respectively. At December 31, 2007, the gross and net book value of the related assets was approximately $135,000 and $28,000, respectively. 6. Shareholders' Equity The following table summarizes the changes in shareholders' equity (deficiency) for the nine months ended September 30, 2008: 8 DIRECT INSITE CORP. AND SUBSIDIARIES
-------------------------------------------------- -------------------- In thousands -------------------------------------------------- -------------------- Balance - January 1, 2008 $ (1,045) -------------------------------------------------- -------------------- Dividends accrued (536) -------------------------------------------------- -------------------- Stock based compensation 481 -------------------------------------------------- -------------------- Shares issued for settlement of accrued liabilities 67 -------------------------------------------------- -------------------- Proceeds on exercise of options and warrants 618 -------------------------------------------------- -------------------- Net income 3,721 ----------- -------------------------------------------------- -------------------- Balance - September 30, 2008 $ 3,306 -------------------------------------------------- --------------------
Common Stock and Option Issuances --------------------------------- During the nine months ended September 30, 2008 the Company issued 147,500 restricted common shares with a fair value of $303,000 based on the closing share price on the date of the grant to certain officers under employment agreements. The Company also issued 1,552 restricted common shares valued at $3,000 to a former employee for services in 2007, and 72,275 restricted common shares with a fair value of $65,000 to an employee in settlement of compensation accrued in 2007 and compensation earned in 2008. During the nine months ended September 30, 2008 the Company also issued 141,898 common shares on the exercise of 440,000 stock options on a cashless basis and 360,000 shares on exercise of options for cash of $418,000. The Company also issued 213,950 shares on exercise of warrants and received proceeds of $200,000. During the nine months ended September 30, 2008, the Company issued 75,000 options to an officer and a director to purchase common stock. The options have an exercise prices of $1.50 (the trading price of the shares at the date of the grant) and a fair value at the grant date of $69,000. The valuation was determined using the Black-Scholes method. The key assumptions used were a volatility of 98.1%, dividend rate of 0%, a risk free rate of 1.9% and an expected life (using the simplified method) of 3.0 years. Also in September 2008, the Company issued 1,346,800 restricted common shares upon the conversion of all of the outstanding shares of the Series A Preferred Stock. 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 are not included in the computation when their effect would be anti-dilutive. The following table presents the shares used in the computation of fully diluted earnings per share for the three and nine months ended September 30, 2008 and 2007: 9 DIRECT INSITE CORP. AND SUBSIDIARIES
- ------------------------------------------------ -------------------- -------------------- -------------------- -------------------- Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2007 - ------------------------------------------------ -------------------- -------------------- -------------------- -------------------- (in thousands) (in thousands) (in thousands) (in thousands) - ------------------------------------------------ -------------------- -------------------- -------------------- -------------------- Weighted Average Common shares outstanding 7,903 6,082 7,482 5,650 - ------------------------------------------------ -------------------- -------------------- -------------------- -------------------- Warrants to purchase common stock 634 1,164 842 1,152 - ------------------------------------------------ -------------------- -------------------- -------------------- -------------------- Options to purchase common stock 987 1,768 1,216 1,334 - ------------------------------------------------ -------------------- -------------------- -------------------- -------------------- Restricted stock grants 29 -- 14 -- - ------------------------------------------------ -------------------- -------------------- -------------------- -------------------- Series A Convertible preferred stock -- -- 1,317 - ------------------------------------------------ -------------------- -------------------- -------------------- -------------------- Total fully diluted shares 9,553 9,014 10,871 8,136 ===== ====== ====== ===== - ------------------------------------------------ -------------------- -------------------- -------------------- --------------------
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 anti-dilutive for the periods presented, consist of the following (in thousands):
