EasyLink Services International 10Q 2007 Q3 Quarterly report

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 April 30, 2007

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: 000-24996

INTERNET COMMERCE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		13-3645702
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

6025 The Corners Parkway, Suite 100
Norcross, Georgia		30092
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (678) 533-8000

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 o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated Filer o

Non-accelerated filer x

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

As of June 4, 2007, the Registrant had outstanding 23,113,056 shares of class A common stock.

INDEX TO FORM 10-Q

		PAGE

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of April 30, 2007 (unaudited) and July 31, 2006	3

	Condensed Consolidated Statements of Operations for the three and nine months ended April 30, 2007 (unaudited) and April 30, 2006 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2007 (unaudited) and April 30, 2006 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

Item 4.	Controls and Procedures	20

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Submission of Matters to a Vote of Security Holders	26

Item 5.	Other Information	26

Item 6.	Exhibits	26

SIGNATURES		27

EXHIBIT INDEX		28

CERTIFICATIONS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

	April 30,			July 31,
	2007			2006
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,046,612		$	6,988,753
Accounts receivable, net of allowance for doubtful accounts and allowance for sales returns and allowances of $447,635 and $458,061, respectively	4,106,314			3,631,135
Prepaid expenses and other current assets	684,422			461,778
Total current assets	11,837,348			11,081,666

Restricted cash	433,478			432,974
Property and equipment, net	1,058,023			1,113,701
Goodwill	6,168,883			6,148,332
Other intangible assets, net	4,000,474			4,829,772
Other assets	40,554			37,822
Total assets	$	23,538,760		$	23,644,267

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	397,927		$	662,151
Accrued expenses	888,717			574,783
Accrued dividends – preferred stock	65,753			232,329
Deferred revenue	237,237			261,214
Lease liability from acquisition	266,448			249,940
Other current liabilities	134,950			116,280
Total current liabilities	1,991,032			2,096,697

Long-term lease liability from acquisition	776,102			967,442
Total liabilities	2,767,134			3,064,139

Stockholders’ equity:
Preferred stock – 5,000,000 shares authorized, 5,000 and 10,000 shares of series C, respectively, and 250 shares of series D:
Series C – par value $.01 per share, 44.76 votes per share; 5,000 shares issued and outstanding (liquidation value of $5,065,753) and 10,000 shares issued and outstanding (liquidation value of $10,232,329), respectively	50			100
Series D – par value $.01 per share, 769 votes per share; 250 shares issued and outstanding (liquidation value of $250,000)	3			3
Common stock:
Class A - par value $.01 per share, 40,000,000 shares authorized, one vote per share; 22,958,674 and 22,712,944 shares issued and outstanding, respectively	229,587			227,129
Class B - par value $.01 per share, 2,000,000 shares authorized, six votes per share; none issued and outstanding	—			—
Additional paid-in capital	101,402,629			103,042,746
Accumulated deficit	(80,860,643		)	(82,689,850		)
Total stockholders’ equity	20,771,626			20,580,128
Total liabilities and stockholders’ equity	$	23,538,760		$	23,644,267

See notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Operations (Unaudited)

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2007			2006			2007			2006

Service revenues	$	5,390,270		$	4,535,316		$	16,500,465		$	14,565,388

Expenses:
Cost of services	1,999,118			1,578,825			5,828,093			5,234,404
Product development and enhancement	595,836			192,090			1,898,177			502,001
Selling and marketing	379,589			566,795			1,268,905			1,559,452
General and administrative	1,780,780			1,715,360			5,609,905			5,650,155

	4,755,323			4,053,070			14,605,080			12,946,012

Operating income	634,947			482,246			1,895,385			1,619,376

Other income (expense):
Interest and investment income	69,856			74,634			233,542			134,867
Interest expense	(18,791		)	(23,044		)	(59,065		)	(136,338		)
Other income (expense)	288			27,043			(21,288		)	54,594
	51,353			78,633			153,189			53,123

Income before income taxes	686,300			560,879			2,048,574			1,672,499

Provision for income taxes, current	135,097			10,723			219,367			27,895

Net income	551,203			550,156			1,829,207			1,644,604

Dividends on preferred stock	(48,767		)	(97,534		)	(233,425		)	(299,178		)
Extinguishment of dividends on retired preferred stock	—			—			200,000			—

Income attributable to common stockholders	$	502,436		$	452,622		$	1,795,782		$	1,345,426

Basic income per common share	$	0.02		$	0.02		$	0.08		$	0.07

Diluted income per common share	$	0.02		$	0.02		$	0.07		$	0.07

Anti-dilutive stock options, warrants, and series C preferred stock outstanding	2,371,473			1,075,057			1,482,592			1,600,841

Weighted average number of common shares outstanding – basic	22,823,776			20,370,591			22,759,581			19,982,232

Weighted average number of common shares outstanding –diluted	24,234,565			22,943,061			24,674,040			21,900,688

See notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended April 30,
	2007			2006
Cash flows from operating activities:
Net income	$	1,829,207		$	1,644,604
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,517,310			822,026
Bad debt expense	364,610			597,023
Non-cash interest expense	58,958			136,900
Loss on disposal of fixed assets	52			—
Non-cash charges for equity instruments issued for compensation and services	694,889			554,283
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable	(798,873		)	(71,885		)
Prepaid expenses and other assets	(222,096		)	(1,585		)
Accounts payable	(264,224		)	125,959
Accrued expenses	298,933			(848,878		)
Deferred revenue	(23,977		)	(16,220		)
Other liabilities	(215,119		)	(819,150		)

Net cash provided by operating activities	3,239,670			2,123,077

Cash flows from investing activities:
Payment for purchase of acquisitions, net of cash acquired	(300,000		)	(886,619		)
Additional costs of previous acquisition	(20,551		)	(65,000		)
Purchases of property and equipment	(361,341		)	(410,823		)

Net cash used in investing activities	(681,892		)	(1,362,442		)

Cash flows from financing activities:
Payments of capital lease obligations	—			(3,645		)
Payment to reacquire class A common stock	(613,587		)	—
Payment to reacquire series C preferred stock	(2,261,413		)	—
Proceeds from exercise of warrants	247,564			3,002,701
Proceeds from exercise of employee stock options	127,517			646,876

Net cash provided by (used in) financing activities	(2,499,919		)	3,645,932

Net increase in cash and cash equivalents	57,859			4,406,567

Cash and cash equivalents, beginning of period	6,988,753			3,983,005

Cash and cash equivalents, end of period	$	7,046,612		$	8,389,572

Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	—		$	216
Cash paid for income taxes during the period	251,158			113,184

Supplemental disclosure of noncash investing activity:
Payment for purchase of acquisition	—			23,300

Supplemental disclosure of noncash financing activity:
Issuance of 20,283 shares of class A common stock upon exercise of Warrants	—			203
Issuance of 50,117 shares of class A common stock upon exercise of 355,713 stock options	—			501
Issuance of common stock for dividends on preferred stock	200,000			400,000

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The accompanying unaudited condensed consolidated financial statements of Internet Commerce Corporation (the “Company” or “ICC”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. In the opinion of management, such statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods indicated. Pursuant to the requirements of the Securities and Exchange Commission (the “SEC”) applicable to Quarterly Reports on Form 10-Q, the accompanying financial statements do not include all the disclosures required by GAAP for annual financial statements. While the Company believes that the disclosures presented are adequate to make the information not misleading, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2006. Operating results for the nine month period ended April 30, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2007 or any future period.

