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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended January 31, 2004
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
13-3645702
Delaware (I.R.S. Employer
(State of incorporation) Identification Number)
805 Third Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 271-7640
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of March 11, 2004 the registrant had outstanding 14,241,467 shares of
Class A Common Stock.
INTERNET COMMERCE CORPORATION
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of January 31, 2004 (unaudited) and
July 31, 2003........................................................ 3
Consolidated statements of operations and comprehensive loss for the
three and six months ended January 31, 2004 (unaudited) and
January 31, 2003 (unaudited)......................................... 4
Consolidated statements of cash flows for the six months ended January
31, 2004 (unaudited) and January 31, 2003 (unaudited)................ 5
Notes to consolidated financial statements (unaudited)............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 36
Item 4 Controls and Procedures......................................... 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 37
Item 2. Changes in Securities and Use of Proceeds...................... 37
Item 3. Defaults Upon Senior Securities................................ 37
Item 4. Submission of Matters to a Vote of Security Holders ........... 37
Item 5. Other Information.............................................. 37
Item 6. Exhibits and Reports on Form 8-K .............................. 37
SIGNATURES
CERTIFICATIONS
2
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
January 31, July 31,
2004 2003
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 889,774 $ 2,283,339
Marketable securities - 91,941
Accounts receivable, net of allowance for doubtful
accounts of $235,165 and $220,281, respectively 1,777,565 1,732,890
Prepaid expenses and other current assets 342,798 295,474
----------- -----------
Total current assets 3,010,137 4,403,644
Restricted cash 117,037 128,607
Property and equipment, net 381,500 556,812
Software development costs, net 44,651 127,841
Goodwill 1,211,925 1,211,925
Other intangible assets, net 1,673,000 2,151,000
Other assets 14,236 18,507
----------- -----------
Total assets $ 6,452,486 $ 8,598,336
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 554,376 $ 918,337
Accrued expenses 947,069 1,178,880
Accrued dividends - preferred stock 33,880 231,726
Short-term debt 533,615 -
Deferred revenue 53,181 96,952
Capital lease obligation 116,465 148,189
Other liabilities 63,573 129,985
----------- -----------
Total current liabilities 2,302,159 2,704,069
Capital lease obligation - less current portion 13,900 46,120
Other non-current liabilities - 8,011
----------- -----------
Total liabilities 2,316,059 2,758,200
----------- -----------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - 5,000,000 shares authorized,
including 10,000 shares of series A, 10,000
shares of series C, 250 shares of series D
and 175 shares of series S:
Series A preferred stock - par value $.01 per
share, none issued and outstanding - -
Series C preferred stock - par value $.01 per
share, 44.76 votes per share; 10,000 shares
issued and outstanding (liquidation value of
$10,033,880) 100 100
Series D preferred stock - par value $.01 per share,
769 votes per share; 250 shares issued and
outstanding (liquidation value of $250,000) 3 3
Common stock:
Class A - par value $.01 per share, 40,000,000
shares authorized, one vote per share;
14,210,955 and 13,797,566 shares issued and
outstanding, respectively 142,109 137,976
Additional paid-in capital 88,128,080 87,489,583
Accumulated deficit (84,133,865) (81,813,191)
Accumulated other comprehensive income - 25,665
----------- -----------
Total stockholders' equity 4,136,427 5,840,136
----------- -----------
Total liabilities and stockholders' equity $ 6,452,486 $ 8,598,336
=========== ===========
See notes to consolidated financial statements.
3
INTERNET COMMERCE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------------------------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue:
Services $ 2,755,732 $ 2,837,406 $ 5,859,084 $ 5,887,182
------------ ------------ ------------ ------------
Expenses:
Cost of services administrative
(excluding non-cash compensation of
$19,070 for the three and six months
ended January 31, 2004) 1,750,986 1,929,013 3,611,295 3,807,538
Impairment of capitalized software 44,983 -- 44,983 --
Impairment of software inventory -- 248,077 -- 248,077
Product development and enhancement
(excluding non-cash compensation of
$111,640 for the three and six months
ended January 31, 2004) 226,790 295,388 452,004 555,788
Selling and marketing (excluding
non-cash compensation of $75,415
for the three and six months ended
January 31, 2004) 811,896 822,088 1,637,577 1,585,617
General and administrative (excluding
non-cash compensation of $267,019 and
$319,961 for the three and six months
ended January 31, 2004 respectively, and
of $10,416 for the three and six months
ended January 31, 2003) 1,004,628 1,095,347 1,950,013 2,205,488
Non-cash charges for stock-based
compensation and services 473,144 10,416 526,087 10,416
------------ ------------ ------------ ------------
4,312,427 4,400,329 8,221,959 8,412,924
------------ ------------ ------------ ------------
Operating loss (1,556,695) (1,562,923) (2,362,875) (2,525,742)
------------ ------------ ------------ ------------
Other income and (expense):
Interest and investment income 68,381 3,895 69,239 9,189
Investment loss -- -- -- (19,072)
Interest expense (14,613) (9,618) (27,038) (14,287)
Impairment of marketable securities -- (317,924) -- (317,924)
------------ ------------ ------------ ------------
53,768 (323,647) 42,201 (342,094)
------------ ------------ ------------ ------------
Net loss $ (1,502,927) (1,886,570) (2,320,674) (2,867,836)
Dividends on preferred stock (101,593) (101,647) (202,154) (202,190)
------------ ------------ ------------ ------------
Loss attributable to common stockholders $ (1,604,520) $ (1,988,217) (2,522,828) $ (3,070,026)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.12) $ (0.17) (0.18) $ (0.26)
Weighted average number of common shares
outstanding - basic and diluted 13,816,359 11,708,051 13,807,015 11,735,835
============ ============ ============ ============
COMPREHENSIVE LOSS:
Net loss $ (1,502,927) $ (1,886,570) (2,320,674) $ (2,867,836)
Other comprehensive income:
Unrealized gain (loss) - marketable securities 33,146 (519) 42,169 12,965
Reclassification for impairment of marketable
securities -- 317,924 -- 317,924
Reclassification of unrealized gain on
marketable securities (67,834) -- (67,834) --
------------ ------------ ------------ ------------
Comprehensive loss $ (1,537,615) $ (1,569,165) $ (2,346,339) $ (2,536,947)
============ ============ ============ ============
See notes to consolidated financial statements.
4
INTERNET COMMERCE CORPORATION
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended January 31,
-----------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(2,320,674) $(2,867,836)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 766,589 874,062
Bad debt expense 29,369 67,795
Non-cash interest expense 17,210 --
Realized (gain) loss on sale of marketable
securities (67,834) 19,072
Impairment of capitalized software 44,983 --
Impairment of marketable securities -- 317,924
Non-cash charges for equity instruments
issued for compensation and services
Changes in: 526,086 10,416
Accounts receivable (74,044) 1,484,908
Prepaid expenses and other assets 3,389 319,189
Accounts payable (387,347) (318,858)
Accrued expenses (341,812) (553,342)
Deferred revenue (43,771) (17,172)
Other liabilities (74,422) (71,354)
----------- -----------
Net cash used in operating activities (1,922,278) (735,196)
----------- -----------
Cash flows from investing activities:
Capitalization of software development costs -- (16,333)
Purchases of property and equipment (75,068) (43,681)
Proceeds from sales of marketable securities 134,110 55,494
----------- -----------
Net cash provided by (used in)
investing activities 59,042 (4,520)
----------- -----------
Cash flows from financing activities:
Borrowings under accounts receivable
financing agreement 864,156 --
Repayment of borrowings under accounts
receivable financing agreement (330,541) --
Payments of capital lease obligations (63,943) (102,125)
----------- -----------
Net cash (used in) provided by
financing activities 469,672 (102,125)
Net decrease in cash and cash equivalents (1,393,564) (841,841)
Cash and cash equivalents, beginning of period 2,283,339 2,087,915
----------- -----------
Cash and cash equivalents, end of period $ 889,775 $ 1,246,074
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 7,830 $ 9,528
Noncash investing and financing activities:
Issuance of common stock for dividends on
preferred stock 340,000 400,000
See notes to consolidated financial statements.
5
INTERNET COMMERCE CORPORATION
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Internet
Commerce Corporation (the "Company" or "ICC") have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information. In the
opinion of management, such statements include all adjustments (consisting
only of normal recurring adjustments) necessary for the fair presentation
of the Company's financial position, results of operations and cash flows
at the dates and for the periods indicated. Pursuant to the requirements
of the Securities and Exchange Commission (the "SEC") applicable to
Quarterly Reports on Form 10-Q, the accompanying financial statements do
not include all the disclosures required by GAAP for annual financial
statements. While the Company believes that the disclosures presented are
adequate to make the information not misleading, these unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended July 31, 2003.
