-----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, NceK4RS1SYHexdrWLzK4JLi3nP8TMCkPot567eze3Obw30zJwrC6b5kDmVfEs2BU 2tz//2O8RR7aG6njMT8w9A== 0001201800-09-000130.txt : 20091116 0001201800-09-000130.hdr.sgml : 20091116 20091116163112 ACCESSION NUMBER: 0001201800-09-000130 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20090930 FILED AS OF DATE: 20091116 DATE AS OF CHANGE: 20091116 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: 091187326 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 dir10q-sept2009.txt 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, 2009 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.) 13450 West Sunrise Boulevard, Suite 510, Sunrise, FL 33323 (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] 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, 2009 was: 11,112,514.
PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements. Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008 ................................................................................. 3 Condensed Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)........................ 4 Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2009 and 2008 (Unaudited).................................. 5 Notes to Condensed Consolidated Financial Statements (Unaudited) .................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 15 Item 3. Quantitative and Qualitative Disclosure About Market Risk.................................... 20 Item 4T. Controls and Procedures..................................................................... 20 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, 2009 AND DECEMBER 31, 2008 (In thousands, except share data)
September 30, December 31, 2009 2008 --------------------- -------------------- (Unaudited) ASSETS Current assets Cash and cash equivalents $ 2,243 $ 980 Accounts receivable, net of allowance for doubtful accounts of $0 in 2009 and 2008 1,686 1,951 Prepaid expenses and other current assets 95 162 --------------------- -------------------- Total current assets 4,024 3,093 Property and equipment, net 471 649 Deferred tax asset 2,867 2,867 Other assets 280 271 --------------------- -------------------- TOTAL ASSETS $ 7,642 $ 6,880 ===================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 1,509 $ 1,802 Current portion of capital lease obligations 5 6 Current portion of notes payable 190 172 Warrant liability 305 -- Dividends payable 50 124 Deferred revenue 182 75 --------------------- -------------------- Total current liabilities 2,241 2,179 Capital lease obligations, net of current portion 2 7 Notes payable, net of current portion 183 274 --------------------- -------------------- Total liabilities 2,426 2,460 --------------------- -------------------- Series C Redeemable Preferred stock, 2,000 shares issued and outstanding in 2009 and 2008; liquidation preference of $2,000,000 2,000 - Commitments and contingencies Shareholders' equity Preferred stock, $0.0001 par value; 2,000,000 shares authorized; Series B Redeemable Preferred, 0 shares outstanding in 2009 and 974 shares issued and outstanding in 2008, liquidation preference of - - $974,000 at December 31, 2008; Series D Redeemable Preferred, 100 shares issued and outstanding - - in 2009 and 2008; liquidation preference of $100,000. Common stock, $0.0001 par value; 50,000,000 shares authorized; 10,987,305 and 10,311,968 shares issued in 2009 and 2008, respectively; and 10,947,378 and 10,272,041 shares outstanding in 2009 1 1 and 2008, respectively Additional paid-in capital 114,474 116,862 Accumulated deficit (110,931) (112,115) --------------------- -------------------- 3,544 4,748 Common stock in treasury, at cost - 24,371 shares (328) (328) --------------------- -------------------- Total shareholders' equity 3,216 4,420 --------------------- -------------------- TOTAL LIABILITIES AND SHAREHODERS' EQUITY $ 7,642 $ 6,880 ===================== ====================
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, 2009 and 2008 (in thousands, except per share data)
Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, ------------- ------------- 2009 2008 2009 2008 ------------------ ----------------- ----------------- --------------- Revenue $ 2,474 $ 2,509 $ 7,648 $ 6,810 ------------------ ----------------- ----------------- --------------- Costs and expenses Operations, research and development 862 984 2,735 2,816 Sales and marketing 364 273 1,061 692 General and administrative 567 747 1,947 2,197 Depreciation and amortization 87 74 277 227 ------------------ ----------------- ----------------- --------------- 1,880 2,078 6,020 5,932 ------------------ ----------------- ----------------- --------------- Operating income 594 431 1,628 878 Other (income) expense Change in fair value of warrant liability 101 -- 158 -- Other income, net (1) (1) (1) (1) Interest expense, net 6 -- 19 11 ------------------ ----------------- ----------------- --------------- Income before provision for (benefit from) income tax 488 432 1,452 868 Provision for (benefit from) income taxes 23 14 55 (2,853) ------------------ ----------------- ----------------- --------------- Net income 465 418 1,397 3,721 Preferred stock dividends (50) (161) (208) (536) ------------------ ----------------- ----------------- --------------- Net income attributable to common shareholders $ 415 $ 257 $ 1,189 $ 3,185 ================== ================= ================= =============== Basic income per share attributable to common shareholders $ 0.04 $ 0.03 $ 0.11 $ 0.43 ================== ================= ================= =============== Diluted income per share attributable to common shareholders $ 0.04 $ 0.03 $ 0.11 $ 0.31 ================== ================= ================= =============== Basic weighted average common shares outstanding 10,878 7,903 10,783 7,482 ================== ================= ================= =============== Diluted weighted average common shares outstanding 11,300 9,553 11,137 10,871 ================== ================= ================= ===============
