U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 30, 2001
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3645702
(State of incorporation) (I.R.S. Employer Identification Number)
805 Third Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 271-7640
(Registrant's telephone number, including area code)
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 |_|
As of June 13, 2001 the registrant had outstanding 9,659,262 shares of
Class A Common Stock and 2,574 shares of Class B Common Stock that are
convertible into Class A Common Stock.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of April 30, 2001 (unaudited)
and July 31, 2000............................................ 3
Consolidated Statements of Operations and Comprehensive Loss
for the Nine and Three Months Ended April 30, 2001
and April 30, 2000 (unaudited) .............................. 4
Consolidated Statements of Cash Flows for the Nine Months ended
April 30, 2001 and April 30, 2000 (unaudited)................ 5
Notes to Consolidated Financial Statements............................ 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 12-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 18
Item 2. Changes in Securities and Use of Proceeds.................... 18
Item 6. Exhibits and Reports on Form 8-K ............................ 18
SIGNATURES............................................................ 19
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
April 30, July 31,
2001 2000
----------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,309,664 $ 14,003,329
Marketable securities 873,523
Accounts receivable (net of allowance for doubtful accounts
of $75,977 and $74,388, respectively) 2,487,897 629,087
Note receivable 5,000,000
Prepaid expenses and other assets 478,271 209,112
------------ ------------
Total current assets 7,149,355 19,841,528
Restricted cash 548,403 523,863
Prepaid acquisition costs 369,486
Property and equipment, net 2,215,872 925,596
Capitalized software, net 370,851 474,592
Goodwill, net 18,562,664 182,927
Intangibles 7,185,300
Other assets 69,439 14,237
------------ ------------
Total assets 36,101,884 22,332,229
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,475,476 $ 1,090,859
Accrued dividends 190,590 275,763
Deferred revenue 161,756 250,000
Capital lease obligation 241,393 307,677
Other liabilities 185,463 86,237
------------ ------------
Total current liabilities 3,254,678 2,010,536
Capital lease obligation - less current portion 436,995 231,457
Deferred tax liability 3,233,385
------------ ------------
Total liabilities 6,925,058 2,241,993
Commitments and contingencies
Preferred stock:
Preferred stock - 5,000,000 shares authorized, including
10,000 series A preferred stock, 10,000 series C preferred
stock and 175 series S preferred stock
Series A preferred stock - par value $.01 per share, $1,000
liquidation value per share, 525 and 668 shares issued
and outstanding, respectively 5 7
Series C preferred stock - par value $.01 per share, $1,000
liquidation value per share, 10,000 shares issued and outstanding 100 100
Series S preferred stock - par value $.01 per share, $1,000 liquidation
value per share, 175 shares issued and none outstanding
Common stock:
Class A - par value $.01 per share, 40,000,000 shares
authorized, 9,652,228 and 6,388,445 shares issued and
outstanding, respectively 96,522 63,884
Class B - par value $.01 per share, 2,000,000 shares
authorized, 2,574 shares issued and outstanding 26 26
Class E-1 - par value $.01 per share, 2,000,000 shares
authorized, 286,427 shares issued and none outstanding
Class E-2 - par value $.01 per share, 2,000,000 shares
authorized, 286,427 shares issued and none outstanding
Additional paid-in capital 79,755,768 58,432,187
Accumulated deficit (50,519,718) (38,405,968)
Accumulated other comprehensive loss (155,877)
------------ ------------
Total stockholders' equity 29,176,826 20,090,236
------------ ------------
Total liabilities and stockholders' equity $ 36,101,884 $ 22,332,229
============ ============
See notes to consolidated financial statements
3
INTERNET COMMERCE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------------- ----------------------------
2001 2000 2001 2000
--------------- ------------ ----------- -------------
Revenue:
Revenues, net $ 3,041,468 $ 425,799 $ 6,940,238 $ 768,823
------------ ------------ ------------ ------------
Expenses:
Cost of revenues (including amortization of intangible
assets of $439,000 in the three months and nine months
ended April 30, 2001) 2,478,409 822,471 5,819,618 1,584,139
Product development and enhancement (excluding non-cash charges
for compensation and services of $97,809 for the
nine months ended April 30, 2000) 237,012 150,161 674,654 506,853
Selling and marketing (excluding non-cash charges for
compensation and services of $767,639 for the nine months
ended April 30, 2000) 1,362,391 1,094,755 4,066,437 2,267,328
General and administrative (excluding non-cash charges for
compensation and services of $450,110 for the nine months
ended April 30, 2001 and $2,445,809 for the nine months
ended April 30, 2000) 2,920,720 1,428,448 8,182,021 3,290,629
Non-cash charges for compensation and services 450,110 3,311,257
Impairment of acquired intangibles 1,871,900 1,871,900
------------ ------------ ------------ ------------
8,870,432 3,495,835 21,064,740 10,960,206
------------ ------------ ------------ ------------
Loss from operations (5,828,964) (3,070,036) (14,124,502) (10,191,383)
------------ ------------ ------------ ------------
Interest and investment income 57,311 279,449 434,340 418,941
Interest expense (21,315) (8,756) (59,962) (45,864)
Other income 30,994 30,994
------------ ------------ ------------ ------------
66,990 270,693 405,372 373,077
------------ ------------ ------------ ------------
Loss before income taxes $ (5,761,974) $ (2,799,343) $(13,719,130) $ (9,818,306)
Income tax benefit 1,605,380 1,605,380
------------ ------------ ------------ ------------
NET LOSS $ (4,156,594) $ (2,799,343) $(12,113,750) $ (9,818,306)
============ ============ ============ ============
Accrued dividends on preferred stock (102,518) (314,827)
------------ ------------ ------------ ------------
