UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 0-20660
DIRECT INSITE CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Issurer's telephone number, including area code (631) 873-2900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
-------------------- -----------------------------------------
Common Stock, par value $.0001 OTC - BB
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act [ ]
Indicate by check mark if the registrant issuer is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act [ ]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer", and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes[ } No [ X ]
The aggregate market value of the Common Stock held by non-affiliates was
approximately $6,010,620 based on the closing sales price of the Common Stock as
quoted on the OTC-BB June 30, 2008.
As of March 16, 2009, there were 10,686,739 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
Direct Insite Corp. and Subsidiaries
Form 10-K for the Year Ended December 31, 2008
Table of Contents
PART I
PAGE
----
ITEM 1 Business 1
ITEM 1A Risk Factors 6
ITEM 2 Properties 10
ITEM 3 Legal Proceedings 10
ITEM 4 Submission of Matters to a Vote of Security Holders 10
PART II
ITEM 5 Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 10
ITEM 6 Selected Financial Data NOT REQUIRED
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 8 Financial Statements and supplementary data 18
ITEM 9. Changes in and Disagreements with Accountants on Accounting 18
and Financial Disclosure
ITEM 9A. Controls and Procedures 18
ITEM 9B. Other Information 20
PART III
ITEM 10. Directors, Executive Officers, and Corporate Governance 21
ITEM 11. Executive Compensation 23
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 29
ITEM 13. Certain Relationships and Related Transactions, and
Director Independence 30
ITEM 14. Principal Accountant Fees and Services 30
PART IV
ITEM 15. Exhibits and financial statement schedules 31
SIGNATURES 34
CERTIFICATIONS Exhibits
PART I
Item 1. BUSINESS
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FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this
Form 10-KSB including, without limitation, statements under, "Management's
Discussion and Analysis or Plan of Operation" regarding our financial position,
business strategy and the plans and objectives of management for future
operations, are forward-looking statements. When used in this Form 10-KSB, words
such as "anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as such words or expressions relate to us or our management,
identify forward-looking statements. Such forward - looking statements are based
on the beliefs of management, as well as assumptions made by, and information
currently available to, our management. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of certain
factors including but not limited to, fluctuations in future operating results,
technological changes or difficulties, management of future growth, expansion of
international operations, current economic conditions, the risk of errors or
failures in our software products, dependence on proprietary technology,
competitive factors, risks associated with potential acquisitions, the ability
to recruit personnel, and the dependence on key personnel. Such statements
reflect the current views of management with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating to the
operations, results of operations, growth strategy and liquidity. All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by this paragraph.
OVERVIEW
Direct Insite Corp. and its subsidiaries (hereinafter referred to at times
as "Direct Insite" or the "Company"), was organized as a public company, under
the laws of the State of Delaware on August 27, 1987. In August, 2000, we
changed our name to Direct Insite Corp.
Our Current Business
Direct Insite operates as a Software as a Service provider ("SaaS"),
providing best practice financial supply chain automation and workflow
efficiencies within the Procure-to-Pay (PTP) and Order-to-Cash (OTC) processes.
The Company's global Electronic Invoice Presentment and Payment ("EIP&P")
services automate manual business processes such as complex billing, invoice
validation, invoice-to-order matching, consolidation, dispute handling, and
payment processing.
Through extensive automation for presenting, receiving, approving or paying
invoices, Direct Insite is helping its customers reduce costs, resolve disputes,
enhance cash flow efficiency, and improve customer satisfaction.
Direct Insite is currently delivering invoicing services across the
Americas, Europe, and Asia, including 62 countries, 15 languages and more than
30 currencies. Direct Insite processes more than $125 billion in invoice value
annually on behalf of its clients. Direct Insite processes, distributes and
hosts millions of invoices, purchase orders, and supporting attachment
documents. Suppliers, customers, and internal departments, such as Finance and
Accounting or Customer Service can easily access these critical business
documents whenever they need them through Direct Insite's self-service portal.
Our largest customer, EDS an HP company ("EDS"), (formerly Electronic Data
Systems Corporation), accounted for approximately 47% and 46% of revenue for the
years ended December 31, 2008 and 2007, respectively. Electronic Data Systems
Corporation was acquired by Hewlett- Packard Company ("HP") in 2008. IBM
accounted for approximately 42% and 51% of our revenue for the years ended
1
December 31, 2008 and 2007, respectively. The decrease in revenue from IBM is
due to the decrease in service to IBM in Europe and a decrease in engineering
services resulting from the completion of deploying the IOL service to all major
geographic areas.
PRODUCTS AND SERVICES
Direct Insite specializes in the automation of financial supply chain best
practices within the Procure-to-Pay and Order-to-Cash processes. Direct Insite
provides its Software as a Service ("SaaS") and offers Custom Engineering
support to implement and customize its solutions.
The following are Direct Insite's primary service offerings:
o Procure-to Pay: eInvoice Management for Accounts Payable
o Order-to Cash: eInvoice Management for Accounts Receivable
Procure-to Pay - Electronic Invoice Automation for Accounts Payable
Direct Insite's eInvoice Management for Accounts Payable dramatically
increases accounts payable productivity by streamlining manual supplier invoice
validation, inquiry and approval processes.
Supplier Self Service Portal
Direct Insite's Procure-to-Pay service offering includes a supplier-self
service portal and electronic invoice presentment capability that is able to
materially reduce call center traffic by resolving inquiries without human
intervention. Direct Insite's online portal allows suppliers to access their
invoice status, invoice line items, attachments, payment status, and other
relevant billing information on their own time, at any time and without having
to call or wait for support.
Supplier Electronic Invoice Submission
Suppliers are able to submit their invoices via electronic formats &
adaptors, including web form entry, supplier networks, spreadsheet upload, and
Enterprise Resource Planning ("ERP") adaptors such as Oracle, SAP, Great Plains,
or legacy billing systems. Suppliers can also perform a purchase order "flip"
function where customer orders can be used to automatically generate preliminary
bills for review and release for payment.
Invoice Matching & Workflow Exception Handling
Direct Insite's Procure-to-Pay service allows Accounts Payable
administrators the ability to configure robust invoice validation business rules
where inbound supplier invoices can be automatically matched against orders,
variable consumption reports, or other business documents. Non compliant
invoices and line items are flagged and routed for exception workflow handling.
Invoice Approval & Payment
Once invoices have been validated they can be routed to the Accounts
Payable financial system for disbursement or paid within the Direct Insite
self-service portal. Direct Insite ensures that a company's ERP financial system
is always updated seamlessly.
Direct Insite's Procure-to-Pay service is focused on providing the
following significant business benefits:
o Eliminate manual invoice validation processes
o Improve on-time payments and the ability to capture early payment
discounts
o Increase supplier electronic invoice submission
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o Reduce Accounts Payable call center traffic
o Enhance supplier relationships and overall ease of business
Order-to-Cash - Electronic Invoice Automation for Accounts Receivable
Direct Insite's eInvoice Management for Accounts Receivable service
offering generates a dynamic electronic invoice that facilitates customer
analysis, dispute resolution, approval and payment. The benefits include lower
invoicing costs, more timely payment and improved customer satisfaction.
Invoice Compliance and Validation
Direct Insite's Order-to Cash solution allows for a preliminary invoice
workflow process that automatically validates Accounts Receivable invoices
against source billing documents to ensure the invoice is compliant and accurate
before the invoice is finalized and distributed to the customer for payment.
During the preliminary invoice validation cycle, invoice exceptions are flagged
and automatically processed for resolution. Once the invoices have been
finalized, they can be released for payment.
Invoice Attachment Processing
Direct Insite enables billers to distribute electronic attachments with
their invoice to proactively provide the supporting documentation often required
by Accounts Payable departments. Invoice attachments are then presented online
within an easily accessible self-service portal. This facilitates the
reconciliation process for the customer and makes for more timely payments.
Invoice Distribution & Self Service Portal Presentment
Direct Insite's Order-to-Cash service also supports multiple invoice
distribution and presentment methods depending upon customer preferences,
including online, PDF email, self-service downloads, EDI, fax, or print. The
invoice presentment capability displays invoices and attachments within a
self-service web portal where customers can access their invoice, line item
detail, and supporting attachments at all times.
Dispute Management
Direct Insite further supports the ability for customers to initiate online
invoice or line item inquiries and disputes. Specifically, customers can review
their invoices within the self-service portal and initiate invoice or line item
invoice disputes without having to reach call center support. Once the dispute
request has been initiated, customers can approve the remainder of the invoice
and schedule it for payment. Easing the dispute process supports customer
satisfaction and allows for partial invoice collection to improve cash flow.
Invoice Approval & Payment
Direct Insite provides a workflow tool, with configurable rules, that
customers can use to route an invoice through their corporate approval process.
This ensures that invoices are not stalled in the company's authorization
hierarchy. Approved invoices can be routed to the ERP financial system for
disbursement or paid within the Direct Insite self-service portal. Direct Insite
ensures the customer's ERP financial system is updated seamlessly.
Reporting & Data Analysis
This Order-to-Cash service can store multiple years of online invoice, line
item, dispute status, and payment history to generate online reporting and data
analysis. Customers can use the self-reporting capability to track their
spending or produce detailed usage reports. Internal Finance and Accounting
administrators are able to perform online reporting to track scheduled payments
or forecast in-bound cash flow.
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Audit & Traceability
Direct Insite's Procure-to-Pay and Order-to-Cash service offerings support
a complete audit log whereby all internal and external user actions are logged,
tracked and presented in views of user activity history. At any time, authorized
administrators can review online user activity and monitor user adoption.
Direct Insite's Order-to-Cash service offering is focused on providing the
following significant business benefits:
o Reduce paper invoicing costs
o Eliminate manual invoice reconciliation, preparation and consolidation
processes
o Reduce Accounts Receivable call center traffic
o Reduce customer disputes and inquiries
o Reduce Days Sales Outstanding
o Improve overall cash flow
o Increase customer satisfaction and competitive advantage
SALES AND MARKETING
CHANNELS TO MARKET
Direct Insite has two primary channels to market - direct through our sales
representatives and indirect through channel and strategic partners. These
channels are supported by a technical sales support group.
Direct
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The direct sales organization consists of senior sales associates
complemented by sales support resources. The sales associates and support
resources are primarily responsible for qualifying direct opportunities followed
by a proven solution selling methodology. Sales associates engage in direct
sales activities that include business value analysis and alignment,
capabilities demonstrations, sales forecasting, procurement and contract
management. Direct Insite's executive management team is actively involved with
and complements Direct Insite's direct sales organization.
Indirect
--------
Direct Insite continues to pursue both reseller and strategic partner
relationships to further develop existing account relationships and to increase
market coverage. Direct Insite's strategic partnerships complement the direct
sales channel and serve to expand Direct Insite's offerings and global market
leadership. Strategic partnerships also complement Direct Insite's offerings and
capability in the areas of payment transaction processing, content management,
centralized user authentication, and other complementary financial supply chain
functions. The use of indirect channel relationships also allows Direct Insite
to leverage additional engineering and professional resources.
Technical Sales Support and Post-Sales Account Management
---------------------------------------------------------
Direct Insite has a pre-sales support staff and adds post sales support to
the existing client services management group as we secure new business. This
group is responsible for technical sales presentations, developing proposals and
pricing, contract administration and account management post-sales support.
RESEARCH AND DEVELOPMENT
The computer software industry is characterized by rapid technological
change, which requires ongoing development and maintenance of software products.
It is customary for modifications to be made to a software product as experience
with its use grows or changes in manufacturers' hardware and software so
require.
4
We believe that our research and development staff, many with extensive
experience in the industry, represents a significant competitive advantage. As
of March 16, 2009, our research and development group consists of 18 employees.
Further, when needed, we retain the services of independent professional
consultants. We seek to recruit highly qualified employees, and our ability to
attract and retain such employees is expected to be a principal factor in our
success in maintaining a leading technological position. For the years ended
December 31, 2008 and 2007, research and development expenses were approximately
$2,593,000, and $2,599,000, respectively. We believe that investments in
research and development are required in order to remain competitive.
COMPETITION
We believe our primary competitors are:
American Express - Harbor Payments, Inc. Harbor Payments was acquired by
American Express on December 31, 2006. Harbor operates as a subsidiary of
American Express and its primary base of operations is located in Atlanta,
Georgia. The acquisition by American Express supports their strategy to offer a
suite of solutions to enable companies to automate their `source to settle'
processes - by integrating steps in their electronic purchasing cycle.
170 Systems is a privately held Bedford, Massachusetts provider of software
solutions that manage and optimize financial processes - from Accounts Payable
to General Ledger. Since 1990, 170 Systems has offered their Financial Suite
that includes imaging, workflow, self service, and e-Invoicing functionality.
Basware Corporation, a public corporation founded in 1985 with headquarters in
Finland provides purchase-to-pay solutions for its clients.
iPayables is based in Lake Forest, California and was founded in 1999. iPayables
provides Internet invoice delivery services focused on reducing paper processing
costs within Accounts Payable departments.
JPMorgan Xign, a subsidiary of JPMorgan Chase was founded in 2000 and is
headquartered in Pleasanton, California. JPMorgan Xign's Business Settlement
Network provides electronic order delivery, invoice processing, and payment
service for business-to-business commerce. JPMorgan Xign's product suite focuses
on automating a buyer's Order-to-Pay cycle, including receipt, validation,
routing, dispute management, approval, payment, and posting.
Ariba, Inc. (NASDAQ: ARBA) helps companies analyze, understand, and manage their
corporate spending to achieve increased cost savings and business process
efficiency. Its solutions include software, network access, and professional
services. The company's software and services streamline and enhance the
business processes related to the identification of suppliers of goods and
services, the negotiation of the terms of purchases, and the management of
ongoing purchasing and settlement activities. Ariba is a public company founded
in 1996 and headquartered in Sunnyvale, California.
Bottomline Technologies (NASDAQ: EPAY) was established in 1989 and provides a
B2B EIP&P solution, primarily to financial institutions and the legal services
markets. The company's products include software designed to automate the
disbursement process for banks and their corporate customers' anti-fraud and
electronic commerce payment software. Bottomline focuses on cash management and
financial-related remittance, reporting and audit data.
Many of our current and potential competitors have greater name
recognition, larger installed customer bases, longer operating histories, and
substantially greater financial, technical and marketing resources than Direct
Insite. We cannot assume that current and potential competitors will not develop
products that may be or may be perceived to be more effective or responsive to
technological change than are our current or future products or that our
technologies and products will not be rendered obsolete by such developments.
Increased competition could result in price reductions, reduced margins or loss
of market share, any of which could have a material adverse effect on our
business, operating results and financial condition.
5
EMPLOYEES
We had 39 employees, all in the United States, at March 16, 2009, including
25 in technical support, (including research and development), 9 in marketing,
sales and support services, and 5 in corporate finance and administration. Our
future success will depend in part upon our continued ability to attract and
retain highly skilled and qualified personnel. We believe that our relations
with our employees are good, and we have no collective bargaining agreements
with any labor unions.
INTELLECTUAL PROPERTY
We rely on proprietary knowledge and employ various methods, including
confidentiality agreements, to protect our software code, concepts, ideas and
documentation of our proprietary technology. We have a federally registered
patent "dbExpress", a data mining tool which expires in 2013.
Despite these efforts, unauthorized parties may attempt to copy aspects of
our products, obtain and use information that we regard as proprietary or
misappropriate our copyrights, trademarks, trade dress and similar proprietary
rights. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate. In addition,
our competitors might independently develop similar technology or duplicate our
products or circumvent any patents or our other intellectual property rights.
Item 1A. RISK FACTORS
- ----------------------
You should carefully consider the factors described below and other
information contained in this report on Form 10K ("report"). The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us that we currently deem immaterial,
or are similar to those faced by other companies in our industry or business in
general, may also impair our business operations. If any of the following risks
actually occurs, our business, financial condition or results of operations
could be materially and adversely affected. In such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
This report also contains forward-looking statements that involve risks and
uncertainties and are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The words "anticipates," "believes,"
"estimates," "expects," "intends," "plans," "seeks," variations of such words,
and similar expressions are intended to identify forward-looking statements. We
have based these forward-looking statements on our current expectations,
estimates and projections about our business and industry, our beliefs and
certain assumptions made by our management. Investors are cautioned that matters
subject to forward-looking statements involve risks and uncertainties including
economic, competitive, governmental, technological and other factors that may
affect our business and prospects. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. In order to obtain the benefits of these "safe harbor"
provisions for any such forward-looking statements, we wish to caution investors
and prospective investors about the following significant factors, which, among
others, have in some cases affected our actual results and are in the future
likely to affect our actual results and could cause them to differ materially
from those expressed in any such forward-looking statements. These factors
include:
Current conditions in the global economy and the industries we serve may
materially and adversely affect our business and results of operations.
Our business and operating results may be affected by worldwide economic
conditions. As a result, existing or potential customers may delay or cancel
plans to purchase our services, and may not be able to fulfill their obligations
to us in a timely fashion. If the global economic slowdown continues for a
significant period, or there is significant further decline in the global
economy, our results of operations, financial position and cash flows could be
materially adversely affected.
Prior to the year 2006, our operations had not been profitable and we cannot
represent that they will continue to be profitable in the future.
6
For the years ended December 31, 2008, 2007 and 2006 we had net income of
$4,181,000, $2,100,000 and $269,000, respectively. Prior to 2006, we had a long
history of losses and we cannot represent that we will continue to be
profitable.
We may not be able to obtain funds necessary for the ongoing operation of our
business on terms which are acceptable to us.
At December 31, 2008, we had working capital of $914,000 and at December
31, 2007 we had a working capital deficit of $1,613,000. In 2008 we had positive
cash flow from operations of $1,923,000. Based on our current levels of
operations and commitments, we believe we will need to continue to generate
positive cash flows from operations in order to decrease our dependence on
outside financing. If we do not generate sufficient cash flow from operations,
adequate funds for us to operate our business on terms which we find acceptable,
whether equity financing, debt financing or from other sources, may not be
available as needed and may result in significant dilution to our existing
security-holders. We have no additional bank or other credit facility or other
readily available access to debt financing. If we are unable to secure
additional funding when needed, we may be forced to decrease or eliminate
certain current or expansion activities. Ultimately, our inability to obtain
sufficient funds from operations or external sources would have a material
adverse effect on our financial condition and viability.
The large number of shares available for future sale may adversely affect the
market price of our stock.
