U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
_____________
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended October 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE
ACT FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 13-3645702
- ----------------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
805 Third Avenue 9th flr, New York, NY 10022
- ----------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(212) 271-7640
- -----------------------------------------
(Issuer's telephone number)
Infosafe Systems, Inc.
- -----------------------------------------
(Former name, normer address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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_____
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding at October 31, 1998:
------------------------------------ ---------------------------------
Class A Common Stock, $.01 par value 1,282,386 shares
Class B Common Stock, $.01 par value 194,397 shares
Traditional Small Business Disclosure Format
Yes__X__ No_____
INDEX TO FORM 10-QSB
PAGE
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of July 31, 1998 and
October 31, 1998 (Unaudited) 3
Condensed Statements of Operations for the Three Months
ended October 31, 1997 and October 31, 1998 (Unaudited)
and for the period November 18, 1991 (Inception) through
October 31, 1998 (Unaudited) 4
Condensed Statements of Cash Flows for the
Three Months ended October 31, 1997 and October 31, 1998
(Unaudited) and for the period November 18, 1991
(Inception) to October 31, 1998 (Unaudited) 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
INTERNET COMMERCE CORPORATION
(a development stage company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, 1998 October 31, 1998
(audited) (unaudited)
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 178,287 $ 112,877
Accounts receivable 7,231 6,669
Prepaid expenses and other assets 100,882 38,406
--------------- ----------------
Total current assets 286,400 157,952
Fixed assets 533,188 485,974
Software development costs 714,298 714,164
Other assets 1,200 1,200
Goodwill, net 457,317
--------------- ----------------
Total assets $ 1,535,086 $ 1,816,607
LIABILITIES
Current liabilities:
Accounts payable $ 575,031 $ 627,034
Bridge notes, net of debt discount 232,557 518,084
Notes payable 157,649
Capital lease obligation 84,505 88,113
Accrued expenses 308,646 628,786
---------------- ----------------
Total current liabilities 1,200,739 2,019,666
---------------- ----------------
Capital lease obligation - less current portion 196,887 173,459
---------------- ----------------
Total liabilities 1,397,626 2,193,125
---------------- ----------------
Redeemable Common Stock 5,729 5,729
STOCKHOLDERS' EQUITY
Common stock:
Class A - par value $.01 per share, 40,000,000 shares authorized,
one vote per share; 947,951 shares issued and outstanding
at July 31, 1998 and 1,282,386 shares issued and outstanding
at October 31, 1998 9,480 12,825
Class B - par value $.01 per share, 2,000,000 shares authorized,
six votes per share; 194,397 shares issued and outstanding 1,944 1,944
Additional paid-in capital 14,532,208 15,106,015
Notes receivable (112,500) (112,500)
(Deficit) accumulated during development stage (14,299,401) (15,390,531)
---------------- ----------------
Total stockholder's equity 131,731 (382,247)
---------------- ----------------
Total liabilities and stockholders' equity $ 1,535,086 $ 1,816,607
---------------- ----------------
</TABLE>
Attention is directed to the accompanying notes to financial statments
INTERNET COMMERCE CORPORATION
(a development stage company)
Condensed Statements of Operations
(Unaudited)
For the Three Months Period From
Ended October 31, November 18, 1991
----------------------------- (Inception) through
1997 1998 October 31, 1998
----------------------------- -------------------
Revenue:
License Fees $ 350,000
Services $ 9,296 26,777
Other $ 3,150 261,163
------------ ------------ -------------------
Total 3,150 9,296 637,940
------------ ------------ -------------------
Expenses:
Cost of revenue 2,308 5,010 261,724
Operating expenses 504,152 1,021,660 14,281,674
Write-down of assets 1,155,091
------------ ------------ -------------------
Total 506,460 1,026,670 15,698,489
------------ ------------ -------------------
Operating (loss) (503,310) (1,017,374) (15,060,549)
------------ ------------ -------------------
Interest and investment
income 41,887 4,767 577,003
Settlement expense (394,828)
Minority interest 1,000
Interest expense (253) (78,523) (504,757)
------------ ------------ ------------------
Net (loss) $ (461,676) $(1,091,130) $ (15,382,131)
------------ ------------ ------------------
Basic and diluted (loss)
per common share $ (0.43) $ (0.85)
------------ ------------
Weighted average number
of common shares 1,062,348 1,276,849
------------ ------------
Outstanding - basic and
diluted (loss)
per share
Attention is directed to the accompanying notes to finincial statements