Operating results for the three and six-month periods ended January 31,
2004 are not necessarily indicative of the results that may be expected
for the fiscal year ending July 31, 2004.
2. ORGANIZATION AND NATURE OF BUSINESS
ICC provides Internet-based services for the e-commerce
business-to-business communication services market. ICC.NET, our global
Internet-based value added network, or VAN, provides supply chain
connectivity solutions for electronic data interchange, or EDI, and
e-commerce and offers users a vehicle to securely send and receive files
of any format and size.
The ICC.NET system uses the Internet and proprietary technology to deliver
the Company's customers' documents and data files to members of their
trading communities, many of which have incompatible systems, by
translating the documents and data files into any format required by the
receiver. The system can be accessed using a standard Web browser or
virtually any other communications protocol.
ICC's capabilities also include an EDI service bureau, which provides EDI
services to small and mid-sized companies. The service bureau's services
include the conversion of electronic forms into hard copies and the
conversion of hard copies to an EDI format. IDC also provides Universal
Product Code ("UPC") services and maintains UPC catalogs for its
customers.
The Company has the capability to facilitate the development and operation
of comprehensive business-to-business electronic commerce solutions. The
Company's professional services segment specializes in electronic commerce
solutions involving EDI and EAI (Enterprise Application Integration) by
providing mission critical electronic commerce consulting, electronic
commerce software, outsourced electronic commerce services and technical
resource management
As of January 31, 2004, ICC had unrestricted cash and cash equivalents of
approximately $890,000. These resources together with the available
borrowing capacity under the Company's Accounts Receivable Financing
Agreement are expected to provide the Company with sufficient liquidity to
continue in operation through July 31, 2004. However, if expenses increase
more than anticipated, or revenue does not increase as anticipated because
of competitive or other reasons, cash resources may not be sufficient and
the Company will require additional financing. There can be no assurances
that any financing will be available or that the terms will be acceptable
to the Company.
6
INTERNET COMMERCE CORPORATION
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany transactions
have been eliminated in consolidation.
Revenue recognition:
The Company derives revenue from subscriptions to its ICC.NET service,
which includes transaction, mailbox and fax transmission fees. The
subscription fees are comprised of both fixed and usage-based fees. Fixed
subscription fees are recognized on a pro-rata basis over the subscription
period, generally three to six months. Usage fees are recognized in the
period the services are rendered. The Company also derives revenue through
implementation fees, interconnection fees and by providing data mapping
services to its customers. Implementation fees are recognized over the
life of the subscription period. Interconnection fees are fees charged to
connect to another VAN service and are recognized when the data is
transmitted to the connected service. Revenue from data mapping services
is recognized when the map has been completed and delivered to the
customer. The Company has a limited number of fixed fee data mapping
services contracts. Under these arrangements the Company is required to
provide a specified number of maps for a fixed fee. Revenue from such
arrangements is recognized using the percentage-of-completion method of
accounting (see below).
The Company also derives revenue from its Service Bureau. Service Bureau
revenue is comprised of EDI services, including data translation services,
purchase order and invoice processing from EDI-to-print and print-to-EDI,
UPC services, including UPC number generation, UPC catalog maintenance and
UPC label printing. The Service Bureau also derives revenue from software
licensing and provides software maintenance and support. Revenue from the
EDI services and UPC services is recognized when the services are
provided. The Company accounts for its EDI software license sales in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 97-2, "Software Revenue Recognition," as amended
("SOP 97-2"). Revenue from software licenses is recognized when all of the
following conditions are met: (1) a non-cancelable, non-contingent license
agreement has been signed; (2) the software product has been delivered;
(3) there are no material uncertainties regarding customer acceptance; and
(4) collection of the resulting receivable is probable. Revenue from
software maintenance and support contracts is recognized ratably over the
life of the contract. The Service Bureau's software license revenue was
not significant in any of the periods presented.
In addition, SOP 97-2 generally requires that revenue from software
arrangements involving multiple elements be allocated among each element
of the arrangement based on the relative fair values of the elements, such
as software licenses, post contract customer support, installation or
training. Furthermore, SOP 97-2 requires that revenue be recognized as
each element is delivered and the Company has no significant performance
obligations remaining. The Company's multiple element arrangements
generally consist of a software license and post contract support. The
Company allocates the aggregate revenue from multiple element arrangements
to each element based on vendor specific objective evidence. The Company
has established vendor specific objective evidence for each of the
elements as it sells both the software and post contract customer support
independent of multiple element agreements. Customers are charged standard
prices for the software and post contract customer support and these
prices do not vary from customer to customer.
If the Company enters into a multiple element agreement where vendor
specific objective evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred
until all elements of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
7
INTERNET COMMERCE CORPORATION
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
The Company also provides a broad range of professional services
consisting primarily of EDI and electronic commerce consulting, EDI
education and training at seminars throughout the United States. Revenue
from EDI and electronic commerce consulting and education and training are
recognized when the services are provided. The Company discontinued its
EDI education and training seminars in January 2004. Revenues from our EDI
education and training seminars were immaterial in all periods presented.
Revenue from fixed fee data mapping and professional service contracts are
recognized using the percentage-of-completion method of accounting, as
prescribed by SOP 81-1 "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in
the estimated profitability of a fixed-price contract. In such
circumstances, adjustments to cost and profitability estimates are made in
the period in which the underlying factors requiring such revisions become
known. If such revisions indicate a loss on a contract, the entire loss is
recorded at such time. Amounts billed in advance of services being
performed are recorded as deferred revenue. Certain fixed-fee contracts
may have substantive customer acceptance provisions. The acceptance terms
generally include a single review and revision cycle for each deliverable
to incorporate the customer's suggested or required modifications.
Deliverables are considered accepted upon completion of the review and
revision cycle and revenue is recognized upon that acceptance.
Deferred revenue:
Deferred revenue is comprised of deferrals for subscription fees,
professional services, license fees, and maintenance associated with
contracts for which amounts have been received in advance of services to
be performed or prior to the shipment of software.
Stock-based Compensation:
In January 2004, the Company adopted the fair value provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 established a
fair-value-based method of accounting for stock-based compensation plans.
Pursuant to the transition provisions of SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (SFAS 148), the
Company has elected the prospective method and will apply the fair value
method of accounting to all equity instruments issued to employees on or
after August 1, 2003. The fair value method is not applied to stock option
awards granted in fiscal years prior to 2004. Such awards will continue to
be accounted for under the intrinsic value method pursuant to Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB25"), except to the extent that prior years' awards are
modified subsequent to August 1, 2003. Option awards grant prior to August
1, 2003 that have not been modified or settled continue to be accounted
for under the intrinsic value method of APB 25. Therefore, the cost
related to stock-based employee compensation included in the determination
of the net loss for 2004 is less than that which would have been
recognized if the fair value based method had been applied to all awards
since their date of grant. The following table illustrates the effect on
net loss and net loss per common share if the fair value based method had
been applied to all outstanding and unvested awards in each period.
8
INTERNET COMMERCE CORPORATION
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ----------- ----------- -------------
Net loss, as reported $(1,502,927) $(1,886,570) $(2,320,674) $ (2,867,836)
Add: Stock-based employee
compensation expense included in
reported net loss, net of related
tax effects 473,144 10,416 526,086 10,416
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (565,460) (1,815,841) (808,222) (3,588,579)
----------- ----------- ----------- -------------
Pro forma net loss $(1,595,243) $(3,691,995) $(2,602,810) $ (6,445,999)
=========== =========== =========== =============
Basic and diluted loss per common share:
As reported $ (0.12) $ (0.17) $ (0.18) $ (0.26)
====== ====== ====== ======
Pro forma $ (0.12) $ (0.32) $ (0.20) $ (0.57)
====== ====== ====== ======
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenue
and expense during the reporting period. Actual results could differ from
those estimates. Significant accounting estimates used in the preparation
of the Company's consolidated financial statements include the fair value
of equity securities underlying stock based compensation, the
realizability of deferred tax assets, the carrying value of goodwill,
intangible assets and long-lived assets, and depreciation and
amortization.
Recent Accounting Pronouncements:
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 supersedes
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires
that costs associated with an exit or disposal plan be recognized when
incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company adopted SFAS 146
on January 1, 2003. The adoption of this standard did not have a
significant impact on the Company's consolidated financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" which elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions
of Interpretation No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company
has provided information regarding commitments and contingencies relating
to guarantees in Note 9. The adoption of this standard did not have a
significant impact on the consolidated financial position or results of
operations.
