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 October 31, 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 December 14, 2001 the registrant had outstanding 11,021,096 shares
of Class A Common Stock.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of October 31, 2001
(unaudited) and July 31, 2001.................................... 3
Consolidated statements of operations and comprehensive
loss for the three months ended October 31, 2001
(unaudited) and October 31, 2000 (unaudited) .................... 4
Consolidated statements of cash flows for the three
months ended October 31, 2001(unaudited) and October 31,
2000 (unaudited)................................................. 5
Notes to consolidated financial statements....................... 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 11-15
Item 3 Quantitative and Qualitative Disclosures About Market Risk....... 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 15
Item 6. Exhibits and Reports on Form 8-K ................................ 15
SIGNATURES................................................................ 16
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
October 31, July 31,
2001 2001
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,505,845 $ 2,223,487
Marketable securities 423,788 665,552
Accounts receivable, net of allowance for doubtful
accounts of $259,613 and $224,022, respectively 1,800,777 1,588,242
Prepaid expenses and other current assets 611,040 401,334
------------ ------------
Total current assets 6,341,450 4,878,615
Restricted cash 276,635 276,635
Property and equipment, net 1,711,883 1,920,662
Software development costs, net 461,410 425,471
Goodwill, net 3,904,684 2,194,067
Other intangible assets, net 3,824,000 5,917,854
Other assets 58,649 60,794
------------ ------------
Total assets $ 16,578,711 $ 15,674,098
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 668,469 $ 713,670
Accrued expenses 2,321,325 2,381,788
Accrued dividends - preferred stock 336,335 273,289
Deferred revenue 255,734 306,764
Capital lease obligation 304,089 328,480
Other liabilities 211,908 228,189
------------ ------------
Total current liabilities 4,097,860 4,232,180
Capital lease obligation - less current portion 256,111 255,009
------------ ------------
Total liabilities 4,353,971 4,487,189
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock:
Preferred stock - 5,000,000 shares authorized,
including 10,000 shares series A, 10,000 shares
series C and 175 shares series S:
Series A preferred stock - par value $.01 per share,
225 shares issued and outstanding (liquidation
value of $228,002) 2 2
Series C preferred stock - par value $.01 per share,
44.76 votes per share; 10,000 shares issued and
outstanding (liquidation value of $10,333,333) 100 100
Common stock:
Class A - par value $.01 per share, 40,000,000 shares
authorized, one vote per share; 10,957,822 and
9,770,180 shares issued and outstanding, respectively 109,578 97,702
Class B - par value $.01 per share, 2,000,000 shares
authorized, six votes per share; 1,930 shares issued
and outstanding 19 19
Additional paid-in capital 83,808,747 80,750,153
Accumulated deficit (71,366,376) (69,261,320)
Accumulated other comprehensive loss (269,290) (209,728)
Deferred compensation - restricted stock (58,040) (190,019)
------------ ------------
Total stockholders' equity 12,224,740 11,186,909
------------ ------------
Total liabilities and stockholders' equity $ 16,578,711 $ 15,674,098
============ ============
See notes to consolidated financial statements
3
INTERNET COMMERCE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three Months Ended
October 31,
-------------------------------
2001 2000
----------- -----------
Revenues:
Services $ 3,045,927 $ 1,316,385
----------- -----------
Expenses:
Cost of services (excluding non-cash compensation of $93,058 in 2002) 2,482,453 1,059,014
Product development and enhancement 244,742 152,198
Selling and marketing (excluding non-cash compensation of $16,205 in 2002) 975,556 1,177,917
General and administrative (excluding non-cash compensation of $22,716 and
$450,111, respectively) 1,359,824 1,959,362
Non-cash charges for stock-based compensation and services 131,979 450,111
----------- -----------
5,194,554 4,798,602
----------- -----------
Operating loss (2,148,627) (3,482,217)
----------- -----------
Other income and expense:
Interest and investment income 72,585 217,799
Interest expense (29,014) (15,936)
----------- -----------
43,571 201,863
----------- -----------
Net loss $(2,105,056) $(3,280,354)
Dividends on preferred stock (63,046) (106,226)
----------- -----------
Loss attributable to common stockholders $(2,168,102) $(3,386,580)
