-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SLoP9Xjo6+/IQXwpq6Sxu+xUcrNoqWP2tS808X6a0pOJ/A5yZHyDvavWp3yWVcNj iVdUzaN9n0ISVx1l86Gtow== 0000922423-04-002024.txt : 20041215 0000922423-04-002024.hdr.sgml : 20041215 20041215160358 ACCESSION NUMBER: 0000922423-04-002024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041031 FILED AS OF DATE: 20041215 DATE AS OF CHANGE: 20041215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNET COMMERCE CORP CENTRAL INDEX KEY: 0000894738 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 133645702 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24996 FILM NUMBER: 041204966 BUSINESS ADDRESS: STREET 1: 805 THIRD AVE STREET 2: STE 622 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2122717640 MAIL ADDRESS: STREET 1: 805 THIRD AVENUE STREET 2: 342 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: INFOSAFE SYSTEMS INC DATE OF NAME CHANGE: 19940914 10-Q 1 kl12019_10q.txt FORM 10-Q QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q _____________ |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended October 31, 2004 |_| 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. 000-24996 INTERNET COMMERCE CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3645702 (State of incorporation) (I.R.S. Employer Identification Number) 805 Third Avenue, 9th Floor New York, New York 10022 (Address of principal executive offices, including zip code) (212) 271-7640 (Registrant's telephone number, including area code) 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 |_| Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes |_| No |X| As of December 14, 2004, the registrant had outstanding 19,058,187 shares of Class A Common Stock. INTERNET COMMERCE CORPORATION INDEX TO FORM 10-Q PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets as of October 31, 2004 (unaudited) and July 31, 2004.................................................... 3 Consolidated statements of operations and comprehensive loss for the three months ended October 31, 2004 (unaudited) and October 31, 2003 (unaudited)..................................... 4 Consolidated statements of cash flows for the three months ended October 31, 2004 (unaudited) and October 31, 2003 (unaudited).......................................................... 5 Notes to consolidated financial statements (unaudited)............... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................... 36 Item 4. Controls and Procedures......................................... 36 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 37 Item 2. Unregistered Sales of Equity................................... 37 Item 3. Defaults Upon Senior Securities................................ 37 Item 4. Submission of Matters to a Vote of Security Holders............ 38 Item 5. Other Information.............................................. 38 Item 6. Exhibits ...................................................... 38 SIGNATURES CERTIFICATIONS 2 INTERNET COMMERCE CORPORATION Consolidated Balance Sheets
October 31, July 31, 2004 2004 ------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,645,535 $ 3,789,643 Accounts receivable, net of allowance for doubtful accounts of $338,409 and $308,867, respectively 2,475,352 2,154,463 Prepaid expenses and other current assets 213,600 244,900 ------------ ------------ Total current assets 6,334,487 6,189,006 Restricted cash 107,992 107,658 Property and equipment, net 253,472 295,556 Capitalized software development costs, net 4,465 17,860 Goodwill 2,619,048 2,539,238 Other intangible assets, net 1,971,371 2,265,010 Other assets 14,237 14,237 ------------ ------------ Total assets $ 11,305,072 $ 11,428,565 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 718,780 $ 523,703 Accrued expenses 978,952 1,004,461 Accrued dividends - preferred stock 333,333 232,787 Deferred revenue 136,273 133,063 Capital lease obligation 27,507 52,291 Other liabilities 22,085 45,111 ------------ ------------ Total current liabilities 2,216,930 1,991,416 Capital lease obligation - less current portion 1,197 2,908 ------------ ------------ Total liabilities 2,218,127 1,994,324 ------------ ------------ Commitments and contingencies Stockholders' equity: Preferred stock - 5,000,000 shares authorized, including 10,000 shares of series A, 10,000 shares of series C, 250 shares of series D and 175 shares of series S: Series A preferred stock - par value $.01 per share, none issued and outstanding -- -- Series C preferred stock - par value $.01 per share, 44.76 votes per share; 10,000 shares issued and outstanding (liquidation value of $10,333,333) 100 100 Series D preferred stock - par value $.01 per share, 769 votes per share; 250 shares issued and outstanding (liquidation value of $250,000) 3 3 Common stock: Class A - par value $.01 per share, 40,000,000 shares authorized, one vote per share; 19,058,187 and 19,058,187 shares issued and outstanding, respectively 190,582 190,582 Additional paid-in capital 95,197,670 95,143,356 Accumulated deficit (86,301,410) (85,899,800) ------------ ------------ Total stockholders' equity 9,086,945 9,434,241 ------------ ------------ Total liabilities and stockholders' equity $ 11,305,072 $ 11,428,565 ============ ============
See notes to consolidated financial statements. 3
Consolidated Statements of Operations and Comprehensive Loss (unaudited) Three Months Ended October 31, ----------------------------- 2004 2003 ------------ ------------ Revenue: Services $ 3,746,540 $ 3,103,352 ------------ ------------ Expenses: Cost of services (excluding non-cash compensation of $2,143 for the three months ended October 31, 2004) 1,417,426 1,860,309 Product development and enhancement (excluding non-cash compensation of $7,552 for the three months ended October 31, 2004) 222,711 225,214 Selling and marketing (excluding non-cash compensation of $2,643 for the three months ended October 31, 2004) 838,118 825,681 General and administrative (excluding non-cash compensation of $198,495 and $52,943 for the three months ended October 31, 2004 and 2003, respectively) 1,462,165 945,385 Non-cash charges for stock-based compensation and services 210,833 52,943 ------------ ------------ Total expenses 4,151,253 3,909,532 ------------ ------------ Operating loss (404,713) (806,180) ------------ ------------ Other income and (expense): Interest and investment income 6,098 858 Interest expense (2,996) (12,425) ------------ ------------ 3,102 (11,567) ------------ ------------ Net loss $ (401,611) $ (817,747) Dividends on preferred stock (100,546) (100,561) ------------ ------------ Loss attributable to common stockholders $ (502,157) $ (918,308) ============ ============ Basic and diluted loss per common share $ (0.03) $ (0.07) ============ ============ Weighted average number of common shares outstanding - basic and diluted 19,058,187 13,797,567 ============ ============ COMPREHENSIVE LOSS: Net loss $ (401,611) $ (817,747) Other comprehensive income: Unrealized gain - marketable securities -- 9,023 ------------ ------------ Comprehensive loss $ (401,611) $ (808,724) ============ ============
See notes to consolidated financial statements. 4
Consolidated Statements of Cash Flows (unaudited) Three Months Ended October 31, ------------------------------- 2004 2003 ----------- ----------- Cash flows from operating activities: Net loss $ (401,611) $ (817,747) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 381,260 385,804 Bad debt expense 29,542 15,517 Non-cash interest expense -- 8,605 Non-cash charges for equity instruments issued for compensation and services 210,833 52,943 Changes in: Accounts receivable (350,431) (213,365) Prepaid expenses and other assets 3,883 42,717 Accounts payable 195,077 (264,772) Accrued expenses (30,885) (245,909) Deferred revenue 3,210 (27,351) Other liabilities (23,026) (39,520) ----------- ----------- Net cash provided by (used in) operating activities 17,852 (1,103,078) ----------- ----------- Cash flows from investing activities: Additional costs of previous acquisition (79,810) -- Purchases of property and equipment (32,142) (46,188) Purchase of certificates of deposit -- (421) ----------- ----------- Net cash used in investing activities (111,952) (46,609) ----------- ----------- Cash flows from financing activities: Net proceeds from the issuance of common stock and warrants (23,512) -- Payments of capital lease obligations (26,496) (36,136) ----------- ----------- Net cash used in financing activities (50,008) (36,136) ----------- ----------- Net decrease in cash and cash equivalents (144,108) (1,185,823) Cash and cash equivalents, beginning of period 3,789,643 2,283,339 ----------- ----------- Cash and cash equivalents, end of period $ 3,645,535 $ 1,097,516 =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest during the period $ 2,996 $ 3,820
See notes to consolidated financial statements. 5 INTERNET COMMERCE CORPORATION 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Internet Commerce Corporation (the "Company" or "ICC") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. In the opinion of management, such statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. Pursuant to the requirements of the Securities and Exchange Commission (the "SEC") applicable to Quarterly Reports on Form 10-Q, the accompanying financial statements do not include all the disclosures required by GAAP for annual financial statements. While the Company believes that the disclosures presented are adequate to make the information not misleading, these unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended July 31, 2004. Operating results for the three month period ended October 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2005. 2. ORGANIZATION AND NATURE OF BUSINESS ICC provides Internet-based services for the e-commerce business-to-business communication services market. ICC.NET, our global Internet-based value added network, or VAN, provides supply chain connectivity solutions for electronic data interchange, or EDI, and e-commerce, and offers users a vehicle to securely send and receive files of any format and size. The ICC.NET 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. The Company has the capability to facilitate the development and operation of comprehensive business-to-business electronic commerce solutions. The Company can provide professional service electronic commerce solutions involving EDI and EAI (Enterprise Application Integration) by providing mission critical electronic commerce consulting, electronic commerce software, outsourced electronic commerce services and technical resource management. ICC's capabilities also include an EDI Service Bureau, which provides EDI services to small and mid-sized companies. The Service Bureau's services include the conversion of electronic forms into hard copies and the conversion of hard copies to an EDI format. The Service Bureau also provides Universal Product Code ("UPC") services and maintains UPC catalogs for its customers. On June 22, 2004, the Company acquired Electronic Commerce Systems, Inc. ("ECS"). ECS offers ongoing EDI compliance within e-business solutions to suppliers. ECS provides Internet-based services, software, and service bureau services for the e-commerce business-to-business communication service market. The operating results of ECS are included in the Service Bureau segment. On September 28, 2004, ICC announced that the Board of Directors approved the relocation of the corporate headquarters to Atlanta, Georgia. This move, which is targeted for completion by mid-January 2005, will consolidate corporate operations in one city. The East Setauket, NY; Cary, GA; and Carrollton, GA facilities and offices will be unaffected by this move. Since the lease of the present corporate headquarters in New York, NY, expires on January 31, 2005, the Company does not expect to incur any lease termination expenses. The Company expects to incur expenses of approximately $200,000 for moving, new leasehold improvements and retention bonuses, which will be recognized when incurred. 6 INTERNET COMMERCE CORPORATION 3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Revenue recognition: The Company derives revenue from subscriptions to its ICC.NET service, which includes transaction, mailbox and fax transmission fees. The subscription fees are comprised of both fixed and usage-based fees. Fixed subscription fees are recognized on a pro-rata basis over the subscription period, generally three to six months. Usage fees are recognized in the period the services are rendered. The Company also derives revenue through implementation fees, interconnection fees and by providing data mapping services to its customers. Implementation fees are recognized over the life of the subscription period. Interconnection fees are fees charged to connect to another VAN service and are recognized when the data is transmitted to the connected service. Revenue from data mapping services is recognized when the map has been completed and delivered to the customer. The Company has a limited number of fixed fee data mapping service contracts. Under these contracts, the Company is required to provide a specified number of maps for a fixed fee. Revenue from such contracts is recognized using the percentage-of-completion method of accounting (see below). Until January 2004, the Company provided a range of EDI and electronic commerce consulting services and EDI education and training seminars throughout the United States. Revenue from EDI and electronic commerce consulting services and education and training seminars were recognized when the services were provided. The Company discontinued its EDI education and training seminars in February 2004. Revenues from our EDI education and training seminars were immaterial in all periods presented. Revenue from fixed fee data mapping and professional service contracts are recognized using the percentage-of-completion method of accounting, as prescribed by SOP 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." The percentage of completion for each contract is determined based on the ratio of direct labor hours incurred to total estimated direct labor hours required to complete the