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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, DC 20549****FORM 10-Q****[Mark One]**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934******For the quarterly period ended October 31, 2005******OR**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934******For the transition period from ___to ___******Commission File Number: 000-24996****INTERNET COMMERCE CORPORATION**(Exact Name of Registrant as Specified in Its Charter)   **Delaware** **13-3645702**(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)   **6025 The Corners Parkway, Suite 100**  **Norcross, Georgia** **30092**(Address of Principal Executive Offices) (Zip Code)**Registrant’s Telephone Number, Including Area Code: (678) 533-8000**Indicate by check mark whether the Registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (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 þ No oIndicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes o No þIndicate by check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o No þAs of December 5, 2005, the Registrant had outstanding 19,564,502 shares of Class A CommonStock.   
 

 
**INDEX TO FORM 10-Q**       PAGE **PART I. FINANCIAL INFORMATION**         ****Item 1. Financial Statements         ****Condensed Consolidated balance sheets as of October 31, 2005 (unaudited) and July 31, 2005   3      ****Condensed Consolidated statements of operations for the three months ended October 31, 2005 (unaudited) and October 31, 2004 (unaudited)  4      ****Condensed Consolidated statements of cash flows for the three months ended October 31, 2005 (unaudited) and October 31, 2004 (unaudited)  5      ****Notes to condensed consolidated financial statements (unaudited)   6      ****Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   9      ****Item 3. Quantitative and Qualitative Disclosures About Market Risk   15      ****Item 4. Controls and Procedures   15      **PART II. OTHER INFORMATION**         ****Item 1. Legal Proceedings   16      ****Item 1A.Risk Factors   16      ****Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   20      ****Item 3 Defaults Upon Senior Securities   20      ****Item 4. Submission of Matters to a Vote of Security Holders   21      ****Item 5. Other Information   21      ****Item 6. Exhibits   21      **SIGNATURES**  22      **EXHIBIT INDEX**  23      **CERTIFICATIONS**  24  EX-31.1 SECTION 302 CERTIFICATE OF THE CEO EX-31.2 SECTION 302 CERTIFICATE OF THE CFO EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO
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**PART I. FINANCIAL INFORMATION****Item 1. Financial Statements****Condensed Consolidated Balance Sheets**           **October 31,**  **July 31,**   **2005**  **2005**   **(unaudited)**     **ASSETS**        Current assets:        Cash and cash equivalents **$**4,680,646  **$**3,983,005 Accounts receivable, net of allowance for doubtful accounts andallowance for sales returns and allowances of $655,685 and$581,907, respectively  3,720,073   3,476,211 Prepaid expenses and other current assets  230,445   403,659        Total current assets  8,631,164   7,862,875          Restricted cash  417,330   417,330 Property and equipment, net  650,652   629,919 Goodwill  3,907,536   3,842,536 Other intangible assets, net  1,442,281   1,772,757 Other assets  32,373   32,373        Total assets **$**15,081,336  **$**14,557,790                 **LIABILITIES AND STOCKHOLDERS’ EQUITY**        Current liabilities:        Accounts payable **$**550,593  **$**226,097 Accrued expenses  1,011,625   1,490,604 Accrued dividends – preferred stock  332,151   232,329 Deferred revenue  130,685   152,434 Capital lease obligation  1,489   3,645 Other current liabilities  650,950   894,199        Total current liabilities  2,677,493   2,999,308          Long-term lease liability from acquisition  1,139,654   1,216,280        Total liabilities  3,817,147   4,215,588                 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; 10,000sharesissued and outstanding (liquidation value of $10,332,151)  100   100 Series D Preferred Stock – par value $.01 per share, 769 votes per share; 250 sharesissued and outstanding (liquidation value of $250,000)  3   3 Series S Preferred Stock – par value $.01 per share, none issued and outstanding  —   — Common stock:        Class A– par value $.01 per share, 40,000,000 shares authorized, one vote per share;19,562,502 and 19,414,420 shares issued and outstanding, respectively  195,625   194,144 Class B– par value $.01 per share, 2,000,000 shares authorized, six votes per share;none issued and outstanding  —   — Additional paid-in capital  96,011,721   95,813,761 Accumulated deficit  (84,943,260)  (85,665,806)       Total stockholders’ equity  11,264,189   10,342,202        Total liabilities and stockholders’ equity **$**15,081,336  **$**14,557,790        **See notes to condensed consolidated financial statements.**
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**Condensed Consolidated Statements of Operations (Unaudited)**           **Three Months Ended**   **October 31,**   **2005**  **2004**          Servicerevenues **$**5,017,833  **$**3,746,540                 Expenses:                 Cost of services (including non-cashcompensation of $5,871 and $2,143 for the three monthsended October 31, 2005 and 2004, respectively)  1,905,397   1,419,569          Product development and enhancement (including non-cashcompensation of $3,188 and $7,552 for the three monthsended October 31, 2005 and 2004, respectively)  102,983   230,263          Selling and marketing (including non-cash compensationof $5,663 and $2,643 for the three months ended October31, 2005 and 2004, respectively)  415,357   840,761          General and administrative (including non-cashcompensation of $172,376 and $198,495 for the threemonths endedOctober 31, 2005 and 2004, respectively)  1,854,255   1,660,660                    4,277,992   4,151,253                 Operating Income/(loss)  739,841   (404,713)                Other income and (expense):        Interest and investment income  25,670   6,098 Interest expense  (35,787)  (2,996)Other income  17,087   —           6,970   3,102                 Income (loss) before income taxes  746,811   (401,611)         Provision for income taxes, current  24,265   —                 Net income (loss)  722,546   (401,611)         Dividends on preferred stock  (99,822)  (100,546)                Income/(loss) attributable to common stockholders **$**622,724  **$**(502,157)                Basic and diluted income/(loss) per common share **$**0.03  **$**(0.03)                Anti-dilutive stock options and warrants outstanding  3,108,137   8,611,979                 Weighted average number of common shares outstanding –basic  19,510,748   19,058,187                 Weighted average number of common shares outstanding –diluted  21,536,286   19,550,188        **See notes to condensed consolidated financial statements.**
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**Condensed Consolidated Statements of Cash Flows (Unaudited)**           **Three Months Ended October 31,**   **2005**  **2004** **Cash flows from operating activities:**        Net income (loss) **$**722,546  $(401,611)Adjustments to reconcile net income/(loss) to net cash provided byoperating activities:        Depreciation and amortization  404,238   381,260 Bad debt expense  126,571   29,542 Non-cash interest expense  35,615   — Non-cash charges for equity instruments issued for compensation and services  187,098   210,833 Changes in:        Accounts receivable  (370,433)  (350,431)Prepaid expenses and other assets  119,215   3,883 Accounts payable  324,496   195,077 Accrued expenses  (478,980)  (30,885)Deferred revenue  (21,750)  3,210 Other liabilities  (355,490)  (23,026)                Net cash provided by operating activities  693,126   17,852                 **Cash flows from investing activities:**        Additional costs of previous acquisition  (65,000)  (79,810)Purchases of property and equipment  (94,495)  (32,142)                Net cash used in investing activities  (159,495)  (111,952)                **Cash flows from financing activities:**        Common stock issued for services related to 2004 private placement  —   (23,512)Payments of capital lease obligations  (2,155)  (26,496)Proceeds from exercise of employee stock options  166,165   —                 Net cash provided by/ (used in) financing activities  164,010   (50,008)                **Net increase (decrease) in cash and cash equivalents**  697,641   (144,108)         Cash and cash equivalents, beginning of period  3,983,005   3,789,643                 **Cash and cash equivalents, end of period** **$**4,680,646  $3,645,535                 **Supplemental disclosure of cash flow information:**                Cash paid for interest during the period $172  $2,996          **Supplemental disclosure of noncash financing activity:**        Issuance of 20,283 shares of Class A Common Stock upon exercise of40,000 Silicon Valley Bank Warrants  203   — **See notes to condensed consolidated financial statements.**