=========== ===========
Basic and diluted loss per common share $ (.22) $ (.51)
=========== ===========
Weighted average number of common shares outstanding-- basic and diluted
loss per share 9,813,593 6,616,766
=========== ===========
Comprehensive loss:
- -------------------
Net loss (2,105,056) (3,280,354)
Other comprehensive loss:
Unrealized holding loss (59,562) (75,430)
----------- -----------
Comprehensive loss $(2,164,618) $(3,355,784)
=========== ===========
See notes to consolidated financial statements
4
INTERNET COMMERCE CORPORATION
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended October 31,
-----------------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (2,105,056) $ (3,280,354)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 562,481 201,408
Allowance for doubtful accounts 53,877 --
Gain on sale of marketable securities (64,637) --
Non-cash charges for equity instruments issued
for compensation and services 131,979 450,111
Changes in:
Accounts receivable (266,412) 129,217
Prepaid expenses and other assets (65,468) (131,269)
Accounts payable (45,201) (131,382)
Accrued expenses (139,414) (44,235)
Deferred revenue (51,031) (270,206)
Other liabilities (16,281) 14,757
------------ ------------
Net cash used in operating activities (2,005,163) (3,061,953)
------------ ------------
Cash flows from investing activities:
Payment for purchase of acquisition, net of cash acquired -- 293,289
Capitalization of software development costs (95,264) --
Purchases of property and equipment (1,429) (102,713)
Purchase of certificate of deposits -- (14,010)
Proceeds from sales of marketable securities 246,839 --
------------ ------------
Net cash provided by investing activities 150,146 176,566
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net 3,189,219 --
Proceeds from exercise of employee stock options 23,249 154,912
Payments of capital lease obligations (75,093) (82,244)
------------ ------------
Net cash provided by financing activities 3,137,375 72,668
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,282,358 (2,812,719)
Cash and cash equivalents, beginning of period 2,223,487 14,003,329
------------ ------------
Cash and cash equivalents, end of period $ 3,505,845 $ 11,190,610
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 29,014 $ 15,936
Noncash investing and financing activities:
Issuance of common stock for services performed 77,400 --
Property acquired under capital lease 51,804 --
Conversion of note to equity of RTCI -- 5,063,699
Amounts related to business acquisition:
Fair value of assets acquired, net of cash acquired -- 3,684,540
Less:
Liabilities assumed -- 479,633
Fair value of equity instruments issued -- 3,308,754
Transactions costs paid in prior period -- 189,442
------------ ------------
-- 3,977,829
------------ ------------
Payment for purchase of acquisitions, net of cash acquired -- 293,289
See notes to consolidated financial statements
5
INTERNET COMMERCE CORPORATION
Notes to Financial Statements
October 31, 2001
1. 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 three-month period ended October 31, 2001 are
not necessarily indicative of the results that may be expected for the
fiscal year ending July 31, 2002.
The balance sheet at July 31, 2001 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-K for the fiscal year ended July 31, 2001.
2. 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 services for the electronic 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
electronic 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
customers' documents and data files to members of their trading
communities, many of which have incompatible systems, by translating such
documents and data files into any format required by the receiver. The
ICC.Net system can be accessed using a standard web browser or virtually
any other communications protocol.
The acquisition of Research Triangle Commerce, Inc. ("RTCI") on November
6, 2000, gives the Company the capability to facilitate the development
and operations of comprehensive business-to-business electronic commerce
solutions. RTCI specializes in electronic commerce solutions involving EDI
and EAI (Enterprise Application Integration) by providing mission critical
electronic commerce consulting, electronic commerce software, outsourced
electronic commerce services and technical resource management.
Through the acquisition of Intercoastal Data Corporation ("IDC") on August
3, 2000, ICC expanded its capabilities to include an EDI service bureau,
which provides EDI services to small and mid-sized companies. These
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, or UPC, services and maintains UPC catalogs for
our customers.
