10-Q 1 diri_10q.htm QUARTERLY REPORT diri_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
   
OR
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________

Commission file number: 0-20660
 
DIRECT INSITE CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
 
11-2895590
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
500 East Broward Boulevard, Suite 1550
Fort Lauderdale, Florida
 
33394
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:  (954) 510-3750

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 þ      No o

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 þ     No o
 
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
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 11, 2016, there were 13,002,652 shares of the registrant’s Common Stock outstanding.
 


 
 
 
 
 
DIRECT INSITE CORP.

TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
3-18
   
3
   
3
   
4
   
5
   
6
   
15
   
18
   
18
   
PART II. OTHER INFORMATION
19
   
19
   
19
   
19
   
19
   
19
   
19
   
19
   
 20
 
 
2

 
 
PART I – FINANCIAL INFORMATION
 

CONDENSED BALANCE SHEETS
(in thousands, except share data)

   
March 31,
2016
   
December 31,
2015
 
   
(Unaudited)
   
(Audited)
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 2,243     $ 2,375  
Accounts receivable
    1,599       1,444  
Prepaid expenses and other current assets
    426       405  
Total current assets
    4,268       4,224  
Property and equipment, net
    1,023       934  
Deferred tax assets
    1,195       1,195  
Other assets
    249       247  
Total assets
  $ 6,735     $ 6,600  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 1,464     $ 1,468  
Current portion of capital lease obligations
    2       11  
Deferred rent
    34       37  
Total liabilities
    1,500       1,516  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, $0.0001 par value; 2,000,000 shares authorized; none issued or outstanding
           
Common stock, $0.0001 par value; 50,000,000 shares authorized; 13,022,646 and 12,979,536 shares issued and 12,982,719 and 12,939,609 shares outstanding in 2016 and 2015, respectively
    1       1  
Additional paid-in capital
    116,518       116,478  
Accumulated deficit
    (110,956 )     (111,067 )
Common stock in treasury, at cost; 24,371 shares in 2016 and 2015
    (328 )     (328 )
Total stockholders’ equity
    5,235       5,084  
Total liabilities and stockholders’ equity
  $ 6,735     $ 6,600  
 
See notes to condensed financial statements.
 
 
3

 
 
CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except per share data)

   
For the three months ended
 
   
March 31,
2016
   
March 31,
2015
 
Revenues:
           
Recurring
  $ 1,500     $ 1,707  
Non-recurring
    275       353  
Total revenues
    1,775       2,060  
Operating costs and expenses:
               
Operations, research and development
    736       893  
General and administrative
    590       617  
Sales and marketing
    276       385  
Amortization and depreciation
    61       80  
Total operating costs and expenses
    1,663       1,975  
Operating income
    112       85  
Other expense, net
    1       1  
Income before provision for income taxes
    111       84  
Provision for income taxes
    -       4  
Net income
  $ 111     $ 80  
                 
Basic income per share
  $ 0.01     $ 0.01  
                 
Diluted income per share
  $ 0.01     $ 0.01  
                 
Basic weighted average common stock outstanding
    12,928       12,792  
                 
Diluted weighted average common stock outstanding
    12,928       12,802  
 
See notes to condensed financial statements.
 
 
4

 
 
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)

   
For the three months ended
 
   
March 31,
2016
   
March 31,
2015
 
Cash flows from operating activities
           
Net income
  $ 111     $ 80  
Adjustments to reconcile net income  to net cash provided by operations:
               
Amortization and depreciation
    61       80  
Stock-based compensation expense
    40       50  
Deferred rent expense
    (3 )     (1 )
                 
Changes in operating assets and liabilities:
               
Accounts receivable
    (155 )     486  
Prepaid expenses and other current assets
    (23 )     (15 )
Accounts payable and accrued expenses
    (4 )     (135 )
Deferred revenue
    -       (31 )
Total adjustments
    (84 )     434  
Net cash provided by operating activities
    27       514  
                 
Cash flows used in investing activities:
               
Expenditures for property and equipment
    (50 )     --  
Capitalization of internally developed software
    (100 )     (37 )
                 
Net cash used in investing activities
    (150 )     (37 )
                 
Cash flows used in financing activities:
               
Repayment of capital lease obligations
    (9 )     (5 )
                 
Net increase (decrease) in cash and cash equivalents
    (132 )     472  
Cash and cash equivalents – beginning
    2,375       871  
Cash and cash equivalents – ending
  $ 2,243     $ 1,343  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 1     $ 1  
                 
Schedule of non-cash investing and financing activities:
               
Issuance of common stock in settlement of accrued directors’ fees
  $ -     $ 103  
 
See notes to condensed financial statements.
 