Loss attributable to common stockholders $ (4,259,112) $ (2,799,343) $(12,428,577) $ (9,818,306)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.45) $ (0.58) $ (1.47) $ (2.68)
============ ============ ============ ============
Weighted average number of common shares outstanding--
basic and diluted loss per share 9,519,102 4,834,371 8,461,208 3,669,923
============ ============ ============ ============
COMPREHENSIVE LOSS:
- -------------------
Net loss $ (4,156,594) $ (2,799,343) $(12,113,750) $ (9,818,306)
Other comprehensive (loss) income:
Unrealized (losses) gains (137,389) 4,000 (155,877) 34,000
------------ ------------ ------------ ------------
Comprehensive loss $ (4,293,983) $ (2,795,343) $(12,269,627) $ (9,784,306)
============ ============ ============ ============
See notes to consolidated financial statements
4
INTERNET COMMERCE CORPORATION
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended April 30,
-----------------------------------
2001 2000
--------------- ----------------
Cash flows from operating activities:
Net loss $(12,113,750) $ (9,818,306)
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment of assets 1,871,900
Depreciation and amortization 2,901,535 457,173
Provision for bad debts 53,696
Loss on sale of marketable securities 14,938
Non-cash charges for compensatory stock options issued 450,110 3,311,257
Deferred taxes (1,613,925)
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (1,177,037) (299,277)
Prepaid expenses and other assets 70,194 (92,304)
Accounts payable and accrued expenses (75,609) 280,045
Deferred revenue (346,998)
Other liabilities 14,116
------------ ------------
Net cash used in operating activities (9,965,768) (6,146,474)
------------ ------------
Cash flows from investing activities:
Payment for purchase of acquisitions, net of cash acquired (22,055)
Purchases of property and equipment (574,991) (221,670)
Capitalization of software development costs (74,230)
Purchase of certificates of deposit (24,540) (84,631)
Proceeds from sales of marketable securities 3,987,126
------------ ------------
Net cash (used in) provided by investing activities (695,816) 3,680,825
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 10,000,000
Proceeds from issuance of common stock 9,499,776
Proceeds from exercise of employee stock options 291,310 742,586
Proceeds from exercise of warrants 4,164,773
Payments of capital lease obligations (323,391) (134,378)
------------ ------------
Net cash (used in) provided by financing activities (32,081) 24,272,757
------------ ------------
Net (decrease) increase in cash and cash equivalents (10,693,665) 21,807,108
Cash and cash equivalents, beginning of period 14,003,329 114,258
------------ ------------
Cash and cash equivalents, end of period $ 3,309,664 $ 21,921,366
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 59,962 $ 45,864
Cash paid for income taxes during the period 24,366
Noncash investing and financing activities:
Issuance of common and preferred stock for settlement 176,000
Property acquired under capital lease 44,945 205,634
Accrued dividends on preferred stock 85,173
Unrealized loss in marketable securities 155,877
Fair value of assets acquired through business combinations
Fair value of assets acquired through business combinations 28,492,258
Payment for purchase of acquisitions, net of cash acquired 26,571,166
Liabilities assumed from business combinations 1,921,092
See notes to consolidated financial statements
5
INTERNET COMMERCE CORPORATION
Notes to Consolidated Financial Statements
April 30, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements 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, all
adjustments (consisting of normal recurring accruals) considered necessary for
fair presentation have been included. Operating results for the nine-month
period ended April 30, 2001 are not necessarily indicative of the results that
may be expected for the fiscal year ending July 31, 2001.
The balance sheet at July 31, 2000 has been derived from the audited financial
statements at that date, but does not include all the footnotes required by GAAP
for complete financial statements. For further information, refer to the audited
financial statements and footnotes thereto included in Internet Commerce
Corporation's (the "Company" or "ICC") Annual Report on Form 10-KSB for the
fiscal year ended July 31, 2000.
NOTE B - ORGANIZATION AND NATURE OF BUSINESS
The Company was incorporated under the name Infosafe Systems, Inc. in November
1991 in the State of Delaware.
ICC provides Internet-based e-commerce services for the e-commerce,
business-to-business communication services market. ICC.NET, our global
Internet-based value added network, or VAN, provides supply chain connectivity
solutions for electronic data interchange, or EDI, and e-commerce and offers
users a vehicle to securely send and receive files of any format and size.
The ICC.NET system uses the Internet and proprietary technology to deliver the
Company's customers' documents and data files to members of their trading
communities, many of which have incompatible systems, by translating the
documents and data files into any format required by the receiver. The system
can be accessed using a standard Web browser or virtually any other
communications protocol.
Through the acquisition of Intercoastal Data Corporation ("IDC") on August 3,
2000, ICC has expanded its capabilities to include an EDI service bureau, which
provides EDI services to small and mid-sized companies. IDC's services include
the conversion of electronic forms into hard copies and the conversion of hard
copies to an EDI format. IDC also provides Universal Product Code ("UPC")
services and maintains UPC catalogs for its customers. The acquisition of
Research Triangle Commerce, Inc. ("RTCI") on November 6, 2000, provides ICC with
the capability to deliver comprehensive business-to-business e-commerce
solutions. RTCI provides EC infrastructure solutions, on-site and off-site data
mapping services and conducts EDI seminars.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
it's wholly-owned subsidiary. All significant intercompany transactions have
been eliminated in consolidation.
