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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
(Mark One)

x            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

o              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File No. 0 – 20660

DIRECT INSITE CORP.
 (Exact name of registrant as specified in its charter)

Delaware
 
11-2895590
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
13450 West Sunrise Blvd., Suite 510, Sunrise, FL
 
33323
(Address of principal executive offices)
 
(Zip Code)
     
Registrant’s telephone number, including area code   (631) 873-2900
 
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes  x   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

  Large accelerated filer o
 
Accelerated filer o
     
  Non-accelerated filer o
 
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

The number of shares of $.0001 par value common stock outstanding as of November 14, 2012 was: 12,464,251.
 


 
 

 
 
Table of Contents
 
PART I – FINANCIAL INFORMATION
Page
       
 
Item 1.
Financial Statements
 
       
        Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011
3
       
        Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)
4
       
        Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)
5
       
        Notes to Condensed Consolidated Financial Statements (Unaudited)
6
       
 
Item 2.
15
       
 
Item 3.
19
       
 
Item 4.
19
       
PART II – OTHER INFORMATION  
       
 
Item 1.
20
       
 
Item 1A.
20
       
 
Item 2.
20
       
 
Item 3.
20
       
 
Item 4.
20
       
 
Item 5.
20
       
 
Item 6.
20
       
  Signatures
21
       
CERTIFICATIONS  
Exhibits  
 
PART I –
FINANCIAL INFORMATION
Item 1.
Financial Statements
 
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
 
   
2012
   
2011
 
   
(Unaudited)
   
(Audited)
 
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 725     $ 687  
Accounts receivable
    1,977       1,568  
Prepaid expenses and other current assets
    283       233  
Deferred tax assets - current
    261       261  
                 
Total Current Assets
    3,246       2,749  
                 
Property and Equipment, Net
    701       765  
                 
Deferred Tax Asset
    766       766  
                 
Other Assets
    297       248  
                 
Total Assets
  $ 5,010     $ 4,528  
                 
Liabilities and Stockholders' Equity
               
Current Liabilities
               
Accounts payable and accrued expenses
  $ 1,199     $ 1,384  
Current portion of capital lease obligations
    190       135  
Current portion of notes payable
    45       62  
Deferred revenue
    70       --  
Deferred rent payable
    25       30  
Total Current Liabilities
    1,529       1,611  
                 
Other Liabilities
               
Capital lease obligations, net of current portion
    218       248  
Notes payable, net of current portion
    -       33  
                 
Total Liabilities
    1,747       1,892  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity
               
Preferred stock, $0.0001 par value; 2,000,000 shares authorized; none issued or outstanding
    --       --  
Common stock; $0.0001 par value; 50,000,000 shares authorized;12,484,262 and 12,156,760
shares issued and 12,444,335 and 12,116,833 shares outstanding in 2012 and 2011
    1       1  
Additional paid-in capital
    115,732       115,333  
Accumulated deficit
    (112,142 )     (112,370 )
Common stock in treasury, at cost; 24,371 shares in 2012 and 2011
    (328 )     (328 )
Total Stockholders' Equity
    3,263       2,636  
Total Liabilities and Stockholders' Equity
  $ 5,010     $ 4,528  
 
See notes to condensed consolidated financial statements.

 
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
                       
Recurring revenues
  $ 1,826     $ 1,807     $ 5,475     $ 5,385  
Professional services fees and other
    342       456       1,075       1,031  
                                 
Total Revenues
    2,168       2,263       6,550       6,416  
                                 
Costs and Expenses
                               
Operations, research and development
    928       945       2,890       2,708  
Sales and marketing
    585       586       1,727       1,558  
General and administrative
    451       454       1,411       1,837  
Severance pay to former CEO
    --       --       --       620  
Amortization and depreciation
    101       74       277       224  
                                 
Total Operating Costs and Expenses
    2,065       2,059       6,305       6,947  
                                 
Operating Income (Loss)
    103       204       245       (531 )
                                 
Other (Expense) Income
                               
Other (expense) income, net
    (11 )     12       (17 )     (192 )
                                 
Total Other (Expense) Income, Net
    (11 )     12       (17 )     (192 )
                                 
Income (Loss) Before Provision for Income Taxes
    92       216       228       (723 )
                                 
Provision for Income Taxes
    --       --       --       --  
                                 
Net Income (Loss)
  $ 92     $ 216     $ 228     $ (723 )
                                 
Basic Income (Loss) Per Share
  $ 0.01     $ 0.02     $ 0.02     $ (0.06 )
                                 
Diluted Income (Loss) Per Share
  $ 0.01     $ 0.02     $ 0.02     $ (0.06 )
                                 