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, 2009 AND 2008 (In thousands, except share data)
For the Nine Months Ended ------------------------- September 30, ------------- 2009 2008 ----------------- ----------------- Cash flows from operating activities Net income $ 1,397 $ 3,721 Adjustments to reconcile net income to net cash provided by operations: Amortization and depreciation 277 226 Deferred taxes -- (2,867) Stock based compensation expense 430 481 Change in fair value of warrant liability 158 -- Changes in operating assets and liabilities: Accounts receivable 265 (92) Prepaid expenses and other assets 57 50 Accounts payable and accrued expenses (96) (81) Deferred revenue 107 57 ----------------- ----------------- Net cash provided by operations 2,595 1,495 ----------------- ----------------- Cash flows used in investing activities: Expenditures for property and equipment (43) (198) ----------------- ----------------- Cash flows from financing activities: Redemption of preferred stock (974) -- Payment of dividends on preferred stock (282) (2,922) Proceeds from issuance of shares on exercise of options and warrants 100 618 Principal payments on capital lease obligations (5) (34) Repayments of long-term debt (128) (89) ----------------- ----------------- Net cash used in financing activities (1,289) (2,427) ----------------- ----------------- Net increase (decrease) in cash and cash equivalents 1,263 (1,130) Cash and cash equivalents - beginning of period 980 2,184 ----------------- ----------------- Cash and cash equivalents - end of period $ 2,243 $ 1,054 ================= ================= Supplemental Disclosures: Cash paid for interest $ 44 $ 38 ================= ================= Cash paid for income taxes $ 14 $ 30 ================= ================= Non-cash investing and financing activities: Reduction in accrued liabilities through issuance of debt $ -- $ 62 ================= ================= Acquisition of equipment through issuance of debt $ 55 $ 295 ================= ================= Dividends accrued and unpaid $ 50 $ 536 ================= ================= Reduction in accrued liabilities through issuance of common stock $ 198 $ 67 ================= ================= Derivative liability on adoption of ASC Sub Topic 815 - 40, "Contracts in Entity's Own Stock" $ 147 $ -- ================= =================
See notes to condensed consolidated financial statements. 5 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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, 2009, and the condensed consolidated statements of income and cash flows for the three and nine months ended September 30, 2009 and 2008, 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, 2008 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 months ended September 30, 2009, 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, 2008 included in the Company's Form-10K. The accounting policies used in preparing these unaudited condensed consolidated financial statements are consistent with those described in the audited December 31, 2008 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, fair value of the warrant liability,and the valuation allowance on deferred tax assets. 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 a Software as a Service provider ("SaaS"), 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. As described in Note 9, the Company has three customers that accounted for approximately 95.1% and 97.0% of the Company's revenue for the nine months ended September 30, 2009 and 2008, respectively. Loss of IBM or EDS would have a material adverse effect on the Company. 6 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. Change in Accounting Principle Effective January 1, 2009, the Company, adopted the guidance in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Sub Topic 815-40, "Contracts in Entity's Own Stock", determined that a warrant issued in conjunction with the guarantee of a credit facility contained a provision whereby the exercise price could be adjusted upon certain financing transactions at a lower price per share could no longer be viewed as indexed to the Company's common stock. As such, the Company changed the accounting for this warrant to a "derivative". As a result the Company recorded the warrant liability at the fair value of the warrant of $147,000 as of January 1, 2009 and reclassified its issuance date fair value from additional paid-in-capital. The cumulative effect of the change in accounting principle is as follows:
---------------------------------------------------------- ----------------------------- ---------------------- Additional Paid In Capital Accumulated Deficit ---------------------------------------------------------- ----------------------------- ---------------------- ($ in thousands) ---------------------------------------------------------- ---------------------------------------------------- Balance December 31, 2008 $116,862 ($112,115) ---------------------------------------------------------- ----------------------------- ---------------------- Cumulative effect of change in accounting principle (141) (5) ----------------------------- ---------------------- ---------------------------------------------------------- ----------------------------- ---------------------- Balance January 1, 2009 $116,721 ($112,120) ======================== =================== ---------------------------------------------------------- ----------------------------- ----------------------