INTERNET COMMERCE CORPORATION
(a development stage company)
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Period From
Ended October 31, November 18, 1991
------------------------------- (Inception) through
1997 1998 October 31, 1998
------------------------------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $ (461,676) $ (1,091,130) $ (15,382,131)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Write-down of assets 1,155,091
Other net cash provided by (used in)
operating activities (86,226) 669,315 2,950,627
-------------- ------------- -------------------
Net cash (used in) operating
activities (547,902) (421,815) (11,276,413)
-------------- ------------- -------------------
Cash flows from investing activities:
Purchases of marketable securities (499,726) (16,083,295)
Sales of marketable securities 1,090,317 16,083,295
Capitalization of software development
costs (921,188)
Other investing activities (260,328) (1,814,637)
-------------- ------------- -------------------
Net cash provided by (used in)
investing activities 330,263 (2,735,825)
-------------- ------------- -------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 16,075,260
Costs in connection with sale of
common stock (2,912,671)
Payment of purchase agreement (15,000) (212,840)
Exercise of warrants and options 424,895
Proceeds from bridge notes and notes
payable 455,000 2,250,000
Payment of bridge loan (1,500,000)
Payment of deferred financing costs (224,919)
Proceeds form financing lease 340,715
Other financing activities (2,489) (98,595) (115,325)
-------------- ------------- -------------------
Net cash provided by (used in)
financing activities (17,489) 356,405 14,125,115
-------------- ------------- -------------------
Net increase (decrease) in cash and cash
equivalents (235,128) (65,410) 112,877
Cash and cash equivalents, beginning
of period 392,860 178,287
-------------- ------------- -------------------
Cash and cash equivalents, end of period $ 157,732 $ 112,877 $ 112,877
-------------- ------------- -------------------
Supplemental schedule of noncash investing
and financing activities:
Debt discount in connection with
bridge loan 78,775
Goodwill 470,383
</TABLE>
Attention is directed to the accompanying notes to financial statements
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION AND THE COMPANY:
[1] Basis of presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Article 3 of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have
been included. Operating results for the three-month period ended
October 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending July 31, 1999.
The balance sheet at July 31, 1998 has been derived from the audited
consolidated financial statements at that date, but does not include
all the footnotes required by generally accepted accounting
principles for complete financial statements. For further
information, refer to the audited financial statements and footnotes
thereto included in the Form 10-KSB for the Company's fiscal year
ended July 31, 1998.
[2] The Company:
Internet Commerce Corporation (the "Company" or "ICC"), formerly
Infosafe Systems, Inc. is a development stage company, engaged in the
design, development and marketing of systems for securing,
controlling, delivering and auditing electronic documents and files
primarily over the Internet. The Company believes that its
technology and methods address critical areas of electronic commerce
and it is seeking to position itself as an independent third party to
authenticate, certify, validate, authorize, and deliver secure
transactions for electronic information.
The acquisition of the 16.7% of its majority owned subsidiary
("ICCSUB" or the subsidiary"), not previously held by the Company was
completed during the first fiscal quarter. A total of 334,435 shares
of Class A Common Stock is issuable to the former minority owners of
ICCSUB as a result of this acquisition. The acquisition was
accounted for as a purchase of a minority interest.
NOTE B - GOODWILL:
The Company recorded $470,383 in goodwill, as a result of the
acquisition of ICCSUB. The Company valued the acquisition of ICCSUB
at the market value of the Class A Common Stock on the date of the
transaction. The goodwill, which represents the excess of purchase
price over fair value of net assets acquired, is being amortized on a
straight-line basis over 3 years. Accumulated amortization as of
October 31, 1998 was $13,066.
NOTE C - BRIDGE NOTES:
The Company had $595,000 of Bridge Notes outstanding as of October
31, 1998. The accrued interest at fiscal quarter end was $13,166.
In connection with the issuance of the Bridge Notes, 178,500 Bridge
Warrants to purchase shares of Class A Common Stock have become
issuable. The Company has valued these warrants using the Black-
Scholes pricing model at $150,578, which are being treated as debt
discount and amortized over the term of the notes. Subsequent to
fiscal quarter end, the Company has received and accepted an
additional $300,000 of Bridge Notes.