- ----------------------------------------------------- --------------------------------------- ------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, - ----------------------------------------------------- --------------------------------------- ------------------------------------- 2008 2007 2008 2007 ---- ---- ---- ---- - ----------------------------------------------------- ---------------- ---------------------- ---------------- -------------------- Options to purchase common stock 123 445 123 445 - ----------------------------------------------------- ---------------- ---------------------- ---------------- -------------------- Warrants to purchase common stock 643 200 643 200 - ----------------------------------------------------- ---------------- ---------------------- ---------------- -------------------- Restricted stock grants 577 -- 577 -- - ----------------------------------------------------- ---------------- ---------------------- ---------------- -------------------- Series A Convertible preferred stock -- 1,347 -- 1,347 ===== ===== ===== ===== - ----------------------------------------------------- ---------------- ---------------------- ---------------- -------------------- - ----------------------------------------------------- ---------------- ---------------------- ---------------- -------------------- Total potential common shares 1,343 1,992 1,343 1,992 ===== ===== ===== ===== - ----------------------------------------------------- ---------------- ---------------------- ---------------- --------------------
7. 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. The following table displays revenue by product (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 ------ ------ ------ ------ ASP IOL fees $2,016 $2,035 $5,668 $5,594 Custom engineering fees 493 547 1,142 1,822 ------ ------ ------ ------ Total Revenue $2,509 $2,582 $6,810 $7,416 ====== ====== ====== ======
Major Customers --------------- For the three and nine month periods ended September 30, 2008, IBM accounted for 41.1% and 45.0% of revenue, respectively, compared to 48.8% and 49.1% for the three and nine month periods ended September 30, 2007, respectively. For the three and nine month periods ended September 30, 2008, EDS accounted for 45.1% and 46.3% of revenue, respectively, compared to 48.5% and 47.6% for the three and nine month periods ended September 30, 2007, respectively. Accounts receivable from these customers amounted to $1,272,000 and $1,416,000 at September 30, 2008 and December 31, 2007, respectively. 10 DIRECT INSITE CORP. AND SUBSIDIARIES 8. Income Taxes In its interim financial statements the Company follows the guidance in Accounting Principles Board ("APB") Opinion 28 "Interim Financial Reporting" and FIN 18 "Accounting for Income Taxes in Interim Periods an Interpretation of APB 28", whereby the Company utilizes the expected annual effective tax rate in determining its income tax provisions for the interim period's income or loss. As the Company has significant net operating loss carry-forwards the effective income tax rate applied to the period ended September 30, 2008 income was 0%. The Company accounts 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 basis 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. The Company currently has significant deferred tax assets consisting predominately of net operating loss carry-forwards. 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. During the nine months ended September 30, 2008, the Company reviewed previous positive and negative evidence and also reviewed its expected taxable income for future periods and concluded that it is more likely than not that approximately $2,867,000 of tax benefits related to net operating loss carry-forwards will be utilized in future tax years and, therefore, reduced its valuation allowance during the nine months ended September 30, 2008 in accordance with APB 28. As a result the Company's effective tax rate for the three and nine months ended September 30, 2008 differs from the current statutory rates. In addition, the Company expects to provide a valuation allowance on the remaining future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize the remaining assets, or other significant positive evidence arises that suggests its ability to utilize the remaining assets. The future realization of a portion of its 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. The Company will continue to re-assess its reserves on deferred income tax assets in future periods on a quarterly basis. The Company has elected the "with and without approach" regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year. Under this approach the windfall tax benefit would be recognized in additional paid-in-capital only if an incremental tax benefit is realized after considering all other benefits presently available. At December 31, 2007, the Company had federal and state net operating loss carryforwards ("NOLs") remaining of approximately $77 million and $33 million, respectively, which may be available to reduce taxable income, if any. These NOLs expire through 2025. 9. 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 nine months ended September 30, 2008 and 2007 the Company had net cash provided by operations of $1,495,000 and $2,307,000, 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 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 the year ended December 31, 2007 the Company signed agreements with two new customers to provide IOL services. Management anticipates that revenue from new customers will continue to increase in 2008 and beyond and expects to further broaden the customer base in 2009, 11 DIRECT INSITE CORP. AND SUBSIDIARIES although there is no assurance that the Company will be able to further broaden its customer base. o Based on the advice of legal counsel, management believes the Company may only pay dividends to the extent it has a surplus or current earnings pursuant to the Delaware General Corporation Law. During the nine months ended September 30, 2008, the Company paid dividends on the Series A, B, and C Preferred Stock of $2,922,000 and expects to pay further dividends in 2008. 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 September 30, 2009. 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. 