contract. The Company may periodically encounter changes in estimated costs and other factors that may lead to a change in the estimated profitability of a fixed-price contract. In such circumstances, adjustments to cost and profitability estimates are made in the period in which the underlying factors requiring such revisions become known. If such revisions indicate a loss on a contract, the entire loss is recorded at such time. Amounts billed in advance of services being performed are recorded as deferred revenue. Certain fixed-fee contracts may have substantive customer acceptance provisions. The acceptance terms generally include a single review and revision cycle for each deliverable to incorporate the customer's suggested or required modifications. Deliverables are considered accepted upon completion of the review and revision cycle and revenue is recognized upon that acceptance. The Company also derives revenue from its Service Bureau. Service Bureau revenue is comprised of EDI services, including data translation services, purchase order and invoice processing from EDI-to-print and print-to-EDI, UPC services, including UPC number generation, UPC catalog maintenance and UPC label printing. The Service Bureau also derives revenue from software licensing and provides software maintenance and support. Revenue from the EDI services and UPC services is recognized when the services are provided. The Company accounts for its EDI software license sales in accordance with the American Institute of Certified Public Accountants' Statement of Position 97-2, "Software Revenue Recognition," as amended ("SOP 97-2"). Revenue from software licenses is recognized when all of the following conditions are met: (1) a non-cancelable, non-contingent license agreement has been signed; (2) the software product has been delivered; (3) there are no material uncertainties regarding customer acceptance; and (4) collection of the resulting receivable is probable. Revenue from software maintenance 7 INTERNET COMMERCE CORPORATION 3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED) and support contracts is recognized ratably over the life of the contract. The Service Bureau's software license revenue was not significant in any of the periods presented. In addition, SOP 97-2 generally requires that revenue from software arrangements involving multiple elements be allocated among each element of the arrangement based on the relative fair values of the elements, such as software licenses, post contract customer support, installation or training. Furthermore, SOP 97-2 requires that revenue be recognized as each element is delivered and the Company has no significant performance obligations remaining. The Company's multiple element arrangements generally consist of a software license and post contract support. The Company allocates the aggregate revenue from multiple element arrangements to each element based on vendor specific objective evidence. The Company has established vendor specific objective evidence for each of the elements as it sells both the software and post contract customer support independent of multiple element agreements. Customers are charged standard prices for the software and post contract customer support and these prices do not vary from customer to customer. If the Company enters into a multiple element agreement where vendor specific objective evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until all elements of the arrangement are delivered. Service revenue from post contract customer support is recognized ratably over the term of the support contract, on a straight-line basis. Other service revenue is recognized at the time the service is performed. Deferred revenue: Deferred revenue is comprised of deferrals for subscription fees, professional services, license fees and maintenance associated with contracts for which amounts have been received in advance of services to be performed or prior to the shipment of software. Stock-based Compensation: In January 2004, the Company adopted the fair value provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 established a fair-value-based method of accounting for stock-based compensation plans. Pursuant to the transition provisions of SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148), the Company has elected the prospective method and will apply the fair value method of accounting to all equity instruments issued to employees on or after August 1, 2003. The fair value method is not applied to stock option awards granted in fiscal years prior to 2004. Such awards will continue to be accounted for under the intrinsic value method pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), except to the extent that prior years' awards are modified subsequent to August 1, 2003. Option awards granted prior to August 1, 2003 that have not been modified or settled continue to be accounted for under the intrinsic value method of APB 25. Therefore, the cost related to stock-based employee compensation included in the determination of the net loss for 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since their date of grant. The following table illustrates the effect on net loss and net loss per common share if the fair value based method had been applied to all outstanding and unvested awards in each period. 8 INTERNET COMMERCE CORPORATION 3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED) Three Months Ended October 31, -------------------------- 2004 2003 ----------- ----------- Net loss, as reported $ (401,611) $ (817,747) Add: Stock-based employee compensation expense included in reported net loss 178,373 -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (178,373) (189,820) ----------- ----------- Pro forma net loss $ (401,611) $(1,007,567) =========== =========== Basic and diluted loss per common share: As reported $ (0.03) $ (0.07) Pro forma $ (0.03) $ (0.08) Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant accounting estimates used in the preparation of the Company's consolidated financial statements include the fair value of equity securities underlying stock based compensation, the realizability of deferred tax assets, the carrying value of goodwill, intangible assets and long-lived assets, and depreciation and amortization. Recent Accounting Pronouncements: In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of Interpretation No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has provided information regarding commitments and contingencies relating to guarantees in Note 10. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations. 9 INTERNET COMMERCE CORPORATION 3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED) In November 2002, the Emerging Issues Task Force of the FASB ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. The EITF was effective for revenue arrangements entered into in fiscal years and interim periods beginning after June 15, 2003. The adoption of this consensus, effective August 1, 2003, did not have a significant impact on the Company's consolidated financial position or results of operations. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" to provide alternative methods to account for the transition from the intrinsic value method of recognition of stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" to the fair value recognition provisions under SFAS 123. SFAS 148 provides two additional methods of transition and will no longer permit the SFAS 123 prospective method to be used for fiscal years beginning after December 15, 2003. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the pro-forma effects had the fair value recognition provisions of SFAS 123 been used for all periods presented. The adoption of SFAS 148 did not have a significant impact on the Company's consolidated financial position and results of operations. The Company adopted the fair-value recognition provisions of SFAS 123 in January 2004. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46R") to address certain FIN 46 implementation issues. This interpretation requires that the assets, liabilities and results of activities of a Variable Interest Entity ("VIE") be consolidated into the financial statements of the enterprise that is the primary beneficiary of the VIE. FIN 46R also requires additional disclosures by primary beneficiaries and other significant variable interest holders. This interpretation is effective no later than the end of the first interim or reporting period ending after March 15, 2004, except for those VIE's that are considered to be special purpose entities, for which the effective date is no later than the end of the first interim or annual reporting period ending after December 15, 2003. The Company adopted FIN 46 in its entirety as of January 31, 2003. Since the Company does not have any VIE's, the adoption of FIN 46 did not have an impact on the Company's financial position or results of operations. In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and clarifies accounting for derivative instruments and for hedging activities under SFAS 133. Specifically, SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. Additionally, SFAS 149 clarifies the circumstances in which a contract with an initial net investment meets the characteristics of a derivative and when a derivative contains a financing component that requires special reporting in the statement of cash flows. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and did not have a significant impact on the Company's consolidated financial position or results of operations. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. For financial instruments created before the issuance date of this SFAS 150 and still existing at the beginning of the 10 INTERNET COMMERCE CORPORATION 3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED) interim period of adoption, transition shall be achieved by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attribute required by this Statement. The adoption of SFAS 150, effective August 1, 2003, did not have a material impact on the Company's consolidated financial position or results of operations. 4. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of accounts receivable. The Company believes that any credit risk associated with receivables is minimal due to the number and credit worthiness of its customers. Receivables are stated at estimated net realizable value, which approximates fair value. For the three-month period ended October 31, 2004 and 2003, no single customer accounted for more than 10% of revenue. No single customer accounted for more than 10% of accounts receivable at July 31, 2004 or October 31, 2004. 5. PRO FORMA DISCLOSURES RELATED TO RECENT ACQUISITIONS In June 2004, the Company completed the acquisition of Electronic Commerce Systems, Inc. ("ECS"). In accordance with the terms of the Agreement and Plan of Merger, dated May 25, 2004 (the "Merger Agreement"), ICC Acquisition Corporation, Inc., a wholly-owned subsidiary of ICC, merged with and into ECS and ECS became a wholly-owned subsidiary of ICC. ICC issued a total of 1,941,409 shares of its class A common stock, valued at $2,465,589, in connection with the acquisition, of which 345,183 shares were issued in exchange for approximately $471,000 of outstanding debt ECS owed to certain of its shareholders and in payment of ECS's legal fees. In determining the purchase price of the acquisition, the shares of ICC class A common stock issued were valued at $1.28 per share, the average market price of ICC's class A common stock over the 2-day period before and after the terms of the acquisition were agreed to and announced. The following unaudited pro forma summary financial information presents the consolidated results of operations of the Company as if the acquisition of ECS had occurred on August 1, 2003. The pro forma results are shown for illustrative purposes only and do not purport to be indicative of the results of the Company that would have been reported had the acquisition of ECS occurred on August 1 or indicative of results that may occur in the future. Three months ended October 31, 2004 2003 --------------------------- Revenues $ 3,747,000 $ 3,596,000 Net loss $ (402,000) $ (792,000) Basic and diluted loss per common share $ (0.03) $ (0.06) 6. BUSINESS SEGMENT INFORMATION The Company's two operating segments are: 11 INTERNET COMMERCE CORPORATION 6. BUSINESS SEGMENT INFORMATION (CONTINUED) o ICC.NET - The Company's global Internet-based value added network, or VAN, uses the Internet and proprietary technology to deliver customers' documents and data files to members of their trading communities, many of which may have incompatible systems, by translating the documents and data files into any format required by the receiver, and the development and operation of comprehensive business-to-business e-commerce solutions. Until January 2004, this segment also conducted a series of product-independent, one-day EDI seminars for e-commerce users. The Company discontinued offering seminars at the end of January 2004. Revenue from these seminars was immaterial in all periods presented. In response to continuing weak demand for its professional services, in February 2004 the Company combined these activities with ICC.NET to reduce operating costs. As a result, effective February 2004, the Company no longer reports the results for its professional services activities in a separate segment and includes these results in the ICC.NET segment. These activities were previously reported in the Professional Services segment. o Service Bureau - The Service Bureau manages and translates the data of small and mid-sized companies that exchange EDI data with large companies and provides various EDI and UPC (universal product code) services. The Service Bureau also licenses EDI software. Effective in June 2004, the Company combined the activities of ECS in the Service Bureau segment. The tables below summarize information about operations and long-lived assets as of and for the three months ended October 31, 2004 and 2003. Such information has been recast for each period presented, to reflect this reorganization as if it had occurred on August 1, 2003.