We have 10,686,739 shares of common stock outstanding as of March 16, 2009,
of which approximately 5,093,000 shares are freely tradable. We also have
2,220,713 shares issuable upon exercise of options and warrants. If all of our
outstanding options and warrants were exercised, we would have 12,907,452 shares
outstanding. The issuance of such a large number of shares could have a
significant adverse effect on the market for, as well as the price of, our
common stock. A decline in the market price also may make the terms of future
financings using our common stock or using convertible debt more burdensome.
Our planned growth may cause a strain on our management and other resources.
We are pursuing a business strategy that has involved and is expected to
continue to involve significant growth over at least the next twelve months. We
cannot guarantee that we will be able to achieve our planned growth.
Accomplishing our objectives will depend upon a number of factors, including our
ability to develop products internally with emphasis on the exploitation of our
Invoices-on-Line products. We may also incur development, acquisition or
expansion costs that represent a higher percentage of total revenues than larger
or more established companies, which may adversely affect our results of
operations.
We may not be able to compete favorably in the competitive information solutions
industry.
The market for our information solutions is intensely competitive. We face
competition from a broad range of competitors, many of whom have greater
financial, technical and marketing resources than us. We may not be able to
compete effectively with such entities.
Our operations are dependent upon key management personnel.
We believe that our continued success depends to a significant extent upon
the efforts and abilities of our senior management. In particular, the loss of
James Cannavino, our Chairman and Chief Executive Officer, or any of our other
executive officers or senior managers, could have a material adverse effect on
our business.
Internal control weakness
The Company maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports it files with the SEC
is accumulated and communicated to management, as appropriate, to allow timely
decisions regarding required disclosure, and such information is recorded,
7
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of our disclosure controls and procedures as
such term is defined by the rules established under the Securities Exchange Act
of 1934.
Based on our evaluation, we believe that these procedures were not
effective as a result of limited resources and a limited segregation of duties
in accounting and financial reporting. More specifically, the Company has a
limited number of personnel in the finance and accounting area and therefore one
person performs various accounting functions where a greater segregation of
duties would permit checks and balances and reviews that would improve internal
control. The Company has been aware of this material weakness since January 2004
at which time the staff of the accounting department was reduced. As a result
the Chief Financial Officer devotes substantive time to reviewing the accounting
records and financial reports and the Company expects that this will continue
until financial resources permit engaging additional accounting staff. The
Company has not determined at this time when such additional staff will be
employed.
If we fail to maintain proper and effective internal controls or are
unable to remediate the material weakness in our internal controls, our ability
to produce accurate and timely financial statements could be impaired and
investors' perception that our internal controls are not adequate could have an
adverse affect on our stock price.
Two customers account for a significant percentage of our revenue.
We have two customers that accounted for approximately 89% and 97% of our
revenue for the years ended December 31, 2008 and 2007, respectively. The loss
of either of these customers would have a material adverse effect on our
business, financial condition and results of operations.
Our success depends upon protecting our intellectual property.
The computer software industry is characterized by extensive use of
intellectual property protected by copyright, patent and trademark laws. While
we believe that we do not infringe on the intellectual property rights of any
third parties in conducting our business, any allegations of infringement, or
disputes or litigations relating to infringement, could have a material adverse
affect on our business, financial condition and results of operations. If we
cannot prevent third parties from using our proprietary technology without our
consent or without compensating us for the use of the technology, we believe
that it could adversely affect our ability to compete. We cannot guarantee that
our patents and copyrights will effectively protect us from any copying or
emulation of our products in the future.
Our common stock is quoted on the OTC Bulletin Board, which may limit the
liquidity and price of our securities more than if our securities were quoted or
listed on the NASDAQ Stock Market or a national exchange.
Our common stock is currently quoted and traded on the OTC Bulletin Board
("OTCBB"), a NASD-sponsored and operated inter-dealer automated quotation system
for equity securities not included in the NASDAQ Stock Market or national
exchange. Quotation of our securities on the OTC Bulletin Board may limit the
liquidity and price of our securities more than if our securities were quoted or
listed on the NASDAQ Stock Market or a national exchange. Some investors may
perceive our securities to be less attractive because they are traded in the
over-the-counter market. Institutional and other investors may have investment
guidelines that restrict or prohibit investing in securities traded in the
over-the-counter market. These factors may have an adverse impact on the trading
and price of our securities.
Trading in our common stock has been limited, so investors may not be able
to sell as many of their shares as they want at prevailing prices.
The average daily volume of trading in our common stock for the three month
period ended March 16, 2009 was 2,925 shares. If limited trading in our common
stock continues, it may be difficult for investors who purchase shares of common
8
stock to sell such shares in the public market at any given time at prevailing
prices. Also, the sale of a large block of our common stock could depress the
market price of our common stock to a greater degree than a company that
typically has a higher volume of trading of its securities.
We cannot predict whether an active market for our common stock will
develop in the future. In the absence of an active trading market:
o Investors may have difficulty buying and selling or obtaining market
quotations;
o Market visibility for our common stock may be limited; and
o Lack of visibility for our common stock may have a depressive effect
on the market price for our common stock.
Our common stock is subject to the SEC's penny stock rules, broker-dealers may
experience difficulty in completing customer transactions and trading activity
in our securities may be severely limited.
Currently, we have net tangible assets less than $5,000,000 and our common
stock has a market price per share of less than $5.00. Therefore, transactions
in our common stock are subject to the "penny stock" rules promulgated under the
Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend
such securities to persons other than institutional investors:
o Must make a special written suitability determination for the
purchaser;
o Receive the purchaser's written agreement to a transaction prior to
sale;
o Provide the purchaser with risk disclosure documents which identify
risks associated with investing in "penny stocks" and which describe
the market for these "penny stocks" as well as a purchaser's legal
remedies; and
o Obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the required
risk disclosure document before a transaction in a "penny stock" can
be completed.
As a result of these requirements, broker-dealers may find it difficult to
effectuate customer transactions and trading activity in our stock will be
significantly limited. Accordingly, the market price of our stock and other
publicly traded securities may be depressed, and it may be more difficult to
sell our shares.
Our stock price may be volatile.
The stock market in general and the market for shares of technology
companies in particular, have experienced extreme price fluctuations, often
unrelated to the operating performance of the affected companies. Many
technology companies, including us, have experienced dramatic volatility in the
market prices of their common stock. If our future operating results are below
the expectations of stock market analysts and investors, our stock price may
decline. We cannot be certain that the market price of our common stock will
remain stable in the future. Our stock price may undergo fluctuations that are
material, adverse and unrelated to our performance.
Our charter provisions and statutory law may inhibit changes in control of our
company.
Our certificate of incorporation and bylaws contain provisions which may
discourage takeover attempts and hinder a merger, tender offer or proxy contest
targeting us, including transactions in which security-holders might receive a
premium for their shares. This may limit your ability as a stockholder to
approve a transaction that you may think is in your best interests. These
provisions could reduce the price that certain investors might be willing to pay
in the future for shares of common stock or preferred stock. Moreover, although
our ability to issue preferred stock may provide flexibility in connection with
possible acquisitions and other corporate purposes, such issuance may make it
more difficult for a third party to acquire, or may discourage a third party
from acquiring, a majority of our voting stock. Furthermore, we may in the
future adopt other measures that may delay, defer or prevent a change in
control. We may adopt some of these measures without any further vote or action
by security-holders.
9
Compliance with the Sarbanes-Oxley Act of 2002 may require additional financial
and management resources.
Section 404 of the Sarbanes-Oxley Act of 2002 currently requires that we
evaluate and report on our system of internal controls for the year ended
December 31, 2008 and requires that we have such system of internal controls
audited beginning with the year ended December 31, 2009. If we fail to maintain
the adequacy of our internal controls, we could be subject to regulatory
scrutiny, civil or criminal penalties and/or stockholder litigation. Any
inability to provide reliable financial reports could harm our business. The
development and/or enhancement of the internal controls to achieve compliance
with the Sarbanes-Oxley Act may increase our costs. We currently report a
material weakness based on the lack of segregation of financial
responsibilities. Weaknesses in our internal controls could cause investors to
lose confidence in our reported financial information, which could have a
negative effect on the trading price of our stock.
Item 2. DESCRIPTION OF PROPERTIES
- ----------------------------------
We currently maintain leased facilities in the locations listed below:
-------------------------- ------------------------ -------------------- ------------------------ ------------------------
Description Location Square Footage Lease term Annual Rental Cost
-------------------------- ------------------------ -------------------- ------------------------ ------------------------
Corporate office Bohemia, NY 5,000 7/1/08 - 6/30/09 $ 94,500
Satellite office Deerfield Beach , FL 1,721 monthly $ 37,536
Co-location facility Hauppauge, NY Note 1 12/1/08 - 11/30/11 $ 215,280
Co-location facility Santa Clara, CA Note 1 9/1/08 - 8/31/11 $ 48,240
Note 1. The collocation facilities in Hauppauge, New York and Santa Clara,
California provide rack space of our computer equipment and the rental is not
base on square footage used.
Item 3. LEGAL PROCEEDINGS
- --------------------------
We are not currently involved in any legal or regulatory proceeding, or
arbitration, the outcome of which is expected to have a material adverse effect
on our business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
PART II
Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
- --------------------------------------------------------------------------------
PURCHASES OF QUITY SECURITIES
- -----------------------------
(a) Market Information
Our common stock is traded on the Over-The-Counter Bulletin Board since
October 24, 2003. The following table sets forth the high and low sales prices
for our common stock by the quarters indicated:
High Low
---- ---
2007
First Quarter 1.68 0.76
Second Quarter 3.00 0.76
Third Quarter 2.50 1.26
Fourth Quarter 2.36 1.78
10
2008
First Quarter 2.00 1.30
Second Quarter 1.80 1.30
Third Quarter 1.50 1.05
Fourth Quarter 1.40 0.30
2009
First Quarter to March 16, 2009 1.20 0.20
(b) As of March 16, 2009, there were 2,572 shareholders of record. We estimate
that there are approximately 6,500 shareholders, including shareholders whose
shares are held in the name of their brokers or stock depositories.
(c) There were no cash dividends or other cash distributions made by us during
the year ended December 31, 2008 to common shareholders. In 2007 we issued
100,000 restricted common shares valued at $213,000 to MetVP in partial payment
of dividends on the Series A-Preferred Stock. In 2008 the Company paid dividends
of $3,827,978 to the holders of the Series A, B, C and D Preferred Stock.
Further dividend policy will be determined by our Board of Directors based on
our earnings, financial condition, capital requirements and other then existing
conditions. It is anticipated that cash dividends will not be paid to the
holders of our common stock in the foreseeable future.
The following table sets forth certain information as of December 31, 2008, for
all compensation plans, including individual compensation arrangements under
which equity securities of the Company are authorized for issuance.
Securities Authorized for Issuance Under Equity Compensation Plans.
- ---------------------------------- ------------------------------- -------------------------------- -------------------------------
Number of securities
remaining available for
future issuance under equity
Number of securities to be compensation plans (excluding
issued upon exercise of Weighted-average exercise securities reflected in
outstanding options price of outstanding options column (a)
Plan category (a) (b) (c)
- ---------------------------------- ------------------------------- -------------------------------- -------------------------------
Equity compensation plans
approved by security holders 552,500 $0.61 1,401,434
- ---------------------------------- ------------------------------- -------------------------------- -------------------------------
Equity compensation plans not
approved by security holders 725,000 $0.62 885,621
- ---------------------------------- ------------------------------- -------------------------------- -------------------------------
Total 1,277,500 $0.62 2,287,055
- ---------------------------------- ------------------------------- -------------------------------- -------------------------------
A description of our equity compensation plans can be found under Item 10. of
this report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Overview
Direct Insite Corp. and its subsidiaries (hereinafter referred to at times
as "Direct Insite" or the "Company"), was organized under the name Unique
Ventures, Inc. as a public company, under the laws of the State of Delaware on
August 27, 1987. In August, 2000, we changed our name to Direct Insite Corp.
Direct Insite operates as Software as a Service provider ("SaaS"),
providing best practice financial supply chain automation and workflow
efficiencies within the Procure-to-Pay (PTP) and Order-to-Cash (OTC) processes.
11
Specifically, Direct Insite's global eInvoice Management services automate
complex manual business processes such as invoice validation, order matching,
consolidation, dispute handling, and e-payment processing in a B2B transaction
based "fee for service" business model.
Through the automation and workflow of Procure-to-Pay and Order-to-Cash
processes and the presentation of invoices, orders, and attachment data via a
self service portal, Direct Insite is helping our customers reduce manual
invoice-to-order reconciliation costs, reduce the frequency of inquiries and
disputes, improve cash flow, increase competitiveness and improve customer
satisfaction.
Direct Insite is currently delivering service and business value across the
Americas, Europe, and Asia, including 62 countries, 15 languages and more than
30 currencies. Direct Insite processes more than $125 billion in invoice value
annually on behalf of its clients. Direct Insite processes, hosts and
distributes millions of invoices, purchase orders, and attachment documents
making them accessible on-line within an internet self service portal.
Suppliers, customers, and internal departments such as Finance and Accounting or
Customer Service users can access their business documents 24 hours per day,
seven days per week, 365 days per year.
Currently, IBM, representing approximately 42% and 51% of revenue for the
years ended December 31, 2008 and 2007, respectively, utilizes our suite of
services to allow their customers from around the globe to receive, analyze,
dispute and cost allocate all of their invoice data in their local language and
currency via the Internet 24 hours a day, 7 days a week, 365 days a year. The
decrease in revenue from IBM is due to the decrease in service to IBM in Europe
and a decrease in engineering services resulting from the completion of
deploying the IOL service to all major geographies. We have two principal
contracts with IBM to provide electronic invoice ("einvoice") services for
substantially all IBM's operating units. These contracts are for one year
periods and are renewable annually. The contracts may be terminated on ninety
days advance written notice.
EDS accounted for 47% and 46% of revenue for the years ended December 31,
2008 and 2007, respectively. We have four principal contracts with EDS providing
einvoice services. These contracts have terms ranging from one to five years.
The contracts may be terminated on ninety days advance written notice. EDS was
acquired by Hewlett-Packard Company ("HP") in 2008. We do not anticipate that
the acquisition will have any material negative impact on our business with the
EDS unit of HP.
Seasonality/Quantity Fluctuations
Revenue from SaaS ongoing services generally is not subject to fluctuations
or seasonal flows. However, we believe that revenue derived from custom
engineering services will have a significant tendency to fluctuate based on
customer demand.
Other factors including, but not limited to, new product introductions,
domestic and global economic conditions, customer budgetary considerations, and
the timing of product upgrades may create fluctuations. As a result of the
foregoing factors, our operating results for any quarter are not necessarily
indicative of results for any future period.
Our Critical Accounting Policies
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. On a
continual basis, management reviews its estimates utilizing currently available
information, changes in facts and circumstances, historical experience and
12
reasonable assumptions. After such reviews, and if deemed appropriate, those
estimates are adjusted accordingly. Actual results may vary from these estimates
and assumptions under different and/or future circumstances. Management
considers an accounting estimate to be critical if:
o it requires assumptions to be made that were uncertain at the time the
estimate was made; and
o changes in the estimate, or the use of different estimating methods
that could have been selected, could have a material impact on the
Company's consolidated results of operations or financial condition.
The following critical accounting policies have been identified that affect the
more significant judgments and estimates used in the preparation of the
consolidated financial statements. We believe that the following are some of the
more critical judgment areas in the application of our accounting policies that
affect our financial condition and results of operations. We have discussed the
application of these critical accounting policies with our Audit Committee. The
following critical accounting policies are not intended to be a comprehensive
list of all of the Company's accounting policies or estimates.
Revenue Recognition
-------------------
We record revenue in accordance with Statement of Position 81-1, issued by
the American Institute of Certified Public Accountants and SEC Staff Accounting
Bulletin Topic 13 "Revenue Recognition in Financial Statements." In some
circumstances, we enter into arrangements whereby the Company is obligated to
deliver to its customer multiple products and/or services (multiple
deliverables). In these transactions, in accordance with the Emerging Issues
Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables", the Company allocates the total revenue to be earned among the
various elements based on their relative fair values. The Company recognizes
revenue related to the delivered products or services only if:
o Any undelivered products or services are not essential to the functionality
of the delivered products or services;
o Payment for the delivered products or services is not contingent upon
delivery of the remaining products or services;
o We have an enforceable claim to receive the amount due in the event it does
not deliver the undelivered products or services and it is probable that
such amount is collectible;
o There is evidence of the fair value for each of the undelivered products or
services;
o Delivery of the delivered element represents the culmination of the
earnings process.
The following are the specific revenue recognition policies for each major
category of revenue.
SaaS Services
--------
We provide transactional data processing services through our SaaS software
solutions to our customers. The customer is charged a monthly fixed rate on a
per transaction basis or a fixed fee based on monthly transaction volumes.
Revenue is recognized as the services are performed.
Custom Engineering Services
---------------------------
We perform custom engineering services which are single contractual
agreements involving modification or customization of the Company's proprietary
SaaS solution. Progress is measured using the relative fair value of
specifically identifiable output measures (milestones). Revenue is recognized at
the lesser of the milestone amount when the customer accepts such milestones or
the percentage of completion of the contract following the guidance of SOP 81-1,
13
"Accounting for Performance of Construction-Type and Certain Production Type
Contracts".
Cost of Revenue
---------------
Cost of revenue in the consolidated statements of operations is presented
along with operations, research and development costs and exclusive of
amortization and depreciation shown separately. Custom Engineering Services
costs related to uncompleted milestones are deferred and included in other
current assets, when applicable.
Allowance For Doubtful Accounts
-------------------------------
The allowance for doubtful accounts reflects management's best estimate of
probable losses inherent in the account receivable balance. Management
determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence. At December 31, 2008 and
2007, an allowance for doubtful accounts is not provided since, in the opinion
of management, all accounts are deemed collectible.
Impairment of Long-Lived Assets
-------------------------------
Statement of Financial Accounting Standards ("SFAS"), No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("FAS 144") requires
management judgments regarding the future operating and disposition plans for
marginally performing assets, and estimates of expected realizable values for
assets to be sold. The Company accounts for its long-lived assets in accordance
with FAS 144 for purposes of determining and measuring impairment of its other
intangible assets. It is the Company's policy to periodically review the value
assigned to its long lived assets, including capitalized software costs, to
determine if they have been permanently impaired by adverse conditions. If
required, an impairment charge would be recorded based on an estimate of future
discounted cash flows. In order to test for recoverability, the Company compared
the sum of an undiscounted cash flow projection from the related long-lived
assets to the net carrying amount of such assets. Considerable management
judgment is necessary to estimate undiscounted future operating cash flows and
fair values and, accordingly, actual results could vary significantly from such
estimates. No impairment charges were recognized during the years ended December
31, 2008 and 2007, respectively.