 
5

 
 
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 1 – Nature of Business

Direct Insite Corp. (“Direct Insite” or the “Company”) operates as a Software as a Service (“SaaS”) provider, providing financial supply chain automation and workflow efficiencies within the Procure-to-Pay and Order-to-Cash processes. Specifically, Direct Insite’s global electronic invoice (“e-invoice”) management services automate complex manual business processes such as invoice validation, order matching, consolidation, dispute handling, and e-payment processing in a business-to-business transaction based “fee for services” business model.

The Company’s revenue comes from (i) recurring, on-going services that are billed monthly and (ii) non-recurring, professional services derived from the configuration of the Company’s software platform.

Throughout the year, the Company operated redundant data centers in Miami, Florida, and Amsterdam, Netherlands.

As described in Note 9, the Company has three major customers that accounted for 82.1%, and 80.4% of the Company’s revenue for the three months ended March 31, 2016 and 2015, respectively.  Loss of any of these customers would have a material effect on the Company.

In November 2015, we were notified by HP Enterprise Services (“HPE”) that one of its clients, representing approximately 11.0% and 14.2% of our revenue for the three months ended March 31, 2016 and 2015, respectively, was terminating its contract with HPE effective February 23, 2016.  As disclosed in our Current Report on Form 8-K filed with the SEC on February 19, 2016, despite efforts to negotiate a direct contractual agreement with this client, the client ultimately decided to terminate its use of our services, and accordingly, the Company does not expect to record revenue from this client after February 2016.
 
Note 2 - Summary of Significant Accounting Policies

Interim Financial Information

The accompanying unaudited condensed interim financial statements include the accounts of Direct Insite. The condensed balance sheet as of March 31, 2016, and the statements of operations and cash flows for the three months ended March 31, 2016 and 2015 have not been audited.  These unaudited condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to quarterly report on Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  The December 31, 2015 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.  These interim condensed 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 months ended March 31, 2016, are not necessarily indicative of results that may be expected for any other interim period or for the full year.

These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 22, 2016.

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 financial statements, as well as the reported amounts of revenue and expenses during the reporting period.
 
 
6

 
DIRECT INSITE CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 2 - Summary of Significant Accounting Policies (continued)

Use of Estimates (continued)

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.  The most significant estimates are used in the accounting related to stock based compensation, the valuation allowance on deferred tax assets and capitalized internally developed software.  Actual results could differ from those estimates.

Revenue Recognition

The Company records revenue in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”), and SEC Staff Accounting Bulletin Topic 13, Revenue Recognition in Financial Statements.  Revenue is recognized when it is both earned and realizable, that is, when the following criteria are met:

persuasive evidence of arrangements exist;
 
delivery has occurred or services have been rendered;
 
the seller’s price is fixed and determinable; and
 
collectability is reasonably assured.

The following are the specific revenue recognition policies for each major category of revenue.

Recurring (Ongoing Services)

The Company provides transactional data processing services through its SaaS software solutions to its customers.  The customer is charged a monthly fixed rate on a per transaction basis or a fixed fee based on monthly transaction volumes.  Revenue is recognized as the services are provided.

Non-Recurring (Professional Services)

The Company provides non-recurring engineering services to its customers, which may include initial or additional development, modification, and customization services to the Company’s software platform.  Such services are billed based on: (i) hourly rates; or (ii) milestone billings.  For hourly billed services, revenue is recognized when work is performed.  For milestone billed services, revenue is recognized when the project milestone has been accepted by the customer.  The Company does not sell software licenses, upgrades or enhancements, or post-contract customer services.

