Item 1. BUSINESS
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 100 countries, 35 languages and multiple currencies. 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”), accounted for approximately 51% of revenue for the years ended December 31, 2010 and 2009, respectively. IBM accounted for approximately 33% of our revenue for the years ended December 31, 2010 and 2009, respectively. Siemens Shared Services LLC accounted for 12% and 11% of revenue for the years ended December 31, 2010 and 2009 respectively.
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:
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Procure-to Pay: eInvoice Management for Accounts Payable
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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.
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:
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Eliminate manual invoice validation processes
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Improve on-time payments and the ability to capture early payment discounts
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Increase supplier electronic invoice submission
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Reduce Accounts Payable call center traffic
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Enhance supplier relationships and overall ease of business
Order-to-Cash - Electronic Invoice Automation for Accounts Receivable
Direct Insite’s eInvoice Management for Accounts Receivable service offering generates a dynamic electronic invoice that facilitates customer analysis, dispute resolution, approval and payment. The benefits include lower invoicing costs, more timely payment and improved customer satisfaction.
Invoice Compliance and Validation
Direct Insite’s Order-to Cash solution allows for a preliminary invoice workflow process that automatically validates Accounts Receivable invoices against source billing documents to ensure the invoice is compliant and accurate before the invoice is finalized and distributed to the customer for payment. During the preliminary invoice validation cycle, invoice exceptions are flagged and automatically processed for resolution. Once the invoices have been finalized, they can be released for payment.
Invoice Attachment Processing
Direct Insite enables billers to distribute electronic attachments with their invoice to proactively provide the supporting documentation often required by Accounts Payable departments. Invoice attachments are then presented online within an easily accessible self-service portal. This facilitates the reconciliation process for the customer and makes for more timely payments.
Invoice Distribution & Self Service Portal Presentment
Direct Insite’s Order-to-Cash service also supports multiple invoice distribution and presentment methods depending upon customer preferences, including online, PDF email, self-service downloads, EDI, fax, or print. The invoice presentment capability displays invoices and attachments within a self-service web portal where customers can access their invoice, line item detail, and supporting attachments at all times.
Dispute Management
Direct Insite further supports the ability for customers to initiate online invoice or line item inquiries and disputes. Specifically, customers can review their invoices within the self-service portal and initiate invoice or line item invoice disputes without having to reach call center support. Once the dispute request has been initiated, customers can approve the remainder of the invoice and schedule it for payment. Easing the dispute process supports customer satisfaction and allows for partial invoice collection to improve cash flow.
Invoice Approval
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.
Direct Insite’s Order-to-Cash service offering is focused on providing the following significant business benefits:
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Reduce paper invoicing costs
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Eliminate manual invoice reconciliation, preparation and consolidation processes
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Reduce Accounts Receivable call center traffic
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Reduce customer disputes and inquiries
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Reduce Days Sales Outstanding
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Improve overall cash flow
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Increase customer satisfaction and competitive advantage
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.
SALES AND MARKETING
CHANNELS TO MARKET
Direct Insite has two primary channels to market - direct through our sales representatives and indirect through channel and strategic partners. These channels are supported by a technical sales support group.
Direct
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.
Certified Partnerships
In 2010 Direct Insite achieved SAP partner certification. As a result of the certified integration, Invoices On-Line now provides seamless interoperability with more than twenty different business objects supported by SAP ERP systems. This allows Direct Insite SAP customers the ability to automate and extend their Procure-to-Pay or Order-to-Cash processes to the cloud - including Purchase Order distribution, Invoice receipt and validation, Workflow, and Electronic Payments.
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, 2011, 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, 2010 and 2009, research and development expenses were approximately $1,753,000 and $1,909,000, 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 company 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.
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 (“B2B”) 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 38 employees, all in the United States, at March 16, 2011, including 24 in production, development and technical support, 9 in marketing, sales and support services, and 5 in corporate finance and administration. Our future success will depend in part upon our continued ability to attract and retain highly skilled and qualified personnel. We believe that our relations with our employees are good, and we have no collective bargaining agreements with any labor unions.
INTELLECTUAL PROPERTY
We rely on proprietary knowledge and employ various methods, including confidentiality agreements, to protect our software code, concepts, ideas and documentation of our proprietary technology. We have a federally registered patent “dbExpress”, a data mining tool which expires in 2013.
Despite these efforts, unauthorized parties may attempt to copy aspects of our products, obtain and use information that we regard as proprietary or misappropriate our copyrights, trademarks, trade dress and similar proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate. In addition, our competitors might independently develop similar technology or duplicate our products or circumvent any patents or our other intellectual property rights.
AVAILABLE INFORMATION
We have a site on the worldwide web at www.directinsite.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 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.
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 11,677,383 shares of common stock outstanding as of March 16, 2011, of which approximately 5,416,000 shares are freely tradable. We also have 425,000 shares issuable upon exercise of options. If all of our outstanding options were exercised, we would have 12,102,283 shares outstanding. The issuance of such a large number of shares could have a significant adverse effect on the market for, as well as the price of, our common stock. A decline in the market price also may make the terms of future financings using our common stock or using convertible debt more burdensome.
Our planned growth may cause a strain on our management and other resources.
We are pursuing a business strategy that has involved and is expected to continue to involve significant growth over at least the next twelve months. We cannot guarantee that we will be able to achieve our planned growth. Accomplishing our objectives will depend upon a number of factors, including our ability to develop products internally with emphasis on the exploitation of our Invoices-On-Line products. We may also incur development, acquisition or expansion costs that represent a higher percentage of total revenues than larger or more established companies, which may adversely affect our results of operations.
We may not be able to compete favorably in the competitive information solutions industry.
The market for our information solutions is intensely competitive. We face competition from a broad range of competitors, many of whom have greater financial, technical and marketing resources than us. We may not be able to compete effectively with such entities. 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.
Three customers account for a significant percentage of our revenue.
We have three customers that accounted for approximately 94% and 95% of our revenue for the years ended December 31, 2010 and 2009, 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.
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 4, 2011 was 16,324 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:
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Investors may have difficulty buying and selling or obtaining market quotations;
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Market visibility for our common stock may be limited; and
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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:
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Must make a special written suitability determination for the purchaser;
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Receive the purchaser’s written agreement to a transaction prior to sale;
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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
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Obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.
As a result of these requirements, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our stock will be significantly limited. Accordingly, the market price of our stock and other publicly traded securities may be depressed, and it may be more difficult to sell our shares.
Our stock price may be volatile.
The stock market in general and the market for shares of technology companies in particular, have experienced extreme price fluctuations, often unrelated to the operating performance of the affected companies. Many technology companies, including us, have experienced dramatic volatility in the market prices of their common stock. If our future operating results are below the expectations of stock market analysts and investors, our stock price may decline. We cannot be certain that the market price of our common stock will remain stable in the future. Our stock price may undergo fluctuations that are material, adverse and unrelated to our performance.
Our charter provisions and statutory law may inhibit changes in control of our company.