10. New Accounting Pronouncements In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") 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. On February 12, 2008, the FASB issued FASB Staff Position (FSP) No. SFAS 157-2, "Effective Date of FASB Statement No. 157" (FSP SFAS 157-2). FSP SFAS 157-2 amends SFAS No. 157, to delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for the items that are recognized or disclosed at fair value in the financial statements on a recurring basis. For items within its scope, FSP SFAS 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of adopting SFAS 157 and FSP SFAS 157-2 on its consolidated financial statements. 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. The Company has not elected to use the fair value method for any financial assets or liabilities and therefore SFAS 159 did not have an effect on the Company's financial position or results of operations. In December 2007, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 141R, "Business Combinations" ("SFAS 141R"), which replaces SFAS No. 141, "Business Combinations." SFAS 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including non-controlling interests, contingent consideration, and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R will be applicable prospectively to business combinations for which the acquisition date is on or after the beginning of 12 DIRECT INSITE CORP. AND SUBSIDIARIES the first annual reporting period beginning on or after December 15, 2008. SFAS 141R would have an impact on accounting for any businesses acquired after the effective date of this pronouncement. In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary (previously referred to as minority interests). SFAS 160 also requires that a retained non-controlling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of SFAS 160, the Company would be required to report any non-controlling interests as a separate component of stockholders' equity. The Company would also be required to present any net income allocable to non-controlling interests and net income attributable to the stockholders of the Company separately in its consolidated statements of operations. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160 would have an impact on the presentation and disclosure of the non-controlling interests of any non wholly-owned businesses acquired in the future. In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133", which amends and expands the disclosure requirements of SFAS 133 to require qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement will be effective for the Company beginning on January 1, 2009. The adoption of this statement will change the disclosures related to derivative instruments held by the Company, if any. 13 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Forward looking statements All statements other than statements of historical fact included in this Form 10-Q 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-Q, 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, the dependence on key personnel, and such other risk factors which may arise from time to time including, but not limited to, the risk factors as set forth in the Company's Reports on Form 10KSB as filed with the Securities Exchange Commission. 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 as a public company, under the laws of the State of Delaware on August 27, 1987. 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. The Company's global Electronic Invoice Presentment and Payment ("EIP&P") services automate manual business processes such as complex billing, invoice validation, invoice-to-order matching, consolidation, dispute handling, and payment processing. 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. For the three and nine month periods ended September 30, 2008, IBM accounted for 41.1% and 45.0% of revenue, respectively, compared to 48.8% and 49.1% for the three and nine month periods ended September 30, 2007, respectively. The decrease in revenue from IBM is due to the decrease in service to IBM in Europe and a decrease in engineering services resulting from the completion of deploying the IOL service to all major geographies. For the three and nine month periods ended September 30, 2008, EDS accounted for 45.1% and 46.3% of revenue, respectively, compared to 48.5% and 47.6% for the three and nine month periods ended September 30, 2007, respectively. The decrease in the percentage of revenue from EDS is principally due to increased revenue from other customers. 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 14 DIRECT INSITE CORP. AND SUBSIDIARIES 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 continuing 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 we do 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 - ------------ 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. 15 DIRECT INSITE CORP. AND SUBSIDIARIES 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 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. 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 September 30, 2008 and December 31, 2007, 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 nine months ended September 30, 2008 and 2007, respectively. 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. 