Service ICC.NET Bureau Total ----------- ----------- ----------- Three Months - October 31, 2004 Revenues from external customers $ 2,825,242 $ 921,298 $ 3,746,540 =========== =========== =========== Operating income (loss) $ (477,713) $ 73,000 $ (404,713) Other income, net 3,102 -- 3,102 ----------- ----------- ----------- Net income (loss) (1) $ (474,611) $ 73,000 $ (401,611) =========== =========== =========== Supplemental segment information: Amortization and depreciation $ 308,711 $ 72,549 $ 381,260 Non-cash charges for stock-based compensation and services $ 210,833 $ -- $ 210,833 As of October 31, 2004 Property and Equipment, net $ 189,202 $ 64,270 $ 253,472 Capitalized software development costs, net 4,465 -- 4,465 Goodwill 1,211,925 1,407,123 2,619,048 Other intangibles assets, net 956,000 1,015,371 1,971,371 ----------- ----------- ----------- Long lived assets, net $ 2,361,592 $ 2,486,764 $ 4,848,356 =========== =========== ===========
(1) Commencing in the first quarter of fiscal 2005, certain costs for selling and marketing functions were allocated to the Service Bureau from ICC.NET based on the level of service performed. ICC.NET allocated $24,000 of selling and marketing costs to the Service Bureau during the three months ended October 31, 2004. Also commencing in the first quarter of fiscal 2005, certain costs for executive management, MIS, human resources and accounting and finance functions were allocated to the Service Bureau from ICC.NET based on the level of service performed. ICC.NET allocated $135,000 of general and administrative costs for these services to the Service Bureau for the three months ended October 31, 2004. 12 INTERNET COMMERCE CORPORATION 6. BUSINESS SEGMENT INFORMATION (CONTINUED)
Service ICC.NET Bureau Total ----------- ----------- ----------- (As recasted) Three Months - October 31, 2003 Revenues from external customers $ 2,795,701 $ 307,651 $ 3,103,352 =========== =========== =========== Operating loss (1) $ (775,246) $ (30,934) $ (806,180) Other expense, net (11,567) -- (11,567) ----------- ----------- ----------- Net loss $ (786,813) $ (30,934) $ (817,747) =========== =========== =========== Supplemental segment information: Amortization and depreciation $ 372,516 $ 13,288 $ 385,804 Non-cash charges for stock-based compensation and services $ 52,943 $ -- $ 52,943 As of October 31, 2003 Property and Equipment, net $ 440,079 $ 35,221 $ 475,300 Capitalized software, net -- 108,738 108,738 Acquired identified intangibles, net 1,912,000 -- 1,912,000 Goodwill 26,132 1,185,793 1,211,925 ----------- ----------- ----------- Long lived assets, net $ 2,378,211 $ 1,329,752 $ 3,707,963 =========== =========== ===========
(1) Commencing in the second quarter of fiscal 2003, certain costs for executive management, human resources, accounting and finance were allocated to the Service Bureau from ICC.NET based on the level of services performed. In an effort to operate more efficiently and to reduce costs, these functions were consolidated and are performed by ICC.NET personnel. ICC.NET allocated $45,000 to the Service Bureau during the three month period ended October 31, 2003. 7. STOCKHOLDERS' EQUITY 2004 Private Placement of Common Stock: On April 20, 2004, the Company completed a private placement of class A common stock and warrants to purchase shares of class A common stock (the "2004 Private Placement") for aggregate gross proceeds of approximately $4,955,500. In the 2004 Private Placement, the Company sold 2,831,707 shares of class A common stock and warrants to purchase 849,507 shares of class A common stock. These warrants are exercisable for five years commencing on October 20, 2004 at an exercise price of $2.22 per share. No directors, officers or entities with which the Company's directors or officers are affiliated participated in the 2004 Private Placement. In connection with the 2004 Private Placement, the Company incurred fees and expenses of $772,001, of which $423,274 was paid in cash at closing, $122,822 is payable in cash and $225,905 was paid by issuing warrants to purchase 283,170 shares of class A common stock. The fair value of the warrants was estimated by management using the Black Scholes option-pricing model. These warrants have substantially the same terms as the warrants issued in the 2004 Private Placement. In connection with the 2004 Private Placement, the Company entered into a registration rights agreement with the investors, dated as of April 20, 2004, and filed a registration statement with the SEC on April 30, 2004 pursuant to this agreement. The registration statement was declared effective on August 20, 2004 and the Company was required to pay the holders of shares issued in the 2004 Private Placement, liquidated damages totaling $3,300 because of a two-day delay in causing the registration statement to become effective. If the effectiveness of the registration statement is not maintained for the period required by the registration rights agreement, the Company may be required to pay to the holders of shares issued in the 13 INTERNET COMMERCE CORPORATION 7. STOCKHOLDERS' EQUITY (CONTINUED) 2004 Private Placement liquidated damages of one percent (1%) of the purchase price paid for the shares by the holders for each 30 day period (or portion thereof on a pro rata basis) that the effectiveness of the registration statement is not maintained. No directors, officers or entities with which the Company's directors or officers are affiliated participated in the 2004 Private Placement. 2003 Private Placement of Common Stock and Preferred Stock: During April and May 2003, the company completed a private placement of common stock, convertible preferred stock and warrants to purchase shares of common stock (the "2003 Private Placement") for aggregate gross proceeds of approximately $2,085,000. In the 2003 Private Placement, the Company sold 1,682,683 shares of class A common stock and warrants to purchase 1,346,140 of class A common stock for gross proceeds of approximately $1,835,000 and 250 shares of series D convertible redeemable preferred stock ("series D preferred") and warrants to purchase 153,845 shares of class A common stock for $250,000. All warrants are immediately exercisable and have an exercise price of $1.47 per share. The warrants are exercisable until the fifth anniversary of the date of issuance. In addition, the warrants are redeemable at the Company's option, if the closing bid price of the Company's class A common stock exceeds 200% of the exercise price of the warrants for 30 consecutive trading days. The redemption price is $0.10 per share for each share issuable under the warrants. The 250 shares of series D preferred are convertible into 192,307 shares of class A common stock. The allocation of the proceeds from the sale of the series D preferred between the fair value of the series D and the fair value of the detachable warrants resulted in a beneficial conversion feature in the amount of $106,730. The discount was immediately accreted and treated as a deemed dividend to the holder of the series D preferred, as all of the series D preferred stock was immediately convertible upon issuance. In connection with the 2003 Private Placement, the Company incurred fees of $325,750 of which $237,938 was payable in cash and $87,802 was paid by issuing warrants to purchase 110,680 shares of class A common stock. These warrants have substantially the same terms as the warrants issued in the 2004 Private Placement. In connection with the 2003 Private Placement, the Company issued 48,076 shares of class A common stock and warrants to purchase 38,460 shares of class A common stock in settlement of certain outstanding payables. The common stock and warrants were valued at $50,000, the invoice amount of the services provided to the Company. Approximately 21%, or $432,000, of the gross proceeds from the 2003 Private Placement was received from directors and officers and entities with which the Company's directors are affiliated. Subsequent to the completion of the 2003 Private Placement, the Company determined that in order to comply with NASD Marketplace Rule 4350(i)(1)(A), the purchase price per share for the shares of class A common stock purchased by directors and officers in the private placement should be increased to market value, and on June 17, 2003 the directors and officers agreed to do so. As a result, two directors and three officers agreed to pay an additional $0.58 per share, or an aggregate of $85,502, for the shares of class A common stock they purchased in the private placement. In August of 2003 the Company paid bonuses of $40,000 to reimburse the officers for their additional $0.58 per share payment and in January 2004, at the request of the NASD, these officers returned to the Company an aggregate of 11,091 shares of class A common stock they purchased in the private placement in order to increase their purchase price to $1.45 per share without regard to the bonuses. 14 INTERNET COMMERCE CORPORATION 7. STOCKHOLDERS' EQUITY (CONTINUED) Stock Based Compensation: On March 10, 2003, options and shares of class A common stock were awarded to a non-employee director as compensation for consulting services. This individual was awarded 20,000 shares of class A common stock, valued at $18,000, which was recorded as a non-cash charge for stock-based compensation in the quarter ended April 30, 2003. Also on March 10, 2003, this individual was also granted options to purchase 100,000 shares of class A common stock, of which options to purchase 60,000 shares have an exercise price of $1.00 per share and vest six months from the date of issuance, and options to purchase 40,000 shares have an exercise price of $1.25 per share and vest one year from the date of issuance. The options have a fair value of $67,000, of which $15,440 has been recorded as a non-cash stock-based compensation charge for services during the three months ended October 31, 2003. In November 2003, this individual surrendered the 100,000 options noted above to the Company with no additional compensation charge recorded. Each non-employee member of the board of directors receives annual compensation of $25,000 for his current term of office, payable quarterly, in shares of class A common stock of the Company. The Company has recorded a compensation charge of $32,460 and $37,503 for the three months ended October 31, 2004 and 2003, respectively. Stock Options Cancellation and Exchange: In January 2004, the Company implemented a voluntary stock option exchange program whereby the Company offered to exchange certain outstanding options to purchase shares of the Company's class A common stock held by eligible employees of the Company, with exercise prices per share greater than or equal to $11.50, for new options to purchase shares of the Company's class A common stock (the "Offer to Exchange"). Under the terms of the Offer to Exchange, the 26 participating employees agreed to cancel, as of January 30, 2004, their existing options to purchase a total of 823,500 shares of the Company's common stock and were granted options to purchase 494,100 shares of the Company's class A common stock with an exercise price of $1.25 per share, the closing market price per share on January 20, 2004. Each new employee option was fully vested at the date of grant. Additionally, under the terms of the Offer to Exchange, two directors cancelled as of January 30, 2004 existing options to purchase 250,000 shares of the Company's class A common stock and were granted options to purchase 150,000 shares of the Company's common stock with an exercise price of $2.00 per share. The options granted to directors vest in two equal annual installments commencing one year after the date of grant. One director was eligible but declined to participate in the exchange and surrendered to the Company options to purchase 50,000 shares of the Company's class A common stock at an exercise price of $19.00 per share. Prior to August 1, 2003, the Company accounted for its employee stock options under the intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations ("APB 25"). No stock-based employee compensation expense is reflected in the statement of operations for options granted to employees to purchase common stock granted with an exercise price equal to or greater that the market value of the underlying common stock on the date of grant. Effective August 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FASB No. 123"). The fair value method has been applied prospectively to all employee awards granted, modified or settled after August 1, 2003. Options granted prior to August 1, 2003 that have not been modified or settled continue to be accounted for under the intrinsic value method of APB 25. During the three months ended October 31, 2004 the Company recorded non-cash charges for stock-based compensation of $178,373 and recorded no such charges during the three months ended October 31, 2003, as a result of the adoption of the fair value recognition provisions of FASB No. 123. 15 INTERNET COMMERCE CORPORATION 8. IMPAIRMENT OF SOFTWARE DEVELOPMENT COSTS, INVESTMENTS AND SOFTWARE INVENTORY In January 2004, the Company recorded an impairment charge of approximately $45,000 for previously capitalized software development costs related to a completed development project of its Service Bureau. The Company determined during the quarter ended January 31, 2004 that projected sales of this software were not sufficient to support its carrying value. 9. GOODWILL AND OTHER INTANGIBLE ASSETS On August 1, 2001, the Company adopted the provisions of SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires that intangible assets with indefinite useful lives no longer be amortized, but rather be tested at least annually for impairment. The Company's reporting units utilized for evaluating the recoverability of goodwill are the same as its operating segments. Intangible assets and related accumulated amortization consisted of the following at October 31, 2004 and July 31, 2004.