1. ORGANIZATION AND NATURE OF BUSINESS

ICC creates, deploys and manages the secure and reliable electronic exchange of essential business documents. With the Company’s value added network (“VAN”), desktop software and hosted applications, managed services, consulting and professional services, ICC is a trusted provider of e-commerce solutions to connect businesses, regardless of size and level of technical sophistication, with their trading communities. Thousands of customers, ranging from sole proprietorships to large corporations, in a variety of industries rely on the value delivered from ICC’s broad line of solutions, expertise and customer service to help meet the unique requirements for trading partner compliance, coordination and collaboration.

2. RECENT ACQUISITIONS

STEWART TECHNICAL SERVICES

On January 31, 2007, the Company completed the acquisition of certain assets of Stewart Technical Services, Inc. (“STS”). STS provides EDI services and software and will be included in our EC Solutions segment. In accordance with the Asset Purchase Agreement (“Agreement”), the Company paid $300,000 upon close and has a contingent payment of up to an additional one times revenue for the first year’s revenue less the $300,000 payment made at closing. Additionally, if the first year’s revenues are less than $400,000, then no additional earn-out will be paid. The Company received tangible assets of approximately $49,000, which included accounts receivable of $44,000 and fixed assets of $5,000, and intangible assets of approximately $266,000, which are comprised of internally developed software of $166,000 and customer relationships of $100,000. Under the Agreement, the Company also recorded a liability of $15,000 for transition costs. The fixed assets are estimated to have a useful life of three years and customer relationships and internally developed software are estimated to have useful lives of five and four years, respectively.

ENABLE

On May 9, 2006, the Company acquired all of the outstanding shares of Enable Corp. (“Enable”), a privately held corporation with offices in New York City that provides trading community portals, web based EDI trading tools, and EDI professional services to a variety of industries. Under the terms of the Share Purchase Agreement, the Company paid $4.2 million in cash and issued 686,324 shares of its class A common stock valued at approximately $2.6 million. On May 4, 2007, the Company issued 12,488 additional shares of its class A common stock as per the terms of the Share Purchase Agreement.

The following table sets forth the components of the purchase price for Enable as of April 30, 2007.

Cash on closing	$	4,203,000
ICC class A common stock issued	2,632,739
Transaction costs	416,208
Additional costs since July 31, 2006	20,551
Total purchase price	$	7,272,498

The following table provides the estimated fair value of assets acquired and liabilities assumed in the Enable acquisition:

Cash	$	991,747
Accounts receivable	705,386
Restricted cash	15,000
Other assets	14,975
Fixed assets	246,520
Intangible assets – acquired technology	1,775,000
Intangible assets – trade names	250,000
Intangible assets – customer relationships	1,500,000
Liabilities	(510,778		)
Fair value of net assets acquired	$	4,987,850
Goodwill	$	2,284,648
Total purchase price	$	7,272,498

The recorded fixed and other assets are estimated to have a life of two to three years. The acquired technology intangibles are estimated to have a life between one and four years, and the customer relationship and trade names intangibles are estimated to have a life of seven years. We recorded $2,285,000 in goodwill resulting from the Enable acquisition. Revenue from the Enable acquisition includes hosting and transaction fees, administrative fees and professional services. The hosting, transaction fees and administrative fees are included in our EC Solutions segment, while the professional services are include in our EC Services segment. Goodwill and intangible assets are deductible for tax purposes. The results of operations of Enable are consolidated with the results of operations of the Company subsequent to the acquisition date. The acquisition of Enable was made to strengthen the Company’s web based trading technology offering and customer base.

3. REPURCHASE OF PREFERRED AND COMMON STOCK

On December 14, 2006, two subsidiaries of 3V Capital LLC (3V Capital Fund Ltd. and Distressed/High Yield Trading Opportunities, Ltd. (collectively, the “3V Entities”)) acquired from Omega Liquidating Trust, the liquidating trust for the bankrupt Cable & Wireless USA, 10,000 shares of the series C preferred stock and 381,111 shares of the class A common stock of Internet Commerce Corporation (“ICC” or the “Company”). Thereafter, on December 20, 2006, ICC entered into a Stock Purchase Agreement with each of the 3V Entities, pursuant to which ICC reacquired a total of 5,000 shares of its series C preferred stock and 190,555 shares of its class A common stock for an aggregate purchase price of $2,875,000. Following this reacquisition of shares by ICC, the 3V Entities together continue to own the remaining 5,000 shares of ICC’s series C preferred stock and 190,556 shares of ICC’s class A common stock. The repurchased shares were retired during the second quarter of fiscal year 2007.

4. BUSINESS SEGMENT INFORMATION

The Company’s two reportable segments are:

· Electronic Commerce Solutions (“EC Solutions”) segment, which includes ICC.NET VAN services, browser-based and hosted applications, and desktop software; and

· Electronic Commerce Services (“EC Services”) segment, which is comprised of the EC service center, EC outsourcing, mapping and professional services.

The Company changed its reportable segments as of August 1, 2006 to coincide with management’s realignment of the business operations to follow our service and product lines. The EC Solutions segment was formed to consolidate the services and products offered with direct or indirect connections to our VAN. The EC Services segment was formed and consolidates all of our professional, managed and outsourcing services. Specifically, professional service revenue and mapping revenue were moved from the old ICC.NET segment to the EC Services segment. Hosted applications and desktop software were moved to the EC Solutions segment from the old EC Service Bureau segment. The browser-based and hosted applications acquired from Enable were also added to the EC Solutions segment. In addition, the Company will no longer allocate 100% of its operating expenses to the reporting segments. Only those expenses that are directly related to the development and delivery of a reporting segment’s products and services will be allocated. The Company has restated the previous period’s reporting segments for comparability purposes between the periods.

The tables below summarize information about operations for the three and nine month periods ended April 30, 2007 and 2006.

	EC Solutions		EC Services		Total
Three Months – April 30, 2007
Revenues from external customers	$	4,105,042	$	1,285,228	$	5,390,270
Segment operating income	$	2,500,988	$	196,210	$	2,697,198

The following is a reconciliation of operating segment income to net income for the three month period ending April 30, 2007:

Segment operating income	$	2,697,198
Corporate expenses	(2,062,251		)
Operating income	634,947
Other income (expense), net	51,353
Income before income taxes	686,300
Income tax expense	135,097
Net income	$	551,203

	EC Solutions		EC Services		Total
Nine Months – April 30, 2007
Revenues from external customers	$	11,921,704	$	4,578,761	$	16,500,465
Segment operating income	$	7,132,291	$	1,370,740	$	8,503,031

The following is a reconciliation of operating segment income to net income for the nine month period ending April 30, 2007:

Segment operating income	$	8,503,031
Corporate expenses	(6,607,646		)
Operating income	1,895,385
Other income (expense), net	153,189
Income before income taxes	2,048,574
Income tax expense	219,367
Net income	$	1,829,207

	EC Solutions		EC Services		Total
Three Months – April 30, 2006
Revenues from external customers	$	3,209,472	$	1,325,844	$	4,535,316
Segment operating income	$	2,283,066	$	443,406	$	2,726,472

The following is a reconciliation of operating segments income to net income for the three month period ending April 30, 2006:

Segment operating income	$	2,726,472
Corporate expenses	(2,244,226		)
Operating income	482,246
Other income (expense), net	78,633
Income before income taxes	560,879
Income tax expense	10,723
Net income	$	550,156

	EC Solutions		EC Services		Total
Nine Months – April 30, 2006
Revenues from external customers	$	9,580,218	$	4,985,170	$	14,565,388
Segment operating income	$	6,544,843	$	2,146,733	$	8,691,576

The following is a reconciliation of operating segments income to net income for the nine month period ending April 30, 2006:

Segment operating income	$	8,691,576
Corporate expenses	(7,072,200		)
Operating income	1,619,376
Other income (expense), net	53,123
Income before income taxes	1,672,499
Income tax expense	27,895
Net income	$	1,644,604

5. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 describes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and will be effective for the Company in fiscal 2008. The Company is currently evaluating the impact of this new accounting interpretation on its financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 requires fair value measurements to be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS No. 157 on its financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of assessing materiality. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company is currently evaluating the impact of adopting SAB No. 108 on its financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to measure financial instruments and certain other items at fair value. The objective of this statement is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is expected to expand the use of fair value measurement for accounting for financial instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS No. 159 on its financial statements.

6. INCOME TAXES

A provision for income taxes has been provided for the three and nine months ended April 30, 2007 and 2006 for estimated federal alternative minimum taxes and certain state income taxes, as the Company has sufficient net operating loss carryforwards to offset regular taxable income. As of April 30, 2007, the Company released a portion of the valuation allowance to cover current tax liabilities, but continues to maintain a valuation allowance against the total net deferred tax asset balance. The Company will continue to evaluate its prospects going forward. If the Company’s operations continue at current levels and future business projections indicate continued profitability, the Company will review the valuation allowance and, in the near future, will consider releasing a portion of the deferred tax asset valuation reserve.

7. SUBSEQUENT EVENTS

On May 3, 2007, ICC and Jets Acquisition Sub, Inc., a wholly-owned subsidiary of ICC (“MergerSub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire EasyLink Services Corporation (NASDAQ: EASY), a Delaware corporation (“EasyLink”). Pursuant to the Merger Agreement, the Merger Sub will merge with and into EasyLink, and EasyLink will become a wholly-owned subsidiary of ICC. The transaction has been approved by both the ICC Board of Directors and the EasyLink Board of Directors. Under the terms of the

Merger Agreement, ICC will pay $5.80 per share in cash in exchange for each share of class A common stock of EasyLink, for an estimated aggregate purchase price of approximately $67 million. The transaction is expected to close in the third calendar quarter of 2007, subject to customary closing conditions, regulatory approvals, and stockholder approval by both companies

EasyLink has made customary representations and warranties in the Merger Agreement and agreed to customary covenants, including covenants regarding the operation of the business of EasyLink and its subsidiaries prior to the closing and covenants prohibiting EasyLink from soliciting or initiating discussions concerning proposals relating to alternative business combination transactions, except in limited circumstances relating to unsolicited proposals that constitute, or are reasonably expected to lead to, a Superior Proposal (as defined in the Merger Agreement). If EasyLink’s Board of Directors withdraws its support for the Merger, or if EasyLink terminates the Merger Agreement to accept a Superior Proposal made by a third party, EasyLink will be required to pay a termination fee of $2.5 million to ICC. If ICC stockholders approval is not obtained, ICC will pay EasyLink a termination fee of $2.5 million and will be required to expense all costs incurred for the merger as of the date of the termination.

Also on May 3, 2007, ICC entered into a Securities Purchase Agreement (the “Purchase Agreement”) with several purchasers (the “Purchasers”) affiliated with York Capital Management, LLC (“York Capital”) pursuant to which the Purchasers will purchase Series A Senior Secured Convertible Notes (the “Series A Notes”), Series B Senior Secured Convertible Notes (the “Series B Notes”), warrants to purchase shares of ICC’s class A common stock (the “Warrants”) and additional investment rights to acquire additional notes on the same terms as the Series A Notes (the “Additional Investment Rights”), all as more fully described in the Purchase Agreement, for an aggregate purchase price of up to $60 million. Contemporaneously with the closing of the Merger, and subject to the terms and conditions set forth in the Purchase Agreement, the Purchasers will purchase from ICC in the aggregate not less than $20,000,000 and not more than $30,000,000 of the Series A Notes (as may be determined by ICC) and $30,000,000 of the Series B Notes. The Series A Notes bear interest at the prime rate plus 75 basis points (0.75%) less an interest factor based on the performance of ICC’s class A common stock, as more fully described in the Series A Notes, and interest is payable quarterly. The Series A Notes have a term of four years, are repayable in 30 equal monthly installments of principal beginning 18 months after issuance, and can be prepaid subject to a 25% prepayment penalty and certain other conditions. The Series B Notes bear interest at the prime rate plus 300 basis points (3.00%) less an interest factor based on the performance of ICC’s class A common stock, as more fully described in the Series B Notes, and interest is payable quarterly. The Series B Notes have a term of four years, are repayable in 30 equal monthly installments of principal beginning 18 months after issuance, and can be prepaid subject to a 25% prepayment penalty and certain other conditions, provided that ICC can prepay up to $15,000,000 of the Series B Notes from the proceeds of sales of assets subject to a 12.5% prepayment penalty.

The Warrants will entitle the Purchasers to acquire an aggregate number of shares equal to 30% of the principal amount of the Series B Notes divided by the lesser of (i) the arithmetic average of the volume weighted average price (as defined in the Purchase Agreement) for the ten trading days prior to the closing of the Merger, (ii) the closing price on the trading day immediately preceding the closing of the Merger, and (iii) $2.53. The Warrants are exercisable from the closing of the Merger until the fifth anniversary of the date a registration statement covering the resale of the shares issuable upon exercise of the Warrants is declared effective by the Securities and Exchange Commission. The Additional Investment Rights entitle the Purchasers to purchase an aggregate of $10,000,000 of additional notes having terms similar to the Series A Notes.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains a number of “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Specifically, all statements other than statements of historical facts included in this Quarterly Report regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to management. When used in this Report, the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “hope,” “continue” and “intend,” and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements. These statements reflect our current view with respect to future events and are subject to risks, uncertainties and assumptions related to various factors including, without limitation, those factors discussed in Item 1 (Business) of Part I and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of our Annual Report on Form 10-K filed on October 30, 2006, Item 2 and Item 1A of Part II of our Quarterly Reports. You should carefully review those risks, as well as additional risks described in other documents we file from time to time with the Securities and Exchange Commission.

Although we believe that our expectations are reasonable, we cannot assure you that our expectations will prove to be correct. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in this Quarterly Report as anticipated, believed, estimated, expected or intended.

Overview

Internet Commerce Corporation creates, deploys and manages the secure and reliable electronic exchange of essential business documents. With our VAN, desktop software and hosted applications, managed services, consulting and professional services, we are a trusted provider of e-commerce solutions to connect businesses, regardless of their size and level of technical sophistication, with their trading communities. Thousands of customers, ranging from sole proprietorships to large corporations, in a variety of industries rely on the value delivered from ICC’s broad line of solutions, expertise and customer service to help meet the unique requirements for trading partner compliance, coordination and collaboration.