NOTE D - NOTES PAYABLE:
The Company has issued $155,000 in Notes Payable, accruing interest
at a rate of 10% per annum, $100,000 is due to family members of an
officer of the Company, $5,000 is due to an officer of the Company
and $50,000 is due to an unaffiliated party. The accrued interest at
fiscal quarter end was $2,648. Subsequent to fiscal quarter end, the
unaffiliated party converted $50,000 of the Notes Payable into the
Bridge Notes. The remaining notes are due from November 30 to
December 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Except for the description of historical facts contained herein, this
Form 10-QSB contains certain forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties,
such as (i) the Company's ability to obtain financing expected to be
required during the fiscal year ending July 31, 1999, or (ii) that
the Company will ever achieve profitable operations, as detailed
herein under "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and from time to time
in the Company's filings with Securities and Exchange Commission and
elsewhere. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties
which could cause actual results to differ materially from those
described in the forward-looking statements. The Company's actual
results could differ materially from those discussed herein.
Overview
The Company is a development stage company, engaged in the design,
development and marketing of systems for securing, controlling,
delivering and auditing electronic documents and files primarily over
the Internet. The Company believes its technology and methods address
critical areas of electronic commerce and is seeking to position
itself as an independent third party to authenticate, certify,
validate, authorize, and deliver secure transactions for electronic
information. From November 18, 1991 (inception) to October 31, 1998,
the Company recognized revenues of approximately $638,000
and had an accumulated deficit of approximately $15 million. The
Company has continued to operate at a deficit since inception and
expects to continue to operate at a deficit until such time, if ever,
as operations generate sufficient revenues to cover costs. The
Company's ability to generate revenues and operate profitably and
continue as a going concern, is dependent on its ability to market
the CommerceSense System it has developed and its ability to raise
the necessary additional operating funds. The likelihood of the
success of the Company must be considered in light of the
difficulties and risks inherent in a new business. There can be no
assurance that revenues will increase significantly in the future or
that the Company will ever achieve profitable operations.
The Company anticipates that it will need approximately $500,000 in
additional proceeds from the Bridge Financing or other sources to
continue its operations through the end of December 1998. In the
event that the Company does not raise necessary amount from the
Bridge Financing, it will seek alternative sources of funding,
including a private placement of equity securities or one or more
strategic venture partners.
As of October 31, 1998, the Company had received and accepted
subscription for the purchase of $595,000 of Bridge Units from
individual accredited investors. As of November 13, 1998, the
company has received and accepted $895,000 of Bridge Units from
accredited investors.
The Company has issued $155,000 in Notes Payable, accruing interest
at a rate of 10% per annum, $100,000 is due to family members of an
officer of the Company, $5,000 is due to an officer of the Company
and $50,000 is due to an unaffiliated party. Subsequent to the end of
the fiscal quarter, the unaffiliated party converted $50,000 of the
Notes Payable into the Bridge Notes.
The Company has incurred substantial losses since inception and
anticipates losses to continue through the fiscal year ending July
31, 1999 ("fiscal 1999") as the Company attempts to expand commercial
markets for CommerceSense. Although management believes that the
Company will be successful in develop and marketing CommerceSense,
there can be no assurance that it will be able to do so or that its
present resources or access to additional financing will be adequate,
if available at all, to achieve these objectives or to continue
as a going concern.
Results of Operations
Three Months Ended October 31, 1998 Compared with Three Months
Ended October 31, 1997.
Revenues were approximately $9,000 and $3,000, respectively, for
the three months ended October 31, 1998 (the "1999 Quarter"),
and for the three months ended October 31, 1997 (the "1998
Quarter"). The 1999 revenues were generated by CommerceSense.
Operating expenses increased from $504,000 for the 1998 Quarter to
$1,022,000 for the 1999 Quarter. The increase of $518,000 is
attributable to an increase in technical costs of over
$223,000 that were not present in the 1998 Quarter, an increase of
$155,000 of legal expenses, $65,000 in accrued settlement expenses
related to the Nagel arbitration and other increases in expenditures
in support of the CommerceSense service not present in the 1998
Quarter. The Nagel settlement was for a total of $122,650, payable
on or about December 4, 1998, the Company had previously accrued
approximately $58,000 in a prior period.
The Company had income from investments of $5,000 for the 1999
Quarter and $42,000 for the 1998 Quarter. The decrease was
due to an decrease in average balances of the Company's
investment securities for the period.
