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

August 12, 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 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 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 41.6% and 52.2% of revenue for the three months ended June 30, 2014 and 2013, respectively, and approximately 39.4% and 50.9% of revenue for the six months ended June 30, 2014 and 2013, respectively. In the second quarter, we had 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, the Company was notified by HP, that one of its customers, representing 18.5% of the Company's revenues for the three months ended June 30, 2013, and 15.7% of the Company's revenues for the six months ended June 30, 2013, was terminating its contract effective March 31, 2013. As disclosed in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on July 24, 2013, the Company determined that despite its efforts to negotiate a direct contractual agreement with this client, the client ultimately decided to sunset its use of the application. As such, the Company did not record any revenue from this client after June 30, 2013.

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Table of Contents International Business Machines, Inc. ("IBM"), representing approximately 38.0% and 27.9%, of revenue for the three months ended June 30, 2014 and 2013, respectively, and approximately 36.9% and 28.7%, of revenue for the six months ended June 30, 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 on 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

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

The following is a summary of operating results for the three months ended June 30, 2014 and 2013 (in thousands):

2014 2013 Increase (Decrease) Revenues: Recurring $ 1,636$ 1,969$ (333 ) (16.9 )% Non-recurring 510 549 (39 ) (7.1 )% Total revenues 2,146 2,518 (372 ) (14.8 )%



Operating costs and expenses: Operations, research and development 850 1,022 (172 ) (16.8 )% General and administrative

610 562 48 8.5 % Sales and marketing 570 627 (57 ) (9.1 )% Amortization and depreciation 83 101 (18 ) (17.8 )%



Total operating costs and expenses 2,113 2,312 (199 ) (8.6 )%

Operating income 33 206 (173 ) (84.0 )% Other expense net 2 9 (7 ) (77.8 )% Net income $ 31$ 197$ (166 ) (84.3 )% Revenues



For the three months ended June 30, 2014, revenue decreased by $372,000, or 14.8 %, to $2,146,000 from $2,518,000 for the comparable prior year period. Recurring revenue decreased by $333,000, or 16.9 %, to $1,636,000 for the three months ended June 30, 2014, from $1,969,000 for the comparable prior year period. This was primarily due to the aforementioned HP customer terminating its contract effective July 1, 2013. Non-recurring revenue decreased by $39,000, or 7.1%, to $510,000 for the three months ended June 30, 2014 from $549,000 for the comparable prior year period primarily due to the non-recurrence of engineering of a large prior year customer requested modifications.

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Table of Contents Operating Cost and Expenses



Costs of operations, research and development decreased by approximately $172,000, or 16.8%, to $850,000 for the three months ended June 30, 2014 from $1,022,000 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 the capitalization of internally developed software and lower consulting fees for outsourced development, partially offset by higher cloud license and service costs.

General and administrative costs increased by approximately $48,000, or 8.5%, to $610,000 for the three months ended June 30, 2014 from $562,000 for the comparable prior year period, primarily due to legal and other professional fees related to the Company's proxy and Stock Incentive Plan, and intellectual property.

Sales and marketing costs decreased by approximately $57,000, or 9.1%, to $570,000 for the three months ended June 30, 2014 from $627,000 for the comparable prior year period, primarily due to a headcount-related decrease in compensation expense of $89,000, partially offset by trade show sponsorships and consulting expense.

Amortization and depreciation decreased by approximately $18,000, or 17.8%, to $83,000 for the three months ended June 30, 2014 from $101,000 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

Operating income decreased by approximately $173,000, or 84.0%, to $33,000, for the three months ended June 30, 2014, compared to $206,000 for the comparable prior year period, due to the aforementioned decrease in revenues, partially offset by the aforementioned decrease in operating cost and expenses.

Other Expense, net

We reported other expense of approximately $2,000 for the three months ended June 30, 2014 compared to other expense of $9,000 for the comparable prior year period.

Net Income

Net income decreased by approximately $166,000, to $31,000, for the three months ended June 30, 2014, compared to net income of $197,000 for the comparable prior year period, due to a decrease in operating income.