Our certificate of incorporation and bylaws contain provisions which may discourage takeover attempts and hinder a merger, tender offer or proxy contest targeting us, including transactions in which security-holders might receive a premium for their shares. This may limit your ability as a stockholder to approve a transaction that you may think is in your best interests. These provisions could reduce the price that certain investors might be willing to pay in the future for shares of common stock or preferred stock. Moreover, although our ability to issue preferred stock may provide flexibility in connection with possible acquisitions and other corporate purposes, such issuance may make it more difficult for a third party to acquire, or may discourage a third party from acquiring, a majority of our voting stock. Furthermore, we may in the future adopt other measures that may delay, defer or prevent a change in control. We may adopt some of these measures without any further vote or action by security-holders.
Item 2.
Item 2. DESCRIPTION OF PROPERTIES
We currently maintain leased facilities in the locations listed below:
Note 1. The co-location facilities in Commack, New York and Santa Clara, California provide rack space for our computer equipment and the rental is not based on square footage used.
Item 3.
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.
Item 4. [Removed and reserved]
PART II
Item 5.
Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY 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:
(b) As of March 4, 2011, 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) In 2010 the Company paid dividends of $68,000 to holders of the Series C and D Preferred Stock. In 2009 the Company paid dividends of $340,783 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, 2010, for all compensation plans, including individual compensation arrangements under which equity securities of the Company are authorized for issuance.
Securities Authorized for Issuance Under Equity Compensation Plans.
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 100 countries, 35 languages and multiple 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, 7 days per week, 365 days per year.
HP Enterprise Services (“HP”) accounted for 51% of revenue for the years ended December 31, 2010 and 2009, respectively. We have three principal contracts with HP providing e-invoice services. These contracts have terms ranging from one to five years. The contracts may be terminated on ninety days advance written notice.
Currently, IBM, representing approximately 33% of revenue for the years ended December 31, 2010 and 2009, 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. We have two principal contracts with IBM to provide electronic invoice (“e-invoice”) 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 10% and 11% of revenue for the years ended December 31, 2010 and 2009 respectively.
We will continue to focus our sales and marketing efforts to increase revenue and expand our customer base in 2011 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:
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it requires assumptions to be made that were uncertain at the time the estimate was made; and
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changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on the Company's consolidated results of operations or financial condition.
The following critical accounting policies have been identified that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. We have discussed the application of these critical accounting policies with our Audit Committee. The following critical accounting policies are not intended to be a comprehensive list of all of the Company's accounting policies or estimates.
Revenue Recognition
We 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:
§ Any undelivered products or services are not essential to the functionality of the delivered products or services;
§ Payment for the delivered products or services is not contingent upon delivery of the remaining products or services;
§ We have an enforceable claim to receive the amount due in the event we do not deliver the undelivered products or services and it is probable that such amount is collectible;
§ There is evidence of the fair value for all the deliverables in an agreement;
§ 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, 2010 and 2009, 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 ”Plant, Property, and Equipment” (ASC360) 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 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, 2010 and 2009, 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. 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, 2010 and 2009 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, 2010 we had operating income of $853,000, compared to operating income of $1,821,000 for the year ended December 31, 2009, a decrease of $968,000 or 53%. For the year ended December 31, 2010, we had net income of $1,033,000 compared to net income of $1,659,000 for the year ended December 31, 2009, a decrease of $626,000.
Cash provided from operating activities for the year ended December 31, 2010 was $1,485,000, consisting of net income of $1,033,000, increased by non-cash items of $592,000, including depreciation and amortization of $274,000, stock based compensation expense of $539,000 and the change in fair value of the warrant liability of ($221,000). Cash from operations was further reduced by an increase in accounts receivable of $29,000 offset by a decrease in prepaid expenses of $19,000 and an increase in other assets of $105,000. This was offset by a decrease in accounts payable and accrued expenses of $19,000 and deferred revenue of $6,000.
Cash used in investing activities was $144,000 for the year ended December 31, 2010, compared to $53,000 for the previous year. This was principally expenditures for equipment.
Cash used in financing activities totaled $1,392,000 for the year ended December 31, 2010, compared to cash used in financing activities of $2,462,000 in 2009. We redeemed preferred stock of $1,100,000 eliminating all preferred stock outstanding, and paid dividends on the preferred stock of $68,000. In addition, we made repayments on capital leases and capital notes of $216,000. We also repurchased common stock of $8,000.
As a result of these operating, investing and financing activities, cash decreased by $51,000 to $1,707,000 at December 31, 2010.
Results of Operations
For the year ended December 31, 2010 revenue decreased $957,000 or 9.6% to $9,052,000 compared to revenue of $10,009,000 in 2009. The decrease is due to a reduction in recurring IOL services revenue of $788,000 and a decrease in engineering services revenue of $169,000. The decrease in recurring revenue was a result of price adjustments on existing contracts with IBM and HP, 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 2009 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 $215,000 (6.0%) to $3,351,000 for the year ended December 31, 2010 compared to the costs of $3,566,000 in 2009. 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 $140,000. Costs for contract development staff increased $64,000 as we used outside engineering services to complete our projects in 2010. Costs for software and supplies decreased by $7,000 in 2010, resulting from fewer software purchases. Cost for purchased services decreased by $193,000 in 2010 compared to 2009 due to a decrease in outsourced services for document scanning services to support the Siemens account. Rents increased $101,000 primarily due to an increase in rents for our co-location data centers where we expanded our space requirements. All other operating expenses combined decreased approximately $40,000 net.
Sales and marketing costs were $1,694,000 for the year ended December 31, 2010, an increase of $282,000 or 20.0% compared to costs of $1,412,000 in 2009. Salaries and related costs, including stock compensation costs, decreased $4,000. Consulting and professional fees increased $120,000 and trade show expense increased $23,000. We engaged a consultant to support customers, we incurred recruitment fees to hire additional sales staff, and we attended more trade shows in 2010. Travel and entertainment costs increased $73,000. Other expense increased by $70,000.
General and administrative costs increased $31,000 or 1.1% to $2,880,000 for the year ended December 31, 2010 compared to costs of $2,849,000 in 2009. Salaries and related costs increased $39,000 principally due to the addition of a Controller and wage increases for staff. This was offset by a decrease in stock based compensation of $36,000 for stock grants, as certain grants were fully expensed during the year. Travel and entertainment expense increased $113,000 as result of an increase in travel to the Florida office and to trade shows. Consulting and Professional fees increased $81,000 in 2010 compared to 2009. This increase was primarily due to the engagement of a compensation consultant costing $37,000, and temporary accounting support to assist the Controller in transition of responsibilities from the former employee of $33,000. Legal costs decreased $68,000 in 2010 compared to 2009 as an employment claim was settled in 2009. Board meeting expenses increased by $49,000 as a result of appointing a new member to the board, and an increase in the number of meetings compared to 2009. Rent expense decreased by $18,000, primarily a result of lower rent expense in the New York location. Other office expenses decreased by $26,000. This consisted of storage and alarm services totaling $11,000 in 2009, not incurred in 2010, sundry expenses totaling $15,000 incurred in 2009 and not in 2010. Dues and subscriptions expense decreased by $11,000, as compared to the 2009 expense. Miscellaneous expense decreased by $60,000; in 2009 we wrote down the value of a deposit. All other General and administrative costs decreased $32,000 compared to 2009.
Depreciation and amortization expense decreased by $87,000 (24.1%) to $274,000 for the year ended December 31, 2010 compared to costs of $361,000 in 2009, primarily due to equipment being fully depreciated.
Other income, net for the year ended December 31, 2010 was $25,000 compared to other expense, net of $1,000 in 2009. We received a refund from a supplier for billing errors in 2010.