Basic Weighted Average Common Stock Outstanding
    12,398       11,914       12,286       11,776  
                                 
Diluted Weighted Average Common Stock Outstanding
    12,410       11,993       12,292       11,776  
 
See notes to condensed consolidated financial statements.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
 
   
2012
   
2011
 
Cash Flows From Operating Activities
           
Net income (loss)
  $ 228     $ (723 )
Adjustments to reconcile net income (loss) to net cash provided by operations:
               
Amortization and depreciation
    277       224  
Stock-based compensation expense
    122       95  
Deferred rent expense
    (5 )     18  
Changes in operating assets and liabilities:
               
Accounts receivable
    (409 )     (227 )
Prepaid expenses and other current assets
    (99 )     (106 )
Accounts payable and accrued expenses
    92       818  
Deferred revenue
    70       (69 )
                 
Total Adjustments
    48       753  
                 
Net Cash Provided by Operating Activities
    276       30  
                 
Cash Flows Used in Investing Activities
               
Expenditures for property and equipment
    (58 )     (186 )
                 
Cash Flows From Financing Activities
               
Proceeds from exercise of stock options
    --       217  
Repayment of notes payable
    (50 )     (144 )
Repayment of capital lease obligations
    (130 )     (8 )
                 
Net Cash (Used in) Provided by Financing Activities
    (180 )     65  
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    38       (91 )
                 
Cash and Cash Equivalents - Beginning
    687       1,707  
                 
Cash and Cash Equivalents - Ending
  $ 725     $ 1,616  
                 
Supplemental Disclosure of Cash Flow Information:
               
                 
Cash paid for interest
  $ 11     $ 11  
Cash paid for income taxes
  $ --     $ --  
                 
Schedule of Non-Cash Investing and Financing Activities:
               
                 
Issuance of common stock in settlement of accrued board fees
  $ 277     $ --  
Equipment acquired by capital lease
  $ 155     $ 42  
 
See notes to condensed consolidated financial statements.

 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 1 –
Nature of Business

Direct Insite Corp. and Subsidiaries (“Direct Insite” or the “Company”), primarily operate as a Software as a Service provider (“SaaS”), that markets an integrated transaction based “fee for service” offering called Invoices On-Line (“IOL”), an electronic invoice presentment and payment (“EIP&P”) service that processes high volumes of transactional data for invoice presentment purposes delivered via the Internet on a global basis.  During the period, the Company operated redundant data centers in Miami, Florida, Commack, New York and Santa Clara, California.

As described in Note 8, the Company has three major customers that accounted for 87.5% and 92.3% of the Company’s revenue for the nine months ended September 30, 2012 and 2011, respectively.  Loss of any of these customers would have a material effect on the Company.


Note 2 -
Summary of Significant Accounting Policies

Interim Financial Information and Principles of Consolidation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of Direct Insite and its subsidiaries.  All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of September 30, 2012, the condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 and cash flows for the nine months ended September 30, 2012 and 2011, have not been audited.  These unaudited, condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  The December 31, 2011 consolidated balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.  These interim condensed consolidated financial statements include all adjustments which management considers necessary for a fair presentation of the financial statements and consist of normal recurring items.  The results of operations for the three and nine months ended September 30, 2012, are not necessarily indicative of results that may be expected for any other interim period or for the full year.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.  The accounting policies used in preparing these unaudited condensed consolidated financial statements are consistent with those described in the audited December 31, 2011 consolidated financial statements.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period.  Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  The most significant estimates are used in the accounting related to stock based compensation and the valuation allowance on deferred tax assets.  Actual results could differ from those estimates.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 2 -
Summary of Significant Accounting Policies (continued)
 
Revenue Recognition

The Company records revenue in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”) and SEC Staff Accounting Bulletin Topic 13 Revenue Recognition in Financial Statements.  Revenue is recognized when it is both earned and realizable, that is, when the following criteria are met:

 
·
Persuasive evidence of arrangements exist;
 
·
Delivery has occurred or services have been rendered;
 
·
The seller’s price is fixed and determinable; and
 
·
Collectability is reasonably assured.

The following are the specific revenue recognition policies for each major category of revenue.

Recurring

The Company provides transactional data processing services through its SaaS software solutions to its customers.  The customer is charged a monthly fixed rate on a per-transaction basis or a fixed fee based on monthly transaction volumes.  Revenue is recognized as the services are performed.