Internally Developed Software

The Company released the first phase of PAYBOX®, a next generation version of its accounts receivable platform in November 2014.  It was designed for a global bank and is available to all Order-to-Cash process customers.  According to ASC 350-40, Intangibles-Goodwill and Other-Internal-Use Software, the Company is able to capitalize the costs associated with the application development stage of a project.  The Company started amortizing capitalized costs when the software was ready for use and placed in service in November 2014.  The capitalized costs are being amortized on a straight-line basis over the estimated five year useful life of the software.  As additional functionality is added, costs incurred are capitalized in accordance with professional standards.  Precontract software development costs are generally charged to operating costs and expenses as incurred, however, in accordance with professional standards the Company defers precontract costs when such costs are directly associated with specific anticipated contracts for which recovery is probable.
 
 
7

 
DIRECT INSITE CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 2 - Summary of Significant Accounting Policies (continued)

Income Taxes

The Company accounts for income taxes using the asset and liability method.  This 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.  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 statement of income, 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.

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 earnings per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
 
The computation of basic and diluted earnings per share for the three months ended March 31, 2016 and 2015 is as follows (in thousands):
 
   
For the three months ended March 31,
 
   
2016
   
2015
 
Basic weighted average shares outstanding……...
    12,928       12,792  
Restricted stock grants                                                           
     -        10  
Weighted average shares outstanding-diluted
    12,928       12,802  
 
The weighted average securities that could potentially dilute basic EPS in the future, that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented, consists of the following (in thousands):
 
   
For the three months ended March 31,
 
   
2016
   
2015
 
Options to purchase common stock                                                           
    563       629  
Restricted stock grants                                                           
    225       14  
Potential anti-dilutive common stock                                                           
    788       643  

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, and accounts receivable.  The Company has cash deposits in excess of the maximum amounts insured by the Federal Depository Insurance Corporation at March 31, 2016 and December 31, 2015.

The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers.  Concentrations of credit risk with respect to accounts receivable and revenue are disclosed in Note 9.
 
 
8

 
DIRECT INSITE CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 2 – Summary of Significant Accounting Policies (continued)

Recently Issued and Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company has elected to adopt this standard early and applied it as of January 1, 2016, with no significant impact on our financial statements.
 
Note 3 – Property and Equipment

Property and equipment consist of the following at March 31, 2016 and December 31, 2015:

   
2016
   
2015
 
   
(in thousands)
 
Computer equipment and purchased software (3 years)
  $ 1,428     $ 1,378  
Internally developed software either placed or not yet placed in service  (5 years)
    1,201       1,101  
Furniture and fixtures and leasehold improvements (5 – 7 years)
    159       159  
      2,788       2,638  
Less: accumulated depreciation and amortization                                                                               
    (1,765 )     (1,704 )
Property and equipment, net                                                                               
  $ 1,023     $ 934  

Depreciation and amortization expense related to property and equipment for the three months ended March 31, 2016 and 2015 was approximately $61,000 and $80,000, respectively.
 
Note 4 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following at March 31, 2016 and December 31, 2015 as follows:
 
   
2016
   
2015
 
   
(in thousands)
 
Trade accounts payable                                                                               
  $ 316     $ 262  
Sales taxes payable                                                                               
    539       539  
Accrued directors’ fees                                                                               
    385       377  
Other accrued expenses                                                                               
    224       290  
Total accounts payable and accrued expenses                                                                               
  $ 1,464     $ 1,468  

 
9

 
DIRECT INSITE CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 5 – Capital Lease Obligations

The Company has equipment under two capital lease obligations expiring at various times through June 2016.  The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair values of the assets.

The implied interest rates related to these capital leases range from 7.4% to 8.9%. The gross book value and the net book value of the related assets are approximately $77,000 and $8,000, respectively, as of March 31, 2016, and $77,000 and $21,000, respectively, as of December 31, 2015.  Amortization of assets under capital leases is included in depreciation expense.
 