During the year ended December 31, we recorded a non-cash income of $221,000 for the change in the value of a warrant liability.
Net Operating Loss Carry Forwards
At December 31, 2010, the Company has federal and state net operating loss carry-forwards (“NOLs”) remaining of approximately $52 million and $8 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 2010, 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 August 2010, the FASB issued new accounting guidance, under ASU N0. 2010-17 “Revenue Recognition-Milestone Method” (Topic 605), which amends the scope of existing software revenue recognition accounting. ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. This guidance was effective for fiscal years and interim periods within those years beginning on or after June 15, 2010. The adoption of this guidance did not materially change the revenue recognition policies of the Company and therefore did not materially affect our consolidated financial condition, results of operations or cash flows.
Item 8 . FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included beginning on page
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTNG AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission.
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 of our disclosure controls and procedures which took place as of December 31, 2010 (the “Evaluation Date”), we believe that these controls and procedures were effective.
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.
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.
It is the responsibility of the Company’s management to establish and maintain adequate internal control over financial reporting.
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, 2010. 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). Based on this assessment and those criteria, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.
ITEM 9B. OTHER INFORMATION - None
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
As of March 16, 2011, 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
Chairman of the Board of Directors
and Chief Executive Officer
Bernard Puckett (1)
Member of the Board of Directors
Dennis Murray (1)
Member of the Board of Directors
Michael Levin
Member of the Board of Directors
Charles S. Mechem Jr. (1)
Member of the Board of Directors
Matthew E. Oakes
President and Chief Operating Officer
Arnold Leap
Executive Vice-President Sales and Marketing
and Chief Technology Officer
Michael J. Beecher
Chief Financial Officer and Secretary
(1) Member of the Audit and Compensation committees.
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 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 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. Mr. Levin is Chief Executive Officer of AsiaCrest Capital. 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.
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, 2010.
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, 2010 and 2009, the Audit Committee consisted of Dr. Dennis J. Murray (Chairman), Charles Mechem 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, 2010 and 2009, the Compensation Committee consisted of Bernard Puckett (Chairman), Charles Mechem 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, 2010 and 2009.
.
Summary Compensation Table
Footnotes
(1)
All Other Compensation includes the following for each of the executives:
In 2010, Mr. Cannavino received a housing/office allowance of $120,000, medical expenses of $12,709, other reimbursable expenses of $55,000, leased cars including insurance valued at $11,772, and director’s fees of $28,000 and in 2009, a housing/office allowance of $120,000, medical expenses of $24,796, other reimbursable expenses of $60,000, leased cars including insurance of $12,772, and director’s fees of $21,098.
In 2010, Mr. Oakes received a car allowance including insurance valued at $9,600 and in 2009 a car allowance of $9,600.
In 2010, Mr. Leap received a car allowance including insurance of $9,600 and life insurance costs of $1,860 and in 2009, a car allowance including insurance of $9,600 and life insurance costs of $1,926.
In 2010, Mr. Beecher received a car allowance including insurance of $9,600, and a living allowance of $5,200 and in 2009, 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.
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, 2010:
(1)
These options were fully vested on December 30, 2005
(2)
These options were fully vested on March 25, 2009
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:
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, 2010. At December 31, 2010, 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, 2010. At December 31, 2010, 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, 2010. At December 31, 2010, 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. No options were granted under this plan during the fiscal year ended December 31, 2010. At December 31, 2010, 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, 2010. At December 31, 2010, no options to purchase shares of common stock were outstanding under this plan.
Equity Compensation Plan Information (continued)
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, 2010. At December 31, 2010, no options to purchase 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, 2010. At December 31, 2010, options to purchase 425,000 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, 2010 and 2009. Mr. Cannavino’s directors fees earned in 2010 and 2009 are included in the Summary Compensation Table above:
(1)
Dr. Murray is chair of the audit committee and member of the compensation committee, Mr. Puckett is chair of the compensation committee and member of the audit committee.
(2)
Mr. Levin is the director designate of MetVP and as such all of his director’s fees are assigned and paid to MetVP.
Employment Agreements
Subsequent to December 31, 2010, the Company executed new employment agreements with the Chairman and Chief Executive Officer, the President and Chief Operating Officer, and the Chief Financial Officer.
The agreement with the Chairman and Chief Executive Officer is for a two year term effective January 1, 2011 through December 31, 2012. The agreement provides for a salary of $25,833 per month and an annual incentive bonus with a target equal to 70% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The agreement with the President and Chief Operating Officer is for a two year term effective January 1, 2011 through December 31, 2012. The agreement provides for a salary of $16,667 per month and an annual incentive bonus with a target equal to 30% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: use of an automobile and related expenses; reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The agreement with the Chief Financial Officer is for a one year term effective January 1, 2011 through December 31, 2011 with an option to renew for an additional year to December 31, 2012. The agreement provides for a salary of $15,417 per month and an annual incentive bonus with a target equal to 20% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: use of an automobile and related expenses; reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The Company has an employment and consulting agreement with its former President which ends December 31, 2011. During the term of the agreement compensation will be $6,000 per month and duties during the consulting term include consultation with senior executives concerning the Company’s respective businesses and operations
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, 2011 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.
_______
* = 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., which is 590 Madison Avenue, 34th Floor, New York, NY 10022 and Tall Oaks Group, LLC, which is 205 Lexington Avenue, 8th Floor, New York, NY 10016.
(2)
Based upon 11,677,383 common shares outstanding as of March 16, 2011, plus outstanding options, warrants and stock grants exercisable within 60 days.
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, 2010 the Audit and Compensation Committees consisted of Dr. Dennis J. Murray (Chairman - Audit Committee), Bernard Puckett (Chairman - Compensation Committee) and Charles Mechem. For 2009, 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, 2010 and 2009:
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.
________________________
(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, 2010 and 2009.
(2)
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.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3.1
(a)
Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(b)
Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(c)
Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(d)
Certificate of Amendment (Authorizing Increase in Shares of Common Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K for the year ended 1995).
(e)
Certificate of Amendment (Authorizing one for ten reverse-stock split as of March 30, 1998). (1)
(f)
Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed October 3, 2002 (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated September 25, 2002).
(g)
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed December 20, 2002 (Incorporated by reference to Exhibit 3.2 of Company's Current Report on Form 8-K dated December 24, 2002).
(h)
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed January 2, 2003 (Incorporated by reference to Exhibit 3.3 of Company's Current Report on Form 8-K dated January 2, 2003).
(i)
Certificate of Designation, Preferences and Rights of Series B Redeemable Preferred Stock filed December 10, 2003 (Incorporated by reference to Exhibit 3(i) of the Company’s Annual Report on Form 10-KSB filed April 14, 2004).
(j)
Certificate of Designation, Preferences and Rights of Series C redeemable Preferred Stock filed December 16, 2003 (Incorporated by reference to Exhibit 3(j) of the Company’s Annual Report on Form 10-KSB filed April 14, 2004).
(k)
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series C Preferred Stock filed March 29, 2005
3.2
By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company’s Form S-1 Registration Statement).(1)
4.1
Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4 to the Company’s Form S-1 Registration Statement).(1)
4.2
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).
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 January 1, 2011 (Incorporated by reference to Exhibit 10.1 to the Company’s 8-K filed on January 10, 2011).
