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, 2009
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)
Suite 510, 13450 West Sunrise Boulevard, Sunrise, FL 33323
(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 $5,69,420 based on the closing sales price of the Common Stock as
quoted on the OTC-BB June 30, 2009.
As of March 16, 2010, there were 11,232,911 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, 2009
Table of Contents
PART I
PAGE
----
ITEM 1 Business 1
ITEM 1A Risk Factors 7
ITEM 2 Properties 10
ITEM 3 Legal Proceedings 10
ITEM 4 [Removed and reserved] 10
PART II
ITEM 5 Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 11
ITEM 6 Selected Financial Data NOT REQUIRED
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
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 19
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-K 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-K, 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", "our", "we", 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 more than 80 countries, 30 currencies and
15 languages. Direct Insite processes more than 25 million invoices annually
with an invoice value of $125 billion. 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, HP Enterprise Services ("HP") (formerly EDS),
accounted for approximately 51% and 47% of revenue for the years ended December
31, 2009 and 2008, respectively. Electronic Data Systems Corporation was
acquired by Hewlett-Packard Company in 2008. IBM accounted for approximately 33%
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and 42% of our revenue for the years ended December 31, 2009 and 2008,
respectively. Siemens Shared Services LLC accounted for 11% of revenue for the
year ended December 31, 2009. 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.
Vendor Boarding and Supplier Services
A key component of deploying Procure to Pay services is to assure that
suppliers register with such services and are properly "boarded" into the
Procure to Pay environment. Direct Insite provides a complete set of suppliers'
services such as webinars, training materials, and HELP services embedded within
the service offering. Additionally, Direct Insite provides vendor boarding
campaigns which include statistical analysis of vendor invoice submission,
calling and email programs that effectively communicate the buyer's strategic
direction to the suppliers requiring their participation.
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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. The service fully integrates with all of the major ERP
systems ensuring seamless system interoperability.
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
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.
3
Invoice Approval
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.
Invoice Payment
Direct Insite supports electronic payment of invoices using a number of
financial instruments including major credit card and Automated Clearing House
(ACH) transactions. In order to support credit card payment it is required that
the service provider is Payment Card Industry Data Security Standard (PCI DSS)
complaint. PCI DSS is a set of very strict requirements designed to ensure that
ALL companies that process, store or transmit credit card information maintain a
secure environment. Direct Insite is PCI DSS compliant.
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.
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.
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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.
We believe that our research and development staff, many with extensive
experience in the industry, represents a significant competitive advantage. As
of March 16, 2010, our research and development group consists of 19 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, 2009 and 2008, research and development expenses were approximately
$1,909,000, and $2,593,000, respectively. We believe that continued investments
in research and development are required in order to remain competitive.
COMPETITION
We believe our primary competitors are:
Kofax/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.
OB10 is a privately held founded in 2000 with offices in Atlanta, GA, London,
United Kingdom and Kuala Lumpur, Malaysia. OB10 provides an electronic invoice
network service.
Basware Corporation, a public corporation founded in 1985 with headquarters in
Finland provides purchase-to-pay solutions for its clients.
5
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.
EMPLOYEES
We had 39 employees, all in the United States, at March 16, 2010, including
24 in technical support, (including research and development), 10 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.
AVAILABLE INFORMATION
We have a site on the worldwide web at www.directiniste.com; however,
information found on our website is not incorporated by reference into this
report. We make available free of charge our SEC filings, including our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. Further,
copies of our filings with the SEC are available at the SEC's Public Reference
Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation
of the Public Reference Room can be obtained by calling the SEC at
6
1-800-SEC-0330. The SEC maintains a site on the worldwide web that contains
reports, proxy and information statements and other information regarding our
filings at www.sec.gov.
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.
The large number of shares available for future sale may adversely affect the
market price of our stock.
We have 11,232,231 shares of common stock outstanding as of March 16, 2010,
of which approximately 5,269,000 shares are freely tradable. We also have
1,120,000 shares issuable upon exercise of options and warrants. If all of our
outstanding options and warrants were exercised, we would have 12,352,231 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.
7
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. We believe that continued investments in
research and development are required in order to remain competitive.
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,
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 anticipates hiring additional qualified accounting staff in 2010.
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.
Three customers account for a significant percentage of our revenue.
We have three customers that accounted for approximately 95% and 98% of our
revenue for the years ended December 31, 2009 and 2008, respectively. The loss
of any 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.
8
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 OTCBB 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 2, 2010 was 3,168 shares. If limited trading in our common
stock continues, it may be difficult for investors who purchase shares of common
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.
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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.
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, 2009 and requires that we have such system of internal controls
audited beginning with the year ended December 31, 2010. 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 Sunrise, FL 3,284 9/14/09 - 12/31/12 $ 98,520
Satellite office Bohemia , NY 3,000 7/1/09 - 6/30/10 $69,408
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 $49,440
<FN>
Note 1. The co-location facilities in Hauppauge, New York and Santa Clara,
California provide rack space for our computer equipment and the rental is not
based on square footage used.
</FN>
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. [Removed and reserved]
- -------------------------------
10
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. The
following table sets forth the high and low sales prices for our common stock by
the quarters indicated:
High Low
---- ---
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 1.20 0.20
Second Quarter 1.00 0.21
Third Quarter 1.25 0.25
Fourth Quarter 1.20 0.40
2010
First Quarter to March 19, 2010 1.05 0.21
(b) As of March 15, 2010, there were 2,580 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 2009 the Company
paid dividends of $340,783 to holders of the Series B, C, and D 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, 2009, for
all compensation plans, including individual compensation arrangements under
which equity securities of the Company are authorized for issuance.
11
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 770,000 $0.68 1,625,696
- ---------------------------------- ------------------------------- -------------------------------- -------------------------------
Equity compensation plans not
approved by security holders -- -- 775,534
- ---------------------------------- ------------------------------- -------------------------------- -------------------------------
Total 770,000 $0.68 2,401,230
- ---------------------------------- ------------------------------- -------------------------------- -------------------------------
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", "our", "we", 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.
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.
HP Enterprise Services ("HP") (formerly EDS) accounted for 51% and 47% of
revenue for the years ended December 31, 2009 and 2008, respectively. We have
four principal contracts with HP 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 and renamed HP Enterprise Services.
12
Currently, IBM, representing approximately 33% and 42% of revenue for the
years ended December 31, 2009 and 2008, 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.
Siemens Shared Services LLC accounted for 11% of revenue for the year ended
December 31, 2009.
We will continue to focus our sales and marketing efforts to increase
revenue and expand our customer base in 2010 and beyond
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
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.
13
Revenue Recognition
-------------------
We recognize revenue in accordance with Accounting Standards Codification
("ASC") Topic 605 "Revenue Recognition" ("ASC 605") 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, we allocate the total revenue to be earned
among the various elements based on their relative fair values. We recognize
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 ASC 605.
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, 2009 and
2008, an allowance for doubtful accounts is not provided since, in the opinion
of management, all accounts are deemed collectible.
Impairment of Long-Lived Assets
-------------------------------
ASC 360 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. We account for long-lived assets in
accordance with ASC 360 for purposes of determining and measuring impairment of
its other intangible assets. It is the Company's policy to periodically review
14
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, 2009 and 2008, respectively.
Income Taxes
------------
We account 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. We currently have significant
deferred tax assets. ASC 740, "Income Taxes" 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. As a result the
Company's effective tax rate for the years ended December 31, 2009 and 2008
differs from the current statutory rates. In addition, we expect 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. We will continue to re-assess our
reserves on deferred income tax assets in future periods on a quarterly basis.
We have 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.
