XOTC:DIRI Direct Insite Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 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 May 15, 2012 was: 12,426,240.
 


 
 

 
 
Table of Contents
 
PART I – FINANCIAL INFORMATION
Page
       
 
Item 1. Financial Statements.
 
       
    3
       
    4
       
    5
       
   
6
       
  18
       
 
21
       
 
21
       
PART II – OTHER INFORMATION
 
       
 
22
       
 
Item 1A. Risk Factors
22
       
 
22
       
 
22
       
 
22
       
 
22
       
 
Item 6. Exhibits
22
       
 
23
       
CERTIFICATIONS
 
Exhibits
 


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
 
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, 2012 AND DECEMBER 31, 2011

   
2012
   
2011
 
   
(Unaudited)
   
(Audited)
 
Assets
 
Current Assets
           
Cash and cash equivalents
  $ 781     $ 687  
Accounts receivable
    1,382       1,568  
Prepaid expenses and other current assets
    189       233  
Deferred tax assets - current
    261       261  
                 
Total Current Assets
    2,613       2,749  
                 
Property and Equipment, Net
    789       765  
                 
Deferred Tax Asset
    766       766  
                 
Other Assets
    279       248  
                 
Total Assets
  $ 4,447     $ 4,528  
                 
Liabilities and Stockholders' Equity
 
Current Liabilities
               
Accounts payable and accrued expenses
  $ 1,281     $ 1,384  
Current portion of capital lease obligations
    113       135  
Current portion of notes payable
    59       62  
Deferred rent payable
    24       30  
Total Current Liabilities
    1,477       1,611  
                 
Other Liabilities
               
Capital lease obligation, net of current portion
    283       248  
Notes payable, net of current portion
    20       33  
                 
Total Liabilities
    1,780       1,892  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity
               
Preferred stock, $0.0001 par value; 2,000,000shares authorized; none issued or outstanding
    --       --  
Common stock; $.0001 par value; 50,000,000 shares authorized; 12,180,712 and 12,156,760
shares issued and
12,140,785 and 12,116,833 shares outstanding in 2012 and 2011
    1       1  
Additional paid-in capital
    115,370       115,333  
Accumulated deficit
    (112,376 )     (112,370 )
Common stock in treasury, at cost; 24,371 shares in 2012 and 2011
    (328 )     (328 )
Total Stockholders' Equity
    2,667       2,636  
Total Liabilities and Stockholders' Equity
  $ 4,447     $ 4,528  
 
See notes to condensed consolidated financial statements.

DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDTIED
(in thousands)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
 
   
2012
   
2011
 
             
Revenues
           
Recurring revenues
  $ 1,813     $ 1,783  
Professional services fees and other
    302       345  
                 
Total Revenues
    2,115       2,128  
                 
Costs and Expenses
               
Operations, research and development
    992       848  
Sales and marketing
    581       468  
General and administrative
    459       647  
Amortization and depreciation
    81       77  
                 
Total Operating Costs and Expenses
    2,113       2,040  
                 
Operating Income
    2       88  
                 
Other Expense
               
Other expense, net
    8       4  
                 
Total Other Expense, Net
    8       4  
                 
(Loss) Income Before Provision for Income Taxes
    (6 )     84  
                 
Provision for Income Taxes
    --       --  
                 
Net (Loss) Income
  $ (6 )   $ 84  
                 
Basic (Loss) Income Per Share
  $ --     $ 0.01  
                 
Diluted (Loss) Income Per Share
  $ --     $ 0.01  
                 
Basic Weighted Average Common Stock Outstanding
    12,093       11,693  
                 
Diluted Weighted Average Common Stock Outstanding
    12,093       11,784  

See notes to condensed consolidated financial statements.
 

DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(in thousands)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
 
   
2012
   
2011
 
Cash Flows From Operating Activities
           
Net (loss) income
  $ (6 )   $ 84  
Adjustments to reconcile net (loss) income to net cash provided by (used in) operations:
               
Amortization and depreciation
    81       77  
Stock-based compensation expense
    37       14  
Deferred rent expense
    (6 )     --  
Changes in operating assets and liabilities:
               
Accounts receivable
    186       (328 )
Prepaid expenses and other current assets
    13       14  
Accounts payable and accrued expenses
    (103 )     (152 )
Deferred revenue
    --       (24 )
                 
Total Adjustments
    208       (399 )
                 
Net Cash Provided by (Used in) Operating Activities
    202       (315 )
                 
Cash Flows Used in Investing Activities
               
Expenditures for property and equipment
    (55 )     --  
                 
Cash Flows From Financing Activities
               
Repayment of long-term debt
    (16 )     (54 )
Repayment of capital lease obligations
    (37 )     --  
                 
Net Cash Used in Financing Activities
    (53 )     (54 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    94       (369 )
                 
Cash and Cash Equivalents - Beginning
    687       1,707  
                 
Cash and Cash Equivalents - Ending
  $ 781     $ 1,338  
                 
Supplemental Disclosure of Cash Flow Information:
               
                 
Cash paid for interest
  $ 2     $ 7  
Cash paid for income taxes
  $ 7     $ 45  
                 
Schedule of Non-Cash Investing and Financing Activities:
               
                 
Equipment acquired by capital lease
  $ 50     $ 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.  Throughout the year, the Company operated redundant data centers in Miami, Florida, Commack, New York and Santa Clara, California.

As described in Note 9, the Company has three major customers that accounted for 88.1% and 91.5% of the Company’s revenue for the three months ended March 31, 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 March 31, 2012, and the condensed consolidated statements of operations and cash flows for the three months ended March 31, 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 months ended March 31, 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-10K filed with the Securities and Exchange Commission on  March 30, 2012.

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
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 2 - Summary of Significant Accounting Policies (continued)

Use of Estimates (continued)

related to stock based compensation and the valuation allowance on deferred tax assets.  Actual results could differ from those estimates.

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.

Professional Services

The Company provides nonrecurring engineering services to its customers, which may include 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.

Property and Equipment

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets.  Leasehold improvements are amortized over the terms of the respective leases or the service lives of the related assets, whichever is shorter.

Capitalized lease assets are amortized over the shorter of the lease term or the service life of the related assets.

Impairment of Long-Lived Assets

ASC 360, Plant, Property, and Equipment (“ASC 360”) requires management judgments regarding the future operating and disposition plans for marginally performing assets, and estimates of expected realizable values for assets to be sold.  The Company accounts for its long-lived assets in accordance with ASC 360 for purposes of determining and measuring impairment of its other intangible assets.  It is the Company’s policy to review the value assigned to its long lived assets, to
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 2 - Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets (continued)

determine if they have been permanently impaired by adverse conditions whenever events or circumstances (triggering events) indicate the related carrying amount may not be recoverable.  If required, an impairment charge would be recorded based on an estimate of future discounted cash flows.

In order to test for recoverability, the Company would compare the sum of an undiscounted cash flow projection from the related long-lived assets to the net carrying amount of such assets.  Considerable management judgment is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly, actual results could vary significantly from such estimates.  There were no triggering events identified, and accordingly, no impairment charges were recognized during the three months ended March 31, 2012 and 2011.

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 March 31, 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 months ended March 31, 2012 and 2011 differs from the current statutory rates.  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 re-assess 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 (loss) income 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 months ended March 31, 2012, potentially dilutive securities consisting of options to acquire 607,500 shares of common stock and 132,456 shares of unvested restricted stock are not included in the calculation of diluted loss per share because their impact was anti-dilutive.

 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 2 - Summary of Significant Accounting Policies (continued)

Earnings Per Share (continued)

The computation of diluted weighted average common shares outstanding used in the calculation of diluted earnings per share for the three months ended March 31, 2012 and 2011 is as follows (in thousands):

   
2012
   
2011
 
Weighted Average Common shares outstanding
    12,093       11,693  
Options to purchase common stock
    -       88  
Restricted stock grants
    -       3  
Total diluted shares
    12,093       11,784  
 
Cash and Cash Equivalents

The Company considers all investments with original maturities of three months or less to be cash equivalents.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the account receivable balance.  Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence.  Management performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and each customer's current credit worthiness, as determined by the review of their current credit information.  Collections and payments from customers are continuously monitored.  While such bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.  As of March 31, 2012 and December 31, 2011, an allowance for doubtful accounts is not provided since, in the opinion of management, all accounts are deemed collectible.  If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, allowances may be required.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.  The Company has cash deposits in excess of insured amounts at March 31, 2012.