10.15
Services agreement between the Company and Mathew E. Oakes dated January 1, 2011 (Incorporated by reference to Exhibit 10 to the Company’s 8-K filed on January 7, 2011).
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 January 1, 2011 (Incorporated by reference to Exhibit 10 to the Company’s 8-K filed on January 19, 2011).
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 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)
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
_________
1Filed with Form S-1, Registration Statement of the Company Reg. No 3-47322 and are incorporated herein by reference.
2Incorporated by reference to the Company’s Annual Report on Form-10K filed April 15, 2003.
3Incorporated by reference to the Company’s Annual Report on Form-10K filed April 14, 2004.
SIGNATURES
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 24th day of March 2011.
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 24, 2011:
/s/ James A. Cannavino
Chairman of the Board
James A. Cannavino
Chief Executive Officr
/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
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2010 and 2009
DIRECT INSITE CORP. AND SUBSIDIARIES
CONTENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Shareholders’ Equity
Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-
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, 2010 and 2009 and the related consolidated statements of income, 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, 2010 and 2009 and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
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
Fort Lauderdale, FL
March 28, 2011
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2010 and 2009
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2010 and 2009
LIABILITIES AND SHAREHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2010 and 2009 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY, continued
For the Years Ended December 31, 2010 and 2009 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
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 Commack, New York and Santa Clara, California.
As described in Note 14, the Company has three major customers that accounted for 94.2% and 94.7% of the Company's revenue for the years ended December 31, 2010 and 2009, 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:
§ Any undelivered products or services are not essential to the functionality of the delivered products or services;
§ Payment for the delivered products or services is not contingent upon delivery of the remaining products or services;
§ 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;
§ There is evidence of the fair value for all deliverables in an agreement;
§ 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.
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 income is presented along with research and development costs and exclusive of amortization and depreciation which is shown separately. Custom Engineering Service costs related to uncompleted milestones are deferred and included in other current assets, when applicable. For the years ended December 31, 2010 and 2009, research and development expenses were approximately $1,753,000, and $1,909,000, 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 2010 and 2009.
Impairment of Long-Lived Assets
ASC 360, “Plant, Property, and Equipment” (ASC360) 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.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
In order to test for recoverability, the Company would compare 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, 2010 and 2009, 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. During the years ended December 31, 2010 and 2009, 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. As a result the Company’s effective tax rate for the years ended December 31, 2010 and 2009, 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 income, 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:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
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):
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, 2010 and 2009.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
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. 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, 2010 and 2009, 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.
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.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
New Accounting Pronouncements
In August 2010, the FASB issued new accounting guidance, under ASU N0. 2010-17 “Revenue Recognition-Milestone Method” (Topic 605), which amends the scope of existing software revenue recognition accounting. ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. This guidance is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010. 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, 2010 the Company recorded $539,000 in stock based compensation expense for the fair value of stock based compensation all of which related to restricted stock grants. 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. At December 31, 2010, there was approximately $25,000 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 815, “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 and accumulated deficit.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Fair Value of Financial Instruments
At December 31, 2010 there were no assets or liabilities measured at fair value. 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:
The fair value of the warrant liability was determined using the Black-Scholes method. The Company determined that the warrants included an implied down-side protection feature and performed a valuation using a lattice model. The Company concluded there was no material difference from the valuation 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 warrants expired without exercise in 2010.
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 years ended December 31, 2010 and 2009:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3):
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 income.
NOTE 5 - Property and Equipment
Property and equipment consist of the following:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2010 and 2009 was $271,000 and $358,000, respectively.
NOTE 6 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
NOTE 7 - Debt
Notes payable
At December 31, 2010 and 2009, notes payable consist of $261,000 and $320,000, respectively, of borrowings for the purchase of equipment. These notes bear interest at rates ranging from 8.0% to 10.3% per year and mature through August 2013. The notes are collateralized by the equipment purchased with net book values of $237,000 and $234,000, at December 31, 2010 and 2009, respectively.
As of December 31, 2010 future principal payments under these notes are:
NOTE 8 - Shareholders’ Equity
Preferred Stock
The Company has 2,000,000 authorized preferred shares of which 0 and 1,100 were issued and outstanding at December 31, 2010 and 2009, respectively, as follows:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders’ Equity, continued
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 - 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, 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 had issued 2,000 shares of its non-voting Series C Redeemable Preferred Stock (“Series C”). The holders of Preferred Stock - C were entitled to dividends at the rate of 9-½% per annum, payable quarterly in arrears beginning October 1, 2005. The Company had 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 price per share (“Price Per Share”) divided by 123% of the closing price per share of the Company's common stock on the trading dayimmediately 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, 2010 and 2009 no warrants issued in connection with the Series C were outstanding. During the year ended December 31, 2010, the Company paid dividends of $62,000 to holders of the Series C and redeemed 1,000 shares of the series C for $1,000,000. 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 could 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 was classified as temporary equity as redemption was now deemed to be at the option of the holder. At December 31, 2010, no shares of the Series C remain outstanding.
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 were 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 had preference in the payment of dividends and, in the event of liquidation, to all classes of capital stock of the Company except for the Series A, B and C Preferred Stock. As of December 31, 2009, 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, 2010 and 2009 there were $0 and $2,000, respectively, of dividends accrued and unpaid for Series D Preferred Holders. During the year ended December 31, 2010 and 2009, the Company paid $6,000 and $55,000, respectively, of dividends to the holder of the Series D Preferred Stock. During the year end December 31, 2010, the Company redeemed all of the 100 shares of Series D preferred Stock for $100,000.
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, 2010 and 2009 were:
Common Stock, Options, Stock Grants and Warrant Issuances
Year Ended December 31, 2010
During the year ended December 31, 2010 the Company issued 270,000 restricted common shares with a fair value of $567,600 based on the closing share price on the date of the grant to certain officers under employment agreements. The Company recorded stock based compensation of approximately $489,000 in 2010 related to these restricted common shares. The Company also issued 151,283 shares on exercise of 345,000 options on a cashless basis. In addition, the Company considers 87,369 common shares held in deferred compensation accounts for directors issued and outstanding
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, 2010, the Company purchased 7,500 shares for a total of $8,000 from one of the Company's officers. During the year ended December 31, 2009, the Company purchased 63,746 shares for a total of $59,000.
Year Ended December 31, 2009
During the year ended December 31, 2009 the Company issued 270,000 restricted common shares with a fair value of $596,000 based on the closing share price on the date of the grant to certain officers under employment agreements. The Company recorded stock based compensation of approximately $575,000 in 2009 related to these restricted common shares. 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.
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, 2010, 3,061,954 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.
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 2010 and 2009, relating to all of the Company’s common stock plans (shares are in thousands):
The following table summarizes stock option information as of December 31, 2010:
Options Outstanding
A total of 3,062,000 shares of the Company’s common stock are reserved for options, warrants and contingencies at December 31, 2010. The total fair value of options vested during the years ended December 31, 2010 and 2009 was $0 and $35,000, respectively. At December 31, 2010, there was no unrecognized compensation costs related to stock options outstanding.
Restricted Stock Grants
A summary of the status of the Company’s non-vested stock grants as of December 31, 2010 and 2009 and changes during the year ended December 31, 2010 is presented below:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders’ Equity, continued
The future expected expense for non-vested shares is $25,000 and will be recognized on a straight-line basis over the period January 1, 2011 through December 31, 2011.