4. Stock Based Compensation Stock Options ------------- The Company accounts for share-based awards exchanged for employee services in accordance with accounting standards as set forth in ASC 718, "Compensation-Stock Compensation". As a result, for the three and nine month periods ended September 30, 2009 the Company recorded $0 and $9,000, respectively, in compensation expense for the fair value of options. 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. At September 30, 2009, there was no unrecognized compensation costs related to stock options granted. 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, 2009, 3,396,329 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 no options granted during the nine months ended September 30, 2009. 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. 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 8). A summary of option activity under the plans for the nine months ended September 30, 2009 is as follows:
------------------------------------ ----------------- --------------------- -------------------- ---------------------- Weighted Average Remaining Aggregate Intrinsic Shares Weighted Average Contractual Value (in thousands) Exercise Price Term (in years) (in thousands) ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Balance,January 1, 2009 1,277 $0.62 ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Granted -- -- ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Exercised (100) $0.45 ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Canceled -- -- ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Forfeited (47) $1.66 ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Balance, September 30, 2009 1,130 $0.59 2.0 $555 ------------------------------------ ----------------- --------------------- -------------------- ---------------------- Exercisable, September 30, 2009 1,130 $0.59 2.0 $555 ------------------------------------ ----------------- --------------------- -------------------- ---------------------- 7
DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 4. Stock Based Compensation (continued) The total fair value of options vested during the nine months ended September 30, 2009 and 2008 was $35,000 and $63,000, respectively. Restricted Stock Grants ----------------------- During the nine months ended September 30, 2009 the Company granted 44,544 shares to directors as part of their compensation. The stock grants had a fair value of $49,000 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, 2009 through December 31, 2010. A summary of the status of the Company's restricted non-vested shares issued pursuant to employment and service agreements as of September 30, 2009 and changes during the nine months ended September 30, 2009 is presented below:
- ------------------------------------------ ---------------------------------- ------------------------------------------------ Non-vested Shares Shares (in thousands) Weighted-average Grant Date Fair Value - ------------------------------------------ ---------------------------------- ------------------------------------------------ Non-vested at January 1, 2009 521 $2.21 - ------------------------------------------ ---------------------------------- ------------------------------------------------ Granted 45 $1.09 - ------------------------------------------ ---------------------------------- ------------------------------------------------ Vested (228) $2.10 - ------------------------------------------ ---------------------------------- ------------------------------------------------ Forfeited -- -- ------------------------------------- - ------------------------------------------ ---------------------------------- ------------------------------------------------ Non-vested at September 30, 2009 338 $2.14 ===================================== - ------------------------------------------ ---------------------------------- ------------------------------------------------
For the three months ended September 30, 2009 and 2008 stock compensation expense for stock grants was $140,000 and $134,000, respectively. For the nine months ended September 30, 2009 and 2008 stock compensation expense for stock grants was $421,000 and $403,000, respectively. At September 30, 2009, the future expected expense for non-vested shares is $631,000 and will be recognized on a straight-line basis over the period October 1, 2009 through December 31, 2010. 5. Fair Value of Financial Instruments ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"), defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 applies to all assets and liabilities that are measured and reported on a fair value basis. ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: Level 1-Observable inputs such as quoted prices in active markets; Level 2-Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; Level 3-Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. The following are the Company's major categories of liabilities measured at fair value on a recurring basis at September 30, 2009, categorized by the fair value hierarchy: 8 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. Fair Value of Financial Instruments (continued) Fair Value Measurements at September 30, 2009 Using Significant ---------------------------------------------------------------------- Unobservable Inputs: -------------------
Description (Level 3) ---------------------------------------------- ----------------- Liabilities: Warrant liability $ 305 =================