Note 6 – Stockholders’ Equity
 
Preferred Stock

The Company is authorized to issue 2,000,000 shares of preferred stock, of which none were issued or outstanding as of March 31, 2016 and December 31, 2015.

Common Stock, Options and Stock Grants

Three Months Ended March 31, 2016

During the three months ended March 31, 2016, 161,812 restricted common shares were granted with an aggregate grant date fair value of approximately $100,000.  During the three months ended March 31, 2016, approximately 43,110 restricted common shares with an aggregate grant date fair value of approximately $29,374 vested.

During the three months ended March 31, 2016, the Company recognized $11,000 of stock-based compensation related to the vesting of stock options.

Three Months Ended March 31, 2015
 
During the three months ended March 31, 2015, 135,000 restricted common shares were granted with an aggregate grant date fair value of approximately $100,000.  During the three months ended March 31, 2015, approximately 27,000 restricted common shares with an aggregate grant date fair value of approximately $22,000 vested.

During the quarter ended March 31, 2015, the Company issued 111,602 shares of restricted common stock pursuant to the Company’s Directors’ Deferred Compensation Plan dated January 1, 2008 (the “Directors’ Deferred Compensation Plan”).  These shares were issued to settle approximately $103,175 of accrued directors’ fees to two former directors for past services.

During the three months ended March 31, 2015, 41,557 stock options with an aggregate grant date fair value of approximately $28,000 vested. During this same period 90,000 options were awarded to employees. Outstanding options vest over a four year period, with 25% vesting on the first anniversary of the grant date and the remaining 75% vesting in equal monthly amounts through the fourth anniversary of the grant date. The options granted in this quarter vest over three years with 33% vesting at the end of each of the three years. These options have a five year term.  The Company estimates the grant date fair value of the stock option using the Black-Scholes-Merton option model and the following assumptions:  volatility of 90%, risk free rate of 0.89%, dividend rate of zero, and expected term of 3.75 years.  The grant date fair value of the stock options issued was determined to be approximately $44,100.

 
10

 
DIRECT INSITE CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 6 – Stockholders’ Equity (continued)
 
Stock Option Plans

The Company has granted options under multiple stock-based compensation plans that do not differ substantially in the characteristics of the awards.  Nonqualified and incentive stock options have been granted to directors, officers and employees of the Company under the Company’s stock option plans.  Options generally vest over three to four years and expire five years from the date of the grant.  On June 3, 2014, the Company’s stockholders approved the adoption of the 2014 Stock Incentive Plan (the “2014 Plan”).  The 2014 Plan replaces the 2004 Stock Option/Stock Issuance Plan which expired on August 20, 2014.  The 2014 Plan provides for the grant of non-qualified stock options, incentive stock options, and stock appreciation rights, shares of restricted stock, stock units and shares of unrestricted stock.  Eligible participants include officers, employees and directors.  The aggregate number of shares authorized for issuance under the 2014 Plan is 1,200,000, and is subject to adjustment as described in the 2014 Plan.  As of March 31, 2016, 651,464 shares were available for issuance under the 2014 plan.  Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans.

The following is a summary of stock option activity for three months ended March 31, 2016, relating to all of the Company’s common stock plans:
 
               
Weighted Average
       
         
Weighted
   
Remaining
       
   
Shares
   
Average Exercise
   
Contractual Term
   
Aggregate Intrinsic Value
 
   
(in thousands)
   
Price
   
(in years)
   
(in thousands)
 
Outstanding at January 1, 2016
    600     $ 1.24       2.10     $ --  
Forfeited
     (100 )   $ 1.65                  
Outstanding at March 31, 2016
    500     $ 1.16       1.71     $ --  
Exercisable at March 31, 2016
    400     $ 1.17       0.99     $ --  

The following table summarizes stock option information as of March 31, 2016:
 
Outstanding Options
       
Weighted Average
   
   
Number Outstanding
 
Remaining
 
Options Exercisable
Exercise Prices
 
(in thousands)
 
Contractual Life
 
(in thousands)
$0.90
 
90
 
4.00 Years
 
30
$1.15
 
310
 
0.88 years
 
306
$1.20
 
20
 
0.23 years
 
20
$1.50
 
80
 
2.72 years
 
44
Total
 
500
 
1.71 years
 
400

As of March 31, 2016, there was approximately $56,000 of unrecognized compensation costs related to stock options outstanding.