Professional Services

The Company provides nonrecurring engineering services to its customers, which may include initial or additional development, modification, and customization services to the Company’s existing software platform.  Such services are billed based on hourly rates or upon acceptance by the customer on a completed contract basis.  The Company does not sell software licenses, upgrades or enhancements, or post-contract customer services.  For hourly billed services, revenue is recognized as the services are performed.  For project-based services, revenue is recognized when the project has been accepted by the customer.

Income Taxes

The Company accounts for income taxes using the asset and liability method.  This method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax basis of assets and liabilities, using enacted tax rates.  Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized.  The Company currently has significant deferred tax assets.  The Company reviewed previous positive and negative evidence and also reviewed its expected taxable income for future periods and concluded that it is more likely than not that as of September 30, 2012 approximately $1,027,000 of tax benefits related to net operating loss carry-forwards will be utilized in future tax years.  As a result, the Company’s effective tax rate for the three and nine months ended September 30, 2012 and 2011 differs from the current statutory rates.  The Company
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 2 -
Summary of Significant Accounting Policies (continued)

Income Taxes (continued)

utilizes the expected annual effective tax rate in determining its income tax provision for the interim period’s income or loss.  The Company provides a valuation allowance on the remaining future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize the remaining assets, or other significant positive evidence arises that suggests its ability to utilize the remaining assets.  The future realization of a portion of its reserved deferred tax assets related to excess tax benefits associated with the exercise of stock options that, if and when realized, will not result in a tax benefit in the consolidated statement of operations, but rather will result in an increase in additional paid-in capital. The Company will continue to reassess its reserves on deferred income tax assets in future periods on a quarterly basis.

Earnings Per Share

The Company displays earnings per share in accordance with ASC 260, Earnings Per Share (“ASC 260”).  ASC 260 requires dual presentation of basic and diluted earnings per share (“EPS”).  Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.  Diluted earnings per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.  For the three and nine months ended September 30, 2012, potentially dilutive securities consisting of options to acquire 926,000 shares of common stock and 3,000 shares of unvested restricted stock are not included in the calculation of diluted earnings per share because their impact was anti-dilutive.

For the three and nine months ended September 30, 2011, potentially dilutive securities consisting of options to acquire 153,000 shares of common stock, and 24,000 and 47,000 shares of unvested restricted stock, respectively, are not included in the calculation of diluted loss per share because their impact was anti-dilutive.

The computation of diluted weighted average common shares outstanding used in the calculation of diluted earnings per share for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Weighted Average Common shares outstanding
    12,398       11,914       12,286       11,776  
Options to purchase common stock
    -       71       -       -  
Restricted stock grants
    12       8       6       -  
Total diluted shares
    12,410       11,993       12,292       11,776  

Fair Value of Financial Instruments

The carrying value of the Company’s accounts receivable and accounts payable approximates their fair value due to the short-term maturity of such instruments.  The carrying value of notes payable and capital lease obligations approximate their fair value because the terms of these instruments approximate prevailing market rates.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 2 -
Summary of Significant Accounting Policies (continued)
 
Recently Issued and Adopted Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial statements.
 
Note 3 –
Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consist of the following as of September 30, 2012 and December 31, 2011 as follows (in thousands):

 
 
2012
   
2011
 
Trade accounts payable
  $ 155     $ 229  
Sales taxes payable
    539       539  
Accrued board fees
    250       427  
Other accrued expenses
    255       189  
Total Accounts Payable and Accrued Expenses
  $ 1,199     $ 1,384  
 
Note 4 –
Debt

Line of Credit

The Company entered into a loan agreement with JPMorgan Chase Bank, NA (“Chase”) on May 31, 2011.  The agreement provided a revolving line of credit up to $1,000,000 with availability based on 80% of eligible assets (as defined).  The line of credit provided that interest would accrue at an annual rate of LIBOR plus 2%, was collateralized by the Company’s accounts receivable, had a term of 12 months, and provided for financial covenants.  During the time the loan agreement was in effect, the Company had not drawn any funds from the line of credit.

On May 11, 2012, the Company was notified by Chase that it was not in compliance with one of the financial covenants of the loan agreement, and although no funds had been drawn, the line of credit had been cancelled.

Notes Payable

As of September 30, 2012 and December 31, 2011, notes payable consist of approximately $45,000 and $95,000, respectively, of borrowings for the purchase of equipment.  These notes bear interest at rates ranging from 8.0% to 9.5% per year and mature through August 2013.  The notes are collateralized by the equipment purchased with net book values of approximately $46,000 and $95,000, as of September 30, 2012 and December 31, 2011, respectively.

