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, 1999
[ ] 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 No.)
805 Third Avenue 9TH Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 271-7640
(Issuer's telephone number)
- ---------------------------
(Former name, former 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 31,1999:
----- -------------------------------
Class A Common Stock, $.01 par value 2,249,108 shares
Class B Common Stock, $.01 par value 115,590 shares
Traditional Small Business Disclosure Format
Yes |X| No |_|
<PAGE>
INTERNET COMMERCE CORPORATION
INDEX TO FORM 10-QSB
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance sheets as of October 31, 1999 (unaudited) and July 31, 1999..... 3
Statements of operations and comprehensive loss for the three months
ended October 31, 1999 and October 31, 1998 (unaudited).............. 4
Statements of cash flows for the three months ended October 31, 1999
and 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.................................... 8-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 11
SIGNATURES ......................................................... 12
2
<PAGE>
INTERNET COMMERCE CORPORATION
Balance Sheet
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 452,732 $ 114,258
Marketable securities 1,993,400 3,970,655
Accounts receivable 114,818 49,424
Prepaid expenses and other assets 31,338 111,434
-------------- ---------------
Total current assets 2,592,288 4,245,771
Restricted cash 441,024 435,664
Property and equipment, net 807,253 793,131
Software development costs, net 708,839 711,889
Goodwill, net 300,523 339,721
Other assets 14,237 14,237
-------------- ---------------
Total assets $ 4,864,164 $ 6,540,413
============== ===============
LIABILITIES
Current liabilities:
Accounts payable $ 430,328 $ 367,379
Accrued expenses 379,002 554,537
Capital lease obligation 218,760 188,271
Other liabilities 370 16,819
-------------- ---------------
Total current liabilities 1,028,460 1,127,006
Capital lease obligation - less current portion 333,562 358,498
-------------- ---------------
Total liabilities 1,362,022 1,485,504
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock:
Preferred stock - 5,000,000 shares authorized, including 10,000 series A
preferred stock and 175 series S preferred.
Series A preferred stock - par value $.01 per share, $1,000 liquidation
value per share, 7,690 and 9,590 shares issued and outstanding at October
31, 1999
and July 31, 1999 77 96
Common stock:
Class A - par value $ .01 per share, 40,000,000 shares authorized, one vote
per share; 2,249,108 and 1,810,941 shares issued and outstanding
October 31, 1999 and July 31, 1999 22,491 18,109
Class B - par value $ .01 per share, 2,000,000 shares authorized,
six votes per share; 115,590 shares issued and outstanding October 31,
1999
and July 31, 1999 1,156 1,156
Additional paid-in capital 29,181,585 28,989,889
Accumulated deficit (25,695,007) (23,920,341)
Accumulated other comprehensive loss (8,160) (34,000)
-------------- ---------------
Total stockholders' equity 3,502,142 5,054,909
-------------- ---------------
Total liabilities and stockholders' equity $ 4,864,164 $ 6,540,413
============== ===============
</TABLE>
See notes to financial statements
3
<PAGE>
INTERNET COMMERCE CORPORATION
Statements of Operations and Comprehensive Loss
<TABLE>
<CAPTION>
Three Months Ended
October 31,
--------------------------------
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
Revenue:
Services $ 140,363 $ 9,296
-------------- ---------------
Expenses:
Cost of services 222,931 5,010
Product development and enhancement 223,214 106,168
Selling and marketing 565,832 126,087
General and administrative 906,547 756,528
Non-cash charges in connection with compensation
and services 487,950
-------------- ---------------
(1,918,524) (1,481,743)
-------------- ---------------
Operating loss (1,778,161) (1,472,477)
-------------- ---------------
Interest and investment income 27,759 4,767
Interest expense (24,264) (80,878)
-------------- ---------------
NET LOSS $ (1,774,666) $ (1,548,558)
Other comprehensive income:
Un
Unrealized holding gains 25,840
-------------- ---------------
Comprehensive loss $ (1,748,826) $ (1,548,558)
============== ===============
Basic and diluted loss
per common share $ (.96) $ (1.21)
============== ===============
Weighted average number of common
shares outstanding - basic
and diluted loss per share 1,841,794 1,276,849
============== ===============
</TABLE>
See notes to financial statements
4
<PAGE>
Internet Commerce Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-----------------------------------------
1999 1998
-----------------------------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,774,666) $ (1,548,558)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 109,177 60,415
Loss on sale of marketable securities 14,932
Issuance of common stock and warrants for services,
compensation and consulting agreement termination 487,950