9
INTERNET COMMERCE CORPORATION
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
In November 2002, the Emerging Issues Task Force of the FASB ("EITF")
reached a consensus on Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables." EITF 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which the vendor will
perform multiple revenue generating activities. The EITF was effective for
revenue arrangements entered into in fiscal years and interim periods
beginning after June 15, 2003. The adoption of this consensus, effective
August 1, 2003, did not have a significant impact on the Company's
consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No.
123" ("SFAS 148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based
Compensation" to provide alternative methods to account for the transition
from the intrinsic value method of recognition of stock-based employee
compensation in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees" to the fair value recognition provisions under SFAS
123. SFAS 148 provides two additional methods of transition and will no
longer permit the SFAS 123 prospective method to be used for fiscal years
beginning after December 15, 2003. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the pro-forma effects
had the fair value recognition provisions of SFAS 123 been used for all
periods presented. The adoption of SFAS 148 did not have a significant
impact on the Company's consolidated financial position and results of
operations. The Company adopted the fair-value recognition provisions of
SFAS 123 in January 2004 (Note 6).
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation No. 46") and in December 2003
issued FIN No. 46 (Revised) ("FIN 46R") to address certain FIN 46
implementation issues. FIN 46R also requires additional disclosures by
primary beneficiaries and other significant variable interest holders.
Interpretation No. 46 clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", to certain entities
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial
support from other parties. The Company adopted Interpretation No. 46 on
January 31, 2003. The adoption of this standard did not have a significant
impact on the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends
and clarifies accounting for derivative instruments and for hedging
activities under SFAS 133. Specifically, SFAS 149 requires that contracts
with comparable characteristics be accounted for similarly. Additionally,
SFAS 149 clarifies the circumstances in which a contract with an initial
net investment meets the characteristics of a derivative and when a
derivative contains a financing component that requires special reporting
in the statement of cash flows. This Statement is generally effective for
contracts entered into or modified after June 30, 2003 and did not have a
significant impact on the Company's consolidated financial position or
results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS
150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. This Statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. For
financial instruments created before the issuance date of this Statement
and still existing at the beginning of the interim period of adoption,
transition shall be achieved by reporting the cumulative effect of a
change in an accounting principle by initially measuring the financial
instruments at fair value or other measurement attribute required by this
Statement. The adoption of this Statement, effective August 1, 2003, did
not have a material impact on the Company's consolidated financial
position or results of operations.
10
INTERNET COMMERCE CORPORATION
4. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of accounts receivable.
The Company believes that any credit risk associated with receivables is
minimal due to the number and credit worthiness of its customers.
Receivables are stated at estimated net realizable value, which
approximates fair value. For the three and six-month periods ended January
31, 2004 and 2003, no single customer accounted for more than 10% of
revenue. No single customer accounted for more than 10% of accounts
receivable at July 31, 2003 or January 31, 2004.
5. BUSINESS SEGMENT INFORMATION
The Company's three operating segments are:
o ICC.NET service - the Company's global Internet-based value added
network, or VAN, uses the Internet and proprietary technology to
deliver customers' documents and data files to members of their trading
communities, many of which may have incompatible systems, by
translating the documents and data files into any format required by
the receiver.
o Service Bureau - the Service Bureau manages and translates the data of
small and mid-sized companies that exchange EDI data with large
companies and provides various EDI and UPC (universal product code)
services. The service bureau also licenses EDI software.
o Professional Services - this segment facilitates the development and
operation of comprehensive business-to-business e-commerce solutions.
Until January 2004 this segment also conducted a series of
product-independent, one-day EDI seminars for e-commerce users. The
Company discontinued offering seminars in January 2004. Revenues from
these seminars were immaterial in all periods presented.
11
INTERNET COMMERCE CORPORATION
5. BUSINESS SEGMENT INFORMATION (CONTINUED)
The tables below summarizes information about operations and long-lived
assets as of and for the three and six -month periods ended January 31,
2004 and 2003:
Service Professional
ICC.NET Bureau Services Total
------- ------ -------- -----
Three Months - January 31, 2004
Revenues from external customers $ 2,205,062 $ 271,543 $ 279,127 $ 2,755,732
=========== =========== =========== ===========
Operating loss $(1,346,406) $ (97,767) $ (112,522) $(1,556,695)
Other income (expense), net 56,065 -- (2,297) 53,768
----------- ----------- ----------- -----------
Net loss $(1,290,341) $ (97,767) $ (114,819) $(1,502,927)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 351,044 $ 13,289 $ 16,452 $ 380,785
Impairment of capitalized software $ -- $ 44,983 $ -- $ 44,983
Non-cash charges for stock-based
compensation and services $ 473,144 $ -- $ -- $ 473,144
Six Months - January 31, 2004
Revenues from external customers $ 4,645,601 $ 579,194 $ 634,289 $ 5,859,084
=========== =========== =========== ===========
Operating loss $(2,025,223) $ (128,702) $ (208,950) $(2,362,875)
Other income (expense), net 47,092 -- (4,891) 42,201
----------- ----------- ----------- -----------
Net loss $(1,978,131) $ (128,702) $ (213,841) $(2,320,674)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 705,391 $ 26,577 $ 34,621 $ 766,589
Impairment of capitalized software $ -- $ 44,983 $ -- $ 44,983
Non-cash charges for stock-based
compensation and services $ 526,087 $ -- $ -- $ 526,087
As of January 31, 2004
Property and Equipment, net $ 219,807 $ 27,641 $ 134,052 $ 381,500
Capitalized software, net -- 44,651 -- 44,651
Acquired identified intangibles, net 1,673,000 -- -- 1,673,000
Goodwill 26,132 1,185,793 -- 1,211,925
----------- ----------- ----------- -----------
Long lived assets, net $ 1,918,939 $ 1,258,085 $ 134,052 $ 3,311,076
=========== =========== =========== ===========
12
INTERNET COMMERCE CORPORATION
5. BUSINESS SEGMENT INFORMATION (CONTINUED)
Service Professional
ICC.NET Bureau Services Total
------- ------ -------- -----
Three Months - January 31, 2003
Revenues from external customers $ 2,043,829 $ 389,858 $ 403,719 $ 2,837,406
=========== =========== =========== ===========
Operating loss (1) $(1,117,195) $ (38,789) $ (406,939) $(1,562,923)
Other income (expense), net (319,317) -- (4,330) (323,647)
----------- ----------- ----------- -----------
Net loss $(1,436,512) $ (38,789) $ (411,269) $(1,886,570)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 375,806 $ 30,645 $ 27,827 $ 434,278
Impairment of software inventory $ -- $ -- $ 248,077 $ 248,077
Impairment of marketable securities $ 317,924 $ -- $ -- $ 317,924
Non-cash charges for stock-based
compensation and services $ 10,416 $ -- $ -- $ 10,416
Six Months - January 31, 2003
Revenues from external customers $ 4,162,910 $ 855,895 $ 868,377 $ 5,887,182
=========== =========== =========== ===========
Operating income (loss) (1) $(2,086,319) $ 44,482 $ (483,905) $(2,525,742)
Other income (expense), net (333,906) -- (8,188) (342,094)
----------- ----------- ----------- -----------
Net income (loss) $(2,420,225) $ 44,482 $ (492,093) $(2,867,836)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation 751,258 61,291 61,513 874,062
Impairment of software inventory $ -- $ -- $ 248,077 $ 248,077
Impairment of marketable securities $ 317,924 $ -- $ -- $ 317,924
Non-cash charges for stock-based compensation
and services $ 10,416 $ -- $ -- $ 10,416
As of January 31, 2003
Property and Equipment, net $ 410,007 $ 57,960 $ 361,001 $ 828,968
Capitalized software, net -- 313,436 -- 313,436
Acquired identified intangibles, net 2,629,000 -- -- 2,629,000
Goodwill 26,132 2,167,935 -- 2,194,067
----------- ----------- ----------- -----------
Long lived assets, net $ 3,065,139 $ 2,539,331 $ 361,001 $ 5,965,471
=========== =========== =========== ===========
(1) Commencing in the second fiscal quarter of 2003, certain costs for
executive management, human resources, selling and marketing, accounting
and finance have been allocated among segments based on the level of
services performed for each segment. In an effort to operate more
efficiently and to reduce costs, these functions were consolidated and are
now performed by ICC.NET personnel. ICC.NET allocated a total of $111,000
of these costs to the Service Bureau and Professional Services segments in
the amounts of $45,000 and $66,000, respectively, during the three and
six-month periods.