Warrants
At December 31, 2009, the Company had warrants outstanding to purchase 590,909 shares of common stock. The warrants had exercise prices ranging from $1.00 to $2.03 and contractual lives of 5 years. During the year ended December 31, 2009, 95,648 warrants were exercised and 928,479 warrants expired without being exercised. There were no warrants outstanding at December 31, 2010
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, 2010 and 2009.
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 2007 through 2010, 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, 2010 and 2009. The Company does not expect its unrecognized tax benefit position to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
The following table summarizes components of the provision for current and deferred income taxes for the years ended December 31, 2010 and 2009:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2010 and 2009:
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
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:
At December 31, 2010, the Company has federal and state net operating loss carryforwards (“NOLs”) remaining of approximately $52 million and $8 million, respectively, which may be available to reduce taxable income, if any. Approximately $8 million of Federal NOLs expired in 2010 and 2009, and approximately $18 million and $9 million of Federal NOLs will expire in 2011 and 2012 with the remaining $25 million expiring in 2019 through 2026. However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company. During 2010, 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, 2010 included approximately $1,068,000 related to windfall tax benefits for which a benefit would be recorded in additional paid-in-capital, if and 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, 2010, the Company has recorded a liability of $35,000 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, 2010, the future minimum lease payments under operating leases are summarized as follows:
Rent expense approximated $454,000 and $436,000 for the years ended December 31, 2010 and 2009, respectively.
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, 2010 and 2009, the Company issued 120,000 and 150,000 restricted common shares and recorded $270,000 in 2010 and 2009 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, 2010 and 2009, 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, 2010 and 2009, 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, 2010 and 2009, the Company recorded $24,000 and $59,000, 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.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies (continued)
Subsequent to December 31, 2010, the Company executed new employment agreements with the Chairman and Chief Executive Officer, the President and Chief Operating Officer and the Chief Financial Officer.
The agreement with the Chairman and Chief Executive Officer is for a two year term effective January 1, 2011 through December 31, 2012. The agreement provides for a salary of $25,833 per month and an annual incentive bonus with a target equal to 70% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The agreement with the President and Chief Operating Officer is for a two year term effective January 1, 2011 through December 31, 2012. The agreement provides for a salary of $16,667 per month and an annual incentive bonus with a target equal to 30% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: use of an automobile and related expenses; reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The agreement with the Chief Financial Officer is for a one year term effective January 1, 2011 through December 31, 2011 with an option to renew for an additional year to December 31, 2012. The agreement provides for a salary of $15,417 per month and an annual incentive bonus with a target equal to 20% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: use of an automobile and related expenses; reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The Company has a consulting agreement with its former President which ends December 31, 2011. During the term of the agreement compensation will be $6,000 per month. Duties include consultation with senior executives concerning the Company’s respective businesses and operations.
Future commitments under employment and consulting agreements total $767,000 and $510,000 for the years ended December 31, 2011 and 2012 respectively.
NOTE 12 - Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information for the years ended December 31, 2010 and 2009 is summarized as follows:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Consolidated Statements of Cash Flows continued
Non-cash investing and financing activities for the years ended December 31, 2010 and 2009 are summarized as follows:
NOTE 13 - Products and Services
The Company and its subsidiaries currently operate in one business segment and have, during the years 2010 and 2009, 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:
NOTE 14 - Major Customers
For the year ended December 31, 2010, IBM, HP Enterprise Services (“HP”) and Siemens Shared Services LLC (“Siemens”) accounted for 32.8 %, 51.0% and 10.4%, respectively, of the Company’s revenue. In 2009, IBM, HP and Siemens accounted for 33.2%, 50.9% and 10.6% of revenue, respectively. Accounts receivable from these three customers at December 31, 2010 and 2009, amounted to $1,243,000 and $1,242,000, 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 other than those discussed in Note 11.
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 100 countries, 35 languages and multiple 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, 7 days per week, 365 days per year.
HP Enterprise Services (“HP”) accounted for 51% of revenue for the years ended December 31, 2010 and 2009, respectively. We have three principal contracts with HP providing e-invoice services. These contracts have terms ranging from one to five years. The contracts may be terminated on ninety days advance written notice.
Currently, IBM, representing approximately 33% of revenue for the years ended December 31, 2010 and 2009, 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. We have two principal contracts with IBM to provide electronic invoice (“e-invoice”) 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 10% and 11% of revenue for the years ended December 31, 2010 and 2009 respectively.
We will continue to focus our sales and marketing efforts to increase revenue and expand our customer base in 2011 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:
·
it requires assumptions to be made that were uncertain at the time the estimate was made; and
·
changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on the Company's consolidated results of operations or financial condition.
The following critical accounting policies have been identified that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. We have discussed the application of these critical accounting policies with our Audit Committee. The following critical accounting policies are not intended to be a comprehensive list of all of the Company's accounting policies or estimates.
Revenue Recognition
We 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:
§ Any undelivered products or services are not essential to the functionality of the delivered products or services;
§ Payment for the delivered products or services is not contingent upon delivery of the remaining products or services;
§ We have an enforceable claim to receive the amount due in the event we do not deliver the undelivered products or services and it is probable that such amount is collectible;
§ There is evidence of the fair value for all the deliverables in an agreement;
§ 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, 2010 and 2009, 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 ”Plant, Property, and Equipment” (ASC360) 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 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, 2010 and 2009, 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. 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, 2010 and 2009 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, 2010 we had operating income of $853,000, compared to operating income of $1,821,000 for the year ended December 31, 2009, a decrease of $968,000 or 53%. For the year ended December 31, 2010, we had net income of $1,033,000 compared to net income of $1,659,000 for the year ended December 31, 2009, a decrease of $626,000.
Cash provided from operating activities for the year ended December 31, 2010 was $1,485,000, consisting of net income of $1,033,000, increased by non-cash items of $592,000, including depreciation and amortization of $274,000, stock based compensation expense of $539,000 and the change in fair value of the warrant liability of ($221,000). Cash from operations was further reduced by an increase in accounts receivable of $29,000 offset by a decrease in prepaid expenses of $19,000 and an increase in other assets of $105,000. This was offset by a decrease in accounts payable and accrued expenses of $19,000 and deferred revenue of $6,000.
Cash used in investing activities was $144,000 for the year ended December 31, 2010, compared to $53,000 for the previous year. This was principally expenditures for equipment.
Cash used in financing activities totaled $1,392,000 for the year ended December 31, 2010, compared to cash used in financing activities of $2,462,000 in 2009. We redeemed preferred stock of $1,100,000 eliminating all preferred stock outstanding, and paid dividends on the preferred stock of $68,000. In addition, we made repayments on capital leases and capital notes of $216,000. We also repurchased common stock of $8,000.
As a result of these operating, investing and financing activities, cash decreased by $51,000 to $1,707,000 at December 31, 2010.