Capital Lease Obligations

The Company has equipment under four capital lease obligations expiring at various times through August 2015.  The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair values of the assets.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 4 –
Debt
 
Capital Lease Obligations (continued)

As of September 30, 2012, future minimum payments under these capital leases are (in thousands):

For the Twelve Months Ending
     
September 30,
 
Amount
 
2013
  $ 201  
2014
    198  
2015
    25  
Total minimum lease payments
    424  
Less: amounts representing interest
    (16 )
Net minimum lease payments
    408  
Less: current portion
    (190 )
Long-Term Portion
  $ 218  

The implied interest rates related to these capital leases are 0.0%, 3.0%, 3.3% and 8.0%. The gross book value and the net book value of the related assets are approximately $589,000 and $423,000, respectively, as of September 30, 2012.
 
Note 5–
Stockholders’ Equity
 
Common Stock, Options and Stock Grants

For the nine months ended September 30, 2012 and 2011 the Company recorded approximately $122,000 and $95,000, respectively, in stock based compensation expense for the fair value of stock-based compensation.  For the three months ended September 30, 2012 and 2011 the Company recorded approximately $45,000 and $15,000, respectively, in stock based compensation expense for the fair value of stock-based compensation.  As of September 30, 2012, there was approximately $471,000 of total unrecognized stock based compensation costs, which is expected to be recognized over a weighted average period of 3.1 years.

Nine Months Ended September 30, 2012

During the nine months ended September 30, 2012, 65,999 restricted common shares with an aggregate grant date fair value of approximately $50,000 vested.  During the nine months ended September 30, 2012, the Company granted, to certain employees of the Company, options to acquire an aggregate of 835,000 shares of common stock for an exercise price of $1.15 per share, exercisable over a term of five years from the date of grant.  The options vest over a four year period, with 25% vesting on the first anniversary of the grant date and the remaining 75% vesting in equal monthly amounts through the fourth anniversary of the grant date. The Company estimated the grant date fair value of the stock options using the Black-Scholes option model and the following assumptions: volatility ranging from 168% to 175%, risk-free rate ranging from 0.36% to 0.41%, dividend rate of zero, and expected term of 3.75 years.  The grant date fair value of the stock options was determined to be approximately $500,000, of which approximately $71,000 was recognized as stock compensation expense for the nine months ended September 30, 2012.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 5–
Stockholders’ Equity (continued)

Common Stock, Options and Stock Grants (continued)
 
On April 5, 2012, the Company issued 261,503 shares with a grant date fair value of approximately $277,000, pursuant to the Direct Insite Corp. Directors’ Deferred Compensation Plan dated January 1, 2008, to two former Directors for past services.

Nine Months Ended September 30, 2011

During the nine months ended September 30, 2011, the Company granted 22,500 options to the current CEO with an exercise price of $1.15. The options have a fair value of $16,000 determined using the Black-Sholes pricing model. The key assumptions used in the model were a volatility of 102.0%, a dividend rate of 0%, a risk-free rate of 0.33%, and an expected life of 2.7 years. The Company also granted 55,000 options to employees with an exercise price of $1.20.  The options had a fair value of $40,000 determined using the Black-Sholes pricing model. The key assumptions used in the model were a volatility of 103.0%, a dividend rate of 0%, a risk-free rate of 0.62%, and an expected life of 2.5 years.

During the nine months ended September 30, 2011 the Company granted approximately 111,000 shares to directors of the Company as part of their compensation. The stock grants had a fair value of approximately $86,000 based on the closing price of the stock on the date of the grant. The stock grants vest over the two year period from January 1, 2011 through December 31, 2012.  The Company also issued 350,000 shares on the exercise of 350,000 options for $217,000 to the former CEO.

Stock Options

The following is a summary of stock option activity for nine months ended September 30, 2012, relating to all of the Company’s common stock plans:

         
Weighted
   
Weighted Average
   
Aggregate
 
         
Average
   
Remaining
   
Intrinsic
 
   
Shares
   
Exercise
   
Contractual Term
   
Value
 
   
(in thousands)
   
Price
   
(in years)
   
(in thousands)
 
                         
Outstanding at January 1, 2012
    128     $ 1.31       2.7     $ --  
Granted
    835     $ 1.15       4.3     $ --  
Forfeited
    (20 )   $ 1.15                  
Expired
    (17 )   $ 1.20                  
Outstanding at September 30, 2012
    926     $ 1.17       4.1     $ --  
Exercisable at September 30, 2012
    111     $ 1.33       2.3     $ --  
 
The following table summarizes stock option information as of September 30, 2012:

Outstanding Options
 
         
Weighted Average
     
     
Number Outstanding
 
Remaining
 
Options Exercisable
 
Exercise Prices
   
(in thousands)
 
Contractual Life
 
(in thousands)
 
  $1.50       50  
0.5 years
    50  
  $1.20       38  
3.7 years
    38  
  $1.15       838  
4.4 years
    23  
Total
      926  
4.1 years
    111  

 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 5–
Stockholders’ Equity (continued)

Stock Options (continued)

As of September 30, 2012, there was approximately $417,000 of unrecognized compensation costs related to stock options outstanding.  As of September 30, 2012, 375,785 shares were available for issuance under the stock option plans.