The following is a reconciliation of the beginning and ending balances for the Company's liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) and a summary of the derivative warrant liability during the nine months ended September 30, 2009:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3): ------------------------------------------------------------------------- Description (Level 3) ----------------------------------------------------------------- ----------------- Liabilities: Balance at January 1, 2009 $ -- Cumulative effect of the change in accounting principle, January 1, 2009 147 Change in fair value included in operations 158 ----------------- Balance, September 30, 2009 $ 305 =================
The change in fair value recorded for Level 3 liabilities for the periods above are reported in other income (expense) on the condensed consolidated statement of operations. 6. Warrant Liability The Company accounts for certain warrants as a derivative liability (see Note 3.) using the fair value method at the end of each quarter, with the resultant gain or loss recognition recorded against earnings. The Company recognized a total non-cash expense of approximately $101,000 and $158,000 for the three and nine months ended September 30, 2009, respectively, for these derivative warrants. The fair value of the derivative warrants was determined using the Black -Scholes valuation model using the closing price stock price of $1.05, a volatility rate of 178%, a risk free interest rate of 0.4% and a contractual life of 0.78 years. 7. Debt Notes payable ------------- At September 30, 2009 and December 31, 2008, notes payable consist of $373,000 and $446,000, 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 August 2012. The notes are collateralized by the equipment purchased with net book values of $283,000 and $396,000, at September 30, 2009 and December 31, 2008, respectively. Capitalized lease obligations ----------------------------- The Company has equipment under a capital lease obligation expiring in 2011. 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 rate pertaining to this capital lease is 15.3%. 9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7. Debt (continued) At September 30, 2009, the gross and net book value of the related assets is approximately $14,000 and $6,000, respectively. At December 31, 2008, the gross and net book value of the related assets was approximately $38,000 and $18,000, respectively. 8. Shareholders' Equity The following table summarizes the changes in shareholders' equity for the nine months ended September 30, 2009:
--------------------------------------------------- ------------------- In thousands --------------------------------------------------- ------------------- Balance, December 31, 2008 $ 4,420 --------------------------------------------------- ------------------- Cumulative effect of change in accounting principle (147) --------------------------------------------------- ------------------- Balance - January 1, 2009 $ 4,273 --------------------------------------------------- ------------------- Dividends accrued (208) --------------------------------------------------- ------------------- Stock based compensation 430 --------------------------------------------------- ------------------- Shares issued for settlement of accrued liabilities 198 --------------------------------------------------- ------------------- Proceeds on exercise of warrants 100 --------------------------------------------------- ------------------- Redemption of preferred stock (974) --------------------------------------------------- ------------------- Reclassification of Series C Redeemable Preferred Stock (2,000) --------------------------------------------------- ------------------- Net income 1,397 ---------- --------------------------------------------------- ------------------- Balance - September 30, 2009 $3,216 --------------------------------------------------- -------------------
Common Stock and Option Issuances --------------------------------- During the nine months ended September 30, 2009 the Company issued 270,000 restricted common shares with a fair value of $596,000 based on the closing share price on the date of the grant to certain officers under employment agreements. The Company also issued 319,050 restricted common shares valued at $198,000 to directors in settlement of directors fees accrued in 2006 and 2007. The Company also issued 95,648 shares on exercise of warrants and received proceeds of $100,000. Also during the nine months ended September 30, 2009 the Company issued 58,139 shares on the exercise of 100,000 options on a cashless basis. 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 price 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. 10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 8. Shareholders' Equity (continued) Common Stock Purchase --------------------- In September 2009, the Board of Directors adopted a plan to purchase a certain number of shares from options holders on the exercise of options to encourage the option holders to exercise their options and to provide the option holder with a method to have cash for the tax on the exercise. The plan provides that the price to be paid for any shares purchased shall be the closing price of the common stock on the date of exercise. Further the Company will only provide up to $300,000 for all such purchases for all option exercises in the aggregate in any twelve month period. Subsequent to September 30, 2009, the Company purchased 59,963 shares for a total of $56,000. Earnings Per Share ------------------ The Company displays earnings per share in accordance with ASC 260, "Earnings Per Share" ("ASC 260"). ASC 260 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 diluted earnings per share for the three and nine months ended September 30, 2009 and 2008 (in thousands):