Results of Operations
For the year ended December 31, 2010 revenue decreased $957,000 or 9.6% to $9,052,000 compared to revenue of $10,009,000 in 2009. The decrease is due to a reduction in recurring IOL services revenue of $788,000 and a decrease in engineering services revenue of $169,000. The decrease in recurring revenue was a result of price adjustments on existing contracts with IBM and HP, 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 2009 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 $215,000 (6.0%) to $3,351,000 for the year ended December 31, 2010 compared to the costs of $3,566,000 in 2009. 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 $140,000. Costs for contract development staff increased $64,000 as we used outside engineering services to complete our projects in 2010. Costs for software and supplies decreased by $7,000 in 2010, resulting from fewer software purchases. Cost for purchased services decreased by $193,000 in 2010 compared to 2009 due to a decrease in outsourced services for document scanning services to support the Siemens account. Rents increased $101,000 primarily due to an increase in rents for our co-location data centers where we expanded our space requirements. All other operating expenses combined decreased approximately $40,000 net.
Sales and marketing costs were $1,694,000 for the year ended December 31, 2010, an increase of $282,000 or 20.0% compared to costs of $1,412,000 in 2009. Salaries and related costs, including stock compensation costs, decreased $4,000. Consulting and professional fees increased $120,000 and trade show expense increased $23,000. We engaged a consultant to support customers, we incurred recruitment fees to hire additional sales staff, and we attended more trade shows in 2010. Travel and entertainment costs increased $73,000. Other expense increased by $70,000.
General and administrative costs increased $31,000 or 1.1% to $2,880,000 for the year ended December 31, 2010 compared to costs of $2,849,000 in 2009. Salaries and related costs increased $39,000 principally due to the addition of a Controller and wage increases for staff. This was offset by a decrease in stock based compensation of $36,000 for stock grants, as certain grants were fully expensed during the year. Travel and entertainment expense increased $113,000 as result of an increase in travel to the Florida office and to trade shows. Consulting and Professional fees increased $81,000 in 2010 compared to 2009. This increase was primarily due to the engagement of a compensation consultant costing $37,000, and temporary accounting support to assist the Controller in transition of responsibilities from the former employee of $33,000. Legal costs decreased $68,000 in 2010 compared to 2009 as an employment claim was settled in 2009. Board meeting expenses increased by $49,000 as a result of appointing a new member to the board, and an increase in the number of meetings compared to 2009. Rent expense decreased by $18,000, primarily a result of lower rent expense in the New York location. Other office expenses decreased by $26,000. This consisted of storage and alarm services totaling $11,000 in 2009, not incurred in 2010, sundry expenses totaling $15,000 incurred in 2009 and not in 2010. Dues and subscriptions expense decreased by $11,000, as compared to the 2009 expense. Miscellaneous expense decreased by $60,000; in 2009 we wrote down the value of a deposit. All other General and administrative costs decreased $32,000 compared to 2009.
Depreciation and amortization expense decreased by $87,000 (24.1%) to $274,000 for the year ended December 31, 2010 compared to costs of $361,000 in 2009, primarily due to equipment being fully depreciated.
Other income, net for the year ended December 31, 2010 was $25,000 compared to other expense, net of $1,000 in 2009. We received a refund from a supplier for billing errors in 2010.
During the year ended December 31, we recorded a non-cash income of $221,000 for the change in the value of a warrant liability.
Net Operating Loss Carry Forwards
At December 31, 2010, the Company has federal and state net operating loss carry-forwards (“NOLs”) remaining of approximately $52 million and $8 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 2010, 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 August 2010, the FASB issued new accounting guidance, under ASU N0. 2010-17 “Revenue Recognition-Milestone Method” (Topic 605), which amends the scope of existing software revenue recognition accounting. ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. This guidance was effective for fiscal years and interim periods within those years beginning on or after June 15, 2010. The adoption of this guidance did not materially change the revenue recognition policies of the Company and therefore did not materially affect our consolidated financial condition, results of operations or cash flows.
Item 8
Item 8 . FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included beginning on page
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTNG AND FINANCIAL DISCLOSURE
None.
Item 9A.
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 rules of the Securities and Exchange Commission.
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 of our disclosure controls and procedures which took place as of December 31, 2010 (the “Evaluation Date”), we believe that these controls and procedures were effective.
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.
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.
It is the responsibility of the Company’s management to establish and maintain adequate internal control over financial reporting.
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, 2010. 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). Based on this assessment and those criteria, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.
ITEM 9B.
ITEM 9B. OTHER INFORMATION - None
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
As of March 16, 2011, 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
Chairman of the Board of Directors
and Chief Executive Officer
Bernard Puckett (1)
Member of the Board of Directors
Dennis Murray (1)
Member of the Board of Directors
Michael Levin
Member of the Board of Directors
Charles S. Mechem Jr. (1)
Member of the Board of Directors
Matthew E. Oakes
President and Chief Operating Officer
Arnold Leap
Executive Vice-President Sales and Marketing
and Chief Technology Officer
Michael J. Beecher
Chief Financial Officer and Secretary
(1) Member of the Audit and Compensation committees.
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 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 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. Mr. Levin is Chief Executive Officer of AsiaCrest Capital. 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.
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, 2010.
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, 2010 and 2009, the Audit Committee consisted of Dr. Dennis J. Murray (Chairman), Charles Mechem 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, 2010 and 2009, the Compensation Committee consisted of Bernard Puckett (Chairman), Charles Mechem 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.
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, 2010 and 2009.
.
Summary Compensation Table
Footnotes
(1)
All Other Compensation includes the following for each of the executives:
In 2010, Mr. Cannavino received a housing/office allowance of $120,000, medical expenses of $12,709, other reimbursable expenses of $55,000, leased cars including insurance valued at $11,772, and director’s fees of $28,000 and in 2009, a housing/office allowance of $120,000, medical expenses of $24,796, other reimbursable expenses of $60,000, leased cars including insurance of $12,772, and director’s fees of $21,098.
In 2010, Mr. Oakes received a car allowance including insurance valued at $9,600 and in 2009 a car allowance of $9,600.
In 2010, Mr. Leap received a car allowance including insurance of $9,600 and life insurance costs of $1,860 and in 2009, a car allowance including insurance of $9,600 and life insurance costs of $1,926.
In 2010, Mr. Beecher received a car allowance including insurance of $9,600, and a living allowance of $5,200 and in 2009, 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.
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, 2010:
(1)
These options were fully vested on December 30, 2005
(2)
These options were fully vested on March 25, 2009
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:
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, 2010. At December 31, 2010, 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, 2010. At December 31, 2010, 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, 2010. At December 31, 2010, 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. No options were granted under this plan during the fiscal year ended December 31, 2010. At December 31, 2010, 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, 2010. At December 31, 2010, no options to purchase shares of common stock were outstanding under this plan.
Equity Compensation Plan Information (continued)
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, 2010. At December 31, 2010, no options to purchase 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, 2010. At December 31, 2010, options to purchase 425,000 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, 2010 and 2009. Mr. Cannavino’s directors fees earned in 2010 and 2009 are included in the Summary Compensation Table above:
(1)
Dr. Murray is chair of the audit committee and member of the compensation committee, Mr. Puckett is chair of the compensation committee and member of the audit committee.
(2)
Mr. Levin is the director designate of MetVP and as such all of his director’s fees are assigned and paid to MetVP.
Employment Agreements
Subsequent to December 31, 2010, the Company executed new employment agreements with the Chairman and Chief Executive Officer, the President and Chief Operating Officer, and the Chief Financial Officer.