Restricted Stock Grants

A summary of the status of the Company’s non-vested stock grants as of September 30, 2012 and changes during the nine months ended September 30, 2012 is presented below:

Non-Vested Shares
 
Shares
(in thousands)
   
Weighted-Average
Grant Date Fair Value
 
Non-Vested at January 1, 2012
    35     $ 0.93  
Granted
    150     $ 0.66  
Forfeited
    (40 )   $ 0.71  
Vested
    (66 )   $ 0.75  
Non-Vested at September 30, 2012
     79     $ 0.68  
 
The future expected expense for non-vested shares is approximately $54,000 and will be recognized as expense through December 31, 2013.

Note 6 –
Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740 which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim period, disclosure and transition.  There were no unrecognized tax benefits as of September 30, 2012 and December 31, 2011.

The Company has identified its federal tax return and its state tax returns in New York and Florida as “major” tax jurisdictions, as defined in ASC 740.  Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.  The Company’s evaluation was performed for tax years ended 2008 through 2011, the only periods subject to examination.  The Company believes that its income tax positions and deductions will be sustained upon audit and does not anticipate any adjustments that will result in a material change to its financial position.  The Company has elected to classify interest and penalties incurred on income taxes, if any, as income tax expense.  No interest or penalties on income taxes have been recorded during the three and nine months ended September 30, 2012 and 2011.  The Company does not expect its unrecognized tax benefit position to change during the next twelve months.  Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.

As of September 30, 2012, the Company has federal and state net operating loss carryforwards (“NOLs”) remaining of approximately $36 million and $30 million, which may be available to reduce taxable income, if any.  Approximately $9 million of Federal NOLs will expire in 2012 with the remaining $27 million expiring in 2019 through 2031.  Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company.  During 2011, the Company performed an evaluation as to whether a change in control had taken place.  Management believes that there has been no change in control as such applies to Section 382.  However, if it is determined that a change in control has taken place, either historically or in the future, utilization of its NOLs could be subject to severe limitations, which could have the effect of eliminating substantially all of the future income tax benefits of the NOLs.  The NOL carryforward as of September 30, 2012 included approximately $1,194,000 related to windfall tax benefits for which a benefit would be recorded in additional paid-in capital if and when realized.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 7 –
Commitments and Contingencies
 
Operating Leases

Operating leases are primarily for office space, data centers, equipment and automobiles.  As of September 30, 2012, the future minimum lease payments under operating leases are summarized as follows (in thousands):

Twelve Months Ending
 
 
 
September 30,
 
Amount
 
2013
  $ 313  
2014
    207  
2015
    5  
Total
  $ 525  

Rent expense approximated $147,000 and $148,000 for the three months ended September 30, 2012 and 2011, respectively.  Rent expense approximated $400,000 and $391,000 for the nine months ended September 30, 2012 and 2011, respectively.

Employment Agreements

Future commitments under employment agreements for the Company’s President and Chief Executive Officer and the Company’s Executive Vice President of Channel Sales and Chief Technology Officer total $325,000 and $69,000 for the years ending September 30, 2013 and 2014 respectively.
 
Note 8 –
Major Customers

Three customers, HP Enterprise Services (“HP”), International Business Machines Corp. (“IBM”) and Siemens Corporation (“Siemens”), accounted for a significant portion of the Company’s revenues as follows:
 
   
% of Total Revenues
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
HP Customer A
    14.4 %     18.8 %     14.1 %     18.9 %
HP Customer B
    14.5 %     15.0 %     14.9 %     15.7 %
HP Customer C
    16.4 %     16.6 %     15.2 %     13.7 %
HP Customer D
    6.5 %     0.0 %     5.1 %     0.0 %
Total HP
    51.8 %     50.4 %     49.3 %     48.3 %
IBM
    32.7 %     30.9 %     32.7 %     33.1 %
Siemens
    4.7 %     10.2 %     5.5 %     10.9 %
Total Major Customers
    89.2 %     91.5 %     87.5 %     92.3 %
Others
     10.8 %     8.5 %     12.5 %     7.7 %
Total
    100.0 %     100.0 %     100.0 %     100.0 %
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 8 –
Major Customers (continued)
 
Revenue from Siemens for the three and nine months ended September 30, 2012 decreased due to the Company no longer incurring costs, and no longer charging Siemens for the facilitation of scanning services utilized by Siemens.