The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers.  Concentrations of credit risk with respect to accounts receivable and revenue are disclosed in Note 9.

Stock-Based Compensation

The Company accounts for stock based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”).  ASC 718 establishes accounting for stock-based awards exchanged for employee services.  Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the equity grant).  The fair value of the Company’s common stock options are estimated using the Black-
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 2 - Summary of Significant Accounting Policies (continued)

Stock-Based Compensation (continued)

Scholes option-pricing model with the following assumptions:  expected volatility, dividend rate, risk free interest rate and the expected life.  The Company calculates the expected volatility using the historical volatility over the most recent period equal to the expected term and evaluates the extent to which available information indicate that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant.  The Company has not experienced significant exercise activity on stock options. Due to the lack of historical information, the Company determined the expected term of its stock option awards issued using the simplified method.  The simplified method assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires.  The Company expenses stock-based compensation by using the straight-line method.  In accordance with ASC 718, excess tax benefits realized from the exercise of stock-based awards are classified in cash flows from financing activities.  The future realization of the reserved deferred tax assets related to these excess tax benefits associated with the exercise of stock options will result in a credit to additional paid-in capital if the related tax deduction reduces taxes payable.  The Company has elected the “with and without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year.  Under this approach, the windfall tax benefit would be recognized in additional paid-in-capital only if an incremental tax benefit is realized after considering all other benefits presently available.  For the three months ended March 31, 2012 and 2011 the Company recorded approximately $18,000 and $14,000, respectively, in stock based compensation expense for the fair value of stock-based compensation.  As of March 31, 2012, there was approximately $374,000 of total unrecognized stock based compensation costs, which is expected to be recognized over a weighted average period of 3.2 years.

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.

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.


DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 3 – Property and Equipment

Property and equipment consist of the following as of March 31, 2012 and December 31, 2011 (in thousands):

             
Estimated
   
2012
   
2011
 
Useful Lives
Computer equipment and purchased software
  $ 4,943     $ 4,838  
3 years
Furniture and fixtures and leasehold improvements
    84       84  
5 - 7 years
      5,027       4,922    
Less: accumulated depreciation and amortization
    (4,238 )     (4,157 )  
Property and Equipment, Net
  $ 789     $ 765    
 
Depreciation and amortization expense related to property and equipment for the three months ended March 31, 2012 and 2011 was approximately $81,000 and $77,000, respectively.

Note 4 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of March 31, 2012 and December 31, 2011 as follows (in thousands):

 
 
2012
   
2011
 
Trade accounts payable
  $ 180     $ 229  
Sales taxes payable
    539       539  
Accrued board fees
    455       427  
Other accrued expenses
    107       189  
Total Accounts Payable and Accrued Expenses
  $ 1,281     $ 1,384  

Note 5 – 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, and as of March 31, 2012, 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.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 5 – Debt (continued)

Notes Payable

As of March 31, 2012 and December 31, 2011, notes payable consist of approximately $79,000 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 $79,000 and $95,000, as of March 31, 2012 and December 31, 2011, respectively.

As of March 31, 2012 future principal payments under these notes are (in thousands):

For the Twelve Months Ending
     
March 31,
 
Amount
 
2013
  $ 59  
2014
    20  
Total payments
    79  
Current portion
    59  
Long-Term Portion
  $ 20  

Capital Lease Obligations

The Company has equipment under three capital lease obligations expiring at various times through November 2014.  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.