We pioneered the use of the Internet for electronic data interchange (“EDI”) business-to-business (B2B) solutions and continue to lead as new technologies and requirements emerge for more efficient business communication. Organizationally, our two segments of business are known as the:

· EC Solutions segment, which includes ICC.NET VAN services, browser-based and hosted applications, and desktop software; and

· EC Services segment, whose operations primarily focus on facilitating the EDI communications of small and mid-sized businesses with their trading partners. The EC Services segment includes the EC service center, EC outsourcing, mapping and professional services.

These segments compliment one another and give us the ability to provide solutions to many different kinds of enterprises, from sole proprietorships to large corporations, operating in a variety of industries.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. We consider certain accounting policies related to revenue recognition, valuation of acquired intangibles and impairment of long-lived assets including goodwill, stock-based compensation, and income taxes to be critical policies due to the estimation process involved in each. Management discusses its estimates and judgments with the Audit Committee of our Board of Directors.

For a more detailed description on the application of these and other accounting policies, see Note 2 of the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2006. Reference is also made to the discussion of the application of these critical accounting policies and estimates contained in Management’s Discussion and Analysis in our Annual Report on Form 10-K for fiscal 2006. During the nine months ended April 30, 2007, there were no significant or material changes in the application of critical accounting policies that would require an update to the information provided in the Form 10-K for fiscal 2006.

Three Months Ended April 30, 2007 Compared with Three Months Ended April 30, 2006.

Results of Operations – EC Solutions

Our EC Solutions segment uses the Internet and our proprietary technology to deliver our customers’ documents and data files to members of their trading communities. The following table summarizes operating results for our EC Solutions services for the three months ended April 30, 2007 and 2006:

	Three Months Ended
	April 30,				Variance
	2007		2006		$	%
Revenues:
Services	$	4,105,042	$	3,209,471	895,571	28

Expenses:
Cost of services	1,113,769		726,814		386.955	53
Product development and enhancement	420,274		153,652		266,622	174
General and administrative	70,010		45,939		24,071	52
Total expenses	1,604,054		926,405		677,649	73

Segment operating income	$	2,500,988	$	2,283,065	217,923	10

Revenues – EC Solutions – Revenue from our EC Solutions segment was 76% of consolidated revenues for the quarter ended April 30, 2007 (“2007 Quarter”) compared with 71% for the quarter ended April 30, 2006 (“2006 Quarter”). Revenue for the 2007 Quarter compared with the 2006 Quarter increased primarily due to the browser-based and hosted services revenue acquired from Enable. VAN related transaction and monthly fee revenue grew approximately 4% in the 2007 Quarter compared with the 2006 Quarter. The growth is attributable to a monthly fee increase implemented in the 2007 Quarter and higher transaction volumes.

Cost of services – EC Solutions – Costs of services relating to our EC Solutions segment was 27% of EC Solutions revenue for the 2007 Quarter compared with 23% for the 2006 Quarter. Cost of services consists primarily of salaries and employee benefits, connectivity fees, amortization, allocation of product and development expenses and rent. Costs of services increased primarily as a result of higher acquired technology and customer list amortization expense of $262,000 resulting from recent acquisitions and higher product development allocation of $199,000, offset by a reduction in telephone and connectivity fees of $186,000.

enhancement costs increased $267,000 in the 2007 Quarter compared with the 2006 Quarter. The increase is primarily related to the additional staff, consulting and rent expenses from the acquired Enable operations.

General and administrative - EC Solutions - General and administrative expenses supporting our EC Solutions segment consist primarily of depreciation, telephone, and computer maintenance expenses. General and administrative costs increased $24,000 in the 2007 Quarter compared with the 2006 Quarter. The increase was primarily due to higher computer maintenance expenses.

Operating Income - EC Solutions - Operating income from EC Solutions increased $218,000, or 10%, for the 2007 Quarter compared with the 2006 Quarter, due mainly to the increased revenue from the Enable acquisition, offset by higher acquired technology and customer list amortization, and additional staff, consulting and rent expenses from the Enable operations.

Results of Operations – EC Services

Our EC Services operations primarily focus on facilitating the EDI communications of small and mid-sized businesses with their trading partners through our EC Service center, E-Commerce outsourcing and professional services. The following table summarizes operating results for our EC Services segment for the three months ended April 30, 2007 and 2006:

	Three Months Ended
	April 30,					Variance
	2007		2006			$		%
Revenues:
Services	$	1,285,228	$	1,325,844		(40,616	)	(3	)

Expenses:
Cost of services	885,348		852,011			33,337		4
Product development and enhancement	143,123		38,438			104,685		272
General and administrative	60,547		(8,010		)	68,557		(856	)
Total expenses	1,089,018		882,439			206,579		23

Segment operating income	$	196,210	$	443,405		(247,195	)	(56	)

Revenue – EC Services – Revenue from our EC Services was 24% of consolidated revenues for the 2007 Quarter compared with 29% for the 2006 Quarter. Revenue for the 2007 Quarter compared with the 2006 Quarter decreased slightly due to lower revenues as a result of customer attrition from our MEC and Kodiak acquisitions. This erosion appears to have stabilized.

Cost of services – EC Services - Cost of services relating to our EC Services segment was 69% of EC Services revenue in the 2007 Quarter, compared with 64% in the 2006 Quarter. Cost of services consists primarily of salaries and employee benefits, amortization, connectivity fees and rent. Costs of services increased $33,000 for the 2007 Quarter compared to the 2006 Quarter as a result of the reclassification of ECS, MEC and Kodiak customer list amortization of $68,000 from Corporate Sales and Marketing, offset by lower salary and benefit expenses.

Product development and enhancement – EC Services - Product development and enhancement costs consist primarily of salaries and employee benefits. Product development and enhancement costs incurred by our EC Services segment increased $105,000 in the 2007 Quarter compared with the 2006 Quarter. The increase was primarily the result of increased salary and benefits expense of approximately $197,000 from a recent realignment of our product development department, offset by a higher allocation of product development to other departments of $101,000.

General and administrative – EC Services - General and administrative expenses relating to our EC Services segment consist primarily of office expenses, depreciation, computer maintenance expense, telephone and rent. General and administrative expenses incurred by our EC Services segment increased $69,000 in the 2007 Quarter compared with the 2006 Quarter. The increase is primarily due to higher depreciation and computer maintenance expenses related to recent investments in capital expenditures.

Operating Income - EC Services - Operating income from EC Services for the 2007 Quarter compared with the 2006 Quarter decreased $247,000, or 56%, primarily as a result of higher expenses from the reallocation of our product development department and increased depreciation and computer maintenance expenses.

Corporate Expenses

Our Corporate expenses represent the general, administrative, corporate and executive expenses not directly related to our EC Solutions or EC Services segments. The following table summarizes operating and other expenses for our corporate expenses for the three months ended April 30, 2007 and 2006:

	Three Months Ended
	April 30,				Variance
	2007		2006		$		%
Expenses:
Product development and enhancement	$	32,439	$	—	32,439		—
Selling and marketing	379,589		566,795		(187,206	)	(33	)
General and administrative	1,650,223		1,677,431		(27,208	)	(2	)
Total expenses	$	2,062,251	$	2,244,226	(181,975	)	(8	)

Other:
Other income	$	51,353	$	78,633	(27,280	)	(35	)
Provision for income taxes	$	135,097	$	10,723	124,374		1,160

Product development and enhancement – Corporate – Product development and enhancement costs included in our corporate expenses consist primarily of salaries and employee benefits. Product development and enhancement costs increased $32,000 in the 2007 Quarter compared with the 2006 Quarter. The increase is primarily a result of unallocable salary and benefit costs not directly related to the EC Solutions or EC Services segments.