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, 2009 we had operating income of $1,821,000,
compared to operating income of $1,375,000 for the year ended December 31, 2008,
an increase of $446,000 or 32.4%. For the year ended December 31, 2009, we had
net income of $1,659,000 compared to net income of $4,181,000 for the year ended
December 31, 2008, a decrease of $2,522,000. The decrease is principally due to
the benefit from income taxes of $2,867,000 that we recognized in 2008. Cash
provided from operating activities for the year ended December 31, 2009
increased $1,370,000 compared to cash provided from operations for the year
ended December 31, 2008. This increase is due primarily to the increase in
sales, a decrease in certain costs and a decrease in accounts receivable.
Cash provided from operating activities for the year ended December 31,
2009 was $3,293,000, consisting of net income of $1,659,000, increased by
15
non-cash items of $1,010,000, including depreciation and amortization of
$361,000, stock based compensation expense of $575,000 and the change in fair
value of the warrant liability of $74,000. Cash from operations was further
increased by a decrease in accounts receivable of $655,000 and prepaid expenses
and other assets of $130,000 offset by a decrease in accounts payable and
accrued expenses of $161,000.
Cash used in investing activities was $53,000 for the year ended December
31, 2009, compared to $233,000 for the previous year. This was principally
expenditures for equipment.
Cash used in financing activities totaled $2,462,000 for the year ended
December 31, 2009, compared to cash used in financing activities of $2,894,000
in 2008. We redeemed preferred stock of $1,974,000 and paid dividends on the
preferred stock of $341,000. We received proceeds from exercise of warrants of
$100,000. In addition, we made repayments on capital leases and capital notes of
$188,000. We also repurchased common stock of $59,000.
As a result of these operating, investing and financing activities, cash
increased by $778,000 to $1,758,000 at December 31, 2009.
Results of Operations
- ---------------------
For the year ended December 31, 2009 revenue increased $400,000 or 4.2% to
$10,009,000 compared to revenue of $9,609,000 in 2008. The increase is primarily
due to an increase in recurring IOL services revenue of $1,011,000 offset by a
decrease in engineering services revenue of $611,000. The increase in recurring
revenue resulted from an increase in services to HP and Siemens, while the
decrease in engineering services revenue is primarily due to a decrease in
revenue from HP and Siemens resulting from the completion of projects in 2008
and a decrease in engineering services to IBM resulting from the substantial
completion of deploying the IOL service to all major geographies .
Costs of operations, research and development decreased by $372,000 (9.4%)
to $3,566,000 for the year ended December 31, 2009 compared to the costs of
$3,938,000 in 2008. 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
SaaS services. The decrease in costs is principally due to a decrease in
salaries and related costs of $262,000 and stock compensation costs of $74,000
resulting from the reassignment of staff to sales and marketing. Costs for
contract development staff decreased $279,000 as we used fewer contract staff in
2009 as our engineering services work decrease compared to 2008. Costs for
software and supplies also decreased by $61,000 in 2009, resulting from fewer
software purchases. Cost for purchased services increased $262,000 in 2009
compared to 2008 due to an increase in outsourced services for document scanning
services to support the Siemens account. Rents increased $48,000 primarily due
an increase in rents for our co-location data centers where we expanded our
space requirements. All other operating expenses combined decreased
approximately $6,000 net.
Sales and marketing costs were $1,412,000 for the year ended December 31,
2009, a increase of $428,000 or 43.5% compared to costs of $984,000 in 2008.
Salaries and related costs, including stock compensation costs, increased
$365,000 due to reassignment of staff from operations. Consulting and
professional fees increased $63,000 and trade show expense increased $29,000. We
engaged a consultant to support customers and we attended more trade shows in
2009. Travel and entertainment costs decreased $29,000.
General and administrative costs decreased $138,000 or 4.6% to $2,849,000
for the year ended December 31, 2009 compared to costs of $2,987,000 in 2008.
Salaries and related costs decreased $42,000 principally due to a decrease in
stock based compensation for stock grants. Professional fees decreased $93,000
in 2009 compared to 2008. In 2008 we had engaged an investment banking advisor
and we engaged an employment recruiting service. Accounting and auditing fees
decreased $70,000 in 2009 compared to 2008. Legal costs increased $41,000 as we
incurred costs to settle an employment claim. All other general and
administrative costs had a net increase of $26,000.
16
Depreciation and amortization expense increased by $36,000 (11.1%) to
$361,000 for the year ended December 31, 2009 compared to costs of $325,000 in
2008, primarily due to additional equipment acquired for a second collocation
data center.
Interest expense, net decreased by $13,000 (34.2%) to $25,000 for the year
ended December 31, 2009 compared to costs of $38,000 in 2008, primarily due to
the decrease in outstanding loan balances resulting from payment of principle.
Other expense, net for the year ended December 31, 2009 was $1,000 compared
to other income, net of $1,000 in 2008.
During the year ended December 31, we recorded a non-cash expense of
$74,000 for the change in the value of a warrant liability.
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.
Net Operating Loss Carry Forwards
- ---------------------------------
At December 31, 2009, the Company has federal and state net operating loss
carry-forwards ("NOLs") remaining of approximately $62 million and $17 million,
respectively, which may be available to reduce federal taxable income, if any.
These NOLs expire through 2026. However, Internal Revenue Code Section 382 rules
limit the utilization of NOLs upon a change in control of a company. During
2009, 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 April 2009, the FASB issued new accounting guidance, under ASU 2010-06,
"Fair Value Measurements and Disclosures" (Topic 820) on fair value measurements
and disclosures, which established the requirements for estimating fair value
when market activity has decreased and on identifying transactions that are not
orderly. Under this guidance, entities are required to disclose in interim and
annual periods the inputs and valuation techniques used to measure fair value.
This guidance is effective for interim and annual periods ending after June 15,
2009. The adoption of this guidance did not have a material impact on the
Company's consolidated financial position or results of operations.
In May 2009, the FASB issued new accounting guidance, under ASU 2010-09,
"Subsequent Events" (Topic 855), which sets forth general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. This
guidance is effective for interim and annual periods ending after June 15, 2009.
The adoption of this guidance did not have a material impact on the Company's
consolidated financial position or results of operations.
17
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB
Interpretation No. 46(R)" ("SFAS 167"). This standard has not yet been
integrated into the ASC. SFAS 167 eliminates Interpretation 46(R)'s exceptions
to consolidating qualifying special-purpose entities, contains new criteria for
determining the primary beneficiary, and increases the frequency of required
reassessments to determine whether a company is the primary beneficiary of a
variable interest entity. SFAS 167 also contains a new requirement that any
term, transaction, or arrangement that does not have a substantive effect on an
entity's status as a variable interest entity, a company's power over a variable
interest entity, or a company's obligation to absorb losses or its right to
receive benefits of an entity must be disregarded in applying Interpretation
46(R)'s provisions. The elimination of the qualifying special-purpose entity
concept and its consolidation exceptions means more entities will be subject to
consolidation assessments and reassessments. SFAS 167 will be effective January
1, 2010. The Company does not expect the adoption of SFAS 167 to have any impact
on its financial statements or results of operations.
In July 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162" which was codified under the FASB
Accounting Standards Codification ("ASC") Topic 105, Generally Accepted
Accounting Standards. This standard establishes the ASC as the source of
authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of this Standard,
the Codification superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. This ASC, which
changes the referencing of financial standards, was effective for interim or
annual financial periods ending after September 15, 2009. The Company adopted
such guidance in September 2009 and has modified all earlier references to
accounting standards to reflect such adoption.
In October 2009, the FASB issued new accounting guidance, under ASU No.