6
NOTE C - SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Revenue recognition:
The Company derives its revenue from subscriptions to its ICC.NET service, which
include transaction, mailbox and fax transmission fees. The subscription fees
are both fixed and usage-based fees. Fixed subscription fees are recognized on a
pro-rata basis over the subscription period. Usage fees are recognized in the
period the services are rendered. The Company also derives revenue through
implementation fees and interconnection fees. Implementation fees are recognized
over the life of the subscription period, generally one year. Interconnection
fees are fees charged to connect to another VAN service and are recognized when
the data is transmitted to the connected service.
The Company also provides a broad range of professional services consisting of
EDI and e-commerce consulting, data mapping services and EDI education and
training at seminars hosted by leading universities around the United States.
Revenue from EDI and e-commerce consulting and education and training are
recognized when the services are provided. Revenue from data mapping services
are recognized when the map has been completed and delivered to the customer.
The Company also derives revenue from its service bureau. Service bureau
revenues are comprised of EDI services, including data translation services,
purchase order and invoice processing from EDI to print and print to EDI, UPC
services, including UPC number generation and UPC catalog maintenance and UPC
label printing. The service bureau also derives revenue from software licensing
and provides software maintenance and support. Revenues from the EDI services
and UPC services are recognized when the services are provided. The Company
accounts for its EDI software license sales in accordance with the American
Institute of Certified Public Accountants' Statement of Position 97-2, "Software
Revenue Recognition". Revenues from software licenses are recognized when all of
the following conditions are met: a non-cancelable license agreement has been
signed, the software has been delivered, there are no material uncertainties
regarding customer acceptance and collection of the resulting receivable is
reasonably assured. Revenues from software maintenance and support contracts are
recognized ratably over the life of the contract.
Revenue is deferred and recognized over the period the services are performed in
the event services are billed prior to providing services or billed prior to the
shipment of software.
NOTE D - ACQUISITIONS
Acquisition of IDC
On August 3, 2000, ICC consummated a merger with IDC (the "IDC Merger"). All
issued and outstanding shares of IDC common stock were converted into an
aggregate of 190,861 shares of ICC class A common stock. The former stockholders
of IDC received 47,715 additional shares of ICC class A common stock in December
2000. The issuance of the additional shares was pursuant to the merger agreement
and based on the change in ICC's class A common stock price from the date of the
closing to December 5, 2000, the date the registration statement ICC filed
covering the resale of the shares issued in the merger became effective under
the Securities Act of 1933, as amended (the "Securities Act").
It is the opinion of management that the IDC merger qualifies as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986.
7
NOTE D - ACQUISITIONS (CONTINUED)
The IDC merger was accounted for under the purchase method of accounting and
accordingly, the acquired assets and liabilities of IDC were recorded based on
their fair values at the date of acquisition. The results of operations of IDC
have been included in the consolidated financial statements for all periods
subsequent to the date of acquisition.
The allocation of the purchase price is summarized below:
Purchase Price:
Value of class A common stock issued $ 3,308,754
Transaction costs 256,972
------------
Total purchase price $ 3,565,726
============
Fair value of assets acquired:
Cash $ 347,133
Marketable securities 1,029,400
Fixed assets 79,931
Other assets 161,738
Liabilities assumed (479,633)
------------
Fair value of net assets acquired 1,138,569
------------
Cost in excess of net assets acquired $ 2,427,157
============
The cost in excess of net assets acquired is being amortized on a straight-line
basis over a period of ten years and is included in general and administrative
expenses in the statement of operations.
Acquisition of RTCI
On November 6, 2000, ICC completed the acquisition of RTCI pursuant to the
Agreement and Plan of Merger dated June 14, 2000 (the "Merger Agreement").
Under the terms of the Merger Agreement, RTCI's outstanding shares of common
stock were converted into $2,214,009 of cash and 2,719,083 shares of ICC class A
common stock. Issued and outstanding options and warrants to purchase RTCI
common stock were converted into options and warrants of ICC providing the
holders the right to receive, upon exercise, an aggregate of 419,348 shares of
ICC class A common stock and $364,722 of cash. The cash portion of the purchase
price was funded from cash acquired from RTCI.
It is the opinion of management that the acquisition of RTCI qualifies as a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986.
The acquisition of RTCI was accounted for under the purchase method of
accounting and accordingly, the acquired assets and liabilities of RTCI were
recorded based on their fair values at the date of acquisition. The results of
operations of RTCI have been included in the consolidated financial statements
for all periods subsequent to the acquisition.
8
NOTE D - ACQUISITIONS (CONTINUED)
The allocation of the purchase price is summarized below:
Purchase Price:
Value of class A common stock and options issued $ 17,220,870
Cash distributed to shareholders 2,214,009
Note receivable and accrued interest 5,063,698
Transaction costs 1,624,484
------------
Total purchase price $ 26,123,061
============
Fair value of assets acquired:
Cash $ 2,770,488
Fixed assets 1,220,166
Other assets 968,288
Identifiable intangibles 9,996,000
Liabilities assumed (1,441,459)
------------
Fair value of net assets acquired 13,513,483
------------
Cost in excess of net assets acquired 12,609,578
Deferred tax effect of purchase accounting 4,498,200
------------
Recorded goodwill $ 17,107,778
============
Goodwill related to the RTCI acquisition is being amortized on a straight-line
basis over a period of ten years and is included in general and administrative
expenses in the statement of operations.
The intangible assets acquired from RTCI were its workforce, valued at
$4,000,000, certain proprietary technology valued at $4,780,000, and its
customer list valued at $1,216,000. The value of these intangibles is being
amortized on a straight-line basis over periods of five to ten years.
