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DIRECT INSITE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 14, 2014

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 forward­looking 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 forward­looking statements. Such forward­looking 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 forward­looking statements as a result of certain factors including but not limited to: general economic conditions; customer concentration; the risk of errors or failures in our software products; technological changes or difficulties; dependence on proprietary technology; the dependence on key personnel; the ability to recruit personnel; and the management of future growth both organically and through potential acquisitions. 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 forward­looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph.

OVERVIEW

The Company was incorporated under the laws of the State of Delaware on August 27, 1987. We consummated our initial public offering in 1992. In May 1990, we changed our name to Computer Concepts, Inc. and in August 2000, we changed our name to Direct Insite Corp.

Direct Insite operates as a SaaS, 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 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 services" 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, in 35 languages and multiple currencies. Direct Insite processes more than $125 billion in invoice value annually on behalf of our clients. Direct Insite processes, distributes and hosts millions of invoices, purchase orders, and supporting attachment documents, making them accessible on-line with an internet self-service portal. Suppliers, customers, and internal departments, such as Finance and Accounting or Customer Service users, can easily access their business documents.

Our revenue comes from (i) recurring, on-going services that are billed monthly; and (ii) non-recurring, professional services derived from the configuration of our software platform.

HP Enterprise Services ("HP") accounted for approximately 36.5% and 49.5% of revenue for the three months ended March 31, 2014 and 2013, respectively. We have three principal contracts with HP providing e-invoice services. These contracts have terms ranging from one to five years. The contracts may be terminated on ninety days advance written notice. In February 2013, we were notified by HP that one of its customers, representing approximately 12.8% of our revenue for the three months ended March 31, 2013, was terminating its contract with HP, thus HP terminated this individual contract with us effective March 31, 2013. As disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on July 24, 2013, despite efforts to negotiate a direct contractual agreement with this client, the client ultimately decided to sunset its use of the application. As such, we did not record revenue from this client after June 30, 2013.

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Table of Contents International Business Machines, Inc. ("IBM"), representing approximately 35.7% and 29.7% , of revenue for the three months ended March 31, 2014 and 2013, respectively, utilizes our suite of services to allow its 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. On October 28th 2013 one of these contracts was extended for a three year period, through December 31, 2016, and is renewable annually thereafter. The other contract was renewed for a one-year period and is renewable annually. The contracts may be terminated by either party with ninety days advance written notice.

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

The following is a summary of our operating results for the three months ended March 31, 2014 and 2013 (dollars in thousands):

2014 2013 Increase (Decrease) Revenues: Recurring $ 1,618$ 1,961$ (343 ) (17.5 )% Non-recurring 352 399 (47 ) (11.8 )% Total revenues 1,970 2,360 (390 ) (16.5 )% Operating costs and expenses: Operations, research and development 900 956 (56 ) (5.9 %) General and administrative 592 613 (21 ) (3.4 )% Sales and marketing 474 605 (131 ) (21.7 )% Amortization and depreciation 83 98 (15 ) (15.3 )%



Total operating costs and expenses 2,049 2,272 (223 ) (9.8 )%

Operating income (loss) (79 ) 88 (167 ) (189.8 )% Other expense, net 4 4 (0 ) (0.0 %) Provision for income taxes 3 0 3 Net income (loss) $ (86 )$ 84$ (170 ) (202.4 )% Revenues



For the three months ended March 31, 2014, total revenue decreased by $390,000, or 16.5%, to $1,970,000 from $2,360,000 for the comparable prior year period. Recurring revenue decreased by $343,000, or 17.5%, to $1,618,000 for the three months ended March 31, 2014, from $1,961,000 for the comparable prior year period, primarily due to the aforementioned HP customer that terminated its contract effective July 1, 2013. Non-recurring revenue decreased by $47,000, or 11.8%, to $352,000 for the three months ended March 31, 2014 from $399,000 for the comparable prior year period, primarily due to the non-recurrence of a large prior year customer-requested modification.

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Table of Contents Operating Cost and Expenses



Costs of operations, research and development decreased by approximately $56,000, or 5.9%, to $900,000 for the three months ended March 31, 2014 from $956,000 for the comparable prior year period. 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 decrease was primarily due to reduced salary expense resulting from a reduction in the workforce and the capitalization of internally developed software, partially offset by higher consulting fees for outsourced development.

General and administrative costs decreased by approximately $21,000, or 3.4%, to $592,000 for the three months ended March 31, 2014 from $613,000 for the comparable prior year period, as lower payroll costs, consulting and recruitment fees were mostly offset by legal and other expenses of $41,000 related to the exploration of strategic opportunities.

Sales and marketing costs decreased by approximately $131,000, or 21.7%, to $474,000 for the three months ended March 31, 2014 from $605,000 for the comparable prior year period, primarily due to a headcount-related decrease in compensation expense of $124,000, travel and related expenses of $19,000, and marketing related expenses of $6,000, partially offset by an increase in consulting expenses of $18,000.

Amortization and depreciation decreased by approximately $15,000, or 15.3%, to $83,000 for the three months ended March 31, 2014 from $98,000 for the comparable prior year period as the depreciable fixed assets remained virtually the same as last year, while some of the older assets became fully depreciated during that time.

Operating Income (Loss)

We had a net operating loss of $79,000, for the three months ended March 31, 2014, compared to net operating income of $88,000 for the comparable prior year period, due to the aforementioned decrease in revenue, partially offset by the aforementioned decrease in operating costs and expenses.

Other Expense

There was no change in other expense for the three months ended March 31, 2014 compared to the comparable prior year period.

Net Income (Loss)

We had a net loss of $86,000 for the three months ended March 31, 2014, a decrease of approximately $170,000 from net income of $84,000 for the comparable prior year period, due to the aforementioned decrease in operating income.

FINANCIAL CONDITION AND LIQUIDITY

As of March 31, 2014, we had total stockholders' equity of approximately $3,871,000, working capital of $1,830,000 and an accumulated deficit of $111,827,000. Our cash decreased by $387,000 during the three months ended March 31, 2014, to $984,000 on hand as of March 31, 2014.

Our primary sources for liquidity come from existing cash on hand and cash generated from operations. We believe we have sufficient liquidity available to fund our operations for the next twelve months.

During the three months ended March 31, 2014, cash used by operations was $162,000, compared to cash provided by operations of $463,000 for the three months ended March 31, 2013. The decrease in cash provided by operations is primarily due to the timing of collections from our customers and the timing of payments to our vendors.

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Table of Contents Cash used in investing activities for the three months ended March 31, 2014 was $170,000 due to capitalization of internally developed software. Cash used in investing activities for the three months ended March 31, 2013 was due to net expenditures for new equipment of $71,000.

Cash used in financing activities totaled $55,000 and $62,000 for the three months ended March 31, 2014 and 2013, respectively, with both periods reflecting payments on equipment notes and capital leases, primarily using cash provided by operations.

OUR CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are described in the audited financial statements and notes thereto for the year ended December 31, 2013, included in the Company's Annual Reported on Form 10-K filed with the SEC on March 26, 2014.

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.


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Source: Edgar Glimpses