 
11

 
DIRECT INSITE CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 6 – Stockholders’ Equity (continued)

Restricted Stock Grants

A summary of the status of the Company’s non-vested stock grants as of March 31, 2016 and changes during the three months ended March 31, 2016 is presented below:

Non-Vested Shares
 
Shares
(in thousands)
   
Weighted-Average
Grant Date Fair Value
 
Non-Vested at January 1, 2016
    78     $ 0.74  
Granted
    161     $ 0.62  
Vested
    (43 )   $ 0.68  
Non-Vested at March 31, 2016
    196     $ 0.65  
 
The future expected expense as of March 31, 2016 for non-vested shares is approximately $128,000 and will be recognized as expense through December 31, 2017.
 
Note 7 – Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim period, disclosure and transition.  There were no unrecognized tax benefits as of March 31, 2016 and December 31, 2015.

The Company has identified its federal tax return and its state tax return in Florida as “major” tax jurisdictions, as defined in ASC 740.  Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.  The Company’s evaluation was performed for tax years ended 2012 through 2015, the only periods subject to examination.  The Company believes that its income tax positions and deductions would be sustained upon audit and does not anticipate any adjustments that would result in a material change to its financial position.  The Company has elected to classify interest and penalties incurred on income taxes, if any, as income tax expense.  No interest or penalties on income taxes have been recorded during the three months ended March 31, 2016 and 2015.  The Company does not expect its unrecognized tax benefit position to change during the next twelve months.  Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
 
 As of March 31, 2016, the Company has federal and state net operating loss carryforwards (“NOLs”) remaining of approximately $25 million and $20 million, respectively, which may be available to reduce taxable income, if any. Remaining federal and state net operating loss carry forwards expire from 2019 through 2035. However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company.  During 2015, the Company performed an evaluation as to whether a change in control had taken place.  Management believes that there has been no change in control in accordance with Section 382.  However, if it is determined that an ownership change has taken place, either historically or in the future, utilization of its NOLs could be subject to severe limitations, which could eliminate a substantial portion of the future income tax benefits of the NOLs.  The NOL carryforward as of March 31, 2016 included approximately $1,193,000 related to windfall tax benefits for which a benefit would be recorded in additional paid-in capital if and when realized.

 
12

 
DIRECT INSITE CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 8 –Commitment and Contingencies

The Company had an employment agreement with Matthew E. Oakes, Chief Executive Officer and Chairman of the Board of Directors, for a term effective June 1, 2013 through December 31, 2015.  On February 20, 2015, Mr. Oakes’ employment agreement was superseded by a new employment agreement extending the term through December 31, 2017.  The agreement provides for a base salary of $24,583 per month, discretionary and annual incentive bonuses based on the Company’s performance in achieving prescribed revenue and earnings before interest and taxes (“EBIT”) targets.  The agreement also provides for reimbursement of all out-of-pocket expenses reasonably incurred by him in the performance of his duties hereunder and certain severance benefits in the event of termination prior to the expiration date.  If Mr. Oakes is terminated without cause or resigns from employment for “good reason” (as defined within Mr. Oakes’ employment agreement), he would receive one year of base salary and COBRA coverage at the Company’s expense.  The Company shall continue to make lease payments on the corporate apartment located in Fort Lauderdale, Florida and utilized by Mr. Oakes through the date of termination of such lease on December 31, 2017.
 