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**Notes to condensed consolidated financial statements (unaudited)**     The accompanying unaudited condensed consolidated financial statements of InternetCommerce Corporation (the “Company” or “ICC”) have been prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”) forinterim financial information. In the opinion of management, such statements include alladjustments (consisting only of normal recurring adjustments) necessary for the fairpresentation of the Company’s financial position, results of operations and cash flows atthe dates and for the periods indicated. Pursuant to the requirements of the Securities andExchange Commission (the “SEC”) applicable to Quarterly Reports on Form 10-Q, theaccompanying financial statements do not include all the disclosures required by GAAP forannual financial statements. While the Company believes that the disclosures presented areadequate to make the information not misleading, these unaudited interim condensedconsolidated financial statements should be read in conjunction with the consolidatedfinancial statements and related notes included in the Company’s Annual Report on Form 10-Kfor the year ended July 31, 2005. Operating results for the three month period endedOctober 31, 2005 are not necessarily indicative of the results that may be expected for thefiscal year ending July 31, 2006.**1.****Organization and Natureof Business**     The Company’s main source of revenue is derived from subscriptions to its value addednetwork (“VAN”) sold under the brand name ICC.NETTM. These services include transaction,mailbox and fax transmission activities for which fees are charged. Revenue is also derivedfrom fixed fee data mapping and professional internet services. In addition, the Companyoperates a Service Bureau with revenue derived from electronic data interchange (“EDI”)services including data translation services, purchase order and invoice processing fromEDI-to-print and print-to-EDI, Universal Product Code (“UPC”) number generation, UPC catalogmaintenance and UPC label printing. The Company also sells EDI software and softwaremaintenance, the revenue of which is immaterial in the periods presented.**2.****Recent Acquisitions**     On March 17, 2005, the Company completed the acquisition of the assets of QRSCorporation’s (“QRS”) Managed ECÔ business (“MEC”), from the parent company of QRS,Inovis International, Inc. (“Inovis”). The consideration for the acquisition of theseassets was the assumption of certain liabilities that have been recorded on the Company’sbooks per Statement of Financial Accounting Standards No. 141 “Business Combinations”(“FASB 141”). The Company was aided in arriving at the estimates required under FASB 141by a third party valuation.     As part of the transaction, the Company assumed an unfavorable lease as discussed inFASB 141. The Company has recorded the present value of the estimated difference betweenthe cash amounts due under the existing terms of the lease; cash received from Inovis aspart of the transaction net of the estimated current market value of cash flows receivableunder the terms of an assumed sublease. The estimates of the sublease cash flows aresubject to change as per FASB 141. As of the date of the transaction, the Company recordedapproximately $2,291,000 as other liabilities under the assumed lease. In addition, theCompany assumed certain employee obligations, transition services fees payable to Inovisand other estimated closing costs of the MEC New York location that have been recorded asother accrued liabilities for approximately $376,000. The total allocated purchase pricewas $2,378,781.     Under the FASB 141 allocation, the Company recorded fixed assets and leaseholdimprovements of approximately $210,000, restricted cash of approximately $420,000,intangibles for customer relationships of approximately $737,000 and goodwill ofapproximately $1,456,000. The recorded fixed assets are estimated to have a life of twoyears; the leasehold improvements are being amortized over the term of the lease and thecustomer relationship intangible will be amortized over five years. The recorded goodwillwill be subject to annual impairment testing under Statement of Financial AccountingStandards No. 142 “Goodwill and Other Intangibles.”     At the date of acquisition, the intangible assets of MEC consisted of its customerrelationships, valued at $737,000.     The following table sets forth the components of the purchase price for MEC as ofOctober 31, 2005:     Assumption of lease $2,291,035 Estimated transaction costs  22,746 Additional costs since July 31, 2005  65,000     Total purchase price $2,378,781     
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**3.****BUSINESSSEGMENT INFORMATION**     The Company’s two operating segments are: **•** ICC.NETTM — ICC.NET is a complete VAN solution designed to meetelectronic data interchange requirements in a secure, reliable, available andflexible environment regardless of file size, communication protocol or dataformat. We charge our customers using the ICC.NET service based upon theamount of information that customers transmit through our network to theirtrading partners. These charges are primarily made on a set price per“kilo-character” (every thousand bytes of information through the network).  **•** EC Service Bureau — The EC Service Bureau manages and translatesthe data of small and mid-sized companies that exchange EDI data with largecompanies and provides various EDI and Universal Product Code (“UPC”) services.The EC Service Bureau also licenses EDI software which amounts are immaterialfor all periods presented.     The tables below summarize information about operations and long-lived assets as of andfor the three month periods ended October 31, 2005 and 2004.                   **EC Service**      **ICC.NET**  **Bureau**  **Total** **Three Months  — October 31, 2005**            Revenues from external customers $3,034,016  $1,983,817  $5,017,833           Operating income (1) $372,943  $366,898  $739,741 Other income (expense), net  6,970   —   6,970           Income before income taxes  379,913   366,898   746,811           Income tax expense  13,009   11,256   24,265           Net income (1) $366,904  $355,642  $722,546           Supplemental segment information:            Amortization and depreciation $295,239  $108,999  $404,238 Non-cash charges for stock-basedcompensation and services $182,822  $4,276  $187,098              **As of October 31, 2005**            Property and equipment, net $444,533  $206,119  $650,652 Goodwill  26,132   3,881,404   3,907,536 Acquired identified intangibles, net  —   1,442,281   1,442,281           Long lived assets, net $470,665  $5,529,804  $6,000,469           Capital expenditures $94,495  $—  $94,495            1) Certain costs for selling and marketing functions were allocated to theEC Service Bureau from ICC.NET based on the level of service performed.ICC.NET allocated $45,000 of selling and marketing costs to the EC ServiceBureau during the three months ended October 31, 2005. Also, certain costsfor executive management, MIS, human resources and accounting and financefunctions were allocated to the EC Service Bureau from ICC.NET based onthe level of service performed. ICC.NET allocated $255,000 of general andadministrative costs for these services to the EC Service Bureau for thethree months ended October 31, 2005.