As of March 31, 2012, future minimum payments under these capital leases are (in thousands):

For the Twelve Months Ending
     
March 31,
 
Amount
 
2013
  $ 163  
2014
    162  
2015
    96  
Total minimum lease payments
    421  
Less: amounts representing interest
    (25 )
Net minimum lease payments
    396  
Current portion
    113  
Long-term portion
  $ 283  

The implied interest rates related to these capital leases are 3.0%, 3.3% and 8.0%. The gross book value and the net book of the related assets are approximately $464,000 and $392,000, respectively, as of March 31, 2012.


DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 6 – Stockholders’ Equity

Preferred Stock

The Company is authorized to issue 2,000,000 shares of preferred stock of which none were issued and outstanding as of March 31, 2012 and December 31, 2011.

Common Stock, Options and Stock Grants

Three Months Ended March 31, 2012

During the three months ended March 31, 2012, 23,952 restricted common shares with an aggregate grant date fair value of approximately $18,000 vested.  During the three months ended March 31, 2012, the Company granted, to two officers of the Company, options to acquire an aggregate of 480,000 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 of 175%, risk free rate of 0.36%, 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 $298,000, of which approximately $19,000 was recognized as stock compensation expense for the three months ended March 31, 2012.
 
On April 5, 2012, the Company issued 261,503 shares pursuant to the Direct Insite Corp. Directors Deferred Compensation Plan dated January 1, 2008 to two former Directors for past services.

Three Months Ended March 31, 2011

During the three months ended March 31, 2011, 16,685 restricted common shares with a grant date fair value of approximately $14,000 vested.

Common Stock Purchase Plan

In September 2009, the Company’s Board of Directors adopted a plan to purchase a certain number of shares from option holders on the exercise of options to encourage the option holders to exercise their options and to provide the option holder with a method to have cash for the tax on the exercise.  The plan provides that the price to be paid for any shares purchased shall be the closing price of the common stock on the date of exercise.  Further the Company will only provide up to $300,000 for all such purchases for all option exercises in the aggregate in any twelve month period.  During the three months ended March 31, 2012 and 2011, the Company purchased no shares under the plan.

Stock Option Plans

The Company grants options under multiple stock-based compensation plans that do not differ substantially in the characteristics of the awards.  Nonqualified and incentive stock options have been granted to directors, officers and employees of the Company under the Company’s Stock Option Plans.  Options generally vest over three to four years and expire five years from the date of the grant.  As of March 31, 2012, 693,785 shares were available for issuance under the stock option plans.  Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans.  The Company issues new shares to satisfy stock option exercises.


DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 6 – Stockholders’ Equity (continued)

Stock Option Plans (continued)

The following is a summary of stock option activity for three months ended March 31, 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       3.0     $ --  
Granted
    480     $ 1.15       4.8     $ --  
Outstanding at March 31, 2012
    608     $ 1.18       4.4     $ --  
Exercisable at March 31, 2012
    128     $ 1.31       3.0     $ --  
 
The following table summarizes stock option information as of March 31, 2012:
 
Outstanding Options
 
          Weighted Average      
     
Number Outstanding
 
Remaining
 
Options Exercisable
 
Exercise Prices
   
(in thousands)
 
Contractual Life
 
(in thousands)
 
$ 1.50       50  
1.0 years
    50  
$ 1.20       55  
4.2 years
    55  
$ 1.15       503  
4.6 years
    23  
Total
      608  
4.4 years
    128  

As of March 31, 2012, there was approximately $279,000 of unrecognized compensation costs related to stock options outstanding.

Restricted Stock Grants

A summary of the status of the Company’s non-vested stock grants as of March 31, 2012 and changes during the three months ended March 31, 2012 is presented below:

Non-Vested Shares
 
Shares
(in thousands)
   
Weighted-Average
Grant Date Fair Value
 
Non-Vested at December 31, 2011
    35     $ 0.93  
Granted
    121     $ 0.66  
Vested
    (24 )   $ 0.76  
Non-Vested at March 31, 2012
     132     $ 0.71  

The future expected expense for non-vested shares is approximately $95,000 and will be recognized as expense through December 31, 2013.

 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 7 – 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 March 31, 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 months ended March 31, 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 March 31, 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.  However, 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 March 31, 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.