The agreement with the Chairman and Chief Executive Officer is for a two year term effective January 1, 2011 through December 31, 2012. The agreement provides for a salary of $25,833 per month and an annual incentive bonus with a target equal to 70% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The agreement with the President and Chief Operating Officer is for a two year term effective January 1, 2011 through December 31, 2012. The agreement provides for a salary of $16,667 per month and an annual incentive bonus with a target equal to 30% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: use of an automobile and related expenses; reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The agreement with the Chief Financial Officer is for a one year term effective January 1, 2011 through December 31, 2011 with an option to renew for an additional year to December 31, 2012. The agreement provides for a salary of $15,417 per month and an annual incentive bonus with a target equal to 20% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: use of an automobile and related expenses; reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The Company has an employment and consulting agreement with its former President which ends December 31, 2011. During the term of the agreement compensation will be $6,000 per month and duties during the consulting term include consultation with senior executives concerning the Company’s respective businesses and operations
Item 12.
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, 2011 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.
_______
* = 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., which is 590 Madison Avenue, 34th Floor, New York, NY 10022 and Tall Oaks Group, LLC, which is 205 Lexington Avenue, 8th Floor, New York, NY 10016.
(2)
Based upon 11,677,383 common shares outstanding as of March 16, 2011, plus outstanding options, warrants and stock grants exercisable within 60 days.
Item 13.
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, 2010 the Audit and Compensation Committees consisted of Dr. Dennis J. Murray (Chairman - Audit Committee), Bernard Puckett (Chairman - Compensation Committee) and Charles Mechem. For 2009, the Audit and Compensation Committees consisted of Dr. Dennis J. Murray (Chairman - Audit Committee), and Bernard Puckett (Chairman - Compensation Committee).
Item 14.
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, 2010 and 2009:
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.
________________________
(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, 2010 and 2009.
(2)
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.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3.1
(a)
Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(b)
Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(c)
Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(d)
Certificate of Amendment (Authorizing Increase in Shares of Common Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K for the year ended 1995).
(e)
Certificate of Amendment (Authorizing one for ten reverse-stock split as of March 30, 1998). (1)
(f)
Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed October 3, 2002 (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated September 25, 2002).
(g)
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed December 20, 2002 (Incorporated by reference to Exhibit 3.2 of Company's Current Report on Form 8-K dated December 24, 2002).
(h)
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed January 2, 2003 (Incorporated by reference to Exhibit 3.3 of Company's Current Report on Form 8-K dated January 2, 2003).
(i)
Certificate of Designation, Preferences and Rights of Series B Redeemable Preferred Stock filed December 10, 2003 (Incorporated by reference to Exhibit 3(i) of the Company’s Annual Report on Form 10-KSB filed April 14, 2004).
(j)
Certificate of Designation, Preferences and Rights of Series C redeemable Preferred Stock filed December 16, 2003 (Incorporated by reference to Exhibit 3(j) of the Company’s Annual Report on Form 10-KSB filed April 14, 2004).
(k)
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series C Preferred Stock filed March 29, 2005
3.2
By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company’s Form S-1 Registration Statement).(1)
4.1
Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4 to the Company’s Form S-1 Registration Statement).(1)
4.2
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).
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 January 1, 2011 (Incorporated by reference to Exhibit 10.1 to the Company’s 8-K filed on January 10, 2011).
10.15
Services agreement between the Company and Mathew E. Oakes dated January 1, 2011 (Incorporated by reference to Exhibit 10 to the Company’s 8-K filed on January 7, 2011).
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 January 1, 2011 (Incorporated by reference to Exhibit 10 to the Company’s 8-K filed on January 19, 2011).
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 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)
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
_________
1Filed with Form S-1, Registration Statement of the Company Reg. No 3-47322 and are incorporated herein by reference.
2Incorporated by reference to the Company’s Annual Report on Form-10K filed April 15, 2003.
3Incorporated by reference to the Company’s Annual Report on Form-10K filed April 14, 2004.
SIGNATURES
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 24th day of March 2011.
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 24, 2011:
/s/ James A. Cannavino
Chairman of the Board
James A. Cannavino
Chief Executive Officr
/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
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2010 and 2009
DIRECT INSITE CORP. AND SUBSIDIARIES
CONTENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Shareholders’ Equity
Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-
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, 2010 and 2009 and the related consolidated statements of income, 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, 2010 and 2009 and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
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
Fort Lauderdale, FL
March 28, 2011
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2010 and 2009
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2010 and 2009
LIABILITIES AND SHAREHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2010 and 2009 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY, continued
For the Years Ended December 31, 2010 and 2009 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
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 Commack, New York and Santa Clara, California.
As described in Note 14, the Company has three major customers that accounted for 94.2% and 94.7% of the Company's revenue for the years ended December 31, 2010 and 2009, 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:
§ Any undelivered products or services are not essential to the functionality of the delivered products or services;
§ Payment for the delivered products or services is not contingent upon delivery of the remaining products or services;
§ 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;
§ There is evidence of the fair value for all deliverables in an agreement;
§ 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.
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 income is presented along with research and development costs and exclusive of amortization and depreciation which is shown separately. Custom Engineering Service costs related to uncompleted milestones are deferred and included in other current assets, when applicable. For the years ended December 31, 2010 and 2009, research and development expenses were approximately $1,753,000, and $1,909,000, 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 2010 and 2009.
Impairment of Long-Lived Assets
ASC 360, “Plant, Property, and Equipment” (ASC360) 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.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
In order to test for recoverability, the Company would compare 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, 2010 and 2009, 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. During the years ended December 31, 2010 and 2009, 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. As a result the Company’s effective tax rate for the years ended December 31, 2010 and 2009, 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 income, 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:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
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):
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, 2010 and 2009.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
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. 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, 2010 and 2009, 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.
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.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
New Accounting Pronouncements
In August 2010, the FASB issued new accounting guidance, under ASU N0. 2010-17 “Revenue Recognition-Milestone Method” (Topic 605), which amends the scope of existing software revenue recognition accounting. ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. This guidance is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010. 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, 2010 the Company recorded $539,000 in stock based compensation expense for the fair value of stock based compensation all of which related to restricted stock grants. 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. At December 31, 2010, there was approximately $25,000 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 815, “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 and accumulated deficit.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Fair Value of Financial Instruments
At December 31, 2010 there were no assets or liabilities measured at fair value. 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:
The fair value of the warrant liability was determined using the Black-Scholes method. The Company determined that the warrants included an implied down-side protection feature and performed a valuation using a lattice model. The Company concluded there was no material difference from the valuation 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 warrants expired without exercise in 2010.
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 years ended December 31, 2010 and 2009:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3):
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 income.
NOTE 5 - Property and Equipment
Property and equipment consist of the following:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2010 and 2009 was $271,000 and $358,000, respectively.
NOTE 6 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
NOTE 7 - Debt
Notes payable
At December 31, 2010 and 2009, notes payable consist of $261,000 and $320,000, respectively, of borrowings for the purchase of equipment. These notes bear interest at rates ranging from 8.0% to 10.3% per year and mature through August 2013. The notes are collateralized by the equipment purchased with net book values of $237,000 and $234,000, at December 31, 2010 and 2009, respectively.