2009-13"Revenue Recognition" (Topic 605), which amends revenue recognition
policies for arrangements with multiple deliverables. This guidance eliminates
the residual method of revenue recognition and allows the use of management's
best estimate of selling price for individual elements of an arrangement when
vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or
third-party evidence (TPE) is unavailable. This guidance is effective for all
new or materially modified arrangements entered into on or after January 1, 2011
with earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. The Company has not
completed their assessment of the impact this new guidance may have on its
financial condition, results of operations or cash flows. In October 2009, the
FASB issued new accounting guidance, under ASU No. 2009-14 "Software" (Topic
985), which amends the scope of existing software revenue recognition
accounting. Tangible products containing software components and non-software
components that function together to deliver the product's essential
functionality would be scoped out of the accounting guidance on software and
accounted for based on other appropriate revenue recognition guidance. This
guidance is effective for all new or materially modified arrangements entered
into on or after January 1, 2011 with earlier application permitted as of the
beginning of a fiscal year. Full retrospective application of this new guidance
is optional. This guidance must be adopted in the same period that the company
adopts the amended accounting for arrangements with multiple deliverables
described in the preceding paragraph. The Company has not completed their
assessment of this new guidance on their financial condition, results of
operations or cash flows.
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.
18
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, 2009 (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
intends to add qualified financial staff in 2010 that the Company anticipates
will alleviate the internal control weakness.
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
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 $48,000 and $11,000 for this consultant
in 2009 and 2008, 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,
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
Ilimited 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.
19
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, 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, 2009.
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, 2009. 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, 2009 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, 2009.
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
limited segregation of duties and 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 24, 2010, 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 65 Chairman of the Board of Directors
and Chief Executive Officer 2000
Bernard Puckett (1) 65 Member of the Board of Directors 2004
Dennis Murray (1) 63 Member of the Board of Directors 2000
Michael Levin 37 Member of the Board of Directors 2005
Charles S. Mechem Jr. 79 Member of the Board of Directors 2009
Matthew E. Oakes 47 President and Chief Operating Officer
Arnold Leap 42 Executive Vice-President Sales and Marketing
and Chief Technology Officer
Michael J. Beecher 65 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 also is 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.
Charles S. Mechem, Jr., was formerly the Chairman and Chief Executive
Officer of Taft Broadcasting and Great American Broadcasting Company from 1967
until his retirement in 1990. Previously he was a partner in the law firm of
Taft, Stettinius & Hollister, Cincinnati, Ohio from 1955 to 1967. He is also a
business advisor to professional athletes and is Chairman Emeritus of the Ladies
Professional Golf Association ("LPGA"). Mr. Mechem holds a Bachelor of Arts
degree from Miami University (Ohio) and a Juris Doctorate degree from Yale
University School of Law. He also holds honorary degrees from Miami University
and Ohio University. He has been active on many boards of directors including
philanthropic organizations and was formerly the Chairman of the Board of
Cincinnati Bell and Convergys Corporation.
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.
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.
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.
22
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, 2009.
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, 2009 and 2008, 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,
2009 and 2008, 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 $100,000 for services
rendered for the year ended December 31, 2009 and 2008.
23
Summary Compensation Table
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Nonqualified
Non-Equity Deferred
Name and Principal Incentive Compensation All Other
Position Stock Option Plan Earnings Compensation Total
Year Salary($) Bonus($) Awards($) Awards($) Compensation($) ($) ($)(1) ($)
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
James A. Cannavino 2009 $240,000 $35,000 $270,000 -- -- -- $159,982 $704,982
Chief Executive 2008 $240,000 $30,000 $270,000 $46,200 -- -- $153,758 $739,958
Officer (PEO)
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Matthew Oakes 2009 $186,000 $30,000 $135,000 -- -- -- $10,829 $361,829
President and Chief 2008 $186,000 $25,000 $ 56,250 $ 4,630 -- -- $ 9,600 $281,480
Operating Officer (3)
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Arnold Leap 2009 $198,000 -- $135,000 -- -- -- $11,526 $344,526
EVP - Sales and 2008 $198,000 $21,500 $ 56,250 $ 4,630 -- -- $11,460 $291,840
Marketing and Chief
Technology Officer
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Michael Beecher 2009 $175,000 $12,000 $59,442 -- -- -- $13,643 $260,085
Chief Financial Officer 2008 $175,000 $15,500 $55,500 $ 4,630 -- -- $13,600 $264,230
<FN>
- -------------------------- ----- ------------ --------- ------------ ----------- ------------- ------------- ------------- ---------
Footnotes
- ---------
(1) All Other Compensation includes the following for each of the executives:
In 2009, Mr. Cannavino received a housing/office allowance of $120,000,
leased cars including insurance valued at $12,772, and directors fees of
$27,167, and in 2008, a housing/office allowance of $120,000, leased cars
including insurance of $12,600, and directors fees of $21,098.
In 2009, Mr. Oakes received a car allowance including insurance valued at
$9,600 and in 2008 a car allowance of $9,600.
In 2009, Mr. Leap received a car allowance including insurance of $9,600
and life insurance costs of $1,926 and in 2008, a car allowance including
insurance of $9,600 and life insurance costs of $1,860.
In 2009, Mr. Beecher received a car allowance including insurance of
$8,400, and a living allowance of $5,200 and in 2008, a car allowance
including insurance of $8,400 and a living allowance of $5,200.
(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, 2009:
- ----------------- --------------------------------------------------------------------- --------------------------------------------
Option Awards Stock Awards
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- ---------- ---------
Equity
Incentive
Plan Equity
Awards: Incentive
Number Plan
of Awards:
Market Unearned Market or
Value of Shares, Payout
Equity Shares Units Value of
Incentive or Units or Unearned
Number of Number of Plan Awards: Number of of Stock Other Shares,
Securities Securities Number of Shares or That Rights Units or
Underlying Underlying Underlying Units of have That Other
Unexercised Unexercised Unexercised Option Option Stock That Not Have Rights
Options - Options - Unearned Exercise Expiration Have Not Vested Not That Have
Name Exercisable Unexercisable Options Price Date Vested (5) Vested Not Vested
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- --------- ----------
James Cannavino 350,000 (1) -- $0.62 12/30/2012 120,000 $114,000
50,000 (2) -- -- $1.50 3/25/2013 -- --
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- --------- ----------
Matthew Oakes -- -- -- -- -- 60,000 $ 57,000 -- --
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- --------- ----------
Arnold Leap -- -- -- -- -- 60,000 $57,000 -- --
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- --------- ----------
Michael Beecher 70,000 -- -- $0.25 7/31/2011 30,000 $28,500 -- --
- ----------------- -------------- --------------- -------------- ---------- ------------ ------------ ---------- --------- ----------
<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) Based on the closing price of the Company's stock of $0.95 on December 31,
2009.
</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
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
25
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, 2009. At December 31, 2009, 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, 2009. At December 31, 2009, 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, 2009. At December 31, 2009, no options to purchase 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, 2009. At December 31, 2009, 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
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.
26
No options were granted under this plan during the fiscal year ended December
31, 2009. At December 31, 2009, 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, 2009. At December 31, 2009, 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, 2009. At December 31, 2009, options to purchase 275,000 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.
No options were granted under this plan during the fiscal year ended December
31, 2009. In 2008, 75,000 options were granted under this plan. At December 31,
2009, options to purchase 495,000 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 $5,000 in
addition to the membership fee. In 2008 the Company adopted a deferred
compensation plan for directors whereby the directors may elect to defer their
compensation to a date following the termination of their service as a director.
The Company also reimburses directors for reasonable expenses incurred in
attending board and committee meetings.