- ---------------------------------------------------- ------------------------------------- -------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, - ---------------------------------------------------- ------------------ ------------------ ------------------- ------------------ 2009 2008 2009 2008 ---- ---- ---- ---- - ---------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Weighted Average Common shares outstanding 10,878 7,903 10,783 7,482 - ---------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Warrants to purchase common stock -- 634 -- 842 - ---------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Options to purchase common stock 383 987 322 1,216 - ---------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Restricted stock grants 39 29 32 14 - ---------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Series A Convertible preferred stock -- -- -- 1,317 ------------------ ------------------ ------------------- ------------------ - ---------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Total diluted shares 11,300 9,553 11,137 10,871 ================== ================== =================== ================== - ---------------------------------------------------- ------------------ ------------------ ------------------- ------------------
Securities that could potentially dilute basic EPS in the future, that were not included in the computation of the diluted EPS consist of the following (in thousands):
- --------------------------------------------------- -------------------------------------- ------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, - --------------------------------------------------- ----------------- -------------------- ------------------ ------------------ 2009 2008 2009 2008 ---- ---- ---- ---- - --------------------------------------------------- ----------------- -------------------- ------------------ ------------------ Options to purchase common stock 75 123 75 123 - --------------------------------------------------- ----------------- -------------------- ------------------ ------------------ Warrants to purchase common stock 591 643 591 643 - --------------------------------------------------- ----------------- -------------------- ------------------ ------------------ Restricted stock grants 308 577 308 577 - --------------------------------------------------- ----------------- -------------------- ------------------ ------------------ Series A Convertible preferred stock -- -- -- -- ----------------- -------------------- ------------------ ------------------ - --------------------------------------------------- ----------------- -------------------- ------------------ ------------------ Total potential common shares 974 1,343 974 1,343 ================= ==================== ================== ================== - --------------------------------------------------- ----------------- -------------------- ------------------ ------------------
11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Preferred Stock --------------- During the nine months ended September 30, 2009, the Company redeemed all of the outstanding Series B Redeemable Preferred Stock ("Series B") in the amount of $974,000 and recorded this amount as a reduction of Additional Paid- in Capital. The Company's Chairman and Chief Executive Officer, as a holder of the Series B, received $266,000 of the redemption amount. 8. Shareholders' Equity (continued) Subsequent to September 30, 2009, the Company redeemed 50% (1,000 shares) of the outstanding Series C Redeemable Preferred Stock ("Series C") in the amount of $1,0000,000 and recorded this amount as a reduction of Additional Paid- in Capital. The Company's Chairman and Chief Executive Officer, certain directors and Metropolitan Venture Partners II, L.P., as holders of the Series C, received $285,000 of the redemption amount. The Series C can only be redeemed on the approval of the Board of Directors, and certain members of the Board are also holders of the Series C Preferred Stock and had resolved not to vote to redeem such stock. As such the Series C was recorded as equity. In September 2009 the Board rescinded this resolution and voted to redeem a portion of the Series C stock. At September 30, 2009, the Series C was reclassified from shareholders' equity to temporary equity based on the intent of the Company to redeem these shares in full. 9. Products and Services The Company and its subsidiaries currently operate in one business segment and provide two separate products: SaaS services and custom engineering services. The following table displays revenue by product (in thousands):
Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, ------------- ------------- 2009 2008 2009 2008 --------- --------- ------- --------- SaaS fees $2,238 $2,016 $6,723 $5,668 Custom engineering fees 236 493 925 1,142 --------- --------- ------- --------- Total Revenue $2,474 $2,509 $7,648 $6,810 ======== ========= ======= =========
Major Customers --------------- For the three and nine month periods ended September 30, 2009, IBM accounted for 33.7% and 32.4% of revenue, respectively, compared to 41.1% and 45.0% for the three and nine month periods ended September 30, 2008, respectively. For the three and nine month periods ended September 30, 2009, HP accounted for 51.8% of revenue, respectively, compared to 45.1% and 46.3% for the three and nine month periods ended September 30, 2008, respectively. For the three and nine month periods ended September 30, 2009, Siemens accounted for 10.3% and 10.9% of revenue, respectively, compared to 9.2% and 5.7% for the three and nine month periods ended September 30, 2008, respectively. Accounts receivable from these customers amounted to $1,601,000 and $1,879,000 at September 30, 2009 and December 31, 2008, respectively. 10. Income Taxes In its interim financial statements the Company follows the guidance in ASC 270, "Interim Reporting" ("ASC 240") and ASC 740, "Income Taxes" ("ASC270") 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 approximate effective income tax rate applied to the nine months ended September 30, 2009 income was 3.8%. 