13
INTERNET COMMERCE CORPORATION
6. STOCKHOLDERS' EQUITY
2003 Private Placement of Common Stock and Preferred Stock:
During April and May 2003, the company completed a private placement of
common stock, convertible preferred stock and warrants to purchase shares
of common stock (the "2003 Private Placement") for aggregate gross
proceeds of approximately $2,085,000.
In the 2003 Private Placement the Company sold 1,682,683 shares of class A
common stock and warrants to purchase 1,346,140 of class A common stock
providing gross proceeds of approximately $1,835,000 and 250 shares of
series D convertible redeemable preferred stock ("series D preferred") and
warrants to purchase 153,845 shares of class A common stock for $250,000.
All warrants are immediately exercisable and have an exercise price of
$1.47 per share. The warrants are exercisable until the fifth anniversary
of the date of issuance. In addition, the warrants are redeemable at the
Company's option, if the closing bid price of the Company's class A common
stock exceeds 200% of the exercise price of the warrants for 30
consecutive trading days. The redemption price is $0.10 per share for each
share issuable under the warrants.
The 250 shares of series D preferred are convertible into 192,307 shares
of class A common stock. The allocation of the proceeds from the sale of
the series D preferred between the fair value of the series D and the fair
value of the detachable warrants resulted in a beneficial conversion
feature in the amount of $106,730. The discount was immediately accreted
and treated as a deemed dividend to the holder of the series D preferred,
as all of the series D preferred stock was immediately convertible upon
issuance.
In connection with the 2003 Private Placement, the Company incurred fees
of $325,750 of which $237,938 was payable in cash and $87,802 was paid by
issuing warrants to purchase 110,680 shares of class A common stock. These
warrants have substantially the same terms as the warrants issued in the
2003 Private Placement.
In connection with the 2003 Private Placement, the Company issued 48,076
shares of class A common stock and warrants to purchase 38,460 shares of
class A common stock in settlement of certain outstanding payables. The
common stock and warrants were valued at $50,000, the invoice amount of
the services provided to the Company.
Approximately 21%, or $432,000, of the gross proceeds from the 2003
Private Placement were received from directors and officers and entities
with which the Company's directors are affiliated.
Subsequent to the completion of the Company's private placement described
above, the Company determined that in order to comply with NASD
Marketplace Rule 4350(i)(1)(A), the purchase price per share for the
shares of class A common stock purchased by directors and officers in the
private placement should be increased to market value, and on June 17,
2003 the directors and officers agreed to do so. As a result, two
directors and three officers agreed to pay an additional $0.58 per share,
or an aggregate of $85,502, for the shares of class A common stock they
purchased in the private placement. In August of 2003 the Company paid
bonuses of $40,000 to reimburse the officers for their additional $0.58
per share payment and in January 2004, at the request of the NASD, these
officers returned to the Company an aggregate of 11,091 shares of class A
common stock they purchased in the private placement in order to increase
their purchase price to $1.45 per share without regard to the bonuses.
14
INTERNET COMMERCE CORPORATION
6. STOCKHOLDERS' EQUITY (CONTINUED)
Stock Based Compensation:
On March 10, 2003, options and stock were awarded to a non-employee member
of the board of directors as compensation for consulting services. This
individual was awarded 20,000 shares of class A common stock, valued at
$18,000, which was recorded as a non-cash charge for stock-based
compensation in the quarter ended April 30, 2003. This individual was also
granted options to purchase 100,000 shares of class A common stock.
Options to purchase 60,000 shares at an exercise price of $1.00 per share
vest six months from the date of issuance, and options to purchase 40,000
shares at an exercise price of $1.25 per share vest one year from the date
of issuance. The options have a fair value of $67,000 of which $15,440 has
been recorded as a non-cash stock-based compensation charge for services
during the three months ended October 31, 2003. In November 2003, this
individual surrendered the 100,000 options noted above to the Company with
no additional compensation charge recorded.
Each non-employee member of the board of directors receives annual
compensation of $25,000 for his current term of office, payable quarterly,
in class A common stock of the Company. The Company has recorded a
compensation charge of $72,917 for the six months ended January 31, 2004.
Stock Options Cancellation and Exchange:
In January 2004, the Company implemented a voluntary stock option exchange
program whereby the Company offered to exchange certain outstanding
options to purchase shares of the Company's common stock held by eligible
employees of the Company, with exercise prices per share greater than or
equal to $11.50, for new options to purchase shares of the Company's
common stock (the "Offer to Exchange"). Under the terms of the Offer to
Exchange, the 26 participating employees agreed to cancel as of January
30, 2004 their existing options to purchase 823,500 shares of the
Company's common stock and were granted options to purchase 494,100 shares
of the Company's common stock with an exercise price of $1.25 per shares,
the closing market price per share on January 20, 2004. Each new employee
option was fully vested at the date of grant. Additionally, under the
terms of the Offer to Exchange, two directors cancelled as of January 30,
2004 existing options to purchase 250,000 shares of the Company's common
stock and were granted options to purchase 150,000 shares of the Company's
common stock with an exercise price of $2.00 per share. The options
granted to directors vest in 2 equal annual installments commencing one
year after the date of grant. One director was eligible but declined to
participate in the exchange and surrendered to the Company options to
purchase 50,000 shares of common stock at an exercise price of $19 per
share.
Prior to August 1, 2003, the Company accounted for its employee stock
options under the intrinsic value method of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
No stock-based employee compensation expense is reflected in the statement
of operations for options granted to employees to purchase common stock
granted with an exercise price equal to or greater that the market value
of the underlying common stock on the date of grant. Effective August 1,
2003, the Company adopted the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation." The fair
value method has been applied prospectively to all employee awards
granted, modified, or settled after August 1, 2003. Option grants issued
prior to August 1, 2003 that have not been modified or settled continue to
be accounted for under the intrinsic value method of APB 25. During the
three months ended January 31, 2004, the Company recorded $437,066, of
which $383,038 is attributable to the voluntary stock option exchange
program, for noncash charges for stock-based compensation and services as
a result of the adoption of SFAS 123. The Company did not issue stock
options during the first quarter of fiscal 2004. Therefore the Company has
not restated its previously reported interim results for the quarter ended
October 31, 2003.
15
INTERNET COMMERCE CORPORATION
7. IMPAIRMENT OF SOFTWARE DEVELOPMENT COSTS, INVESTMENTS AND SOFTWARE
INVENTORY
In January 2004, the Company recorded an impairment charge of
approximately $45,000 for previously capitalized software development
costs related to a completed development project of its Service Bureau.
The Company determined during the quarter ended January 31, 2004 that
projected sales of this software were not sufficient to support its
carrying value.
In April 2003, the Company recorded an impairment charge of approximately
$134,000 for previously capitalized software development costs related to
an in-process software development project of its Service Bureau. The
Company decided during the quarter ended April 30, 2003, not to complete
this project due to unfavorable market conditions for the foreseeable
future. In January 2003, the Company recorded an impairment charge of
approximately $318,000 to write down available-for-sale marketable
securities due to an other than temporary decline in value. Additionally,
in January 2003, the Company recorded an impairment charge of
approximately $248,000 for software inventory held by the Professional
Services segment based on historical and projected sales, which indicated
that its net carrying value was not recoverable. The Company had
previously recorded an impairment charge of $100,000 for software
inventory in July 2002. Such software inventory was classified as other
current assets in the consolidated balance sheet. The Company's carrying
value of inventory at January 31, 2004 is not significant.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
On August 1, 2001, the Company adopted the provisions of SFAS No. 141,
"Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 requires that intangible assets
with indefinite useful lives no longer be amortized, but rather be tested
at least annually for impairment. The Company's reporting units utilized
for evaluating the recoverability of goodwill are the same as its
operating segments.
At January 31, 2004 and July 31, 2003, Other Intangible assets are
comprised of the proprietary data mapping technology acquired in the
acquisition of Research Triangle Commerce, Inc. in November 2000. The
gross carrying value of the mapping technology was $4,780,000 at January
31, 2004 and July 31, 2003. Accumulated amortization relating to mapping
technology was $3,107,000 and $2,629,000 at January 31, 2004 and July 31,
2003, respectively. The data mapping technology is being amortized over
five years and amortization expense is recorded in cost of services.
The Company did not have any indefinitely lived intangible assets that
were not subject to amortization as of January 31, 2004 and July 31, 2003.
The aggregate amortization expense for other intangible assets was
$239,000 during each of the three-month periods ended January 31, 2004 and
2003 and $478,000 for each of the six-month periods ended January 31, 2004
and 2003.