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**Business Segment Information (continued)**                   **EC 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) (2) $(477,713) $73,000  $(404,713)Other income (expense), net  (3,102)  —   (3,102)          Net income (loss) (2) $(474,611) $73,000  $(401,611)          Supplemental segment information:            Amortization and depreciation $308,711  $72,549  $381,260 Non-cash charges for stock-basedcompensation and services $210,833  $—  $210,833              **As of October 31, 2004**            Property and equipment, net $189,202  $64,270  $253,472 Capitalized software developmentcosts, net  4,465   —   4,465 Goodwill  26,132   2,592,916   2,619,048 Acquired identified intangibles, net  956,000   1,015,371   1,971,371           Long lived assets, net $1,175,799  $3,672,557  $4,848,356            2) Certain costs for selling and marketing functions were allocated to the ECService Bureau from ICC.NET based on the level of service performed. ICC.NETallocated $24,000 of selling and marketing costs to the EC Service Bureauduring the three months ended October 31, 2004. Also, certain costs forexecutive management, MIS, human resources and accounting and financefunctions were allocated to the EC Service Bureau from ICC.NET based on thelevel of service performed. ICC.NET allocated $135,000 of general andadministrative costs for these services to the EC Service Bureau for thethree months ended October 31, 2004.**4.****Subsequent Event**     On November 1, 2005, the Company acquired The Kodiak Group, Inc. (“Kodiak”), aprivately held company delivering e-commerce and global data synchronization services toblue chip customers in a variety of industries. Under the terms of the Share PurchaseAgreement, the Company paid $1.0 million in cash on close, will pay an additional $1 millionin cash should the Kodiak operations generate revenue of no less than $3.0 million over thefirst twelve months following the acquisition, and up to an additional $0.5 million on a pro-rated basis should theKodiak operations generate between $3.25 and $4 million inrevenue over the first twelvemonths following the acquisition. The Company completed the acquisition of Kodiak in order to strengthen its EDIprofessional services offerings. The Company acquired cash, receivables, fixed assets,contracts, a customer list and other long-term intangibles from the acquisition. TheCompany has hired an outside third party to complete an independent valuation of theseassets. Upon completion of the valuation, the Company will disclose the results of thevaluation and additional pro-forma information.
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**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” withinthe meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), andSection 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 Reportregarding our financial position, business strategy and plans and objectives of management forfuture operations are forward-looking statements. These forward-looking statements are based onthe beliefs of management, as well as assumptions made by and information currently available tomanagement. When used in this Report, the words “anticipate,” “believe,” “estimate,” “expect,”“may,” “will,” “continue” and “intend,” and words or phrases of similar import, as they relate toour financial position, business strategy and plans, or objectives of management, are intended toidentify forward-looking statements. These statements reflect our current view with respect tofuture events and are subject to risks, uncertainties and assumptions related to various factorsincluding, without limitation, those described in the “Risk Factors” section of this QuarterlyReport.     Although we believe that our expectations are reasonable, we cannot assure you that ourexpectations will prove to be correct. Should any one or more of these risks or uncertaintiesmaterialize, or should any underlying assumptions prove incorrect, actual results may varymaterially from those described in this Quarterly Report as anticipated, believed, estimated,expected or intended.**Overview**     Internet Commerce Corporation is a pioneer in the use of the Internet for electronic datainterchange (“EDI”) business-to-business (B2B) e-commerce solutions and an operator of one of thelargest EDI service centers in the United States. EDI is an electronic tool used to provide a moreefficient exchange of business information between trading partners. Intermediaries calledvalue-added networks (“VAN”) have evolved to facilitate EDI processes. A VAN allows each customerto adopt its own communication protocol and also allows multiple trading partners in the supplychain to communicate electronically using a VAN as an intermediary.     Our B2B Internet and service center solutions allow thousands of customers to rely on oursolutions, expertise and support to help balance the cost and function required to meet theindividual requirements for communicating with their trading partners in compliance with partnerspecifications.     Organizationally, our two segments of business are known as the: **•** ICC.NETTM segment, which is composed primarily of our VAN operations, and  **•** Electronic Commerce Service Bureau (“EC Service Bureau”) segment, whoseoperations primarily focus on facilitating the EDI communications of small and mediumsized businesses with their trading partners.     These segments compliment one another and give us the ability to provide solutions to manydifferent kinds of enterprises, from sole proprietorships to large corporations, operating in avariety of industries.**Critical Accounting Policies and Estimates**     The discussion and analysis of our financial condition and results of operations are basedupon our condensed consolidated financial statements, which have been prepared in accordance withaccounting principles accepted in the United States of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reported amount of assets,liabilities, revenues and expenses. We consider certain accounting policies related to revenuerecognition, valuation of acquired intangibles and impairment of long-lived assets includinggoodwill, and valuation of investments to be critical policies due to the estimation processinvolved in each. Management discusses its estimates and judgments with the Audit Committee of ourBoard of Directors.
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     For a more detailed description on the application of these and other accounting policies, seeNote 2 of the Consolidated Financial Statements included in our Annual Report on Form 10-K for thefiscal year ended July 31, 2005. Reference is also made to the discussion of the application ofthese critical accounting policies and estimates contained in Management’s Discussion and Analysisin our Annual Report on Form 10-K for fiscal 2005. During the three months ended October 31, 2005,there were no significant or material changes in the application of critical accounting policiesthat would require an update to the information provided in the Form 10-K for fiscal 2005.**Stock-Based Compensation**     In January 2004, we adopted the fair value method of recording stock-based compensationexpense in accordance with Statement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”). On December 6, 2004, the Financial Accounting StandardsBoard issued FASB Statement No. 123R (revised 2004), Share-Based Payment, which is a revision ofSFAS 123. Statement 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employeesand amends FASB Statement No. 95, Statements of Cash Flows. The approach to accounting forshare-based payments in Statement 123R is similar to the approach described in Statement 123.However, Statement 123R requires that all share-based payments to employees, including grants ofemployee stock options, be recognized in the financial statements based on their fair values and nolonger allows pro forma disclosure as an alternative to financial statement recognition. Weadopted the fair-value recognition provisions of SFAS 123 in January 2004 and no changes were madeto our recognition method upon adoption of Statement 123R, which became effective on August 1,2005.     Thefair value of stock options issued in stock-based compensation plans as determined on the dateof grant using the Black-Scholes option-pricing model is being expensed over the vesting period ofthe related stock options. The use of this model requiredmanagement to make certain estimates for values of variables used by the model. Managementestimated the values for stock price volatility, the expected life of the equity instruments andthe risk free interest rate based on information that was available to management at the time theBlack-Scholes option-pricing calculations were performed. During the three month period endedOctober 31, 2005, the we recorded non-cash charges forstock-option compensation of $133,098.