Pro Forma Financial Information
The following unaudited pro forma summary financial information presents the
consolidated results of operations of the Company as if the acquisitions of IDC
and RTCI had occurred on August 1, 1999. The pro forma results are shown for
illustrative purposes only and do not purport to be indicative of the results
that would have been reported if the business combinations had occurred on the
date indicated or which may occur in the future.
Nine Months Ended Nine Months Ended
April 30, 2000 April 30, 2001
------------------- --------------------
Revenues $ 7,741,000 $ 8,433,000
Net loss $ (15,824,000) $(14,130,000)
Basic and diluted loss per share $ (2.39) $ (1.49)
9
NOTE E - BUSINESS SEGMENT INFORMATION
As a result of the acquisitions of IDC and RTCI, the Company has three operating
segments . Prior to these acquisitions the Company had one operating segment.
These three operating segments are:
ICC.NET service - Our ICC.NET service, the company's global Internet-based value
added network or VAN, uses the Internet and our proprietary technology to
deliver our customers' documents and data files to members of their trading
communities, many of which may have incompatible systems, by translating the
documents and data files into any format required by the receiver.
Service Bureau - Our service bureau manages and translates the data of small and
mid-sized companies that exchange EDI data with large companies and provides
various EDI and UPC (universal product code) services. Our services bureau also
licenses EDI software.
Professional Services - Our professional services segment provides comprehensive
business-to-business e-commerce solutions including e-commerce infrastructure
solutions and data mapping services. Our professional services segment also
conducts a series of product-independent one-day EDI seminars for e-commerce
users.
The table below summarizes information about operations and long-lived assets as
of and for the three and nine months ended April 30, 2001.
Service Professional
ICC.NET Bureau services (A) Total
------- ------ ------------ -----
Three Months - April 30, 2001
Revenues from external customers $ 1,602,157 $ 329,319 $ 1,109,992 $ 3,041,468
============ ============ ============ ============
Loss before income taxes ($ 1,893,316) ($ 165,325) ($ 3,703,333) ($ 5,761,974)
============ ============ ============ ============
Supplemental segment information:
Amortization and depreciation $ 239,132 $ 70,606 $ 1,010,726 $ 1,320,464
Impairment of acquired intangibles $ 1,871,900 $ 1,871,900
Nine months - April 30, 2001
Revenues from external customers $ 3,542,234 $ 1,086,504 $ 2,311,500 $ 6,940,238
============ ============ ============ ============
Loss before income taxes ($ 7,603,695) ($ 296,062) ($ 5,819,373) ($13,719,130)
============ ============ ============ ============
Supplemental segment information:
Amortization and depreciation $ 687,368 $ 191,765 $ 2,022,402 $ 2,901,535
Impairment of acquired intangibles $ 1,871,900 $ 1,871,900
As of April 30, 2001
Property and Equipment, net $ 1,097,312 $ 79,931 $ 1,038,629 $ 2,215,872
Capitalized software, net 296,620 74,231 370,851
Acquired identified intangibles, net 7,185,300 7,185,300
Goodwill, net 65,331 2,244,944 16,252,389 18,562,664
------------ ------------ ------------ ------------
Long lived assets, net $ 1,459,263 $ 2,399,106 $ 24,476,318 $ 28,334,687
============ ============ ============ ============
(A) - Subsequent to RTCI's acquisition as of November 6, 2000.
10
NOTE F - CONCENTRATIONS
The Company has a major customer that accounted for 14% of the Company's
consolidated revenue for the nine-month period ended April 30, 2001. At April
30, 2001 approximately 30% of accounts receivable was attributed to that
customer. No customer accounted for more than 10% of revenue or accounts
receivable in the nine-months ended April 30, 2000.
NOTE G - STOCKHOLDERS' EQUITY
[1] Series A preferred stock:
In August 2000, one hundred shares of ICC series A preferred stock were
converted into 20,000 shares of ICC class A common stock.
In January 2001, forty-three shares of ICC series A preferred stock were
converted into 14,333 shares of ICC class A common stock.
[2] Stock options:
In November 2000, in connection with the acquisition of RTCI, ICC assumed
RTCI's employee stock option plan. The employee options to purchase RTCI
common stock were converted into options to purchase 349,145 shares of ICC
class A common stock and cash upon exercise of the options pursuant to the
terms of the Merger Agreement. The Company paid $28,616 upon exercise of
stock options to former RTCI employees during the nine-month period ended
April 30, 2001.
During the nine-month period ended April 30, 2001, current and former
employees of ICC exercised stock options to purchase 160,646 shares of
class A common stock.
[3] Warrants:
In November 2000, ICC assumed outstanding warrants of RTCI. These warrants
to purchase shares of common stock of RTCI were converted into warrants to
purchase 45,760 shares of ICC class A common stock and cash upon exercise
of the warrants pursuant to the terms of the Merger Agreement.
NOTE H - IMPAIRMENT OF ACQUIRED INTANGIBLES
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Due to a reduction of the workforce of RTCI during and subsequent
to the three-month period ended April 30, 2001, the Company recorded an
impairment charge of $1,871,900 related to the acquired workforce of RTCI in the
three-month period ended April 30, 2001.
11
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, 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 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 quarterly report, the words "anticipate," "believe," "estimate,"
"expect," "may," "will," "should," "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 "cautionary 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 listed below under the
heading "Overview" and in our registration statements and periodic reports filed
with the Securities and Exchange Commission under the Securities Act and the
Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure you
that our expectations will prove to be correct. Based upon changing conditions,
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 report as anticipated, believed, estimated,
expected or intended.