The following table provides the compensation earned by our non-employee
directors for the year ended December 31, 2009 and 2008. Mr. Cannavino's
27
directors fees earned in 2009 and 2008 are included in the Summary Compensation
Table above:
- ---------------- -------------------------------------------------------------------------------------------------------------------
Director Compensation
- -------------------------- --------- ----------- ----------- --------- ----------------- ----------------- ----------------- -------
Fees Nonqualified
Earned or Non-equity Deferred
Paid in Stock Option Incentive Plan Compensation All Other
Cash ($) Awards Awards Compensation Earnings Compensation Total
Name (1) $ ($) ($) ($) ($) ($)
- -------------------------- --------- ----------- ----------- --------- ----------------- ----------------- ----------------- -------
Dennis Murray (1) 2009 $37,000 $10,000 -- -- -- $47,000
2008 $38,000 $10,000 $23,100 $71,100
- -------------------------- --------- ----------- ----------- --------- ----------------- ----------------- ----------------- -------
Bernard Puckett (1) 2009 $37,000 $10,000 -- -- -- -- $47,000
2008 $38,000 $10,000 $48,000
- -------------------------- --------- ----------- ----------- --------- ----------------- ----------------- ----------------- -------
Michael Levin (2) 2009 $17,000 $10,000 -- -- -- -- $27,000
2008 $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 Metropolitan Venture Partners
Corp. and as such all of his director's fees are assigned and paid to
Metropolitan Venture Partners Corp.
</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, 2009 and 2008, the Company issued 150,000
shares valued at $337,500 and 120,000 shares valued at $270,000, 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 President (formerly 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 each of the years ended December 31, 2009 and 2008 the Company recorded
$97,875 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 Sales and Marketing 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.
28
During each of the years ended December 31, 2009 and 2008 the Company recorded
$97,875 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, with an option to extend
the agreement for one additional year. In November 2009 the agreement was
extended to December 31, 2010. The fair value of the stock grants is $143,000
based on the closing price of the shares on the grant dates and is being
amortized over the contract period. During the years ended December 31, 2009 and
2008 the Company recorded $59,443 and $55,500, 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.
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, 2010 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 -- 21.2%
Tall Oaks Group, LLC 257,611 500,000 6.5%
James Cannavino 1,901,787 450,000 20.1%
Bernard Puckett 199,986 -- 1.8%
Dennis Murray 293,541 25,000 2.8%
Michael Levin 2,000 -- *
Charles Mechem 10,000 -- *
Matthew Oakes 361,145 25,000 3.5%
Arnold Leap 296,331 25,000 2.9%
Michael Beecher 193,586 82,500 2.4%
All Officers and Directors
as a Group (8 persons) 3,264,376 607,500 32.7%
<FN>
- -------
* = Less than 1%
Footnotes
- ---------
(1) The address of the holder is 13450 West Sunrise Boulevard, Suite 510,
Sunrise, FL 33323, 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.
(2) Based upon 11,232,911 common shares outstanding as of March 16, 2010,
plus outstanding options, warrants and stock grants exercisable within
60 days.
</FN>
29
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, 2009 and 2008, the
Audit and Compensation Committees consisted of Dr. Dennis J. Murray (Chairman -
Audit Committee), and Bernard Puckett (Chairman - Compensation Committee).
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
The following is a summary of the aggregate fees for professional services
rendered to us by Marcum LLP, our independent auditors, for the fiscal years
ended December 31, 2009 and 2008:
Description 2009 2008
----------- ---- ----
Audit Fees (1) $ 148,000 $ 182,000
Audit-Related Fees (2) -- 6,650
Tax Fees (3) 15,000 15,000
----------- ---------
Total Fees $ 163,000 $ 203,650
========== =========
Our Audit Committee has determined that the provision of services by Marcum
LLP other than for audit related services is compatible with maintaining the
independence of Marcum LLP as our independent accountants.
<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 issued in 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, 2009 and 2008.
(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)
30
(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 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).
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).
31
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 Form of Subscription Agreement for Series C Redeemable Preferred Stock (3)
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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 registration statement
filed on February 19, 2009)
10.19 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
registration statement filed on February 19, 2009)
10.20 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
registration statement filed on February 19, 2009)
10.21 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 registration statement
filed on February 19, 2009)
10.22 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
registration statement filed on February 19, 2009)
10.23 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 registration
statement on February 19, 2009)
10.24 Master Services Agreement MIAP (OGS) Amendment (#10) dated August 21, 2008
32
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
registration statement filed on February 19, 2009)
23 Consent of Marcum 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 registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 25th day of March
2010.
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 by the following persons on behalf of the registrant and
in the capacities indicated on March 25, 2010:
/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
/s/ Michael Levin
-------------------- Director
Michael Levin
/s/ Charles Mechem
-------------------- Director
Charles Mechem
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 F-5
Consolidated Statements of Cash Flows F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-26
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, 2009 and 2008 and the
related consolidated statements of income, changes in shareholders' equity, 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, 2009 and 2008 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 warrants in accordance with FASB Accounting
Standards Codification Sub Topic 815-40, "Contracts in Entity's Own Stock",
effective January 1, 2009.
/s/ Marcum LLP
Marcum LLP
Melville, NY
March 25, 2010
F-1
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2009 and 2008
- --------------------------------------------------------------------------------
ASSETS
2009 2008
---------------- -----------------
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 1,758 $ 980
Accounts receivable, net of allowance for doubtful accounts of
$0 in 2009 and 2008 1,296 1,951
Prepaid expenses and other current assets 76 162
Deferred tax asset - current 750 --
---------------- -----------------
Total Current Assets 3,880 3,093
PROPERTY AND EQUIPMENT, Net 397 649
DEFERRED TAX ASSET 2,117 2,867
OTHER ASSETS 226 271
---------------- -----------------
TOTAL ASSETS $6,620 $6,880
================ =================
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, 2009 and 2008
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
2009 2008
--------------- ---------------
CURRENT LIABILITIES
- -------------------
Accounts payable and accrued expenses $ 1,444 $ 1,802
Current portion of capital lease obligations 6 6
Current portion of notes payable 177 172
Warrant liability 221 --
Deferred revenue 75 75
Dividends payable 26 124
--------------- ---------------
Total Current Liabilities 1,949 2,179
OTHER LIABILITIES
- -----------------
Capital lease obligations, net of current portion -- 7
Notes payable, net of current portion 143 274
--------------- ---------------
TOTAL LIABILITIES 2,092 2,460
--------------- ---------------
SERIES C REDEEMABLE PREFERRED STOCK,
- -----------------------------------
1,000 shares issued and outstanding; liquidation preference of
$1,000,000 at December 31, 2009 1,000 --
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock, $0.0001 par value; 2,000,000 shares authorized; -- --
Series C Redeemable Preferred, 2,000 shares issued and outstanding;
liquidation preference of $2,000,000 at December 31, 2008
Series B Redeemable Preferred, 0 issued and outstanding and 974 -- --
shares issued and outstanding; liquidation preference of $0 and
$974,075 at December 31, 2009 and 2008, respectively;
Series D Redeemable Preferred, 100 shares issued and outstanding, -- --
liquidation preference of $100,000 at December 31, 2009 and 2008,
respecively;
Common stock, $.0001 par value; 50,000,000 shares
authorized; 11,216,158 and 10,311,968 shares issued in
2009 and 2008, respectively; and 11,176,231 and 10,272,041
shares outstanding in 2009 and 2008, respectively 1 1
Additional paid-in capital 114,559 116,862
Accumulated deficit (110,704) (112,115)
--------------- ---------------
3,856 4,748
Common stock in treasury, at cost; 24,371 shares in 2009
and 2008 (328) (328)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 3,528 4,420
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 6,620 $ 6,880
=============== ===============
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, 2009 and 2008
- --------------------------------------------------------------------------------
2009 2008
-------------- ----------------
REVENUES $ 10,009 $ 9,609
- -------- -------------- ----------------
COSTS AND EXPENSES
- ------------------
Operations, research and development 3,566 3,938
Sales and marketing 1,412 984
General and administrative 2,849 2,987
Amortization and depreciation 361 325
-------------- ----------------
TOTAL OPERATING EXPENSES 8,188 8,234
-------------- ----------------
OPERATING INCOME 1,821 1,375
-------------- ----------------
OTHER EXPENSE (INCOME)
- ----------------------
Change in fair value of warrant liability 74 --