Note 8 – Commitments and Contingencies

Operating Leases

Operating leases are primarily for office space, data centers, equipment and automobiles.  As of March 31, 2012, the future minimum lease payments under operating leases are summarized as follows (in thousands):

Twelve Months Ending
 
 
 
March 31,
 
Amount
 
2013
  $ 332  
2014
    280  
2015
    205  
Total
  $ 817  

Rent expense approximated $137,000 and $123,000 for the three months ended March 31, 2012 and 2011, respectively.

 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 8 – Commitments and Contingencies (continued)

Employment Agreements

President and Chief Executive Officer

On May 25, 2011, the Board of Directors appointed the Company’s then President and Chief Operating Officer as President and Chief Executive Officer.  On August 16, 2011, the Board ratified and approved the employment agreement with the President and Chief Executive Officer (the “Agreement”).  The Agreement provides for an increased salary and the granting of 22,500 options to purchase an aggregate of 22,500 shares of the Company at an exercise price of $1.15.  On January 1, 2012, the Company amended the Agreement with the President and Chief Executive Officer.  The amended Employment Agreement is for a two-year term effective January 1, 2012 through December 31, 2013.  The amended Agreement provides for a base salary of $22,917 per month, annual incentive bonuses based on the Company’s performance in achieving prescribed revenue and Earnings Before Interest and Taxes (“EBIT”) targets and discretionary bonuses.  The Agreement further provides for options to purchase an aggregate of 360,000 shares of common stock of the Company at an exercise price of $1.15 per share, 90,000 of such options to vest on the twelve-month anniversary date of grant and the remaining options to vest in equal monthly installments beginning on the thirteen-month anniversary of the date of grant and concluding on the four-year anniversary of the date of grant.  In addition, the Company has agreed to reimburse the Chief Executive Officer and President for up to $25,000 of expenses incurred in connection with his relocation to the Company’s headquarters in Sunrise, Florida.  The Agreement also provides for reimbursement of certain out-of-pocket expenses and certain severance benefits in the event of termination prior to the expiration date.
 
On April 5, 2012, the Compensation Committee of the Board of Directors agreed that the Company shall continue to make lease payments on the corporate apartment located in Ft. Lauderdale, Florida which will be utilized by the President and Chief Executive Officer through the date of termination of such lease, and was extended to May 2013, in lieu of the Companys reimbursing the executive for up to $25,000 of relocation expenses as originally provided in the Agreement.

Vice President of Channel Sales and Marketing and Chief Technology Officer

On December 14, 2010, the Board ratified and approved an employment agreement with the Executive Vice President of Sales and Marketing and Chief Technology Officer for a two-year term effective January 1, 2011 through December 31, 2012.  The agreement provides for a salary of $6,667 per month for the position of Chief Technology Officer, and a salary of $10,000 per month for the position of Executive Vice President of Sales and Marketing.  The agreement additionally provides for an annual incentive bonus with a target equal to 20% of the apportioned base salary for the Chief Technology Officer position subject to achieving certain revenue growth and operating cash flow goals as well as performance objectives.  The agreement further provides for: payment of certain sales commissions; use of an automobile and reimbursement of related expenses; reimbursement of out-of-pocket expenses; and certain severance benefits in the event of termination prior to the expiration date.

On January 9, 2012, the Company amended its agreement with the Executive Vice President of Sales and Marketing and Chief Technology Officer to provide for a change in title and responsibilities to Executive Vice President of Channel Sales and Chief Technology Officer of the Company.

Future commitments under employment agreements total $425,000 and $206,000 for the years ending March 31, 2013 and 2014 respectively.

 
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 9 – Major Customers

For the three months ended March 31, 2012 and 2011, three customers accounted for a significant portion of the Company’s revenues as follows:

 
% of Total
Revenues
 
2012
 
2011
HP Customer A
14.6%
 
19.6%
HP Customer B
15.0%
 
15.9%
HP Customer C
16.1%
 
12.5%
HP Customer D
  2.4%
 
       --
Total HP
48.1%
 
48.0%
IBM
33.2%
 
33.1%
Siemens
  6.8%
 
10.4%
Total
88.1%
 
91.5%
 
Revenue from Siemens Shared Services LLC ("Siemens") for the three months ended March 31, 2012 decreased due to the Company no longer paying a third-party scanning vendor or charging Siemens for the scanning services utilized by Siemens.
 