October 31, 2004 (Unaudited) July 31, 2004 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Value Amortization Value Value Amortization Value ------------------------------------------------------------------------------------- Data mapping technology (a)(c) $4,780,000 $3,824,000 $ 956,000 $4,780,000 $3,585,000 $1,195,000 Other technology (a) (d) 877,000 62,000 815,000 877,000 18,000 859,000 Customer relationships (b) (d) 216,000 16,000 200,000 216,000 5,000 211,000 ------------------------------------------------------------------------------------- $5,873,000 $3,902,000 $1,971,000 $5,873,000 $3,608,000 $2,265,000 =====================================================================================
(a) Amortized over five years on a straight-line basis. Amortization expense recorded in cost of services. (b) Amortized over five years on a straight-line basis. Amortization expense recorded in selling and marketing. (c) Acquired in the acquisition of Research Triangle Commerce, Inc. (d) Acquired in the acquisition of Electronic Commerce Systems, Inc. The Company did not have any indefinite lived intangible assets that were not subject to amortization as of October 31, 2004 and July 31, 2004. The aggregate amortization expense for other intangible assets were $294,000 and $239,000 during each of the three months ended October 31, 2004 and 2003, respectively. At October 31, 2004, estimated amortization expense for other intangible assets over the remaining life of those assets is as follows: Fiscal Year Estimated Remaining Amortization Expense ---- ---------------------------------------- 2005 $880,000 2006 $458,000 2007 $219,000 2008 $219,000 2009 $195,000 16 INTERNET COMMERCE CORPORATION 9. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) During the fourth quarter of fiscal 2003, the goodwill of the Service Bureau was tested for impairment due to a significant decline in revenue and operating income resulting primarily from the bankruptcy of its largest customer. An impairment loss of $982,142 was recognized as a result of this evaluation. The fair value of the Service Bureau was estimated using the net present value of expected future cash flows. The Company recorded an additional $79,810 to goodwill in the quarter ended October 31, 2004 relating to the ECS acquisition as a result of additional professional fees incurred after July 31, 2004. The change in carrying amount of goodwill for the three months ended October 31, 2004 is shown below: Service ICC.NET Bureau Total ---------------------------------------- Balance at July 31, 2004 $ 26,132 $ 2,513,106 $ 2,539,238 Additional cost of previous acquisition - 79,810 79,810 ---------------------------------------- Balance at October 31, 2004 $ 26,132 $ 2,592,916 $ 2,619,048 As of August 1, 2004, the Company performed its annual test for impairment on the carrying value of goodwill of its ICC.NET and Service Bureau reporting segments. The Company concluded that no impairment existed at that date. 10. GUARANTEES AND INDEMNIFICATIONS As part of its standard license agreements, the Company agrees to indemnify its customers against liability if the Company's products infringe a third party's intellectual property rights. Historically, the Company has not incurred any significant costs related to performance under these indemnities. As of October 31, 2004, the Company was not subject to any litigation alleging that the Company's products infringe the intellectual property rights of any third parties. 17 INTERNET COMMERCE CORPORATION 11. ACCOUNTS RECEIVABLE FINANCING AGREEMENT On May 30, 2003, the Company executed an Accounts Receivable Financing Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term of 1 year. Under the Financing Agreement, the Company may borrow, subject to certain conditions, up to 80% of its outstanding accounts receivable up to a maximum of $2,000,000. Interest accrues at the prime rate plus .35% plus a collateral handling fee equal to .20% on the average daily outstanding financed receivable balance. Interest is payable monthly. The Bank has been granted a security interest in substantially all of the Company's assets. In connection with the Financing Agreement, the Company issued the bank warrants to purchase 40,000 shares of the Company's class A common stock. The warrants are immediately exercisable at an exercise price of $1.39, equal to the fair market value of the Company's class A common stock at the date of closing of the Financing Agreement. The warrants are exercisable for seven years. The fair value of the warrants in the amount of approximately $34,000 was amortized to interest expense over the term of the Financing Agreement. During the fiscal year ended July 31, 2004, the Company recorded interest expense in the amount of approximately $28,434 for the amortization of the fair value of the warrants. No amortization expense was taken in the 2005 fiscal year. On October 22, 2003 and August 31, 2004, the Company and the Bank amended the Financing Agreement to extend its term to August 31, 2004 and December 29, 2004, respectively. As of October 31, 2004 and July 31, 2004, no amounts were outstanding under the Financing Agreement. 18 INTERNET COMMERCE CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q 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 Quarterly 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 Quarterly 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 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 described below the heading "Overview" and in our registration statements and periodic reports filed with the SEC 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. 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 Quarterly Report as anticipated, believed, estimated, expected or intended. In this Item 2, references to the "Company," "we," or "us" means Internet Commerce Corporation and its wholly owned subsidiaries. Overview We are in the e-commerce ("EC") business-to-business communication services market providing complete EC infrastructure solutions. Our business operates in two segments: namely, ICC.NET and Service Bureau. As the Company approaches cash flow break-even, we have strengthened the executive management team by the addition of a new Chief Executive Officer, Chief Operating Officer and Chief Financial Officer to capitalize on the individual skills of senior management and more precisely align those skills with the many new opportunities currently developing. We are focusing on the future direction of the markets in which we compete, mergers and acquisitions and the development of important strategic relationships, such as our Microsoft Business Network opportunity, that have the potential to increase our revenues and profits. ICC.NET includes the Company's global Internet-based value added network, or VAN, which uses the Internet and our proprietary technology to deliver our customers' documents and data files to members of their trading communities, many of which may have incompatible systems, by translating the documents and data files into any format required by the receiver. We believe that our ICC.NET service has significant advantages over traditional VANs as well as email-based and other Internet-based software systems because our service is provided at a low cost, with greater transmission speed that is nearly real-time and offers more features. In addition, ICC.NET facilitates the development and operation of comprehensive business-to-business e-commerce solutions. Professional Services assists its clients to conduct business electronically through a continuum of services including eConsulting, data transformation mapping (EDI, EAI, XML) and internetworking. Our Service Bureau manages and translates the data of small and mid-sized companies that exchange EDI data with large companies that require that data be transmitted to them electronically. The Service Bureau delivers business-to-business EDI standards-based documents for companies that do not have EDI departments. The Value Added Network business has become significantly more price competitive over the past year, with major networks restructuring to reduce their overhead cost to be better positioned to compete on a price point basis against Internet based networks such as ICC.NET. We have been successful in maintaining, and in fact have improved, our margins, but we have experienced some price erosion in competing for larger customers. Although we expect to continue to add new customers and increase the volume of data transmitted through our service, we do not expect our revenue from VAN services to continue to grow as rapidly as in the past. This trend is expected to continue in the short term until such time as a cost-based pricing floor is reached by our larger 19 INTERNET COMMERCE CORPORATION competitors. To counteract this negative impact on our revenue growth, management has deployed a new dual pronged strategy. We expect to add revenue through acquisition of Electronic Commerce Systems, Inc. ("ECS") and have developed new product and service offerings (AS2 and Data Synchronization) to improve our value proposition. AS2 capabilities has refocused the attention of industry. AS2 is a service offering on the Internet, which handles primary XML documents, which are an extension of traditional EDI. We have incorporated this communication methodology into our standard network services and are achieving success in stemming a migration of our customers network traffic to those who could otherwise purchase an AS2 software offering. Data synchronization has forced the industry to change its focus from cost savings to compliance. Data synchronization is a methodology by which descriptive data identifying an item or items is stored in a central depository resulting in one common source of truth about the product description. We believe this will be an industry focus for a year or so and thereafter be a standard business practice. We have become a certified data synchronization "on-boarder" and are currently offering training and consulting services to capitalize on this emerging initiative. During the fiscal quarter ended October 31, 2004, we further improved our operational leverage by increasing our consolidated revenue by $643,000 and by reducing our operating loss by $401,000 from the fiscal quarter ended October 31, 2003. Consolidated revenue for the three months ended October 31, 2004 increased from the three months ended October 31, 2003 by $643,000; however, our EDI educational services and seminars unit that was discontinued in February 2004 due to continued operating losses produced revenue of $82,000 in the three months ended October 31, 2003. VAN services revenue increased $266,000 or approximately 11%. Service Bureau revenue in the quarter ended October 31, 2004 significantly increased $614,000, or 200%, over the three months period ended October 31, 2003 due to the ECS acquisition. Professional services and mapping revenues continue to be weak due to slow demand for these services. Commencing in the third quarter of fiscal 2004 we combined the Professional Services operating segment with ICC.NET to further minimize operating costs. As a result, the Company, effective February 2004, no longer separately reports the operating results for its professional services activities as a separate segment and began including these results in the ICC.NET segment. These activities were previously reported in the Professional Services segment. We rely on many of our competitors to interconnect, at reasonable cost, with our service and have interconnection arrangements with more than 65 business-to-business networks for the benefit of our customers. We believe that these arrangements will satisfy the business requirements of our existing customers. On September 28, 2004, ICC announced that the Board of Directors approved the relocation of the corporate headquarters to Atlanta, Georgia. This move, which is targeted for completion by mid-January 2005, will consolidate corporate operations in one city. The East Setauket, NY; Cary, GA; and Carrollton, GA facilities and offices will be unaffected by this move. Since the lease of the present corporate headquarters in New York, NY, expires on January 31, 2005, the Company does not expect to incur any lease termination expenses. The Company expects to incur expenses of approximately $200,000 for moving, new leasehold improvements and retention bonuses, which will be recognized when incurred. Critical Accounting Policies and Significant Use of Estimates in Financial Statements Critical accounting policies are those policies that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The following list of critical accounting policies is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in note 2 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended July 31, 2004. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles with no need for management's judgment in their application. There are also areas in which 20 INTERNET COMMERCE CORPORATION management's judgment in selecting any available alternative would not produce a materially different result. We have identified the following to be critical accounting policies of the Company: Revenue Recognition: The Company derives revenue from subscriptions to its ICC.NET service, which includes transaction, mailbox and fax transmission fees. The subscription fees are comprised of both fixed and usage-based fees. Fixed subscription fees are recognized on a pro-rata basis over the subscription period, generally three to six months. Usage fees are recognized in the period the services are rendered. The Company also derives revenue through implementation fees, interconnection fees and by providing data mapping services to its customers. Implementation fees are recognized over the life of the subscription period. Interconnection fees are fees charged to connect to another VAN service and are recognized when the data is transmitted to the connected service. Revenue from data mapping services is recognized when the map has been completed and delivered to the customer. The Company has a limited number of fixed fee data mapping services contracts. Under these arrangements the Company is required to provide a specified number of maps for a fixed fee. Revenue from such arrangements is recognized using the percentage-of-completion method of accounting (see below). The Company provides a range of EDI and electronic commerce consulting services and EDI education and training seminars throughout the United States. Revenue from EDI and electronic commerce consulting services and education and training seminars are recognized when the services are provided. The Company discontinued its EDI education and training seminars in February 2004. Revenues from our EDI education and training seminars were immaterial in all periods presented. Revenue from fixed fee data mapping and professional service contracts is recognized using the percentage-of-completion method of accounting, as prescribed by SOP 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." The percentage of completion for each contract is determined based on the ratio of direct labor hours incurred to total estimated direct labor hours required to complete the contract. The Company may periodically encounter changes in estimated costs and other factors that may lead to a change in the estimated profitability of a fixed-price contract. In such circumstances, adjustments to cost and profitability estimates are made in the period in which the underlying factors requiring such revisions become known. If such revisions indicate a loss on a contract, the entire loss is recorded at such time. Amounts billed in advance of services being performed are recorded as deferred revenue. Certain fixed-fee contracts may have substantive customer acceptance provisions. The acceptance terms generally include a single review and revision cycle for each deliverable to incorporate the customer's suggested or required modifications. Deliverables are considered accepted upon completion of the review and revision and revenue cycle is recognized upon acceptance. Service Bureau revenue is comprised of EDI services including data translation services, EDI-to-print and print-to-EDI purchase order and invoice processing, UPC services including UPC number generation, UPC catalog maintenance and UPC label printing. The Service Bureau also derives revenue from licensing software and providing software maintenance and support. Revenue from EDI services and UPC services is recognized when the services are provided. The Company accounts for its EDI software license sales in accordance with the American Institute of Certified Public Accountants' Statement of Position 97-2, "Software Revenue Recognition," as amended ("SOP 97-2"). Revenue from software licenses is recognized when all of the following conditions are met: (1) a non-cancelable non-contingent license agreement has been signed; (2) the software product has been delivered; (3) there are no material uncertainties regarding customer acceptance; and (4) collection of the resulting receivable is probable. Revenue from software maintenance and support contracts is recognized ratably over the life of the contract. The Service Bureau's software license revenue was not significant in any of the periods presented. In addition, SOP 97-2 generally requires that revenue from software arrangements involving multiple elements be allocated among each element of the arrangement based on the relative fair values of the elements, such as software licenses, post contract customer support, installation or training. Furthermore, SOP 97-2 requires that revenue be recognized as each element is delivered with no significant performance obligation remaining on the part of the Company. The Company's multiple element arrangements generally consist of a software license and post contract support. The Company allocates the aggregate revenue from multiple element arrangements to each element based on vendor specific objective evidence. The Company has established vendor specific objective evidence for each of the elements as it sells both the software and post contract customer support independent of 21 INTERNET COMMERCE CORPORATION multiple element agreements. Customers are charged standard prices for the software and post contract customer support and these prices do not vary from customer to customer. If the Company enters into a multiple element agreement for which vendor specific objective evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until all elements of the arrangement are delivered. Service revenue from post contract customer support is recognized ratably over the term of the support contract, on a straight-line basis. Other service revenue is recognized at the time the service is performed. Goodwill: Goodwill consists of the excess purchase price over the fair value of identifiable net assets of acquired businesses. The carrying value of goodwill is evaluated for impairment on an annual basis. Management also reviews goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. If it is determined that an impairment in value has occurred, goodwill is written down to its implied fair value. The Company's reporting units utilized for evaluating the recoverability of goodwill are the same as its operating segments. Other Intangible Assets: Other intangible assets are carried at cost less accumulated amortization. Other intangible assets are amortized on a straight-line basis over their expected lives, which are estimated to be five years. The Company did not have any indefinite lived intangible assets other than goodwill that were not subject to amortization. Impairment of long-lived assets: Long-lived assets of the Company, including amortizable intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Management also reevaluates the periods of amortization of long-lived assets to determine whether events and circumstances warrant revised estimates of useful lives. When such events or changes in circumstances occur, the Company tests for impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset, the Company would recognize an impairment loss. The amount of the impairment loss will be determined by comparing the carrying value of the long-lived asset to the present value of the net future operating cash flows to be generated by the asset. Stock-based compensation: In January 2004, the Company adopted the fair value provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 established a fair-value-based method of accounting for stock-based compensation plans. Pursuant to the transition provisions of SFAS 148, "Accounting for Stock Based Compensation - Transition and Disclosure" ("SFAS 148"), the Company has elected the prospective method and will apply the fair value method of accounting to all equity instruments issued to employees on or after August 1, 2003. The fair value method is not applied to stock option awards granted in fiscal years prior to 2004. Such awards will continue to be accounted for under the intrinsic value method pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), except to the extent that prior years' awards are modified subsequent to August 1, 2003. Option grants issued prior to August 1, 2003 that have not been modified or settled continue to be accounted for under the intrinsic value method of APB 25. Therefore, the cost related to stock-based employee compensation included in the determination of the net loss for 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since their date of grant. Income Taxes: Deferred income taxes are determined by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A valuation allowance is provided based on the weight of available evidence, if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period. Actual results could 22 INTERNET COMMERCE CORPORATION differ from those estimates. The following discussion reviews items incorporated in our financial statements during the three month periods ended October 31, 2004 and 2003 or as of October 31, 2004 and July 31, 2004 that required the use of significant management estimates. As discussed above, in January 2004, the Company adopted the fair value provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). During the three months ended October 31, 2004 the Company recorded non-cash charges for stock-based compensation of $178,373 and recorded no such amounts during the three months ended October 31, 2003 as a result of the adoption of the fair value recognition provisions of SFAS 123. The Black-Scholes option-pricing model was used to determine the estimated fair value of stock options issued and modified. The use of this model required management to make certain estimates for values of variables used by the model. Management estimated the values for stock price volatility, the expected life of the equity instruments and the risk free rate based on information that was available to management at the time the Black-Scholes option-pricing calculations were performed. Changes in such estimates could have a significant impact on the estimated fair value of those equity instruments. The Company has entered into several transactions involving the issuance of warrants and options to purchase shares of the Company's class A common stock to consultants, lenders, warrant holders, placement agents and other business associates and vendors. The issuance of these securities required management to estimate their value using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires management to make certain estimates for values of variables used by the model. Management estimated the values for stock price volatility, the expected life of the equity instruments and the risk free rate based on information that was available to management at the time the Black-Scholes option-pricing calculations were performed. Changes in such estimates could have a significant impact on the estimated fair value of those equity instruments. In connection with the Company's April 2004 private placement, the Company incurred fees which were paid by issuing warrants to purchase 283,170 shares of class A common stock at an exercise price of $2.22 per share. The fair value of the warrants was determined by management to be $225,905 by utilizing the Black-Scholes option pricing model. In January 2004, we implemented a voluntary stock option exchange program whereby we offered to exchange certain outstanding options to purchase shares of class A common stock held by eligible employees, with exercise prices per share greater than or equal to $11.50, for new options to purchase shares of class A common stock. Under this exchange program, the 26 participating employees agreed to cancel, as of January 30, 2004, their existing options to purchase a total of 823,500 shares of the class A common stock and were granted options to purchase 494,100 shares of class A common stock with an exercise price of $1.25 per share, the closing market price per share on January 20, 2004. In addition, under this exchange program, two directors cancelled as of January 30, 2004 existing options to purchase 250,000 shares of class A common stock and were granted options to purchase 150,000 shares of the class A common stock with an exercise price of $2.00 per share. Management estimated the value of the options granted under the exchange program using the Black Scholes option-pricing model. 