Selling and marketing – Corporate - Selling and marketing costs included in our Corporate expenses consist primarily of salaries and employee benefits and travel. Selling and marketing expenses decreased $187,000 in the 2007 Quarter compared with the 2006 Quarter. The decrease is primarily due to lower salary, benefits and commission expense of approximately $103,000 and the reclassification of ECS, MEC and Kodiak customer list amortization of $68,000 to cost of sales in the EC Services segment.

General and administrative – Corporate – General and administrative costs included in our Corporate expenses consist primarily of salaries and employee benefits, office expenses, legal and accounting expenses, depreciation, computer maintenance expenses, telephone and rent. General and administrative expenses decreased in the 2007 Quarter by $27,000 primarily due to lower rent due to fewer office locations and bad debt expense as a result of increased collection activity.

Other income – Corporate – Other income costs consist primarily of interest income, interest expense and other non-operating expenses. Other income decreased in the 2007 Quarter compared with the 2006 Quarter mainly due to a one-time legal settlement during the 2006 Quarter.

Provision for income taxes – Corporate – Provision for income taxes consist primarily of federal and state income tax expense. The provision for income taxes increased $124,000 in the 2007 Quarter compared with the 2006 Quarter. The increase is due to current year state income taxes of $78,000 which were not covered by our existing state net loss carryforwards and a true up of past years’ state income tax timing differences of $80,000 as a result of changing the tax year-end from December 31 to July 31.

Reduction in Force - During the 2007 Quarter, we completed a reduction in our work force eliminating redundancy from acquisitions and streamlining operations. We experienced no cost savings during the 2007 Quarter due to employee severance payments, but anticipate future savings of approximately $326,000 per quarter and $1,304,000 annually.

Nine Months Ended April 30, 2007 Compared with Nine Months Ended April 30, 2006.

Results of Operations – EC Solutions

	Nine Months Ended
	April 30,				Variance
	2007		2006		$	%
Revenues:
Services	$	11,921,704	$	9,580,219	2,341,485	24

Expenses:
Cost of services	3,169,720		2,565,028		604,692	24
Product development and enhancement	1,411,012		332,941		1,078,071	324
General and administrative	208,681		137,407		71,274	52
Total expenses	4,789,413		3,035,376		1,754,037	58

Segment operating income	$	7,132,291	$	6,544,843	587,448	9

Revenues – EC Solutions – Revenue from our EC Solutions segment was 72% of consolidated revenues for the nine months ended April 30, 2007 (“2007 Nine Months”) compared with 66% for the nine months ended April 30, 2006 (“2006 Nine Months”). The increase in revenue is primarily related to the browser-based and hosted services revenue acquired from Enable.

Cost of services – EC Solutions – Costs of services relating to our EC Solutions segment was 27% of EC Solutions revenue for the 2007 Nine Months compared with 27% for the 2006 Nine Months. Cost of services consists primarily of salaries and employee benefits, connectivity fees, amortization, allocation of product and development expenses and rent. Costs of services increased mainly as a result of higher technology and customer list amortization expense of $518,000 from our recent acquisitions, higher product development allocation of $348,000, offset by the reduction in telephone and connectivity fees of $349,000.

Product development and enhancement - EC Solutions - Product development and enhancement costs relating to our EC Solutions segment consist primarily of salaries and employee benefits. Product development and enhancement costs increased $1,078,000 in the 2007 Nine Months compared with the 2006 Nine Months primarily due to the additional staff, consulting and rent expenses from the Enable operations.

General and administrative - EC Solutions - General and administrative expenses supporting our EC Solutions segment consist primarily of depreciation, telephone, and computer maintenance expenses. General and administrative costs increased $71,000 in the 2007 Nine Months compared with the 2006 Nine Months mainly due to higher computer maintenance expenses.

Operating Income - EC Solutions - Operating income from EC Solutions increased $587,000, or 9%, for the 2007 Nine Months compared with the 2006 Nine Months, due mainly to the increased revenue from the Enable acquisition, offset principally by higher acquired technology and customer list amortization, additional staff, consulting and rent expenses from the Enable operations.

Results of Operations – EC Services

Our EC Services operations primarily focus on facilitating the EDI communications of small and mid-sized businesses with their trading partners through our EC service center, E-Commerce outsourcing and professional services. The following table summarizes operating results for our EC Services segment for the nine months ended April 30, 2007 and 2006:

	Nine Months Ended
	April 30,				Variance
	2007		2006		$		%
Revenues:
Services	$	4,578,761	$	4,985,170	(406,409	)	(8	)

Expenses:
Cost of services	2,658,373		2,669,376		(11,003	)	—
Product development and enhancement	374,795		169,060		205,735		122
General and administrative	174,853		—		174,853		—
Total expenses	3,208,021		2,838,436		369,585		13

Segment operating income	$	1,370,740	$	2,146,734	(775,994	)	(36	)

Revenue – EC Services –Revenue from our EC Services was 28% of consolidated revenue for the 2007 Nine Months compared to 34% for the 2006 Nine Months and decreased by $406,000. Our EC service center revenues decreased approximately $821,000 due to the customer attrition experienced mainly during the first six months of fiscal 2007, offset by increased revenues from our EC outsourcing services of $311,000 due to a full nine months of revenue from our Kodiak acquisition included in the period and the increase in non-recurring professional services of $284,000 related to our browser-based application development.

Cost of services – EC Services - Costs of services relating to our EC Services segment was 58% for the 2007 Nine Months compared with 54% for the 2006 Nine Months. Cost of services consists primarily of salaries and employee benefits, connectivity fees, amortization, allocation of product and development expenses and rent. Costs of services decreased $11,000 in the 2007 Nine Months compared with the 2006 Nine Months.

Product development and enhancement – EC Services - Product development and enhancement costs relating to our EC Services segment consist primarily of salaries and employee benefits. Product development and enhancement costs increased $206,000 in the 2007 Nine Months compared with the 2006 Nine Months primarily due to increased salary and benefits expenses.

General and Administrative – EC Services - General and administrative expenses relating to our EC Services segment consist primarily of office expenses, depreciation, computer maintenance expense, telephone and rent. General and administrative expenses increased $175,000 in the 2007 Nine Months compared with the 2006 Nine Months as a result of higher depreciation and computer maintenance expenses related to ongoing investments in capital expenditures.

Operating Income - EC Services - Operating income from EC Services for the 2007 Nine Months compared with the 2006 Nine Months decreased $776,000, or 36%, due to the combination of decreased revenues from the MEC and Kodiak acquisition related customer attrition experienced in the first six months of fiscal 2007 and higher product development salary and benefit expense and deprecation and computer maintenance expenses.