Note 9 – Major Customers
 
Three customers, HP Enterprise Services (“HPE”), inclusive of its underlying customers, International Business Machines Corp. (“IBM”) and one other customer, accounted for a significant portion of the Company’s revenues as follows:

   
% of Total Revenues
 Three Months Ended
 March 31,
 
   
2016
   
2015
 
HPE Customer A                                        
    11.0 %     14.2 %
HPE Customer B                                        
    13.2       11.2  
HPE Customer C                                        
    7.9       6.2  
Total HPE                                        
    32.1 %     31.6 %
IBM                                        
    38.3       39.7  
Other Major Customer                                        
    11.7       9.1  
Total Major Customers                                        
    82.1 %     80.4 %
Others                                        
    17.9       19.6  
Total                                        
    100.0 %     100.0 %

In November 2015, the Company was notified by HPE that one of its clients (HPE Customer A above) was terminating its contract with HPE effective February 23, 2016. Despite the Company’s efforts to negotiate a direct contractual agreement with this client, the client ultimately decided to terminate its use of the Company’s services as of that date.
 
As of March 31, 2016 and December 31, 2015, HPE and IBM, along with one other major customer, accounted for a significant portion of the Company’s accounts receivable as follows (in thousands):

   
2016
   
2015
 
Total HPE
  $ 735     $ 389  
IBM
    453       467  
One Other Major Customer
    208       224  
Total
  $ 1,396     $ 1,080  
 
 
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DIRECT INSITE CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 10 – Subsequent Events
 
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed financial statements.
 
 
 
 
 
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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 our 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 such words or expressions relate to us or our 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, our 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, expansion of international operations, current economic conditions, the risk of errors or failures in our software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel, and dependence on key personnel.  Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph.

OVERVIEW

The Company was incorporated under the laws of the State of Delaware on August 27, 1987.  We consummated our initial public offering in 1992.  In May 1990, we changed our name to Computer Concepts, Inc. and in August 2000, we changed our name to Direct Insite Corp.

Direct Insite operates as a SaaS, providing best practice financial supply chain automation and workflow efficiencies within the Order-to-Cash and Procure-to-Pay processes. Specifically, Direct Insite’s global e-invoice management services automate complex manual business processes such as invoice validation, order matching, consolidation, dispute handling, and e-payment processing in a business-to-business transaction based “fee for services” business model.

Through the automation and workflow of Order-to-Cash and Procure-to-Pay processes and the presentation of invoices, orders, and attachment data via a self-service portal, Direct Insite is helping our customers reduce manual invoice-to-order reconciliation costs, reduce the frequency of inquiries and disputes, improve cash flow, increase competitiveness and improve customer satisfaction.

Direct Insite is currently delivering service and business value across the Americas, Europe, and Asia, including more than 100 countries, in 17 languages and multiple currencies.  Direct Insite processes more than $160 billion in invoice value annually on behalf of our clients.  Direct Insite processes, distributes and hosts millions of invoices, purchase orders, and supporting attachment documents, making them accessible on-line with an internet self-service portal.  Suppliers, customers, and internal departments, such as Finance and Accounting or Customer Service users, can easily access their business documents.

Our revenue comes from (i) recurring, on-going services that are billed monthly; and (ii) non-recurring, professional services derived from the configuration of our software platform.

HP Enterprise Services (“HPE”) accounted for approximately 32.1% and 31.6% of revenue for the three months ended March 31, 2016 and 2015, respectively. As of December 31, 2015, we had three principal contracts with HP providing e-invoice services.  These contracts have terms ranging from one to five years.  The contracts may be terminated by either party with ninety days advance written notice.   In November 2015, we were notified by HPE that one of its clients, representing approximately 11.0% and 14.2% of our revenue for the three months ended March 31, 2016 and 2015, respectively was terminating its contract with HPE effective February 23, 2016.  As disclosed in our Current Report on Form 8-K filed with the SEC on February 19, 2016, despite efforts to negotiate a direct contractual agreement with this client, the client ultimately decided to terminate its use of our services, and accordingly, the Company does not expect to record revenue from this client after February 2016.

 
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International Business Machines, Inc. (“IBM”), representing approximately 38.3% and 39.7%, of revenue for the three months ended March 31, 2016 and 2015, respectively, utilizes our suite of services to allow its customers from around the globe to receive, analyze, dispute and cost allocate all of their invoice data in their local language and currency via the internet.  We have two principal contracts with IBM to provide e-invoice services for substantially all of IBM’s operating units. On October 28, 2013 one of these contracts was extended for a three year period, through December 31, 2016, and is renewable annually thereafter. The other contract was renewed through December 31, 2016, and is renewable annually thereafter.  The contracts may be terminated by either party with ninety days advance written notice.