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 (see note 8 to the Condensed Consolidated Financial Statements). Use of Estimates - ---------------- In preparing 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 16 DIRECT INSITE CORP. AND SUBSIDIARIES revenue and expenses during the reporting period. Certain items, among others, that are particularly sensitive to estimates are revenue recognition, stock based compensation and the valuation allowance on deferred tax assets. Actual results could differ from those estimates. Results of operations For the three and nine month periods ended September 30, 2008 we had income from operations of $431,000 and $878,000, respectively, compared to income from operations of $544,000 and $1,647,000 for the three and nine month periods ended September 30, 2007, respectively. We had net income of $418,000 and $3,721,000 for the three and nine months ended September 30, 2008, respectively, compared to net income of $524,000 and $1,542,000 for the three and nine months ended September 30, 2007, respectively. During the nine months ended September 30, 2008, we recorded a benefit from income taxes of $2,867,000 as a result of reducing the valuation allowance on our deferred tax assets for net operating loss carry-forwards we more likely than not expect to utilize in future years. For the three and nine month periods ended September 30, 2008 revenue decreased $73,000 (2.8%) to $2,509,000 and $606,000 (8.2%) to $6,810,000, respectively, compared to revenue of $2,582,000 and $7,416,000 for the three and nine month periods ended September 30, 2007, respectively. This decrease is primarily the result of a decrease in engineering services revenue of $54,000 (9.9%) and $680,000 (37.3%) for the three and nine months ended September 30, 2008, respectively. The decrease in the engineering services revenue is due to a decrease in the number and size of projects in process during the first nine months of 2008. Revenue from our recurring ASP IOL services decreased $19,000 (0.9%) for the three months ended September 30, 2008 and increased $74,000 (1.3%) for the nine months ended September 30, 2008 compared to the same period in 2007. Costs of operations, research and development increased by $140,000 (16.6%) and $110,000 (4.1%) to $984,000 and $2,816,000 for the three and nine months ended September 30, 2008, respectively, compared to costs of $844,000 and $2,706,000 for the three and nine months ended September 30, 2007, respectively. 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 2008 is principally due to an increase in the cost of purchased services of $156,000 for the three months and $147,000 for the nine months ended September 30, 2008, due to outsourcing certain services in support of a new IOL product offering to one customer. Other costs of operations decreased $16,000 and $37,000 for the three and nine months ended September 30, 2008, respectively. Sales and marketing costs increased $28,000 (11.4%) to $273,000 compared to costs of $245,000 for the three months ended September 30, 2007. The increase is due to an increase in personnel costs of $16,000, and increase in travel of $10,000 and other costs of $2,000. For the nine months ended September 30, 2008 sales and marketing costs decreased $181,000 (20.7%) to $692,000 compared to costs of $873,000 for the same period in 2007. The decrease is due to a reduction of $92,000 in salaries and benefits due to a reduction in staff, a decrease of $66,000 for professional and consulting fees and a decrease of other sales costs of $23,000. General and administrative costs decreased $124,000 (14.2%) to $747,000 for the three months ended September 30, 2008, compared to costs of $871,000 the same period in 2007. The decrease is principally due to a decrease in stock compensation costs of $210,000, offset by an increase in professional fees of $77,000 and other administrative costs of $9,000. For the nine months ended September 30, 2008, general and administrative costs increased $266,000 (13.8%) compared to the nine months ended September 30, 2007. This increase was due to an increase in personnel costs of $151,000, an increase in professional fees of $96,000, while all other administrative costs increased $19,000 compared to the same period in 2007. During the three months ended September 30, 2008 we had $0 interest expense, net compared to interest expense, net of $20,000 for the same period in 2007. For 17 DIRECT INSITE CORP. AND SUBSIDIARIES the nine months ended September 30, 2008 interest expense, net was $11,000 compared to $86,000 for the same period in 2007. The improvement was due to a return on investment of excess cash and lower borrowing in 2008 compared to 2007. Financial Condition and Liquidity Cash provided by operating activities for the nine months ended September 30, 2008 was $1,495,000 compared to cash provided by operating activities of $2,307,000 for the nine months ended September 30, 2007. This consisted of net income of $3,721,000, increased by non-cash expenses of $707,000, including depreciation and amortization of property and equipment of $226,000, and stock-based compensation expense of $481,000, offset by the change in the deferred tax asset of $2,867,000. This was further offset by an increase in accounts receivable of $92,000 and a decrease in accounts payable and accrued expenses of $81,000. Prepaid expenses decreased $50,000 and deferred revenue increased $57,000. Cash used in investing activities was $198,000 for the nine months ended September 30, 2008, compared to $122,000 for same period in 2007. This was principally expenditures for equipment. Cash used in financing activities totaled $2,427,000 for the nine months ended September 30, 2008, compared to cash used in financing activities of $547,000 for the nine months ended September 30, 2007. We paid $2,922,000 in dividends on preferred stock and repaid $123,000 of long-term debt and capital lease obligations in the first nine months of 2008 and we received proceeds from the exercise of stock options and warrants of $618,000. 