Corporate Expenses

	Nine Months Ended
	April 30,				Variance
	2007		2006		$		%
Expenses:
Product development and enhancement	$	112,369	$	—	112,369		—
Selling and marketing	1,268,904		1,559,452		(290,548	)	19
General and administrative	5,226,371		5,512,748		(286,377	)	(5	)
Total expenses	$	6,607,646	$	7,072,200	(464,554	)	(7	)

Other:
Other income	$	153,189	$	53,123	100,066		188
Provision for income taxes	$	219,367	$	27,895	191,472		686

Product development and enhancement – Corporate – Product development and enhancement costs included in our corporate expenses consist primarily of salaries and employee benefits. Product development and enhancement costs increased $112,000 in the 2007 Nine Months compared with the 2006 Nine Months. The increase is primarily a result of unallocable salary and benefit costs not directly related to the EC Solutions or EC Services segments.

Selling and marketing – Corporate - Selling and marketing costs included in our Corporate expenses consist primarily of salaries and employee benefits and travel. Selling and marketing expenses decreased $291,000 in the 2007 Nine Months compared with the 2006 Nine Months. The decrease is due to lower salary, benefits and commission expense of approximately $95,000 due to fewer headcount and the reclassification of ECS, MEC and Kodiak customer list amortization of $185,000 to cost of sales in the EC Services segment.

General and administrative – Corporate – General and administrative costs included in our Corporate expenses consist primarily of salaries and employee benefits, office expenses, legal and accounting expenses, depreciation, computer maintenance expenses, telephone and rent. General and administrative expenses decreased by $286,000 for the 2007 Nine Months compared with the 2006 Nine Months primarily due to lower bad debt expense of $232,000 as a result of stronger collection activity and reduced general office expenses.

Other income – Corporate – Other income costs consist primarily of interest income, interest expense and other non-recurring, non-operating expenses. Other income increased in the 2007 Nine Months compared with the 2006 Nine Months mainly due to lower interest expense related to the assumed lease liability from our MEC acquisition and higher levels in interest income due to higher levels of cash for the 2007 Nine Months.

Provision for income taxes – Corporate – Provision for income taxes consists primarily of federal and state income tax expense. The provision for income taxes increased $191,000 in the 2007 Nine Months compared with the 2006 Nine Months. The increase is due to current year state income taxes of $78,000 which were not covered by our existing state net loss carryforwards, a true up of past years’ state income tax timing differences of $80,000 as a result of changing the tax year-end from December 31 to July 31, and current year federal alternative minimum tax of $61,000.

Liquidity and Capital Resources

Our principal sources of liquidity, which consist of unrestricted cash and cash equivalents, increased to $7,047,000 as of April 30, 2007 from $6,989,000 as of July 31, 2006. We believe these resources will provide us with sufficient liquidity to continue in operation through April 30, 2008.

The principal uses of cash for the nine month period ended April 30, 2007 were for the repurchase of our series C preferred stock of $2,261,000 and our class A common stock of $614,000. Additionally, we used $300,000 for the acquisition of certain assets of Stewart Technical Services, Inc. and $205,000 in capital expenditures to upgrade and relocate the equipment from our Enable data center.

The principal sources of cash during the period were cash generated from continued operations of $3,240,000, proceeds from the exercise of 71,200 warrants that were originally issued in a private placement that closed in October 2004 of $248,000, and proceeds from the exercise of 299,687 stock options of $128,000.

The Company has net operating loss carryforwards for tax purposes of approximately $71.1 million as of April 30, 2007. These carryforwards expire from 2011 to 2025.

The Internal Revenue Code and Income Tax Regulations contain provisions which limit the use of available net operating loss carryforwards in any given year should significant changes (greater than 50%) in ownership interests occur. Due to the private placement of series A preferred stock in April 1999, the net operating loss carryover of approximately $19.6 million incurred prior to the private placement is subject to an annual limitation of approximately $1.4 million until that portion of the net operating loss is utilized or expires. Due to a 100% ownership change of an acquired company in November 2000, the purchased net operating loss of approximately $6.5 million incurred prior to the ownership change is subject to an annual limitation of approximately $1.1 million until that portion of the net operating loss is utilized or expires. Additionally, this transaction created an ownership change for the Company as defined by IRC Section 382. As such, its net operating loss of approximately $49.4 million incurred prior to the ownership change is subject to an annual limitation of approximately $2.8 million until that portion of the net operating loss is utilized or expires. Finally, due to a 100% ownership change of an acquired company in June 2004, the purchased net operating loss of approximately $1.2 million incurred prior to the ownership change is subject to an annual limitation of approximately $128,000 until that portion of the net operating loss is utilized or expires.

Off Balance Sheet Arrangements

We provide indemnifications of varying scope and amount to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products and services. We evaluate estimated losses for such indemnification under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, as interpreted by Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. We consider factors such as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any material liabilities related to such indemnifications in our financial statements.

Contractual Obligations

Our contractual obligations are comprised of future minimum rental payments due under non-cancelable operating leases. The following table is a summary of our contractual obligations as of April 30, 2007:

Fiscal Year	Amount
2007	$	400,022
2008	$	1,524,649
2009	$	1,429,073
2010	$	1,188,485
2011	$	335,924

The minimum future rental payments have not been reduced by $2,551,636 of sublease rentals to be received in the future under our non-cancelable sublease.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We may invest our cash in a variety of financial instruments. If invested, we account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). All of the cash equivalents and investments are treated as available-for-sale under SFAS No. 115. Investments that are classified as cash and cash equivalents have original maturities of three months or less. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may vary widely due to changes in interest rates, or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates. For the quarter ended April 30, 2007, our cash investments consisted entirely of overnight cash sweep accounts invested in a fund composed primarily of triple A rated commercial paper and government agency bonds. As of April 30, 2007, the interest rate for this investment was 4.63%.

Item 4. Controls and Procedures

Our management, including our chief executive officer and chief financial officer, has carried out an evaluation of the effectiveness of our disclosure controls and procedures as of April 30, 2007, as required by paragraph (b) of Exchange Act Rules 13(a)-15 and 15(d)-15. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that as of such date, our disclosure controls and procedures are effective. There was no change in our internal control over financial reporting during the quarter ended April 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are party to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flow.

Item 1A. Risk Factors

The following Risk Factor disclosure updates the risk factors as disclosed in our 2006 Annual Report on Form 10-K previously filed with the Securities and Exchange Commission.

Risks Relating to Our Company

We may not remain profitable in the future. We have incurred significant losses since the Company was founded in 1991, and, as of April 30, 2007, we had an accumulated deficit of approximately $80.9 million. We realized profitability and have done so for the past 9 consecutive quarters. However, there can be no assurances that we may not incur losses again in the future.

We must continue to grow our business in order to remain competitive. Over the past year, the VAN business has remained significantly price competitive. Our major competitors appear to be restructuring their VAN operations to reduce their overhead and other costs to better compete against Internet-based networks such as our ICC.NET service. While we have been successful in maintaining our margins and we have increased the volume of data transmitted through our VAN, we have experienced price erosion in competing for larger customers. Although we expect to continue to add new customers and increase the volume of data transmitted through our service, we do not expect our revenue from VAN services to continue to grow rapidly as in the past. If our revenues grow at a slower rate than we anticipate, or decrease and we are unable to adjust spending in a timely manner or if our expenses increase without commensurate increases in revenues, our operating results will suffer and we may again report losses.