We have one other customer, representing approximately 11.7% and 9.1% of our revenue for the three months ended March 31, 2016 and 2015, respectively.  This customer utilizes our accounts payable automation solution and is contracted with us through December 2019.
 
SEASONALITY / QUANTITY FLUCTUATIONS

Revenue from SaaS ongoing services generally is not subject to fluctuations or seasonal flows.  However, we believe that revenue derived from custom engineering services will have a significant tendency to fluctuate based on customer demand.

Other factors, including, but not limited to, new service introductions, domestic and global economic conditions, customer budgetary considerations, and the timing of service upgrades may create fluctuations.  As a result of the foregoing factors, our operating results for any quarter are not necessarily indicative of results for any future period.

RESULTS OF OPERATIONS

The following is a summary of our operating results for the three months ended March 31, 2016 and 2015 (dollars in thousands):

   
2016
   
2015
   
Increase (Decrease)
 
Revenues:
                       
Recurring
  $ 1,500     $ 1,707     $ (207 )     (12.1 )%
Non-recurring
    275       353       (78 )     (22.1 )%
Total revenues
    1,775       2,060       (285 )     (13.8 )%
                                 
Operating costs and expenses:
                               
Operations, research and development
    736       893       (157 )     (17.6 )%
General and administrative
    590       617       (27 )     (4.4 )%
Sales and marketing
    276       385       (109 )     (28.3 )%
Amortization and depreciation
    61       80       (19 )     (23.8 )%
Total operating costs and expenses
    1,663       1,975       (312 )     (15.8 )%
                                 
Operating income
    112       85       27       31.8 %
                                 
                                 
Other expense, net
    1       1       -       0.0 %
Provision for income taxes
    -       4       (4 )     (100.0 )%
                                 
Net income
  $ 111     $ 80     $ 31       38.8 %
 
Revenues

For the three months ended March 31, 2016, total revenue decreased by $285,000, or 13.8%, to $1,775,000 from $2,060,000 for the comparable prior year period.  Recurring revenue decreased by $207,000, or 12.1%, to $1,500,000 for the three months ended March 31, 2016, from $1,707,000 for the comparable prior year period, due to the February 2016 termination of the HPE customer previously noted and lower volume at certain other customers.  Non-recurring revenue decreased by $78,000, or 22.1%, to $275,000 for the three months ended March 31, 2016, from $353,000 for the three months ended March 31, 2015, as the non-recurrence of large prior year professional services fees were only partially offset by higher charges for the facilitation of scanning services.
 
 
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Operating Cost and Expenses

Costs of operations, research and development decreased by approximately $157,000, or 17.6%, to $736,000 for the three months ended March 31, 2016 from $893,000 for the comparable prior year period. These costs consist principally of salaries and related expenses for software development, programming, custom engineering, network services, and quality control and assurance.  Also included are costs for purchased services, network costs, costs of the production co-location facilities and other expenses directly related to our custom engineering and SaaS services.  A headcount-related decrease in salary expense, was mostly offset by less costs capitalized for internally developed software and higher scanning charges.

General and administrative costs decreased by approximately $27,000, or 4.4%, to $590,000 for the three months ended March 31, 2016 from $617,000 for the comparable prior year period, as higher payroll costs and professional fees were partially offset by the non-recurrence of the prior period’s legal and other expenses.

Sales and marketing costs decreased by approximately $109,000, or 28.3%, to $276,000 for the three months ended March 31, 2016 from $385,000 for the comparable prior year period, primarily due to a decrease in trade show (timing-related) and sales compensation expense.

Amortization and depreciation decreased by approximately $19,000, or 23.8%, to $61,000 for the three months ended March 31, 2016 from $80,000 for the comparable prior year period, due to existing assets that became fully depreciated during 2015.