In October 2001, we sold in a private placement 1,159,716 shares of class
A common stock and warrants to purchase 347,915 additional shares of class
A common stock for gross proceeds of $3,189,219. The warrants expire in
October 2006 and are exercisable at $3.58 per share. As of October 31,
2001, we had cash and cash equivalents and marketable securities of
$3,930,000. We believe these resources provide us with sufficient
liquidity to continue in operation through July 31, 2002. However, if our
cost reductions do not achieve sufficient savings, if our expenses
increase more than anticipated, if our revenue does not increase as
anticipated because of competitive or other reasons or if our accounts
receivable increases further as a result of a further lengthening of the
collection cycle, our cash resources may not be sufficient and we will
require additional financing. There can be no assurances that the terms of
any financing will be available or that the terms will be acceptable to
us, or that any financing will be consummated.
6
INTERNET COMMERCE CORPORATION
Notes to Financial Statements
October 31, 2001
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany transactions
have been eliminated in consolidation.
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 comprised of 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 electronic commerce consulting, data mapping
services and EDI education and training at seminars hosted by leading
universities around the United States. Revenue from EDI and electronic
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. Revenues
from fixed fee professional service contracts are recognized using
contract accounting based on the estimated percentage of completion.
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, 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: (1) a non-cancelable non-contingent
license agreement has been signed; (2) the software product has been
delivered; (3) there are no material uncertainties regarding customer
acceptance; and (4) collection of the resulting receivable is probable.
Revenues from software maintenance and support contracts are recognized
ratably over the life of the contract. The Company's software license
revenues were not significant in any of the periods presented.
Deferred revenue:
Deferred revenue is comprised of deferrals for subscription fees,
professional services, license fees and maintenance associated with
contracts for which amounts have been received in advance of services to
be performed or prior to the shipment of software.
Recent Accounting Pronouncements:
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that all business combinations subsequent to June 30, 2001, be
accounted for under the purchase method of accounting. SFAS No.141 also
requires that the fair value of an assembled workforce acquired be
included in the amount initially recorded as goodwill. The Company
reclassified $1,710,617 initially recorded as other intangible assets
related to the value of the workforce into goodwill as required by this
statement. SFAS No. 142 requires that upon adoption, amortization of
goodwill will cease; and instead, the carrying value of goodwill will be
evaluated for impairment on at least an annual basis. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, the
Company has adopted this standard as of the beginning of its 2002 fiscal
year, August 1, 2001. See Note 8 for effects of adoption of this standard.
In addition, the Company will need to evaluate goodwill for impairment
within six months.
7
INTERNET COMMERCE CORPORATION
Notes to Financial Statements
October 31, 2001
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (continued)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The provisions of SFAS No. 144 are effective for fiscal years
beginning after December 15, 2001. The Company is required to adopt SFAS
No. 144 by the first quarter of fiscal 2003. The Company is currently
evaluating the potential impact of SFAS No. 144 on its results of
operations and financial position.
4. PRIVATE PLACEMENT OF COMMON STOCK
On October 29, 2001, the Company sold 1,159,716 shares of class A common
stock and warrants to purchase 347,915 shares of class A common stock for
gross proceeds of $3,189,219. The warrants are immediately exercisable and
have an exercise price of $3.58 per share. The warrants are exercisable
for a five-year period. The Company may redeem the warrants, at its
option, at any time beginning 180 calendar days after the sale if the
closing bid price of the class A common stock exceeds 200% of the exercise
price for a period of 30 consecutive trading days. The redemption price is
ten cents per warrant. The Company is required to file a registration
statement on Form S-3, within 75 days of the sale, covering the resale of
these shares of class A common stock, including the shares of class A
common stock issuable upon exercise of these warrants.
In connection with the private placement the Company incurred fees of
$152,111. Of such fees, $35,000 will be paid in cash and $117,511 will be
paid by issuing warrants to purchase 50,000 shares of class A common
stock. The warrants will have substantially the same terms and conditions
as the warrants issued in the private placement.