As of September 30, 2012, these three customers accounted for a significant portion of the Company’s accounts receivable as follows (in thousands):

HP
  $ 902  
IBM
    708  
Siemens
    75  
Total
  $ 1,685  
 
Note 9 –
Subsequent Events
 
On October 24, 2012, the Company entered into a 66-month Office Lease for 5,806 square feet of office space in downtown Ft. Lauderdale, Florida.  The lease calls for escalating base rent from $17.25 to $20.00 per square foot, plus an escalating allocated share of operating costs estimated from $12.55 to $16.02 per square foot, over the lease term.  The agreement provides for a total of six months’ rent abatement in the first 15 months of the term, and termination at the Company’s discretion at the end of the 42nd month for a fee of $100,000.  The lease required a $50,000 security deposit and first month’s rent upon contract execution.  Under the terms of the lease, the amount of the security deposit will be reduced by $15,000 each, after months 36 and 49.  The Company plans to relocate its corporate headquarters from Sunrise, Florida to the new location in January, 2013.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements under, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements.  When used in this Form 10-Q, words such as “anticipate”, “believe”, “estimate”, “expect”, “intend” and similar expressions, as such words or expressions relate to us or our management, identify forward-looking statements.  Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management.  Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, expansion of international operations, current economic conditions, the risk of errors or failures in our software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel, the dependence on key personnel, and customer concentration. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph.

Overview

Direct Insite Corp., (collectively with its subsidiaries hereinafter referred to at times as “Direct Insite”, “our”, “we”, or the “Company”) operates as Software as a Service provider, providing best practice financial supply chain automation and workflow efficiencies within the Procure-to-Pay and Order-to-Cash processes.  Specifically, Direct Insite’s global electronic invoice (“e-invoice”) management services automate complex manual business processes such as invoice validation, order matching, consolidation, dispute handling, and e-payment processing in a business-to-business transaction based “fee for service” business model.

Through the automation and workflow of Procure-to-Pay and Order-to-Cash processes and the presentation of invoices, orders, and attachment data via a self-service portal, Direct Insite is helping our customers reduce manual invoice-to-order reconciliation costs, reduce the frequency of inquiries and disputes, improve cash flow, increase competitiveness and improve customer satisfaction.

Direct Insite is currently delivering service and business value across the Americas, Europe, and Asia, including more than 100 countries, 35 languages and multiple currencies.  Direct Insite processes more than $125 billion in invoice value annually on behalf of our clients.  Direct Insite processes, hosts and distributes millions of invoices, purchase orders, and attachment documents making them accessible on-line within an internet self-service portal.  Suppliers, customers, and internal departments such as Finance and Accounting or Customer Service users can access their business documents 24 hours per day, 7 days per week, 365 days per year.

HP Enterprise Services (“HP”) accounted for 51.8% and 50.4% of revenue for the three months ended September 30, 2012 and 2011, respectively, and 49.3% and 48.3% of revenue for the nine months ended September 30, 2012 and 2011, respectively.  We have four principal contracts with HP providing e-invoice services.  These contracts have terms ranging from one to five years.  The contracts may be terminated on ninety days advance written notice.

IBM, representing 32.7% and 30.9% of revenue for the three months ended September 30, 2012 and 2011, respectively, and 32.7% and 33.1% of revenue for the nine months ended September 30, 2012 and 2011, respectively, utilizes our suite of services to allow their customers from around the globe to receive, analyze, dispute and cost allocate all of their invoice data in their local language and currency via the internet.  We have two principal contracts with IBM to provide e-invoice services for substantially all of IBM’s operating units.  These contracts are for one-year periods and are renewable annually.  The contracts may be terminated on ninety days advance written notice.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
 
Siemens Corporation (“Siemens”) accounted for approximately 4.7% and 10.2% of revenue for the three months ended September 30, 2012 and 2011, respectively, and approximately 5.5% and 10.9% of revenue for the nine months ended September 30, 2012 and 2011, respectively.  Revenue from Siemens for the three and nine months ended September 30, 2012, decreased due to the Company no longer incurring costs, and no longer charging Siemens for the facilitation of scanning services utilized by Siemens.  This change resulted in offsetting decreases in our operating, research and development expenses.

We expect to continue to focus our sales and marketing efforts to increase revenue and expand our customer base in 2012 and beyond.

Seasonality/Quantity Fluctuations

Revenue from SaaS ongoing services generally is not subject to fluctuations or seasonal flows.  However, we believe that revenue derived from custom engineering services will have a significant tendency to fluctuate based on customer demand.