At January 31, 2004, estimated amortization expense for other intangible
assets for the remaining life of those assets are as follows:
Year Estimated Amortization Expense
2004 $478,000
2005 $956,000
2006 $239,000
There was no change in the carrying amount of goodwill for the three and
six-month periods ended January 31, 2004.
16
8. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
During the fourth quarter of fiscal 2003, the goodwill of the Service
Bureau was tested for impairment due to a significant decline in revenues
and operating income resulting primarily from the bankruptcy of its
largest customer. An impairment loss of $982,142 was recognized as a
result of this evaluation. The fair value of the Service Bureau reporting
unit was estimated using the net present value of expected future cash
flows.
As of August 1, 2003, the Company performed its annual test for impairment
on the carrying value of goodwill of its ICC.NET and Service Bureau
reporting units. The Company concluded that no impairment existed at that
date.
9. GUARANTEES AND INDEMNIFICATIONS
As part of its standard license agreements, the Company agrees to
indemnify its customers against liability if the Company's products
infringe a third party's intellectual property rights. Historically, the
Company has not incurred any significant costs related to performance
under these indemnities. As of January 31, 2004, the Company was not
subject to any litigation alleging that the Company's products infringe
the intellectual property rights of any third parties.
10. ACCOUNTS RECEIVABLE FINANCING AGREEMENT
On May 30, 2003, the Company executed an Accounts Receivable Financing
Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a
term of 1 year. Under the Financing Agreement, the Company may borrow,
subject to certain conditions, up to 80% of its outstanding accounts
receivable up to a maximum of $2,000,000. Interest accrues at the prime
rate plus .35% plus a collateral handling fee equal to .20% on the average
daily outstanding financed receivable balance. Interest is payable
monthly. The Financing Agreement contains certain restrictive covenants
that are customary for a commercial transaction of this type, including,
without limitation, restrictions on the disposition or encumbrance of the
collateral pledged to the Bank, restrictions on incurring additional
indebtedness and restrictions on the payment of dividends and the
redemption or repurchase of any capital stock. In addition, the Company is
required to maintain at all times a ratio of Quick Assets (i.e.,
consolidated, unrestricted cash, cash equivalents, net accounts receivable
and investments with maturities of fewer than 12 months determined
according to GAAP) to Current Liabilities (i.e., all obligations and
liabilities of the Company to Bank, plus, without duplication, the
aggregate amount of the Company's total liabilities which mature within
one (1) year) minus Deferred Revenue (i.e., all amounts received in
advance of performance under contracts and not yet recognized as revenue)
of at least 1.10 to 1.0. The Bank has been granted a security interest in
substantially all of the Company's assets. In connection with the
Financing Agreement, the Company issued the bank warrants to purchase
40,000 shares of the Company's class A common stock. The warrants are
immediately exercisable at an exercise price of $1.39, equal to the fair
market value of the Company's class A common stock at the date of closing
of the Financing Agreement. The warrants are exercisable for a seven-year
period. The fair value of the warrants in the amount of approximately
$34,000 is being amortized to interest expense over the term of the
Financing Agreement. During the three and six-month periods ended January
31, 2004, the Company recorded interest expense in the amount of
approximately $8,600 and $17,200, respectively, for the amortization of
the fair value of the warrants. On October 22, 2003, the Company and
Silicon Valley Bank amended the Financing Agreement to extend the term of
the agreement to August 31, 2004. At January 31, 2004, there was
approximately $534,000 outstanding under the financing arrangement.
17
INTERNET COMMERCE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in this Quarterly Report regarding
our financial position, business strategy and plans and objectives of management
for future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of management, as well as assumptions made
by and information currently available to management. When used in this Report,
the words "anticipate," "believe," "estimate," "expect," "may," "will,"
"continue" and "intend," and words or phrases of similar import, as they relate
to our financial position, business strategy and plans, or objectives of
management, are intended to identify forward-looking statements. These
statements reflect our current view with respect to future events and are
subject to risks, uncertainties and assumptions related to various factors
including, without limitation, those described below the heading "Overview" and
in our registration statements and periodic reports filed with the SEC under the
Securities Act and the Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure
you that our expectations will prove to be correct. Should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described in this
Quarterly Report as anticipated, believed, estimated, expected or intended.
In this Item 2, references to the "Company," "we," or "us" means Internet
Commerce Corporation.
Overview
We are in the e-commerce ("EC") business-to-business communication
services market providing complete EC infrastructure solutions. Our business
operates in three segments: namely, our ICC.NET service, our Service Bureau and
our Professional Services.
Our ICC.NET service, the Company's global Internet-based value added
network or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. We believe that our ICC.NET
service has significant advantages over traditional VANs as well as email-based
and other Internet-based software systems, because our service is provided at a
low cost, with greater transmission speed that is nearly real-time and offers
more features. Our Service Bureau manages and translates the data of small and
mid-sized companies that exchange EDI data with large companies that require
that data be transmitted to them electronically. The Service Bureau delivers
business-to-business EDI standards-based documents for companies that do not
have EDI departments. Our Professional Services segment facilitates the
development and operations of comprehensive business-to-business e-commerce
solutions. Professional Services assists its clients to conduct business
electronically through a continuum of services including eConsulting, data
transformation mapping (EDI, EAI, XML) and internetworking.
During the fourth quarter of fiscal 2003 the goodwill of the Service
Bureau was tested for impairment due to a significant decline in revenues and
operating income resulting primarily from the bankruptcy of its largest
customer. An impairment loss of $982,142 was recognized as a result of this
evaluation. The fair value of the Service Bureau reporting unit was estimated
using the net present value of expected future cash flows.
We rely on many of our competitors to interconnect, at reasonable cost,
with our service and have interconnection arrangements with more than 65
business-to-business networks for the benefit of our customers. We believe that
these arrangements, will satisfy the business requirements of our existing
customers.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
Critical accounting policies are those policies that require application
of management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods.
The following list of critical accounting policies is not intended to be a
comprehensive list of all of our accounting policies. Our significant accounting
policies are more fully described in note 2 of the notes to the consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended July 31, 2003. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting principles
with no need for management's judgment in their application. There are also
areas in which management's judgment in selecting any available alternative
would not produce a materially different result. We have identified the
following to be critical accounting policies of the Company:
18
INTERNET COMMERCE CORPORATION
Revenue Recognition: The Company derives revenue from subscriptions to its
ICC.NET service, which includes transaction, mailbox and fax transmission fees.
The subscription fees are comprised of both fixed and usage-based fees. Fixed
subscription fees are recognized on a pro-rata basis over the subscription
period, generally three to six months. Usage fees are recognized in the period
the services are rendered. The Company also derives revenue through
implementation fees, interconnection fees and by providing data mapping services
to its customers. Implementation fees are recognized over the life of the
subscription period. Interconnection fees are fees charged to connect to another
VAN service and are recognized when the data is transmitted to the connected
service. Revenue from data mapping services is recognized when the map has been
completed and delivered to the customer. The Company has a limited number of
fixed fee data mapping services contracts. Under these arrangements the Company
is required to provide a specified number of maps for a fixed fee. Revenue from
such arrangements is recognized using the percentage-of-completion method of
accounting (see below).
Service Bureau revenue is comprised of EDI services including data
translation services, EDI-to-print and print-to-EDI purchase order and invoice
processing, UPC services including UPC number generation, UPC catalog
maintenance and UPC label printing. The Service Bureau also derives revenue from
licensing software and providing software maintenance and support. Revenue from
EDI services and UPC services is recognized when the services are provided. The
Company accounts for its EDI software license sales in accordance with the
American Institute of Certified Public Accountants' Statement of Position 97-2,
"Software Revenue Recognition," as amended ("SOP 97-2"). Revenue from software
licenses is recognized when all of the following conditions are met: (1) a
non-cancelable non-contingent license agreement has been signed; (2) the
software product has been delivered; (3) there are no material uncertainties
regarding customer acceptance; and (4) collection of the resulting receivable is
probable. Revenue from software maintenance and support contracts is recognized
ratably over the life of the contract. The Service Bureau's software license
revenue was not significant in any of the periods presented.
In addition, SOP 97-2 generally requires that revenue from software
arrangements involving multiple elements be allocated among each element of the
arrangement based on the relative fair values of the elements, such as software
licenses, post contract customer support, installation or training. Furthermore,
SOP 97-2 requires that revenue be recognized as each element is delivered with
no significant performance obligation remaining on the part of the Company. The
Company's multiple element arrangements generally consist of a software license
and post contract support. The Company allocates the aggregate revenue from
multiple element arrangements to each element based on vendor specific objective
evidence. The Company has established vendor specific objective evidence for
each of the elements as it sells both the software and post contract customer
support independent of multiple element agreements. Customers are charged
standard prices for the software and post contract customer support and these
prices do not vary from customer to customer.