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***Three Months Ended October 31, 2005 Compared with Three Months Ended October 31, 2004.*****Results of Operations — Consolidated**     The following table reflects consolidated operating data by reported segments. Allsignificant intersegment activity has been eliminated. Accordingly, the segment results belowexclude the effect of transactions with our subsidiaries.           **Three Months Ended**   **October 31,**   **2005**  **2004** **Income (loss) before income taxes:**        ICC.NET $379,913  $(474,611)EC Service Bureau  366,898   73,000        Income (loss) before income taxes $746,811  $(401,611)       **Results of Operations – ICC.NET**     Our ICC.NET service, our global Internet-based VAN, uses the Internet and our proprietarytechnology to deliver our customers’ documents and data files to members of their tradingcommunities. The following table summarizes operating results for ourICC.NET service forthe three months ended October 31, 2005 and 2004:                   **Three Months Ended**      **October 31,**  **Variance**   **2005**  **2004**  **$**  **%** Revenues:                VAN services $2,853,577  $2,621,838   231,739   9 Professional services  133,849   138,775   (4,926)  (4)Mapping services  46,590   64,629   (18,039)  (28)                3,034,016   2,825,242   208,774   7                  Expenses:                Cost of services  1,005,964   1,200,157   (194,193)  (16)Product development and enhancement  27,643   134,077   (106,434)  (79)Selling and marketing  245,005   688,312   (443,307)  (64)General and administrative  1,199,639   1,069,576   130,063   12 Non-cash charges for stock-based compensation  182,822   210,833   (28,011)  (13)                2,661,073   3,302,955   (641,882)  (19)                              Operating income (loss)  372,943   (477,713)  850,656   178                               Other income (expense), net  6,970   3,102   3,868   125                               Net income (loss) before income taxes $379,913  $(474,611)  854,524   180                   *Revenues— ICC.NET –*Revenue from ICC.NET services was 60% of consolidated revenues forthe quarter ended October 31, 2005 (“2006 Quarter”) compared to 75% for the quarter ended October31, 2004 (“2005 Quarter”), reflecting the increased revenue in the EC Service Bureau segment due tothe acquisition of MEC (see Note 2 to our Condensed Consolidated Financial Statements fordisclosures related to our recent acquisitions). ICC.NET service revenues increased $209,000, or7%, to $3,034,000 for the 2006 Quarter compared to $2,825,000 for the 2005 Quarter. VAN servicerevenue increased $232,000, or 9%, to $2,854,000 for the 2006 Quarter compared to $2,622,000 forthe 2005 Quarter. The increase in VAN services revenue is attributable to an increase intransaction volume. Professional services revenue decreased $5,000, or 4%, to $134,000 for the2006 Quarter compared to $139,000 for the 2005 Quarter. Mapping services revenue decreased$18,000, or 28%, to $47,000 for the 2006 Quarter compared to $65,000 for the 2005 Quarter. Wecontinue to experience slow demand for both of these services.     *Costof services — ICC.NET*– Cost of services relating to our ICC.Net service was 33%of revenue from the ICC.NET services for the 2006 Quarter, compared to 42% for the 2005 Quarter.Total cost of services decreased $194,000, or 16%, to $1,006,000 for the 2006 Quarter compared to$1,200,000 for the 2005 Quarter. Cost of services consists primarily of salaries and employee benefits, connectivity fees,amortization, allocation of product and development expenses and rent.
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This decrease was theresult of a $67,000 reduction in salaries and benefits due to reduced headcount as well as a$57,000 decrease in connectivity fees due to a switch in our primary connectivity vendor and a$57,000 decrease in rent due primarily to a decrease in office space allocation.     *Product development and enhancement — ICC.NET*- Product development and enhancementcosts relating to our ICC.NET service consist primarily of salaries and employee benefits. Productdevelopment and enhancement costs decreased $106,000 to $28,000 in the 2006 Quarter from $134,000in the 2005 Quarter primarily due to a reduction in salaries and benefits.     *Selling and marketing — ICC.NET*- Selling and marketing expenses relating to ourICC.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 servicedecreased $443,000 to $245,000 in the 2006 Quarter from $688,000 in the 2005 Quarter. Thisdecrease was due primarily to a $251,000 decrease in salaries and benefits, a $43,000 decrease intravel expenses attributable to a decrease in the number of employees traveling, a $22,000 decreasein trade show expenses, a $58,000 decrease in the office space allocation, and a $21,000 increasein the ICC.NET allocation of a portion of the cost of sales and marketing functions to the ECService Bureau.     *General and administrative*- *ICC.NET*- General and administrative expenses supportingour ICC.NET service consist primarily of salaries and employee benefits, legal and professionalfees, facility costs, travel meals and entertainment and insurance. General and administrativecosts supporting our ICC.NET service increased $130,000 to $1,200,000 in the 2006 Quarter from$1,070,000 in the 2005 Quarter. Salaries and benefits increased $234,000, primarily due to theaccrual for an executive bonus program, and bad debt expense increased $49,000 based on a carefulreview of accounts receivable collectibility. These increases were offset by a decrease inaccounting fees of $76,000 resulting from a change in our external audit firm, an increase in theoffice space allocation of $49,000, and by an increase in the ICC.NET allocation of a portion ofthe cost of executive management, human resources, MIS, and accounting and finance functions to theEC Service Bureau of $120,000.     *Non-cash charges — ICC.NET*- Non-cash charges of approximately $183,000 in the 2006Quarter consist of $129,000 for stock options issued to employees and directors and $54,000 forshares of our Class A Common Stock to be issued to non-employee directors as compensation for threemonths of calendar year 2005 directors’ fees. Non-cash charges of approximately $211,000 in the2005 Quarter consist of $178,000 for stock options issued to employees and directors and $33,000for shares of our Class A Common Stock issued to non-employee directors as compensation for 2004directors’ fees.
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**Resultsof Operations — Service Bureau**     Our EC Service Bureau manages and translates supply chain information for small and mid-sizedcompanies that exchange EDI data with other companies and provides various EDI and UPC services.Our EC Service Bureau also licenses EDI software. On June 22, 2004 and March 17, 2005, we acquiredElectronic Commerce Systems, Inc. (“ECS”) and QRS Corporation’s Managed ECÔ assets (“MEC”),respectively, the operating results of which are reported in the EC Service Bureau segment. Thefollowing table summarizes operating results for our EC Service Bureau:                   **Three Months Ended**      **October 31,**  **Variance**   **2005**  **2004**  **$**  **%** Revenues:                Services $1,983,817  $921,298   1,062,519   115                            Expenses:                Cost of services  893,562   217,270   676,292   311 Product development and enhancement  72,152   88,635   (16,483)  (19)Selling and marketing  164,689   149,806   14,883   10 General and administrative  482,240   392,587   89,653   23 Non-cash charges for stock-based compensation  4,276   —   4,276   —           Total expenses $1,616,919  $848,298   768,621   91                            Operating income  366,898   73,000   293,898   403                            Other income, net  —   —   —   —                            Net income before income taxes $366,898  $73,000   293,898   403                *Revenue— EC Service Bureau*- Revenue from our EC Service Bureau was 40% of consolidatedrevenues for the 2006 Quarter compared to 25% for the 2005 Quarter. The revenue increased$1,063,000, or 115%, to $1,984,000 for the 2006 Quarter compared to $921,000 for the 2005 Quarter.The revenue was primarily generated from services performed, customer support and licensing fees.The increase was primarily the result of the acquisition of MEC.     *Costof services — EC Service Bureau*- Cost of services relating to our EC Service Bureau was45% of revenue derived from the EC Service Bureau in the 2006 Quarter, compared to 24% of suchrevenue in the 2005 Quarter. Cost of services relating to our EC Service Bureau consists primarilyof salaries and employee benefits, amortization, connectivity fees and rent. Cost of servicesrelating to our EC Service Bureau increased $676,000 to $893,000 in the 2006 Quarter from $217,000in the 2005 Quarter primarily due to an increase in salaries and benefits of $622,000 related tothe acquisition of MEC (see Note 2 to our Condensed Consolidated Financial Statements fordisclosures related to our recent acquisitions).     *Productdevelopment and enhancement — EC Service Bureau*- Product development and enhancementcosts consist primarily of salaries and employee benefits. Product development and enhancementcosts incurred by our EC Service Bureau decreased $16,000 to $72,000 in the 2006 Quarter from$88,000 in the 2005 Quarter.     *Sellingand marketing — EC Service Bureau*- Selling and marketing expenses relating to our ECService Bureau consist primarily of salaries and employee benefits and amortization. Selling andmarketing expenses incurred by our EC Service Bureau increased $15,000 to $165,000 in the 2006Quarter from $150,000 in the 2005 Quarter.     *Generaland administrative — EC Service Bureau*- General and administrative expenses relatingto our EC Service Bureau consist primarily of salaries and employee benefits, office expenses,depreciation, telephone and rent. General and administrative expenses incurred by our EC ServiceBureau increased $90,000 to $482,000 in the 2006 Quarter from $392,000 in the 2005 Quarter.Allocation of general and administrative expenses from ICC.NET increased $120,000, and bad debtexpense increased $48,000 based on a careful review of accounts receivable collectibility. Theseincreases were partially offset by a reduction in salaries and employee benefits of $19,000 and a reduction in consultant expenses of $28,000.     *Non-cashcharges — EC Service Bureau*- Non-cash charges of approximately $4,000 inthe 2006 Quarter consist of stock options issued to employees.