5. CONTINGENCY
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. The
Company is currently considering such requests. It is the Company's
understanding that both Messrs. Alpern and Medici intend to defend the
action vigorously. The Company is unable to predict the ultimate outcome
of this claim since this action is in its preliminary stage.
Subsequently, by Demand for Arbitration dated November 30, 2001, Mr.
Lipscomb commenced an arbitration against the Company arising out of the
same alleged breach of his employment agreement that formed the underlying
basis for his suit against Messrs. Alpern and Medici. In the arbitration,
Mr. Lipscomb seeks recovery of $751,000 before interest, costs and
attorneys' fees. The Company intends to defend the arbitration vigorously
and is unable to predict the ultimate outcome of this claim.
6. CONCENTRATION OF CREDIT RISK
For the quarter ended October 31, 2001, no single customer accounted for
more than 10% of revenue. One customer accounted for 19% of revenue for
the quarter ended October 31, 2000.
No single customer accounted for more than 10% of accounts receivable as
of October 31, 2001 and 2000.
8
INTERNET COMMERCE CORPORATION
Notes to Financial Statements
October 31, 2001
7. BUSINESS SEGMENT INFORMATION
The Company has three operating segments. 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 electronic commerce solutions including
electronic commerce infrastructure solutions and data mapping services.
Our professional services segment also conducts a series of
product-independent one-day EDI seminars for electronic commerce users.
The table below summarizes information about operations and long-lived
assets as of and for the three months ended October 31, 2001 and 2000.
Service Professional
ICC.NET Bureau services(A) Total
----------- ----------- ------------ -----------
Three Months - October 31, 2001
Revenues from external customers $ 1,567,750 $ 419,588 1,058,589 3,045,927
=========== =========== =========== ===========
Operating loss (1,202,061) (14,094) (932,472) (2,148,627)
Other income, net 67,312 -- (23,741) 43,571
----------- ----------- ----------- -----------
(1,134,749) $ (14,094) (956,213) (2,105,056)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 204,633 $ 21,315 $ 336,533 $ 562,481
Non-cash charges for stock-based compensation -- -- 131,979 131,979
As of October 31, 2001
Property and equipment, net $ 917,680 $ 59,122 $ 735,081 1,711,883
Software development costs, net 177,972 283,438 -- 461,410
Goodwill, net -- 2,194,067 1,710,617 3,904,684
Other intangible assets, net -- -- 3,824,000 3,824,000
----------- ----------- ----------- -----------
Long lived assets, net $ 1,095,652 $ 2,536,627 $ 6,269,698 $ 9,901,977
=========== =========== =========== ===========
9
INTERNET COMMERCE CORPORATION
Notes to Financial Statements
October 31, 2001
7. BUSINESS SEGMENT INFORMATION (CONTINUED)
Service Professional
ICC.NET Bureau services(A) Total
----------- ----------- ------------ -----------
Three Months - October 31, 2000
Revenues from external customers $ 905,160 $ 411,225 $ -- 1,316,385
=========== =========== ======= ===========
Operating loss (3,441,045) (41,172) -- (3,482,217)
Other income, net 201,863 -- -- 201,863
----------- ----------- ------- -----------
$(3,239,182) $ (41,172) $ -- $(3,280,354)
=========== =========== ======= ===========
Supplemental segment
information:
Amortization and depreciation $ 140,576 $ 60,832 $ -- $ 201,408
Non-cash charges for stock-based compensation 450,111 -- -- 450,111
As of October 31, 2000
Property and equipment, net 986,448 79,931 -- 1,066,379
Software development costs, net 415,268 -- -- 415,268
Goodwill, net 143,728 2,372,466 -- 2,516,194
----------- ----------- ------- -----------
Long lived assets, net $ 1,545,444 $ 2,452,397 $ -- $ 3,997,841
=========== =========== ======= ===========
(A) - The Company's professional services segment was acquired on
November 6, 2000.