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 nine months ended September 30, 2008 and 2007 we had net cash provided by operations of $1,495,000 and $2,307,000, respectively. We will continue to monitor and control expenses and we anticipate that we will continue to achieve positive cash flows from operations. o 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 the year ended December 31, 2007 we signed agreements with two new customers to provide IOL services. We anticipate that revenue from new customers will continue to increase in 2008 and beyond and we expect to further broaden our customer base in 2009, although there is no assurance that we will be able to further broaden our customer base. o Based on the advice of legal counsel, we believe the Company may only pay dividends to the extent it has a surplus or current earnings pursuant to Delaware General Corporate Law. During the nine months ended September 30, 2008, we paid dividends on preferred stock of $2,922,000 and we expect to pay further dividends in 2008. We believe that these plans and new initiatives as discussed above will lead to continued positive cash flows and profitability. While we pursue 18 DIRECT INSITE CORP. AND SUBSIDIARIES 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 September 30, 2009. 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. Item 3. Quantitative and Qualitative Disclosure About Market Risk Not applicable Item 4T. 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. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as such term is defined by the rules established under the Securities Exchange Act of 1934. Based on our evaluation which took place as of September 30, 2008 (the "Evaluation Date"), we believe that these procedures were not effective as a result of limited resources and a limited segregation of duties in accounting and financial reporting. More specifically, 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 material 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 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. In 2007 the Company adopted and implemented the control requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act"). There was no change in the Company's internal control over financial reporting during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. It is the responsibility of the Company's management to establish and maintain adequate internal control over financial reporting. However, due to its limited financial resources, there is only limited segregation of duties within the accounting function, leaving most significant aspects of financial reporting in the hands of the CFO. 19 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 as of the Evaluation Date, under standards established by the Public Company Accounting Oversight Board. As previously stated, the reportable condition and material weakness relates to limited segregation of duties and the absence of reviews and approvals beyond that performed by the Chief Financial Officer as mentioned above, of transactions and accounting entries. Given this reportable condition and material weakness, the Chief Financial Officer devoted additional time to closing, preparing and reviewing the report for the nine months ended September 30, 2008. 20 DIRECT INSITE CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION 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. 21 DIRECT INSITE CORP. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIRECT INSITE CORP. /s/ James A. Cannavino - ------------------------------------------- James A. Cannavino, Chief Executive Officer November 13, 2008 /s/ Michael J. Beecher - -------------------------------------------- Michael J. Beecher, Chief Financial Officer November 13, 2008 22 EX-31 2 diri10qsept2008-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-Q 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 officer 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)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) 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; and d) 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 (the registrant's fourth fiscal quarter in the case of an annual report) 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 officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. November 13, 2008 /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-Q 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 officer 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)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) 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; and d) 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 (the registrant's fourth fiscal quarter in the case of an annual report) 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 officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. November 13, 2008 /s/ Michael J. Beecher --------------------------- Michael J. Beecher Chief Financial Officer EX-32 3 diri10qsept2008-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-Q of the Company for the three and nine months ended September 30, 2008 (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 results of operations of the Company. Date: November 13, 2008 /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-Q of the Company for the three and nine months ended September 30, 2008 (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 results of operations of the Company. Date: November 13, 2008 /s/ Michael J. Beecher ---------------------------------------- Michael J. Beecher Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----