Income Taxes
------------
The Company accounts for income taxes using the liability method. The
liability method requires the determination of deferred tax assets and
liabilities based on the differences between the financial statement and income
tax basis of assets and liabilities, using enacted tax rates. Additionally, net
deferred tax assets are adjusted by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the net deferred tax assets will not be realized. The Company currently
has significant deferred tax assets. SFAS No. 109, "Accounting for Income Taxes
("FAS 109"), requires a valuation allowance be established when it is more
likely than not that all or a portion of deferred tax assets will not be
realized. During the year ended December 31, 2008, the Company reviewed previous
positive and negative evidence and also reviewed its expected taxable income for
future periods and concluded that it is more likely than not that approximately
$2,867,000 of tax benefits related to net operating loss carry-forwards will be
utilized in future tax years and, therefore, reduced its valuation allowance
during the year ended December 31, 2008 in accordance with APB 28. As a result
the Company's effective tax rate for the year ended December 31, 2008 differs
from the current statutory rates. In addition, the Company expects to provide a
valuation allowance on the remaining future tax benefits until it can sustain a
level of profitability that demonstrates its ability to utilize the remaining
assets, or other significant positive evidence arises that suggests its ability
to utilize the remaining assets. The future realization of a portion of its
reserved deferred tax assets related to tax benefits associated with the
exercise of stock options, if and when realized, will not result in a tax
benefit in the consolidated statement of operations, but rather will result in
an increase in additional paid in capital. The Company will continue to
re-assess its reserves on deferred income tax assets in future periods on a
quarterly basis. The Company has elected the "with and without approach"
regarding ordering of windfall tax benefits to determine whether the windfall
tax benefit did reduce taxes payable in the current year. Under this approach
the windfall tax benefit would be recognized in additional paid-in-capital only
if an incremental tax benefit is realized after considering all other benefits
presently available.
14
Use of Estimates
----------------
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America, our
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the consolidated financial statements, as well as the reported
amounts of revenue and expenses during the reporting period. Certain items,
among others, that are particularly sensitive to estimates are revenue
recognition, the fair value of derivative warrants, stock based compensation and
the valuation allowance on deferred tax assets. Actual results could differ from
those estimates.
Financial Condition and Liquidity
- ---------------------------------
For the year ended December 31, 2008 we had operating income of $1,375,000
compared to operating income of $2,216,000 for the year ended December 31, 2007,
a decrease of $841,000. For the year ended December 31, 2008, we had net income
of $4,181,000 compared to net income of $2,100,000 for the year ended December
31, 2007, an increase of $2,081,000. The increase includes a benefit from income
taxes of $2,867,000. Cash provided from operations for the year ended December
31, 2008 was $1,923,000 compared to cash provided from operations of $3,255,000
for the year ended December 31, 2007. This decrease is due primarily to the
decrease in sales, an increase in certain costs and an increase in accounts
receivable.
Cash provided from operations for the year ended December 31, 2008 was
$1,923,000, consisting of the net income of $4,181,000, reduced by non-cash
items of $1,917,000, including the deferred tax benefit of $2,867,000 offset by
depreciation and amortization of $325,000, and stock based compensation expense
of $625,000. Cash from operations was further decreased by an increase in
accounts receivable and prepaid expenses of $491,000 and a decrease in deferred
revenue of $48,000, offset by an increase in accounts payable and accrued
expenses of $198,000.
Cash used in investing activities was $233,000 for the year ended December
31, 2008, compared to $202,000 for the previous year. This was principally
expenditures for equipment.
Cash used in financing activities totaled $2,894,000 for the year ended
December 31, 2008, compared to cash used in financing activities of $1,164,000
in 2007. We paid dividends on the preferred stock of $3,154,000 bringing the
dividends substantially current. We received proceeds from exercise of options
and warrants of $428,000. In addition, and we made repayments on capital leases
and capital notes of $168,000.
As a result of these operating, investing and financing activities, cash
decreased by $1,204,000 to $980,000 at December 31, 2008.
Results of Operations
- ---------------------
For the year ended December 31, 2008 revenue decreased $502,000 or 5.0% to
$9,609,000 compared to revenue $10,111,000 in 2007. The decrease is primarily
due to a decrease in engineering services revenue of $831,000 and a decrease in
recurring revenue from IBM of $837,000, offset by an increase in IOL and other
recurring SaaS services from other customers of $1,166,000. The decrease in
engineering services revenue is primarily due to a decrease in revenue from EDS
resulting from the completion of a major project in 2007. The increase in
recurring revenue resulted principally from an increase in continuing services
to EDS and other customers offset by a decrease in recurring revenue from IBM
resulting from a decrease in services to IBM in Europe.
Costs of operations, research and development increased by $240,000 (6.5%)
to $3,938,000 for the year ended December 31, 2008 compared to the costs of
$3,698,000 in 2007. These costs consist principally of salaries and related
expenses for software developers, programmers, custom engineers, network
services, and quality control and assurance. Also included are cost for
purchased services, network costs, costs of the production co-location
facilities and other expenses directly related to our custom engineering and
15
SaaS services. The increase in costs is principally due to an increase in costs
for outsourced services of $361,000, offset by a decrease in costs for contract
development staff of $204,000. Rents increased $80,000 primarily due an increase
in rents for our co-location data where we expanded our space requirements. All
other operating expenses combined increased approximately $3,000 net.
Sales and marketing costs were $984,000 for the year ended December 31,
2008, a decrease of $126,000 or 11.4% compared to costs of $1,110,000 in 2007.
Salaries and related costs decreased $28,000 and consulting and professional
fees decreased $62,000. Travel and entertainment costs decreased $13,000. All
other costs sales and marketing costs decreased $23,000, net.
General and administrative costs increased $232,000 or 8.4% to $2,987,000
for the year ended December 31, 2008 compared to costs of $2,755,000 in 2007.
Salaries and related costs increased $97,000 principally to an increase in stock
based compensation for stock grants and salary increases to certain executives.
Directors' fees increased $79,000 and professional fees increased $50,000. We
adopted a new compensation plan for directors in 2008 and professional fees were
higher due to recruiting costs incurred to identify qualified systems
development staff. All other general and administrative costs had a net increase
of $6,000.
Depreciation and amortization expense decreased by $7,000 (2.1%) to
$325,000 for the year ended December 31, 2008 compared to costs of $332,000 in
2007, primarily due to equipment becoming fully depreciated.
Interest expense, net decreased by $59,000 (60.8%) to $38,000 for the year
ended December 31, 2008 compared to costs of $97,000 in 2007, primarily due to
the repayment of Lines of credit of $586,000 in 2007 and the termination of the
short-term revolving loan agreement used for working capital.
Other income, net for the year ended December 31, 2007 was $1,000 compared
to $8,000 in 2007. In 2007 we had a gain from the sale of securities of $8,000.
During the year ended December 31, 2008, the Company reviewed previous
positive and negative evidence and also reviewed its expected taxable income for
future periods and concluded that it is more likely than not that approximately
$2,867,000 of tax benefits related to net operating loss carry-forwards will be
utilized in future tax years and, therefore, reduced its valuation allowance
during the year ended December 31, 2008 in accordance with APB 28.
Net Operating Loss Carry Forwards
- ---------------------------------
At December 31, 2008, the Company has net operating loss carry-forwards
("NOLs") remaining of approximately $72 million, which may be available to
reduce federal taxable income, if any. These NOLs expire through 2025. However,
Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a
change in control of a company. During 2008, we performed an evaluation as to
whether a change in control had taken place. We believe that there has been no
change in control as such applies to Section 382. If it is determined that a
change in control has taken place, utilization of its NOLs will be subject to
severe limitations in future periods, which would have the effect of eliminating
substantially all of the future income tax benefits of the NOLs.
Off-Balance Sheet Arrangements
- ------------------------------
The Company has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to
investors.
New Accounting Pronouncements
- -----------------------------
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies
the principle that fair value should be based on the assumptions market
participants would use when pricing an asset or liability and establishes a fair
value hierarchy that prioritizes the information used to develop those
16
assumptions. SFAS 157 requires fair value measurements to be separately
disclosed by level within the fair value hierarchy. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The adoption of this
pronouncement did not have an effect on the Company's financial position or
results of operations. On February 12, 2008, the FASB issued FASB Staff Position
(FSP) No. SFAS 157-2, "Effective Date of FASB Statement No. 157" (FSP SFAS
157-2). FSP SFAS 157-2 amends SFAS No. 157, to delay the effective date of SFAS
157 for nonfinancial assets and nonfinancial liabilities, except for the items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis. For items within its scope, FSP SFAS 157-2 defers the effective
date of SFAS 157 to fiscal years beginning after November 15, 2008. The Company
is currently evaluating the impact of adopting SFAS 157 and FSP SFAS 157-2 on
its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS No. 159"), which permits entities to choose to measure
many financial instruments and certain other items at fair value. The fair value
option established by this Statement permits all entities to choose to measure
eligible items at fair value at specified election dates. A business entity
shall report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. Adoption
is required for fiscal years beginning after November 15, 2007. The Company has
not elected to use the fair value method for any financial assets or liabilities
and therefore SFAS 159 did not have an effect on the Company's consolidated
financial position or results of operations.
In December 2007, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 141R, "Business Combinations" ("SFAS 141R"), which
replaces SFAS No. 141, "Business Combinations." SFAS 141R establishes principles
and requirements for determining how an enterprise recognizes and measures the
fair value of certain assets and liabilities acquired in a business combination,
including non-controlling interests, contingent consideration, and certain
acquired contingencies. SFAS 141R also requires acquisition-related transaction
expenses and restructuring costs be expensed as incurred rather than capitalized
as a component of the business combination. SFAS 141R will be applicable
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS 141R would have an impact on accounting for any
businesses acquired after the effective date of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests
in Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained non-controlling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company would be required to report any
non-controlling interests as a separate component of stockholders' equity. The
Company would also be required to present any net income allocable to
non-controlling interests and net income attributable to the stockholders of the
Company separately in its consolidated statements of operations. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption
of the presentation and disclosure requirements for existing minority interests.
All other requirements of SFAS 160 shall be applied prospectively. SFAS 160
would have an impact on the presentation and disclosure of the non-controlling
interests of any non wholly-owned businesses acquired in the future.
In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No. 133",
which amends and expands the disclosure requirements of SFAS 133 to require
qualitative disclosure about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. This statement will be effective for the
Company beginning on January 1, 2009. The adoption of this statement will change
the disclosures related to derivative instruments held by the Company, if any.
In June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an
Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
17
statements issued for fiscal years beginning after December 15, 2008. Early
application is not permitted. The Company is assessing the potential impact of
this EITF 07-5 on the consolidated financial condition and results of
operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The financial statements are included beginning on page F-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTNG AND FINANCIAL
- --------------------------------------------------------------------------------
DISCLOSURE
----------
None.
Item 9A. CONTROLS AND PROCEDURES
- --------------------------------
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
Evaluation of Disclosure Controls and Procedures
- -------------------------------------------------
The Company maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports it files with the SEC
is accumulated and communicated to management, as appropriate, to allow timely
decisions regarding required disclosure, and such information is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer we
have evaluated the effectiveness of our disclosure controls and procedures as
such term is defined by the rules established under the Securities Exchange Act
of 1934.
Based on our evaluation which took place as of December 31, 2008 (the
"Evaluation Date"), we believe that these procedures were not effective as a
result of limited resources and a limited segregation of duties in accounting
and financial reporting. More specifically, the Company has a limited number of
personnel in the finance and accounting area and therefore one person performs
various accounting functions where a greater segregation of duties would permit
checks and balances and reviews that would improve internal control. The Company
has been aware of this material weakness since January 2004 at which time the
staff of the accounting department was reduced. As a result the Chief Financial
Officer devotes substantive time to reviewing the accounting records and
financial reports and the Company expects that this will continue until
financial resources permit engaging additional accounting staff. The Company has
not determined at this time when such additional staff will be employed.
Changes in Internal Control Over Financial Reporting
- ----------------------------------------------------
The Company maintains a system of internal controls designed to provide
reasonable assurance that transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary to (1) permit preparation of financial statements in conformity with
accepted accounting principles generally accepted in the United States of
America, and (2) maintain accountability for assets. Access to assets is
permitted only in accordance with management's general or specific
authorization. In 2007 the Company adopted and implemented the control
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act"). The
Company engaged an outside consulting firm to assist Management with the
adoption of Section 404. The Company incurred costs of approximately $11,000 and
$84,000 for this consultant in 2008 and 2007,respectively.
Since the date of the most recent evaluation of the Company's internal
controls over financial reporting by the Chief Executive and Chief Financial
Officers, there have been no changes in such controls or in other factors that
could have materially affected, or is reasonably likely to materially affect,
18
those controls, including any corrective actions with regard to significant
deficiencies and material weaknesses. However, the Company engaged an outside
consultant to assist with the financial closing process as it relates to the
Company's tax provision and report thereon.
It is the responsibility of the Company's management to establish and
maintain adequate internal control over financial reporting. However, due to its
limited financial resources, there is only limited segregation of duties within
the accounting function, leaving most significant aspects of financial reporting
in the hands of the CFO.
Our independent auditors have reported to our Board of Directors certain
matters involving internal controls that our independent auditors considered to
be a reportable condition and a material weakness on the Evaluation Date, under
standards established by the American Institute of Certified Public Accountants.
As previously stated, the reportable condition and material weakness relates to
limited segregation of duties and the absence of reviews and approvals beyond
that performed by the Chief Financial Officer and the consultant as mentioned
above, of transactions and accounting entries. Given this reportable condition
and material weakness, the Chief Financial Officer devoted additional time to
closing, preparing and reviewing the report for the year ended December 31,
2008.
Exhibit A - Management's Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the
Exchange Act. Internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, and effected by the board of directors, management, and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with United States Generally Accepted Accounting
Principles ("US GAAP") including those policies and procedures that: (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company, (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with US GAAP and that
receipts and expenditures are being made only in accordance with authorizations
of management and directors of the company, and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with policies and procedures may deteriorate.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, our management used the
criteria described in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Due to
the inherent issue of segregation of duties in a small company, we have relied
heavily on entity or management review controls to lessen the issue of
segregation of duties. Based on this assessment and those criteria, our
management concluded that the Company did not maintain effective internal
control over financial reporting as of December 31, 2008 as noted below.
A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company's annual or interim
financial statements will not be prevented or detected on a timely basis.
Management identified the following material weakness as of December 31, 2008.
Financial Reporting
Management identified the following significant deficiencies that when
aggregated give rise to a material weakness. These deficiencies include a) lack
of review or evidence of review in the financial reporting process due to
19
limited segregation of duties b) the Company has a limited number of personnel
in the finance and accounting area and therefore one person performs various
accounting functions where a greater segregation of duties would permit checks
and balances and reviews that would improve internal control.
ITEM 9B. OTHER INFORMATION
None
20
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
- -----------------------------------------------------------------
As of March 26, 2009, the names, ages and positions of the directors and
executive officers of the Company are as follows (Note 1):
Name Age Position Director Since
----- --- -------- --------------
James A Cannavino 64 Chairman of the Board of Directors
and Chief Executive Officer 2000
Bernard Puckett (1) 64 Member of the Board of Directors 2004
Dennis Murray (1) 62 Member of the Board of Directors 2000
Michael Levin 36 Member of the Board of Directors 2005
Arnold Leap 41 Executive Vice-President Sales and Marketing
and Chief Technology Officer
Matthew E. Oakes 46 President and Chief Operating Officer
Michael J. Beecher 64 Chief Financial Officer and Secretary
<FN>
(1) Member of the Audit and Compensation committees.
</FN>
James A. Cannavino has been our Chairman of the Board and a director since
March 2000, and Chief Executive Officer since December 2002. From September of
1997 to April of 2000 he was the non-executive Chairman of Softworks, Inc (a
then wholly owned subsidiary of the Company), which went public and was later
sold to EMC. Mr. Cannavino was also the Chief Executive Officer and Chairman of
the Board of Directors of CyberSafe, Inc., a corporation specializing in network
security from April 1998 to July 2001. In August, 1995, he was appointed as
President and Chief Operating Officer of Perot Systems Corporation and in 1996
was elected to serve as Chief Executive Officer through July 1997. During his
tenure at Perot he was responsible for all the day-to-day global operations of
the company, as well as for strategy and organization. Prior to that he served
as a Senior Vice President at IBM, responsible for strategy and development. Mr.
Cannavino held various positions at IBM for over thirty years beginning in 1963.
Mr. Cannavino led IBM's restructuring of its $7 billion PC business to form the
IBM PC Company. He also served on the IBM Corporate Executive Committee and
Worldwide Management Council, and on the board of IBM's integrated services and
solutions company. Mr. Cannavino presently serves on the Boards of the National
Center for Missing and Exploited Children, the International Center for Missing
and Exploited Children, and Verio. He recently was Chairman of the Board of
Marist College in Poughkeepsie, New York and continues to serve on the board.
Mr. Cannavino will serve on the Board until his successor is elected.
Bernard Puckett served as Chairman of the Board of Openwave Systems, Inc.,
a leading provider of open IP-based communication infrastructure software and
applications, from 2002 until 2007. Mr. Puckett is also a member of the Board of
Directors of Skilled Healthcare, Corp., a public company. Mr. Puckett was
formerly the President and Chief Executive Officer of Mobile Telecommunications
Technology Corp. ("Mtel"). Prior to joining Mtel, Mr. Puckett spent 26 years
with IBM where he was Senior Vice-president - Corporate Strategy and
Development. He also held positions in marketing, finance, product development,
manufacturing and new business development during his tenure at IBM. He also
serves on the board of directors of IMS Health (NYSE:RX). Mr. Puckett was
appointed to our Board of Directors in February 2004 and will serve in such
capacity until his successor is elected.
Dr. Dennis J. Murray has been President of Marist College since 1979. Early
in his tenure, he identified the importance of technology in higher education
and made it one of the central themes of his administration. He developed an
innovative joint study with the IBM Corporation, which resulted in Marist
becoming one of the nations most technologically advanced liberal arts colleges.
Marist was one of the first colleges or universities in the country to have a
fully networked campus, and currently operates on an IBM e-server zSeries 900
processor with a z/OS operating system. Dr. Murray has been a strong supporter
of the Linux operating system and recently initiated a Linux Research and
Development Center at Marist. Dr. Murray serves on the boards of the Franklin
21
and Eleanor Roosevelt Institute, McCann Foundation, and the New York State
Greenway Conservancy, which oversees the Hudson River Valley National Heritage
Area. He is also the author of two books on nonprofit management, editor of
three books on government and public affairs, and co-author of a guide to
corporate-sponsored university research in biotechnology.