8. GOODWILL - EFFECT OF ADOPTION OF SFAS 142
The following table reports what net loss and loss per basic and diluted
share would have been in all periods presented exclusive of goodwill
amortization expense recognized in those periods.
Three Months Ended
October 31
----------------------------
2001 2000
----------- -----------
Reported net loss $(2,105,056) $(3,280,354)
Add back: Goodwill amortization -- 100,031
----------- -----------
Adjusted net loss $(2,105,056) (3,180,323)
=========== ===========
Reported basic and diluted loss per common share $ (.22) $ (.51)
Add back: Goodwill amortization -- .01
----------- -----------
Adjusted basic and diluted loss per share $ (.22) $ (.50)
=========== ===========
10
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,"
"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 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 quarterly report as anticipated,
believed, estimated, expected or intended.
Overview
We are a leader in the electronic commerce business-to-business
communication services market that provides complete electronic commerce
infrastructure solutions. Our business operates in three segments: our ICC.Net
service, our professional services and our service bureau.
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 a lower cost, greater
transmission speed and more features, including authentication and audit
services. Our professional services segment facilitates the development and
operations of comprehensive business-to-business electronic commerce solutions.
Our service bureau manages and translates the data of small and mid-sized
companies that exchange EDI data with large companies.
Through July 2000, our business was entirely focused on our ICC.NET
service. During fiscal 2001, we made two acquisitions that enable us to offer a
more complete range of services and allow our customers to expand their
electronic commerce trading communities and bridge their legacy systems to the
Internet.
In August 2000, we acquired IDC through which we acquired our service
bureau. IDC is engaged in the development, marketing, sale and other
exploitation of business-to-business EDI standards-based applications for
standard-based EDI exchange over VANs, private networks, exchanges, extranets
and the Internet.
In November 2000, we completed the acquisition of RTCI, through which we
acquired our professional services segment. RTCI is an electronic commerce
infrastructure solutions company serving the business-to-business electronic
commerce market. RTCI helps its clients conduct business electronically through
a continuum of services including eConsulting, data transformation mapping (EDI,
EAI, XML) and internetworking. RTCI has developed a business model that offers
remote service delivery, fixed and value-based pricing and reusable solutions.
Subsequent to the acquisition, due to a reduction of the workforce of RTCI, a
steep decline in value of companies similar to RTCI, continued operating losses
and a significant reduction in the forecasted future operating profits of our
professional services segment, management determined that triggering events had
occurred related to certain intangible assets. Projected cash flow analysis
related to those assets determined that the assets had been impaired. These
intangible assets were written down to fair value based on the related
discounted expected future cash flows in fiscal year 2001.
11
Our revenues are derived from subscriptions to our ICC.NET service, which
include transaction, mailbox and fax transmission fees. The subscription fees
are comprised of 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.
We also provides a broad range of professional services consisting of EDI
and electronic 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.
Revenues from fixed fee professional service contracts are recognized using
contract accounting based on the estimated percentage of completion.
We also derive revenue from our service bureau. Our 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. Our service bureau also derives revenue from software licensing
and provides software maintenance and support. Revenues from our EDI services
and UPC services are recognized when the services are provided. Revenues from
software licenses are recognized when all of the following conditions are met:
(1) a non-cancelable non-contingent license agreement has been signed; (2) the
software product has been delivered; (3) there are no material uncertainties
regarding customer acceptance; and (4) collection of the resulting receivable is
probable. Revenues from software maintenance and support contracts are
recognized ratably over the life of the contract. Our software license revenues
were not significant in any of the periods presented.
Deferred revenue is comprised of deferrals for subscription fees,
professional services, license fees and maintenance associated with contracts
for which amounts have been received in advance of services to be performed or
prior to the shipment of software.
Results of Operations and Financial Condition
Three Months Ended October 31, 2001 Compared with Three Months Ended
October 31, 2000.
Our revenue was $3,046,000 in the quarter ended October 31, 2001 ("2002
Quarter") and $1,316,000 in the quarter ended October 31, 2000 ("2001 Quarter").