Other factors, including, but not limited to, new service introductions, domestic and global economic conditions, customer budgetary considerations, and the timing of service upgrades may create fluctuations.  As a result of the foregoing factors, our operating results for any quarter are not necessarily indicative of results for any future period.

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Summary information of the Company’s results of operations for the three months ended September 30, 2012 and 2011 is as follows (in thousands):

   
Three Months Ended September 30,
             
   
2012
   
2011
   
Increase (Decrease)
 
                         
Revenues
                       
Recurring revenues
  $ 1,826     $ 1,807     $ 19       1 %
Professional services fees and other
    342       456       (114 )     (25 %)
                                 
Total Revenues
    2,168       2,263       (95 )     (4 %)
                                 
Costs and Expenses
                               
Operations, research and development
    928       945       (17 )     (2 %)
Sales and marketing
    585       586       (1 )     0 %
General and administrative
    451       454       (3 )     (1 %)
Amortization and depreciation
    101       74       27       36 %
                                 
Total Operating Costs and Expenses
    2,065       2,059       6       0 %
                                 
Operating Income
    103       204       (101 )     (50 %)
                                 
Other (Expense) Income
                               
Other (expense) income, net
    (11 )     12       (23 )     (192 %)
                                 
Total Other (Expense) Income, Net
    (11 )     12       (23 )     (192 %)
                                 
Income Before Provision for Income Taxes
    92       216       (124 )     (57 %)
                                 
Provision for Income Taxes
    --       --       --       0 %
                                 
Net Income
  $ 92     $ 216     $ (124 )     (57 %)
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
 
For the three months ended September 30, 2012 we had operating income of $103,000, compared to operating income of $204,000 for the three months ended September 30, 2011.  For the three months ended September 30, 2012 we had net income of $92,000, compared to net income of $216,000 for the three months ended September 30, 2011.  The decrease in income for 2012 compared to 2011 is primarily due to a decrease in revenues of approximately $95,000 and a $27,000 increase in depreciation expense primarily related to new equipment purchased at the end of 2011.

For the three months ended September 30, 2012, revenue decreased by $95,000 or 4% from $2,263,000 for the three months ended September 30, 2011 to $2,168,000 for the three months ended September 30, 2012.  The decrease is primarily due to the decrease in startup engineering services revenue from new customers contracted at the end of 2011 as they converted to ongoing IOL services revenue streams, together with the decrease in direct costs related to third-party scanning services no longer charged to Siemens.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Summary information of the Company’s results of operations for the nine months ended September 30, 2012 and 2011 is as follows (in thousands):

   
Nine Months Ended June 30,
             
   
2012
   
2011
   
Increase (Decrease)
 
                         
Revenues
                       
Recurring revenues
  $ 5,475     $ 5,385     $ 90       2 %
Professional services fees and other
    1,075       1,031       44       4 %
                                 
Total Revenues
    6,550       6,416       134       2 %
                                 
Costs and Expenses
                               
Operations, research and development
    2,890       2,708       182       7 %
Sales and marketing
    1,727       1,558       169       11 %
General and administrative
    1,411       1,837       (426 )     (23 %)
Severance pay to former CEO
    --       620       (620 )     (100 %)
Amortization and depreciation
    277       224       53       24 %
                                 
Total Operating Costs and Expenses
    6,305       6,947       (642 )     (9 %)
                                 
Operating Income (Loss)
    245       (531 )     776       (146 %)
                                 
Other Expense
                               
Other expense, net
    (17 )     (192 )     175       (91 %)
                                 
Total Other Expense, Net
    (17 )     (192 )     175       (91 %)
                                 
Income (Loss) Before Provision for Income Taxes
    228       (723 )     951       (132 %)
                                 
Provision for Income Taxes
    --       --       --       0 %
                                 
Net Income (Loss)
  $ 228     $ (723 )   $ 951       (132 %)
 
For the nine months ended September 30, 2012 we had operating income of $245,000, compared to an operating loss of $531,000 for the nine months ended September 30, 2011.  For the nine months ended September 30, 2012 we had net income of $228,000, compared to a net loss of $723,000 for the nine months ended September 30, 2011.  The increase in income for 2012 compared to 2011 is primarily due to approximately $620,000 of severance expenses incurred in 2011, an increase in revenues of $134,000 and a decrease in legal fees reflecting non-recurrence of proxy solicitation costs incurred in 2011, offset by increases in sales and marketing and operations, research and development expenses.