If we are not successful in selling our products and services, our results of operations will suffer. While our primary focus in the past has been on growing our ICC.NET VAN service, we have attempted to diversify by acquiring Electronic Commerce Systems in June 2004, the MEC operations of Inovis International, Inc. in March 2005, Enable Corp. in May 2006 and certain assets of Stewart Technical Services, Inc. in January 2007. However, the success of our services depends to a large extent on the future of business-to-business electronic commerce and our ability to effectively compete in the marketplace. In particular, our success depends on the number of customers that subscribe to our services, the volume of the data, documents or other information they send or retrieve and the price we are able to charge for these services in light of competitive pressures. In connection with the assimilation of our new customers acquired from the MEC operation and the Enable acquisition, we expect to see attrition to these newly acquired customer bases due to the seasonal trends, integration difficulties, and customer defections to alternative EDI solutions. As a result, a portion of our revenues may be adversely affected. While we are learning to manage these new customers, there is no assurance that we will accurately assess the trends of these new customers. Accordingly, the value of these new customers, the volume of our services subscribed by them and the possibility of payment collection may differ materially from our current expectation. Further, since our operating expense levels are based significantly on our expectations of future revenue, our inability to assess the trends may render us vulnerable in the case of a significant shortfall in revenues or orders from these new customers, in which case we may not be able to reduce our operating expenses quickly in response. Therefore, any significant shortfall in revenue or orders could have an immediate adverse effect on our operating results.

We may not be successful in competing against our competitors. We face a significant number of competitors, ranging from very large enterprises or divisions of very large companies to a number of relatively small organizations. These competitors are diverse in terms of their histories, business models, corporate strategies, financial strength, name recognition, company reputation, customer base and breadth of offerings. Many of our large competitors have more history, significantly greater financial resources, larger customer bases and more easily recognized names than we do. As a result, our competitors may be able to respond more quickly to changing technology and changes in customer requirements or be able to undertake more extensive marketing campaigns,

adopt more aggressive pricing policies and make more attractive offers to potential customers and employees, or be able to devote greater resources to the development, promotion and sale of their services than we can. New competition is emerging in the form of web services networks, collaborative applications, application service providers, e-marketplaces and integration broker suites. We have enhanced our technologies to communicate with these web-based technologies. However, there can be no assurance that our product and service offerings will compete effectively and generate any significant revenues. We believe that the high cost of implementation and the ongoing costs of supporting a company’s trading partners may be a barrier to the wider acceptance of our new product offerings in the marketplace. As a result, we may not be successful in competing against our competitors.

If we are unable to maintain or replace our existing interconnect arrangements, our results of operations would suffer. We rely on many of our competitors to interconnect with our service to promote an “open community” so all businesses can take advantage of the efficiencies of EDI, no matter what network they choose as their provider. Although we have interconnect agreements with the major VAN providers, there can be no assurances that these agreements will not be terminated or will continue with acceptable terms. If terminated, we would have to find an acceptable alternative. If available, such an alternative could add significant operating costs to our business.

We must continue to develop new products and services. If we do not keep pace with rapid technological changes, customer demands and intense competition, we will not be successful. Our market is characterized by rapidly changing technology, customer demands and intense competition. The satisfactory performance, reliability and availability of our network infrastructure, customer support and document delivery systems and our web site are critical to our reputation and our ability to attract customers and maintain adequate customer service levels. If we cannot keep pace with these changes and maintain the performance and reliability of our network and customer service levels, our business will suffer. The intense competition in our industry requires us to continue to develop strategic business and Internet solutions that enhance and improve the customer service features, functions and responsiveness of our products and services and we must constantly keep pace with continuing changes in information technology and customer requirements. While we actively search for ways to expand our business and our products and services to keep pace with the rapidly changing technology, customer demands and intense competition, there can be no assurance that we will be able to keep pace with these changes. If we are not successful in developing and marketing enhancements to our products and services that respond to technological change or customer demands, our business will suffer.

We may need to obtain additional financing on satisfactory terms to continue to compete successfully. If we are unable to obtain necessary future capital, our business will suffer. We may need to raise additional funds if competitive pressures or technological changes are greater than anticipated, if we are unable to increase revenue at anticipated rates, if our expenses increase significantly or if our customers delay payment of our receivables or if we identify a suitable acquisition candidate that requires a cash outlay in order to complete the transaction. We cannot assure you that any additional financing will be available on reasonable terms or at all. Raising additional funds in the future by issuing securities could adversely affect our stockholders and negatively impact our publicly traded share price. If we raise additional funds through the issuance of debt securities, the holders of the debt securities will have a claim to our assets that will have priority over any claim of our stockholders. The interest on these debt securities would increase our costs and negatively impact our operating results. If we raise additional funds through the issuance of common stock or securities convertible into or exchangeable for common stock, the percentage ownership of our then-existing stockholders will decrease and they may experience additional and substantial dilution. In addition, any convertible or exchangeable securities may have rights, preferences and privileges more favorable to the holders than those of the common stock.

Failure of our third-party providers to provide adequate Internet and telecommunications service could result in significant losses of revenue. Our operations depend upon third parties for Internet access and telecommunications service. Frequent or prolonged interruptions of these services could result in significant losses of revenues. We have experienced outages in the past and could experience outages, delays and other difficulties due to system failures unrelated to our internal activities in the future. These types of occurrences could also cause users to perceive our services as not functioning properly and therefore cause them to use other methods to deliver and receive information. We have limited control over these third parties and cannot assure you that we will be able to maintain satisfactory relationships with any of them on acceptable commercial terms or that the quality of services that they provide will remain at the levels needed to enable us to conduct our business effectively.

We may suffer systems failures and business interruptions that would harm our business. Our success depends in part on the efficient and uninterrupted operation of our VAN service and Enable’s web hosting sites.

Almost all of our network operating systems are located in third party co-location facilities. Although these facilities are designed to prevent operational interrupts, our systems are vulnerable to events such as damage from fire, power loss, telecommunications failures, break-ins and earthquakes. This could lead to interruptions or delays in our service, loss of data or the inability to accept, transmit and confirm customer documents and data. Although we have implemented network security measures, our servers may be vulnerable to computer viruses, electronic break-ins, attempts by third parties deliberately to exceed the capacity of our systems and similar disruptions.

If we are unable to successfully integrate acquisitions, our financial results will suffer. Our ability to implement our business plan successfully requires effective planning and strong execution skills. If we cannot manage the integration of anticipated acquisitions, our business and financial results will suffer. We expect that we will need to continue to manage and to expand multiple relationships with customers, Internet service providers and other third parties. We also expect that we will need to continually improve our financial systems, procedures and controls and will need to expand, train and manage our workforce, particularly our information technology and sales and marketing staffs.

If we lose our net operating loss carryforward of approximately $71.1 million, our financial results will suffer. Section 382 of the Internal Revenue Code contains rules designed to discourage persons from buying and selling the net operating losses of companies. These rules generally operate by focusing on ownership changes among stockholders owning directly or indirectly 5% or more of the common stock of a company or any change in ownership arising from a new issuance of stock by a company. In general, the rules limit the ability of a company to utilize net operating losses after a change of ownership of more than 50% of its common stock over a three-year period. Purchases of our class A common stock in amounts greater than specified levels could create a limitation on our ability to utilize our net operating losses for tax purposes in the future. We are currently subject to certain limitations on the utilization of portions of our net operating loss carryforward.