Revenue related to our ICC.NET service was $1,568,000, or 51% of the 2002
Quarter revenue. Our ICC.NET service revenue increased $663,000 in the 2002
Quarter compared to the 2001 Quarter. The 2001 Quarter includes $250,000 of fees
from Triaton GmbH, a subsidiary of ThyssenKrupp Information Services GmbH, under
a Joint Services Agreement dated July 28, 2000. No such fees were recognized in
the 2002 Quarter. Transaction fees from our ICC.NET service increased $815,000
as a result of a larger billable customer base and increased volume usage from
additional customers. Revenue in the amount of $420,000, or 13% of the 2002
Quarter revenue, was generated from our service bureau compared to $411,000 in
the 2001 Quarter. The service bureau's revenue was primarily generated from the
services performed, customer support and licensing fees. Professional services,
acquired in November 2000, accounted for $1,059,000, or approximately 35% of the
2002 Quarter revenue. Revenue generated from professional services consists of
consulting, custom solutions and mapping services.
Cost of services increased to $2,482,000 in the 2002 Quarter from
$1,059,000 in the 2001 Quarter. Cost of services relating to our ICC.NET service
was $934,000, or 60% of revenue derived from the service in the 2002 Quarter,
versus $899,000, or 99% of revenue in the 2001 Quarter. Salaries and employee
benefits related to the ICC.NET service increased $149,000. Data lines and
support increased $37,000, depreciation and amortization decreased $26,000 and
consulting fees decreased $88,000 in the 2002 Quarter from the 2001 Quarter. We
anticipate that our ICC.NET cost of services will continue to decline as a
percentage of revenue in future periods due to increased utilization of our
existing communications infrastructure as we expect the use of our service to
increase. Cost of services relating to our service bureau totaled $236,000, or
56% of revenue derived from the service bureau in the 2002 Quarter compared to
$160,000, or 39% of revenue derived from the service bureau in the 2001 Quarter.
Consulting fees increased $40,000 and salaries and employee benefits relating to
our service bureau increased $36,000. Cost of services relating to professional
services were $1,311,000, or 124% of revenue derived from
12
professional services in the 2002 Quarter. Salaries and employee benefits
relating to our professional services were $496,000 and consulting fees were
$235,000 in the 2002 Quarter. Other cost of services relating to our
professional services included amortization of acquired intangibles relating to
proprietary technology in the amount of $238,000.
Product development and enhancement costs related to the maintenance and
improvement of our products and services increased to $245,000 in the 2002
Quarter from $152,000 in the 2001 Quarter. Product and development and
enhancement costs related to our ICC.NET service were $199,000 in the 2002
Quarter compared to $58,000 in the 2001 Quarter. Consulting fees related to our
ICC.NET service decreased $30,000 and salaries and employee benefits increased
$200,000. Product development and enhancement costs incurred by our service
bureau were $45,000 in the 2002 Quarter versus $95,000 in the 2001 Quarter. The
decrease was primarily attributable to a decrease in salaries and employee
benefits of $22,000 and a decrease in consulting fees of $31,000.
Selling and marketing expenses decreased to $976,000 in the 2002 Quarter
from $1,178,000 in the 2001 Quarter. Selling and marketing expenses related to
our ICC.NET service were $725,000 in the 2002 Quarter compared to $1,154,000 in
the 2001 Quarter. Salaries and employee benefits related to our ICC.NET service
decreased $177,000, consulting fees decreased $86,000, travel, meals and
entertainment decreased $83,000 and advertising decreased $38,000. Selling and
marketing expenses related to our service bureau were $29,000 in the 2002
Quarter compared to $24,000 in the 2001 Quarter. Selling and marketing expenses
related to professional services were $221,000 in the 2002 Quarter, which were
comprised primarily of salaries and related expenses of $183,000.