References in this Item 2 to "we," "our," "ICC" or the "Company" mean Internet
Commerce Corporation and its subsidiary on a consolidated basis, unless
otherwise indicated.
Overview
We developed our ICC.NET service as an alternative to the EDI services that are
currently provided by traditional VANs that offer their services primarily using
dedicated telecommunications links. Our ICC.NET service, the company's global
Internet-based value added network or VAN, uses the Internet and our proprietary
technology to deliver our customers' documents and data files to members of
their trading communities, many of which may have incompatible systems, by
translating the documents and data files into any format required by the
receiver. We believe that our ICC.NET service has significant advantages over
traditional VANs, and email-based and other Internet-based systems, because our
service has lower cost, higher level of service, greater transmission speed and
more features. ICC.NET provides the following services:
o Traditional VAN services -- our ICC.NET service
provides the full suite of traditional VAN services,
but uses the Internet to provide cost savings and
increased capabilities for our customers;
o EDI for web-based retailers -- our ICC.NET service
provides an electronic document and data file
delivery link between web-based retailers and their
vendors that require that documents and data files be
transmitted using electronic data interchange, or
EDI, format;
o EDI to fax service -- our ICC.NET service can
translate electronic documents into fax format and
send the documents by fax to our customers' trading
partners that cannot receive electronically
transmitted documents; and
o Large-scale electronic document management and
delivery -- our ICC.NET service can transmit
large-scale non-EDI electronic documents and data
files and provides real-time delivery, archiving,
security, authentication and audit services. Our
ICC.NET service translates and transmits electronic
documents, such as purchase orders, requests for
proposals and receipts, images and other data over
the Internet.
12
The acquisition of IDC in August 2000 has expanded our capabilities to include
an EDI and UPC service bureau division. Our service bureau manages and
translates the data of small and mid-sized companies that exchange EDI data with
large companies and provides the following services:
o Receives electronic purchase orders from large
retailers and converts the purchase orders into hard
copies for their suppliers that are our customers.
o Converts paper invoices for our customers into EDI
which are transmitted to the large companies.
o Provides UPC (Universal Product Code) services for
ASN (Advanced Ship Notice) Casing & UCC (Uniform Code
Council) 128 labels.
o Maintains UPC catalogs for its customers allowing the
customers to generate the UPC numbers and tickets for
the items in the UPC catalogs.
In November 2000 we acquired RTCI, a vertically integrated provider of
consulting and education services. Our professional services segment facilitates
the development and operations of comprehensive business-to-business e-commerce
solutions. We provide the following professional services:
o EC infrastructure solutions by providing mission
critical e-commerce consulting, software, outsourced
services, translation/mapping and technical resource
management. Mapping is the activity of making logical
connections between two entities.
o On-site and off-site data mapping services to
maximize productivity and efficiency in managing
inter-company and intra-company data transaction
requirements.
o A series of product-independent one-day EDI seminars
for e-commerce users. The seminars are hosted by
leading universities and training facilities in the
United States. We also develop in-house EDI training
programs.
We will need to generate significant additional revenue and decrease expenses to
achieve and maintain profitability. If we do not increase our revenue
significantly and decrease expenses, we will continue to be unprofitable.
We expect to base our expenditures on our plans and estimates of future revenue.
We may be unable to adjust spending in a timely manner if we experience an
unexpected shortfall in our revenue. As a result, we may not ever achieve
profitability.
Results of Operations and Financial Condition
The results of operations for the three and nine months ended April 30, 2001
include the results of operations of IDC and RTCI from their dates of
acquisition on August 3, 2000 and November 6, 2000, respectively.
Three Months Ended April 30, 2001 Compared with Three Months Ended April 30,
2000.
Our revenue was $3,041,000 in the three months ended April 30, 2001 (the "2001
Third Quarter") and $426,000 in the three months ended April 30, 2000 (the "2000
Third Quarter"). Revenue related to our ICC.NET service was $1,602,000, or 53%
of 2001 Third Quarter revenue. Our ICC.NET service revenue increased $1,176,000
in the 2001 Third Quarter compared to the 2000 Third Quarter. This increase
includes $500,000 of guaranteed service fees from Triaton GmbH (formerly
Hightech International Services GmbH), a subsidiary of ThyssenKrupp Information
Services GmbH, under a Joint Services Agreement dated July 28, 2000. Service
revenue from our ICC.NET service
13
also increased as a result of increased transaction fees generated from a larger
billable customer base and increased monthly flat fees from the addition of flat
fee paying customers in the total amount of $676,000. RTCI, acquired in November
2000, accounted for $1,110,000, or 36% of the 2001 Third Quarter revenue.
Revenue generated by RTCI includes professional services consisting of
consulting, custom solutions and mapping services. Revenue in the amount of
$329,000, or 11% of the 2001 Third Quarter revenue was generated from our
service bureau. We acquired our service bureau through our purchase of IDC in
August 2000. The service bureau's revenue was primarily generated from the
services performed, customer support and licensing fees.