Operating Income

We had net operating income of $112,000 for the three months ended March 31, 2016, compared to net operating income of $85,000 for the comparable prior year period, due to the aforementioned decrease in operating costs and expenses, partially offset by the decline in revenue.
 
Other Expense

Other expense remained the same at $1,000 for the three months ended March 31, 2016 from $1,000 for the comparable prior year period.  No provision for income taxes was recorded during the first quarter of 2016 as compared with a provision of $4,000 in the prior year first quarter.

Net Income

We had net income of $111,000 for the three months ended March 31, 2016, an increase of approximately $31,000 from net income of $80,000 for the comparable prior year period, due to the aforementioned increase in operating income.
 
FINANCIAL CONDITION AND LIQUIDITY

As of March 31, 2016, we had total stockholders’ equity of approximately $5,235,000, working capital of $2,768,000 and an accumulated deficit of $110,956,000.  Our cash decreased by $132,000 during the three months ended March 31, 2016, to $2,243,000 on hand as of March 31, 2016, with a corresponding increase in trade accounts receivable of $155,000 for a total receivable of $1,599,000.

Our primary sources for liquidity come from existing cash on hand and cash generated from operations.  We believe we have sufficient liquidity available to fund our operations for the next twelve months.

During the three months ended March 31, 2016, cash provided by operations was $27,000, compared to cash provided by operations of $514,000 for the three months ended March 31, 2015.  The decrease in cash provided by operations is primarily due to the timing of collections from our customers and the timing of payments to our vendors.
 
 
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Cash used in investing activities totaled $150,000 and $37,000 for the three months ended March 31, 2016 and 2015, respectively, with both periods reflecting the capitalization of internally developed software and 2016 reflecting the purchase of property and equipment.

Cash used in financing activities totaled $9,000 and $5,000 for the three months ended March 31, 2016 and 2015, respectively, with both periods reflecting payments on capital leases, primarily using cash provided by operations.
 
OUR CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are described in the audited financial statements and notes thereto for the year ended December 31, 2015, included in the Company’s Annual Reported on Form 10-K filed with the SEC on March 22, 2016.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.


Not applicable.


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act).  Based upon this evaluation our Chief Executive Officer and Chief Financial Officer concluded that, at March 31, 2016, our disclosure controls and procedures were effective.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II    Other Information
 

We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on our business, and no such proceedings are known to be contemplated.

 
Not required.


Pursuant to the terms of the Company’s director compensation plan, each non-officer director of the Company was entitled to receive an award on January 1, 2016 of restricted shares of common stock vesting daily over two years, as follows: James A. Cannavino, Paul Lisiak, Thomas C. Lund, and John J. Murabito, each 40,453 shares.  These directors elected to defer receipt of the shares until January 15th of the year following such director’s termination of services as director.

In addition, on March 31, 2016, pursuant to the terms of the director compensation plan, each of Mr. Cannavino, Mr. Lund, and Mr. Murabito were granted 3,731 shares.  These directors elected to defer receipt of the shares until January 15th of the year following such director’s termination of services as director.

These awards were made in reliance on Section 4(a)(2) under the Securities Act of 1933, as amended and/or the “no-sale” theory.

 
None.


Not applicable.


None.

 
Exhibit No.   Description
     
10.1   Employment Agreement, effective January 1, 2015 by and between Direct Insite Corp. and Matthew E. Oakes (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 24, 2015).
     
31.1   Certification pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer.
     
31.2   Certification pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.
     
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer.
     
32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.
     
101   The following materials from Direct Insite’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of March 31, 2016 (Unaudited) and December 31, 2015, (ii) Condensed Statements of Income for the Three Months Ended March 31, 2016 and 2015 (Unaudited), (iii) Condensed Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited), (iv) and Notes to Condensed Financial Statements (Unaudited).
 
 
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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.  
       
May 11, 2016
By:
/s/ Matthew E. Oakes  
    Matthew E. Oakes  
    Chief Executive Officer  
       
       
May 11, 2016
By:
/s/ Lowell M. Rush  
    Lowell M. Rush  
    Chief Financial Officer  

 
 
 
 
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