General and administrative costs decreased to $1,360,000 in the 2002
Quarter from $1,959,000 in the 2001 Quarter. General and administrative expenses
supporting our ICC.NET service decreased to $912,000 in the 2002 Quarter from
$1,785,000 in the 2001 Quarter. Salaries and related employee benefits decreased
$557,000 primarily due to a decrease in personnel. Legal and professional fees
decreased $230,000, consulting fees decreased $114,000, recruiting fees
decreased $87,000 and insurance increased $39,000. General and administrative
expenses supporting our service bureau were $123,000 in the 2002 Quarter
compared to $174,000 in the 2001 Quarter. General and administrative expenses
supporting our professional services in the 2002 Quarter accounted for $325,000,
which was comprised primarily of salaries and employee benefits of $177,000,
communication expenses of $30,000, facility charges of $25,000 and legal and
professional services of $22,000.
Non-cash charges for compensation and services decreased to $132,000 in
the 2002 Quarter from $450,000 in the 2001 Quarter. In the 2002 Quarter, we
recognized $132,000 of stock-based compensation expenses related to assumed
unvested restricted shares issued to RTCI employees in connection with our
acquisition of RTCI. In March 2000, ICC granted an option to purchase 100,000
shares of class A common stock pursuant to a consulting agreement with a former
executive officer and board member. Non-cash charges for this option amounted to
$450,000 in the 2001 Quarter.
Interest and investment income decreased to $73,000 in the 2002 Quarter
from $218,000 in the 2001 Quarter. The decrease was due to lower average cash
balances in the 2002 Quarter compared to the 2001 Quarter.
Liquidity and Capital Resources
Current assets increased to $6,341,000 as of October 31, 2001 from
$4,879,000 as of July 31, 2001. The increase was primarily due to an increase in
cash and cash equivalents of $1,282,000, a decrease in marketable securities of
$242,000, an increase in accounts receivable of $213,000 and an increase in
prepaid and other assets of $210,000. The increase in cash and cash equivalents
was principally due to gross proceeds of $3,189,000 received from an October
2001 private placement and sales of marketable securities of $247,000 offset by
net cash used in operating activities of $2,005,000. The increase in accounts
receivable is due to increased business activity and a slower than average
collection cycle during the three months ended October 31, 2001. The increase in
prepaid expenses and other current assets is primarily attributable to a
receivable due from a former employee that will be paid in January 2002 upon the
transfer of 23,684 shares of class A common stock held by that individual to the
Company.
Total liabilities decreased to $4,354,000 as of October 31, 2001 from
$4,487,000 as of July 31, 2001.
At October 31, 2001, working capital increased to $2,244,000 from $646,000
at July 31, 2001. The increase was the result of proceeds from the October 2001
private placement offset by continuing operating losses.
13
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,
private placements of our class A common stock, series C preferred stock and
warrants in November 1999 and a private placement of our class A common stock
and warrants in October 2001. We anticipate losses through fiscal 2002 as we
continue to expand the 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, increased to $3,930,000 as of October 31,
2001 from $2,889,000 as of July 31, 2001. Net cash used in operating activities
was $2,005,000 for the 2002 Quarter compared to $3,062,000 for the 2001 Quarter.
The decrease in cash used in operating activities was primarily the result of
the decreased operating losses. Cash flows from investing activities were
$150,000 in the 2002 Quarter compared to $177,000 provided by the 2001 Quarter.
The decrease in cash flows from investing activities was primarily due to the
proceeds from the sale of marketable securities of $247,000 offset by additions
to software development costs of $95,000 in the 2002 Quarter and in the 2001
Quarter we received net cash of $293,000 for the acquisition of IDC offset by
the purchase of $103,000 of property and equipment. Net cash provided by
financing activities was $3,137,000 in the 2002 Quarter compared to $73,000
provided by financing activities in the 2001 Quarter. The cash provided by
financing activities in the 2002 quarter was primarily the result of proceeds
from the October 2001 private placement described below. No such transactions
occurred in the 2001 Quarter.
In October 2001, we sold in a private placement 1,159,716 shares of class
A common stock and warrants to purchase 347,915 additional shares of class A
common stock for gross proceeds of $3,189,219. The warrants expire in October
2006 and are exercisable at $3.58 per share, subject to adjustment pursuant to
customary antidilution adjustments for stock splits, dividends and combinations.