Michael Levin is Managing Director of Metropolitan Venture Partners Corp.,
a venture capital firm he co-founded in 1999. In his role, Mr. Levin negotiates
and manages investments, as well as oversees the financial and operational
management of the firm. He also serves as an active Board member and works
closely with portfolio companies on strategic growth and ensuring proper fiscal
discipline. Prior to MetVP, Mr. Levin developed and managed hedge funds for the
Man Group plc and Larry Hite. Mr. Levin was graduated Magna Cum Laude from The
Wharton School at the University of Pennsylvania with a concentration in
Finance. He is also an alumnus of Phillips Exeter Academy.
Arnold Leap has been Executive Vice President and Chief Technology Officer
since November 2000. Mr. Leap recently accepted the additional role of EVP Sales
and Marketing. From March 1998 until November 2000 he held the position of Chief
Information Officer. Mr. Leap originally was hired in February 1997 as the
Company's Director of Development and Engineering and held the position until
March 1998. Prior to his joining Direct Insite, Mr. Leap was the MIS
Manager/Director of AMP Circuits, Inc., and a subsidiary of AMP, Inc. from 1993
to February 1997. His responsibilities at AMP Circuits, Inc. included day-to-day
information systems operation as well as the development and implementation of a
consolidated ERP and financial system.
Matthew Oakes was appointed President and Chief Operating Officer on March
18, 2009. Prior thereto he held the position of Executive Vice President and
Chief Operating Officer from August 2006, and Executive Vice President - Client
Services since November of 2002. Prior to his joining the Company, Mr. Oakes
served for three years as the Operations Officer for Direct Media Networks a New
York based e-commerce and technology company. He held executive positions in
Westinghouse Communities Inc. including "Managing Director of Operations" for
the Pelican Bay Community in Naples, Florida. Mr. Oakes received a JD degree
from Nova Southeastern University and holds an MBA in finance. He is a 1993
graduate with a Bachelors Degree in Business from Cornell University. He served
with the United States Marines prior to attending Cornell.
Michael J. Beecher, CPA, joined the Company as Chief Financial Officer in
December 2003. Prior to joining Direct Insite Mr. Beecher was Chief Financial
Officer and Treasurer of FiberCore, Inc., a publicly held company in the
fiber-optics industry. From 1989 to 1995 he was Vice-President Administration
and Finance at the University of Bridgeport. Mr. Beecher began his career in
public accounting with Haskins & Sells, an international public accounting firm.
He is a graduate of the University of Connecticut, a Certified Public Accountant
and a member of the American Institute of Certified Public Accountants.
Term of Office and Family Relationships
- ---------------------------------------
All directors hold office until the next annual meeting of shareholders or
until their respective successors are elected or until their earlier death,
resignation or removal. Executive officers are appointed by and serve at the
discretion of our Board of Directors. There are no family relationships among
our executive officers and directors.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Exchange Act requires our executive officers,
directors and persons who own more than ten percent of a registered class of our
equity securities ("Reporting Persons") to file reports of ownership and changes
in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission
(the "SEC") and the National Association of Securities Dealers, Inc. (the
"NASD"). These Reporting Persons are required by SEC regulation to furnish us
with copies of all Forms 3, 4 and 5 they file with the SEC and the NASD. To our
knowledge, based solely upon our review of the copies of the forms we have
received, we believe that all Reporting Persons complied on a timely basis with
all filing requirements applicable to them with respect to the fiscal year ended
December 31, 2008.
22
Code of Ethics
Direct Insite adopted a Corporate Code of Business Ethics (the "Code") in
2004 that applies to all employees, officers and directors of Direct Insite. It
is broad in scope and is intended to foster honest and ethical conduct,
including accurate financial reporting, compliance with laws and the like. It
does not expressly cover certain procedural matters covered by the
Sarbanes-Oxley Act and regulations promulgated thereunder and may not constitute
a "code of ethics" within the meaning of the law and regulations. Accordingly,
the Company adopted an additional code of ethics on February 18, 2005 that
covers senior executive officers of Direct Insite and is intended to comply with
the new law and regulations. The "Code of Ethics - Chief Executive and Chief
Financial Officers" is posted on our internet website at www.directinsite.com.
Audit Committee and Audit Committee Financial Expert
- ----------------------------------------------------
The Board has a standing Audit Committee. The Board has affirmatively
determined that each director who serves on the Audit Committee is independent,
as the term is defined by applicable Securities and Exchange Commission ("SEC")
rules. During the years ended December 31, 2008 and 2007, the Audit Committee
consisted of Dr. Dennis J. Murray (Chairman), and Bernard Puckett. The members
of the audit committee have substantial experience in assessing the performance
of companies, gained as members of the Company's board of directors and audit
committee, as well as by serving in various capacities in other companies or
governmental agencies. As a result, they each have an understanding of financial
statements. However, none of them keep current on all aspects of generally
accepted accounting principles. Accordingly, the board of directors does not
consider any of them to be a financial expert as that term is defined in
applicable regulations. Nevertheless, the board of directors believes that they
competently perform the functions required of them as members of the audit
committee and, given their backgrounds, it would not be in the best interest of
the Company to replace any of them with another person to qualify a member of
the Audit Committee as a financial expert.
The Audit Committee regularly meets with our independent registered public
accounting firm outside the presence of management.
Compensation Committee
- ----------------------
Our Compensation Committee annually establishes, subject to the
approval of the Board of Directors and any applicable employment agreements, the
salaries which will be paid to our executive officers during the coming year,
and administers our stock-based benefit plans. During the years ended December
31, 2008 and 2007, the Compensation Committee consisted of Bernard Puckett
(Chairman), and Dr. Dennis J. Murray. Each member of the Compensation Committee
is a director who is not employed by us or any of our affiliates, and is an
independent director under applicable SEC rules.
Item 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth the annual and long-term compensation with
respect to the Principal Executive Officer ("PEO") and each of the other
executive officers of the Company who received more than $100,000 for services
rendered for the year ended December 31, 2008 and 2007.
23
Summary Compensation Table
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Nonqualified
Non-Equity Deferred
Name and Principal Incentive Compensation All Other
Position Stock Option Plan Earnings Compensation Total
Year Salary ($) Bonus($) Awards ($) Awards ($) Compensation($) ($) ($) (1) ($)
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
James A. Cannavino 2008 $240,000 $30,000 $270,000 $46,200 -- -- $153,758 $739,958
Chief 2007 $215,000 $50,000 $382,500 -- -- -- $136,891 $784,391
Executive
Officer (PEO)
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Arnold Leap 2008 $198,000 $21,500 $ 56,250 $ 4,630 -- -- $11,460 $291,840
EVP - Chief 2007 $183,000 $60,000 -- $ 7,938 -- -- $11,533 $262,471
Technology Officer
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Michael Beecher 2008 $175,000 $15,500 $ 55,500 $ 4,630 -- -- $13,600 $264,230
Chief Financial Officer 2007 $147,833 $25,000 $ 4,625 $ 7,938 -- -- $13,369 $198,765
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Matthew Oakes 2008 $186,000 $25,000 $ 56,250 $ 4,630 -- -- $ 9,600 $281,480
EVP -Chief Operating 2007 $171,000 $65,000 -- $ 7,938 -- -- $ 9,673 $253,611
Officer (3)
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Christopher Cauley 2008 $182,898 -- -- $12,352 -- -- -- $195,250
Director-Sales and 2007 $182,250 -- $ 6,000 $18,527 -- -- $ 73 $206,850
Marketing
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
<FN>
Footnotes
- ---------
(1) All Other Compensation includes the following for each of the
executives:
In 2008, Mr. Cannavino received a housing/office allowance of
$120,000, leased cars including insurance valued at $12,660, and
directors fees of $21,098, and in 2007, a housing/office allowance of
$120,000, leased cars including insurance of $8,805, parking costs of
$2,012, directors fees of $6,000.
In 2008, Mr. Leap received a car allowance including insurance of
$9,600 and life insurance costs of $1,860 and in 2007, a car allowance
including insurance of $9,600 and life insurance costs of $1,933.
In 2008, Mr. Beecher received a car allowance including insurance of
$8,400, and a living allowance of $5,200 and in 2007, a car allowance
including insurance of $8,100 and a living allowance of $5,200.
In 2008, Mr. Oakes received a leased car including insurance valued at
$9,600 and in 2007 a car allowance of $9,600.
(2) The assumptions used in determining the value of stock and option
awards are included in Note 8 to the accompanying consolidated
financial statements.
(3) Mr. Oakes was appointed President and Chief Operating Officer on March
18, 2009.
</FN>
24
Outstanding Equity Awards at Fiscal Year End
The following table provides information concerning outstanding
options, unvested stock and equity incentive plan awards for the named
executives as of December 31, 2008:
- ----------------- --------------------------------------------------------------------- --------------------------------------------
Option Awards Stock Awards
- ----------------- --------------------------------------------------------------------- --------------------------------------------
Equity Equity
Incentive Incentive
Plan Plan
Awards: Awards:
Number Market or
Market of Payout
Equity Value of Unearned Value of
Incentive Shares Shares, Unearned
Number of Number of Plan Awards: Number of or Units Units or Shares,
Securities Securities Number of Shares or of Stock Other Units or
Underlying Underlying Underlying Units of That Rights Other
Unexercised Unexercised Unexercised Option Option Stock That Have Not That Rights
Options - Options - Unearned Exercise Expiration Have Not Vested Have Not That Have
Name Exercisable Unexercisable Options Price Date Vested (5) Vested Not Vested
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- ---------- ---------
James Cannavino 350,000 (1) -- $0.62 12/30/2012 240,000 $261,600 -- --
25,000 (2) 25,000 (2) -- $1.50 3/25/2013
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- ---------- ---------
Arnold Leap 90,000 (3) -- $0.25 7/31/2011 120,000 $130,800 -- --
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- ---------- ---------
Michael Beecher 30,000 (1) -- -- $1.60 12/31/2009 30,000 $ 32,700 -- --
120,000 (3) -- -- $0.25 7/31/2011
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- ---------- ---------
Matthew Oakes 100,000 (1) -- -- $0.65 8/31/2010 120,000 $130,800 -- --
120,000 (3) -- -- $0.25 7/31/2011
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- ---------- ---------
Christopher
Cauley 175,000 (4) -- $0.65 8/31/2010 -- --
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- ---------- ---------
<FN>
(1) These options were fully vested on December 30, 2005
(2) These options vest 25,000 on March 25, 2008 and 25,000 on March 25,
2009
(3) These options for Mr. Leap, Mr. Beecher and Mr. Oakes vest at 5,000
per month over the 24 month period from August 1, 2006 through July 1,
2008.
(4) Mr. Cauley's options vest(ed) 35,000 on September 1, 2005 and then
4,000 per month from October 1, 2005 through August 1, 2008.
(5) Based on the closing price of the Company's stock of $1.09 on December
31, 2008.
</FN>
Equity Compensation Plan Information
- ------------------------------------
We maintain various stock plans under which options vest and shares are
awarded at the discretion of our Board of Directors or its compensation
committee. The purchase price of the shares under the plans and the shares
subject to each option granted is not less than the fair market value on the
date of the grant. The term of each option is generally five years and is
determined at the time of the grant by our board of directors or the
compensation committee. The participants in these plans are officers, directors,
employees and consultants of the Company and its subsidiaries and affiliates.
The following information is provided about our current stock option plans:
2000 Stock Option/Stock Issuance Plan. The 2000 Stock Option/Stock Issuance
Plan covers 166,667 shares of common stock. Options granted under the plan may
be incentive stock options qualified under Section 422 of the Internal Revenue
Code of 1986, as amended or non-qualified stock options. Under the terms of the
plan, the exercise price of options granted under the plan will be the fair
market value at the date of the grant. Prices for incentive stock options
25
granted to employees who own 10% or more of our stock are at least 110% of the
market value at the date of the grant. The nature and terms of the options to be
granted are determined at the date of the grant by the compensation committee of
the board of directors. The term for which stock and options may be granted
under the Plan expires on May 31, 2010 and stock or options granted under the
Plan shall expire not later than five years from the date of grant. Stock
options granted under the Plan may become exercisable in one or more
installments in the manner and at the time or times specified by the committee.
No options were granted under this plan during the fiscal year ended December
31, 2008. At December 31, 2008, no options to purchase shares of common stock
were outstanding under this plan.
2001 Stock Option/Stock Issuance Plan. The 2001 Stock Option/Stock Issuance
Plan covers 330,000 shares of common stock. Options granted under the plan may
be incentive stock options qualified under Section 422 of the Internal Revenue
Code of 1986, as amended or non-qualified stock options. Under the terms of the
plan, the exercise price of options granted under the plan will be the fair
market value at the date of the grant. Prices for incentive stock options
granted to employees who own 10% or more of our stock are at least 110% of the
market value at the date of the grant. The nature and terms of the options to be
granted are determined at the date of the grant by the compensation committee of
the board of directors. The term for which stock and options may be granted
under the Plan expires on May 31, 2011 and stock or options granted under the
Plan shall expire not later than five years from the date of grant. Stock
options granted under the Plan may become exercisable in one or more
installments in the manner and at the time or times specified by the committee.
No options were granted under this plan during the fiscal year ended December
31, 2008. At December 31, 2008, no options to purchase shares of common stock
were outstanding under this plan.
2001-A Stock Option/Stock Issuance Plan. The 2001-A Stock Option/Stock
Issuance Plan covers 600,000 shares of common stock. Options granted under the
plan may be incentive stock options qualified under Section 422 of the Internal
Revenue Code of 1986, as amended or non-qualified stock options. Under the terms
of the plan, the exercise price of options granted under the plan will be the
fair market value at the date of the grant. Prices for incentive stock options
granted to employees who own 10% or more of our stock are at least 110% of the
market value at the date of the grant. The nature and terms of the options to be
granted are determined at the date of the grant by the compensation committee of
the board of directors. The term for which stock and options may be granted
under the Plan expires on September 17, 2011 and stock or options granted under
the Plan shall expire not later than five years from the date of grant. Stock
options granted under the Plan may become exercisable in one or more
installments in the manner and at the time or times specified by the committee.
No options were granted under this plan during the fiscal year ended December
31, 2008. At December 31, 2008, options to purchase 30,000 shares of common
stock were outstanding under this plan.
2002 Stock Option/Stock Issuance Plan. The 2002 Stock Option/Stock Issuance
Plan covers 625,000 shares of common stock. Options granted under the plan may
be incentive stock options qualified under Section 422 of the Internal Revenue
Code of 1986, as amended or non-qualified stock options. Under the terms of the
plan, the exercise price of options granted under the plan will be the fair
market value at the date of the grant. Prices for incentive stock options
granted to employees who own 10% or more of our stock are at least 110% of the
market value at the date of the grant. The nature and terms of the options to be
granted are determined at the date of the grant by the compensation committee of
the board of directors. The term for which stock and options may be granted
under the Plan expires on January 1, 2012 and stock or options granted under the
Plan shall expire not later than five years from the date of grant. Stock
options granted under the Plan may become exercisable in one or more
installments in the manner and at the time or times specified by the committee.
No options were granted under this plan during the fiscal year ended December
31, 2008. At December 31, 2008, no options to purchase shares of common stock
were outstanding under this plan.
2002-A Stock Option/Stock Issuance Plan. The 2002-A Stock Option/Stock
Issuance Plan covers 875,000 shares of common stock. Options granted under the
plan may be incentive stock options qualified under Section 422 of the Internal
Revenue Code of 1986, as amended or non-qualified stock options. Under the terms
of the plan, the exercise price of options granted under the plan will be the
fair market value at the date of the grant. Prices for incentive stock options
granted to employees who own 10% or more of our stock are at least 110% of the
market value at the date of the grant. The nature and terms of the options to be
granted are determined at the date of the grant by the compensation committee of
26
the board of directors. The term for which stock and options may be granted
under the Plan expires on January 1, 2012 and stock or options granted under the
Plan shall expire not later than five years from the date of grant. Stock
options granted under the Plan may become exercisable in one or more
installments in the manner and at the time or times specified by the committee.
No options were granted under this plan during the fiscal year ended December
31, 2008. At December 31, 2008, no options to purchase shares of common stock
were outstanding under this plan.
2003 Stock Option/Stock Issuance Plan. The 2003 Stock Option/Stock Issuance
Plan covers 725,000 shares of common stock. Options granted under the plan may
be incentive stock options qualified under Section 422 of the Internal Revenue
Code of 1986, as amended or non-qualified stock options. Under the terms of the
plan, the exercise price of options granted under the plan will be the fair
market value at the date of the grant. Prices for incentive stock options
granted to employees who own 10% or more of our stock are at least 110% of the
market value at the date of the grant. The nature and terms of the options to be
granted are determined at the date of the grant by the compensation committee of
the board of directors. The term for which stock and options may be granted
under the Plan expires on April 1, 2013 and stock or options granted under the
Plan shall expire not later than five years from the date of grant. Stock
options granted under the Plan may become exercisable in one or more
installments in the manner and at the time or times specified by the committee.
No options were granted under this plan during the fiscal year ended December
31, 2008. At December 31, 2008, no options to purchase shares of common stock
were outstanding under this plan.
2003-A Stock Option/Stock Issuance Plan. The 2003-A Stock Option/Stock
Issuance Plan covers 975,000 shares of common stock. Options granted under the
plan may be incentive stock options qualified under Section 422 of the Internal
Revenue Code of 1986, as amended or non-qualified stock options. Under the terms
of the plan, the exercise price of options granted under the plan will be the
fair market value at the date of the grant. Prices for incentive stock options
granted to employees who own 10% or more of our stock are at least 110% of the
market value at the date of the grant. The nature and terms of the options to be
granted are determined at the date of the grant by the compensation committee of
the board of directors. The term for which stock and options may be granted
under the Plan expires on April 1, 2013 and stock or options granted under the
Plan shall expire not later than five years from the date of grant. Stock
options granted under the Plan may become exercisable in one or more
installments in the manner and at the time or times specified by the committee.
No options were granted under this plan during the fiscal year ended December
31, 2008. At December 31, 2008, options to purchase 375,000 shares of common
stock were outstanding under this plan.