Amortization of debt discount 52,083
Changes in:
Accounts receivable, prepaid expenses and other assets 9,342 60,509
Accounts payable, notes payable and accrued expenses 46,965 387,011
-------------- ---------------
Net cash used in operating activities (1,594,250) (500,590)
-------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (34,029)
Proceeds from sales of marketable securities 1,988,163
-------------- ---------------
Net cash provided by investing activities 1,954,134
-------------- ---------------
Cash flows from financing activities:
Proceeds from bridge loan 300,000
Proceeds from note payable 155,000
Proceeds from exercise of employee stock options 20,059
Payments on capital lease obligations (41,469) (19,820)
-------------- ---------------
Net cash (used in) provided by financing activities (21,410) 435,180
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 338,474 (65,410)
Cash and cash equivalents, beginning of period 114,258 178,287
-------------- ---------------
Cash and cash equivalents, end of period $ 452,732 $ 112,877
============== ===============
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 24,264 $ 23,911
Noncash investing and financing activities:
Issuance of common stock for settlement 176,000
Property acquired under capital lease 47,022
Debt discount in connection with bridge loan 78,775
Issuance of common stock for purchase of minority
interest of subsidiary 470,384
</TABLE>
See notes to financial statements
5
<PAGE>
INTERNET COMMERCE CORPORATION
Notes to financial statements
October 31, 1999
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, 1999 are not necessarily indicative of the results that may
be expected for the year ending July 31, 2000.
The balance sheet at July 31, 1999 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
Company's Form 10-KSB for the fiscal year ended July 31, 1999.
[2] The Company:
Internet Commerce Corporation (the "Company" or "ICC") was incorporated
on November 18, 1991 in the State of Delaware.
ICC is engaged in the design, development, and marketing of systems for
securing, controlling, delivering and auditing electronic documents and
files primarily over the Internet. ICC is seeking to position itself as
an independent third party to authenticate, certify, validate,
authorize and deliver secure transactions for electronic information.
ICC began the development of the CommerceSense service in 1997,
introduced CommerceSense for beta testing in November 1997 and launched
the current version of CommerceSense commercially in April 1999. The
CommerceSense system uses the Internet and proprietary technology to
deliver the Company's customers' documents and data files to members of
their trading communities, many of which have incompatible systems, by
translating the documents and data files into any format required by
the receiver. The system can be accessed using a standard Web browser
or virtually any other communications protocol.
[3] Reclassification:
The Company has revised the October 31, 1998 balance sheet, statement
of operations and statement of cash flows from those previously
reported to conform to current year presentation. In addition, $78,775
was reclassified from net cash used in operating activities to net cash
provided by financing activities in the statement of cash flows from
amounts previously reported.
6
<PAGE>
NOTE B - SUBSEQUENT EVENTS
[1] Private Placements
On November 24, 1999, Cable & Wireless PLC ("C&W") agreed to purchase
for $10 million, 10,000 shares of a new class of convertible preferred
stock of ICC. Initially, the investment is convertible into shares of
class A common stock at $22.34 per share. The average closing bid price
of the class A common stock for the five trading days before the
definitive agreement was executed and delivered was $22.21. The
preferred stock is entitled to a four percent cumulative, annual
dividend, payable in cash or in kind at ICC's option, and votes
together with the class A common stock. Each share of preferred stock
entitles C&W to a number of votes equal to the number of shares of
class A common stock into which the preferred stock is convertible. C&W
will also receive 400,000 warrants to purchase class A common stock of
ICC. The warrants are exercisable for five years at $22.21. The
transaction with C&W is subject to approval of the boards of both
companies.
On November 19, 1999, Firmco Firstar Investment Research and Management
Company, LLC agreed to purchase for $2.5 million, 138,300 shares of
class A common stock. On November 23, 1999, Bantry Bay Ventures, LLC
agreed to purchase for $2 million, 98,159 shares of class A common
stock. On November 26, 1999, Acorn Investment Trust agreed to purchase
for $5 million, 197,725 shares of class A common stock. The purchase
price for the class A common stock in each of these transactions was
based upon the average closing bid price of the class A common stock
for the five trading days before the applicable definitive agreement
was executed and delivered.