As of March 31, 2012, three customers accounted for a significant portion of the Company’s accounts receivable as follows:

   
Accounts Receivable
(in thousands)
 
HP
  $ 737  
IBM
    279  
Siemens
    87  
Total
  $ 1,103  

Note 10 – Subsequent Events

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, except as noted in Note 5 and Note 6, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.


DIRECT INSITE CORP. AND SUBSIDIARIES
 

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, and the dependence on key personnel. 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 a 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 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 approximately 48.1% and 48.0% of revenue for the three months ended March 31, 2012 and 2011, 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.

IBM, representing approximately 33.2% and 33.1% of revenue for the three months ended March 31, 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 Shared Services LLC (“Siemens”) accounted for approximately 6.8% and 10.4% of revenue for the three months ended March 31, 2012 and 2011, respectively.  Revenue from Siemens for the three months ended March 31, 2012, decreased due to the Company no longer paying or charging Siemens for the facilitation 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 product introductions, domestic and global economic conditions, customer budgetary considerations, and the timing of product 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 March 31, 2012 Compared to Three Months Ended March 31, 2011

Summary information of the Company’s results of operations for the three months ended March 31, 2012 and 2011 is as follows (in thousands):
 
   
2012
   
2011
   
Increase (Decrease)
 
                         
Revenues
                       
Recurring revenues
  $ 1,813     $ 1,783     $ 30       2 %
Professional services fees and other
    302       345       (43 )     -12 %
                                 
Total Revenues
    2,115       2,128       (13 )     -1 %
                                 
Costs and Expenses
                               
Operations, research and development
    992       848       144       17 %
Sales and marketing
    581       468       113       24 %
General and administrative
    459       647       (188 )     -29 %
Amortization and depreciation
    81       77       4       5 %
                                 
Total Operating Costs and Expenses
    2,113       2,040       73       4 %
                                 
Operating Income
    2       88       (86 )     -98 %
                                 
Other Expense
                               
Other expense, net
    8       4       4       100 %
                                 
Total Other Expense, Net
    8       4       4       100 %
                                 
(Loss) Income Before Provision for Income Taxes
    (6 )     84       (90 )     -107 %
                                 
Provision for Income Taxes
    --       --       --       0 %
                                 
Net (Loss) Income
  $ (6 )   $ 84     $ (90 )     -107 %
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES

Net Income (Loss)

For the three months ended March 31, 2012 we had operating income of $2,000, compared to operating income of $88,000 for the three months ended March 31, 2011.  For the three months ended March 31, 2012 we had a net loss of $6,000, compared to net income of $84,000 for the three months ended March 31, 2011.  The decrease in income for 2012 compared to 2011 is primarily due to an increase in operations, research and development expenses of $144,000, and an increase in sales and marketing expenses of $113,000, offset by a reduction in general and administrative expenses of approximately $188,000.

For the three months ended March 31, 2012, revenue decreased by $13,000 or 1% from $2,128,000 for the three months ended March 31, 2011 to $2,115,000 for the three months ended March 31, 2012.  The decrease is primarily due to a decrease in engineering services revenue of $37,000 offset by an increase in recurring IOL services revenue of $25,000; both a result of the transition of revenue for new customers at the end of 2011 from startup engineering services to recurring revenue streams.

Costs of operations, research and development increased by approximately $144,000, or 17% from $848,000 for the three months ended March 31, 2012 to $992,000 for the three months ended March 31, 2012. 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 increases in labor of $97,000 due to the addition of a Vice President of Development and other development staff and development costs of $47,000, consisting primarily of consulting fees of $33,000, software costs of $35,000, co-location rent of $10,000 and other expenses of $8,000, offset by a decrease in scanning services of $39,000, as the Company increased engineering and development work related to new customers.