If the Company enters into a multiple element agreement for which vendor
specific objective evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until all elements
of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
The Company also provides a broad range of professional services
consisting primarily of EDI and electronic commerce consulting, EDI education
and training at seminars throughout the United States. Revenue from EDI and
electronic commerce consulting and education and training are recognized when
the services are provided. The Company discontinued its EDI educational training
services in January 2004. Revenues from our EDI education and training seminars
were immaterial in all periods presented.
Revenue from fixed fee data mapping and professional service contracts is
recognized using the percentage-of-completion method of accounting, as
prescribed by SOP 81-1 "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in the
estimated profitability of a
19
INTERNET COMMERCE CORPORATION
fixed-price contract. In such circumstances, adjustments to cost and
profitability estimates are made in the period in which the underlying factors
requiring such revisions become known. If such revisions indicate a loss on a
contract, the entire loss is recorded at such time. Amounts billed in advance of
services being performed are recorded as deferred revenue. Certain fixed-fee
contracts may have substantive customer acceptance provisions. The acceptance
terms generally include a single review and revision cycle for each deliverable
to incorporate the customer's suggested or required modifications. Deliverables
are considered accepted upon completion of the review and revision and revenue
cycle is recognized upon acceptance.
Goodwill: Goodwill consists of the excess purchase price over the fair
value of identifiable net assets of acquired businesses. The carrying value of
goodwill is evaluated for impairment on an annual basis. Management also reviews
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of goodwill may be impaired. If it is determined that
an impairment in value has occurred, goodwill is written down to its implied
fair value. The Company's reporting units utilized for evaluating the
recoverability of goodwill are the same as its operating segments.
Other Intangible Assets: Other intangible assets are carried at cost less
accumulated amortization. Other intangible assets are amortized on a
straight-line basis over their expected lives, which are estimated to be five
years. The Company did not have any indefinite lived intangible assets other
than goodwill that were not subject to amortization.
Impairment of long-lived assets: Long-lived assets of the Company,
including amortizable intangibles, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. Management also reevaluates the periods of amortization of
long-lived assets to determine whether events and circumstances warrant revised
estimates of useful lives. When such events or changes in circumstances occur,
the Company tests for impairment by comparing the carrying value of the
long-lived asset to the estimated undiscounted future cash flows expected to
result from use of the asset and its eventual disposition. If the sum of the
expected undiscounted future cash flows is less than the carrying amount of the
asset, the Company would recognize an impairment loss. The amount of the
impairment loss will be determined by comparing the carrying value of the
long-lived asset to the present value of the net future operating cash flows to
be generated by the asset.
Stock-based compensation: In January 2004, the Company adopted the fair
value provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 established a
fair-value-based method of accounting for stock-based compensation plans.
Pursuant to the transition provisions of SFAS 148, "Accounting for Stock Based
Compensation - Transition and Disclosure" (SFAS 148), the Company has elected
the prospective method and will apply the fair value method of accounting to all
equity instruments issued to employees on or after August 1, 2003. The fair
value method is not applied to stock option awards granted in fiscal years prior
to 2004. Such awards will continue to be accounted for under the intrinsic value
method pursuant to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB25), except to the extent that prior years'
awards are modified subsequent to August 1, 2003. Option grants issued prior to
August 1, 2003 that have not been modified or settled continue to be accounted
for under the intrinsic value method of APB 25. Therefore, the cost related to
stock-based employee compensation included in the determination of the net loss
for 2004 is less than that which would have been recognized if the fair value
based method had been applied to all awards since their date of grant.
Income Taxes: Deferred income taxes are determined by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements. A valuation allowance is provided based on
the weight of available evidence, if it is considered more likely than not that
some portion, or all, of the deferred tax assets will not be realized.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the
20
INTERNET COMMERCE CORPORATION
financial statements and reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates. The
following discussion reviews items incorporated in our financial statements
during the three and six month periods ended January 31, 2004 and 2003 or as of
January 31, 2004 and July 31, 2003 that required the use of significant
management estimates.
As discussed above, in January 2004 the Company adopted the fair value
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). As a result of adoption of SFAS 123,
we recorded and additional charge to noncash charges for stock based
compensation and services of approximately $437,066 for the three months ended
January 31, 2004. The Black-Scholes option-pricing model was used to determine
the estimated fair value of stock options issued and modified during the three
month period. The use of this model required management to make certain
estimates for values of variables used by the model. Management estimated the
values for stock price volatility, the expected life of the equity instruments
and the risk free rate based on information that was available to management at
the time the Black-Scholes option-pricing calculations were performed.
The Company has entered into several transactions involving the issuance
of warrants and options to purchase shares of the Company's class A common stock
to consultants, lenders, warrant holders, placement agents and other business
associates and vendors. The issuance of these securities required management to
estimate their value using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model requires management to make certain estimates
for values of variables used by the model. Management estimated the values for
stock price volatility, the expected life of the equity instruments and the risk
free rate based on information that was available to management at the time the
Black-Scholes option-pricing calculations were performed. Changes in such
estimates could have a significant impact on the estimated fair value of those
equity instruments.
On May 30, 2003, the Company executed an Accounts Receivable Financing
Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term
of 1 year. On October 22, 2003, the Company and Silicon Valley Bank amended the
Financing Agreement to extend the term of the agreement to August 31, 2004. In
connection with the Financing Agreement, the Company issued the Bank warrants to
purchase 40,000 shares of the Company's class A common stock. The warrants are
immediately exercisable at an exercise price of $1.39 per share, equal to the
fair market value of the Company's class A common stock on the date of closing
of the Financing Agreement. The warrants are exercisable for a seven-year
period. The value of the warrants in the amount of $34,000 is being amortized
over the life of the Financing Agreement. At January 31, 2004, there was
approximately $534,000 outstanding under the financing arrangement.
On March 10, 2003, the Company issued options to purchase 100,000 shares
of class A common stock to a non-employee member of the board of directors as
compensation for consulting services. The estimated fair value of the options
was determined by management to be $42,000. In November 2003, this individual
surrendered his 100,000 options noted above to the Company with no additional
compensation charge recorded.
The allocation of the proceeds from the sale of the series D preferred
stock and warrants issued in the Company's April 30, 2003 private placement
between the fair value of the series D preferred stock and the fair value of the
detachable warrants required management to estimate the fair value of the
warrants. Management's estimate resulted in a beneficial conversion feature in
the amount of $106,730. The discount was immediately accreted and treated as a
deemed dividend to the holder of the series D preferred as all of the series D
preferred stock was eligible for conversion upon issuance.
In connection with the private placement that closed during April and May
of 2003, the Company incurred fees which were paid by issuing warrants to
purchase 110,680 shares of class A common stock at an exercise price of $1.47
per share. The fair value of the warrants was determined by management to be
$87,800.
In connection with the acquisition of RTCI on November 6, 2000, issued and
outstanding options and warrants to purchase RTCI common stock were exchanged
for options and warrants of ICC, providing the holders the right to receive,
upon exercise, an aggregate of 394,905 shares of ICC class A common stock and
$343,456 of cash. The options and warrants were valued using the Black-Scholes
option-pricing model. The fair value of the vested portion of the options was
included in the purchase price for RTCI.
Goodwill is evaluated for impairment at least annually and whenever events
or circumstances indicate impairment may have occurred. The assessment requires
the comparison of the fair value of each of the Company's reporting units to the
carrying value of its respective net assets, including allocated goodwill. If
the carrying value of the reporting unit exceeds its fair value, the Company
must perform a second test to measure the amount of impairment. The second step
of the goodwill impairment test compares the implied fair value of reporting
unit goodwill with the carrying amount of that goodwill. The Company allocates
the fair value of a reporting unit to all of the assets and liabilities of that
unit as if the reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the price paid to acquire the reporting
unit. The excess of the fair value of a
21
INTERNET COMMERCE CORPORATION
reporting unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill. If the carrying amount of reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized by the Company in an amount equal to that excess.
The Company estimates the fair value of its reporting units based on the
net present value of expected future cash flows. The use of this method requires
management to make estimates of the expected future cash flows of the reporting
unit and the Company's weighted average cost of capital. Estimating the
Company's weighted average cost of capital requires management to make estimates
for long-term interest rates, risk premiums, and beta coefficients. Management
estimated these items based on information that was available to management at
the time the Company prepared its estimate of the fair value of the reporting
unit. Changes in either the expected cash flows or the weighted average cost of
capital could have a significant impact on the estimated fair value of the
Company's reporting units.