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**Liquidity and Capital Resources**     Our principal sources of liquidity, which consist of unrestricted cash and cash equivalents,increased to $4,681,000 as of October 31, 2005 from $3,983,000 as of July 31, 2005. We believethese resources will provide us with sufficient liquidity to continue in operation through July 31,2006.     On May 30, 2003, we executed an Accounts Receivable Financing Agreement (“FinancingAgreement”) with Silicon Valley Bank (“Bank”) with an initial term of one year. Under theFinancing Agreement, we may borrow, subject to certain conditions, up to 80% of our outstandingaccounts receivable up to a maximum of $2,000,000. The Financing Agreement was amended on October22, 2003, August 31, 2004, and March 16, 2005. As of the last amendment to the FinancingAgreement, the applicable interest rate is the prime rate plus .25% as long as our adjusted quickratio is 1.25% or greater and prime rate plus .75% if our adjusted quick ratio is less than 1.25%.We also pay a collateral handling fee equal to .15% on the average daily outstanding receivablebalance as long as its adjusted quick ratio is 1.25% or greater, going to .35% if our adjustedquick ratio is less than 1.25%. Interest under the Financing Agreement is payable monthly. TheFinancing Agreement prohibits the payment of dividends other than dividends on our Series CPreferred Stock, which may not exceed $400,000 in any fiscal year. The Bank has been granted asecurity interest in substantially all of our assets.     In connection with the Financing Agreement, we issued the Bank warrants to purchase 40,000shares of Class A Common Stock, exercisable for a seven-year period. The fair value of thewarrants in the amount of approximately $34,000 was amortized tointerest expense in the previous periods. Thelast Financing Agreement amendment extends its term through March 16, 2006. At October 31, 2005,there were no amounts outstanding under the Financing Agreement. The Bank exercised the warrantsissued under the Financing Agreement on September 30, 2005. When issued, the warrants wereimmediately exercisable at an exercise price of $1.39, equal to the fair market value of the ClassA Common Stock on the date of closing of the Financing Agreement. The Bank elected the option toconvert the warrants into 20,283 shares of Class A Common Stock using the cashless exercise formulaspecified in the warrant.     During the quarter ending October 31, 2005, 127,799 stock options were exercised resulting inthe issuance of an equal number of shares of Class A Common Stock for which we received $166,165.     We have a net operating loss carryforward of approximately $76.6 million to offset futuretaxable income for federal income tax purposes. The utilization of the loss carryforward to reduceany such future income taxes will depend on our ability to generate sufficient taxable income priorto the expiration of the net operating loss carryforwards. The carryforward expires from 2007 to2024. The Internal Revenue Code of 1986, as amended, and the regulations promulgated thereundercontain provisions that limit the use of available net operating loss carryforwards in any givenyear should significant changes (greater than 50%) in ownership interests occur. Therefore, the netoperating loss carryover of approximately $1.9 million incurred prior to our initial publicoffering is subject to an annual limitation of approximately $400,000 until that portion of the netoperating loss is utilized or expires. Due to a private placement of Series A Preferred Stock inApril 1999, the net operating loss carryover of approximately $18 million incurred prior to theprivate placement and subsequent to the initial public offering is subject to an annual limitationof approximately $1 million until that portion of the net operating loss is utilized or expires.Due to the 100% ownership change when we acquired Research Triangle Commerce, Inc. (“RTCI”) inNovember 2000, RTCI’s net operating loss of approximately $6.5 million incurred prior to theownership change is subject to an annual limitation of approximately $1.4 million until thatportion of the net operating loss is utilized or expires. Also, due to a 100% ownership change ofElectronic Commerce Systems, Inc. (“ECS”) in June 2004, the acquired net operating loss ofapproximately $1.1 million incurred prior to the ownership change is subject to an annuallimitation of approximately $128,000 until that portion of the net operating loss is utilized orexpires.
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**Consolidated Working Capital**     Consolidated working capital increased to $5,954,000 at October 31, 2005 from $4,864,000 atJuly 31, 2005. This increase was primarily due to an increase in cash of $698,000 primarilyresulting from increased accounts receivable collections and a decrease in accrued expenses of$479,000 primarily due to the cash payments under our 2005 bonus program.**Analysis of Cash Flows**     Cash provided by operating activities was $693,000 in the three months ended October 31, 2005compared to $18,000 in the three months ended October 31, 2004. The increase in the three monthsended October 31, 2005 of $675,000 was primarily the result of net income of $722,000 in the threemonths ended October 31, 2005 compared to a net loss of $402,000 in the three months ended October31, 2004.     Cash used in investing activities increased to $159,000 in the three months ended October 31,2005 from $112,000 in the three months ended October 31, 2004. Cash used in investing activitiesin the three months ended October 31, 2005 primarily resulted from the purchase of property andequipment of $94,000 and additional costs relating to the MEC acquisition of $65,000. Cash used ininvesting activities in the three months ended October 31, 2004 primarily resulted from thepurchase of property and equipment of $32,000 and additional costs relating to the ECS acquisitionof $80,000.     Cash provided by financing activities was $164,000 in the three months ended October 31, 2005compared to cash used in financing activities of $50,000 in the three months ended October 31,2004. Cash provided by financing activities in the three months ended October 31, 2005 wasprimarily the result of proceeds from the exercise of employee stock options of $166,000 offset bypayments of capital lease obligations of $2,000. Cash used in financing activities in the threemonths ended October 31, 2004 was primarily the result of common stock issued for services relatedto the 2004 private placement of $24,000 and proceeds from the exercise of employee stock optionsof $26,000.**Item 3. Quantitative and Qualitative Disclosures About Market Risk**     **Interest Rate Risk**     We may invest our cash in a variety of financial instruments, including taxable andtax-advantaged floating rate and fixed rate obligations of corporations, municipalities, and local,state and national governmental entities and agencies. We account for our investment instrumentsin accordance with Statement of Financial Accounting Standards No. 115, “Accounting for CertainInvestments in Debt and Equity Securities” (“SFAS No. 115”). All of the cash equivalents andinvestments are treated as available-for-sale under SFAS No. 115. Investments that are classifiedas cash and cash equivalents have original maturities of three months or less. Investments in bothfixed rate and floating rate interest earning instruments carry a degree of interest rate risk.Fixed rate securities may have their fair market value adversely impacted due to a rise in interestrates, while floating rate securities may produce less income than expected if interest rates fall.Due in part to these factors, our future investment income may fall short of expectations due tochanges in interest rates, or we may suffer losses in principal if forced to sell securities thathave seen a decline in market value due to changes in interest rates. For the periods presentedherein, our cash investments, if any, consisted entirely of overnight cash account sweeps investedin a fund composed primarily of triple A rated commercial paper and government agency bonds. Asof October 31, 2005, the interest rate for this investment was 3.03%.**Item 4. Controls and Procedures**     Our management, including our chief executive officer and chief financial officer, havecarried out an evaluation of the effectiveness of our disclosure controls and procedures as ofOctober 31, 2005, pursuant to Exchange Act Rules 13a-15(e) and 15(d)-15(e). Based upon thatevaluation, our chief executive officer and chief financial officer have concluded that as of suchdate, our disclosure controls and procedures are effective. Therewas no change in our internal control over financial reporting during the quarter endedOctober 31, 2005 that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.