Cost of revenues increased to $2,478,000 in the 2001 Third Quarter from $822,000
in the 2000 Third Quarter. Cost of revenues relating to our ICC.NET service was
$903,000, or 56% of revenue derived from the service, as compared to $822,000 in
the 2000 Third Quarter. Salaries and employee benefits related to the ICC.NET
service increased $307,000. Data lines and support increased $55,000 in the 2001
Third Quarter. These increases were due to the increased use of our ICC.NET
service, which resulted in the hiring of additional employees for customer and
technical support. These increases were offset by a reduction of $286,000 in
technical support costs. Cost of revenues relating to RTCI were $1,406,000, or
123% of revenues derived from professional services. Salaries and employee
benefits relating to our professional services were $634,000 and consultant fees
were $142,000. Other costs of services relating to our professional services
were software and hardware purchases in the amount of $74,000, non-reimbursable
travel expenses in the amount of $38,000, amortization of acquired intangibles
relating to the assembled workforce and proprietary technology in the amount of
$439,000 and other expenses totaling $79,000. Costs of services relating to our
service bureau totalled $170,000, or 52% of revenues derived from the service
bureau. Salaries and employee benefits relating to our service bureau were
$121,000. Data lines and support amounted to $13,000, facility overhead was
$19,000 and other expenses relating to our service bureau totaled $17,000.
Personnel dedicated to providing our services increased to 92, of whom 46
performed professional services, 14 were employed in our service bureau and 32
supported our ICC.NET service at the end of the 2001 Third Quarter compared to
19 supporting our ICC.NET service at the end of the 2000 Third Quarter.
Product development and enhancement costs relating to the maintenance and
improvement of our products and services increased to $237,000 in the 2001 Third
Quarter from $150,000 in the 2000 Third Quarter. In the 2001 Third Quarter,
salaries and employee benefits increased $204,000 as a result of increased
staffing to enhance our ICC.NET system. In addition, facility overhead increased
a total of $20,000 from the renting of additional space. These increases were
offset by a $105,000 decrease in consulting and other expenses that was the
result of the addition of new employees. Included in the above amounts was
$79,000 in expenses incurred by our new service bureau. Personnel dedicated to
product development and enhancements increased to 19, of whom 6 supported our
service bureau and 13 supported our ICC.NET service at the end of the 2001 Third
Quarter compared to 12 supporting out ICC.NET service at the end of the 2000
Third Quarter.
Selling and marketing expenses increased to $1,362,000 in the 2001 Third Quarter
from $1,095,000 in the 2000 Third Quarter. The increase is primarily
attributable to the selling and marketing efforts related to our professional
services which totalled $402,000. Salaries and benefits related to the selling
and marketing efforts for our ICC.NET service decreased $190,000. The 2000 Third
Quarter included a specific telesales campaign that was not repeated in the 2001
Third Quarter. Our service bureau division incurred selling expenses in the
amount of $35,000 which was primarily comprised of salaries and benefits.
Personnel dedicated to selling and marketing increased to 25 as of the end of
the 2001 Third Quarter, of whom 11 supported professional services and 14
supported our service bureau and ICC.NET service. At the end of the 2000 Third
Quarter, there were 22 personnel related to the selling and marketing efforts of
our ICC.NET service.
General and administrative costs increased to $2,921,000 in the 2001 Third
Quarter from $1,428,000 in the 2000 Third Quarter. The amortization of goodwill
resulting from our acquisition of RTCI accounted for $428,000 of the increase.
General and administrative expenses supporting professional services accounted
for $682,000 of the overall increase. General and administrative expenses
included $263,000 for costs associated with the technological integration of the
acquired companies. Salaries and benefits decreased $145,000 primarily due to
the termination of three executive officers. Severance of $438,000 was
recognized due to the termination of an officer in the 2001 Third Quarter.
Personnel related to general and administrative functions increased to 29, of
whom 11 supported
14
professional services and 18 supported our service bureau and ICC.NET service at
the end of the 2001 Third Quarter compared to 16 supporting our ICC.NET service
at the end of the 2000 Third Quarter.
Impairment of acquired intangibles in the amount of $1,872,000 resulted from a
reduction of the workforce of RTCI during and subsequent to the 2001 Third
Quarter. The workforce of RTCI was recorded at its estimated fair value at the
time of the merger. The value of the workforce has been impaired by the
reduction of approximately 50% of the RTCI personnel. We believe that other
acquired intangible assets and goodwill associated with the RTCI acquisition
have not been impaired by the reduction of the workforce.
We earned income from investments of $57,000 in the 2001 Third Quarter and
$279,000 in the 2000 Third Quarter. The decrease in the 2001 Third Quarter was
due to a decrease of average cash balances and reduced interest rates during the
period.
Income tax benefit, of $1,605,000 in the 2001 Third Quarter primarily resulted
from the impairment of our assembled workforce, which decreased our deferred tax
liability. Our deferred tax liability also decreased from the amortization of
our acquired identifiable intangible assets associated with our acquisitions.
Nine Months Ended April 30, 2001 Compared with Nine Months Ended April 30, 2000.
Our revenue was $6,940,000 in the nine months ended April 30, 2001 (the "2001
Nine Months") and $769,000 in the nine months ended April 30, 2000 (the "2000
Nine Months"). Revenue related to our ICC.NET service was $3,542,000, or 51% of
2001 Nine Months revenue. Our ICC.NET service revenue increased $2,773,000 in
the 2001 Nine Months compared to the 2000 Nine Months. This increase includes
$1,000,000 of guaranteed service fees from Triaton GmbH (formerly Hightech
International Services GmbH), a subsidiary of ThyssenKrupp Information Services
GmbH, under a Joint Services Agreement dated July 28, 2000. Service revenue from
our ICC.NET service also increased as a result of increased transaction fees
generated from a larger billable customer base and increased monthly flat fees
from the addition of flat fee paying customers in the total amount of
$1,773,000. RTCI, acquired in November 2000, accounted for $2,312,000, or
approximately 33% of the revenue in the 2001 Nine Months. Revenue generated by
RTCI includes professional services consisting of consulting, custom solutions
and mapping services. Revenue in the amount of $1,086,000, or 16% of the 2001
Nine Months revenue, was generated from our service bureau. We acquired our
service bureau through our purchase of IDC. The service bureau's revenue was
primarily generated from the services performed, customer support and licensing
fees.