As of December 31, 2010 future principal payments under these notes are:
NOTE 8 - Shareholders’ Equity
Preferred Stock
The Company has 2,000,000 authorized preferred shares of which 0 and 1,100 were issued and outstanding at December 31, 2010 and 2009, respectively, as follows:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders’ Equity, continued
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 - 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, 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 had issued 2,000 shares of its non-voting Series C Redeemable Preferred Stock (“Series C”). The holders of Preferred Stock - C were entitled to dividends at the rate of 9-½% per annum, payable quarterly in arrears beginning October 1, 2005. The Company had 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 price per share (“Price Per Share”) divided by 123% of the closing price per share of the Company's common stock on the trading dayimmediately 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, 2010 and 2009 no warrants issued in connection with the Series C were outstanding. During the year ended December 31, 2010, the Company paid dividends of $62,000 to holders of the Series C and redeemed 1,000 shares of the series C for $1,000,000. 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 could 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 was classified as temporary equity as redemption was now deemed to be at the option of the holder. At December 31, 2010, no shares of the Series C remain outstanding.
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 were 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 had preference in the payment of dividends and, in the event of liquidation, to all classes of capital stock of the Company except for the Series A, B and C Preferred Stock. As of December 31, 2009, 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, 2010 and 2009 there were $0 and $2,000, respectively, of dividends accrued and unpaid for Series D Preferred Holders. During the year ended December 31, 2010 and 2009, the Company paid $6,000 and $55,000, respectively, of dividends to the holder of the Series D Preferred Stock. During the year end December 31, 2010, the Company redeemed all of the 100 shares of Series D preferred Stock for $100,000.
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, 2010 and 2009 were:
Common Stock, Options, Stock Grants and Warrant Issuances
Year Ended December 31, 2010
During the year ended December 31, 2010 the Company issued 270,000 restricted common shares with a fair value of $567,600 based on the closing share price on the date of the grant to certain officers under employment agreements. The Company recorded stock based compensation of approximately $489,000 in 2010 related to these restricted common shares. The Company also issued 151,283 shares on exercise of 345,000 options on a cashless basis. In addition, the Company considers 87,369 common shares held in deferred compensation accounts for directors issued and outstanding
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, 2010, the Company purchased 7,500 shares for a total of $8,000 from one of the Company's officers. During the year ended December 31, 2009, the Company purchased 63,746 shares for a total of $59,000.
Year Ended December 31, 2009
During the year ended December 31, 2009 the Company issued 270,000 restricted common shares with a fair value of $596,000 based on the closing share price on the date of the grant to certain officers under employment agreements. The Company recorded stock based compensation of approximately $575,000 in 2009 related to these restricted common shares. 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.
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, 2010, 3,061,954 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.
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 2010 and 2009, relating to all of the Company’s common stock plans (shares are in thousands):
The following table summarizes stock option information as of December 31, 2010:
Options Outstanding
A total of 3,062,000 shares of the Company’s common stock are reserved for options, warrants and contingencies at December 31, 2010. The total fair value of options vested during the years ended December 31, 2010 and 2009 was $0 and $35,000, respectively. At December 31, 2010, there was no unrecognized compensation costs related to stock options outstanding.
Restricted Stock Grants
A summary of the status of the Company’s non-vested stock grants as of December 31, 2010 and 2009 and changes during the year ended December 31, 2010 is presented below:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders’ Equity, continued
The future expected expense for non-vested shares is $25,000 and will be recognized on a straight-line basis over the period January 1, 2011 through December 31, 2011.
Warrants
At December 31, 2009, the Company had warrants outstanding to purchase 590,909 shares of common stock. The warrants had exercise prices ranging from $1.00 to $2.03 and contractual lives of 5 years. During the year ended December 31, 2009, 95,648 warrants were exercised and 928,479 warrants expired without being exercised. There were no warrants outstanding at December 31, 2010
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, 2010 and 2009.
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 2007 through 2010, 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, 2010 and 2009. The Company does not expect its unrecognized tax benefit position to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
The following table summarizes components of the provision for current and deferred income taxes for the years ended December 31, 2010 and 2009:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2010 and 2009:
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
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:
At December 31, 2010, the Company has federal and state net operating loss carryforwards (“NOLs”) remaining of approximately $52 million and $8 million, respectively, which may be available to reduce taxable income, if any. Approximately $8 million of Federal NOLs expired in 2010 and 2009, and approximately $18 million and $9 million of Federal NOLs will expire in 2011 and 2012 with the remaining $25 million expiring in 2019 through 2026. However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company. During 2010, 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, 2010 included approximately $1,068,000 related to windfall tax benefits for which a benefit would be recorded in additional paid-in-capital, if and 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, 2010, the Company has recorded a liability of $35,000 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, 2010, the future minimum lease payments under operating leases are summarized as follows:
Rent expense approximated $454,000 and $436,000 for the years ended December 31, 2010 and 2009, respectively.
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, 2010 and 2009, the Company issued 120,000 and 150,000 restricted common shares and recorded $270,000 in 2010 and 2009 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, 2010 and 2009, 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, 2010 and 2009, 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, 2010 and 2009, the Company recorded $24,000 and $59,000, 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.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments and Contingencies (continued)
Subsequent to December 31, 2010, the Company executed new employment agreements with the Chairman and Chief Executive Officer, the President and Chief Operating Officer and the Chief Financial Officer.
The agreement with the Chairman and Chief Executive Officer is for a two year term effective January 1, 2011 through December 31, 2012. The agreement provides for a salary of $25,833 per month and an annual incentive bonus with a target equal to 70% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The agreement with the President and Chief Operating Officer is for a two year term effective January 1, 2011 through December 31, 2012. The agreement provides for a salary of $16,667 per month and an annual incentive bonus with a target equal to 30% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: use of an automobile and related expenses; reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The agreement with the Chief Financial Officer is for a one year term effective January 1, 2011 through December 31, 2011 with an option to renew for an additional year to December 31, 2012. The agreement provides for a salary of $15,417 per month and an annual incentive bonus with a target equal to 20% of the base annual salary subject to achieving certain revenue growth and operating cash flow goals. The agreement further provides for: use of an automobile and related expenses; reimbursement of certain medical and travel expenses; and certain severance benefits in the event of termination prior to the expiration date.
The Company has a consulting agreement with its former President which ends December 31, 2011. During the term of the agreement compensation will be $6,000 per month. Duties include consultation with senior executives concerning the Company’s respective businesses and operations.
Future commitments under employment and consulting agreements total $767,000 and $510,000 for the years ended December 31, 2011 and 2012 respectively.
NOTE 12 - Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information for the years ended December 31, 2010 and 2009 is summarized as follows:
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Consolidated Statements of Cash Flows continued
Non-cash investing and financing activities for the years ended December 31, 2010 and 2009 are summarized as follows:
NOTE 13 - Products and Services
The Company and its subsidiaries currently operate in one business segment and have, during the years 2010 and 2009, 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:
NOTE 14 - Major Customers
For the year ended December 31, 2010, IBM, HP Enterprise Services (“HP”) and Siemens Shared Services LLC (“Siemens”) accounted for 32.8 %, 51.0% and 10.4%, respectively, of the Company’s revenue. In 2009, IBM, HP and Siemens accounted for 33.2%, 50.9% and 10.6% of revenue, respectively. Accounts receivable from these three customers at December 31, 2010 and 2009, amounted to $1,243,000 and $1,242,000, 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 other than those discussed in Note 11.