For the nine months ended September 30, 2012, revenue increased by $134,000 or 2% from $6,416,000 for the nine months ended September 30, 2011 to $6,550,000 for the nine months ended September 30, 2012.  The increase is primarily due to IOL services revenue and startup engineering services revenue from new customers contracted at the end of 2011, offset by the decrease in direct costs related to third-party scanning services no longer charged to Siemens.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
 
Costs of operations, research and development increased by approximately $182,000, or 7%, to $2,890,000 for the nine months ended September 30, 2012 from $2,708,000 for the nine months ended September 30, 2011. These costs consist principally of salaries and related expenses for software development, programming, custom engineering, network services, and quality control and assurance.  Also included are costs for purchased services, network costs, costs of the production co-location facilities and other expenses directly related to our custom engineering and SaaS services.  The increase was primarily the result of an increase in labor costs due to the addition of a Vice President of Development and other development staff and development costs as the Company increased engineering and development work related to new customers.

Sales and marketing costs increased by approximately $169,000, or 11%, to $1,727,000 for the nine months ended September 30, 2012 from $1,558,000 for the nine months ended September 30, 2011.  This increase resulted principally from increased labor costs due to the addition of a new Vice President of Sales in the first quarter of 2012, marketing consultant fees and increased trade show and travel expenses, which were incurred to support corporate sales and marketing initiatives.

General and administrative costs decreased by approximately $426,000, or 23%, to $1,411,000 for the nine months ended September 30, 2012 to $1,837,000 for the nine months ended September 30, 2011.  Salaries and related costs decreased by $67,000, legal fees decreased by $183,000, travel decreased by $68,000, other expenses decreased by $128,000, telephone expenses decreased by $6,000 and professional fees decreased by $14,000.  These decreases were offset by increases in accounting fees by $34,000 and insurance expenses by $6,000.

Financial Condition and Liquidity

As of September 30, 2012, the Company had total stockholders’ equity of $3,263,000, working capital of $1,717,000 and an accumulated deficit of $112,142,000.  The Company’s cash increased by $38,000 during the nine months ended September 30, 2012, to $725,000 on hand as of September 30, 2012.

During the nine months ended September 30, 2012, cash provided by operations was $276,000, compared to cash provided by operations of $30,000 for the nine months ended September 30, 2011.  In 2012, cash generated from operations principally reflects the Company’s operating income and non-cash charges of $277,000 for depreciation and amortization, $122,000 for stock based compensation, a $92,000 increase in accounts payable and an increase in deferred revenue of $70,000, offset by a $409,000 increase in accounts receivable, and a $99,000 increase in prepaid expense and other current assets.

Cash provided by operating activities for the nine months ended September 30, 2011 was $30,000, consisting of the net loss of $723,000, increased by non-cash income and expenses of $337,000, including depreciation and amortization of property and equipment of $224,000, stock-based compensation expense of $95,000 and deferred rent expense of $18,000. In addition, accounts receivable increased by $227,000 and prepaid expenses and other assets increased $106,000.  Accounts payable and accrued expenses increased $818,000 and deferred revenue decreased $69,000.

Cash used in investing activities due to expenditures for new equipment was $58,000 for the nine months ended September 30, 2012 and $186,000 for the nine months ended September 30, 2011.

Cash used in financing activities totaled $180,000 for the nine months ended September 30, 2012, reflecting payments on long-term debt and capital leases, compared to cash provided by financing of $65,000 in 2011, reflecting proceeds from the exercise of stock options of $217,000, offset by $152,000 in repayments of equipment loans and capital leases.
 
The Company believes it has sufficient liquidity available to continue in operation through at least September 2013.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
 
Our Critical Accounting Policies

Our critical accounting policies are described in the audited consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.


Quantitative and Qualitative Disclosure About Market Risk

Not applicable
 
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Acting Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act).  Based upon this evaluation our Chief Executive Officer and Acting Chief Financial Officer concluded that, at September 30, 2012, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
 
PART II
Other Information
 
Legal Proceedings
 
We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on our business, and no such proceedings are known to be contemplated.
 
Risk Factors
 
Not required of smaller reporting companies.
 
Unregistered Sale of Equity Securities and Use of Proceeds
 
None.
 
 Defaults in Senior Securities
 
None.
 
Mine Safety Disclosures
 
Not applicable.
 
Other Information
 
None.
 
Item 6.
Exhibits

Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
DIRECT INSITE CORP.
   
     
/s/ Matthew E. Oakes
   
Matthew E. Oakes, Chief Executive Officer
 
November 14, 2012
     
/s/ Sandra Wallace
   
Sandra Wallace, Acting Chief Financial Officer
 
November 14, 2012
 
 
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