23 INTERNET COMMERCE CORPORATION On May 30, 2003, the Company executed an Accounts Receivable Financing Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term of 1 year. Under the Financing Agreement, the Company may borrow, subject to certain conditions, up to 80% of its outstanding accounts receivable up to a maximum of $2,000,000. Interest accrues at the prime rate plus .35% plus a collateral handling fee equal to .20% on the average daily outstanding financed receivable balance. Interest is payable monthly. The Bank has been granted a security interest in substantially all of the Company's assets. In connection with the Financing Agreement, the Company issued the bank warrants to purchase 40,000 shares of the Company's class A common stock. The warrants are immediately exercisable at an exercise price of $1.39, equal to the fair market value of the Company's class A common stock at the date of closing of the Financing Agreement. The warrants are exercisable for seven years. The fair value of the warrants in the amount of approximately $34,000 was amortized to interest expense over the term of the Financing Agreement. During the fiscal year ended July 31, 2004, the Company recorded interest expense in the amount of approximately $28,434 for the amortization of the fair value of the warrants. No amortization expense was taken in the 2005 fiscal year. On October 22, 2003 and August 31, 2004, the Company and the Bank amended the Financing Agreement to extend its term to August 31, 2004 and December 29, 2004, respectively. As of July 31, 2004 and October 31, 2004, no amounts were outstanding under the Financing Agreement. On March 10, 2003, the Company issued options to purchase 100,000 shares of class A common stock to a non-employee member of the board of directors as compensation for consulting services. The estimated fair value of the options was determined by management to be $42,000. In November 2003, this individual surrendered his 100,000 options noted above to the Company with no additional compensation charge recorded. The allocation of the proceeds from the sale of the series D preferred stock and warrants issued in the Company's April 30, 2003 private placement between the fair value of the series D preferred stock and the fair value of the detachable warrants required management to estimate the fair value of the warrants. Management's estimate resulted in a beneficial conversion feature in the amount of $106,730. The discount was immediately accreted and treated as a deemed dividend to the holder of the series D preferred as all of the series D preferred stock was eligible for conversion upon issuance. In connection with the private placement that closed during April and May of 2003, the Company incurred fees which were paid by issuing warrants to purchase 110,680 shares of class A common stock at an exercise price of $1.47 per share. The fair value of the warrants was determined by management to be $87,800. In connection with the acquisition of RTCI on November 6, 2000, issued and outstanding options and warrants to purchase RTCI common stock were exchanged for options and warrants of ICC, providing the holders the right to receive, upon exercise, an aggregate of 394,905 shares of ICC class A common stock and $343,456 of cash. The options and warrants were valued using the Black-Scholes option-pricing model. The fair value of the vested portion of the options was included in the purchase price for RTCI. Goodwill is evaluated for impairment at least annually and whenever events or circumstances indicate impairment may have occurred. The assessment requires the comparison of the fair value of each of the Company's reporting units to the carrying value of its respective net assets, including allocated goodwill. If the carrying value of the reporting unit exceeds its fair value, the Company must perform a second test to measure the amount of impairment. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The Company allocates the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized by the Company in an amount equal to that excess. The Company estimates the fair value of its reporting units based on the net present value of expected future cash flows. The use of this method requires management to make estimates of the expected future cash flows of the reporting unit and the Company's weighted average cost of capital. Estimating the Company's weighted average cost of capital requires management to make estimates for long-term interest rates, risk premiums, and beta coefficients. Management estimated these items based on information that was available to management at the time 24 INTERNET COMMERCE CORPORATION the Company prepared its estimate of the fair value of the reporting unit. Changes in either the expected cash flows or the weighted average cost of capital could have a significant impact on the estimated fair value of the Company's reporting units. During the fourth quarter of fiscal 2003, the goodwill of the Service Bureau was tested for impairment due to a significant decline in revenues and operating income resulting primarily from the bankruptcy of its largest customer. The fair value of the Service Bureau reporting unit was estimated using the net present value of expected future cash flows. An impairment of goodwill in the amount of approximately $982,000 was recorded during the year ended July 31, 2003. As of August 1, 2004, the Company performed its annual test for impairment on the carrying value of goodwill of its ICC.NET and Service Bureau reporting units. The Company concluded that no impairment existed at that date. 25 INTERNET COMMERCE CORPORATION Three Months Ended October 31, 2004 Compared with Three Months Ended October 31, 2003. Results of Operations - Consolidated The following table reflects consolidated operating data by reported segments. All significant intersegment activity has been eliminated. Accordingly, the segment results below exclude the effect of transactions with our subsidiaries. Three Months Ended October 31, --------------------------- Consolidated net loss: 2004 2003 (1) ----------- ----------- ICC.NET $ (474,611) $ (786,813) Service Bureau 73,000 (30,934) ----------- ----------- Consolidated loss $ (401,611) $ (817,747) =========== =========== (1) Recasted to reflect the inclusion of Professional Services within the ICC.NET segment. Results of Operations - ICC.NET Our ICC.NET service, the Company's global Internet-based value added network, or VAN, uses the Internet and our proprietary technology to deliver our customers' documents and data files to members of their trading communities, many of which may have incompatible systems, by translating the documents and data files into any format required by the receiver. In addition, ICC.NET facilitates the development and operation of comprehensive business-to-business e-commerce solutions. These professional services assist our clients to conduct business electronically through a continuum of services including eConsulting, data transformation mapping (EDI, EAI, XML) and internetworking. The following table summarizes operating results for our ICC.NET service for the three months ended October 31, 2004 and 2003:
Three Months Ended October 31, Variance ----------------------------------------------------------- 2004 2003 (1) $ % ----------- ----------- ---------------------- Revenue: VAN services $ 2,621,838 $ 2,355,730 $ 266,108 11 Professional services 138,775 355,162 (216,387) (61) Mapping services 64,629 84,808 (20,179) (24) ----------- ----------- ----------- 2,825,242 2,795,700 29,542 1 Expenses: Cost of services 1,200,157 1,656,407 (456,250) (28) Product development and enhancement 134,077 190,965 (56,888) (30) Selling and marketing 688,312 807,231 (118,919) (15) General and administrative 1,069,576 863,401 206,175 24 Non-cash charges for stock-based compensation 210,833 52,942 157,891 298 ----------- ----------- ----------- 3,302,955 3,570,946 (267,991) (8) ----------- ----------- ----------- Operating loss (477,713) (775,246) 297,533 (38) Other expense, net 3,102 (11,567) 14,669 (127) ----------- ----------- ----------- Net loss $ (474,611) $ (786,813) $ 312,202 (40) =========== =========== ===========
(1) Recasted to reflect the inclusion of Professional Services within the ICC.NET segment. 26 INTERNET COMMERCE CORPORATION Revenue - ICC.NET - Revenue related to our ICC.NET service was 75% of consolidated revenue for the quarter ended October 31, 2004 (the "2005 Quarter") and 90% of consolidated revenue for the quarter ended October 31, 2003 (the "2004 Quarter"). Total ICC.NET revenue increased $30,000 in the 2005 Quarter from the 2004 Quarter, or approximately 1%. VAN services revenue increased $266,000, or approximately 11%, in the 2005 Quarter from the 2004 Quarter. The increase in VAN services revenue is primarily attributable to an increase in the monthly mailbox fee during the 2005 Quarter. Professional services revenue decreased $216,000, or approximately 61%, in the 2005 Quarter from the 2004 Quarter, partially due to a decrease of $82,000 in revenue from EDI educational services and seminars. We discontinued our EDI educational services and seminars in January 2004. In addition, revenue from our professional services decreased $107,000, or approximately 39%, in the 2005 Quarter from the 2004 Quarter due to a continued slowing in demand for these services. Mapping revenue decreased $20,000, or approximately 24%, in the 2005 Quarter from the 2004 Quarter, primarily due to a decrease in the number of customers and smaller mapping projects resulting from the continued slowing in demand for these services. Cost of services - ICC.NET - Cost of services relating to our ICC.NET service was 43% of revenue derived from the ICC.NET service in the 2005 Quarter, compared to 59% of such revenue in the 2004 Quarter. Cost of services relating to our ICC.NET service consists primarily of salaries and employee benefits, connectivity fees, amortization and rent. Total cost of services decreased $456,000 in the 2005 Quarter from the 2004 Quarter. Salaries and benefits and fees paid to consultants decreased $297,000 in the 2005 Quarter from the 2004 Quarter, primarily due to a decrease in headcount to 16 in October 2004 from 34 in October 2003 and a decrease in the use of consultants. Allocation of salaries from product and development decreased $46,000 in the 2005 Quarter from the 2004 Quarter, due to less developer time spent on costs of services projects. In addition, travel and entertainment decreased $35,000 in the 2005 Quarter from the 2004 Quarter due to the completion of professional service projects requiring travel and the discontinuance of our educational services and seminars in January 2004. Depreciation expense decreased $20,000 in the 2005 from the 2004 Quarter due to assets reaching the end of their useful lives subsequent to the 2004 Quarter. Product development and enhancement - ICC.NET - Product development and enhancement costs relating to our ICC.NET service consist primarily of salaries and employee benefits. Product development and enhancement costs decreased $57,000 in the 2005 Quarter from the 2004 Quarter. Salaries and benefits decreased $83,000 in the 2005 Quarter from the 2004 Quarter, primarily due to a decrease in the number of employees to 7 at the end of the 2005 Quarter from 10 at the end of the 2004 Quarter. Depreciation expense decreased $11,000 in the 2005 from the 2004 Quarter due to assets reaching the end of their useful lives subsequent to the 2004 Quarter. Offsetting these decreases, allocation of product development salaries to other departments decreased $38,000 in the 2005 Quarter from the 2004 Quarter. Selling and marketing - ICC.NET - Selling and marketing expenses relating to our ICC.NET service consist primarily of salaries and employee benefits, rent, travel-related costs, advertising and trade-show costs. Selling and marketing expenses relating to our ICC.NET service decreased $119,000 in the 2005 Quarter from the 2004 Quarter. Salaries and benefits decreased $80,000 in the 2005 Quarter from the 2004 Quarter primarily due to a decrease in the number of employees to 14 at the end of the 2005 Quarter from 21 at the end of the 2004 Quarter. Commencing in the 2005 Quarter, ICC.NET began