2004 Stock Option/Stock Issuance Plan. The 2004 Stock Option/Stock Issuance
Plan covers 1,200,000 shares of common stock. Options granted under the plan may
be incentive stock options qualified under Section 422 of the Internal Revenue
Code of 1986, as amended or non-qualified stock options. Under the terms of the
plan, the exercise price of options granted under the plan will be the fair
market value at the date of the grant. Prices for incentive stock options
granted to employees who own 10% or more of our stock are at least 110% of the
market value at the date of the grant. The nature and terms of the options to be
granted are determined at the date of the grant by the compensation committee of
the board of directors. The term for which stock and options may be granted
under the Plan expires on August 20, 2014 and stock or options granted under the
Plan shall expire not later than five years from the date of grant. Stock
options granted under the Plan may become exercisable in one or more
installments in the manner and at the time or times specified by the committee.
In 2008, 75,000 options were granted under this plan. At December 31, 2008,
options to purchase 872,500 shares of common stock were outstanding under this
plan.
Directors Compensation
- ----------------------
Directors receive an annual fee of $10,000 cash and a number of shares
equal to $10,000 divided by the average closing price of the shares for the last
five trading days in the prior calendar year. The directors also receive meeting
fees of $2,500 for each board of directors meeting attended; $1,500 for
participation in a telephone meeting of the board; an annual fee of $5,000 for
membership on each committee of the Board and $1,000 for each committee meeting
attended. The Chair person of each committee receives an annual fee of $5,000 in
addition to the membership fee. In 2008 the Company adopted a deferred
compensation plan for directors whereby the directors may elect to defer their
compensation to a date following the termination of their service as a director.
The Company also reimburses directors for reasonable expenses incurred in
attending board and committee meetings.
27
The following table provides the compensation earned by our non-employee
directors for the year ended December 31, 2008. Mr. Cannavino's directors fees
earned in 2008 are included in the Summary Compensation Table above:
- -----------------------------------------------------------------------------------------------------------------------------------
Director Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
Fees Nonqualified
Earned or Non-equity Deferred
Paid in Stock Option Incentive Plan Compensation All Other
Cash ($) Awards Awards Compensation Earnings Compensation Total
Name (1) $ ($) ($) ($) ($) ($)
- --------------------------- ------------ ------------ --------- ----------------- ------------------ ------------------ -----------
Dennis Murray (1) $38,000 $10,000 $23,100 -- -- -- $ 71,300
- --------------------------- ------------ ------------ --------- ----------------- ------------------ ------------------ -----------
Bernard Puckett (1) $38,000 $10,000 -- -- -- -- $ 48,000
- --------------------------- ------------ ------------ --------- ----------------- ------------------ ------------------ -----------
Michael Levin (2) $17,000 $10,000 -- -- -- -- $ 27,000
- --------------------------- ------------ ------------ --------- ----------------- ------------------ ------------------ -----------
<FN>
(1) Dr. Murray is chair of the audit committee and member of the
compensation committee, Mr. Puckett is chair of the compensation
committee and member of the audit committee.
(2) Mr. Levin is the director designate of MetVP and as such all of his
director's fees are assigned and paid to MetVP.
</FN>
Employment Agreements
- ---------------------
On August 22, 2007, the Board ratified and approved the Services Agreement
with its Chairman and Chief Executive Officer, effective June 1, 2007 for a term
ending on December 31, 2010. The agreement calls for compensation of $20,000 per
month (with a 10% increase on each annual anniversary subject to approval of the
Company's Compensation Committee and based on performance of the Company), a
one-time grant of 100,000 shares of restricted common stock and the granting of
10,000 shares of restricted common stock per month commencing with the execution
of the Agreement and ending on December 1, 2010. The fair value of the stock
grants is $1,193,000 based on the closing price of the shares on the grant date.
During the years ended December 31, 2008 and 2007, the Company issued 120,000
shares valued at $270,000 and 170,000 shares valued at $383,000, respectively,
as compensation expense related to the services agreement. The agreement further
provides for: reimbursement of certain expenses; living and travel expenses
approximating $11,000 per month; and certain severance benefits in the event of
termination prior to the expiration date.
On August 22, 2007, the Board ratified and approved an amendment to the
Services Agreement with its Executive Vice President and Chief Operating
Officer, for a term ending on December 31, 2010. The agreement calls for
compensation of $15,500 per month, a $25,000 cash bonus paid upon execution of
the Agreement, and the granting of 5,000 shares of restricted common stock per
month commencing on August 1, 2008 and ending on December 31, 2010. The fair
value of the stock grants is $326,000 based on the closing price of the shares
on the grant date and is being amortized over the contract period. During the
years ended December 31, 2008 and 2007 the Company recorded $97,875 and $33,000,
respectively, as compensation expense related to the stock grant. The agreement
further provides for reimbursement of certain expenses and severance benefits in
the event of termination prior to the expiration date.
On August 22, 2007, the Board ratified and approved an amendment to the
Services Agreement with its Executive Vice President and Chief Technology
Officer, for a term ending on December 31, 2010. The agreement calls for
compensation of $16,500 per month, a $25,000 cash bonus paid upon execution of
the Agreement, and the granting of 5,000 shares of restricted common stock per
month commencing on August 1, 2008 and ending on December 31, 2010. The fair
value of the stock grants is $326,000 based on the closing price of the shares
on the grant date and is being amortized over the contract period. During the
years ended December 31, 2008 and 2007 the Company recorded $97,875 and $33,000,
respectively, as compensation expense related to the stock grant. The agreement
further provides for reimbursement of certain expenses and severance benefits in
the event of termination prior to the expiration date.
28
On December 12, 2007, the Board ratified and approved an amendment to the
Services Agreement with its Chief Financial Officer, for a term ending on
December 31, 2009. The agreement calls for compensation of $14,583 per month,
and the granting of 2,500 shares of restricted common stock per month commencing
on December 1, 2007 and ending on December 31, 2009. The fair value of the stock
grants is $116,000 based on the closing price of the shares on the grant date
and is being amortized over the contract period. During the years ended December
31, 2008 and 2007 the Company recorded $55,500 and $5,000, respectively, as
compensation expense related to the stock grant. The agreement further provides
for reimbursement of certain expenses and severance benefits in the event of
termination prior to the expiration date.
The Company entered into an employment services agreement with the former
Executive Vice President of Sales and Marketing on August 1, 2006. The term of
the agreement is for two years and provides for base compensation of $144,996
per year for each year of the agreement plus $2,500 per month payable in common
stock of the Company. In addition the agreement provides for commissions from 3%
to 5% of the net revenue received on certain accounts. The Executive Vice
President of Sales and Marketing was previously granted options to purchase
175,000 restricted common shares at the exercise price of $0.65 per share. The
options vest at the rate 20% at the grant date and the balance in equal monthly
amounts over the three years from September 1, 2005. The employment agreement
was extended on a month to month basis.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- --------------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The following table sets forth the beneficial ownership of shares of voting
stock of the Company, as of March 16, 2009 of (i) each person known by the
Company to beneficially own 5% or more of the shares of outstanding common
stock, based solely on filings with the Securities and Exchange Commission, (ii)
each of the Company's executive officers and directors and (iii) all of the
Company's executive officers and directors as a group. Except as otherwise
indicated, all shares are beneficially owned, and the persons named as owners
hold investment and voting power.
Common Stock Rights to Acquire Total Beneficially
Beneficially Beneficial Ownership Through Exercise Owned as % of
Name of Beneficial Owner (1) Owned of Options and Warrants Within 60 Days Outstanding Shares (2)
- ------------------------------------------------------------------------------------------------------------------
Metropolitan Venture
Partners II, L.P. 2,384,824 -- 22.3%
Tall Oaks Group, LLC 257,611 635,501 7.9%
Thomas Lund (3) 403,633 352,304 6.9%
James Cannavino 1,781,787 450,000 20.0%
Bernard Puckett 199,986 -- 1.9%
Dennis Murray 293,541 25,000 3.0%
Michael Levin 2,000 -- *
Arnold Leap 187,681 115,000 2.8%
Matthew Oakes 215,882 245,000 4.2%
Michael Beecher 135,214 162,500 2.7%
Christopher Cauley 134,719 175,000 2.9%
All Officers and Directors
as a Group (8 persons) 2,950,810 1,172,500 34.8%
<FN>
- -------
* = Less than 1%
Footnotes
- ---------
(1) The address of the holder is 80 Orville Drive, Suite 100, Bohemia, New York
11716, except for Metropolitan Venture Partners II, L.P. and Tall Oaks
Group, LLC which is 432 Park Avenue South, 12th Floor, New York, NY 10016
and Thomas Lund which is 800 Third Avenue, Naples, FL 34101.
29
(2) Based upon 10,686,739 common shares outstanding as of March 16, 2009, plus
outstanding options, warrants and stock grants exercisable within 60 days.
(3) Thomas Lund is the father-in-law of Matthew Oakes, the Company's EVP and
Chief Operating Officer. Mr. Oakes disclaims beneficial ownership of shares
held by Mr. Lund.
</FN>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
- --------------------------------------------------------------------------------
INDEPENDENCE
------------
Director Independence
- ---------------------
The Board has standing Audit and Compensation Committees. The Board has
affirmatively determined that each director who serves on these committees is
independent, as the term is defined by applicable Securities and Exchange
Commission ("SEC") rules. During the years ended December 31, 2008 and 2007, the
Audit and Compensation Committees consisted of Dr. Dennis J. Murray (Chairman -
Audit Committee), and Bernard Puckett (Chairman - Compensation Committee).
Shareholder
- -----------
Mr. Thomas Lund, who holds more than 5% of the Company's outstanding
shares, is the father-in-law of Mathew Oakes, the Company's EVP and Chief
Operating Officer.
Related Party Transactions
- --------------------------
The Company had a consulting agreement with DCL Consulting whereby DCL
provides quality assurance testing for the Company. In 2008 and 2007 the Company
incurred $1,000 and $27,000, respectively, for these services. The spouse of an
officer of the Company is owner and principal employee of DCL.
The Company received advisory services from Tall Oaks and Lawrence Hite.
Tall Oaks is an affiliate of Metropolitan and Lawrence Hite is the principal
owner of Tall Oaks. In 2007 the Company incurred costs of $18,000 for such
services.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
The following is a summary of the aggregate fees for professional services
rendered to us by Marcum & Kliegman, LLP, our independent auditors, for the
fiscal years ended December 31, 2008 and 2007:
Description 2008 2007
----------- ---- ----
Audit Fees (1) $ 182,000 $ 176,000
Audit-Related Fees (2) 6,650 10,000
Tax Fees (3) 15,000 10,000
--------- ---------
Total Fees $ 203,650 $ 196,000
========= =========
Our Audit Committee has determined that the provision of services by Marcum
& Kliegman LLP other than for audit related services is compatible with
maintaining the independence of Marcum & Kliegman as our independent
accountants.
30
<FN>
- ------------------------
(1) Audit Fees consist of aggregate fees billed and to be billed for
professional services rendered for the audit of our annual financial
statements, review of the interim financial statements included in
quarterly reports, and consents issuedin connection with registration
statements or services that are normally provided by the independent
auditors in connection with statutory and regulatory filings or engagements
for the fiscal years ended December 31, 2008 and 2007.
(2) Audit related fees consist of fees billed for professional services in
conjunction with proposed accounting treatment of complex transactions.
(3) Tax Fees consist of the aggregate fees billed for professional services
rendered for tax compliance, tax advice, and tax planning, including fees
related to the preparation of federal and state income tax returns.
</FN>
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------------------
3.1 (a) Certificate of Incorporation, as amended. (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(b) Certificate of Amendment (Change in Name) (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(c) Certificate of Amendment (Change in Name) (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(d) Certificate of Amendment (Authorizing Increase in Shares of Common
Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K
for the year ended 1995).
(e) Certificate of Amendment (Authorizing one for ten reverse-stock split
as of March 30, 1998). (1)
(f) Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock filed October 3, 2002 (Incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K
dated September 25, 2002).
(g) Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series A Convertible Preferred Stock filed December 20,
2002 (Incorporated by reference to Exhibit 3.2 of Company's Current
Report on Form 8-K dated December 24, 2002).
(h) Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series A Convertible Preferred Stock filed January 2,
2003 (Incorporated by reference to Exhibit 3.3 of Company's Current
Report on Form 8-K dated January 2, 2003).
(i) Certificate of Designation, Preferences and Rights of Series B
Redeemable Preferred Stock filed December 10, 2003 (Incorporated by
reference to Exhibit 3(i) of the Company's Annual Report on Form
10-KSB filed April 14, 2004).
(j) Certificate of Designation, Preferences and Rights of Series C
redeemable Preferred Stock filed December 16, 2003 (Incorporated by
reference to Exhibit 3(j) of the Company's Annual Report on Form
10-KSB filed April 14, 2004).
(k) Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series C Preferred Stock filed March 29, 2005.
3.2 By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company's Form
S-1 Registration Statement).(1)
4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4
to the Company's Form S-1 Registration Statement).(1)
4.2 Rights Agreement dated as of August 28, 2001 between the Company and
Manhattan Transfer Registrar Company, as Rights Agent. (Incorporated by
reference to Exhibit 4 to the Company's Form 8-K dated August 28, 2001.
4.3 Securities Purchase Agreement between the Company, Sigma Opportunity Fund,
LLC and Metropolitan Venture Partners II, LP (Incorporated by reference to
Exhibit 4.1 of the Current Report on Form 8-K filed March 31, 2005).
31
10.1 Directors, Officers and Consultants 1993 Stock Option Plan (Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-8 filed on June 28, 1995).
10.2 Employees 1993 Stock Option Plan (Incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-8 filed on June 28,
1995).
10.3 1995 Incentive Stock Plan (Incorporated by reference to Exhibit 5 to the
Company's Proxy Statement filed on January 29, 1996).
10.4 2000 Stock Option Plan (Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2001).
10.5 2001 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.6 2001-A Stock Option/Stock Issuance Plan. (Incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.7 2002 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.8 2003 Stock Option /Stock Issuance Plan. (2)
10.9 Lease Extension Agreement between Atrium Executive Center and the Company
(Incorporated by reference to Exhibit 10 (g) (ii) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993).
10.10 Stock Purchase and Registration Rights Agreement between the Company and
Metropolitan Venture Partners II, L.P. dated as of September 25, 2002
(Incorporated by reference to Exhibit 10.1 of Registrant's Current Report
on Form 8-K dated September 25, 2002).
10.11 Stock Purchase and Registration Rights Agreement between the Company and
Metropolitan Venture Partners II, L.P. dated as of December 24, 2002
(Incorporated by reference to Exhibit 10.1 of Registrant's Current Report
on Form 8-K dated December 24, 2002).
10.12 Promissory Note between the Company and Tall Oaks Group LLC dated January
13, 2003.(2)
10.13 Amendment and Notice dated January 13, 2003 by and among the Company,
Metropolitan Venture Partners II, L.P. and Tall Oaks Group L.L.C. (2)
10.14 Form of Subscription Agreement for Series C Redeemable Preferred Stock (3)
10.15 Employment and Consulting Agreement between the Company and Robert L.
Carberry (Incorporated by reference to Exhibit 10.2 of registrant's Current
Report on Form 8-K dated December 5, 2003).
10.16 Services agreement between the Company and James A. Cannavino dated June
1, 2007 (Incorporated by reference to Exhibit 10.1 to the Company's 8-K
filed on September 27, 2007).
10.17 Services agreement amendment 1 between the Company and Mathew E. Oakes
dated June 1, 2007 (Incorporated by reference to Exhibit 10.2 to the
Company's 8-K filed on September 27, 2007).
10.18 Services agreement amendment 1 between the Company and Arnold P. Leap
dated June 1, 2007 (Incorporated by reference to Exhibit 10.3 to the
Company's 8-K filed on September 27, 2007).
32
10.19 Services agreement between the Company and Michael J. Beecher dated
December 23, 2007 (Incorporated by reference to Exhibit 10.1 to the
Company's 8-K filed on January 9, 2008).
10.20 Amendment letter dated January 29, 2004 to the Statement of Work between
IBM Corporation and the Company. Portions of the exhibit have been omitted
pursuant to a request for confidential treatment. (Incorporated by
reference to Exhibit 10.28 to the Company's S-1 filed on February 19,2009)
10.21 Worldwide Invoices on-Line (IOL) Appendix A Payments and Fees for Ongoing
Support (OCS)-Invoice Processing, Archiving, and Attachment Processing and
Non-Recurring Engineering (NRE) between International Business Machines
Corporation and the Company dated December 1, 2008. Portions of the exhibit
have been omitted pursuant to a request for confidential treatment.
(Incorporated by reference to Exhibit 10.29 to the Company's S-1 filed on
February 19,2009)
10.22 Master Services Agreement #EDS-2004-01-2005 dated May 7, 2004 between
Electronic Data Systems Corporation and the Company. Portions of the
exhibit have been omitted pursuant to a request for confidential treatment.
(Incorporated by reference to Exhibit 10.30 to the Company's S-1 filed on
February 19,2009)
10.23 Statement of Work #EDS-2007-05-01 dated May 8, 2007 between Electronic
Data Systems Corporation and the Company. Portions of the exhibit have been
omitted pursuant to a request for confidential treatment. (Incorporated by
reference to Exhibit 10.31 to the Company's S-1 filed on February 19,2009)
10.24 Master Services Agreement EIAP (OGS) Amendment (#8) dated June 27, 2007
between Electronic Data Systems Corporation and the Company. Portions of
the exhibit have been omitted pursuant to a request for confidential
treatment. (Incorporated by reference to Exhibit 10.32 to the Company's S-1
filed on February 19,2009)
10.25 Statement of Work #EDS-2008-05-07 dated May 7, 2008 between Electronic
Data Systems Corporation and the Company. Portions of the exhibit have been
omitted pursuant to a request for confidential treatment. (Incorporated by
reference to Exhibit 10.33 to the Company's S-1 filed on February 19,2009)
10.26 Master Services Agreement MIAP (OGS) Amendment (#10) dated August 21, 2008
between Electronic Data Systems Corporation and the Company. Portions of
the exhibit have been omitted pursuant to a request for confidential
treatment. (Incorporated by reference to Exhibit 10.34 to the Company's S-1
filed on February 19,2009)
23(a) Consent of Marcum & Kliegman, LLP.
31.0 Certification of Officers
32.0 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ----------
((1))Filed with Form S-1, Registration Statement of the Company Reg. No 3-47322
and are incorporated herein by reference.
((2))Incorporated by reference to the Company's Annual Report on Form-10K filed
April 15, 2003.
((3))Incorporated by reference to the Company's Annual Report on Form-10K filed
April 14, 2004.
33
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 26th day of March 2009.
DIRECT INSITE CORP.