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. ASC 740, 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, 12 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. Income Taxes (continued) 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, 2008, the Company had federal and state net operating loss carryforwards ("NOLs") remaining of approximately $72 million and $26 million, respectively, which may be available to reduce taxable income, if any. These NOLs expire through 2025. 11. New Accounting Pronouncements In July 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS 168"). SFAS 168 establishes the FASB Accounting Standards Codification to become the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS 168, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. The Company has modified all earlier references to accounting standards to reflect the adoption of SFAS 168. In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"). This standard has not yet been integrated into the ASC. SFAS 167 eliminates Interpretation 46(R)'s exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity's status as a variable interest entity, a company's power over a variable interest entity, or a company's obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying Interpretation 46(R)'s provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. SFAS 167 will be effective January 1, 2010. The Company does not expect the adoption of SFAS 167 to have any impact on its financial statements or results of operations. In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" now incorporated in ASC 855, "Subsequent Events". This Statement sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for 13 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 11. New Accounting Pronouncements (continued) potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Statement is effective for interim and annual periods ending after June 15, 2009. The company adopted this Statement in the quarter ended June 30, 2009. This Statement did not impact the Company's consolidated financial position and results of operations. In October 2009, the FASB issued new accounting guidance, under ASC Topic 605 "Revenue Recognition", which amends revenue recognition policies for arrangements with multiple deliverables. This guidance eliminates the residual method of revenue recognition and allows the use of management's best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE) is unavailable. This guidance is effective for all new or materially modified arrangements entered into on or after January 1, 2011 with earlier application permitted as of the beginning of a fiscal year. Full retrospective application of the new guidance is optional. The Company has not completed their assessment of this new guidance on their financial condition, results of operations or cash flows. In October 2009, the FASB issued new accounting guidance, under ASC Topic 985 "Software", which amends the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product's essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. This guidance is effective for all new or materially modified arrangements entered into on or after January 1, 2011 with earlier application permitted as of the beginning of a fiscal year. Full retrospective application of this new guidance is optional. This guidance must be adopted in the same period that the company adopts the amended accounting for arrangements with multiple deliverables described in the preceding paragraph. The Company has not completed their assessment of this new guidance on their financial condition, results of operations or cash flows. 12. Subsequent Events The Company has evaluated events that occurred subsequent to September 30, 2009 through November 16, 2009, the date on which the financial statements for the period ended September 30, 2009 were issued. Except as disclosed in Note 8 to these financial statements, management concluded that no other events required disclosure in these financial statements. 14 DIRECT INSITE CORP. AND SUBSIDIARIES 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 10K 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 a Software as a Service provider ("SaaS"), 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 months ended September 30, 2009, IBM accounted for 33.7% and 32.4% of revenue, respectively, compared to 41.1% and 45.0% of revenue for the three and nine month periods ended September 30, 2008. The decrease in revenue from IBM is due to the decrease in services to IBM in Europe resulting from the discontinuance of one service IBM no longer required and a decrease in engineering services resulting from the completion of deploying the IOL service to all major geographies. For the three and nine months ended September 30, 2009, EDS an HP company ("EDS") accounted for 51.8% of revenue, compared to 45.1% and 46.3% of revenue for the three and nine month periods ended September 30, 2008. The increase in revenue from EDS results from an expansion of services. Siemens Shared Services LLC accounted for 10.3% and 10.9% of revenue for the three and nine month periods ended September 30, 2009, respectively, compared to 9.2% and 5.7% of revenue for the three and nine month periods ended September 30, 2008. The increase in revenue from Siemens resulted from deploying an additional service to Siemens in late 2008 and 2009. 15 DIRECT INSITE CORP. AND SUBSIDIARIES 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 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 ASC 605 "Revenue Recognition" ("ASC 605") 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, 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. 