Cost of revenues increased to $5,820,000 in the 2001 Nine Months from $1,584,000
in the 2000 Nine Months. Cost of revenues relating to our ICC.NET service was
$2,691,000, or 76% of revenues derived from the service in the 2001 Nine Months,
versus $1,584,000, or 206% of revenues in the 2000 Nine Months. Salaries and
employee benefits related to the ICC.NET service increased $740,000. Data lines
and support increased $151,000, depreciation and amortization increased
$124,000, cost for consultants increased $115,000. The increases in salaries and
employee benefits and data lines and support were due to the increased use of
our service, which resulted in the hiring of additional employees in customer
and technical support. The increase in depreciation and amortization was the
result of increased amortization of our capitalized software costs. Cost of
revenues relating to RTCI were $2,664,000, or 115% of revenues derived from
professional services. Salaries and employee benefits relating to our
professional services were $1,650,000 and consultant fees were $277,000. Other
costs of revenues relating to our professional services included amortization of
acquired intangibles relating to the workforce and proprietary technology in the
amount of $439,000. Costs of revenues relating to our service bureau totaled
$464,000, or 43% of revenues derived from the service bureau. Salaries and
employee benefits relating to our service bureau were $320,000.
Product development and enhancement costs related to the maintenance and
improvement of our products and services increased to $675,000 in the 2001 Nine
Months from $507,000 in the 2000 Nine Months. In the 2001 Nine Months salaries
and employee benefits related to our ICC.NET service increased $550,000. This
increase was offset
15
by a $110,000 decrease in consulting expenses, which was the result of the
addition of new employees. Product development and enhancement costs incurred by
our service bureau were $266,000, which consisted of $215,000 in salaries and
benefits and $51,000 for consultants.
Selling and marketing expenses increased to $4,066,000 in the 2001 Nine Months
from $2,267,000 in the 2000 Nine Months. The increase is attributable in part to
the selling and marketing expenses related to our professional services totaling
$734,000, which was comprised primarily of salaries and related expenses of
$479,000, travel and entertainment in the amount of $81,000, and trade shows and
advertising costs in the amount of $101,000. Salaries and benefits related to
the selling and marketing efforts for our ICC.NET service increased $421,000.
Other increases in selling and marketing expenses related to our ICC.NET service
included trade shows and advertising in the amount of $199,000 as we increased
our marketing efforts, facility overhead in the amount of $131,000 due to the
rental of additional space, and travel and entertainment in the amount of
$63,000 related to the increased participation in trade shows. Our new service
bureau incurred selling expenses in the amount of $77,000 which was primarily
comprised of salaries and benefits.
General and administrative costs increased to $8,182,000 in the 2001 Nine Months
from $3,291,000 in the 2000 Nine Months. The amortization of goodwill and
acquired intangibles resulting from our acquisition of RTCI accounted for
$1,325,000 of the increase. General and administrative expenses supporting
professional services accounted for $1,537,000 of the overall increase. These
expenses were comprised primarily of salaries and benefits in the amount of
$647,000, rent in the amount of $340,000, and depreciation and amortization in
the amount of $228,000. In addition, general and administrative expenses include
an increase in rent of $331,000 from the rental of additional space, of which
$61,000 was due to the purchase of IDC. We incurred expenses of $793,000
associated with the technological integration of the acquired companies.
Salaries and employee benefits increased $209,000 due to the overall growth of
the Company, offset in part by the termination of three executive officers.
Severance of $438,000 was recognized due to the termination of an executive
officer in the 2001 Nine Months. Amortization of goodwill relating to our
purchase of IDC was $183,000.
Non-cash charges for compensation and services amounted to $450,000 in the 2001
Nine Months and $3,311,000 in the 2000 Nine Months. In March 2000, ICC granted
options to purchase 100,000 shares of class A common stock pursuant to a
consulting agreement with a former executive officer and board member. The
options were valued at $6,318,850 and were being amortized as consulting expense
over the term of the consulting agreement. Non-cash charges for these options
amounted to $450,000 during the 2001 Nine Months. On September 22, 2000, the
former board member forfeited the options. For the 2000 Nine Months, ICC
recorded a total of $3,311,000 in non-cash charges in connection with these
options.
Impairment of acquired intangibles in the amount of $1,872,000 resulted from a
reduction of the workforce of RTCI during and subsequent to the 2001 Nine
Months. The workforce of RTCI was recorded at its estimated fair value at the
time of the merger. The value of the workforce has been impaired by the
reduction of approximately 50% of the RTCI personnel. We believe that other
acquired intangible assets have not been impaired by the reduction in the
workforce.
Income tax benefit of $1,605,000 in the 2001 Nine Months primarily resulted from
the impairment of our workforce, which decreased our deferred tax liability. Our
deferred tax liability also decreased from the amortization of our acquired
identifiable intangible assets associated with our acquisitions.