By: /s/ James A. Cannavino
-------------------------------------------
James A. Cannavino, Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 26, 2009 by the following persons in the
capacities indicated:
/s/ James A. Cannavino
---------------------- Chairman of the Board
James A. Cannavino Chief Executive Officer
/s/ Michael J. Beecher
---------------------- Chief Financial Officer
Michael J. Beecher
/s/ Bernard Puckett
---------------------- Director
Bernard Puckett
/s/ Dennis J. Murray
---------------------- Director
Dennis J. Murray
---------------------- Director
Michael Levin
34
DIRECT INSITE CORP. AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-4
Consolidated Statement of Shareholders' Equity (Deficiency) F-5
Consolidated Statements of Cash Flows F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Audit Committee of the
Board of Directors and Shareholders of
Direct Insite Corp.
We have audited the accompanying consolidated balance sheets of Direct Insite
Corp. and Subsidiaries (the "Company") as of December 31, 2008 and 2007 and the
related consolidated statements of income, changes in shareholders' equity
(deficiency), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2008 and 2007 and the consolidated results of its
operations and its cash flows for the years then ended in conformity with United
States generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for common stock warrants in accordance with
FASB Staff Position ("FSP") EITF 00-19-2, "Accounting for Registration Payment
Arrangements" on January 1, 2007.
/s/ Marcum & Kliegman LLP
Marcum & Kliegman LLP
Melville, NY
March 26, 2009
F-1
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2008 and 2007
- --------------------------------------------------------------------------------------------------------------------
ASSETS
2008 2007
---------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 980 $ 2,184
Accounts receivable, net of allowance for doubtful accounts of
$0 in 2008 and 2007 1,951 1,486
Prepaid expenses and other current assets 162 135
--------- ---------
Total Current Assets 3,093 3,805
PROPERTY AND EQUIPMENT, Net 649 443
DEFERRED TAX ASSET 2,867 --
OTHER ASSETS 271 274
--------- ---------
TOTAL ASSETS $ 6,880 $ 4,522
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2008 and 2007
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
2008 2007
--------------- ---------------
CURRENT LIABILITIES
- -------------------
Accounts payable and accrued expenses $ 1,802 $ 1,839
Current portion of capital lease obligations 6 36
Current portion of notes payable 172 84
Deferred revenue 75 123
Dividends payable 124 3,336
----------- -----------
Total Current Liabilities 2,179 5,418
OTHER LIABILITIES
- -----------------
Capital lease obligations, net of current portion 7 14
Notes payable, net of current portion 274 135
----------- -----------
TOTAL LIABILITIES 2,460 5,567
----------- -----------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
- ---------------------------------
Preferred stock, $0.0001 par value; 2,000,000 shares authorized;
Series A Convertible Preferred, ) 0 issued and outstanding in 2008 and
134,680 issued and outstanding in 2007;
Series B Redeemable Preferred, 974 issued and outstanding in -- --
2008 and 2007; liquidation preference of $974,075;
Series C Redeemable Preferred, 2,000 issued and -- --
outstanding in 2008 and 2007; liquidation preference of $2,000,000; -- --
Series D Redeemable Preferred, 100 shares issued and outstanding in
2008 and 2007,liquidation preference of $100,000;
Common stock, $.0001 par value; 50,000,000 shares
authorized; 10,311,968 and 7,115,216 shares issued in
2008 and 2007, respectively; and 10,272,041 and 7,075,289
shares outstanding in 2008 and 2007, respectively 1 1
Additional paid-in capital 116,862 114,961
Accumulated deficit (112,115) (115,679)
----------- -----------
4,748 (717)
Common stock in treasury, at cost; 24,371 shares in 2008
and 2007 (328) (328)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) 4,420 (1,045)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY) $ 6,880 $ 4,522
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended December 31, 2008 and 2007
- ------------------------------------------------------------------------------------------------------------------
2008 2007
----------- ------------
REVENUES $ 9,609 $ 10,111
- -------- ----------- ------------
COSTS AND EXPENSES
- ------------------
Operations, research and development 3,938 3,698
Sales and marketing 984 1,110
General and administrative 2,987 2,755
Amortization and depreciation 325 332
----------- ------------
TOTAL OPERATING EXPENSES 8,234 7,895
----------- ------------
OPERATING INCOME 1,375 2,216
----------- ------------
OTHER EXPENSE (INCOME)
- ----------------------
Interest expense, net 38 97
Other (income) expense, net (1) (8)
----------- ------------
TOTAL OTHER EXPENSE, NET 37 89
----------- ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,338 2,127
- ----------------------------------------
BENEFIT FROM (PROVISION) FOR INCOME TAXES 2,843 (27)
- ----------------------------------------- ----------- ------------
NET INCOME 4,181 2,100
- ----------
PREFERRED STOCK DIVIDENDS (616) (1,060)
- ------------------------- ----------- ------------
NET INCOME ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ 3,565 $ 1,040
------------ =========== ============
BASIC INCOME PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 0.44 $ 0.17
- ---------------------------------------------------------- =========== ============
DILUTED INCOME PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 0.35 $ 0.12
- ------------------------------------------------------------ =========== ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUSTANDING 8,075 5,966
- ----------------------------------------------- =========== ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUSTANDING 10,787 8,534
- ------------------------------------------------- =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 2008 and 2007 (in thousands)
- --------------------------------------------------------------------------------
Preferred Stock
-----------------------------------------------
Additional
Paid-in
Series A Series B Series C Series D Common stock Capital Accum-
ulated Treasury
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Amount Deficit Stock Total
-------------------------------------------------------------------------------------------------------------------
BALANCE -
January
1, 2007 135 $ -- 1 $ -- 2 $ -- -- $ -- 5,253 $ -- $113,185 $(116,756) $(328) $(3,899)
Cumulative
effect of
change in
Accounting
principle 565 37 602
Common stock
and warrants
issued for
services 5 -- 45 45
Common stock
issued on
exercise of
options and
warrants 765 1 28 29
Employee
stock based
compensation
expense 185 564 564
Common stock
issued to
settle
accrued
liabilities 767 361 361
Dividends
declared,
preferred
stock 100 -- 213 (1,060) (847)
Net income 2,100 2,100
---- --- ----- ------ ---- ------- ---- ----- ----- ------- -------- -------- ------ -------
BALANCE -
December
31, 2007 135 $ -- 1 $ -- 2 $ -- -- $ -- 7,075 $ 1 $114,961 $(115,679) $ (328) $ (1,045)
==== === ===== ====== ==== ======= ==== ===== ===== ======= ======== ======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY), continued
For the Years Ended December 31, 2008 and 2007 (in thousands)
- --------------------------------------------------------------------------------
Preferred Stock
------------------------------------------------------------------ Additional
Paid-in
Series A Series B Series C Series D Common Stock Capital Accumulated Treasury
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Amount Deficit Stock Total
-------------------------------------------------------------------------------------------------------------------
BALANCE -
December
31, 2007 135 $ -- 1 $ -- 2 $ -- -- $ -- 7,075 $ 1 $ 114,961 $(115,679) $(328) $(1,045)
Common stock
issued on
conversion
of Convert-
ible Pre-
ferred
Stock (135) 1,347 --
Common stock
issued on
exercise
of options
and warrants 1,561 -- 1,208 1,208
Employee stock
based
compensation
expense 203 625 625
Common stock
issued to
settle
accrued
liabilities 86 68 68
Dividends
declared,
preferred
stock (617) (617)
Net income 4,181 4,181
---- ---- ------- ------- ------ ------ ------ ------- ------ ----- ------------ -------------- ------ ---------
BALANCE -
December
31, 2008 -- $ -- 1 $ -- 2 $ -- -- $ -- 10,272 1 $ 116,862 $(112,115) $(328) $ 4,420
=== ===== ======= ======= ===== ======= ====== ======= ====== ===== ============ =============== ===== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2008 and 2007
- -------------------------------------------------------------------------------------------------------------------------
2008 2007
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 4,181 $ 2,100
Adjustments to reconcile net income
to net cash provided by operations:
Amortization and depreciation:
Property and equipment 323 329
Other 2 3
Deferred taxes (2,867)
Stock based compensation expense 625 609
Changes in operating assets and liabilities:
Accounts receivable (465) 513
Prepaid expenses and other current assets (26) 4
Other assets -- 3
Accounts payable and accrued expenses 198 135
Deferred revenue (48) (441)
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,923 $ 3,255
------------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES
- ---------------------------------------
Expenditures for property and equipment $ (233) $ (202)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from issuance of shares on exercise of options and warrants 428 28
Payment of dividends on preferred stock (3,154) --
Repayment of short-term revolving loans, net -- (481)
Repayment of long-term debt (130) (68)
Repayments of lines of credit -- (586)
Repayments of capital lease obligations (38) (57)
------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (2,894) (1,164)
------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,204) 1,889
CASH AND CASH EQUIVALENTS - Beginning 2,184 295
- ------------------------ ------------- --------------
CASH AND CASH EQUIVALENTS - Ending $ 980 $ 2,184
- ------------------------- ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business
------------------
Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as a
Software as a Service provider ("SaaS"), that markets an integrated transaction
based "fee for service" offering called Invoices On-Line (IOL), an electronic
invoice presentment and payment (EIP&P) service that processes high volumes of
transactional data for invoice presentment purposes delivered via the Internet
on a global basis. The Company operates redundant data centers in Hauppauge, New
York and Santa Clara, California.
As described in Note 14, the Company has two major customers that accounted for
approximately 89% and 97% of the Company's revenue for the years ended December
31, 2008 and 2007, respectively. Loss of either of these customers would have a
material adverse effect on the Company.
NOTE 2 - Significant Accounting Policies
-------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Direct Insite
Corp. and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Revenue Recognition
- -------------------
The Company records revenue in accordance with Statement of Position ("SOP")
81-1 "Accounting for Performance of Construction-Type and Certain Production
Type Contracts", issued by the American Institute of Certified Public
Accountants and SEC Staff Accounting Bulletin Topic 13 "Revenue Recognition in
Financial Statements." In some circumstances, the Company enters into
arrangements whereby the Company is obligated to deliver to its customer
multiple products and/or services (multiple deliverables). In these
transactions, in accordance with the Emerging Issues Task Force ("EITF") Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables", the Company
allocates the total revenue to be earned among the various elements based on
their relative fair values. The Company recognizes revenue related to the
delivered products or services only if:
o Any undelivered products or services are not essential to the functionality
of the delivered products or services;
o Payment for the delivered products or services is not contingent upon
delivery of the remaining products or services;
o The Company has an enforceable claim to receive the amount due in the event
it does not deliver the undelivered products or services and it is probable
that such amount is collectible;
o There is evidence of the fair value for each of the undelivered products or
services;
o Delivery of the delivered element represents the culmination of the
earnings process.
The following are the specific revenue recognition policies for each major
category of revenue.
F-8
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
SaaS Services
- -------------
The Company provides transactional data processing services through our SaaS
software solutions to its customers. The customer is charged a monthly fixed
rate on a per transaction basis or a fixed fee based on monthly transaction
volumes. Revenue is recognized as the services are performed.
Custom Engineering Services
- ---------------------------
The Company performs custom engineering services which are single contractual
agreements involving modification or customization of our proprietary SaaS
software solution. Progress is measured using the relative fair value of
specifically identifiable output measures (milestones). Revenue is recognized at
the lesser of the milestone amount when the customer accepts such milestones or
the percentage of completion of the contract following the guidance of SOP 81-1.
Cost of Revenue
- ---------------
Cost of revenue in the consolidated statements of operations is presented along
with research and development costs and exclusive of amortization and
depreciation which is shown separately. Custom Service Engineering costs related
to uncompleted milestones are deferred and included in other current assets,
when applicable. For the years ended December 31, 2008 and 2007, research and
development expenses were approximately $2,593,000, and $2,599,000,
respectively.
Property and Equipment
- ----------------------
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the terms of the respective leases or the
service lives of the related assets, whichever is shorter.
Capitalized lease assets are amortized over the shorter of the lease term or the
service life of the related assets.
Software Costs
- --------------
Costs associated with the development of software products are generally
capitalized once technological feasibility is established. Purchased software
technologies are recorded at cost and software technologies acquired in purchase
business transactions are recorded at their estimated fair value. Software costs
are amortized using the greater of the ratio of current revenue to total
projected revenue for a product or the straight-line method over its estimated
useful life. Amortization of software costs begins when products become
available for general customer release. Costs incurred prior to establishment of
technological feasibility are expensed as incurred and are included in
"operations, research and development". No software development costs were
capitalized in 2008 and 2007.
Impairment of Long-Lived Assets
- -------------------------------
Statement of Financial Accounting Standards ("SFAS"), No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("FAS 144") requires management
judgments regarding the future operating and disposition plans for marginally
performing assets, and estimates of expected realizable values for assets to be
sold. The Company accounts for its long-lived assets in accordance with FAS 144
for purposes of determining and measuring impairment of its other intangible
assets. It is the Company's policy to periodically review the value assigned to
its long lived assets, including capitalized software costs, to determine if
they have been permanently impaired by adverse conditions. If required, an
F-9
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
impairment charge would be recorded based on an estimate of future discounted
cash flows. In order to test for recoverability, the Company compared the sum of
an undiscounted cash flow projection from the related long-lived assets to the
net carrying amount of such assets. Considerable management judgment is
necessary to estimate undiscounted future operating cash flows and fair values
and, accordingly, actual results could vary significantly from such estimates.
No impairment charges were recognized during the years ended December 31, 2008
and 2007, respectively.
Income Taxes
- ------------
The Company accounts for income taxes using the liability method. The liability
method requires the determination of deferred tax assets and liabilities based
on the differences between the financial statement and income tax basis of
assets and liabilities, using enacted tax rates. Additionally, net deferred tax
assets are adjusted by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
net deferred tax assets will not be realized. The Company currently has
significant deferred tax assets. SFAS No. 109, "Accounting for Income Taxes
("FAS 109"), requires a valuation allowance be established when it is more
likely than not that all or a portion of deferred tax assets will not be
realized. During the year ended December 31, 2008, the Company reviewed previous
positive and negative evidence and also reviewed its expected taxable income for
future periods and concluded that it is more likely than not that approximately
$2,867,000 of tax benefits related to net operating loss carry-forwards will be
utilized in future tax years and, therefore, reduced its valuation allowance
during the year ended December 31, 2008 in accordance with APB 28. As a result
the Company's effective tax rate for the year ended December 31, 2008 differs
from the current statutory rates. In addition, the Company expects to provide a
valuation allowance on the remaining future tax benefits until it can sustain a
level of profitability that demonstrates its ability to utilize the remaining
assets, or other significant positive evidence arises that suggests its ability
to utilize the remaining assets. The future realization of a portion of its
reserved deferred tax assets related to tax benefits associated with the
exercise of stock options, if and when realized, will not result in a tax
benefit in the consolidated statement of operations, but rather will result in
an increase in additional paid in capital. The Company will continue to
re-assess its reserves on deferred income tax assets in future periods on a
quarterly basis. The Company has elected the "with and without approach"
regarding ordering of windfall tax benefits to determine whether the windfall
tax benefit did reduce taxes payable in the current year. Under this approach
the windfall tax benefit would be recognized in additional paid-in-capital only
if an incremental tax benefit is realized after considering all other benefits
presently available.
Earnings per Share
- ------------------
The Company displays earnings per share in accordance with SFAS No. 128,
"Earnings Per Share". SFAS No. 128 requires dual presentation of basic and
diluted earnings per share. Basic earnings per share includes no dilution and is
computed by dividing net income attributable to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share include the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock.
The computation of basic and diluted earnings per share is as follows:
F-10
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2008 (in thousands except per share amounts)
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Net Income Shares Per Share
Numerator Denominator Amount
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Basic Earnings Per Share:
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Net income attributable to common shareholders $3,565 8,075 $0.44
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Effect of dilutive securities:
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Warrants 649
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Options 1,057
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Restricted stock 18
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Series A convertible preferred stock 221 988
------------------ -------------------
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Diluted earnings per share $3,786 10,787 $0.35
================ =================
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2007 (in thousands except per share amounts)
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Net Income Shares Per Share
Numerator Denominator Amount
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Basic Earnings Per Share:
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Net income attributable to common shareholders $1,040 5,966 $0.17
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Effect of dilutive securities:
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Warrants 1,159
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Options 1,406
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Restricted stock
3
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Diluted earnings per share $1,040 8,534 $0.12
================ ==================
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Securities that could potentially dilute basic earnings per share ("EPS") in the
future, that were not included in the computation of diluted EPS because to do
so would have been anti-dilutive for the periods presented, consist of the
following (shares are in thousands):
Potential Common Shares December 31,
-----------------------------
2008 2007
---------------- ------------
Options to purchase common stock 122 --
Warrants to purchase common stock 1,215 200
Series A Convertible Preferred Stock -- 1,347
---------- ----------
Total Potential Common Shares as of December 31, 1,337 1,547
========= ==========
Cash and Cash Equivalents
- -------------------------
The Company considers all investments with original maturities of three months
or less to be cash equivalents. The Company has cash deposits in excess of the
maximum amounts insured by FDIC at December 31, 2008 and 2007.
Allowance For Doubtful Accounts
- -------------------------------
The allowance for doubtful accounts reflects management's best estimate of
probable losses inherent in the account receivable balance. Management
F-11
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence. Management performs on-going
credit evaluations of its customers and adjusts credit limits based upon payment
history and the customer's current credit worthiness, as determined by the
review of their current credit information. Collections and payments from
customers are continuously monitored. While such bad debt expenses have
historically been within expectations and allowances established, the Company
cannot guarantee that it will continue to experience the same credit loss rates
that it has in the past. At December 31, 2008 and 2007, an allowance for
doubtful accounts is not provided since, in the opinion of management, all
accounts are deemed collectible. If the financial condition of customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Concentrations and Fair Value of Financial Instruments
- ------------------------------------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. Concentrations
of credit risk with respect to accounts receivable and revenue are disclosed in
Note 16. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
Unless otherwise disclosed, the fair value of financial instruments approximates
their recorded value.
Fair Value Measurements
- -----------------------
SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157 applies to all assets and
liabilities that are measured and reported on a fair value basis.
SFAS 157 establishes a three-tier fair value hierarchy which prioritizes the
inputs used in measuring fair value as follows:
Level 1 - Observable inputs such as quoted prices in active markets
Level 2 - Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly
Level 3 - Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own assumptions
SFAS 157 was effective for fiscal years beginning after November 15, 2007. FASB
Staff Position ("FSP") FAS 157-2, "Effective Date of FASB Statement No. 157",
delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed in the financial statements on a
nonrecurring basis until fiscal years beginning after November 15, 2008. The
Company does not have any assets or liabilities measured at fair value on a
recurring basis at December 31, 2008; accordingly, the partial adoption of SFAS
157 did not have any impact on the Company's financial statements. The Company
will apply the provisions of SFAS 157 to nonfinancial assets and liabilities
beginning January 1, 2009 as required by FSP FAS 157-2.