allocating a portion of the cost of sales and marketing functions to the Service Bureau segment based on the level of effort utilized in selling Service Bureau products. This corporate allocation to the Service Bureau segment was $24,000 in the 2005 Quarter. General and administrative - ICC.NET - General and administrative expenses supporting our ICC.NET service consist primarily of salaries and employee benefits, legal and professional fees, facility costs, travel meals and entertainment and insurance. General and administrative costs supporting our ICC.NET service increased $206,000 in the 2005 Quarter from the 2004 Quarter. Salaries and benefits increased $253,000 in the 2005 Quarter from the 2004 Quarter due to retention bonuses of $118,000 for finance department employees in the 2005 Quarter and due the strengthening of executive management by the addition of a new chief executive officer and chief operating officer subsequent to the 2004 Quarter. Legal and professional fees increased $64,000 in the 2005 Quarter from the 2004 Quarter due to an increase in the use of these services. Commencing in the second fiscal quarter of 2003, ICC.NET began allocating a portion of the cost of executive management, human resources, accounting and finance functions to the Service Bureau segment based on the level of services provided, and in the 2005 Quarter, the cost of 27 INTERNET COMMERCE CORPORATION the MIS function was added to those being allocated. This corporate allocation to the Service Bureau segment increased $90,000 in the 2005 Quarter from the 2004 Quarter, to $135,000 from $45,000. Non-cash charges - ICC.NET - Non-cash charges of approximately $211,000 in the 2005 Quarter consist of $178,000 for stock options issued to employees and directors and of $33,000 for shares of class A common stock to be issued to non-employee directors as compensation for 2004 directors' fees. Non-cash charges of approximately $53,000 in the 2004 Quarter consisted of shares of class A common stock issued to non-employee directors as compensation for calendar year 2003 directors' fees in the amount of $38,000. In addition, $15,000 of expense was recognized during the 2004 Quarter for stock options issued to a non-employee director as compensation for consulting services. Results of Operations - Service Bureau Our Service Bureau manages and translates the data of small and mid-sized companies that exchange EDI data with large companies and provides various EDI and UPC (Universal Product Code) services. Our Service Bureau also licenses EDI software. On June 22, 2004, we acquired Electronic Commerce Systems, Inc. ("ECS"), the operating results of which are reported in the Service Bureau segment. The following table summarizes operating results for our Service Bureau:
Three Months Ended October 31, Variance -------------------- 2004 2003 $ % ---------------------------------------------------------- Revenue: Services $ 921,298 $ 307,651 $ 613,647 199 --------- --------- --------- --------- Expenses: Cost of services 217,270 203,901 13,369 7 Product development and enhancement 88,635 34,249 54,386 159 Selling and marketing 149,806 18,450 131,356 712 General and administrative 392,587 81,985 310,602 379 --------- --------- --------- --------- 848,298 338,585 509,713 151 --------- --------- --------- --------- Operating income (loss) 73,000 (30,934) 103,934 (336) Other income, net -- -- -- -- --------- --------- --------- --------- Net income (loss) $ 73,000 $ (30,934) $ 103,934 $ (336) ========= ========= ========= =========
Revenue - Service Bureau - Revenue relating to our Service Bureau was 25% of consolidated revenue in the 2005 Quarter and 10% of consolidated revenue in the 2004 Quarter. The Service Bureau's revenue was primarily generated from services performed, customer support and licensing fees. Revenue in the 2005 Quarter increased $614,000, or 200%, from the 2004 Quarter due to the acquisition of ECS in June 2004. Cost of services - Service Bureau - Cost of services relating to our service bureau was 24% of revenue derived from the Service Bureau in the 2005 Quarter, compared to 66% of such revenue in the 2004 Quarter. Cost of services relating to our Service Bureau consists primarily of salaries and employee benefits, amortization, connectivity fees and rent. Cost of services relating to our Service Bureau increased $13,000 in the 2005 Quarter from the 2004 Quarter. Amortization was $44,000 in the 2005 Quarter with no amount in the 2004 Quarter due to the amortization of technology obtained in the acquisition of ECS. Connectivity fees increased $10,000 in the 2005 Quarter from the 2004 Quarter due an increase in the level of business conducted. Offsetting these increases, 28 INTERNET COMMERCE CORPORATION allocation of expense from the product development and enhancement department decreased $28,000 in the 2005 Quarter from the 2004 Quarter. Product development and enhancement - Service Bureau - Product development and enhancement costs consist primarily of salaries and employee benefits. Product development and enhancement costs incurred by our Service Bureau increased $54,000 in the 2005 Quarter from the 2004 Quarter. Salaries and benefits increased $23,000 in the 2005 Quarter from the 2004 Quarter due primarily to an increase in the number of employees to 4 at the end of the 2004 Quarter from 3 at the end of the 2003 Quarter. Allocation of product development salaries to other departments decreased $29,000 in the 2005 Quarter from the 2004 Quarter. Selling and marketing - Service Bureau - Selling and marketing expenses relating to our Service Bureau consist primarily of salaries and employee benefits and amortization. Selling and marketing expenses incurred by our Service Bureau increased $131,000 in the 2005 Quarter from the 2004 Quarter. Salaries and benefits increased $82,000 in the 2005 Quarter from the 2004 Quarter due to an increase in the number of employees to 4 at the end of the 2005 Quarter from 1 at the end of the 2004 Quarter. Amortization was $11,000 in the 2005 Quarter with no amount in the 2004 Quarter due to the amortization of customer relationships obtained in the acquisition of ECS. Allocation of selling and marketing expenses from ICC.NET increased $24,000 in the 2005 Quarter from the 2004 Quarter. See "Selling and marketing - ICC.NET" above for a discussion of the allocation of selling and marketing expenses between segments. General and administrative - Service Bureau - General and administrative expenses relating to our Service Bureau consist primarily of salaries and employee benefits, office expenses, depreciation, telephone and rent. General and administrative expenses incurred by our Service Bureau increased $311,000 in the 2005 Quarter from the 2004 Quarter. Salaries and employee benefits increased $143,000 in the 2005 Quarter from the 2004 Quarter due primarily to an increase in the number of employees to 5 at the end of the 2005 Quarter from 1 at the end of the 2004 Quarter. Rent, office expense, telephone expenses and depreciation increased $23,000, $16,000, $14,000 and $10,000, respectively, in the 2005 Quarter from the 2004 Quarter as a result of the addition of new facilities resulting from the acquisition of ECS. Allocation of general and administrative expenses from ICC.NET increased $90,000 in the 2005 Quarter from the 2004 Quarter. See "General and administrative - ICC.NET" above for a discussion of the allocation of general and administrative expenses between segments. Liquidity and Capital Resources Our principal sources of liquidity, which consist of unrestricted cash and cash equivalents, decreased slightly to $3,646,000 as of October 31, 2004 from $3,790,000 as of July 31, 2004. We believe these resources provide us with sufficient liquidity to continue in operation at least through July 31, 2005. On April 20, 2004, the Company completed a private placement of common stock and warrants to purchase shares of common stock (the "2004 Private Placement") that provided aggregate gross proceeds of approximately $4,955,000. In the 2004 Private Placement, the Company sold 2,831,707 shares of its class A common stock and warrants to purchase 849,507 shares of our class A common stock. These warrants are exercisable for five years commencing on October 20, 2004 at an exercise price of $2.22 per share. In connection with the 2004 Private Placement, the Company incurred fees and expenses of $772,001, of which $423,274 was paid in cash at closing, $122,822 is payable in cash and $225,905 was paid by issuing warrants to purchase 283,170 shares of class A common stock. The fair value of the warrants was estimated by management using the Black Scholes option-pricing model. These warrants have substantially the same terms as the warrants issued in the 2004 Private Placement. No directors, officers or entities with which the Company's directors, or officers are affiliated participated in the 2004 Private Placement. In connection with the 2004 Private Placement, the Company entered into a registration rights agreement with the investors, dated as of April 20, 2004, and filed a registration statement with the SEC on April 30, 2004 pursuant to this agreement. The registration statement was declared effective on August 20, 2004 and the Company is required to pay the holders of shares issued in the 2004 Private Placement liquidated damages totaling $3,300 29 INTERNET COMMERCE CORPORATION because of a two-day delay in causing the registration statement to become effective. If the effectiveness of the registration statement is not maintained for the period required by the registration rights agreement, the Company may be required to pay to the holders of shares issued in the 2004 Private Placement liquidated damages of one percent (1%) of the purchase price paid for the shares by the holders for each 30 day period (or portion thereof on a pro rata basis) that the effectiveness of the registration statement is not maintained. During April and May 2003, the Company completed a private placement of shares of its class Acommon stock, convertible preferred stock and warrants to purchase shares of common stock (the "2003 Private Placement") for aggregate gross proceeds of approximately $2,085,000. In the 2003 Private Placement, the Company sold 1,682,683 shares of class A common stock and warrants to purchase 1,346,140 of class A common stock providing gross proceeds of approximately $1,835,000 and 250 shares of series D convertible redeemable preferred stock ("series D preferred") and warrants to purchase 153,845 shares of class A common stock for $250,000. All warrants are immediately exercisable and have an exercise price of $1.47 per share. The warrants are exercisable until the fifth anniversary of the date of issuance. In addition, the warrants are redeemable at the Company's option, if the closing bid price of the Company's class A common exceeds 200% of the exercise price of the warrants for 30 consecutive trading days. The redemption price is $0.10 per share for each share issuable under the warrants. The 250 shares of series D preferred are convertible into 192,307 shares of class A common stock. The allocation of the proceeds from the sale of the series D preferred between the fair value of the series D and the fair value of the detachable warrants resulted in a beneficial conversion feature in the amount of $106,730. The discount was immediately accreted and treated as a deemed dividend to the holder of the series D preferred as all of the series D preferred was eligible for conversion upon issuance. In connection with the 2003 Private Placement, the Company incurred fees of $325,750, of which $237,938 was payable in cash and $87,802 was paid by issuing warrants to purchase 110,680 shares of class A common stock. These warrants have substantially the same terms as the warrants issued in the 2003 Private Placement. In connection with the 2003 Private Placement, the Company issued 48,076 shares of class A common stock and warrants to purchase 38,460 shares of class A common stock in settlement of certain outstanding payables. The common stock and warrants were valued at $50,000, the invoice amount of the services provided to the Company. Approximately 21%, or $432,000, of the gross proceeds from the 2003 Private Placement was received from directors and officers and entities with which the Company's directors are affiliated. On May 30, 2003, the Company executed an Accounts Receivable Financing Agreement ("Financing Agreement") with Silicon Valley Bank ("the Bank") with a term of one year. Under the Financing Agreement, the