[2] Warrant Conversions
The Company received proceeds of $930,000 upon the exercise of warrants
subsequent to October 31, 1999.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-QSB contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in this Report regarding our
financial position, business strategy and plans and objectives of management for
future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of management, as well as assumptions made
by and information currently available to management. When used in this Report,
the words "anticipate," "believe," "estimate," "expect," "may," "will,"
"continue" and "intend," and words or phrases of similar import, as they relate
to our financial position, business strategy and plans, or objectives of
management, are intended to identify forward-looking statements. These
"cautionary statements" reflect our current view with respect to future events
and are subject to risks, uncertainties and assumptions related to various
factors including, without limitation, those listed below the heading "Overview"
and in our registration statements and periodic reports filed with the
Securities and Exchange Commission under the Securities Act and the Exchange
Act.
Although we believe that our expectations are reasonable, we cannot assure you
that our expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described in this Report as anticipated, believed, estimated,
expected or intended.
Overview
We were founded as Infosafe Systems, Inc. in November 1991 and from 1991 to 1997
we conducted limited operations and developed products that we were unable to
exploit commercially and consequently discontinued. In 1998, we shifted our
business emphasis to focus exclusively on the development and marketing of our
CommerceSense service and launched the current version of our CommerceSense
service commercially in April 1999. As a result, we have only a limited
operating history and there is little historical information on which to
evaluate our business and prospects.
We developed our CommerceSense service as an alternative to the electronic data
interchange, or EDI, services that are currently provided by traditional value
added networks, also known as VANs, that offer their services primarily using
dedicated telecommunications links. Our CommerceSense service translates and
transmits electronic documents, such as purchase orders, requests for proposals
and receipts, as well as images and other data over the Internet.
We are currently focusing on our CommerceSense service. As a result, our revenue
for the foreseeable future is almost entirely dependent on the success of this
service, including, but not limited to, the number of customers who subscribe to
the service and the volume (in kilocharacters) of the data, documents or other
information they send or retrieve utilizing our service. We expect our cost of
revenue and operating expenses to increase significantly, especially in the
areas of marketing, customer installation and customer service. We will need to
generate significant revenue to achieve and maintain profitability. If we do not
increase our revenue significantly, we will continue to be unprofitable.
We expect to base our expenditures on our plans and estimates of future revenue.
We may be unable to adjust spending in a timely manner if we experience an
unexpected shortfall in our revenue. As a result, we may not achieve
profitability.
8
<PAGE>
Results of Operations
Three Months Ended October 31, 1999 Compared with Three Months Ended October 31,
1998.
Our revenue was $140,000 and $9,000, respectively, in the three months ended
October 31, 1999 (the "2000 Quarter") and October 31, 1998 (the "1999 Quarter").
CommerceSense generated this revenue.
Cost of services increased to $223,000 in the 2000 Quarter from $5,000 in the
1999 Quarter. The increase of $218,000 is primarily due to direct cost
components, including charges for data lines and personnel employed for the
roll-out of our CommerceSense service to new customers and the depreciation of
equipment used to render this service.
Product development and enhancement costs increased to $223,000 in the 2000
Quarter from $106,000 in the 1999 Quarter, an increase of $117,000. We were able
to spend more of our resources on enhancing our service since we had sufficient
funds to do so. In addition, we developed and added new features to our service
in the 2000 Quarter.
Selling and marketing expenses increased to $566,000 in the 2000 Quarter from
$126,000 in the 1999 Quarter, an increase of $440,000. We were able to spend
more of our resources on our selling and marketing efforts since we had
sufficient funds to do so in the 2000 Quarter. These expenses primarily
consisted of salaries and related costs, advertising and participation in trade
shows.
General and administrative costs increased to $907,000 in the 2000 Quarter from
$757,000 in the 1999 Quarter. The increase of $150,000 is largely due to an
increase in salaries and related employee benefits of $116,000.
Non-cash charges in connection with compensation and services decreased to zero
in the 2000 Quarter from $488,000 in the 1999 Quarter. The decrease of $488,000
was due to the fact that in the 1999 Quarter we issued warrants to consultants
for services ($460,000) and common stock ($28,000) to an employee for
compensation and did not have similar expenses in the 2000 Quarter.
We had income from investments of $28,000 in the 2000 Quarter and $5,000 in the
1999 Quarter. The increase is due to higher average cash and marketable
securities balances in the 2000 Quarter compared to the 1999 Quarter.
Interest expense decreased to $24,000 in the 2000 Quarter from $81,000 in the
1999 Quarter. The decrease of $57,000 was largely attributable to the
amortization of debt discount. Debt discount amounted to $52,000 in the 1999
Quarter. There was no debt discount in the 2000 Quarter.
The net loss in the 2000 Quarter was $1,775,000 compared to $1,549,000 in the
1999 Quarter. The net loss in the 1999 Quarter, after excluding non-cash charges
for compensation and services expense and debt discount, was $1,008,917.