Liquidity and Capital Resources
Current assets decreased to $7,149,000 as of April 30, 2001 from $19,842,000 as
of July 31, 2000. The decrease was primarily due to a decrease in cash and cash
equivalents of $10,694,000 from continuing operating losses and acquisition
payments, an increase in marketable securities acquired from IDC of $874,000, an
increase in accounts receivable of $1,859,000, of which $750,000 is due to the
Company from Triaton GmbH and the balance is due to increased business activity
and our acquisitions, a decrease of a note receivable in the amount of
$5,000,000, which was converted into equity in RTCI, and an increase in prepaid
and other assets of $268,000.
16
Total liabilities increased to $6,925,000 as of April 30, 2001 from $2,242,000
as of July 31, 2000. The increase was primarily the result of an increase of
current and non-current deferred tax liability of $3,233,000, an increase in
accrued expenses of $1,409,000, an increase in capital lease obligations of
$139,000 and an increase in other liabilities of $99,000. This was offset by a
decrease in accrued dividends, accrued revenue and accounts payables totaling
$197,000. The deferred tax liability arose from the acquisition of certain
intangibles from RTCI, specifically $4,780,000 allocated to mapping technology,
$4,000,000 allocated to the workforce and $1,216,000 allocated to the customer
list.
At April 30, 2001, working capital decreased to $3,895,000 from $17,831,000 at
July 31, 2000. The decrease was the result of continuing losses and acquisition
payments.
We have financed our operations through private placements during fiscal 1994,
our initial public offering during fiscal 1995 (the "IPO"), a private placement
in March 1997, a private placement of bridge note units during fiscal 1998 and
1999, a private placement of series A preferred stock in April 1999 and private
placements of our class A common stock, series C preferred stock and warrants in
November 1999. We anticipate losses through fiscal 2001 as we continue to expand
commercial markets for our ICC.NET service and service bureau.
Our principal sources of liquidity, which consisted of cash and cash equivalents
and marketable securities, decreased to $4,183,000 as of April 30, 2001 from
$14,003,000 as of July 31, 2000. Net cash used in operating activities was
$9,966,000 for the 2001 Nine Months compared to $6,146,000 for the 2000 Nine
Months. The increase in cash used in operating activities was primarily the
result of the operating losses of RTCI incurred subsequent to its acquisition.
Cash flows used in investing activities were $696,000 for the 2001 Nine Months
compared to $3,681,000 provided by investing activities for the 2000 Nine
Months. The decrease in cash provided by investing activities was primarily due
to the sale of marketable securities during the 2000 Nine Months. No such sales
occurred in the 2001 Nine Months. The primary reason for cash used in investing
activities in the 2001 Nine Months was to acquire property and equipment. Net
cash used in financing activities was $32,000 in the 2001 Nine Months compared
to $24,273,000 provided by financing activities in the 2000 Nine Months. The
large amount of cash provided by financing activities in the 2000 Nine Months
was primarily the result of proceeds from various private placements referred to
above. No such transactions occurred in the 2001 Nine Months.
We believe that as a result of the workforce reduction that took place at the
end of January 2001 and a workforce reduction subsequent to the Nine Months
ended April 30, 2001, planned reductions of various other expenses, including
leased facilities and anticipated revenue increases, our existing cash resources
should provide sufficient working capital through April 30, 2002 without raising
additional capital. If, however, we are not able to achieve sufficient cost
reductions on a timely basis or if our revenue does not increase as anticipated
for competitive or other reasons, our cash resources will not be sufficient and
we will require additional financing. We are exploring the possibility of
raising additional capital in a private placement or a series of private
placements that would yield us $2,000,000 to $5,000,000 in proceeds. There can
be no assurances that the terms of any available financing will be acceptable to
us, or that any financing will be consummated.
We have a net operating loss carryforward of approximately $58 million to offset
future taxable income for federal income tax purposes. The utilization of the
loss carryforward to reduce any such future income taxes will depend on our
ability to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The carryforward expires from 2007 to 2020. The
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder 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 IPO, the net operating loss
carryover of approximately $1.9 million incurred prior to the IPO will be
subject to an annual limitation of approximately $400,000 until that portion of
the net operating loss is utilized or expires. Also, due to the private
placement of series A preferred stock in 1999, the net operating loss carryover
of approximately $18 million incurred prior to the private placement will be
subject to an annual limitation of approximately $1 million until that portion
of the net operating loss is utilized or expires.
17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
-----------------
In October 2000, Thomas Lipscomb, a former President and Chief Executive Officer
of the Company, commenced an action against Alan Alpern, a former officer of the
Company, and against Arthur Medici, a former officer and a current director of
the Company, in the Supreme Court of the State of New York, County of New York.
In the action, Mr. Lipscomb claims that Messrs. Alpern and Medici tortuously
interfered with his employment agreement with the Company. Mr. Lipscomb seeks
compensatory damages of $672,000 and punitive damages of $1 million. Both
Messrs. Alpern and Medici have requested that the Company indemnify them
pursuant to its by-laws, requests that the Company is currently considering. It
is the Company's understanding that both Messrs. Alpern and Medici intend to
defend the action vigorously.
Item 2: Changes in Securities and Use of Proceeds
-----------------------------------------
In April 2001, ICC issued 111,142 shares of class A common stock as a dividend
payment on the series C preferred stock. .
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits. None.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the three-month period ended
April 30, 2001.
18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERNET COMMERCE CORPORATION
-----------------------------
(Registrant)
Date: June 14, 2001 By: /s/ G. Michael Cassidy
-------------------------------
G. Michael Cassidy
President and Chief Executive Officer
(Principal Executive Officer)
Date: June 14, 2001 By: /s/ Walter M. Psztur
--------------------------
Walter M. Psztur
Chief Financial Officer
(Principal Financial and
Accounting Officer)