Interest expense was $79,000 in the 1999 Quarter compared to $300
in the 1998 Quarter. The interest expense increase is attributed to
debt discount amortization related to Bridge Note Warrants and the
financing of a capital lease.
The net loss for the 1999 Quarter was $1,091,000 compared to
$461,700 for the 1998 Quarter. Management believes that losses
will continue through fiscal 1999 as the Company is still in the
development stage and is in the process of commercializing and
marketing its new service.
Liquidity and Capital Resources
The Company has incurred substantial losses since inception.
Although no assurance can be given, the Company anticipates that
revenues will continue to be generated, although as a result of
increased expenses associated with any such revenues, losses may
increase, or the decrease in losses realized in fiscal 1999 may not
be comparable to fiscal 1998. At October 31, 1998, the
Company had a negative working capital of approximately ($1.9
million). The Company has financed its operations through
private placements during fiscal 1994, its initial public offering
during fiscal 1995 (the "IPO"), a private placement in March 1997,
and a private placement of Bridge Note Units during fiscal 1998 and
1999. The Company anticipates losses through fiscal 1999, as the
Company attempts to expand commercial markets for CommerceSense. The
Company does not have sufficient financial resources to continue its
operations beyond December 1998, without obtaining additional
financing. There can be no assurance that the Company will be able
to obtain the necessary financing or to generate sufficient revenue
to continue its operations and continue as a going concern. Any
additional equity financing would be dilutive to stockholders, and
debt financing, if available, may contain covenants that might
restrict the Company's ability to implement its current objectives.
The Company has a net operating loss carryforward of approximately
$15 million to offset any future taxable income for federal tax
purposes. The utilization of the loss carryforward to reduce any
such future income taxes will depend on the Company's ability to
generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The carryforward expires from 2007 to
2013. The Internal Revenue Code of 1986, as amended, generally
contains provisions which limit the use of available net operating
loss carryforwards in any given year should significant changes
(greater than 50%) in ownership interests occur. Due to the IPO, the
net operating loss carryover of approximately $1,900,000 incurred
prior to the IPO will be subject to an annual limitation of
approximately $400,000 until that portion of the net operating loss
is utilized or expires.
PART II
Item 1: Legal Proceedings
The Company commenced arbitration against its former Vice President
and Director of Technology, Robert Nagel ("Nagel"), on May 29, 1997,
for fraud, breach of his employment contract, breach of the duties of
obedience and loyalty and misappropriation of corporate opportunity.
Nagel denied the claims and served a counterclaim alleging breach of
the employment agreement, discrimination on the basis of his
blindness, defamation, and violation of the Federal Wiretapping Act
and the Federal Eavesdropping Act. The damages sought by Nagel
against the Company was for approximately $1,000,000, excluding
interest, costs and attorney's fees. The Company believed that it
had a meritorious case against Nagel and strong defenses to Nagel's
counterclaims. Nonetheless, the arbitrators found in favor of Nagel
and awarded Nagel $122,650, payable on or about December 4, 1998.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit(s).
Number Description Method of Filing
- ------ ----------------------- ---------------------------
27 Financial Data Schedule Filed with this Form 10-QSB
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended October 31,
1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNET COMMERCE CORPORATION
- -----------------------------
(Registrant)
Date: November 19, 1998 By: /s/ Richard J. Berman
-------------------------------------------
Richard J. Berman, Chief Executive Officer,
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 19, 1998 By: /s/ Walter M. Psztur
-------------------------------------------
Walter M. Psztur, V.P. Finance &
Administration (Chief Financial Officer,
Principal Accounting Officer & Secretary)
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 112,877
<SECURITIES> 0
<RECEIVABLES> 6,669
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 157,952
<PP&E> 939,727
<DEPRECIATION> 453,753
<TOTAL-ASSETS> 1,816,607
<CURRENT-LIABILITIES> 2,019,666
<BONDS> 0
0
0
<COMMON> 20,498
<OTHER-SE> (402,745)
<TOTAL-LIABILITY-AND-EQUITY> 1,816,607
<SALES> 9,296
<TOTAL-REVENUES> 9,296
<CGS> 5,010
<TOTAL-COSTS> 5,010
<OTHER-EXPENSES> 1,021,660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,523
<INCOME-PRETAX> (1,091,130)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,091,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,091,130)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