Liquidity and Capital Resources
At October 31, 1999 we had working capital of $1,564,000.
We have financed our operations through private placements during fiscal 1994,
our initial public offering during fiscal 1995 (the "IPO"), a private placement
in March 1997, a private placement of bridge note units during fiscal 1998 and
1999 and a private placement of series A preferred stock in April 1999. We
anticipate losses through fiscal 2000, as we attempt to expand commercial
markets for CommerceSense.
9
<PAGE>
As a result of operating losses, cash used in operating activities amounted to
$1,594,000 in the 2000 Quarter and $501,000 in the 1999 Quarter. Cash used for
purchase of equipment amounted to $34,000 in the 2000 Quarter and $0 in the 1999
Quarter.
Our principal sources of liquidity at October 31, 1999 included cash and cash
equivalents of $453,000 and marketable securities of $1,993,000. In November of
1999, we obtained binding commitments for the purchase of Class A Common Stock
in the total amount of $9.5 million from outside investors. Also in November,
Cable & Wireless agreed to purchase for $10 million 10,000 shares of preferred
stock and 400,000 warrants. See Note B (1) of Notes to Financial Statements
herein.
We have a net operating loss carryforward of approximately $24 million to offset
future taxable income for federal tax purposes. The utilization of the loss
carryforward to reduce any such future income taxes will depend on our ability
to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The carryforward expires from 2007 to 2019. The
Internal Revenue Code of 1986, as amended, contains provisions which generally
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 $1.9 million incurred prior to
the IPO will be subject to an annual limitation of $400,000 until the pre-IPO
portion of the net operating loss is utilized or expires. Also, due to the
private placement of series A preferred stock in April 1999, the net operating
loss carryover of $20 million incurred prior to the private placement will be
subject to an annual limitation of $1 million until that portion of the net
operating loss is utilized or expires.
Year 2000 Compliance
We may have substantial exposure to the year 2000 problem, both with our own
systems and with systems we do not control. The year 2000 problem could harm our
business and financial results. Many currently installed computer systems and
software products have been coded to accept or recognize only two digit entries
to define the applicable year. These systems may erroneously recognize the year
2000 as the year 1900. Thus could result in major failures or malfunctions.
This risk is particularly significant for our business. We rely on computer
programs and systems in connection with our internal and external communication
networks and systems, including transmissions of information over the Internet,
order processing and fulfillment, accounting and financial systems, customer
access to our web site and other business functions. Based on our design process
and assessment to date, we believe the current versions of our service and our
various systems are year 2000 compliant. However, we cannot assure you that our
programs designed to minimize the impact of the transition to the year 2000 on
the terminal operations software at our facilities and other date sensitive
equipment will be completely successful. In addition, the costs of implementing
these programs may exceed our current estimates. If these programs are not
successful or if their costs exceed our estimates, the date change from 1999 to
2000 could harm our business. The full extent of any adverse impact on our
business is impossible to determine.
In addition, our customers may not become year 2000 compliant in a timely
fashion or at all. The failure of a customer to become year 2000 compliant will
adversely affect the ability of that customer's trading partners to receive or
utilize the document or data we transmit. As a result, customers that are not
year 2000 compliant may cease using our CommerceSense service, decreasing our
revenues and harming our results of operations.
10
<PAGE>
PART II. OTHER INFORMATION
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
On December 1, 1999 and December 13, 1999, we filed Current Reports on Form 8-K.
11
<PAGE>
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: December 14, 1999 By: /s/ Geoffrey S. Carroll
---------------------------------------------
Geoffrey S. Carroll
President and Chief Executive Officer
(Principal Executive Officer)
Date: December 14, 1999 By: /s/ Walter M. Psztur
---------------------------------------------
Walter M. Psztur
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 452,732
<SECURITIES> 1,993,400
<RECEIVABLES> 114,818
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,592,288
<PP&E> 1,387,259
<DEPRECIATION> 580,006
<TOTAL-ASSETS> 4,864,164
<CURRENT-LIABILITIES> 1,028,460
<BONDS> 0
0
77
<COMMON> 22,491
<OTHER-SE> 3,479,574
<TOTAL-LIABILITY-AND-EQUITY> 4,864,164
<SALES> 140,363
<TOTAL-REVENUES> 140,363
<CGS> 222,931
<TOTAL-COSTS> 222,931
<OTHER-EXPENSES> 1,695,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,264
<INCOME-PRETAX> (1,774,666)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,774,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,774,666)
<EPS-BASIC> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