If we cannot hire and retain highly qualified employees, our business and financial results will suffer. We are substantially dependent on the continued services and performance of our executive officers and other key employees. If we are unable to attract, assimilate and retain highly qualified employees, our management may not be able to effectively manage our business, exploit opportunities and respond to competitive challenges and our business and financial results will suffer. Many of our competitors may be able to offer more lucrative compensation packages and higher-profile employment opportunities than we can.

We depend on our intellectual property, which may be difficult and costly to protect. If we fail to adequately protect our proprietary rights, competitors could offer similar products relying on technologies we developed, potentially harming our competitive position and decreasing our revenues. We attempt to protect our intellectual property rights by limiting access to the distribution of our software, documentation and other proprietary information and by relying on a combination of copyright, trademark and trade secret laws. In addition, we enter into confidentiality agreements with our employees and certain customers, vendors and strategic partners. In some circumstances, however, we may, if required by a business relationship, provide our licensees with access to our data model and other proprietary information underlying our licensed applications. Despite the precautions we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. Policing unauthorized use of software is difficult, and some foreign laws do not protect proprietary rights to the same extent as United States laws. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, any of which could be costly and adversely affect our operating results.

Intellectual property infringement claims against us could harm our business. It is possible our products and service may infringe upon the proprietary rights of others and other parties may assert infringement claims against us. Any such claims and any resulting litigation could subject us to significant liability for damages and could invalidate our proprietary rights. We could be required to enter into royalty and licensing agreements, which may be costly or otherwise burdensome or which may not be available on terms acceptable to us.

We must comply in the future with new and costly reporting requirements. Under current Securities and Exchange Commission (“SEC”) regulations, we are considered a non-accelerated filer as our market capitalization as of January 31, 2007 was under $75 million. We will have to be compliant with Section 404(a), management’s assertion portion of the Sarbanes-Oxley Act of 2002 (“SOX”) by July 31, 2008 and compliant with Section 404(b), the independent audit requirement of SOX by July 31, 2009. The costs of implementing the requirements of the SOX have ranged from approximately $500,000 to over $1 million for smaller companies. Although we have begun our SOX compliance efforts, there can be no assurance that we can be in full compliance when required for reasonable costs.

Risks Relating to the Internet and Online Commerce Aspects of Our Business

If Internet usage does not continue to grow or if its infrastructure fails, our business will suffer. We cannot be certain that the infrastructure or complementary services necessary to maintain the Internet as a useful and easy means of transferring documents and data will continue to develop. The Internet infrastructure may not support the demands that growth may place on it and the performance and reliability of the Internet may decline.

Privacy concerns may prevent customers from using our services. Concerns about the security of online transactions and the privacy of users may inhibit the growth of the Internet as a means of delivering business documents and data. We may need to incur significant expenses to protect against the threat of security breaches or to alleviate problems caused by security breaches. We rely upon encryption and authentication technology to provide secure transmission of confidential information. If our security measures do not prevent security breaches, we could suffer operating losses, damage to our reputation, litigation and possible liability. Advances in computer capabilities, new discoveries in the field of cryptography or other developments that render current encryption technology outdated may result in a breach of our encryption and authentication technology and could enable an outside party to steal proprietary information or interrupt our operations.

Government regulation and legal uncertainties relating to the Internet could harm our business. Changes in the regulatory environment in the United States and other countries could decrease our revenues and increase our costs. The Internet is largely unregulated and the laws governing the Internet remain unsettled. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy and taxation apply to the Internet. In addition, because of increasing popularity and use of the Internet, any number of laws and regulations may be adopted in the United States and other countries relating to the Internet or other online services covering issues such as user privacy, security, pricing and taxation, contents and distribution.

The cost of transmitting documents and data over the Internet could increase. We may not be able to increase our prices to cover these rising costs. Also, foreign and state laws and regulations relating to the provision of services over the Internet are still developing. If individual states or foreign countries impose taxes or laws that negatively impact services provided over the Internet, our cost of providing our ICC.NET and other services may increase.

Risks Relating to Our Class A Common Stock

The market price of our class A common stock is likely to be highly volatile. The market price of our class A common stock has been very volatile in the past, ranging from a low of $2.21 to a high of $3.98 during fiscal 2007 and is likely to fluctuate substantially in the future. If our class A common stock falls under $1.00 per share and fails to maintain a minimum bid price of $1.00 for 30 consecutive trading days, it may no longer be eligible for trading in the Nasdaq Capital Market, which would adversely affect the ability of investors to sell their shares of our class A common stock.

Shares eligible for future sale by our existing stockholders may adversely affect our stock price making it difficult to sell class A common stock. Between January 1, 2003 and May 2006, we registered the resale under the Securities Act of 1933 of an aggregate of 10,676,141 shares of our class A common stock, which includes 3,016,917 shares of class A common stock issuable upon the exercise of warrants to purchase shares of class A common stock and 192,307 shares of class A common stock issuable upon conversion of our series D preferred. The market price of our class A common stock could be materially and adversely affected by sales of even a small percentage of these shares or the perception that these sales could occur.

The market for our class A common stock on the Nasdaq Capital Market may be illiquid, which would restrict the ability to sell shares of class A common stock and could result in increased volatility in the trading prices for our class A common stock. The price at which our class A common stock will trade in the future cannot be predicted and will be determined by the market. The price may be influenced by many factors, including investors’ perceptions of our business, our financial condition, operating results and prospects, the use of the Internet for business purposes and general economic and market conditions.

Our Board of Directors can issue preferred stock with rights adverse to the holders of class A common stock. Our Board of Directors is authorized, without further stockholder approval, to determine the provisions of and to issue up to 4,994,750 shares of preferred stock. Issuance of preferred shares with rights to dividends and other distributions, voting rights or other rights superior to the class A common stock could be adverse to the holders of class A common stock. In addition, issuance of preferred shares could have the effect of delaying, deterring or preventing an unsolicited change in control of our company, or could impose various procedural and other

requirements that could make it more difficult for holders of our class A common stock to effect certain corporate actions, including the replacement of incumbent directors and the completion of transactions opposed by the incumbent Board of Directors. The rights of the holders of our class A common stock would be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.

We may have to use significant resources indemnifying our officers and directors or paying for damages caused by their conduct. The Delaware General Corporation Law provides for broad indemnification by corporations of their officers and directors and permits a corporation to exculpate its directors from liability for their actions. Our bylaws and certificate of incorporation implement this indemnification and exculpation to the fullest extent permitted under this law as it currently exists or as it may be amended in the future. Consequently, subject to this law and to some limited exceptions in our certificate of incorporation, none of our directors will be liable to us or to our stockholders for monetary damages resulting from conduct as a director.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 21, 2007, the Company announced that our Board of Directors approved the repurchase of up to $2 million in common shares. No shares have been repurchased to date, and as a result of the pending purchase by the Company of EasyLink Services Corporation, the amount and timing of future purchases is uncertain.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* In accordance with Release No. 34-47986, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.

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.

Date: June 5, 2007

	INTERNET COMMERCE CORPORATION


	By:	/s/ Thomas J. Stallings
		Thomas J. Stallings
		Chief Executive Officer


	By:	/s/ Glen E. Shipley
		Glen E. Shipley
		Chief Financial Officer

EXHIBIT INDEX

Exhibit No.		Document

Exhibit 31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

*In accordance with Release No. 34-47986, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Good

EasyLink Services International (ESIC) Inactive 10-Q2007 Q3 Quarterly report

Content analysis

SIGNATURES