16 DIRECT INSITE CORP. AND SUBSIDIARIES SaaS Services - ------------- We provide transactional data processing services through our SaaS 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 SaaS 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 ASC 605. 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, 2009 and December 31, 2008, an allowance for doubtful accounts is not provided since, in the opinion of management, all accounts are deemed collectible. Impairment of Long-Lived Assets - ------------------------------- ASC 360 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 ASC 360 "Property, Plant and Equipment" 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, 2009 and 2008, respectively. Income Taxes - ------------ We currently have significant deferred tax assets. ASC 740 "Income Taxes", 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, accounting standards provide 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 10 to the Condensed Consolidated Financial Statements). 17 DIRECT INSITE CORP. AND SUBSIDIARIES 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 revenue and expenses during the reporting period. Certain items, among others, that are particularly sensitive to estimates are revenue recognition, stock based compensation, fair value of warrant liabilities 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, 2009 we had net income of $465,000 and $1,397,000, respectively, compared to net income of $418,000 and $3,721,000 for the three and nine month periods ended September 30, 2008, 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 months ended September 30, 2009 revenue decreased $35,000 (1.4%) to $2,474,000, compared to revenue of $2,509,000 for the three months ended September 30, 2008. The decrease was due to a decrease in engineering services revenue of $257,000 (52.1%), offset by an increase in recurring SaaS revenue of $222,000 (11.0%). The decrease in engineering services revenue was the result of a decrease in services to IBM, while the increase in recurring revenue resulted from increased recurring revenue from EDS and Siemens as a result of expanding the recurring services to these companies. For the nine months ended September 30, 2009, revenue increased $838,000 (12.3%) to $7,648,000, compared to revenue of $6,810,000 for the nine months ended September 30, 2008., This increase is primarily the result of an increase in our recurring SaaS IOL services revenue of $1,055,000 (18.6%) resulting from increases in services to EDS, Siemens and other customers. This increase was offset by a decrease in engineering services revenue of $217,000 (19.0%), as a result of substantially completing certain projects for EDS. Costs of operations, research and development decreased $122,000 (12.4%) to $862,000 for the three months ended September 30, 2009 compared to the same period in 2008. For the nine months ended September 30, 2009 cost of operations, research and development decreased $81,000 (2.9%) to $2,735,000 compared to costs for the nine months ended September 30, 2008. 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 cost for purchased services, network costs, costs of the production co-location facility and other expenses directly related to our custom engineering and SaaS production services. During the nine month period ended September 30, 2009 costs of goods sold increased $355,000 compared to costs for the same period in 2008 due to an increase in costs for purchased services for outsourcing certain services in support of a new IOL product offering to one customer. For the three months ended September 30, 2009 cost of goods sold decreased $9,000. Professional fees decreased $81,000 and $231,000 for the three and nine months ended September 30, 2009, respectively, compared to costs for such services in 2008. In 2008 the Company engaged contract development staff to support the implementation of a new service to one customer. Also during the three and nine months ended September 30, 2009, salaries and related costs decreased $60,000 and $207,000, respectively, compared to cost for the same periods in 2008 due to the reassignment of personnel to sales and marketing. For the three and nine month periods ended September 30, 2009, rents increased $31,000 and $46,000, respectively compared to costs for the same periods in 2008. The increase is principally due to an increase in costs for our collocations data centers. Other costs of operations, research and development decreased $3,000 and $44,000 for the three and nine months ended September 30, 2009, respectively, compared to other costs in the same periods in 2008. Sales and marketing costs increased $91,000 (33.3%) to $364,000 and $369,000 (53.3%) to $1,061,000 for the three and nine month periods ended September 30, 2009, compared to costs of $273,000 and $692,000 for the three and nine month periods ended September 30, 2008, respectively. The increase is due to an increase in personnel costs of $59,000 and $305,000 for the three and nine months ended September 30, 2009 compared to costs for the same periods in 2008. The increase in personnel costs is primarily due to the addition of personnel 18 DIRECT INSITE CORP. AND SUBSIDIARIES and the reassignment of personnel from other departments in support of new and continuing clients. All other sales and marketing costs increased $32,000 and $64,000 for the three and nine months ended June 30, 2009 compared to other costs for the same periods in 2008. General and administrative costs decreased $180,000 (24.1%) to $567,000 for the three months ended September 30, 2009, compared to costs of $747,000 for the same period in 2008. For the nine months ended September 30, 2009 these costs decreased $250,000 (11.4%) to $1,947,000 compared to costs for the nine months ended September 30, 2008. The decrease for the three months ended September 30, 2009 is