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Table of Contents Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013



The following is a summary of operating results for the six months ended June 30, 2014 and 2013 (in thousands):

2014 2013 Increase (Decrease) Revenues: Recurring $ 3,254$ 3,930$ (676 ) (17.2 )% Non-recurring 861 948 (87 ) (9.2 )% Total revenues 4,115 4,878 (763 ) (15.6 )%



Operating costs and expenses: Operations, research and development 1,751 1,978 (227 ) (11.5 )% General and administrative

1,202 1,175 27 2.3 % Sales and marketing 1,044 1,234 (190 ) (15.4 )% Amortization and depreciation 166 199 (33 ) (16.6 )%



Total operating costs and expenses 4,163 4,586 (423 ) (9.2 )%

Operating income (loss) (48 ) 292 (340 ) (116.4 )% Other expense, net 5 13 (8 ) (61.5 )% Net income (loss) $ (53 )$ 279$ (332 ) (119.0 )% Revenues



For the six months ended June 30, 2014, total revenue decreased by $763,000, or 15.6%, to $4,115,000 from $4,878,000 for the comparable prior year period. Recurring revenue decreased by $676,000, or 17.2%, to $3,254,000 for the six months ended June 30, 2014, from $3,930,000 for the comparable prior year period. This was primarily due to the aforementioned HP customer terminating its contract effective July 1, 2013. Non-recurring revenue decreased by $87,000, or 9.2%, to $861,000 for the six months ended June 30, 2014 from $948,000 for the comparable prior year period primarily due to the non-recurrence of engineering of a large prior year customer requested modifications.

Operating Costs and Expenses

Costs of operations, research, and development decreased by approximately $227,000, or 11.5%, to $1,751,000 for the six months ended June 30, 2014 from $1,978,000 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 the capitalization of internally developed software and a decrease in subcontractor usage, partially offset by higher cloud license and service costs.

General and administrative costs increased by approximately $27,000, or 2.3%, to $1,202,000 for the six months ended June 30, 2014 from $1,175,000 for the comparable prior year period, primarily due to legal and other professional fees related to the Company's proxy and Stock Incentive Plan, and intellectual property.

Sales and marketing costs decreased by approximately $190,000, or 15.4%, to $1,044,000 for the six months ended June 30, 2014 from $1,234,000 for the comparable prior year period, primarily due to a headcount-related decrease in compensation expense of $176,000 and decreases in travel and entertainment and recruitment costs, partially offset by an increase in consulting fees.

Amortization and depreciation decreased by approximately $33,000, or 16.6%, to $166,000 for the six months ended June 30, 2014 from $199,000 for the comparable prior year period due to lower depreciation expense that is associated with less new capital expenditures over the past six months.

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Table of Contents Operating Income



Operating income (loss) decreased by approximately $340,000, to an operating loss of $48,000 for the six months ended June 30, 2014, compared to operating income of $292,000 for the comparable prior year period, due to the aforementioned decrease in revenues, partially offset by the aforementioned decrease in operating costs and expenses.

Other Expense, net

We reported other expense of approximately $5,000 for the six months ended June 30, 2014 compared to $13,000 for the comparable prior year period.

Net Income (Loss)

Net income (loss) for the six months ended June 30, 2014 decreased by approximately $332,000, or 119.0%, to a net loss of $53,000, compared to net income of $279,000 for the comparable prior year period.

FINANCIAL CONDITION AND LIQUIDITY

As of June 30, 2014, we had total stockholders' equity of approximately $3,950,000, working capital of $1,856,000 and an accumulated deficit of $111,797,000. Our cash decreased by $443,000 during the six months ended June 30, 2014, to $928,000 of cash on hand as of June 30, 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 six months ended June 30, 2014, cash used in operations was $30,000, compared to cash provided by operating activities of $638,000 for the comparable prior year period. The decrease in cash provided from operations is primarily due to lower profitability and the timing of payments from our customers.

Cash used in investing activities for the six months ended June 30, 2014 was $305,000 primarily due to capitalization of internally developed software. Cash used in investing activities for the six months ended June 30, 2013 was due to expenditures for new equipment of $102,000, partially offset by proceeds from the sale of property and equipment of $8,000.

Cash used in financing activities totaled $108,000 and $125,000 for the six months ended June 30, 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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Table of Contents


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