Interest expense, net 25 38
Other expense (income), net 1 (1)
-------------- ----------------
TOTAL OTHER EXPENSE, NET 100 37
-------------- ----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,721 1,338
- ----------------------------------------
PROVISION FOR (BENEFIT FROM) INCOME TAXES 62 (2,843)
- ----------------------------------------- -------------- ----------------
NET INCOME 1,659 4,181
- ----------
PREFERRED STOCK DIVIDENDS (243) (616)
- ------------------------- -------------- ----------------
NET INCOME ATTRIBUTABLE TO COMMON
- ---------------------------------
SHAREHOLDERS $ 1,416 $ 3,565
------------ ============== ================
BASIC INCOME PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 0.13 $ 0.44
- ---------------------------------------------------------- ============== ================
DILUTED INCOME PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 0.13 $ 0.35
- ------------------------------------------------------------ ============== ================
BASIC WEIGHTED AVERAGE COMMON SHARES OUSTANDING 10,874 8,075
- ----------------------------------------------- ============== ================
DILUTED WEIGHTED AVERAGE COMMON SHARES OUSTANDING 11,230 10,787
- ------------------------------------------------- ============== ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2009 and 2008 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
------------------------------------------------------------------
Additional
Paid in Accumulated Treasury
Series A Series B Series C Series D Common Stock Capital Deficit Stock Total
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Amount
-----------------------------------------------------------------------------------------------------------------
BALANCE -
- ---------
January 1,
2008 135 $ -- 1 $ -- 2 $ -- -- $ -- 7,075 $ 1 $ 114,961 $(115,679) $ (328) $(1,045)
Common stock
issued on
conversion
of Convertible
Preferred Stock (135) -- -- -- -- -- -- -- 1,347 -- -- -- -- --
Common stock
issued on
exercise --
of options
and warrants 1,561 -- 1,208 1,208
Employee stock
based compensa-
tion 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-5
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, continued
For the Years Ended December 31, 2009 and 2008 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Additional
Paid in Accumulated Treasury
Series A Series B Series C Series D Common Stock Capital Deficit Stock Total
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Amount
-----------------------------------------------------------------------------------------------------------------
BALANCE -
- ---------
December 31,
2008 -- $ -- 1 $ -- 2 $ -- -- $ -- 10,272 $ 1 $ 116,862 $(112,115) $ (328) $ 4,420
Cumulative effect
of change in
accounting principle (142) (5) (147)
-----------------------------------------------------------------------------------------------------------------
Balance January
1, 2009 -- -- 1 -- 2 -- -- 10,272 1 116,720 (112,120) (328) 4,273
Redemption of
preferred
stock -- -- (1) -- -- -- -- -- -- (974) -- -- (974)
Common stock
issued on
exercise
of options
and warrants 379 -- 100 100
Employee stock
based compensa-
tion expense 270 575 575
Reclassify
preferred stock
to temporary
equity (2,000) (2,000)
Common stock
issued to settle
accrued liabilities 319 197 197
Repurchase of shares (64) (59) (59)
Dividends declared,
preferred
Stock -- -- -- -- -- -- -- -- -- -- -- (243) -- (243)
Net income -- -- -- -- -- -- -- -- -- -- -- 1,659 -- 1,659
____ ________ ____ _________ ____ ________ ____ ______ ______ ______ ___________ ____________ ________ _______
BALANCE -
December 31,
2009 -- $ -- -- $ -- 2 $ -- -- $ -- 11,176 $ 1 $ 114,559 $(110,704) $(328) $3,528
==== ======== ==== ========= ==== ======== ==== ====== ====== ====== =========== ============ ======== =======
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, 2009 and 2008
- --------------------------------------------------------------------------------
2009 2008
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 1,659 $ 4,181
Adjustments to reconcile net income
to net cash provided by operations:
Amortization and depreciation:
Property and equipment 358 323
Other 3 2
Deferred taxes -- (2,867)
Change in fair value of warrant liability 74 --
Stock based compensation expense 575 625
Changes in operating assets and liabilities:
Accounts receivable 655 (465)
Prepaid expenses and other current assets 86 (26)
Other assets 44 --
Accounts payable and accrued expenses (161) 198
Deferred revenue -- (48)
----------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,293 $ 1,923
----------------- ------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
- ---------------------------------------
Expenditures for property and equipment $ (53) $ (233)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from issuance of shares on exercise of options and warrants 100 428
Redemption of redeemable preferred stock (1,974) --
Payment of dividends on preferred stock (341) (3,154)
Purchase of common stock (59) --
Repayment of long-term debt (182) (130)
Repayments of capital lease obligations (6) (38)
----------------- ------------------
NET CASH USED IN FINANCING ACTIVITIES (2,462) (2,894)
----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 778 (1,204)
CASH AND CASH EQUIVALENTS - Beginning 980 2,184
- ------------------------- ----------------- ------------------
CASH AND CASH EQUIVALENTS - Ending $ 1,758 $ 980
- ------------------------- ================= ==================
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 three major customers that accounted
for 94.7% and 97.5% of the Company's revenue for the years ended December 31,
2009 and 2008, respectively. Loss of any 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 Accounting Standards Codification
("ASC") 605 "Revenue Recognition" ("ASC 605") 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, 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 ASC 605.
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, 2009 and 2008, research and
development expenses were approximately $1,909,000, and $2,593,000,
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 2009 and 2008.
Impairment of Long-Lived Assets
- -------------------------------
ASC 360 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 ASC 360 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.
F-9
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
--------------------------------
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, 2009 and
2008, 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. ASC 740 "Income Taxes" 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 years ended December 31,
2009 and 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 ASC 740. As a result the Company's effective tax rate
for the years ended December 31, 2009 and 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 ASC 260, "Earnings
Per Share". ASC 260 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, 2009 (in thousands except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------------
Net Income Shares Per Share
Numerator Denominator Amount
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Basic Earnings Per Share:
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Net income attributable to common shareholders $1,416 10,874 $0.13
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Effect of dilutive securities:
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Warrants -- --
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Options -- 316
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Restricted stock -- 40
--------------------- --------------------
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
Diluted earnings per share $1,416 11,230 $0.13
================ =================
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
- -------------------------------------------------------------------------------------------------------------------------------
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
================ =================
- ------------------------------------------------------------- --------------------- --------------------- ---------------------
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,
-----------------------------
2009 2008
---- ----
---------------- ------------
Options to purchase common stock 75 122
Warrants to purchase common stock 590 1,215
------ -----
Total Potential Common Shares as of December 31, 665 1,337
====== =====
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, 2009 and 2008.
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 exper-
F-11
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
ience, 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, 2009 and 2008, 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 14. 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
- -----------------------
ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"), 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. ASC 820 applies to all assets and
liabilities that are measured and reported on a fair value basis.
ASC 820 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
The Company adopted the provisions of ASC 820 as of January 1, 2009. See Note 4
for the effect on the Company's financial position and results of operations for
the year ended December 31, 2009.
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
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.
F-12
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
New Accounting Pronouncements
- -----------------------------
In April 2009, the FASB issued new accounting guidance, under Accounting
Standards Update ("ASU") 2010-06, "Fair Value Measurements and Disclosures"
(Topic 820) on fair value measurements and disclosures, which established the
requirements for estimating fair value when market activity has decreased and on
identifying transactions that are not orderly. Under this guidance, entities are
required to disclose in interim and annual periods the inputs and valuation
techniques used to measure fair value. This guidance is effective for interim
and annual periods ending after June 15, 2009. The adoption of this guidance did
not have a material impact on the Company's consolidated financial position or
results of operations.