principally due to a decrease in professional fees of $66,000, legal fees of $25,000 and audit fees of $28,000. In 2008 the Company had engaged an investment advisor which did not continue in 2009. All other costs decreased $61,000 net compared to the same period in 2008. For the nine months ended September 30, 2009 salaries and related costs decreased $75,000 primarily as a result of a decrease in stock compensation costs, and professional fees decreased $156,000 again the result of not engaging an investment advisor in 2009. All other general and administrative costs decreased $19,000 net compared to the same period in 2008. Amortization and depreciation expense was $87,000 and $277,000 for the three and nine months ended September 30, 2009, respectively, an increase of $13,000 (17.6%) and $50,000 (22.0%) over costs for the same periods in 2008. The increase is due to the purchase of equipment for our second collocation data center facility in late 2008 and the purchase of new accounting software in 2008. Other expense for the three and nine months ended September 30, 2009 consists of the change in the fair value of the warrant liability of $101,000 and $158,000, respectively. Interest expense, net, was $6,000 and $19,000 for the three and nine months ended September 30, 2009, respectively, compared to interest, net, of $0 and interest expense, net, of $11,000 for the same periods in 2008. The increase is principally due to an increase in borrowings to finance capital equipment acquisitions. Financial Condition and Liquidity Cash provided by operating activities for the nine months ended September 30, 2009 was $2,595,000 compared to cash provided by operating activities of $1,495,000 for the nine months ended September 30, 2008. This consisted of net income of $1,397,000, increased by non-cash income and expenses of $865,000, including depreciation and amortization of property and equipment of $277,000, stock-based compensation expense of $430,000 and the change in the fair value of the warrant liability of $158,000. In addition accounts receivable decreased by $265,000 and prepaid expenses decreased $57,000. Accounts payable and accrued expenses decreased $96,000, while deferred revenue increased $107,000. Cash used in investing activities was $43,000 for the nine months ended September 30, 2009, compared to $198,000 for same period in 2008. This was principally expenditures for equipment. Cash used in financing activities totaled $1,289,000 for the nine months ended September 30, 2009, compared to cash used in financing activities of $2,427,000 for the nine months ended September 30, 2008. In July 2009 we redeemed all of the Series B Redeemable Preferred stock for $974,000. We paid $282,000 in dividends on preferred stock and repaid $133,000 of long-term debt and capital lease obligations in the first nine months of 2009 and we received proceeds from the exercise of warrants of $100,000. Subsequent to September 30, 2009 we redeemed $1,000,000 of the Series C Redeemable Preferred stock. 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. 19 DIRECT INSITE CORP. AND SUBSIDIARIES 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, 2009 (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. The Company recently employed a qualified accountant and the Company expects that it will reassign certain responsibilities and tasks previously performed by the Chief Financial Officer and that this will improve internal disclosure controls and internal controls over financial reporting 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. 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. The Company believes that the employment of a qualified accountant as discussed above will improve internal control over financial reporting. 20 DIRECT INSITE CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. Exhibits 31 Certifications pursuant to Rules 13a-14(a)/15(d)-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 16, 2009 /s/ Michael J. Beecher - ------------------------------------------- Michael J. Beecher, Chief Financial Officer November 16, 2009 EX-31 2 dir10qsept09ex-31.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 report on Form 10-Q of Direct Insite Corp.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and 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 report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. Disclosed in this report any changes 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 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 the 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 control 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 control over financial reporting. November 16, 2009 /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 report on Form 10-Q of Direct Insite Corp.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and 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 report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. Disclosed in this report any changes 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 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 the 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 control 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 control over financial reporting. November 16, 2009 /s/ Michael J. Beecher --------------------------------------- Michael J. Beecher Chief Financial Officer EX-32 3 dir10qsept09ex-32.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, 2009 (the "Report") fully compliesm 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 16, 2009 /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, 2009 (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 16, 2009 /s/ Michael J. Beecher ---------------------- Michael J. Beecher Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----