In connection with the private placement the Company incurred fees of $152,111.
Of such fees, $35,000 will be paid in cash and $117,511 will paid by issuing
warrants to purchase 50,000 shares of class A common stock. The warrants will
have substantially the same terms and conditions as the warrants issued in the
private placement.
As of October 31, 2001, we had cash and cash equivalents and marketable
securities of $3,930,000. We believe these resources provide us with sufficient
liquidity to continue in operation through July 31, 2002. However, if our cost
reductions do not achieve sufficient savings, if our expenses increase more than
anticipated, if our revenue does not increase as anticipated because of
competitive or other reasons or if our accounts receivable increases further as
a result of a further lengthening of the collection cycle, our cash resources
may not be sufficient and we will require additional financing. There can be no
assurances that the terms of any financing will be available or that the terms
will be acceptable to us, or that any financing will be consummated.
We have a net operating loss carryforward of approximately $72 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 2021. 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 is subject to
an annual limitation of approximately $400,000 until that portion of the net
operating loss is utilized or expires. Due to the private placement of series A
preferred stock in April 1999, the net operating loss carryover of approximately
$18 million incurred prior to the private placement is subject to an annual
limitation of approximately $1 million until that portion of the net operating
loss is utilized or expires. Also, due to a 100% ownership change of RTCI, the
acquired net operating loss of approximately $6.5 million incurred prior to the
ownership change is subject to an annual limitation of approximately $1.4
million until that portion of the net operating loss is utilized or expires.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations subsequent to June 30, 2001, be accounted for under
the purchase method of accounting. SFAS No.141 also requires that the fair value
of an assembled workforce acquired be included in the amount initially recorded
as goodwill. The Company reclassified $1,710,617 initially recorded as other
intangible assets related to the value of the workforce into goodwill as
required by this statement. SFAS No. 142 requires that upon adoption,
amortization of goodwill will cease; and instead, the carrying value of goodwill
will be evaluated for impairment on at least an annual basis. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, the
Company has adopted this standard as of the beginning of its 2002 fiscal year,
August 1, 2001. The adoption of this standard resulted in a reduction of
amortization expense in the amount of $136,484 during the three months ended
October 31, 2001, as compared to the fourth quarter of fiscal 2001, due to the
suspension of goodwill amortization. In addition, the Company will need to
evaluate goodwill for impairment within six months.
14
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The provisions of
SFAS No. 144 are effective for fiscal years beginning after December 15, 2001.
The Company is required to adopt SFAS No. 144 by the first quarter of fiscal
2003. The Company is currently evaluating the potential impact of SFAS No. 144
on its results of operations and financial position.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
During the first quarter ended October 31, 2001, there were no significant
changes related to the Company's market risk exposure.
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
On October 29, 2001, the Company sold 1,159,716 shares of class A common
stock and warrants to purchase 347,915 shares of class A common stock for gross
proceeds of $3,189,219. The warrants are immediately exercisable and have an
exercise price of $3.58 per share. The warrants are exercisable for a five year
period. The Company may redeem the warrants, at its option, at any time
beginning 180 calendar days after the sale if the closing bid price of the class
A common stock exceeds 200% of the exercise price for a period of thirty
consecutive trading days. The redemption price is ten cents per warrant. We
intend to use the proceeds from this private placement to fund operations. The
securities described in this section were issued by ICC in a transaction not
involving a public offering, to investors that made representations that they
were "accredited" investors who were purchasing the securities with investment
intent and not with an intent to distribute the securities. The issuance of the
securities was exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
None.
(b) Reports on Form 8-K
--------------------
On September 24, 2001, we filed a Current Report on Form 8-K to
report the resignation of a director of the Company.
15
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: December 17, 2001 By: /s/ Walter M. Psztur
--------------------------------------------
Walter M. Psztur
Chief Financial Officer
(Principal Financial and Accounting Officer)
16