Company may borrow, subject to certain conditions, up to 80% of its outstanding accounts receivable up to a maximum of $2,000,000. The applicable interest rate is the prime rate plus .35% plus a collateral handling fee equal to .20% on the average daily outstanding receivable balance, and interest is payable monthly. The Financing Agreement contains certain restrictive covenants that are customary for a commercial transaction of this type, including, without limitation, restrictions on the disposition or encumbrance of the collateral pledged to the Bank, restrictions on incurring additional indebtedness and restrictions on the payment of dividends and the redemption or repurchase of any capital stock. In addition, the Company is required to maintain at all times a ratio of Quick Assets (i.e., consolidated, unrestricted cash, cash equivalents, net accounts receivable and investments with maturities of fewer than 12 months determined according to GAAP) to Current Liabilities (i.e., all obligations and liabilities of the Company to Bank, plus, without duplication, the aggregate amount of the Company's total liabilities which mature within one (1) year) minus Deferred Revenue (i.e., all amounts received in advance of performance under contracts and not yet recognized as revenue) of at least 1.10 to 1.0. The Bank has been granted a security interest in substantially all of the Company's assets. In connection with the Financing Agreement, the Company issued the Bank warrants to purchase 40,000 shares of the Company's class A common stock. The warrants are immediately exercisable at an exercise price of $1.39, equal to the fair market value of the Company's class A common stock on the date of closing of the Financing Agreement. The warrants are exercisable for a seven-year period. The fair value of the warrants in the amount of approximately $34,000 will be amortized to interest expense over the term of the 30 INTERNET COMMERCE CORPORATION Financing Agreement. During the three-month period ended October 31, 2004 and 2003, the Company recorded interest expense in the amount of approximately $0 and $8,600, respectively, for the amortization of the fair value of the warrants. On October 22, 2003 and August 31, 2004, the Company and the Bank amended the Financing Agreement to extend its term to August 31, 2004 and December 29, 2004, respectively. At October 31, 2004 and July 31, 2004, there were no amounts outstanding under the Financing Agreement. The Company has net operating loss carryforwards for tax purposes of approximately $78.5 million as of July 31, 2004. These carryforwards expire from 2007 to 2024. The Internal Revenue Code and Income Tax Regulations contain 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 initial public offering in January 1995, the net operating loss carryover of approximately $1.9 million incurred prior to the initial public offering is subject to an annual limitation of approximately $400,000 until that portion of the net operating loss is utilized or expires. Due to the private placement of series A preferred stock in April 1999, the net operating loss carryover of approximately $18 million incurred prior to the private placement and subsequent to the initial public offering is subject to an annual limitation of approximately $1 million until that portion of the net operating loss is utilized or expires. Due to a 100% ownership change of RTCI in November 2000, the acquired net operating loss of approximately $6.5 million incurred prior to the ownership change is subject to an annual limitation of approximately $1.4 million until that portion of the net operating loss is utilized or expires. Also, due to a 100% ownership change of ECS in June 2004, the acquired net operating loss of approximately $1.1 million incurred prior to the ownership change is subject to an annual limitation of approximately $128,000 until that portion of the net operating loss is utilized or expires. Consolidated Working Capital Consolidated working capital decreased slightly to $4,118,000 at October 31, 2004 from $4,198,000 at July 31, 2004. Analysis of Cash Flows Cash provided by operating activities was $18,000 in the 2005 Quarter compared to cash used in operating activities of $1,103,000 in the 2004 Quarter. Cash provided by operating activities in the 2005 Quarter is primarily the result of an increase in accounts payable of $195,000 and increase in non-cash charges of $211,000 and a lower operating losses. The decrease in the 2004 Quarter is primarily the result of a decrease in accounts payable and accrued expense of $511,000 coupled with an increase in accounts receivable of $213,000 and operating losses. Cash used in investing activities was $135,000 in the 2005 Quarter from $47,000 in the 2004 Quarter. Cash used in investing activities in the 2005 Quarter resulted from the professional fees relating to the acquisition of ECS of $80,000, professional fees relating to the 2004 Private Placement of $24,000 and expenditures from the purchase of property and equipment of $32,000. Cash used in investing activities in the 2004 Quarter was primarily the result of purchases of property and equipment of $46,000. Cash used in financing activities was $26,000 in the 2005 Quarter compared to $36,000 in the 2004 Quarter. Cash used in financing activities in the both the 2005 and 2004 Quarters represent payments of capital lease obligations. Recent Accounting Pronouncements In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations. 31 INTERNET COMMERCE CORPORATION In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of Interpretation No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has provided information regarding commitments and contingencies relating to guarantees in Note 10. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations. In November 2002, the Emerging Issues Task Force of the FASB ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. The EITF was effective for revenue arrangements entered into in fiscal years and interim periods beginning after June 15, 2003. The adoption of this consensus, effective August 1, 2003, did not have a significant impact on the Company's consolidated financial position or results of operations. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" to provide alternative methods to account for the transition from the intrinsic value method of recognition of stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" to the fair value recognition provisions under SFAS 123. SFAS 148 provides two additional methods of transition and will no longer permit the SFAS 123 prospective method to be used for fiscal years beginning after December 15, 2003. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the pro-forma effects had the fair value recognition provisions of SFAS 123 been used for all periods presented. The adoption of SFAS 148 did not have a significant impact on the Company's consolidated financial position and results of operations. The Company adopted the fair-value recognition provisions of SFAS 123 in January 2004 (Note 6). In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46R") to address certain FIN 46 implementation issues. This interpretation requires that the assets, liabilities and results of activities of a Variable Interest Entity ("VIE") be consolidated into the financial statements of the enterprise that is the primary beneficiary of the VIE. FIN 46R also requires additional disclosures by primary beneficiaries and other significant variable interest holders. This interpretation is effective no later than the end of the first interim or reporting period ending after March 15, 2004, except for those VIE's that are considered to be special purpose entities, for which the effective date is no later than the end of the first interim or annual reporting period ending after December 15, 2003. We adopted FIN 46 in its entirety as of January 31, 2003. Since hawse have no VIE's, the adoption of FIN 46 did not have an impact on our financial position or results of operations. In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and clarifies accounting for derivative instruments and for hedging activities under SFAS 133. Specifically, SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. Additionally, SFAS 149 clarifies the circumstances in which a contract with an initial net investment meets the characteristics of a derivative and when a derivative contains a financing component that requires special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and did not have a significant impact on the Company's consolidated financial position or results of operations. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer 32 INTERNET COMMERCE CORPORATION classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. For financial instruments created before the issuance date of this Statement and still existing at the beginning of the interim period of adoption, transition shall be achieved by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attribute required by this Statement. The adoption of this Statement, effective August 1, 2003, did not have a material impact on the Company's consolidated financial position or results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is primarily exposed to interest rate risk and credit risk. Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash equivalents have original maturities of three months or less. Changes in interest rates may affect the value of these investments. Credit Risk - Our accounts receivables are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result we do not anticipate any material losses in this area. Item 4. Controls and Procedures Our management, including our chief executive officer and our principal accounting officer, have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of October 31, 2004, pursuant to Exchange Act Rules 13a-15(e) and 15(d)-15(e). Based upon that evaluation, our chief executive officer and our principal accounting officer have concluded that as of such date, our disclosure controls and procedures in place are effective to ensure material information and other information requiring disclosure is identified and communicated on a timely basis. 33 PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3: Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K Exhibits. --------- 31.1 Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 34 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. Date: December 15, 2004 INTERNET COMMERCE CORPORATION by: /s/ Thomas J. Stallings ---------------------------------- Thomas J. Stallings Chief Executive Officer by: /s/ Glen Shipley ---------------------------------- Glen Shipley Chief Financial Officer 35 EX-31 2 kl12019_ex31-1.txt EXHIBIT 31.1 CERTIFICATE Exhibit 31.1 I, Thomas J. Stallings, certify that : 1. I have reviewed this quarterly report on Form 10-Q of Internet Commerce Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our report about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal control over financial report which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 15, 2004 By: /s/ Thomas J. Stallings -------------------------------- Thomas J. Stallings Chief Executive Officer EX-31 3 kl12019_ex31-2.txt EXHIBIT 31.2 CERTIFICATE Exhibit 31.2 I, Glen Shipley, certify that : 1. I have reviewed this quarterly report on Form 10-Q of Internet Commerce Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our report about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal control over financial report which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 15, 2004 By: /s/ Glen Shipley --------------------------------- Glen Shipley Chief Financial Officer EX-32 4 kl12019_ex32-1.txt EXHIBIT 32.1 CERTIFICATE Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Internet Commerce Corporation (the "Company") on Form 10-Q for the quarter ended October 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas Stallings, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Thomas J. Stallings ---------------------------------- Thomas J. Stallings Chief Executive Officer December 15, 2004 EX-32 5 kl12019_ex32-2.txt EXHIBIT 32.2 CERTIFICATE Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Internet Commerce Corporation (the "Company") on Form 10-Q for the quarter ended October 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Glen Shipley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Glen Shipley - ------------------------------ Glen Shipley Chief Financial Officer December 15, 2004 -----END PRIVACY-ENHANCED MESSAGE-----