During the fourth quarter of fiscal 2003, the goodwill of the Service
Bureau was tested for impairment due to a significant decline in revenues and
operating income resulting primarily from the bankruptcy of its largest
customer. The fair value of the Service Bureau reporting unit was estimated
using the net present value of expected future cash flows. An impairment of
goodwill in the amount of approximately $982,000 was recorded during the year
ended July 31, 2003.
Three Months Ended January 31, 2004 Compared with Three Months Ended January
31, 2003.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported
segments. All significant intersegment activity has been eliminated.
Accordingly, the segment results below exclude the effect of transactions with
our subsidiary.
Three Months Ended
January 31,
-------------------------------
Consolidated net loss: 2004 2003
----------- -----------
ICC.NET $(1,290,341) $(1,436,512)
Service Bureau (97,767) (38,789)
Professional Services (114,819) (411,269)
----------- -----------
Consolidated loss $(1,502,927) $(1,886,570)
=========== ===========
Results of Operations - ICC.NET
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. The following table
summarizes operating results for our ICC.NET service for the three months ended
January 31, 2004 and 2003:
22
INTERNET COMMERCE CORPORATION
Three Months Ended
January 31,
-----------------------------
2004 2003
------------ -----------
Revenue:
VAN Services $ 2,119,470 $ 1,885,557
Mapping Services 85,592 158,272
----------- -----------
2,205,062 2,043,829
Expenses:
Cost of services 1,277,299 1,317,135
Product development and enhancement 196,786 248,602
Selling and marketing 759,400 733,154
General and administrative 844,839 851,717
Non-cash charges for stock based compensation 473,144 10,416
----------- -----------
3,551,468 3,161,024
----------- -----------
Operating loss (1,346,405) (1,117,195)
----------- -----------
Other income (expense), net 56,065 (319,317)
----------- -----------
Net loss $(1,290,341) $(1,436,512)
=========== ===========
Revenue - ICC.NET - Revenue related to our ICC.NET service was 80% of
consolidated revenue for the quarter ended January 31, 2004 ("2004 Quarter")
compared to 72% for the quarter ended January 31, 2003 ("2003" Quarter). Total
ICC.NET revenue increased $161,000 in the 2004 Quarter from the 2003 Quarter, or
approximately 8%. VAN services revenue increased $234,000, or approximately 12%,
in the 2004 Quarter from the 2003 Quarter. The increase in VAN services revenue
is primarily attributable to an increase in the number of customers from
approximately 700 in January 2003 to approximately 1,100 in January 2004.
Mapping revenue decreased $73,000, or approximately 46%, in the 2004 Quarter
from the 2003 Quarter primarily due to a decrease in the number of customers and
smaller mapping projects resulting from the continued slow demand for these
services.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 58% of revenue derived from the ICC.NET service in the 2004 Quarter,
compared to 64% in the 2003 Quarter. Cost of services related to our ICC.NET
service consists primarily of salaries and employee benefits, connectivity fees,
amortization, allocation from product and development and rent. Total cost of
services decreased $40,000 in the 2004 Quarter from the 2003 Quarter. Salaries
and benefits decreased $74,000 in the 2004 Quarter from the 2003 Quarter
primarily due to a decrease in headcount to 19 in January 2004 from 23 in
November 2003. In addition, rent decreased $47,000 in the 2004 Quarter from the
2003 Quarter due primarily to a decrease in office space occupied by client
services personnel. These decreases were offset by an increase in data lines
costs of $42,000 in the 2004 Quarter from the 2003 Quarter due to higher
interconnect fees resulting from an increase in volume. Amortization expense
increased $13,000 in the 2004 Quarter from the 2003 Quarter due to software that
was placed in service subsequent to the 2003 Quarter. Allocation of product and
development costs increased $13,000 in the 2004 Quarter from the 2003 Quarter
due to an increase in time spent on new customer implementations and testing. In
addition, allocation of equipment and software expense increased $11,000 in the
2004 Quarter from the 2003 Quarter to reflect costs incurred by ICC.NET
personnel working in professional services facilities. Cost of services relating
to VAN services decreased to $900,000 in the 2004 Quarter from $950,000 in the
2003 Quarter. Cost of services relating to the mapping services increased to
$377,000 in the 2004 Quarter from $367,000 in the 2003 Quarter primarily because
mapping personnel spent less time on non-mapping projects.
Product development and enhancement - ICC.NET - Product development and
enhancement costs relating to our ICC.NET service consist primarily of salaries
and employee benefits. Product development and enhancement costs decreased
$52,000 in the 2004 Quarter from the 2003 Quarter. Allocation of product and
development salaries to cost of services and general and administrative expense
departments increased $25,000 in the 2004 Quarter from the 2003 Quarter. In
addition, salaries and benefits decreased $21,000 in the 2004 Quarter from the
2003 Quarter primarily due to a decrease in the number of employees to 10 at the
end of the 2004 Quarter from 12 at the end of the 2003 Quarter.
23
INTERNET COMMERCE CORPORATION
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consist primarily of salaries and employee benefits,
travel-related costs, rent, depreciation, advertising and trade-show costs.
Selling and marketing expenses related to our ICC.NET service increased $26,000
in the 2004 Quarter from the 2003 Quarter. Rent increased $20,000 in the 2004
Quarter from the 2003 Quarter primarily due to a more representative allocation
of rent to selling and marketing departments in the 2004 Quarter. Outside
commissions increased $18,000 in the 2004 Quarter from the 2003 Quarter due to
an increase in the use of outside sales agents. Severance payments increased
$7,000 in the 2004 Quarter from the 2003 Quarter due to a reduction in headcount
to 8 in January 2004 from 9 in January 2003. Advertising and trade shows,
seminar fees and publications increased $17,000 in the 2004 Quarter from the
2003 Quarter. These increases were offset by a decrease in salaries and benefits
of $38,000 in the 2004 Quarter from the 2003 Quarter primarily due to the
forfeiture of accrued vacation in calendar year 2003.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, facility costs, legal and professional fees, insurance, travel meals
and entertainment and depreciation. General and administrative costs supporting
our ICC.NET service decreased $7,000 in the 2004 Quarter from the 2003 Quarter.
Non-cash charges - ICC.NET - Non-cash charges of approximately $473,000
in the 2004 Quarter relate primarily to the adoption of FASB Statement No. 123,
"Accounting for Stock-Based Compensation." In January 2004, the Company
implemented a voluntary stock option exchange program under which the Company
offered to exchange certain outstanding options to purchase shares of the
Company's common stock held by eligible employees of the Company, with exercise
prices per share greater than or equal to $11.50 per share, for new options to
purchase shares of the Company's common stock. The fair value method has been
applied prospectively to all employee and director awards granted, modified, or
settled after July 31, 2003.
Other income (expense) - ICC.NET - Other income increased $375,000 in the
2004 Quarter from the 2003 Quarter. The increase is primarily attributable to a
charge in the 2003 Quarter of $318,000 for the impairment of available-for-sale
marketable securities due to an other than temporary decline in value.
Results of Operations - Service Bureau
Our service bureau manages and translates the data of small and mid-sized
companies that exchange EDI data with large companies and provides various EDI
and UPC (universal product code) services. Our service bureau also licenses EDI
software. The following table summarizes operating results for our service
bureau for the three months periods ended January 31, 2004 and 2003:
Three Months Ended
January 31,
2004 2003
--------- ---------
Revenue:
Services $ 271,543 $ 389,858
--------- ---------
Expenses:
Cost of services 196,588 183,493
Impairment of capitalized software 44,983 --
Product development and enhancement 30,004 46,787
Selling and marketing 19,495 57,131
General and administrative 78,241 141,236
--------- ---------
369,310 428,647
--------- ---------
Operating loss (97,767) (38,789)
--------- ---------
Other income, net -- --
--------- ---------
Net loss $ (97,767) $ (38,789)
========= =========
Revenue - Service Bureau - Revenue related to our service bureau was 10%
of our consolidated revenue in the 2004 Quarter compared to 14% of our
consolidated revenue for the 2003 Quarter. The service bureau's revenue
24
INTERNET COMMERCE CORPORATION
was primarily generated from services performed, customer support and licensing
fees. The decrease in revenue in 2004 Quarter from the 2003 Quarter of $118,000,
or 30%, was primarily the result of a decrease its EDI service business
attributable to a slow economy.