Use of Estimates
- ----------------
In preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements, as well as the reported amounts of
revenue and expenses during the reporting period. Management bases its estimates
on historical experience and on various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Disclosures that are particularly
F-12
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
sensitive to estimation include revenue recognition, fair value of derivative
warrants, stock based compensation, and valuation allowance on deferred tax
assets. Actual results could differ from those estimates.
New Accounting Pronouncements
- -----------------------------
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS No. 159"), which permits entities to choose to measure
many financial instruments and certain other items at fair value. The fair value
option established by this Statement permits all entities to choose to measure
eligible items at fair value at specified election dates. A business entity
shall report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. Adoption
is required for fiscal years beginning after November 15, 2007. The Company has
not elected to use the fair value method for any financial assets or liabilities
and therefore SFAS 159 did not have an effect on the Company's consolidated
financial position or results of operations.
In December 2007, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141R, "Business Combinations" ("SFAS 141R"), which replaces SFAS
No. 141, "Business Combinations." SFAS 141R establishes principles and
requirements for determining how an enterprise recognizes and measures the fair
value of certain assets and liabilities acquired in a business combination,
including non-controlling interests, contingent consideration, and certain
acquired contingencies. SFAS 141R also requires acquisition-related transaction
expenses and restructuring costs be expensed as incurred rather than capitalized
as a component of the business combination. SFAS 141R will be applicable
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS 141R would have an impact on accounting for any
businesses acquired after the effective date of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained non-controlling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company would be required to report any
non-controlling interests as a separate component of stockholders' equity. The
Company would also be required to present any net income allocable to
non-controlling interests and net income attributable to the stockholders of the
Company separately in its consolidated statements of operations. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption
of the presentation and disclosure requirements for existing minority interests.
All other requirements of SFAS 160 shall be applied prospectively. SFAS 160
would have an impact on the presentation and disclosure of the non-controlling
interests of any non wholly-owned businesses acquired in the future.
In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No. 133",
which amends and expands the disclosure requirements of SFAS 133 to require
qualitative disclosure about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. This statement will be effective for the
Company beginning on January 1, 2009. The adoption of this statement will change
the disclosures related to derivative instruments held by the Company, if any.
In June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an
Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF
F-13
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
application is not permitted. The Company is assessing the potential impact of
this EITF 07-5 on the consolidated financial condition and results of
operations.
Stock Options and Similar Equity Instruments
- --------------------------------------------
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No,
123(Revised 2004), "Share-Based Payment", ("SFAS 123(R)"), using the
modified-prospective-transition method to account for stock based compensation.
Non-employee stock based compensation is accounted for using the provisions of
EITF 96-18. As a result, for the year ended December 31, 2008 the Company
recorded $625,000 in stock based compensation expense for the fair value of
stock based compensation of which $87,000 related to stock options granted to
employees, and $538,000 related to restricted stock grants. For the year ended
December 31, 2007, the Company recorded $609,000 in stock based compensation
expense for the fair value of stock based compensation of which $81,000 related
to stock options granted to employees, $452,000 related to restricted stock
grants, and $35,000 related to warrants issued in exchange for services. At
December 31, 2008, there was approximately $1,012,000 of total unrecognized
stock based compensation costs, which is expected to be recognized over a
weighted average period of 1.9 years.
NOTE 3 - Change in Accounting Principle
------------------------------
Prior to January 1, 2007 the Company, under the provisions of EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock", was required to record the warrants issued
in conjunction with a bridge loan as a derivative liability at fair value on the
date of issuance due to the registration payment arrangements included in the
financing and warrant agreements. At December 31, 2006 the fair value of the
warrant liability was $602,000. In January 2007, the Company changed the method
of accounting following the guidance of FSP EITF 00-19-2 which provides that the
contingent obligation to make future payments under a registration payment
arrangement should be accounted for as a separate agreement in accordance with
FASB Statement No. 5, Accounting for Contingencies. As a result the warrant
liability at issuance of $565,000 was reclassified to Additional Paid In Capital
based on its original fair value and the cumulative effect of the change in
accounting principle of $37,000 was recorded as a credit to accumulated deficit.
The cumulative effect upon adoption of FSP EITF 00-19-2 is summarized below (in
thousands):
Accumulated deficit - December 31, 2006 $(116,756)
Cumulative effect of the change in accounting principle 37
----------
Accumulated deficit - January 1, 2007 $(116,719)
==========
NOTE 4 - Accounts Receivable and Short-term Revolving Loans
--------------------------------------------------
On May 31, 2007, the Company renewed an Accounts Receivable Line of Credit with
a Bank, whereby the Company from time to time could assign some of their
accounts receivable to the Bank on a full recourse basis. Upon specific invoice
approval, an advance of 80% of the underlying receivable is provided to the
Company. The remaining balance (20%), less finance charges equal to the prime
rate plus 2.00% per month (9.25% at December 31, 2007), is paid to the Company
once the customer has paid. The maximum amount of all assigned receivables
outstanding at any time could not exceed $1.5 million. The Company paid a
facility fee of $15,000 for the renewal and the agreement expired and was not
renewed on May 30, 2008. A December 31, 2007, the Company had no accounts
receivable assigned to the Bank and had no advances from the Bank.
F-14
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Accounts Receivable and Short-term Revolving Loans (continued)
--------------------------------------------------------------
In May 2004, the Company entered into an Agreement with DIRI Rec Fund LLC (the
"Rec Fund") whereby the Company could assign certain accounts receivable on a
full recourse basis to the Rec Fund as security for advances (loans). The Rec
Fund was established solely to advance funds to the Company upon the assignment
of receivables. The Rec Fund was administered by a third party trustee. Certain
shareholders of the Company and a former Director of the Company, were the
principal investors in the Rec Fund. Under the Agreement, the Company paid
interest at the rate of one (1) percent per month on the maximum purchase amount
(as defined in the agreement) of the Rec Fund and paid the administrative costs
of the Rec Fund which approximated $12,000 per year. At December 31, 2007 the
Company had repaid all advances received from the Rec Fund and the Agreement was
terminated.
NOTE 5 - Property and Equipment
----------------------
Property and equipment consist of the following:
December 31, Useful life
2008 2007 in Years
-------------- --------------- --------------
(in thousands)
Computer equipment and purchased software $ 3,815 $ 3,287 3
Furniture and fixtures 58 58 5 - 7
-------- --------
3,873 3,345
Less: accumulated deprecation and amortization (3,224) (2,902)
------- -------
Property and Equipment, Net $ 649 $ 443
======== ========
Depreciation and amortization expense related to property and equipment for the
years ended December 31, 2008 and 2007 was $322,000 and $329,000, respectively,
which includes amortization of equipment under capital leases of $13,000 and
$35,000 for the years ended December 31, 2008 and 2007, respectively. The costs
and net book value of equipment under capital leases is stated in Note 7.
NOTE 6 - Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses consist of the following:
December 31,
2008 2007
----------------------------------
(in thousands)
Trade accounts payable $ 491 $ 456
Sales taxes payable 539 539
Accrued board fees 465 644
Other accrued expenses 307 200
------- -------
$1,802 $1,839
====== ======
NOTE 7 - Debt
----
Capitalized lease obligations
The Company has equipment under capital lease obligations expiring at various
times through January 2011. The assets and liabilities under capital leases are
recorded at the lower of the present values of the minimum lease payments or the
fair values of the assets.
F-15
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Debt (continued)
----------------
As of December 31, 2008 minimum future payments under these capital leases are:
Year Ending
---------------------------------------
(in thousands)
2009 $ 9
2010 7
---------
Total minimum lease payments 16
Less: amounts representing interest (3)
---------
Net minimum lease payments 13
Current portion 6
---------
Long term portion $ 7
=========
The interest rates pertaining to these capital leases and notes range from 12.3%
to 15.3%. The gross value and the net book value of the related assets is
approximately $38,000 and $18,000 at December 31, 2008, respectively, and
$135,000 and $28,000 at December 31, 2007, respectively.
Notes payable
- -------------
At December 31, 2008 and 2007, notes payable consist of $446,000 and $219,000,
respectively, of borrowings for the purchase of equipment. These notes bear
interest at rates ranging from 8.80% to 10.3% per year and mature through
September 2012. The notes are collateralized by the equipment purchased with net
book values of $396,000 and $187,000, at December 31, 2008 and 2007,
respectively.
As of December 31, 2008 future principal payments under these notes are:
Year Ending
---------------------------------------
(in thousands)
2009 $ 172
2010 164
2011 108
2012 2
----------
Total payments 446
Current portion 172
----------
Long term portion $ 274
==========
NOTE 8 - Shareholders' Equity
--------------------
Preferred Stock
- ---------------
The Company has 2,000,000 authorized preferred shares of which 3,074 and 137,754
were issued and outstanding at December 31, 2008 and 2007, respectively, as
follows:
Series A Convertible Preferred Stock
- ------------------------------------
The Company had issued 134,680 shares of Series A Convertible Preferred Stock
("Series A Preferred") to Metropolitan Venture Partners II L.P. ("MetVP"). Each
share of Series A Preferred is convertible into 10 shares of common stock of the
Company. Under the terms of the Series A Preferred the shares automatically
F-16
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity, continued
convert to common shares under certain events with a final automatic conversion
date of September 25, 2008. The holders of the Series A Preferred ("the
Holders") are entitled to dividends, on a cumulative basis, at the rate of
9-1/2% per annum, compounded quarterly and payable on February 1, 2005 and
September 25, 2005. The Holders have certain demand and piggyback registrations
rights for the Common Stock issuable upon conversion of the Series A Preferred.
The payment of the first dividend was originally scheduled for September 25,
2004, however, the Company and the Holders agreed to defer this payment until
February 1, 2005. As consideration for the deferral of the dividend payment, the
Company agreed to pay the Holders a premium of 7.5% of the dividend. In May
2004, the Company and the Holders further agreed to grant the Company the right,
in its sole discretion, to defer the payment of the dividend scheduled to be
paid on February 1, 2005 until February 1, 2006. In the event the Company
elected to pay the dividend on February 1, 2006 the Holders would receive a
premium of $129,000. Also, the Company and the Holders further agreed to grant
the Company the right, in its sole discretion, to defer the payment of the
dividend scheduled to be paid on September 25, 2005 until February 1, 2006. As a
result of this deferment, the Company agreed to pay a premium of $26,000. The
holders of Series A Preferred had preference in the payment of dividends and, in
the event of liquidation, to all classes of capital stock of the Company except
for the Series B and C Preferred Stock. Certain issues had arisen concerning the
Company's obligation to accumulate and pay dividends on the Series A Preferred
beyond September 25, 2005. On November 21, 2007, the Company and MetVP entered
into an agreement resolving certain disputes which had arisen with respect to
the payment of dividends and interest to MetVP. The Agreement provides that, in
addition to the undisputed sum of approximately $1,406,000, the Company will be
paying an additional $500,000 through September 25, 2008 in consideration of
past, present and future dividend and interest payments through that date. All
payments are conditioned upon there being funds legally available for such
payments when due. The agreement further provided for the issuance to MetVP of
100,000 restricted shares of the Company's common stock. These shares were
issued in November 2007 and had a fair value based on the closing stock price on
the date of issuance of $213,000 which was recorded as a dividend during the
fourth quarter of 2007. At December 31, 2007, there was $1,685,000 of dividends
accrued and unpaid for Series A Preferred Holders. During the year ended
December 31, 2008 the Company paid dividends totaling $1,906,000 which was all
of the dividends due on the Series A Preferred Stock through September 25, 2008
and on September 25, 2008 all of the Series A Preferred Stock was converted into
1,346,800 restricted common shares.
Series B Redeemable Preferred Stock
- -----------------------------------
The Company has issued 974 Series B Preferred shares at $1,000 per share in
exchange of $974,000 of outstanding debt. The Company's Chairman and current
Chief Executive Officer holds 266 shares, Markus & Associates (an affiliate of
SJ, Note 10) holds 208 shares, and Tall Oaks holds 500 shares.
Each of the Preferred Stock - B shares is entitled to mandatory dividends,
payable quarterly, commencing on the first day of the calendar quarter after the
date of issuance, at the rate of 12% per annum. Additionally, the Preferred
Stock - B shares were redeemable, at the sole option of the Company, on or after
March 31, 2005 (or prior to March 31, 2005 with the consent of
majority-in-interest holders of Preferred Stock - B shares). Upon redemption,
the holders of the Preferred Stock - B shall be entitled to receive, for each
share of Preferred Stock - B outstanding, an amount equal to the price per share
plus accrued and unpaid dividends. During the year ended December 31, 2008, the
Company paid dividends of $860,000 to the holders of the Series B Preferred
Stock. As of December 31, 2008 and 2007, there were $29,000 and $773,000,
respectively, in dividends payable to the Preferred Stock - B holders. The
holders of Series B Preferred have preference in the payment of dividends and,
in the event of liquidation, to all classes of capital stock of the Company
before the Series A, C and D Preferred Stock.
Series C Redeemable Preferred Stock
- -----------------------------------
The Company has issued 2,000 shares of its non-voting Series C Redeemable
Preferred Stock ("Preferred Stock - C"). The holders of Preferred Stock - C are
F-17
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity, continued
--------------------
entitled to dividends at the rate of 9-1/2% per annum, payable quarterly in
arrears beginning October 1, 2005. The Company has the option to redeem issued
shares of Preferred Stock - C, in whole or in part, at any time, with the
redemption price equal to the purchase price plus accrued and unpaid dividends.
For each share of Preferred Stock - C purchased, each investor received a
Warrant to purchase the number of shares of the Company's common stock equal to
the exchange ratio of $1,000 of price per share ("Price Per Share") divided by
123% of the closing price per share of the Company's common stock on the trading
day immediately prior to the date of issuance of the Warrant. Certain officers,
directors and affiliates hold 1,470 shares of the Preferred Stock - C. As of
December 31, 2008 and 2007, 946,214 and 1,990,779 warrants were outstanding,
respectively, in connection with the issuances of Preferred Stock - C. The
remaining warrants expire in 2009 and have exercise prices ranging from $0.86 to
$1.85 per common share. The holders of Series C Preferred have preference in the
payment of dividends and, in the event of liquidation, to all classes of capital
stock of the Company except for the Series B Preferred Stock. During the year
ended December 31, 2008, the Company paid dividends of $1,062,000 to holders of
the Series C Preferred Stock. As of December 31, 2008 and 2007, there were
$48,000 and $844,000, respectively, in dividends accrued for the Preferred Stock
- - C holders.
Series D Redeemable Preferred Stock
- -----------------------------------
The Board of Directors authorized the issuance of up to 1,500 shares of Series D
Redeemable Preferred Stock ("Series D Preferred") at $1,000 per share. The
holders of Series D Preferred are entitled to dividends, on a cumulative basis,
at the rate of 9-1/2% per year, compounded and payable quarterly beginning on
April 1, 2006. The holders of Series D Preferred have preference in the payment
of dividends and, in the event of liquidation, to all classes of capital stock
of the Company except for the Series A, B and C Preferred Stock. As of December
31, 2008 and 2007, 100 shares of Series D Preferred had been sold and the
Company received proceeds of $100,000. The buyer was issued warrants to purchase
90,909 common shares at an exercise price of $2.03 per share in conjunction with
the sale. At December 31, 2008 and 2007 there were $48,000 and $34,000,
respectively, of dividends accrued and unpaid for Series D Preferred Holders. In
January 2009, the Company paid $48,000 of dividends to the holder of the Series
D Preferred Stock.
Based on the advice of legal counsel, management believes the Company may only
pay dividends to the extent it has a surplus or current earnings pursuant to
Delaware General Corporate Law.
Dividends included in net income attributable to common shareholders for the
years ended December 31, 2008 and 2007 were:
- ---------------------------------------- ----------------------------------------- -----------------------------------
Preferred Stock 2008 2007
--------------- ---- ----
- ---------------------------------------- ----------------------------------------- -----------------------------------
Series A $ 221,000 $ 553,000
- ---------------------------------------- ----------------------------------------- -----------------------------------
Series B $ 117,000 $ 240,000
- ---------------------------------------- ----------------------------------------- -----------------------------------
Series C $ 265,000 $ 255,000
- ---------------------------------------- ----------------------------------------- -----------------------------------
Series D $ 13,000 $ 12,000
--------- ----------
- ---------------------------------------- ----------------------------------------- -----------------------------------
Total $ 616,000 $1,060,000
========= ==========
- ---------------------------------------- ----------------------------------------- -----------------------------------
Common Stock, Options, Stock Grants and Warrant Issuances
- ---------------------------------------------------------
Year Ended December 31, 2008
- ----------------------------
During the year ended December 31, 2008 the Company issued 935,165 registered
shares of common stock, 2,261,587 unregistered shares of common stock and 75,000
options to purchase common shares as follows:
o 812,010 common shares on exercise of options and warrants to Met VP in
lieu of cash payment of dividends on preferred stock of $591,000;
F-18
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity, continued
--------------------
o 1,346,800 common shares to Met VP on conversion of the Series A
Convertible Preferred Stock;
o 213,950 common shares on exercise of warrants for which the Company
received proceeds of $200,000;
o 360,000 common shares to the Chief Executive Officer on exercise of
options for which the Company received proceeds of $249,000 and in
addition, settlement of accrued liabilities of $169,000 were used to
reduce the proceeds to exercise the options;
o 175,165 common shares on the cashless exercise of options;
o 120,000 common shares to the Chief Executive Officer for compensation
under his employment agreement (Note 12). The Company recorded
$270,000 of stock based compensation related to the issuance of the
restricted stock;
o 84,775 common shares, valued at $83,000 based on the closing price of
the shares on the date earned, to the Vice President Sales and
Marketing under his employment agreement;
o 32,500 common shares to the Chief Financial Officer for compensation
under his employment agreement (Note 12). The Company recorded $56,000
of stock based compensation related to the issuance of the restricted
stock;
o 25,000 common shares to the Chief Operating Officer for compensation
under his employment agreement (Note 12). The Company recorded $98,000
of stock based compensation related to the issuance of the restricted
stock;
o 25,000 common shares to the Chief Technology Officer for compensation
under his employment agreement (Note 12). The Company recorded $98,000
of stock based compensation related to the issuance of the restricted
stock;
o 1,552 common shares to an employee valued at $3,000 based on the
closing price of the shares on the date earned for services in 2007;
o 75,000 options to purchase common shares to certain directors of the
Company.