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**PART II. OTHER INFORMATION****Item 1. Legal Proceedings**     None.**Item 1A. Risk Factors**     ***Risks Relating to Our Company***     ***We have only recently begun to realize a profit, and may incur losses again.***We reported ourfirst profit ever for the fiscal year ending July 31, 2005. There can be no assurances that we maynot incur losses again in the future. We have incurred significant losses since we were founded in1991, and, as of July 31, 2005, we had an accumulated deficit of approximately $85.7 million.     ***We must continue to grow our business in order to remain competitive.***Over the past year, theVAN business has remained significantly price competitive. Our major competitors appear to berestructuring their VAN operations to reduce their overhead and other costs to better competeagainst Internet-based networks such as our ICC.NET service. While we have been successful inmaintaining our margins and we have increased the volume of data transmitted through our VAN, wehave experienced price erosion in competing for larger customers. Although we expect to continueto add new customers and increase the volume of data transmitted through our service, we do notexpect our revenue from VAN services to continue to grow as rapidly as in the past. If ourrevenues grow at a slower rate than we anticipate, or decrease and we are unable to adjust spendingin a timely manner or if our expenses increase without commensurate increases in revenues, ouroperating results will suffer and we may again report losses.     ***If we are not successful in selling our products and services, particularly from our ECService Bureau segment, our results of operations will suffer.***While our primary focus in the pasthas been on growing our ICC.NET VAN service, we have attempted to diversify by acquiring ECS inJune 2004 and the MEC operations in March 2005. We expect that our revenue from the ICC.NETsegment will drop to approximately 60% of total revenue beginning in Fiscal 2006 and the revenuefrom the EC Service Bureau segment will grow to approximately 40% of total revenue. However, thesuccess of our services depends to a large extent on the future of business-to-business electroniccommerce and our ability to effectively compete in the marketplace. In particular, our successdepends on the number of customers that subscribe to our services, the volume of the data,documents or other information they send or retrieve and the price we are able to charge for theseservices in light of competitive pressures.     ***We may not be successful in competing against our competitors.***We face a significant numberof competitors, ranging from very large enterprises or divisions of very large companies to anumber of relatively small organizations. These competitors are diverse in terms of theirhistories, business models, corporate strategies, financial strength, name recognition, companyreputation, customer base and breadth of offerings. Many of our large competitors have morehistory, significantly greater financial resources, larger customer bases and more easilyrecognized names than we do. As a result, our competitors may be able to respond more quickly tochanging technology and changes in customer requirements or be able to undertake more extensivemarketing campaigns, adopt more aggressive pricing policies and make more attractive offers topotential customers and employees, or be able to devote greater resources to the development,promotion and sale of their services than we can. New competition is emerging in the form of webservices networks, collaborative applications, application service providers, e-marketplaces andintegration broker suites. We have enhanced our technologies to communicate with these AS2-basedtechnologies. As described above, we have developed new product and service offerings (AS2 andData Synchronization) to improve our value proposition. However, there can be no assurance thatthese new product and service offerings will compete effectively and generate any significantrevenues. Competitors providing these alternatives include Cyclone Corporation and Inovis. Theyoffer software solutions that utilize the Internet to transmit data between trading partners. Webelieve that the high cost of implementation and the ongoing costs of supporting a company’strading partners are a barrier to the wider acceptance of some of these product offerings in themarketplace.
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     ***If we are unable to maintain or replace our existing interconnect arrangements, our results ofoperations would suffer.***We rely on many of our competitors to interconnect with our service topromote an “open community” so all businesses can take advantage of the efficiencies of EDI, nomatter what network they choose as their provider. In September 2001 and April 2002, two of ourcompetitors, GXS and Sterling Commerce, terminated existing interconnect agreements with us, and wemade alternative arrangements to serve our customers. However, GXS has subsequently purchased thecompany that was providing our alternative arrangement. Although we have a contract forinterconnect services with the combined GXS through April 2006, there can be no assurances that thecontract will be renewed or that the renewal will be at an acceptable cost. If not renewed, wewill have to find an acceptable alternative.     ***We must continue to develop new products and services.***If we do not keep pace with rapidtechnological changes, customer demands and intense competition, we will not be successful. Ourmarket is characterized by rapidly changing technology, customer demands and intense competition.The satisfactory performance, reliability and availability of our network infrastructure, customersupport and document delivery systems and our web site are critical to our reputation and ourability to attract customers and maintain adequate customer service levels. If we cannot keep pacewith these changes and maintain the performance and reliability of our network and customer servicelevels, our business will suffer. The Internet’s recent growth and the intense competition in ourindustry require us to continue to develop strategic business and Internet solutions that enhanceand improve the customer service features, functions and responsiveness of our ICC.NET and otherproposed services and that keep pace with continuing changes in information technology and customerrequirements. We are actively searching for ways to expand our business and the products andservices we offer to keep pace with the rapidly changing technology, customer demands and intensecompetition. However, there can be no assurance that we will be able to keep pace with thesechanges, and if we are not successful in developing and marketing enhancements to our ICC.NET VANor other EC Service Bureau proposed services that respond to technological change or customerdemands, our business will suffer.     ***We may need to obtain additional financing on satisfactory terms to continue to competesuccessfully.