Sales and marketing costs increased by approximately $113,000, or 24%, from $468,000 for the three months ended March 31, 2011 to $581,000 for the three months ended March 31, 2012.  This increase, resulting 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 new sales and marketing initiatives.

General and administrative costs decreased $188,000, or 29%, from $647,000 for the three months ended March 31, 2011 to $459,000 for the three months ended March 31, 2012. Salaries and related costs decreased by $89,000, travel decreased by $37,000 and other reimbursed expenses decreased by $30,000 principally due to the departure of our former Chief Executive Officer in May 2011.  Legal fees decreased by approximately $32,000 primarily the result of the annual meeting and proxy solicitations costs incurred in 2011.

Financial Condition and Liquidity

As of March 31, 2012, the Company had total stockholders’ equity of $2,667,000, working capital of $1,136,000 and an accumulated deficit of $112,376,000.  The Company’s cash increased by $94,000 during the three months ended March 31, 2012, to $781,000 on hand as of March 31, 2012, compared to a decrease in cash of $369,000 during the three months ended March 31, 2011.

During the three months ended March 31, 2012, the Company generated $202,000 of cash from operations, compared to cash used in operations of $315,000 for the three months ended March 31, 2011.   In the first quarter, cash generated from operations principally reflects the Company’s narrow operating loss, offset by non-cash charges of $81,000 for depreciation and amortization, $37,000 for stock based compensation, a $186,000 decrease in accounts receivable, and a $103,000 decrease in accounts payable.

Cash used in operating activities for the three months ended March 31, 2011 was $315,000, which reflects net income of $84,000, reduced by non-cash income and expenses of $91,000, including depreciation and amortization of property and equipment of $77,000, and stock-based compensation expense of $14,000, an increase in accounts receivable of $328,000, principally due to a delay in cash receipts from one customer, offset by a decrease in prepaid expenses of $14,000.
 
 
DIRECT INSITE CORP. AND SUBSIDIARIES
 
Cash used in investing activities was $55,000 for the three months ended March 31, 2012, principally due to expenditures for new equipment.  There was no cash used in investing activities during the three months ended March 31, 2011.

Cash used in financing activities totaled $53,000 for the three months ended March 31, 2012, compared to $54,000 in 2011, reflecting payments on equipment of $16,000 and $54,000 in 2012 and 2011, respectively, and payments on capital leases of $37,000 in 2012.
 
On May 11, 2012, the Company was notified by JPMorgan Chase Bank, NA ("Chase") that Chase was cancelling the Company's $1,000,000 secured credit line with a one-year term expiring May 31, 2012, because the Company was not in compliance with one of the financial covenants of the loan aggrement. No funds had beeen drawn under the credit line, and the Company does not believe that the loss of the credit line with have a material impact on the Company's liquidity.  Nevertheless, the Company intends to explore alternative sources of credit.

Our Critical Accounting Policies

Our critical accounting policies are described in Note 2 to the interim condensed consolidated financial statements included in this quarterly report.

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.
 

Not applicable
 
 
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 March 31, 2012, our disclosure controls and procedures were not effective.

Management attributes this to the departure of the Company’s Chief Financial Officer and appointment of an Acting Chief Financial Officer at the end of the third quarter, as well as limited resources within the accounting and financial function.  Subsequent to the close of the fiscal quarter, management engaged additional personnel to assist with accounting and financial reporting functions, which is intended to address and restore the effectiveness of the Company’s disclosure controls and procedures.
 
Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  However, subsequent to the close of the fiscal quarter, management engaged additional personnel to assist with accounting and financial reporting functions which, is intended to address and remediate a previously identified material weakness in the financial reporting process.

 
DIRECT INSITE CORP. AND SUBSIDIARIES

PART II Other Information


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.

Item 1A.

Not required of smaller reporting companies.
 
None.
 
None.
 
 
Not applicable.
 
 
None.
 
Item 6.
 
Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
 
 
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   May 15, 2012  
       
/s/ Sandra Wallace      
Sandra Wallace,  Acting Chief Financial Officer    May 15, 2012  
 
 
23

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XOTC:DIRI Direct Insite Corp Quarterly Report 10-Q Filing - 3/31/2012
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