In May 2009, the FASB issued new accounting guidance, under ASU 2010-09,
"Subsequent Events" (Topic 855), which sets forth general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. This
guidance is effective for interim and annual periods ending after June 15, 2009.
The adoption of this guidance did not have a material impact on the Company's
consolidated financial position or results of operations.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)" ("SFAS 167"). This standard has not yet been integrated into the ASC.
SFAS 167 eliminates Interpretation 46(R)'s exceptions to consolidating
qualifying special-purpose entities, contains new criteria for determining the
primary beneficiary, and increases the frequency of required reassessments to
determine whether a company is the primary beneficiary of a variable interest
entity. SFAS 167 also contains a new requirement that any term, transaction, or
arrangement that does not have a substantive effect on an entity's status as a
variable interest entity, a company's power over a variable interest entity, or
a company's obligation to absorb losses or its right to receive benefits of an
entity must be disregarded in applying Interpretation 46(R)'s provisions. The
elimination of the qualifying special-purpose entity concept and its
consolidation exceptions means more entities will be subject to consolidation
assessments and reassessments. SFAS 167 will be effective January 1, 2010. The
Company does not expect the adoption of SFAS 167 to have any impact on its
consolidated financial statements or results of operations.
In July 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162" ("SFAS 168") now incorporated in ASC 105
"Generally Accepted Accounting Principles". SFAS 168 establishes the FASB
Accounting Standards Codification to become the source of authoritative U.S.
GAAP recognized by the FASB to be applied by non-governmental entities. Rules
and interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this Statement, the Codification
superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. SFAS 168, which changes the
referencing of financial standards, is effective for interim or annual financial
periods ending after September 15, 2009. The Company has modified all earlier
references to accounting standards to reflect the adoption of SFAS 168.
In October 2009, the FASB issued new accounting guidance, under ASU No. 2009-13
"Revenue Recognition" (Topic 605), which amends revenue recognition policies for
arrangements with multiple deliverables. This guidance eliminates the residual
method of revenue recognition and allows the use of management's best estimate
of selling price for individual elements of an arrangement when vendor specific
objective evidence (VSOE), vendor objective evidence (VOE) or third-party
evidence (TPE) is unavailable. This
F-13
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
guidance is effective for all new or materially modified arrangements entered
into on or after January 1, 2011 with earlier application permitted as of the
beginning of a fiscal year. Full retrospective application of the new guidance
is optional. The Company has not completed their assessment of the impact this
new guidance may have on its consolidated financial condition, results of
operations or cash flows. In October 2009, the FASB issued new accounting
guidance, under ASU N0. 2009-14 "Software" (Topic 985), which amends the scope
of existing software revenue recognition accounting. Tangible products
containing software components and non-software components that function
together to deliver the product's essential functionality would be scoped out of
the accounting guidance on software and accounted for based on other appropriate
revenue recognition guidance. This guidance is effective for all new or
materially modified arrangements entered into on or after January 1, 2011 with
earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of this new guidance is optional. This guidance must
be adopted in the same period that the company adopts the amended accounting for
arrangements with multiple deliverables described in the preceding paragraph.
The Company has not completed their assessment of this new guidance on their
consolidated financial condition, results of operations or cash flows.
Stock Based Compensation
- ------------------------
The Company accounts for stock based compensation in accordance with ASC 718,
"Compensation - Stock Compensation" ("ASC 718"). ASC 718 establishes accounting
for stock-based awards exchanged for employee services. Under the provisions of
ASC 718, share-based compensation cost is measured at the grant date, based on
the fair value of the award, and is recognized as expense over the employee's
requisite service period (generally the vesting period of the equity grant). The
fair value of the Company's common stock options are estimated using the Black
Scholes option-pricing model with the following assumptions: expected
volatility, dividend rate, risk free interest rate and the expected life. The
Company expenses stock-based compensation by using the straight-line method. In
accordance with ASC 718, excess tax benefits realized from the exercise of
stock-based awards are classified in cash flows from financing activities. The
future realization of the reserved deferred tax assets related to these tax
benefits associated with the exercise of stock options will result in a credit
to additional paid in capital if the related tax deduction reduces taxes
payable. 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. As a result, for the year ended December 31, 2009 the
Company recorded $575,000 in stock based compensation expense for the fair value
of stock based compensation of which $9,000 related to stock options granted to
employees, and $566,000 related to restricted stock grants. 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. At December 31, 2009, there was approximately $514,000 of total
unrecognized stock based compensation costs, which is expected to be recognized
over a weighted average period of one year.
NOTE 3 - Change in Accounting Principle
------------------------------
Effective January 1, 2009, the Company, adopted the guidance in ASC Sub Topic
815-40, "Contracts in Entity's Own Stock", and determined that a warrant issued
in conjunction with the guarantee of a credit facility contained a provision
whereby the exercise price could be adjusted upon certain financing transactions
at a lower price per share could no longer be viewed as indexed to the Company's
common stock. As such, the Company changed the accounting for this warrant to a
"derivative". As a result the Company recorded the warrant liability at the fair
value of the warrant of $147,000 as of January 1, 2009 and reclassified its
issuance date fair value from additional paid-in-capital. The cumulative effect
of the change in accounting principle is as follows:
F-14
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Change in Accounting Principle (continued)
------------------------------
- ----------------------------------------------------------------- ------------------------------- --------------------------
Additional Paid In Capital Accumulated Deficit
- ----------------------------------------------------------------- ------------------------------- --------------------------
($ in thousands)
- ----------------------------------------------------------------- ----------------------------------------------------------
Balance December 31, 2008 $116,862 ($112,115)
- ----------------------------------------------------------------- ------------------------------- --------------------------
Cumulative effect of change in accounting principle (142) (5)
----------------------------- -------------------------
- ----------------------------------------------------------------- ------------------------------- --------------------------
Balance January 1, 2009 $116,720 ($112,120)
======================== ===================
- ----------------------------------------------------------------- ------------------------------- --------------------------
NOTE 4 - Fair Value of Financial Instruments
-----------------------------------
ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"), defines fair
value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about 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.
ASC 820 applies to all assets and liabilities that are measured and reported on
a fair value basis.
ASC 820 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.
The following are the Company's major categories of liabilities measured at fair
value on a recurring basis at December 31, 2009, categorized by the fair value
hierarchy:
Fair Value Measurements at December 31, 2009 Using Significant Unobservable Inputs:
------------------------------------------------------------------------------------
Description (Level 3)
---------------------------------------------- -----------------
Liabilities:
Warrant liability $ 221
=================
The valuation was determined using the Black-Scholes method. The key assumptions
used were a volatility of 176.5%, dividend rate of 0%, a risk free rate of 0.4%
and an expected life of 0.5 years.
The following is a reconciliation of the beginning and ending balances for the
Company's liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) and a summary of the derivative
warrant liability during the year ended December 31, 2009:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3):
-------------------------------------------------------------------------
Description (Level 3)
----------------------------------------------------------------- --------------
Liabilities:
Balance at January 1, 2009
$ -
Cumulative effect of the change in accounting
principle, January 1, 2009 147
Change in fair value included in operations 74
---------
Balance, December 31, 2009 $221
=========
F-15
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The change in fair value recorded for Level 3 liabilities for the periods above
are reported in other income (expense) on the consolidated statement of
operations.