***If we are unable to obtain necessary future capital, our business will suffer. Wemay need to raise additional funds if competitive pressures or technological changes are greaterthan anticipated, if we are unable to increase revenue at anticipated rates, if our expensesincrease significantly or if our customers delay payment of our receivables or if we identify asuitable acquisition candidate that requires a cash outlay in order to complete the transaction.We cannot assure you that any additional financing will be available on reasonable terms or at all.Raising additional funds in the future by issuing securities could adversely affect ourstockholders and negatively impact our operating results. If we raise additional funds through theissuance of debt securities, the holders of the debt securities will have a claim to our assetsthat will have priority over any claim of our stockholders. The interest on these debt securitieswould increase our costs and negatively impact our operating results. If we raise additional fundsthrough the issuance of Class A Common Stock or securities convertible into or exchangeable forClass A Common Stock, the percentage ownership of our then-existing stockholders will decrease andthey may experience additional dilution. In addition, any convertible or exchangeable securitiesmay have rights, preferences and privileges more favorable to the holders than those of the Class ACommon Stock.     ***We rely on third parties to provide our services, and any failure of such third parties couldadversely affect our business.***Failure of our third-party providers to provide adequate Internetand telecommunications service could result in significant losses of revenue. Our operationsdepend upon third parties for Internet access and telecommunications service. Frequent orprolonged interruptions of these services could result in significant losses of revenues. We haveexperienced outages in the past and could experience outages, delays and other difficulties due tosystem failures unrelated to our internal activities in the future. These types of occurrencescould also cause users to perceive our services as not functioning properly and therefore causethem to use other methods to deliver and receive information. We have limited control over thesethird parties and cannot assure you that we will be able to maintain satisfactory relationshipswith any of them on acceptable commercial terms or that the quality of services that they providewill remain at the levels needed to enable us to conduct our business effectively.     ***We may suffer systems failures and business interruptions that would harm our business.***Oursuccess depends in part on the efficient and uninterrupted operation of our VAN service, which isrequired to accommodate a high volume of traffic. Almost all of our network operating systems arelocated at the Securities Industry Automation Corporation (“SIAC”). SIAC runs all computingoperations for the New York Stock
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Exchangeand the American Stock Exchange. Our systems are vulnerable to events such as damage from fire, powerloss, telecommunications failures, break-ins and earthquakes. This could lead to interruptions ordelays in our service, loss of data or the inability to accept, transmit and confirm customerdocuments and data. Although we have implemented network security measures, our servers may bevulnerable to computer viruses, electronic break-ins, attempts by third parties to deliberatelyexceed the capacity of our systems and similar disruptions.     ***If we are unable to manage our growth or successfully integrate acquisitions, our financialresults will suffer.***Our ability to implement our business plan successfully in a new and rapidlyevolving market requires effective planning and growth management. If we cannot manage theintegration of anticipated acquisitions, our business and financial results will suffer. We expectthat we will need to continue to manage and to expand multiple relationships with customers,Internet service providers and other third parties. We also expect that we will need to continueto improve our financial systems, procedures and controls and will need to expand, train and manageour workforce, particularly our information technology and sales and marketing staffs.     ***If we lose our net operating loss carryforward, our financial results will suffer.***Our netoperating loss carryforward is approximately $76.6 million. Section 382 of the Internal RevenueCode contains rules designed to discourage persons from buying and selling the net operating lossesof companies. These rules generally operate by focusing on ownership changes among stockholdersowning directly or indirectly 5% or more of the common stock of a company or any change inownership arising from a new issuance of stock by a company. In general, the rules limit theability of a company to utilize net operating losses after a change of ownership of more than 50%of its common stock over a three-year period. Purchases of our Class A Common Stock in amountsgreater than specified levels could inadvertently create a limitation on our ability to utilize ournet operating losses for tax purposes in the future. We are currently subject to a limitation onthe utilization of our net operating loss carryforward.     ***If we cannot successfully expand our business outside of the United States, our revenues andoperating results will be adversely affected.***Our current and future customers are conductingtheir businesses internationally. As a result, one component of our business strategy is to expandour international marketing and sales efforts, and if we do not successfully expand our business inthis way, we may lose current and future customers.     ***If we cannot hire and retain highly qualified employees, our business and financial resultswill suffer.***We are substantially dependent on the continued services and performance of ourexecutive officers and other key employees. If we are unable to attract, assimilate and retainhighly qualified employees, our management may not be able to effectively manage our business,exploit opportunities and respond to competitive challenges and our business and financial resultswill suffer. Many of our competitors may be able to offer more lucrative compensation packages andhigher-profile employment opportunities than we can.     ***We depend on our intellectual property, which may be difficult and costly to protect.***If wefail to adequately protect our proprietary rights, competitors could offer similar products relyingon technologies we developed, potentially harming our competitive position and decreasing ourrevenues. We attempt to protect our intellectual property rights by limiting access to thedistribution of our software, documentation and other proprietary information and by relying on acombination of patent, copyright, trademark and trade secret laws. In addition, we enter intoconfidentiality agreements with our employees and certain customers, vendors and strategicpartners. In some circumstances, however, we may, if required by a business relationship, provideour licensees with access to our data model and other proprietary information underlying ourlicensed applications. Despite the precautions we take, it may be possible for unauthorized thirdparties to copy aspects of our current or future products or to obtain and use information that weregard as proprietary. Policing unauthorized use of software is difficult, and some foreign lawsdo not protect proprietary rights to the same extent as United States laws. Litigation may benecessary in the future to enforce our intellectual property rights, to protect our trade secretsor to determine the validity and scope of the proprietary rights of others, any of which could becostly and adversely affect our operating results.     ***Intellectual property infringement claims against us could harm our business.***Our businessactivities and our ICC.NET service may infringe upon the proprietary rights of others and otherparties may assert infringement claims against us. Any such claims and any resulting litigationcould subject us to significant liability for damages and could invalidate our proprietary rights.We could be required to enter into royalty and licensing agreements, which may be costly orotherwise burdensome or which may not be available on terms acceptable to us.