During the year ended December 31, 2008, the Company recorded $625,000 as stock
based compensation expense for the vesting of options and restricted stock
grants with the offset to additional paid-in-capital.
The 75,000 options issued have an exercise price of $1.50 per share (the trading
prices of the shares at the date of the grant) and have a fair value at the date
of the grant of $69,000. The valuation was determined using the Black-Scholes
method. The key assumptions used were an expected volatility based on historical
volatility of 98.1%, dividend rate of 0%, a risk free interest rate of 1.9%, and
expected life of 3 years using the simplified method to determine expected life.
Year Ended December 31, 2007
- ----------------------------
During the year ended December 31, 2007 the Company issued 764,580 registered
shares of common stock, 1,057,325 unregistered shares of common stock and 80,000
options to purchase common shares as follows:
o 646,176 common shares on exercise of warrants on a cashless basis;
F-19
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity, continued
---------------------
o 25,000 common shares stock on exercise of options for which the
Company received proceeds of $28,000;
o 93,404 common shares on the cashless exercise of options;
o 100,000 common shares to MetVP pursuant to the settlement agreement
related to dividends on the Series A Preferred Stock. The shares were
valued at $213,000 based on the closing price of the shares on the
date of the agreement;
o 88,740 common shares, valued at $44,000 based on the closing price of
the shares on the date earned, for settlement of accrued directors
fees;
o 659,618 common shares, valued at $307,000 based on the closing price
of the shares on the date earned, to certain employees, executives and
former employees for accrued compensation related to salary reductions
in 2005 and 2006;
o 170,000 common shares to the Chief Executive Officer for compensation
under his employment agreement (Note 12). The shares were valued at
$383,000 based on the closing market price of the shares on the date
of the grant;
o 35,592 common shares to an employee and a consultant for services
valued at $38,000 for services of which 18,720 shares valued at
$10,000 were for services in 2006. The shares were based on the
closing price of the stock on the date earned;
o 3,375 common shares to certain employees for bonuses, valued at $7,000
based on the closing market price on the date of the grant;
o 80,000 options to purchase common shares to certain employees of the
Company.
During the year ended December 31, 2007, the Company recorded $564,000 as stock
based compensation expense for the vesting of options and restricted stock
grants with the offset to additional paid-in-capital. The options issued have
exercise prices ranging from $0.61 to $0.95 per share (the trading prices of the
shares at the date of the grant) and have a fair value at the date of the grants
of $29,000. The valuation was determined using the Black-Scholes method. The key
assumptions used were an expected volatility based on historical volatility of
69.0% to 76.7% with a weighted average volatility of 71.7%, dividend rate of 0%,
a risk free interest rate of 3.9% to 4.9%, and expected life of 3.25 years using
the simplified method to determine expected life.
During the year ended December 31, 2007, the Company amended its employment
agreements with certain of the executive officers. Under these agreements
certain stock grants were granted to these officers. See Note 12 for a detailed
explanation of these grants.
Stock Option Plans
- ------------------
The Company grants options under multiple stock-based compensation plans that do
not differ substantially in the characteristics of the awards. Nonqualified and
incentive stock options have been granted to directors, officers and employees
of the Company under the Company's Stock Option Plans. Options generally vest
over 3 years and expire five years from the date of the grant. At December 31,
2008, 3,454,468 shares were authorized for issuance under the stock option
plans. Awards that expire or are cancelled without delivery of shares generally
become available for issuance under the plans. The Company issues new shares to
satisfy stock option exercises.
F-20
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity, continued
--------------------
The following is a summary of stock option activity for 2008 and 2007, relating
to all of the Company's common stock plans (shares are in thousands):
Weighted Weighted Average Aggregate
Average Remaining Intrinsic
Shares Exercise Contractual Term Value
(in thousands) Price (in years) (in thousands)
---------------- -------------- ------------------------- ----------------------
Outstanding at January 1, 2007 4,604 1.15 2.1 $ 398
-------- ---- --- --------
Granted 80 0.70
Exercised (283) 1.32 $ 237
Forfeited (1,809) 1.66 --------
--------- ----
Outstanding at December 31, 2007 2,592 0.77 2.1 $ 3,433
---- --- --------
Granted 75 1.50
Exercised (1,385) 0.95 $ 393
Forfeited ( 5) 0.85 --------
---------- ----
Outstanding at December 31, 2008 1,277 $0.62 2.6 $ 661
========= ===== === ========
Exercisable at December 31, 2008 1,240 $0.59 2.5 $ 661
========= ===== === ========
The following table summarizes stock option information as of December 31, 2008:
Options Outstanding
------------------------- ----------------------------- ------------------------ ---------------------------
Weighted Average
Number Outstanding Remaining Contractual Options Exercisable
Exercise Prices (in thousands) Life (in thousands)
------------------------- ----------------------------- ------------------------ ---------------------------
$0.25 to $0.70 1,155 2.6 years 1,155
------------------------- ----------------------------- ------------------------ ---------------------------
$1.50 to $1.75 122 2.8 years 85
--- --- -----
------------------------- ----------------------------- ------------------------ ---------------------------
Total 1,277 2.6 years 1,240
===== =====
------------------------- ----------------------------- ------------------------ ---------------------------
A total of 7,302,000 and 7,302,000 shares of the Company's common stock are
reserved for options, warrants and contingencies at December 31, 2007 and 2006,
respectively. The total fair value of options vested during the year ended
December 31, 2008 was $63,000. The weighted average fair value of options
granted during the years ended December 31, 2008 and 2007 were $0.92 and $0.36,
respectively. At December 31, 2008, there was $9,000 of total unrecognized
compensation costs related to stock options granted which is expected to be
recognized over a weighted average period of .25 years.
Restricted Stock Grants
A summary of the status of the Company's non-vested stock grants as of December
31, 2008 and 2007 and changes during the years ended December 31, 2008 and 2007
is presented below:
F-21
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity, continued
---------------------
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Non-vested Shares Shares (000) Weighted-average Grant Date Fair Value
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Non-vested at January 1, 2008 710 $2.22
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Granted 22 $1.50
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Vested (211) $2.15
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Forfeited -- $0.00
-----------------------------------
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Non-vested at December 31, 2008 521 $2.21
==================================
- ------------------------------------------- ----------------------------------- ----------------------------------------------
The future expected expense for non-vested shares is $1,003,000 and will be
recognized on a straight-line basis over the period January 1, 2009 through
December 31, 2010.
Warrants
- --------
At December 31, 2008, the Company had warrants outstanding to purchase 1,615,036
shares of common stock. The warrants have exercise prices ranging from $0.86 to
$2.03 and contracted lives from 5 to 7 years. During the year ended December 31,
2008, 625,960 warrants were exercised and 440,692 warrants expired without being
exercised.
NOTE 9 - Income Taxes
------------
The Company adopted Financial Accounting Standards Board's Interpretation No.
48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109" ("FIN 48"), effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements
and requires the impact of a tax position to be recognized in the financial
statements if that position is more likely than not of being sustained by the
taxing authority. FIN 48 is effective for fiscal years beginning after December
31, 2006, and is to be applied to all open tax years as of the date of
effectiveness. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. There were no unrecognized tax benefits as of December 31, 2008 and
2007.
The Company has identified its federal tax return and its state tax return in
New York as "major" tax jurisdictions, as defined in FIN 48. Based on the
Company's evaluation, it has been concluded that there are no significant
uncertain tax positions requiring recognition in the Company's financial
statements. The Company's evaluation was performed for tax years ended 2005
through 2008, the only periods subject to examination. The Company believes that
its income tax positions and deductions will be sustained upon audit and does
not anticipate any adjustments that will result in a material change to its
financial position. In addition, the Company did not record a cumulative effect
adjustment related to the adoption of FIN 48. The Company has elected to
classify interest and penalties incurred on income taxes, if any, as income tax
expense. No interest or penalties on income taxes have been recorded during the
year ended December 31, 2008 and 2007. The Company does not expect its
unrecognized tax benefit position to change during the next twelve months.
Management is currently unaware of any issues under review that could result in
significant payments, accruals or material deviations from its position. The
adoption of FIN 48 did not have a material effect on our consolidated financial
position, results of operations or cash flows.
F-22
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Income Taxes (continued)
-----------------------
The following table summarizes components of the provision for current and
deferred income taxes for the years ended December 31, 2008 and 2007:
December 31,
2008 2007
---------------- -----------------
(in thousands)
Current
Federal $ 23 $ 23
State and other 1 4
-------------- -----------
Total 24 27
-------------- -----------
Deferred
Federal (2,465) --
State and other (402) --
-------------- -----------
Total (2,867) --
-------------- -----------
Provision for Income Taxes $ (2,843) $ 27
=============== ===========
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes for the years ended December 31, 2008 and 2007:
December 31,
2008 2007
----------------- --------------
U.S. Federal statutory tax rate 34% 34%
Permanent items 1 1
Change in effective tax rate ---------------- 9
State taxes
Decrease in valuation allowance 6 6
(253) (49)
----------------- --------------
(212)% 1%
================= ==============
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are summarized as follows:
December 31,
2008 2007
----------------- ----------------
(in thousands)
Deferred tax assets
Net operating loss carryforwards $ 25,462 $ 27,649
Tax credit carryforwards 419 759
Fixed and intangible assets 45 46
Deferred revenue 30 49
Value of stock options and stock compensation 223 99
Unrealized loss on securities 544 544
Accruals 210 222
---------- ----------
26,933 29,368
Valuation allowance (24,066) (29,368)
---------- ----------
Deferred tax assets $ 2,867 $ 0
========== ==========
F-23
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Income Taxes (continued)
------------
At December 31, 2008, the Company has federal and state net operating loss
carryforwards ("NOLs") remaining of approximately $72 million and $26 million,
respectively, which may be available to reduce taxable income, if any. These
NOLs expire through 2025. However, Internal Revenue Code Section 382 rules limit
the utilization of NOLs upon a change in control of a company. During 2008, the
Company performed an evaluation as to whether a change in control had taken
place. Management believes that there has been no change in control as such
applies to Section 382. However, if it is determined that a change in control
has taken place, either historically or in the future, utilization of its NOLs
could be subject to severe limitations, which could have the effect of
eliminating substantially all of the future income tax benefits of the NOLs. The
NOL carryforward as of December 31, 2008 included approximately $637,000 related
to windfall tax benefits for which a benefit would be recorded in additional
paid-in-capital when realized.
NOTE 10 - Related Party and Other Transactions
------------------------------------
o The Company has a consulting agreement with DCL Consulting whereby DCL
provides quality assurance testing for the Company. In 2008 and 2007
the Company incurred $1,000 and $27,000, respectively, for these
services. The spouse of an officer of the Company is owner and
principal employee of DCL.
o The Company received advisory services from Tall Oaks and Lawrence
Hite. Tall Oaks is an affiliate of Metropolitan and Lawrence Hite is
the principal owner of Tall Oaks. In 2007 the Company incurred costs
of $18,000 for such services. The agreement was terminated in 2007.
o During the year ended December 31, 2006, the Company terminated and
settled the consulting agreement with Mountain Meadow Farm and its
associates, including SJ Associates (collectively "Mountain Meadow").
As part of the settlement the Company agreed to issue Mountain Meadow
90,638 restricted common shares valued at $34,000 and to pay for the
costs of medical, life and certain other insurance through December
31, 2013 with the cost for such insurance not to exceed $200,000 in
the aggregate or $50,000 in any 12 month period. At December 31, 2008,
the Company has recorded a liability of $99,000 representing the
estimated present value of this obligation. Mountain Meadow and its
principal employee are shareholders of the Company.
NOTE 11 - Commitments and Contingencies
-----------------------------
Operating Leases
- ----------------
Operating leases are primarily for office space, data centers, equipment and
automobiles. At December 31, 2008, the future minimum lease payments under
operating leases are summarized as follows:
Year Ending
December 31, Amount
---------------------------------------------
(in thousands)
2009 $349
2010 286
2011 216
----
Total $851
====
Rent expense approximated $512,000 and $430,000 for the years ended December 31,
2008 and 2007, respectively.
F-24
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies (continued)
-----------------------------
Employment Agreements
- ---------------------
On August 22, 2007, the Board ratified and approved the Services Agreement with
its Chairman and Chief Executive Officer, effective June 1, 2007 for a term
ending on December 31, 2010. The agreement calls for compensation of $20,000 per
month (with a 10% increase on each annual anniversary subject to approval of the
Company's Compensation Committee and based on performance of the Company), a
one-time grant of 100,000 shares of restricted common stock and the granting of
10,000 shares of restricted common stock per month commencing with the execution
of the Agreement and ending on December 1, 2010. The fair value of the stock
grants is $1,193,000 based on the closing price of the shares on the grant date.
During the years ended December 31, 2008 and 2007, the Company issued 120,000
and 170,000 shares and recorded $270,000 and $383,000, respectively, as
compensation expense related to the services agreement. The agreement further
provides for: reimbursement of certain expenses; living and travel expenses
approximating $11,000 per month; and certain severance benefits in the event of
termination prior to the expiration date.
On August 22, 2007, the Board ratified and approved an amendment to the Services
Agreement with its Executive Vice President and Chief Operating Officer, for a
term ending on December 31, 2010. The agreement calls for compensation of
$15,500 per month, a $25,000 cash bonus paid upon execution of the Agreement,
and the granting of 5,000 shares of restricted common stock per month commencing
on August 1, 2008 and ending on December 31, 2010. The fair value of the stock
grants is $326,000 based on the closing price of the shares on the grant date
and is being amortized over the contract period. During the years ended December
31, 2008 and 2007, the Company recorded $98,000 and $33,000, respectively, as
compensation expense related to the stock grant. The agreement further provides
for reimbursement of certain expenses and severance benefits in the event of
termination prior to the expiration date.
On August 22, 2007, the Board ratified and approved an amendment to the Services
Agreement with its Executive Vice President and Chief Technology Officer, for a
term ending on December 31, 2010. The agreement calls for compensation of
$16,500 per month, a $25,000 cash bonus paid upon execution of the Agreement,
and the granting of 5,000 shares of restricted common stock per month commencing
on August 1, 2008 and ending on December 31, 2010. The fair value of the stock
grants is $326,000 based on the closing price of the shares on the grant date
and is being amortized over the contract period. During the years ended December
31, 2008 and 2007, the Company recorded $98,000 and $33,000, respectively, as
compensation expense related to the stock grant. The agreement further provides
for reimbursement of certain expenses and severance benefits in the event of
termination prior to the expiration date.
On December 12, 2007, the Board ratified and approved an amendment to the
Services Agreement with its Chief Financial Officer, for a term ending on
December 31, 2009. The agreement calls for compensation of $14,583 per month,
and the granting of 2,500 shares of restricted common stock per month commencing
on December 1, 2007 and ending on December 31, 2009. The fair value of the stock
grants is $116,000 based on the closing price of the shares on the grant date
and is being amortized over the contract period. During the years ended December
31, 2008 and 2007, the Company recorded $56,000 and $5,000, respectively, as
compensation expense related to the stock grant. The agreement further provides
for reimbursement of certain expenses and severance benefits in the event of
termination prior to the expiration date.
The Company entered into an employment and consulting agreement with its former
President effective January 1, 2003. The agreement was amended on January 1,
2006 and further amended in April 2008. The employment term of the agreement
expired June 30, 2006 and is followed by a consulting period which ends March
31, 2010. During the consulting term of the agreement compensation will be
$12,000 per month through March 31, 2008 and $6,000 per month for the period
April 1, 2008 through March 31, 2010 and duties during the consulting term
include consultation with senior executives concerning the Company's respective
businesses and operations.
F-25
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies (continued)
-----------------------------
The Company entered into an employment services agreement with the Executive
Vice President of Sales and Marketing on August 1, 2006. The term of the
agreement is for two years and provides for base compensation of $144,996 per
year for each year of the agreement plus $2,500 per month payable in common
stock of the Company. In addition the agreement provides for commissions from 3%
to 5% of the net revenue received on certain accounts. The Executive Vice
President of Sales and Marketing was previously granted options to purchase
175,000 restricted common shares at the exercise price of $0.65 per share. The
fair value of the options on the date of the grant was $71,000. The options vest
at the rate 20% at the grant date and the balance in equal monthly amounts over
the three years from September 1, 2005. The employment agreement was extended on
a month to month basis after August 1, 2008.
Future commitments under employment and consulting agreements are:
2009 $ 871,000
2010 642,000
------------
Total $1,513,000
============
NOTE 12 - Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information for the years ended December
31, 2008 and 2007 is summarized as follows:
Year ended December 31,
2008 2007
----------------- ------------------
(in thousands)
Interest paid $ 69 $120
====== ====
Income taxes paid $ 24 $ 14
====== =====
Non-cash investing and financing activities for the years ended December 31,
2008 and 2007 are summarized as follows:
Year Ended December 31,
2008 2007
------------- --------------
(in thousands)
Dividends accrued $ 616 $ 847
======== ======
Capitalized leases and equipment notes incurred $ 295 $ 119
======== ======
Stock issued as dividends $ 0 $ 213
======== ======
Reduction in accounts payable, accrued expenses and dividends payable
upon exercise of options and warrants $ 780 $ 0
======== ======
Common stock issued in settlement of liability $ 68 $ 0
======== ======
Reduction of accrued liability through issuance of debt $ 62 $ 0
======== ======
F-26
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Products and Services
---------------------
The Company and its subsidiaries currently operate in one business segment and
have, during the years 2008 and 2007, provided two separate products: SaaS
Services and Custom Engineering Services. Refer to Note 1 for a detailed
description of these products and services. Revenues from these products are as
follows:
Year Ended December 31,
2008 2007
-------------- --------------
(in thousands)
SaaS fees $ 7,935 $ 7,606
Custom Engineering fees 1,674 2,505
--------- -------
Total Revenue $ 9,609 $10,111
======== =======
NOTE 14 - Major Customers
---------------
For the year ended December 31, 2008, IBM and Electronic Data Systems Corp.
("EDS") accounted for 42% and 47%, respectively, of the Company's revenue. In
2007, IBM and EDS accounted for 51% and 46% of revenue, respectively. Accounts
receivable from these two customers at December 31, 2008 and 2007, amounted to
$1,583,000 and $1,416,000, respectively. Loss of either of these customers would
have a material adverse effect on the Company.
NOTE 15 - Subsequent Events
-----------------
Subsequent to December 31, 2008 the Company issued 319,050 restricted common
shares to directors for the payment of $197,000 of accrued directors' fees. Also
subsequent to December 31, 2008 the Company issued 95,648 restricted common
shares on the exercise of warrants and received proceeds of $100,000.
F-27