NOTE 5 - Property and Equipment
----------------------
Property and equipment consist of the following:
December 31, Useful life
2009 2008 in Years
------------------------------ --------------
(in thousands)
Computer equipment and purchased software $ 3,911 $ 3,815 3
Furniture and fixtures and leasehold improvments 68 58 5 - 7
-------- --------
3,979 3,873
Less: accumulated deprecation and amortization (3,582) (3,224)
------- -------
Property and Equipment, Net $ 397 $ 649
======== ========
Depreciation and amortization expense related to property and equipment for the
years ended December 31, 2009 and 2008 was $358,000 and $322,000, respectively,
which includes amortization of equipment under capital leases of $5,000 and
$13,000 for the years ended December 31, 2009 and 2008, 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,
2009 2008
----------------------------------
(in thousands)
Trade accounts payable $ 377 $ 491
Sales taxes payable 539 539
Accrued board fees 207 465
Other accrued expenses 321 307
------- -------
$1,444 $1,802
====== ======
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.
As of December 31, 2009 minimum future payments under these capital leases are:
Year Ending
-----------------------------------------------
(in thousands)
2010 $ 7
--------
Total minimum lease payments 7
Less: amounts representing interest (1)
---------
Net minimum lease payments 6
Current portion 6
---------
Long term portion $ --
=========
F-16
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Debt (continued)
----
The interest rate pertaining to this capital lease is 15.3%. The gross value and
the net book value of the related assets is approximately $14,000 and $4,000 at
December 31, 2009, respectively, and $38,000 and $18,000 at December 31, 2008,
respectively.
Notes payable
- -------------
At December 31, 2009 and 2008, notes payable consist of $320,000 and $446,000,
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 August
2012. The notes are collateralized by the equipment purchased with net book
values of $234,000 and $396,000, at December 31, 2009 and 2008, respectively.
As of December 31, 2009 future principal payments under these notes are:
Year Ending
-----------------------------------------------
(in thousands)
2010 $ 177
2011 128
2012 15
-----------
Total payments 320
Current portion 177
-----------
Long term portion $ 143
===========
NOTE 8 - Shareholders' Equity
--------------------
Preferred Stock
- ----------------
The Company has 2,000,000 authorized preferred shares of which 1,100 and 3,074
were issued and outstanding at December 31, 2009 and 2008, 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 was convertible into 10 shares of common stock of
the Company. Under the terms of the Series A Preferred the shares automatically
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") were 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. 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 had issued 974 Series B Preferred shares at $1,000 per share in
exchange of $974,000 of outstanding debt. The Company's Chairman and Chief
Executive Officer held 266 shares, Markus & Associates (an affiliate of SJ, Note
10) held 208 shares, and Tall Oaks held 500 shares. Each of the Preferred Stock
F-17
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity, continued
--------------------
- - B shares was 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 were 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 there were $29,000 in
dividends payable to the Preferred Stock - B holders. During the year ended
December 31, 2009, the Company paid dividends of $88,000 and redeemed all of the
outstanding Series B Redeemable Preferred Stock in the amount of $974,000 and
recorded this as a reduction of Additional Paid- in Capital. The Company's
Chairman and Chief Executive Officer, as a holder of the Series B, received
$266,000 of the redemption amount.
Series C Redeemable Preferred Stock
- -----------------------------------
The Company has issued 2,000 shares of its non-voting Series C Redeemable
Preferred Stock ("Series C"). The holders of Preferred Stock - C are 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
Series 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 Series 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 held 1,470
shares of the Series C. As of December 31, 2009 no warrants issued in connection
with the Series C were outstanding and at December 31, 2008, 946,214 warrants
were outstanding. The holders of Series C have preference in the payment of
dividends and, in the event of liquidation, to all classes of capital stock of
the Company. During the year ended December 31, 2008, the Company paid dividends
of $1,062,000 to holders of the Series C and as of December 31, 2008 there were
$48,000 in dividends accrued for the Series C holders. During the year ended
December 31, 2009, the Company paid $198,000 in dividends on the Series C and
redeemed 1,000 shares of the Series C for $1,000,000. The Series C can only be
redeemed on the approval of the Board of Directors, and certain members of the
Board are also holders of the Series C Preferred Stock and had previously
resolved not to vote to redeem such stock. As such the Series C was recorded as
equity. In September 2009 the Board rescinded this resolution and voted to
redeem a portion of the Series C stock. At December 31, 2009, the Series C is
classified as temporary equity as redemption was now deemed to be at the option
of the holder. At December 31, 2009, 1,000 shares of the Series C remain
outstanding and $24,000 in dividends are accrued.
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, 2009 and 2008, 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, 2009 and 2008 there were $2,000 and $48,000,
respectively, of dividends accrued and unpaid for Series D Preferred Holders.
During the year ended December 31, 2009, the Company paid $55,000 of dividends
to the holder of the Series D Preferred Stock.
F-18
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity, continued
Dividends included in net income attributable to common shareholders for the
years ended December 31, 2009 and 2008 were:
- ---------------------------------------- ----------------------------------------- -----------------------------------
Preferred Stock 2009 2008
--------------- ---- ----
- ---------------------------------------- ----------------------------------------- -----------------------------------
Series A $ -- $221,000
- ---------------------------------------- ----------------------------------------- -----------------------------------
Series B $ 58,000 $117,000
- ---------------------------------------- ----------------------------------------- -----------------------------------
Series C $175,000 $265,000
- ---------------------------------------- ----------------------------------------- -----------------------------------
Series D $ 10,000 $ 13,000
-------- --------
- ---------------------------------------- ----------------------------------------- -----------------------------------
Total $243,000 $616,000
======== ========
- ---------------------------------------- ----------------------------------------- -----------------------------------
Common Stock, Options, Stock Grants and Warrant Issuances
- ---------------------------------------------------------
Year Ended December 31, 2009
- ----------------------------
During the year ended December 31, 2009 the Company issued 337,500 restricted
common shares with a fair value of $744,000 based on the closing share price on
the date of the grant to certain officers under employment agreements. The
Company also issued 319,050 restricted common shares valued at $197,000 to
directors in settlement of directors fees accrued in 2006 and 2007. The Company
also issued 95,648 shares on exercise of warrants and received proceeds of
$100,000. Also during the year ended December 31, 2009 the Company issued
283,238 shares on the exercise of 460,000 options on a cashless basis.
Common Stock Purchase
- ---------------------
In September 2009, the Board of Directors adopted a plan to purchase a certain
number of shares from options holders on the exercise of options to encourage
the option holders to exercise their options and to provide the option holder
with a method to have cash for the tax on the exercise. The plan provides that
the price to be paid for any shares purchased shall be the closing price of the
common stock on the date of exercise. Further the Company will only provide up
to $300,000 for all such purchases for all option exercises in the aggregate in
any twelve month period. During the year ended December 31, 2009, the Company
purchased 63,746 shares for a total of $59,000.
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;
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;
F-19
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity, continued
--------------------
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 11). 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 11). 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 11). 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 11). 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.
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,
2009, 3,171,230 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 2009 and 2008, 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, 2008 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
===== === ========
Granted -- --
Exercised (460) 0.41 $ 264
--------
Forfeited ( 47) 1.66
------------ ----
Outstanding at December 31, 2009 770 $0.68 2.0 $ 250
============ ===== === ========
Exercisable at December 31, 2009 770 $0.68 2.0 $ 250
============ ===== === ========
The following table summarizes stock option information as of December 31, 2009:
Options Outstanding
------------------------- ----------------------------- ------------------------ ---------------------------
Weighted Average
Number Outstanding Remaining Contractual Options Exercisable
Exercise Prices (in thousands) Life (in thousands)
------------------------- ----------------------------- ------------------------ ---------------------------
$0.25 to $0.70 695 1.9 years 695
------------------------- ----------------------------- ------------------------ ---------------------------
$1.50 75 3.2 years 75
--- ---
------------------------- ----------------------------- ------------------------ ---------------------------
Total 770 2.0 years 770
=== ===
------------------------- ----------------------------- ------------------------ ---------------------------
A total of 3,762,000 shares of the Company's common stock are reserved for
options, warrants and contingencies at December 31, 2009. The total fair value
of options vested during the years ended December 31, 2009 and 2008 was $35,000
and $63,000, respectively. The weighted average fair value of options granted
during the year ended December 31, 2008 was $0.92. At December 31, 2009, there
was no unrecognized compensation costs related to stock options granted.