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     ***We must comply in the future with new and costly reporting requirements.***Under currentSecurities and Exchange Commission regulations, we are considered a non-accelerated filer, as ourmarket capitalization as of July 31, 2005 was under $75 million. As long as our marketcapitalization remains under $75 million through January 31, 2006, we will have to be compliantwith Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) by July 31, 2007. Should our marketcapitalization be greater than $75 million as of January 31, 2006, we will have to be compliantwith the SOX by July 31, 2006. The costs of implementing the requirements of the SOX have rangedfrom approximately $500,000 to over $1 million for smaller companies. Although we began our SOXcompliance efforts in fiscal year of 2005, there can be no assurance that we can be in fullcompliance when required for reasonable costs.     ***Risks Relating to the Internet and Online Commerce Aspects of Our Business***     ***If Internet usage does not continue to grow or if its infrastructure fails, our business willsuffer.***If the Internet does not gain increased acceptance for business-to-business electroniccommerce, the growth of our business will be adversely affected. We cannot be certain that theinfrastructure or complementary services necessary to maintain the Internet as a useful and easymeans of transferring documents and data will continue to develop. The Internet infrastructure maynot support the demands that growth may place on it and the performance and reliability of theInternet may decline.     ***Privacy concerns may prevent customers from using our services.***Concerns about the securityof online transactions and the privacy of users may inhibit the growth of the Internet as a meansof delivering business documents and data. We may need to incur significant expenses to protectagainst the threat of security breaches or to alleviate problems caused by security breaches. Werely upon encryption and authentication technology to provide secure transmission of confidentialinformation. If our security measures do not prevent security breaches, we could suffer operatinglosses, damage to our reputation, litigation and possible liability. Advances in computercapabilities, new discoveries in the field of cryptography or other developments that rendercurrent encryption technology outdated may result in a breach of our encryption and authenticationtechnology and could enable an outside party to steal proprietary information or interrupt ouroperations.     ***Government regulation and legal uncertainties relating to the Internet could harm ourbusiness.***Changes in the regulatory environment in the United States and other countries coulddecrease our revenues and increase our costs. The Internet is largely unregulated and the lawsgoverning the Internet remain unsettled, even in areas where there has been some legislativeaction. It may take years to determine whether and how existing laws such as those governingintellectual property, privacy and taxation apply to the Internet. In addition, because ofincreasing popularity and use of the Internet, any number of laws and regulations may be adopted inthe United States and other countries relating to the Internet or other online services coveringissues such as user privacy, security, pricing and taxation, content and distribution. The cost oftransmitting documents and data over the Internet could increase. We may not be able to increaseour prices to cover these rising costs. Also, foreign and state laws and regulations relating tothe provision of services over the Internet are still developing. If individual states or foreigncountries impose taxes or laws that negatively impact services provided over the Internet, our costof providing our ICC.NET and other services may increase.     ***Risks Relating to our Class A Common Stock***     ***The market price of our common stock is likely to be highly volatile.***The market price of ourClass A Common Stock has been very volatile in the past, ranging from a low of $0.69 to a high of$2.19 to during fiscal 2005 and is likely to fluctuate substantially in the future. If our Class ACommon Stock falls under $1.00 per share and fails to maintain a minimum bid price of $1.00 for 30consecutive trading days, it may no longer be eligible for trading in the Nasdaq SmallCap Market.     ***Shares eligible for future sale by our existing stockholders may adversely affect our stockprice.***Between January 1, 2003 and October 2004, we registered on one or more registrationstatements, an aggregate of 9,987,817 shares of our Class A Common Stock, which includes 3,016,917shares of Class A Common Stock issuable upon the exercise of warrants to purchase shares of Class ACommon Stock and 192,307 shares of Class A Common Stock issuable upon conversion of our Series DPreferred. The market price of our Class A Common
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Stock could be materially and adversely affected by sales of even a small percentage of theseshares or the perception that these sales could occur. As a result, it may be difficult to sellour Class A Common Stock     ***There is not a significant demand for our common stock, which may make it difficult to sell.***The market for our Class A Common Stock on the Nasdaq SmallCap Market may be illiquid, which wouldrestrict the ability to sell shares of Class A Common Stock and could result in increasedvolatility in the trading prices for our Class A Common Stock. The price at which our Class ACommon Stock will trade in the future cannot be predicted and will be determined by the market.The price may be influenced by many factors, including investors’ perceptions of our business, ourfinancial condition, operating results and prospects, the use of the Internet for business purposesand general economic and market conditions.     ***Our Board of Directors can issue preferred stock with rights adverse to the holders of Class ACommon Stock.***Our Board of Directors is authorized, without further stockholder approval, todetermine the provisions of and to issue up to 4,979,575 shares of preferred stock. Issuance ofpreferred shares with rights to dividends and other distributions, voting rights or other rightssuperior to the Class A Common Stock could be adverse to the holders of Class A Common Stock. Inaddition, issuance of preferred shares could have the effect of delaying, deterring or preventingan unsolicited change in control of our company, or could impose various procedural and otherrequirements that could make it more difficult for holders of our Class A Common Stock to effectcertain corporate actions, including the replacement of incumbent directors and the completion oftransactions opposed by the incumbent Board of Directors. The rights of the holders of our Class ACommon Stock would be subject to, and may be adversely affected by, the rights of the holders ofany preferred stock that may be issued in the future.     ***We may have to use significant resources indemnifying our officers and directors or paying fordamages caused by their conduct.***The Delaware General Corporation Law provides for broadindemnification by corporations of their officers and directors and permits a corporation toexculpate its directors from liability for their actions. Our bylaws and certificate ofincorporation implement this indemnification and exculpation to the fullest extent permitted underthis law as it currently exists or as it may be amended in the future. Consequently, subject tothis law and to some limited exceptions in our certificate of incorporation, none of our directorswill be liable to us or to our stockholders for monetary damages resulting from conduct as adirector.**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**     None.**Item 3. Defaults Upon Senior Securities**     On October 14, 2004, our Board of Directors declared a dividend on our Series C PreferredStock for 2004 payable on January 1, 2005 in shares of Class A Common Stock in the amount of$400,000, which, per the terms of the Series C Preferred Stock, amounted to 236,267 shares. Afterwe had recorded the issuance of the shares as payment for the dividend, but before the certificaterepresenting the Class A Common Stock was physically issued, we began discussions with Cable &Wireless PLC (“C&W”), purported owner of the Series C Preferred Stock, about retiring the Series CPreferred Stock. As these discussions progressed, we realized that there was substantial evidencethat the Series C Preferred Stock was held by Cable & Wireless USA (“C&W USA”), a formerly whollyowned subsidiary of C&W that filed Chapter 11 bankruptcy in the United States on December 8, 2003.We continue to hold the certificate for the Class A Common Stockand have presented evidence of ourbelief that the Series C Preferred Shares are held by the estate of the bankrupt C&W USA to boththe management of C&W and the trustee for C&W USA, a managing director of AlixPartners. Thetrustee for C&W USA has also reached the conclusion that the estate holds the Series C PreferredStock and is in negotiations with C&W to resolve the ownership issue. Until we are notified whoactually owns the Series C Preferred Stock, either as a result of the negotiations between thetrustee for C&W USA and C&W, or as the result of any required legal action to settle ownership, wewill not issue any Series Class A Common Stock certificates. We will continue to accrue for theSeries C Preferred Stock dividend and, when appropriate, record the appropriate amount of Class ACommon Stock as issued for payment of the dividend.
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**Item 4. Submission of Matters to a Vote of Security Holders**     None.**Item 5. Other Information**     None.**Item 6. Exhibits** 31.1 Certificate of the Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002  31.2 Certificate of the Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002  32.1 Certification of the Chief Executive Officer and Chief Financial Officerpursuant to Section 906 of the Sarbanes-Oxley Act of 2002* * In accordance with Release No. 34-47986, this Exhibit is herebyfurnished to the SEC as an accompanying document and is not deemed “filed” forpurposes of Section 18 of the Securities Exchange Act of 1934 or otherwisesubject to the liabilities of that Section, nor shall it be deemed incorporatedby reference into any filing under the Securities Act of 1933.
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**SIGNATURES**     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.Date:December 13, 2005       **INTERNET COMMERCE CORPORATION**** **      By: /s/ Thomas J. Stallings         Thomas J. Stallings    Chief Executive Officer       By: /s/ Glen E. Shipley         Glen E. Shipley    Chief Financial Officer
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**EXHIBIT INDEX**   **Exhibit No.** **Document** Exhibit 31.1 Certificate of the Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002   Exhibit 31.2 Certificate of the Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002   Exhibit 32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuantto Section 906 of the Sarbanes-Oxley Act of 2002* * In accordance with Release No. 34-47986, this Exhibit is hereby furnished to the SEC as anaccompanying document and is not deemed “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it bedeemed incorporated by reference into any filing under the Securities Act of 1933.
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