Cost of services - Service Bureau - Total cost of services relating to our
service bureau was 72% of revenue derived from the service bureau in the 2004
Quarter compared to 47% in the 2003 Quarter. Cost of services related to our
service bureau consists primarily of salaries and employee benefits, cost of
software, product development allocation and rent. Cost of services relating to
our service bureau increased $13,000 in the 2004 Quarter due to an increase in
the cost of Electronic Commerce System software sold of $38,000 and a $13,000
increase in the allocation of salaries and employee benefits from the product
development and enhancement department due to a greater number of cost of
services projects requiring product development and enhancement personnel. These
increases were partially offset by lower salaries and benefits of $23,000,
primarily due to a decrease in headcount to 11 in January 2004 from 14 in
January 2003, and a $9,000 decrease in amortization expense.
Product development and enhancement - Service Bureau - Product development
and enhancement costs consist primarily of salaries and employee benefits and
product development allocation. Product development and enhancement costs
incurred by our service bureau decreased $17,000 in the 2004 Quarter primarily
due to an increase in the allocation of salaries and employee benefits to the
product development and enhancement resulting from a greater number of product
development and enhancement projects.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits. The decrease in selling and marketing expenses of $37,000 in the 2004
Quarter from the 2003 Quarter was primarily due to a decrease in salaries and
benefits of $30,000 in the 2004 Quarter from the 2003 Quarter due to a reduction
of staffing of one person and to no severance payments in the 2004 Quarter as
compared to $5,000 in the 2003 Quarter.
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits, depreciation, rent, and office expenses. The decrease in
general and administrative expense of $63,000 in the 2004 Quarter from the 2003
Quarter is primarily attributable to a decrease in Service Bureau salaries and
employee benefits of $52,000 due to a reduction in personnel to 2 at the end of
the 2004 Quarter from 3 at the end of the 2003 Quarter. In addition,
depreciation expense decreased $8,000 in the 2004 Quarter from the 2003 Quarter
primarily as a result of fewer assets being acquired and more assets becoming
fully depreciated resulting in a lower depreciable base.
Results of Operations - Professional Services
Our Professional Services segment provides comprehensive
business-to-business electronic commerce solutions including electronic commerce
infrastructure solutions. Our Professional Services segment also conducts a
series of product-independent one-day EDI seminars for electronic commerce
users. In January 2004, we discontinued our EDI educational training and
seminars services. The following table summarizes operating results for our
professional services for the three months ended January 31, 2004 and 2003:
25
INTERNET COMMERCE CORPORATION
Three Months Ended
January 31,
-------------------------------
2004 2003
--------------- -------------
Revenue:
Services $ 279,127 $ 403,719
--------------- -------------
Expenses:
Cost of services 277,099 428,384
Impairment of software inventory - 248,077
--------------- -------------
Total cost of services 277,099 676,461
Selling and marketing 33,000 31,803
General and administrative 81,550 102,394
--------------- -------------
391,649 810,658
--------------- -------------
Operating loss (112,522) (409,939)
Other expense, net (2,297) (4,330)
--------------- -------------
Net loss $ (114,819) $ (411,269)
=============== =============
Revenue - Professional Services - Revenue related to professional services
was 10% of our consolidated revenue in the 2004 Quarter compared to 14% in the
2003 Quarter. Revenue generated from professional services consists of
consulting and educational services. As a result of slow demand for these
services, revenue from our professional services decreased $125,000, or 31%, in
the 2004 Quarter from the 2003 Quarter. This decrease is primarily due to a
decrease in EDI educational services of $90,000 in the 2004 Quarter from the
2003 Quarter. We discontinued our EDI educational services and seminars in
January 2004.
Cost of services - Professional Services - Cost of services relating to
professional services was 99% of revenue derived from professional services in
the 2004 Quarter, compared to 106% of revenue in the 2003 Quarter. Cost of
services related to our professional services consists primarily of salaries and
employee benefits and contract labor. Cost of services related to professional
services decreased $151,000 in the 2004 Quarter from the 2003 Quarter. Salaries
and benefits and contract labor decreased $118,000 in the 2004 Quarter from the
2003 Quarter due primarily to a decrease in the number of employees to 8 at the
end of the 2004 Quarter from 14 at the beginning of the 2003 Quarter. Rent
expense decreased $15,000 in the 2004 Quarter from the 2003 Quarter due
primarily to an allocation of rent expense to ICC.NET for space utilized by
ICC.NET. In addition, private classroom fees decreased $9,000 in the 2004
Quarter from the 2003 Quarter due to fewer classes given.
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, rent, depreciation and amortization and
telephone charges. General and administrative costs supporting our professional
services decreased $21,000 in the 2004 Quarter from the 2003 Quarter. Allocation
of expenses to ICC.NET from professional services increased $54,000 in the 2004
Quarter from the 2003 Quarter to reflect costs incurred relating to ICC.NET
personnel working in the professional services facilities. Depreciation expense
decreased $17,000 in the 2004 Quarter from the 2003 Quarter due to the
allocation of depreciation expense to other professionals services departments
in the 2004 Quarter. This was offset by an increase in salaries and benefits of
$46,000 in the 2004 Quarter from the 2003 Quarter due to the addition of one
employee in the 2004 Quarter and a $19,000 vacation expense adjustment in the
2003 Quarter.
Six Months Ended January 31, 2004 Compared with Six Months Ended January 31,
2003.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported
segments. All significant intersegment
26
INTERNET COMMERCE CORPORATION
activity has been eliminated. Accordingly, the segment results below exclude the
effect of transactions with our subsidiary.
Six Months Ended
January 31,
------------------------------
Consolidated loss before income taxes: 2004 2003
--------------- ------------
ICC.NET (1,978,131) (2,420,225)
Service Bureau (128,702) 44,482
Professional Services (213,841) (492,093)
--------------- ------------
Consolidated loss before income taxes (2,320,674) (2,867,836)
=============== ============
Results of Operations - ICC.NET
The following table summarizes operating results for our ICC.NET service
for the six months ended January 31, 2004 and 2003:
Six Months Ended
January 31,
------------------------------
2004 2003
--------------- -------------
Revenue:
VAN Services $ 4,475,200 $ 3,834,517
Mapping Services 170,401 328,393
--------------- -------------
4,645,601 4,162,910
Expenses:
Cost of services 2,579,965 2,573,542
Product development and enhancement 387,751 478,821
Selling and marketing 1,533,632 1,417,466
General and administrative 1,643,390 1,768,984
Non-cash charges 526,086 10,416
--------------- -------------
6,670,824 6,249,229
--------------- -------------
Operating loss (2,025,224) (2,086,319)
--------------- -------------
Other income (expense), net 47,092 (333,906)
--------------- -------------
Loss before income taxes $ (1,978,131) $ (2,420,225)
=============== =============
Revenue - ICC.NET - Revenue related to our ICC.NET service was 79% of
consolidated revenue for the six months ended January 31, 2004 ("2004 Six
Months") compared to 71% of consolidated revenue for the six months ended
January 31, 2003 ("2003 Six Months"). Total ICC.NET revenue increased $483,000
in the 2004 Six Months from the 2003 Six Months, or approximately 12%. VAN
services revenue increased $641,000, or approximately 17%, in the 2004 Six
Months from the 2003 Six Months due to an increase in customers from
approximately 700 at January 2003 to approximately 1,100 at January 2004.
Mapping revenue decreased $158,000, or approximately 48%, in the 2004 Six Months
from the 2003 Six Months due primarily to slow demand for these services.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 56% of revenue derived from the ICC.NET service in the 2004 Six
Months, compared to 62% of revenue in the 2003 Six Months. Cost of services
related to our ICC.NET service consists primarily of salaries and employee
benefits, connectivity fees, amortization and rent. The total increase in cost
of services of $6,000 in the 2004 Six Months from the 2003 Six Months was
primarily the result of an increase in data lines costs of $116,000 in the 2004
Six Months from the 2003 Six Months due to higher interconnect fees resulting
from an increase in volume and an increase in the number of customers.
Amortization increased $27,000 in the 2004 Six Months from the 2003 Six Months
due to software that was placed in service subsequent to the 2003 Six Months.
Allocation of equipment and software expense increased $22,000 in the 2004 Six
Months compared to the 2003 Six Months to reflect costs incurred by ICC.NET
personnel working in professional services facilities. In additions, allocation
of Product and Development costs increased $14,000 in the 2004 Six Months from
the 2003 Six Months due to an increase in time spent on new
27
INTERNET COMMERCE CORPORATION
customer implementations and testing. Offsetting these increases, salaries