Restricted Stock Grants
A summary of the status of the Company's non-vested stock grants as of December
31, 2009 and 2008 and changes during the year ended December 31, 2009 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 December 31, 2008 521 $2.21
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Granted 74 $1.02
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Vested (303) $2.10
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Forfeited -- $0.00
-----------------------------------
- ------------------------------------------- ----------------------------------- ----------------------------------------------
Non-vested at December 31, 2009 292 $2.03
==================================
- ------------------------------------------- ----------------------------------- ----------------------------------------------
The future expected expense for non-vested shares is $514,000 and will be
recognized on a straight-line basis over the period January 1, 2010 through
December 31, 2010.
Warrants
- --------
At December 31, 2009, the Company had warrants outstanding to purchase 590,909
shares of common stock. The warrants have exercise prices ranging from $1.00 to
$2.03 and contracted lives of 5 years. During the year ended December 31, 2009,
95,648 warrants were exercised and 928,479 warrants expired without being
exercised.
NOTE 9 - Income Taxes
------------
The Company accounts for income taxes in accordance with ASC 740 which
prescribes a recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. ASC 740 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim period, disclosure
and transition. There were no unrecognized tax benefits as of December 31, 2009
and 2008.
The Company has identified its federal tax return and its state tax return in
New York as "major" tax jurisdictions, as defined in ASC 740. Based on the
Company's evaluation, it has been concluded that there are no significant
uncertain tax positions requiring recognition in the Company's financial
statements. The Company's evaluation was performed for tax years ended 2006
through 2009, 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. 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 years ended December 31,
2009 and 2008. 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.
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, 2009 and 2008:
December 31,
2009 2008
---------------- -----------------
(in thousands)
Current
Federal $ 53 $ 23
State and other 9 1
------------- -------------
Total 62 24
------------- -------------
Deferred
Federal -- (2,465)
State and other -- (402)
------------- -------------
Total -- (2,867)
------------- -------------
Provision for Income Taxes $ 62 $ (2,843)
============= =============
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, 2009 and 2008:
December 31,
2009 2008
----------------- --------------
U.S. Federal statutory tax rate 34% 34%
Permanent items 7 1
Change in effective tax rate -- --
State taxes 6 6
Decrease in valuation allowance (43) (253)
----------------- --------------
4% (212)%
================= ==============
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are summarized as follows:
December 31,
2009 2008
----------------- ----------------
(in thousands)
Deferred tax assets
Net operating loss carryforwards $ 21,750 $ 25,462
Tax credit carryforwards 406 419
Fixed and intangible assets 51 45
Deferred revenue 30 30
Value of stock options and stock compensation 224 223
Unrealized loss on securities 544 544
Accruals 138 210
-------- --------
23,143 26,933
Valuation allowance (20,276) (24,066)
-------- --------
Deferred tax assets, net $ 2,867 $ 2,867
======== =========
F-23
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Income Taxes (continued)
------------
The change in the valuation allowance for deferred tax assets are summarized as
follows:
- ----------------------------------------------------- ----- ---------------------------------------------------
For the year ended December 31,
- ----------------------------------------------------- ----- ---------------------------------------------------
2009 2008
---- ----
- ----------------------------------------------------- ----- ---------------------------- ----------------------
Beginning balance $ 24,066 $ 29,369
- ----------------------------------------------------- ----- ---------------------------- ----------------------
Change in allowance (3,790) (5,303)
-------------------- --------------------
- ----------------------------------------------------- ----- ---------------------------- ----------------------
Ending balance $ 20,276 $ 24,066
================== =================
- ----------------------------------------------------- ----- ---------------------------- ----------------------
At December 31, 2009, the Company has federal and state net operating loss
carryforwards ("NOLs") remaining of approximately $62 million and $17 million,
respectively, which may be available to reduce taxable income, if any. These
NOLs expire through 2026. However, Internal Revenue Code Section 382 rules limit
the utilization of NOLs upon a change in control of a company. During 2009, 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, 2009 included approximately $915,000 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
------------------------------------
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,
2009, the Company has recorded a liability of $58,000 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, 2009, the future minimum lease payments under
operating leases are summarized as follows:
Amount
Year ended December 31 (in thousands)
---------------------- ------------
2010 $420
2011 318
2012 103
2013 1
----
Total $842
====
Rent expense approximated $436,000 and $512,000 for the years ended December 31,
2009 and 2008, 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, 2009 and 2008, the Company issued 150,000
and 120,000 restricted common shares and recorded $270,000 in 2009 and 2008 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
(President and Chief Operating Officer from March 18, 2009), 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 each of the years ended December 31,
2009 and 2008, the Company recorded $98,000 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 each of the years ended
December 31, 2009 and 2008, the Company recorded $98,000 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, with an option to extend for one additional year. The
agreement was extended and expires on December 31, 2010. 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. In accordance with the extension of the Services Agreement an
additional stock grant of 30,000 restricted common shares was granted and the
fair value of the grant was $27,000 based on the closing price of the shares on
the grant date. During the years ended December 31, 2009 and 2008, the Company
recorded $59,000 and $56,000, 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.
F-25
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies (continued)
-----------------------------
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.
Future commitments under employment and consulting agreements total $817,000 for
the year ended December 31, 2010.
NOTE 12 - Consolidated Statements of Cash Flows
-------------------------------------
Supplemental disclosure of cash flow information for the years ended December
31, 2009 and 2008 is summarized as follows:
Year ended December 31,
2009 2008
----------------- ------------------
(in thousands)
Interest paid $ 53 $ 69
====== =====
Income taxes paid $ 45 $ 24
====== =====
Non-cash investing and financing activities for the years ended December 31,
2009 and 2008 are summarized as follows:
Year Ended December 31,
2009 2008
--------------- --------------
(in thousands)
Dividends accrued $ 26 $ 616
======= ======
Equipment notes incurred $ 55 $ 295
======= ======
Reduction in accounts payable, accrued expenses
and dividends payable upon exercise of options and warrants $ -- $ 780
======= ======
Common stock issued in settlement of liability $ 197 $ 68
======= ======
Reduction of accrued liability through issuance of debt $ -- $ 62
======= ======
NOTE 13 - Products and Services
---------------------
The Company and its subsidiaries currently operate in one business segment and
have, during the years 2009 and 2008, 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,
2009 2008
----------------- ----------------
(in thousands)
SaaS fees $ 8,946 $ 7,935
Custom Engineering fees 1,063 1,674
---------- ---------
Total Revenue $ 10,009 $ 9,609
========== =========
F-26
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Major Customers
---------------
For the year ended December 31, 2009, IBM, HP Enterprise Services ("HP")
(formerly EDS) and Siemens Shared Services LLC ("Siemens") accounted for 33.2 %,
50.9% and 10.6%, respectively, of the Company's revenue. In 2008, IBM, HP and
Siemens accounted for 42.5%, 46.7% and 8.3% of revenue, respectively. Accounts
receivable from these three customers at December 31, 2009 and 2008, amounted to
$1,242,000 and $1,879,000, respectively. Loss of any of these customers would
have a material adverse effect on the Company.
NOTE 15 - Subsequent Events
-----------------
The Company evaluates events that have occurred after the balance sheet date but
before the financial statements are issued. Based upon the evaluation, the
Company did not identify any recognized or non-recognized subsequent events that
would have required adjustment or disclosure in the consolidated financial
statements.
F-27